<PAGE>   1
 
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                  FORM 10-K/A
 
<TABLE>
<C>               <S>
   (MARK ONE)
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                      OR
      [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                        COMMISSION FILE NUMBER 0-27490
</TABLE>
 
                             ---------------------
                           HOME CHOICE HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                             <C>                             <C>
           DELAWARE                      ALRENCO, INC.                    35-1480655
(State or other jurisdiction of          (Former name)                  (I.R.S Employer
incorporation or organization)                                        Identification No.)
</TABLE>
 
                            714 E. Kimbrough Street
                             Mesquite, Texas 75149
                                 (972) 288-9327
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                      NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                           COMMON STOCK, NO PAR VALUE
                                (Title of class)
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]
 
     Aggregate market value of the 10,621,950 shares of Common Stock held by
non-affiliates of the registrant at the closing sales price on March 27,
1998: $212,439,000
 
     Number of shares of Common Stock outstanding as of the close of business on
March 27, 1998: 16,967,121
                             ---------------------
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of the definitive proxy statement relating to the 1997 Annual
Meeting of Shareholders of Alrenco, Inc., are incorporated into Part III of this
report.
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<PAGE>   2
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I......................................................    1
  ITEM 1.  BUSINESS.........................................    1
     General................................................    1
     RTO Merger.............................................    1
     Rental-Purchase Industry...............................    2
     Merchandising..........................................    2
     Store Operations.......................................    3
     Purchasing and Distribution............................    5
     Marketing and Advertising..............................    6
     Service Marks..........................................    6
     Competition............................................    6
     Government Regulation..................................    7
     Employees..............................................    8
PART II.....................................................    9
  ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS..............    9
     General................................................    9
     Certain Components of Net Earnings.....................   10
     Results of Operations -- Supplemental Consolidated
      Results of Operations of the Company..................   11
     Comparison of Years Ended December 31, 1997 and 1996...   12
     Comparison of Years Ended December 31, 1996 and 1995...   14
     Results of Operations -- Historical....................   16
     Comparison of Years Ended December 31, 1997 and 1996...   16
     Comparison of Years Ended December 31, 1996 and 1995...   17
     Liquidity and Capital Resources........................   18
     Recent Accounting Pronouncements.......................   20
     Seasonality and Inflation..............................   20
     Depreciation Issues; Income Tax Consequences...........   21
     Other Matters..........................................   21
PART III....................................................   22
  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
            REGISTRANT......................................   22
SIGNATURES..................................................   23
</TABLE>
 
                                        i
<PAGE>   3
 
                                     PART I
 
     Unless otherwise stated herein, items required by Form 10-K and not
contained herein are contained in the Form 10-K filed by Alrenco, Inc. on March
31, 1998 for the fiscal year ended December 31, 1998.
 
ITEM 1.  BUSINESS
 
     Certain matters discussed in this Report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The forward-looking statements relate to anticipated financial
performance, management's plans and objectives for future operations, growth
strategies, business prospects, industry trends and other matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements in certain circumstances. The following discussion is
intended to identify the forward-looking statements and certain factors that
could cause future outcomes to differ materially from those set forth in the
forward-looking statements.
 
     Forward-looking statements include the information concerning possible or
assumed future results of operations of the Company. Readers are cautioned that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors may affect the Company's operations, markets, products, services and
prices. In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, factors that
could cause the Company's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following: general economic and business conditions; changes in the competitive
environment within the rental-purchase industry; the ability of the Company to
integrate its operations following the consummation of the merger (the "RTO
Merger") between the Company and RTO, Inc. ("RTO") in February 1998; the ability
to integrate and manage future acquired businesses; the rate of acquisitions and
new store openings; the ability to open new rental-purchase stores on a
profitable basis; the ability of the Company to implement and to obtain the
anticipated cost savings related to the RTO Merger and acquisitions of other
acquired businesses and to realize anticipated cost savings therefrom; the
actual costs required to realize synergies and cost savings from the RTO Merger
and future acquired businesses; and changes in business strategy or development
plans.
 
GENERAL
 
     The Company currently operates 440 rental-purchase stores in 23 states,
primarily located in the midwestern, southeastern and southwestern United
States. The Company's stores offer high quality, brand-name consumer merchandise
under flexible, renewable rental-purchase agreements, also known as rent-to-own
agreements. The Company's rental-purchase agreements provide customers with the
option, but not the obligation, to obtain ownership of the merchandise following
a stated number of consecutive rental payments. The Company's customers are
typically low to middle income consumers with limited or no access to
traditional credit sources such as bank financing, installment credit and credit
cards. The Company also provides its products to consumers who desire only
temporary rental of a product. The Company's products include consumer
electronics, appliances, furniture, jewelry and home furnishing accessories.
 
RTO MERGER
 
     On February 26, 1998, the Company consummated the RTO Merger. Management of
the Company believes that the RTO Merger will allow the Company to pursue its
strategic objectives by (i) increasing the number of rental-purchase stores
operated by the Company and increasing the Company's geographic diversity, (ii)
providing increased management depth and expertise, as well as increased
opportunity to attract new employees, (iii) reducing the expenses of the
combined company and thus increasing operating profit and (iv) enhancing the
Company's ability to acquire existing rental-purchase stores and to open new
rental-purchase stores. In the current industry environment of increased
competitive conditions and industry consolidation, management believes that the
RTO Merger represented a unique opportunity for the Company
<PAGE>   4
 
to position itself as an effective competitor and that the RTO Merger will
effectively enable the Company to improve financial results and increase
long-term shareholder value.
 
RENTAL-PURCHASE INDUSTRY
 
     Based on estimates of the Association of Progressive Rental Organization
("APRO"), in 1997, the rental-purchase industry had gross revenues of $4.1
billion and rented 5.8 million products to 2.9 million households through 7,500
stores.
 
     The Company's market includes customers with income at or below the median
family income level in each of its individual markets. According to U.S. Census
Bureau data, the median family income in 1990 was approximately $35,000.
Approximately 50.5% of all households in the United States have incomes at or
below this level.
 
     The rental-purchase industry is highly fragmented. Management of the
Company believes, based on APRO information, that the majority of dealers
operate fewer than 20 stores. The rental-purchase industry is experiencing
consolidation primarily because larger, multi-unit operators have significant
competitive advantages compared to their smaller competitors. Rental-purchase
operators typically have been financed by a small number of commercial lenders
who specialized in the industry. In recent years, many of the lenders have
withdrawn from the market or imposed more restrictive lending standards. These
conditions have reduced many smaller operators' access to the capital necessary
to maintain and grow their business. Larger operators also enjoy greater
purchasing power that enables them to provide more competitively priced
merchandise and typically operate more efficiently than smaller operators
because of better management information systems and economies of scale.
Further, many smaller competitors lack the managerial resources necessary to
operate larger rental-purchase operations efficiently across multiple locations.
Based on their experience in the rental-purchase industry, management believes
that these factors will continue to promote the trend toward consolidation and
present an opportunity for well-capitalized operators to acquire additional
stores on favorable terms.
 
MERCHANDISING
 
     The Company's stores generally offer an assortment of quality, brand-name
merchandise, including consumer electronics, appliances, furniture, jewelry and
home furnishing accessories. The Company displays a wide variety of styles and
models of merchandise in its stores. Merchandise is displayed in showroom
settings featuring attractive, professional displays and signage. Store
interiors generally feature bright colors in an atmosphere intended to make
customers feel comfortable. Corporate and regional management closely monitor
adherence to the Company's standards for cleanliness and quality of merchandise
in all stores.
 
     Management regularly evaluates and modifies its product offerings to
reflect changing local demand. The Company frequently test markets new
merchandise items to expand the total number of items on rent and increase the
dollar value of its outstanding contracts. Customers may choose either new or
previously rented merchandise. Previously rented merchandise is marketed at the
same rental rate as new merchandise, but generally requires fewer consecutive
rental payments to obtain ownership. The Company, like the rental-purchase
industry in general, requires higher aggregate payments than are usually charged
under installment purchase or credit plans that do not offer the same array of
payment options or services or that require a continuing financial obligation.
 
                                        2
<PAGE>   5
 
STORE OPERATIONS
 
     The Company currently operates 440 stores in 23 states. The following table
sets forth the number of store locations in each state in which the Company
presently operates.
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
STATE                                                          STORES
-----                                                         ---------
<S>                                                           <C>
Alabama.....................................................      16
Arizona.....................................................      14
Arkansas....................................................      34
Colorado....................................................       7
Florida.....................................................      63
Georgia.....................................................      19
Indiana.....................................................      12
Kansas......................................................       1
Kentucky....................................................      14
Louisiana...................................................      37
Mississippi.................................................       9
Missouri....................................................       9
North Carolina..............................................       7
Ohio........................................................      16
Oklahoma....................................................      12
Nevada......................................................       3
New Mexico..................................................      11
South Carolina..............................................      12
Tennessee...................................................       6
Texas.......................................................     118
Utah........................................................       3
Virginia....................................................      11
West Virginia...............................................       6
</TABLE>
 
     The average store contains approximately 3,900 square feet. Each regional
manager maintains an office in a store within his or her region. Management of
the Company believes that suitable store space is available for lease in each
market where the Company currently operates or plans to operate. The Company
operates its own service centers but does not operate any distribution
warehouses.
 
