<PAGE> 1
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 JUNE 30, 1998
COMMISSION FILE NUMBER 0-27490
HOME CHOICE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1480655
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
714 E. KIMBROUGH
MESQUITE, TX 75185
(972) 288-9327
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE
NUMBER, INCLUDING AREA CODE OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
ALRENCO, INC.
714 E. KIMBROUGH
MESQUITE, TX 75185
(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 AUGUST 14, 1998: 17,019,070
<PAGE> 2
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as
Of December 31, 1997 and June 30, 1998 3
Consolidated Statements of Operations for
the quarters ended June 30, 1997 and 1998 4
Consolidated Statements of Operations for
the six month periods ended June 30, 1997 and 1998 5
Consolidated Statements of Cash Flow for the
six month periods ended June 30, 1997 and 1998 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information
First Amendment to Comerica Credit Agreement 18
Item 6. Exhibits and Reports on Form 8-K
Change in CFO from K. David Belt to John Egeland 18
Results of the June 23, 1998 meeting of Shareholders 19
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Unaudited)
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,569,132 $ 7,548,967
Rental merchandise, net 97,260,578 97,893,748
Prepaid expenses and other assets 6,342,919 5,935,420
Deferred income taxes 6,135,051 8,815,740
Property and equipment, net 15,038,978 18,097,657
Notes receivable 243,535 361,712
Income tax receivable 2,429,249 2,417,669
Intangible assets, net 92,541,249 91,205,261
------------- -------------
Total assets $ 223,560,691 $ 232,276,174
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdraft $ -- $ 8,293,749
Accounts payable, trade 18,701,265 6,222,147
Accrued liabilities 12,393,040 15,841,787
Deferred income taxes 1,293,919 1,293,919
Notes payable 48,161,872 66,264,725
------------- -------------
Total liabilities 80,550,096 97,916,327
------------- -------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, no par; 10,000,000 shares authorized, none issued
or outstanding at December 31, 1997 and $.01 par; 25,000,000 shares
authorized, none issued or outstanding at June 30, 1998 -- --
Common stock, no par; 75,000,000 shares authorized; 16,957,119 shares
issued and outstanding at December 31, 1997 and $.01 par,
16,985,085 issued and outstanding at June 30, 1998 149,385,777 169,851
Paid-in capital -- 149,607,359
Unamortized stock awards (987,810) --
Accumulated deficit (5,387,372) (15,417,363)
------------- -------------
Total stockholders' equity 143,010,595 134,359,847
------------- -------------
Total liabilities and stockholders' equity $ 223,560,691 $ 232,276,174
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Quarters Ended
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1998
------------- -------------
Revenue:
<S> <C> <C>
Rental and fee revenue $ 55,721,252 $ 63,467,616
Cash sales and other revenue 1,085,938 2,063,927
------------- -------------
Total revenue 56,807,190 65,531,543
------------- -------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise 15,759,778 20,438,782
Other 30,354,875 36,084,346
------------- -------------
46,114,653 56,523,128
Corporate expenses 5,445,442 8,038,551
Cost of business combinations 99,229 69,927
Name change expense -- 226,916
Amortization of intangibles 2,863,802 1,657,406
------------- -------------
Total operating expenses 54,523,126 66,515,928
------------- -------------
Operating income (loss) 2,284,064 (984,385)
Other income (expense):
Interest expense (582,978) (1,211,112)
Interest income 140,687 89,501
Other non-operating income (expense), net (71,245) (842,196)
------------- -------------
Income (loss) before income taxes 1,770,528 (2,948,192)
Income tax expense (benefit) 931,719 (985,916)
------------- -------------
Net income (loss) $ 838,809 $ (1,962,276)
============= =============
Net income and net loss per share:
Basic $ .05 $ (.12)
============= =============
Diluted $ .05 $ (.12)
============= =============
Weighted average shares outstanding:
Basic 16,942,356 16,973,782
============= =============
Diluted 17,116,109 16,973,782
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Month Periods Ended
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1998
------------- -------------
Revenue:
<S> <C> <C>
Rental and fee revenue $ 106,692,808 $ 125,329,569
Cash sales and other revenue 3,459,867 5,744,834
------------- -------------
Total revenue 110,152,675 131,074,403
------------- -------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise 30,948,291 39,572,988
Other 58,110,759 71,895,912
------------- -------------
89,059,050 111,468,900
Corporate expenses 10,785,969 13,709,825
Cost of business combinations 501,960 11,114,540
Name change expense -- 634,491
Amortization of intangibles 5,657,238 3,596,761
------------- -------------
Total operating expenses 106,004,217 140,524,517
------------- -------------
Operating income (loss) 4,148,458 (9,450,114)
Other income (expense):
Interest expense (1,005,873) (2,307,954)
Interest income 260,910 95,106
Other non-operating income (expense), net (130,566) (768,215)
------------- -------------
Income (loss) before income taxes 3,272,929 (12,431,177)
Income tax expense (benefit) 2,115,072 (2,401,186)
------------- -------------
Net income (loss) $ 1,157,857 $ (10,029,991)
============= =============
Pro forma information:
Pro forma income $ 1,157,857
Pro forma income tax benefit (213,833)
-------------
Pro forma net income $ 1,371,690
=============
Pro forma net income and net loss per share:
Basic $ .08 $ (.59)
============= =============
Diluted $ .08 $ (.59)
============= =============
Weighted average shares outstanding:
Basic 16,930,902 16,969,208
============= =============
Diluted 17,326,229 16,969,208
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
For the Six Month Periods Ended
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1998
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 1,157,857 $ (10,029,991)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on disposition of property and equipment 132,770 932,057
Depreciation and disposition of rental
merchandise 30,948,291 39,572,988
Amortization of intangibles 5,657,238 3,596,761
Depreciation of property and equipment 1,660,625 1,910,817
Deferred income taxes 475,133 (2,680,689)
Amortization of stock awards 97,164 987,810
Changes in operating assets and liabilities, net of effects of
acquisitions of businesses:
Purchases of rental merchandise (40,857,570) (39,186,681)
Accounts payable and accrued expenses (574,964) (10,627,524)
Other assets (332.980) 407,499
Income taxes receivable (1,196,096) 11,580
------------- -------------
Net cash used in operating activities (2,832,532) (15,105,373)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (2,545,638) (5,847,570)
Proceeds from sale of property and equipment 287,386 77,789
Acquisitions of businesses, net of cash acquired (38,811,000) (1,814,869)
Payments (advances) on notes receivable 1,022,565 (118,177)
Increase in loan to stockholder (7,018) --
------------- -------------
Net cash used in investing activities (40,053,705) (7,702,827)
------------- -------------
Cash flows from financing activities:
Book overdraft -- 8,293,749
Purchase of common stock from dissenters (265,679) --
Proceeds from stock options 39,088 391,433
Net repayment of old revolving credit facilities (45,725,592)
Net borrowings under old revolving credit facilities 22,556,733 4,036,307
Net borrowings under new revolving credit facilities -- 60,500,000
Payments on notes payable and capital leases (11,189,687) (707,862)
Distributions to S corporation shareholders (54,900) --
------------- -------------
Net cash provided by financing activities 11,085,555 26,788,035
------------- -------------
Net (decrease) increase in cash (31,800,682) 3,979,835
Cash at beginning of period 35,745,989 3,569,132
------------- -------------
Cash at end of period $ 3,945,307 $ 7,548,967
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements of Home Choice
Holdings, Inc., successor in interest to 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 the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company, the accompanying unaudited consolidated financial statements
contain all necessary accruals to present fairly the financial position of
the Company as of June 30, 1998, the results of operations for the three
and six month periods ended June 30, 1997 and 1998, and the statements of
cash flow for the six month periods ended June 30, 1997 and 1998. The
results of operations for the six month period ended June 30, 1998 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, 1997, including the financial
statements and notes contained therein, filed with the Securities and
Exchange Commission.
