<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 SEPTEMBER 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)
(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 12, 1998: 17,025,938
1
<PAGE> 2
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as
of December 31, 1997 and September 30, 1998 3
Consolidated Statements of Operations for
the quarters ended September 30, 1997 and 1998 4
Consolidated Statements of Operations for
the nine month periods ended September 30, 1997 and 1998 5
Consolidated Statements of Cash Flow for the
nine month periods ended September 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 10
Other Information
Item 5. Other Information
Second Amendment to Comerica Credit Agreement
Item 6. Exhibits and Reports on Form 8-K
Execution of Merger Agreement with Rent-Way, Inc.
Financial results for the three and nine month
periods ended September 30, 1998
</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, SEPTEMBER 30,
1997 1998
(UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,569,132 $ 4,150,670
Rental merchandise, net 97,260,578 98,068,920
Prepaid expenses and other assets 6,342,919 5,874,406
Deferred income taxes 6,135,051 6,726,391
Property and equipment, net 15,038,978 18,882,121
Notes receivable 243,535 327,927
Income tax receivable 2,429,249 2,803,412
Intangible assets, net 92,541,249 92,844,422
------------- -------------
Total assets $ 223,560,691 $ 229,678,269
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdraft $ -- $ 7,801,944
Accounts payable, trade 18,701,265 9,760,657
Accrued liabilities 12,393,040 14,689,027
Deferred income taxes 1,293,919 1,293,919
Notes payable 48,161,872 60,561,229
------------- -------------
Total liabilities 80,550,096 94,106,776
------------- -------------
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 September 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, 17,025,938 issued and outstanding at
September 30, 1998 149,385,777 170,260
Paid-in capital -- 150,062,067
Unamortized stock awards (987,810) --
Accumulated deficit (5,387,372) (14,660,834)
------------- -------------
Total stockholders' equity 143,010,595 135,571,493
------------- -------------
Total liabilities and stockholders' equity $ 223,560,691 $ 229,678,269
============= =============
</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>
SEPTEMBER 30,
---------------------------
1997 1998
------------- ------------
<S> <C> <C>
REVENUE:
Rental and fee revenue $ 57,467,247 $ 62,801,462
Cash sales and other revenue 1,807,319 2,158,387
------------ ------------
Total revenue 59,274,566 64,959,849
------------ ------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise 15,275,059 20,452,141
Other 35,458,561 35,646,920
------------ ------------
50,733,620 56,099,061
Corporate expenses 5,300,041 4,870,397
Cost of business combinations 362,121 25,112
Name change expense - 392,687
Amortization of intangibles 2,450,683 1,523,283
Key executives signing bonuses 400,119 -
------------ ------------
Total operating expenses 59,246,584 62,910,540
------------ ------------
Operating income 27,982 2,049,309
Other income (expense):
Interest expense (662,837) (1,223,881)
Interest income - 15,705
Other non-operating income, net 1,074,819 318,877
------------ ------------
Income before income taxes 439,964 1,160,010
Income tax expense 573,259 403,481
------------ ------------
Net income (loss) $ (133,295) $ 756,529
============ ============
Net income and net loss per share:
Basic $ (0.01) $ 0.04
============ ============
Diluted $ (0.01) $ 0.04
============ ============
Weighted average shares outstanding:
Basic 16,944,859 17,016,576
============ ============
Diluted 16,944,859 17,046,626
============ ============
</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 Nine Month Periods Ended
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1998
------------- -------------
<S> <C> <C>
REVENUE:
Rental and fee revenue $164,160,055 $188,131,031
Cash sales and other revenue 5,267,186 7,903,221
------------ ------------
Total revenue 169,427,241 196,034,252
------------ ------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise 43,316,498 60,025,129
Other 96,476,172 107,542,832
------------ ------------
139,792,670 167,567,961
Corporate expenses 16,086,010 18,580,222
Cost of business combinations 864,081 11,139,652
Name change expense - 1,027,178
Amortization of intangibles 8,107,921 5,120,044
Key executives signing bonuses 400,119 -
------------ ------------
Total operating expenses 165,250,801 203,435,057
------------ ------------
Operating income (loss) 4,176,440 (7,400,805)
Other income (expense):
Interest expense (1,602,118) (3,531,835)
Interest income 194,318 179,187
Other non-operating income (expense), net 944,253 (517,714)
------------ ------------
Income (loss) before income taxes 3,712,893 (11,271,167)
Income tax expense (benefit) 2,688,331 (1,997,705)
------------ ------------
Net income (loss) $ 1,024,562 $ (9,273,462)
============ ============
Pro forma net income and net loss per share:
Pro forma income $ 1,024,562
Pro forma income tax benefit 213,835
-----------
Pro forma net income $ 1,238,397
===========
Pro forma net income and net loss per share:
Basic $ .07 $ (.55)
=========== ============
Diluted $ .07 $ (.55)
=========== ============
Weighted average shares outstanding:
Basic $16,935,524 $ 16,986,251
=========== ============
Diluted $17,380,857 $ 16,986,251
=========== ============
</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 Nine Month Periods Ended
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,024,562 $ (9,273,462)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss on disposition of property and equipment 91,576 850,994
Gain on sale of stores, net (950,366) (174,411)
Depreciation and disposition of rental
merchandise 43,316,498 60,025,129
Amortization of intangibles 8,107,921 5,120,044
Depreciation of property and equipment 2,394,523 2,905,162
Deferred income taxes (77,697) (591,340)
Amortization of stock awards 145,746 987,810
Name change expenses, non-cash property and equipment - 681,637
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses:
Purchases of rental merchandise (50,270,412) (58,561,171)
Accounts payable and accrued expenses 140,918 (8,241,772)