     Management and Supervision.  The Company's strategy is to limit the number
of stores supervised by each regional manager to assure adequate monitoring of
store operations. The Company expects to employ additional regional managers as
the number of stores increases. The Company's 440 stores are presently organized
into four divisions. Directors of Store Operations each direct six to ten
regional managers who are, in turn, each responsible for six to ten stores.
Directors of Store Operations are experienced managers who report directly to a
Vice President of Store Operations. Regional managers reside in the regions that
they supervise and monitor individual store performance and rental merchandise
on a daily basis.
 
     Each mature Company store requires a staff of three to ten employees,
including a store manager, assistant manager and sales, delivery and collection
personnel. Each Company store manager reports to a regional manager. Individual
store managers are responsible for customer relations and account collection,
development of new rental accounts, rental merchandise management, staffing and
training and profit and loss control. In addition, the Company distributes
simplified written procedures and policies covering all aspects of store-level
operations.
 
     Management at the Company's corporate offices directs and coordinates
purchasing, product servicing, planning and controls, employee training and
personnel matters. Marketing, purchasing and operations personnel evaluate the
performance of each store utilizing on-site reviews and daily operations
summaries. Management believes that total revenue and profits for
rental-purchase stores can be managed by focusing on a few key operational
ratios and therefore the Company seeks to enforce profit and loss accountability
at each
 
                                        3
<PAGE>   6
 
level of management through profit-based incentive compensation programs. Store
managers receive monthly and annual bonuses based upon the store's performance.
Directors of Store Operations and regional managers also receive monthly and
annual bonuses based on the profitability of the group of stores for which they
are responsible. Strict rental merchandise controls allow management to monitor
the status and income production of each individual piece of rental merchandise
until its disposal.
 
     The Company continuously seeks to attract and retain qualified store
managers and other store-level personnel. Management personnel are required to
complete a training program when assigned to a store. In addition, the Company
has developed a comprehensive training manual for its employees which outlines
all of the Company's procedures and operational practices.
 
     Customer Service.  Management believes that both the quality and timeliness
of its customer service provide the Company with a competitive advantage. The
Company provides same day delivery of in-stock merchandise and installation of
its merchandise at no additional cost to the customer. The Company performs all
necessary repair and maintenance service on rental merchandise without charge,
except for damage in excess of normal wear and tear. Most products offered by
the Company are covered under standard manufacturers' warranties, and the
remainder of the warranties may be transferred to a customer who obtains
ownership. Customers are fully liable for damage, loss or destruction of the
merchandise unless they have purchased an optional loss/damage waiver.
 
     The Company's customers generally obtain rental merchandise at the store,
although they may also do so by telephone. Generally, a sufficient quantity of
merchandise is held at all store locations to fill customer orders promptly. In
most instances, suppliers of merchandise ship products directly to individual
store locations on a weekly basis.
 
     The Company monitors customer relations at the store level and encourages
customer feedback. Company policy requires employees to provide all customers,
upon request, with the telephone number of the Company's corporate office where
any complaints or problems which are not handled at the store level to the
satisfaction of the customer can be resolved.
 
     Collection Procedures.  Management believes that good collection practices
are critical to the Company's profitability and continued success. The Company
manages the collection process by making a thorough and accurate initial
presentation of the rental-purchase transaction to each customer and then
monitoring each new account closely thereafter. Management of the Company
believes that the Company's approach to collection practices increases total
revenue per product while controlling collection and pickup costs, decreases the
likelihood of customer default and improves customer relations and reduces
chargeoffs. The Company has adopted and closely monitors compliance with
standardized collection procedures. Information on delinquent accounts is
reported in detail each day, and the Company's collection procedures are
monitored by store managers and reviewed routinely by their regional managers.
 
     In the event a customer fails to renew a rental-purchase agreement or
return the merchandise in a timely manner, the account manager who delivered the
product contacts the customer to arrange for reinstatement by in-store payment
of the amount due. If no payment is received, an account manager will arrange
for the return of the merchandise to the store. Substantially all recoveries of
merchandise are voluntary. In a small number of cases, the Company utilizes the
judicial process to enforce the return of unrecovered items.
 
     Management Information Systems.  The Company's management information
systems provide detailed information on store operations in daily, weekly,
monthly and year-to-date reports. These reports cover data in a broad range of
categories and present information by stores or groups of stores. The systems
provide the Company's management with on demand access to operating and
financial information about any store. The Company's integrated computerized
management information and control systems track rental merchandise movement for
each store location and by each product category, minimizing excess rental
merchandise while maintaining optional in-stock positions. The systems also
monitor collection procedures and practices in order to help minimize late
payments and expenses related to recovery of merchandise while maximizing
customer relations and compliance with regulatory and industry-accepted
collection practices. Store reports are reviewed daily by store and regional
managers. Daily store activity is electronically transmitted to the
 
                                        4
<PAGE>   7
 
Company's corporate and division offices, thereby allowing Directors of Store
Operations and senior executives to review group summaries and address
exceptions to Company standards each day. The systems have enabled the Company
to expand its operations while maintaining a high degree of control over cash
receipts, rental merchandise and customer transactions.
 
     The Company is aware of the issues associated with the program in existing
computer and software systems as the millenium ("Year 2000") approaches. The
Year 2000 problem is pervasive and complex, as virtually all computer operations
could be affected in some way by the rollover of the two-digit year value to
"00". The issue is whether systems will properly recognize date sensitive
information when the year rolls over to 2000. Systems that do not properly
recognize such information could result in erroneous data or cause complete
system failures. The Company believes its primary systems will successfully
handle the rollover to the Year 2000. Based upon these facts, the Company
believes that the Year 2000 problem will not have a material effect on the
financial position, results of operations or cash flows of the Company.
 
     The Company's electronics and appliances vendors are generally
multi-national manufacturers of name brand products. These manufacturers
reviewed their products for possible Year 2000 conflicts in their annual lineups
for each of the last several years. Based on the nature of its business and
systems and the aforementioned facts, the Company believes there will be no
significant Year 2000 complications with its rental products.
 
     Rental-Purchase Agreements.  The Company extends renewable week-to-week or
month-to-month rental-purchase agreements that can be canceled at any time. The
customer's obligations are to make rental payments in advance of the period for
which he or she chooses to rent the merchandise, to pay for loss or damage to
the merchandise if not covered under available loss/damage waivers and to return
the merchandise to the Company at the expiration of the rental period if he or
she elects not to renew the agreement. Each agreement automatically expires at
the end of the stated rental period unless a renewal payment is made. Expired
accounts may be renewed by payment of the delinquent rent and a nominal
reinstatement fee. The Company retains title to the merchandise during the term
of the agreement. Ownership of the merchandise may transfer to the customer
after continuous renewal of the agreement for a stated period.
 
     The Company has developed and used its own standard form rental-purchase
agreements based upon APRO model documents. Management believes that the
Company's agreements materially comply with the legal requirements of the states
in which they are used. See "-- Government Regulation."
 
     Although the Company does not conduct a formal credit investigation to
qualify its customers, potential customers must provide certain personal
information which is verified by the store manager or assistant manager before a
rental-purchase agreement can be approved. Required information typically
includes a valid driver's license, a place of employment or verifiable source of
income, home address and the telephone numbers and addresses of relatives or
neighbors. Subsequent rental payments are required to be mailed to or made at
the store. Where permitted by law, the Company offers loss/damage waivers to
customers who desire protection from loss or damage. Such fees are standard in
the industry, are not represented as insurance, and may be subject to
government-specified limits.
 
PURCHASING AND DISTRIBUTION
 
     The Company's product mix is determined by senior management, based on
promotional requirements and on customer demand as determined from store rental
merchandise analysis reports. Store managers order rental merchandise on a
weekly basis and consult with their regional managers to determine whether
existing merchandise can be reallocated before ordering new products. Store
managers are not permitted to order directly from a manufacturer but may order
fill-in quantities from local distributors with prior approval from the
purchasing department. The Company seeks to maximize return on rental
merchandise investment by maintaining merchandise held for rent but not rented
at a level of approximately 25% of total rental merchandise. Adjusted for
seasonal fluctuations, the Company is currently maintaining merchandise held for
rent at the targeted level. The Company does not maintain a centralized
warehouse or distribution facility, since the Company's suppliers make direct
shipments to its stores. Management believes that such an
 
                                        5
<PAGE>   8
 
arrangement minimizes rental merchandise costs and overhead expenses while
allowing the Company to structure reasonably competitive terms and prices with
its suppliers.
 
     The Company purchases the majority of its electronics and appliance
merchandise directly from manufacturers. The Company purchases its furniture
from various manufacturers and distributors. Management generally does not sign
contracts with suppliers, but the Company does enter into contracts with
dealers. The Company currently expects to continue relationships with its
existing suppliers, but believes there are numerous sources of products
available to the Company. Management of the Company does not believe that the
Company's success is dependent on any one or more of its present suppliers.
Executive officers and key managers regularly attend national and regional trade
shows to identify new products, negotiate prices and initiate contacts with
potential new suppliers.
 
