UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
February 22, 1999 (December 10, 1998) Date of Report (Date
of earliest event reported)
Rent-Way, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 000-22026 25-1407782
(State or other jurisdiction (Commission File Number) (IRS Employer
of corporation) Identification No.)
One RentWay Place, Erie, Pennsylvania 16505
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (814) 455-5378
Item 2. Acquisition or Disposition of Assets
On December 10, 1998, the Company completed its merger (the "Merger") with
Home Choice Holdings, Inc. ("HMCH"), pursuant to which HMCH merged with and into
the Company, with the Company being the surviving entity. The Merger was
accounted for as a pooling-of-interests under Accounting Principles Board
("APB") Opinion No. 16. The terms of the Merger called for each outstanding
share of HMCH common stock at the time of the Merger to be converted into 0.588
shares of the Company's common stock. As a result, the Company issued 10,024,821
shares of common stock to the stockholders of HMCH.
Prior to the Merger, the Company operated 405 rental-purchase stores in 25
states, primarily in the northeastern and eastern parts of the United States.
HMCH, at the time of the Merger, operated 460 rental-purchase stores in 26
states, primarily in the southeastern, midwestern and southwestern portions of
the United States. As a result of the Merger, the Company is the second largest
company in the rental-purchase industry, operating 865 rental-purchase stores in
34 states.
<TABLE>
<CAPTION>
Item 7. Financial Statements and Exhibits
a. Financial statements of business acquired:
Interim Unaudited Financial Statements of Home Choice Holdings, Inc:
<S> <C>
Balance Sheets - as of September 30, 1998 and December 31, 1997 5
Statements of Operations for the periods ending September 30, 1998 and 1997 6
Statements of Cash Flow for the periods ending September 30, 1998 and 1997 7
Notes to Interim Unaudited Financial Statements 8
Audited Financial Statements of Home Choice Holdings, Inc:
Reports of Independent Accountants 12
Balance Sheets - as of December 31, 1997 and 1996 14
Statements of Operations for the years ended December 31, 1997, 1996 and 1995 15
Statements of Stockholders' Equity for the years ended December 31, 1997,1996 and 1995 16
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 17
Notes to Audited Financial Statements 18
b. Unaudited Pro forma condensed combined financial information:
Rent-Way, Inc. and Home Choice Holdings, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet *
Unaudited Pro Forma Condensed Combined Statement of Operations
for the twelve months ended September 30, 1998 33
Unaudited Pro Forma Condensed Combined Statement of Operations
for the twelve months ended September 30, 1997 34
Unaudited Pro Forma Condensed Combined Statement of Operations
for the twelve months ended September 30, 1996 35
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations 36
*previously filed with Company's December 31, 1998 10-Q
c. Exhibits in Accordance with the Provisions of Item 601 of
Regulation S-K:
Exhibit
(2)-5 Form S-4 registering the shares used in the Merger between Rent-Way, Inc. and
Home Choice Holdings, Inc.*
* Previously filed.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Rent-Way, Inc.
(Registrant)
Date February 22, 1999 /s/ Jeffrey A. Conway_____
(Signature)
Jeffrey A. Conway
Chief Financial Officer
<TABLE>
<CAPTION>
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------- ---------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents......................................... $ 4,150,670 $ 3,569,132
Rental merchandise, net........................................... 98,068,920 97,260,578
Prepaid expenses and other assets................................. 5,874,406 6,342,919
Deferred income taxes............................................. 6,726,391 6,135,051
Property and equipment, net....................................... 18,882,121 15,038,978
Notes receivable.................................................. 327,927 243,535
Income tax receivable............................................. 2,803,412 2,429,249
Intangible assets, net............................................ 92,844,422 92,541,249
------------- -------------
Total assets............................................ $ 229,678,269 $ 223,560,691
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdraft.................................................... $ 7,801,944 $ --
Accounts payable, trade........................................... 9,760,657 18,701,265
Accrued liabilities............................................... 14,689,027 12,393,040
Deferred income taxes............................................. 1,293,919 1,293,919
Notes payable..................................................... 60,561,229 48,161,872
------------- -------------
Total liabilities....................................... 94,106,776 80,550,096
------------- -------------
Commitments and contingencies Stockholders' equity:
Preferred stock, no par; 10,000,000 shares authorized; none
issued or outstanding........................................ -- --
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....... 170,260 149,385,777
Paid in capital................................................ 150,062,067 --
Unamortized value of stock awards............................... -- (987,810)
Accumulated deficit............................................. (14,660,834) (5,387,372)
------------- -------------
Total stockholders' equity.............................. 135,571,493 143,010,595
------------- -------------
Total liabilities and stockholders' equity.............. $ 229,678,269 $ 223,560,691
============= =============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Month Periods Ended September 30,
1998 1997
------------------------------------------
Revenue: (unaudited)
<S> <C> <C>
Rental and fee revenue.................................. $ 188,131,031 $ 164,160,055
Cash sales and other revenue............................ 7,903,221 5,267,186
---------------------- -------------
Total revenue................................... 196,034,252 169,427,241
-------------------- -------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise........................................ 60,025,129 43,316,498
Other................................................ 107,542,832 96,476,172
------------------- -------------
167,567,961 139,792,670
Corporate expenses...................................... 18,580,222 16,086,010
Cost of business combinations........................... 11,139,652 864,081
Name change expenses.................................... 1,027,178 --
Amortization of intangibles............................. 5,120,044 8,107,921
Key executive signing bonuses........................... 400,119
-------------------- -------------
Total operating expenses........................ 203,435,057 165,250,801
-------------------- -------------
Operating income (loss)......................... (7,400,805) 4,176,440
Other income (expense):
Interest expense........................................ (3,531,835) (1,602,118)
Interest income......................................... 179,187 194,318
Other non-operating income (expense), net............... (517,714) 944,253
-------------------- -------------
Income (loss) before income taxes............... (11,271,167) 3,712,893
Income tax expense (benefit).............................. (1,997,705) 2,688,331
-------------------- -------------
Net income (loss)............................... $ (9,273,462) $ 1,024,562
==================== =============
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................................................... $ (.55) .07
==================== ==============
Diluted................................................. $ (.55) .07
==================== ==============
Weighted average shares outstanding:
Basic................................................... 16,986,251 16,935,524
==================== ==============
Diluted................................................. 16,986,251 17,380,857
==================== ==============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HOME CHOICE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ending
September 30,
1997
1998______
Cash flows from operating activities: (unaudited)
<S> <C> <C>
Net income (loss)............................... $ (9,273,462) $ 1,024,562
Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:
Loss on sale of property and equipment........ 850,994 91,576
Gain on sale of stores........................ (174,411) (950,366)
Depreciation and disposition of rental 60,025,129 43,316,498
merchandise.......................................
Amortization of intangibles................... 5,120,044 8,107,921
Depreciation of property and equipment........ 2,905,162 2,394,523
Deferred income taxes......................... (591,340) (77,697)
Amortization of stock awards.................. 987,810 145,746
Name change, non-cash property and equipment.. 681,637 --
Changes in operating assets and liabilities, net
of effects
of acquisitions of businesses and dispositions
of stores:
Purchase of rental merchandise................ (58,561,171) (50,270,412)
Accounts payable and accrued expenses......... (8,241,772) 140,918
Other assets.................................. 475,695 (1,331,358)
Income taxes receivable....................... (374,163) (502,982)
-------------- -------------
Net cash provided by (used in) operating (6,169,848) 2,088,929
------------- ------------
activities........................................
Cash flows from investing activities:
Purchase of property and equipment............. (8,254,005) (4,007,676)
Proceeds from sale of property and equipment... 77,789 3,516,393
Acquisitions of businesses, net of cash acquired (4,903,381) (49,101,390)
Payment made for SKC store exchange............ (1,132,476) --
Payments (advances) on notes receivable........ (84,392) 492,921
Increase in loan to stockholder................ -- (7,018)
------------- ------------
Net cash used in investing activities.... (14,296,465) (49,106,770)
------------- ------------
Cash flows from financing activities:
Book Overdraft................................. 7,801,944 --
Purchase of common stock from dissenters....... -- (265,679)
Proceeds from stock options.................... 846,550 179,574
Net repayment of old revolving credit facilities (45,725,592) --
Net borrowings under old revolving credit 4,036,307 30,798,080
facilities........................................
Net repayment of new revolving credit facilities (700,000) --
Net borrowings under new revolving credit 60,500,000 --
facilities........................................
Payments on notes payable and capital leases... (5,711,358) (14,353,797)
Distributions to S corporation shareholders.... -- (76,616)
------------- ------------
Net cash provided by financing activities 21,047,851 16,281,562
------------- ------------
Net increase (decrease) in cash.................. 581,538 (30,736,279)
Cash at beginning of period...................... 3,569,132 35,745,989
------------- ------------
Cash at end of period............................ $ 4,150,670 $ 5,009,710
============= ============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
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 (1,755,398) -
expenses
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
RE SULTS 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>
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.
