<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27490
ALRENCO, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1480655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1736 East Main Street
New Albany, Indiana 47150
(812) 949-3370
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Aggregate market value of the 2,019,200 shares of Common Stock held by
non-affiliates of the registrant at the closing sales price on March 11, 1996:
$31,045,200.
Number of shares of Common Stock outstanding as of the close of business on
March 11, 1996: 4,424,200.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 1996 Annual
Meeting of Shareholders of Alrenco, Inc., are incorporated into Part III of this
report.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following amended financial statements of Alrenco, Inc. are filed
as a part of this Amendment.
Page
----
Report of Independent Certified Public Accountants F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets - December 31, 1995 and 1994 F-3
Statements of Earnings - Years ended December 31,
1995, 1994 and 1993 F-4
Statement of Stockholders' Equity - Years ended
December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-8
The foregoing financial statements, filed as a part of the Form 10-K dated
March 26, 1996, have been amended to correct certain errors on the balance sheet
as of December 31, 1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 23, 1996
ALRENCO, INC.
By: /s/ Theodore H. Wilson
-------------------------------------------
Theodore H. Wilson, Executive Vice President
and Chief Financial Officer
<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, 1995 and 1994, 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, 1995 and 1994, 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.
GRANT THORNTON LLP
Dallas Texas
February 2, 1996
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Alrenco, Inc.
We have audited the accompanying statements of earnings, stockholders'
equity, and cash flows 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-2
<PAGE>
Alrenco, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- ----------
<S> <C> <C>
Cash $ 27,041 $ 23,927
Rental merchandise, net
On rent 9,999,312 7,032,048
Held for rent 3,116,056 2,304,352
----------- ----------
13,115,368 9,336,400
Investments - 435,369
Prepaid expenses and other assets 1,480,759 778,695
Deferred income taxes 18,699 200,088
Property assets, net 1,402,409 1,256,984
Loan to stockholder 64,384 56,918
Intangible assets, net 4,868,590 592,208
----------- -----------
$20,977,250 $12,680,589
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade $ 1,763,272 $ 1,007,484
Accrued liabilities 1,542,621 1,062,352
Taxes other than income 330,530 170,452
Debt 12,865,239 7,201,208
----------- -----------
16,501,662 9,441,496
Stockholders' equity
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 issued and outstanding 1,500 1,500
Unrealized gains on investments,
net of taxes - 30,097
Retained earnings 4,474,088 3,207,496
----------- -----------
4,475,588 3,239,093
----------- -----------
$20,977,250 $12,680,589
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Alrenco, Inc.
STATEMENTS OF EARNINGS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenue
Rentals and fees $37,575,639 $27,800,152 $22,283,272
Operating expenses
Direct store expenses
Depreciation of rental
merchandise 9,099,579 7,482,614 5,888,777
Other 20,923,600 14,380,485 10,076,162
----------- ----------- -----------
30,023,179 21,863,099 15,964,939
General and administrative
expenses 4,338,583 3,677,674 3,650,029
Litigation settlement - - 625,000
Amortization of intangibles 284,901 97,134 30,625
---------- ---------- -----------
Total operating expenses 34,646,663 25,637,907 20,270,593
---------- ---------- -----------
Operating profit 2,928,976 2,162,245 2,012,679
Other expense (income)
Interest expense 894,003 461,130 281,178
Gain on sale of investments (99,930) - -
---------- ---------- -----------
794,073 461,130 281,178
---------- ---------- -----------
Earnings before income taxes 2,134,903 1,701,115 1,731,501
Income tax expense 868,311 739,287 721,561
---------- ---------- -----------
NET EARNINGS $1,266,592 $ 961,828 $ 1,009,940
---------- ---------- -----------
---------- ---------- -----------
Earnings per common share $ .41 $ .31 $ .33
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Alrenco, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Net
---------------- Retained unrealized
Shares Amount earnings gain Total
--------- -------- ---------- ---------- ----------
<S> <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 3,207,496 30,097 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
--------- ------ ---------- -------- ----------
--------- ------ ---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Alrenco, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 1,266,592 $ 961,828 $ 1,009,940
Adjustments to reconcile net earnings
to net cash provided by
operating activities
Depreciation of rental merchandise 9,099,579 7,482,614 5,888,777
Depreciation of property assets 373,502 271,775 138,620
Amortization of intangibles 284,901 97,134 914
Loss on sale of property assets 13,353 671 -
Deferred income taxes 202,672 263,060 (296,659)
Other - - (159,221)
Gain on sale of investments (99,930) - -
Changes in operating assets and liabilities,
net of effects of acquisitions
Rental merchandise (10,888,866) (9,108,973) (6,146,605)
Prepaid expenses and other (676,064) (401,881) 235,440
Accounts payable - trade 755,788 310,861 (176,941)
Accrued liabilities 480,269 (401,318) 658,095
Income taxes payable - (211,620) 165,711
Taxes other than income 160,078 52,755 (25,169)
------------ ----------- -----------
Net cash provided by (used in)
operating activities 971,874 (683,094) 1,292,902
</TABLE>
F-6
<PAGE>
Alrenco, Inc.