2. ACQUISITIONS
During the quarter ended June 30, 1998, the Company purchased five stores
and two rental-purchase portfolios for approximately $1.3 million. During
the quarter ended March 31, 1998, the company purchased one store which had
not been opened, one store which was an operating location and one
rental-purchase portfolio for approximately $0.5 million. In 1997, for the
quarter ended June 30, the Company purchased 14 stores and four
rental-purchase portfolios for approximately $5.6 million. During the
quarter ended March 31, 1997, in 30 separate transactions, the Company
purchased 72 stores and seven rental-purchase portfolios for approximately
$33.2 million.
The above acquisitions have been accounted for as purchases, as defined by
Accounting Principles Board Opinion No. ("APB") 16, and, accordingly the
operating results of the acquired businesses have been included in the
results of operations since their respective acquisition dates. The
purchase prices have been allocated as follows for the six months ended
June 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Rental Merchandise $ 14,454,481 $ 1,019,478
Property and equipment 2,322,209 131,770
Intangible assets 35,637,780 663,621
Other assets 742,082 --
Accounts payable and accrued expenses (1,755,428) --
Notes payable assumed (5,151,764) --
Notes payable issued (7,100,000) --
Deferred tax liability (338,360) --
------------ ------------
Cash paid, net of cash acquired $ 38,811,000 $ 1,814,869
------------ ------------
</TABLE>
7
<PAGE> 8
The following summary, prepared on an unaudited pro forma basis,
presents the results of operations (i) as if the above 1997 transactions
had been purchased as of the beginning of the year and (ii) to include the
effect of adjustments for amortization of intangibles, interest, income
taxes and weighted average shares outstanding.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Results of Operations
Six Months Ended
June 30, 1997
---------------------
<S> <C>
Revenue $ 116,626,022
Pro Forma net income $ 954,279
Pro forma net income per share:
Basic $ .06
Diluted $ .06
</TABLE>
The results of operations for the stores acquired in 1998 have been
excluded since the amounts are immaterial. The unaudited pro forma
information is presented for informational purposes only and is not
necessarily indicative of operating results that would have occurred had
the acquisitions been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
3. EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." ("SFAS No.
128") In accordance with SFAS No. 128, the Company computes basic pro forma
net income and net loss based on the weighted-average number of common
shares outstanding during each period presented. Diluted pro forma net
income and net loss per share is computed based on the weighted-average
number of common shares plus the dilutive effect of all potentially
dilutive securities, principally stock options, during each period
presented. For the three and six month periods ended June 30, 1998 the
diluted earnings per share excludes the effects of convertible notes and
stock options as they are considered anti-dilutive. All prior period net
income and net income per share amounts have been restated to comply with
the provisions of SFAS No. 128.
Basic and diluted earnings per common share is computed based on the
following information (In thousands except for per share data):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 839 $ (1,962) $ 1,372 $ (10,030)
======= ========= ======== =========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Weighted average number of shares
outstanding during the period 16,942 16,974 16,931 16,969
Dilutive stock options 174 -- 395 --
Weighted average number of shares used in
calculation of diluted earnings per common
share 17,116 16,974 17,326 16,969
======= ======= ======= =======
Basic earnings per common share $ .05 $ (.12) $ .08 $ (.59)
======= ======= ======= =======
Diluted earnings per common share $ .05 $ (.12) $ .08 $ (.59)
======= ======= ======= =======
</TABLE>
4. NOTES PAYABLE
On February 26, 1998, immediately following the merger of RTO, Inc.
("RTO") with and into the Company (the "RTO Merger") the Company entered
into a new revolving credit facility (the "Comerica Credit Agreement") with
Comerica Bank, as lender and agent for certain other lenders, which
provided for a $50,000,000 secured three-year credit facility. The Comerica
Credit Agreement replaced the existing credit agreements of Alrenco, Inc.
and RTO. The Comerica Credit Agreement provides for interest rates based on
a base rate (as defined), the agent's prime rate or the federal funds rate
plus 100 basic points, or a "Eurodollar Rate", plus an applicable margin.
Under the Comerica Credit Agreement, the Company has the option, provided
that certain conditions are met, to obtain an increase in the amount
available under the Comerica Credit Agreement up to an aggregate amount of
$100,000,000. The Comerica Credit Agreement is collateralized by
substantially all assets of the Company and by a pledge of the stock of the
Company's subsidiaries.
On April 1, 1998, borrowings available under the Comerica Credit
Agreement were increased to $60,000,000. On June 22, 1998 the Company
signed the First Amendment to the Comerica Credit Agreement whereby the
borrowings available were increased to $80,000,000 and additional financial
covenants were provided. The Company was in violation of certain financial
covenants as of June 30, 1998; however, the Company obtained waivers from
the lender with respect to such covenants. Management of the Company is
currently negotiating a second amendment to the Comerica Credit Agreement
in order to modify the financial covenants. Management believes the Company
will meet the requirements of these modified covenants.
5. RECLASSIFICATIONS
Certain reclassifications were made to the prior period financial
statements to conform with the current period presentation.
6. STATEMENTS OF CASH FLOW
Excluded from the Consolidated Statements of Cash Flow were the effect
of the following noncash activities for the six month periods ended June
30, 1997 and 1998:
9
<PAGE> 10
June 30, 1997
* The issuance of common stock to settle notes payable totaling
$587,500 to certain shareholders.
* Approximately $231,752 in capital leases for vehicles were converted
to operating leases with a net book value of $221,834 resulting in a
gain of $9,918.
* In connection with certain Purchase Acquisitions, the Company issued
a total of $7,100,000 of notes payable to individuals.
June 30, 1998
* The issuance of a non-compete agreement to a shareholder of
$1,600,000.
7. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") for its fiscal year
ending December 31, 1998. SFAS No. 130 requires companies to display an
amount representing the total comprehensive income for the period in the
financial statement which is displayed with the same prominence as other
financial statements. The Company has no differences between comprehensive
income and net income.
Management believes that the adoption of SFAS 131, 132 and 133 will not
have a material impact on the financial statements of the Company.
