<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-27490
ALRENCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-1480655
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1736 EAST MAIN STREET
NEW ALBANY, INDIANA 47150
(812) 949-3370
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER
FISCAL YEAR IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) , AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, AS OF THE
CLOSE OF BUSINESS NOVEMBER 1, 1997: 6,095,516
<PAGE>
ALRENCO, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1997
AND DECEMBER 31, 1996. 3
CONDENSED STATEMENTS OF EARNINGS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. 4
CONDENSED STATEMENTS OF EARNINGS FOR
THE QUARTER ENDED SEPTEMBER 30, 1997 AND 1996. 5
CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. 6
NOTES TO CONDENSED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
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<PAGE>
ALRENCO, INC.
Balance sheets
September 30, December 31,
1997 1996
(Unaudited)
------------- ------------
ASSETS
Cash and cash equivalents $ 4,015,993 $ 7,468,539
Rental merchandise, net 36,886,237 27,932,741
Prepaid expenses and other assets 2,598,622 1,436,556
Income tax receivable - 323,327
Deferred income taxes 378,263 377,839
Property assets, net 5,499,528 4,261,951
Loan to stockholder 78,654 71,636
Intangible assets, net 35,429,549 20,323,147
------------- -------------
$ 84,886,846 $ 62,195,736
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade $ 2,581,620 $ 2,567,140
Accrued liabilities 4,300,770 1,542,056
Taxes other than income 264,222 423,274
Debt 15,625,092 -
------------- -------------
22,771,704 4,532,470
Stockholders' equity
Preferred stock, no par; 1,000,000 shares
Authorized; none issued or outstanding - -
Common stock, no par; 20,000,000 shares
Authorized, 6,095,516 shares issued and
outstanding at September 30, 1997 and
6,074,100 shares issued and outstanding at
December 31, 1996 50,887,512 50,707,938
Unamortized value of stock award (1,036,392) (1,182,138)
Retained Earnings 12,264,022 8,137,466
------------- -------------
62,115,142 57,663,266
$ 84,886,846 $ 62,195,736
------------- -------------
------------- -------------
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Statements Of Earnings
For the Nine Months Ended
(Unaudited)
September 30,
------------------------------
1997 1996
------------- -------------
REVENUE
Rentals and fees $ 74,698,266 $ 43,287,272
Sales 1,386,874 828,501
Other 86,235 55,804
------------- -------------
Total Revenue 76,171,375 44,171,577
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 18,065,635 9,611,828
Cost of sales 1,074,036 533,109
Salaries and other expenses 41,489,315 24,237,551
------------ ------------
60,628,986 34,382,488
General and administrative expenses 6,298,852 3,903,214
Amortization of intangibles 2,448,802 613,341
------------ ------------
Total operating expenses 69,376,640 38,899,043
Operating profit 6,794,735 5,272,534
Gain on sale of assets 950,366 -
Interest income 1,366 6,118
Interest expense (844,581) (615,204)
------------ ------------
Earnings before income taxes 6,901,886 4,663,448
Income tax expense 2,775,330 1,913,774
------------ ------------
NET EARNINGS $ 4,126,556 $ 2,749,674
------------ ------------
------------ ------------
Weighted average shares outstanding 6,082,205 4,365,814
Earnings per common share $ 0.68 $ 0.63
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Statements Of Earnings
For the Quarter Ended
(Unaudited)
September 30,
---------------------------------
1997 1996
------------- -------------
REVENUE
Rentals and fees $ 25,391,843 $ 16,851,084
Sales 429,350 296,543
Other 35,064 19,974
------------- -------------
Total Revenue 25,856,257 17,167,601
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise 6,262,780 3,675,570
Cost of sales 333,323 196,967
Salaries and other expenses 14,939,377 9,412,684
------------- -------------
21,535,480 13,285,221
General and administrative expenses 1,725,414 1,455,664
Amortization of intangibles 881,674 226,273
------------- -------------
Total operating expenses 24,142,568 14,967,158
------------- -------------
Operating profit 1,713,689 2,200,443
Gain on sale of assets 950,366 -
Interest income 471 10
Interest expense (340,301) (324,326)
------------- ------------
Earnings before income taxes 2,324,225 1,876,127
Income tax expense 923,840 769,228
------------- ------------
NET EARNINGS $ 1,400,385 $ 1,106,899
------------- ------------
------------- ------------
Weighted average shares outstanding 6,094,011 4,672,147
Earnings per common share $ 0.23 $ 0.24
------------- ------------
------------- ------------
The accompanying notes are an integral part of these statements
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<PAGE>
Statements of Cash Flows
For the Nine Months Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 4,126,556 $ 2,749,674
Adjustments to reconcile net earnings to