STATEMENTS OF CASH FLOWS - Continued
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from investing activities
Purchase of property assets (434,846) (426,129) (149,067)
Proceeds from sale of property assets 160,661 83,975 -
Purchases of investments (58,581) (78,108) (78,108)
Proceeds from sale of investments 542,501 - -
Acquisition of businesses (6,835,060) (3,500,000) -
Increase in loan to stockholder (7,466) (7,662) (7,842)
----------- ----------- -----------
Net cash used in investing
activities (6,632,791) (3,927,924) (235,017)
Cash flows from financing activities
Increase (decrease) in line of credit 5,664,031 4,613,559 (1,531,032)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH 3,114 2,541 (473,147)
Cash at beginning of year 23,927 21,386 494,533
----------- ----------- -----------
Cash at end of year $ 27,041 $ 23,927 $ 21,386
----------- ----------- -----------
----------- ----------- -----------
Supplemental cash flow information
Cash paid during the year for
Interest $ 818,330 $ 394,037 $ 294,360
Income taxes $ 623,903 $ 814,999 $ 860,408
</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:
NATURE OF OPERATIONS
The Company leases household durable goods to customers under rental-purchase
agreements. At December 31, 1995, the Company operated 69 stores in 12
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 is 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.
F-8
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
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.
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's 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.
F-9
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
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. Weighted average shares are
3,105,000 for all periods presented. 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, accounts payable
and debt whose carrying value approximates fair value at December 31,
1995 and 1994.
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 acquisition was accounted for as a
purchase and, accordingly, the operating results of the acquired stores
have been included in the operating results of the Company since June 30,
1994.
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 acquisition was
accounted for as a purchase and, accordingly, the operating results of
the acquired stores have been included in the operating results of the
Company since August 31, 1995.
The following summary, prepared on a pro forma basis, combines the
results of operations as if the Magic stores and the TVM stores had been
acquired at the beginning of each of the following years, after
including the effect of adjustments for amortization of intangibles,
depreciation, compensation and interest expense on the acquisition debt.
F-10
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS - Continued
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Revenue $43,429,802 $39,931,409
Net earnings $ 1,249,179 $ 409,799
Earnings per common share $ .40 $ .13
</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
at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ON RENT
Cost $17,644,780 $13,033,453
Less accumulated depreciation 7,645,468 6,001,405
----------- -----------
$ 9,999,312 $ 7,032,048
----------- -----------
----------- -----------
HELD FOR RENT
Cost $ 4,405,998 $ 4,196,551
Less accumulated depreciation 1,289,942 1,892,199
----------- -----------
$ 3,116,056 $ 2,304,352
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE D - PROPERTY ASSETS
Property assets consist of the following at December 31:
<TABLE>
<CAPTION>
Depreciation
period 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Furniture and equipment 5 years $1,431,278 $1,173,936
Delivery vehicles 3 years 256,404 400,500
Leasehold improvements 3-10 years 1,178,699 862,377
---------- ----------
2,866,381 2,436,813
Less accumulated depreciation 1,463,972 1,179,829
---------- ----------
$1,402,409 $1,256,984
---------- ----------
---------- ----------
</TABLE>
NOTE E - INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
Amortization
period 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Customer rental agreements 15 months $ 430,000 $ 180,000
Noncompete agreements 10 years 913,675 25,000
Goodwill 20 years 3,918,265 488,785
---------- ---------
5,261,940 693,785
Less accumulated amortization 393,350 101,577
---------- ---------
$4,868,590 $ 592,208
---------- ---------
---------- ---------
</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 stated term of the
customer contract, 15 months. The noncompete agreements are amortized on
the straight-line method over the life of the respective agreement.