8. REINCORPORATION
On June 23, 1998, Alrenco, Inc. was reincorporated in the State of
Delaware as Home Choice Holdings, Inc. The reincorporation was accounted
for as a tax-free reorganization of companies under common control in a
manner similar to a pooling of interests. Upon the effectiveness of the
reincorporation each outstanding share of no par Alrenco Inc. common stock
was converted into one share of Home Choice Holdings, Inc. common stock,
par value $.01.
10
<PAGE> 11
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
As of June 30, 1998, the Company has redefined its current strategic objectives
to focus on improving the performance of under-performing stores in order
to enhance both existing and new store revenues and create efficiencies to
reduce its overall cost structure. As a result, the Company does not plan to
open any additional new stores for the remainder of 1998; however, the Company
will remain market-focused and opportunistic with respect to acquisitions. The
continued growth and financial performance of the Company is significantly
affected by the Company's opening of new rental purchase stores as well as
acquiring existing stores and integrating them into current operations.
For the six month period ended June 30, 1998 the Company opened 32 new stores,
acquired six stores and two rental-purchase portfolios, while for the six month
period ended June 30, 1997 the Company opened 12 new stores, acquired 94 stores
and 11 rental-purchase portfolios.
The following table summarizes the quarterly store activity for 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Store locations at January 1, 287 434
============================ =============================
Locations acquired 80 1
New store openings 5 14
Locations sold - (1)
Mergers into existing stores (2) (3)
---------------------------- -----------------------------
Store locations at March 31, 370 445
============================ =============================
Locations acquired 14 5
New store openings 7 18
Locations sold (1) (2)
Mergers into existing stores - (10)
---------------------------- -----------------------------
Store locations at June 30, 390 456
============================ =============================
Locations acquired 28
New store openings 4
Locations sold (7)
Mergers into existing stores (2)
----------------------------
Store locations at September 30, 413
============================
Locations acquired 5
New store openings 19
Locations sold -
Mergers into existing stores (3)
----------------------------
Store locations at December 31, 434
============================
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
Comparison of Three Months ended June 30, 1998 and 1997
Revenues. Revenue for the quarter ended June 30, 1998 increased $8.7
million or 15.4% to $65.5 million from the comparable quarter in 1997. New
stores opened in 1997 contributed $3.3 million to the increase from the quarter
ended June 30, 1997. Revenues from 1997 purchase acquisitions increased $4.8
million from $11.9 million for the quarter ended June 30, 1997 to $16.7 million
for the quarter ended June 30, 1998. Revenues from 1998 purchase acquisitions
and 1998 new stores were $1.3 million for the quarter ended June 30, 1998.
These increases were offset by a decrease in revenues from existing stores as
of December 31, 1996 (excluding 1997 and 1998 purchases and new store openings)
of $0.7 million or 1.6% to $43.8 million for the quarter ended June 30, 1998
from $44.5 million for the same quarter last year. This decrease in revenues
from existing stores is primarily attributable to the sale of seven stores in
the quarter ended September 30, 1997 which had revenues of $1.0 million for the
quarter ended June 30, 1997 and contributed no revenue for the quarter ended
June 30, 1998.
Depreciation and Disposition of Rental Merchandise. Depreciation and
disposition of rental merchandise increased $4.7 million or 30.0% to $20.4
million for the quarter ended June 30, 1998 from $15.8 million for the
comparable period in 1997. As a percentage of revenues, depreciation and
disposition of rental merchandise for the second quarter of 1998 increased to
31.2% from 27.7% for the quarter ended June 30, 1997. The factors contributing
to the increase in depreciation and disposition of rental merchandise as a
percentage of revenues in 1998 as compared to 1997 are as follows: (i) in 1997,
a conforming adjustment was recorded in order to depreciate all rental
merchandise using the income forecasting method which resulted in a
non-recurring decrease in expense of approximately $0.4 million, (ii) the
inability of certain of the 1996 and 1997 Pooling Acquisitions to replenish
rental merchandise during the last quarter of 1996 and the first quarter of
1997, (depreciation and disposition is typically lower for used merchandise)
and (iii) an increase in inventory charge-offs recorded in 1998. In July of
1998 the Company began implementing a plan to operationally extend the life of
the rental merchandise and therefore reduce the monthly product cost as a
percentage of revenue.
Other Direct Store Expenses. Other direct store expenses increased
$5.7 million or 18.9% to $36.1 million for the quarter ended June 30, 1998 from
$30.4 million for the comparable period in 1997. As a percentage of revenues,
other direct store expenses increased 1.6% to 55.0% for the quarter ended June
30, 1998 compared to 53.4% for the quarter ended June 30, 1997. The increase in
other direct store expenses is primarily attributable to (i) $1.5 million of
increased advertising costs, (ii) $1.1 million of increased store occupancy
costs, and (iii) $2.6 million of increased salaries and wages. The Company
incurred additional advertising costs of $0.7 million for the quarter ended
June 30, 1998 in order to establish a consistent brand image for the entire
HomeChoice store chain. The Company does not expect to incur these additional
advertising costs on a continuing basis.
Corporate Expenses. Corporate expenses increased $2.6 million or 48.0%
to $8.0 million for the quarter ended June 30, 1998 from $5.4 million for the
comparable period in 1997. As a percentage of revenues, corporate expenses
increased to 12.3% for the quarter ended June 30, 1998 compared to 9.6% for the
quarter ended June 30, 1997. The increase in expenses is a result of additional
staff and facilities necessary to administer the 1997 purchase
12
<PAGE> 13
and pooling acquisitions as well as the RTO Merger. On July 23, 1998 the
Company initiated a plan to reduce corporate overhead by creating efficiencies
and removing redundancies created in the Alrenco integration process. As a
result, the Company is eliminating 64 full-and part-time positions at the
corporate level. Management expects to achieve costs savings of $1.1 million in
1998 and $2.6 million in 1999 as a result of this plan.
Cost of Business Combinations. Cost of business combinations for the
quarter ended June 30, 1998 includes the costs incurred in order to maintain an
acquisitions department of $0.2 million offset by a net reduction in the
estimated accrual for lease terminations and an increase in severance costs. For
the quarter ended June 30, 1997 business combinations costs consist primarily of
expenses incurred in order to maintain an acquisitions department.
Name Change Expenses. During the quarter ended December 31, 1997,
prior to its merger with the Company, RTO initiated a program to change the
name of its stores to "HomeChoice Lease or Own" from the various trade names
acquired by RTO in its 1996 and 1997 purchase and pooling acquisitions. The
Company incurred $0.2 million during the quarter ended June 30, 1998 in
connection with the program compared to $0.4 million during the quarter ended
March 31, 1998. The Company expects to complete this program by December 31,
1998.
Amortization of Intangibles. Amortization of intangibles decreased
$1.2 million to $1.7 million in 1998 from $2.9 million in 1997. As a percentage
of revenues, amortization of intangibles decreased from 5.0% for the quarter
ended June 30, 1997 to 2.5% for the quarter ended June 30, 1998. The decrease
is attributable to the reduced amortization expense of the 1996 and 1997
purchase acquisitions primarily for customer rental agreements which are
amortized on an accelerated method over an estimated useful life of 18 months.