Net cash provided by operating activities
Depreciation of rental merchandise 18,065,635 9,611,828
Depreciation of property assets 703,563 524,273
Amortization of intangibles 2,448,804 613,341
Amortization of stock awards 145,746 107,006
Gain on sale of assets (950,366) -
Changes in operating assets and liabilities
Net of effects of acquisitions and sales
Rental merchandise (21,590,742) (15,327,389)
Prepaid expenses and other (846,083) 1,244,527
Accounts payable-trade 14,480 3,317,100
Accrued liabilities 2,324,682 (1,215,636)
Income taxes payable 204,296 453,905
Taxes other than income 70,684 25,688
Net cash provided by (used in) -------------- ------------
operating activities 4,717,255 (384,737)
Cash flows from investing activities
Purchases of property assets (1,621,705) (1,314,036)
Increase in loan to shareholder (7,018) (7,252)
Sale of assets 3,031,691 -
Acquisitions of businesses (25,377,435) (22,195,241)
Net cash used in -------------- ------------
investing activities (23,974,467) (23,516,529)
Cash flows from financing activities
Proceeds from public offerings - net - 48,058,013
Proceeds from exercise of stock options 179,574 -
Increase (decrease) in line of credit 15,625,092 (12,865,239)
Net cash provided by -------------- ------------
financing activities 15,804,666 5,192,774
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,452,546) 11,291,508
Cash and cash equivalents at beginning of year 7,468,539 27,041
-------------- ------------
Cash and cash equivalents at end of period $ 4,015,993 $ 11,318,549
-------------- ------------
-------------- ------------
Supplemental cash flow information
Cash paid during the period for
Interest $ 846,018 $ 620,734
Income taxes $ 2,309,980 $ 1,744,164
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
ALRENCO, INC.
Notes to Condensed Financial Statements
1. BASIS OF PRESENTATION. The accompanying condensed financial statements
of Alrenco, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the company
as of September 30, 1997, the results of operations for the three and nine
month periods ended September 30, 1997 and 1996, and the statements of cash
flows for the nine month periods ended September 30, 1997 and 1996. The
results of operations for the periods ended September 30, 1997 are not
necessarily indicative of the operating results for the full year. These
interim financial statements should be read in conjunction with the Form 10-K
for the year ended December 31, 1996, including the financial statements and
notes contained therein, filed with the Securities and Exchange Commission.
2. DEBT AGREEMENTS. On July 31, 1997, the Company entered into a formal
agreement with a bank for a $30,000,000 line of credit facility. This
agreement replaces a similar, smaller facility with another bank. The
agreement carries a three-year term with interest rates of prime minus 1/2%.
Under the terms of the agreement, the Company is required to pay 1/8 of 1%
per annum on the unused portion of the facility. As of October 31, 1997 the
Company owed $15.0 million under the agreement.
3. ACQUISITION ACTIVITY. The company purchased 28 rental-purchase stores
from a company doing business as Fastway Rentals on January 2, 1997 for cash
of approximately $11.9 million. On February 28, 1997, the Company acquired 9
stores from a company doing business as Powerhouse Rentals for cash of
approximately $6.5 million. During the nine month period ended September 30,
1997, the Company also acquired 16 rental-purchase stores and 13 rental
portfolios in 16 unrelated transactions for an aggregate purchase price of
$7.0 million. During 1996, the Company purchased 76 rental-purchase stores
in 22 separate transactions for an aggregate purchase price of $25.0 million.
All of the acquisitions have been accounted for as purchases and accordingly
the operating results of the acquired stores have been included in the
operating results of the company since their acquisition dates.
The following summary, prepared on a pro-forma basis, combines the results of
operations as if the stores had been acquired at the beginning of each of the
periods presented after including the effect of adjustments for amortization
of intangibles and interest expense on acquisition debt. Weighted average
share outstanding calculations have been adjusted to reflect the impact of
public stock offerings.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
---------------------------------------------------------------
09/30/97 09/30/96 09/30/97 09/30/96
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenue $ 80,187,102 $ 76,831,936 $ 26,274,116 $ 25,962,134
Net Earnings $ 4,151,951 $ 3,565,845 $ 1,401,902 $ 1,274,465
Earnings per common share $ 0.68 $ 0.82 $ 0.23 $ 0.27
</TABLE>
4. GAIN ON SALE OF ASSETS. In August 1997, the Company sold eight marginally
performing stores, in two separate transactions, for an aggregate price of
$3.5 million cash. Net gain on these transactions was $950,400.
