<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 3,597,870 shares of Common Stock held by
non-affiliates of the registrant at the closing sales price on March 10, 1997:
$39,576,570.
Number of shares of Common Stock outstanding as of the close of business on
March 10, 1997: 6,076,892.
----------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 1997 Annual
Meeting of Shareholders of Alrenco, Inc., are incorporated into Part III of
this report.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters.......................................................... 12
Item 6. Selected Financial Data........................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13
Item 8. Financial Statements and Supplementary Data....................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant............... 21
Item 11. Executive Compensation........................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management... 21
Item 13. Certain Relationships and Related Transactions................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 21
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a growing operator of rental-purchase stores that
currently has 167 stores in 20 states primarily in the midwestern and southern
United States. The Company's stores offer quality, brand-name consumer
merchandise principally consisting of consumer electronics, appliances,
furniture, jewelry and home furnishing accessories. Merchandise is made
available to individuals under flexible rental-purchase agreements that allow
the customer to use the merchandise immediately and obtain ownership of the
merchandise at the conclusion of the rental period.
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 training.
Management's active leadership role in APRO, the industry trade
association and its experience in the rental-purchase industry are two of the
Company's strengths and competitive advantages. Raymond C. Holladay, the
Company's Executive Vice President and Chief Operating Officer, organized APRO
in1980 and has served as its president and as a director. Theodore H. Wilson,
the Company's Executive Vice President and Chief Financial Officer, has
previously served as president, treasurer and director of APRO. Messrs.
Holladay and Wilson are both regular contributors to the industry trade magazine
and are frequent participants in 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.
RENTAL-PURCHASE INDUSTRY
Based on APRO estimates, in 1995, the rental-purchase industry had
gross revenues of $4.0 billion and rented 5.5 million products to 2.8 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. Management believes that only a small percentage of the
potential rental-purchase market is currently being served.
The rental-purchase industry is highly fragmented. According to
industry estimates, the ten largest companies in the industry own 41.4% of the
total stores. Management believes, based on APRO information, that the majority
of dealers operate 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
business. Larger operators enjoy greater purchasing power that enables 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.
3
<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. 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. 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 against other large
multi-store competitors by focusing on store-level operations and leveraging
employees' knowledge of local markets.
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 over 50% 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 one account manager to each
customer. The account manager who delivers the customer's products will also
make service calls and inquire 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.
PROVIDE BRAND-NAME MERCHANDISE ON COMPETITIVE TERMS. The Company
seeks to supply its customers with quality, nationally advertised 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.
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. 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.
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.
4
<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. Management is committed to providing its employees with formal,
supervised training. The Company has established 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 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 maintaining
their local market presence.
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,
and higher inventory yield. Through the implementation of these strategies,
revenue from the stores acquired in the 1994 and 1995 acquisitions increased
approximately 30.0% and 10.0% respectively since the dates of acquisition. 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 introduction of broader 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 1992 through 1996 by 3.1%,
8.0%, 4.3%, 3.2% and 4.7%, respectively. In certain established market areas,
the Company may open new stores where viable acquisition opportunities are not
available.
MERCHANDISING
Each of the Company's stores offers an assortment of quality,
brand-name merchandise, including consumer electronics, appliances, furniture,
jewelry and home furnishing 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 neon 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.
5
<PAGE>
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 December 31, 1996, consumer electronics accounted for 37.0%; appliances
accounted for 26.0%; furniture accounted for 22.0%; and jewelry and home
furnishing accessories accounted for 16.0%. 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 February 28, 1997, the Company's average rental
rate was $13.16 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 $44.95.
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 FURNISHING 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. The typical jewelry customer presently makes timely
payments at the store on other products. 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 furnishing 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.
STORE OPERATIONS
The Company currently operates 167stores in 20 states. The following
table sets forth the number of store locations in each state in which the
Company presently operates.
Number of Number of
State Stores State Stores
------ ------- ------ -------
Alabama 11 Maryland 2
Arizona 3 Mississippi 6
Arkansas 19 Missouri 4
Florida 21 North Carolina 1
Georgia 15 Ohio 16
Indiana 9 South Carolina 1
Illinois 6 Tennessee 5
Kansas 1 Texas 7
Kentucky 16 Virginia 11
Louisiana 7 West Virginia 6
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.
6
<PAGE>
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.
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 167 stores are presently organized into three
divisions. A Division Vice President directs up to eight regional managers who
are responsible for five to seven stores each. Division Vice Presidents 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,
three account managers and a showroom sales assistant. 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 personnel evaluate the performance
of each store utilizing on-site reviews and daily operations summaries. The
Company has significantly expanded its corporate office resources during 1994,
1995 and 1996 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 operational
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 one week 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.
7
<PAGE>
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, 1996. 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 1995.
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 manager will arrange
for reinstatement of the agreement or the return of the merchandise to the
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 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 maximizing 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 canceled at any
time. Approximately 75% of all agreements provide for weekly 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."
8
<PAGE>
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.
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. During the 12-month period ended December 31, 1996, the average
duration of the Company's rental-purchase agreements was approximately six
months. On February 28, 1997, the Company's stores were assigned an average of
1,082 items of merchandise per store, of which approximately 809 items were on
rental-purchase agreements and approximately 273 items were in service or
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 no greater than 25% of total
inventory. Adjusted for seasonal fluctuations, the Company is currently
maintaining merchandise held for rent at the targeted level. 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 16.8% and 16.5%, respectively, of
all merchandise purchased for Company stores in 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 over 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.
