<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALRENCO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
INDIANA 7359 35-1480655
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
1736 EAST MAIN STREET
NEW ALBANY, INDIANA 47150
(812) 949-3370
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
MICHAEL D. WALTS
CHAIRMAN OF THE BOARD AND PRESIDENT
ALRENCO, INC.
1736 EAST MAIN STREET
NEW ALBANY, INDIANA 47150
(812) 949-3370
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
C. Craig Bradley, Jr., Esq. Thomas J. Sherrard, III, Esq.
Stites & Harbison Sherrard & Roe, PLC
Suite 1800 Suite 2000
400 West Market Street 424 Church Street
Louisville, Kentucky 40202 Nashville, Tennessee 37219
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same filing. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
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. / / ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, no par value.... 1,725,000 shares $22.375 $38,596,875 $13,310
<FN>
(1) Includes 225,000 shares of Common Stock which the Underwriters have an
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c), and based upon the average of the high and low sale prices
of the Common Stock reported on the Nasdaq National Market on August 26,
1996.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 29, 1996
1,500,000 SHARES
[ALRENCO LOGO]
COMMON STOCK
------------------
All of the 1,500,000 shares of Common Stock of Alrenco, Inc. (the "Company")
offered hereby (the "Offering") are being offered by the Company. The Common
Stock of the Company is traded on the Nasdaq National Market under the symbol
"RNCO." On August 27, 1996, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $22.38 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses estimated at $300,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 225,000 shares of Common Stock at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them. The
Underwriters reserve the right to reject orders in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
, 1996.
EQUITABLE SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
J. J. B. HILLIARD, W. L. LYONS, INC.
, 1996
<PAGE>
(PHOTO)
PHOTOGRAPH OF INTERIOR OF ALRENCO STORE.
(MAP)
MAP OF UNITED STATES WITH STATES IN WHICH ALRENCO OPERATES HIGHLIGHTED AND
LOCATIONS OF STORES MARKED.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET- MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS, EXPECTATIONS AND PLANS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." UNLESS OTHERWISE INDICATED
HEREIN, ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO
REFLECT A 30,000-FOR-1 STOCK SPLIT ON NOVEMBER 8, 1995. THE COMPANY COMPLETED
THE INITIAL PUBLIC OFFERING OF SHARES OF ITS COMMON STOCK ON JANUARY 23, 1996
(THE "IPO").
THE COMPANY
Alrenco, Inc. (the "Company") is a rapidly growing operator of
rental-purchase stores that currently has 119 stores in 15 states, primarily
located in the midwestern and southern United States. The Company offers high
quality, brand-name consumer merchandise under flexible, renewable
rental-purchase agreements, also known as rent-to-own agreements. Approximately
75% of the Company's customers make weekly rental payments. The agreements
provide customers with the option, but not the obligation, to obtain ownership
of the merchandise following a stated number of consecutive rental payments,
usually 78 weeks or 18 months. Less than 25% of the Company's customers complete
the full term of the agreement. Previously rented merchandise is refurbished and
re-rented generally for a reduced term. The Company's target customers are
typically low to middle income consumers with limited or no access to
traditional credit sources such as bank financing, installment credit and credit
cards. The Company also provides its products to consumers who desire only
temporary rental of a product.
The Company's average store contains approximately 3,800 square feet and is
stocked with consumer electronics, appliances, furniture, jewelry and home
furnishings accessories in retail showroom displays. Store interiors feature
bright colors and custom neon signage in an atmosphere designed to make
customers feel comfortable. The Company delivers and installs its products
generally the same day at little or no additional cost to the consumer and
provides free service throughout the rental period. Management believes that
this convenient access to high quality merchandise with minimal initial cash
outlay and no long-term obligation makes rental-purchase an attractive
alternative for credit-constrained consumers.
The Company has continued to refine its operational concept which management
believes effectively distinguishes the Company's stores from local and national
competitors. The Company seeks to (i) position itself as the "neighborhood
rental store" within each of its markets, (ii) emphasize a high level of
customer service, (iii) achieve operating efficiencies through clustering its
stores within defined market areas, (iv) utilize sophisticated management
information systems and (v) enhance employee productivity through
incentive-based compensation and formalized training. Management intends to
continue to increase the revenue at its existing stores and improve the
operations of acquired stores through the application of its operating
strategies. These strategies have enabled the Company's stores to operate with a
current average of 841 units on rent as compared to an average of 697 units for
the largest companies reporting to the Association of Progressive Rental
Organizations ("APRO") in 1996.
The Company's primary growth strategy is to acquire smaller, profitable, yet
undercapitalized chains of stores which can be effectively integrated into the
Company's operational structure and target market areas. During 1994 and 1995,
the Company acquired a total of 35 stores. Since the IPO, the Company has
acquired an additional 59 stores in 15 separate transactions (the "1996
Acquisitions"). Nine of the stores acquired have been consolidated into existing
stores. The 1996 Acquisitions have provided the Company with entry into the
large Atlanta and Chicago markets and increased the
3
<PAGE>
Company's market share in certain of its existing markets, including Birmingham,
Cincinnati, Indianapolis, Louisville, Miami and New Orleans. The stores acquired
were generally profitable but were operating at levels of revenue and
profitability below those of the Company's existing stores.
Management believes that an opportunity exists to continue the Company's
growth primarily through the acquisition of existing rental-purchase stores.
According to APRO, the industry's 7,500 stores generated aggregate annual
revenues of $4.0 billion in 1995. The majority of the industry continues to be
comprised of chains with fewer than 20 stores. The rental-purchase industry is
experiencing consolidation due primarily to the substantial advantages possessed
by large operators following the withdrawal of many traditional financing
sources for smaller operators and the increased purchasing power and operational
efficiences due to economies of scale. Management believes that the industry
will continue to experience consolidation and that a number of rental-purchase
chains can be acquired on favorable terms. Management believes that the Company
can enhance the performance and profitability of acquired stores through a rapid
infusion of new merchandise, implementation of effective and innovative
marketing and advertising programs and improvement of collection procedures and
operational cost controls.
The Company was incorporated in 1980 under the laws of the State of Indiana.
The Company's principal executive offices are located at 1736 East Main Street,
New Albany, Indiana 47150, and its telephone number is (812) 949-3370.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 1,500,000 shares
Common Stock to be outstanding after the
offering.......................................... 5,924,200 shares (1)
Use of proceeds.................................... To repay indebtedness, to fund the
acquisition and opening of
rental-purchase stores and for general
corporate purposes.
Nasdaq National Market symbol...................... RNCO
Risk factors....................................... See "Risk Factors" for certain factors
that should be considered by
prospective purchasers of the Common
Stock.
</TABLE>
- ------------------------
(1) Excludes 75,147 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the Company's 1995 Stock Incentive Plan (the
"Stock Incentive Plan") which are currently exercisable. See "Management --
Stock Incentive Plan."
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- --------------------
PRO FORMA
1993 1994 1995 1995 (1) 1995 1996
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue.............................................. $ 22,283 $ 27,800 $ 37,576 $ 69,333 $ 16,834 $ 27,004
Operating expenses................................... 20,270 25,638 34,647 65,031 15,523 24,035
--------- --------- --------- ----------- --------- ---------
Operating profit..................................... 2,013 2,162 2,929 4,302 1,311 2,969
Interest expense..................................... 281 461 894 -- 361 182
Gain on sale of investments.......................... -- -- (100) (48) -- --
--------- --------- --------- ----------- --------- ---------
281 461 794 (48) 361 182
--------- --------- --------- ----------- --------- ---------
Earnings before income taxes......................... 1,732 1,701 2,135 4,350 950 2,787
Income tax expense................................... 722 739 868 1,808 447 1,144
--------- --------- --------- ----------- --------- ---------
Net earnings......................................... $ 1,010 $ 962 $ 1,267 $ 2,542 $ 503 $ 1,643
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
Earnings per common share............................ $ .33 $ .31 $ .41 $ .50 $ .16 $ .39
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
Weighted average common shares outstanding........... 3,105 3,105 3,105 5,046 3,105 4,207
OPERATING DATA:
Stores open at end of period......................... 34 53 69 53 100
Comparable store revenue growth (3).................. 8.0% 4.3% 3.3% 2.7% 6.1%
<CAPTION>
PRO FORMA
1996 (2)
-----------
<S> <C>
STATEMENT OF EARNINGS DATA:
Revenue.............................................. $ 35,545
Operating expenses................................... 32,346
-----------
Operating profit..................................... 3,199
Interest expense..................................... --
Gain on sale of investments.......................... --
-----------
--
-----------
Earnings before income taxes......................... 3,199
Income tax expense................................... 1,364
-----------
Net earnings......................................... $ 1,835
-----------
-----------
Earnings per common share............................ $ .40
-----------
-----------
Weighted average common shares outstanding........... 4,577
OPERATING DATA:
Stores open at end of period.........................
Comparable store revenue growth (3)..................
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED(4)(5)
--------- ------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Rental merchandise, net............................................... $ 20,689 $ 22,203 $ 22,203
Total assets.......................................................... 36,560 43,058 59,088
Total debt............................................................ 9,252 15,219 --
Total liabilities..................................................... 13,963 20,461 5,242
Stockholders' equity.................................................. 22,597 22,597 53,846
</TABLE>
- ------------------------------
(1) Adjusted to give effect to the 1995 acquisition of 15 stores and the 1996
acquisition of 49 stores, as if they had been consummated at January 1,
1995, and the sale by the Company of 1,940,656 shares of Common Stock in
the IPO and in this Offering and the application of the net proceeds
therefrom to repay all outstanding indebtedness under the Company's bank
loan agreement. Does not include the results of ten stores acquired in
seven transactions in 1996 which were consolidated into existing stores or
which are otherwise immaterial to the pro forma presentation.
(2) Adjusted to give effect to the 1996 acquisition of 49 stores, as if they
had been consummated at January 1, 1995, and the sale by the Company of
370,326 shares of Common Stock in this Offering and the application of the
net proceeds therefrom to repay outstanding indebtedness under the
Company's bank loan agreement. Does not include the results of ten stores
acquired in seven transactions in 1996 which were consolidated into
existing stores or which are otherwise immaterial to the pro forma
presentation.
(3) Comparable store revenue for each period presented includes revenue of
stores open at the end of each period and at the end of the prior period.
Comparable store revenue growth does not take into account revenue from the
15 stores acquired in 1995 or any of the stores acquired in 1996 which, as
of June 30, 1996, had not been operated by the Company for two full
six-month periods. The 18 stores acquired in 1994 are included in
comparable store revenue beginning in 1996. The Company has made
significant acquisitions in 1994, 1995 and 1996 which effect the
comparability of the information presented.
(4) Adjusted to give effect to the acquisition in August 1996 of Network
Rental, Inc. as if it had been consummated at June 30, 1996.
(5) Adjusted to give effect to the sale by the Company of 1,500,000 shares of
Common Stock in this Offering (at an assumed public offering price of
$22.38 per share) and the application of the net proceeds therefrom as
described in "Use of Proceeds."
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO OTHER INFORMATION AND FINANCIAL DATA CONTAINED
ELSEWHERE IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE SHARES OF
COMMON STOCK OFFERED HEREBY.
ACQUISITION RISKS
The Company's growth strategy is based upon the acquisition of existing
rental-purchase stores and, to a lesser extent, the opening of new stores.
Management believes that the acquisition of existing stores will produce greater
immediate profitability and cash flow than investing in the opening of new
stores, which have no existing customer accounts. The continued growth and
financial performance of the Company will be significantly affected by the
Company's ability to acquire additional stores on favorable terms, to enhance
their performance and to integrate the acquired stores into the Company's
operations. The Company may compete for acquisition and expansion opportunities
with companies that have significantly greater financial and other resources.
There can be no assurance that the Company will be able to locate or acquire
suitable acquisition candidates, or that any operations that are acquired can be
effectively and profitably integrated into the Company's existing operations.
Additionally, although acquisitions will be designed to contribute to the
Company's long-term profitability, they may negatively impact the Company's
operating results, particularly during the periods immediately following an
acquisition. The Company may acquire operations that are unprofitable or have
inconsistent profitability. The inability to improve the profitability of such
acquired stores could have a material adverse effect on the Company's results of
operations or financial condition. Furthermore, the Company's acquisition
strategy is likely to place significant demands on the Company's management and
financial resources. The Company expects to fund additional store acquisitions
through available borrowings under its existing bank credit facility and a
portion of the net proceeds of this Offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company's business is highly dependent upon the personal
efforts and abilities of its senior management, including Michael D. Walts, the
Company's Chairman of the Board and President, Raymond C. Holladay, the
Company's Executive Vice President and Chief Operating Officer, and Theodore H.
Wilson, the Company's Executive Vice President and Chief Financial Officer. The
Company does not have employment contracts or non-competition agreements with
any of its executive officers. The loss of the services of any of Messrs. Walts,
Holladay or Wilson could have a material adverse effect on the Company.
COMPETITION
The rental-purchase industry is highly competitive. Competition is based
primarily on store location, product selection and availability, customer
service and rental rates and terms. The Company's competitors include national,
regional and local operators of rental-purchase stores. Some of these
competitors may have significantly greater financial and operating resources
and, in certain markets, greater name recognition than the Company. Because
barriers to entry in the rental-purchase industry are relatively low,
competition may arise from new sources not currently competing with the Company.
As a result of these competitive conditions, the Company may not be able to
sustain past levels of revenue or continue its recent revenue growth or
profitability. See "Business -- Competition."
6
<PAGE>
GOVERNMENT REGULATION
Forty-five states have adopted legislation regulating rental-purchase
transactions. Of those states, 43 require companies to provide certain
disclosures to customers regarding the terms of the rental-purchase transaction.
Three states regulate rental-purchase transactions as credit sales subject to
interest rate limitations and other consumer lending restrictions. The Company
neither operates in nor intends to operate in those three states. All 15 states
in which the Company operates impose some type of disclosure requirements,
either in advertising or in the rental-purchase agreement, or both. The
regulations in these states also distinguish rental-purchase transactions from
credit sales. Management believes that the operations of the Company are in
material compliance with applicable state rental-purchase laws. In the past,
federal legislation has been proposed which could affect the rental-purchase
industry; however, management cannot predict whether any such legislation will
be enacted and what the impact of such legislation would be. See "Business --
Government Regulation."
CONTROL BY PRINCIPAL SHAREHOLDERS
Upon completion of this Offering, Michael D. Walts, Chairman of the Board
and President of the Company, will own approximately 35.3% of the Company's
outstanding Common Stock (34.0% if the Underwriters' over-allotment option is
exercised in full). Michael D. Walts, Jr., Vice President of Purchasing of the
Company, will own approximately 3.6% of the Company's outstanding Common Stock
(3.4% if the Underwriters' over-allotment option is exercised in full). As a
result, Messrs. Walts and Walts, Jr. will be in a position to control the
management and policies of the Company through their ability to determine the
outcome of elections of the Company's Board of Directors and certain other
matters requiring the vote or consent of the shareholders of the Company. See
"Principal Shareholders."
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. Under its bank credit agreement, the
Company is currently prohibited from declaring or paying dividends on its Common
Stock without the prior consent of the lender. See "Dividend Policy."
RISKS ASSOCIATED WITH THE RENTAL-PURCHASE INDUSTRY
The operating success of the Company, like other participants in the
rental-purchase industry, depends upon a number of factors. These factors
include the ability to maintain and increase the number of units on rent, the
collection of rental payments when due and the control of inventory and other
costs. The rental-purchase industry is also affected by changes in consumer
confidence, preferences and attitudes, as well as general economic factors.
Failure to control operations and respond to changing market trends could
adversely affect the operations of the Company.
DEPRECIATION ISSUES; INCOME TAX CONSEQUENCES
The Internal Revenue Service (the "IRS") published a revenue ruling in July
1995 providing that a five-year Modified Accelerated Cost Recovery System
("MACRS") is the appropriate depreciation method for rental-purchase
merchandise. Prior to 1996, the Company used the income forecasting method of
depreciation for tax accounting, and management believes that this method has
been widely used throughout the rental-purchase industry prior to publication of
this revenue ruling. The conversion to MACRS will require that the cost of
rental merchandise be depreciated over a five-year period while revenue is
recognized over the contract term, typically 18 months. Management does not
believe that conversion to MACRS will significantly impact the Company's
financial condition and results of operations. The potential effect of
converting to MACRS cannot be accurately estimated, but management believes that
adequate sources of liquidity are available to the Company to fund the payment
of any additional taxes and interest which may result therefrom. The Company is
currently being audited by the IRS and may be required to pay certain additional
taxes and interest and penalties thereon as a result of its use of the income
forecasting method in prior years. Pending the resolution of this audit, the
Company intends to convert to the MACRS method of depreciation for tax
7
<PAGE>
accounting purposes only. Management believes that any such additional taxes and
interest and penalties thereon, if incurred, will not have a material adverse
effect on the Company's financial condition, liquidity or results of operations.
TRANSACTIONS AND RELATIONSHIPS WITH AFFILIATED PARTIES
The Company leases its corporate office space and one rental-purchase store
from an entity owned by Michael D. Walts, the Chairman of the Board and
President of the Company. In addition, two of the Company's current directors,
Robert W. Lanum and Donald E. Groot, have provided professional services to the
Company. See "Certain Transactions; Legal Matters; Experts."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Amended and Restated Code of Bylaws (the
"Bylaws") and certain sections of the Indiana Business Corporation Law (the
"IBCL") may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain shareholders may deem to be in their best interests).
These provisions include, among other things, a classified Board of Directors
serving staggered three-year terms, the removal of directors only for cause, and
certain advance notice requirements for shareholder proposals and nominations
for election to the Board of Directors. The Board of Directors also has the
power to issue shares of preferred stock and to establish the voting rights,
preferences and other terms thereof. These provisions could discourage or make
more difficult a merger, tender offer or proxy contest or could delay or
frustrate the removal of incumbent directors or the assumption of control by
shareholders, even if such events or actions would be beneficial to the
interests of the shareholders. The IBCL imposes restrictions upon change of
control transactions and certain business combination transactions. See
"Description of Capital Stock -- Preferred Stock -- Certain Anti-Takeover
Matters -- Indiana Anti-Takeover Statutes."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of such shares for future sale, will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock (including shares issued upon the
exercise of employee stock options), or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock.
Upon consummation of this Offering, the Company will have 5,924,200 shares of
Common Stock outstanding (6,149,200 shares if the Underwriters' over-allotment
option is exercised in full). All of the 1,500,000 shares to be sold in this
Offering and the 2,019,200 shares sold in the IPO will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"). The Company and each of its current directors
and executive officers have agreed that, for a period of 120 days after the date
of this Prospectus, they will not offer, sell or otherwise dispose of any shares
of Common Stock beneficially owned or controlled by them (including subsequently
acquired shares) without the prior written consent of Equitable Securities
Corporation, on behalf of the Underwriters. Subject to the expiration of such
120-day period, 2,300,000 shares held by the Company's current shareholders or
approximately 38.8% of the outstanding shares of Common Stock following the
Offering (approximately 37.4% if the Underwriters' over-allotment option is
exercised in full) will be eligible for resale subject to the requirements of
Rule 144 under the Securities Act. See "Principal Shareholders," "Shares
Eligible for Future Sale" and "Underwriting."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered hereby (assuming a public offering price of $22.38 per
share and after deducting estimated underwriting discounts and commissions and
the expenses of this Offering) are expected to be approximately $31.2 million
($36.0 million if the Underwriters' over-allotment option is exercised in full).
Approximately $16.5 million of such net proceeds will be used to repay all
outstanding borrowings under the Company's bank loan agreement (the "Loan
Agreement"), which were incurred primarily to finance the 1996 Acquisitions.
Borrowings under the Loan Agreement bear interest at variable rates ranging from
the bank's prime rate of interest (8.5% at June 30, 1996) to the bank's prime
rate of interest plus 1.25%, based upon the aggregate unpaid balance to the bank
and the Company's average three month rental contract revenues. If certain
conditions are satisfied, the Company may elect to fix the interest rate on
certain borrowings under the Loan Agreement for up to three months at a
specified rate based upon prevailing LIBOR rates. The maximum amount available
under the Loan Agreement is $25.0 million. The loan matures on February 1, 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
The Company plans to use its available borrowing capacity under the Loan
Agreement and the remaining approximately $14.7 million ($19.5 million if the
Underwriters' over-allotment option is exercised in full) of the net proceeds of
this Offering to fund additional store acquisitions. Although management has
identified a number of potential acquisitions and frequently holds informal
discussions with potential sellers, the Company currently has no agreements or
understandings with respect to any such acquisitions. If market conditions
dictate, management may also consider using a portion of the net proceeds from
this Offering to finance the opening of new stores. To the extent not used for
acquisitions and new store openings, the remaining net proceeds from this
Offering will be used by the Company for working capital and general corporate
purposes. Pending the application of the net proceeds as described above, the
Company intends to invest the proceeds in short-term interest-bearing
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Common Stock since
its inception in 1980. The Company expects that it will retain all available
earnings generated by its operations for the development and growth of its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. Under the Loan Agreement, the Company may not declare
or pay dividends upon its Common Stock or make any distributions of its assets
without the prior written consent of its lender. Any future change in the
Company's dividend policy will be made at the discretion of the Board of
Directors of the Company and will depend on a number of factors, including the
future earnings, capital requirements, contractual restrictions, financial
condition and future prospects of the Company and such other factors as the
Board of Directors may deem relevant. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
9
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Common Stock for the quarters indicated as reported on the Nasdaq National
Market. The Company completed its initial public offering on January 23, 1996,
at a price per share of $14.00. The Common Stock is traded on the Nasdaq
National Market under the symbol "RNCO."
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1996
First Quarter (from January 23, 1996)...................................................... $ 15.88 $ 13.75
Second Quarter............................................................................. 19.75 14.25
Third Quarter (through August 27, 1996).................................................... 22.75 16.75
</TABLE>
On August 27, 1996, the last reported sales price of the Common Stock on the
Nasdaq National Market was $22.38 per share. As of August 23, 1996, there were
36 holders of record of the Company's Common Stock; however, the Company
believes the number of beneficial owners is substantially greater.
CAPITALIZATION
The following table sets forth the capitalization of the Company as
reflected in the Company's unaudited financial statements as of June 30, 1996
(i) on a historical basis, (ii) on a pro forma basis to give effect to the
acquisition in August 1996 of Network Rental, Inc. ("Network Rental"), as if it
had been consummated at June 30, 1996, and (iii) on a pro forma basis and as
adjusted to give effect to the sale by the Company of 1,500,000 shares of Common
Stock pursuant to this Offering (at an assumed public offering price of $22.38
per share) and the Company's application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction with
the financial statements of the Company and Network Rental and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Debt......................................................................... $ 9,252 $ 15,219 $ --
Stockholders' equity:
Preferred Stock; 1,000,000 shares authorized; none outstanding............. -- -- --
Common Stock, no par value; 20,000,000 shares authorized; 4,424,200 shares
outstanding; 5,924,200 shares outstanding, as adjusted (1)............... 17,759 17,759 49,008
Unamortized value of stock awards............................................ (1,279) (1,279) (1,279)
Retained earnings............................................................ 6,117 6,117 6,117
--------- ----------- -----------
Total stockholders' equity................................................. 22,597 22,597 53,846
--------- ----------- -----------
Total capitalization....................................................... $ 31,849 $ 37,816 $ 53,846
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Excludes 102,797 shares of Common Stock issuable pursuant to stock options
granted under the Stock Incentive Plan. A total of 242,203 shares of Common
Stock are available for future grants under the Stock Incentive Plan.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data for the years ended December 31, 1994
and 1995 was derived from the Company's financial statements audited by Grant
Thornton LLP, independent certified public accountants. The following selected
financial data for the years ended December 31, 1991, 1992 and 1993 was derived
from the Company's financial statements audited by Welenken Himmelfarb & Co.,
independent certified public accountants. The financial statements of the
Company as of December 31, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995, and the reports of Grant Thornton LLP and
Welenken Himmelfarb & Co. thereon are included elsewhere in this Prospectus. The
selected financial data should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The information for the six-month periods ended June 30, 1995 and
1996 is unaudited, but, in the opinion of management, includes all adjustments
(consisting only of normal recurring accruals) necessary for a fair statement of
the results for the periods presented. The interim results for the six-month
period ended June 30, 1996 are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue
Rentals and fees.......................... $ 18,877 $ 20,424 $ 22,283 $ 27,800 $ 37,576 $ 16,834 $ 27,004
Operating expenses
Direct store expenses
Depreciation of rental merchandise...... 5,132 5,620 5,889 7,483 9,099 4,348 5,936
Other expenses.......................... 9,702 10,220 10,076 14,380 20,924 9,085 15,271
--------- --------- --------- --------- --------- --------- ---------
14,834 15,840 15,965 21,863 30,023 13,433 21,207
General and administrative expenses....... 2,398 2,741 3,650 3,678 4,339 1,993 2,441
Litigation settlement..................... -- -- 625 -- -- -- --
Amortization of intangibles............... 1 4 30 97 285 97 387
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................. 17,233 18,585 20,270 25,638 34,647 15,523 24,035
--------- --------- --------- --------- --------- --------- ---------
Operating profit.......................... 1,644 1,839 2,013 2,162 2,929 1,311 2,969
Interest expense............................ 598 434 281 461 894 361 182
Gain on sale of investments................. -- -- -- -- (100) -- --
--------- --------- --------- --------- --------- --------- ---------
598 434 281 461 794 361 182
--------- --------- --------- --------- --------- --------- ---------
Earnings before income taxes.............. 1,046 1,405 1,732 1,701 2,135 950 2,787
Income tax expense.......................... 409 497 722 739 868 447 1,144
--------- --------- --------- --------- --------- --------- ---------
Net earnings.............................. $ 637 $ 908 $ 1,010 $ 962 $ 1,267 $ 503 $ 1,643
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per common share................... $ .21 $ .29 $ .33 $ .31 $ .41 $ .16 $ .39
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares outstanding.. 3,105 3,105 3,105 3,105 3,105 3,105 4,207
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental merchandise, net..................... $ 5,228 $ 5,417 $ 5,675 $ 9,336 $ 13,115 $ 8,916 $ 20,689
Intangible assets, net...................... 17 13 12 592 4,869 495 10,986
Total assets................................ 6,446 7,088 7,666 12,680 20,977 12,184 36,560
Total debt.................................. 4,750 4,137 2,929 7,201 12,865 5,607 9,252
Total liabilities........................... 6,117 5,851 5,419 9,441 16,502 8,442 13,963
Stockholders' equity........................ 329 1,237 2,247 3,239 4,475 3,742 22,597
</TABLE>
11
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma statements of operations of the Company
for the year ended December 31, 1995 and for the six months ended June 30, 1996,
give effect to the acquisition of 15 stores in September 1995 (the "1995
Acquisition" or "The Television Management Companies") and the 1996 Acquisitions
as if they had been consummated at January 1, 1995, and the sale by the Company
of 1,500,000 shares of Common Stock in this Offering and the application of the
net proceeds therefrom to repay all outstanding indebtedness under the Loan
Agreement. The unaudited pro forma financial information set forth below is
qualified by reference to and should be read in conjunction with, the historical
financial statements of the Company, Network Rental, Easy TV & Appliance Rental
Stores ("Easy Rental") and The Television Management Companies and the pro forma
financial statements and the notes thereto included elsewhere in this
Prospectus. The unaudited pro forma financial information set forth below is not
necessarily indicative of the results of operations that might have occurred if
the transactions had taken place on such date or of the Company's results of
operations for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------
1995 1996 PRO FORMA
COMPANY ACQUISITION (1) ACQUISITIONS (2) ADJUSTMENTS PRO FORMA
----------- --------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue..................................... $ 37,576 $ 5,854 $ 25,903 $ -- $ 69,333
Direct store expenses....................... 30,023 4,885 14,952 (8)(3) 49,852
General and administrative expenses......... 4,339 632 8,997 (120)(4) 13,848
Amortization of intangibles................. 285 -- -- 1,046(5) 1,331
----------- ------- --------------- ------------- -----------
Operating profit............................ 2,929 337 1,954 (918) 4,302
Interest expense............................ 894 22 722 (1,638)(6) --
Gain on sale of investments................. (100) -- 52 -- (48)
----------- ------- --------------- ------------- -----------
794 22 774 (1,638) (48)
----------- ------- --------------- ------------- -----------
Earnings before income taxes................ 2,135 315 1,180 720 4,350
Income tax expense.......................... 868 16 490 434(7) 1,808
----------- ------- --------------- ------------- -----------
Net earnings................................ $ 1,267 $ 299 $ 690 $ 286 $ 2,542
----------- ------- --------------- ------------- -----------
----------- ------- --------------- ------------- -----------
Earnings per common share................... $ .41 $ .50
----------- -----------
----------- -----------
Weighted average common shares outstanding.. 3,105 5,046
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------
1996 PRO FORMA
COMPANY ACQUISITIONS (2) ADJUSTMENTS PRO FORMA
----------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue..................................................... $ 27,004 $ 8,541 $ -- $ 35,545
Direct store expenses....................................... 21,207 6,264 -- 27,471
General and administrative expenses......................... 2,441 1,777 -- 4,218
Amortization of intangibles................................. 387 -- 270(5) 657
----------- ------- ------ -----------
Operating profit............................................ 2,969 500 (270) 3,199
Interest expense............................................ 182 215 (397)(8) --
----------- ------- ------ -----------
Earnings before income taxes................................ 2,787 285 127 3,199
Income tax expense.......................................... 1,144 211 9(7) 1,364
----------- ------- ------ -----------
Net earnings................................................ $ 1,643 $ 74 $ 118 $ 1,835
----------- ------- ------ -----------
----------- ------- ------ -----------
Earnings per common share................................... $ .39 $ .40
----------- -----------
----------- -----------
Weighted average common shares outstanding.................. 4,207 4,577
</TABLE>
- ------------------------------
(1) Represents the results of operations of the 1995 Acquisition for the period
from January 1, 1995 to August 31, 1995.
(2) Represents the results of operations for the 1996 acquisition of 49 stores
and for the period from January 1, 1996 to the date of acquisition. Does not
include the results of ten stores acquired in seven transactions in 1996
which were consolidated into existing stores or which are otherwise
immaterial to the pro forma presentation.
(3) Adjustment to depreciation expense for property assets resulting from
purchase accounting adjustments.
(4) Adjustment to remove nonrecurring compensation expense associated with
certain former executive officers of The Television Management Companies.
(5) Amortization of amounts assigned to customer rental-purchase agreements,
noncomplete agreements and goodwill.
(6) Adjustments to interest expense for borrowings of the Company incurred in
connection with the acquisitions using the actual interest rates at the date
of each acquisition and to reflect the use of proceeds from the IPO and this
Offering to retire the outstanding debt of the Company.
(7) Tax effects of pro forma adjustments and providing for taxes on all
entities, using the effective tax rates.
(8) Adjustments to interest expense for borrowings of the Company incurred in
connection with the acquisitions using the actual interest rates at the date
of each acquisition and to reflect the use of proceeds from this Offering to
retire the outstanding debt of the Company.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION SET FORTH UNDER "SELECTED HISTORICAL FINANCIAL AND OPERATING DATA,"
"SELECTED PRO FORMA FINANCIAL DATA" AND THE FINANCIAL STATEMENTS OF THE COMPANY
AND THE ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS, EXPECTATIONS AND PLANS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED UNDER "RISK FACTORS."
GENERAL
The Company grew primarily through the opening of new stores from its
inception in 1980 through 1990. During the period from 1990 to 1993, management
focused its efforts on improving the performance of the Company's stores and, as
a result, the Company increased its revenue from $16.3 million to $22.3 million.
During the same period, operating profit increased from $908,000 to $2.0 million
and net earnings increased from $119,000 to $1.0 million. Management has
continued to improve the operations of these stores, and at June 30, 1996, these
stores were generating aggregate average monthly revenue of $2.1 million, or
approximately $59,400 per store.
In July 1994, the Company acquired 18 rental-purchase stores located in
three states (the "1994 Acquisition"). The purchase price for the stores was
$3.5 million, all of which was borrowed under the Loan Agreement. Of the
purchase price, $180,000 was allocated to the value of rental contracts and
$497,000 was allocated to other intangible assets. At the time of acquisition,
the stores were generating aggregate average monthly revenue of approximately
$689,000, or approximately $38,300 per store. Through implementation of its
operating strategies, management has significantly improved the performance of
the stores acquired in the 1994 Acquisition. At June 30, 1996, the stores
acquired in the 1994 Acquisition were generating aggregate average monthly
revenue of approximately $881,400, or approximately $49,000 per store. The
Company's profitability, however, was negatively impacted during 1994 and the
first half of 1995 due to the cost of acquiring and holding additional
inventory, increased advertising expense and additional personnel costs.
In September 1995, the Company acquired 15 stores located in five states
pursuant to the 1995 Acquisition. The purchase price for the stores was $5.9
million, all of which was borrowed under the Loan Agreement. Of the purchase
price, $210,000 was allocated to the value of rental contracts and $3.7 million
was allocated to other intangible assets. In contrast to the stores acquired in
the 1994 Acquisition, the stores acquired in the 1995 Acquisition generally were
operating near the level of efficiency of the Company's existing stores,
generating over $750,000 in aggregate average monthly revenue at the time of
acquisition, or approximately $50,000 per store. Through implementation of the
Company's operating strategies and consolidation of certain acquired stores into
these stores, average aggregate monthly revenue has increased to $793,500 at
June 30, 1996, or approximately $53,000 per store.
Since the IPO in January 1996, the Company has acquired a total of 59 stores
for an aggregate purchase price of $19.3 million. Of the aggregate purchase
price, $585,000 was allocated to the value of rental contracts and $10.7 million
was allocated to other intangible assets. These stores generated revenue of
approximately $25.9 million in 1995 and are positioned in, or are contiguous to,
a number of the Company's existing market areas. Management believes that the
majority of these stores was profitable and operating at revenue levels
comparable to that of the Company's existing stores. However, the addition of
these stores has increased the level of other direct store expenses as a
percentage of revenue due to the relatively fixed nature of these expenses and
the relatively lower revenue levels generated by these stores. Management
expects to realize increased revenue and profitability from these stores by
implementing its advertising and marketing programs and through operating
efficiencies achieved by integrating these stores into clusters of existing
stores.
13
<PAGE>
Due to the significant impact of the 1994, 1995 and 1996 Acquisitions on the
Company's operations and the increase in the Company's management personnel to
support these and future acquisitions, the Company's historical results of
operations and period-to-period comparisons may not be meaningful or indicative
of future results. The 1994, 1995 and 1996 Acquisitions were accounted for as
purchase transactions. The financial statements therefore include the operations
of the acquired entities from the date of acquisition, and the addition of
revenues, expenses and other components associated with the 1994, 1995 and 1996
Acquisitions are the principal reasons for the significant differences when
comparing results of operations to prior periods. The Company expects to
continue to make acquisitions of rental-purchase stores and may also open new
stores. To the extent that the Company acquires underperforming or unprofitable
stores or opens new stores, the Company's results of operations may be
negatively affected due to the initial costs associated with such stores.
COMPONENTS OF INCOME
REVENUE. The Company collects non-refundable rental payments and fees in
advance, generally on a weekly basis. This revenue is recognized over the rental
term. Rental-purchase agreements include a discounted early purchase option.
Amounts received upon sales of merchandise pursuant to these options and upon
the sale of used merchandise are recognized as revenue when the merchandise is
sold.
DEPRECIATION OF RENTAL MERCHANDISE. Rental merchandise acquired prior to
January 1, 1995 is being depreciated by the straight-line method over various
estimated useful lives, primarily 21 months. For rental merchandise acquired
after January 1, 1995 the Company adopted the income forecasting method of
depreciation. Management believes income forecasting is the most widely used
method of depreciation in the rental-purchase industry, because it provides a
more systematic and rational allocation of the cost of rental merchandise to
operations as its useful life expires. This depreciation method is intended to
match as closely as practicable the recognition of depreciation expense with the
consumption of the rental merchandise. 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 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. The effect of
the change in accounting method was to increase net earnings by approximately
$470,000 for the year ended December 31, 1995, primarily because of the
treatment of merchandise held for rent under the new method. For additional
information regarding the Company's method of depreciating rental-purchase
merchandise for financial accounting purposes, see Note A of Notes to Financial
Statements of the Company.
OTHER DIRECT STORE EXPENSES. Other direct store expenses include all
salaries, wages and commissions paid to store-level employees, including any
related benefits and taxes, as well as store-level general and administrative
expenses and delivery expenses, advertising, occupancy, non-rental depreciation
and other operating expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include all overhead expenses related to the Company's corporate offices
(including expenses of field supervisors), such as salaries, taxes and benefits,
occupancy, training and travel expenses.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles represents the
amortization of excess of purchase price over the fair market value of acquired
assets and is related primarily to the 1994, 1995 and 1996 Acquisitions. See "--
General." Intangible assets generally include covenants not to compete,
intangible value of customer contracts and goodwill with writeoff periods
ranging from 15 months to 240 months. Rental contracts acquired in the 1994,
1995 and 1996 Acquisitions are being amortized over 15 months and the other
intangible assets acquired in those acquisitions are being amortized over
periods of 2 to 20 years.
INCOME TAX EXPENSE. Income tax expense includes the combined effect of all
federal, state and local income taxes imposed upon the Company by various taxing
jurisdictions.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain Statement
of Earnings data as a percentage of revenue.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rentals and fees........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Direct store expenses
Depreciation of rental merchandise.................... 26.4 26.9 24.2 25.8 22.0
Other direct store expenses........................... 45.2 51.7 55.7 54.0 56.6
----- ----- ----- ----- -----
71.6 78.6 79.9 79.8 78.6
General and administrative expenses..................... 16.4 13.2 11.5 11.8 9.0
Litigation settlement................................... 2.8 -- -- -- --
Amortization of intangibles............................. 0.1 0.4 0.8 0.6 1.4
----- ----- ----- ----- -----
Operating profit.......................................... 9.0 7.8 7.8 7.8 11.0
Interest expense.......................................... 1.3 1.7 2.4 2.2 0.7
Gain on sale of investments............................... -- -- (0.3 ) -- --
----- ----- ----- ----- -----
Earnings before income taxes.............................. 7.8 6.1 5.7 5.6 10.3
Income tax expense........................................ 3.2 2.7 2.3 2.6 4.2
----- ----- ----- ----- -----
Net earnings.............................................. 4.5 % 3.5 % 3.4 % 3.0 % 6.1 %
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUE. Revenue increased $10.2 million, or 60.4%, to $27.0 million for
the six months ended June 30, 1996 from $16.8 million for the 1995 comparable
period. Revenue growth from same store operations accounted for $1.0 million, or
10.0% of the increase for the period, and revenue from acquired stores accounted
for $9.2 million or 90.0% of the increase. Management believes that the increase
in revenue for the period was primarily attributable to continued improved
performance of the stores acquired during 1994, and the addition of revenue from
the stores acquired during 1995 and 1996.
DEPRECIATION OF RENTAL MERCHANDISE. Depreciation of rental merchandise
increased $1.6 million, or 36.5%, to $5.9 million for the six months ended June
30, 1996 from $4.3 million for the comparable period in 1995. As a percentage of
revenue, depreciation of rental merchandise decreased to 22.0% from 25.8% for
the comparable period in 1995, primarily as a result of the change in the
Company's depreciation method for new rental merchandise and increased revenue
per item on rent. See "-- Components of Income."
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased $6.2
million, or 68.1%, to $15.3 million for the six months ended June 30, 1996 from
$9.1 million for the 1995 comparable period. These increases were primarily
attributable to the additional costs incurred in connection with the operation
of the stores acquired in 1995 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $447,000, or 22.4%, to $2.4 million for the six months ended June 30,
1996 from $2.0 million for the comparable period in 1995. As a percentage of
revenue, general and administrative expenses decreased to 9.0% for the six
months ended June 30, 1996 from 11.8% for the 1995 comparable period, primarily
as a result of greater operating efficiencies achieved through the operation of
a greater number of stores and increased revenue at existing stores.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased
$290,000, or 300.2%, to $387,000 for the six months ended June 30, 1996 from
$97,000 for the 1995 comparable period primarily as a result of intangible
assets created by the 1995 and 1996 acquisitions.
15
<PAGE>
INTEREST EXPENSE. Interest expense decreased $179,000, or 49.6%, to
$182,000 for the six months ended June 30, 1996 from $361,000 for the comparable
period in 1995. The decline is attributable to the repayment of debt in
connection with the IPO in January 1996, partially offset by interest expense on
additional borrowings during the first six months of 1996. Proceeds from this
Offering will be used to repay outstanding debt. In addition, the Company's Loan
Agreement has been amended to include more favorable terms, including lower
interest rates. See "-- Liquidity and Capital Resources."
NET EARNINGS. Net earnings increased $1.1 million, or 226.4%, to $1.6
million for the six months ended June 30, 1996 from $503,000 for the 1995
comparable period. Net earnings as a percentage of revenue increased to 6.1%
from 3.0% for the comparable period in 1995. These increases are primarily
attributable to improvement in operating margins for the stores acquired in 1994
and generally high operating margins for the stores acquired in 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE. Revenue increased $9.8 million, or 35.2%, to $37.6 million for the
year ended December 31, 1995, from $27.8 million in 1994. Revenue from same
store operations accounted for $779,000, or 8.5% of the increase, and revenue
from acquired stores accounted for $8.4 million, or 91.5% of the increase for
the year. Management believes that the increase in revenue for the period was
primarily attributable to improved performance of the stores acquired in the
1994 Acquisition, an increase in the number of items on rent and in revenue
earned per item on rent, improved collections and the addition of revenue from
four months of operations of the stores acquired in the 1995 Acquisition. The
increase in revenue earned per item on rent was primarily attributable to the
purchase and subsequent rental of higher priced merchandise.
DEPRECIATION OF RENTAL MERCHANDISE. Depreciation of rental merchandise
increased $1.6 million, or 21.6%, to $9.1 million for the year ended December
31, 1995, from $7.5 million in 1994. As a percentage of revenue, depreciation of
rental merchandise decreased to 24.2% for the year ended December 31, 1995, from
26.9% in 1994, primarily as a result of the change in the Company's depreciation
method for new rental merchandise purchases and increased revenue per item. The
effect of the change in accounting method was to increase net earnings by
$470,000 for the year ended December 31, 1995, primarily because of the
treatment of merchandise held for rent under the new method. See "-- Components
of Income."
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased $6.5
million, or 45.5%, to $20.9 million for the year ended December 31, 1995, from
$14.4 million in 1994. As a percentage of revenue, other expenses increased to
55.7% for the year ended December 31, 1995, from 51.7% in 1994. This increase
was primarily attributable to the additional costs incurred in connection with
the operation of the stores acquired in the 1994 Acquisition. The stores
acquired in the 1994 Acquisition operated at lower average revenue per store and
therefore had higher operating costs as a percentage of revenue than the
Company's existing stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $661,000, or 18.0%, to $4.3 million for the year ended December 31,
1995, from $3.7 million in 1994. This increase was primarily attributable to
additional corporate and administrative personnel needed to support the 1994 and
1995 Acquisitions and future store acquisitions. Corporate and administrative
personnel levels are not expected to increase significantly over the foreseeable
future. As a percentage of revenue, general and administrative expenses
decreased to 11.5% for the year ended December 31, 1995, from 13.2% in 1994,
primarily as a result of increased revenue from stores acquired in 1994 and
greater operating efficiencies achieved through higher rental revenue.
Management expects general and administrative costs to continue to decline as a
percentage of revenue as the Company increases the number of stores which it
operates.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased $188,000
to $285,000 for the year ended December 31, 1995, primarily as a result of
intangible assets created by the 1994 and 1995 Acquisitions.
INTEREST EXPENSE. Interest expense increased $433,000, or 93.9%, to
$894,000 for the year ended December 31 ,1995, from $461,000 in 1994. As a
percentage of revenue, interest expense increased to
16
<PAGE>
2.4% for the year ended December 31, 1995, from 1.7% in 1994, primarily as a
result of the debt incurred in connection with the 1994 and 1995 Acquisitions.
Proceeds from the Company's IPO were used to repay outstanding debt in January
1996. See "-- Liquidity and Capital Resources."
NON-OPERATING INCOME. Non-operating income of $100,000 was provided in the
year ended December 31, 1995 by the gain on sale of securities previously held
by the Company.
NET EARNINGS. Net earnings increased $305,000, or 31.7%, to $1.3 million
for the year ended December 31, 1995, from $962,000 in 1991. As a percentage of
revenue, net earnings decreased to 3.4% for the year ended December 31, 1995,
from 3.5% in 1994, primarily as a result of increased interest expense and lower
operating margins for the stores acquired in the 1994 Acquisition.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUE. Revenue increased $5.5 million, or 24.8%, to $27.8 million for
1994, from $22.3 million in 1993. Revenue from same store operations accounted
for $955,000, or 17.3% of this increase, and revenue from acquired stores
accounted for $4.6 million, or 82.7% of this increase. Management believes that
the increase in revenue from acquired stores was primarily attributable to an
increase in the number of items on rent and in revenue earned per item on rent
and improved collection procedures.
DEPRECIATION OF RENTAL MERCHANDISE. Depreciation of rental merchandise
increased $1.6 million, or 27.1%, to $7.5 million for 1994 from $5.9 million in
1993. As a percentage of revenue, depreciation of rental merchandise increased
to 26.9% for 1994 from 26.4% in 1993, primarily as a result of lower average
revenue per store for the stores acquired in the 1994 Acquisition.
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased $4.3
million, or 42.7%, to $14.4 million in 1994 from $10.1 million in 1993. This
increase was attributable to the stores acquired in the 1994 Acquisition. As a
percentage of revenue, other expenses increased to 51.7% for 1994 from 45.2% in
1993, primarily as a result of lower average revenue per store for the stores
acquired in the 1994 Acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
remained constant from 1993 to 1994. As a percentage of revenue, general and
administrative expenses decreased to 13.2% for 1994 from 16.4% in 1993,
primarily as a result of greater operating efficiencies achieved through higher
revenue.
INTEREST EXPENSE. Interest expense increased $180,000, or 64.0% to $461,000
for 1994 from $281,000 in 1993. As a percentage of revenue, interest expense
increased to 1.7% for 1994 from 1.3% in 1993. These increases were primarily the
result of additional borrowings incurred in connection with the 1994
Acquisition.
NET EARNINGS. Net earnings decreased $48,000, or 4.8%, to $962,000 for 1994
from $1.0 million in 1993. As a percentage of revenue, net earnings decreased to
3.5% in 1994 from 4.5% in 1993, primarily as a result of the acquisition of
underperforming stores. Net earnings in 1993 were also negatively impacted in
the amount of $625,000 by the settlement of certain litigation. See
"Business -- Legal Proceedings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital, other than those related to
acquisitions, consist of purchasing additional rental merchandise and replacing
rental merchandise which has been sold or is no longer suitable for rent. During
the six months ended June 30, 1996 and 1995, the Company purchased rental
merchandise for aggregate amounts of approximately $9.7 million and $4.0
million, respectively. In addition, during the six months ended June 30, 1996,
the Company acquired 39 stores for an aggregate purchase price of $11.2 million,
of which $10.0 million was paid in cash and $1.2 million has been placed in
escrow. Historically, the Company's growth has been financed through internally
generated working capital, borrowings under the Loan Agreement and proceeds from
the IPO.
For the year ended December 31, 1995, net cash provided by (used in)
operating activities increased to $972,000 from ($683,000) for the prior year,
primarily due to the additional cash generated from the operations of the stores
acquired in the 1994 Acquisition. For the six months ended
17
<PAGE>
June 30, 1996, net cash provided by (used in) operating activities decreased to
($710,000) from $1.8 million for the same period in 1995, primarily due to
increased purchases of rental merchandise for the stores acquired in the 1996
Acquisitions.