Other assets (1,331,358) 475,695
Income taxes receivable (502,982) (374,163)
------------ ------------
Net cash provided by (used in) operating activities 2,088,929 (6,169,848)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (4,007,676) (8,254,005)
Proceeds from sale of property and equipment 3,516,393 77,789
Acquisitions of businesses, net of cash acquired (49,101,390) (4,903,381)
Payment made for SKC store exchange - (1,132,476)
Payments (advances) on notes receivable 492,921 (84,392)
Increase in loan to stockholder (7,018) -
------------ ------------
Net cash used in investing activities (49,106,770) (14,296,465)
------------ ------------
Cash flows from financing activities:
Book overdraft - 7,801,944
Purchase of common stock from dissenters (265,679) -
Proceeds from stock options 179,574 846,550
Net repayment of old revolving credit facilities - (45,725,592)
Net borrowings under old revolving credit facilities 30,798,080 4,036,307
Net repayment of new revolving credit facilities - (700,000)
Net borrowings under new revolving credit facilities - 60,500,000
Payments on notes payable and capital leases (14,353,797) (5,711,358)
Distributions to S corporation shareholders (76,616) -
------------ ------------
Net cash provided by financing activities 16,281,562 21,047,851
------------ ------------
Net (decrease) increase in cash (30,736,279) 581,538
Cash and cash equivalents at beginning of period 35,745,989 3,569,132
------------ ------------
Cash and cash equivalents at end of period $ 5,009,710 $ 4,150,670
============ ============
</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 adjustments to present
fairly the financial position of the Company as of September 30, 1998, the
results of operations for the three and nine month periods ended September 30,
1997 and 1998, and the statements of cash flow for the nine month periods ended
September 30, 1997 and 1998. The results of operations for the nine month period
ended September 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 and Form 10-K/A 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 September 30, 1998, the Company purchased six
stores from a company doing business as Northwest Rent-to-Own for cash of
approximately $3.0 million. On September 9, 1998 the Company purchased one
rental-purchase portfolio for cash of approximately $0.1 million.
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. During the quarter ended September 30,
1997 the Company purchased the assets of 28 rent-to-own stores in three separate
transactions for cash consideration of $10.3 million. During the quarter ended
June 30, 1997 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 ("APB") Opinion No. 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 nine months ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Rental Merchandise $ 16,655,771 $ 1,962,511
Property and equipment 2,335,924 253,624
Intangible assets 43,707,350 2,685,086
Other assets 747,897 2,160
Accounts payable and accrued expenses (1,755,398) -
Notes payable assumed (5,151,794) -
Notes payable issued (7,100,000) -
Deferred tax liability (338,360) -
------------ ------------
Cash paid, net of cash acquired $ 49,101,390 $ 4,903,381
============ ============
</TABLE>
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
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Revenue $ 181,663,908
Pro Forma net income $ 196,574
Pro forma net income per share:
Basic $ .01
Diluted $ .01
</TABLE>
7
<PAGE> 8
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. EXCHANGE OF STORES
On September 30, 1998, the Company entered into an asset purchase and
exchange agreement with SKC Enterprises Inc. ("SKC") whereby the Company
exchanged five stores and approximately $1.1 million in cash for seven SKC
stores. The Company recognized a gain of approximately $0.3 million as a result
of the transaction with SKC. The following table summarizes the book value of
the assets disposed of and the fair value of the assets purchased from SKC:
<TABLE>
<CAPTION>
BOOK VALUE OF ASSETS SOLD TO SKC
<S> <C>
Rental Merchandise $ 837,256
Property and equipment 127,272
---------
$ 964,528
=========
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE OF ASSETS PURCHASED FROM SKC
<S> <C>
Rental Merchandise $ 1,147,045
Property and equipment 90,898
Intangible assets 1,141,980
Other assets 5,022
-----------
$ 2,384,945
===========
</TABLE>
4. 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 per share 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 nine month period ended
September 30, 1998, and the three month period ended September 30, 1997, 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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (133) $ 757 $1,238 $ (9,273)
======= ====== ====== ========
Weighted average number of shares
outstanding during the period 16,945 17,017 16,936 16,986
Dilutive stock options - 30 166 -
Dilutive debt - - 279 -
Weighted average number of shares used
in calculation of diluted earnings per
common share 16,945 17,047 17,381 16,986
======= ====== ====== ========
Basic earnings per common share $ (.01) $ .04 $ .07 $ (.55)
======= ====== ====== ========
Diluted earnings per common share $ (.01) $ .04 $ .07 $ (.55)
======= ====== ====== ========
</TABLE>
5. 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
8
<PAGE> 9
lender and agent for certain other lenders, which provided for a $50 million
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) which is
the greater of the agent's prime rate, the federal funds rate plus 100 basis
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 million. 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 million. On June 22, 1998 the Company signed the First
Amendment to the Comerica Credit Agreement whereby the borrowings available were
increased to $80 million and additional financial covenants were provided. On
August 17, 1998 the Company signed the second amendment to the Comerica Credit
Agreement which modified the financial covenants. As of September 30, 1998 the
Company was in compliance with these modified financial covenants.
6. RECLASSIFICATIONS
Certain reclassifications were made to the prior period financial statements
to conform with the current period presentation.