9
<PAGE>
For the years ended December 31, 1996 and 1995, total advertising
expense was approximately 5.9% and 7.7%, respectively, of revenue. The decrease
in advertising expense as a percentage of revenue in 1996 is attributable to a
leveraging of expenditures for the stores acquired in the 1996. Management
expects advertising expense as a percentage of revenue to continue to decline as
these stores mature and as the Company acquires or opens additional stores in
existing markets.
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, at March 1997, the 10 largest rental-purchase chains
accounted for 41.5% of the approximately 7,500 rental-purchase stores in the
United States.
RENTAL-PURCHASE INDUSTRY COMPETITORS
Company (1) Ownership Number of Percentage of
----------- --------- Stores (2) U.S. Stores
---------- ------------
Rent-A-Center Private (3) 1,420 18.9%
Renters Choice, Inc. (4) Public 667 8.9
Rent-Way Public 193 2.6
Aaron's Rental Purchase (4) Public 190 2.5
Central Rents Private 174 2.3
Alrenco Public 167 2.2
Action TV & Appliance Rental Private 128 1.7
Champion Rent to Own Private 127 1.7
Bestway Rental, Inc. Public 60 0.8
Rainbow Rentals Private 60 0.8
----- ----
Totals 3,113 41.5%
(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 and other publicly-available 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
10
<PAGE>
those three states. All 20 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.
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 has 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
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 February 22, 1997, the Company employed 845 people, 55 of whom
are assigned to the Company's corporate office and 790 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 and group
life and health insurance plans. Management believes that relationships between
the Company and its employees are good.
ITEM 2. 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 Relationships and Related
Transactions."
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the NASDAQ National
Market under the symbol RNCO since January 23, 1996, the date of the
commencement of the initial public offering of the Common Stock. Prior to that
time there was no established public trading market for the 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.
FISCAL YEAR 1996 HIGH LOW
---- ---
First Quarter (from January 23, 1996) $ 15.88 $ 13.75
Second Quarter 19.75 14.25
Third Quarter 23.75 16.75
Fourth Quarter 22.25 9.88
As of March 15, 1997, there were 53 holders of record of the Company's
Common Stock; however, the Company believes the number of beneficial owners is
substantially greater.
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.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the three years ended
December 31, 1996 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, 1993 and 1992 was
derived from the Company's financial statements audited by Welenken Himmelfarb &
Co., independent certified public accountants. The selected financial data
should be read in conjunction with the financial statements and related notes
thereto included elsewhere in this report and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31 (1)
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue
Rentals and fees...................... $ 63,856 $ 37,576 $ 27,800 $ 22,283 $ 20,424
Operating Expenses
Direct store expenses
Depreciation of rental merchandise.. 13,964 9,099 7,483 5,889 5,620
Other expenses...................... 36,476 20,924 14,380 10,076 10,220
-------- -------- -------- -------- --------
50,440 30,023 21,863 15,965 15,840
General and administrative expenses... 5,589 4,338 3,678 3,650 2,741
Litigation settlement................. - - - 625 -
Amortization of intangibles........... 1,141 285 97 30 4
-------- -------- -------- -------- --------
Total operating expenses............ 57,170 34,646 25,638 20,270 18,585
-------- -------- -------- -------- --------
Operating profit.................... 6,686 2,929 2,162 2,013 1,839
Table continued next page
12
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other expense (income)
Interest expense...................... 652 894 461 281 434
Interest income....................... (134) - - - -
Gain on sale of investments........... - (100) - - -
-------- -------- -------- -------- --------
518 794 461 281 434
-------- -------- -------- -------- --------
Earnings before income taxes........ 6,168 2,135 1,701 1,732 1,405
Income tax expense...................... 2,505 868 739 722 497
-------- -------- -------- -------- --------
NET EARNINGS........................ $ 3,663 $ 1,267 $ 962 $ 1,010 $ 908
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common share............... $ 0.77 $ 0.41 $ 0.31 $ 0.33 $ 0.29
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average shares outstanding..... 4,787 3,105 3,105 3,105 3,105
OPERATING DATA:
Stores open at end of period............ 130 69 53 34 35
Comparable store revenue growth(2)...... 4.7% 3.2% 4.3% 8.0% 3.1%
</TABLE>
<TABLE>
<CAPTION>
As of December 31
-----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental merchandise, net................. $ 27,933 $ 13,115 $ 9,336 $ 5,675 $ 5,417
Intangible assets, net.................. 20,323 4,869 592 12 13
Total assets............................ 62,196 21,007 13,173 7,666 7,088
Total debt.............................. - 12,865 7,694 2,929 4,137
Total liabilities....................... 4,532 16,531 9,934 5,419 5,851
Stockholders' equity.................... 57,663 4,476 3,239 2,247 1,237
</TABLE>
(1) Financial results for 1996, 1995, and 1994 include the operations of
entities acquired from the date of acquisition. In addition, effective
January 1, 1995, the Company changed its method of depreciating rental
merchandise to the income forecasting method. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes A and B of Notes to Financial Statements of the Company.