Indebtedness incurred by the Company in connection with the 1996
Acquisitions was financed with borrowings under the Loan Agreement. A portion of
the net proceeds of this Offering will be used to repay all outstanding
indebtedness under the Loan Agreement. Borrowings under the Loan Agreement bear
interest at varying rates from the bank's prime rate of interest (8.5% at June
30, 1996) to the prime rate plus 1.25%, based upon the aggregate unpaid balance
to the bank and the Company's average three month rental contract revenues. If
certain conditions are satisfied, the Company may elect to fix the interest rate
on certain borrowings under the Loan Agreement for up to three months at a
specified rate based upon prevailing LIBOR rates. The Company is required to pay
(i) 1/2 of 1% per annum of the unused portion of the facility whenever such
unused portion is greater than or equal to $10 million; and (ii) 3/8 of 1% per
annum of the unused portion of the facility whenever such unused portion is less
than $10 million. Under the Loan Agreement, the Company may borrow an amount
equal to the lesser of (a) the immediate three-month average monthly rental
contract revenues multiplied by the monthly revenue multiplier (4.0) or (b) the
maximum amount available under the Loan Agreement ($25.0 million at June 30,
1996). The maximum amount available under the Loan Agreement will be reduced in
quarterly increments during the period beginning in February 1997 and ending in
February 2000. The Loan Agreement matures on February 1, 2000. Borrowings under
the Loan Agreement are secured by a lien on substantially all of the Company's
assets. The Loan Agreement includes certain profitability, cash flow and net
worth requirements, as well as covenants which limit the ability of the Company
to incur additional bank or other indebtedness, declare or pay cash or stock
dividends and engage in any merger transactions.
In the IPO, 1,100,000 shares were offered by the Company and 700,000 shares
were offered by a selling shareholder at the price of $14.00 per share. Net
proceeds to the Company were $13.4 million. On February 26, 1996, the
underwriters of the IPO exercised part of their over-allotment option for
219,200 shares. Net proceeds to the Company from this transaction amounted to
$2.9 million. A portion of the net proceeds was used to repay all outstanding
indebtedness under the Loan Agreement.
Management intends to increase the number of stores the Company operates
primarily through acquisitions. To date in 1996, the Company has acquired 59
stores, and management currently expects to add 60 to 70 stores in the next 12
to 24 months. Management believes that a number of acquisition opportunities are
available within the rental-purchase industry. Acquisitions will vary in size
and the Company will consider large acquisitions that could be material to the
Company. There can be no assurance that the Company will be able to acquire any
additional stores, or that any stores that are acquired will be or will become
profitable.
If acquisition opportunities are not available, the Company may open new
stores. Management estimates that the average investment with respect to new
stores is approximately $350,000 per store, of which rental merchandise
comprises approximately 75%. The remaining investment consists of leasehold
improvements, delivery vehicles, store signs, computer equipment and start-up
costs. There can be no assurance that the Company will open any new stores in
the future, or that any stores that are opened will become profitable.
Management believes that the proceeds of this Offering, together with
internally generated working capital and additional borrowings under the Loan
Agreement (as amended), will be adequate to fund operations and expansion plans
of the Company at least through 1997. The Company plans to continue its current
growth strategy of acquiring or opening new rental-purchase stores. To provide
any additional funds necessary for the continued pursuit of the Company's growth
strategies, the Company may incur, from time to time, additional short- and
long-term bank indebtedness and may issue, in public or private transactions,
its equity and debt securities, the availability of which will depend upon
market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company.
18
<PAGE>
QUARTERLY RESULTS
The following table sets forth summary unaudited quarterly financial
information of the Company for each quarter in 1994 and 1995 and the six months
ended June 30, 1996. Results for periods beginning after June 30, 1994, may not
be comparable to results for periods prior to June 30, 1994, as a result of the
1994, 1995 and 1996 Acquisitions. In the opinion of management, such information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Prospectus and reflects all adjustments necessary
for a fair presentation of such unaudited quarterly results. The quarterly
results should be read in conjunction with the audited financial statements of
the Company included elsewhere in this Prospectus. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Six months ended June 30, 1996
Revenue.................................................. $ 12,398 $ 14,606
Operating profit......................................... 1,224 1,746
Net earnings............................................. 701 942
Earnings per common share................................ .18 .21
Year ended December 31, 1995
Revenue.................................................. $ 8,419 $ 8,553 $ 9,323 $ 11,281
Operating profit......................................... 392 823 720 994
Net earnings............................................. 139 364 268 496
Earnings per common share................................ .04 .12 .09 .16
Year ended December 31, 1994
Revenue.................................................. $ 5,642 $ 5,820 $ 7,852 $ 8,486
Operating profit......................................... 510 439 608 605
Net earnings............................................. 256 205 268 233
Earnings per common share................................ .08 .07 .09 .08
</TABLE>
INFLATION AND SEASONALITY
During the six months ended June 30, 1996, and the years ended December 31,
1995 and 1994, the cost of rental merchandise, occupancy expenses and salaries
and wages have increased. The increases have not had a significant effect on the
Company's results of operations because the Company has been able to charge
higher rental rates for its merchandise. The Company's business is relatively
seasonal, with a greater percentage of rentals occurring during the fourth
quarter of each year.
19
<PAGE>
BUSINESS
GENERAL
The Company is a rapidly growing operator of rental-purchase stores that
currently has 119 stores in 15 states, primarily located in the midwestern and
southern United States. The Company offers high quality, brand-name consumer
merchandise under flexible, renewable rental-purchase agreements, also known as
rent-to-own agreements. Approximately 75% of the Company's customers make weekly
rental payments. The agreements provide customers with the option, but not the
obligation, to obtain ownership of the merchandise following a stated number of
consecutive rental payments, usually 78 weeks or 18 months. Less than 25% of the
Company's customers complete the full term of the agreement. Previously rented
merchandise is refurbished and re-rented generally for a reduced term.
The Company's target customers are typically low to middle income consumers
with limited or no access to traditional credit sources such as bank financing,
installment credit and credit cards. The Company's customers also include
persons who desire only temporary rental of a product. The Company develops a
presence in the neighborhoods served by its stores by emphasizing a high
standard of customer service and by providing quality brand-name merchandise on
competitive terms. The Company has increased its profitability by clustering its
stores within defined market areas, utilizing sophisticated management
information systems and enhancing employee productivity through incentive-based
compensation and formalized training.
Management's experience in the rental-purchase industry and its active
leadership role in APRO are two of the Company's strengths and competitive
advantages. Michael D. Walts, Chairman of the Board and President, Raymond C.
Holladay, Executive Vice President and Chief Operating Officer, and Theodore H.
Wilson, Executive Vice President and Chief Financial Officer, have over 50 years
of combined experience in the industry. Mr. Holladay organized APRO in 1980 and
has served as its president and as a director. Mr. Wilson has previously served
as president of APRO and currently serves as a director. Messrs. Holladay and
Wilson are both regular contributors to the industry trade magazine and
frequently conduct industry seminars sponsored by APRO. Management believes that
its visibility within APRO and its industry experience are of particular benefit
in enabling the Company to identify and develop acquisition candidates.
1996 ACQUISITIONS
Since the IPO in January 1996, the Company has acquired a total of 59
rental-purchase stores, nine of which were consolidated into existing
operations. Those acquisitions have expanded the Company's operations from 69
stores in 12 states at the time of the IPO to 119 stores in 15 states currently.
The 1996 Acquisitions have provided the Company with entry into the large
Atlanta and Chicago markets and increased the Company's market share in certain
of its existing markets, including Birmingham, Cincinnati, Indianapolis,
Louisville, Miami and New Orleans.
The following outlines the Company's acquisitions since the IPO:
In March 1996, the Company acquired 14 stores operating under the Easy
Rental name from Klopp Enterprises, Inc. for an aggregate purchase price of $6.5
million. These stores generated revenue of approximately $9.9 million in 1995
and are located primarily in New Orleans and throughout Florida. These stores
were operating at a high level of revenues and profitability which required
little action by management to integrate the stores into existing operations. In
connection with this transaction, the Company also received the right of first
refusal to acquire an additional ten stores in the greater Atlanta area.
In June 1996, the Company acquired seven stores from Royce, Inc. for an
aggregate purchase price of $500,000. These stores generated revenue of $1.8
million in 1995 and are located primarily in the greater Chicago area.
Management believes that these stores, located in densely populated markets,
were generally underperforming and provide the Company with the opportunity to
significantly improve their operations. Since the acquisition, the Company has
invested approximately $400,000 in
20
<PAGE>
new merchandise for these stores, upgraded their appearance and acquired new
accounts. The number of units on rent in these stores has increased
approximately 17.1% since the time of acquisition, delinquencies have decreased
significantly and the stores have been integrated successfully into the
Company's operations.
In August 1996, the Company acquired all of the outstanding common stock of
Network Rental, an operator of 14 stores in the greater Atlanta area, for an
aggregate purchase price of $5.7 million subject to post-closing adjustments for
certain assumed liabilities and transferred assets. These Atlanta stores
generated revenue of approximately $7.0 million in 1995 and, together with other
stores acquired in 1996, give the Company a strong presence in the Atlanta
market. The presence of such a large cluster of stores creates the opportunity
for substantial operating, advertising and supervisory efficiencies in this
market.
In addition, the Company has acquired 24 stores in 12 separate transactions
since the IPO for an aggregate purchase price of $6.6 million. These stores are
located primarily in the Company's existing markets of Louisville and
Indianapolis as well as two stores in Atlanta. The location of these stores in
existing markets enabled the Company to quickly integrate the stores into
existing supervisory structures with minimal incremental cost.
RENTAL-PURCHASE INDUSTRY
According to the 1996 APRO Industry Survey, in 1995, the rental-purchase
industry had gross revenues of approximately $4.0 billion and rented 5.5 million
products to 2.9 million households through 7,500 stores.
The Company's target market includes potential customers with income at or
below the median family income level in each of its individual markets.
According to U.S. Census Bureau data, the median family income in 1990 (the
latest date for which such information is available) was approximately $35,000.
Approximately 57.6% of all households in the United States have incomes at or
below this level.
The rental-purchase industry is highly fragmented. According to industry
estimates, the ten largest companies in the industry own 40.5% of the total
stores. Management believes, based on APRO information, that the majority of
dealers operates fewer than 20 stores. See "-- Competition."
The rental-purchase industry is experiencing consolidation primarily because
larger, multi-unit operators have significant competitive advantages compared to
their smaller competitors. Rental-purchase operators typically have been
financed by a small number of commercial lenders who specialized in the
industry. In recent years, many of the lenders have withdrawn from the market or
imposed more restrictive lending standards. These conditions have reduced many
smaller operators' access to the capital necessary to maintain and grow their
businesses. Larger operators enjoy greater purchasing power thus enabling them
to provide more competitively priced merchandise. Larger operators typically are
also able to operate more efficiently than smaller operators because of
management information systems and economies of scale. Many smaller competitors
lack the managerial resources necessary to operate larger rental-purchase
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.
21
<PAGE>
OPERATING STRATEGIES
The Company has developed and refined the Alrenco operating concept which
management believes has improved the operations of the Company's stores. The
Company distinguishes its stores and operations from its competitors through a
commitment to the following operating strategies:
POSITION ALRENCO AS THE "NEIGHBORHOOD RENTAL STORE." The Company
locates its stores near its targeted customers in communities that consist
predominantly of low to middle income consumers. The Company seeks to hire
and retain store employees who know their community well and can expand the
customer base. Store employees must interact positively with customers,
including greeting customers by name on the showroom floor when possible.
Management believes that the Company can successfully compete with other
large multi-store competitors by focusing on store-level operations and
leveraging employees' knowledge of local markets. The Company expects its
store employees to develop a local reputation for quick and friendly
customer service, for making customers feel welcome and comfortable in a
well-maintained store and for providing quality, brand-name merchandise on
competitive terms. The Company typically offers broader product lines and
higher quality merchandise than its local independent competitors. The
Company monitors its competition regularly to stay informed of changing
products and pricing and to adapt its product lines to local market tastes
and influences.
EMPHASIZE A HIGH STANDARD OF CUSTOMER SERVICE. Management believes that
fast, personalized customer service is critical to its ability to generate
repeat and referral business. Management believes its service-oriented
strategy has been successful, since a significant percentage of the
Company's customers are repeat customers or referrals from existing
customers. The Company provides all service, including parts and labor,
throughout the term of the agreement. The Company provides personalized
service by assigning each customer to his or her own account representative,
who delivers the customer's products, makes service calls and inquires about
delinquent payments. The Company's commitment to customer service is
reflected in its policy that requires employees to provide all customers,
upon request, with the telephone number of the Company's corporate office
where any complaints or problems which are not handled at the store level to
the satisfaction of the customer can be resolved. Management believes this
emphasis on customer service also reinforces the Company's credibility with
its customers, builds customer loyalty and minimizes customer complaints.
ACHIEVE OPERATING EFFICIENCIES THROUGH CLUSTERING OF STORE
LOCATIONS. The Company's acquisition and expansion strategy is focused upon
developing "clusters" of stores in each of its markets. Management believes
that by developing a cluster of stores in a particular market, the Company
is better able to manage the operations of the stores and ensure conformity
to its operating standards. In addition, the Company achieves significant
economies of scale in its advertising, marketing and supervision costs by
operating stores in clusters rather than stores in more dispersed locations.
UTILIZE SOPHISTICATED MANAGEMENT INFORMATION SYSTEMS. The Company
utilizes sophisticated management information systems that provide senior
management with daily reports detailing key operational statistics for all
stores. The systems allow management to track inventory movement within each
product category as well as past due accounts and other collection activity.
These systems were originally designed and developed under the direction and
to the specifications of Raymond C. Holladay, the Company's Executive Vice
President and Chief Operating Officer. The Company's management information
systems are a key factor in enabling management to integrate and control its
newly-acquired stores, maintain strict control over costs and revenue and
optimize the Company's return on rental merchandise. Management believes
that the Company's information systems provide a significant competitive
advantage over smaller local operators.
22
<PAGE>
ENHANCE EMPLOYEE PRODUCTIVITY THROUGH INCENTIVE-BASED COMPENSATION AND
TRAINING. The Company has structured its compensation arrangements to
provide regional and store-level managers with incentives to increase store
revenue and profits. As a result, up to 50% of a store manager's total
compensation may be based upon the profitability of his or her store.
Regional managers are paid based on the profitability of the group of stores
they supervise, with over one-third of their compensation provided for in
the form of profit-based commissions. In addition, stock options were
granted to all persons serving as store managers or regional managers at the
time of the IPO, and management is developing a program for awarding stock
options to all store and regional managers on a continuing basis. Management
is committed to providing its employees with formal, supervised training.
The Company establishes a "training store" in each of the Company's market
areas and has developed a comprehensive training manual which outlines all
of the Company's procedures and operating practices. Management believes
that its training programs enhance the Company's operations by ensuring
conformity to established operating standards, reducing employee turnover,
enhancing employee productivity and improving employee morale.
GROWTH STRATEGIES
The Company intends to continue to increase its revenue and profits by
adhering to the following strategies:
ACQUIRE EXISTING RENTAL-PURCHASE STORES. The Company plans to
capitalize on the consolidation trend in the rental-purchase industry and
intends to increase the number of stores it owns primarily through
acquisitions of existing rental-purchase stores. The Company continually
reviews acquisition opportunities, and management believes that a number of
acquisition opportunities currently exist. The Company plans to focus its
acquisition efforts on stores which can most readily be integrated into the
Company's operational structure and target market areas. The Company
typically targets smaller, profitable, yet undercapitalized chains of
rental-purchase stores. The acquired stores benefit from the administrative
systems, improved products, increased advertising and purchasing power of
the larger organization while strengthening their local market position.
IMPROVE THE PERFORMANCE OF ACQUIRED STORES. Following an acquisition,
management seeks to improve store performance through strategies intended to
produce immediate gains in operating efficiency and profitability. These
strategies typically include an immediate investment of capital in new
inventory and an increase in advertising expenditures. Additionally,
management expects to enhance the profitability of acquired stores through
closer supervision of store operations, improved selling techniques,
improved collection procedures, higher inventory yield and the selected
consolidation of acquired stores or rental portfolios into existing stores.
Through the implementation of these strategies, average aggregate monthly
revenue from the stores acquired in the 1994 and 1995 Acquisitions increased
approximately 27.9% and 5.8%, respectively, from the date of the
acquisitions through June 30, 1996. The Company is currently in the process
of applying these strategies to the stores acquired in the 1996
Acquisitions. Management believes that the Company's existing corporate
infrastructure will support the Company's planned level of growth for the
foreseeable future without significant increases in overhead costs.
INCREASE MARKET PENETRATION IN EXISTING MARKETS. While continuing to
pursue its acquisition strategy, the Company will seek to increase revenue
and profits in existing markets through targeted marketing to potential
customers and the continued upgrading and broadening of product lines. The
Company promotes its merchandise and services through direct mail and
television and radio advertising. This strategy enabled the Company to
demonstrate increases in comparable store revenue growth during the years
1990 through 1995 by 13.1%, 13.3%, 3.1%, 8.0%, 4.3% and 3.3%, respectively.
In certain established market areas, the Company may open new stores where
viable acquisition opportunities are not available.
23
<PAGE>
MERCHANDISING
The Company's stores offers an assortment of quality, brand-name
merchandise, including consumer electronics, appliances, furniture, jewelry, and
home furnishings accessories. The Company displays a wide variety of styles and
models of merchandise in its stores. Merchandise is displayed in showroom
settings featuring attractive, professional displays and signage. Store
interiors feature bright colors and custom neon signage in an atmosphere
intended to make customers feel comfortable. Corporate and regional management
closely monitors adherence to Company standards for cleanliness and quality of
merchandise in all stores.
Management regularly evaluates and modifies its product offerings to reflect
changing local demand. The Company frequently test markets new merchandise items
to expand the total number of items on rent and increase the dollar value of its
outstanding contracts. As a percentage of total units on rent at June 30, 1996,
consumer electronics accounted for 37.0%; appliances accounted for 24.6%;
furniture accounted for 21.9%; and jewelry and home furnishings accessories
accounted for 16.5%. Customers may choose either new or previously rented
merchandise. Previously rented merchandise is marketed at the same rental rate
as new merchandise, but requires fewer consecutive rental payments to obtain
ownership. On June 29, 1996, the Company's average rental rate was $13.54 per
week. The Company, like the rental-purchase industry in general, requires higher
aggregate payments than are usually charged under installment purchase or credit
plans that do not offer the same array of payment options or services or that
require a continuing financial obligation.
CONSUMER ELECTRONICS. The Company offers a variety of videocassette
recorders, color televisions, stereo systems and home entertainment centers.
Major electronics brands include Fisher, RCA, GE, Sharp and Zenith. Weekly
rental prices for electronics range from $6.99 to $42.99.
APPLIANCES. The Company rents major appliances including brand names such
as Whirlpool, Tappan, Roper and Gibson. The product line includes washing
machines and dryers, refrigerators, microwave ovens, ranges, freezers and
portable dishwashers. Weekly rental prices for appliances range from $6.99 to
$24.99.
FURNITURE. The Company offers a broad selection of furniture items,
including recliners, casual dinettes, seven-piece living room groups with
matching lamps and tables and bedroom and juvenile furniture in a variety of
styles and packages. Room vignettes allow customers to visualize how the product
will look in their homes while simultaneously providing a showcase for
accessories. Weekly rental rates for furniture range from $9.99 to $24.99.
JEWELRY AND HOME FURNISHINGS ACCESSORIES. The Company offers diamond and
gold jewelry in store displays featuring lighted glass cases with custom neon
signage and track lighting. Employees receive special training in jewelry
merchandising and security. Weekly rental rates for jewelry range from $9.99 to
$19.99. The Company's stores also display a wide variety of low-cost home
furnishings accessories, including decorative lamps, oversized wall art and
casual tables. Accessories are typically packaged with other merchandise such as
a living room group or bedroom group. Weekly rental rates for these products
range from $3.99 to $9.99.
24
<PAGE>
STORE OPERATIONS
The Company currently operates 119 stores in 15 states. The following table
sets forth the number of store locations in each state in which the Company
presently operates.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
LOCATION STORES LOCATION STORES
- ---------------------------------- --------------- ---------------------------------- ---------------
<S> <C> <C> <C>
Alabama........................... 9 Maryland.......................... 4
Arizona........................... 2 Mississippi....................... 1
Florida........................... 12 Ohio.............................. 16
Georgia........................... 17 Tennessee......................... 5
Illinois.......................... 6 Texas............................. 2
Indiana........................... 9 Virginia.......................... 11
Kentucky.......................... 12 West Virginia..................... 6
Louisiana......................... 7
</TABLE>
The average store contains approximately 3,800 square feet. Approximately
70% of each store's space is generally used for showroom space and 30% for
offices and storage. Each regional manager maintains an office in a store within
his or her region. Management believes that suitable store space is available
for lease in each market where the Company currently operates or plans to
operate. The Company does not operate any distribution warehouses, but in
certain markets, individual stores may rent storage facilities on a temporary
basis.
In considering acquisition opportunities and potential new markets, the
Company reviews demographic and competitive information concerning the patterns
of potential rental-purchase customers. Store locations are evaluated based upon
management's analysis of such demographic information, the proximity of
competitors, traffic counts, area population, accessibility and cost. Stores are
typically located in strip shopping centers that contain a large anchor tenant,
usually a major discounter or supermarket, and other compatible tenants such as
auto parts retailers, drugstores, convenience stores, fast food outlets and
laundromats. The surrounding area is typically populated with a high
concentration of lower and middle income consumers. Most customers reside within
a five-mile radius of the store.
The Company has developed a procedure for successfully integrating acquired
stores into its operations. Store signage and appearance are changed
immediately. Within 30 days following an acquisition, the acquired stores are
converted to the Company's internal procedures and management information
systems. Inventory is added or replaced and the Company's collection policies
are implemented promptly. Generally management is able to fully convert stores
acquired within 30 days of acquisition.
MANAGEMENT AND SUPERVISION. The Company's operating strategy is to limit
the number of stores supervised by each division or regional manager to assure
adequate monitoring of operations. The Company expects to employ additional
division and regional managers as the number of store locations increases. The
Company's 119 stores are presently organized into two divisions. Management
expects to add a third division in the near future. A division manager directs
seven to eight regional managers who are responsible for five to eight stores
each. Division managers are experienced executives who report directly to the
Chief Operating Officer. Regional managers reside in the regions that they
supervise and monitor individual store performance and inventory on a daily
basis.
Each store is typically staffed with a manager, an assistant manager and
four account representatives. Individual store managers are responsible for
customer relations and account collection, development of new rental accounts,
inventory management, staffing and training and profit and loss control.
Management at the Company's corporate offices directs and coordinates
purchasing, product servicing, planning and controls, employee training and
personnel matters. Marketing and operations
25
<PAGE>
personnel evaluate the performance of each store utilizing on-site reviews and
daily operations summaries. The Company expanded its corporate office resources
during 1994 and 1995 to support its continued growth.
The Company distributes simplified written procedures and policies covering
all aspects of store-level operations. These policies and procedures have been
designed to minimize the operating risks inherent in the rental-purchase
business. Management believes that revenue and profits for rental-purchase
stores can be managed by focusing on a few key operating ratios. The Company
also seeks to enforce profit and loss accountability at each level of management
through profit-based incentive compensation programs. Store managers receive a
monthly commission based on profits of their stores before corporate overhead.
Division and regional managers receive commissions based on the profitability of
the group of stores for which they are responsible. Strict inventory controls
allow management to monitor the status and income production of each individual
piece of inventory until its disposal, typically 18 to 24 months after original
date of purchase.
The Company seeks to attract and retain qualified store managers and other
store-level personnel. New personnel at all levels of the organization are
required to complete a supervised training program before being assigned to a
store for continued on-the-job training. The Company has developed an innovative
training program that includes the establishment of a "training store" in each
of the Company's market areas. In addition, the Company has developed a
comprehensive training manual for its employees which outlines all of the
Company's procedures and operational practices.
CUSTOMER SERVICE. Management believes that the quality and timeliness of
its customer service provide the Company with a competitive advantage. The
Company provides same day delivery and installation of its merchandise at little
or no additional cost to the customer. The Company performs all necessary
service without charge, except for damage in excess of normal wear and tear.
Most products offered by the Company are covered under standard manufacturers'
warranties, and the remainder of the warranties may be transferred to a customer
who obtains ownership. Customers are fully liable for damage, loss or
destruction of the merchandise unless they have purchased an optional
loss/damage waiver.
The Company monitors customer relations at the store level and encourages
customer feedback. Company policy requires employees to provide all customers,
upon request, with the telephone number of the Company's corporate office where
any complaints or problems which are not handled at the store level to the
satisfaction of the customer can be resolved.
COLLECTION PROCEDURES. Management believes that good collection practices
are critical to the Company's profitability and continued success. The Company
manages the collection process by making a thorough and accurate initial
presentation of the rental-purchase transaction to each customer and then
monitoring each new account closely thereafter. Management believes that the
Company's "preventive maintenance" approach to collection practices increases
revenue per product while controlling collection and pickup costs, decreases the
likelihood of customer default, improves customer relations and reduces
chargeoffs. The Company has adopted and closely monitors compliance with
standardized collection procedures. Information on delinquent accounts is
reported in detail each day, and the Company's collection procedures are
monitored by store managers and reviewed routinely by their regional managers.
Average chargeoffs due to lost or stolen merchandise were approximately 1.9% of
the Company's revenue during the three years ended December 31, 1995. This rate
compares favorably to three-year average chargeoff rate of approximately 2.6% of
revenue for the largest chains in the industry reporting to APRO in 1996.
In the event a customer fails to renew a rental-purchase agreement or return
the merchandise in a timely manner, the account manager who delivered the
product contacts the customer to arrange for reinstatement by in-store payment
of the amount due. If no payment is received, the account representative will
arrange for reinstatement of the agreement or the return of the merchandise to
the
26
<PAGE>
store. In order to reduce potential conflict and liability, employees are
discouraged from collecting payments at the customer's residence. Approximately
90% of all rental payments are made in person at the store or by mail.
Management attempts to recover all rental merchandise or receive full payment
within seven days of expiration of the agreement. Substantially all recoveries
of merchandise are voluntary. In a small number of cases, the Company utilizes
the judicial process to enforce the return of unrecovered items. Only a
corporate officer may approve civil proceedings against a customer.
MANAGEMENT INFORMATION SYSTEMS. The Company's management information
systems provide detailed information on store operations in daily, weekly,
monthly and year-to-date reports. These reports cover data in a broad range of
categories and present information by stores or groups of stores. The systems
provide the Company's management with on-demand access to operating and
financial information about any store. The systems were originally designed and
developed under the direction and to the specifications of Raymond C. Holladay,
the Company's Executive Vice President and Chief Operating Officer. The
Company's integrated computerized management information and control systems
track inventory movement for each store location and by each product category,
minimizing excess inventory while maintaining optimal in-stock positions. The
systems also monitor collection procedures and practices in order to help
minimize late payments and expenses related to recovery of merchandise while
maintaining good customer relations and compliance with regulatory and
industry-accepted collection practices. Store reports are reviewed daily by
store and regional managers. Division managers and senior executives review
group summaries, and exceptions to Company standards are addressed each day.
Daily store activity is electronically transmitted to home office computers each
night. The integration of the management information systems with the Company's
accounting system allows financial statements to be generated within seven to
ten days after the end of each month. These systems have enabled the Company to
expand its operations while maintaining a high degree of control over cash
receipts, inventory and customer transactions.
RENTAL-PURCHASE AGREEMENTS. The Company extends renewable week-to-week or
month-to-month rental-purchase agreements that can be cancelled at any time.
Approximately 75% of the Company's customers make weekly rental payments. The
customer's obligations are to make rental payments in advance of the period for
which he or she chooses to rent the merchandise, to pay for loss or damage to
the merchandise if not covered under available loss/damage waivers and to return
the merchandise to the Company at the expiration of the rental period if he or
she elects not to renew the agreement. Each agreement automatically expires at
the end of the stated rental period unless a renewal payment is made. Expired
accounts may be renewed by payment of the delinquent rent and a nominal
reinstatement fee. The Company retains title to the merchandise during the term
of the agreement. Ownership of the merchandise may transfer to the customer
after continuous renewal of the agreement for a stated period, usually 78 weeks.
The Company has developed and uses its own standard form rental-purchase
agreements based upon APRO model documents. Variations in the legal requirements
of each state are normally addressed through the use of riders to the form
agreements. Management believes that the Company's agreements materially comply
with the legal requirements of the states in which they are used. See "--
Government Regulation."
Although the Company does not conduct a formal credit investigation to
qualify its customers, potential customers must provide certain personal
information which is verified by the store manager or assistant manager before a
rental-purchase agreement can be approved. Required information typically
includes a valid driver's license, a place of employment or verifiable source of
income, home address and the phone numbers and addresses of relatives.
Approximately 90% of all rental orders are approved. Subsequent rental payments
are required to be mailed to or made at the store. Where permitted by law, the
Company offers loss/damage waivers to customers who desire protection from loss
or damage. Such fees are standard in the industry, are not represented as
insurance, and may be subject to government-specified limits.
27
<PAGE>
PRODUCT TURNOVER. Historical information maintained by the Company
indicates that less than 25% of the Company's customers complete the full term
of a rental-purchase agreement, and management believes that this trend will
continue. Management believes the average rental period for its products
historically has been approximately twenty-six weeks. As of August 21, 1996, the
Company's stores were assigned an average of 1,146 items of merchandise per
store, of which approximately 841 items were on rental-purchase agreements and
approximately 305 items were available for rental.
PURCHASING AND DISTRIBUTION
The Company's product mix is determined by senior management, based on
promotional requirements and on customer demand as determined from store
inventory analysis reports. Store managers order inventory on a weekly basis and
consult with their regional managers to determine whether existing merchandise
can be reallocated before ordering new products. Store managers are not
permitted to order directly from a manufacturer but may order fill-in quantities
from local distributors with prior approval from the purchasing department. The
Company seeks to maximize return on inventory investment by maintaining
merchandise held for rent but not rented at a level equal to approximately 22%
of total inventory. Adjusted for seasonal fluctuations, management believes the
Company is currently maintaining merchandise held for rent within an acceptable
range. The Company does not maintain a centralized warehouse or distribution
facility, since the Company's suppliers make direct shipments to its stores.
Management believes that such an arrangement minimizes inventory costs and
overhead expenses while allowing the Company to structure reasonably competitive
terms and prices with its suppliers.
The Company purchases the majority of its electronics merchandise directly
from manufacturers and most of its appliances from one distributor. The Company
purchases its furniture from various manufacturers and distributors. The
Company's largest suppliers include Hart-Parrish Distributors and Sanyo-Fisher
Corporation, which accounted for approximately 18.6% and 14.4%, respectively, of
all merchandise purchased for Company stores in the six month period ended June
30, 1996. No other supplier accounted for more than 10% of total purchases.
Management generally does not sign contracts with suppliers. The Company
currently expects to continue relationships with its existing suppliers, but
believes there are numerous sources of products available to the Company.
Management does not believe that the Company's success is dependent on any one
or more of its present suppliers. Executive officers and key managers regularly
attend national and regional markets and trade shows to identify new products,
negotiate prices and initiate contacts with potential new suppliers.
MARKETING AND ADVERTISING
The Company promotes its products and services primarily through television
and direct mail advertising. Unlike many rental-purchase companies that
emphasize primarily print advertising, the Company spends approximately 50% of
its advertising budget on television advertising. Management believes that
television advertising reaches the Company's targeted customer base more
effectively than print advertising and enhances the Company's image with its
customers. The Company's television advertising and promotional literature
emphasize the Company's credibility, quality of service and competitive weekly
rental rates. The Company also markets its products and services through direct
customer solicitation by the Company's store employees. Each store manager is
required to generate additional business from the Company's active and inactive
customer base.
The Company utilizes television advertising in each of its markets. The
commercials generally promote a special price for a particular product for a
limited time period. Four-color, four-page direct mail brochures are mailed
several times a year to selected zip codes within a five-mile radius of each of
the Company's stores. The Company utilizes extensive point of sale materials in
each store.
For the year ended December 31, 1995, and the six months ended June 30,
1996, total advertising expense was approximately 7.7% and 6.5%, respectively,
of revenue. Management believes the decline in advertising expense as a
percentage of revenue is a result of increased revenue from the stores acquired
in the 1994 and 1995 Acquisitions.
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<PAGE>
SERVICE MARKS
The Company owns the registered service marks "Alrenco Rent To Own For The
Home" and "Alrenco Rent To Own For The Home -- The Only Way To Go." The products
held for rent by the Company also bear trademarks and service marks held by
their manufacturers.
COMPETITION
The rental-purchase industry is highly competitive. As the following table
illustrates, as of August 1996, the ten largest rental-purchase chains accounted
for only 40.5% of the approximately 7,500 rental-purchase stores in the United
States.
RENTAL-PURCHASE INDUSTRY COMPETITORS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMPANY (1) OWNERSHIP STORES (2) U.S. STORES
- -------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Rent-A-Center............................................................. Private (3) 1,420 18.9%
Renters Choice, Inc. (4).................................................. Public 653 8.7
Aaron's Rental Purchase (4)............................................... Public 190 2.5
Central Rents, Inc........................................................ Private 174 2.3
Champion Rent to Own...................................................... Private 150 2.0
ALRENCO, INC.............................................................. PUBLIC 119 1.6
Action TV & Appliance Rental, Inc......................................... Private 105 1.4
Rent-Way, Inc............................................................. Public 104 1.4
Bestway Rental, Inc....................................................... Public 60 0.8
Rainbow Rentals, Inc...................................................... Private 60 0.8
----- ---
Total................................................................... 3,035 40.5%
----- ---
----- ---
</TABLE>
- ------------------------
(1) Some of these competitors may also operate rent-to-rent stores in addition
to the rental-purchase stores referenced in the table.
(2) Source: Association of Progressive Rental Organizations, based on membership
records as of August 1996 and other published information.
(3) Owned by Thorn PLC, a publicly traded company in the United Kingdom.
(4) Includes franchised rental-purchase stores.
The Company competes directly with other national and regional
rental-purchase businesses, and on a very limited basis with temporary-use
rental stores, such as furniture rental outlets, that investigate credit and
generally extend three-month minimum leases. Competition within the rental-
purchase industry is based primarily on store location, product selection and
availability, customer service and rental rates and terms. The Company's largest
national competitors have significantly greater resources than the Company.
GOVERNMENT REGULATION
STATE REGULATION. Forty-five states have adopted legislation regulating
rental-purchase transactions. Of those states, 43 require companies to provide
certain disclosures to customers regarding the terms of the rental-purchase
transaction. Three states regulate rental-purchase transactions as credit sales
subject to interest rate limitations and other consumer lending restrictions.
The Company neither operates in nor intends to operate in those three states.
All 15 states in which the Company operates impose some type of disclosure
requirements, either in advertising or in the rental-purchase agreement, or
both. The regulations in these states also distinguish rental-purchase
transactions from credit sales. Management believes that the operations of the
Company are in material compliance with applicable state rental-purchase laws.
29
<PAGE>
FEDERAL REGULATION. No federal legislation has been enacted regulating the
rental-purchase industry. In the past, federal legislation has been proposed
which could affect the rental-purchase industry; however, management cannot
predict whether any such legislation will be enacted and what the impact of such
legislation would be.
DEPRECIATION ISSUES. The IRS published a revenue ruling in July 1995
providing that MACRS is the appropriate depreciation method for rental-purchase
merchandise. Prior to 1996, the Company used the income forecasting method of
depreciation for tax accounting, and management believes that this method has
been widely used throughout the rental-purchase industry prior to publication of
this revenue ruling. The Company is currently being audited by the IRS and may
be required to pay certain additional taxes and interest and penalties thereon
as a result of its use of the income forecasting method in prior years. Pending
the resolution of this audit, the Company intends to convert to the MACRS method
of depreciation for tax accounting purposes only. Management does not believe
that any additional taxes, interest and penalties which may be incurred as a
result of the conversion to MACRS or the IRS audit will have a material adverse
effect on the Company's financial condition, liquidity or results of operations.
EMPLOYEES
As of August 27, 1996, the Company employed 670 people, 44 of whom are
assigned to the Company's corporate office and 626 of whom are directly involved
in the management and operation of the Company's stores. None of the Company's
employees are covered by a collective bargaining agreement. The Company provides
numerous employee benefits, including a 401(k) plan, stock options and group
life and health insurance plans. Management believes that relationships between
the Company and its employees are good.
PROPERTIES
The Company leases space for all of its rental-purchase stores as well as
its corporate offices under leases expiring at various times through 2004. Most
of the leases contain renewal options for additional periods at rental rates
adjusted according to agreed upon formulas. The Company's corporate office
consists of approximately 11,600 square feet and is leased from Kentuckiana
Outfitting Company, a corporation owned by Michael D. Walts, Chairman of the
Board and President of the Company. The Company also leases one store from
Kentuckiana Outfitting Company. See "Certain Transactions."
LEGAL PROCEEDINGS
From time to time the Company has been a party to various legal proceedings
arising in the ordinary course of its business. The Company is not currently a
party to any material litigation and is not aware of any litigation threatened
against it that could have a material adverse effect on its business.
In connection with the settlement in 1994 of certain employment
discrimination litigation initiated in the United States District Court,
Northern District of Alabama, by former management employees, management
employees and non-management employees, the Company agreed to take certain
affirmative actions in hiring and established a "target" level for certain
pivotal management and store-level positions. Failure to meet the target
established in the settlement is not to be considered a per se violation of the
settlement if the Company can demonstrate good faith efforts toward compliance.
The Company has implemented a number of measures since the settlement in order
to meet the targets. The court will retain jurisdiction over matters pertaining
to the settlement until June 10, 1997. The settlement is final and binding on
all parties. See Note K of Notes to Financial Statements of the Company.
30
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and other key employees of the Company are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- -------------------------------------- --- --------------------------------------------
<S> <C> <C>
Michael D. Walts 55 Chairman of the Board and President
Raymond C. Holladay 50 Executive Vice President, Chief Operating
Officer and Director
Theodore H. Wilson 50 Executive Vice President, Chief Financial
Officer and Director
Michael D. Walts, Jr. 29 Vice President of Purchasing and Director
William A. Kelly II 38 Division Manager
Meryl M. Sellers 46 Division Manager
Robert W. Lanum 59 Director
Donald E. Groot 40 Director
W. Barrett Nichols 46 Director
</TABLE>
MICHAEL D. WALTS. Mr. Walts is the Chairman of the Board of Directors and
President of the Company. He has worked in the rental-purchase industry for more
than 16 years since founding the Company in 1980. Prior to 1980, Mr. Walts owned
and operated Kentuckiana Outfitting Company, a door-to-door weekly installment
sales retailer which he acquired in 1964. Kentuckiana Outfitting Company is
currently a real estate holding company which, among other things, leases
certain properties to the Company. See "Certain Transactions."
RAYMOND C. HOLLADAY. Mr. Holladay has served as Executive Vice President
and Chief Operating Officer of the Company since November 1995. He previously
served as Vice President -- Marketing from February 1993 to November 1995, and
as Vice President -- Employee Development from February 1989 to February 1993.
Mr. Holladay has worked in the rental-purchase industry for over 25 years as a
store owner, operator and consultant. From 1973 to 1988, he owned and operated
ABC Rentals, a chain of rental-purchase stores. In 1980, he organized APRO and
served as its president and later as a director.
THEODORE H. WILSON. Mr. Wilson has served as Executive Vice President and
Chief Financial Officer of the Company since November 1995. He previously served
as Vice President -- Finance and Administration for more than ten years. Mr.
Wilson has served as president and is currently a director of APRO.
MICHAEL D. WALTS, JR. Mr. Walts, Jr. was appointed Vice President of
Purchasing in November 1995. He previously served as Director of Product
Development from February 1995 to November 1995 and Jewelry Manager from
September 1990 to February 1995. Mr. Walts, Jr. joined the Company as a fulltime
employee in June 1989. From June 1989 to September 1990, he held successive
store positions as account manager, manager in training and store manager.
WILLIAM A. KELLY II. Mr. Kelly has served as a Division Manager of the
Company since September 1995. Since joining the Company in March 1990, he has
served as Director of Operations and Operations Manager. From June 1979 to March
1990, Mr. Kelly was employed by Rex TV and Appliance, a household goods
retailer, most recently as a regional manager responsible for 10 stores. Mr.
Kelly is currently president of the Indiana Rental Dealers Association, a
nonprofit trade association.
31
<PAGE>
MERYL M. SELLERS. Mr. Sellers has served as a Division Manager since
joining the Company in September 1995. Mr. Sellers has more than 20 years of
experience as an owner, manager and consultant in the rental-purchase industry.
From January 1995 to June 1995, he served as operations manager for America's
Sales & Leasing. From October 1991 to December 1994, he held the position of
operations manager for Action TV & Appliance Rental, Inc. From September 1990 to
September 1991, he was a partner in Family Thrift, a retailer of previously
owned merchandise. Mr. Sellers was associated with Remco, Inc. in various
operations and management capacities and as a franchisee of rental-purchase
stores from 1976 to 1987.
ROBERT W. LANUM. Mr. Lanum is a director of the Company. He is a partner in
the law firm of Stites & Harbison and has been admitted to practice law since
1968. His principal areas of practice include corporate, trust and estate and
tax law. Mr. Lanum has represented the Company on legal matters since its
inception in 1980. Mr. Lanum is a member of the Audit and Compensation
Committees of the Company.
DONALD E. GROOT. Mr. Groot is a director of the Company. He is a partner in
the accounting firm of Welenken Himmelfarb & Co. and has been a certified public
accountant since 1985. Mr. Groot served as principal engagement partner for the
Company from 1989 until September 1995. Mr. Groot is a member of the
Compensation Committee of the Company.
W. BARRETT NICHOLS. Mr. Nichols is a director of the Company. He is the
President and a co-founder of Mesa Food Products, Inc., a producer of frozen and
dry Mexican food products. He was previously employed in various capacities with
PNC Bank for 20 years, most recently serving as Executive Vice President
responsible for all of PNC's banking activities in Kentucky and Indiana. He
currently serves as Chairman of the Board of PNC Bank, Indiana, Inc.. Mr.
Nichols is a member of the Audit and Compensation Committees of the Company.
Michael D. Walts, Chairman of the Board and President, is the father of
Michael D. Walts, Jr., Vice President of Purchasing and a director, and the
brother-in-law of Theodore H. Wilson, Executive Vice President, Chief Financial
Officer and a director. Robert W. Lanum is a partner in the law firm of Stites &
Harbison, which serves as the Company's primary counsel. See "Legal Matters."
Donald E. Groot is a partner in the accounting firm of Welenken Himmelfarb &
Co., which served as the Company's independent accountants from its inception in
1980 to September 1995. See "Experts."
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The number of directors of the Company is currently fixed at
seven. All of the current directors except Messrs. Walts and Walts, Jr. were
first elected to the Board of Directors in October 1995. The Company's Articles
provide that the Company's Board of Directors shall be divided into three
classes. The members of each class of directors serve for staggered three-year
terms. The Board is composed of two Class I Directors (Messrs. Nichols and
Wilson), two Class II Directors (Messrs. Groot and Walts, Jr.) and three Class
III Directors (Messrs. Lanum, Holladay and Walts). The initial terms of office
of the Class II and Class III Directors will expire upon the election and
qualification of directors at the annual meetings of shareholders held following
the fiscal years ending December 31, 1996 and 1997, respectively. The initial
term of office of the Class I Directors expired at the 1996 annual meeting and
each of Messrs. Nichols and Wilson were re-elected for a three-year term
expiring in 1999. At each subsequent annual meeting of shareholders, directors
will be re-elected or elected for a full term of three years to succeed those
directors whose terms are expiring.
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee consists of Messrs. Lanum and
Nichols and is responsible for establishing and monitoring compliance with the
Company's audit policies. The Audit Committee will also review the scope of the
Company's annual audit performed by the Company's independent accountants and
monitor the implementation of recommendations or corrective measures disclosed
in the independent accountants' audit report. The Audit Committee is responsible
for reviewing all
32
<PAGE>
related party transactions on a continuing basis and potential conflict of
interest situations where appropriate. The Compensation Committee consists of
Messrs. Lanum, Groot and Nichols and will review and recommend compensation
arrangements for all officers of the Company. The Compensation Committee will
also be responsible for the design, implementation and administration of the
Company's incentive compensation plans.
Directors who are not employees of the Company ("Nonemployee Directors")
receive $2,000 for each meeting of the Board of Directors that they attend and
$500 for attending a meeting of a committee of the Board. In addition, all
directors are reimbursed for travel and lodging expenses incurred in connection
with their attendance at Board, shareholder and committee meetings. Nonemployee
Directors will be entitled to receive nondiscretionary awards of stock options
under the Stock Incentive Plan. The Company has entered into agreements with all
Directors pursuant to which the Company has agreed to indemnify them against
certain claims arising out of their service as Directors. Directors are also
entitled to the protection of certain indemnification provisions in the Articles
and Bylaws. See "-- Stock Incentive Plan" and "-- Indemnification of Directors
and Officers."
EXECUTIVE COMPENSATION
The following table sets forth summary compensation information for the
fiscal years ended December 31, 1995 and 1994, paid or awarded by the Company
to, or accrued for the benefit of, the Company's chief executive officer and
each other executive officer of the Company whose total annual salary and bonus
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------------------------------------------- --------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael D. Walts (1) ........................ 1995 $ 473,600 $ 205,000(2) $ 57,651(3) $ 38,790(4)
Chairman of the Board and President 1994 473,600 205,000 (3) 47,338(4)
Raymond C. Holladay (1) ..................... 1995 110,000 52,566 (3) 28,150 (5)
Executive Vice President and Chief Operating 1994 110,000 36,476 (3) 37,534 (5)
Officer
</TABLE>
- ------------------------
(1) In December 1995, the Compensation Committee of the Board of Directors
reviewed the annual compensation arrangements for the Company's executive
officers and, effective upon completion of the IPO, approved annual salaries
for Messrs. Walts and Holladay of $240,000 and $190,000, respectively. In
addition, Messrs. Walts and Holladay will receive annual cash bonuses equal
to 2.0% and 1.0%, respectively, of the Company's net after-tax income for
1996.
(2) Represents bonus compensation accrued by the Company in 1995. This amount
was paid in January 1996.
(3) In addition to salary and bonus amounts, the named executive officers
received certain personal benefits from the Company during 1995 and 1994.
The amount disclosed for Mr. Walts in 1995 includes approximately $15,245
for personal use of Company-owned automobiles and the Company's cost
(approximately $42,406) of purchasing certain automobiles for Mr. Walts. The
aggregate amount of such benefits received by each of the named executive
officers in each of the other years included in the summary compensation
table did not exceed the lesser of $50,000 or 10% of the total of annual
salary and bonus reported for such officer for that year.
(4) Includes the Company's expense under an executive deferred compensation
arrangement with Mr. Walts. This arrangement was terminated effective
September 30, 1995. Mr. Walts received a lump sum distribution of $305,729
from his deferred compensation account in 1995. See Note L of Notes to
Financial Statements of the Company. Also includes a premium payment by the
Company of $2,338 in 1994 and $5,040 in 1995 on a life insurance policy
maintained for the benefit of Mr. Walts.
33
<PAGE>
(5) Represents the Company's expense under an executive deferred compensation
arrangement with Mr. Holladay. This arrangement was terminated effective
September 30, 1995. Mr. Holladay received a lump sum distribution of
$147,906 from his deferred compensation account in 1995. See Note L of Notes
to Financial Statements of the Company.
STOCK INCENTIVE PLAN
In November 1995, the Board of Directors of the Company adopted, and the
shareholders approved, the Stock Incentive Plan. The purpose of the Stock
Incentive Plan is to further the interests of the Company by providing eligible
employees with an additional incentive to increase the value of the Company's
stock by granting such employees a stake in the future of the Company. A total
of 450,000 shares of Common Stock have been reserved for issuance under the
Stock Incentive Plan. The Stock Incentive Plan will be administered by the
Compensation Committee of the Board of Directors (the "Committee"). The Stock
Incentive Plan authorizes the Committee to grant, in its discretion, stock
options, stock appreciation rights, restricted stock, nonrestricted stock or any
combination thereof to employees of the Company.
STOCK OPTIONS. Each stock option granted under the Stock Incentive Plan
will entitle the holder thereof to purchase the number of shares of the
Company's Common Stock specified in the grant at the purchase price specified
therein. The terms and conditions of each stock option granted under the Stock
Incentive Plan will be determined by the Committee.