Other non-operating expense, net. Other non-operating expense, net,
increased approximately $0.7 million to $0.8 million from $0.1 million for the
quarter ended June 30, 1997. The majority of these costs were incurred as a
result of the Company's decision to close the east regional office
located in New Albany, Indiana during the second quarter of 1998 and
accordingly disposing of leasehold improvements and other assets net of
proceeds.
Net Income (Loss). For the quarter ended June 30, 1998, the Company
experienced a net loss of $2.0 million compared to net income of $0.8 million
for the quarter ended June 30, 1997 for the reasons discussed above.
Comparison of Six Months ended June 30, 1998 and 1997
Revenues. Revenue for the six month period ended June 30, 1998 increased $20.9
million or 19.0% to $131.1 million from the comparable period in 1997. New
stores opened in 1997 contributed $6.0 million to the increase from the
year-to-date ended June 30, 1997. Revenues from 1997 purchase acquisitions
increased $13.1 million from $21.0 million for the year-to-date ended June 30,
1997 to $34.1 million for the year-to-date ended June 30, 1998. Revenues from
1998 purchase acquisitions and 1998 new stores were $1.5 million for the year to
date ended June 30, 1998. Revenues from stores existing as of December 31, 1996
(excludes 1997 and 1998 purchases and new store
13
<PAGE> 14
openings) increased $0.3 million to $89.0 million for the year to date
ended June 30, 1998 from $88.7 million for the comparable period in 1997. The
increase in revenues from existing stores is reduced by the sale of seven stores
in the quarter ended September 30, 1997 which had revenues of $2.2 million for
the six months ended June 30, 1997 and which contributed no revenues in 1998.
Depreciation and Disposition of Rental Merchandise. Depreciation and
disposition of rental merchandise increased $8.6 million or 27.9% to $39.6
million for the year to date ended June 30, 1998 from $30.9 million for the
comparable period in 1997. As a percentage of revenues, depreciation and
disposition of rental merchandise for the six months ended June 30, 1998
increased to 30.2% from 28.1% for the year to date ended June 30, 1997. The
factors contributing to the increase in depreciation and disposition of rental
merchandise as a percentage of revenues in 1998 as compared to 1997 are as
follows: (i) in 1997, a conforming adjustment was recorded in order to
depreciate all rental merchandise using the income forecasting method which
resulted in a non-recurring decrease in expense of approximately $0.4 million,
(ii) the inability of certain of the 1996 and 1997 Pooling Acquisitions to
replenish rental merchandise during the last quarter of 1996 and the first
quarter of 1997, (depreciation and disposition is typically lower for used
merchandise) and (iii) an increase in inventory charge-offs recorded in 1998. In
July of 1998 the Company began implementing a plan to operationally extend the
life of the rental merchandise and therefore reduce the monthly product cost as
a percentage of revenue.
Other Direct Store Expenses. Other direct store expenses increased
$13.8 million or 23.7% to $71.9 million for the year-to-date ended June 30,
1998 from $58.1 million for the comparable period in 1997. As a percentage of
revenues other direct store expenses increased 2.1% to 54.9% for the year to
date ended June 30, 1998 compared to 52.8% for the year-to-date ended June 30,
1997. The increase in other direct store expenses is primarily attributable to
(i) $2.7 million of increased advertising costs, (ii) $2.1 million of increased
store occupancy costs, and (iii) $6.0 million of increased salaries and wages.
The Company incurred additional advertising costs of $0.7 million for the six
months ended June 30, 1998 in order to establish a consistent brand image for
the entire HomeChoice store chain. The Company does not expect to incur these
additional advertising costs on a continuing basis.
Corporate Expenses. Corporate expenses increased $2.9 million or 27.1%
to $13.7 million for the year-to-date ended June 30, 1998 from $10.8 million
for the comparable period in 1997. As a percentage of revenues, corporate
expenses increased to 10.5% for the year-to-date ended June 30, 1998 compared
to 9.8% for the year to date ended June 30, 1997. The increase is a result of
the additional staff and facilities necessary to administer the 1997 purchase
and pooling acquisitions and the RTO Merger. On July 23, 1998 the Company
initiated a plan to reduce corporate overhead by creating efficiencies and
removing redundancies created in the Alrenco integration process. As a result,
the Company is eliminating 64 full-and part-time positions at the corporate
level. Management expects to achieve minimum cost savings of approximately $1.1
million in 1998 and $2.6 million in 1999 as a result of this plan.
Cost of Business Combinations. Cost of business combinations for the
six months ended June 30, 1998 increased $10.6 million to $11.1 million from
$0.5 million for the comparable period in 1997. In 1998, cost of business
combinations are attributable to costs associated with the RTO Merger. The RTO
Merger costs included (i) investment banker fees, proxy presentation, printing
and other professional fees; (ii) employee severance and other costs associated
with relocating the corporate headquarters from
14
<PAGE> 15
Indiana to Texas; (iii) costs related to closing and merging stores in the same
markets following the merger; (iv) amortization expense of stock awards which
vested fully upon the RTO Merger and (v) costs associated with terminating
certain leases. Included in the quarter ended June 30, 1998 are the costs
incurred in order to maintain an acquisitions department of $0.2 million offset
by a net reduction in the estimated accrual for lease terminations and an
increase in severance costs. Cost of business combinations for the six months
ended June 30, 1997 were incurred in connection with seven pooling acquisitions.
Name Change Expenses. During the year to date ended December 31, 1997,
prior to its merger with the Company, RTO initiated a program to change the
name of its stores to "HomeChoice Lease or Own" from the various trade names it
acquired in its 1996 and 1997 purchase and pooling acquisitions. The Company
has incurred $0.6 million for the year-to-date ended June 30, 1998 in
connection with this program. The Company expects to complete this program by
December 31, 1998.
Amortization of Intangibles. Amortization of intangibles decreased
$2.1 million to $3.6 million for the six months ended June 30, 1998 from $5.7
million for the comparable period in 1997. As a percentage of revenues,
amortization of intangibles decreased from 5.1% for the year to date ended June
30, 1997 to 2.7% for the year-to-date ended June 30, 1998. The decrease is
attributable to the reduced amortization expense of the 1996 and 1997 purchase
acquisitions primarily for customer rental agreements which are amortized on an
accelerated method over an estimated useful life of 18 months.
Other non-operating income (expense), net. Other non-operating expenses
increased approximately $0.7 million to $0.8 million from $0.1 million for the
year-to-date ended June 30, 1997. The majority of these costs were incurred as a
result of the Company's decision to close the east regional office located in
New Albany, Indiana during the second quarter of 1998 and accordingly
disposing of leasehold improvements and other assets net of proceeds.
Net Income (Loss). For the six month period ended June 30, 1998, the
Company experienced a net loss of $10.0 million compared to net income of $1.2
million for the six months ended June 30, 1997 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of the
acquisition of existing stores (including the retirement of any assumed
indebtedness), the opening of new stores, the purchase of additional rental
merchandise for new store openings and the replacement of rental merchandise
which has been sold, charged-off, rented to term or is no longer suitable for
rent.