MARKETING AND ADVERTISING
 
     The Company promotes its products and services primarily through television
and direct mail advertising. The Company's television advertising and
promotional literature emphasize the Company's credibility, quality of service
and competitive weekly rental rates. The Company also markets its products and
services through direct customer solicitation by the Company's store employees.
Each store manager is required to generate additional business from the
Company's active and inactive customer base.
 
     The Company utilizes television advertising in multiple store markets. The
commercials generally promote a special price for a particular product for a
limited time period. Four-color direct mail brochures are mailed several times a
year to selected zip codes within a local radius of each of the Company's
stores. The Company utilizes extensive point-of-sale materials in each store.
 
SERVICE MARKS
 
     The Company, or one of the Company's subsidiaries, owns the registered
service marks "Home Choice," "Working To Be Your First Choice," "Alrenco Rent To
Own For The Home," "Alrenco Rent To Own For The Home -- The Only Way To Go,"
"Bring it all Home," "We Deliver the Difference" and "Action." The products held
for rent by the Company also bear trademarks and service marks held by their
manufacturers.
 
COMPETITION
 
     The rental-purchase industry is highly competitive. As the following table
illustrates, the eight largest rental-purchase chains accounted for 50.4% of the
approximately 7,500 rental purchase stores in the United States.
 
                      RENTAL-PURCHASE INDUSTRY COMPETITORS
 
<TABLE>
<CAPTION>
                                                                             NUMBER      PERCENTAGE OF
COMPANY(1)                                                    OWNERSHIP   OF STORES(2)    U.S. STORES
----------                                                    ---------   ------------   -------------
<S>                                                           <C>         <C>            <C>
Rent-A-Center...............................................  Private (3)    1,500           20.0%
Renters Choice, Inc.(4).....................................  Public           770           10.3
Alrenco.....................................................  Public           440            5.9
Aaron's Rents, Inc.(4)......................................  Public           395            5.3
Rent-Way, Inc...............................................  Public           382            5.1
Central Rents...............................................  Private          168            2.2
Bestway Rental, Inc.........................................  Public            63            0.8
Rainbow Rentals.............................................  Private           62            0.8
                                                                             -----           ----
          Totals............................................                 3,780           50.4%
                                                                             =====           ====
</TABLE>
 
---------------
 
(1) Some of these competitors may also operate rent-to-rent stores in addition
    to the rental-purchase stores referenced in the table.
 
                                        6
<PAGE>   9
 
(2) Sources: November 1997 APRO estimates (based on membership records) and
    other publicly available information.
(3) Owned by Thorn PLC, a publicly traded company in the United Kingdom.
(4) Includes franchised rental-purchase stores.
 
     The Company competes directly with other national and regional
rental-purchase businesses, and on a very limited basis with temporary-use
rental stores, such as furniture rental outlets. The Company believes, however,
that its most direct competition comes from national firms such as
Rent-A-Center, Renter's Choice, Aaron Rents and Rent-Way. Competition within the
rental-purchase industry is based primarily on store location, product selection
and availability, customer service and rental rates and terms. Some of the
Company's largest national competitors have significantly greater resources than
the Company.
 
GOVERNMENT REGULATION
 
     State Regulation.  Forty-eight states have adopted legislation regulating
rental-purchase transactions. Of those states, 45 require companies to provide
certain disclosures to customers regarding the terms of the rental-purchase
transaction. North Carolina, Wisconsin and Minnesota regulate rental-purchase
transactions as credit sales subject to consumer lending restrictions. North
Carolina subjects the transactions to interest rate or finance charge
limitations. In addition, recent court decisions in New Jersey have created a
legal environment in that state which is prohibitive to rental-purchase
transactions. The Company operates in North Carolina, but does not operate in
the other three states. All but one of the 23 states in which the Company
operates impose some type of disclosure requirements, either in advertising or
in the rental-purchase agreement, or both. Management believes that the
operations of the Company are in material compliance with applicable state
rental-purchase laws.
 
     Federal Regulation.  Although certain proposed federal regulations are
under consideration, no federal legislation has been enacted regulating
rental-purchase transactions. As of the date hereof, two bills have been
introduced in Congress that would regulate the rental-purchase industry. One of
the bills is supported by APRO and mandates certain disclosures to customers
similar to those required by most state legislation. The Company does not
believe that this bill, if enacted, would have a material adverse effect upon
the Company's operations.
 
     The second bill would regulate rental-purchase transactions as credit sales
and would subject rental-purchase transactions to interest rate, finance charge
and fee limitations, as well as the Federal Truth in Lending Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Fair
Credit Reporting Act. This bill would also require the lessor to make certain
disclosures to customers about the terms of the rental-purchase transaction. The
Company believes that in the event federal legislation is enacted regulating
rental-purchase transactions as credit sales, the Company would be able to adapt
to the new laws and remain profitable by repositioning itself as a rent-to-rent
business. However, there can be no assurance that the proposed legislation, if
enacted, would not have a material adverse effect on the business of the
Company.
 
     Depreciation Issues.  The Internal Revenue Service ("IRS") published a
revenue ruling in July 1995 providing that a five-year recovery period under the
Modified Accelerated Cost Recovery System ("MACRS") is the appropriate
depreciation method for rental-purchase merchandise. In August 1997 federal tax
legislation was enacted that included a provision requiring use of three-year
MACRS as the appropriate depreciation method for rental-purchase merchandise.
Prior to 1996, the Company used the income forecasting method of depreciation
for tax accounting, and management of the Company believes that this method has
been widely used throughout the rental-purchase industry prior to publication of
either of these rulings. The conversion to three-year MACRS has required that
the cost of rental merchandise be depreciated over a three-year period while
revenue is recognized over the contract term, typically 18 to 24 months.
Management of the Company believes that conversion to three-year MACRS will not
negatively impact the Company's financial condition or results of operations.
The potential effect of conversion to three-year MACRS cannot be accurately
estimated, but management of the Company believes that the conversion will
potentially create tax benefits. The Company was audited by the IRS for the
years 1992 through 1995 and
 
                                        7
<PAGE>   10
 
may be required to pay certain additional taxes and interest and penalties
thereon as a result of its use of the income forecasting method in prior years.
In December 1997, the Company reached a partial settlement with the IRS. The
settlement resulted in the payment of $167,200 in additional income taxes and
$50,300 in interest. The Company is in the process of appealing the remaining
unresolved issues. The Company has converted to the MACRS method of depreciation
for tax accounting purposes only. Management of the Company does not believe
that any additional taxes, interest and penalties which may be incurred as a
result of the use of the income forecasting method in years prior to the
conversion to MACRS or the IRS audit will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
 
EMPLOYEES
 
     As of March 20, 1998, the Company employed 2,796 people, 179 of whom are
assigned to the Company's corporate and division offices and the balance of whom
are directly involved in the management and operation of the Company's stores.
None of the Company's employees are covered by a collective bargaining
agreement. The Company provides numerous employee benefits, including a 401(k)
plan and group life and health insurance plans. Management believes that
relationships between the Company and its employees are good.
 
                                        8
<PAGE>   11
 
                                    PART II
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following discussion and analysis should be read in conjunction with
the supplemental consolidated financial statements of the Company, and the
historical financial statements of Alrenco and the accompanying notes thereto
and in conjunction with the selected supplemental consolidated financial data of
the Company and the selected historical financial data of the Company and the
accompanying notes thereto included elsewhere in this report.
 
GENERAL
 
     On February 26, 1998, Alrenco merged with RTO in the RTO Merger. Alrenco
began operations in 1980 and RTO began operations in 1996. Prior to the RTO
Merger, the management of both Alrenco and RTO grew their operations through
diverse strategies which are described below.
 
     Alrenco Acquisitions.  Alrenco grew primarily through the opening of new
stores from its inception in 1980 through 1990. During the period from 1990 to
1993, management focused its efforts on improving the performance of Alrenco's
stores and, as a result, Alrenco increased its revenue from $16.3 million to
$22.3 million. During the same period, operating profit increased from $908,000
to $2.0 million and net earnings increased from $119,000 to $1.0 million.
 
     In 1994, Alrenco acquired 18 rental-purchase stores (the "1994 Alrenco
Acquisition"). The purchase price for the stores was $3.5 million, all of which
was borrowed under Alrenco's then existing bank loan agreement (the "Loan
Agreement").
 
     In September 1995, Alrenco acquired 15 stores (the "1995 Alrenco
Acquisition"). The purchase price for the stores was $5.9 million, all of which
was borrowed under the Loan Agreement.
 
     In 1996, Alrenco acquired 75 stores (the "1996 Alrenco Acquisitions") in 23
separate transactions, for an aggregate purchase price of $25 million. Alrenco
utilized borrowings under the Loan Agreement and Alrenco's cash reserves to fund
these acquisitions.
 