(2) 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
acquired stores which, as of December 31, 1996, had not been operated by
the Company for two full twelve month periods.
ITEM 7. 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 Item 6, "Selected Financial Data," and the
financial statements of the Company and the accompanying notes thereto included
elsewhere in this report.
13
<PAGE>
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.
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 Company's bank 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.
In September 1995, the Company acquired 15 stores located in five
states (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 March , 1996 the Company acquired 14 stores located in four states.
The purchase price for the stores was $6.5 million, of which $3.8 million came
from the Company's cash and $2.7 million was borrowed under the Loan Agreement.
At the time of acquisition, the stores were generating approximately $850,000 in
aggregate average monthly revenues or approximately $60,000 per store,
approximately the same level as the Company's core stores.
In August , 1996 the Company acquired 15 stores located in one state.
The purchase price for the stores was $5.9 million, all of which was borrowed
under the Loan Agreement. At the time of acquisition, the stores were
generating approximately $595,000 in aggregate average monthly revenues or
approximately $40,000 per store.
In addition, in 1996, the Company acquired 47 stores in 21 separate
transactions for an aggregate purchase price of $12.9 million. At the times
of acquisition, these stores were generating approximately $1.4 million in
aggregate average monthly revenues or approximately $31,000 per store. Of the
aggregate purchase price, $476,000 was allocated to the value of rental
contracts and $7.2 million was allocated to other intangible assets. These
stores are positioned in, or are contiguous to, a number of the Company's
existing market areas.
In January, 1997 the Company acquired 28 stores located in four
states. The purchase price for the stores was $11.9 million, of which $6.2
million came from the Company's cash and $5.7 million was borrowed under the
Loan Agreement. At the time of acquisition, the stores were generating
approximately $994,000 in aggregate average monthly revenues or approximately
$36,000 per store. Of the purchase price, $311,000 was allocated to the value
of rental contracts, and $7.4 million was allocated to other intangible assets.
Management believes that, although many of these stores are operating
at revenue levels below that of the Company's existing stores, the majority are
profitable. While 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, 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.
Due to the significant impact of the 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. All 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 acquisitions are the principal reasons for the
significant differences when comparing results of operations to prior periods.
14
<PAGE>
The Company expects to continue to make acquisitions of
rental-purchase stores and may 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 was 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. 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.
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.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statement of Earnings data as a percentage of revenue.
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
REVENUE:
Rentals and fees........................... 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Direct store expenses......................
Depreciation of rental merchandise.... 21.9 24.2 26.9
Other direct store expenses........... 57.1 55.7 51.7
---- ---- ----
79.0 79.9 78.6
General and administrative................. 8.8 11.5 13.2
Amortization of intangibles................ 1.8 0.8 0.4
---- ---- ----
Operating profit................................ 10.4 7.8 7.8
Interest income................................. (0.2) - -
Interest expense................................ 1.0 2.4 1.7
Non-operating income............................ - ( 0.3) -
---- ---- ----
Earnings before income taxes.................... 9.6 5.7 6.1
Income tax expense.............................. 3.9 2.3 2.7
---- ---- ----
Net Earnings.................................... 5.7 3.4 3.4
---- ---- ----
---- ---- ----
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE. Revenue increased $26.3 million, or 69.9%, to $63.9 million
for the year ended December 31, 1996, from $37.6 million in 1995. Revenue from
same store operations accounted for $1.3 million, or 4.9% of the increase, and
revenue from acquired stores accounted for $25.0 million, or 95.1% 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 and 1995 Acquisitions, and 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 operations of the stores acquired in 1996.
DEPRECIATION OF RENTAL MERCHANDISE. Depreciation of rental
merchandise increased $4.9 million, or 53.5%, to $14.0 million for the year
ended December 31, 1996, from $9.1 in 1995. As a percentage of revenue,
depreciation of rental merchandise decreased to 21.9% for the year ended
December 31, 1996, from 24.2% in 1995, primarily as a continuing result of the
change in the Company's depreciation method for new inventory additions.
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased
$15.6 million, or 74.3%, to $36.5 million for the year ended December 31, 1996,
from $20.9 million in 1995. As a percentage of revenue, other expenses
increased to 57.1% for the year ended December 31, 1996, from 55.7% in 1995.
This increase was primarily attributable to the additional costs incurred in
connection with the operation of the stores acquired in the 1994, 1995 and 1996
Acquisitions. The stores acquired operated at lower average revenue per store
and therefore had higher operating costs as a percentage of revenue than the
Company's existing stores.
16
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $1.3 million, or 28.8%, to $5.6 million for the year ended
December 31, 1996, from $4.3 million in 1995. This increase was primarily
attributable to additional corporate and administrative personnel to support the
1996 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 8.8% for the year ended December 31, 1996, from 11.5% in 1995,
primarily as a result of increased revenue from stores acquired in 1996 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
$856,000 to $1.1million for the year ended December 31, 1996, from $285,000 in
1995, primarily as a result of intangible assets created by the 1995 and 1996
acquisitions. As a percentage of revenue, amortization of intangibles increased
to 1.8% for the year ended December 31, 1996, from 0.8% in 1995, primarily as
a result of intangible assets created in the 1996 and 1995 acquisitions.
Management expects amortization of intangibles to continue to increase with
future acquisitions.