7. STATEMENTS OF CASH FLOW
Excluded from the Consolidated Statements of Cash Flow were the effect of
the following noncash activities for the nine month periods ended September 30,
1997 and 1998:
September 30, 1997
o The issuance of common stock to settle notes payable totaling approximately
$0.6 million to certain shareholders
o Approximately $0.3 million in capital leases were entered into by the
Company
o In connection with certain purchase acquisitions, the Company issued a
total of $7.1 million of notes payable to individuals
September 30, 1998
o Entered into a non-compete agreement with a shareholder for approximately
$1.6 million payable over five years.
o In conjunction with the asset purchase and exchange agreement with SKC the
Company exchanged cash of $1.1 million and five stores with assets having a
net book value of $1.0 million in exchange for seven stores with a fair value
of $2.4 million
8. 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 Nos. 131, 132 and 133 will not
have a material impact on the consolidated financial statements of the Company.
9. 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. PENDING MERGER
On September 1, 1998, the Company executed an Agreement and Plan of Merger
with Rent-Way, Inc. ("Rent-Way"). Under the terms of the agreement each
stockholder of the Company will be entitled to receive .588 shares of Rent-Way's
common stock
9
<PAGE> 10
in exchange for each outstanding share of the Company's common stock. The merger
agreement is subject to customary approvals and consents, including the approval
by stockholders of the Company and Rent-Way. The meetings of the stockholders of
the Company and Rent-Way have been set for December 10, 1998, and the closing of
the merger is expected thereafter.
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
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 13
New store openings 4 1
Locations sold (7) (5)
Mergers into existing stores (2) (1)
--- ---
Store locations at September 30, 413 464
=== ===
Locations acquired 5
New store openings 19
Locations sold -
Mergers into existing stores (3)
---
Store locations at December 31, 434
===
</TABLE>
RESULTS OF OPERATIONS
Comparison of Three Months ended September 30, 1998 and 1997
- ------------------------------------------------------------
Revenues. Revenue for the quarter ended September 30, 1998 increased $5.7
million or 9.6% to $65.0 million from the comparable quarter in 1997. New stores
opened in 1997 contributed $3.0 million to the increase from the quarter ended
September 30, 1997. Revenues from 1997 purchase acquisitions increased $0.9
million from $15.0 million for the quarter ended September 30, 1997 to $15.9
million for the quarter ended September 30, 1998. Revenues from 1998 purchase
acquisitions and new stores opened in 1998 were $1.9 million and $1.2 million
respectively, for the quarter ended September 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 $1.4 million or
3.1% to $42.1 million for the quarter ended September 30, 1998 from $43.5
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 $2.0 million for the quarter
ended September 30, 1997 and contributed no revenue for the quarter ended
September 30, 1998.
Depreciation and Disposition of Rental Merchandise. Depreciation and
disposition of rental merchandise increased $5.2 million or 33.9% to $20.5
million for the quarter ended September 30, 1998 from $15.3 million for the
comparable period in 1997. As a percentage of revenues, depreciation and*
disposition of rental merchandise for the third quarter of 1998 increased to
31.5% from 25.8% for the quarter ended September 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
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<PAGE> 11
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.
Other Direct Store Expenses. Other direct store expenses increased $0.1
million or 1.0% to $35.6 million for the quarter ended September 30, 1998 from
$35.5 million for the comparable period in 1997. As a percentage of revenues,
other direct store expenses decreased 4.9% to 54.9% for the quarter ended
September 30, 1998 compared to 59.8% for the quarter ended September 30, 1997.
The increase in other direct store expenses is primarily attributable to (i)
$0.7 million of increased store occupancy costs (ii) $2.1 million of increased
salaries and wages and (iii) $ offset by a decrease in advertising and other
direct store expenses of $2.6 million.
Corporate Expenses. Corporate expenses decreased $0.4 million or 7.5% to
$4.9 million for the quarter ended September 30, 1998 from $5.3 million for the
comparable period in 1997. As a percentage of revenues, corporate expenses
decreased to 7.5% for the quarter ended September 30, 1998 compared to 8.9% for
the quarter ended September 30, 1997. The decrease in expenses is as a result of
a plan initiated on July 23, 1998 to reduce corporate overhead. As part of this
plan, the Company eliminated 64 full and part-time positions at the corporate
level.
Cost of Business Combinations. Cost of business combinations for the quarter
ended September 30, 1998 consist primarily of expenses incurred in order to
maintain an acquisitions department. Costs incurred during the corresponding
period in 1997 were in conjunction with seven pooling-of-interest
transactions.
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
expenses of $0.4 million during the quarter ended September 30, 1998 in
connection with the program compared to $0.2 million during the quarter ended
June 30, 1998. The Company does not expect to incur a significant amount of
additional name change expenses for the remainder of 1998.
Amortization of Intangibles. Amortization of intangibles decreased $1.0
million to $1.5 million in 1998 from $2.5 million in 1997. As a percentage of
revenues, amortization of intangibles decreased from 4.1% for the quarter ended
September 30, 1997 to 2.3% for the quarter ended September 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 income
(expense), net, in 1998 is primarily the gain on sale of stores of $0.3 million
resulting from the exchange of stores with SKC. In 1997, Other non-operating
income (expense), net, was attributable to a $1.0 million gain on sale of assets
which were previously held by the Company.
Net Income (Loss). For the quarter ended September 30, 1998, the Company had
net income of $0.8 million compared to a net loss of $0.1 million for the
quarter ended September 30, 1997 for the reasons discussed above.