5. PENDING MERGER. On September 29, 1997 the Company and RTO, Inc.
announced the signing of a definitive merger agreement. Under the terms of
the agreement, RTO shareholders will receive approximately 10.9 million
shares of Alrenco's common stock in exchange for all of the outstanding
common stock of RTO, Inc. The merger agreement is subject to customary
consents and approvals, including approval by shareholders of Alrenco and
RTO. Closing of the merger is expected in the first quarter of 1998.
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<PAGE>
6. NEW ACCOUNTING PRONOUNCEMENT. The FASB has issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for
financial statements issued after December 15, 1997. Early adoption of the
new standard is not permitted. The new standard eliminates primary and fully
diluted earnings per share together with disclosure of how the per share
amounts were computed. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. The adoption of this new pronouncement will not
have a material impact on the disclosure of earnings per share in the
financial statements.
ALRENCO, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
In the nine months ended September 30, 1997, the Company acquired 53
rental-purchase stores in 8 separate transactions. The financial results for
the nine months since the date of each acquisition includes additional
revenue of $9.3 million and additional operating profit of $2.4 million from
these acquisitions. In addition, during the nine month period ended
September 30, 1997 the Company acquired 13 rental account portfolios which
were merged into existing stores.
PENDING MERGER
On September 29, 1997 the Company and RTO, Inc. announced the signing of a
definitive merger agreement. Under the terms of the agreement, RTO
shareholders will receive approximately 10.9 million shares of Alrenco's
common stock in exchange for all of the outstanding common stock of RTO, Inc.
The merger agreement is subject to customary consents and approvals,
including approval by shareholders of Alrenco and RTO. Closing of the merger
is expected in the first quarter of 1998.
RESULTS OF OPERATIONS
REVENUE. Revenue increased $8.7 million or 50.6% to $25.9
million for the quarter ended September 30, 1997 from $17.2 million in the
comparable quarter in 1996. Revenue growth from same store operations
accounted for $625,100, or 7.2% of the increase for the quarter, and revenue
growth from stores acquired subsequent to June 30, 1996 accounted for $8.1
million or 92.8% of the increase. For the nine months ended September 30,
1997, revenue increased $32.0 million or 72.4% to $76.2 million from $44.2
million for the comparable period in 1996. Revenue growth from same store
operations accounted for $581,300, or 1.8% of the increase for the nine
months, and revenue growth from stores acquired subsequent to December 31,
1996 accounted for $31.4 million or 98.2% of the increase. Management
believes that the increase in revenue for the period was primarily
attributable to the addition of revenue from the stores acquired during 1996
and 1997.
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<PAGE>
DEPRECIATION OF RENTAL MERCHANDISE. Depreciation of rental
merchandise increased $2.6 million or 70.4% to $6.3 million for the quarter
ended September 30, 1997 from $3.7 million in the comparable quarter in 1996.
As a percentage of revenue, depreciation of rental merchandise increased to
24.2% for the three months ended September 30, 1997 from 21.4% for the
comparable period in 1996, primarily as a result of discounted terms on
second and third quarter rentals. For the nine months ended September 30,
1997, depreciation of rental merchandise increased $8.5 million or 88.0% to
$18.1 million from $9.6 million in the comparable period in 1996. As a
percentage of revenue, depreciation of rental merchandise increased to 23.7%
for the nine months ended September 30, 1997 from 21.8% for the comparable
period in 1996, primarily as a result of discounted terms on second and third
quarter rentals.
OTHER DIRECT STORE EXPENSES. Other direct store expenses increased $5.7
million or 58.9% to $15.3 million for the quarter ended September 30, 1997
from $9.6 million for the same period in 1996. As a percentage of revenue,
other direct store expenses increased to 59.1% for the three months ended
September 30, 1997 from 56.0% for the comparable period in 1996. For the
nine months ended September 30, 1997, other direct store expenses increased
$17.8 million or 71.8% to $42.6 million from $24.8 million in the comparable
period in 1996. As a percentage of revenue, other direct store expenses
decreased to 55.9% for the nine months ended September 30, 1997 from 56.1%
for the comparable period in 1996. These percentage decreases were primarily
attributable to the additional volume being generated by the stores acquired
in 1996 and 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $270,000 or 18.5% to $1.7 million for the quarter ended
September 30, 1997 from $1.5 million in the comparable quarter. As a
percentage of revenue, general and administrative expenses decreased to 6.7%
for the three months ended September 30, 1997 from 8.5% for the 1996
comparable period, primarily as a result of vendors participation fees
received for exhibits at the annual meeting. For the nine months ended
September 30, 1997, general and administrative expenses increased $2.4
million or 61.4% to $6.3 million from $3.9 million in the comparable period.