     In 1997, Alrenco acquired 54 stores and 13 rental-purchase portfolios in 19
separate transactions for an aggregate purchase price of $25.5 million (the
"1997 Alrenco Acquisitions"). Alrenco purchased the stores through borrowings
under the Loan Agreement and use of cash reserves.
 
     On February 26, 1998, the Company acquired 275 stores as a result of the
RTO Merger. The Merger Agreement provided that each of the 120,960 outstanding
shares of RTO Common Stock was to be converted into the right to receive 89.795
shares of Common Stock. As a result of the RTO Merger, the Company now operates
275 stores formerly operated by RTO.
 
     RTO Acquisitions.  RTO was incorporated on June 20, 1996 and since that
time has aggressively sought to establish its store base through multiple
significant store acquisitions, new store openings and smaller store
acquisitions.
 
     In July and August of 1996, RTO purchased 109 stores (the "1996 RTO
Purchase Acquisitions") in two separate transactions which included the purchase
of Action TV & Appliance Rental, Inc.'s ("Action") 102 store chain (the "Action
Acquisition"). The 1996 RTO Purchase Acquisitions were accounted for under
"purchase" accounting as defined by Accounting Principles Board Opinion No. 16
("APB 16"). During 1997, RTO purchased, in transactions accounted for as
purchases, an additional 73 stores in a series of transactions for cash, notes
payable and convertible debt (the "1997 RTO Purchase Acquisitions"). Finally,
during the last three months of 1996 and the year ended December 31, 1997, RTO
acquired 59 stores in transactions accounted for as pooling-of-interests (the
"1996 RTO Pooling Acquisitions" and the "1997 RTO Pooling Acquisitions" and,
collectively with the 1996 RTO Purchase Acquisitions and the 1997 RTO Purchase
Acquisitions, the "RTO Acquisitions").
 
                                        9
<PAGE>   12
 
     RTO New Store Openings.  During the year ended December 31, 1997, RTO
opened 34 new stores. From January 1, 1998 until March 25, 1998, RTO opened
eight additional stores. Management of the Company expects to open 50 new stores
during 1998, including the eight stores opened to date.
 
     Operating Results of New and Acquired Stores.  New stores are expected to
operate at a loss for a period of six to nine months after opening. Acquired
stores may also be unprofitable when acquired or may become unprofitable during
the period of acquisition due to disruptions in their business operations caused
by the acquisition. Some stores acquired as part of an acquisition of a larger
group of stores may be closed because they are unprofitable. The operating
results of new and acquired stores may also suffer because of disruptions
associated with integrating their operations into the existing operations of the
Company. Because of these factors, the growth of the Company's business through
new store openings and acquisitions of existing stores is likely to affect the
Company's results of operations and financial condition. Such factors may also
cause results to vary from quarter to quarter and may cause the market price of
Common Stock to fluctuate substantially.
 
CERTAIN COMPONENTS OF NET EARNINGS
 
     Except as otherwise indicated, the following description of the components
of net earnings is applicable to both the historical results of operations and
the supplemental consolidated results of operations of Alrenco.
 
     Total Revenue.  The Company collects non-refundable rental payments and
fees in advance, generally on a weekly basis. This revenue is recognized as
collected over the rental term. Rental-purchase agreements include a discounted
early purchase option. Amounts received upon sales of merchandise pursuant to
these options and upon the sale of used merchandise are recognized as revenue
when the merchandise is sold.
 
     Depreciation and Disposition of 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 agreement. The income forecasting
method is an activity-based method similar to the units of production method.
Disposition of rental merchandise represents the expensing of the remaining
carrying value of rental merchandise sold, charged off or rented until owned by
the customer. Rental merchandise acquired by Alrenco prior to January 1, 1995
was being depreciated by the straight-line method over various estimated useful
lives, primarily 21 months. For rental merchandise acquired after January 1,
1995, Alrenco adopted the income forecasting method of depreciation. The effect
of the change in accounting method was to increase Alrenco's net earnings by
approximately $470,000 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 decreased net loss by approximately $400,000.
 
     Other Direct Store Expenses.  Other direct store expenses include salaries,
wages and related expenses paid to all store level, regional management and
service department employees, store-level occupancy costs, advertising cost and
other direct store-level expenses, including general and administrative
expenses, delivery and collection expenses and non-rental depreciation.
 
     Corporate Expenses.  Corporate expenses include all overhead expenses
related to corporate and division offices such as salaries, taxes and benefits,
occupancy, training, travel expenses and certain performance bonuses to regional
managers and store personnel. Regional costs are included in "Direct Store
Expenses." See "Store Operations -- Management and Supervision."
 
                                       10
<PAGE>   13
 
     Amortization of Intangibles.  Amortization of intangibles consists
primarily of the amortization of rental-purchase agreements, noncompetition
agreements and the excess of purchase price over the fair market value of
acquired assets.
 
     Income Tax Expense.  Income taxes 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 RTO's business combinations involved companies which were
nontaxable enterprises, unaudited pro forma tax expense (benefit) has been
presented for the nontaxable enterprises as if they had been taxable enterprises
for periods prior to consummation.
 
RESULTS OF OPERATIONS -- SUPPLEMENTAL CONSOLIDATED RESULTS OF OPERATIONS OF THE
COMPANY
 
     The discussion of Results of Operations below is based on the supplemental
consolidated financial statements of the Company. The supplemental consolidated
financial statements of the Company have been prepared to give retroactive
effect to the RTO Merger. Generally accepted accounting principles proscribe
giving effect to a consummated business combination accounted for by the
pooling-of-interests methods 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 the
RTO Merger are issued. As such, the respective impact of the Company and RTO on
the supplemental consolidated results of operations is also discussed
individually.
 
     The supplemental consolidated financial statements reflect the financial
position and results of operations of the 1996 Alrenco Acquisitions, the 1996
RTO Purchase Acquisitions and the 1997 RTO Purchase Acquisitions from their
respective dates of acquisition through 1997, consistent with the requirements
of APB 16 for purchase acquisitions. In addition, the supplemental consolidated
financial statements reflect the financial position and results of operations of
the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions as
though the Company and the 1996 RTO Pooling Acquisitions and the 1997 RTO
Pooling Acquisitions had operated as a single business for all periods required
to be presented consistent with the requirements of APB 16 for
pooling-of-interests acquisitions.
 
     Acquisitions accounted for as pooling-of-interests transactions, as
compared to acquisitions accounted for as purchases, generally require a longer
period of time to consummate. During the period between the time that the
Company reaches an agreement in principle to purchase a business and the
consummation of the transaction, the operations of such business are still under
the control of the seller. Any failure of the seller to operate the business in
accordance with sound business practices may adversely affect the operating
results of such business.
 
     The operating results of certain of the 1996 RTO Pooling Acquisitions and
the 1997 RTO Pooling Acquisitions declined substantially during the last half of
1996 and the first half of 1997. Management believes that this decline is
attributable primarily to a failure of these businesses to properly replenish
rental merchandise while the acquisitions of the businesses were pending, which
resulted in the businesses not having adequate inventories during the fourth
quarter of 1996 and the first quarter of 1997. The failure of such businesses to
have adequate inventories of rental merchandise during such periods, together
with other factors relating to the operations of these businesses outside the
control of RTO, resulted in a substantial decline in revenues and net income of
these businesses for the years ended December 31, 1996 and 1997.
 
     Management of the Company continues to believe that the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions can be operated profitably.
The 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions were
managed by diverse management teams with significant differences in (i) goals
and objectives relating to profitability, (ii) access to capital resources,
(iii) operating philosophies and strategies, and (iv) compensation programs.
Management has taken steps to replenish inventories at these businesses and to
implement operational controls, compensation plans and other systems designed to
improve the perform-
 
                                       11
<PAGE>   14
 
ance of these businesses. As a result of these steps, results of operations of
the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions improved
significantly during the third and fourth quarters of 1997.
 