Stock options to be granted under the Stock Incentive Plan may be either
incentive stock options or nonqualified stock options. Stock options designated
by the Committee as incentive stock options will comply with Section 422 of the
Internal Revenue Code of 1986. The purchase price for shares subject to an
incentive stock option will not be less than 100% of the fair market value of
the Common Stock at the time of grant. No incentive stock option may be granted
to any employee of the Company who owns at the date of grant shares of stock
representing in excess of 10% of the voting power of all classes of stock of the
Company unless the exercise price for stock subject to such option is at least
equal to 110% of the fair market value of the stock at the time of grant and the
option term does not exceed five years. The terms of any nonqualified stock
option, including without limitation the exercise price and period of exercise,
will be determined by the Committee in its sole discretion at the time of grant.
STOCK APPRECIATION RIGHTS. Stock appreciation rights will entitle the
holder to receive an amount equal to the excess of the fair market value of one
share of Common Stock as of the date such right is exercised over the exercise
or base price specified in the stock appreciation right, multiplied by the
number of shares of Common Stock in respect of which the stock appreciation
right is being exercised.
RESTRICTED STOCK. The Committee may also grant shares of Common Stock to
plan participants subject to certain restrictions ("Restricted Stock").
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise
encumbered during a "Restricted Period," which shall not be less than one year
from the date of grant. The employee as the owner of such stock shall have all
rights of a shareholder including, but not limited to, the right to vote such
stock and to receive dividends thereon as and when paid. Upon the grant of
shares of Restricted Stock, the employee shall enter into an agreement with the
Company in a form specified by the Committee and containing such additional
terms and conditions, if any, as the Committee in its sole discretion shall
determine, which are not inconsistent with the provisions of the Stock Incentive
Plan. The amount of Restricted Stock to be granted to any employee and the
respective terms and conditions of such grant (which terms and provisions need
not be the same in each case) will be determined by the Committee in its
discretion.
NONRESTRICTED STOCK. The Committee may from time to time make awards of
unrestricted Common Stock ("Nonrestricted Stock") to plan participants. The
Committee in its discretion will determine those plan participants to whom
awards of Nonrestricted Stock will be granted and the number of shares to be
granted to each participant.
34
<PAGE>
NONEMPLOYEE DIRECTOR STOCK OPTIONS. Immediately following completion of the
IPO, each Nonemployee Director received nonqualified options to purchase 5,000
shares of Common Stock at a price equal to $14.00 per share. Any other
Nonemployee Director who is subsequently elected to serve as such after the
completion of this Offering will as of the date of such election automatically
receive options to purchase 5,000 shares of Common Stock at a price equal to the
fair market value of such stock on the date such options are granted. These
initial option grants will become fully vested twelve months following
completion of the IPO or subsequent election, as the case may be. Beginning
January 1, 1997, automatic annual awards of fully-vested stock options will be
made to each Nonemployee Director in each of the five years following the
initial option grant providing for the purchase of 1,000 shares of Common Stock
at a price equal to the fair market value of such shares on the date such
options are granted.
AWARDS UNDER STOCK INCENTIVE PLAN. A total of 105,000 shares of Restricted
Stock have been awarded to Raymond C. Holladay, Executive Vice President and
Chief Operating Officer, and Theodore H. Wilson, Executive Vice President and
Chief Financial Officer. All of these shares of Restricted Stock will vest on
January 23, 2003. Stock options exercisable for an aggregate of 87,797 shares of
Common Stock have been awarded to management and corporate office employees and
senior executive officers pursuant to the Stock Incentive Plan, including
options granted to Messrs. Holladay, Wilson and Walts, Jr. for 10,000 shares,
12,624 shares and 2,022 shares, respectively. Options for a total of 75,147
shares are currently exercisable; options for the remaining 12,650 shares will
vest on January 23, 1998.
EXECUTIVE BENEFIT PLANS
KEY EXECUTIVE LIFE INSURANCE. The Company and Michael D. Walts currently
maintain a life insurance policy on Mr. Walts. The Company is a beneficiary of
such policy to the extent the death benefit does not exceed $200,000. Mr. Walts
has designated other beneficiaries in the event the death benefit exceeds
$200,000. Mr. Walts owns the cash value of such policy.
LONG-TERM DISABILITY AND SALARY CONTINUATION PLANS. The Company maintains a
long-term disability insurance plan for the benefit of certain management
employees, excluding Michael D. Walts, who have completed six months of
continuous service. This plan provides that eligible employees who become
disabled will receive payments for a specified term equal to a percentage of
their salaries. The Company provides a management salary continuation plan to
certain executive officers who have completed six months of continuous service.
For all covered employees except Michael D. Walts, the Company self-insures the
first 13 weeks of disability benefits under the plan and maintains insurance for
all benefit periods thereafter. The Company maintains a long-term disability
plan for Mr. Walts which provides for annual payments of 100% of his salary.
401(K) PLAN. The Company's 401(k) plan was adopted by the Company effective
as of January 1, 1996. All active employees of the Company who are 21 years of
age are eligible to participate in the 401(k) plan upon the completion of one
year of service. The 401(k) plan assets are held in trust for the benefit of the
employee participants pursuant to an agreement with Lincoln National Life
Insurance Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until November 1995, the Company had no Compensation Committee or other
committee of the Board of Directors performing similar functions. Decisions
concerning the compensation of executive officers for fiscal years 1995 and 1994
were made by Michael D. Walts, the Company's Chairman of the Board and
President. In November 1995, the Board of Directors established a Compensation
Committee, consisting of Robert W. Lanum, Donald E. Groot and W. Barrett
Nichols. None of the executive officers of the Company currently serves as a
director or member of the compensation committee of another entity or of any
other committee of the board of directors of another entity performing similar
functions.
35
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The IBCL empowers an Indiana corporation to indemnify its directors,
officers, employees and agents under certain circumstances. In addition, the
IBCL authorizes a corporation to indemnify such persons, to such further extent
not inconsistent with law, as may be provided by its articles of incorporation,
bylaws, agreement, vote of shareholders or disinterested directors or otherwise.
Article VII of the Company's Articles requires the Company to indemnify its
directors and officers to the fullest extent permitted by Indiana law. Similar
provisions are also included in the Company's Bylaws. Article VII and the Bylaws
authorize the Company to provide indemnification to its directors, officers,
employees and agents beyond that expressly set forth in the IBCL.
The Board of Directors has approved a form of indemnification agreement (the
"Indemnification Agreement") into which the Company has entered with each of its
present directors (including those directors who are also officers of the
Company) and into which the Company intends to enter with its future directors.
The Indemnification Agreement gives directors a specific contractual right to
indemnification by the Company. Although the directors of the Company presently
have certain rights to indemnification under the Company's Articles and Bylaws
and may have protection from certain liabilities under the terms of a directors
and officers liability insurance policy which the Company has obtained, the
Board of Directors believes that the additional assurance provided by the
broader contractual rights contained in the Indemnification Agreement enables
the Company to attract and retain qualified directors.
The IBCL empowers an Indiana corporation to purchase and maintain insurance
on behalf of its directors, officers, employees and agents against liability
asserted against or incurred by them in their capacities as directors, officers,
employees or agents of the corporation, whether or not the corporation would
have the power under the IBCL to indemnify them against such liability. The
Company has purchased directors' and officers' liability insurance.
PERSONAL LIABILITY OF DIRECTORS
The IBCL does not contain any provision permitting a corporation to
eliminate or limit a director's personal liability for monetary damages for a
breach of his or her fiduciary duty of care to the corporation or its
shareholders. However, the IBCL provides that a director will not be liable for
any action taken as a director or for any failure to take any action unless the
director has failed to comply with the standards enumerated in the statute and
such failure to comply constitutes willful misconduct or recklessness.
36
<PAGE>
CERTAIN TRANSACTIONS
The Company leases its corporate office building, located in New Albany,
Indiana, from Kentuckiana Outfitting Company ("Kentuckiana"), a corporation
owned by Michael D. Walts, the Chairman of the Board, President and the
principal shareholder of the Company. The rent under this lease is payable in
monthly installments of $8,730 per month, for an aggregate annual rent of
$104,760. The ten-year term of this lease expires December 31, 2004. The Company
also leases a store location in Louisville, Kentucky, from Kentuckiana. The rent
under this lease is payable in monthly installments of $1,440, for an aggregate
annual rent of $17,280. The ten-year term of this lease expires December 31,
2004.
On November 8, 1995, the Board of Directors reviewed the terms of the
foregoing leases to determine their fairness to the Company under current market
conditions. The Board of Directors considered, among other things, lease rates
prevailing in each of the respective markets for comparable commercial real
estate, existing rates for other Company store locations in the Louisville,
Kentucky area, availability of office space in New Albany and the results of an
independent appraisal. The Board of Directors determined that the rent, term and
other provisions of the leases, as amended and set forth above, were reasonably
fair to the Company, and the Board believed that those terms are comparable to
those that might be obtained if the properties were leased from unaffiliated
persons.
In connection with a life insurance policy insuring the life of Mr. Walts,
the Company has made a loan to Mr. Walts each year beginning in 1988. Mr. Walts
has used the proceeds of these loans to pay his portion of the annual premium
due under such policy. Interest on each such loan has been calculated at the
prevailing applicable federal rate. The balance outstanding as of June 30, 1996,
was approximately $71,600. On November 8, 1995, the Board of Directors adopted a
policy that, in the future, the Company will not make loans to its officers,
directors and employees, except for loans in the ordinary course of the
Company's business, such as advances for travel and relocation expenses, unless
such loans are approved by a disinterested majority of the Board.
Prior to the IPO, Mr. Walts and his wife guaranteed the Company's
indebtedness under the Loan Agreement. These guarantees were released upon
completion of the IPO.
The Board of Directors has adopted a policy that any transaction between the
Company and any of its officers, directors or principal shareholders or
affiliates thereof, must be on terms no less favorable than those which could be
obtained from unaffiliated parties and must be approved by a majority of the
disinterested members of the Board of Directors. The Audit Committee of the
Board of Directors is responsible for reviewing all related party transactions
on a continuing basis and potential conflict of interest situations where
appropriate.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of the date of this Prospectus
with respect to the beneficial ownership of the Company's Common Stock (i) by
each director and each of the named executive officers of the Company, (ii) by
each person known to the Company to own of record or beneficially more than 5%
of the outstanding shares of the Common Stock, and (iii) by all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each of the persons listed below has sole voting and investment power with
respect to the securities owned by him.
<TABLE>
<CAPTION>
PERCENT OF CLASS
--------------------------------
TO BE OWNED
OWNED BEFORE AFTER OFFERING
NAME NUMBER OF SHARES OFFERING (1)
- -------------------------------------------------------- ------------------ -------------- ----------------
<S> <C> <C> <C>
Michael D. Walts (2).................................... 2,090,000 47.2% 35.3%
Michael D. Walts, Jr. (2)............................... 212,022(3) 4.8% 3.6%
Raymond C. Holladay..................................... 70,000(3)(4) 1.6% 1.2%
Theodore H. Wilson...................................... 57,624(3)(4) 1.3% 1.0%
Robert W. Lanum......................................... -- -- --
Donald E. Groot......................................... -- -- --
W. Barrett Nichols...................................... -- -- --
OppenheimerFunds, Inc. (5).............................. 482,000 10.9% 8.1%
All executive officers and directors
as a group (7 persons)................................. 2,429,646(3)(4) 54.6% 40.8%
</TABLE>
- ------------------------
(1) Assumes the sale by the Company of 1,500,000 shares of Common Stock in this
Offering.
(2) Michael D. Walts is the Chairman of the Board and President of the Company.
The address of Messrs. Walts and Walts, Jr. is 1736 East Main Street, New
Albany, Indiana 47150.
(3) Includes the following number of shares of Common Stock issuable upon
exercise of stock options granted pursuant to the Stock Incentive Plan which
are currently exercisable: Michael D. Walts, Jr., 2,022 shares; Raymond C.
Holladay, 10,000 shares; Theodore H. Wilson, 12,624 shares; and all
executive officers and directors as a group, 24,646 shares.
(4) Includes 60,000 and 45,000 shares of Restricted Stock awarded to Messrs.
Holladay and Wilson, respectively, pursuant to the Stock Incentive Plan. See
"Management -- Stock Incentive Plan."
(5) Based upon a Schedule 13G filed by OppenheimerFunds, Inc. with the
Securities and Exchange Commission on April 25, 1996. The address of
OppenheimerFunds, Inc. is Two World Trade Center, Suite 3400, New York, New
York 10048.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, no par value, and 1,000,000 shares of Preferred Stock. There are
currently 4,424,200 shares of Common Stock outstanding. There are no shares of
Preferred Stock outstanding. Immediately following this Offering, 5,924,200
shares of Common Stock (6,149,200 shares if the Underwriters' over-allotment
option is exercised in full) will be outstanding. The Company has reserved
450,000 shares of its authorized Common Stock for issuance from time to time
pursuant to the Stock Incentive Plan. The following description of the capital
stock of the Company is qualified in its entirety by reference to the Company's
Articles and Bylaws, which have been incorporated by reference as exhibits to
the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock will be entitled to one vote per share on all
matters submitted to a vote of shareholders. Shareholders do not have cumulative
voting rights. Holders of Common Stock will be entitled to receive such
dividends and other distributions as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividends." In the event of the
liquidation, dissolution or winding-up of affairs of the Company, holders of
Common Stock will be entitled to share ratably in all assets of the Company
remaining after payment or provision for payment of all debts, liabilities and
preferences, if any. Holders of Common Stock will have no preemptive rights and
no right to convert their Common Stock into any other securities. The shares of
Common Stock are not redeemable. All shares sold in the Offering, upon payment
therefor, will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors may, without further action by the shareholders of
the Company, designate and issue from time to time up to 1,000,000 shares of
Preferred Stock in one or more series and fix the rights and preferences
thereof, including voting rights, dividend rights and rates, redemption rights,
liquidation rights, conversion rights, and any other designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof not inconsistent with the Company's Articles
or the IBCL. Such Preferred Stock could rank prior to the Common Stock with
respect to dividend rights and rights upon liquidation and could have rights
which would dilute the voting power of the Common Stock. Shares of Preferred
Stock may also be issued to deter or delay an attempted takeover of the Company
that may be opposed by management. The Company currently has no plans to issue
any Preferred Stock.
CERTAIN ANTI-TAKEOVER MATTERS
Certain provisions of the Company's Articles and Bylaws concern matters of
corporate governance and the rights of shareholders. These provisions, as well
as the IBCL and the ability of the Board of Directors to issue shares of
Preferred Stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain shareholders may deem to be in their best interests).
These provisions and the ability of the Board to issue Preferred Stock without
further shareholder action, also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders, even if such
removal or assumption would be beneficial to shareholders of the Company. These
provisions also could discourage or make more difficult a merger, tender offer
or proxy contest, even if a transaction or contest could be favorable to
interests of shareholders, and could potentially depress the market price of the
Common Stock. The Board of Directors of the Company believes that these
provisions are appropriate to protect the interests of the Company and all of
its shareholders. The Board of Directors has no present plans to adopt any other
measures or provisions which may be deemed to have an anti-takeover effect.
CLASSIFICATION OF DIRECTORS. Article VI of the Company's Articles provides
for the classification of the Board of Directors into three classes, each class
to consist, as nearly as possible, of one-third of the number of directors
constituting the entire Board, as determined in the Bylaws. Following their
initial terms each class will be elected for a three-year term. Thus, beginning
with the 1996 annual meeting,
39
<PAGE>
one class will be elected each year with the terms of each class expiring in
successive years. Article VI is intended to ensure continuity of Board
membership and impede the ability of a third party to make sudden changes in
directors through a proxy contest or the acquisition of a substantial stock
interest.
REMOVAL OF DIRECTORS. Article VI of the Company's Articles provides that
the directors can be removed from that position only for cause. "Cause" means a
director's participation in any transaction in which his or her financial
interests conflict with those of the Company or its shareholders; any act or
omission not in good faith or involving intentional misconduct or violation of
law; or the participation by a director in any transaction from which he or she
derived improper personal benefit. The purpose of this provision is to impose a
more stringent standard generally for the removal of directors, and also to
prevent a majority shareholder from circumventing the classified board structure
by simply voting to remove directors without cause.
ADVANCE NOTICE BYLAW PROVISION. The Bylaws impose certain advance notice
requirements on a shareholder nominating a director or submitting a proposal to
a shareholder meeting. This notice must be submitted to the Secretary of the
Company between 60 and 90 days before a meeting, and must contain the
information prescribed by the Bylaws.
AMENDMENT OF ARTICLES OF INCORPORATION. Under the IBCL, amendments to
articles of incorporation must generally be approved by the board of directors
and by the holders of a majority of the outstanding shares voting thereon at a
meeting of shareholders, unless the articles of incorporation or the board of
directors provide a higher voting requirement. Article VI requires that any
amendment or repeal of those provisions be approved by shareholders owning at
least 80% of the total shares outstanding and entitled to vote generally in the
election of directors, voting together as a single class. The requirement for an
increased shareholder vote to amend Article VI is intended to prevent a
shareholder that controls a majority of the voting shares (or possibly less than
a majority) from avoiding the requirements of the classified board and removal
of directors provisions discussed above by simply repealing such provisions.
INDIANA ANTI-TAKEOVER STATUTES
The IBCL prohibits any business combination, such as a merger or
consolidation between an Indiana corporation with shares of its stock registered
under the federal securities laws or which makes an election under the IBCL, and
an "interested shareholder" (which is defined as any owner of 10% or more of the
corporation's stock) for five years after the date on which such shareholder
became an interested shareholder, unless the stock acquisition which caused the
person to become an interested shareholder was approved in advance by the
corporation's board of directors. This provision of the IBCL is effective even
if all parties should subsequently decide that they wish to engage in the
business combination. The IBCL also contains a "control share acquisition"
provision which effectively denies voting rights to shares of an "issuing public
corporation" acquired in control share acquisitions unless the grant of such
voting rights is approved by a majority vote of disinterested shareholders. An
issuing public corporation is a corporation that (i) has 100 or more
shareholders; (ii) has its principal place of business, its principal office or
substantial assets within Indiana; and (iii) either (a) more than 10% of its
shareholders are Indiana residents, (b) more than 10% of its shares are owned by
Indiana residents, or (c) 10,000 shareholders resident in Indiana. A control
share acquisition is one by which a purchasing shareholder acquires more than
one-fifth, one-third, or one-half of the voting power of the stock of an Indiana
corporation whose stock is registered under the federal securities laws. In
addition, if any person proposing to make or who has made "control share
acquisitions" does not file an "acquiring person statement" with the issuing
corporation or if the control shares are not accorded full voting rights by
other shareholders, and if the articles of incorporation or by-laws of the
corporation whose shares are acquired authorize such redemption, the acquired
shares are subject to redemption by the corporation. Finally, if a control share
acquisition should be made of a majority or more of the corporation's voting
stock, and those shares are granted full voting rights, shareholders are granted
dissenters' rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Star Bank, N.A.,
Cincinnati, Ohio.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have issued and
outstanding 5,924,200 shares of Common Stock (6,149,200 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 1,500,000
shares being sold pursuant to this Offering and the 2,019,200 shares sold in the
IPO will be freely tradable without restriction or further registration under
the Securities Act, except for any shares purchased by persons deemed to be
"affiliates" of the Company for the purposes of the Securities Act. The
remaining 2,405,000 shares will be owned by affiliates of the Company. See
"Principal Shareholders." Pursuant to Rule 144 under the Securities Act,
2,300,000 shares are currently eligible for sale in the open market. The
remaining 105,000 shares will be eligible for eventual sale in the open market
upon the expiration of the applicable two-year holding period under Rule 144.
Persons holding an aggregate of 2,405,000 shares of Common Stock after
completion of this Offering have agreed that during a period of 120 days from
the date of this Prospectus, they will not, without the prior written consent of
Equitable Securities Corporation on behalf of the Representatives of the
Underwriters, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of, any shares of Common Stock presently owned by them,
directly or indirectly.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated under the Rule) who has beneficially owned his
shares for at least two years, including persons deemed to be affiliates of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock (59,242 shares immediately following the Offering or
61,492 shares if the Underwriters' over-allotment option is exercised in full)
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information regarding the Company. A person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned his shares for at least three years, would
be entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions, notice requirements or availability of
current public information. Upon completion of the Offering, 2,405,000 shares of
Common Stock will be owned by shareholders presently regarded by the Company as
affiliates.
The Company has filed a registration statement under the Securities Act
registering the 450,000 shares of Common Stock reserved for issuance under its
Stock Incentive Plan. See "Management -- Stock Incentive Plan." Shares of Common
Stock issued pursuant to awards granted under the Stock Incentive Plan will
therefore be eligible for sale in the open market immediately upon issuance.
No predictions can be made of the effect, if any, that market sales of
shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of Common Stock in the public market following this
Offering could adversely affect the then-prevailing market prices.
41
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Equitable Securities Corporation,
Wheat, First Securities, Inc. and J. J. B. Hilliard, W. L. Lyons, Inc. are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement"), to purchase from the Company, the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Equitable Securities Corporation...........................................................
Wheat, First Securities, Inc...............................................................
J. J. B. Hilliard, W. L. Lyons, Inc........................................................
-----------
Total................................................................................ 1,500,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the shares of
Common Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock being purchased
directly to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the public offering, the offering price and other selling terms may be
changed.
The Company has granted the Underwriters a 30-day option to purchase up to
an additional 225,000 shares of Common Stock at the public offering price less
the underwriting discount set forth on the cover page of this Prospectus to
cover over-allotments, if any. If the Underwriters exercise their over-allotment
option to purchase any of the 225,000 additional shares of Common Stock from the
Company, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them as shown in the above table
bears to the 1,500,000 shares of Common Stock offered hereby. The Underwriters
may exercise this option only to cover over-allotments made in connection with
the sale of the Common Stock offered hereby.
In connection with this Offering, certain Underwriters and selling group
members, if any, or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the two
business day period before the commencement of the offers or sales of the Common
Stock. The passive market making transactions must comply with applicable volume
and price limits and be identified as such. In general, a passive market maker
may display its bid of a price not in excess of the highest independent bid for
such security if all independent bids are lowered when certain purchase limits
are exceeded. The Representatives currently make a market in the Common Stock
and intend to continue such market making activity after completion of this
Offering.
The Company and its directors and executive officers have agreed that they
will not offer, pledge, issue, sell, contract to sell, grant any option for the
sale of or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
for a period of 120 days after the date of this Prospectus without the prior
written consent of Equitable Securities Corporation on behalf of the
Representatives; provided, however, the Company may grant stock options under,
and issue shares of Common Stock upon the exercise of outstanding stock options
granted under, the Company's Stock Incentive Plan.
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<PAGE>
The Company has agreed to indemnify the Underwriters and controlling
persons, if any, against certain liabilities, including liabilities under the
Securities Act or will contribute to any payments which the Underwriters or any
controlling persons may be required to make in respect thereof.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Stites & Harbison, Louisville, Kentucky. Certain legal
matters relating to the Offering will be passed upon for the Underwriters by
Sherrard & Roe, PLC, Nashville, Tennessee. Robert W. Lanum, a partner in Stites
& Harbison, is a director of the Company.
EXPERTS
The financial statements of the Company, Network Rental, Easy Rental and The
Television Management Companies included in this Prospectus have been audited by
the following firms, as stated in their reports appearing elsewhere herein: (i)
the financial statements of the Company as of December 31, 1994 and 1995, and
for the years then ended, have been audited by Grant Thornton LLP, independent
certified public accountants; (ii) the financial statements of the Company for
the year ended December 31, 1993 have been audited by Welenken Himmelfarb & Co.,
independent certified public accountants; (iii) the financial statements of
Network Rental as of May 31, 1995 and 1996, and for the years then ended, have
been audited by Grace & Associates, P.C., independent certified public
accountants; (iv) the combined financial statements of Easy Rental as of
December 31, 1994 and 1995, and for the years then ended, have been audited by
Grant Thornton LLP, independent certified public accountants; and (v) the
combined financial statements of The Television Management Companies as of
December 31, 1994 and August 31, 1995, and for each of the two years in the
period ended December 31, 1994 and the eight months ended August 31, 1995, have
been audited by Grant Thornton LLP, independent certified public accountants.
Such financial statements are so included in reliance on such reports given upon
the authority of said firms as experts in accounting and auditing.
Welenken Himmelfarb & Co. served as the Company's independent accountants
from its inception in 1980 to 1995. On September 28, 1995, the Company engaged
Grant Thornton LLP to replace Welenken Himmelfarb & Co. as its independent
accountants in preparation for the IPO. Upon the engagement of Grant Thornton
LLP, the Company dismissed Welenken Himmelfarb & Co. as its independent
accountants. The Company's Board of Directors ratified the engagement of Grant
Thornton LLP as the Company's new independent accountants in November 1995.
During the period Welenken Himmelfarb & Co. was engaged by the Company, there
were no disagreements between them and the Company on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, and no reportable events relating to the relationship between the
Company and Welenken Himmelfarb & Co. Donald E. Groot is a partner in the
accounting firm of Welenken Himmelfarb & Co., and has served as a director of
the Company since November 1995.
43
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "Commission"), a Registration Statement on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to the
Company and the Common Stock, reference is made to such Registration Statement
and exhibits. Statements contained in this Prospectus regarding the contents of
any contract, agreement or other document are not necessarily complete, and in
each instance reference is made to the copy of the contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
together with the exhibits thereto, may be inspected at the Public Reference
Section of the Commission's principal office, Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at its regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained from the Commission upon
payment of the prescribed fees.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at its principal
offices at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048; and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
Such material, as well as the Registration Statement, may be accessed
electronically through the Commission's site on the World Wide Web. The
Commission's Internet address is HTTP://WWW.SEC.GOV.
The Common Stock is listed on the Nasdaq National Market System. Reports,
proxy statements and other information about the Company can also be inspected
at the offices of the National Association of Securities Dealers, Inc. located
at 1735 K Street, N.W., Washington, D.C. 20006.
The Company furnishes its shareholders with annual reports containing
audited financial statements and quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
44
<PAGE>
ALRENCO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS OF ALRENCO, INC.
Report of Independent Certified Public Accountants....................................................... F-2
Report of Independent Certified Public Accountants....................................................... F-3
Balance Sheets -- December 31, 1994 and 1995 and June 30, 1996 (unaudited)............................... F-4
Statements of Earnings -- Years ended December 31, 1993, 1994, and 1995 and six months ended June 30,
1995 and 1996 (unaudited)............................................................................... F-5
Statement of Stockholders' Equity -- Years ended December 31, 1993, 1994, and 1995 and six months ended
June 30, 1996 (unaudited)............................................................................... F-6
Statements of Cash Flows -- Years ended December 31, 1993, 1994, and 1995 and six months ended June 30,
1995 and 1996 (unaudited)............................................................................... F-7
Notes to Financial Statements............................................................................ F-8
FINANCIAL STATEMENTS OF NETWORK RENTAL, INC.
Report of Independent Certified Public Accountants....................................................... F-16
Balance Sheets -- May 31, 1995 and 1996 and July 31, 1996 (unaudited).................................... F-17
Statements of Earnings -- Years ended May 31, 1995 and 1996 and two months ended July 31, 1995 and 1996
(unaudited)............................................................................................. F-18
Statement of Stockholders' Equity -- Years ended May 31, 1995 and 1996................................... F-19
Statements of Cash Flows -- Years ended May 31, 1995 and 1996 and two months ended July 31, 1995 and 1996
(unaudited)............................................................................................. F-20
Notes to Financial Statements............................................................................ F-21
COMBINED FINANCIAL STATEMENTS OF EASY TV & APPLIANCE RENTAL STORES, INC.
Report of Independent Certified Public Accountants....................................................... F-28
Combined Balance Sheets -- December 31, 1994 and 1995.................................................... F-29
Combined Statements of Operations -- Years ended December 31, 1994 and 1995.............................. F-30
Combined Statement of Stockholder's Equity -- Years ended December 31, 1994 and 1995..................... F-31
Combined Statements of Cash Flows -- Years ended December 31, 1994 and 1995.............................. F-32
Notes to Combined Financial Statements................................................................... F-33
COMBINED FINANCIAL STATEMENTS OF THE TELEVISION MANAGEMENT COMPANIES
Report of Independent Certified Public Accountants....................................................... F-36
Combined Balance Sheets -- December 31, 1994 and August 31, 1995......................................... F-37
Combined Statements of Earnings -- Years ended December 31, 1993 and 1994 and eight months ended August
31, 1994 (unaudited) and 1995........................................................................... F-38
Combined Statement of Equity -- Years ended December 31, 1993 and 1994 and eight months ended August 31,
1995.................................................................................................... F-39
Combined Statements of Cash Flows -- Years ended December 31, 1993 and 1994 and eight months ended August
31, 1994 (unaudited) and 1995........................................................................... F-40
Notes to Combined Financial Statements................................................................... F-41
PRO FORMA CONDENSED FINANCIAL STATEMENTS
Pro Forma Condensed Balance Sheets -- June 30, 1996...................................................... F-47
Pro Forma Condensed Statements of Earnings -- Year ended December 31, 1995............................... F-48
Pro Forma Condensed Statements of Earnings -- Six months ended June 30, 1996............................. F-49
Notes to Pro Forma Condensed Statements of Earnings...................................................... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alrenco, Inc.
We have audited the accompanying balance sheets of Alrenco, Inc. (an Indiana
corporation) as of December 31, 1994 and 1995, and the related statements of
earnings, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 Alrenco, Inc. as of December
31, 1994 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note A to the accompanying financial statements, the
Company, on January 1, 1994, changed its method of accounting for investments
and on January 1, 1995, changed its method of depreciating rental merchandise in
1995.
GRANT THORNTON LLP
Dallas, Texas
February 2, 1996, except for Note B as to which
the date is August 9, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alrenco, Inc.
We have audited the accompanying statement of earnings, stockholders' equity
and cash flows of Alrenco, Inc. for the year ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of Alrenco, Inc. and its
cash flows for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
WELENKEN HIMMELFARB & CO.
Louisville, Kentucky
January 28, 1994
F-3
<PAGE>
ALRENCO, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents........................................ $ 23,927 $ 27,041 $ 970,449
Rental merchandise, net
On rent........................................................ 7,032,048 9,999,312 14,716,931
Held for rent.................................................. 2,304,352 3,116,056 5,971,699
Property assets, net............................................. 1,256,984 1,402,409 3,116,893
Investments...................................................... 435,369 -- --
Intangible assets, net........................................... 592,208 4,868,590 10,985,946
Prepaid expenses and other assets................................ 778,695 1,480,759 707,622
Deferred income taxes............................................ 200,088 18,699 18,699
Loan to stockholder.............................................. 56,918 64,384 71,636
-------------- -------------- --------------
$ 12,680,589 $ 20,977,250 $ 36,559,875
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
Accounts payable -- trade........................... $ 1,007,484 $ 1,763,272 $ 4,052,323
Accrued liabilities................................. 1,062,352 1,542,621 347,977
Taxes other than income............................. 170,452 330,530 310,382
Debt................................................ 7,201,208 12,865,239 9,252,335
----------- ----------- -----------
9,441,496 16,501,662 13,963,017
</TABLE>
Stockholders' Equity
<TABLE>
<S> <C> <C> <C>
Preferred stock, no par; 1,000,000 shares
authorized; none issued or outstanding........... -- -- --
Common stock, no par; 20,000,000 shares
authorized; 3,000,000 shares at December 31, 1994
and 1995 and 4,424,200 shares of June 30, 1996
issued and outstanding........................... 1,500 1,500 17,759,297
Unrealized gains on investments, net of taxes..... 30,097 -- --
Unamortized value of restricted stock awards...... -- -- (1,279,302)
Retained earnings................................. 3,207,496 4,474,088 6,116,863
----------- ----------- -----------
3,239,093 4,475,588 22,596,858
----------- ----------- -----------
$12,680,589 $20,977,250 $36,559,875
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ALRENCO, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
-------------- -------------- -------------- SIX MONTHS ENDED
JUNE 30,
------------------------------
1995 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Rentals and fees............... $ 22,283,272 $ 27,800,152 $ 37,575,639 $ 16,834,150 $ 27,003,976
OPERATING EXPENSES
Direct store expenses
Depreciation of rental
merchandise................. 5,888,777 7,482,614 9,099,579 4,347,934 5,936,257
Other........................ 10,076,162 14,380,485 20,923,600 9,084,459 15,270,854
-------------- -------------- -------------- -------------- --------------
15,964,939 21,863,099 30,023,179 13,432,393 21,207,111
General and administrative
expenses...................... 3,650,029 3,677,674 4,338,583 1,993,329 2,440,443
Litigation settlement.......... 625,000 -- -- -- --
Amortization of intangibles.... 30,625 97,134 284,901 96,720 387,067
-------------- -------------- -------------- -------------- --------------
Total operating expenses... 20,270,593 25,637,907 34,646,663 15,522,442 24,034,621
-------------- -------------- -------------- -------------- --------------
Operating profit........... 2,012,679 2,162,245 2,928,976 1,311,708 2,969,355
Interest expense............... 281,178 461,130 894,003 361,154 182,034
Gain on sale of investments.... -- -- (99,930) -- --
-------------- -------------- -------------- -------------- --------------
281,178 461,130 794,073 361,154 182,034
-------------- -------------- -------------- -------------- --------------
Earnings before income
taxes..................... 1,731,501 1,701,115 2,134,903 950,554 2,787,321
Income tax expense............. 721,561 739,287 868,311 447,181 1,144,546
-------------- -------------- -------------- -------------- --------------
NET EARNINGS............... $ 1,009,940 $ 961,828 $ 1,266,592 $ 503,373 $ 1,642,775
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Weighted average common and
common equivalent shares
outstanding................... 3,105,000 3,105,000 3,105,000 3,105,000 4,206,653
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Earnings per common share...... $ .33 $ .31 $ .41 $ .16 $ .39
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ALRENCO, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK UNAMORTIZED
------------------------- UNREALIZED VALUE OF RETAINED
SHARES AMOUNT GAINS STOCK AWARDS EARNINGS TOTAL
---------- ------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993............. 3,000,000 $ 1,500 $ -- $ -- $ 1,235,728 $ 1,237,228
Net earnings........................... -- -- -- -- 1,009,940 1,009,940
---------- ------------- ----------- ------------ ------------ -------------
Balance at December 31, 1993........... 3,000,000 1,500 -- -- 2,245,668 2,247,168
Unrealized gains from initial adoption
of Statement of Financial Accounting
Standards No. 115 effective January 1,
1994, net of tax of $24,972........... -- -- 35,313 -- -- 35,313
Net change in unrealized gains, net of
tax of $3,689......................... -- -- (5,216) -- -- (5,216)
Net earnings........................... -- -- -- -- 961,828 961,828
---------- ------------- ----------- ------------ ------------ -------------
Balance at December 31, 1994........... 3,000,000 1,500 30,097 -- 3,207,496 3,239,093
Net change in unrealized gains, net of
tax of $21,283........................ -- -- (30,097) -- -- (30,097)
Net earnings........................... -- -- -- -- 1,266,592 1,266,592
---------- ------------- ----------- ------------ ------------ -------------
Balance at December 31, 1995........... 3,000,000 1,500 -- -- 4,474,088 4,475,588
Public offering of common stock
(unaudited)........................... 1,319,200 16,287,797 -- -- -- 16,287,797
Restricted stock awards issued
(unaudited)........................... 105,000 1,470,000 -- (1,470,000) -- --
Amortization of stock awards
(unaudited)........................... -- -- -- 190,698 -- 190,698
Net earnings (unaudited)............... -- -- -- -- 1,642,775 1,642,775
---------- ------------- ----------- ------------ ------------ -------------
Balance at June 30, 1996 (unaudited)... 4,424,200 $ 17,759,297 $ -- $ (1,279,302) $ 6,116,863 $ 22,596,858
---------- ------------- ----------- ------------ ------------ -------------
---------- ------------- ----------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
ALRENCO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
------------ ------------ ------------- SIX MONTHS ENDED
JUNE 30,
---------------------------
1995 1996
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings................................ $ 1,009,940 $ 961,828 $ 1,266,592 $ 503,373 $ 1,642,775
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation of rental merchandise........ 5,888,777 7,482,614 9,099,579 4,347,934 5,936,257
Depreciation of property assets........... 138,620 271,775 373,502 174,992 314,322
Amortization of intangibles............... 914 97,134 284,901 96,720 387,067
Gain on sale of investments............... -- -- (99,930) -- --
Loss on sale of property assets........... -- 671 13,353 -- --
Deferred income taxes..................... (296,659) 263,060 202,672 -- --
Other..................................... (159,221) -- -- -- --
Changes in operating assets and liabilities,
net of effects of acquisitions
Rental merchandise........................ (6,146,605) (9,108,973) (10,888,866) (4,006,533) (9,683,117)
Prepaid expenses and other................ 235,440 (401,881) (676,064) 272,415 773,137
Accounts payable -- trade................. (176,941) 310,861 755,788 384,456 1,134,791
Accrued liabilities....................... 658,095 (401,318) 480,269 (253,196) (1,194,644)
Income taxes payable...................... 165,711 (211,620) -- 301,340 (588,342)
Taxes other than income................... (25,169) 52,755 160,078 23,127 568,194
------------ ------------ ------------- ------------ -------------
Net cash provided by (used in) operating
activities............................. 1,292,902 (683,094) 971,874 1,844,628 (709,560)
Cash flows from investing activities
Purchase of property assets................. (149,067) (426,129) (434,846) (150,167) (1,014,806)
Proceeds from sale of property assets....... -- 83,975 160,661 228,000 --
Purchases of investments.................... (78,108) (78,108) (58,581) 39,054 --
Proceeds from sale of investments........... -- -- 542,501 -- --
Acquisition of businesses................... -- (3,500,000) (6,835,060) -- (9,999,867)
Increase in loan to stockholder............. (7,842) (7,662) (7,466) (7,466) (7,252)
------------ ------------ ------------- ------------ -------------
Net cash provided by (used in) investing
activities............................. (235,017) (3,927,924) (6,632,791) 109,421 (11,021,925)
Cash flows from financing activities
Increase (decrease) in line of credit....... (1,531,032) 4,613,559 5,664,031 (1,594,693) (3,612,904)
Net proceeds from initial public offering... -- -- -- -- 16,287,797
------------ ------------ ------------- ------------ -------------
Net cash provided by (used in) financing
activities............................. (1,531,032) 4,613,559 5,664,031 (1,594,693) 12,674,893
------------ ------------ ------------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents............................ (473,147) 2,541 3,114 359,356 943,408
Cash and cash equivalents at beginning of
period....................................... 494,533 21,386 23,927 23,927 27,041
------------ ------------ ------------- ------------ -------------
Cash and cash equivalents at end of period.... $ 21,386 $ 23,927 $ 27,041 $ 383,283 $ 970,449
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Supplemental cash flow information
Cash paid during the period for
Interest................................ $ 294,360 $ 394,037 $ 818,330 $ 361,154 $ 182,034
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Income taxes............................ $ 860,408 $ 814,999 $ 623,903 $ 130,619 $ 1,744,479
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
DESCRIPTION OF OPERATIONS
The Company leases household durable merchandise to customers on a
rental-purchase basis. At June 30, 1996, the Company operated 100 stores in 15
states in the United States.
RENTAL MERCHANDISE
Rental merchandise is carried at the lower of 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. 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 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.
Rental merchandise acquired prior to January 1, 1995 is being depreciated by
the straight-line method over various estimated useful lives, primarily 21
months. The range of the various estimated useful lives is generally one to
three years. The Company adopted the income forecasting method because
management believes that it provides a more systematic and rational allocation
of the cost of rental merchandise to operations as its useful life expires. The
effect of the change in accounting method was to increase net earnings and
earnings per share by approximately $470,000 and $.15, respectively, for the
year ended December 31, 1995.
RENTAL REVENUE
Merchandise leased 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 is 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.
PROPERTY ASSETS AND RELATED DEPRECIATION
Furniture, equipment and vehicles are stated at cost and depreciation is
provided over the estimated useful lives of the respective assets by the
straight-line method. Leasehold improvements are amortized over the lease term
plus one renewal option 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.
INCOME TAXES
The Company provides 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 or receivable.
F-8
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standard No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES (SFAS 115). SFAS 115 requires companies to classify investments in
marketable securities and in all debt securities as trading securities,
available-for-sale securities, or held-to-maturity securities. The Statement
requires trading securities and available-for-sale securities to be carried at
fair value, with unrealized holding gains and losses of trading securities
included in the determination of net earnings and unrealized holding gains and
losses of available-for-sale securities included in equity. Held-to-maturity
securities are to be carried at amortized cost. The Company designates all of
its securities, which consist entirely of equity securities, as
available-for-sale securities. For years prior to January 1, 1994, the Company
carried investment securities at the lower of aggregate cost or market value.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with an original maturity of three months or less.
EARNINGS PER COMMON SHARE
Earnings per common share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period
presented. Common share equivalents for all periods include restricted stock
awards of 105,000 shares. Such shares have been retroactively restated to
reflect a 30,000-for-1 stock split effective November 8, 1995.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and debt whose carrying
value approximates fair value at December 31, 1994 and 1995.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulations S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
unaudited interim financial statements as of June 30, 1996 and for the six
months ended June 30, 1995 and 1996 include all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the Company's financial
position, results of operations and cash flows. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the full year.
STOCK OPTIONS
The Financial Accounting Standards Board issued SFAS No. 123 -- Accounting
for Stock-Based Compensation in the Fall of 1995. The statement defines a fair
value based method of accounting for an employee stock option to determine
compensation expense at the date of grant. However, the statement allows a
company to continue measuring compensation expense for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25 --
Accounting for Stock
F-9
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Issued to Employees. The Company elected to continue measuring compensation
expense for stock options based on APB Opinion No. 25 and will provide the
required pro forma disclosures prescribed in SFAS No. 123 when complete
financial statements are presented for 1996.
NOTE B -- ACQUISITIONS
The Company purchased 18 rent-to-own stores from a company doing business as
Magic Rent to Own ("Magic") on June 30, 1994 for cash of approximately $3.5
million.
The Company purchased 15 rent-to-own stores from a company doing business as
The Television Management Companies ("TVM") on August 31, 1995 for cash of
approximately $5.95 million.
The Company purchased 14 rent-to-own stores from a company doing business as
Easy TV & Appliance Rentals ("Easy") on March 1, 1996 for cash of approximately
$6.5 million. During the three month period ended June 30, 1996 the Company
acquired 25 additional rent-to-own stores in ten unrelated transactions for an
aggregate purchase price of approximately $4.7 million. Of the $11.2 million
aggregate purchase price for these acquisitions, $10 million was paid in cash
and $1.2 million is to be paid in the future. In August 1996, the Company
acquired all of the outstanding common stock of Network Rental, Inc., an
operator of 14 rent-to-own stores for cash of approximately $5.7 million.
All of the acquisitions have been accounted for as purchases and,
accordingly the operating results of the acquired businesses have been or will
be included in the results of operations since their acquisition dates.
The following summary, prepared on a pro forma basis, presents the results
of operations as if the businesses acquired had been purchased as of January 1,
of the year previous to the date of acquisition, after including the effect of
adjustments for amortization of intangibles, depreciation, compensation and
interest expense incurred to finance the acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................... $ 39,931,409 $ 69,332,900 $ 34,129,269 $ 35,545,035
Net earnings.......................... $ 409,799 $ 807,193 $ 388,960 $ 1,380,219
Earnings per common share............. $ .13 $ .26 $ .13 $ .33
</TABLE>
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
Cost and accumulated depreciation of rental merchandise are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
ON RENT
Cost................................................... $ 13,033,453 $ 17,644,780 $ 23,312,013
Less accumulated depreciation.......................... 6,001,405 7,645,468 8,595,082
-------------- -------------- --------------
$ 7,032,048 $ 9,999,312 $ 14,716,931
-------------- -------------- --------------
-------------- -------------- --------------
HELD FOR RENT
Cost................................................... $ 4,196,551 $ 4,405,998 $ 7,215,778
Less accumulated depreciation.......................... 1,892,199 1,289,942 1,244,079
-------------- -------------- --------------
$ 2,304,352 $ 3,116,056 $ 5,971,699
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-10
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- PROPERTY ASSETS
Property assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIATION ----------------------------
PERIOD 1994 1995
------------ ------------- ------------- JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment..................... 5 years $ 1,173,936 $ 1,431,278 $ 1,699,202
Delivery vehicles........................... 3 years 400,500 256,404 1,129,812
Leasehold improvements...................... 3-10 years 862,377 1,178,699 2,066,173
------------- ------------- -------------
2,436,813 2,866,381 4,895,187
Less accumulated depreciation............... 1,179,829 1,463,972 1,778,294
------------- ------------- -------------
$ 1,256,984 $ 1,402,409 $ 3,116,893
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE E -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION --------------------------
PERIOD 1994 1995
---------------- ----------- ------------- JUNE 30, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer rental agreements............... 15 months $ 180,000 $ 430,000 $ 742,335
Noncompete agreements.................... 2-10 years 25,000 913,675 1,225,300
Goodwill................................. 20 years 488,785 3,918,265 9,805,845
----------- ------------- --------------
693,785 5,261,940 11,773,480
Less accumulated amortization............ 101,577 393,350 780,418
----------- ------------- --------------
$ 592,208 $ 4,868,590 $ 10,993,062
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
Customer rental agreements represent the fair value of open customer
contracts of acquired stores at acquisition date and are amortized straight-line
over the approximate average term of the customer contract, 15 months. The
noncompete agreements are amortized on the straight-line method over the life of
the respective agreements. Goodwill is amortized by the straight-line method
over 20 years. The Company reviews goodwill at each reporting date to assess
recoverability. Impairment would be recognized in operating results if expected
future undiscounted operating cash flows of the acquired business are less than
the carrying value of goodwill.
NOTE F -- INVESTMENTS
The cost, unrealized gains, and fair values of the Company's
available-for-sale securities held at December 31, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Equity securities held at December 31, 1994....... $ 383,989 $ 51,380 $ -- $ 435,369
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
</TABLE>
There were realized gains of $99,930 on sales of securities during the year
ended December 31, 1995 and no realized gains or losses on sales of securities
during the year ended December 31, 1994.
NOTE G -- DEBT
Debt consists of a revolving loan payable to a bank with interest at the
bank's prime rate (8.75% at December 31, 1995) plus 1.75% for amounts up to
$6,500,000 and 2% for additional amounts. The loan matures on September 1, 1997.
F-11
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- DEBT (CONTINUED)
The line provides for maximum borrowings of the lesser of: (a) the immediate
three month average monthly rental contract revenues multiplied by the monthly
revenue multiplier (3.75 at December 31, 1995) or (b) the maximum amount
available under the term of the loan ($13,500,000 at December 31, 1995). The
monthly revenue multiplier reduces quarterly by .25 until maturity and the
maximum amount available under the loan reduces each quarter beginning June 1996
through March 1997 by $875,000. The remaining balance is due at maturity. The
borrowings are collateralized by all of the Company's assets and the personal
guarantees of the majority stockholder and his spouse. The weighted average
interest rate was 10.1%, 10.4% and 11.3% for the years ended December 31, 1993,
1994 and 1995.
The loan agreement contains certain covenants which include, among others,
earnings and tangible net worth requirements, limitations on liabilities and
capital expenditures, ratios concerning interest expense coverage and rental
merchandise, and restrictions on the payment of dividends.
The following are scheduled maturities of debt at December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------------
<S> <C>
1996.................................................................................... $ 1,990,239
1997.................................................................................... 10,875,000
--------------
$ 12,865,239
--------------
--------------
</TABLE>
NOTE H -- RELATED PARTY TRANSACTIONS
The Company leases office space from a corporation owned by its majority
stockholder. Rental expense pursuant to the lease was $81,905, $85,796 and
$94,800 for the years ended December 31, 1993, 1994 and 1995, respectively.