<TABLE>
<CAPTION>
Basic and diluted earnings per common share is computed based on the
following information (In thousands, except for per share data):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1997 1998
---------------------------------- -------------------------------
1998________ ___
--------------- ---
Net income (loss) $ (133) $ 757 $ $
======== ========
1,238 (9,273)
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of shares
outstanding during the period 16,945 17,017 16,986
16,936
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 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 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.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Alrenco, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Alrenco, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997,
and the related supplemental consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997, after restatement for the 1998 pooling of
interests with RTO, Inc. ("RTO") described in Note 1. These supplemental
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits. We did not audit the
financial statements of Alrenco, Inc. ("Alrenco") prior to the combination with
RTO, which statements reflect total assets constituting 37% and 40% of the
restated total assets as of December 31, 1996 and 1997, respectively, and total
revenues constituting 48%, 51%, and 44% of the restated totals for the years
ended December 31, 1995, 1996, and 1997, respectively. The contribution of
Alrenco represented net income of $3,663,378 and $3,586,304 for the years ended
December 31, 1996 and 1997, respectively, compared to a restated supplemental
consolidated net income of $1,097,558 for the year ended December 31, 1996 and a
restated supplemental consolidated net loss of $4,117,594 for the year ended
December 31, 1997. The contribution of Alrenco to supplemental consolidated net
income represented 24% of the restated total for the year ended December 31,
1995. Those financial statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Alrenco, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Alrenco and RTO on February 26, 1998, which has been accounted
for as a pooling of interests as described in Notes 1 and 3 to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination described in Note 1 of the
notes to the supplemental consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Spartanburg, South Carolina
March 3, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alrenco, Inc.
We have audited, prior to the restatement for the 1998 pooling of interests
with RTO, Inc., the balance sheets of Alrenco, Inc. as of December 31, 1997 and
1996, and the related statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997, which
are presented elsewhere herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alrenco, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Dallas Texas
January 30, 1998
<PAGE>
<TABLE>
<CAPTION>
ALRENCO, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 31,
1996 1997
------------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents......................................... $ 35,745,989 $ 3,569,132
Rental merchandise, net........................................... 58,723,990 97,260,578
Prepaid expenses and other assets................................. 2,827,461 6,342,919
Deferred income taxes............................................. 3,044,867 6,135,051
Property and equipment, net....................................... 9,481,081 15,038,978
Notes receivable.................................................. 1,252,857 243,535
Income tax receivable............................................. -- 2,429,249
Intangible assets, net............................................ 58,054,831 92,541,249
------------- -------------
Total assets............................................ $ 169,131,076 $ 223,560,691
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, trade........................................... $ 8,305,964 $ 18,701,265
Accrued liabilities............................................... 7,175,931 12,393,040
Deferred income taxes............................................. 532,580 1,293,919
Notes payable..................................................... 6,772,269 48,161,872
------------- -------------
Total liabilities....................................... 22,786,744 80,550,096
------------- -------------
Commitments and contingencies Stockholders' equity:
Preferred stock, no par; 10,000,000 shares authorized; none
issued or outstanding........................................ -- --
Common stock, no par; 75,000,000 shares authorized; 16,903,197
and 16,957,119 shares issued and outstanding in 1996 and
1997, respectively........................................... 148,719,632 149,385,777
Unamortized value of stock awards............................... (1,182,138) (987,810)
Accumulated deficit............................................. (1,193,162) (5,387,372)
------------- -------------
Total stockholders' equity.............................. 146,344,332 143,010,595
------------- -------------
Total liabilities and stockholders' equity.............. $ 169,131,076 $ 223,560,691
============= =============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALRENCO, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1995 1996 1997
------------- ------------- ---------
Revenue:
<S> <C> <C> <C>
Rental and fee revenue.................................. $74,990,274 $ 121,145,016 $ 223,289,934
Cash sales and other revenue............................ 2,538,450 3,016,344 7,678,665
----------- ------------- -------------
Total revenue................................... 77,528,724 124,161,360 230,968,599
----------- ------------- -------------
Operating expenses:
Direct store expenses:
Depreciation and disposition of rental
merchandise........................................ 25,054,452 36,581,109 67,257,744
Other................................................ 39,966,441 67,599,707 127,964,749
----------- ------------- -------------
65,020,893 104,180,816 195,222,493
Corporate expenses...................................... 7,988,273 10,710,565 26,139,960
Cost of business combinations........................... -- 1,743,433 934,717
Name change expenses.................................... -- -- 742,541
Amortization of intangibles............................. 568,386 3,982,093 9,902,303
Key executive signing bonuses........................... -- 1,485,641 400,119
----------- ------------- -------------
Total operating expenses........................ 73,577,552 122,102,548 233,342,133
----------- ------------- -------------
Operating income (loss)......................... 3,951,172 2,058,812 (2,373,534)
Other income (expense):
Interest expense........................................ (2,467,652) (1,571,808) (2,512,015)
Interest income......................................... 35,415 645,291 218,118
Other non-operating income (expense), net............... 261,537 403,255 (163,957)
Gain on sale of stores.................................. 1,048,923 750,800 950,366
----------- ------------- -------------
Income (loss) before income taxes and
extraordinary item............................ 2,829,395 2,286,350 (3,881,022)
Income tax expense........................................ 877,177 1,188,792 236,572
----------- ------------- -------------
Income (loss) before extraordinary item......... 1,952,218 1,097,558 (4,117,594)
Extraordinary item, net of income tax expense............. 3,335,851 -- --
----------- ------------- -------------
Net income (loss)............................... $ 5,288,069 $ 1,097,558 $ (4,117,594)
=========== ============= =============
Pro forma information (unaudited):
Income (loss) before extraordinary item................. $ 1,952,218 $ 1,097,558 $ (4,117,594)
Pro forma income tax expense (benefit).................. 290,000 200,674 (213,835)
----------- ------------- -------------
Pro forma income (loss) before extraordinary item 1,662,218 896,884 (3,903,759)
Extraordinary item, net of income tax expense........... 3,335,851 -- --
----------- ------------- -------------
Pro forma net income (loss)..................... $ 4,998,069 $ 896,884 $ (3,903,759)
=========== ============= =============
Pro forma income (loss) before extraordinary item per share
Basic................................................... $ .37 $ .09 $ (.23)
Diluted................................................. .37 .09 (.23)
Extraordinary item per share
Basic................................................... .74 -- --
Diluted................................................. .74 -- --
Pro forma net income (loss) per share
Basic................................................... 1.11 .09 (.23)
Diluted................................................. 1.11 .09 (.23)
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALRENCO, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) For the Three Years Ended
December 31, 1997
Unamortized
Common Stock Value of Accumulated Unrealized
Shares Amount Stock Awards Deficit Gain Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994... 4,377,994 $ 3,945,184 $ -- $(4,826,135) $ 30,097 $ (850,854)
Issuance of common
stock............. 63,485 483,281 -- -- -- 483,281
Contributions of
capital........... -- 45,498 -- -- -- 45,498
Distributions to S
corporation
shareholders...... -- -- -- (1,486,943) -- (1,486,943)
Net change in
unrealized gains,
net of tax of
$21,283........... -- -- -- -- (30,097) (30,097)
Net income.......... -- -- -- 5,288,069 -- 5,288,069
--------- ------------- ----------- ----------- -------- -------------
December 31, 1995... 4,441,479 4,473,963 -- (1,025,009) -- 3,448,954
Issuance of common
stock............. 12,356,118 142,336,038 -- -- -- 142,336,038
Restricted stock
awards............ 105,000 1,470,000 (1,470,000) -- -- --
Exercise of stock
options........... 600 8,400 -- -- -- 8,400
Amortization of stock
awards............ -- -- 287,862 -- -- 287,862
Contributions of
capital........... -- 431,231 -- -- -- 431,231
Distributions to S
corporation
shareholders...... -- -- -- (1,265,711) -- (1,265,711)
Net income.......... -- -- -- 1,097,558 -- 1,097,558
--------- ------------- ----------- ----------- -------- -------------
December 31, 1996... 16,903,197 148,719,632 (1,182,138) (1,193,162) -- 146,344,332
Issuance of common
stock............. 49,567 690,000 -- -- -- 690,000
Exercise of stock
options........... 21,416 241,824 -- -- -- 241,824
Amortization of stock
awards............ -- -- 194,328 -- -- 194,328
Purchase and
retirement of
common stock from
dissenters........ (17,061) (265,679) -- -- -- (265,679)
Distributions to S
corporation
shareholders...... -- -- -- (76,616) -- (76,616)
Net loss............ -- -- -- (4,117,594) -- (4,117,594)
--------- ------------- ----------- ----------- -------- -------------
December 31, 1997... 16,957,119 $ 149,385,777 $ (987,810) $(5,387,372) $ -- $ 143,010,595
========== ============= =========== =========== ======== =============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ALRENCO, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1996 1997
------------- ------------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss)............................... $ 5,288,069 $ 1,097,558 $ (4,117,594)
Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:
Extraordinary gain............................ (3,335,851) -- --
Loss on sale of property and equipment........ 183,225 157,743 229,148
Gain on sale of stores........................ (1,048,923) (750,800) (950,366)
Depreciation and disposition of rental 25,054,452 36,581,109 67,257,744
merchandise.......................................