Comparison of Nine Months ended September 30, 1998 and 1997
- -----------------------------------------------------------
Revenues. Revenue for the nine month period ended September 30, 1998
increased $26.6 million or 15.7% to $196.0 million from the comparable period in
1997. New stores opened in 1997 contributed $9.0 million to the increase from
the year-to-date ended September 30, 1997. Revenues from 1997 purchase
acquisitions increased $14.1 million from $36.0 million for the year-to-date
ended September 30, 1997 to $50.1 million for the year-to-date ended September
30, 1998. Revenues from 1998 purchase acquisitions and 1998 new stores were $1.7
million and $2.8 million respectively, for the year-to-date ended September 30,
1998. Revenues from stores existing as of December 31, 1996 (excludes 1997 and
1998 purchases and new store openings) decreased $1.1 million to $131.1 million
for the year to date ended September 30, 1998 from $132.2 million for the
comparable period in 1997. The decrease in revenues from existing stores is a
result of the sale of seven stores in the quarter ended September 30, 1997 which
had revenues of $3.0 million for the nine months ended September 30, 1997 and
which contributed no revenues in 1998.
Depreciation and Disposition of Rental Merchandise. Depreciation and
disposition of rental merchandise increased $16.7 million or 38.6% to $60.0
million for the year to date ended September 30, 1998 from $43.3 million for the
comparable period in 1997. As a percentage of revenues, depreciation and
disposition of rental merchandise for the nine months ended September 30, 1998
increased to 30.6% from 25.6% for the year to date ended September 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
11
<PAGE> 12
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.
Other Direct Store Expenses. Other direct store expenses increased $11.0
million or 11.5% to $107.5 million for the year-to-date ended September 30, 1998
from $96.5 million for the comparable period in 1997. As a percentage of
revenues other direct store expenses decreased 2.0% to 54.9% for the year to
date ended September 30, 1998 compared to 56.9% for the year-to-date ended
September 30, 1997. The increase in other direct store expenses is primarily
attributable to (i) $1.3 million of increased advertising costs, (ii) $2.8
million of increased store occupancy costs, (iii) $8.2 million of increased
salaries and wages and (iv) off-set by a decrease in other direct expenses of
$1.2 million.
Corporate Expenses. Corporate expenses increased $2.5 million or 15.5% to
$18.6 million for the year-to-date ended September 30, 1998 from $16.1 million
for the comparable period in 1997. As a percentage of revenues, corporate
expenses remained at 9.5% for the year-to-date ended September 30, 1998 and
1997. This is a result of the additional staff and facilities necessary to
administer the 1997 purchase and pooling acquisitions and the RTO Merger offset
by the decrease in expenses as a result of a plan initiated on July 23, 1998 to
reduce corporate overhead. As part of this plan, the Company eliminated 64
full and part-time positions at the corporate level.
Cost of Business Combinations. Cost of business combinations for the nine
months ended September 30, 1998 increased $10.2 million to $11.1 million from
$0.9 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 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 nine month period ended September 30, 1998 are costs incurred in order to
maintain an acquisitions department of $0.3 million offset by a net reduction in
the estimated accrual for lease terminations of $0.5 million and an increase in
other business combination costs of $0.5 million. Cost of business combinations
for the nine months ended September 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
$1.0 million for the year-to-date ended September 30, 1998 in connection with
this program. The Company does not expect to incur a significant amount of
additional name change expenses for the remainder of 1998.
Amortization of Intangibles. Amortization of intangibles decreased $3.0
million to $5.1 million for the nine months ended September 30, 1998 from $8.1
million for the comparable period in 1997. As a percentage of revenues,
amortization of intangibles decreased from 4.8% for the year to date ended
September 30, 1997 to 2.7% for the year-to-date ended September 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 income
(expense), net, in 1998 consists primarily of costs incurred as a result of the
Company's decision to close the east regional office located in New Albany,
Indiana during the quarter ended June 30, 1998, which was off-set by the gain on
sale of stores of $0.3 million resulting from the exchange of stores with SKC.
In 1997, other non-operating income (expense), net, was primarily attributable
to a $1.0 million gain on sale of assets previously held by the Company.
Net Income (Loss). For the nine month period ended September 30, 1998, the
Company experienced a net loss of $9.3 million compared to net income of $1.0
million for the nine months ended September 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.
12
<PAGE> 13
Historically, the Company's growth has been financed through internally
generated working capital, borrowings under loan agreements and the issuance of
common stock. During the nine month periods ended September 30, 1997 and 1998,
the Company did not issue common stock for purposes of raising capital.
The Company has opened 33 new stores during the first nine 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 nine
months of 1998 the Company has incurred operating losses of $2.4 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 million 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
million. 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 million. On June 22, 1998, the Company signed the First Amendment to the
Comerica Credit Agreement whereby the borrowings available were increased to $80
million. 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. Additionally, certain covenants contained in the Comerica Credit
Agreement were modified and a new financial covenant was added. The negative
covenants related to the incurring of additional debt by the Company and the
permitting of additional liens against the Company's property and the imposition
of liens in connection with interest rate protection agreements. In addition, a
new financial covenant was added providing the Company must maintain ratios of
total debt to debt to EBITDA (defined as net income before adjustment for
interest expense, taxes, depreciation and amortization of intangibles) of (i) 4
to 1 as of the end of the quarters ending June 30, 1998 and September 30, 1998
and (ii) 3.5 to 1 as of the end of the quarter ended December 31, 1998 and
after.