NOTE I -- INCOME TAXES
The income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
------------- ----------- -----------
<S> <C> <C> <C>
Current
Federal...................................................... $ 823,910 $ 334,320 $ 514,672
State........................................................ 194,310 141,907 150,967
------------- ----------- -----------
Total current.............................................. 1,018,220 476,227 665,639
Deferred
Federal...................................................... (244,217) 215,920 171,809
State........................................................ (52,442) 47,140 30,863
------------- ----------- -----------
Total deferred............................................. (296,659) 263,060 202,672
------------- ----------- -----------
Total...................................................... $ 721,561 $ 739,287 $ 868,311
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
F-12
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I -- INCOME TAXES (CONTINUED)
The income tax provision reconciled to the tax computed at the statutory
Federal rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate...................................................... 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit................................. 5.4 7.3 5.6
Other...................................................................... 2.3 2.2 1.1
--- --- ---
Total.................................................................. 41.7% 43.5% 40.7%
--- --- ---
--- --- ---
</TABLE>
The Federal income tax returns of the Company have been examined through
1992 and proposed adjustments are being contested. Management believes adequate
provision has been made for any adjustments which might be assessed.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- ------------
<S> <C> <C>
Deferred tax assets
Deferred compensation...................................................... $ 229,954 $ 88,309
Rental merchandise......................................................... 187,141 40,460
Accumulated depreciation................................................... 32,023 51,256
Deferred loan fees......................................................... 9,925 --
Other...................................................................... 5,219 --
----------- ------------
464,262 180,025
Deferred tax liabilities
Intangible assets.......................................................... (235,435) (154,137)
Investments................................................................ (21,283) --
Other...................................................................... (7,456) (7,189)
----------- ------------
(264,174) (161,326)
----------- ------------
Net deferred asset........................................................... $ 200,088 $ 18,699
----------- ------------
----------- ------------
</TABLE>
NOTE J -- ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expense was
$1,844,185, $2,064,430 and $2,900,755 for each of the three years in the period
ended December 31, 1995.
F-13
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities under operating leases
expiring in various years through 2003. Rental expense was $965,480, $1,326,186
and $1,905,909 for the years 1993, 1994 and 1995, respectively. Future minimum
rental payments under operating leases with remaining noncancelable lease terms
in excess of one year at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996......................................................... $1,793,844
1997......................................................... 1,467,808
1998......................................................... 1,023,104
1999......................................................... 592,243
2000......................................................... 221,316
----------
$5,098,315
----------
----------
</TABLE>
The Company is defendant in various lawsuits arising in the normal course of
business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial condition or results of operations. In 1993, the Company
settled a class action lawsuit for $625,000 filed by seventeen of its former
employees for alleged discrimination.
The tax returns of the Company are currently under examination by the
Internal Revenue Service (IRS). In addition, the IRS has issued a revenue ruling
which could impact the manner in which the Company depreciates its rental
merchandise for income tax purposes. Management believes that adequate provision
has been made for income taxes and any liability that may arise from prior
periods or the revenue ruling will not have a material effect on the financial
condition or results of operations of the Company.
NOTE L -- EMPLOYEE BENEFITS
In 1990, the Company established individual deferred compensation plans with
six key executives. Effective September 30, 1995, the Company and the executives
rescinded the plans. Despite the rescission, the Company agreed to compensate
the executives for amounts accrued under the plans through September 30, 1995.
Compensation recognized under the plans was $137,438, $75,658, and $119,603, for
each of the three years in the period ended December 31, 1995.
On November 8, 1995 the Company approved a stock incentive plan (the "Plan")
under which 450,000 common shares were reserved. Under the Plan, the Company may
grant its employees incentive stock options or nonqualified stock options to
purchase a specified number of shares of common stock at a price not less than
fair market value on the date of grant and for a term not to exceed 10 years. In
addition to the stock options, the Company may grant stock appreciation rights
(SAR), restricted stock awards and options to nonemployee directors. SAR's and
options to nonemployee directors must be granted at a minimum of fair market
value at the date of grant and restricted stock awards at a price to be
determined by the Board of Directors' compensation committee. Nonemployee
directors are initially entitled to a grant of 5,000 shares and on each of the
next five anniversaries an automatic 1,000 share grant. At the completion of the
Company's initial public offering in January 1996, the Company granted 105,000
shares of restricted stock to two key employees which vest at the end of seven
years and issued of 97,997 stock options to directors and employees under the
stock incentive plan. The exercise price of these options is the price to the
public of the stock at the effective date of the Offering. 70,347 of these
options are exercisable immediately and the remainder vest over one to two
years.
F-14
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M -- INITIAL PUBLIC OFFERING
In January 1996, the Company completed a public offering of 2,019,200 shares
of common stock at $14 per share. The net proceeds to the Company relating to
1,319,200 shares (700,000 were sold by a shareholder) after underwriting
commissions and expenses were approximately $16.3 million and were used to
retire debt of approximately $12.9 million.
NOTE N -- SUPPLEMENTARY EARNINGS PER COMMON SHARE
Supplementary earnings per common share were $.50 for the year ended
December 31, 1995. Supplementary earnings per share are calculated assuming the
retirement of debt with the proceeds of the offering of common stock as if it
had occurred on January 1, 1995. The weighted average shares outstanding used
for this calculation were 4,088,179.
NOTE O -- UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1995 and 1994 (in thousands) is as
follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Revenue................................................... $ 8,419 $ 8,553 $ 9,323 $ 11,281
Operating profit.......................................... 392 823 720 994
Net earnings.............................................. 139 364 268 496
Earnings per common share................................. $ .04 $ .12 $ .09 $ .16
Year ended December 31, 1994
Revenue................................................... $ 5,642 $ 5,820 $ 7,852 $ 8,486
Operating profit.......................................... 510 439 608 605
Net earnings.............................................. 256 205 268 233
Earnings per common share................................. $ .08 $ .07 $ .09 $ .08
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Network Rental, Inc.
We have audited the accompanying balance sheets of Network Rental, Inc. (a
Georgia corporation) as of May 31, 1995 and 1996, and the related statements of
earnings, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the May 31, 1995 and 1996 financial statements referred to
above present fairly, in all material respects, the financial position of
Network Rental, Inc. as of May 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
GRACE & ASSOCIATES, P.C.
Atlanta, Georgia
July 19, 1996, except for Note 8 and Note 12
as to which the date is August 9, 1996
F-16
<PAGE>
NETWORK RENTAL, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1995 1996
------------- ------------- JULY 31, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents (note 1)................................... $ 74,526 $ 161,936 $ 83,787
Rental merchandise, net (note 2)
On rent............................................................ 1,460,196 1,330,199 1,229,980
Held for rent...................................................... 264,685 269,310 229,495
Prepaid expenses and other assets.................................... 118,293 86,186 92,907
Deferred income taxes (note 7)....................................... 306,730 235,924 235,924
Property assets, net (note 3)........................................ 136,925 260,812 208,980
Loan to stockholder (note 9)......................................... 384,596 377,427 376,180
------------- ------------- -------------
TOTAL ASSETS......................................................... $ 2,745,951 $ 2,721,794 $ 2,457,253
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
LIABILITIES
Accounts payable..................................... $ 272,721 $ 241,504 $ 168,312
Accrued expenses (note 4)............................ 481,553 230,354 373,966
Capital lease obligation (note 6).................... 58,080 197,378 152,826
Debt (note 5)........................................ 1,445,000 1,086,000 769,000
---------- ---------- ----------
Total Liabilities.................................. 2,257,354 1,755,236 1,464,104
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Common stock -- $.01 par value -- 2,000,000 shares
authorized; 900,000 shares issued and outstanding... 9,000 9,000 9,000
Additional paid-in capital........................... 69,167 69,167 69,167
Retained earnings.................................... 410,430 888,391 914,982
---------- ---------- ----------
Total stockholders' equity......................... 488,597 966,558 993,149
---------- ---------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY.............................. $2,745,951 $2,721,794 $2,457,253
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
NETWORK RENTAL, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1995 1996
------------- ------------- TWO MONTHS ENDED
JULY 31,
------------------------------
1995 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Rentals and fees................................... $ 6,949,250 $ 7,057,807 $ 1,180,901 $ 1,144,040
------------- ------------- -------------- --------------
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise............... 1,899,362 1,916,619 324,154 295,845
Other............................................ 3,076,112 3,136,591 515,903 526,986
------------- ------------- -------------- --------------
4,975,474 5,053,210 840,057 822,831
General and administrative expenses................ 1,114,110 1,192,487 178,961 286,776
------------- ------------- -------------- --------------
Total operating expenses....................... 6,089,584 6,245,697 1,019,018 1,109,607
------------- ------------- -------------- --------------
Operating profit............................... 859,666 812,110 161,883 34,433
OTHER EXPENSE (INCOME)
Interest expense................................... 279,941 155,414 28,295 19,102
(Gain) loss on sale of property assets............. 1,091 (18,762) -- --
Other.............................................. (194,153) (155,825) (35,724) (27,558)
------------- ------------- -------------- --------------
86,879 (19,173) (7,429) (8,456)
------------- ------------- -------------- --------------
Earnings before income taxes................... 772,787 831,283 169,312 42,889
INCOME TAX EXPENSE................................. 314,786 353,322 64,339 16,298
------------- ------------- -------------- --------------
NET EARNINGS................................... $ 458,001 $ 477,961 $ 104,973 $ 26,591
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
NETWORK RENTAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE --
MAY 31, 1994........................ 900,000 $ 9,000 $ 69,167 $ (47,571) $ 30,596
Net earnings...................... -- -- -- 458,001 458,001
----------- ------------- -------- ------------- -----------
BALANCE --
MAY 31, 1995........................ 900,000 9,000 69,167 410,430 488,597
Net earnings...................... -- -- -- 477,961 477,961
----------- ------------- -------- ------------- -----------
BALANCE --
MAY 31, 1996........................ 900,000 9,000 69,167 888,391 966,558
Net earnings (unaudited).......... -- -- -- 26,591 26,591
----------- ------------- -------- ------------- -----------
BALANCE --
JULY 31, 1996
(unaudited)......................... 900,000 $ 9,000 $ 69,167 $ 914,982 $ 993,149
----------- ------------- -------- ------------- -----------
----------- ------------- -------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
NETWORK RENTAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEAR ENDED MAY 31, JULY 31,
---------------------------- ------------------------
1995 1996 1995 1996
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings.......................................... $ 458,001 $ 477,961 $ 104,973 $ 26,591
Adjustments needed to reconcile to net cash provided
by operations:
Depreciation of rental merchandise.................. 1,899,362 1,916,619 324,154 295,845
Depreciation of property assets..................... 75,305 99,332 13,500 18,549
(Gain) loss on sale of equipment 1,543........ (18,762) -- --
Deferred income tax................................. 152,321 70,806 76,047 --
Changes in operating assets and liabilities:
Rental merchandise.................................. (2,054,793) (1,794,525) (268,621) (155,811)
Prepaid expenses and other.......................... (615) 35,385 (4,356) (6,721)
Accounts payable.................................... (34,205) (31,217) (54,179) (73,192)
Accrued expenses.................................... 196,430 (251,199) (28,469) 143,612
------------- ------------- ----------- -----------
Net cash provided by operating
activities....................................... 693,349 504,400 163,049 248,873
------------- ------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property assets........................... (28,117) (226,727) -- --
Redemption of certificate of deposit.................. 50,000 -- -- --
Sale of property assets............................... -- 22,270 -- 33,283
Collection of stockholder note receivable............. 6,666 7,169 1,159 1,247
------------- ------------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... 28,549 (197,288) 1,159 34,530
------------- ------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional lease obligations.......................... -- 197,588 -- --
Repayment of note payable............................. (1,300,022) (359,000) (4,291) (317,000)
Repayment of capital lease obligations................ (29,444) (58,290) (5,095) (44,552)
------------- ------------- ----------- -----------
Net cash used by financing activities............. (1,329,466) (219,702) (9,386) (361,552)
------------- ------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (607,568) 87,410 154,822 (78,149)
CASH AND CASH EQUIVALENTS --
beginning of period.................................... 682,094 74,526 74,526 161,936
------------- ------------- ----------- -----------
CASH AND CASH EQUIVALENTS --
end of period.......................................... $ 74,526 $ 161,936 $ 229,348 $ 83,787
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Supplemental cash flow information:
Cash paid during the period for --
Interest.......................................... $ 268,028 $ 164,564 $ 28,295 $ 19,102
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Income taxes...................................... $ 6,610 $ 415,385 $ -- $ --
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the company
are as follows:
DESCRIPTION OF BUSINESS
Network Rental, Inc. rents household appliances and furniture for periods of
up to 18 months pursuant to rental agreements which are cancelable at any time.
Weekly or monthly rental payments are collected in advance, and ownership in the
related merchandise is transferred at the end of the designated rental period.
The company operates 14 rental-purchase stores in Atlanta and surrounding areas.
Additionally, it has three franchise locations in Georgia and receives monthly
royalty fees from the franchisees.
RENTAL MERCHANDISE
Rental revenue from merchandise on rent is recognized as rents are
collected. Rental agreements may be terminated at any time by a customer upon
the return of the merchandise. Depreciation is computed using the straight-line
method over 24 months, which represents the company's estimate of the useful
life of the rental merchandise. Upon transfer of ownership in the merchandise at
the end of the rental period, the remaining net book value of the merchandise,
if any, is charged to operations as depreciation expense. The Company does not
reserve for losses of rental merchandise damaged or not returned by customers.
The loss is recognized as they are incurred.
The Company includes in revenues the following income: rental fees,
franchise fees, collection fees, delivery fees, damage waivers and other fees.
Returned checks and refunds for 1995 are netted against revenues. For 1996, the
Company included the returned checks and refunds totaling $35,265 in other
direct store expenses, instead of netting them against revenues.
CASH AND CASH EQUIVALENTS
The company considers all money market accounts and highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
The Company's cash management policy is to use all excess cash to repay its
debt referred to in note 5.
PROPERTY ASSETS AND RELATED DEPRECIATION
Equipment and leasehold improvements are stated at cost. Expenditures for
repairs and maintenance are charged to expense as incurred and additions and
improvements that significantly extend the lives of depreciable property are
capitalized. Upon sale or retirement of depreciable property, the cost and
accumulated depreciation are removed from the related accounts and any gain or
loss is reflected in operations. Depreciation on equipment is computed by using
an accelerated method based on the estimated useful lives of the depreciable
assets, principally three to five years. Leasehold improvements are amortized
over the respective lease terms using the straight-line method.
INCOME TAXES
Income taxes are computed based on the provisions of SFAS 109, "Accounting
for Income Taxes." Deferred tax assets and liabilities are recognized for the
estimated future tax effects attributed to temporary differences between book
and tax bases of assets and liabilities and for carryforward items. The
measurement of current and deferred tax assets and liabilities is based on
enacted tax law. Deferred tax assets are reduced, if necessary, by a valuation
allowance for the amount of tax benefits that may not be realized. Prior to
1994, income taxes were computed in accordance with APB Opinion No. 11.
F-21
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for
each of the two month periods ended July 31, 1995 and July 31, 1996 include all
adjustments, consisting of normal recurring accruals necessary to present fairly
the Company's results of operations and cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts payable,
capital lease obligations and debt whose carrying value approximates fair value
at May 31, 1995 and 1996.
NOTE 2. -- RENTAL MERCHANDISE
Rental merchandise consists of the following at May 31:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
ON RENT
Cost...................................................................... $ 2,828,142 $ 2,790,090
Less accumulated depreciation............................................. 1,367,946 1,459,891
------------- -------------
$ 1,460,196 $ 1,330,199
------------- -------------
------------- -------------
HELD FOR RENT
Cost...................................................................... $ 502,812 $ 596,828
Less accumulated depreciation............................................. 238,127 327,518
------------- -------------
$ 264,685 $ 269,310
------------- -------------
------------- -------------
</TABLE>
NOTE 3. -- PROPERTY ASSETS
Equipment and leasehold improvements consist of the following major
classifications:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Furniture and equipment....................................... $ 831,227 $ 831,710
Vehicles...................................................... 363,807 276,991
Equipment and vehicles under capital leases................... 119,807 321,234
Leasehold improvements........................................ 270,713 281,672
-------------- --------------
1,585,554 1,711,607
Accumulated depreciation...................................... (1,448,629) (1,450,795)
-------------- --------------
$ 136,925 $ 260,812
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4. -- ACCRUED EXPENSES
Accrued expenses consist of the following major classifications:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Income taxes........................................................ $ 155,855 $ 23,236
Accrued salaries.................................................... 126,272 93,927
Accrued sales and other taxes....................................... 40,753 53,827
Deferred compensation............................................... 111,725 6,437
Accrued interest.................................................... 18,455 9,305
Other accrued expenses.............................................. 28,493 43,622
----------- -----------
$ 481,553 $ 230,354
----------- -----------
----------- -----------
</TABLE>
F-22
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- DEBT
The Company obtained a $1,500,000 revolving line of credit from Comerica
Bank--Texas on June 26, 1995. Under terms of this loan, interest payments of 2%
above the bank's prime rate are due monthly, and the entire principal balance
plus any accrued interest are due on September 1, 1996. All of the Company's
assets are pledged as collateral under the loan, and the Company's stockholder
has personally guaranteed the loan. The Company is bound by various financial
covenants related to minimum net worth and debt/equity ratios under the terms of
the loan agreement.
Note payable on May 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Prime Plus 3.5% Installment Note Payable to a Commercial Finance
Company--collateralized by substantially all of the company's
assets and the personal guaranty of the company's major
stockholder. Interest is payable monthly. Principal is payable
$35,000 per month through maturity with any remaining
principal due April 14, 1995.................................. $ 1,445,000 $ --
Prime plus 2% Revolving Line of Credit with Comerica
Bank--Texas................................................... -- 1,086,000
------------- -------------
$ 1,445,000 $ 1,086,000
------------- -------------
------------- -------------
</TABLE>
NOTE 6. -- LEASES
The company leases computer equipment and vehicles which qualify as capital
leases. A capital lease obligation of $3,099 is personally guaranteed by the
company's stockholder.
The company leases its facilities under noncancellable operating leases.
Future minimum lease payments under the capital leases and operating leases as
of May 31, 1996, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
Year Ending
May 31, 1997.................................................... $89,985 $ 356,316
May 31, 1998.................................................... 65,656 205,304
May 31, 1999.................................................... 63,448 84,427
May 31, 2000.................................................... 22,048 43,704
May 31, 2001 and thereafter..................................... -- 11,899
----------- -----------
Total minimum lease payments........................................ 241,137 $ 701,650
-----------
-----------
Less: amount representing interest 43,759
-----------
Present value of net minimum lease payments......................... $197,378
-----------
-----------
</TABLE>
The capital leases are payable in monthly installments totaling $7,875,
including interest and sales taxes.
Rent expense totaled $349,249 for 1995 and $364,326 for 1996.
NOTE 7. -- PROVISION FOR INCOME TAXES
During the year ended May 31, 1994, the company implemented Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 establishes standards for financial accounting and reporting for
income taxes that are currently payable and for provisions
F-23
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. -- PROVISION FOR INCOME TAXES (CONTINUED)
for deferred income taxes. The standard requires a change from the deferred
method to the asset and liability method of accounting for income taxes. The
cumulative effect of the change in accounting method was a benefit of $727,908.
The current provision for federal income taxes results from imposition of
the alternative minimum tax (AMT). AMT is imposed at a 20% rate on the company's
alternative minimum taxable income, which is determined by making statutory
adjustment to the company's regular taxable income (loss). The adjustments
consist primarily of limitations on depreciation deductions as calculated under
an alternative depreciation system and limitations on the application of net
operating loss carryforwards.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current provision
Federal......................................................... $ 247,875 $ 266,637
Utilization of net operating loss carryforward.................. (109,155) (39,591)
----------- -----------
138,720 227,046
----------- -----------
State........................................................... 43,743 47,054
Utilization of net operating loss carryforward.................. (20,608) --
----------- -----------
23,135 47,054
----------- -----------
Deferred Provision
Federal......................................................... 126,849 67,617
State........................................................... 26,082 11,605
----------- -----------
152,931 79,222
----------- -----------
$ 314,786 $ 353,322
----------- -----------
----------- -----------
</TABLE>
As of May 31, 1996, the tax effect of components of net deferred tax assets
and liabilities is as follows:
<TABLE>
<CAPTION>
FEDERAL STATE
----------- ---------
<S> <C> <C>
Deferred tax assets
Capital leases................................................... 7,896 1,393
Stock options.................................................... 2,189 386
Depreciation..................................................... 72,433 11,292
AMT credit....................................................... 144,779 --
----------- ---------
227,297 13,071
----------- ---------
Deferred tax liabilities
State income tax benefit......................................... (4,444) --
----------- ---------
(4,444) --
----------- ---------
Net Deferred Tax Assets and Liabilities.......................... $ 222,853 $ 13,071
----------- ---------
----------- ---------
</TABLE>
As of May 31, 1996, the company has an Alternative Minimum Tax (AMT) credit
of $144,779 which may be carried forward indefinitely to reduce future taxable
income and taxes. The tax benefits of this carryforward is included in the
deferred tax assets presented above.
F-24
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. -- PROVISION FOR INCOME TAXES (CONTINUED)
Additionally, the Company has investment tax credit carryovers totaling
$244,793 that will expire in the years 2000 and 2001. The investment tax credits
are not included in deferred tax assets.
NOTE 8. -- INCENTIVE STOCK OPTION PLAN
Under the company's incentive stock option plan, options to purchase shares
of the company's common stock are granted at a price equal to the estimated fair
market value of the stock at the date of the grant. Generally, the options
become exercisable in installments 2 years after the company has exceeded a
certain average monthly sales volume and unless exercised, expire at various
intervals not exceeding ten years from date of grant.
At May 31, 1996, options to purchase up to 4,500 shares with an option
prices of $1.71 per share have been granted. For the year ending May 31, 1996,
options equal to 8.58% of the Company's total common stock were exercised by
employees and were sold back to the Company at market value. The Company r e
corded compensation expense of $13,773 during 1996 related to the outstanding
options.
On August 2, 1996, all three remaining participants in the stock option plan
executed waivers to release the Company against any past and future claims under
the plan.
NOTE 9. -- RELATED PARTY TRANSACTIONS
Transactions and outstanding balances with the company's major stockholder
are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Notes receivable.............................................................. $ 384,596 $ 377,427
Interest income............................................................... $ 28,342 $ 27,839
Rent expense.................................................................. $ 33,817 $ 52,271
Receivable.................................................................... $ 2,358 $ 2,328
</TABLE>
The note receivable is secured by real estate, bearing interest at 7.3% with
principal and interest payable monthly over twenty-five years through September
2017.
NOTE 10. -- PROFIT SHARING PLAN
During the year ended May 31, 1994, the company implemented a 401(k) profit
sharing plan covering substantially all employees. The company is required to
match employee voluntary contributions subject to certain limitations at a rate
of 25 percent. The company made matching contributions of $7,813 for 1996 and
$6,687 for 1995.
NOTE 11. -- COMMITMENTS AND CONTINGENCIES
Prior to January 1, 1996, management took the position that merchandise in
the hands of its customers was not part of its inventory and personal property
taxes due on these items were the responsibility of the customers. Network
Rental filed ad valorem taxes with the appropriate taxing authorities on an
annual basis and reported only unrented inventory. Management is aware that one
or more taxing authorities might assert a claim against the company for taxes on
property in the hands of customers.
Discussions by management with the various taxing authorities has indicated
that when such a claim is asserted, audits go back three years even though the
statute of limitations may be longer.
Legal counsel for the company advises that "the ad valorem taxes constitute
not only a lien against the property, but also the personal obligation of the
taxpayer. In this regard, the taxing authority could assert a claim against the
current owner of the property based on the lien or against
F-25
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
the owner of the property on January 1 of each year. For this reason, it can be
assumed that Network Rental has some exposure in this area. However, the
exposure is contingent at best and as a practical matter appears to be limited
in scope."
Based on management's experience and investigation, its assessment is that
the company has an annual exposure of between $0 and $30,000 on this contingent
claim and a total exposure of between $0 and $60,000, exclusive of any penalty
and interest that might be assessed.
The Company depreciates its rental merchandise using the income forecasting
method for federal and state income tax purposes. This depreciation method has
been widely used in the industry and purports to match the depreciation
deductions against the revenues that the rental merchandise generates. However,
in 1994 the United States Tax Court in the case ABC RENTALS OF SAN ANTONIO,
INC., ET AL V. COMMISSIONER OF THE INTERNAL REVENUE, upheld the Internal Revenue
Service position that this method is not allowable for use by rental purchase
companies. Furthermore, the Internal Revenue Service issued in 1995 Revenue
Ruling 95-52 which effectively precludes any company taking a contrary position
from doing so without being in direct conflict with the Revenue Code.
The "ABC Rentals" case is on appeal in two U.S. Circuit Courts and the
industry has been putting forth effort to have the tax code amended to allow for
a three year accelerated depreciation method. As a result, the company h a s
continued to depreciate its rental merchandise under the income forecasting
method for years prior to June 1, 1995.
For the year ending May 31, 1996, the company converted to the prescribed
method of depreciation (MACRS 5 years) for all new rental merchandise purchased
during the year, which represents 53% of the Company's total rental merchandise
at year end. Since the rental merchandise is generally rented for periods of
less than 24 months, it is likely that the remaining assets that were
depreciated under the income forecasting method would be disposed by May 31,
1997. The Company, however, would remain liable for penalties and interest for
not converting to the proper method after the issuance of the 1995 Revenue
Ruling.
Network Rental, Inc. is contingently liable for letters of credit extended
to a major supplier and to the State of Georgia for the Company's warranty
program.
Network Rental, Inc. is contingently liable for cellular phone contracts
which have not expired.
During the year ending May 31, 1996, the Company's employees exercised
certain stock options. The difference between the fair market value of the
common stock and the exercise price is compensation subject to withholding taxes
for federal income tax purposes. The Company did not report the amounts as
employee compensation, nor did it withhold any employment taxes. Therefore, the
Company is contingently liable for employment taxes on $35,191 in compensation
plus penalties and interest.
A claim has been made by Aaron Rents, Inc. alleging that Network Rental,
Inc. violated the Lanham Act in connection with a commercial comparing the two
companies. Legal counsel for Network believes that Aaron Rents does not intend
to pursue any damage claim. However, a release has not been executed and the
claim may or may not be pursued. Management has ceased running the
advertisement, and is advised and believes that no claim will result from the
alleged violation.
An $8,750 claim has been made against the Company by its previous auditors,
Joseph Decosimo and Company, for unpaid accounting fees. Management for Network
Rental, Inc. believes that all fees were paid in full per agreement and intends
to dispute the claim. Legal counsel believes that litigation may result.
F-26
<PAGE>
NETWORK RENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. -- SUBSEQUENT EVENTS
As of August 8, 1996, Perry J. McNeal has negotiated to sell 107,100 of his
shares in the Company's common stock to Alrenco, Inc.
On July 26, 1996 Perry J. McNeal transferred 792,900 shares to the Vyrdilee
Brooks McNeal Scholarship Fund Charitable Remainder Trust. The Vyrdilee Brooks
McNeal Scholarship Fund Charitable Remainder Trust negotiated to sell all
792,900 shares to Alrenco, Inc. as of August 8, 1996.
On August 9, 1996, all 900,000 shares of the Company's common stock were
acquired by Alrenco, Inc.
NOTE 13. -- CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's 14 rental-purchase stores are located exclusively in the
Atlanta metropolitan area. The concentration of its operations in a single
metropolitan area increases the vulnerability that its operations may be
jeopardized if the entire area should experience an economic depression.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alrenco, Inc.
We have audited the accompanying combined balance sheets of Easy TV &
Appliance Rental Stores as of December 31, 1994 and 1995, and the related
combined statements of operations, stockholder's equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 combined financial position of Easy TV & Appliance
Rental Stores as of December 31, 1994 and 1995 and the combined results of their
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
April 29, 1996
F-28
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
COMBINED BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Cash and cash equivalents........................................................... $ 951,185 $ 1,044,712
Rental merchandise
On rent........................................................................... 1,646,304 1,797,895
Held for rent..................................................................... 386,170 421,729
------------- -------------
2,032,474 2,219,624
Property assets, net................................................................ 466,372 600,218
Other assets........................................................................ 81,546 102,736
------------- -------------
$ 3,531,577 $ 3,967,290
------------- -------------
------------- -------------
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable -- trade......................................................... $ 277,640 $ 324,603
Accrued expenses and other liabilities............................................ 180,214 252,077
Debt to related parties........................................................... 2,425,203 2,755,833
------------- -------------
2,883,057 3,332,513
EQUITY
Common stock
Easy TV & Appliance Rental of New Orleans, Inc., $1 par value 500 shares
authorized, issued and outstanding............................................. 500 500
Easy TV & Appliance Rental of Mobile, Inc., $1 par value 1,000 shares
authorized, issued and outstanding............................................. 1,000 1,000
Easy TV & Appliance Rental of Tampa, Inc., $1 par value 500 shares authorized,
issued and outstanding......................................................... 500 500
Easy TV & Appliance Rental of Miami, Inc., $1 par value 500 shares authorized,
issued and outstanding......................................................... 500 500
Easy Rental of Dallas, Inc., $1 par value 1,000 shares authorized, issued and
outstanding.................................................................... -- 1,000
------------- -------------
2,500 3,500
Retained earnings................................................................. 646,020 631,277
------------- -------------
648,520 634,777
------------- -------------
$ 3,531,577 $ 3,967,290
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Revenues
Rental income and fees............................................................ $ 9,101,453 $ 9,865,336
Costs and operating expenses
Direct store expenses
Depreciation of rental merchandise.............................................. 2,379,161 2,658,989
Other........................................................................... 335,237 793,740
General and administrative expenses, including fees of $982,163 and $898,009 to
affiliated company in 1995 and 1994, respectively................................ 5,817,576 6,337,383
------------- -------------
8,531,974 9,790,112
------------- -------------
Operating income.............................................................. 569,479 75,224
Other (income) expense
Interest expense.................................................................. 264,431 288,593
Other, net........................................................................ (3,240) 50,874
------------- -------------
261,191 339,467
------------- -------------
NET EARNINGS (LOSS)........................................................... $ 308,288 $ (264,243)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994......................................... 2,500 $ 2,500 $ 118,232 $ 120,732
Benefit of interest free loan from stockholder..................... -- -- 219,500 219,500
Net earnings....................................................... -- -- 308,288 308,288
--------- --------- ------------ ------------
Balance at December 31, 1994....................................... 2,500 2,500 646,020 648,520
Benefit of interest free loan from stockholder..................... -- -- 249,500 249,500
Initial capitalization of Easy Rental of Dallas, Inc............... 1,000 1,000 -- 1,000
Net loss........................................................... -- -- (264,243) (264,243)
--------- --------- ------------ ------------
Balance at December 31, 1995....................................... 3,500 $ 3,500 $ 631,277 $ 634,777
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-31
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss)............................................................. $ 308,288 $ (264,243)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities
Depreciation of rental merchandise............................................ 2,379,161 2,658,989
Depreciation of property assets............................................... 195,403 201,221
Amortization of intangible assets............................................. -- 326
Interest expense imputed on stockholder debt.................................. 219,500 249,500
Loss from disposal of property assets......................................... -- 50,874
Changes in operating assets and liabilities
Rental merchandise.......................................................... (2,812,436) (2,846,140)
Other assets................................................................ 47,139 (12,290)
Accounts payable, trade..................................................... (749,873) 46,963
Accrued expenses and other liabilities...................................... 113,279 71,863
-------------- --------------
Net cash provided by (used in) operating activities....................... (299,539) 157,063
Cash flows from investing activities
Purchase of property assets..................................................... (145,219) (404,869)
Proceeds from sale of property assets........................................... 10,960 9,703
-------------- --------------
Net cash used in investing activities..................................... (134,259) (395,166)
Cash flows from financing activities
Proceeds from issuance of debt.................................................. 106,124 583,159
Retirement of debt.............................................................. (233,554) (252,529)
Issuance of common stock........................................................ -- 1,000
-------------- --------------
Net cash provided by (used in) financing activities....................... (127,430) 331,630
-------------- --------------
Increase (decrease) in cash and cash equivalents.................................. (561,228) 93,527
Cash and cash equivalents, beginning of year...................................... 1,512,413 951,185
-------------- --------------
Cash and cash equivalents, end of year............................................ $ 951,185 $ 1,044,712
-------------- --------------
-------------- --------------
Supplemental cash flow information
Cash paid during the year for
Interest...................................................................... $ 33,544 $ 27,235
Income taxes.................................................................. -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows.
1. BASIS OF PRESENTATION
The accompanying combined financial statements include Easy TV & Appliance
Rental of New Orleans, Inc., Easy TV & Appliance Rental of Mobile, Inc., Easy TV
& Appliance Rental of Tampa, Inc., Easy TV & Appliance Rental of Miami, Inc. and
Easy Rental of Dallas, Inc., all of which are under common ownership
(collectively, the "Company").
All significant intercompany accounts and transactions have been eliminated.
2. NATURE OF OPERATIONS
The Company leases household durable merchandise to customers under
rental-purchase agreements. At December 31, 1995, the Company operated 14 stores
in 4 states.
3. RENTAL MERCHANDISE
Rental merchandise is recorded at cost. Depreciation is provided using the
straight-line method over the Company's estimate of the useful life of its
rental merchandise, generally 18 months.
4. RENTAL REVENUE
Merchandise is rented to customers pursuant to rental purchase agreement
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 is
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.
5. PROPERTY ASSETS AND RELATED DEPRECIATION
Furniture, fixtures, equipment and vehicles are recorded at cost.
Depreciation is computed on the straight-line method for financial statement
purposes based on the estimated useful lives as listed below. Leasehold
improvements are amortized over the lesser of the property life or lease term.
<TABLE>
<S> <C>
Vehicles..................................................... 3 to 5 years
Furniture, fixtures and equipment............................ 5 to 7 years
Leasehold improvements....................................... 5 to 31 years
</TABLE>
6. INCOME TAXES
Income taxes on net earnings are payable personally by the stockholder
pursuant to an election under Subchapter S of the Internal Revenue Code not to
have the company taxed as a corporation. As a result of the election, no
provision has been made for income taxes.
7. CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with an original maturity of three months or less.
8. 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-33
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of (1) cash and cash equivalents
and accounts payable whose carrying value approximates fair value at December
31, 1995 and (2) debt. The carrying value of the Company's debt exceeds its fair
value at December 31, 1995 by approximately $280,000.
NOTE B -- RENTAL MERCHANDISE
Cost and accumulated depreciation of rental merchandise are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
On rent
Cost.................................................................. $ 3,457,021 $ 3,549,507
Less accumulated depreciation......................................... 1,810,717 1,751,612
-------------- --------------
$ 1,646,304 $ 1,797,895
-------------- --------------
-------------- --------------
Held for rent
Cost.................................................................. $ 810,906 $ 832,600
Less accumulated depreciation......................................... 424,736 410,871
-------------- --------------
$ 386,170 $ 421,729
-------------- --------------
-------------- --------------
</TABLE>
NOTE C -- PROPERTY ASSETS
Property assets consist of the following:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Vehicles................................................................ $ 696,813 $ 869,834
Furniture, fixture and equipment........................................ 357,322 433,437
Leasehold improvements.................................................. 237,082 131,121
-------------- --------------
1,291,217 1,434,392
Less accumulated depreciation........................................... 824,845 834,174
-------------- --------------
$ 466,372 $ 600,218
-------------- --------------
-------------- --------------
</TABLE>
NOTE D -- RELATED PARTY MATTERS
Debt with related parties was comprised of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Notes payable with the Company's stockholder due
on demand and noninterest-bearing; interest has been
imputed at 10%........................................................... $ 2,195,000 $ 2,595,000
Notes payable with affiliated company due in monthly installments of
principal ranging from $591 to $2,949
plus interest through December 1997, bearing
interest at 12%.......................................................... 230,203 160,833
------------- -------------
$ 2,425,203 $ 2,755,833
------------- -------------
------------- -------------
</TABLE>
Administrative fees totaling $898,009 and $982,163 for the years ended
December 31, 1994 and 1995, respectively, were paid to an affiliated company. In
addition, the Company paid rent of $95,316 for 1994 and 1995 to its stockholder
under month-to-month operating leases.
F-34
<PAGE>
EASY TV & APPLIANCE RENTAL STORES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- LEASE COMMITMENTS
The Company leases its store facilities. Future minimum rental payments
under operating leases with remaining noncancelable lease terms in excess of one
year at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 285,914
1997..................................................................... 228,926
1998..................................................................... 218,747
1999..................................................................... 161,071
2000..................................................................... 91,356
Thereafter............................................................... 4,688
---------
$ 990,702
---------
---------
</TABLE>
Total rental expense was $328,428 and $382,825 for years ended December 31,
1994 and 1995, respectively.
NOTE F -- RETIREMENT PLAN
The Company maintains a 401(k) plan (the "Plan") for all eligible employees.
The Company, at its discretion, may match up to 6% of employee contributions to
the Plan up to designated limits. Company contributions for the years ended
December 31, 1994 and 1995 totaled $14,242 and $35,303, respectively.
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alrenco, Inc.
We have audited the accompanying combined balance sheets of The Television
Management Companies as of December 31, 1994 and August 31, 1995 and the related
combined statements of earnings, equity and cash flows for each of the two years
in the period ended December 31, 1994 and the eight months ended August 31,
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 combined financial position of The Television
Management Companies as of December 31, 1994 and August 31, 1995 and the
combined results of their operations and their cash flows for each of the two
years in the period ended December 31, 1994 and the eight months ended August
31, 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
September 29, 1995
Dallas, Texas
F-36
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................................... $ 99,481 $ 137,193
Notes receivable, stockholder..................................................... 319,334 209,630
Rental merchandise, net
On rent......................................................................... 1,182,498 1,152,058
Held for rent................................................................... 291,074 299,741
Property assets, net.............................................................. 798,292 903,205
Other assets...................................................................... 143,059 51,889
------------- -------------
$ 2,833,738 $ 2,753,716
------------- -------------
------------- -------------
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable, trade........................................................... $ 402,746 $ 364,242
Accrued expenses and other liabilities............................................ 129,693 123,473
Debt.............................................................................. 1,284,197 948,179
Obligations under capital leases.................................................. 190,983 192,244
------------- -------------
2,007,619 1,628,138
EQUITY
Common stock -- authorized, 10,000 shares, no par value; 7,500 shares issued and
outstanding...................................................................... 1,100 1,100
Paid-in capital................................................................... 150 150
Retained earnings................................................................. 1,001,061 1,383,258
Proprietor's deficit.............................................................. (176,192) (258,930)
------------- -------------
826,119 1,125,578
------------- -------------
$ 2,833,738 $ 2,753,716
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED AUGUST
DECEMBER 31, 31,
---------------------------- ----------------------------
1993 1994 1994 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues
Rental income and fees............................. $ 8,183,304 $ 8,296,928 $ 5,445,309 $ 5,854,163
Costs and operating expenses
Direct store expenses
Depreciation of rental merchandise............... 1,892,126 2,149,107 1,352,570 1,584,531
Other............................................ 4,859,976 4,770,151 3,198,006 3,300,745
------------- ------------- ------------- -------------
6,752,102 6,919,258 4,550,576 4,885,276
General and administrative expenses................ 865,879 868,384 560,562 631,749
------------- ------------- ------------- -------------
Total operating expenses....................... 7,617,981 7,787,642 5,111,138 5,517,025
------------- ------------- ------------- -------------
Operating income............................... 565,323 509,286 334,171 337,138
Other (income) expense
Interest income.................................... (7,589) (29,194) (14,279) (17,045)
Interest expense................................... 293,524 224,617 145,911 109,874
Other, net......................................... (22,017) (68,350) (50,429) (70,911)
------------- ------------- ------------- -------------
263,918 127,073 81,203 21,918
------------- ------------- ------------- -------------
Net earnings before provision for income
taxes......................................... 301,405 382,213 252,968 315,220
Provision for income taxes -- state.................. 20,846 20,751 12,648 15,761
------------- ------------- ------------- -------------
NET EARNINGS................................... $ 280,559 $ 361,462 $ 240,320 $ 299,459
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
COMBINED STATEMENT OF EQUITY
<TABLE>
<CAPTION>
THE TELEVISION MANAGEMENT COMPANIES
------------------------------------------------
COMMON STOCK DEFICIT OF SOLE
-------------------- PAID-IN RETAINED PROPRIETORSHIP OF
SHARES AMOUNT CAPITAL EARNINGS JOHN H. CALLENDER TOTAL
--------- --------- ----------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993............ 7,500 $ 1,100 $ 150 $ 239,092 $ (56,244) $ 184,098
Net earnings (loss)................. -- -- -- 329,677 (49,118) 280,559
--------- --------- ----- ------------- ----------------- -------------
Balance, December 31, 1993.......... 7,500 1,100 150 568,769 (105,362) 464,657
Net earnings (loss)................. -- -- -- 432,292 (70,830) 361,462
--------- --------- ----- ------------- ----------------- -------------
Balance, December 31, 1994.......... 7,500 1,100 150 1,001,061 (176,192) 826,119
Net earnings (loss)................. -- -- -- 382,197 (82,738) 299,459
--------- --------- ----- ------------- ----------------- -------------
Balance, August 31, 1995............ 7,500 $ 1,100 $ 150 $ 1,383,258 $ (258,930) $ 1,125,578
--------- --------- ----- ------------- ----------------- -------------
--------- --------- ----- ------------- ----------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS ENDED AUGUST 31,
------------------------------ ------------------------------
1993 1994 1994 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities
Net earnings.................................... $ 280,559 $ 361,462 $ 240,320 $ 299,459
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation of rental merchandise............ 1,892,126 2,149,106 1,352,570 1,584,531
Depreciation of property assets............... 216,155 180,398 107,726 136,442
Gain on sale of property assets............... (9,711) (12,987) (4,344) (33,003)
Changes in operating assets and liabilities
Rental merchandise............................ (1,873,731) (2,276,355) (1,312,625) (1,562,757)
Other assets.................................. 5,945 (20,817) (70,177) 57,482
Accounts payable, trade....................... 86,131 145,821 110,191 (38,504)
Accrued expenses and other liabilities........ 34,740 (56,115) (12,273) (6,220)
-------------- -------------- -------------- --------------
Net cash provided by operating activities... 632,214 470,513 411,388 437,430
Cash flows from investing activities
Purchase of property assets..................... (91,344) (138,641) (64,210) (124,303)
Proceeds from sale of property assets........... 73,402 58,550 12,211 51,129
(Increase) decrease in notes receivable,
stockholders................................... 19,277 (4,549) 7,938 143,392
-------------- -------------- -------------- --------------
Net cash used in investing activities....... 1,335 (84,640) (44,061) 70,218
Cash flows from financing activities
Principal payments on notes payable............. -- (5,803) (13,963) (20,946)
Repayments on credit facilities and revolving
debt........................................... (690,676) (484,999) (321,037) (315,073)
Repayments on capital lease obligations......... (158,515) (196,476) (117,022) (133,917)
Proceeds from note payable...................... -- 50,000 -- --
-------------- -------------- -------------- --------------
Net cash used in financing activities....... (849,191) (637,278) (452,022) (469,936)
-------------- -------------- -------------- --------------
Increase (decrease) in cash and cash
equivalents...................................... (215,642) (251,405) (84,695) 37,712
Cash and cash equivalents, beginning of period.... 566,528 350,886 350,886 99,481
-------------- -------------- -------------- --------------
Cash and cash equivalents, end of period.......... $ 350,886 $ 99,481 $ 266,191 $ 137,193
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest expense.................. $ 275,811 $ 238,673 $ 163,625 $ 112,276
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Cash paid for income taxes...................... $ 8,410 $ 20,846 $ -- $ 21,751
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Noncash Investing and Financing Activities
Acquisition of property assets financed by
capital leases................................. $ 332,000 $ 209,000 $ -- $ 141,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows.
BASIS OF PRESENTATION
The accompanying combined financial statements include Television
Management, Inc. and subsidiary and two stores owned by John H. Callender (a
sole proprietorship) (collectively, the "Company"). Both are under common
control.
All significant intercompany accounts and transactions have been eliminated.
DESCRIPTION OF OPERATIONS
The Company leases household durable merchandise to customers on a
rent-to-own basis. At August 31, 1995, the Company operated 15 stores in 5
states.
RENTAL MERCHANDISE
Rental merchandise is recorded at cost. Depreciation is provided using the
straight-line method over the company's estimate of the useful life of its
rental merchandise, generally 15 months.
RENTAL REVENUE
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 is
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.
PROPERTY ASSETS AND RELATED DEPRECIATION
Property, furniture, equipment and vehicles are recorded at cost.
Depreciation is computed on the straight-line method for financial statement
purposes based on the estimated useful lives as listed below. Leasehold
improvements are amortized over the lesser of the property life or lease term.
<TABLE>
<S> <C>
Buildings 31 years
Delivery vehicles 5 years
Furniture, fixtures and equipment 5 to 7 years
Leasehold improvements 5 to 31 years
</TABLE>
INCOME TAXES
Deferred income taxes are determined using the liability method under which
deferred tax assets and liabilities are determined based on differences between
financial accounting and tax bases of assets and liabilities.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with an original maturity of three months or less.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for
the eight-month period ended August 31, 1994 include all adjustments, consisting
of normal recurring accruals necessary to present fairly the Company's results
of operations and cash flows.
F-41
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- RENTAL MERCHANDISE
Cost and accumulated depreciation of rental merchandise are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- AUGUST 31,
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
On rent
Cost..................................................... $ 2,810,509 $ 3,017,672 $ 3,107,934
Less accumulated depreciation............................ 1,702,047 1,835,174 1,955,876
------------- ------------- -------------
$ 1,108,462 $ 1,182,498 $ 1,152,058
------------- ------------- -------------
------------- ------------- -------------
Held for rent
Cost..................................................... $ 646,009 $ 646,359 $ 690,748
Less accumulated depreciation............................ 408,148 355,285 391,007
------------- ------------- -------------
$ 237,861 $ 291,074 $ 299,741
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE C -- PROPERTY ASSETS
Property assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- AUGUST 31,
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Buildings.................................................. $ 123,215 $ 123,215 $ 215,908
Delivery vehicles.......................................... 683,665 778,457 776,936
Furniture, fixture and equipment........................... 481,492 354,737 361,557
Leasehold improvements..................................... 234,519 215,618 231,247
------------- ------------- -------------
1,522,891 1,472,027 1,585,648
Less accumulated depreciation.............................. 847,476 694,539 703,247
------------- ------------- -------------
675,415 777,488 882,401
Land....................................................... 20,804 20,804 20,804
------------- ------------- -------------
$ 696,219 $ 798,292 $ 903,205
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-42
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- AUGUST 31,
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Credit facility with a bank, due in monthly installments of
$55,735 plus interest at the index rate plus 2.0% (10.75%
at August 31, 1995) through December 1996................. $ -- $ 1,200,000 $ 831,801
Note payable to a bank, due in monthly installments of
$2,325 including interest at the base rate (10.25% at
August 31) through September 1996......................... -- 44,197 23,252
Revolving term debt payable to a commercial finance
company, due September 25, 1995 with interest at prime
plus 5.25% with a minimum of 12%.......................... 1,725,000 -- --
Revolving credit facility with a bank that matures December
27, 1996. The revolving credit line provides for maximum
borrowings of $100,000 with interest at the index rate
plus 2% (10.75% at August 31, 1995); $6,874 was available
under the line at August 31, 1995......................... -- 40,000 93,126
------------- ------------- -------------
$ 1,725,000 $ 1,284,197 $ 948,179
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The credit facilities contain certain restrictive covenants and conditions.
Borrowings are collateralized by all rental purchase agreements, rental
merchandise and property assets of the Company and are guaranteed by the
stockholder.
The following are scheduled maturities of debt at August 31, 1995:
<TABLE>
<S> <C>
Four months ending December 31, 1995..................................... $ 309,510
Year ending December 31, 1996............................................ 638,669
---------
$ 948,179
---------
---------
</TABLE>
Effective September 1, 1995, the credit facility with a bank was paid off in
conjunction with the sale of the Company's assets to Alrenco, Inc.
NOTE E -- CAPITAL LEASE OBLIGATIONS
The assets under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair value of the assets.
Amortization of assets under capital leases was approximately $138,000, $112,000
and $98,100 in 1993, 1994 and the period ended August 31, 1995, respectively.
Assets under capital leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ AUGUST 31,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Delivery vehicles................................................ $ 683,668 $ 778,459 $ 777,539
Less accumulated amortization.................................... 284,625 310,453 289,382
----------- ----------- -----------
$ 399,043 $ 468,006 $ 488,157
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-43
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- CAPITAL LEASE OBLIGATIONS (CONTINUED)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of future payments. The present
value is calculated at the rate implicit in the leases which ranged from 9.0% to
12.4% at August 31, 1995.