Amortization of intangibles................... 570,034 3,985,279 9,902,303
Depreciation of property and equipment........ 1,275,954 1,874,180 3,096,386
Deferred income taxes......................... 71,845 (1,437,643) (2,306,428)
Amortization of stock awards.................. -- 287,862 194,328
Gain on sale of investments................... (99,930) -- --
Changes in operating assets and liabilities, net
of effects
of acquisitions of businesses and dispositions
of stores:
Purchase of rental merchandise................ (25,530,026) (47,384,827) (90,366,228)
Accounts payable and accrued expenses......... 1,297,974 3,148,167 13,781,844
Other assets.................................. (663,999) 218,068 (3,829,116)
Income taxes payable.......................... 164,766 38,566 (1,570,689)
------------ ------------ ------------
Net cash provided by (used in) operating 3,227,590 (2,184,738) (8,678,668)
------------ ------------ ------------
activities........................................
Cash flows from investing activities:
Purchase of property and equipment.............. (1,070,066) (3,036,474) (9,251,093)
Proceeds from sale of property and equipment.... 244,389 71,468 2,844,612
Purchase of investments......................... (58,581) -- --
Proceeds from sale of investments............... 542,501 -- --
Acquisitions of businesses, net of cash acquired (7,205,060) (74,502,919) (50,628,896)
Dispositions of stores, net of cash sold........ 2,700,000 1,043,058 3,031,691
Amounts advanced on notes receivable............ (114,425) (336,225) --
Payments received on notes receivable........... 67,179 98,261 1,098,246
Increase in loan to stockholder................. (7,466) (7,252) (7,018)
------------ ------------ ------------
Net cash used in investing activities.... (4,901,529) (76,670,083) (52,912,458)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of common stock from dissenters........ -- -- (265,679)
Proceeds from issuance of common stock.......... 483,281 142,336,038 --
Proceeds from stock options..................... -- 8,400 241,824
Proceeds from notes payable..................... 6,925,654 2,393,150 58,305,102
Payments on notes payable and capital leases.... (4,350,105) (29,778,248) (28,790,362)
Payments for deferred loan fees................. (16,090) -- --
Contributions of capital........................ 45,498 51,610 --
Distributions to S corporation shareholders..... (1,328,012) (1,520,151) (76,616)
------------ ------------ ------------
Net cash provided by financing activities 1,760,226 113,490,799 29,414,269
------------ ------------ ------------
Net increase (decrease) in cash................... 86,287 34,635,978 (32,176,857)
Cash at beginning of period....................... 1,023,724 1,110,011 35,745,989
------------ ------------ ------------
Cash at end of period............................. $ 1,110,011 $ 35,745,989 $ 3,569,132
============ ============ ============
Supplemental disclosure of cash flow information: Cash paid for:
Interest...................................... $ 2,867,380 $ 1,676,893 $ 2,295,982
============ ============ ============
Income taxes.................................. $ 683,074 $ 2,615,322 $ 4,886,911
============ ============ ============
The accompanying notes are an integral part of the
supplemental consolidated financial statements.
</TABLE>
ALRENCO, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
On February 26, 1998, RTO, Inc. ("RTO") merged with and into Alrenco, Inc.
("Alrenco"), with Alrenco being the surviving corporation in the merger (the
"RTO Merger"). The supplemental consolidated financial statements of Alrenco
have been prepared to give retroactive effect to the RTO Merger on February 26,
1998. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
Alrenco and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
The supplemental consolidated financial statements include the combination
of Alrenco and RTO, the Purchase Acquisitions and the Pooling Acquisitions (as
described in Note 3) (collectively referred to as the "Company") as required by
Accounting Principles Board Opinion Number 16 ("APB 16").
The Company develops, acquires, owns and operates a chain of stores that
rents durable household products such as consumer electronics, appliances,
furniture, jewelry and home furnishing accessories under cancelable
rental-purchase agreements renewable on a weekly or monthly basis. At December
31, 1997, the Company operated 432 stores in 23 states (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Rental Merchandise
Rental merchandise is carried at the lower of cost or net realizable value.
Depreciation is provided using the income forecasting method or straight-line
method over a period designed to approximate the income forecasting method. The
income forecasting method is designed to match as closely as practicable the
recognition of depreciation expense with the consumption of the rental
merchandise. The consumption of rental merchandise occurs during periods of
rental and directly coincides with the receipt of rental revenue over the
rental-purchase agreement period, generally 18 to 24 months. Under the income
forecasting method, merchandise held for rent is not depreciated, and
merchandise on rent is depreciated in the proportion of rents received to total
rents required to obtain ownership as provided in the rental-purchase agreement.
The income forecasting method is an activity-based method similar to the units
of production method.
Rental merchandise acquired prior to January 1, 1995 by Alrenco, is being
depreciated by the straight-line method over various estimated useful lives,
primarily 21 months. The range of the various estimated useful lives is
generally one to three years. The Company adopted the income forecasting method
because management believes that it provides a more systematic and rational
allocation of the cost of rental merchandise to operations as its useful life
expires. The effect of the change in accounting method was to increase pro forma
net income and pro forma net income per basic and diluted share by approximately
$470,000 and $0.10, respectively, for the year ended December 31, 1995.
Effective January 1, 1997, RTO and its new subsidiaries elected to
depreciate all additions to rental merchandise acquired subsequent to December
31, 1996 using the income forecasting method and make other conforming changes
to the estimate of depreciation expense. These changes were made to more
accurately match revenues and expenses. The impact of these changes on the
results of operations for the year ended December 31, 1997 was to decrease pro
forma net loss by approximately $400,000 or $.02 per basic and diluted share.
Rental Revenue
Merchandise is rented to customers pursuant to rental-purchase agreements,
which provide for predominantly weekly rental terms with non-refundable rental
payments. Rental revenue is recognized as collected, since at the time of
collection the rental merchandise has been placed in service and costs of
installation and delivery have been incurred. Generally, the customer has the
right to acquire title through either a purchase option or through payment of
all rentals required to obtain ownership as provided in the rental-purchase
agreement. The customers may terminate rental-purchase agreements at any time,
and if terminated, the rental merchandise is returned to the Company. A
provision is made for estimated losses of rental merchandise damaged or not
returned by customers.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risks
The Company maintained deposits and a money market mutual fund account
totaling $35,745,989 and $3,569,132 at December 31, 1996 and 1997, respectively,
with several financial institutions. Deposits in excess of $100,000 and mutual
funds are not insured by the Federal Deposit Insurance Corporation.
During 1996, the Company invested excess funds in a money market mutual fund
account with a bank. As of December 31, 1996, the market value of the securities
approximates the carrying amount of $25,000,000.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid instruments with maturities of three months or less when purchased. The
carrying amount of cash and cash equivalents is the estimated fair value at
December 31, 1996 and 1997.
Property and Equipment and Related Depreciation
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of depreciable assets are capitalized. Upon
sale or other retirement of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in the results of operations. Depreciation of furniture and fixtures,
signs and vehicles is provided over the estimated useful lives of the respective
assets on a straight-line and an accelerated bases. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the term of the
lease and renewal period, if applicable.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company continually evaluates the propriety of the carrying value of
property and equipment, goodwill and other intangible assets based on the
estimated future undiscounted cash flows of the related investment, as well as
the amortization period to determine whether current events and circumstances
warrant adjustments to carrying value and/or revised estimates of useful lives.
At this time, the Company believes that no significant impairment of the
long-lived assets has occurred and that no reduction of the estimated useful
lives is warranted.
Income Taxes
Income taxes for the Company are determined by use of the liability method
in which deferred income taxes are provided for temporary differences between
the financial reporting and income tax basis of assets and liabilities using the
income tax rates under existing legislation expected to be in effect at the date
such temporary differences are expected to reverse.
