<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR IF CHANGED SINCE LAST REPORT)
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
--- ---
THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, AS OF THE CLOSE
OF BUSINESS NOVEMBER 8, 1996: 6,074,100.
<PAGE>
ALRENCO, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1996
AND DECEMBER 31, 1995. 3
CONDENSED STATEMENTS OF EARNINGS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995. 4
CONDENSED STATEMENTS OF EARNINGS FOR
THE QUARTER ENDED SEPTEMBER 30, 1996 AND 1995. 5
CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995. 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
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ALRENCO, INC.
Balance sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 11,318,549 $ 27,041
Rental Merchandise, net 24,947,649 13,115,368
Prepaid expenses and other assets 1,807,636 1,480,759
Deferred income taxes 504,623 18,699
Property assets, net 3,835,698 1,402,409
Loan to stockholder 71,636 64,384
Intangible assets, net 18,907,957 4,868,590
------------- ------------
$ 61,393,748 $ 20,977,250
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable - trade $ 4,910,147 $ 1,763,272
Accrued liabilities 1,888,736 1,542,621
Taxes other than income 542,309 330,530
Debt - 12,865,239
------------- ------------
7,341,192 16,501,660
Stockholders' equity
Preferred stock, no par; 1,000,000 shares
authorized; none issued or outstanding - -
Common stock, no par; 20,000,000 shares
authorized, 5,924,200 shares issued and
outstanding at September 30, 1996 and
3,000,000 shares issued and outstanding at
December 31, 1995 48,059,514 1,500
Unamortized value of stock award (1,230,720) -
Retained Earnings 7,223,762 4,474,088
------------- ------------
54,052,556 4,475,588
$ 61,393,748 $ 20,977,250
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Statements Of Earnings
For the Nine Months Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30,
--------------------------------
1996 1995
------------ ------------
REVENUE
<S> <C> <C>
Rentals and fees $ 43,287,272 $ 25,597,109
Sales 828,501 468,832
Other 55,804 90,970
------------ ------------
Total Revenue $ 44,171,577 $ 26,156,911
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 9,611,828 6,581,199
Cost of sales 533,109 245,234
Salaries and other expenses 24,237,551 14,247,608
------------ ------------
34,382,488 13,432,393
General and administrative expenses 3,903,214 2,981,267
Amortization of intangibles 613,341 166,278
------------ ------------
Total operating expenses 38,899,043 24,221,586
------------ ------------
Operating profit 5,272,534 1,935,325
Interest expense 609,086 560,231
------------ ------------
Earnings before income taxes 4,663,448 1,375,094
Income tax expense 1,913,774 603,677
------------ ------------
NET EARNINGS $ 2,749,674 $ 771,417
------------ ------------
------------ ------------
Weighted average shares outstanding 4,365,814 3,105,000
Earnings per common share $ 0.63 $ 0.25
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Statements Of Earnings
For the Quarter Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30,
---------------------------------
1996 1995
------------- ------------
REVENUE
<S> <C> <C>
Rentals and fees $ 16,851,084 $ 9,114,719
Sales 296,543 152,202
Other 19,974 55,840
------------- ------------
Total Revenue 17,167,601 9,322,761
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 3,675,570 2,233,265
Cost of sales 196,967 38,210
Salaries and other expenses 9,412,684 5,370,173
------------- ------------
13,285,221 7,641,648
General and administrative expenses 1,455,664 987,938
Amortization of intangibles 226,273 69,558
------------- ------------
Total operating expenses 14,967,158 8,699,144
------------- ------------
Operating profit 2,200,443 623,617
Interest expense 324,316 199,078
------------- ------------
Earnings before income taxes 1,876,127 424,539
Income tax expense 769,228 156,496
------------- ------------
NET EARNINGS $ 1,106,899 $ 268,043
------------- ------------
------------- ------------
Weighted average shares outstanding 4,672,147 3,105,000
Earnings per common share $ 0.24 $ 0.09
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Statements of Cash Flows
For the Nine Months Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30,
---------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 2,749,674 $ 771,417
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation of rental merchandise 9,611,828 6,581,199
Depreciation of property assets 524,273 278,128
Amortization of intangibles 613,341 166,278
Other 107,006 80,345
Other changes in operating assets and liabilities
net of effects of acquisitions
Rental merchandise (15,327,389) (6,671,897)
Prepaid expenses and other (1,244,527) 293,076
Accounts payable-trade 3,317,100 1,132,747
Accrued liabilities (1,215,636) 644,722
Income taxes payable 453,905 -
Taxes other than income 25,688 34,401
------------- -----------
Net cash provided by (used in)
operating activities (384,737) 3,310,416
Cash flows from investing activities
Purchases of property assets (1,314,036) (230,470)
Proceeds from sale of property assets - 160,661
Purchases of investments - (58,581)
Increase in loan to shareholder (7,252) (7,466)
Acquisition of businesses (22,195,241) (6,420,513)
------------- -----------
Net cash used in
investing activities (23,516,529) (6,556,369)
Cash flows from financing activities
Proceeds from public offerings - net 48,058,013 -
Increase (Decrease) in line of credit (12,865,239) 3,816,111
------------- -----------
Net cash provided by
financing activities 35,192,774 3,816,111
NET INCREASE IN CASH AND
CASH EQUIVALENTS 11,291,508 570,158
Cash and cash equivalents at beginning of year 27,041 516,443
------------- -----------
Cash and cash equivalents at end of period $ 11,318,549 $ 1,086,601
------------- -----------
------------- -----------
Supplemental cash flow information
Cash paid during the period for
Interest $ 620,734 $ 526,220
Income taxes $ 1,774,164 $ 267,598
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Notes to Condensed Financial Statements
1. BASIS OF PRESENTATION. In the opinion of the Company, the accompanying
unaudited condensed financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of the Company as of September 30, 1996, the results of operations for
the three and nine month periods ended September 30, 1996 and 1995, and the
statements of cash flows for the nine month periods ended September 30, 1996 and
1995. The results of operations for the nine months ended September 30, 1996
are not necessarily indicative of the operating results for the full year.