     The following table sets forth, for the periods indicated, certain
supplemental consolidated Statement of Operations data as a percentage of
revenue.
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 1995      1996      1997
                                                                ------    ------    ------
<S>                                                             <C>       <C>       <C>
Rental and fee revenue......................................     96.7%     97.6%     96.7%
Cash sales and other revenue................................      3.3       2.4       3.3
                                                                -----     -----     -----
          Total revenue.....................................    100.0     100.0     100.0
                                                                -----     -----     -----
Depreciation and disposition of rental merchandise..........     32.3      29.5      29.1
Other direct store expenses.................................     51.6      54.4      55.4
                                                                -----     -----     -----
          Total direct store expenses.......................     83.9      83.9      84.5
Corporate expenses..........................................     10.3       8.6      11.3
Cost of business combinations...............................       --       1.4       0.3
Name change expenses........................................       --        --       0.3
Amortization of intangibles.................................      0.7       3.2       4.3
Key executive signing bonuses...............................       --       1.2       0.2
                                                                -----     -----     -----
          Total operating expenses..........................     94.9      98.3     100.9
                                                                -----     -----     -----
          Operating income (loss)...........................      5.1       1.7      (0.9)
Other income (expense):
  Interest expense..........................................     (3.2)     (1.3)     (1.1)
  Interest income...........................................      0.1       0.5       0.1
  Other non-operating income (expense), net.................      0.3       0.3      (0.1)
  Gain on sale of stores....................................      1.4       0.6       0.4
                                                                -----     -----     -----
          Income (loss) before income taxes and
            extraordinary item..............................      3.7       1.8      (1.6)
Income tax expense..........................................      1.2       0.9       0.1
                                                                -----     -----     -----
          Income (loss) before extraordinary item...........      2.5       0.9      (1.7)
Extraordinary item, net of income tax expense...............      4.3        --        --
                                                                -----     -----     -----
          Net income (loss).................................      6.8       0.9      (1.7)
                                                                =====     =====     =====
</TABLE>
 
 Comparison of Years Ended December 31, 1997 and 1996
 
     Revenue.  Revenue increased $106.8 million, or 86%, to $231.0 million for
the year ended December 31, 1997 from $124.2 million for the comparable period
in 1996. Revenue increased by approximately $105.7 million, or 99.0% of the
total increase, primarily as a result of the inclusion of revenue from the 1997
Alrenco Acquisitions and the 1997 RTO Purchase Acquisitions from the respective
dates of acquisition, and the inclusion of revenue of the 1996 Alrenco
Acquisitions and 1996 RTO Purchase Acquisitions for the full year in 1997.
During 1997, RTO opened 34 new stores generating $2.7 million, or 2.5%, of the
total increase in revenues from 1996 to 1997. The aforementioned revenue
increases were offset in part by a $2.2 million decrease in revenue from the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions. See
"-- General -- RTO Acquisitions."
 
     Depreciation and Disposition of Rental Merchandise.  Depreciation and
disposition of rental merchandise expense increased $30.7 million, or 83.9%, to
$67.3 million for the year ended December 31, 1997 from $36.6 million for the
comparable period in 1996. As a percentage of total revenue, depreciation and
disposition of rental merchandise decreased slightly from 29.5% in 1996 to 29.1%
in 1997 primarily due to (i) lower rental merchandise costs as a percentage of
revenue during 1997, due to the failure of certain of the 1996 RTO Pooling
Acquisitions and 1997 RTO Pooling Acquisitions to replenish rental merchandise
during the last quarter of 1996 and the first quarter of 1997 which affects
depreciation expenses because depreciation expense as a percentage of rental
revenue is generally lower for the rental of used merchandise as compared to new
 
                                       12
<PAGE>   15
 
merchandise, (ii) reducing, in accordance with policies of RTO, the percentage
of total revenues contributed by cash sales and other revenue (gross margins are
significantly lower on cash sales relative to margins generated on the rental of
merchandise) for certain of the 1996 RTO Pooling Acquisitions and 1997 RTO
Pooling Acquisitions, (iii) increasing, during the year ended 1997, the revenue
generated as a multiple of rental merchandise cost for certain of the 1996 RTO
Pooling Acquisitions and 1997 RTO Pooling Acquisitions in order to conform the
pricing policies of such acquisitions to RTO's pricing policies, and (iv)
electing to depreciate all additions to rental merchandise acquired subsequent
to December 31, 1996 using the income forecasting method and other conforming
changes resulting in a nonrecurring decrease in depreciation expense.
Depreciation and disposition expense in 1997 as a percentage of total revenue
also decreased slightly partially as a result of a more aggressive pricing
strategy used by one of the 1997 RTO Purchase Acquisitions, thereby producing
greater revenues as a multiple of rental merchandise cost. The decreases
described above were offset by the increase in depreciation of rental
merchandise as a percentage of total revenue of Alrenco to 23.8% from 21.9% for
the year ended December 31, 1996, primarily as a result of price and term
discounting in the second, third and fourth quarters of 1997. The factors
contributing to the decline in depreciation of rental merchandise as a
percentage of revenue described in (i) and (iv) above are nonrecurring in nature
and caused depreciation and disposition of rental merchandise as a percentage of
revenue to decrease to a level lower than that which management for the company
believes is sustainable.
 
     Other Direct Store Expenses.  Other direct store expenses increased $60.4
million, or 89.3%, to $128.0 million for the year ended December 31, 1997 from
$67.6 million for the comparable period in 1996. As a percentage of revenue,
other direct store expenses rose from 54.5% in 1996 to 55.4% in 1997. The
increase in direct store expenses as a percentage of revenue is attributable to
(i) $4.7 million of expenses related to the 34 new stores opened in 1997, (ii) a
higher percentage of expenses for the 1996 RTO Purchase Acquisitions and the
1997 RTO Purchase Acquisitions, and (iii) a higher percentage of expenses for
the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions for the
reasons discussed under "-- Results of Operations" above, offset by a decrease
in other direct store expenses as a percentage of revenue for the Alrenco Stores
due to increased revenue from the stores acquired in the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions.
 
     Corporate Expenses.  Corporate expenses increased $15.4 million, or 144%,
to $26.1 million for the year ended December 31, 1997 from $10.7 million for the
comparable period in 1996. The increase is attributable to (i) the inclusion of
expenses related to the 1996 RTO Purchase Acquisitions and the 1996 Alrenco
Acquisitions for the full year in 1997 and (ii) an increase in RTO and Alrenco's
staff to accommodate the increased stores managed by the Company in 1997 as a
result of the integration of stores acquired in the RTO Acquisitions, the 1996
Alrenco Acquisitions and the 1997 Alrenco Acquisitions. As a percentage of
revenue, corporate expenses increased to 11.3% from 8.6% for the comparable
period in 1996. This percentage increase was due primarily to the duplication of
certain corporate expenses during the transition periods subsequent to the
integration of the 1996 RTO Pooling Acquisitions and the 1997 RTO Pooling
Acquisitions and prior to the closing of the RTO Merger offset by advertising
and vendor co-op reimbursements received by Alrenco in the third quarter.
 
     Name Change Expenses.  Following the consummation of the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions and the 1996 RTO Purchase
Acquisitions and the 1997 RTO Purchase Acquisitions, the management of RTO
launched a program to change the name of all its stores from the various trade
names acquired to "HomeChoice Lease or Own." RTO incurred nonrecurring costs
totaling $743,000 for items such as expensing the net carrying value of replaced
old signs and branded supplies at 165 of its 267 stores, as well as expensing
new vehicle decals, consistent with prior accounting policies, for 600 of its
750 vehicles. Name change expenses are expected to continue in 1998 for the
conversion of the remaining RTO stores and the conversion of a majority of the
Alrenco stores.
 
     Amortization of Intangibles.  Amortization of intangibles increased $5.9
million, or 147.5%, to $9.9 million in 1997 from $4.0 million in 1996, and as a
percentage of revenue, amortization of intangibles increased to 4.3% for 1997
from 3.2% for the comparable period in 1996. This increase was primarily
attributable to the amortization of noncompetition agreements, customer rental
agreements and goodwill from
 
                                       13
<PAGE>   16
 
the 1996 RTO Purchase Acquisitions and the 1997 RTO Purchase Acquisitions and
the 1996 Alrenco Acquisitions and the 1997 Alrenco Acquisitions.
 
     Gain on Sale of Assets.  In August 1997, Alrenco sold eight marginally
performing stores in two separate transactions for an aggregate purchase price
of $3.0 million in cash. Net gain on these transactions was $950,400.
 
     Net Income (Loss).  Net income decreased $5.2 million, or 472.7% to a loss
of $4.1 million for the year ended December 31, 1997, from an income of $1.1
million for the comparable period in 1996, and as a percentage of revenue, net
income decreased to a negative 1.7% from a positive .9% for the comparable
period in 1996. These decreases occurred primarily as a result of higher
amortization of intangibles, operating losses attributable to the 34 new stores
opened by RTO during the year ended December 31, 1997, expenses related to the
Company's store name change program initiated in 1997, and increased corporate
expenses related to integration of the RTO Acquisitions, the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions. The decrease in net income for
1997 is partially offset by lower business combination costs and related key
executive signing bonuses expensed in 1997 as compared to those expensed in
1996.
 
  Comparison of Years Ended December 31, 1996 and 1995
 
     Revenue.  Revenue increased $46.7 million, or 60.3%, to $124.2 million for
the year ended December 31, 1996, from $77.5 million in 1995. Revenue from
Alrenco's same store operations accounted for $1.3 million of the increase, and
the addition of revenue from the 1995 Alrenco Acquisition and the 1996 Alrenco
Acquisitions accounted for $25.0 million of the increase for the year. The
increase in Alrenco's same store revenue for the period was mainly attributable
to improved performance of the stores acquired in the 1994 Alrenco Acquisition
and the 1995 Alrenco Acquisition, an increase in the number of items on rent and
in revenue earned per item on rent, and improved collections. The remainder of
the increase consisted of the addition of revenue of $25.2 million from the 1996
RTO Purchase Acquisitions, offset in part by a $4.6 million decrease in revenue
resulting from the sale by RTO of thirteen stores in September 1995 and four
stores in September 1996. RTO's same store revenue (not including the results of
stores sold, closed, opened or bought during the periods) for the 1996 RTO
Pooling Acquisitions and 1997 RTO Pooling Acquisitions decreased by $1.5
million, or 4.5%, compared to 1995 due to the reasons discussed above. Revenue
from new stores acquired in 1995 and opened on various dates in 1995 and 1996
increased by $1.3 million.
 