On August 17, 1998 the Company signed the Second Amendment to the Comerica
Credit Agreement ("Second Amendment") which further modified the financial
covenants. In accordance with the Second Amendment the Company must maintain a
fixed charge coverage ratio of (i) 1.35 to 1 for the quarter ended September 30,
1998, (ii) 1.6 to 1 for the quarter ended December 31, 1998, (iii) 1.8 to 1 for
the quarter ended March 31, 1999, (iv) 2.15 to 1 for the quarter ended June 30,
1999 and (v) 2.25 for the quarter ended September 30, 1999 and after. In
addition, the Company must maintain a ratio of Total Debt to EBITDA of (i) 5.25
to 1 for the quarter ending September 30, 1998, (ii) 3.75 to 1 for the quarter
ended December 31, 1998 and (iii) 3.5 to 1 for the quarter ended March 31, 1999
and after. The Company is in compliance with the requirements of these modified
financial covenants. In addition, management of the Company believes the $80
million 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 nine months ended September
30, 1998 was $6.2 million compared to net cash provided by operating activities
of $2.1 million for the nine months ended September 30, 1997. The change is
primarily attributable to (i) increased purchases of rental merchandise of $8.3
million, (ii) a decrease in accounts payable and accrued expenses of $8.4
million, (iii) a $16.7 million increase in depreciation and disposition of
rental merchandise and (iv) a $10.3 million increase in the net loss.
Net cash used in investing activities for the nine months ended September
30, 1998 decreased $34.8 million to $14.3 million from $49.1 million for the
nine months ended September 30, 1997. The decrease is primarily attributable to
the decrease in the cash used to acquire businesses of $44.2 million.
Net cash provided by financing activities for the nine months ended
September 30, 1998 increased $4.7 million to $21.0 million from $16.3 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to the net increase in borrowings under the new and old revolving
credit facilities of $12.7 million which was offset by the payment of $5.0
million in notes payable and an increase in the book overdraft of $7.8 million.
13
<PAGE> 14
OTHER MATTERS
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 Nos. 131, 132 and 133 will not
have a material impact on the consolidated financial statements of the Company.
Year 2000
The Year 2000 problem is pervasive and complex, as virtually all computer
systems operations could be affected in some way by the rollover of the
two-digit year value to "00". The issue is whether computer 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. As part of the Company's Year
2000 readiness program, Management has evaluated the hardware and software for
financial and non-financial systems as follows:
o The Company's information systems infrastructure consists of both
software and hardware utilized to manage the corporate financial systems
and the operation of our 464 stores. The Company's corporate financial
systems and store operations are maintained on a third party software
program developed by High Touch Inc. ("High Touch"). On June 1, 1998,
the Company signed a software licensing agreement with High Touch which
provides for the release of a Year 2000 compliant version of the High
Touch software (i.e. Version 13) by March 31, 1999. The Company is in
continuous discussions with High Touch regarding the delivery of Version
13. The remaining third party software products utilized by the Company
are currently Year 2000 compliant. The total costs of purchasing
software which is specifically Year 2000 compliant is expected to be
approximately $0.8 million, of which $0.7 has already been incurred as
of September 30, 1998.
o The hardware utilized within our financial information systems
infrastructure must also be compatible with the Year 2000 compliant
software in order to ensure a smooth transition to the new millenium. In
June, 1998 the Company performed a review of the Company's hardware in
use with the corporate financial systems and store operations. As a
result of this review, the Company has estimated the cost of replacing
or upgrading the hardware which will not be compatible with the Year
2000 compliant software to be approximately $0.5 million. The Company is
currently implementing a plan to replace this hardware by March 31,
1999.
o The Company's electronics and appliance vendors are generally
multi-national manufacturers of name brand products. These manufacturers
have 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.
o Non-financial systems such as telephone and HVAC (e.g. heating and
cooling systems) will be evaluated by March 1999. The total cost of
fixing the potential Year 2000 related problems associated with these
non-financial systems is not expected to be significant.
In summary, if the Company does not successfully obtain a Year 2000
compliant software product from High Touch, our information systems which
utilize date-sensitive information (such as customer rental agreements) would be
adversely affected. In such a scenario, the Company would experience significant
difficulty in maintaining, updating and creating new customer rental agreements
and would have to implement procedures to manually maintain this information.
However, the Company believes that its information systems infrastructure will
successfully handle the rollover to the year 2000 and that the problem will not
have a material effect on the consolidated financial position, results of
operations or cash flows of the Company.
14
<PAGE> 15
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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 Second Amendment to Comerica Credit Agreement
27.1 Financial Data Schedule
B. Reports on Form 8-K
1. On September 11, 1998, the Registrant filed a report on Form 8-K to
announce the signing of a definitive Agreement and Plan of Merger with
Rent-Way, Inc.
2. On October 30, 1998, the Registrant filed a report on Form 8-K to
announce financial results for the three and nine month periods ended
September 30, 1998
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: November 12, 1998
HOME CHOICE HOLDINGS, INC. (Registrant)
/s/ John T. Egeland
- --------------------------------
John T. Egeland
Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------- -------
<S> <C>
10.1 Second Amendment to Credit Agreement between Home Choice
Holdings, Inc. and Comerica Bank-Texas as lender and agent for
certain other lenders
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
August 17, 1998
Mr. James G. Steckart
President and CEO
Home Choice Holdings, Inc.
714 E. Kimbrough
Mesquite, Texas 75149
Re: Waiver and Second Amendment ("Waiver and Amendment") under the
Amended and Restated Revolving Credit Agreement dated as of April 1,
1998 (as amended, the "Credit Agreement") among Home Choice Holdings,
Inc., as successor by merger to Alrenco, Inc. (the "Company"), the
Banks named therein and Comerica Bank as Agent for the Banks (the
"Agent")
Ladies and Gentlemen:
Reference is made to the Credit Agreement. Except as specifically
defined to the contrary herein, capitalized terms used in this Waiver and
Amendment shall have the meanings given them in the Credit Agreement. This
Waiver and Amendment shall not become effective unless and until countersigned
by the Company and returned to the Agent within five (5) days from the date of
this letter.