2. DEBT AGREEMENTS. On February 29, 1996, the Company entered into a formal
agreement with a bank for a $16,150,000 line of credit facility. This
agreement replaces a similar, smaller facility with the same bank . On August
9, 1996 the Company entered into an agreement to amend the February 29, 1996
document. The amendment provides a maximum debt level of $25,000,000 and
carries a three-year term with interest rates ranging from prime rate to prime
plus 1-1/4% depending upon level of indebtedness. Under the terms of the
agreement, the Company is required to pay from 3/8 to 1/2 of 1% per annum on
the unused portion of the facility. As of September 30, 1996 the Company had no
outstanding loans under the agreement.
3. ACQUISITION ACTIVITY. The Company purchased 14 rental-purchase stores from
a company doing business as Easy Rentals on March 1, 1996 for cash of
approximately $6.5 million. On August 1, 1996, the Company acquired 14 stores
from a company doing business as Network Rentals for cash of approximately $5.6
million. During the three month period ended September 30, 1996, the Company
also acquired 14 rental-purchase stores in five unrelated transactions for an
aggregate purchase price of $4.6 million for cash of approximately $4.6
million. All of the acquisitions have been accounted for as purchases and
accordingly the operating results of the acquired stores have been included in
the operating results of the Company since their acquisition dates. On August
31,1995, the Company purchased 15 rental-purchase stores for $5.95 million which
was accounted for as a purchase. The operating results of these acquired stores
are 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 stores had been acquired at the beginning of each of the
periods presented after including the effect of adjustments for amortization of
intangibles and interest expense on acquisition debt.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
09/30/96 09/30/95 09/30/96 09/30/95
<S> <C> <C> <C> <C>
Revenue $ 56,974,834 $ 55,779,918 $ 21,169,566 $ 17,048,037
Net Earnings $ 2,741,962 $ 925,627 $ 1,009,935 $ 289,658
Earnings per common share $ .63 $ .30 $ .22 $ .09
</TABLE>
4. STOCK BASED COMPENSATION. Statement of Financial Accounting Standard No.
123 (SFAS 123) "Accounting for Stock-Based Compensation", is effective for 1996.
As permitted by SFAS 123, the Company has elected to continue to account for
stock-based compensation under pre-existing accounting standards and will
provide the required pro forma disclosures prescribed by SFAS 123 when complete
financial statements are presented for 1996.
5. PUBLIC STOCK OFFERINGS. On January 23, 1996, the Company completed an
initial public offering of its stock. In conjunction with this offering the
Company awarded 105,000 shares of restricted stock to two key employees. At the
date of grant, the fair value of such shares was $1,470,000. Compensation will
be charged to earnings over the seven year vesting period. Additionally,
101,247 stock options were issued to directors and employees under a stock
option plan. On September 18, 1996, the Company completed a secondary offering
of 1,500,000 shares of its stock.
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<PAGE>
ALRENCO, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
In the quarter ended September 30, 1996, the Company acquired 28 rental-purchase
stores in 6 separate transactions. The financial results for the quarter since
the date of each acquisition includes additional revenue of $1.5 million and
additional operating profit of $712,000.
RESULTS OF OPERATIONS
REVENUE. Revenue increased $7.9 million or 84.1% to $17.2 million for the
quarter ended September 30, 1996 from $9.3 million in the comparable quarter in
1995. Revenue growth from same store operations accounted for $261,900, or 3.3%
of the increase for the quarter, and revenue growth from stores acquired
subsequent to June 30, 1995 accounted for $7.5 million or 96.7% of the increase.
For the nine months ended September 30, 1996, revenue increased $18.0 million,
or 68.9% to $44.2 million from $26.2 million for the 1995 comparable period.
Revenue growth from same store operations for the nine month period ended
September 30, 1996 accounted for $1.3 million, or 7.1% of the increase for the
period, and revenue from acquired stores accounted for $16.7 million or 92.9% 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 $1.4 million or 64.6% to $3.7 million for the quarter ended September
30, 1996 from $2.2 million in the comparable quarter in 1995. As a percentage
of revenue, depreciation of rental merchandise decreased to 21.4% for the three
months ended September 30, 1996 from 24.0% for the comparable period in 1995.