<TABLE>
<S> <C>
Four months ending December 31, 1995..................................... $ 54,928
Year ending December 31
1996................................................................... 142,739
1997................................................................... 19,093
---------
216,760
Less amount representing interest.................................... 24,516
---------
Present value of net minimum lease payments.............................. $ 192,244
---------
---------
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Company leases its store facilities. Future minimum rental payments
under operating leases with remaining noncancelable lease terms in excess of one
year at August 31, 1995 are as follows:
<TABLE>
<S> <C>
Four months ending December 31, 1995........................... $ 166,964
Year ending December 31,
1996......................................................... 449,787
1997......................................................... 416,719
1998......................................................... 307,218
1999......................................................... 222,728
2000......................................................... 57,627
----------
$1,621,043
----------
----------
</TABLE>
Rental expense was $478,689, $471,816, and $321,606 for 1993, 1994 and the
eight months ended August 31, 1995, respectively.
The Company is defendant in various lawsuits involving workers compensation
claims and breach of contract. In the opinion of management, based upon advice
of counsel, the ultimate outcome of these lawsuits will not have a material
impact on the Company's financial condition or results of operations.
F-44
<PAGE>
THE TELEVISION MANAGEMENT COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- INCOME TAXES
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- AUGUST 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward............................. $ 417,807 $ 279,493 $ 251,836
Inventory reserve........................................... 6,922 6,673 6,755
------------ ------------ ------------
424,729 286,166 258,591
Valuation allowance......................................... (346,000) (196,000) (102,000)
------------ ------------ ------------
78,729 90,166 156,591
Deferred tax liabilities
Rental merchandise.......................................... (71,012) (72,716) (127,289)
Property assets............................................. (7,717) (17,450) (29,302)
------------ ------------ ------------
(78,729) (90,166) (156,591)
------------ ------------ ------------
$ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As of August 31, 1995, the Company has available net operating loss
carryforwards of approximately $749,000 which are available to reduce future
taxable income.
The Company's effective income tax rate differed from the statutory rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER EIGHT MONTHS ENDED
31, AUGUST 31,
-------------------- --------------------
1993 1994 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Federal statutory rate...................................... 34.0% 34.0% 34.0% 34.0%
Reduction in deferred tax asset valuation allowance.............. (14.4) (3.1) (3.2) (37.6)
Use of net operating loss carryforwards.......................... (22.8) (36.2) (36.0) (8.8)
Tax effect of losses of sole proprietorship...................... 5.5 6.3 .8 8.9
State taxes...................................................... 6.9 5.4 5.0 5.0
Other, net....................................................... (2.3) (1.0) 4.4 3.5
--------- --------- --------- ---------
6.9% 5.4% 5.0% 5.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-45
<PAGE>
ALRENCO, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma condensed financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results that would have occurred if the transactions given pro forma effect
herein had been consummated as of the time reflected herein, nor are they
necessarily indicative of the future operating results or financial position of
the Company. The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. All of the
acquisitions have been accounted for using the purchase method of accounting.
Allocations of the purchase price for the Network acquisition have been
determined based upon preliminary estimates of fair value and are subject to
change. Differences between the amounts included herein and the final
allocations are not expected to have a material effect on the pro forma
financial statements. These pro forma financial statements should be read in
conjunction with the historical financial statements and related notes of the
Company, the 1995 Acquisition, Network and Easy TV included elsewhere in this
Prospectus. Ten stores which were acquired in seven separate transactions have
not been included as they were consolidated into existing stores or otherwise
immaterial to this presentation.
The following unaudited pro forma condensed balance sheet as of June 30,
1996 gives effect to (i) the Network acquisition (which occurred in August 1996)
and (ii) the sale of 1,500,000 shares of common stock offered by the Company
hereby and the application of the net proceeds therefrom as of that date as
described under the caption "Use of Proceeds", as if these transactions had
occurred at that date.
The following unaudited pro forma condensed statement of earnings for the
year ended December 31, 1995 and the six months ended June 30, 1996 give effect
to (i) all of the acquisitions and (ii) the offering and the application of the
estimated net proceeds therefrom as described under the caption "Use of
Proceeds" as though each had occurred on January 1, 1995.
F-46
<PAGE>
ALRENCO, INC.
PRO FORMA CONDENSED BALANCE SHEETS
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR PRO FORMA
ACQUISITION PRO FORMA FOR ADJUSTMENTS FOR
COMPANY NETWORK (1) ACQUISITION OFFERING (2) PRO FORMA
-------------- ------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash.............................. $ 970,449 $ 57,167 $ -- $ 1,027,616 $ 16,030,092 $ 17,057,708
Rental merchandise, net........... 20,688,630 1,513,931 -- 22,202,561 -- 22,202,561
Property assets, net.............. 3,116,893 252,576 -- 3,369,469 -- 3,369,469
Intangible assets, net............ 10,985,946 -- 3,734,808 14,720,754 -- 14,720,754
Other assets...................... 797,957 699,693 240,000 1,737,650 -- 1,737,650
-------------- ------------- -------------- -------------- --------------- --------------
$ 36,559,875 $ 2,523,367 $ 3,974,808 $ 43,058,050 $ 16,030,092 $ 59,088,142
-------------- ------------- -------------- -------------- --------------- --------------
-------------- ------------- -------------- -------------- --------------- --------------
Liabilities
Accounts payable, trade........... $ 4,052,323 $ 119,720 $ -- $ 4,172,043 $ -- $ 4,172,043
Accrued liabilities............... 347,977 287,132 125,000 760,109 -- 760,109
Taxes other than income........... 310,382 -- -- 310,382 -- 310,382
Debt.............................. 9,252,335 1,088,323 4,878,000 15,218,658 (15,218,658) --
-------------- ------------- -------------- -------------- --------------- --------------
13,963,017 1,495,175 5,003,000 20,461,192 (15,218,658) 5,242,534
Stockholders' equity................ 22,596,858 1,028,192 (1,028,192) 22,596,858 31,248,750 53,845,608
-------------- ------------- -------------- -------------- --------------- --------------
$ 36,559,875 $ 2,523,367 $ 3,974,808 $ 43,058,050 $ 16,030,092 $ 59,088,142
-------------- ------------- -------------- -------------- --------------- --------------
-------------- ------------- -------------- -------------- --------------- --------------
</TABLE>
- ------------------------
(1) Gives effect to the consummation of the Network acquisition by the Company
and the allocation of purchase price to the assets and liabilities of
Network. The consideration for Network consists of (i) $4.9 million in cash
paid at closing and (ii) $125,000 to be paid.
(2) Gives effect to the Offering and the application of the estimated net
proceeds therefrom as described under the caption "Use of Proceeds".
F-47
<PAGE>
ALRENCO, INC.
PRO FORMA CONDENSED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1995 PRO FORMA
ACQUISITION 1996 ACQUISITIONS ADJUSTMENTS
1995 PRO FORMA ---------------------------------- FOR 1996
COMPANY ACQUISITION ADJUSTMENTS TOTAL NETWORK EASY TV OTHER ACQUISITIONS
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $37,575,639 $5,854,163 $ -- $43,429,802 $6,952,424 $9,865,336 $9,085,338 $ --
Operating expenses
Direct store
expenses............. 30,023,179 4,885,276 (8,000 (1) 34,900,455 5,052,866 3,452,729 6,446,128 --
General &
administrative
expenses............. 4,338,583 631,749 (120,000 (2) 4,850,332 794,559 6,337,383 1,865,357 --
Amortization of
intangibles.......... 284,901 -- 95,500 (3) 380,401 -- -- -- 950,686 (4)
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Total operating
expenses........... 34,646,663 5,517,025 (32,500 ) 40,131,182 5,847,425 9,790,112 8,311,485 950,686
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Operating profit.... 2,928,976 337,138 32,500 3,298,614 1,104,999 75,224 773,853 (950,686 )
Other expense (income)
Interest expense...... 894,003 21,918 400,000 (5) 1,315,921 200,693 288,593 232,396 885,670 (5)
Other................. (99,930) -- -- (99,930) -- 50,874 1,174 --
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Total other expenses
(income)........... 794,073 21,918 400,000 1,215,991 200,693 339,467 233,570 885,670
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Earnings (loss) before
income taxes........... 2,134,903 315,220 (367,500 ) 2,082,623 904,306 (264,243) 540,283 (1,836,356 )
Income tax expense...... 868,311 15,761 (50,628 (6) 833,444 362,901 -- 127,559 (704,484 )(6)
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Net earnings
(loss)............. $ 1,266,592 $ 299,459 $ (316,872 ) $ 1,249,179 $ 541,405 $ (264,243) $ 412,724 $(1,131,872 )
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
----------- ---------- ------------- ----------- ---------- ---------- ---------- --------------
Earnings per share...... $ 0.41
-----------
-----------
Weighted average common
shares outstanding..... 3,105,000
-----------
-----------
<CAPTION>
PRO FORMA PRO FORMA
FOR ADJUSTMENTS
ACQUISITIONS FOR OFFERING PRO FORMA
----------- -------------- -----------
<S> <C> <C> <C>
Revenues................ $69,332,900 $ -- $69,332,900
Operating expenses
Direct store
expenses............. 49,852,178 -- 49,852,178
General &
administrative
expenses............. 13,847,631 -- 13,847,631
Amortization of
intangibles.......... 1,331,087 -- 1,331,087
----------- -------------- -----------
Total operating
expenses........... 65,030,896 -- 65,030,896
----------- -------------- -----------
Operating profit.... 4,302,004 -- 4,302,004
Other expense (income)
Interest expense...... 2,923,273 (2,923,273 ) --
Other................. (47,882) -- (47,882)
----------- -------------- -----------
Total other expenses
(income)........... 2,875,391 (2,923,273 ) (47,882)
----------- -------------- -----------
Earnings (loss) before
income taxes........... 1,426,613 2,923,273 4,349,886
Income tax expense...... 619,420 1,188,958 1,808,378
----------- -------------- -----------
Net earnings
(loss)............. $ 807,193 $ 1,734,315 $ 2,541,508
----------- -------------- -----------
----------- -------------- -----------
Earnings per share...... $ 0.26 $ 0.50
----------- -----------
----------- -----------
Weighted average common
shares outstanding..... 3,105,000 5,045,656
----------- -----------
----------- -----------
</TABLE>
F-48
<PAGE>
ALRENCO, INC.
PRO FORMA CONDENSED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
1996 ACQUISITIONS ADJUSTMENTS PRO FORMA
---------------------------------- FOR 1996 FOR
COMPANY NETWORK EASY TV OTHER ACQUISITIONS ACQUISITIONS
----------- ---------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................................... $27,003,976 $3,382,866 $1,697,979 $3,460,214 $ -- $35,545,035
Operating expenses
Direct store expenses.......................... 21,207,111 2,477,554 594,269 3,191,811 -- 27,470,745
General & administrative expenses.............. 2,440,443 454,964 1,029,581 292,783 -- 4,217,771
Amortization of intangibles.................... 387,067 -- -- -- 270,705 (4) 657,772
----------- ---------- ---------- ---------- ------------- -----------
Total operating expenses..................... 24,034,621 2,932,518 1,623,850 3,484,594 270,705 32,346,288
----------- ---------- ---------- ---------- ------------- -----------
Operating profit............................. 2,969,355 450,348 74,129 (24,380) (270,705 ) 3,198,747
Interest expense................................. 182,034 70,534 48,099 96,880 373,843 (5) 771,390
----------- ---------- ---------- ---------- ------------- -----------
Earnings (loss) before income taxes.............. 2,787,321 379,814 26,030 (121,260) (644,548 ) 2,427,357
Income tax expense............................... 1,144,546 181,767 -- 29,241 (308,416 (6) 1,047,138
----------- ---------- ---------- ---------- ------------- -----------
Net earnings (loss).......................... $ 1,642,775 $ 198,047 $ 26,030 $ (150,501) $ (336,132 ) $ 1,380,219
----------- ---------- ---------- ---------- ------------- -----------
----------- ---------- ---------- ---------- ------------- -----------
Earnings per share............................... $ 0.39 $ 0.33
----------- -----------
----------- -----------
Weighted average common shares outstanding....... 4,206,653 4,206,653
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR OFFERING PRO FORMA
------------- -----------
<S> <C> <C>
Revenues......................................... $ -- $35,545,035
Operating expenses
Direct store expenses.......................... -- 27,470,745
General & administrative expenses.............. -- 4,217,771
Amortization of intangibles.................... -- 657,772
------------- -----------
Total operating expenses..................... -- 32,346,288
------------- -----------
Operating profit............................. -- 3,198,747
Interest expense................................. (771,390 --
------------- -----------
Earnings (loss) before income taxes.............. 771,390 3,198,747
Income tax expense............................... 316,748 1,363,886
------------- -----------
Net earnings (loss).......................... $ 454,642 $ 1,834,861
------------- -----------
------------- -----------
Earnings per share............................... $ 0.40
-----------
-----------
Weighted average common shares outstanding....... 4,576,979
-----------
-----------
</TABLE>
F-49
<PAGE>
ALRENCO, INC.
NOTES TO PRO FORMA CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(1) Adjustment to depreciation expense resulting from the acquisition of
property assets in the 1995 Acquisition. The acquired property assets will
be depreciated over their service lives of five years.
(2) Adjustment to remove compensation expense associated with certain former
executive officers of The Television Management Companies who were not
employed by the Company after the acquisition on August 31, 1995.
(3) Amortization of amounts assigned to intangible assets acquired in the 1995
Acquisition over the periods indicated as follows:
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
------------- -------------
<S> <C> <C>
Customer rental agreements..................................................... $ 210,000 15 months
Noncompete agreements.......................................................... 889,000 10 years
Goodwill....................................................................... 2,859,000 20 years
</TABLE>
(4) Amortization of amounts assigned to intangible assets acquired in 1996 over
the periods indicated as follows:
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
------------- -------------
<S> <C> <C>
Customer rental agreements..................................................... 517,000 15 months
Noncompete agreements.......................................................... 342,000 2-5 years
Goodwill....................................................................... 9,305,000 20 years
</TABLE>
(5) Adjustment to interest expense for additional borrowings of $5,950,000 and
$10,050,000 incurred in connection with the 1995 Acquisitions and 1996
Acquisitions. The actual interest rates at the time of the acquisitions were
used to determine these amounts.
(6) Tax effects of pro forma adjustments and providing for taxes on all
entities, using the effective tax rate of the Company.
(7) Adjustment to reflect the use of proceeds from the Offering contemplated
herein to retire outstanding debt of the Company.
F-50
<PAGE>
(PHOTOS)
Four photographs showing interior of Alrenco store with customers and one
photograph of exterior of Alrenco store.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
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 THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 9
Dividend Policy................................ 9
Price Range of Common Stock.................... 10
Capitalization................................. 10
Selected Historical Financial and Operating
Data.......................................... 11
Selected Pro Forma Financial Data.............. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 13
Business....................................... 20
Management..................................... 31
Certain Transactions........................... 37
Principal Shareholders......................... 38
Description of Capital Stock................... 39
Shares Eligible for Future Sale................ 41
Underwriting................................... 42
Legal Matters.................................. 43
Experts........................................ 43
Additional Information......................... 44
Index to Financial Statements.................. F-1
</TABLE>
1,500,000 SHARES
[ALRENCO LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
EQUITABLE SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
J. J. B. HILLIARD, W. L. LYONS, INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses payable by the
Registrant in connection with this Offering (excluding underwriting discounts
and commissions):
<TABLE>
<S> <C>
SEC registration fee............................................. $ 13,310
NASD filing fee.................................................. 2,381
NASDAQ listing fee............................................... 17,500
Legal fees and expenses.......................................... 50,000
Accounting fees and expenses..................................... 50,000
Printing and engraving costs..................................... 100,000
Blue sky qualification fees and expenses......................... 10,000
Miscellaneous.................................................... 56,809
---------
Total........................................................ $ 300,000
---------
---------
</TABLE>
- ------------------------
All amounts except the SEC, NASD and NASDAQ fees are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 37 of the Indiana Business Corporation Law empowers an Indiana
corporation to indemnify an individual (including his estate or personal
representative) who was, is or is threatened to be made a named defendant or
respondent in a threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, because he is or was a director against liability incurred in the
proceeding if: (i) he conducted himself in good faith; (ii) he reasonably
believed, in the case of conduct in his official capacity with the corporation,
that his conduct was in its best interests and, in all other cases, that his
conduct was at least not opposed to its best interests; and (iii) in the case of
any criminal proceeding, he had (A) reasonable cause to believe his conduct was
lawful, or (B) no reasonable cause to believe his conduct was unlawful.
Indemnification may be made against the obligation to pay a judgment,
settlement, penalty, fine or reasonable expenses (including counsel fees)
incurred with respect to a proceeding. Pursuant to Chapter 37, a corporation may
pay for or reimburse the reasonable expenses incurred by a director in advance
of final disposition of the proceeding if (i) the director affirms to the
corporation in writing his good faith belief that he has met the standard of
conduct required for indemnification; (ii) the director undertakes the personal
obligation to repay such advance upon an ultimate determination that he failed
to meet such standard of conduct; and (iii) the corporation determines that the
facts then known to those making the determination would not preclude
indemnification.
Unless limited by the articles of incorporation, a director who has been
wholly successful, on the merits or otherwise, in the defense of any proceeding
to which he was a party because he is or was a director of the corporation is
entitled to indemnification against reasonable expenses incurred by him in
connection with the proceeding. Unless limited by its articles of incorporation,
an Indiana corporation may indemnify and advance expenses to an officer,
employee or agent of the corporation to the same extent that it may indemnify
and advance expenses to directors. An officer of the corporation is also
entitled to mandatory indemnification to the same extent as a director.
The indemnification provided by or granted pursuant to Chapter 37 is not
exclusive of any rights to which those seeking indemnification may otherwise be
entitled. Chapter 37 empowers an Indiana corporation to purchase and maintain
insurance on behalf of its directors, officers, employees or agents against
liability asserted against or incurred by the individuals in those capacities,
whether or not the corporation would have the power under Chapter 37 to
indemnify them against such liability.
II-1
<PAGE>
The Registrant has purchased and maintains directors' and officers' liability
insurance. The Registrant has also entered into an agreement with each of its
directors which requires the Registrant to indemnify the director to the fullest
extent permitted by Indiana law.
The Registrant's Amended and Restated Articles of Incorporation and Amended
and Restated Code of Bylaws require the Registrant to indemnify its directors to
the fullest extent permitted by applicable state or federal laws. The Bylaws
further permit the Registrant to indemnify its officers to the same extent that
it indemnifies directors and to such further extent, consistent with law, as may
be provided by general or specific action of the Board of Directors, or
contract.
Under Section 8(c) of the Underwriting Agreement filed as Exhibit 1.1
hereto, the Underwriters have agreed to indemnify, under certain circumstances,
the Registrant, its directors, officers and persons who control the Registrant
against certain liabilities which may be incurred in connection with the
Offering, including certain liabilities under the Securities Act of 1933, as
amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has not sold any securities
which were not registered under the Securities Act of 1933 except for a total of
105,000 shares of restricted common stock which were issued on January 23, 1996
to two of its executive officers concurrently with completion of the
Registrant's initial public offering. These shares were issued pursuant to the
Registrant's 1995 Stock Incentive Plan, and their issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ---------------------------------------------------------------------------------------------------------------
<C> <C><S>
1.1 -- Form of Underwriting Agreement
3.1* -- Amended and Restated Articles of Incorporation of the Registrant
3.2* -- Amended and Restated Code of Bylaws of the Registrant
4.1* -- Specimen common stock certificate
5.1 -- Opinion and consent of Stites & Harbison
10.1* -- Agreement of Purchase and Sale dated as of June 30, 1994, between the Registrant and MRTO Holdings, Inc. f/k/a
Transamerica Rental Finance Corporation d/b/a "Magic Rent to Own"
10.2* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sight & Sound Television
Rental, Inc.
10.3* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sights & Sounds T.V.
Rental, Inc.
10.4* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sights & Sounds, Inc.
10.5* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Television Management,
Inc. d/b/a Budget T.V. & Furniture Rental and Express T.V. and Furniture
10.6* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and John H. Callender, Jr.
d/b/a Sight & Sound Television Rental
10.7* -- Noncompetition Agreement dated as of August 31, 1995, among the Registrant, Barbara B. Callender and John H.
Callender, Jr.
10.8* -- Consulting Agreement dated as of August 31, 1995, between the Registrant and John H. Callender, Jr.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ---------------------------------------------------------------------------------------------------------------
10.9 -- Amended and Restated Financing Agreement dated as of February 29, 1996, between the Registrant and Star Bank,
National Association
<C> <C><S>
10.10 -- Amendment dated August 9, 1996, to Amended and Restated Financing Agreement dated as of February 29, 1996,
between the Registrant and Star Bank, National Association
10.11* -- Lease Agreement dated as of January 1, 1995, between the Registrant and Kentuckiana Outfitting Company, as
amended
10.12* -- Lease Agreement dated as of January 1, 1995, between the Registrant and Kentuckiana Outfitting Company, as
amended
10.13* -- Life Insurance Policy for Michael D. Walts
10.14* -- The Registrant's 1995 Stock Incentive Plan
10.15* -- Restricted Stock Agreement between the Registrant and Raymond C. Holladay
10.16* -- Restricted Stock Agreement between the Registrant and Theodore H. Wilson
10.17* -- The Registrant's 401(k) Salary Reduction Plan effective January 1, 1996
10.18* -- Form of director indemnification agreement
10.19** -- Asset Purchase Agreement, dated February 29, 1996, between the Registrant and Easy T.V. & Appliance Rental of
Florida, Inc., Easy T.V. & Appliance Rental of Louisiana, Inc., Easy T.V. & Appliance Rental of Alabama, Inc.
and Easy Rental of Dallas, Inc.
10.20*** -- Stock Purchase Agreement, dated August 9, 1996, by and between Perry J. McNeal and the Registrant
10.21*** -- Stock Purchase Agreement, dated August 9, 1996, by and between Vyrdilee Brooks McNeal Scholarship Fund
Charitable Remainder Trust, Network Rental, Inc. and the Registrant
10.22*** -- Noncompetition Agreement, dated August 9, 1996, by and between Perry J. McNeal and the Registrant
16.1* -- Letter from Welenken Himmelfarb & Co. regarding change in independent accountants
18.1* -- Letter from Grant Thornton LLP regarding change in accounting principle
23.1 -- Consent of Stites & Harbison (included in Exhibit 5.1)
23.2 -- Consent of Grant Thornton LLP
23.3 -- Consent of Welenken Himmelfarb & Co.
23.4 -- Consent of Grace & Associates, P.C.
24.1 -- Powers of attorney (reference is made to page II-5 of this registration statement)
</TABLE>
- ------------------------
* Incorporated herein by reference to exhibits filed with the Registrant's
registration statement on Form S-1 (File No. 33-99438) filed under the
Securities Act of 1933.
** Incorporated herein by reference to the exhibit filed with the Registrant's
current report on Form 8-K dated February 29, 1996 (File No. 0-27490) filed
under the Securities Exchange Act of 1934.
*** Incorporated herein by reference to exhibits filed with Amendment No. 1 on
Form 8-K/A dated August 28, 1996 to the Registrant's current report on Form
8-K dated August 26, 1996 (File No. 0-27490) filed under the Securities
Exchange Act of 1934.
(b) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted, as the required information
is inapplicable or the information is present in the financial statements and
related notes included in the Prospectus.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, 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 for 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Albany, State of
Indiana, on the 28th day of August, 1996.
ALRENCO, INC.
By: /s/ MICHAEL D. WALTS
-----------------------------------
Michael D. Walts, Chairman of
the Board and President
Pursuant to the requirements of the Securities Act of 1933 (the "Act"), this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes Raymond C. Holladay and Theodore H. Wilson, or either one of
them, to execute in the name of each such person and to file, any amendments to
this Registration Statement and any other documents as the registrant deems
appropriate, including without limitation, a registration statement filed
pursuant to Rule 462(b) under the Act, and appoints each such agent as
attorney-in-fact to sign in his behalf individually and in each capacity stated
below and to file any and all amendments and post-effective amendments to this
Registration Statement and any and all such other documents.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ ------------------------------------------ -------------------
<C> <S> <C>
/s/ MICHAEL D. WALTS
-------------------------------------- Chairman of the Board and President August 28, 1996
Michael D. Walts (principal executive officer)
/s/ THEODORE H. WILSON Executive Vice President, Chief Financial
-------------------------------------- Officer and Director (principal financial August 28, 1996
Theodore H. Wilson and accounting officer)
/s/ RAYMOND C. HOLLADAY
-------------------------------------- Executive Vice President, Chief Operating August 28, 1996
Raymond C. Holladay Officer and Director
/s/ MICHAEL D. WALTS, JR.
-------------------------------------- Vice President of Purchasing and Director August 28, 1996
Michael D. Walts, Jr.
/s/ ROBERT W. LANUM
-------------------------------------- Director August 28, 1996
Robert W. Lanum
/s/ DONALD E. GROOT
-------------------------------------- Director August 28, 1996
Donald E. Groot
/s/ W. BARRETT NICHOLS
-------------------------------------- Director August 28, 1996
W. Barrett Nichols
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ---------------------------------------------------------------------------------------------------------------
<C> <C><S>
1.1 -- Form of Underwriting Agreement
3.1* -- Amended and Restated Articles of Incorporation of the Registrant
3.2* -- Amended and Restated Code of Bylaws of the Registrant
4.1* -- Specimen common stock certificate
5.1 -- Opinion and consent of Stites & Harbison
10.1* -- Agreement of Purchase and Sale dated as of June 30, 1994, between the Registrant and MRTO Holdings, Inc. f/k/a
Transamerica Rental Finance Corporation d/b/a "Magic Rent to Own"
10.2* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sight & Sound Television
Rental, Inc.
10.3* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sights & Sounds T.V.
Rental, Inc.
10.4* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Sights & Sounds, Inc.
10.5* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and Television Management,
Inc. d/b/a Budget T.V. & Furniture Rental and Express T.V. and Furniture
10.6* -- Agreement of Purchase and Sale dated as of August 31, 1995, between the Registrant and John H. Callender, Jr.
d/b/a Sight & Sound Television Rental
10.7* -- Noncompetition Agreement dated as of August 31, 1995, among the Registrant, Barbara B. Callender and John H.
Callender, Jr.
10.8* -- Consulting Agreement dated as of August 31, 1995, between the Registrant and John H. Callender, Jr.
10.9 -- Amended and Restated Financing Agreement dated as of February 29, 1996, between the Registrant and Star Bank,
National Association
10.10 -- Amendment dated August 9, 1996, to Amended and Restated Financing Agreement dated as of February 29, 1996,
between the Registrant and Star Bank, National Association
10.11* -- Lease Agreement dated as of January 1, 1995, between the Registrant and Kentuckiana Outfitting Company, as
amended
10.12* -- Lease Agreement dated as of January 1, 1995, between the Registrant and Kentuckiana Outfitting Company, as
amended
10.13* -- Life Insurance Policy for Michael D. Walts
10.14* -- The Registrant's 1995 Stock Incentive Plan
10.15* -- Restricted Stock Agreement between the Registrant and Raymond C. Holladay
10.16* -- Restricted Stock Agreement between the Registrant and Theodore H. Wilson
10.17* -- The Registrant's 401(k) Salary Reduction Plan effective January 1, 1996
10.18* -- Form of director indemnification agreement
10.19** -- Asset Purchase Agreement, dated February 29, 1996, between the Registrant and Easy T.V. & Appliance Rental of
Florida, Inc., Easy T.V. & Appliance Rental of Louisiana, Inc., Easy T.V. & Appliance Rental of Alabama, Inc.
and Easy Rental of Dallas, Inc.
10.20*** -- Stock Purchase Agreement, dated August 9, 1996, by and between Perry J. McNeal and the Registrant
10.21*** -- Stock Purchase Agreement, dated August 9, 1996, by and between Vyrdilee Brooks McNeal Scholarship Fund
Charitable Remainder Trust, Network Rental, Inc. and the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ---------------------------------------------------------------------------------------------------------------
10.22*** -- Noncompetition Agreement, dated August 9, 1996, by and between Perry J. McNeal and the Registrant
<C> <C><S>
16.1* -- Letter from Welenken Himmelfarb & Co. regarding change in independent accountants
18.1* -- Letter from Grant Thornton LLP regarding change in accounting principle
23.1 -- Consent of Stites & Harbison (included in Exhibit 5.1)
23.2 -- Consent of Grant Thornton LLP
23.3 -- Consent of Welenken Himmelfarb & Co.
23.4 -- Consent of Grace & Associates, P.C.
24.1 -- Powers of attorney (reference is made to page II-5 of this registration statement)
</TABLE>
- ------------------------
* Incorporated herein by reference to exhibits filed with the Registrant's
registration statement on Form S-1 (File No. 33-99438) filed under the
Securities Act of 1933.
** Incorporated herein by reference to the exhibit filed with the Registrant's
current report on Form 8-K dated February 29, 1996 (File No. 0-27490) filed
under the Securities Exchange Act of 1934.
*** Incorporated herein by reference to exhibits filed with Amendment No. 1 on
Form 8-K/A dated August 28, 1996 to the Registrant's current report on Form
8-K dated August 26, 1996 (File No. 0-27490) filed under the Securities
Exchange Act of 1934.
<PAGE>
1,500,000 SHARES
ALRENCO, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
EQUITABLE SECURITIES CORPORATION __, 1996
WHEAT, FIRST SECURITIES, INC.
J.J.B. HILLIARD, W.L.LYONS, INC.
As Representatives of the
Several Underwriters Named in Schedule I
c/o Equitable Securities Corporation
Nashville City Center, Suite 800
511 Union Street
Nashville, Tennessee 37219
Ladies and Gentlemen:
Alrenco, Inc., an Indiana corporation (the "Company"), proposes to sell to
the several underwriters (the "Underwriters") named in SCHEDULE I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
1,500,000 shares (the "Firm Shares") of common stock, no par value (the "Common
Stock") of the Company. The Company also proposes to sell to the several
Underwriters an aggregate of up to 225,000 additional shares of the Company's
Common Stock (the "Option Shares") if requested by the Underwriters as provided
in SECTION 2 below. The Underwriters, severally and not jointly, are willing to
purchase the number of Firm Shares set forth opposite their names in SCHEDULE I,
and their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part. The Firm Shares and the Option
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to each Underwriter as follows:
(a) A registration statement on Form S-1 (File No. 333- ) with
respect to the Shares has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, (the "Securities Act") and the rules and regulations thereunder
(the "Rules and Regulations"),
<PAGE>
including a preliminary prospectus, and has filed one or more amendments
thereto. Copies of such registration statement and any amendments,
including any post-effective amendments, and all forms of the related
prospectuses contained therein and any supplements thereto, have been
delivered to you. Such registration statement, including the prospectus,
Part II, all financial schedules and exhibits thereto, and all information
deemed to be a part of such Registration Statement pursuant to Rule 430A
and Rule 434 under the Securities Act, as amended at the time when it shall
become effective, as well as any registration statement filed by the
Company pursuant to Rule 462(b) of the Rules and Regulations, is herein
referred to as the "Registration Statement," and the prospectus included as
part of the Registration Statement on file with the Commission that
discloses all the information that was omitted from the prospectus on the
effective date pursuant to Rule 430A or Rule 434 of the Rules and
Regulations and in the form filed pursuant to Rule 424(b) under the
Securities Act is herein referred to as the "Final Prospectus." The
prospectus included as part of the Registration Statement on the date when
the Registration Statement became effective is referred to herein as the
"Effective Prospectus." Any prospectus included in the Registration
Statement and in any amendment thereto prior to the effective date of the
Registration Statement is referred to herein as a "Preliminary Prospectus."
(b) No order preventing or suspending the use of any Preliminary
Prospectus or Effective Prospectus has been issued and no proceeding for
that purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. If the
Registration Statement has become effective under the Act, no stop order
suspending the effectiveness of the Registration Statement or any part
thereof has been issued and no proceeding for that purpose has been
instituted or threatened or, to the best knowledge of the Company,
contemplated by the Commission or the securities authority of any state or
other jurisdiction.
(c) Each Preliminary Prospectus, at the time of filing thereof,
complied with the requirements of the Securities Act and the Rules and
Regulations, and did not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; except that the foregoing does not
apply to statements or omissions made in reliance upon and in conformity
with written information furnished to the Company by any Underwriter
specifically for use therein (it being understood that the only information
so provided is the information described in the last section of this
Agreement). When the Registration Statement becomes effective and at all
times subsequent thereto up to and including the First Closing Date (as
hereinafter defined), (i) the Registration Statement, the Effective
Prospectus and any amendments or supplements thereto will contain all
statements which are required to be stated therein in accordance with the
Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Rules and Regulations and will comply with the
requirements of the Securities Act, the Exchange Act and the Rules and
Regulations, and (ii) neither the Registration
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Statement, the Effective Prospectus, the Final Prospectus nor any amendment
or supplement thereto will include any untrue statement or material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
are made, not misleading; except that the foregoing does not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter
specifically for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has full power and
authority (corporate and other) to own or lease its properties and conduct
its business as it is currently being conducted. Each of the Company and
its subsidiaries is duly qualified or authorized to transact business as a
foreign corporation in all jurisdictions in which the nature of its
business or the ownership or leasing of property requires such
qualification. Each of the Company and its subsidiaries holds all
licenses, consents and approvals, and has satisfied all eligibility and
other similar requirements imposed by federal and state regulatory bodies,
administrative agencies or other governmental bodies, agencies or
officials, in each case as material to the conduct of the business in which
it is engaged as described in the Effective Prospectus.
(e) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are owned beneficially by the Company free
and clear of all liens, security interests, pledges, charges, encumbrances,
defects, shareholders' agreements, voting trusts, equities or claims of any
nature whatsoever. Other than the subsidiaries listed on Exhibit 22 to the
Registration Statement, the Company does not own, directly or indirectly,
any capital stock or other equity securities of any other corporation or
any ownership interest in any partnership, joint venture or other
association.
(f) The capitalization of the Company as of June 30, 1996, is as set
forth under the caption "Capitalization" in the Effective Prospectus, and
the Company's capital stock conforms to the description thereof contained
under the caption "Description of Capital Stock" in the Effective
Prospectus. All the outstanding shares of capital stock have been duly
authorized and validly issued and are fully paid and non-assessable. None
of the issued shares of capital stock of the Company have been issued in
violation of any preemptive or similar rights. No person or entity holds a
right to require or participate in the registration under the Securities
Act of shares of Common Stock of the Company which right has not been
waived by the holder thereof as to the offering contemplated hereby and by
the Registration Statement, or satisfied by participation by such holder in
the offering. No person or entity has any preemptive or other right of
participation or first refusal with respect to any of the Shares or the
issue and sale thereof by the Company, which rights have not been waived.
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(g) Grant Thornton LLP, who have certified certain financial
statements of the Company, The Television Management Companies and Magic
Rent to Own Stores and other accountants whose reports appear in the
Registration Statement and the Preliminary Prospectus and the Effective
Prospectus, who have certified certain financial statements of the Company,
are each, and were each during the periods covered by their reports
included in therein, independent public accountants as required by the
Securities Act and the Rules and Regulations.
(h) The financial statements of the Company, The Television
Management Companies and Magic Rent to Own Stores, together with related
notes and schedules included in the Registration Statement, present fairly
the financial position, the results of operations and cash flows of the
Company and such other companies, at the dates and for the periods
presented. These financial statements have been prepared in accordance
with generally accepted accounting principles, applied on a consistent
basis throughout the periods indicated, and all adjustments necessary for a
fair presentation of results for such periods have been made. The pro
forma condensed financial statements set forth in the Registration
Statement fairly present the information required to be presented therein,
and such statements meet the requirements of the Securities Act. The
selected financial, operating and statistical data set forth in the
Prospectus under the captions "Selected Historical Financial and Operating
Data," "Selected Pro Forma Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Principal
Shareholders," fairly present, on the basis stated in the Preliminary
Prospectus and the Effective Prospectus, the information set forth therein.
(i) Neither the Company nor any of its subsidiaries is or, with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Articles of Incorporation or Code of Bylaws or under any
agreement, lease, contract, indenture or other instrument or obligation to
which it is a party or by which it or any of its properties is bound and
which default is of material significance in respect of the business or
financial condition of the Company or its subsidiaries. The consummation
of the transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, (i) any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
of its subsidiaries is a party, except for any such breach or default which
would not have a material adverse effect on the Company or any of its
subsidiaries, singly or in the aggregate, or (ii) the Articles of
Incorporation or Code of Bylaws of the Company or any of its subsidiaries
or any order, rule or regulation applicable to the Company or any of its
subsidiaries of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction.
(j) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to the Underwriters
as provided herein,
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and this Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms.
(k) No consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Securities Act
(which, if the Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this Agreement) and such
as may be required under state securities or blue sky laws in connection
with the offer, sale and distribution of the Shares by the Underwriters.
(l) Other than as disclosed in the Preliminary Prospectus and the
Effective Prospectus, there is no litigation, arbitration, claim,
proceeding or investigation pending or, to the knowledge of the Company,
threatened or contemplated in which the Company or any of its subsidiaries
is a party or of which any of the properties or assets of such respective
parties are the subject which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a
material adverse effect on the condition (financial or otherwise), results
of operations, business or prospects of the Company or any of its
subsidiaries. Neither the Company nor any of its subsidiaries is in
violation of, or in default with respect to, any statute, rule, regulation,
order, judgment or decree, which violation might have a material adverse
effect on the condition (financial or otherwise), results of operations,
business or prospects of the Company.
(m) The Company and each or its subsidiaries have good and marketable
title in fee simple to all real property, if any, and good title to all
personal property owned by it, in each case free and clear of all liens,
security interests, pledges, charges, encumbrances, mortgages and defects,
except such as are disclosed in the Preliminary Prospectus and the
Effective Prospectus or such as do not materially and adversely affect the
value of such property and do not interfere with the use made or proposed
to be made of such property by the Company or such subsidiary; and any real
property and buildings held under lease by the Company or any of its
subsidiaries are held under valid, existing and enforceable leases, with
such exceptions as are disclosed in the Preliminary Prospectus and the
Effective Prospectus or are not material and do not interfere with the use
made or proposed to be made of such property and buildings by the Company.
(n) The Company and each of its subsidiaries have filed all foreign,
federal, state and local income, excise and franchise tax returns which are
required to have been filed and have paid all taxes shown as due on said
returns and all assessments and charges received by them to the extent that
such have become due and payable; and no deficiency with respect to any
such return has been assessed or proposed.
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(o) Since the respective dates as of which information is given in the
Registration Statement and the Effective Prospectus, (i) neither the
Company nor any of its subsidiaries have incurred any liabilities or
obligations, direct or contingent, or entered into any transactions, not in
the ordinary course business, that are material to the Company, (ii)
neither the Company nor any of its subsidiaries have purchased any of its
outstanding capital stock or declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock, (iii) there has not been
any change in the capital stock, long-term debt or short-term debt of the
Company, and (iv) there has not been any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the condition (financial or otherwise), results of operations,
business or prospects of the Company or any subsidiary, in each case other
than as disclosed in the Effective Prospectus.
(p) The Company and each of its subsidiaries operate its respective
business in conformity in all material respects with all applicable
statutes, common laws, ordinances, decrees, orders, rules and regulations
of governmental bodies. The Company and each of its subsidiaries have all
licenses, approvals or consents to operate its business in all locations in
which such business is currently being operated, and neither the Company
nor any of its subsidiaries is aware of any existing or imminent matter
that may adversely impact any of its operations or business prospects other
than as specifically disclosed in the Effective Prospectus. No director,
officer, agent or employee of the Company or any of its subsidiaries, or to
the Company's knowledge any other person associated with or acting for or
on behalf of the Company or any of its subsidiaries, has directly or
indirectly made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any person, private or public,
regardless of form, whether in money, property, or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable
treatment for business obtained, or (iii) to obtain special concessions or
for special concessions already obtained for or in respect of the Company
or any of its subsidiaries.
(q) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to occupational safety
and health or to the storage, handling or transportation of hazardous or
toxic material, and the Company and each of its subsidiaries have received
all permits, licenses or other approvals required of it under applicable
federal and state occupational safety and health and environmental laws and
regulations to conduct its business. The Company and each of its
subsidiaries are in compliance with all the terms and conditions of any
such permit, license or approval, except any such violation of law or
regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in or affecting the condition
(financial or otherwise), of the Company or the subsidiaries, as the case
may be, except as described in the Effective Prospectus.
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(r) The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, tradenames, copyrights, trade
secrets and know-how or other information (collectively, "Intellectual
Property") described in the Effective Prospectus as owned by or used by it
or which is necessary to the conduct of its business as now conducted or
proposed to be conducted as described in the Effective Prospectus. The
Company is not aware of any infringement of or conflict with the rights of
claims of others with respect to any of the Company's Intellectual Property
which could have a material adverse effect on the condition (financial or
otherwise), business or prospects of the Company. The Company is not aware
of any infringement of any of the Company's Intellectual Property rights by
any third party which could have a material adverse effect on the condition
(financial or otherwise), business or prospects of the Company.
(s) Neither the Company nor any of its officers, directors or
affiliates, has taken or will take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Shares.
(t) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment company"
or a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(u) The Company and each of its subsidiaries have complied with all
provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of
Florida) relating to the disclosure of business with Cuba.
(v) Except as disclosed in the Preliminary Prospectus and the
Effective Prospectus, none of the employees of the Company or any of its
subsidiaries are covered by collective bargaining agreements. No labor
dispute with the employees of the Company or any of its subsidiaries exists
or is threatened or imminent that could result in a material adverse change
in or affecting the condition, financial or otherwise, of the Company or
any of its subsidiaries, except as described in the Preliminary Prospectus
and the Effective Prospectus.
(w) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; all such policies of insurance insuring the Company, its
subsidiaries, and its businesses, assets, employees, officers and directors
are in full force and effect; there are no claims by the Company or any of
its subsidiaries under any such policy as to which any insurer is
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denying liability or defending under a reservation of rights clause; neither
the Company nor any of its subsidiaries has been refused any insurance
coverage sought or for which it has applied; and the Company has no
reason to believe that it will not be able to renew its and its
subsidiaries existing insurance coverages as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a comparable cost except as
disclosed in the Effective Prospectus.
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain assets accountability for
the assets of the Company and each of its subsidiaries; (iii) access to the
assets of the Company and each of its subsidiaries are permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets of the Company and each of its
subsidiaries are compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(y) All offers and sales of the Company's capital stock prior to the
date hereof were at all relevant times exempt from the registration
requirements of the Securities Act, and were duly registered or were the
subject of an available exemption from the requirements of all applicable
state securities or Blue Sky laws.
(z) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distributions on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary or from transferring any
of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as disclosed in the Prospectus.
(aa) The Company has obtained for the benefit of the Company and the
Underwriters from each of its directors and officers a written agreement
that for a period of 120 days from the date of the Effective Prospectus
such director or officer will not, without prior written consent, offer,
pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of (or announce any offer, pledge, sale, grant of an
option to purchase or other disposition), directly or indirectly, any
shares of Common Stock or securities convertible into, or exercisable or
exchangeable for, shares of Common Stock.
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2. PURCHASE AND SALE OF THE SHARES.
(a) On the basis of the representations, warranties and covenants,
and subject to the terms and conditions herein set forth, (i) the Company
agrees to issue and sell the Firm Shares, and (ii) each Underwriter
agrees, to purchase from the Company at a purchase price of $_____ per
share, the number of Firm Shares set forth opposite the name of each
Underwriter in SCHEDULE I hereof.
(b) On the basis of the representations and warranties contained in
this Agreement and subject to its terms and conditions, the Company hereby
grants to the several Underwriters an option to purchase, solely for the
purpose of covering over-allotments made in connection with the
distribution and sale of the Firm Shares, the Option Shares at the purchase
price per share as set forth in clause (a) of this SECTION 2. Upon written
notice given by Equitable Securities Corporation on behalf of the
Representatives to the Company within 30 days after the date of this
Agreement, the option granted hereby may be exercised in whole or in part
at any time (but only once). The notice shall set forth the aggregate
number of Option Shares to be purchased and the time and date for delivery
and payment for such Option Shares, as determined by the Representatives,
but in no event earlier than either the First Closing Date (as defined in
SECTION 4(a) below) or the second full business day after the exercise of
such option, nor later than the tenth business day after the date of such
notice (such time and date being referred to herein as the "Option Closing
Date"). If the date of exercise of the option is three or more days before
the First Closing Date, the notice of exercise shall set the First Closing
Date as the Option Closing Date. Upon exercise of the option, the Company
shall become obligated to sell to the Underwriters, and, subject to the
terms and conditions herein set forth, the Underwriters shall become
obligated, severally and not jointly, to purchase, for the account of each
Underwriter, from the Company, the number of Option Shares specified in
such notice. Option Shares shall be purchased for the accounts of the
Underwriters in proportion to the number of Firm Shares set forth opposite
such Underwriter's name in SCHEDULE I hereto, except that the respective
purchase obligations of each Underwriter shall be adjusted so that no
Underwriter shall be obligated to purchase fractional Option Shares.
3. OFFERING BY THE UNDERWRITERS. The Sellers are advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Final Prospectus.
4. DELIVERY OF AND PAYMENT FOR SHARES. Certificates in definitive form
for the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as Equitable Securities Corporation
may request upon at least two business days' prior notice to the Company, shall
be delivered by or on behalf of the Company to Equitable Securities Corporation
(or its designee) for the account of such Underwriter, against payment by such
Underwriter on its behalf of the purchase price therefor by: (i)
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official bank check or checks (payable in same day funds) payable to the order
of the Company; or (ii) wire transfer of same day available funds to an account
designated in writing by the Company upon at least two business days notice. In
lieu of physical delivery of certificates representing the Shares, the Shares
may be posted to The Depository Trust Company account of Equitable Securities
Corporation for further transfer to the account of the respective Underwriters
against payment of the purchase price for the Shares as described above. The
closing of the sale and purchase of the Shares shall be held at the offices of
Sherrard & Roe, PLC, 424 Church Street, Suite 2000, Nashville, Tennessee 37219,
except that if certificates representing the Shares are physically delivered to
the Representatives, such delivery shall be made at the office of The Depository
Trust Company, 55 Water Street, New York, New York 10041. The time and date of
such delivery and payment shall be, (a) with respect to the Firm Shares, at 9:00
a.m., Nashville time, on the third full business day after this Agreement
becomes effective or at such other time and date as the Representatives and the
Company may agree upon in writing, and, (b) with respect to the Option Shares,
at 9:00 a.m., Nashville time, on the date specified by the Representatives in
the written notice given by the Representatives of the Underwriters' election to
purchase all or part of such Option Shares, or at such other time and date as
the Representatives and the Company may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Closing Date",
such time and date for delivery of the Option Shares, if not the First Closing
Date, is herein called the "Option Closing Date", and each such time and date
for delivery is herein called a "Closing Date". Such certificates will be
available for inspection no later than 9:30 a.m., New York City time, on the
business day preceding the respective Closing Date at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041 or at such
other location in New York, New York specified by the Representatives in writing
at least two business days prior to such Closing Date. It is understood that
the Representatives may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for the Shares to be purchased by such
Underwriter or Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company shall (i) use its best efforts to cause the
Registration Statement to become effective under the Securities Act as soon
as practicable after the execution and delivery of this Agreement; or (ii)
if the Registration Statement has been declared effective prior to the
execution and delivery of this Agreement, comply with the provisions of and
make all requisite filings with the Commission pursuant to Rules 424, 430A
and 434 of the Rules and Regulations and to notify you promptly (in
writing, if requested) of all such filings.
(b) The Company will advise you promptly, and if requested by you, to
confirm such advice in writing (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective; (ii) of the
receipt of any comments from the Commission; (iii) notify you promptly of
any request by the Commission for
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any amendment of or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus or for additional information; (iv)
prepare and file with the Commission, promptly upon your request, any
amendments of or supplements to the Registration Statement, the Effective
Prospectus or the Final Prospectus which, in your opinion, may be necessary
or advisable in connection with the distribution of the Shares and will use
its best efforts to cause any such amendment to the Registration Statement
to be declared effective as promptly as possible; (v) not file any
amendment of the Registration Statement, or supplement to the Effective
Prospectus or the Final Prospectus unless you have received a reasonable
time to review any such proposed amendment or supplement or to which you
shall have objected in writing; (vi) advise you promptly of the issuance by
the Commission or any jurisdiction or other regulatory body of any stop
order or other order suspending the effectiveness of the Registration
Statement, suspending or preventing the use of any Preliminary Prospectus,
the Effective Prospectus or the Final Prospectus or suspending the
qualification of the Shares for offering or sale in any jurisdiction, or of
the institution of any proceedings for any such purpose; and (vii) use its
best efforts to prevent the issuance of any stop order or other such order
and, should a stop order or other such order be issued, to obtain as soon
as possible the lifting thereof.