As you know, for the fiscal quarter ending June 30, 1998, the Company
is required to maintain the following financial covenant levels under the Credit
Agreement: (a) pursuant to Section 8.10, a Positive Net Income of not less than
$1.00; (b) pursuant to Section 8.11, a Fixed Charge Coverage Ratio of not less
than 1.75 to 1.0; and (c) pursuant to Section 8.12A, a Total Debt to EBITDA
Ratio of not more than 4.0 to 1.0. The Company has advised the Agent and the
Banks that for its fiscal quarter ending June 30, 1998, the Company was not in
compliance with these financial covenants and the Company requested that the
Agent and the Banks waive compliance under the Credit Agreement with these
Sections of the Credit Agreement. The Agent and the Banks have given the Company
a verbal waiver and are formalizing such waiver in this Waiver and Amendment.
The Company has also requested that the Agent and the Banks agree to
certain amendments to the Credit Agreement.
<PAGE> 2
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 2
Based on the Agent's receipt of the approval of the requisite Banks and
subject to the conditions set forth in the penultimate paragraph of this letter
agreement, this letter agreement will confirm that the Banks hereby:
(a) waive compliance by the Company under the Credit Agreement with
Section 8.10 (Positive Net Income), Section 8.11 (Fixed Charge Coverage Ratio),
and Section 8.12A (Total Debt to EBITDA Ratio) of the Credit Agreement for its
fiscal quarter ending June 30, 1998, and
(b) amend the following Sections of the Credit Agreement:
(i) The definition of "EBITDAR" is hereby amended and restated
in its entirety as follows:
"`EBITDAR' of any Person shall mean, for any period,
the sum of (a) Net Income for such period (without giving
effect to (i) any one-time cash charges in an aggregate
amount not to exceed $10,000,000 and any one-time non-cash
charges in an aggregate amount not to exceed $1,000,000
arising from the Merger and (ii) any reasonable and
customary investment banking fees, accountant's fees, and
legal fees incurred by the Company in an aggregate amount
not to exceed $500,000 for the four fiscal quarters then
ending arising from any acquisition and/or mergers other
than the Merger, in each case without netting the amount
of any taxes attributable thereto) plus (b) to the extent
deducted in the computation of such Net Income, (i) all
amounts treated as expenses for depreciation of fixed
assets, amortization of intangible assets and interest
paid or payable on the Debt of such Person for such
period, (ii) all accrued taxes on or measured by income
and (iii) the amount of all Rental Expenses, determined in
each case in accordance with GAAP."
(ii) The definition of "Fixed Charge Coverage Ratio" is hereby
amended and restated in its entirety as follows:
"`Fixed Charge Coverage Ratio' shall mean as of any
date of determination, a ratio (i) the numerator of which
shall be equal to the sum of EBITDAR for the Measuring
Period then ending, and (ii) the denominator of which
shall be Fixed Charges for the Measuring Period then
ending. For purposes of this definition, "for the
Measuring Period then ending" shall mean (x) for the
fiscal quarter ending on June 30, 1998, the period
beginning on January
<PAGE> 3
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 3
1, 1998 and ending on June 30, 1998; (y) for the fiscal
quarter ending on September 30, 1998, the period beginning
on January 1, 1998 and ending on September 30, 1998; and
(z) for the fiscal quarter ending on December 31, 1998 and
for each fiscal quarter ending thereafter, the period of
four consecutive fiscal quarters ending on the date of
determination."
(iii) The definition of "Fixed Charges" is hereby amended and
restated in its entirety as follows:
"`Fixed Charges' of any Person shall mean, for any
period of determination, the sum, without duplication, of
(i) all interest expense paid or payable during such
period on the Total Debt of such Person plus (ii) the
amount of all Rental Expenses of such Person during such
period, all determined in accordance with GAAP plus (iii)
all cash dividends paid by Company pursuant to Section 9.6
hereof."
(iv) The definition of "Permitted Acquisition" is amended as
follows:
(A) Paragraph (c) thereof is amended and
restated in its entirety as follows:
"(c) in the event that the value of such
proposed new acquisition, computed on the basis of
total acquisition consideration paid or incurred, or
to be paid or incurred, by the Company or its
Subsidiaries with respect thereto, including all
indebtedness which is assumed or to which such
assets, businesses or business or ownership interests
or shares, or any Person so acquired, is subject, and
including in the calculation of the value of such
acquisition the value of any common shares
transferred as a part of such acquisition,
(i) shall be greater than or equal to
Ten Million Dollars ($10,000,000), determined
as of the date of such acquisition, or
(ii) when combined with the value of all
other acquisitions conducted as Permitted
Acquisitions in the same fiscal year shall be
greater
<PAGE> 4
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 4
than or equal to (x) for fiscal year 1998,
Sixteen Million Five Hundred Thousand Dollars
($16,500,000), determined as of the date of
such acquisition, (y) for fiscal year 1999,
Thirty Five Million Dollars ($35,000,000),
determined as of the date of such
acquisition, and (z) for fiscal year 2000 and
thereafter, Fifty Million Dollars
($50,000,000), determined as of the date of
such acquisition,
then not less than thirty (30) nor more than
ninety (90) days prior to the date each such
proposed acquisition is scheduled to be
consummated, the Company provides written notice
thereof to Agent, accompanied by (A) draft of the
letter of intent and, when available, all material
documents pertaining to such proposed acquisition,
(B) detail setting forth the acquisition price
with supporting documentation and historical
financial information (including income statement,
balance sheet and cash flows) covering at least
three complete fiscal years of the acquisition
target prior to the effective date of the
acquisition or the entire credit history of the
acquisition target, whichever period is shorter
(provided, however, that, if the financial
information referred to in this subparagraph (B)
is not available, Company shall furnish Agent with
financial information otherwise reasonably
satisfactory to the Majority Banks, and (C) Pro
Forma Projected Financial Information, whereupon
Agent shall promptly notify each of the Banks of
its receipt thereof and upon the written request
of any Bank distribute copies of all notices and
other materials received from Company under this
clause (c) to each Bank;"
(B) Paragraph (d) thereof is amended and restated as
follows:
"(d) in the event that the value of such
proposed new acquisition, computed on the basis of
total acquisition consideration paid or incurred,
or to be paid or incurred, by the Company or its
Subsidiaries with respect thereto, including all
indebtedness which is assumed or to which such
assets, businesses or business or ownership
interests or shares, or any Person so acquired, is
subject, and including
<PAGE> 5
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 5
the value of any common shares transferred as a
part of such acquisition is less than Ten Million
Dollars ($10,000,000) determined as of the date of
such acquisition, then not less than ten (10)
Business Days after date each such proposed
acquisition has been consummated, the Company
provides written notice thereof to Agent (with
certified copies of all material documents
pertaining to such acquisition), whereupon Agent
shall promptly notify each of the Banks of its
receipt thereof and upon the written request of
any Bank distribute copies of all notices and
other materials received from Company under this
clause (d) to each Bank;"
(v) The definition of "Total Debt to EBITDA Ratio" is
hereby amended and restated in its entirety 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
fiscal quarter ending thereafter, EBITDA for the period
of four consecutive fiscal quarters ending on the date
of determination."