Historically, the Company's growth has been financed through
internally generated working capital, borrowings under loan agreements and the
issuance of
15
<PAGE> 16
common stock. During the six month periods ended June 30, 1997 and
1998, the Company did not issue common stock for purposes of raising capital.
The Company has opened 32 new stores during the first six months of
1998 and does not expect to open any additional new stores for the remainder of
the year. The new stores opened in 1998 are expected to operate at a loss for a
period of six to nine months from their respective openings. For the first six
months of 1998 the Company has incurred operating losses of $1.5 million
related to these new stores. Purchased stores may also be unprofitable when
acquired or may become unprofitable during the period of acquisition due to
disruptions in their business operations caused by the acquisition. Some stores
purchased as part of an acquisition of a larger group of stores may be closed
because they are unprofitable. The operating results of the new and acquired
stores may also suffer because of disruptions associated with integrating their
operations into the existing operations of the Company. Because of these
factors, the growth of the Company's business through new store openings and
acquisitions of existing stores is likely to affect the Company's results of
operations and financial condition. Such factors may also cause results to vary
from quarter to quarter and may cause the market price of Common Stock to
fluctuate substantially.
On February 26, 1998, immediately following the RTO Merger, the Company
entered into a revolving credit facility with Comerica Bank as lender and agent
for certain other lenders (the "Comerica Credit Agreement") which provides for a
$50,000,000 secured three-year credit facility. Under the Comerica Credit
Agreement, the Company has the option, provided that certain conditions are met,
to increase the amount available under the Comerica Credit Agreement to
$100,000,000. On April 1, 1998 the Company entered into an agreement to increase
the amount of the revolving line of credit under the Comerica Credit Agreement
to $60,000,000. On June 22, 1998 the Company signed the First Amendment to the
Comerica Credit Agreement whereby the borrowings available were increased to
$80,000,000 and additional financial covenants were provided. The Company was in
violation of certain financial covenants as of June 30, 1998; however, the
Company obtained waivers from the lender with respect to such covenants.
Management of the Company is currently negotiating a second amendment to the
Comerica Credit Agreement in order to modify the financial covenants. Management
believes the Company will meet the requirements of these modified financial
covenants and that the $80,000,000 available under the agreement when combined
with the Company's internal working capital will be sufficient to meet all of
the Company's current capital requirements.
Net cash used in operating activities for the six months ended June
30, 1998 increased $12.3 million to $15.1 million compared to $2.8 million for
the six months ended June 30, 1997. The increase is primarily attributable to
the decrease in accounts payable and accrued expenses of $9.0 million.
Net cash used in investing activities for the six months ended June
30, 1998 decreased $32.3 million to $7.7 million from $40.0 million for the six
months ended June 30, 1997. The decrease is primarily attributable to the
decrease in the cash used to acquire businesses of $37.0 million.
16
<PAGE> 17
Net cash provided by financing activities for the six months ended
June 30, 1998 increased $15.7 million to $26.8 million from $11.1 million for
the six months ended June 30, 1997. The increase is primarily attributable to
the net increase in borrowings under the new and old revolving credit
facilities of $18.8 million offset by the increase in the book overdraft of
$8.3 million.
OTHER MATTERS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") for its fiscal year ending
December 31, 1998. SFAS No. 130 requires companies to display an amount
representing the total comprehensive income for the period in the financial
statement which is displayed with the same prominence as other financial
statements. The Company has no differences between comprehensive income and net
income.
Management believes that the adoption of SFAS 131, 132 and 133 will not have a
material impact on the financial statements of the Company.
The Company is aware of the issues associated with the program in existing
computer and software systems as the millenium ("Year 2000") approaches. The
Year 2000 problem is pervasive and complex, as virtually all computer
operations could be affected in some way by the rollover of the two-digit year
value to "00". The issue is whether systems will properly recognize date
sensitive information when the year rolls over to 2000. Systems that do not
properly recognize such information could result in erroneous data or cause
complete system failures. The Company believes its primary systems will
successfully handle the rollover to the Year 2000. Based upon these facts, the
Company believes that the Year 2000 problem will not have a material effect on
the financial position, results of operations or cash flows of the Company.
The Company's electronics and appliances vendors are generally multi-national
manufacturers of name brand products. These manufacturers reviewed their
products for possible Year 2000 conflicts in their annual lineups for each of
the last several years. Based on the nature of its business and systems and the
aforementioned facts, the Company believes there will be no significant Year
2000 complications with its rental products.
17
<PAGE> 18
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 23, 1998, the annual meeting of the Company's shareholders was
convened for (i) the election of Michael D. Walts and Thomas E. Hannah as
directors of the Company, (ii) the ratification of the Alrenco, Inc. 1998 Stock
Incentive Plan, (iii) to ratify the reincorporation of the Company in the State
of Delaware, and (iv) to transact such other business that came before the
meeting. The election of Messrs. Walts and Hannah was approved by the Company's
shareholders by a vote of 15,695,460 and 15,708,180 votes in favor,
respectively, and 73,536 votes abstaining. The ratification of the Alrenco, Inc.
1998 Stock Incentive Plan was approved by the shareholders by a vote of
11,939,521 votes in favor, 855,732 votes opposed and 7,208 votes abstaining. The
ratification of the reincorporation of the Company in the State of Delaware was
approved by the shareholders by a vote of 12,753,341 votes in favor, 68,585
votes opposed and 5,290 votes abstaining.
Item 5. Other Information.
On June 22, 1998 the Company signed the First Amendment to the Credit
Agreement with Comerica Bank as lender and agent for certain other lenders,
whereby the borrowings available under the agreement were increased to
$80,000,000 and additional financial covenants were provided.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
The following exhibit is filed as part of this report
Exhibit No. Description
10.1 First Amendment to Credit Agreement between
Alrenco, Inc. and Comerica Bank - Texas as lender
and agent for certain other lenders
27.1 Financial Data Schedule
B. Reports on Form 8-K
1. On June 2, 1998, the Registrant filed a report on Form 8-K to
announce the change in CFO from K. David Belt to John Egeland.
2. On June 30, 1998, the Registrant filed a report on Form 8-K to
announce the following events which occurred at the June 23, 1998
shareholder's meeting:
(i) the re-incorporation of the Company in the state of
Delaware
(ii) the election of Messrs. Walts and Hannah to the Board of
Directors
(iii) the ratification of the Alrenco, Inc. 1998 Stock
Incentive Plan
(iv) the resignation of Billy W. White, Sr. as Chief
Executive Officer and the appointment of James G.
Steckart as his successor
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf of the
undersigned thereto duly authorized.
Date: August 14, 1998
HOME CHOICE HOLDINGS, INC.
(Registrant)
/s/ John T. Egeland
--------------------------------
John T. Egeland
Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.1 First Amendment to Credit Agreement between Alrenco,
Inc. and Comerica Bank- Texas as lender and agent for
certain other lenders
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FINAL
06/22/98
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") is made as of this
22nd day of June, 1998 by and among Alrenco, Inc., an Indiana corporation
("Company"), Comerica Bank-Texas and the other banks signatory hereto (
including the New Bank, each individually, a "Bank" and collectively, the
"Banks") and Comerica Bank, as agent for the Banks (in such capacity, "Agent").