Since certain of the business combinations accounted for as
poolings-of-interests as defined by APB 16 (see Note 3) involved companies which
were nontaxable enterprises prior to acquisition by the Company (e.g. S
Corporations), unaudited pro forma income tax expense (benefit) has been
presented for the nontaxable enterprises as if they had been a taxable
enterprise for all periods presented. Deferred tax assets and liabilities for
the tax effects of temporary differences for the nontaxable enterprises were
established through an adjustment to income tax expense (benefit) during the
period that the combinations were consummated (see Note 11).
Advertising Costs
Advertising costs amounting to $4,839,000, $7,534,000 and $13,413,000 for
the years ended December 31, 1995, 1996, and 1997, respectively, are expensed as
incurred.
Pro Forma Income (Loss) Per Share
On December 31, 1997, the Company adopted provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." In
accordance with SFAS 128, the Company computes basic pro forma income per share
based on the weighted-average number of common shares outstanding during each
period presented. Diluted pro forma income per share is computed based on the
weighted average number of common shares plus the dilutive effect of all
potential dilutive securities, principally stock options and convertible notes,
outstanding during each period presented. All prior year pro forma income per
share amounts have been restated to comply with the provisions of SFAS 128.
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------ ------------------------------- ------------------
Pro Forma Per Pro Forma Per Pro Forma Per
Net Share Net Share Net Share
Income Shares Amount Income Shares Amount Loss Shares Amount
Basic income per common
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
share.................. $1,662,218 4,516,936 $ .37 $ 896,884 10,219,487 $ .09 $(3,903,759) 16,940,945 $ (.23)
===== ===== ======
Effect of dilutive
options................ -- -- -- 42,353 -- 176,197
---------- -------- --------- ---------- ----------- ---------
Diluted income per common
share.................. $1,662,218 4,516,936 $ .37 $ 896,884 10,261,840 $ .09 (3,903,759) 17,117,142 $ (.23)
========== ========= ===== ========= ========== ===== =========== ========== ======
</TABLE>
Diluted income (loss) per share for the year ended December 31, 1997
presented above, as well as for all quarters in 1997 (see Note 14), excludes the
effect of the convertible notes, if converted, given these securities increase
net income or decrease net loss and would be antidilutive.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and debt whose carrying
value approximates fair value at December 31, 1996 and 1997.
Statements of Cash Flows
Excluded from the supplemental consolidated statements of cash flows was the
effect of the following noncash activities. During the year ended December 31,
1997, the Company issued common stock to settle notes payable totaling $690,000
to certain stockholders. Additionally, in connection with certain Purchase
Acquisitions, the Company issued a total of $7,100,000 of notes payable to
individuals.
Recent Accounting Standards
During June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information". Preliminary analysis of
these new standards by the Company indicates that the standards will not have a
material impact on the Company. The standards are effective for financial
statements for fiscal years beginning after December 15, 1997.
Reclassifications
Certain reclassifications were made to prior year balances to conform to the
1997 presentation.
3. ACQUISITIONS
During 1995, the Company purchased 16 rental-purchase stores for $7,205,060,
which were accounted for as a purchase. The operating results of these acquired
stores are included in the operating results of the Company since the dates of
acquisition.
The Company purchased all of the issued and outstanding common stock of
Action TV & Appliance Rental, Inc. ("Action"), a 102 store chain, effective
August 1, 1996 for cash of approximately $45,300,000 and $2,600,000 for
noncompetition agreements. The Company purchased 14 stores from a company doing
business as Easy Rentals on March 1, 1996 for cash of approximately $6,500,000.
On August 1, 1996, the Company completed the acquisition of 14 stores for cash
of approximately $5,600,000. During 1996, the Company also acquired 55 stores in
22 unrelated transactions for an aggregate cash purchase price of approximately
$14,500,000.
On January 2, 1997, the Company completed the acquisition of 28 stores
located in 4 states from Fastway Rentals, Inc. for an aggregate purchase price
of $11,900,000. The Company purchased the assets of 27 rent-to-own stores from
B&L Concepts, Inc. ("B&L") on January 6, 1997 for total consideration of
approximately $13,800,000 consisting of cash of approximately $10,800,000 and a
$3,000,000 convertible note (see Note 9). Additionally, during 1997, the Company
acquired 60 stores in 8 unrelated transactions for an aggregate purchase price
of approximately $32,000,000 consisting of cash of $27,900,000 and notes
totaling $4,100,000 (see Note 9).
The above acquisitions (collectively referred to as the "Purchase
Acquisitions") have been accounted for as purchases, as defined by APB 16 and,
accordingly, the operating results of the acquired businesses have been included
in the results of operations since their respective acquisition dates. The
purchase prices have been allocated as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
------------- ---------
<S> <C> <C>
Rental merchandise............................. $ 27,048,141 $17,210,537
Property and equipment......................... 4,580,086 2,358,771
Intangible assets.............................. 56,711,492 44,515,140
Other assets................................... 3,967,194 890,000
Accounts payable and accrued expenses.......... (3,886,758) (1,755,398)
Notes payable assumed.......................... (13,917,236) (5,151,794)
Notes payable issued........................... -- (7,100,000)
Income tax liability........................... -- (338,360)
------------ -----------
Cash paid, net of cash acquired...... $ 74,502,919 $50,628,896
============ ===========
</TABLE>
The following summary, prepared on an unaudited pro forma basis, presents
the results of operations (i) as if the above acquisitions had been purchased as
of the beginning of the year of acquisition and the beginning of the year for
the immediately preceding period, (ii) as if the initial capitalization of RTO
had occurred on January 1, 1995, and (iii) to include the effect of adjustments
of (i) and (ii) for amortization of intangibles, interest, income taxes and the
weighted average shares outstanding.
<TABLE>
<CAPTION>
Unaudited Pro Forma Results of Operations
Year Ended December 31,
1995 1996 1997
-------------- -------------- ---------
<S> <C> <C> <C>
Revenue........................................ $162,027,916 $230,622,179 $242,713,286
Pro forma income (loss) before extraordinary item 3,103,527 (1,968,597) (5,441,486)
Pro forma net income (loss).................... 6,439,378 (1,968,597) (5,441,486)
Pro forma income (loss) before extraordinary
item per
share:
Basic........................................ $ .22 $ (.12) $ (.32)
Diluted...................................... .22 (.12) (.32)
Pro forma net income (loss) per share
Basic........................................ $ .46 $ (.12) $ (.32)
Diluted...................................... .46 (.12) (.32)
</TABLE>
The unaudited pro forma financial 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.
The Company entered into definitive agreements to merge with various
entities, which were consummated during 1996, 1997 and 1998 (the "Pooling
Acquisitions"). Under the terms of each merger agreement, shares of common stock
of each entity were multiplied by an exchange ratio and exchanged for shares of
the Company's common stock. A summary of each merger follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shares of
Company
Pooling Acquisitions Date of Merger Stock Issued
- -------------------- ---------------- ------------
Home Choice, Inc. ("Home Choice")............................. October 31, 1996 23,885
Yam's, Inc. ("Yam's")......................................... November 1, 1996 342,837
ARTO, Inc. ("ARTO")........................................... February 28, 186,774
1997
National TV Rental, Inc. ("National")......................... February 28, 188,659
1997
Seajay Group ("Seajay")....................................... February 28, 179,500
1997
Showtyme Group ("Showtyme")................................... February 28, 214,520
1997
ABC Group ("ABC")............................................. March 11, 1997 170,611
Discount Centers of America, Inc. ("Discount")................ May 12, 1997 98,415
The Hut Co. ("Hut")........................................... May 13, 1997 37,714
RTO, Inc. ("RTO")............................................. February 26, 12,280,316
1998
</TABLE>
The Pooling Acquisitions were accounted for as pooling of interests.
Separate unaudited results of the pooled entities prior to each date of the
merger for the years ended December 31, 1995, 1996 and 1997 are as follows
(unaudited):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------- ------------- ---------
Total revenue:
<S> <C> <C> <C>
Alrenco................................ $37,575,639 $ 63,855,808 $102,598,240
RTO.................................... -- 25,157,509 123,250,308
Home Choice............................ 319,772 834,748 --
Yam's.................................. 4,844,923 4,535,581 --
ARTO................................... 3,811,243 4,153,355 684,753
National............................... 7,260,425 6,378,971 850,086
Seajay................................. 11,661,143 7,406,567 1,218,752
Showtyme............................... 4,627,591 4,346,450 632,548
ABC.................................... 3,239,992 3,451,139 550,938
Discount............................... 2,369,852 2,385,037 742,969
Hut.................................... 1,818,144 1,656,195 440,005
----------- ------------ -----------
Combined............................... $77,528,724 $124,161,360 $230,968,599
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
------------------------ --------------------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
Net income (loss):
<S> <C> <C> <C> <C> <C> <C>
Alrenco................... $ 1,266,592 $ 1,266,592 $ 3,663,378 $ 3,663,378 $ 3,586,304 $ 3,586,304
RTO....................... -- -- (3,175,692) (3,141,549) (8,735,940) (8,593,384)
Home Choice............... (221,073) (135,695) (129,993) (79,790) -- --
Yam's..................... 59,313 59,313 (17,711) (17,711) -- --
ARTO...................... 316,396 194,204 367,532 225,591 9,636 9,636
National.................. (6,232) (3,825) 204,135 125,298 (74,480) (52,813)
Seajay (including
extraordinary item 3,385,544 3,385,544 220,813 220,813 (34,204) (34,204)
of $3,335,851 in 1995).