(vi) Section 2.10 (Optional Increase in Commitment) is
amended by amending the first line thereof by replacing the
first word "Provided" with "provided" and by inserting at the
beginning of the sentence the phrase "With the prior written
approval of the Majority Banks and".
(vii) Section 8.1 is amended by adding new clause (c)
immediately following clause (b) thereof, as follows:
"(c) during each month in fiscal year 1998 and, if
requested by the Agent, during any subsequent fiscal
year, as soon
<PAGE> 6
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 6
as available, but in any event not later than twenty
(20) days after the end of each month, the unaudited
consolidated and consolidating financial statements of
the Company as at the end of such month and the related
unaudited statements of income, accumulated earnings,
cash flows and balance sheets of the Company for the
portion of the fiscal year through the end of such
quarter, certified by a Responsible Officer as being
fairly stated in all material respects.".
(viii) Section 8.10 (Positive Net Income) is hereby amended
and restated in its entirety as follows:
"8.10 Positive Net Income. Maintain (a) during
fiscal year 1998, as of the end of each month beginning
with the month ending July 31, 1998, and (b) during
fiscal year 1999 and thereafter as of the end of each
fiscal quarter, Net Income (exclusive of any tax
benefit resulting from a loss carry forward or
otherwise, plus to the extent deducted in the
computation of such Net Income, all accrued taxes on or
measured by income, and without giving effect, but
without duplication, to one-time cash charges in an
aggregate amount not to exceed $10,000,000 and any
one-time non-cash charges in an aggregate amount not to
exceed $1,000,000 arising from the Merger for the first
two fiscal quarters ending after the Merger, as such
charges were given effect prior to giving effect to any
taxes on or measured by income) greater than zero."
(ix) Section 8.11 (Fixed Charged Coverage Ratio) is hereby
amended and restated in its entirety as follows:
"8.11 Fixed Charge Coverage Ratio. Maintain a
Fixed Charge Coverage Ratio of not less than the ratio
set forth below during the applicable period set forth
below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter(s) Ending Ratio
<S> <C>
- --------------------------------------------------------------------------------
September 30, 1998 1.35 to 1.0
- --------------------------------------------------------------------------------
December 31, 1998 1.60 to 1.0
- --------------------------------------------------------------------------------
March 31, 1999 1.80 to 1.0
- --------------------------------------------------------------------------------
June 30, 1999 2.15 to 1.0
- --------------------------------------------------------------------------------
September 30, 1999 through March 31, 2000 2.25 to 1.0
- --------------------------------------------------------------------------------
June 30, 2000 and thereafter 2.35 to 1.0
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 7
(x) Section 8.12A (Total Debt to EBITDA Ratio) is amended in
its entirety 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>
- --------------------------------------------------------------------------------
September 30, 1998 5.25 to 1.0
- --------------------------------------------------------------------------------
December 31, 1998 3.75 to 1.0
- --------------------------------------------------------------------------------
March 31, 1999 and thereafter 3.50 to 1.0
- --------------------------------------------------------------------------------
</TABLE>
(xi) Section 9 is hereby amended by adding new Section 9.13
immediately following Section 9.12, as follows:
"9.13. Limitation on Opening of New Stores. Except
(x) with the prior written consent of the Majority
Banks, or (y) in connection with stores acquired
pursuant to a Permitted Acquisition, during fiscal year
1998 (beginning on August 1, 1998) open any new stores,
and during fiscal year 1999 open more than twenty-five
(25) new stores."
(xii) New Schedule 1.1 (Applicable Fee Percentages and
Eurocurrency Margins), attached hereto as Attachment I, shall
replace existing Schedule 1.1 in its entirety.