For the nine months ended September 30, 1996, depreciation of rental merchandise
increased $3.0 million, or 46.0% , to $9.6 million from $6.6 million 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.
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased $4.2
million or 77.7% to $9.6 million for the quarter ended September 30, 1996 from
$5.4 million for the same period in 1995. For the nine months ended September
30, 1996, other direct store expenses increased $10.3 million or 70.9% to $24.8
million from $14.5 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 $467,700 or 47.3% to $1.5 million for the quarter ended September 30,
1996 from $1.0 million in the comparable quarter in 1995. For the nine months
ended September 30, 1996, general and administrative expenses increased
$922,000, or 30.9%, to $3.9 million from $3.0 million for the comparable period
in 1995. As a percentage of revenue, general and administrative expenses
decreased to 8.8% for the nine months ended September 30, 1996 from 11.4% 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
$156,700 or 225.3% to $226,300 for the quarter ended September 30, 1996 from
$69,600 for the 1995 comparable period. For the nine months ended September 30,
1996, amortization of intangibles increased $447,100 or 268.9% to $613,400 from
$166,300 for the 1995 comparable period primarily as a result of intangible
assets created by the 1995 and 1996 acquisitions.
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<PAGE>
INTEREST EXPENSE. Interest expense increased $125,200 or 62.9% to $324,300
for the quarter from $199,100 for the comparable quarter in 1995. For the nine
months ended September 30, 1996, interest expense increased $48,900 or 8.7% to
$609,100 from $560,200 for the comparable period in 1995. The increases are
attributable to interest expense on additional borrowings during the first nine
months of 1996, partially offset by the repayment of debt in connection with the
initial public offering in January 1996.
NET EARNINGS. Net earnings increased $838,800 or 313.0% to $1.1 million
for the quarter from $268,000 for the comparable quarter in 1995. For the nine
months ended September 30, 1996, net earnings increased $2.0 million or 256.4%
to $2.7 million from $771,400 for the 1995 comparable period. As a percentage
of revenue, net earnings increased to 6.4% for the quarter ended September 30,
1996 from 2.9% for the comparable period in 1995. For the nine months ended
September 30, 1996, net earnings as a percentage of revenue increased to 6.2%
from 2.9% 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.
LIQUIDITY AND CAPITAL RESOURCES
On January 23, 1996, the Company completed an initial public offering of
stock. In this transaction, 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 offering 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. On September 18, 1996 the
Company completed a secondary offering of stock. In this transaction, 1,500,000
shares were offered by the Company at the price of $21.50 per share. Net
proceeds to the Company were $30.3 million. On October 18, 1996, the
underwriters of the offering exercised part of their over-allotment option for
149,300 shares. Net proceeds to the Company from this transaction amounted to
$3.0 million. A portion of the net proceeds was used to repay all outstanding
indebtedness under the loan agreement.
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 nine months ended September 30, 1996 and 1995, the Company purchased
rental merchandise for aggregate amounts of approximately $15.3 million and $6.7
million respectively. In addition, during the nine months ended September 30,
1996, the Company has acquired 66 stores for an aggregate purchase price of
$22.2 million including cash of $21.1 million and amounts held in escrow of $1.1
million.
On February 29, 1996, the Company entered into a formal agreement with a bank
for a $16.2 million line of credit facility. This agreement replaces a similar,
smaller facility with the same bank . On August 9, 1996 the Company entered
into an agreement to amend the February 29, 1996 document. The amendment
provides a maximum debt level of $25.0 million and carries a three-year term
with interest rates ranging from prime rate to prime plus 1-1/4% depending upon
level of indebtedness. Under the terms of the agreement, the Company is
required to pay from 3/8 to 1/2 of 1% per annum on the unused portion of the
facility. As of September 30, 1996 the Company had no outstanding loans under
the agreement. Management believes that the remaining proceeds of the secondary
offering, together with internally generated working capital and borrowings
under the Loan Agreement (as amended), will be adequate to fund operations and
expansion plans for the Company at least through 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No.123 (SFAS 123) "Accounting
for Stock-Based Compensation", is effective for 1996. As permitted by SFAS 123,
the Company has elected to continue to account for stock-based compensation
under pre-existing accounting standards and will provide the required pro forma
disclosures prescribed by SFAS 123 when complete financial statements are
presented for 1996.
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<PAGE>
ALRENCO, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27 - Financial Data Schedule
(b) On August 26, 1996, the Registrant filed a report on Form 8-K to
disclose the acquisition, effective as of August 1, 1996, of 14 rental-
purchase stores doing business under the name of "Network Rentals".
On August 28, 1996 the Registrant filed a report on Form 8-K/A to provide
additional information on the same transaction.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 13, 1996
ALRENCO, INC.
-------------
(Registrant)
/s/ Theodore H. Wilson
------------------------------------------------
Theodore H. Wilson, Executive Vice President and
Chief Financial Officer
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