(c) Prior to any public offering of the Shares, the Company will take
or cause to be taken all necessary action and furnish to counsel for the
Underwriters such information as may be required in connection with
qualifying the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as you may designate, and the Company will
continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares; provided that in no event in
connection therewith shall the Company be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not presently qualified as a foreign corporation.
(d) The Company will furnish, without charge, to the Representatives
four signed copies of the Registration Statement as first filed with the
Commission and of each amendment to it including all exhibits, and will
furnish to the Representatives or to each Underwriter designated by you
such number of conformed copies of the Registration Statement as so filed
and of each amendment, without exhibits, as the Representatives may
reasonably request.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter, for such period as in the opinion of counsel
for the Underwriters, delivery of a prospectus in connection with sales by
an Underwriter or a dealer is required under the Securities Act, the
Company will deliver to, or upon the order of, the Representatives as many
copies of the Final Prospectus (and of any amendments or supplements to
it), or supplemented, as such Underwriter or dealer may reasonably request.
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(f) Within the time during which a Final Prospectus relating to the
Shares is required to be delivered under the Securities Act, the Company
will comply with the Securities Act and the Rules and Regulations, as now
or hereafter amended or as in effect from time to time, so far as is
necessary to permit the continuance of sales of or dealing in the Shares as
contemplated in this Agreement and the Final Prospectus. If during such
period any event occurs as a result of which, in the judgment of the
Company or in the opinion of counsel for the Underwriters, it becomes
necessary to amend or supplement the Final Prospectus in order to make the
statements therein, in the light of the circumstances when the Final
Prospectus is delivered to a purchaser, not misleading, or, if it is
necessary to amend or supplement the Final Prospectus to comply with any
law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Final Prospectus, so that the statements in the Final Prospectus as so
amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Final Prospectus will comply
with applicable law, and to furnish to each Underwriter and to such dealers
as you shall specify, such number of copies thereof as such Underwriter or
dealer may request (PROVIDED, HOWEVER, that, subsequent to the date nine
months after the Registration Statement becomes effective, any such
amendment or supplement shall be at the expense of the Underwriters.).
(g) The Company shall make generally available to its
securityholders, in the manner contemplated by Rule 158(b) under the
Securities Act, as promptly as practicable and in any event no later than
45 days after the end of its fiscal quarter in which the first anniversary
of the effective date of the Registration Statement occurs, an earnings
statement covering a period of at least twelve months beginning after the
effective date of the Registration Statement and complying with the
provisions of Section 11(a) of the Securities Act, and will advise you in
writing when such statement has been made available.
(h) The Company will furnish to its securityholders annual reports
containing financial statements audited by independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial statements and financial information.
During the period of five years from the date hereof, the Company will
deliver to you and, upon request, to each of the other Underwriters, (i)
copies of each annual report of the Company and each other report
(financial or otherwise) furnished by the Company to its securityholders
and (ii) as soon as they are available, a copy of each report or other
publicly available information of the Company mailed by the Company to its
securityholders generally or filed with any securities exchange or with the
Commission or the National Association of Securities Dealers, Inc.
("NASD").
(i) Except pursuant to this Agreement or with the prior written
consent of the Representatives, for a period of 120 days after the date of
the Prospectus, the Company will not, and the Company has provided to you
agreements executed by each
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of its executive officers and directors which provide that for a period of
120 days from the date of the Final Prospectus, such person or entity will
not, directly or indirectly, offer for sale, sell, grant any options,
rights or warrants with respect to any shares of Common Stock, securities
convertible into Common Stock or any capital stock of the Company, or
otherwise dispose of any shares of Common Stock or such other securities or
capital stock; except that the Company may issue, or grant options to
purchase, shares of Common Stock pursuant to any option plan existing on
the date hereof and described in the Prospectus.
(j) Neither the Company nor any of its officers, directors of
affiliates, will take, directly or indirectly, any action designed to cause
or result in, or which might constitute or be expected to constitute,
stabilization or manipulation of the price of the Common Stock.
(k) The Company will cause the Shares to be approved for quotation on
the Nasdaq National Market System at each Closing Date and for at least one
year from the date hereof.
(l) The Company will apply the net proceeds from the sale of the
Shares in the manner set forth under the caption "Use of Proceeds" in the
Prospectus and will file timely and accurate reports on Form SR with the
Commission in accordance with Rule 463 under the Securities Act.
(m) The Company will use its best efforts to do and perform all
things required or necessary to be done and performed under this Agreement
by it prior to the Closing Date or the Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
6. COST AND EXPENSES. The Company will pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to SECTION 10 hereof, including without limitation all costs
and expenses incident to (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Securities Act and all other expenses in connection with the
preparation, printing and, if applicable, filing of the Registration Statement
(including all amendments thereto), any Preliminary Prospectus, the Effective
Prospectus, and the Final Prospectus, this Agreement and any Blue Sky memoranda;
(ii) the delivery of copies of the foregoing documents to the Underwriters;
(iii) the filing fees of the Commission and the NASD relating to the Shares;
(iv) the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and registrar's
fees; (v) the qualification of the Shares for offering and sale under state
securities and Blue Sky laws, including filing fees and fees and disbursements
of counsel for the Underwriters relating thereto; (vi) any listing of the Shares
on the Nasdaq National Market System; and (vii) any expenses for travel, lodging
and meals incurred by the Company in connection with any
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meetings with prospective investors in the Shares. It is understood, however,
that, except as provided in this SECTION 6, SECTION 8 and SECTION 10 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses relating to the offer and sale of the Shares.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase and pay for the Shares to be delivered on each
Closing Date shall be subject, in their discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of such Closing Date as if made on and as of such Closing Date, to
the accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of all of its covenants and
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement as amended to date has not become
effective prior to the execution of this Agreement, such Registration
Statement shall have been declared effective not later than 10:00 a.m.,
Nashville time, on the date of this Agreement or such later date and/or
time as shall have been consented to by the Representatives in writing.
The Final Prospectus shall have been filed with the Commission pursuant to
Rules 424, 430A and 434, as applicable, within the appropriate time period
prescribed for such filing and in accordance with SECTION 5(a) of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceedings for
that purpose shall have been instituted, threatened or, to the knowledge by
the Company and the Representatives, contemplated by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction.
(b) No Underwriter shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus or
Final Prospectus contains an untrue statement of fact which, in your
opinion, is or may be material, or omits to state a fact which, in your
opinion, is or may be material and is or may be required to be stated
therein or is or may be necessary to make the statements therein not
misleading and the Company shall not have cured such untrue statement of
fact or stated a statement of fact required to be stated therein.
(c) You shall have received the opinion of Stites & Harbison, counsel
for the Company, addressed to the Underwriters, dated the Closing Date, to
the effect that:
(i) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power
and authority to own or lease its properties and conduct its
business as described in the Registration Statement and the
Preliminary Prospectus, the
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Effective Prospectus, and the Final Prospectus and to enter
into this Agreement and perform its obligations hereunder.
The Company is duly qualified to transact business as a
foreign corporation and is in good standing under the laws
of each other jurisdiction in which it owns or leases
property, or conducts any business, so as to require such
qualification, except where the failure to so qualify would
not have a material adverse effect on the financial
position, results of operations or business of the Company.
(ii) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Effective Prospectus. All of
the outstanding shares of Common Stock of the Company and
the Final Prospectus have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the
description of such capital stock contained in the Effective
Prospectus. None of the issued shares of capital stock of
the Company has been issued or is owned or held in violation
of any preemptive rights of shareholders or other
contractual rights to purchase, and no person or entity
(including any holder of outstanding shares of capital stock
of the Company) has any preemptive or other rights to
subscribe for any of the Shares.
(iii) To such counsel's knowledge, the Company does not own,
directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership
interest in any partnership, limited liability company,
joint venture or other association.
(iv) Except as disclosed in the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus, there are no
outstanding (A) securities or obligations of the Company
convertible into or exchangeable for any capital stock of
the Company, (B) warrants, rights or options to subscribe
for or purchase from the Company any such capital stock or
any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company to issue any
shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such
warrants, rights or options.
(v) The Shares to be issued and sold by the Company have been
duly authorized and, when issued and delivered against
payment therefor as provided herein, will be validly issued
and fully paid and nonassessable and will conform to the
description of the
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Common Stock contained in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus; the certificates evidencing the
Shares comply with all applicable requirements of Indiana law; and the
Shares have been approved for quotation on the Nasdaq National Market
System.
(vi) Except as disclosed in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement (or
any such right has been effectively waived) or in any securities
being registered pursuant to any other registration statement
filed by the Company under the Securities Act.
(vii) All offers and sales of the Company's capital stock prior to the date
hereof were at all relevant times duly registered under the Securities
Act or exempt from the registration requirements of the Securities Act
and were duly registered or the subject of an available exemption from
the registration requirements of the applicable state securities or
Blue Sky laws.
(viii) The Company is not, nor with the giving of notice or passage of time
or both, would be, in violation of its Articles of Incorporation or
Code of Bylaws or in default under any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
the Company is a party or to which any of its properties or assets is
subject.
(ix) The issue and sale of the Shares being issued at such Closing Date
and the performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with, or (with
or without the giving of notice or the passage of time or both)
result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument
to which the Company is a party or to which any of its properties
or assets is subject, nor will such action conflict with or
violate any provision of the Articles of Incorporation or Code of
Bylaws of the Company or any statute, rule or regulation or any
order, judgment or decree of any court
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or governmental agency or body having jurisdiction over the Company or
any of its properties or assets.
(x) The Company has good and marketable title in fee simple to all real
property and good title to all personal property owned by it, in each
case free and clear of all liens, security interests, pledges,
charges, encumbrances, mortgages and defects except such as are
disclosed in the Preliminary Prospectus, the Effective Prospectus and
the Final Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company; and any real
property and buildings held under lease by the Company are held by the
Company under valid, existing and enforceable leases with such
exceptions as are disclosed in the Prospectus or are not material and
do not interfere with the use made and proposed to be made of such
property and buildings by the Company.
(xi) No consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of
the Shares or the consummation of the transactions contemplated by
this Agreement, except the registration of the Shares under the
Securities Act and such as may be required under state securities
or Blue Sky laws in connection with the offer, sale and
distribution of the Shares by the Underwriters.
(xii) To such counsel's knowledge and other than as disclosed in the
Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus, there is no litigation, arbitration, claim, proceeding or
investigation pending or threatened in which the Company is a party or
of which any of its properties or assets is the subject which, if
determined adversely to the Company, would individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company; and, to such
counsel's knowledge, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or
decree, except as described in the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus, nor is the Company
required to take any action in order to avoid any such violation or
default.
(xiii) This Agreement has been duly authorized, executed and delivered by the
Company.
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(xiv) The Registration Statement, the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements for registration statements on Form S-1 under the
Securities Act and the Rules and Regulations. The descriptions in the
Registration Statement and the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus of statutes, legal and
governmental proceedings or contracts and other documents are accurate
and fairly present the information required to be shown; and such
counsel do not know of any statutes or legal or governmental
proceedings required to be described in the Registration Statement or
the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus that are not described as required to be described in the
Registration Statement or the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as required.
(xv) The Registration Statement is effective under the Securities Act;
any required filing of the Final Prospectus pursuant to Rules 424,
430A and 434 has been made in the manner and within the time
period required by such Rules; and no stop order suspending the
effectiveness of the Registration Statement or any part thereof
has been issued and, to such counsel's knowledge, no proceedings
for that purpose have been instituted or threatened or are
contemplated by the Commission.
(xvi) The Company is not, and will not be as a result of the consummation of
the transactions contemplated by this Agreement, an "investment
company," or a company "controlled" by an "investment company," within
the meaning of the Investment Company Act of 1940.
Such counsel shall also state that, based upon their involvement in the
preparation of the Registration Statement as described in such opinion, nothing
came to their attention which caused them to believe that the Registration
Statement, or any further amendment thereto made prior to such Closing Date, on
its effective date and as of such Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Preliminary Prospectus, the Effective Prospectus and the
Final Prospectus contained or contains any untrue
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statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (provided that such counsel need
express no belief regarding the financial statements and related schedules and
other financial data contained in the Registration Statement, any amendment
thereto, or the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials.
The opinion of Stites & Harbison shall be rendered to you at the request of
the Company and shall so state therein.
(d) You shall have received from Sherrard & Roe, PLC, counsel for the
Underwriters, an opinion dated the Closing Date with respect to the
incorporation of the Company, the validity of this Agreement, the validity of
the Shares being delivered to the Underwriters, the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus and
other related matters as you may reasonably request. Such counsel shall have
received such documents and information from the Company as they request to
enable them to pass upon such matters. In rendering such opinion, counsel for
the Underwriters may rely as to all matters of Indiana law upon the opinion of
counsel referred to in Paragraph (c) of this SECTION 5.
(e) You shall have received from Grant Thornton LLP, letters dated,
respectively, the date hereof (or, if the Registration Statement has been
declared effective prior the execution and delivery of this Agreement, dated
such effective date and the date of this Agreement) and each Closing Date, in
form and substance satisfactory to you, to the effect that:
(i) they are independent public accountants with respect to the
Company within the meaning of the Securities Act and the Rules and
Regulations;
(ii) in their opinion, the financial statements and schedules audited
by them and included in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus and the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules and Regulations;
(iii) the financial statements of the Company as of and for the six
month period ended June 30, 1996, were reviewed by them in accordance with
the standards established by the American Institute of Certified Public
Accountants and based upon their review they are not aware of
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any material modifications that should be made to such financial statements
for them to be in conformity with generally accepted accounting principles,
and such financial statements comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and the
Rules and Regulations;
(iv) In addition to the audit referred to in their report(s) included
in the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraph (iii) above, they
have carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives that are included in the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus,
or which appear in Part II of, or in exhibits or schedules to, the
Registration Statement and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement; and
(v) on the basis of a reading of the unaudited pro forma financial
statements included in the Registration Statement and the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, carrying out
certain specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph (v),
inquiries of certain officials of the Company who have responsibility for
financial and accounting matters and preparing the pro forma financial
statements, nothing came to their attention that caused them to believe
that the unaudited pro forma financial statements do not comply as to form
in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X or that the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of such
statements.
In the event that the letters referred to in this Section 7(e) set forth
any changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (I) such letters shall be accompanied by a
written explanation by the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (II) such changes,
decreases or increases do not, in your sole judgment, make it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Closing Date as contemplated by the Registration Statement, as
amended as of the date of such letter.
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In addition, you shall have received such other letters as you may
reasonably request from Welenken Himmelfarb & Co., and any other accounting
firms whose reports appear in the Registration Statement dated, respectively,
the same dates as the foregoing letters from Grant Thornton LLP, in form and
substance satisfactory to you, addressing the matters provided in clauses (i)
and (ii) above and such other matters as you request.
(f) Since the date of the latest balance sheet included in the
Registration Statement, the Preliminary Prospectus, the Effective Prospectus and
the Final Prospectus, the Company shall not have sustained (i) any loss or
interference with its business from fire, explosion, flood, hurricane or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as disclosed in
the Preliminary Prospectus, the Effective Prospectus and the Final Prospectus,
or (ii) any change, or any development involving a prospective change (including
without limitation a change in management or control of the Company), in or
affecting the condition (financial or otherwise), results of operations,
business or prospects of the Company, otherwise than as disclosed in the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus, the
effect of which, in either such case, is in your judgment so material and
adverse as to make it impracticable or inadvisable to proceed with the purchase,
sale and delivery of the Shares being delivered at such Closing Date as
contemplated by the Registration Statement, as amended as of the date hereof.
(g) You shall have received a certificate of the Company, dated the
Closing Date and addressed to you, signed by the chief executive officer and the
principal financial and accounting officer of the Company, to the effect that:
(i) the representations and warranties of the Company in SECTION 1 of
this Agreement are true and correct, as if made at and as of the Closing
Date, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or prior to
the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
initiated or are pending, or to their knowledge, threatened under the
Securities Act;
(iii) all filings required by Rules 424, 430A and 434 of the Rules and
Regulations have been made;
(iv) the signers of the certificate have carefully examined the
Registration Statement, the Effective Prospectus and the Final Prospectus,
and such documents do not include any untrue statement of a material fact
or omit
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to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and
(v) since the effective date of the Registration Statement, there
has occurred no event (other than with respect to the information
contained under the caption "Underwriting") required to be set forth in
an amendment or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which has not been so set forth.
(h) The Shares shall be approved for quotation on the Nasdaq National
Market System, subject to notice of issuance.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Representatives and counsel for the Underwriters.
The Company shall furnish to the Representatives such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representatives shall reasonably request.
If any of the conditions hereinabove provided for in this SECTION 7 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing at or
prior to the Closing Date.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in SECTIONS 6 AND 8
hereof).
The several obligations of the Underwriters to purchase and pay for the
Option Shares hereunder shall be subject, in their discretion, to satisfaction
on and as of the Option Closing Date of each of the foregoing conditions to
purchase the Firm Shares set forth in paragraphs (a) through (i) above, except
that (i) all references to the "Closing Date" shall be deemed to refer to the
Option Closing Date, if it is any date other than the Closing Date, and (ii) the
opinions required under paragraphs (c) and (d) shall be revised to reflect the
sale of the Option Shares.
8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages, liabilities and
judgments, joint or several, to which such Underwriter or such controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the (A) Registration Statement, any Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, or (B) any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information
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furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Shares under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange (each a
"Blue Sky Application"); or (ii) the omission or alleged omission to state in
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus or any Blue Sky Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending or appearing as a
third-party witness in connection with any such loss, claim, damage, liability,
action or proceeding; PROVIDED, HOWEVER, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement,
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus, or the Final Prospectus, in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter specifically for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, against any losses, claims, damages or liabilities to which the Company or
any such director, officer, or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus, the Final Prospectus, or any Blue Sky Application, or
caused by the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; PROVIDED, HOWEVER, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter specifically for use therein.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraphs (a) or (b) of this SECTION 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
However, the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this SECTION 8 and will not relieve it from any liability
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to the extent it is not materially prejudiced as a proximate result of such
failure. In case any such proceeding is brought against any indemnified party,
the indemnifying party shall be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this SECTION 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation unless the indemnifying party does not so
assume the defense thereof if given the opportunity to do so. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party or any officers, directors or controlling persons of
the indemnifying party and the indemnified party and representation of all such
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the reasonable fees and expenses of more than
one separate firm for all Underwriters and all persons, if any, who control
Underwriters within the meaning of either Section 15 of the Act or Section 20 of
the Exchange Act, and (b) the reasonable fees and expenses of more than one
separate firm for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either such Section. It is further understood that, in any case,
the indemnifying party shall, in addition to the separate firm described above,
be responsible for any fees and expenses of local counsel necessary in
connection with any such proceedings and shall pay all legal fees and expenses
promptly as they are incurred. In the case of any such separate firm for the
Underwriters and such control persons of Underwriters, such firm shall be
designated in writing by you. In the case of any such separate firm for the
Company, and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement or
judgment. No indemnifying party shall, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding, of which
indemnification may be sought hereunder (whether or not any indemnified party is
a party to such claim, action or proceeding) unless such settlement, compromise
or consent includes an unconditional release of the indemnified party from all
liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this SECTION 8 is unavailable
to or insufficient to hold harmless an indemnified party under SECTION 8(a) OR
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party under any
such paragraph shall contribute to the amount paid or
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payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Underwriters
from the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under SECTION 8(c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company, and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Final Prospectus, bear to the aggregate public offering
price of the Shares. The relative fault of the Company and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this SECTION 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this SECTION 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
SECTION 8(e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omissions or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this SECTION 8(d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
9. SUBSTITUTION OF UNDERWRITERS. If any Underwriter defaults in its
obligation to purchase Shares hereunder and if the total number of Shares which
such defaulting Underwriter agreed but failed to purchase is ten percent (10%)
or less of the total number of Shares to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the number of Shares set forth opposite the name of each non-
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defaulting Underwriter in SCHEDULE I hereto bears to the total number of Shares
set forth opposite the names of all the non-defaulting Underwriters), the Shares
which such defaulting Underwriter or Underwriters agreed but failed to purchase.
If any Underwriter so defaults and the total number of Shares with respect to
which such default or defaults occur is more than ten percent (10%) of the total
number of Shares to be sold hereunder, and arrangements satisfactory to the
other Underwriters and the Company for the purchase of such Shares by other
persons (who may include the non-defaulting Underwriters) are not made within 36
hours after such default, this Agreement, insofar as it relates to the sale of
the Shares, will terminate without liability on the part of the non-defaulting
Underwriters or the Company except for (i) the provisions of SECTION 8 hereof,
and (ii) the expenses to be paid or reimbursed by the Company pursuant to
SECTION 6. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this SECTION 9. Nothing herein
shall relieve shall relieve a defaulting Underwriter from liability for its
default.
10. TERMINATION. This Agreement may be terminated by you by written
notice to the Sellers as follows:
(a) At any time prior to the earlier of (i) the time the Shares are
released by you for sale to the public, or (ii) 11:30 a.m., Washington, D.C.
time, on the first business day following the date of this Agreement;
(b) At any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement, the Effective Prospectus and the Final Prospectus, any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the condition, financial or otherwise, of the
Company or the earnings, business affairs, management or business prospects of
the Company, whether or not arising in the ordinary course of business, (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency after the date hereof or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus, (iii) suspension of trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or Nasdaq National Market System or
limitation on prices for securities on either such exchange or Nasdaq National
Market System, (iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects,
or will materially and adversely affect, the business or operations of the
Company, (v) the declaration of a banking moratorium by either federal or New
York State authorities, (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs which in
your opinion has a material adverse effect on the financial markets in the
United States; or
26
<PAGE>
(c) As provided in SECTIONS 7 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company, as
to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in SECTIONS 7 and 9 of this
Agreement.
11. MISCELLANEOUS. Notices given pursuant to this Agreement shall be in
writing and, except as otherwise provided herein, will be mailed or delivered as
follows: (a) if to any Underwriter or to you, to you, c/o Equitable Securities
Corporation, Nashville City Center, Suite 800, 511 Union Street, Nashville,
Tennessee 37219, Attention: Roger T. Briggs, Jr.; and (b) if to the Company, to
1736 East Main Street, New Albany, Indiana 47150, Attention: Michael D. Walts.
This Agreement has been and is made solely for the benefit of the
Underwriters and, the Company, the officers, directors and controlling persons
referred to in SECTION 8 hereof, and their respective successors and assigns,
and no other person shall acquire or have any right by virtue of this Agreement.
The term "successors and assigns" shall not include any purchaser of the Shares
from any of the Underwriters merely by reason of such purchase.
The reimbursement, indemnification and contribution agreements contained
in this Agreement and the representations, warranties and covenants of the
Company in or pursuant to this Agreement shall survive the delivery of and
payment for the Shares hereunder and shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or by
or on behalf of the Company, its directors or officers or any controlling
person of the Company, and (c) acceptance of and payment for the Shares under
this Agreement.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus or the Registration Statement consists of the information set forth
in the last paragraph on the front cover page of the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus (insofar as such information
relates to the Underwriters), information provided in connection with Item
502(d) of Regulation S-K under the Securities Act and information under the
caption "Underwriting" in the Preliminary Prospectus, the Effective Prospectus
and the Final Prospectus.
You will act for the several Underwriters in connection with the
transactions contemplated by this Agreement, and any action under this Agreement
taken by you jointly or by Equitable Securities Corporation on your behalf will
be binding upon all the Underwriters.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
27
<PAGE>
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Tennessee, without giving effect to its principles of
conflicts of law.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
ALRENCO, INC.
By: _______________________________
Michael D. Walts
Chairman of the Board and President
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date
first above written.
Equitable Securities Corporation
Wheat, First Securities, Inc.
J.J.B. Hilliard, W.L.Lyons, Inc.
Acting severally for themselves
and as Representatives of the several
Underwriters named on Schedule I
By: Equitable Securities Corporation
By: ______________________________
Managing Director
28
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
Equitable Securities Corporation. . . . . . .
Wheat, First Securities, Inc. . . . . . . . .
J.J.B. Hilliard, W.L. Lyons, Inc. . . . . . .
Total Underwriters (___) . . . . . . . . . 1,500,000
-------------
-------------
29
<PAGE>
STITES & HARBISON
400 WEST MARKET STREET
SUITE 1800
LOUISVILLE, KENTUCKY 40202-3352
Telephone: (502) 587-3400
Facsimile: (502) 587-6391
August 28, 1996
Alrenco, Inc.
1736 E. Main Street
New Albany, Indiana 47150
Re: Registration Statement on Form S-1
----------------------------------
Gentlemen:
We have acted as counsel for Alrenco, Inc. (the "Company") in connection
with the preparation and filing of a registration statement on Form S-1 (the
"Registration Statement"), relating to the registration by the Company under the
Securities Act of 1933, as amended (the "Act"), of up to 1,725,000 shares of the
Company's common stock, no par value per share (the "Common Stock"), to be
issued by the Company.
In connection with this opinion, we have considered such matters of law and
examined the originals or copies, certified or otherwise identified to our
satisfaction, of such documents and corporate and other records and have
obtained such certificates, letters, representations and information from the
officers, directors and employees of the Company and from others as we
have deemed necessary or appropriate to enable us to render the opinions
expressed herein.
Based upon and in reliance upon the foregoing, and subject to the
qualifications and assumptions set forth below, it is our opinion that, when (a)
the Registration Statement has become effective in accordance with the Act and
the rules and regulations thereunder and the provisions of such state securities
or "blue sky" laws as may be applicable have been complied with, and (b) the
Common Stock has been duly delivered against payment therefor, the Common Stock
to be issued by the Company will be legally issued, fully paid and
nonassessable.
Our opinion is limited by and subject to the following:
<PAGE>
Alrenco, Inc.
Page 2
August 28, 1996
(a) In rendering our opinion we have assumed that, at the time of issuance
and sale of the Common Stock, the Company will be a corporation validly existing
and in good standing under the laws of the State of Indiana.
(b) In our examination of all documents, certificates and records, we have
assumed without investigation the authenticity and completeness of all documents
submitted to us as originals, the conformity to the originals of all documents
submitted to us as copies and the authenticity and completeness of the originals
of all documents submitted to us as copies. We have also assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authority of all persons executing documents on behalf of the parties thereto
other than the Company, and the due authorization, execution and delivery of all
documents by the parties thereto other than the Company.
(c) Our opinion is based solely on and limited to the laws of the State of
Indiana and the federal laws of the United States of America. We express no
opinion as to the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
STITES & HARBISON
<PAGE>
AMENDED AND RESTATED
FINANCING AGREEMENT
--------------------
WHEREAS, STAR BANK, NATIONAL ASSOCIATION, a national banking association
("Bank"), and ALRENCO, INC., an Indiana corporation ("Borrower"), entered into a
certain Financing Agreement dated as of February 10, 1993, which has previously
been amended, including, without limitation, by letter agreements dated as of
July 11, 1994, June 14, 1995 and August 31, 1995 to which Bank and Borrower are
parties (the aforedescribed Financing Agreement between Bank and Borrower, as
previously amended, including, without limitation, as amended by the
aforedescribed letter agreements, is hereinafter referred to as the "Initial
Financing Agreement"); and
WHEREAS, Bank and Borrower now desire to amend and restate the Initial
Financing Agreement, as described herein;
NOW, THEREFORE, THIS AMENDED AND RESTATED FINANCING AGREEMENT (this
"Agreement" or this "Financing Agreement") amends and restates the Initial
Financing Agreement, covers the terms upon which Bank has made and hereafter may
make loans and/or advances to Borrower, and is as follows:
1. CAPITALIZED TERMS. Certain capitalized terms used herein are defined
in Paragraph 15 hereof.
2. LOANS AND OTHER FINANCIAL ACCOMMODATIONS.
2.1. TOTAL FACILITY. Bank, in its sole discretion, may make up to a
Sixteen Million One Hundred and Fifty Thousand Dollar ($16,150,000) total credit
("Total Facility") available to Borrower, subject to the terms and conditions of
this Agreement and comprised of the following "Loans": (a) a revolving loan up
to a maximum of Fifteen Million Dollars ($15,000,000) ("Revolving Loan"), as
more particularly described below, (b) a letter of credit facility as long as
the letters of credit outstanding hereunder never exceed One Million Dollars
($1,000,000) in the aggregate (the "Letter of Credit Facility"), as more
particularly described below, and (c) a credit card facility pursuant to Bank's
standard forms, agreements and documentation in place from time to time of up to
a maximum of One Hundred and Fifty Thousand Dollars ($150,000) (the "Credit Card
Facility"); provided, however, that the maximum amount of the Total Facility and
the maximum amount of the Revolving Loan shall each permanently reduce by Two
Hundred and Fifty Thousand Dollars ($250,000) on February 1, 1997 and on each
May 1, August 1, November 1 and February 1 thereafter until the maximum amount
of the Total Facility shall permanently reduce to Zero Dollars ($0) and until
the maximum amount of the Revolving Loan shall permanently reduce to Zero
Dollars ($0). In addition, the Total Facility shall automatically reduce to
Zero Dollars ($0) effective on February 1, 1999 unless Bank hereafter amends
this provision, which Bank shall be under no obligation to do. The sum of the
then outstanding and unpaid balance of all indebtedness and obligations under
and/or in connection with the Revolving Loan, the aggregate amount of all
Letters of Credit (as hereinafter defined) then outstanding, and the then
outstanding and unpaid balance of all indebtedness and obligations under and/or
in connection with the Credit Card Facility shall not at any time exceed the
lesser of (i) the then applicable maximum amount of the Total Facility, as it
reduces from time to time, or (ii) Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar months
multiplied by the then applicable Monthly Revenue Multiplier (as hereinafter
defined).
2.2 REVOLVING LOAN FACILITY. The Revolving Loan will be lent and
relent, at Bank's discretion, in amounts (after deduction of such reserves as
Bank deems appropriate, including, without limitation, reserves which, in the
sole discretion of Bank, may be established from time to time (u) for amounts
equal to up to six (6) months of rent and other payment obligations for
locations leased to Borrower for which landlord waivers satisfactory to Bank
have not been duly and validly executed and delivered to Bank, (v) under
generally accepted accounting principles, (w) for amounts Borrower may be
required to expend for compliance with, or correcting any violations of, any
environmental laws for which Borrower may be responsible or liable, for tax
assessments and/or liabilities, for litigation liabilities, or for removal of
any liens from the Collateral, (x) to cover any anticipated costs and expenses
relating to liquidation of Collateral, (y) for the undrawn amounts of any
letters of credit and/or banker's acceptances outside the Letter of Credit
Facility that Bank may issue for the account or direct or indirect benefit of
Borrower, or (z) as Bank deems appropriate to ensure that the Obligations are
paid in full) of up to Borrower's Three Month Average Monthly Rental Contract
Revenues for the immediately preceding three (3) calendar months multiplied by
three and three quarters (3.75) (the "Monthly Revenue Multiplier"), but never in
excess of the maximum amount of the Revolving Loan then applicable; provided,
however, that the Monthly Revenue Multiplier shall reduce by one-quarter (0.25)
on February 1, 1997 and on each August 1 and February 1 thereafter until the
Monthly Revenue Multiplier shall permanently reduce to zero (0).
2.3. LETTER OF CREDIT FACILITY. For the Letter of Credit Facility
Bank may, in its sole discretion and subject to the terms and conditions of this
Agreement, issue commercial and/or stand-by letters of credit, which shall be
secured by the Collateral, in such amounts and with such maturity dates (which
shall in no event extend past February 1, 1999 and which additionally shall not
extend for a period greater than one (1) year, but which Borrower may request to
renew for additional one (1) year periods) as the Borrower may from time to time
request and as are acceptable to Bank; provided that in no event shall the total
aggregate amount of all such letters of credit (the "Letters of Credit")
outstanding at any time exceed One Million Dollars ($1,000,000) (the "Letter of
Credit Amount"); and provided further that the Bank shall not issue any banker's
acceptances. Each Letter of Credit may be issued subject to Bank's approval
thereof. Such approval or disapproval by the Bank shall be made no later than
five (5) business days after a written request from the Borrower is received by
the Bank accompanied by an original of the Bank's standard form Irrevocable
Letter of Credit Application and Agreement duly and validly executed by the
Borrower (the "Letter of Credit Agreement"). Each Letter of Credit shall be
fully reserved from, applied against and subject to the limitations of the Total
Facility and its availability, and upon any draw by or on behalf of a
beneficiary under a Letter of Credit, the amount so drawn shall immediately and
automatically be deemed a Revolving Loan by Bank to Borrower hereunder. Each
outstanding Letter of Credit shall reduce the unused portion of the Total
Facility for purposes of calculating the unused facility fee hereunder. Each
Letter of Credit shall bear fees, charges
<PAGE>
and interest as set forth in PARAGRAPH 3.4 hereof. Each Letter of Credit shall
be subject to the terms and conditions of the Letter of Credit Agreement, this
Agreement and the other Loan Documents. Outstanding as of the date hereof is
one (1) Letter of Credit in the face amount of $350,000 that was issued by the
Bank as of September 25, 1995.
2.4 DISBURSEMENT OF LOANS. All disbursements of proceeds of the
Loans shall be effectuated by Bank crediting Borrower's Account No. 00810-8649
at Bank which shall be structured as a controlled disbursement account;
provided, however that Bank may at any time hereafter elect not to credit
proceeds of the Loans to the aforedescribed controlled disbursement account, but
instead may establish a similar non-controlled disbursement account for Borrower
at Bank and disburse proceeds of the Loans by crediting such non-controlled
disbursement account of Borrower at Bank.
2.5. NO LIMITATION ON LIENS. The limits on outstanding advances
against Three Month Average Monthly Rental Contract Revenues set forth in
PARAGRAPH 2.2 above is not intended and shall not be deemed to limit in any way
Bank's security interest in or lien on the Receivables, Inventory, or Equipment.
2.6. VIOLATIONS OF LOAN FORMULAS. If the sum of all Loans
outstanding at any time exceeds the then applicable maximum amount of the Total
Facility, or if all or any part of the Revolving Loan at any time exceeds any of
the upper limits therefor established in PARAGRAPH 2.2, or if the Letters of
Credit outstanding at any time exceed the upper limit established therefor in
PARAGRAPH 2.3, or if the outstanding and unpaid balance of all indebtedness and
obligations under and/or in connection with the Credit Card Facility exceeds the
upper limit therefor established in PARAGRAPH 2.1, as applicable, Borrower shall
immediately, upon being notified thereof, reduce the outstanding balance of such
Loans so that the Total Facility or such upper limit, as applicable, is not
exceeded.
2.7. DISCRETIONARY NATURE OF FACILITY. NOTHING CONTAINED IN THIS
AGREEMENT SHALL, AT ANY TIME, REQUIRE BANK TO MAKE LOANS OR OTHER EXTENSIONS OF
CREDIT TO BORROWER, AND THE MAKING AND AMOUNT OF ANY LOANS OR OTHER EXTENSIONS
OF CREDIT HEREUNDER SHALL AT ALL TIMES BE IN BANK'S SOLE AND ABSOLUTE
DISCRETION, AND OUTSTANDING LOANS AND OTHER EXTENSIONS OF CREDIT SHALL BE
SUBJECT TO THE TERMS OF PARAGRAPHS 11 AND 13 HEREOF, INCLUDING, WITHOUT
LIMITATION, THE TERMS THEREOF RELATING TO REPAYMENT. Borrower acknowledges that
the covenants set forth in this Agreement are not (and are not intended to be)
an exclusive listing of all the elements of Borrower's condition which are
material to Bank, from time to time, in determining whether credit should be
advanced hereunder. Accordingly, compliance by Borrower with all of the
covenants set forth in this Agreement shall not be deemed to affect, in any
manner, Bank's discretion pursuant to PARAGRAPH 2 of this Agreement with respect
to the making and amount of any Loans or other extensions of credit hereunder,
nor to affect, in any manner, Bank's rights pursuant to PARAGRAPH 11 hereof.
2.8. NO SATISFACTION OR CANCELLATION OF DEBT; REFERENCES. Bank and
Borrower agree that the obligations of Borrower to Bank evidenced by the Initial
Financing Agreement shall not be deemed satisfied or cancelled, but upon
execution of this Agreement, the amounts outstanding under such document shall
be evidenced by this Agreement and by entries upon Bank's books and records,
instead of by such document. All amounts outstanding under the Initial
Financing Agreement in excess of the upper limits permitted by this Agreement
shall be paid in full by the Borrower upon execution hereof. The terms of this
Agreement shall control in the event that there is any conflict between the
terms of this Agreement and the terms of the Initial Financing Agreement. All
references in any of the Loan Documents to the Initial Financing Agreement shall
mean the Initial Financing Agreement as amended and restated by this Agreement
and as this Agreement may be amended, restated, supplemented and/or renewed from
time to time.
3. INTEREST CHARGES; FEES.
3.1. INTEREST ON LOANS. Borrower shall pay Bank interest on the
average daily outstanding principal amount of the Loans and the other
Obligations at a per annum rate which shall equal, and vary from time to time
with, the rate announced at Bank from time to time as its prime rate (the "Prime
Rate") PLUS: (a) one-half of one percent (0.50%) (with such rate to be adjusted
on the effective date of any change in the Prime Rate by Bank) during such time
and for as long as the aggregate outstanding unpaid balance of the Loans and the
other Obligations is less than or equal to Borrower's Three Month Average
Monthly Rental Contract Revenues for the immediately preceding three (3)
calendar months; (b) three-quarters of one percent (0.75%) (with such rate to be
adjusted on the effective date of any change in the Prime Rate by Bank) during
such time and for as long as the aggregate outstanding unpaid balance of the
Loans and the other Obligations is greater than Borrower's Three Month Average
Monthly Rental Contract Revenues for the immediately preceding three (3)
calendar months and less than or equal to Borrower's Three Month Average Monthly
Rental Contract Revenues for the immediately preceding three (3) calendar months
multiplied by two (2); (c) one percent (1.0%) (with such rate to be adjusted on
the effective date of any change in the Prime Rate by Bank) during such time and
for as long as the aggregate outstanding unpaid balance of the Loans and the
other Obligations is greater than Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar months
multiplied by two (2) and less than or equal to Borrower's Three Month Average
Monthly Rental Contract Revenues for the immediately preceding three (3)
calendar months multiplied by three (3); and (d) one and three-quarters percent
(1.75%) (with such rate to be adjusted on the effective date of any change in
the Prime Rate by Bank) during such time and for as long as the aggregate
outstanding unpaid balance of the Loans and the other Obligations is greater
than Borrower's Three Month Average Monthly Rental Contract Revenues for the
immediately preceding three (3) calendar months multiplied by three (3). The
Prime Rate is determined solely by Bank pursuant to market factors and its own
operating needs and is not necessarily Bank's best or most favorable rate for
commercial or other loans. The per annum rate of interest applicable at all
times after the
-2-
<PAGE>
occurrence of an Event of Default shall be the Prime Rate (as
adjusted from time to time on the effective date of any change in the Prime Rate
by Bank) plus an additional three and three-quarters percent (3.75%) per annum.
As alternative methods of computing interest on some or all of the
Revolving Loan, in the absence of an Event of Default or the occurrence of an
event which with notice and/or passage of time would constitute an Event of
Default and during such time and for as long as the aggregate outstanding unpaid
balance of the Loans and the other Obligations is less than or equal to
Borrower's Three Month Average Monthly Rental Contract Revenues for the
immediately preceding three (3) calendar months multiplied by two (2), Borrower
may elect to fix the interest rate on the outstanding principal balance of the
Revolving Loan (or such lesser amounts not less than One Hundred Thousand
Dollars ($100,000) and increments of One Hundred Thousand Dollars ($100,000)
above any such amount) for periods of one, two or three months (but only if any
such period does not extend past February 1, 1999 and only for as long as the
aggregate outstanding unpaid balance of the Loans and the other Obligations
remains less than or equal to Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar months
multiplied by two (2)) at the then applicable "LIBOR Rate" (as hereinafter
defined) effective at the beginning of such period. In no event shall Borrower
at any time have outstanding more than three (3) separate parts of the Revolving
Loan subject to an alternative method of computing interest.
The "LIBOR Rate" shall mean the sum of (i) the consensus rate, as
determined by Bank, then being offered (rounded upwards, if necessary, to the
nearest 1/10,000 of one percent) by major international banks on Eurodollar
deposits in the amount chosen by Borrower and with an original maturity of the
period elected by Borrower (I.E., one, two or three months), as quoted on the
Reuter's London Interbank Offered Rates page (LIBOR), adjusted for the cost of
reserves, PLUS (ii) (y) three percent (3.0%) during such time and for as long
as the aggregate outstanding unpaid balance of the Loans and the other
Obligations is less than or equal to Borrower's Three Month Average Monthly
Rental Contract Revenues for the immediately preceding three (3) calendar months
and (z) three and one-quarter percent (3.25%) during such time and for as long
as the aggregate outstanding unpaid balance of the Loans and the other
Obligations is greater than Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar months and
less than or equal to Borrower's Three Month Average Monthly Rental Contract
Revenues for the immediately preceding three (3) calendar months multiplied by
two (2). If Reuter's ceases to quote current London Interbank Offered Rates,
Bank shall, in its sole discretion, select an alternative rate source.
In electing to utilize an alternative method of computing interest on
the Revolving Loan, Borrower shall provide Bank not less than two (2) business
days (by not later than 11:00 a.m. (Cincinnati, Ohio time)) nor more than ten
(10) business days prior written notice of Borrower's election to fix the
interest rate of all or part of the Revolving Loan at the LIBOR Rate applicable
for the period chosen commencing on the starting date of the period chosen
(which must be a day other than a Saturday or Sunday on which banks are open for
business in Cincinnati, Ohio, and in addition, a day on which dealings in
Eurodollar deposits are carried on between banks in the London interbank
market), which written notice from Borrower to Bank shall be in the form of
EXHIBIT A attached hereto. Upon the expiration of the elected period of a LIBOR
Rate, unless Borrower has provided not less than two (2) business days (by not
later than 11:00 a.m. (Cincinnati, Ohio time)) nor more than ten (10) business
days prior written notice to Bank of Borrower's election of another LIBOR Rate
period as provided hereunder, that part of the Revolving Loan to which the
expiring alternative method of computing interest was applicable shall again
bear interest at the Prime Rate plus the then applicable interest rate factor as
determined in accordance with the formula set forth in the initial paragraph of
this PARAGRAPH 3.1.
Upon prepayment of all or part of the principal of the Revolving Loan
for which an alternative method of computing interest described above has been
elected and is in effect, Borrower covenants and agrees to pay to Bank a fee
(the "Breakfunding Fee"), which shall be equal to the greatest of: (a) zero; (b)
the sum of the breakage fees incurred by Bank in connection with such
prepayment; and (c) the "Net Present Value Adjustment" (as hereinafter defined).
"Net Present Value Adjustment" means the amount, calculated on the
"Prepayment Date" (as hereinafter defined), which is derived by subtracting: (i)
the then-outstanding principal amount of the Revolving Loan (or portion of the
Revolving Loan) for which an alternative method of computing interest described
above has been elected to be prepaid as of such Prepayment Date, from (ii) the
"Net Present Value" (as hereinafter defined) of the then-outstanding principal
amount of the Revolving Loan (or portion of the Revolving Loan) to be prepaid on
such Prepayment Date.
"Prepayment Date" means for any part of the Revolving Loan for which
an alternative method of computing interest described above has been elected,
that business day prior to expiration of the applicable elected period of a
LIBOR Rate that Bank receives from Borrower an unscheduled principal payment
amount.
"Net Present Value" means the amount, calculated by Bank, which is
derived by adding together the present values discounted to the Prepayment Date
of each prospective payment of principal and interest which, without such full
or partial prepayment, would otherwise have been received by Bank over the
remaining contractual life of the Revolving Loan for which an alternative method
of computing interest described above has been elected for which a prepayment is
being made. The individual discount rate used to determine the present value of
each prospective payment of principal and/or interest shall be the "Current
Matched Maturity Rate" (as hereinafter defined) for the maturity matching that
of each specific payment of principal and/or interest.
-3-
<PAGE>
"Current Matched Maturity Rate" means that zero-coupon rate,
calculated by Bank, and determined solely by Bank, as the rate at which Bank
would be able to borrow funds in "Money Markets" (as hereinafter defined) on the
Prepayment Date for the prepayment amount matching the maturity of a specific
prospective "Loan Payment Date" (as hereinafter defined). Such a rate shall
include FDIC insurance, reserve requirements and other explicit or implicit
costs levied by any regulatory agency. A separate Current Matched Maturity Rate
will be calculated for each prospective Loan Payment Date.
"Money Markets" means one or more wholesale funding markets available
to Bank including negotiable certificates of deposit, eurodollar deposits, bank
notes, fed funds or others.
"Loan Payment Date" means a date on which a prospective principal
and/or interest payment of the Revolving Loan for which an alternative method of
computing interest described above has been elected for which a prepayment is
being made is due and payable.
In calculating the amount of such Breakfunding Fee, Bank is hereby
authorized by Borrower to make such assumptions regarding the source of funding,
redeployment of funds and other related matters as Bank may deem appropriate.
If Borrower fails to pay any Breakfunding Fee when due, the amount of such fee
shall thereafter bear interest until paid at a rate per annum equal to the Prime
Rate in effect from time to time plus three and three-quarters percent (3.75%)
(computed on the basis of a 360 day year, but applied to actual days elapsed).
If there is more than one prepayment, a Breakfunding Fee shall be due
and payable with respect to each such prepayment, and the Breakfunding Fee shall
be separately computed with respect to each successive prepayment, taking into
account any previous partial prepayments of principal.
The amount of any Breakfunding Fee as computed by Bank shall be
binding and conclusive upon Borrower.
All of the Loans for which Borrower is obligated to pay a Breakfunding
Fee may only be prepaid subject to payment by Borrower of a further out-of-
pocket expense charge in an amount determined by Bank in its reasonable
discretion, with such charge to compensate Bank for all out-of-pocket
liabilities, obligations, costs, expenses, charges and fees incurred by Bank in
connection with such prepayment (the "Out-of-Pocket Expenses"), and with such
Breakfunding Fee and Out-of-Pocket Expenses to be payable by Borrower to Bank,
upon Bank's demand therefor.
In the event of any change in reserve requirements and/or assessment
rates which are applicable to Bank in making any or all of the Revolving Loan at
a LIBOR Rate or any change in circumstances affecting the interbank market, and
the result of any such event is to increase the cost to Bank in making the
Revolving Loan, Borrower shall promptly pay Bank the increased costs incurred by
it in making the Revolving Loan under this Agreement upon Bank's demand therefor
accompanied by a reasonably detailed statement as to such additional costs
(which statement shall be conclusive in the absence of manifest error). If by
reason of circumstances affecting the interbank market adequate and reasonable
means do not exist in the reasonable judgment of Bank for ascertaining the LIBOR
Rate at any time, Bank shall forthwith give notice thereof to Borrower. Unless
and until such notice has been withdrawn by Bank, Borrower may not thereafter
elect to have any Revolving Loan bear interest at the LIBOR Rate. If any law,
rule, regulation, treaty, guideline, order or directive or any change therein or
in the interpretation or application thereof shall make it unlawful for all or
any part of the Revolving Loan to bear interest at the LIBOR Rate, Bank shall
notify Borrower thereof and no Revolving Loan may thereafter bear interest at
the LIBOR Rate. If required by law, any Revolving Loan then bearing interest at
the LIBOR Rate shall cease to bear interest at the LIBOR Rate and shall bear
interest at the Prime Rate plus the then applicable interest rate factor as
determined in accordance with the formula set forth in the initial paragraph of
this PARAGRAPH 3.1.
Provided, however, that notwithstanding anything to the contrary
herein, to the extent the Loans or other Obligations accrue interest at a higher
rate under other documents relating to such Loans or other Obligations (such as
for any credit card facility made available by Bank to Borrower), such higher
interest rates shall apply.
