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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q/A
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
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HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
INDEX
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PART I. Financial Information Page No.
<S> <C>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
SIGNATURES 10
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HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
Information required by Form 10-Q and not contained herein is contained in the
Form 10-Q filed by Home Choice Holdings, Inc. filed on August 14, 1998 for the
quarter ended June 30, 1998.
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.
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1997 1998
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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)
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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)
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Store locations at September 30, 413
============================
Locations acquired 5
New store openings 19
Locations sold -
Mergers into existing stores (3)
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Store locations at December 31, 434
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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
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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
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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
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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
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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. 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,
assets or revenue were modified to allow for the incurring of additional debt
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 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 the quarters ending June 30, 1998 and
September 30, 1998 and (ii) 3.5 to 1 as of the end of the quarters ending
December 31, 1998 and after. 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.
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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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on behalf of the
undersigned thereto duly authorized.
Date: November 2, 1998
HOME CHOICE HOLDINGS, INC.
(Registrant)
/s/ John T. Egeland
--------------------------------
John T. Egeland
Chief Financial Officer
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