RECITALS
A. Company, Agent and the Banks entered into that certain Alrenco
Amended and Restated Revolving Credit Agreement dated as of April 1, 1998 (the
"Credit Agreement") under which the Banks extended (or committed to extend)
credit to the Company, as set forth therein.
B. The Company has requested that Agent and the Banks (i) increase the
amount of the Revolving Credit facility, (ii) add a bank (the "New Bank") as a
Bank under the Credit Agreement and (iii) make certain other amendments to the
Credit Agreement, and Agent and the Banks are willing to do so, but only on the
terms and conditions set forth in this First Amendment.
NOW, THEREFORE, Company, Agent and the Banks agree:
l. Section 1 of the Credit Agreement is hereby amended, as follows:
(a) New definition "EBITDA" is hereby added to the Credit
agreement as follows:
"EBITDA" of any Person shall mean, for any period,
EBITDAR of such Person minus, to the extent added in the
computation of such EBITDAR, the amount of all Rental
Expenses, determined in each case in accordance with GAAP."
(b) New definition of "First Amendment Effective Date"
is added, as follows:
"First Amendment Effective Date" shall mean the
date on which all conditions are satisfied to the
effectiveness of the First Amendment to Credit Agreement
dated as of June 22, 1998 executed and delivered by and among
the Company, the Banks and the Agent."
<PAGE> 2
(c) The definition of "Interest Period" is amended by
adding in the second line thereof, between the words "three (3)"
and "six (6)" the word "or" and deleting in the second line
thereof, the words "or twelve (12)".
(d) New definition of "Interest Rate Protection
Agreement" is added, as follows:
"`Interest Rate Protection Agreement(s)' shall mean
any interest rate, swap, cap, floor, collar, forward rate
agreement or other rate protection transaction, or any
combination of such transactions or agreements or any option
with respect to any such transactions or agreements now
existing or hereafter entered into by Company or any of its
Subsidiaries to manage existing or anticipated interest rate
risk and not for speculative purposes."
(e) The definition of "Indebtedness" is amended and
restated in its entirety, as follows:
"`Indebtedness' shall mean all indebtedness and
liabilities (including without limitation interest, fees and
other charges) arising under this Agreement or any of the
other Loan Documents, whether direct or indirect, absolute or
contingent, of Company or any Guarantor to any of the Banks
or to the Agent, in any manner and at any time, whether
evidenced by the Notes, arising under any Guaranty, or any of
the other Loan Documents, due or hereafter to become due, now
owing or that may hereafter be incurred by Company or any
Guarantor to, any of the Banks or by Agent, and all net
obligations with respect to Interest Rate Protection
Agreements entered into between Company and/or any of its
Guarantors and a Bank or an Affiliate of a Bank and any
judgments that may hereafter be rendered on such indebtedness
or any part thereof, with interest according to the rates and
terms specified, or as provided by law, and any and all
consolidations, amendments, renewals, replacements,
substitutions or extensions of any of the foregoing;
provided, however that for purposes of calculating the
Indebtedness outstanding under the Notes or any of the other
Loan Documents, the direct and indirect and absolute and
contingent obligations of the Company and the Guarantors
(whether direct or contingent) shall be determined without
duplication."
(f) The definition of "Loan Documents" is amended by
inserting in the second line thereof, immediately following the
term "the Guaranty(ies), the words "and any Interest Rate
Protection Agreements entered into between the Company and/or any
of its Guarantors and a Bank or an Affiliate of a Bank".
(g) The definition of "Revolving Credit Aggregate
Commitment" is amended and restated in its entirety, as follows:
2
<PAGE> 3
"Revolving Credit Aggregate Commitment" shall mean
Eighty Million Dollars ($80,000,000) subject to the increase
of the Revolving Credit Aggregate Commitment, pursuant to
Section 2.10 hereof, by an amount up to the amount of the
Revolving Credit Optional Increase and subject to reduction
or termination pursuant to Section 2.8 or 10.2 hereof."
(h) The definition of "Revolving Credit Optional Increase" is
amended and restated in its entirety, as follows:
"Revolving Credit Optional Increase" shall mean
an amount up to Twenty Million Dollars ($20,000,000)."
(i) New definition of "Total Debt to EBITDA Ratio" is added
as follows:
"Total Debt to EBITDA Ratio" shall mean as of the
end of each fiscal quarter, a ratio (i) the numerator of
which shall be equal to Total Debt as of the last day of such
fiscal quarter and (ii) the denominator of which shall be
EBITDA for the Measuring Period then ending. For the purposes
of this definition, " EBITDA for the Measuring Period then
ending" shall mean (x) for the fiscal quarter ending on June
30, 1998, EBITDA for the period beginning on January 1, 1998
and ending on June 30, 1998 multiplied by 2.00; (y) for the
fiscal quarter ending on September 30, 1998, EBITDA for the
period beginning on January 1, 1998 and ending on September
30, 1998 multiplied by 1.33; and (z) for the fiscal quarter
ending on December 31, 1998 and for each subsequent fiscal
quarter, EBITDA for the four preceding fiscal quarters."
2. Section 7 is amended by adding a new Section 7.22
immediately following Section 7.21, as follows:
"7.22 Year 2000 Requirement. The Company and its Guarantors
have reviewed the areas in their business and operations which could
be adversely affected by, and have developed or are developing a
program to address on a timely basis the risk that computer
applications used by the Company and its Guarantors may be unable to
recognize and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999. Any
reprogramming required to permit the proper functioning, in and
following the year 2000, of (i) the Company's and its Guarantors'
computer systems and (ii) equipment containing embedded microchips
(including systems and equipment supplied by others or with which the
Company's or any Guarantor's systems interface) and the testing of all
such systems and equipment, as so reprogrammed, will be completed by
September 30, 1999. The cost to the Company and its Guarantors of such
reprogramming and testing and of the
3
<PAGE> 4
reasonably foreseeable consequences of year 2000 to the Company and
its Guarantors (including, without limitation, reprogramming errors
and the failure of others' systems or equipment) will not result in a
Default or a Material Adverse Effect. Except for such of the
reprogramming referred to in the preceding sentence as may be
necessary, the computer and management information systems of the
Company and its Guarantors are and, with ordinary course upgrading and
maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Company and its Guarantors to conduct their
business without Material Adverse Effect."
3. New Section 8.12A is added to the Credit Agreement
immediately following Section 8.12 thereof, as follows:
"8.12A Total Debt to EBITDA Ratio. Maintain, as of the last
day of each fiscal quarter, a Total Debt to EBITDA Ratio of not more
than the ratio set forth below as of the last day of the applicable
fiscal quarter set forth below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUARTER(S) ENDING RATIO
- -------------------------------------------------------------------------------
<S> <C>
June 30, 1998 and September 30, 1998 4.0 to 1.0
- -------------------------------------------------------------------------------
December 31, 1998 and thereafter 3.5 to 1.0
- -------------------------------------------------------------------------------
</TABLE>
4. Section 9.1 (Indebtedness) of the Credit Agreement is amended by
deleting the word "and" at the end of clause (i) thereof, redesignating "clause
(j)" as "clause (k)" and adding a new "clause (j)" immediately following clause
(i), as follows:
"(j) Interest Rate Protection Agreements; and".