INTEREST INCOME. Interest income of $134,000 was provided in the year
ended December 31, 1996 by investing the cash proceeds of the public offerings
of stock until the proceeds could be used for acquisitions.
INTEREST EXPENSE. Interest expense decreased $242,000, or 27.0%, to
$652,000 for the year ended December 31, 1996, from $894,000 in 1995. As a
percentage of revenue, interest expense decreased to 1.0% for the year ended
December 31, 1996, from 2.4% in 1995, primarily as a result of the capital
raised by the public offerings of stock.
NET EARNINGS. Net earnings increased $2.4 million, or 189.2%, to $3.7
million for the year ended December 31, 1996, from $1.3 million in 1995. As a
percentage of revenue, net earnings increased to 5.7% for the year ended
December 31, 1996, from 3.4% in 1995, primarily as a result of higher revenues
and operating margins for the stores acquired in the 1994 and 1995
Acquisitions.
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 $779,300, 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, and 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 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 inventory additions 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.
17
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $660,900, 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 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 in 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 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.
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% for the 1994 comparable period, primarily as a
result of increased interest expense and lower operating margins for the stores
acquired in the 1994 Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's growth has been financed through
internally generated working capital and borrowings under the Loan Agreement.
Indebtedness incurred by the Company in connection with the 1994, 1995 and 1996
Acquisitions was financed with borrowings under the Loan Agreement.
On January 23, 1996, the Company completed an initial public offering
of 1,800,000 shares of common stock which included 700,000 shares by a selling
shareholder. Proceeds of the sale to the company net of underwriters discount
but before expenses amounted to $14,322,000. On February 26, 1996 the
underwriters of the offering exercised part of their over-allotment option for
219,200 shares. Company net proceeds from this transaction amounted to
$2,853,984. A portion of the net proceeds of the public offering was used to
repay all outstanding indebtedness under the Loan Agreement.
On September 18, 1996, the Company completed a public offering of
1,500,000 shares of common stock. Proceeds of the sale to the company net of
underwriters discount but before expenses amounted to $30,315,000. On October
17, 1996 the underwriters of the offering exercised part of their over-allotment
option for 149,300 shares. Company net proceeds from this transaction amounted
to $3,017,353. A portion of the net proceeds of the public offering was used to
repay all outstanding indebtedness under the Loan Agreement.
18
<PAGE>
On August 9, 1996, the company entered into an agreement with its bank
lender to amend the existing agreement to provide an increase in the maximum
amount of the facility, and lower interest rates and fees. Borrowings under the
Loan Agreement bear interest at the bank's prime rate of interest (8.25% per
annum at December 31, 1996) plus 0.0% to 1.25% depending upon the overall level
of indebtedness under the agreement. If an event of default has occurred or
exists under the Loan Agreement, all borrowings under the Loan Agreement will
bear interest at the bank's prime rate of interest plus 3.25%. 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 (4.00 at December 31, 1996) or (b) the maximum amount
available under the Loan Agreement ($25.0 million at December 31, 1996). The
monthly and the maximum amount available under the Loan Agreement each will be
reduced in quarterly increments during the period beginning in February 1997 and
ending at loan maturity. The Loan Agreement matures on February 1, 2000.
Borrowings under the Loan Agreement are secured by a lien on 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.
For the year ended December 31, 1996, net cash used in operating
activities was $2.0 million consisting primarily of purchases of rental
merchandise for existing and acquired stores. Net cash used in investing
activities was $26.9 million consisting primarily of funds used to acquire
businesses. Net cash provided by financing activities was $36.4 million which
was the proceeds of the two public stock offerings partially offset by repaying
the line of credit.
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 year ended December 31, 1996 and 1995, the Company purchased
additional rental merchandise for aggregate amounts of approximately $22.1
million and $10.9 million, respectively.
Management intends to increase the number of stores the Company
operates primarily through acquisitions. Management currently expects to add
approximately 10 to 20 new stores in 1997, in addition to those acquired in the
Fastway acquisition, primarily through acquisition, and to add a comparable
number of new stores in each of the next few years. 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 internally generated working capital and
additional borrowings under the Loan Agreement, 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.
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 forecast method of
depreciation for tax accounting, and management believes that this method has
been widely used throughout the rental-purchase industry prior to the
publication of this revenue ruling. The 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.
19
<PAGE>
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 forecast 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 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.
INFLATION AND SEASONALITY
During the year ended December 31, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company required to be included in
this Item 8 are set forth in Item 14 of this Report. The quarterly results of
operations are included in the "Notes to Financial Statements" under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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 initial public stock offering.
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 was first elected a director of the Company in November 1995.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT. (*)
ITEM 11. EXECUTIVE COMPENSATION. (*)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.(*)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (*)
---------------
* The information required by Items 10, 11, 12 and 13 is or will be set
forth in the definitive proxy statement relating to the 1997 Annual Meeting of
Shareholders of Alrenco, Inc. which is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended. Such definitive proxy statement relates to a meeting of
shareholders involving the election of directors and the portions therefrom
required to be set forth in this Form 10-K by items 10, 11, 12 and 13 are
incorporated herein by reference pursuant to General Instruction G(3) to Form
10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following financial statements of Alrenco, Inc. are filed as a part
of this report:
Page
----
Report of Independent Certified Public Accountants F-1
Balance Sheets - December 31, 1996 and 1995 F-2
Statements of Earnings - Years ended December 31,
1996, 1995, and 1994 F-3
Statement of Stockholders' Equity - Years ended
December 31, 1996, 1995, and 1994 F-4
Statements of Cash Flows - Years ended
December 31, 1996, 1995, and 1994 F-5
Notes to Financial Statements F-6
(a)(2) All financial statement schedules are omitted, as the required
information is inapplicable or the information is present in the financial
statements and related notes included in this report.