As a percentage of revenue, general and administrative expenses decreased to
8.3% for the nine months ended September 30, 1997 from 8.8% for the
comparable period in 1996.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased
$655,400 or 289.7% to $881,700 for the quarter ended September 30, 1997 from
$226,300 for the 1996 comparable period. For the nine months ended September
30, 1997, amortization of intangibles increased $1.8 million or 299.3% to
$2.4 million primarily as a result of intangible assets created by the 1996
and 1997 acquisitions. A portion of intangibles is amortized over a 15 month
period from date of acquisition. As intangibles created by the 1996 and 1997
acquisitions become fully amortized, amortization expense for these
acquisitions will correspondingly decrease.
GAIN ON SALE OF ASSETS. In August 1997, the Company sold eight
marginally performing stores, in two separate transactions, for an aggregate
price of $3.5 million cash. Net gain on these transactions was $950,400.
NET EARNINGS. Net earnings increased $293,500 or 26.5% to $1.4 million
for the quarter from $1.1 million for the comparable quarter in 1996. The
increase in net earnings for the quarter over the comparable period in 1996
was primarily due to gain recognized on sale of assets. As a percentage of
revenue, net earnings decreased to 5.4% for the quarter ended September 30,
1997 from 6.4% for the comparable period in 1996. For the nine months ended
September 30, 1997, net earnings increased $1.4 million or 50.1% to $4.1
million from $2.7 million in 1996. As a percentage of revenue, net earnings
decreased to 5.4% for the nine month period ended September 30, 1997 from
6.2% for the comparable period in 1996. These percentage decreases are
primarily attributable to higher amortization of intangibles.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital, other than those related
to acquisitions, consist of purchasing additional rental merchandise and
replacing rental merchandise which has been sold or is no longer suitable for
rent. During the nine months ended September 30, 1997 and 1996, the Company
purchased rental merchandise for aggregate amounts of approximately $21.6
million and $15.3 million respectively. In addition, during the nine months
ended September 30, 1997, the Company has acquired 53 stores and 13 rental
account portfolios for an aggregate purchase price of $25.4 million cash and
sold 8 stores for $3.5 million cash.
For the nine months ended September 30, 1997, net cash provided by operating
activities increased $5.1 million to $4.7 million from $384,700 used in the
prior year primarily due to the additional cash generated from the operations
of the stores acquired in the 1995 and 1996 acquisitions partially offset by
increased purchases of rental merchandise for stores acquired in the 1996 and
1997 acquisitions.
The Company has a debt facility with a bank which provides for a maximum debt
level of $30.0 million and carries a three-year term with interest rates of
prime rate minus 1/2%. Under the terms of the agreement, the Company is
required to pay 1/8 of 1% per annum on the unused portion of the facility.
As of October 31, 1997 the Company had $15.0 million in outstanding loans
under the agreement.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share together
with disclosure of how the per share amounts were computed. Basic earnings
per share excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
and converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. The adoption of this new
pronouncement will not have a material impact on the disclosure of earnings
per share in the financial statements.
-10-
<PAGE>
ALRENCO, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27 - Financial Data Schedule
(b) On August 8, 1997, the registrant filed a current report on form 8-K
to disclose the execution of a new bank credit agreement. A copy of
the loan agreement was filed as an exhibit to the form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 14, 1997
ALRENCO, INC.
--------------
(REGISTRANT)
/s/ Theodore H. Wilson
---------------------------------------------
Theodore H. Wilson, Executive Vice President
and Chief Financial Officer
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,015,993
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 36,886,237
<CURRENT-ASSETS> 43,500,852
<PP&E> 8,136,226
<DEPRECIATION> 2,636,898
<TOTAL-ASSETS> 84,886,846
<CURRENT-LIABILITIES> 7,146,612
<BONDS> 0
0
0
<COMMON> 50,887,512
<OTHER-SE> 11,227,630
<TOTAL-LIABILITY-AND-EQUITY> 84,886,846
<SALES> 1,386,874
<TOTAL-REVENUES> 76,171,375
<CGS> 1,074,036
<TOTAL-COSTS> 19,139,671
<OTHER-EXPENSES> 50,236,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 843,215
<INCOME-PRETAX> 6,901,886
<INCOME-TAX> 2,775,330
<INCOME-CONTINUING> 4,126,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,126,556
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