     Depreciation and disposition of rental merchandise.  Depreciation and
disposition of rental merchandise increased $11.5 million, or 46.0%, to $36.6
million for the year ended December 31, 1996 from $25.1 million in 1995,
primarily as a result of the addition of depreciation and disposition expense of
the 1996 Alrenco Acquisitions and the 1996 RTO Purchase Acquisitions from their
respective dates of acquisition and the inclusion of depreciation and
disposition expense of the 1995 Alrenco Acquisitions for a full year, offset in
part by a $2.4 million decrease in depreciation and disposition expense for the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions. As a
percentage of revenue, depreciation and disposition of rental merchandise
expense decreased 2.9% from 32.3% in 1996 to 29.5% in the comparable period in
1996 partly as a continuing result of the changes in Alrenco's depreciation
method for new inventory additions. In addition, the decrease was a result of
(i) a reduction in the percentage of total RTO revenues contributed by cash
sales and other revenue (gross margins are significantly lower on cash sales
relative to margins generated on the rental merchandise) as a result of the
Action Acquisition, which had lower cash sales and other revenues as a
percentage of total revenues and (ii) the use of Action of a more aggressive
pricing strategy, thereby producing greater revenues as a multiple of rental
merchandise cost.
 
     Other Direct Store Expenses.  Other direct store expenses increased $27.6
million, or 69.0%, to $67.6 million for the year ended December 31, 1996 from
$40.0 million in 1995, primarily as a result of the 1996 RTO Purchase
Acquisitions and the 1996 Alrenco Acquisitions from their respective dates of
acquisition and the inclusion of other direct store expenses of the 1995 Alrenco
Acquisition for a full year. As a percentage of revenue, other direct store
expenses increased 2.8% from 51.6% in 1995 to 54.4% in the comparable period in
1996. The increase in other direct store expense as a percentage of revenue
resulted from: (i) higher other direct store expenses of the 1996 Alrenco
Acquisitions and the 1996 RTO Purchase Acquisitions, (ii) higher
 
                                       14
<PAGE>   17
 
other direct store expenses as a percentage of revenue for the 1996 RTO Pooling
Acquisitions and 1997 RTO Pooling Acquisitions attributable to the reasons
discussed above in "-- Depreciation and Disposition of Rental Merchandise," and
(iii) higher proportionate direct store expenses associated with six new
locations opened by RTO on various dates in 1995 and 1996.
 
     Corporate Expenses.  For the year ended December 31, 1996, corporate
expenses increased $2.7 million, or 33.8%, to $10.7 million from $8.0 million
for the year ended December 31, 1995, primarily as a result of the inclusion of
corporate expenses for the 1996 RTO Purchase Acquisitions and the hiring of
additional corporate and administrative personnel to support the 1996 Alrenco
Acquisitions and future store acquisitions. As a percentage of revenue,
corporate expenses decreased to 8.6% for the year ended December 31, 1996 from
10.3% for the year ended December 31, 1995 primarily as a result of increased
revenue from stores acquired by Alrenco in 1996, greater operating efficiencies
achieved through higher rental revenue and lower corporate expenses as a
percentage of revenue for the 1996 RTO Purchase Acquisitions, partially offset
by higher corporate expenses as a percentage of revenue for the 1996 RTO Pooling
Acquisitions and the 1997 RTO Pooling Acquisitions.
 
     Amortization of Intangibles.  Amortization of intangibles increased $3.4
million to $4.0 million for the year ended December 31, 1996, from $569,000 in
1995. This increase was attributable to intangible assets created by the 1995
Alrenco Acquisition, the 1996 Alrenco Acquisitions and the 1996 RTO Purchase
Acquisitions. As a percentage of revenue, amortization of intangibles increased
to 3.2% for the year ended December 31, 1996, from 0.7% in 1995 for the same
reasons.
 
     Interest Income.  Interest income increased $610,000 to $645,000 for the
year ended December 31, 1996 from $35,000 in 1995, primarily as a result of the
short term investment of excess proceeds from the issuance of common stock of
RTO, net of amounts required for completing the 1996 RTO Purchase Acquisitions
and the investment of the cash proceeds of the public offerings of Common Stock
by Alrenco.
 
     Interest Expense.  Interest expense decreased $0.9 million, or 36.0%, to
$1.6 million for the year ended December 31, 1996, from $2.5 million in 1995. As
a percentage of revenue, interest expense decreased to 1.3% for the year ended
December 31, 1996, from 3.2% in 1995, primarily as a result of (i) using the
capital raised by the public offerings of Common Stock to repay all then
outstanding indebtedness under the Loan Agreement, (ii) the use of proceeds from
the issuance of common stock of RTO to reduce the debt of the 1996 RTO Purchase
Acquisitions and the 1996 RTO Pooling Acquisitions and (iii) the forgiveness of
$2.9 million of RTO's debt of one of the 1997 RTO Pooling Acquisitions and $0.4
million of related accrued interest by a secured lender in 1995.
 
     Net Income.  Net earnings decreased $4.2 million, or 79.2%, to $1.1 million
for the year ended December 31, 1996, from $5.3 million in 1995, primarily as a
result of (i) costs of RTO's business combinations of $1.7 million, (ii)
nonrecurring key executive signing bonus expense of $1.5 million related to the
retention of key employees in the 1996 RTO Purchase Acquisitions, (iii) an
increase of amortization of intangibles in the amount of $2.5 million as a
result of the amortization of noncompetition agreements, customer rental
agreements and goodwill from the 1996 Alrenco Acquisitions and the 1996 RTO
Purchase Acquisitions, (iv) the increase of other direct store expenses in the
amount of $.8 million from the opening of six new RTO locations on various dates
in 1995 and 1996, (v) the decrease in same store revenue of $1.5 million for the
1996 RTO Pooling Acquisitions and the 1997 RTO Pooling Acquisitions; offset by
(vi) increased revenues and operating margins in 1996 for the stores acquired in
the 1994 Alrenco Acquisition and the 1995 Alrenco Acquisition. As a percentage
of revenue, net earnings decreased to 0.9% for the year ended December 31, 1996,
from 6.8% in 1995.
 
                                       15
<PAGE>   18
 
RESULTS OF OPERATIONS -- HISTORICAL
 
     The following table sets forth, for the periods indicated, certain
Statement of Operations data as a percentage of revenue.
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 1995      1996      1997
                                                                ------    ------    ------
<S>                                                             <C>       <C>       <C>
REVENUE:
Rentals and fees............................................    100.0%    100.0%    100.0%
                                                                -----     -----     -----
OPERATING EXPENSES:
Direct store expenses
  Depreciation of rental merchandise........................     24.2      21.9      23.8
  Other direct store expenses...............................     55.7      57.1      55.9
                                                                -----     -----     -----
                                                                 79.9      79.0      79.7
General and administrative expenses.........................     11.5       8.8      10.2
Amortization of intangibles.................................      0.8       1.8       3.3
                                                                -----     -----     -----
Operating profit............................................      7.8      10.4       6.8
Interest income.............................................       --       0.2        --
Interest expense............................................     (2.4)     (1.0)     (1.2)
Non-operating income........................................      0.3        --       0.9
                                                                -----     -----     -----
Earnings before income taxes................................      5.7       9.6       6.5
Income tax expense..........................................      2.3       3.9       3.0
                                                                -----     -----     -----
          Net earnings......................................      3.4%      5.7%      3.5%
                                                                =====     =====     =====
</TABLE>
 
Comparison of Years Ended December 31, 1997 and 1996
 
     Revenue.  Revenue increased $38.7 million, or 60.6%, to $102.6 million for
the year ended December 31, 1997, from $63.9 million in 1996. Revenue from same
store operations accounted for $672,800, or 1.0% of the increase, and revenue
from acquired stores accounted for $38.0 million, or 99.0% of the increase for
the year. Management believes that the increase in revenue for the period was
primarily attributable to the stores acquired in the 1996 and 1997 acquisitions.
 
     Depreciation of Rental Merchandise.  Depreciation of rental merchandise
increased $10.5 million, or 75.2%, to $24.5 million for the year ended December
31, 1997, from $14.0 in 1996. As a percentage of revenue, depreciation of rental
merchandise increased to 23.8% for the year ended December 31, 1997, from 21.9%
in 1996, primarily as a result of discounted prices and terms allowed in the
last six months of the year which increased the cost relationship to expected
revenue.
 
