<PAGE>
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 September 17, 1996, the last sale price of the Company's Common Stock
as reported by the Nasdaq National Market was $23.00 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......................... $21.50 $1.29 $20.21
Total (3)......................... $32,250,000 $1,935,000 $30,315,000
</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 $37,087,500, $2,225,250 and
$34,862,250, 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
September 23, 1996.
EQUITABLE SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
J. J. B. HILLIARD, W. L. LYONS, INC.
September 18, 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 5,071 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........... 4,592
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 57,854
Total debt............................................................ 9,252 15,219 --
Total liabilities..................................................... 13,963 20,461 5,242
Stockholders' equity.................................................. 22,597 22,597 52,612
</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 1,966,123 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
385,502 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 the offering price of $21.50 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 (after deducting estimated underwriting discounts
and commissions and the expenses of this Offering) are expected to be
approximately $30.0 million ($34.6 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 $13.5 million ($18.1 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 September 17, 1996)................................................. 23.75 16.75
</TABLE>
On September 17, 1996, the last reported sales price of the Common Stock on
the Nasdaq National Market was $23.00 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 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 47,774
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 52,612
--------- ----------- -----------
Total capitalization....................................................... $ 31,849 $ 37,816 $ 52,612
--------- ----------- -----------
--------- ----------- -----------
</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 5,071
</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 4,592
</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 1994. 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.
28
<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.
37
<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 (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.
38
<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.
40
<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 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, Equitable Securities Corporation, Wheat, First
Securities, Inc. and J. J. B. Hilliard, W. L. Lyons, Inc., 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........................................................... 637,500
Wheat, First Securities, Inc............................................................... 637,500
J. J. B. Hilliard, W. L. Lyons, Inc........................................................ 225,000
-----------
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 $.75 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 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 have engaged 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 Underwriters 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
Underwriters; 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.
42
<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. For 1996, supplementary earnings per common
share are equal to actual earnings per common share.
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 $ 14,796,342 $ 15,823,958
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 $ 14,796,342 $ 57,854,392
-------------- ------------- -------------- -------------- --------------- --------------
-------------- ------------- -------------- -------------- --------------- --------------
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 30,015,000 52,611,858
-------------- ------------- -------------- -------------- --------------- --------------
$ 36,559,875 $ 2,523,367 $ 3,974,808 $ 43,058,050 $ 14,796,342 $ 57,854,392
-------------- ------------- -------------- -------------- --------------- --------------
-------------- ------------- -------------- -------------- --------------- --------------
</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 5,071,123
----------- -----------
----------- -----------
</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....... 4,592,155
-----------
-----------
</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.
September 18, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