(a)(3) Exhibits filed with, or incorporated by reference in, this report are
identified in the Index to Exhibits appearing on page 23 of this report. The
following management contracts or compensatory plans and arrangements are filed
or incorporated by reference as exhibits and included in the Index to Exhibits
on page 23.
( i) Life Insurance Policy for Michael D. Walts
( ii) Alrenco, Inc. 1995 Stock Incentive Plan
(iii) Restricted Stock Agreement between the Company and Raymond C.
Holladay
(iv) Restricted Stock Agreement between the Company and Theodore H.
Wilson
(v) Alrenco, Inc. 401(k) Salary Reduction Plan
(vi) Form of director indemnification agreement
(b) No report on Form 8-K was filed for the quarter ended December 31, 1996.
21
<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.
ALRENCO, INC.
Dated: March 26, 1997 By: /s/ Michael D. Walts
---------------------------
Michael D. Walts, Chairman of the
Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael D. Walts Chairman of the Board and March 26, 1997
- ----------------------- President (principal executive
Michael D. Walts officer)
/s/ Theodore H. Wilson Executive Vice President, Chief March 26, 1997
- ------------------------- Financial Officer and Director
Theodore H. Wilson (principal financial and
accounting officer)
/s/ Raymond C. Holladay Executive Vice President, Chief March 26, 1997
- -------------------------- Operating Officer and Director
Raymond C. Holladay
/s/ Robert W. Lanum Director March 26, 1997
- ----------------------
Robert W. Lanum
/s/ Donald E. Groot Director March 26, 1997
- ----------------------
Donald E. Groot
/s/ W. Barrett Nichols Director March 26, 1997
- -------------------------
W. Barrett Nichols
22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1* -- Amended and restated Articles of Incorporation of the Registrant
3.2* -- Amended and Restated Code of Bylaws of the Registrant
10.1** -- Amended and Restated Financing Agreement dated as of February 29,
1996, between the Registrant and Star Bank, National Association.
10.2** -- Amendment dated August 9, 1996 to Amended and Restated Financing
Agreement dated as of February 29, 1996 between the Registrant
and Star Bank, National Association.
10.3* -- Lease Agreement dated as of January 1, 1995 between the
Registrant and Kentuckiana Outfitting Company as amended.
10.4* -- Lease Agreement dated as of January 1, 1995 between the
Registrant and Kentuckiana Outfitting Company as amended.
10.5* -- Life Insurance Policy for Michael D. Walts.
10.6* -- Alrenco, Inc. 1995 Stock Incentive Plan
10.7* -- Restricted Stock Agreement between the Registrant and
Raymond C. Holladay.
10.8* -- Restricted Stock Agreement between the Registrant and
Theodore H. Wilson.
10.9* -- The Registrant's 401(k) Salary Reduction Plan.
10.10* -- Form of Director Indemnification Agreement
16.1* -- Letter from Welenken Himmelfarb & Co. regarding change in
independent accountants.
18.1* -- Letter from Grant Thornton LLP regarding change in accounting
principle.
23.1 -- Consent of independent certified public accountant.
27.0 -- Financial Data Schedule.
- ---------------
* Incorporated herein by reference to exhibits filed with the registrant's
registration statement on Form S-1 (File No. 33-99438) filed under the
Securities Act of 1933.
** Incorporated herein by reference to exhibits filed with the registrant's
registration statement on Form S-1 (File No. 333-11043) filed under the
Securities Act of 1933.
23
<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, 1996 and 1995, and the related statements of
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, 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 7, 1997
<PAGE>
ALRENCO, INC.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Cash $ 7,468,539 $ 27,041
Rental merchandise, net
On rent 21,060,946 9,999,312
Held for rent 6,871,795 3,116,056
---------- ----------
27,932,741 13,115,368
Prepaid expenses and other assets 1,436,556 1,381,452
Income tax receivable 323,327 128,563
Deferred income taxes 377,839 18,699
Property assets, net 4,261,951 1,402,409
Loan to stockholder 71,636 64,384
Intangible assets, net 20,323,147 4,868,590
---------- ----------
$62,195,736 $21,006,506
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade $ 2,567,140 $ 1,763,272
Accrued liabilities 1,542,056 1,571,877
Taxes other than income 423,274 330,530
Debt - 12,865,239
---------- ----------
4,532,470 16,530,918
Stockholders' equity
Preferred stock, no par; 1,000,000 shares authorized;
none issued or outstanding - -
Common stock, no par; 20,000,000 shares authorized;
6,074,100 and 3,000,000 shares issued and
outstanding in 1996 and 1995, respectively 50,707,938 1,500
Unamortized value of stock awards (1,182,138) -
Retained earnings 8,137,466 4,474,088
---------- ----------
57,663,266 4,475,588
---------- ----------
$62,195,736 $21,006,506
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
ALRENCO, INC.