     Other Direct Store Expenses.  Other direct store expenses increased $20.8
million, or 57.0%, to $57.3 million for the year ended December 31, 1997, from
$36.5 million in 1996. As a percentage of revenue, other expenses decreased to
55.9% for the year ended December 31, 1997, from 57.1% in 1996. This decrease
was primarily attributable to the increased revenues of the stores acquired in
the 1996 Alrenco Acquisitions and the 1997 Alrenco Acquisitions. The
proportional increase in revenue in these acquired stores had the effect of
lowering fixed operating costs as a percentage of revenue.
 
     General and Administrative Expenses.  General and administrative expenses
increased $4.9 million, or 87.3%, to $10.5 million for the year ended December
31, 1997, from $5.6 million in 1996. This increase was primarily attributable to
additional corporate and administrative personnel to support the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions and future store acquisitions. As
a percentage of revenue, general and administrative expenses increased to 10.2%
for the year ended December 31, 1997, from 8.8% in 1996, primarily as a result
of the large proportional increase in expenses.
 
                                       16
<PAGE>   19
 
     Amortization of Intangibles.  Amortization of intangibles increased $2.3
million to $3.4 million for the year ended December 31, 1997, from $1.1 million
in 1996 primarily as a result of intangible assets created by the 1996 Alrenco
Acquisitions and the 1997 Alrenco Acquisitions.
 
     Interest Expense.  Interest expense increased $0.5 million, or 71.4%, to
$1.2 million for the year ended December 31, 1997, from $0.7 in 1996. As a
percentage of revenue, interest expense increased to 1.2% for the year ended
December 31, 1997, from 1.0% in 1996, primarily as a result of the debt incurred
in connection with the 1997 Alrenco Acquisitions.
 
     Non-Operating Income.  Non-operating income of $950,400 was provided in the
year ended December 31, 1997 by the gain on sale of assets previously held by
the Company.
 
     Net Earnings.  Net earnings decreased $77,100, or 2.1%, to $3.6 million for
the year ended December 31, 1997, from $3.7 million in 1996. As a percentage of
revenue, net earnings decreased to 3.4% for the year ended December 31, 1997,
from 5.7% for the 1996 comparable period, primarily as a result of increased
operating expenses and interest expense as a percentage of revenue offset by the
non-operating income.
 
  Comparison of Years Ended December 31, 1996 and 1995
 
     Revenue.  Revenue increased $26.3 million, or 69.9%, to $63.9 million for
the year ended December 31, 1996, from $37.6 million in 1995. Revenue from same
store operations accounted for $1.3 million, or 4.9% of the increase, and
revenue from acquired stores accounted for $25.0 million, or 95.1% of the
increase for the year. Management believes that the increase in revenue for the
period was primarily attributable to improved performance of the stores acquired
in the 1994 Alrenco Acquisition and the 1995 Alrenco Acquisition, and an
increase in the number of items on rent and in revenue earned per item on rent,
improved collections and the addition of revenue from operations of the stores
acquired in 1996.
 
     Depreciation of Rental Merchandise.  Depreciation of rental merchandise
increased $4.9 million, or 53.8%, to $14.0 million for the year ended December
31, 1996, from $9.1 million in 1995. As a percentage of revenue, depreciation of
rental merchandise decreased to 21.9% for the year ended December 31, 1996, from
24.2% in 1995, primarily as a continuing result of the change in Alrenco's
depreciation method for new inventory additions.
 
     Other Direct Store Expenses.  Other direct store expenses increased $15.6
million, or 74.6%, to $36.5 million for the year ended December 31, 1996, from
$20.9 million in 1995. As a percentage of revenue, other direct store expenses
increased to 57.1% for the year ended December 31, 1996, from 55.7% in 1995.
This increase was primarily attributable to the fact that the stores acquired in
the 1996 Alrenco Acquisitions operated at lower average revenue per store and
therefore had higher operating costs as a percentage of revenue than Alrenco's
existing stores.
 
     Corporate Expenses.  Corporate expenses increased $1.3 million, or 30.2%,
to $5.6 million for the year ended December 31, 1996, from $4.3 million in 1995.
This increase was primarily attributable to additional corporate and
administrative personnel hired to support the 1996 Alrenco Acquisitions and
future store acquisitions. As a percentage of revenue, corporate expenses
decreased to 8.8% for the year ended December 31, 1996, from 11.5% in 1995,
primarily as a result of increased revenue from stores acquired in 1996 and
greater operating efficiencies achieved through higher rental revenue.
 
     Amortization of Intangibles.  Amortization of intangibles increased
$856,000, or 300.4%, to $1.1 million for the year ended December 31, 1996, from
$285,000 in 1995, primarily as a result of intangible assets created by the 1995
Alrenco Acquisition and 1996 Alrenco Acquisitions. As a percentage of revenue,
amortization of intangibles increased to 1.8% for the year ended December 31,
1996, from 0.8% in 1995, primarily as a result of intangible assets created in
the 1995 Alrenco Acquisition and 1996 Alrenco Acquisitions.
 
     Interest Income.  Interest income of $134,000 was provided in the year
ended December 31, 1996 by investing the cash proceeds of the public offerings
of Common Stock until the proceeds could be used for acquisitions.
 
     Interest Expense.  Interest expense decreased $242,000, or 27.1%, to
$652,000 for the year ended December 31, 1996, from $894,000 in 1995. As a
percentage of revenue, interest expense decreased to 1.0% for the year ended
December 31, 1996, from 2.4% in 1995, primarily as a result of the capital
raised by the
 
                                       17
<PAGE>   20
 
public offerings of Common Stock. A portion of the net proceeds of such
offerings was used to repay all then outstanding indebtedness under the Loan
Agreement.
 
     Net Earnings.  Net earnings increased $2.4 million, or 184.6%, to $3.7
million for the year ended December 31, 1996, from $1.3 million in 1995. As a
percentage of revenue, net earnings increased to 5.7% for the year ended
December 31, 1996, from 3.4% in 1995, primarily as a result of increased
revenues and operating margins in 1996 for the stores acquired in the 1994
Alrenco Acquisition and 1995 Alrenco Acquisition.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's primary requirements for capital consist of the acquisition
of existing stores (including the retirement of any assumed acquisition
indebtedness), the opening of new stores, the purchase of additional rental
merchandise for new store openings and replacement of rental merchandise which
has been sold, charged-off, rented to term or is no longer suitable for rent.
 
     On January 23, 1996, Alrenco completed an initial public offering of
1,800,000 shares of Common Stock which included 700,000 shares sold by a selling
shareholder. Proceeds of the sale to Alrenco net of underwriters discount but
before expenses amounted to $14,322,000. On February 26, 1996, the underwriters
of the offering exercised part of their over-allotment option for 219,200
shares. Net proceeds to Alrenco from this transaction amounted to $2,853,984. A
portion of the net proceeds of the public offering was used to repay all
outstanding indebtedness under the Loan Agreement.
 
     On September 18, 1996, Alrenco completed a public offering of 1,500,000
shares of Common Stock. Proceeds of the sale to Alrenco net of underwriters
discount but before expenses amounted to $30,315,000. On October 17, 1996, the
underwriters of the offering exercised part of their over-allotment option for
149,300 shares. Net proceeds to Alrenco from this transaction amounted to
$3,017,353. A portion of the net proceeds of the public offering was used to
repay all outstanding indebtedness under the Loan Agreement.
 
     On June 20, 1996, RTO completed a private placement of 9,387,618 shares of
Common Stock (as adjusted to give effect to the exchange ratio of 89.795 in the
RTO Merger (the "Exchange Ratio")). RTO received proceeds of $93.1 million from
the private placement. Since this initial capitalization, and prior to the RTO
Merger, RTO issued an additional 1,475,015 shares of Common Stock (as adjusted
to give effect to the Exchange Ratio) in connection with the 1996 RTO Purchase
Acquisitions and the 1996 and 1997 Pooling Acquisitions. During the year ended
December 31, 1997, RTO purchased the equivalent of 190 shares of its Common
Stock from dissenting shareholders of the 1997 Pooling Acquisitions.
 
     For RTO and Alrenco collectively, cash used in operating activities totaled
$8.7 million for the year ended December 31, 1997 as compared to cash used in
operating activities of $2.2 million for the year ended December 31, 1996. This
$6.5 million increase is primarily attributable to (i) a $5.2 million decrease
in net income, (ii) a $43.0 million increase in rental merchandise purchases for
the year, (iii) a $4.0 million increase in prepaid expenses and other assets,
(iv) a $30.7 million increase in depreciation and disposition of rental
merchandise and (v) a $5.9 million increase in amortization of intangibles. The
significant increase in rental merchandise purchases during the year ended
December 31, 1997 as compared to the comparable period in 1996 reflects the cost
of merchandising 34 RTO new store openings during the period and the integration
of 174 stores acquired through purchases or poolings of interest during the
period. Net cash used in investing activities decreased $23.8 million to $52.9
million for the year ended December 31, 1997 from $76.7 million for the
comparable period in 1996, primarily due to a $23.9 million reduction in
acquisitions of businesses, net of cash acquired. Net cash provided by financing
activities decreased $84.1 to $29.4 million for the year ended December 31, 1997
from $113.5 million of the comparable period in 1996, primarily due to the two
public stock offerings completed by Alrenco during the year ended December 31,
1996 and a private placement completed by RTO during the same period partially
offset by repayments on credit facilities and capital leases.
 