Goodwill is amortized by the straight-line method over 20 years. The
Company reviews goodwill periodically to assess recoverability.
Impairment is recognized in operating results when expected future
undiscounted operating cash flows of the acquired businesses are less
than the carrying value of the related goodwill.
F-12
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 Estimated
unrealized unrealized fair
Cost gains losses 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.
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 11.3% and 10.4% for the years ended December 31, 1995
and 1994, respectively.
The loan agreement contains restrictive covenants which include, among
others, earnings and tangible net worth requirements; limitations on
liabilities and capital expenditures; and ratios concerning interest
expense coverage and rental merchandise, and restrictions on the payment
of dividends.
F-13
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - DEBT - Continued
The following are scheduled maturities of debt at December 31, 1995:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 1,990,23
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 $94,800, $85,796
and $81,905, respectively, for each of the three years in the period
ended December 31, 1995.
NOTE I - INCOME TAXES
The income tax provision was comprised of the following components:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $514,672 $334,320 $ 823,910
State 150,967 141,907 194,310
-------- -------- ----------
665,639 476,227 1,018,220
Deferred
Federal 171,809 215,920 (244,217)
State 30,863 47,140 (52,442)
-------- -------- ----------
202,672 263,060 (296,659)
-------- -------- ----------
Total $868,311 $739,287 $ 721,561
-------- -------- ----------
-------- -------- ----------
</TABLE>
F-14
<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>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 5.6 7.3 5.4
Other 1.1 2.2 2.3
---- ---- ----
Total 40.7% 43.5% 41.7%
---- ---- ----
---- ---- ----
</TABLE>
Deferred tax assets and liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 88,309 $ 229,954
Rental merchandise 40,460 187,141
Accumulated depreciation 51,256 32,023
Deferred loan fees - 9,925
Other - 5,219
--------- ---------
180,025 464,262
Deferred tax liabilities
Intangible assets (154,137) (235,435)
Investments - (21,283)
Other (7,189) (7,456)
--------- ---------
(161,326) (264,174)
--------- ---------
--------- ---------
Net deferred asset $ 18,699 $ 200,088
--------- ---------
</TABLE>
NOTE J - ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expense was
$2,900,755, $2,064,430 and $1,844,185, respectively, for each of the
three years in the period ended December 31, 1995.
F-15
<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 $1,905,909,
$1,326,186 and $965,480, respectively, for each of the three years in the
period ended December 31, 1995. 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>
<CAPTION>
Year ending December 31,
<S> <C>
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
settlement was paid in 1994.
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 no additional provision will be required for any liability
that may arise from prior periods and the revenue ruling will not have a
material effect on the financial condition or results of operations of
the Company.
NOTE L - EMPLOYEE BENEFIT PLANS
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
$119,603, $75,658 and $137,438, respectively, for each of the three years
in the period ended December 31, 1995.
F-16
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE L - EMPLOYEE BENEFIT PLANS - Continued
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. SARs 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
101,247 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.
NOTE M - INITIAL PUBLIC OFFERING
In January 1996, the Company completed a public offering of 1,800,000
shares of common stock at $14 per share. The net proceeds to the Company
relating to 1,100,000 shares (700,000 were sold by a shareholder) after
underwriting commissions and expenses were approximately $13.3 million
and were used to retire debt of approximately $12.9 million.
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
the year ended December 31, 1995.
F-17
<PAGE>
Alrenco, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE N - UNAUDITED QUARTERLY DATA
Smmarized 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-18