STATEMENTS OF EARNINGS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Rentals and fees $63,855,808 $37,575,639 $27,800,152
Operating expenses
Direct store expenses
Depreciation of rental merchandise 13,964,028 9,099,579 7,482,614
Other 36,475,761 20,923,600 14,380,485
---------- ---------- ----------
50,439,789 30,023,179 21,863,099
General and administrative expenses 5,588,925 4,338,583 3,677,674
Amortization of intangibles 1,140,675 284,901 97,134
---------- ---------- ----------
Total operating expenses 57,169,389 34,646,663 25,637,907
---------- ---------- ----------
Operating profit 6,686,419 2,928,976 2,162,245
Other expense (income)
Interest expense 652,255 894,003 461,130
Interest income (133,688) -
Gain on sale of investments - (99,930) -
---------- ---------- ----------
518,567 794,073 461,130
---------- ---------- ----------
Earnings before income taxes 6,167,852 2,134,903 1,701,115
Income tax expense 2,504,474 868,311 739,287
---------- ---------- ----------
NET EARNINGS $ 3,663,378 $ 1,266,592 $ 961,828
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share $ .77 $ .41 $ .31
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
ALRENCO, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNAMORTIZED
COMMON STOCK VALUE NET
-------------------------- OF STOCK RETAINED UNREALIZED
SHARES AMOUNT AWARDS EARNINGS GAIN TOTAL
---------- ---------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994 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
Initial public offering of
common stock 1,319,200 16,285,414 - - - 16,285,414
Restricted stock awards 105,000 1,470,000 (1,470,000) - - -
Public offering of common
stock 1,649,300 32,942,624 - - - 32,942,624
Exercise of stock options 600 8,400 - - - 8,400
Amortization of stock
awards - - 287,862 - - 287,862
Net earnings - - - 3,663,378 - 3,663,378
---------- ----------- ------------ ---------- ---------- -----------
Balance at December 31,
1996 6,074,100 $50,707,938 $ (1,182,138) $8,137,466 $ - $57,663,266
---------- ----------- ------------ ---------- ---------- -----------
---------- ----------- ------------ ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ALRENCO, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 3,663,378 $ 1,266,592 $ 961,828
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of rental merchandise 13,964,028 9,099,579 7,482,614
Depreciation of property assets 556,098 373,502 271,775
Amortization of intangibles 1,140,675 284,901 97,134
Loss on sale of property assets - 13,353 671
Deferred income taxes (177,135) 202,672 263,060
Amortization of stock awards 287,862 - -
Gain on sale of investments - (99,930) -
Changes in operating assets and liabilities, net of effects of
acquisitions
Rental merchandise (22,077,402) (10,888,866) (9,108,973)
Prepaid expenses and other (55,104) (676,064) (401,881)
Income taxes (194,764) - (211,620)
Accounts payable - trade 803,868 755,788 310,861
Accrued liabilities (29,821) 480,269 (401,318)
Taxes other than income 92,744 160,078 52,755
---------- ---------- ----------
Net cash provided by (used in) operating activities (2,025,573) 971,874 (683,094)
Cash flows from investing activities
Purchase of property assets (1,707,314) (434,846) (426,129)
Proceeds from sale of property assets - 160,661 83,975
Purchases of investments - (58,581) (78,108)
Proceeds from sale of investments - 542,501 -
Acquisition of businesses (25,189,562) (6,835,060) (3,500,000)
Increase in loan to stockholder (7,252) (7,466) (7,662)
---------- ---------- ----------
Net cash used in investing activities (26,904,128) (6,632,791) (3,927,924)
Cash flows from financing activities
Increase (decrease) in line of credit (12,865,239) 5,664,031 4,613,559
Net proceeds from public offerings 49,228,038 - -
Exercise of stock options 8,400 - -
---------- ---------- ----------
Net cash provided by financing activities 36,371,199 5,664,031 4,613,559
---------- ---------- ----------
NET INCREASE IN CASH 7,441,498 3,114 2,541
Cash at beginning of year 27,041 23,927 21,386
---------- ---------- ----------
Cash at end of year $ 7,468,539 $ 27,041 $ 23,927
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information
Cash paid during the period for
Interest $ 758,623 $ 818,330 $ 394,037
Income taxes $ 2,456,812 $ 623,903 $ 814,999
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<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, 1996, the Company operated 130
stores in 17 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.
RENTALS AND FEES
Merchandise is rented to customers pursuant to rental-purchase agreements
which provide for weekly or monthly rental terms with nonrefundable rental
payments. Generally, the customer has the right to acquire title either
through a purchase option or through payment of all required rentals.
Rentals and fees are recognized over the rental term. No revenue is
accrued because the customer can cancel the rental contract at any time and
the Company cannot enforce collection for nonpayment of rents. A provision
is made for estimated losses of rental merchandise damaged or not returned
by customers.
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.
F-6
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assets are stated at cost less accumulated amortization
calculated by the straight-line method.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets and intangibles held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. Impairment is recognized when the
carrying amounts of such assets cannot be recovered by the discounted net
cash flows they will generate.
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 Company
designates all of its securities, as available-for-sale securities, which
are carried at fair value with unrealized holding gains and losses included
in equity.