This Waiver and Amendment shall be come effective (according to the
terms and as of the date hereof) upon satisfaction by the Company of the
following conditions:
1. The Company shall have delivered to the Agent the
following documents which were to have been executed and delivered to
the Agent in connection with the reincorporation of the Company by way
of merger on June
<PAGE> 8
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 8
23, 1998 and with the First Amendment to the Credit Agreement dated as
of June 22, 1998:
(a) Assumption Agreement to be executed by Home Choice
Holdings, Inc.;
(b) Reaffirmation of Certain Loan Documents to be executed
by Home Choice Holdings, Inc;
(c) Incumbency Certificate for the list of persons
authorized to sign on behalf of Home Choice Holdings,
Inc. (that is James G. Steckart, John T. Egeland and
Tracy Schrader);
(d) Legal Opinion of King & Spalding; and
(e) Financing Statements (both UCC-1's and 3's) to be
executed in connection with the reincorporation and the
acquisition of certain new stores; and
2. the Company shall have paid (a) to the Agent, for
distribution to the Banks, as applicable, all fees (including any
Revolving Credit Commitment Fees) and other amounts, if any, accrued to
the effective date of this Waiver and Amendment and a waiver fee as
agreed to between the Company and the Agent and (b) to the Agent for
the account of its counsel all accrued and unpaid legal fees.
This Waiver and Amendment is limited to the specific matters described
above and shall not be deemed to be a waiver or consent to any other failure to
comply with any provision of the Credit Agreement or any other Loan Document, or
to amend or alter in any respect the term and conditions of the Credit Agreement
(including without limitation all conditions and requirements for Advances and
any financial covenants), the Notes or any of the other Loan Documents, or to
constitute a waiver or release by of the Banks or the Agent of any right,
remedy, Default or Event of Default under the Credit Agreement or any other Loan
Documents, except as specifically set forth above. Furthermore, this Waiver and
Amendment shall not affect in any manner whatsoever any rights or remedies of
the Banks with respect to any other non-compliance by the Company with the
Credit Agreement or the other Loan Documents whether in the nature of a Default
or an Event of Default, and whether now in existence or subsequently arising.
* * *
SIGNATURES FOLLOW ON SUCCEEDING PAGES
<PAGE> 9
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 9
By signing and returning a counterpart of this letter to the Agent, the
Company acknowledges its acceptance of the terms of this letter.
Very truly yours,
COMERICA BANK, as Agent
By:
Its:
---------------------------------
Acknowledged and Accepted
as of , 1998:
-----------
HOME CHOICE HOLDINGS, INC.
By:
------------------------------
Its:
-----------------------------
RTO OPERATING, INC.
By:
------------------------------
Its:
-----------------------------
RTO HOLDING CO., INC.
By:
------------------------------
Its:
-----------------------------
ATRO, INC.
By:
------------------------------
Its:
-----------------------------
ACTION RENT-TO-OWN HOLDINGS OF SOUTH
CAROLINA, INC.
By:
------------------------------
Its:
-----------------------------
<PAGE> 10
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 10
AUTHORIZATION OF WAIVER AND AMENDMENT
The undersigned Bank hereby consents to the waiver of Sections 8.10, 8.11, and
8.12A of the Credit Agreement, and to the amendments of the Credit Agreement set
forth herein, all on the terms and conditions set forth above, and authorizes
the Agent to issue the foregoing Waiver and Amendment to the Company.
<PAGE> 11
James G. Steckart
President and CEO
Home Choice Holdings, Inc.
August 17, 1998
Page 11
ATTACHMENT I
SCHEDULE 1.1
APPLICABLE FEE PERCENTAGE
AND EUROCURRENCY MARGINS
<TABLE>
<CAPTION>
===============================================================================
BASIS FOR PRICING LEVEL I LEVEL II
===============================================================================
<S> <C> <C>
Fixed Charge greater than or equal
to 2.8 : 1
Coverage Ratio greater than or equal but
to 4.0 : 1.0
less than 4.0 : 1
- -------------------------------------------------------------------------------
Commitment Fee 0.30% 0.375%
- -------------------------------------------------------------------------------
Eurocurrency Margin 1.10% 1.25%
- -------------------------------------------------------------------------------
Letter of Credit Fee 1.10% 1.25%
===============================================================================
<CAPTION>
=====================================================================================
BASIS FOR PRICING LEVEL III LEVEL IV
=====================================================================================
<S> <C> <C>
Fixed Charge greater than greater than
Coverage Ratio or equal to 2.25 : 1 or equal to 1.75:1
but but
less than 2.8 : 1 less than 2.25
- -------------------------------------------------------------------------------------
Commitment Fee 0.425% 0.50%
- -------------------------------------------------------------------------------------
Eurocurrency Margin 1.40% 1.65%
- -------------------------------------------------------------------------------------
Letter of Credit Fee 1.40% 1.65%
=====================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-01-1997
<CASH> 4,150,670 5,009,710
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 98,068,920 80,552,218
<CURRENT-ASSETS> 0 0
<PP&E> 18,882,121 13,028,428
<DEPRECIATION> 2,905,162 2,394,523
<TOTAL-ASSETS> 229,678,269 200,604,081
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 170,260 149,323,527
<OTHER-SE> 135,401,233 (9,281,632)
<TOTAL-LIABILITY-AND-EQUITY> 229,678,269 200,604,081
<SALES> 196,034,252 169,427,241
<TOTAL-REVENUES> 196,034,252 169,427,241
<CGS> 60,025,129 43,316,498
<TOTAL-COSTS> 167,567,961 139,792,670
<OTHER-EXPENSES> 35,867,096 25,458,131
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,531,835 1,602,118
<INCOME-PRETAX> (11,271,167) 3,712,893
<INCOME-TAX> (1,997,705) 2,688,331
<INCOME-CONTINUING> (9,273,462) 1,024,562
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (213,835)
<CHANGES> 0 0
<NET-INCOME> (9,273,462) 1,238,297
<EPS-PRIMARY> (.55) .07
<EPS-DILUTED> (.55) .07
</TABLE>