5. Section 9.2 (Liens) is amended by amending and restating
in its entirety Section 9.2(d) as follows:
"(d) Liens in favor of Agent, as Security for the
Indebtedness, and Liens in favor of a Bank or an Affiliate of any Bank,
as Security for Interest Rate Protection Agreements,"
6. Section 9.7 (Limitation on Capital Expenditures) is
amended and restated in its entirety as follows:
"9.7 Limitation on Capital Expenditures. Except in connection
with the Merger, make or commit to make (by way of the acquisition of
securities of a Person or otherwise) any expenditure in respect of the
purchase or other acquisition of fixed or capital assets except for:
4
<PAGE> 5
(a) acquisitions permitted by Section 9.4, to the
extent assets are acquired pursuant to such acquisitions which
constitute Capital Expenditures;
(b) expenditures in the ordinary course of business
(but excluding expenditures in respect of any asset acquired in
connection with normal replacement and maintenance programs properly
charged to current operations) not exceeding, in the aggregate for
the Company and its Subsidiaries (i) during fiscal year 1998,
$6,000,000 and (ii) during any fiscal year thereafter, $3,000,000;
and
(c) expenditures in respect of any asset acquired in
connection with normal replacement and maintenance programs properly
charged to current operations, not exceeding, in the aggregate for
the Company and its Subsidiaries during any fiscal year, 1.5% of
"Total Revenues" of the Company for such fiscal year as such "Total
Revenues" are reported in its 10-Q and 10-K Reports filed with the
U.S. Securities and Exchange Commission.
7. Section 9.8 (Limitation on Investments) is amended by adding a new
clause (h) immediately following clause (g) (but before the period) as follows:
"; and
(h) Interest Rate Protection Agreements".
8. Section 14.12 of the Credit Agreement is hereby amended by
inserting in the parenthetical which begins of the second line thereof,
immediately following the word "employees", the words "or to employees of any
of its Affiliates".
9. Section 13.13 (Co-Agent) is hereby amended and restated in its
entirety as follows:
"13.13 Co-Agent and Documentation Agent. Bank One, Texas,
N.A. has been designated by the Company as "Co-Agent" and
NationsBanks, N.A. has been designated by the Company as
"Documentation Agent", each under this Agreement. Other than their
respective rights, powers, obligations, liabilities, responsibilities,
remedies and duties as a Bank hereunder, neither the Co-Agent nor the
Documentation Agent shall have any administrative, collateral or other
rights, powers, obligations, liabilities, responsibilities or duties
hereunder, provided, however, that Co-Agent and the Documentation
Agent shall be entitled to the benefits afforded to the Agent under
Sections 13.5 and 13.6 hereof."
10. This First Amendment shall become effective (the "First Amendment
Effective Date") (according to the terms and as of the date hereof) upon
satisfaction by the Company of the following conditions:
5
<PAGE> 6
(a) Agent shall have received:
(i) counterpart originals of this First Amendment,
in each case duly executed and delivered by Company, and the
Banks (including the New Bank), in form satisfactory to Agent
and the Banks;
(ii) new Notes or renewal and replacement Notes (the
"New Notes") substantially in the form of Exhibit B to the
Credit Agreement, payable to the order of each of the Banks
in the face amount of each such Bank's Percentage of the
Revolving Credit Aggregate Commitment as set forth in
Attachment I (Exhibit 1.2 -- Percentages) hereto;
(iii) certified copies of resolutions of the Boards
of Directors of each of the Company and each of the
Guarantors authorizing, as applicable, the execution and
delivery of this First Amendment, the New Notes and the other
Loan Documents required under this clause (a) and the
performance by the Company and the undersigned Guarantors of
each of their respective obligations under the Credit
Agreement as amended by this First Amendment and the new
Notes; and
(iv) an opinion of counsel to the Company and the
Guarantors.
(b) Company shall have paid to Agent, for distribution to the
Banks, as applicable (i) all interest, fees (including the Revolving
Credit Commitment Fee) and other amounts, if any, accrued to the First
Amendment Effective Date and (ii) all fees referenced in Agency Fee
Letter dated December 9, 1997.
11. New Schedule 1.2 (setting forth the applicable Percentages as
revised hereunder) attached hereto as Attachment I shall replace existing
Schedule 1.2 in its entirety.
12. By its execution of this First Amendment, the New Bank hereby
(a) confirms that it has received a copy of the Credit
Agreement and the exhibits and schedules referred to therein, and all
other Loan Documents which it considers necessary, together with
copies of the other documents which were required to be delivered
under the Credit Agreement as a condition to the making of the loans
thereunder;
(b) acknowledges and agrees that it: (i) has made and will
continue to make such inquiries and has taken and will take such care
on its own behalf as would have been the case had its commitment been
granted and its loans been made directly by such New Bank to the
Company without the intervention of the Agent or any other Bank; and
(ii) has made and will
6
<PAGE> 7
continue to make, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it has
deemed appropriate, its own credit analysis and decisions relating to
the Credit Agreement;
(c) acknowledges and agrees that the Agent has not made any
representations or warranties about the creditworthiness of the
Company or any other party to the Credit Agreement or any other of the
Loan Documents, or with respect to the legality, validity, sufficiency
or enforceability of the Credit Agreement, or any other of the Loan
Documents; and
(d) represents and warrants that it is a Person to which
assignments are permitted pursuant to Sections 14.8(c) and (d) of the
Credit Agreement.
13. Concurrently with the First Amendment Effective Date pursuant to
Section 10 hereof, each Bank (including the New Bank) shall have (i) a
Percentage equal to the percentage set forth in Attachment I hereto and (ii)
Revolving Loans (and participation in Letters of Credit) in its Percentage of
all Revolving Loans (and Letters of Credit) outstanding on the First Amendment
Effective Date. To facilitate the foregoing, each Bank (including the New Bank)
which as a result of the adjustments of Percentages evidenced by Attachment I
is to have a greater principal amount of Revolving Loans outstanding than such
Bank had outstanding under the Credit Agreement immediately prior to the First
Amendment Effective Date shall deliver to the Agent immediately available funds
to cover such Revolving Loans (and the Agent shall, to the extent of the funds
so received, disburse funds to each Bank which, as a result of the adjustment
of the Percentages, is to have a lesser principal amount of Revolving Loans
outstanding than such Bank had under the Credit Agreement immediately prior to
the First Amendment Effective Date). Each Bank which was a party to the Credit
Agreement prior the First Amendment Effective Date, upon receipt of its New
Note(s) (which Notes are to be in exchange for and not in payment of the
predecessor Revolving Credit Notes) issued by the Company to such Bank, shall
return its predecessor Revolving Credit Notes and, if applicable, its Swing
Line Note, to the Agent which shall stamp such Notes "Exchanged" and deliver
said Notes to the Company. The New Bank agrees that all interest and fees
accrued under the Credit Agreement prior to the First Amendment Effective Date
are the property of the Banks which were parties to the Credit Agreement prior
to the First Amendment Effective Date. Letter of Credit Fees paid prior to the
First Amendment Effective Date shall not be recalculated, redistributed or
reallocated by Agent to the Banks.