Showtyme.................. 579,037 355,413 211,647 129,909 (2,776) (3,577)
ABC....................... 82,779 50,810 (45,303) (27,807) (76,500) (26,087)
Discount.................. (11,041) (11,041) (99,064) (99,064) (45,335) (45,335)
Hut....................... (161,409) (161,409) (57,826) (57,826) (6,299) (6,299)
Conforming adjustments.... (1,837) (1,837) (44,358) (44,358) 1,262,000 1,262,000
----------- ----------- ----------- ----------- ----------- -----------
Combined.................. $ 5,288,069 $ 4,998,069 $ 1,097,558 $ 896,884 $(4,117,594) $(3,903,759)
=========== =========== =========== =========== =========== ===========
</TABLE>
Conforming adjustments relate to conforming amortization policies, net of
the related tax benefit.
4. SALE OF STORES
During 1997, the Company sold eight stores for $3,031,691. In connection
with the transaction, the Company sold assets with a net book value of
$2,081,325, received cash of $3,031,691 and recorded a gain of $950,366.
During 1996, the Company sold four stores for $1,410,700. In connection with
the transaction, the Company sold assets with a net book value of $659,900,
received $1,043,058 in cash and $367,642 to repay a portion of its debt, and
recorded a gain of $750,800.
During 1995, the Company sold thirteen stores for $2,700,000. In connection
with the transaction, the Company sold assets with a net book value of
$1,651,077, received $2,700,000 in cash and recorded a gain of $1,048,923.
5. RENTAL MERCHANDISE
Cost and accumulated depreciation of rental merchandise consist of the
following:
<TABLE>
<CAPTION>
December 31,
1996 1997
------------ ---------
<S> <C> <C>
Cost....................................................... $85,888,698 $145,740,577
Less accumulated depreciation.............................. 27,164,708 48,479,999
---------- ------------
Rental merchandise, net.......................... $58,723,990 $ 97,260,578
=========== ============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Depreciation December 31,
Period 1996 1997
<S> <C> <C> <C>
Buildings............................................. 20 years $ 445,539 $ 601,679
Furniture and equipment............................... 3-7 years 10,420,777 12,254,503
Leasehold improvements................................ 3-10 years 5,579,886 9,160,747
----------- -----------
16,446,202 22,016,929
Less: accumulated depreciation and amortization....... 7,080,548 7,093,378
----------- -----------
9,365,654 14,923,551
Land.................................................. 115,427 115,427
----------- -----------
Property and equipment, net................. $ 9,481,081 $15,038,978
=========== ===========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Amortization December 31,
Period 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Customer rental agreements.......................... 15-24 months $ 3,071,317 $ 4,942,970
Noncompetition agreements........................... 2-10 years 4,566,300 7,783,006
Goodwill............................................ 10-30 years 55,450,179 94,527,708
----------- -------------
63,087,796 107,253,684
Less: accumulated amortization...................... 5,032,965 14,712,435
----------- -------------
Intangible assets, net.................... $58,054,831 $ 92,541,249
=========== =============
</TABLE>
Customer rental agreements represent the fair value of active customer
agreements of acquired stores at the acquisition date and are amortized in
proportion to and over the period of related estimated rental income on an
accelerated basis. The noncompetition agreements are amortized on the
straight-line and accelerated methods. Goodwill is amortized on the
straight-line method.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1997
<S> <C> <C>
Salaries, wages, taxes and benefits......................... $2,621,062 $ 4,596,457
Property taxes.............................................. 220,124 454,779
Sales and use taxes payable................................. 773,264 1,810,134
Professional and advisory fees.............................. 884,207 1,142,297
Bonuses..................................................... 468,842 974,421
Interest.................................................... 94,668 254,803
Other....................................................... 2,113,764 3,160,149
---------- -----------
Accrued liabilities............................... $7,175,931 $12,393,040
========== ===========
</TABLE>
9. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consists of the following:
December 31,
1996 1997
<S> <C>
Note payable to individuals with an interest rate of 9.25% payable in
equal annual $ -- $ 1,400,000
installments of $700,000 plus accrued interest through January 3, 1999
Convertible note payable to individuals with an interest rate of 6%
payable -- 3,000,000
quarterly with the principal due in January 1999....................
Convertible note payable to individuals with an interest rate of 6%
payable -- 2,000,000
quarterly with the principal due May 30, 1999.......................
Revolving credit facilities with lenders with variable interest rates and
fixed rates 1,317,593 41,689,285
as discussed below..................................................
Notes payable to banks................................................ 3,119,987 --
Notes payable to affiliates........................................... 1,670,811 --
Notes payable to individuals with interest rates at 10% and 20%; payments
ranging from $1,822 to interest only; some maturing on May 2002 and
others no stated maturity date...................................... 105,156 72,587
Equipment notes payable............................................... 200,520 --
Vehicle notes payable................................................. 85,399 --
Capital lease obligations............................................. 272,803 --
---------- -----------
Notes payable............................................... $6,772,269 $48,161,872
========== ===========
</TABLE>
The Company had two revolving credit facilities at December 31, 1997. The
first facility (the "First Facility") was a variable interest rate based on
LIBOR (5.75% at December 31, 1997) plus 2.5% and matures on October 1, 1998. The
First Facility provided for maximum borrowings of $21 million. Borrowings under
the First Facility were also limited based on multiples of average monthly
receipts and rental income, as defined by the First Facility. At December 31,
1997, the Company had no additional borrowings available under the First
Facility. The weighted average interest rate was 8.05% and 8.23% at December 31,
1996 and 1997, respectively.
The second facility (the "Second Facility") provided for maximum borrowings
of $30,000,000 and carried a three-year term scheduled to expire in 2000 with an
interest rate equal to prime (8.5% at December 31, 1997) minus 1/2% or LIBOR
plus 2 1/4%, at the election of the Company. Under the terms of the Second
Facility, the Company was required to pay a commitment fee of .125% per annum on
the unused portion of the Second Facility. As of December 31, 1997, $20,689,285
was outstanding under the Second Facility. The weighted average interest rate
was 10.1% and 8.7% at December 31, 1996 and 1997, respectively.
The First and Second Facilities were collateralized by substantially all of
the Company's assets. The First and Second Facilities restricted the Company's
ability to pay dividends to a percentage of annual income, required the Company
to maintain minimum levels of tangible net worth, as defined, subjected the
Company to a maximum ratio of total liabilities to tangible net worth, limit
liabilities and capital expenditures, and required certain interest coverage
ratios. As of December 31, 1997, the Company was in violation of a financial
covenant under the Second Facility, which has been subsequently waived by the
bank. In February 1998, the Company entered into a new revolving credit facility
which replaced the First and Second Facilities. See Note 15 -- "Subsequent
Event."
On January 6, 1997 and May 28, 1997, the Company issued two notes in the
amounts of $3,000,000 and $2,000,000, respectively, in connection with the
acquisitions of B&L and Instant Rent to Own, Inc. (see Note 3). Upon certain
events these notes are convertible into common stock of the Company at a
conversion rate of $13.92 per share, which will be adjusted for stock splits,
dividends, or recapitalizations of the Company.
Aggregate maturities of notes payable at December 31, 1997 were as follows:
1998........................................... $ 42,403,016
1999........................................... 5,715,001
2000........................................... 16,387
2001........................................... 17,902
2002........................................... 9,566
------------
$ 48,161,872
10. STOCK OPTION PLAN
On November 8, 1995, Alrenco approved a stock incentive plan ("Alrenco Plan")
under which 450,000 common shares were reserved. Under the Alrenco Plan, the
Company was entitled to grant its employees incentive stock options or
nonqualified stock options to purchase a specified number of shares of common
stock at a price not less than fair market value on the date of grant and for a
term not to exceed 10 years. In addition to the stock options, the Company was
entitled to grant stock appreciation rights ("SAR"), restricted stock awards and
options to directors. SARs and options to directors were required to be granted
at a minimum of fair market value at the date of grant and restricted stock
awards at a price to be determined by the Board of Directors' compensation
committee. Directors who are not involved in day-to-day management of the
Company were initially entitled to a grant of 5,000 shares and on each of their
next five anniversaries, an automatic 1,000 share grant. On January 23, 1996,
the Company granted 105,000 shares of restricted stock to two key employees
which vest at the earlier of a change in control or at the end of seven years.