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 and in 1996, include the dilutive effect of
common stock equivalents, principally stock options. Weighted average
shares are 4,786,736 for 1996 and 3,105,000 for both 1995 and 1994.
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are generally
expensed when incurred.
F-7
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation," encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and debt whose carrying
value approximates fair value at December 31, 1996 and 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.
RECLASSIFICATIONS
Certain reclassifications were made to prior year balances to conform to
1996 presentation.
NOTE B - ACQUISITIONS
The Company purchased 14 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 completed the acquisition of 14 stores through the
purchase of the common stock of Network Rentals, Inc. (Network) for cash of
approximately $5.6 million. During 1996, the Company also acquired 48
stores in 21 unrelated transactions for an aggregate cash purchase price of
approximately $12.9 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.
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.
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS - CONTINUED
The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions had been consummated at the beginning
of the Company's 1996 and 1995 fiscal periods, after including the effect
of adjustments for amortization of intangibles and interest expense on
acquisition debt.
1996 1995
---------- ----------
Revenue $75,263,597 $72,722,976
Net earnings $ 3,543,074 $ 979,197
Earnings per common share $.74 $.32
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 :
1996 1995
---------- ----------
On rent
-------
Cost $31,938,928 $17,644,780
Less accumulated depreciation 10,877,982 7,645,468
---------- ----------
$21,060,946 $ 9,999,312
---------- ----------
---------- ----------
Held for rent
-------------
Cost $ 8,307,646 $ 4,405,998
Less accumulated depreciation 1,435,851 1,289,942
---------- ----------
$ 6,871,795 $ 3,116,056
---------- ----------
---------- ----------
F-9
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE D - PROPERTY ASSETS
Property assets consist of the following:
<TABLE>
<CAPTION>
Depreciation
Period 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Furniture and equipment 5-7 years $2,010,218 $1,431,278
Delivery vehicles 3-5 years 1,227,789 256,404
Computer software 3-5 years 132,526 -
Leasehold improvements 3-10 years 2,911,910 1,178,699
--------- ---------
6,282,443 2,866,381
Less accumulated depreciation 2,020,492 1,463,972
--------- ---------
$4,261,951 $1,402,409
--------- ---------
--------- ---------
</TABLE>
NOTE E - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Amortization
Period 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Customer rental agreements 15 months $ 1,573,317 $ 430,000
Noncompete agreements 2-10 years 1,566,300 913,675
Goodwill 20 years 18,715,176 3,918,265
---------- ---------
21,854,793 5,261,940
Less accumulated amortization 1,531,646 393,350
---------- ---------
$20,323,147 $4,868,590
---------- ---------
---------- ---------
</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 agreements. Goodwill
is amortized by the straight-line method over 20 years.
F-10
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - DEBT
The Company has a $25,000,000 line of credit facility with a bank. The
agreement carries a three-year term which expires in 1999 with interest
rates ranging from prime to prime plus 1-1/4% depending upon level of
indebtedness. Under the terms of the agreement, the Company is required to
pay a commitment fee of .375% to .50% (depending on the level of
indebtedness) per annum on the unused portion of the facility.
The borrowings are collateralized by all of the Company's assets and the
weighted average interest rate was 10.1%, 11.3% and 10.4% for the years
ended December 31, 1996, 1995 and 1994, respectively. As of December 31,
1996, the Company had no outstanding borrowings under the agreement.
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.
NOTE G - RELATED PARTY TRANSACTIONS
The Company leases office space from a corporation owned by its majority
stockholder. Rental expense pursuant to the lease was $126,010, $94,800
and $85,796, respectively, for each of the three years in the period ended
December 31, 1996.
NOTE H - INCOME TAXES
The income tax provision was comprised of the following components:
1996 1995 1994
--------- ------- -------
Current
Federal $1,879,026 $514,672 $334,320
State 448,313 150,967 141,907
--------- ------- -------
2,327,339 665,639 476,227
Deferred
Federal 150,795 171,809 215,920
State 26,340 30,863 47,140
--------- ------- -------
177,135 202,672 263,060
--------- ------- -------
Total $2,504,474 $868,311 $739,287
--------- ------- -------
--------- ------- -------
F-11
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - CONTINUED
The income tax provision reconciled to the tax computed at the statutory
Federal rate is as follows:
1996 1995 1994
---- ---- ----
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 5.4 5.6 7.3
Other 1.2 1.1 2.2
---- ---- ----
Total 40.6% 40.7% 43.5%
---- ---- ----
---- ---- ----
Deferred tax assets and liabilities consist of the following at December
31:
1996 1995
---------- ----------
Deferred tax assets
Deferred compensation $ 34,644 $ 88,309
Rental merchandise 62,482 40,460
Other 76,712 51,256
Tax credits 414,581 -
---------- ----------
588,419 180,025
Deferred tax liabilities
Intangible assets 210,580 154,137
Other - 7,189
---------- ----------
210,580 161,326
---------- ----------
Net deferred tax asset $ 377,839 $ 18,699
---------- ----------
---------- ----------
At December 31, 1996, the Company had approximately $270,000 in general
business credit carryforwards which expire, if unused, beginning in the
year 2000 and alternative minimum tax credits of approximately $145,000
which are not subject to expiration. These credit carryforwards relate to
the acquisition of Network and utilization of these credits is limited to
approximately $118,000 per year.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the carryforwards.