14. Each of Company and the undersigned Guarantor hereby represents
and warrants that, after giving effect to the amendments contained herein, (a)
execution and delivery of this First Amendment, the New Notes (as defined
above) and the other Loan Documents required to be delivered hereunder, and the
performance by the Company of its obligations under the Credit Agreement as
amended hereby (herein, as so amended, the "Amended Credit Agreement") are
within such undersigned's corporate powers, have been duly authorized, are not
in contravention of law or
7
<PAGE> 8
the terms of its articles of incorporation or bylaws or other organic documents
of the parties thereto, as applicable, and except as have been previously
obtained (or as referred to in Section 7.13 of the Amended Credit Agreement) do
not require the consent or approval, material to the amendments contemplated in
this First Amendment or the Amended Credit Agreement, of any governmental body,
agency or authority, and this First Amendment, the Amended Credit Agreement,
the New Notes and the other Loan Documents required to be delivered hereunder,
will constitute the valid and binding obligations of such undersigned parties
enforceable in accordance with its terms, except as enforcement thereof may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium, ERISA
or similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (whether enforcement is sought in a proceeding in
equity or at law), and (b) the continuing representations and warranties set
forth in Sections 7.1 through 7.22, inclusive, of the Amended Credit Agreement
are true and correct on and as of the date hereof, and such representations and
warranties are and shall remain continuing representations and warranties
during the entire life of the Amended Credit Agreement.
15. Except as specifically set forth above, this First Amendment shall
not be deemed to amend or alter in any respect the terms and conditions of the
Credit Agreement, any of the Notes issued thereunder or any of the other Loan
Documents, or to constitute a waiver by the Banks or Agent of any right or
remedy under or a consent to any transaction not meeting the terms and
conditions of the Credit Agreement, any of the Notes issued thereunder or any
of the other Loan Documents.
16. Unless otherwise defined to the contrary herein, all capitalized
terms used in this First Amendment shall have the meaning set forth in the
Credit Agreement.
17. This First Amendment may be executed in counterpart in accordance
with Section 14.10 of the Credit Agreement.
18. This First Amendment shall be construed in accordance with and
governed by the laws of the State of Michigan.
[SIGNATURES FOLLOW ON SUCCEEDING PAGES]
8
<PAGE> 9
WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK, ALRENCO, INC.
as Agent
By: By:
---------------------------- ----------------------------
Its: Its:
---------------------------- ----------------------------
One Detroit Center
9th Floor - MC 3289
500 Woodward Avenue
Detroit, Michigan 48226-3289
Attention: Corporate Finance
BANKS: COMERICA BANK-TEXAS
By:
----------------------------
Its:
---------------------------
BANK ONE, TEXAS, N.A.
By:
----------------------------
Its:
---------------------------
NATIONSBANK, N.A.
By:
----------------------------
Its:
---------------------------
9
<PAGE> 10
Acknowledgment of Guarantors
Each of the undersigned, an authorized officer of RTO Operating, Inc.
("RTO Operating"), Action Rent-To-Own Holdings of South Carolina, Inc.
("Action"), RTO Holding Co. ("RTO Holding") or, ATRO, Inc. ("ATRO, and
individually with each of RTO Operating, Action, and RTO Holding a "Guarantor",
and any or all of them, collectively the "Guarantors"), respectively, hereby
acknowledges on behalf of the Guarantor for which it is an authorized officer
that (a) the applicable Guarantor executed a Guaranty dated as of April 1, 1998
pursuant to which such Guarantor guaranteed the obligations of Alrenco, Inc.
(the "Company"), under that certain Alrenco Amended and Restated Credit
Agreement dated as of April 1, 1998 (the "Credit Agreement") by and among the
Company, certain financial institutions (the "Banks") and Comerica Bank as
agent for the Banks (the "Agent"), (b) the Company, the Banks (including the
New Bank, as defined therein) and the Agent have executed a First Amendment
dated as of date hereof (the "First Amendment") to such Credit Agreement (the
Credit Agreement as amended thereby, the "Amended Credit Agreement"). The
undersigned hereby ratifies and confirms, on behalf of the applicable
Guarantor, such Guarantor's obligations under the Amended Credit Agreement, and
agrees that the applicable Guaranty remains in full force and effect after
giving effect to the effectiveness of the First Amendment and that, upon such
effectiveness, all references in such Amended Credit Agreement to the "Credit
Agreement" or the "Notes" issued thereunder shall be references to the Amended
Credit Agreement and the Notes issued thereunder. Capitalized terms not
otherwise defined herein will have the meanings given in the Amended Credit
Agreement. This acknowledgment shall be governed by and construed in accordance
with the laws of, and be enforceable in, the State of Michigan.
Dated as of the 22nd day of June, 1998.
RTO OPERATING, INC.
By:
--------------------------
Its: RTO HOLDING CO., INC.
------------------------- By:
------------------------
ACTION RENT-TO-OWN HOLDINGS Its:
OF SOUTH CAROLINA, INC. -----------------------
By:
----------------------------
Its: ATRO, INC.
----------------------------
By:
------------------------
Its:
-----------------------
10
<PAGE> 11
ATTACHMENT 1
[Replacement Schedule 1.2 -- Percentages]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
BANK PERCENTAGE ALLOCATION
- -------------------------------------------------------------------------------
<S> <C> <C>
Comerica Bank- Texas 43.75% $35,000,000
- -------------------------------------------------------------------------------
Bank One, Texas, N.A. 31.25% $25,000,000
- -------------------------------------------------------------------------------
NationsBank, N.A. 25.00% $20,000,000
- -------------------------------------------------------------------------------
TOTAL 100.00% $80,000,000
===== ====== ===========
- -------------------------------------------------------------------------------
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-30-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 3,569,132 7,548,967
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 97,260,578 97,893,748
<CURRENT-ASSETS> 0 0
<PP&E> 15,038,978 18,097,657
<DEPRECIATION> 1,660,625 1,910,817
<TOTAL-ASSETS> 223,560,691 232,276,174
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 149,385,777 169,851
<OTHER-SE> (6,375,182) (15,267,471)
<TOTAL-LIABILITY-AND-EQUITY> 223,560,691 232,276,174
<SALES> 110,152,675 131,074,403
<TOTAL-REVENUES> 110,152,675 131,074,403
<CGS> 30,948,291 39,572,988
<TOTAL-COSTS> 89,059,050 111,468,900
<OTHER-EXPENSES> 16,945,167 29,055,617
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,005,873 2,307,954
<INCOME-PRETAX> 3,272,929 (12,431,177)
<INCOME-TAX> 2,115,072 (2,401,186)
<INCOME-CONTINUING> 1,157,857 (10,029,991)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,157,857 (10,029,991)
<EPS-PRIMARY> .08 (.59)
<EPS-DILUTED> .08 (.59)
</TABLE>