As a result of the merger with RTO, these shares automatically vested on
February 26, 1998. At December 31, 1997, there were 179,205 shares reserved for
issuance under the Alrenco Plan.
RTO adopted the 1996 Employee Stock Option Plan (the "RTO Plan") to attract
and retain employees. Under the RTO Plan, RTO was entitled to grant options to
purchase a total of not more that 1,027,973 shares of common stock, subject to
anti-dilution and other adjustment provisions provided, however, that the
maximum number of shares subject to all options granted to an individual under
the Plan would not exceed 50% of the shares of common stock authorized for
issuance. No options could be granted under the RTO Plan after the tenth
anniversary of the RTO Plan. The options vest over a four-year period and expire
on the tenth anniversary following the date of grant.
In August 1996, the compensation committee of RTO granted under the RTO
Plan, ten-year options to purchase common stock at an exercise price of $11.14
per share to numerous employees of RTO. Additional options have been granted
subsequent to this initial grant to employees joining RTO through acquisitions
or recruitment at exercise prices per share ranging from $11.14 to $15.59. The
option exercise price was equal to the fair market value of the stock on the
date of grant, as determined by the Board of Directors.
RTO also adopted the 1996 Stock Option Plan for Non-Employee Directors (the
"Director's Plan") that provided for the granting to non-employee directors of
stock options to purchase up to 448,975 shares of the Company's common stock.
During 1997, the Company granted options to purchase 59,085 shares at exercise
prices per share ranging from $15.59 to $16.37. These options vest six months
after the date of grant. No options were issued under the Director's Plan in
1996 and no options were exercised during 1996 and 1997. At December 31, 1997,
50,644 options were exercisable under the Director's Plan at a weighted-average
exercise price of $15.59 per share.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"). As permitted by SFAS 123, the Company has
chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its Plans. Accordingly,
no compensation cost has been recognized for options granted under the Plans.
Had compensation cost for the Company's Plans been determined based on fair
value at the grant dates for awards under the Plans consistent with the method
outlined in SFAS 123, the Company's pro forma net income (loss) and pro forma
net income (loss) per share would have been the amounts indicated below for the
years ended December 31, 1996 and 1997. The Plans had not been adopted during
the year ended December 31, 1995.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1997
-------------------------- ----------------------
As SFAS 123 As SFAS 123
Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C>
Pro forma net income (loss)............. $ 896,884 $ 46,595 $(3,903,759) $(6,288,774)
Pro forma basic net income (loss) per .09 .00 (.23) (.37)
share...................................
Pro forma diluted net income (loss) per .09 .00 (.23) (.37)
share...................................
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using the following assumptions for
grants in 1996 and 1997:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
December 31, December 31,
1996 1997
-------------- ---------
<S> <C> <C>
Expected dividend rate.................. 0% 0%
Volatility rate......................... 0% to 40% 0% to 40%
Risk-free interest rate................. 5.75% to 5.75% to 6.00%
6.30%
Expected life........................... 5.5 to 6 5.0 to 6 years
years
</TABLE>
A summary of the status of the Plan as of December 31, 1996 and 1997, and
changes during the periods are presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding as of January 1, 1996............................ -- $ --
Granted.................................................... 730,052 11.64
Exercised.................................................. (600) 14.00
Forfeited.................................................. (27,159) 11.18
----------- -------
Outstanding as of December 31, 1996.......................... 702,293 11.66
Granted.................................................... 630,016 14.72
Exercised.................................................. (21,416) 11.29
Forfeited.................................................. (177,647) 12.70
----------- -------
Outstanding as of December 31, 1997.......................... 1,133,246 $ 13.19
=========== =======
Options exercisable at December 31, 1996..................... 66,645
===========
Options exercisable at December 31, 1997..................... 210,909
===========
Weighted average fair value of options granted during the year
ended December 31, 1996.................................... $ 3.21
===========
Weighted average fair value of options granted during the year
ended December 31, 1997.................................... $ 5.32
===========
</TABLE>
The following table summarizes information about the Plan's stock options at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Options Outstanding
Weighted -
Average
Number Remaining
Exercise Price Outstanding Contractual Life
December 31, 1996
<S> <C> <C> <C>
$11.14............................... 573,072 9.64 years
13.92............................... 27,926 9.89 years
14.00............................... 101,295 9.00 years
--------
702,293
December 31, 1997
$10.38............................... 4,500 9.80 years
10.81............................... 3,000 9.80 years
11.14............................... 522,607 8.64 years
13.92............................... 133,076 9.01 years
14.00............................... 86,729 8.00 years
15.59............................... 374,894 8.92 years
16.37............................... 8,440 9.94 years
--------
1,133,246
</TABLE>
Effective September 30, 1995, the Company rescinded existing deferred
compensation plans. Despite the rescission, the Company agreed to compensate the
executives for amounts accrued under the plans through September 30, 1995.
Compensation recognized under the deferred compensation plans was $119,603 for
the year ended December 31, 1995.
11. INCOME TAXES
<TABLE>
<CAPTION>
The income tax expense (benefit) is comprised of the following components:
For the Years Ended December 31,
1995 1996 1997
------------ ------------ --------
Current:
<S> <C> <C> <C>
Federal....................................... $ 622,758 $ 1,962,036 $ 1,985,961
State......................................... 182,574 664,399 557,039
--------- ----------- -----------
Total current......................... 805,332 2,626,435 2,543,000
Deferred........................................ 71,845 (1,437,643) (2,306,428)
--------- ----------- -----------
Total................................. $ 877,177 $ 1,188,792 $ 236,572
========= =========== ===========
</TABLE>
Significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
Deferred tax assets:
<S> <C> <C>
Net operating loss carry-forwards.......................... $ 1,272,439 $ 2,087,720
Rental merchandise......................................... 556,615 738,739
Property and equipment..................................... 282,000 405,891
Intangibles................................................ 454,000 2,002,625
Deferred compensation...................................... 34,644 5,072
Tax credits................................................ 414,581 263,316
Other...................................................... 121,151 435,846
Accrued expenses........................................... -- 286,405
Valuation allowance........................................ (90,563) (90,563)
----------- -----------
Net deferred tax assets............................ 3,044,867 6,135,051
----------- -----------
Deferred tax liabilities:
Intangible assets.......................................... 518,580 --
Rental merchandise......................................... -- 955,511
Fixed assets............................................... -- 194,605
Other...................................................... 14,000 143,803
----------- -----------
Deferred tax liabilities................................ 532,580 1,293,919
----------- -----------
$ 2,512,287 $ 4,841,132
=========== ===========
</TABLE>
In 1996, a net deferred tax asset of approximately $400,000 was established
upon the acquisition of Action for the difference in the tax and book basis of
the net assets acquired. In 1997, a net deferred tax asset of $22,417 was
established for one of the Purchase Acquisition for the difference in the tax
and book basis of the net assets acquired as of the date of acquisition.
As of December 31, 1997, the Company has a total of $6,900,000 of net
operating loss carry-forwards for federal tax purposes, expiring 2007 and 2010.
The utilization may be subject to limitations under IRC Section 382.
Additionally, as of December 31, 1997, the Company had approximately $119,000 in
general business credit carry-forwards which expire, if unused, beginning in the
year 2000 and alternative minimum tax credits of approximately $145,000 which
are not subject to expiration. These credit carry-forwards relate to one of the
Purchase Acquisitions and utilization of these credits is limited to
approximately $118,000 per year.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the carry-forwards. Although
realization is not assured, management believes it is more likely than not that
all of the net deferred tax asset will be realized. The amount of deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The income tax expense (benefit) reconciled to the tax computed at the
statutory Federal rate (34%) is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
Federal income tax at the statutory rate................ $ 961,994 $ 777,359 $(1,319,547)
State income tax........................................ 193,651 267,932 (6,122)
Nondeductible goodwill amortization and acquisitions cost 283 272,177 1,057,802
Income from Subchapter S corporations, net.............. (290,000) (200,674) 213,835
Other................................................... 11,249 71,998 290,604
--------- ---------- -----------
$ 877,177 $1,188,792 $ 236,572
========= ========== ===========
</TABLE>
12. BENEFIT PLANS
The Company has a defined contribution profit sharing plan covering
substantially all employees. The plan provides for Company contributions to be
determined annually by the Board of Directors. The Company contributed $50,000
and $120,000 to the plan during 1996 and 1997, respectively.