3.2. INCREASED COSTS - CAPITAL ADEQUACY. In case of any change in
law or governmental rules, regulations, guidelines or orders (or any
interpretations thereof) or the introduction of new laws, regulations or
guidelines which require Bank to reserve for unfunded credit commitments, Bank
may charge Borrower an additional fee which will compensate Bank for such
requirements.
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3.3. UNUSED FACILITY FEE. Borrower shall pay Bank an unused facility
fee equal to the rate of one-half of one percent (0.50%) per annum of the daily
average of the unused portion of the Total Facility, and such unused facility
fee shall be payable monthly in arrears, commencing on March 1, 1996, and on the
first day of each month thereafter, and when the Loans are due (whether by
reason of acceleration or otherwise).
3.4. LETTER OF CREDIT FEES. In addition to all other fees and
expenses (including, without limitation, for cables, postage, telexes and
indemnities) charged by the Bank for commercial and/or stand-by letters of
credit, Borrower shall pay Bank letter of credit fees on all Letters of Credit
("Letter of Credit Fees"), as follows: (i) for each Letter of Credit, a letter
of credit administration fee (the "Letter of Credit Administration Fee") at the
rate of two percent (2.00%) per annum of the face amount of each such Letter of
Credit, which Letter of Credit Administration Fee shall be due and payable upon
the issuance of any Letter of Credit and on each anniversary thereof that such
Letter of Credit remains outstanding, and (ii) upon the opening, closing,
paying, amending or renewing of each Letter of Credit, the greater of Bank's
then standard fees therefor or Fifty Dollars ($50.00) for each such opening,
closing, payment, amendment or renewal.
3.5. CALCULATION OF CERTAIN CHARGES. Accrued interest charges and
the unused facility fee shall be computed on the basis of a year of three
hundred sixty (360) days and applied to actual days elapsed and shall be payable
monthly to Bank on the first day of each month hereafter. All such charges and
fees shall be paid in arrears, except that any charges and fees imposed with
respect to any Letters of Credit shall be paid in advance.
3.6. FIELD EXAMINATION FEE. Borrower shall pay Bank a field
examination fee at the rate of $2,000 per month, which shall be payable by
Borrower to the Bank on the first day of each month in advance and without any
right of refund therefor.
3.7. CHARGING LOAN ACCOUNT. Borrower hereby authorizes Bank, at
Bank's option, to charge any account or charge or increase any Loan balance of
Borrower at Bank for the payment or repayment of any interest or principal of
the Loans or any fees, charges or other amounts due to Bank hereunder or under
any of the other Loan Documents.
3.8. MAXIMUM RATE. If at any time any rate of interest computed in
the manner provided in this PARAGRAPH 3 ("Applicable Rate"), together with all
fees and charges as provided for herein or in any other Loan Document
(collectively, the "Charges"), which are treated as interest under applicable
law exceeds the maximum lawful rate (the "Maximum Rate") allowed under
applicable law, the rate of interest payable hereunder, together with all
Charges, shall be limited to the Maximum Rate; provided, however, that any
subsequent reduction in the Prime Rate and/or the LIBOR Rate shall not reduce
the Applicable Rate below the Maximum Rate until the total amount of interest
earned hereunder, together with all Charges, equals the total amount of interest
which would have accrued at the Applicable Rate if the Applicable Rate had at
all times been in effect. If any payment hereunder, for any reason, results in
Borrower having paid interest in excess of that permitted by applicable law,
then all excess amounts theretofore collected by Bank shall be credited on the
principal balance owing hereunder (or, if all sums owing hereunder have been
paid in full, refunded to Borrower), and the amounts thereafter collectible
hereunder shall immediately be deemed reduced, without the necessity of the
execution of any new document, so as to comply with applicable law and permit
the recovery of the fullest amount otherwise called for hereunder.
4. MONTHLY ACCOUNTINGS. Bank will provide Borrower monthly with a
statement of advances, charges and payments made pursuant to this Agreement and
such account rendered by Bank shall be deemed binding as against Borrower unless
Bank is notified by Borrower within fifteen (15) days after each account is
delivered to Borrower that Borrower disputes such account.
5. SECURITY. The Obligations shall be secured by:
5.1. SECURITY AGREEMENT AND FINANCING STATEMENTS. A security
interest in all of the Collateral, pursuant to a Security Agreement previously
executed and delivered by Borrower to Bank (as heretofore, concurrently
herewith, and/or hereafter amended, restated, supplemented and/or renewed from
time to time, the "Security Agreement") and accompanying financing statements in
form and substance suitable for filing under the applicable state(s) version(s)
of the Uniform Commercial Code (the "Financing Statements"). Without limiting
any of the Borrower's liabilities and/or obligations thereunder, and only
insofar as necessary to confirm that the Security Agreement, the other Loan
Documents and the security interests and liens provided thereunder or in
connection therewith secure all of Borrower's liabilities under this Agreement
(as the same may be amended, restated, supplemented and/or renewed from time to
time) and the Obligations, the Security Agreement and any other Loan Documents
shall be deemed amended hereby.
5.2. INTELLECTUAL PROPERTY. The assignment of Borrower's patents and
related rights and interests, pursuant to a Contingent Patent Assignment
previously executed and delivered by Borrower to Bank (as heretofore,
concurrently herewith, and/or hereafter amended, restated, supplemented and/or
renewed from time to time, the "Patent Assignment") and the assignment of
Borrower's trademarks, licenses and related rights and interests, pursuant to a
Contingent Trademark Assignment previously executed and delivered by Borrower to
Bank (as heretofore, concurrently
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herewith, and/or hereafter amended, restated, supplemented and/or renewed from
time to time, the "Trademark Assignment").
The foregoing documents shall be and remain in form and substance
satisfactory to Bank and its counsel, and the Collateral and other assets and
property covered thereby shall secure the Obligations in such order as may be
determined by Bank in its sole discretion.
By virtue of Bank's Acceptance of this Agreement, the following documents
shall be deemed to be cancelled and of no further force or effect: (a) the
Guaranty dated as of February 10, 1993 executed and delivered by Michael D.
Walts to Bank pursuant to which Michael D. Walts guaranteed the obligations of
Borrower to Bank; (b) the Guaranty dated as of February 10, 1993 executed and
delivered by Geraldine W. Walts to Bank pursuant to which Geraldine W. Walts
guaranteed the obligations of Borrower to Bank; and (c) the Assignment of Life
Insurance Policy as Collateral executed and delivered by Borrower and Michael D.
Walts to Bank pursuant to which insurance on the life of Michael D. Walts was
collaterally assigned to Bank. In connection with the foregoing, upon
Borrower's request therefor, Bank shall return said Guaranties to Michael D.
Walts and Geraldine W. Walts, respectively, and the Assignment of Life Insurance
Policy as Collateral to Borrower.
6. DELIVERIES; FURTHER ASSURANCES. Simultaneously with or prior to the
execution of this Agreement, Borrower shall have delivered to Bank all of the
documents, instruments and other information described on EXHIBIT B attached
hereto. Borrower agrees to execute and deliver or cause to be executed and
delivered any and all further documents and instruments and to take any and all
further actions as may be determined by Bank to be necessary or appropriate to
the transactions contemplated herein.
7. RIGHTS TO PAYMENTS UNDER RENTAL CONTRACTS; COLLECTION OF RIGHTS TO
PAYMENTS UNDER RENTAL CONTRACTS; DISPUTED RIGHTS TO PAYMENTS UNDER RENTAL
CONTRACTS; PROCEEDS OF INVENTORY.
7.1. REPRESENTATIONS AND WARRANTIES REGARDING RIGHTS TO PAYMENTS
UNDER RENTAL CONTRACTS. Borrower agrees and represents that each Right to
Payment under Rental Contracts and each lease-purchase agreement or other
document representing any such Right to Payment under Rental Contracts will
cover a bona fide sale and/or lease and delivery of merchandise usually dealt in
by Borrower and will be for a liquidated amount maturing as stated in the
schedule thereof and in the duplicate lease-purchase agreement covering said
lease and/or sale, and Bank's security interest therein, to the best of
Borrower's knowledge, will not be subject to any offset, deduction,
counterclaim, lien or other condition, except for the rights of the lessee to
terminate any such lease-purchase agreement in accordance with the terms thereof
by returning the leased items and paying all payments due through the date of
return. None of Borrower's lease-purchase agreements shall be backdated,
postdated or redated and Borrower shall make no leases on terms beyond that
customary in Borrower's industry.
7.2. DISPUTES AND CLAIMS REGARDING RIGHTS TO PAYMENTS UNDER RENTAL
CONTRACTS. Borrower shall notify Bank promptly of all material returns and
recoveries and, on request, deliver the material returns and recoveries of
merchandise to Bank at a location or locations selected by Bank in its sole
discretion. Borrower shall also notify Bank promptly of all material disputes
and claims and settle or adjust them at no expense to Bank, but no discount,
credit or allowance outside the ordinary course of business or material, adverse
extension, compromise or settlement shall be granted to any customer or account
debtor and no returns of merchandise outside the ordinary course of business
shall be accepted by Borrower without Bank's consent.
7.3. SPECIAL ACCOUNT; LOCAL ACCOUNTS. In order to provide for
collection and forwarding to Bank of all remittances of every kind due Borrower
("Remittances"), proceeds of other Collateral, and other funds received by
Borrower, Borrower shall on a daily basis deposit all such Remittances,
proceeds, and funds into the accounts of Borrower maintained at the banks where
Borrower's stores are located, all as described at EXHIBIT C attached hereto
(such accounts described at EXHIBIT C, as the same may be supplemented hereafter
from time to time, and any other accounts where Borrower now or hereafter
deposits any Remittances, proceeds of Receivables or other Collateral, or other
funds are collectively referred to as the "Local Accounts"). On a twice per
week basis (and a more frequent basis if Bank hereafter requires, including,
without limitation, after the occurrence of an Event of Default), all funds and
other items in the Local Accounts shall be transferred to, and deposited in,
Account No. 00810-8771 at Bank (the "Special Account"), and Borrower shall take
all actions necessary to effectuate such transfers to the Special Account.
Borrower further hereby grants to Bank an irrevocable power of attorney, coupled
with an interest, to take in Borrower's name all action necessary to grant Bank
access to each and all of the Local Accounts and to effectuate transfers to, and
deposits in, the Special Account of all funds and other items now or hereafter
in any or all of the Local Accounts. Any Remittance or other proceeds of
Receivables or Rights to Payments under Rental Contracts or other Collateral or
funds received by Borrower shall be deemed held by Borrower in trust and as
fiduciary for Bank, and Borrower immediately shall deposit the same, in its
original form, into one of the Local Accounts or, at Bank's discretion, the
Special Account. Pending such deposit, Borrower agrees that it will not
commingle any such Remittance or other proceeds of Receivables or Rights to
Payments under Rental Contracts or other Collateral or funds with any of
Borrower's other funds or property, but will hold it separate and apart
therefrom in trust for Bank until deposit is made into one of the Local Accounts
or the Special Account. All deposits to the Special Account shall be Bank's
property and shall be subject only to the signing authority designated from time
to time by Bank, and Borrower shall have no interest therein or control
thereover. Bank shall have, and Borrower hereby grants to Bank, a security
interest in all funds held in the Special Account and Local Accounts as security
for the Obligations. The Special Account shall not be
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subject to any deduction, set-off, banker's lien or any other right in favor of
any person or entity other than Bank. Deposits to the Special Account and Local
Accounts may be applied against the principal and/or interest of the Revolving
Loan and/or other Obligations of Borrower to Bank in such order and method of
application as may be elected by Bank in its discretion. Any funds in the
Special Account or Local Accounts which Bank elects not to apply to the
Obligations as provided in the preceding sentence may, at Bank's option, be paid
over by Bank to Borrower or retained in the Special Account or Local Accounts as
continuing security for the Obligations. Borrower hereby indemnifies and holds
Bank harmless from and against any loss or damage with respect to any Remittance
deposited in the Special Account or Local Accounts which is dishonored or
returned for any reason. If any Remittance deposited in the Special Account or
Local Accounts is dishonored or returned unpaid for any reason, Bank, at its
discretion, may charge the amount of such dishonored or returned Remittance
directly against Borrower and/or any account maintained by Borrower with Bank
and such amount shall be deemed part of the Obligations hereunder. Bank shall
not be liable for any loss or damage resulting from any error, omission, failure
or negligence on the part of Bank under this Agreement.
7.4. CREDITING OF REMITTANCES. For the purpose of calculating
interest, all Remittances and other proceeds of Receivables and Rights to
Payments under Rental Contracts and other Collateral shall be credited to
Borrower (conditional upon final collection) two (2) business days after deposit
into the Special Account. For the purpose of determining the aggregate loan
availability and the unused facility fee hereunder, all such Remittances shall
be credited on the date of deposit of the same into the Special Account. From
time to time, Bank may adopt such regulations and procedures as it may deem
reasonable and appropriate with respect to the operation of the Special Account
and Local Accounts and the services to be provided by Bank under this Agreement.
7.5. COSTS OF COLLECTION. All costs of collection of Borrower's
Receivables and Rights to Payments under Rental Contracts, including Attorneys'
Fees, out-of-pocket expenses, administrative and record-keeping costs, and all
service charges and costs related to the establishment and maintenance of the
Special Account and the Local Accounts, shall be the sole responsibility of
Borrower, whether the same are incurred by Bank or Borrower, and Bank, at its
discretion, may charge the same against Borrower and/or any account maintained
by Borrower with Bank and the same shall be deemed part of the Obligations
hereunder.
8. EXAMINATION OF COLLATERAL; REPORTING.
8.1. MAINTENANCE OF BOOKS AND RECORDS. Borrower shall keep and
maintain complete books of account, records and files with respect to its
business in accordance with generally accepted accounting principles
consistently applied and shall accurately and completely record all transactions
therein.
8.2. ACCESS AND INSPECTION; BORROWING BASE REPORT AND CERTIFICATE.
Bank may at all times have access to and the right to examine and inspect all of
Borrower's real and personal property, and access to and the right to inspect,
audit and make extracts from all of Borrower's records, files and books of
account, and Borrower shall execute and deliver at the request of Bank such
instruments as may be necessary for Bank to obtain such information concerning
the business of Borrower as Bank may require from any Person. Borrower hereby
authorizes all federal, state and municipal authorities to furnish to Bank
copies of reports of examinations of Borrower which have been made by them and
further authorizes any banking institution, account debtor, lessee or other
third party with whom Borrower has a contractual relationship pertaining to the
Collateral, this Agreement, any of the other Loan Documents or any matter
referenced herein or therein, to furnish to Bank copies of such contracts and
any affiliated writings. Borrower shall furnish Bank at reasonable intervals
with such statements and reports regarding Borrower's financial condition and
the results of Borrower's operations, in addition to those hereinafter required,
as Bank may request from time to time. Not less frequently than monthly by not
later than 30 days after the end of each month, and more frequently if Bank
shall require, Borrower shall provide Bank a fully completed and executed
Borrowing Base Report and Certificate in the form of EXHIBIT D hereto,
containing all such information (including, without limitation, the information
concerning Rights to Payments under Rental Contracts and Three Month Average
Monthly Rental Contract Revenues and reconciliations to Borrower's financial
statements) called for by the Borrowing Base Report and Certificate. With each
Borrowing Base Report and Certificate delivered by Borrower to Bank on a monthly
basis, and more frequently if Bank shall require, Borrower shall provide Bank
with such supporting information as Bank may from time to time request,
including, without limitation, sales and/or lease journals, remittance/cash
receipt advices, credit memoranda, and information concerning leases, sales,
collections and non-cash charges.
8.3. REPORTING REGARDING PAYABLES AND THREE MONTH AVERAGE MONTHLY
RENTAL CONTRACT REVENUES. No later than 30 days after the end of each month, or
sooner if available, Borrower shall deliver to Bank monthly agings of its
accounts payable, and a reconciliation of such accounts payable agings to
Borrower's general ledger, together with such further information with respect
thereto as Bank may require. No later than 30 days after the end of each month,
or sooner if available, Borrower shall deliver to Bank a report regarding its
immediately preceding Three Month Average Monthly Rental Contract Revenues in
such detail as Bank may require and with such further information with respect
thereto as Bank may require (including, without limitation, a reconciliation of
Borrower's total cash Remittances and receipts for the preceding calendar month
to Borrower's revenue reported in Borrower's financial statements for such
month).
8.4. REPORTING REGARDING INVENTORY. Borrower shall conduct a full
and complete physical count of its Inventory at least annually and more
frequently if Bank shall require, in a manner and in accordance with procedures
approved by Borrower's independent certified public accountants and Bank, and
shall promptly extend, price and summarize such physical counts and submit a
report thereof to Bank. Values shown on reports of Inventory shall be at the
lower of cost
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or market value determined in accordance with Borrower's usual cost accounting
system, consistently applied. No later than 30 days after the end of each
month, or sooner if available, Borrower shall submit to Bank an inventory report
broken down into such detail and with such categories as Bank shall require
(including, but not limited to, a report of such Inventory reconciled to
Borrower's general ledger, a report of Inventory on rent and total Inventory on
hand, and a report indicating the mix and location of all of Borrower's
Inventory). In addition, Borrower shall on a monthly basis submit to Bank a
copy of any inventory report that Borrower delivers to its insurer(s) at the
same time such report is delivered to the insurer(s).
8.5. MONTHLY FINANCIAL STATEMENTS. No later than 30 days after the
end of each month, Borrower shall furnish to Bank monthly statements showing
Borrower's financial condition and the results of Borrower's operations for the
periods covered by such statements in form and detail as Bank may from time to
time require, prepared in accordance with generally accepted accounting
principles consistently applied and containing all disclosures required to fully
and accurately present the financial position and results of operations of
Borrower and to make such statements not misleading under the circumstances.
Said statements shall include: (i) a comparison of the projected financial
position and results of operations of Borrower for the month and year-to-date
provided for in PARAGRAPH 8.6 with the actual financial position and results of
operations of Borrower for the month and year-to-date and an explanation of any
material variations between them; and (ii) a comparison between actual
calculated results and covenanted results for each of the Financial Covenants
contained in EXHIBIT K.
8.6. ANNUAL PROJECTIONS. At least 30 days prior to the end of each
of Borrower's fiscal years, Borrower shall furnish to Bank detailed projections
for the next 12 months setting forth projected income and cash flow for each
month and the projected balance sheet as of the end of each month. Such
projections shall be prepared in a manner fully and accurately presenting the
projected financial condition and results of operations of Borrower and making
such projections not misleading under the circumstances.
8.7. AUDITED ANNUAL FINANCIAL STATEMENTS. No later than 90 days
after the end of each of Borrower's fiscal years, Borrower shall submit to Bank
statements of its financial condition and the results of its operations for the
period then ended. Such statements shall be prepared by an independent
certified public accountant acceptable to Bank and shall be prepared and
presented in accordance with generally accepted accounting principles
consistently applied. Such statements shall be delivered to Bank together with
an audit report of such independent certified public accountant addressed to
Bank. Said statements shall be accompanied by: (i) a comparison prepared by
Borrower of the projected financial position and results of operations of
Borrower provided for in PARAGRAPH 8.6 with the actual financial position and
results of operations of Borrower and an explanation of any material variations
between them; and (ii) a comparison prepared by Borrower between actual
calculated results and covenanted results for each of the Financial Covenants
contained in EXHIBIT K.
8.8. MANAGEMENT REPORTS. Borrower shall furnish to Bank promptly
upon receipt copies of all management letters and any other material reports
and/or examinations provided by Borrower's independent accountants. After an
Event of Default, Bank shall be given notice of and the right to attend any
meetings between Borrower and the independent accountants with respect to any
such matters.
8.9. FINANCIAL CERTIFICATE. Borrower shall furnish Bank together
with all materials required pursuant to PARAGRAPHS 8.5, 8.6 AND 8.7 of this
Agreement, a certificate signed by the Chief Financial Officer of Borrower in
the form of EXHIBIT E attached hereto.
8.10. MISCELLANEOUS OTHER REPORTS. Borrower shall additionally
provide to Bank by not later than 30 days after the end of each month, or sooner
if available: (i) a report, in form and detail satisfactory to Bank, of
Borrower's actual units on rent broken down by each store location of Borrower
(and including, without limitation therein, reports of the percentages of pick-
ups, pay-offs, charge-offs and deliveries from Borrower's business during the
prior month, and of the percentage that idle inventory represents of total
inventory); (ii) reports, in form and detail satisfactory to Bank, concerning
the yield and delinquency of Borrower's lease-purchase agreement receivables for
the prior month; and (iii) reports, in form and detail satisfactory to Bank,
indicating the total value of all then existing rental contracts for all items
then being rented by Borrower to its customers. Borrower shall provide to Bank,
as they are issued and/or delivered to the Securities and Exchange Commission,
stock exchanges and other governmental and private regulatory agencies, complete
and up-to-date copies of Borrower's Forms 10-K and 10-Q and other filings and
reports made and/or delivered by or on behalf of Borrower to any or all of such
entities.
9. WARRANTIES, REPRESENTATIONS AND COVENANTS. Borrower warrants and
represents as of the date hereof, and covenants from and after the date hereof
and until the Obligations are fully paid, performed and satisfied, the following
representations, warranties and covenants are and shall remain true:
9.1. ORGANIZATION, ETC. Borrower is and shall remain duly organized,
validly existing and in good standing under the laws of the State of Indiana and
is and shall remain qualified to do business under the laws of all other states
and jurisdictions where such qualification by Borrower is required by such other
state(s) and jurisdiction(s), and has and shall maintain all requisite power and
authority, corporate or otherwise, to conduct its business, to own its property
and to execute, deliver and perform all of its obligations under this Agreement
and each of the other Loan Documents;
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9.2. DUE AUTHORIZATION, VALIDITY, ETC. This Agreement and each of
the other Loan Documents have been duly executed and delivered and authorized by
all requisite corporate action;
9.3. NO VIOLATION. The execution, delivery and/or performance by
Borrower of this Agreement and the other Loan Documents does not and will not
(i) constitute a violation of any applicable law or a breach of any provision
contained in Borrower's Articles of Incorporation or Bylaws or contained in any
order of any court or other governmental agency or in any agreement, instrument
or document to which Borrower is a party or by which Borrower or any of its
properties is bound or (ii) result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of Borrower's properties
(other than in favor of Bank hereunder);
9.4. USE OF LOAN PROCEEDS. Borrower's uses of the proceeds of the
Loans made by Bank to Borrower pursuant to this Agreement are, and will continue
to be, legal and proper corporate uses (duly authorized by Borrower's Board of
Directors), such uses do not and shall not violate any applicable laws or
statutes as in effect as of the date hereof or hereafter, and the Loans are not
and shall not be secured, directly or indirectly, by any stock for the purpose
of purchasing or carrying any margin stock or for any purpose which would
violate either Regulation U, 12 C.F.R. Part 221, or Regulation X, 12 C.F.R. Part
224, promulgated by the Board of Governors of the Federal Reserve System;
9.5. MANAGEMENT; LICENSES, PATENTS, ETC. Borrower possesses and
shall continue to possess active, full-time, professional management adequate to
handle its affairs and adequate employees, assets, governmental approvals,
licenses, patents, copyrights, trademarks and trade names to continue to conduct
its business as heretofore and hereafter conducted by it and all such licenses,
patents, copyrights, trademarks and trade names are described on EXHIBIT F
attached hereto;
9.6. INDEBTEDNESS. Except as reflected in the Financials and except
for short term unsecured trade payables and operating accruals of Borrower
(including for leases of real property and/or vehicles) incurred in the ordinary
course of its business, Borrower has no Indebtedness and shall incur no
Indebtedness, other than the Obligations, and has not guaranteed and shall not
guarantee the obligations of any other Person;
9.7. TITLE TO PROPERTY; NO LIENS. Borrower has and shall retain
good, indefeasible and merchantable title to and ownership of all of its real
and personal property, including, without limitation, the Collateral and other
security for the Obligations, free and clear of all liens, claims, security
interests, assignments, mortgages, pledges and encumbrances, except Permitted
Liens and except as described on EXHIBIT G attached hereto;
9.8. RESTRICTIONS; LABOR DISPUTES; LABOR CONTRACTS, ETC. Borrower is
not, to the best of Borrower's knowledge following diligent inquiry, a party or
subject to, and Borrower shall not become a party or subject to, any charge,
corporate restriction, judgment, decree or order, materially and adversely
affecting its business, property, assets, operations or condition, financial or
otherwise, or any labor dispute; and there are not and shall not be any strikes
or walkouts relating to any labor contracts and no such contract is scheduled to
expire within three (3) years of the date hereof;
9.9. NO VIOLATION OF LAW; HAZARDOUS MATERIAL. Borrower is not, to
the best of Borrower's knowledge following diligent inquiry, and shall not be in
violation of any applicable statute, regulation or ordinance of any governmental
entity (including, but not by way of limitation, any such statute, regulation or
ordinance relating to ecology, human health or the environment), in any respect
materially and adversely affecting the Collateral or other security for the
Obligations or Borrower's business, assets, operations or condition, financial
or otherwise, and, without limiting the generality of the foregoing, no
Hazardous Material is or shall be located on any real property owned or leased
by Borrower in violation of any applicable statute, regulation or ordinance of
any governmental entity or has been or shall be discharged or penetrating into
any real property or surface or subsurface rivers or streams crossing or
adjoining any real property owned or leased by Borrower or the aquifer
underlying any real property owned or leased by Borrower ("Hazardous Material"
as used herein means any existing or future asbestos, polychlorinated byphenyls
and petroleum products, solid wastes, ureaformaldehyde, discharges of sewer or
effluent, paint containing lead and any other hazardous or toxic material,
substance or waste which is defined, determined or identified by those or
similar terms or is regulated as such under any such statute, law, ordinance,
rule or regulation (whether now existing or hereafter promulgated) or any local,
state or federal authority, or any judicial or administrative interpretation of
any such statute, law, ordinance, rule or regulation, including but not limited
to any material, substance or waste which is a hazardous substance within the
meaning of 33 U.S.C. Section 1251 et seq., as amended, or 42 U.S.C. Section 9601
et seq., as amended, or a hazardous waste within the meaning of 42 U.S.C.
Section 6901 et seq., as amended);
9.10. ABSENCE OF DEFAULT. Neither Borrower nor any guarantor of the
Obligations is and neither Borrower nor any guarantor of the Obligations shall
be in default under any note, indenture, loan agreement, mortgage, lease, or
other similar agreement relating to the borrowing of monies or the incurring of
indebtedness to which Borrower or any guarantor of the Obligations is a party or
by which Borrower or any guarantor of the Obligations or any of their respective
assets are bound;
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9.11. ACCURACY OF FINANCIALS; NO MATERIAL CHANGES. The Financials
have been prepared in accordance with generally accepted accounting principles
consistently applied and are true, correct and complete in all material
respects; the Financials fairly present Borrower's assets, liabilities and
financial condition and results of operations and those of such other Persons
described therein as of the date thereof; there are no omissions from the
Financials or other facts or circumstances not reflected in the Financials which
are or may be material; there has been no material and adverse change in
Borrower's assets, liabilities or financial condition since the date of the
Financials nor has there been any material damage to or loss of any of
Borrower's assets or properties since such date; and Borrower's outstanding
advances to any Person do not constitute any equity or long term investment in
any Person which is not reflected in the Financials;
9.12. PENSION PLANS. No "reportable event" or "prohibited
transaction," as defined by the Employee Retirement Income Security Act of 1974
("ERISA"), has occurred or is continuing, or shall occur or continue, as to any
plan of Borrower or any Affiliate, which poses a threat of taxes or penalties
against or termination of such plans (or trusts related thereto); Borrower has
not violated and shall not violate the requirements of any "qualified pension
benefit plan," as defined in ERISA and the Internal Revenue Code of 1986 or done
anything or will do anything to create liability under the Multi-Employer
Pension Plan Amendments Act; and neither Borrower nor any Affiliate has
incurred, and neither shall incur, any material liability to the Pension Benefit
Guaranty Corporation in connection with such plans, including, but not limited
to, any "funding deficiency" (as defined by ERISA);
9.13. TAXES AND OTHER CHARGES. Borrower and each guarantor of the
Obligations has filed and shall file all federal, state and local tax returns
and other reports which it is required by law to file, has paid and shall pay
all taxes, assessments and other similar charges that are due and payable, has
withheld and shall withhold all employee and similar taxes which it is required
by law to withhold, and has maintained and shall maintain adequate reserves for
the payment of all taxes and similar charges; provided, however, neither
Borrower nor any guarantor of the Obligations shall be required to pay any tax
if the validity and/or amount thereof is being contested in good faith and by
appropriate proceedings promptly initiated and diligently conducted of which
Borrower or any guarantor of the Obligations has given prior notice to Bank and
for which appropriate reserves (in Bank's reasonable judgment) have been
established and so long as levy and execution have been and continue to be
stayed, and provided that Borrower or any guarantor of the Obligations, as
applicable, shall promptly pay such tax when the dispute is finally settled;
9.14. NO LITIGATION. There is not and shall not be any litigation,
action or proceeding pending or, to the best of Borrower's knowledge,
threatened, against Borrower or any guarantor of the Obligations, except as set
forth on EXHIBIT H attached hereto (none of which would result in any material
adverse change in the financial condition of Borrower or any guarantor of the
Obligations or materially and adversely affect the operations or assets of
Borrower or any guarantor of the Obligations);
9.15. NO BROKERAGE FEE. No brokerage, finder's or similar fee or
commission is due to any party by reason of Borrower entering into this
Agreement or by reason of any of the transactions contemplated hereby, and
Borrower shall indemnify and hold Bank harmless from all such fees and
commissions;
9.16. AFFILIATES. All Persons who are Borrower's Affiliates at this
time and at all times hereafter are and shall be identified on EXHIBIT I
attached hereto; and
9.17. NON-COMPETITION AGREEMENTS. Other than as described at EXHIBIT
J attached hereto or as consented to in writing by Bank, Borrower is not and
shall not be subject to any contract or agreement containing a covenant not to
compete in any line of business with any person, firm or corporation.
To the extent necessary to cause these representations, warranties and
covenants to remain true, complete and accurate at all times, Borrower shall
promptly update any Exhibits provided for in this PARAGRAPH 9 upon learning of
any circumstance which might make any representation, warranty or covenant
contained herein untrue. The requirement of Borrower to update any Exhibit
provided for herein shall not be and shall not be deemed by the Bank a cure of
any Event of Default occurring prior to any such update and no such update shall
be deemed a cure of any existing or continuing Event of Default.
10. COVENANTS. Until the Obligations are fully paid, performed and
satisfied and this Agreement is terminated, Borrower covenants that it shall:
10.1. PAYMENT OF FEES, COSTS AND EXPENSES. Pay to Bank immediately,
any and all fees, costs and expenses which Bank pays to a bank or other similar
institution arising out of or in connection with (i) the forwarding to Borrower,
or any other Person on Borrower's behalf, by Bank of proceeds of loans made by
Bank to Borrower pursuant to this Agreement, and (ii) the depositing for
collection by Bank of any check or item of payment received and/or delivered to
Bank on account of the Obligations and reimburse Bank, immediately, for any
claims asserted by any bank at which a
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blocked account or local account is established for the deposit of proceeds of
the Collateral in connection with such blocked account or local account or any
returned or uncollected checks received by such bank as proceeds of the
Collateral;
10.2. NOTICE OF LITIGATION. Notify Bank in writing, promptly upon
Borrower's learning thereof, of any litigation, suit or administrative
proceeding which involves a monetary claim of in excess of One Hundred Thousand
Dollars ($100,000) or which may affect Borrower's operations, financial
condition or business in a material adverse manner or Bank's security interest
in the Collateral or other security for the Obligations or any guarantor of the
Obligations in a material adverse manner, whether or not the claim is considered
by Borrower to be covered by insurance;
10.3. NOTICE OF ERISA EVENTS. Notify Bank in writing (i) promptly
upon the occurrence of any event described in Section 4043 of ERISA, other than
a termination, partial termination or merger of a "Plan" (as defined in ERISA)
or a transfer of a Plan's assets, and (ii) prior to any termination, partial
termination or merger of a Plan or a transfer of a Plan's assets;
10.4. NOTICE OF LABOR DISPUTES. Notify Bank in writing, promptly
upon Borrower's learning thereof, of any labor dispute to which Borrower may
become a party, any strikes or walkouts relating to any of its plants or other
facilities and the expiration of any labor contract to which Borrower is a party
or by which Borrower is bound;
10.5. NOTICE OF CHANGES IN LAW AND/OR VIOLATIONS OF LAW. Notify Bank
in writing, promptly upon Borrower's learning thereof, of any changes in
existing laws and/or implementation of new laws materially impacting on the
operation of rent-to-own businesses (including, without limitation, any laws
converting lease-purchase arrangements to installment sales arrangements) and/or
of any violation of any law, statute, regulation or ordinance of any
governmental entity, or of any agency thereof, and of any federal, state or
local tax withholding or assessment, applicable to Borrower or any guarantor of
the Obligations, which violation or withholding or assessment in any respect may
materially and adversely affect the Collateral or other security for the
Obligations or the business, assets, operations or condition, financial or
otherwise, of Borrower or any guarantor of the Obligations;
10.6. NOTICE OF CERTAIN AGREEMENTS. Notify Bank, promptly upon the
occurrence thereof, of default and/or failure to make timely payment by Borrower
or any guarantor of the Obligations under any note, indenture, loan agreement,
mortgage, lease, deed or other similar agreement (including, without limitation,
this Agreement or any of the other Loan Documents) to which Borrower or any
guarantor of the Obligations is a party or by which Borrower or any guarantor of
the Obligations is bound;
10.7. NOTICE OF VIOLATIONS BY OTHER PARTIES AND OF MATERIAL EVENTS.
Notify Bank, promptly upon the occurrence thereof, of any default by any obligor
under any note or other evidence of debt payable to Borrower or of anything
which might have a material adverse effect on the credit of a customer of
Borrower;
10.8. SOLVENCY. At all times prior to, during and after any
disbursement of the Loans, have capital sufficient to carry on its business and
transactions as now conducted and all business and transactions in which it is
about to engage and will be solvent and able to pay its debts as they mature,
and Borrower will own property having a value, both at fair valuation and at
present fair salable value, greater than the amount required to pay Borrower's
debts as they mature;
10.9. PROPERTY INSURANCE. Insure all of its real and personal
property, including, without limitation, the Collateral and other security for
the Obligations, in Bank's name against loss or damage by fire, theft, burglary,
pilferage, loss in transit and such other hazards as Bank shall specify in
amounts and under policies by insurers acceptable to Bank, and all premiums
thereon shall be paid by Borrower and the policies or a certificate thereof
signed by the insurer shall be delivered to Bank within fifteen (15) business
days after the issuance of the policies to Borrower and after each renewal
thereof; each such policy shall name Bank (and no other party) as mortgagee
under a New York Standard Mortgage clause or other similar clause acceptable to
Bank and shall provide that such policy may not be amended or cancelled without
thirty (30) days prior written notice to Bank; and if Borrower fails to do so,
Bank may (but shall not be required to) procure such insurance and charge the
cost to Borrower's account as part of the Obligations payable on demand and
secured by the Collateral and other security for the Obligations;
10.10. LIABILITY INSURANCE. At all times, maintain in full force and
effect such liability insurance with respect to its activities and business
interruption and other insurance as may be reasonably required by Bank, such
insurance to be provided by insurer(s) acceptable to Bank, and if requested by
Bank, such insurance shall name Bank (and no other party) as an additional
insured;
10.11. DEPOSIT ACCOUNTS. At Bank's option, and except as otherwise
specifically contemplated hereby, maintain throughout the term of this Agreement
all of Borrower's depository, disbursement, trust, payroll and other account
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relationships with Bank, and not alter existing account relationships which bear
on the creditworthiness of Borrower and/or the pricing of the Loans or this
credit arrangement or such other account relationships;
10.12. MERGER, ETC. Not, without the Bank's prior written consent,
which the Bank may grant or withhold in its sole discretion, merge or
consolidate or form a joint venture or partnership with any other Person;
10.13. INVESTMENTS. Other than in the ordinary course of Borrower's
business or with the Bank's prior written consent, which the Bank may grant or
withhold in its sole discretion, not make any investment in the securities of
any Person;
10.14. DIVIDENDS. Not, without the Bank's prior written consent,
which shall not be unreasonably withheld, declare or pay cash or stock dividends
upon any of Borrower's stock or make any distributions of Borrower's assets or
make any loans, advances and/or extensions of credit to, or investments in, any
Persons, including, without limitation, any of Borrower's Affiliates, officers
or employees;
10.15. REDEMPTION OF STOCK; CHANGES IN CAPITAL STRUCTURE. Not
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's capital stock, or make any material change in Borrower's capital
structure or in any of Borrower's business objectives, purposes and operations
which might in any way materially adversely affect the repayment of the
Obligations;
10.16. AFFILIATE TRANSACTIONS. Not enter into, or be a party to, any
transaction with any of Borrower's Affiliates, except in the ordinary course of
business, pursuant to the reasonable requirements of Borrower's business, and
upon fair and reasonable terms which are fully disclosed to Bank and are no less
favorable to Borrower than Borrower could obtain in a comparable arm's length
transaction with a Person not Borrower's Affiliate;
10.17. DEPOSITS TO AND WITHDRAWALS FROM ACCOUNTS. Except in
connection with transactions otherwise permitted herein, not make deposits to or
withdrawals from any of Borrower's deposit accounts for the benefit of any of
its Affiliates;
10.18. SALE OR LEASE OF ASSETS. Not sell or lease (except with
Bank's prior written consent, which Bank will not unreasonably withhold, except
for the sale or lease of Inventory in the ordinary course of business, and
except for sales or leases by Borrower of assets having an aggregate value not
in excess of $20,000 in any calendar year) or otherwise dispose of or transfer,
whether by sale, merger, consolidation, liquidation, dissolution, or otherwise,
any of Borrower's assets, including, without limitation, the Collateral and
other security for the Obligations;
10.19. CONSIGNMENTS, ETC. Not make a sale to any customer on a
bill-and-hold, guaranteed sale, sale or return, sale on approval, consignment,
or return (other than in the ordinary course of business) basis, or any other
repurchase basis;
10.20. CHANGE IN MANAGEMENT OR BUSINESS. Not permit to occur any
seizure, vesting or intervention by or under the authority of any government by
which Borrower's management is displaced or its authority in the conduct of its
business is materially curtailed;
10.21. CLAIMS AGAINST COLLATERAL. Not permit to occur any attachment
or distraint of any of the Collateral or other security for the Obligations and
not permit any of the Collateral or other security for the Obligations to become
subject, at any time, to any mandatory court order or other legal process;
10.22. JUDGMENTS. Not permit any judgment in excess of Fifty
Thousand Dollars ($50,000) or any judgments in excess of One Hundred Thousand
Dollars ($100,000), in the aggregate, to be rendered against Borrower unless
such judgments are paid within ten (10) days of the date such judgments become
final, non-appealable and payable or such judgments are otherwise bonded in a
manner and on terms satisfactory to Bank;
10.23. FINANCIAL COVENANTS. Comply with all of the financial
covenants contained in EXHIBIT K (the "Financial Covenants") attached hereto and
incorporated herein by reference;
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10.24. CERTIFICATE OF OFFICERS AND GOOD STANDING CERTIFICATES.
Furnish to Bank by each six (6) month anniversary of the date hereof an updated
Certificate of Officers on Bank's standard Certificate of Officers form and by
each twelve (12) month anniversary of the date hereof a certificate from the
Secretary of State of the state of incorporation of Borrower indicating that
Borrower is in good standing as a corporation under the laws of such state; and
10.25. ADDITIONAL STORES. Not, without Bank's prior written consent
(which may be granted or withheld in Bank's sole discretion) or except as
otherwise specifically permitted by this PARAGRAPH 10.25, open or put into
operation (whether by acquisition of existing stores or outlets, opening new
stores or outlets, or otherwise) more than three (3)
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additional stores or outlets during any calendar year. In the event that
Borrower intends to acquire existing stores or outlets (by means of an asset or
stock acquisition or otherwise) or independently to expand by opening new stores
or outlets, Borrower may do so without requiring Bank's prior written consent to
the financial terms of any such acquisition and/or expansion as long as: (a)
any such acquisition, in conjunction with all acquisitions hereafter by Borrower
of existing stores and/or outlets to which Bank has not granted its express
prior written consent as to all terms thereof, do not result in Borrower's
assuming debts and/or liabilities aggregating to in excess of Five Hundred
Thousand Dollars ($500,000); (b) Borrower has provided Bank not less than
fourteen (14) days prior written notice of Borrower's intent to consummate such
planned acquisition and/or expansion and the specific details thereof (and in
connection therewith, Borrower shall have provided to Bank by not later than
seven (7) days before the closing date for such transaction (i) all documents
evidencing the agreements relating to and the terms of, and designed to
effectuate, such proposed transaction and (ii) pro forma financial statements
for Borrower (in form and detail reasonably satisfactory to Bank) projecting the
impact on Borrower's financial performance and status of such proposed
acquisition and/or expansion); (c) Bank maintains its first priority and
exclusive security interest on all of the Collateral (including, without
limitation, the assets and properties that Borrower plans to acquire as a result
of such proposed acquisition and/or expansion); (d) Bank is permitted and given
the opportunity (at Borrower's expense) to conduct a legal audit and review
(satisfactory to Bank in its discretion) of the structure, mechanics, and the
documents and agreements relating to, and intended to effectuate, such proposed
acquisition and/or expansion, and Bank shall attempt to proportion the scope of
its legal audit and review to the type, size and complexity of the proposed
transaction; and (e) in the event that as of the time of such transaction the
aggregate unpaid balance of the Loans and the other Obligations that is actually
outstanding plus that which is reasonably projected to be outstanding after (and
as a result of) consummation of the proposed transaction plus indebtedness and
liabilities assumed and/or retained by Borrower and/or its Affiliates in
connection with the proposed transaction is greater than or equal to Borrower's
Three Month Average Monthly Rental Contract Revenues (which shall specifically
not include for purposes of the calculation thereof any revenues from the stores
and/or outlets to be acquired and/or opened) for the immediately preceding three
(3) calendar months multiplied by two (2), Bank is provided the opportunity to,
and actually conducts (at Borrower's expense), a field examination of the
Borrower and/or the entity or operations to be acquired, as applicable, with
results reasonably satisfactory to Bank. Notwithstanding anything to the
contrary herein, in the event that Borrower closes on any transaction in which
it acquires existing stores or outlets (by means of an asset or stock
acquisition or otherwise) or independently expands by opening new stores or
outlets of more than three (3) during any calendar year and Borrower has not
received Bank's written consent to all aspects of any such transaction prior to
the closing thereof, Bank shall have the right, in its sole discretion, at any
time within sixty (60) days after the closing of any such transaction to
terminate this Agreement by providing not less than one hundred and fifty (150)
days written notice thereof to Borrower; and if Bank exercises the right of
termination of this Agreement under the preceding clause Borrower shall be
obligated to pay to Bank the Termination Fee, except that if Bank exercises the
right of termination of this Agreement under the preceding clause for any reason
other than Bank's not being satisfied with the results of its field examination
(if applicable) or legal review of the transaction or the documents relating
thereto or Bank's not maintaining its first priority and exclusive security
interest on all of the Collateral (including, without limitation, the assets and
properties that Borrower acquired and/or acquires as a result of such
transaction), in connection with its payment in full of the Obligations Borrower
shall not be obligated to pay to Bank the additional Termination Fee provided at
PARAGRAPH 11.4 hereof.
11. EFFECTIVE DATE; TERMINATION.
11.1. EFFECTIVE DATE. This Agreement shall be effective on the date
of acceptance hereof by Bank.
11.2. TERMINATION BY BANK. Bank may terminate this Agreement
immediately upon notice to Borrower at any time on or after February 1, 1999.
Recourse to security will not be required at any time. Borrower waives
presentment and protest of any
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instrument and notice thereof, notice of default and all other notices to which
Borrower might otherwise be entitled.
11.3. TERMINATION BY BORROWER AT CERTAIN DATES. Except as otherwise
provided in PARAGRAPH 11.4, Borrower may only terminate this Agreement effective
on February 1, 1999 or any later anniversary of such date by giving Bank notice
of its election to so terminate the Agreement at least ninety (90) days before
February 1, 1999 or any later anniversary of such date. If Borrower does not
terminate this Agreement effective on the specific dates permitted pursuant to
this PARAGRAPH 11.3, then, at Bank's sole discretion, and subject to Bank's
rights under PARAGRAPH 11.2 hereof, this Agreement may be extended to the next
following anniversary date of February 1, 1999 or any later anniversary thereof
except as otherwise provided in PARAGRAPH 11.4.
11.4. TERMINATION BY BORROWER AT OTHER DATES AND RELATED FEES. In
addition to Borrower's rights pursuant to PARAGRAPH 11.3, Borrower may terminate
this Agreement as of the last day of any month by giving Bank notice of the date
on which this Agreement is to terminate ("Voluntary Termination Date"), which
date must be the last day of a month, at least ninety (90) days before the
Voluntary Termination Date and by paying, in addition to the other Obligations,
on the Voluntary Termination Date as compensation to Bank for loss of bargain
with respect to the credit advanced hereunder, and not as a penalty, a
termination fee (the "Termination Fee") in the amount of Two Hundred and Twenty-
Five Thousand Dollars ($225,000).
11.5. ACCELERATION UPON TERMINATION. Upon the effective date of
termination, all of Borrower's Obligations to Bank shall become immediately due
and payable without notice or demand. If this Agreement is terminated upon the
occurrence or during the continuance of an Event of Default (unless such Event
of Default is deemed by Bank to have been caused by circumstances beyond the
reasonable control of Borrower), the Obligations shall include an amount equal
to the Termination Fee which would be payable by Borrower if Borrower had
terminated this Agreement pursuant to PARAGRAPH 11.4 as of the last day of the
month in which Bank terminates this Agreement, said amount to compensate Bank
for loss of bargain with respect to the credit advanced hereunder, and not as a
penalty.
11.6. BORROWER REMAINS LIABLE. Notwithstanding any termination,
until all of the Obligations have been fully performed, paid and satisfied,
Borrower shall remain liable for the full and prompt performance and payment of
the Obligations and Bank shall retain all of its rights and privileges
hereunder, including, without limitation, the retention of its interest in and
to all of the Collateral and other security for the Obligations.
12. EVENTS OF DEFAULT. Each of the following shall constitute an "Event
of Default" hereunder:
(a) Borrower shall fail to pay, when due (whether by demand or
otherwise), any portion of the Obligations owing from Borrower to Bank;
(b) Borrower shall commit any breach of this Agreement, as amended or
supplemented, any of the other Loan Documents or any other agreement between
Bank and Borrower or between Borrower and any Affiliate of Bank;
(c) any representation or warranty made by Borrower herein or in any
of the other Loan Documents is, or becomes, untrue or misleading in any material
respect;
(d) Borrower or any guarantor of the Obligations shall: (i) become
insolvent, (ii) become generally unable to pay their respective debts as they
become due, (iii) make an assignment for the benefit of creditors, (iv) call a
meeting of creditors for the composition of debts, (v) make any material
misrepresentation to Bank in connection with this Agreement or any transaction
relating hereto, or (vi) make any material misrepresentation or fail to make any
payment due to any Affiliate of Bank;
(e) there shall be filed by or against Borrower or any guarantor of
the Obligations a petition in bankruptcy or for reorganization or a custodian,
receiver or agent is appointed or authorized to take charge of any of their
respective properties;
(f) there shall occur any material and adverse change in the business
operations or condition, financial or otherwise, of Borrower or any guarantor of
the Obligations;
(g) any guarantor of the Obligations shall be in default under its
guaranty of the Obligations or demand is made on any such guarantor thereunder;
(h) any guarantor of the Obligations shall be in material default
under any other agreement to which it is a party or demand is made on any such
guarantor under the terms of any guaranty agreement to which such guarantor is a
party;
(i) any guarantor of the Obligations dies unless within 90 days of the
death of such guarantor a substitute guarantor acceptable to the Bank has duly
and validly guaranteed the Obligations pursuant to a guaranty in form and
substance satisfactory to the Bank, or any guarantor of the Obligations denies
its obligation to guarantee any then existing Obligations or attempts to limit
or terminate its obligation to guarantee any future Obligations (including,
without limitation, any future advance by Bank to Borrower);
(j) there shall occur a material casualty loss with respect to the
Collateral or other security for the Obligations which is not covered by
insurance;
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(k) the audit report required pursuant to PARAGRAPH 8.7 is not an
unqualified audit report, unless the reason for qualification is not material to
Borrower's financial condition;
(l) an event of default shall occur under any of the other Loan
Documents or any other agreement between Bank and Borrower or between Borrower
and any Affiliate of Bank; or
(m) the Collateral or other security for the Obligations shall decline
in value with the result that Bank's security for the Obligations is materially
diminished.