Although realization is not assured, management believes it is more likely
than not that all of the net deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable; however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
F-12
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE I - ADVERTISING EXPENSES
Advertising expense was $3,755,401, $2,900,755 and $2,064,430,
respectively, for each of the three years in the period ended December 31,
1996.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities under operating leases
expiring in various years through 2003. Rental expense was $3,496,435,
$1,905,909 and $1,326,186, respectively, for each of the three years in the
period ended December 31, 1996. Future minimum rental payments under
operating leases with remaining noncancelable lease terms in excess of one
year at December 31, 1996 are as follows:
Year ending December 31,
1997 $2,994,141
1998 2,165,872
1999 1,402,731
2000 860,541
2001 388,062
Thereafter 366,120
---------
$8,177,467
---------
---------
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 K - EMPLOYEE BENEFIT PLANS AND STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted an employee savings plan
which permits eligible employees to make contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. The Plan provides
for uniform employer contributions to eligible employees of $.25 for each
$1.00 contributed by participants up to 6% of the participant's
compensation. Company contributions to the Plan in 1996 were $56,169.
F-13
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE K - EMPLOYEE BENEFIT PLANS AND STOCK BASED COMPENSATION - 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 directors. SARs and options to 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.
Directors who are not involved in day-to-day management of the Company are
initially entitled to a grant of 5,000 shares and on each of their next
five anniversaries, an automatic 1,000 share grant. On January 23, 1996,
the Company granted 105,000 shares of restricted stock to two key employees
which vest the end of seven years. At December 31, 1996, there were
242,705 shares reserved for issuance under the Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for stock options
granted under the Plan. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. Compensation costs for all other stock-based
compensation is accounted for under SFAS 123. If the Company had elected
to recognize compensation expense based upon the fair value at the grant
date for options under the Plan consistent with the methodology prescribed
by SFAS 123, the Company's net earnings and earnings per share for the year
ended December 31, 1996 would be reduced to the pro forma amounts indicated
as follows:
Net earnings
As reported $3,663,378
Pro forma $3,085,362
Earnings per common share
As reported $.77
Pro forma $.64
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 40 percent; risk-free interest rates
of 5.75 percent; no dividend yield; and expected life of six years.
F-14
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE K - EMPLOYEE BENEFIT PLANS AND STOCK BASED COMPENSATION - CONTINUED
Additional information with respect to options outstanding under the Plan
at December 31, 1996 and the changes for the year then ended are as
follows:
Weighted average
Shares exercise price
------- ----------------
Outstanding at beginning of year - $ -
Granted 102,295 14
Exercised 600 14
Forfeited 400 14
-------
Outstanding at end of year 101,295 14
-------
-------
Options exercisable at year-end 66,545 $14
Weighted average fair value per share of
options granted during 1996 $6.70
All options outstanding and exercisable at December 31, 1996 have exercise
prices of $14 per share, have a weighted-average remaining contractual life
of approximately 9 years and the exercise price equaled the market price on
the grant date.
Effective September 30, 1995, the Company rescinded existing deferred
compensation 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 deferred
compensation plans was $119,603 and $75,658 for the years ended December
31, 1995 and 1994, respectively.
NOTE L - PUBLIC STOCK OFFERINGS
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 $16.3 million and
were used to retire debt of approximately $12.9 million.
In September 1996, the Company completed a secondary stock offering in
which 1,500,000 shares of common stock were issued which provided the
Company with approximately $33 million, net of expenses.
F-15
<PAGE>
ALRENCO, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE M - UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1996 and 1995 (in thousands) is as
follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Revenue $12,398 $14,606 $17,162 $19,690
Operating profit 1,327 1,746 2,200 1,414
Net earnings 701 942 1,107 914
Earnings per common share $ .18 $ .21 $ .24 $ .15
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
</TABLE>
NOTE N - SUBSEQUENT EVENT
On January 2, 1997 the Company completed the acquisition of an additional
28 stores for a cash purchase price of approximately $12 million. The
acquisition will be accounted for as a purchase and the revenues for these
stores during the previous year were approximately $12.4 million.
F-16
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 7, 1997, accompanying the financial
statements incorporated by reference or included in the Annual Report of
Alrenco, Inc. on Form 10-K for the year ended December 31, 1996. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Alrenco, Inc. on Form S-8 (File No. 333-08915, effective July 26,
1996).
GRANT THORNTON LLP
Dallas, Texas
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7468539
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27932741
<CURRENT-ASSETS> 37161163
<PP&E> 6282443
<DEPRECIATION> 2020492
<TOTAL-ASSETS> 62195736
<CURRENT-LIABILITIES> 4532470
<BONDS> 0
0
0
<COMMON> 50707938
<OTHER-SE> 6955328
<TOTAL-LIABILITY-AND-EQUITY> 62195736
<SALES> 1199375
<TOTAL-REVENUES> 63855808
<CGS> 835667
<TOTAL-COSTS> 14799695
<OTHER-EXPENSES> 42236006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 652255
<INCOME-PRETAX> 6167852
<INCOME-TAX> 2504474
<INCOME-CONTINUING> 3663378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3663378
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>