The Company also has two qualified tax deferred retirement savings plans
under the provisions of Section 401(k) of the Internal Revenue Code. The plans
cover all full-time employees who have completed six months of service with the
Company. Under the first plan, the Company matches the first 4% of an eligible
employee's elective contributions. Additional contributions are made at the
discretion of the Board of Directors. The second plan calls for the Company to
match 25% of the first 6% of eligible employees' elective contributions. The
Company contributed approximately $135,000 and $338,000 to the Plans for 1996
and 1997, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and transportation
equipment under operating leases expiring in various years through 2010. Rental
expense was $4,241,000, $8,846,200 and $15,907,118 for the years ended December
31, 1995, 1996 and 1997, respectively. Future minimum rental payments under
operating leases with remaining noncancelable terms in excess of one year at
December 31, 1997 are as follows:
1998................................................. $ 17,390,088
1999................................................. 13,822,487
2000................................................. 9,046,179
2001................................................. 5,370,666
2002................................................. 2,374,380
Thereafter........................................... 1,809,171
------------
$ 49,812,971
The Company leases its corporate office space from the Company's chief
executive officer, president, director and shareholder of the Company. Rental
expense pursuant to the lease was $86,250 and $207,000, for the years ended
December 31, 1996 and 1997, respectively. The Company also leases office space
from a corporation owned by a shareholder and director of the Company. Rental
expense pursuant to the lease was $94,800, $126,010 and $122,040, respectively,
for each of the three years in the period ended December 31, 1997.
The Company from time to time on an as needed basis charters an airplane
from a company owned by one of its stockholders. Fees charged during the year
ended December 31, 1996 and 1997 under this arrangement were $106,650 and
$120,870, respectively.
The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a material adverse effect on the Company's financial position or results of
operations.
The Internal Revenue Service has completed an examination of Alrenco's
Federal income tax returns for the years 1992 through 1995. The Company was
assessed additional taxes of approximately $680,000, related principally to the
Company's method of depreciation on rental merchandise and excess compensation
paid for those years. The Company has paid approximately $167,000 of this
assessment in January 1998 related to the excess compensation portion of the
assessment, and is contesting the remaining amounts related to depreciation on
rental merchandise. Management has analyzed the outstanding matter with tax
advisors and believes it has meritorious defenses to the remaining assessments.
The Company believes that any additional amounts assessed will not have a
material effect on the Company's financial position or results of operations.
14. UNAUDITED QUARTERLY DATA
Summarized quarterly proforma financial data for 1996 and 1997 (in
thousands, except for per share amounts) is as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Year ended December 31, 1996:
<S> <C> <C> <C> <C>
Revenue......................................... $21,843 $ 23,721 $ 35,857 $ 42,740
======= ======== ======== ========
Operating income (loss)......................... $ 2,162 $ 2,034 $ 288 $ (2,425)
======= ======== ======== ========
Pro forma net income (loss)..................... $ 1,107 $ 1,105 $ 239 $ (1,554)
======= ======== ======== ========
Pro forma net income (loss) per share
Basic........................................ $ .20 $ .19 $ .02 $ (.09)
======== ======== ======== ========
Diluted...................................... $ .20 $ .19 $ .02 $ (.09)
======== ======== ======== ========
Year ended December 31, 1997:
Revenue......................................... $53,345 $ 56,807 $ 59,274 $ 61,542
======= ======== ======== ========
Operating income (loss)......................... $ 1,864 $ 2,365 $ (51) $ (6,551)
======= ======== ======== ========
Pro forma net income (loss)..................... $ 753 $ 666 $ (181) $ (5,142)
======= ======== ======== ========
Pro forma net income (loss) per share
Basic........................................ $ .04 $ .04 $ (.01) $ (.30)
======== ======== ======== ========
Diluted...................................... $ .04 $ .04 $ (.01) $ (.30)
======== ======== ======== ========
</TABLE>
15. SUBSEQUENT EVENT
On February 26, 1998, immediately following the RTO Merger, the Company
entered into a new revolving credit facility (the "Comerica Credit Agreement")
with Comerica Bank, as lender and as agent for certain other lenders, which
provides for a $50,000,000 secured three-year credit facility. The Comerica
Credit Agreement replaces the existing credit agreements described in Note 9.
The Comerica Credit Agreement provides for interest rates based on a base rate
(as defined), the agent's prime rate, or the federal funds rate plus 100 basic
points, or a "Eurodollar Rate", plus an applicable margin. Under the Comerica
Credit Agreement, the Company has the option, provided that certain conditions
are met, to obtain an increase in the amount available under the Comerica Credit
Agreement up to an aggregate amount of $100 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.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
and explanatory notes have been prepared to give effect to the Merger. The
Merger is being accounted for as a pooling-of-interests as defined by Accounting
Principles Board Opinion No. 16, ("APB 16"). In accordance with Article 11 of
Regulation S-X under the Securities Act, unaudited pro forma condensed combined
statements of income (loss) (the "Pro Forma Statements of Operations") for the
twelve months ended September 30, 1998 ("Fiscal 1998"), 1997 ("Fiscal 1997") and
1996 ("Fiscal 1996") have been prepared. For all periods included in the Pro
Forma Statements of Operations, the average number of common and common
equivalent shares gives effect to the Exchange Ratio of 0.588 shares of Rent-Way
common stock for one share of HMCH common stock.
Certain data and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The following unaudited pro forma condensed combined financial
statements (the "Pro Forma Statements of Operations") have been prepared based
upon the historical financial statements of Rent-Way and HMCH. The Pro Forma
Statements of Operations should be read in conjunction with (a) the historical
financial statements of Rent-Way for the years ended September 30, 1998, 1997
and 1996, and the unaudited financial statements for the three month periods
ended December 31, 1998 and 1997; (b) the historical consolidated financial
statements of HMCH for the years ended December 31, 1997, 1996 and 1995; (c) the
unaudited consolidated financial statements of HMCH for the nine month periods
ended September 30, 1998 and 1997.
The Pro Forma Statements of Operations have been prepared utilizing the
historical income statement data for both Rent-Way and HMCH. The Pro Forma
Statements of Operations for Fiscal 1997 and 1996 have been prepared utilizing
(a) the historical statements of income data of Rent-Way for the years ended
September 30, 1997 and 1996 and (b) the historical consolidated statements of
income data of HMCH for the years ended December 31, 1997 and 1996. The Pro
Forma Statements of Operations for the twelve month periods ended September 30,
1998 have been prepared utilizing (a) the historical statements of income data
of Rent-Way for the year ended September 30, 1998, and (b) internal consolidated
statements of income data of HMCH for the twelve month period ended September
30, 1998. As a result of Rent-Way and HMCH having different fiscal year ends,
the three month period ended December 31, 1997 for HMCH was included in both the
Pro Forma Statements of Operations for Fiscal 1998 and 1997, respectively.
Revenues of HMCH were $61.2 million and net losses were $5.1 million, for the
three month period ended December 31, 1997. Upon consummation of the Merger, the
loss for the three month period ended December 31, 1997 has been reflected as an
adjustment to shareholders' equity. The Pro Forma Statements of Operations do
not reflect any estimate of expenses directly associated with the Merger. The
amount of expenses directly associated with the Merger which is not included in
the Pro Forma Statements of Operations is approximately $16.8 million, of which,
$16.4 million was incurred during the three month period ended December 31,
1998, with the balance to be incurred during the three month period ending March
31, 1999.
The Pro Forma Statements of Operations for fiscal 1998, 1997 and 1996 give
effect only to the Merger accounted for as a pooling-of-interests. The results
of operations of the Company's acquisitions of Champion Rentals, Inc.
("Champion"), Ace TV Rentals Inc. ("Ace Rentals"), and Perry Electronics Inc.
dba Rental King ("Rental King"), all of which were accounted for as purchases as
defined by APB 16, are not reflected in the Pro Forma Statements of Operations
for Fiscal 1997 and 1996 as if the transactions had been consummated at the
beginning of the respective periods.
The Pro Forma Statements of Operations are provided for illustrative
purposes only, and are not necessarily indicative of the operating results or
financial position that would have occurred if the Merger described above had
been consummated at the beginning of the periods or on the dates indicated, nor
are they necessarily indicative of any future operating results or financial
position.