13. BANK'S RIGHTS AND REMEDIES.
13.1. ACCELERATION, ETC. Upon the occurrence of any Event of
Default, in addition to all other rights and remedies provided herein or
available at law or in equity, Bank may, without further notice or demand,
declare the Loans and all other Obligations to be immediately due and payable,
and, to the extent that the maximum amount of the Total Facility has not yet
been used or fully drawn on by Borrower, terminate the undrawn balance of same,
and Bank shall have all rights to realize upon the Collateral and other security
for the Obligations set forth in the documents providing for such security as
described in PARAGRAPH 5 hereof, the terms of which are incorporated herein by
reference as if set forth herein in full, and as otherwise provided by
applicable law. Bank's rights and remedies under this Agreement shall be
cumulative and not exclusive of any other right or remedy which Bank may have.
13.2. FEES AND EXPENSES. Borrower shall pay to Bank, immediately and
as part of the Obligations, all costs and expenses, including court costs,
Attorneys' Fees and costs of sale, incurred by Bank in exercising any of its
rights or remedies hereunder.
14. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS.
14.1. RELEASE OF COLLATERAL. Bank's rights with respect to the
Collateral and other security for the Obligations and its security interest
therein shall continue unimpaired, and Borrower shall remain obligated in
accordance with the terms hereof, notwithstanding the release or substitution of
any Collateral or other security for the Obligations at any time(s), or any
rights or interests therein, or any delay, extension of time, renewal,
compromise or other indulgence granted by Bank in reference to any Obligations,
and Borrower hereby waives all notice of the same.
14.2. WAIVERS AND AMENDMENTS IN WRITING. Failure by Bank to exercise
any right, remedy or option under this Agreement or any supplement hereto or in
any other agreement between Borrower and Bank or delay by Bank in exercising the
same shall not operate as a waiver by Bank of its right to exercise any such
right, remedy or option. No waiver by Bank shall be effective unless it is in
writing and then only to the extent specifically stated. This Agreement cannot
be changed or terminated orally.
14.3. ASSIGNMENT. Bank shall have the right to assign this
Agreement. Borrower may not assign, transfer or otherwise dispose of any of its
rights or obligations hereunder, by operation of law or otherwise, and any such
assignment, transfer or other disposition without Bank's written consent shall
be void. All of the rights, privileges, remedies and options given to Bank
hereunder shall inure to the benefit of Bank's successors and assigns, and all
the terms, conditions, covenants, provisions and warranties herein shall inure
to the benefit of and bind the representatives, successors and assigns of
Borrower and Bank, respectively.
15. DEFINITIONS. Whenever the following terms are used herein, they shall
be defined as follows:
15.1. "Affiliate" shall mean any person, company or business
entity controlling, controlled by or under common control or having similar
shareholders owning at least ten percent (10%) thereof, whether such common
control is direct or indirect. All of Borrower's officers, shareholders,
directors, parent corporations, subsidiary corporations, joint venturers and
partners shall be deemed to be Borrower's Affiliates for purposes of this
Agreement.
15.2. "Attorneys' Fees" shall mean the reasonable value of the
services (and costs and expenses related thereto) of all attorneys (and all
paralegals and other staff employed by such attorneys) employed by Bank from
time to time in connection with any matter whatsoever related to or arising out
of the transactions contemplated hereunder.
15.3. "Collateral", "Equipment", "General Intangibles",
"Inventory" and "Receivables" shall have the meanings ascribed thereto in the
Security Agreement.
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<PAGE>
15.4. "Financials" shall mean those financial statements
referenced at SCHEDULE 7 to the Initial Financing Agreement and those financial
statements delivered with the certificate of Borrower's chief financial officer
referenced at EXHIBIT B to this Agreement.
15.5. "Indebtedness" shall mean all of Borrower's obligations and
liabilities to any "Person" (as defined below), including, without limitation,
all debts, claims and indebtedness, contingent, fixed or otherwise, heretofore,
now and/or from time to time hereafter owing, due or payable, however evidenced,
created, incurred, acquired or owing and however arising, whether under written
or oral agreement, operation of law or otherwise. Indebtedness includes,
without limiting the foregoing, (i) the "Obligations" (as defined below), (ii)
obligations and liabilities of any Person secured by a lien, claim, encumbrance
or security interest upon property owned by Borrower, even though Borrower has
not assumed or become liable for the payment therefor and (iii) obligations or
liabilities created or arising under any lease of real or personal property,
conditional sales contract or other title retention agreement with respect to
property used and/or acquired by Borrower, even though the rights and remedies
of the lessor, seller and/or lender thereunder are limited to repossession of
such property.
15.6. "Loan Documents" shall mean this Agreement and all other
documents, instruments and agreements executed in connection herewith and/or in
connection with the Initial Financing Agreement, as the same may be amended from
time to time.
15.7. "Three Month Average Monthly Rental Contract Revenues" shall
mean the average of the monthly amount of Borrower's gross cash receipts
(including reinstatement, processing and insurance-related fees) actually
received by Borrower solely from the lease or rental of Inventory to Borrower's
customers in the ordinary course of business for the three (3) calendar months
immediately preceding the date of determination, but specifically excluding (i)
revenues from the sale of Inventory and (ii) all collected sales, use, excise
and other similar taxes.
15.8. "Obligations" shall mean the Loans and all other loans,
advances, debts, liabilities, obligations, covenants and duties owing to Bank or
any Affiliate of Bank from Borrower of any kind, present or future, whether or
not evidenced by or arising out of this Agreement or any other agreement,
transaction, extension of credit, letter of credit, guaranty or indemnification
or in any other manner, whether or not for the payment of money, whether direct
or indirect (including acquired by assignment), absolute or contingent, due or
to become due, now existing or hereafter arising and however acquired, and
including, without limitation, all interest, charges, expenses, fees and any
other sums chargeable to Borrower in connection with any of the foregoing, and
all Attorneys' Fees.
15.9. "Permitted Liens" shall mean the liens and interests in
favor of Bank granted in connection herewith and, to the extent reflected on
Borrower's books and records and not impairing the operations of Borrower or any
performance hereunder or contemplated hereby: (i) liens arising by operation of
law for taxes not yet due and payable; (ii) statutory liens of mechanics,
materialmen, shippers and warehousemen for services or materials for which
payment is not yet due; (iii) liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) liens, if any, specifically
permitted by Bank from time to time in writing; and (v) the following if the
validity or amount thereof is being contested in good faith and by appropriate
and lawful proceedings promptly initiated and diligently conducted of which
Borrower has given prior notice to Bank and for which appropriate reserves (in
Bank's reasonable judgment) have been established and so long as levy and
execution have been and continue to be stayed: claims and liens for taxes due
and payable and claims of mechanics, materialmen, shippers, warehouseman,
carriers and landlords.
15.10. "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, entity, party or government.
15.11. "Real Property" shall mean all of Borrower's now owned or
held or hereafter acquired real property and interests therein, including,
without limitation, all buildings, structures and improvements now or hereafter
erected thereon, all rents, royalties and profits therefrom and all easements
and appurtenances thereto, and all replacements and additions thereto and
substitutes therefor.
15.12. "Rights to Payments under Rental Contracts" shall mean and
include all of Borrower's presently existing and hereafter arising or acquired
rights to payment under, and payment obligations from, rental, lease and/or
lease-purchase agreements and all present and future rights of Borrower to
payment for goods rented or leased or sold under lease-purchase agreements,
including, without limitation, those which are not evidenced by instruments or
chattel paper, and whether or not they have been earned by performance; contract
rights, chattel paper, instruments, documents and insurance proceeds relating to
any of the foregoing; and all such obligations whatsoever owing to Borrower,
together with all instruments and documents of title representing any of the
foregoing, all rights in any goods or merchandise which any of the same may
represent, and all right, title, security and guaranties with respect to each of
the foregoing, including, without limitation, any right of stoppage in transit.
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<PAGE>
15.13. Any accounting terms used in this Agreement which are not
specifically defined shall have the meanings customarily given them in
accordance with generally accepted accounting principles.
16. MISCELLANEOUS.
16.1. SEVERABILITY. Each provision of this Agreement shall be
interpreted in such manner as to be valid under applicable law, but if any
provision hereof shall be invalid under applicable law, such provision shall be
ineffective to the extent of such invalidity, without invalidating the remainder
of such provision or the remaining provisions hereof.
16.2. GOVERNING LAW. This Agreement has been delivered and accepted
at and shall be deemed to have been made at Cincinnati, Ohio. This Agreement
shall be interpreted and the rights and liabilities of the parties hereto
determined in accordance with the laws of the State of Ohio and all other laws
of mandatory application.
16.3. CHOICE OF JURISDICTION AND VENUE. AS A SPECIFICALLY BARGAINED
INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO BORROWER,
BORROWER AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT
OF THIS AGREEMENT, ITS VALIDITY OR PERFORMANCE, AT THE SOLE OPTION OF BANK, ITS
SUCCESSORS AND ASSIGNS, AND WITHOUT LIMITATION ON THE ABILITY OF BANK, ITS
SUCCESSORS AND ASSIGNS, TO EXERCISE ALL RIGHTS AS TO THE COLLATERAL AND OTHER
SECURITY FOR THE OBLIGATIONS OR INITIATE AND PROSECUTE IN ANY APPLICABLE
JURISDICTION ACTIONS RELATED TO REPAYMENT OF THE OBLIGATIONS, SHALL BE INITIATED
AND PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS AT CINCINNATI,
OHIO. BANK AND BORROWER EACH CONSENTS TO AND SUBMITS TO THE EXERCISE OF
JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT CINCINNATI, OHIO HAVING
JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY
CERTIFIED MAIL DIRECTED TO BORROWER AND BANK AT THEIR RESPECTIVE ADDRESSES SET
FORTH IN SUBPARAGRAPH 16.10 BELOW OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE
STATE OF OHIO. BORROWER WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND
ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE
COURT.
16.4. WAIVER OF JURY TRIAL. AS A SPECIFICALLY BARGAINED INDUCEMENT
FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO BORROWER, BORROWER
AND BANK EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR
PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT AND/OR THE CONDUCT OF
THE RELATIONSHIP BETWEEN BANK AND BORROWER.
16.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower
covenants, warrants and represents that all of Borrower's representations and
warranties contained in this Agreement are true at this time, shall survive the
execution, delivery and acceptance hereof by the parties hereto and the closing
of the transactions described herein or related hereto, and shall remain true
until the Obligations are fully performed, paid and satisfied, subject to such
changes as may not be prohibited hereby or do not constitute Events of Default
hereunder.
16.6. EVIDENCE OF LOANS. Each loan or advance made by Bank to
Borrower pursuant to this Agreement may or may not (at Bank's sole discretion)
be evidenced by notes or other instruments issued or made by Borrower to Bank.
Where such loans or advances are not so evidenced, such loans and advances shall
be evidenced solely by entries upon Bank's books and records.
16.7. BANK'S ABILITY REGARDING COLLATERAL. All of the Obligations
shall constitute one loan secured by all security as described in PARAGRAPH 5
above and by all other security now and from time to time hereafter granted by
Borrower to Bank. Bank may, in its sole discretion, (i) exchange, enforce,
waive or release any such security or portion thereof, (ii) apply such security
and direct the order or manner of sale thereof as Bank may, from time to time,
determine and (iii) settle, compromise, collect or otherwise liquidate any such
security in any manner following the occurrence of any Event of Default without
affecting or impairing its right to take any other further action with respect
to any security or any part thereof.
16.8. APPLICATION OF PAYMENTS, ETC. Bank shall have the continuing
right to apply or reverse and reapply any payments to any portion of the
Obligations. To the extent Borrower makes a payment or payments to Bank or Bank
receives any payment or proceeds of the Collateral or any other security for
Borrower's benefit, which payment(s) or proceeds or any part thereof are
subsequently voided, invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or proceeds received, the Obligations or
part thereof intended to be
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<PAGE>
satisfied shall be revived and shall continue in full force and effect, as if
such payment or proceeds had not been received by Bank.
16.9. FEES AND EXPENSES. Borrower shall reimburse Bank for all
costs, fees, expenses and liabilities incurred by Bank or for which Bank becomes
obligated in connection with or arising out of (i) the negotiation, preparation,
closing and enforcement of this Agreement, any amendment hereof and any
agreements, documents and instruments in any way relating hereto and any of
Bank's rights hereunder, (ii) any loans or advances made by Bank hereunder,
(iii) any transaction contemplated by this Agreement, (iv) any inspection and/or
audit and/or verification of the Collateral and/or other security for the
Obligations and/or Borrower (Bank currently charges $400 per diem based on an 8
hour day (plus out of pocket expenses) per auditor or field examiner for the
services of its auditors and field examiners and a potentially greater amount if
the auditor is not a Bank employee), (v) any liability under Section 3505 of the
Internal Revenue Code and all other local, state and federal statutes of similar
import; and (vi) all costs and expenses incurred by Bank after the occurrence of
an Event of Default (a) in enforcing any Obligation or in foreclosing against
the Collateral or exercising or enforcing any other right or remedy available by
reason of such Event of Default, (b) in connection with any refinancing or
restructuring of the credit arrangements provided under this Agreement in the
nature of a "work-out" or in any insolvency or bankruptcy proceeding, (c) in
commencing, defending or intervening in any litigation or in filing a petition,
complaint, answer, motion or other pleadings in any legal proceeding relating to
Borrower and related to or arising out of the transactions contemplated hereby
or by any of the Loan Documents, (d) in taking any other action in or with
respect to any suit or proceeding (whether in bankruptcy or otherwise), (e) in
protecting, preserving, collecting, leasing, selling, taking possession of, or
liquidating any of the Collateral, (f) in attempting to enforce or enforcing any
lien on or security interest in any of the Collateral or any other rights under
the Loan Documents or (g) in meeting with Borrower to discuss such Event of
Default and the course of action to be taken in connection therewith; the
foregoing to include, without limitation, Attorneys' Fees and fees of other
professionals, all lien search and title search fees, all title insurance
premiums, all filing and recording fees and all travel expenses. All of the
foregoing shall be part of the Obligations, payable upon demand, and secured by
the Collateral and other security for the Obligations described in PARAGRAPH 5
above. The Obligations described under this PARAGRAPH 16.9 shall survive any
termination of this Agreement.
16.10. NOTICES. Any notice required, permitted or contemplated
hereunder shall be in writing and addressed to the party to be notified at the
address set forth below or at such other address as each party may designate for
itself from time to time by notice hereunder, and shall be deemed validly given
(i) three (3) days following deposit in the U.S. mails, with proper postage
prepaid, or (ii) the next business day after such notice was delivered to a
regularly scheduled overnight delivery carrier with delivery fees either prepaid
or an arrangement, satisfactory with such carrier, made for the payment thereof,
or (iii) upon receipt of notice given by telecopy, mailgram, telegram, telex or
personal delivery:
To Bank: Star Bank, National Association
Structured Capital Division
425 Walnut Street
Mail Location 9220
Cincinnati, Ohio 45202
Attention: Steven C. Kieffner
Telecopy No: (513) 632-2040
To Borrower: ALRENCO, Inc.
P. O. Box 85
1736 E. Main Street
New Albany, Indiana 47150
Attention: Michael D. Walts
Telecopy No: (812) 948-2579
16.11. HEADINGS. The table of contents and section headings in this
Agreement are for convenience of reference and shall in no manner modify,
supplement or limit the terms or provisions of this Agreement.
16.12. INDEMNIFICATION. In consideration of the execution and delivery of
this Agreement by Bank and the extension of the commitments hereunder, Borrower
hereby indemnifies, exonerates and holds Bank and each of its officers,
directors, employees and agents (collectively the "Indemnified Parties" and,
individually, each an "Indemnified Party") free and harmless from and against
any and all actions, causes of action, suits, losses, costs, liabilities,
damages, and expenses actually incurred in connection therewith (irrespective of
whether such Indemnified Party is a party to the action for which
indemnification hereunder is sought), including reasonable attorneys' fees and
disbursements (the "Indemnified Liabilities"), incurred by the Indemnified
Parties or any of them as a result of, or arising out of, or relating to, or as
a direct or indirect result of:
(a) any transaction financed or to be financed in whole or in part or
directly or indirectly with the proceeds of any of the Loans;
(b) the entering into and performance of this Agreement and the other
Loan Documents by any of the Indemnified Parties;
(c) any investigation, litigation or proceeding related to any
acquisition or proposed acquisition by the Borrower of all or any portion of the
stock or all or substantially all the assets of any Person, whether or not Bank
is party thereto; and
(d) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real property
owned or operated by Borrower of any Hazardous Material (including,
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<PAGE>
without limitation, any losses, liabilities, damages, injuries, costs, expenses
or claims asserted or arising under the Comprehensive Environmental Response,
Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, or
any other federal, state, local or other statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to or imposing liability or
standards on conduct concerning, any Hazardous Material), regardless of whether
or not caused by, or within the control of, Borrower;
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of such Indemnified Party's gross
negligence or willful misconduct or breach by such Indemnified Party of its
obligations under the Loan Documents, and if and to the extent that the
foregoing undertaking may be unenforceable for any reason, Borrower hereby
agrees to make the maximum contribution to the payment and satisfaction of each
of the Indemnified Liabilities which is permissible under applicable law, except
as aforesaid to the extent not payable by reason of the Indemnified Party's
gross negligence or willful misconduct or breach of such obligations. The
Obligations described under this Paragraph 16.12 shall survive any termination
of this Agreement.
16.13 EQUITABLE RELIEF. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its obligations or liabilities
under this Agreement, any remedy of law may prove to be inadequate relief to
Bank; therefore, Borrower agrees that Bank, if Bank so requests, shall be
entitled to temporary and permanent injunctive relief in any such case without
the necessity of proving actual damages.
IN WITNESS WHEREOF, this Agreement has been duly executed by Borrower as of
the 29 day of February, 1996.
Signed and acknowledged
in the presence of: ALRENCO, INC.
/s/ Susan E. Ostrader By: /s/ Michael D. Walts
- -------------------------------- -----------------------------
Name: Susan E. Ostrader Name: Michael D. Walts
-------------------------- Title: President
/s/ Karen A. Buchanan
- --------------------------------
Name: Karen A. Buchanan
--------------------------
ATTEST:
/s/ William R. Haeseley
---------------------------------
Name: William R. Haeseley
Title: Secretary
STATE OF INDIANA )
)SS:
COUNTY OF FLOYD )
The foregoing instrument was acknowledged before me this 29 day of
February, 1996, by Michael D. Walts, the President of ALRENCO, Inc., an
Indiana corporation, on behalf of the corporation.
/s/ Theodore H. Wilson
---------------------------------
Notary Public
Accepted at Cincinnati, Ohio
as of February 29, 1996.
STAR BANK, NATIONAL ASSOCIATION
By: /s/ Steven L. Fields
----------------------------
Name: Steven L. Fields
--------------------------
Title: Vice President
--------------------------
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<PAGE>
STAR BANK
P.O. BOX 1038
CINCINNATI, OHIO 45201-1038
August 9, 1996
ALRENCO, Inc.
P.O. Box 85
1736 East Main Street
New Albany, IN 47150
Attention: Mr. Michael D. Walts, President
Gentlemen:
This letter dated as of August 9, 1996 (this "Amendment") confirms and
evidences certain agreements between Star Bank, National Association, a national
banking association ("Bank"), and ALRENCO, Inc, an Indiana corporation
("Borrower"), with respect to amendment of the Amended and Restated Financing
Agreement dated as of February 29, 1996 between Bank and Borrower, as the same
has previously been amended, if applicable (the aforedescribed Amended and
Restated Financing Agreement, as the same has previously been amended, if
applicable, is hereinafter referred to as the "Agreement"), and certain other
Loan Documents. Inasmuch as Borrower desires to amend certain terms of the
credit facility provided under the Agreement, and Bank is willing to agree to
such amendments subject to and in accordance with the terms and conditions of
the Agreement and as hereinafter set forth, Bank and Borrower hereby agree as
follows:
1. CHANGES IN CREDIT FACILITY.
(A) PARAGRAPH 2.1, PARAGRAPH 2.2 AND PARAGRAPH 2.3 of the Agreement
are hereby amended so as to read in their entirety as follows:
2.1. TOTAL FACILITY. Bank, in its sole discretion, may make up to
a Twenty-Five Million Dollar ($25,000,000) total credit ("Total
Facility") available to Borrower, subject to the terms and conditions
of this Agreement and comprised of the following "Loans": (a) a
revolving loan ("Revolving Loan"), as more particularly described
below, (b) a letter of credit facility as long as the letters of
credit outstanding hereunder never exceed One Million Dollars
($1,000,000) in the aggregate (the "Letter of Credit Facility"), as
more particularly described below, and (c) a credit card facility
pursuant to Bank's standard forms, agreements and documentation in
place from time to time of up to a maximum of One Hundred and Fifty
Thousand Dollars ($150,000) (the "Credit Card Facility");
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 2
provided, however, that the maximum amount of the Total Facility shall
automatically reduce by Two Hundred and Fifty Thousand Dollars
($250,000) on February 1, 1997 and on each May 1, August 1, November 1
and February 1 thereafter until the maximum amount of Total Facility
shall permanently reduce to Zero Dollars ($0) effective on February 1,
2000 unless Bank hereafter amends this provision, which Bank shall be
under no obligation to do. The sum of the then outstanding and unpaid
balance of all indebtedness and obligations under and/or in connection
with the Revolving Loan, the aggregate amount of all Letters of Credit
(as hereinafter defined) then outstanding, and the then outstanding
and unpaid balance of all indebtedness and obligations under and/or in
connection with the Credit Card Facility shall not at any time exceed
the lesser of (i) the then applicable maximum amount of the Total
Facility or (ii) Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar
months multiplied by the Monthly Revenue Multiplier (as hereinafter
defined).
2.2 REVOLVING LOAN FACILITY. The Revolving Loan will be lent
and relent, at Bank's discretion, in amounts (after deduction of such
reserves as Bank deems appropriate, including, without limitation,
reserves which, in the sole discretion of Bank, may be established
from time to time (u) for amounts equal to up to six (6) months of
rent and other payment obligations for locations leased to Borrower
for which landlord waivers satisfactory to Bank have not been duly and
validly executed and delivered to Bank, (v) under generally accepted
accounting principles, (w) for amounts Borrower may be required to
expend for compliance with, or correcting any violations of, any
environmental laws for which Borrower may be responsible or liable,
for tax assessments and/or liabilities, for litigation liabilities, or
for removal of any liens from the Collateral, (x) to cover any
anticipated costs and expenses relating to liquidation of Collateral,
(y) for the undrawn amounts of any letters of credit and/or banker's
acceptances outside the Letter of Credit Facility that Bank may issue
for the account or direct or indirect benefit of Borrower, or (z) as
Bank deems appropriate to ensure that the Obligations are paid in
full) of up to Borrower's Three Month Average Monthly Rental Contract
Revenues for the immediately preceding three (3) calendar months
multiplied by four (4) (the "Monthly Revenue
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 3
Multiplier"), but never in excess of the maximum amount of the
Revolving Loan then applicable.
2.3. LETTER OF CREDIT FACILITY. For the Letter of Credit
Facility Bank may, in its sole discretion and subject to the terms and
conditions of this Agreement, issue commercial and/or stand-by letters
of credit, which shall be secured by the Collateral, in such amounts
and with such maturity dates (which shall in no event extend past
February 1, 2000 and which additionally shall not extend for a period
greater than one (1) year, but which Borrower may request to renew for
additional one (1) year periods) as the Borrower may from time to time
request and as are acceptable to Bank; provided that in no event shall
the total aggregate amount of all such letters of credit (the "Letters
of Credit") outstanding at any time exceed One Million Dollars
($1,000,000) (the "Letter of Credit Amount"); and provided further
that the Bank shall not issue any banker's acceptances. Each Letter
of Credit may be issued subject to Bank's approval thereof. Such
approval or disapproval by the Bank shall be made no later than five
(5) business days after a written request from the Borrower is
received by the Bank accompanied by an original of the Bank's standard
form Irrevocable Letter of Credit Application and Agreement duly and
validly executed by the Borrower (the "Letter of Credit Agreement").
Each Letter of Credit shall be fully reserved from, applied against
and subject to the limitations of the Total Facility and its
availability, and upon any draw by or on behalf of a beneficiary under
a Letter of Credit, the amount so drawn shall immediately and
automatically be deemed a Revolving Loan by Bank to Borrower
hereunder. Each outstanding Letter of Credit shall reduce the unused
portion of the Total Facility for purposes of calculating the unused
facility fee hereunder. Each Letter of Credit shall bear fees,
charges and interest as set forth in PARAGRAPH 3.4 hereof. Each
Letter of Credit shall be subject to the terms and conditions of the
Letter of Credit Agreement, this Agreement and the other Loan
Documents. Outstanding as of the date hereof is one (1) Letter of
Credit in the face amount of $350,000 that was issued by the Bank as
of June 19, 1995.
(B) PARAGRAPH 2.6 of the Agreement is hereby amended so as to read in
its entirety as follows:
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 4
2.6. VIOLATIONS OF LOAN FORMULAS. If the sum of all Loans
outstanding at any time exceeds the then applicable maximum amount of
the Total Facility or such lesser amount as specified in PARAGRAPH
2.1, or if all or any part of the Revolving Loan at any time exceeds
any of the upper limits therefor established in PARAGRAPH 2.2, or if
the Letters of Credit outstanding at any time exceed the upper limit
established therefor in PARAGRAPH 2.3, or if the outstanding and
unpaid balance of all indebtedness and obligations under and/or in
connection with the Credit Card Facility exceeds the upper limit
therefor established in PARAGRAPH 2.1, as applicable, Borrower shall
immediately, upon being notified thereof, reduce the outstanding
balance of such Loans so that the Total Facility or such upper limit,
as applicable, is not exceeded.
(C) PARAGRAPH 3.1 of the Agreement is hereby amended so as to read in
its entirety as follows:
3.1 INTEREST ON LOANS. Borrower shall pay Bank interest on the
average daily outstanding principal amount of the Loans and the other
Obligations at a per annum rate which shall equal, and vary from time
to time with, the rate announced at Bank from time to time as its
prime rate (the "Prime Rate") PLUS: (a) zero percent (0.00%) (with
such rate to be adjusted on the effective date of any change in the
Prime Rate by Bank) during such time and for as long as the aggregate
outstanding unpaid balance of the Loans and the other Obligations is
less than Borrower's Three Month Average Monthly Rental Contract
Revenues for the immediately preceding three (3) calendar months; (b)
one-quarter of one percent (0.25%) (with such rate to be adjusted on
the effective date of any change in the Prime Rate by Bank) during
such time and for as long as the aggregate outstanding unpaid balance
of the Loans and the other Obligations is greater than or equal to
Borrower's Three Month Average Monthly Rental Contract Revenues for
the immediately preceding three (3) calendar months and less than
Borrower's Three Month Average Monthly Rental Contract Revenues for
the immediately preceding three (3) calendar months multiplied by two
(2); (c) one-half of one percent (0.50%) (with such rate to be
adjusted on the effective date of any change in the Prime Rate by
Bank) during such time and for as long as the aggregate outstanding
unpaid balance of the Loans and the other Obligations is greater than
or equal to
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 5
Borrower's Three Month Average Monthly Rental Contract Revenues for
the immediately preceding three (3) calendar months multiplied by two
(2) and less than Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar
months multiplied by three (3); and (d) one and one-quarter percent
(1.25%) (with such rate to be adjusted on the effective date of any
change in the Prime Rate by Bank) during such time and for as long as
the aggregate outstanding unpaid balance of the Loans and the other
Obligations is greater than or equal to Borrower's Three Month Average
Monthly Rental Contract Revenues for the immediately preceding three
(3) calendar months multiplied by three (3). The Prime Rate is
determined solely by Bank pursuant to market factors and its own
operating needs and is not necessarily Bank's best or most favorable
rate for commercial or other loans. The per annum rate of interest
applicable at all times after the occurrence of an Event of Default
shall be the Prime Rate (as adjusted from time to time on the
effective date of any change in the Prime Rate by Bank) plus an
additional three and one-quarter percent (3.25%) per annum.
As alternative methods of computing interest on some or all of
the Revolving Loan, in the absence of an Event of Default or the
occurrence of an event which with notice and/or passage of time would
constitute an Event of Default and during such time and for as long as
the aggregate outstanding unpaid balance of the Loans and the other
Obligations is less than Borrower's Three Month Average Monthly Rental
Contract Revenues for the immediately preceding three (3) calendar
months multiplied by two (2), Borrower may elect to fix the interest
rate on the outstanding principal balance of the Revolving Loan (or
such lesser amounts not less than One Hundred Thousand Dollars
($100,000) and increments of One Hundred Thousand Dollars ($100,000)
above any such amount) for periods of one, two or three months (but
only if any such period does not extend past February 1, 2000 and only
for as long as the aggregate outstanding unpaid balance of the Loans
and the other Obligations remains less than Borrower's Three Month
Average Monthly Rental Contract Revenues for the immediately preceding
three (3) calendar months multiplied by two (2)) at the then
applicable "LIBOR Rate" (as hereinafter defined) effective at the
beginning of such period. In no event shall Borrower at any time have
outstanding more than three (3)
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 6
separate parts of the Revolving Loan subject to an alternative method
of computing interest.
The "LIBOR Rate" shall mean the sum of (i) the consensus rate, as
determined by Bank, then being offered (rounded upwards, if necessary,
to the nearest 1/10,000 of one percent) by major international banks
on Eurodollar deposits in the amount chosen by Borrower and with an
original maturity of the period elected by Borrower (I.E., one, two or
three months), as quoted on the Reuter's London Interbank Offered
Rates page (LIBOR), adjusted for the cost of reserves, PLUS (ii) (y)
two and three-quarters percent (2.75%) during such time and for as
long as the aggregate outstanding unpaid balance of the Loans and the
other Obligations is less than Borrower's Three Month Average Monthly
Rental Contract Revenues for the immediately preceding three (3)
calendar months and (z) three percent (3.00%) during such time and for
as long as the aggregate outstanding unpaid balance of the Loans and
the other Obligations is greater than or equal to Borrower's Three
Month Average Monthly Rental Contract Revenues for the immediately
preceding three (3) calendar months and less than Borrower's Three
Month Average Monthly Rental Contract Revenues for the immediately
preceding three (3) calendar months multiplied by two (2). If
Reuter's ceases to quote current London Interbank Offered Rates, Bank
shall, in its sole discretion, select an alternative rate source.
In electing to utilize an alternative method of computing
interest on the Revolving Loan, Borrower shall provide Bank not less
than two (2) business days (by not later than 11:00 a.m. (Cincinnati,
Ohio time)) nor more than ten (10) business days prior written notice
of Borrower's election to fix the interest rate of all or part of the
Revolving Loan at the LIBOR Rate applicable for the period chosen
commencing on the starting date of the period chosen (which must be a
day other than a Saturday or Sunday on which banks are open for
business in Cincinnati, Ohio, and in addition, a day on which dealings
in Eurodollar deposits are carried on between banks in the London
interbank market), which written notice from Borrower to Bank shall be
in the form of EXHIBIT A attached hereto. Upon the expiration of the
elected period of a LIBOR Rate, unless Borrower has provided not less
than two (2) business days (by not later than 11:00 a.m. (Cincinnati,
Ohio time)) nor more than ten (10)
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 7
business days prior written notice to Bank of Borrower's election of
another LIBOR Rate period as provided hereunder, that part of the
Revolving Loan to which the expiring alternative method of computing
interest was applicable shall again bear interest at the Prime Rate
plus the then applicable interest rate factor as determined in
accordance with the formula set forth in the initial paragraph of this
PARAGRAPH 3.1.
Upon prepayment of all or part of the principal of the Revolving
Loan for which an alternative method of computing interest described
above has been elected and is in effect, Borrower covenants and agrees
to pay to Bank a fee (the "Breakfunding Fee"), which shall be equal to
the greatest of: (a) zero; (b) the sum of the breakage fees incurred
by Bank in connection with such prepayment; and (c) the "Net Present
Value Adjustment" (as hereinafter defined).
"Net Present Value Adjustment" means the amount, calculated on
the "Prepayment Date" (as hereinafter defined), which is derived by
subtracting: (i) the then-outstanding principal amount of the
Revolving Loan (or portion of the Revolving Loan) for which an
alternative method of computing interest described above has been
elected to be prepaid as of such Prepayment Date, from (ii) the "Net
Present Value" (as hereinafter defined) of the then-outstanding
principal amount of the Revolving Loan (or portion of the Revolving
Loan) to be prepaid on such Prepayment Date.
"Prepayment Date" means for any part of the Revolving Loan for
which an alternative method of computing interest described above has
been elected, that business day prior to expiration of the applicable
elected period of a LIBOR Rate that Bank receives from Borrower an
unscheduled principal payment amount.
"Net Present Value" means the amount, calculated by Bank, which
is derived by adding together the present values discounted to the
Prepayment Date of each prospective payment of principal and interest
which, without such full or partial prepayment, would otherwise have
been received by Bank over the remaining contractual life of the
Revolving Loan for which an alternative method of computing interest
described above has been elected for which a prepayment is being made.
The individual discount rate used to determine the present value of
each prospective payment of
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 8
principal and/or interest shall be the "Current Matched Maturity Rate"
(as hereinafter defined) for the maturity matching that of each
specific payment of principal and/or interest.
"Current Matched Maturity Rate" means that zero-coupon rate,
calculated by Bank, and determined solely by Bank, as the rate at
which Bank would be able to borrow funds in "Money Markets" (as
hereinafter defined) on the Prepayment Date for the prepayment amount
matching the maturity of a specific prospective "Loan Payment Date"
(as hereinafter defined). Such a rate shall include FDIC insurance,
reserve requirements and other explicit or implicit costs levied by
any regulatory agency. A separate Current Matched Maturity Rate will
be calculated for each prospective Loan Payment Date.
"Money Markets" means one or more wholesale funding markets
available to Bank including negotiable certificates of deposit,
eurodollar deposits, bank notes, fed funds or others.
"Loan Payment Date" means a date on which a prospective principal
and/or interest payment of the Revolving Loan for which an alternative
method of computing interest described above has been elected for
which a prepayment is being made is due and payable.
In calculating the amount of such Breakfunding Fee, Bank is
hereby authorized by Borrower to make such assumptions regarding the
source of funding, redeployment of funds and other related matters as
Bank may deem appropriate. If Borrower fails to pay any Breakfunding
Fee when due, the amount of such fee shall thereafter bear interest
until paid at a rate per annum equal to the Prime Rate in effect from
time to time plus three and one-quarter percent (3.25%) (computed on
the basis of a 360 day year, but applied to actual days elapsed).
If there is more than one prepayment, a Breakfunding Fee shall be
due and payable with respect to each such prepayment, and the
Breakfunding Fee shall be separately computed with respect to each
successive prepayment, taking into account any previous partial
prepayments of principal.
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 9
The amount of any Breakfunding Fee as computed by Bank shall be
binding and conclusive upon Borrower.
All of the Loans for which Borrower is obligated to pay a
Breakfunding Fee may only be prepaid subject to payment by Borrower of
a further out-of-pocket expense charge in an amount determined by Bank
in its reasonable discretion, with such charge to compensate Bank for
all out-of-pocket liabilities, obligations, costs, expenses, charges
and fees incurred by Bank in connection with such prepayment (the
"Out-of-Pocket Expenses"), and with such Breakfunding Fee and Out-of-
Pocket Expenses to be payable by Borrower to Bank, upon Bank's demand
therefor.
In the event of any change in reserve requirements and/or
assessment rates which are applicable to Bank in making any or all of
the Revolving Loan at a LIBOR Rate or any change in circumstances
affecting the interbank market, and the result of any such event is to
increase the cost to Bank in making the Revolving Loan, Borrower shall
promptly pay Bank the increased costs incurred by it in making the
Revolving Loan under this Agreement upon Bank's demand therefor
accompanied by a reasonably detailed statement as to such additional
costs (which statement shall be conclusive in the absence of manifest
error). If by reason of circumstances affecting the interbank market
adequate and reasonable means do not exist in the reasonable judgment
of Bank for ascertaining the LIBOR Rate at any time, Bank shall
forthwith give notice thereof to Borrower. Unless and until such
notice has been withdrawn by Bank, Borrower may not thereafter elect
to have any Revolving Loan bear interest at the LIBOR Rate. If any
law, rule, regulation, treaty, guideline, order or directive or any
change therein or in the interpretation or application thereof shall
make it unlawful for all or any part of the Revolving Loan to bear
interest at the LIBOR Rate, Bank shall notify Borrower thereof and no
Revolving Loan may thereafter bear interest at the LIBOR Rate. If
required by law, any Revolving Loan then bearing interest at the LIBOR
Rate shall cease to bear interest at the LIBOR Rate and shall bear
interest at the Prime Rate plus the then applicable interest rate
factor as determined in accordance with the formula set forth in the
initial paragraph of this PARAGRAPH 3.1.
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 10
Provided, however, that notwithstanding anything to the contrary
herein, to the extent the Loans or other Obligations accrue interest
at a higher rate under other documents relating to such Loans or other
Obligations (such as for any credit card facility made available by
Bank to Borrower), such higher interest rates shall apply.
(D) PARAGRAPH 3.3 of the Agreement is hereby amended so as to read in
its entirety as follows:
3.3 UNUSED FACILITY FEE. Borrower shall pay Bank an unused
facility fee equal to the rate of (i) one-half of one percent (0.50%)
per annum of the daily average of the unused portion of the Total
Facility whenever such unused portion is greater than or equal to Ten
Million Dollars ($10,000,000) in amount on any date and (ii) three-
eighths of one percent (0.375%) per annum of the daily average of the
unused portion of the Total Facility whenever such unused portion is
less than Ten Million Dollars ($10,000,000) in amount on any date.
Such unused facility fee shall be payable monthly in arrears,
commencing on September 1, 1996, and on the first day of each month
thereafter, and when the Loans are due (whether by reason of
acceleration or otherwise).
(E) PARAGRAPH 10.25 of the Agreement is hereby amended so as to read
in its entirety as follows:
10.25. ADDITIONAL STORES. Not, without Bank's prior written
consent (which may be granted or withheld in Bank's sole discretion)
or except as otherwise specifically permitted by this PARAGRAPH 10.25,
open or put into operation (whether by acquisition of existing stores
or outlets, opening new stores or outlets, or otherwise) more than
three (3) additional stores or outlets during any calendar year. In
the event that Borrower intends to acquire existing stores or outlets
(by means of an asset or stock acquisition or otherwise) or
independently to expand by opening new stores or outlets, Borrower may
do so without requiring Bank's prior written consent to such
acquisition and/or expansion as long as: (a) any such acquisition
and/or expansion does not result in Borrower's paying a purchase price
and/or incurring and/or assuming debts and/or liabilities aggregating
to in excess of the lesser of (i) Three Million Dollars ($3,000,000)
or (ii) in the case of existing store or outlets, nine and
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 11
one-half (9.50) multiplied by the average of the monthly amount of the
seller's or acquired entity's (as applicable) gross cash receipts
(including reinstatement, processing and insurance-related fees)
actually received by the seller or the acquired entity (as applicable)
solely from the lease or rental of inventory to the seller's or the
acquired entity's (as applicable) customers in the ordinary course of
business for the three (3) calendar months immediately preceding the
date of acquisition, but specifically excluding revenues from the sale
of inventory and all collected sales, use, excise and other similar
taxes; and (b) Bank maintains its first priority and exclusive
security interest on all of the Collateral (including, without
limitation, the assets and properties that Borrower plans to acquire
as a result of such proposed acquisition and/or expansion). Bank
shall in any event be permitted and given the opportunity (at
Borrower's expense) to conduct a legal audit and review (satisfactory
to Bank in its discretion) of the structure, mechanics, and the
documents and agreements relating to, and intended to effectuate, any
proposed acquisition and/or expansion by Borrower, and Bank shall
attempt to proportion the scope of its legal audit and review to the
type, size and complexity of the proposed transaction.
Notwithstanding anything to the contrary herein, in the event that
Borrower closes on any transaction in which it acquires existing
stores or outlets (by means of an asset or stock acquisition or
otherwise) or independently expands by opening new stores or outlets
of more than three (3) during any calendar year and Borrower has not
received Bank's written consent to all aspects of any such transaction
prior to the closing thereof, Bank shall have the right, in its sole
discretion, at any time after the closing of any such transaction to
terminate this Agreement by providing not less than one hundred and
fifty (150) days written notice thereof to Borrower.
(F) PARAGRAPH 11.2 of the Agreement is hereby amended so as to read
in its entirety as follows:
11.2. TERMINATION BY BANK. Bank may terminate this Agreement
immediately upon notice to Borrower at any time on or after February
1, 2000. Recourse to security will not be required at any time.
Borrower waives presentment and protest of any instrument and notice
thereof, notice of default and all other notices to which Borrower
might otherwise be entitled.
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 12
(G) PARAGRAPH 11.3 of the Agreement is hereby deleted and shall be of
no further force or effect, and in its place shall read:
11.3. INTENTIONALLY DELETED.
(H) PARAGRAPH 11.4 AND PARAGRAPH 11.5 of the Agreement are hereby
amended so as to read in their entirety as follows:
11.4. TERMINATION BY BORROWER. Borrower may terminate this
Agreement as of the last day of any month by giving Bank notice of the
date on which this Agreement is to terminate ("Voluntary Termination
Date"), which date must be the last day of a month, at least one
hundred and eighty (180) days before the Voluntary Termination Date.
If Borrower shall terminate this Agreement without providing notice in
accordance with the terms set forth in the preceding sentence, as
compensation to Bank for loss of bargain with respect to the credit
advanced hereunder, and not as a penalty, Borrower shall pay to Bank a
termination fee (the "Termination Fee") in the amount of Two Hundred
and Twenty-Five Thousand Dollars ($225,000).
11.5. ACCELERATION UPON TERMINATION. Upon the effective date
of termination, all of Borrower's Obligations to Bank shall become
immediately due and payable without notice or demand.
(I) PARAGRAPH 14.3 of the Agreement is hereby amended so as to read
in its entirety as follows:
14.3. ASSIGNMENT. Bank shall have the right to assign this
Agreement and/or to sell participations in some or all of its
interests in the credit facilities contemplated hereby and the
Obligations upon such terms, in and for such amounts, and to such
persons and entities as Bank, in its sole discretion, elects, without
in any event requiring any notice to and/or consent of Borrower.
Borrower may not assign, transfer or otherwise dispose of any of its
rights or obligations hereunder, by operation of law or otherwise, and
any such assignment, transfer or other disposition without Bank's
written consent shall be void. All of the rights, privileges,
remedies and options given to Bank hereunder shall inure to the
benefit of Bank's successors and assigns, and all the terms,
conditions, covenants, provisions and warranties herein shall inure to
the benefit of and bind the
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 13
representatives, successors and assigns of Borrower and Bank,
respectively.
(J) The terms "Obligations" and "Loans" as used in the Agreement and
in any other Loan Documents shall for all purposes be deemed to include any and
all financing made available to Borrower pursuant to the Agreement, as amended
by this Amendment, and all financing made available to Borrower pursuant to the
Agreement, as amended by this Amendment, shall be subject to all of the terms
and conditions of "Obligations" and "Loans" under the Agreement, including
without limitation, those concerned with the bearing, calculation and payment of
interest, security, default, rights and remedies upon default, and repayment.
(K) THE MAKING AND AMOUNT OF ANY LOANS OR OTHER EXTENSIONS OF CREDIT
UNDER THE AGREEMENT AS AMENDED HEREBY SHALL AT ALL TIMES BE IN BANK'S DISCRETION
AS DESCRIBED IN THE AGREEMENT, AND OUTSTANDING LOANS AND OTHER EXTENSIONS OF
CREDIT SHALL BE SUBJECT TO THE TERMS OF THE AGREEMENT, AS AMENDED HEREBY,
INCLUDING WITHOUT LIMITATION, THE TERMS THEREOF RELATING TO REPAYMENT.
2. EFFECTIVENESS.
(A) This Amendment shall be effective upon delivery to Bank of (i)
four originals of this Amendment duly executed by Borrower and (ii) a copy of
the resolutions of the Board of Directors of Borrower authorizing the execution
and delivery of this Amendment, which resolutions shall be in form and substance
satisfactory to Bank and its counsel and shall be certified by an officer of
Borrower as being true and complete and in full force and effect, together with
a certificate as to the individual authorized to sign this Amendment (with a
specimen signature included and certified to).
(B) The foregoing notwithstanding, this Amendment, at Bank's sole
option, shall cease to be effective and shall be null and void if Borrower has
failed within thirty (30) days of the date hereof to execute and deliver, or
cause to be executed and delivered, to Bank such documents and instruments as
Bank and its counsel may require in order to ensure that any financing extended
by Bank to Borrower pursuant to this Amendment will be fully secured by and
entitled to all of the benefits of all Collateral and other security for the
Obligations.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations,
warranties and covenants of Borrower set forth in the Agreement shall be deemed
restated as of the date hereof, and Borrower further represents and warrants
that:
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 14
(A) This Amendment has been duly executed and delivered by Borrower
and authorized by all requisite corporate action; and
(B) The execution and delivery by Borrower of this Amendment does
not constitute a violation of any applicable law or a breach of any provision
contained in Borrower's Articles of Incorporation or Bylaws or contained in any
order of any court or any other governmental agency or in any agreement,
instrument or document to which Borrower is a party or by which Borrower or any
of its assets or properties is bound.
4. EXPENSES. Without limiting the generality of PARAGRAPH 16.9 of the
Agreement, Borrower agrees to reimburse Bank for all out-of-pocket costs, fees,
expenses and liabilities, including without limitation, all Attorneys' Fees,
lien and title search fees, and recording and filing fees, incurred by Bank or
for which Bank becomes obligated in connection with or arising out of:
(A) This Amendment and any documents and instruments in any way
relating hereto;
(B) Any financing provided pursuant hereto; and/or
(C) Any transaction contemplated hereunder.
5. MISCELLANEOUS.
(A) As amended hereby, the Agreement shall remain in full force and
effect, and all references in the Agreement or other Loan Documents to the
Agreement shall mean the Agreement as amended hereby.
(B) Capitalized terms used but not defined herein shall have the
same meanings herein as in the Agreement.
(C) This Amendment may be executed in counterparts, each of which
shall be deemed to constitute an original document and all of which together
shall be deemed to constitute one instrument.
Please acknowledge the agreement of Borrower to the terms set forth in this
Amendment by having four copies of this Amendment duly executed on behalf of
Borrower in the appropriate places below and returning such documents to Bank at
its address set forth in PARAGRAPH 16.10 of the Agreement.
<PAGE>
ALRENCO, Inc.
August 9, 1996
Page 15
STAR BANK, NATIONAL ASSOCIATION
By: /s/ STEVEN L. FIELDS
-------------------------------------
Name: STEVEN L. FIELDS
-----------------------------------
Title: VICE PRESIDENT
----------------------------------
AGREED AND ACCEPTED
AS OF AUGUST 9, 1996:
ALRENCO, INC. ATTEST:
By: /s/ MICHAEL D. WALTS /s/ WILLIAM R. HAESELEY
----------------------- -----------------------------------
Name: Michael D. Walts Name: William R. Haeseley
Title: President Title: Secretary
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 2, 1996, accompanying the financial
statements of Alrenco, Inc.; our report dated April 29, 1996, accompanying the
financial statements of Easy TV & Appliance Rental Stores; and our report dated
September 29, 1995, accompanying the financial statements of The Television
Management Companies, contained in the Registration Statement and Prospectus. We
consent to the use of the aforementioned reports in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts" and "Selected Historical Financial and Operating Data".
GRANT THORNTON LLP
Dallas, Texas
August 28, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 28, 1994, accompanying the financial
statements of Alrenco, Inc. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the captions "Experts" and "Selected Historical Financial and Operating
Data".
WELENKEN HIMMELFARB & CO.
Louisville, Kentucky
August 28, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 19, 1996, accompanying the financial
statements of Network Rental, Inc. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts".
GRACE & ASSOCIATES, P.C.
Atlanta, Georgia
August 28, 1996