<TABLE>
<CAPTION>
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Rent-Way, Inc.----------------------------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
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For the Twelve Month Period Ended September 30, 1998
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Rent-Way
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Rent-Way Home Choice Conforming Home Choice
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Historical Historical Adjustments Pro Forma
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<S> <C> <C> <C> <C>
Total revenue $177,326,830 $ 257,575,610 $ - $ 434,902,440
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- ------------------------------------------------------------------------------------------------------------------------------------
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Cost and operating expense:
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- ------------------------------------------------------------------------------------------------------------------------------------
Operating expense 144,336,809 251,631,956 - 395,968,765
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Cost of business combinations - 11,210,288 - 11,210,288
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Name change expense - 1,769,719 - 1,769,719
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- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles 4,333,816 6,914,459 - 11,248,275
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Total costs and operating expense 148,670,625 271,526,422 - 420,197,047
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Operating income/(loss) 28,656,205 (13,950,812) - 14,705,393
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Other income (expense):
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Interest expense (6,864,947) (4,441,732) - (11,306,679)
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Interest income 109,655 202,987 - 312,642
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Other expense, net (102,941) (675,558) - (778,499)
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Gain or loss on sales of stores - - - -
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Income (loss) before income tax
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and extraordinary item 21,797,972 (18,865,115) - 2,932,857
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Income tax expense 9,220,542 (4,449,464) - 4,771,078
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- ----------------------------------------------------=================---===================---===================---================
Income (loss) before extraordinary item $ 12,577,430 $ (14,415,651) $ - $ (1,838,221)
- ----------------------------------------------------=================---===================---===================---================
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Pro forma earnings (loss) before
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extraordinary item per common share:
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- ----------------------------------------------------=================---===================--------------------=====================
Basic $ 1.22 $ (0.85) $ (0.09)
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Diluted $ 1.08 $ (0.85) $ (0.09)
- ----------------------------------------------------=================---===================--------------------=====================
- ------------------------------------------------------------------------------------------------------------
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Pro forma weighted average common
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shares outstanding:
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- ----------------------------------------------------=================---===================--------------------=====================
Basic 10,317,338 16,978,968 20,300,971
- ----------------------------------------------------=================---===================--------------------=====================
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Diluted 12,458,279 16,986,251 20,305,254
- ----------------------------------------------------=================---===================-----------------=====================
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The accompanying notes are an integral part of these financial statements
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</TABLE>
<TABLE>
<CAPTION>
Rent-Way, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended September 30, 1997 for Rent-Way
Year Ended December 31, 1997 for Home Choice
Rent-Way
Rent-Way Home Choice Conforming Home Choice
Historical Historical Adjustments Pro Forma
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Total revenue $ 88,043,534 $ 230,968,599 $ - $ 319,012,133
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Cost and operating expense:
Operating expense 72,331,086 221,762,572 - 294,093,658
Cost of business combinations - 934,717 - 934,717
Name change expense - 742,541 - 742,541
Amortization of intangibles 1,926,287 9,902,303 - 11,828,590
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Total costs and operating expense 74,257,373 233,342,133 - 307,599,506
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Operating income/(loss) 13,786,161 (2,373,534) - 11,412,627
Other income (expense):
Interest expense (3,368,980) (2,512,015) - (5,880,995)
Interest income 920 218,118 - 219,038
Other expense, net (103,681) (163,957) - (267,638)
Gain or loss on sales of stores - 950,366 - 950,366
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Income (loss) before income tax
and extraordinary item 10,314,420 (3,881,022) - 6,433,398
Income tax expense 4,629,477 236,572 - 4,866,049
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Income (loss) before extraordinary item $ 5,684,943 $ (4,117,594) $ - $ 1,567,349
================= =================== ==================== ================
================= =================== ==================== ================
Pro forma information (unaudited) (2):
Income (loss) before extraordinary item $ 5,684,943 $ (4,117,594) - $ 1,567,349
Pro forma income tax (benefit) - (213,835) - (213,835)
Pro forma net income (loss) before
----------------- ------------------- -------------------- ----------------
================= =================== ==================== ================
extraordinary item $ 5,684,943 $ (3,903,759) $ - 1,781,184
================= =================== ==================== ===============
================= =================== ==================== ================
Pro forma earnings (loss) before
extraordinary item per common share:
Basic $ 0.89 $ (0.23) $ 0.12
================= =================== ================
================= =================== ================
Diluted $ 0.78 $ (0.23) $ 0.12
================= =================== ================
================= =================== ================
Pro forma weighted average common
shares outstanding:
Basic 6,692,008 16,940,945 16,653,284
================= =================== ================
================= =================== ================
Diluted 8,921,515 17,117,142 17,315,327
================= =================== ================
================= =================== ================
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Rent-Way, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended September 30, 1996 for Rent-Way
Year Ended December 31, 1996 for Home Choice
Rent-Way
Rent-Way Home Choice Conforming Home Choice
Historical Historical Adjustments Pro Forma
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Total revenue $ 51,171,337 $ 124,161,360 $ - $ 175,332,697
----------------- ------------------- -------------------- -----------------
----------------- ------------------- -------------------- -----------------
Cost and operating expense:
Operating expense 43,645,608 116,377,022 - 160,022,630
Cost of business combinations - 1,743,433 - 1,743,433
Name change expense - - - -
Amortization of intangibles 874,668 3,982,093 - 4,856,761
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Total costs and operating expense 44,520,276 122,102,548 - 166,622,824
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Operating income/(loss) 6,651,061 2,058,812 - 8,709,873
Other income (expense):
Interest expense (1,586,792) (1,571,808) - (3,158,600)
Interest income 60,267 645,291 - 705,558
Other expense, net 103,838 403,255 - 507,093
Gain or loss on sales of stores - 750,800 - 750,800
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Income before income tax and
extraordinary item 5,228,374 2,286,350 - 7,514,724
Income tax expense 2,381,062 1,188,792 - 3,569,854
----------------- ------------------- -------------------- ----------------
----------------- ------------------- -------------------- ----------------
Income before extraordinary item $ 2,847,312 $ 1,097,558 $ - $ 3,944,870
================= =================== ==================== ================
================= =================== ==================== ================
Pro forma information (unaudited) (2):
Income before extraordinary item $ 2,847,312 $ 1,097,558 $ - $ 3,944,870
Pro forma income tax (benefit) - 200,674 - 200,674
Pro forma net income before
----------------- ------------------- -------------------- ----------------
================= =================== ==================== ===============
extraordinary item $ 2,847,312 $ 896,884 $ - $ 3,744,196
================= =================== ==================== ================
================= =================== ==================== ================
Pro forma earnings before
extraordinary item per common share:
Basic $ 0.51 $ 0.09 $ 0.32
================= =================== ================
================= =================== ================
Diluted $ 0.46 $ 0.09 $ 0.30
================= =================== ================
================= =================== ================
Pro forma weighted average common
shares outstanding:
Basic 5,345,878 10,219,487 11,354,936
================= =================== ================
================= =================== ================
Diluted 5,960,506 10,261,840 11,994,468
================= =================== ================
================= =================== ===============
The accompanying notes are an integral part of these financial statements
</TABLE>
RENT-WAY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
1. BASIS OF PRESENTATION
The Pro Forma Statements of Operations reflect the combined operations of
Rent-Way and Home Choice as if the Merger had been consummated and accounted for
as a pooling-of-interests in accordance with the provisions of APB 16. The Pro
Forma Statements of Operations present the combined operations of Rent-Way and
Home Choice as if the Merger had been consummated at October 1, 1995.
The pro forma adjustments are based on available information, including
certain estimates and assumptions made by management. Therefore it is probable
that the actual adjustments would differ from the pro forma adjustments.
Rent-Way and Home Choice believe that such adjustments provide a reasonable
basis for presenting the significant effects of the Merger. Management's of
Rent-Way and Home Choice also believe that the pro forma adjustments give
appropriate effect to those assumptions and are properly applied in the Pro
Forma Statements of Operations.
The Pro Forma Statements of Operations do not reflect any synergies, cost
savings and operational efficiencies that may become available to the combined
enterprise as a result of the Merger.
2. PRO FORMA ACCOUNTING ADJUSTMENTS - STATEMENTS OF OPERATIONS
(1) The pro forma weighted average shares outstanding of Home Choice have
been adjusted to reflect the Exchange Ratio of 0.588. In the Pro Forma
Statements of Operations the pro forma weighted average shares
outstanding have been adjusted as if the Merger had been consummated at
October 1, 1995.
(2) Represents the pro forma income taxes on income (loss) of acquired
companies accounted for as pooling-of-interests which were S
Corporations prior to acquisition. The pro forma income taxes have been
provided on income (loss) using an effective income tax rate of
approximately 38.6%.
(3) The historical statements of income of Rent-Way for the year ended
September 30, 1997 include an extraordinary loss of $269,017 or $0.03
per share, which is not reflected in the Pro Forma Statement of
Operations.
(4) MERGER EXPENSES
The Pro Forma Statements of Operations do not reflect any estimate of
expenses directly associated with the Merger. The amount of expenses
directly associated with the Merger which is not included in the Pro
Forma Statements of Operations is approximately $16.8 million, of which,
$16.4 million was incurred during the three month period ended December
31, 1998, with the balance to be incurred during the three month period
ending March 31, 1999.