     Cash used in operating activities totaled $2.2 million for the year ended
December 31, 1996 as compared to cash provided by operations of $3.2 million of
the year ended December 31, 1995. This $5.4 million change is primarily
attributable to a significant increase in purchases of rental merchandise and a
decrease in net income offset by an increase in depreciation and disposition of
rental merchandise. Net cash used in investing activities was $76.7 million for
the year ended December 31, 1996, an increase of $72.8 million over the year
 
                                       18
<PAGE>   21
 
ended December 31, 1995, primarily due to funds used to acquire businesses. Net
cash provided by financing activities was $113.5 million for the year ended
December 31, 1996, a $111.7 million increase from the comparable period in 1995,
primarily due to two public stock offerings completed by Alrenco and a private
placement completed by RTO during the period, partially offset by repayments on
credit facilities.
 
     During the years ended December 31, 1996 and 1997, RTO and Alrenco
purchased additional rental merchandise for aggregate amounts of $47.4 and $90.4
million, respectively. The significant increase in merchandise purchases during
the year ended December 31, 1997 as compared to the periods ended in 1995 and
1996 reflects the cost of merchandising for 34 new stores opened during the
period and the integration of 174 stores acquired through purchases or
poolings-of-interests during the period. RTO and Alrenco collectively
experienced an increase in accounts payable of $10.4 million for the year ended
December 31, 1997. This increase corresponds, in part, to the increase in
revenue over the same period and also reflects increased merchandise purchases
during 1997.
 
     RTO and Alrenco collectively purchased businesses, net of cash acquired,
for aggregate amounts of approximately $7.2 million, $74.5 million and $50.6
million during the years ended December 31, 1995, 1996 and 1997, respectively.
In relation to the purchase acquisitions during the years ended December 31,
1997, $4.4 million was paid in cash to retire assumed debt, notes in the amount
of $5 million and convertible into Common Stock at $13.92 per share were issued
and a note for $2.1 million payable in three installments of $700,000 beginning
January 3, 1997 was issued.
 
     In acquiring the RTO 1997 Pooling Acquisitions, RTO issued 1,076,193 shares
of Common Stock (as adjusted to give effect to the Exchange Ratio) in the
aggregate, paid approximately $266,000 in cash to dissenting shareholders and
paid $7.7 million to retire assumed debt. Cash used to pay dissenting
shareholders and to retire debt of the RTO 1997 Pooling Acquisitions was paid
from working capital and from $12 million in borrowings from RTO's then existing
revolving line of credit.
 
     Historically, each of RTO's and Alrenco's growth has been financed through
internally generated working capital, borrowings under loan agreements and
issuances of common stock.
 
     The Company expects to open 50 new stores during 1998, including eight
stores opened through March 25, 1998, and expects to continue to acquire
existing stores during 1998. New stores opened during 1998 are expected to
operate at a loss for a period of six to nine months. Acquired stores may also
be unprofitable when acquired or may become unprofitable during the period of
acquisition due to disruptions in their business operations caused by the
acquisition. Some stores acquired as part of an acquisition of a larger group of
stores may be closed because they are unprofitable. The operating results of new
and acquired stores may also suffer because of disruptions associated with
integrating their operations into the existing operations of the Company.
Because of these factors, the growth of the Company's business through new store
openings and acquisitions of existing stores is likely to affect the Company's
results of operations and financial condition. Such factors may also cause
results to vary from quarter to quarter and may cause the market price of Common
Stock to fluctuate substantially.
 
     On February 26, 1998, the Company consummated the RTO Merger. During the
last quarter of 1997, the Company incurred expenses related to the RTO Merger of
$1.7 million which have been deferred and will be recognized during the first
quarter of 1998. In addition to these RTO Merger-related expenses, the Company
expects to incur additional expenses of approximately $7.3 million related to
the RTO Merger during the first quarter of 1998. The success of the RTO Merger
will be determined by various factors, including the financial performance of
the Company's operations after the RTO Merger and management's ability to
effectively integrate the operations of the Company and RTO. The integration of
the operations of the Company and RTO may be negatively affected if costs or
difficulties related to the integration are greater than the Company expects. In
addition, there can be no assurance that the anticipated benefits of the RTO
Merger will be realized by the Company or that the RTO Merger will not adversely
affect the future operating results of the Company.
 
     On February 26, 1998, the Company entered into a $50 million Revolving
Credit Agreement with Comerica Bank (the "Comerica Credit Agreement") which
replaced the Loan Agreement and the then
 
                                       19
<PAGE>   22
 
existing RTO credit facility. The Comerica Credit Agreement provides for certain
borrowing options for advances based on a "Base Rate" of (i) the agent's prime
rate or (ii) the federal funds rate plus 100 basis points, or (iii) a
"Eurodollar Rate" adjusted for reserves and other regulatory requirements, plus
an applicable margin. Under the Comerica Credit Agreement, the Company has the
option, provided that certain conditions are satisfied, 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 for general corporate
purposes including working capital and permitted acquisition financing. As
security for borrowings under the Comerica Credit Agreement, the Company granted
a first security interest from the Company in all accounts, notes and contracts
receivable, machinery and equipment, rental units, and substantially all other
assets of the Company. As additional security, the Company pledged to Comerica
the stock of all subsidiaries of the Company.
 
     The Comerica Credit Agreement contains certain negative covenants that
restrict the Company's ability to incur additional debt, make capital
expenditures and pledge its assets. Under the Comerica Credit Agreement, the
Company is restricted from incurring any additional debt except for, among
certain other limited exceptions, (i) debt incurred to finance the acquisition
of motor vehicles in an amount less than $5,000,000, (ii) other debt incurred to
finance the acquisition of fixed or capital assets in an amount less than
$1,000,000, (iii) debt of less than $3,000,000 incurred in connection with
non-competition or signing bonuses entered into by the Company resulting from
certain acquisitions and (iv) additional debt not exceeding $5,000,000. The
Company also agreed that it would not incur any capital expenditures except (i)
normal equipment replacement and maintenance expenditures charged to current
operations, (ii) certain permitted business acquisitions and (iii) expenditures
in the ordinary course of business not to exceed $6,000,000 in fiscal year 1998
and $3,000,000 in any fiscal year thereafter. Additionally, the Comerica Credit
Agreement also prohibits the Company from incurring additional liens on the
Company's property, assets or revenue except in certain limited circumstances.
 
     The Company is also subject to certain financial covenants pursuant to the
Comerica Credit Agreement. First, the Company must maintain a net worth (defined
as net book value of all of the Company's assets other than certain intangible
assets minus all debt of the Company) of $25,000,000. Second, the Company must
have positive net income in each quarter. Third, the Company's total debt may
not exceed its total stockholders' equity at the end of any fiscal quarter.
Finally, the Company must maintain fixed charge coverage ratios of: (i) 1.5 to 1
for the quarter ending March 31, 1998; (ii) 1.75 to 1 for the quarter ending
June 30, 1998; and (iii) 2 to 1 for the quarters ending September 30, 1998 and
after. The fixed charge coverage ratio is the ratio of EBITDAR (net income
before interest, taxes, depreciation, amortization of intangibles, rental
expenses and certain one-time charges) for the prior twelve months to the sum of
interest expenses, rental expenses and dividends paid for the same period.
 
     Management of the Company believes that cash flow from operations and the
Comerica Credit Agreement will be adequate to fund the operations and growth
plans through 1998.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     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.
 
SEASONALITY AND INFLATION
 
     Management believes that operating results may be subject to seasonality.
In particular, the third quarter generally exhibits a slight tightening of
customer spending habits commensurate with summer vacations, back-to-school
needs and other factors. Conversely, the fourth quarter typically has a greater
percentage of rentals because of traditional holiday shopping patterns.
Management plans for these seasonal variances and takes particular advantage of
the fourth quarter with product promotions, marketing campaigns, and employee
incentives. Because many of the Company's expenses do not fluctuate with
seasonal revenue changes, such revenue changes may cause fluctuations in the
Company's quarterly earnings.
 
                                       20
<PAGE>   23
 
     The rate of inflation as measured by changes in the average consumer price
index has not historically had a material effect on the revenue, expenses or
operating results of the Company because the Company has been able to charge
higher rental rates for its merchandise to offset the modest inflationary
pressures. There can be no assurance, however, that inflation will not affect
future operating costs or consumer spending habits.
 
DEPRECIATION ISSUES; INCOME TAX CONSEQUENCES
 
     The IRS published a revenue ruling in July 1995 providing that a five-year
MACRS is the appropriate depreciation method for rental-purchase merchandise. In
August, 1997, federal tax legislation was enacted that included a provision
requiring use of three-year MACRS as the appropriate depreciation method for
rental-purchase merchandise. Prior to 1996, the Company used the income
forecasting method of depreciation for tax accounting, and management of the
Company believes that this method has been widely used throughout the
rental-purchase industry prior to the publication of either of these rulings.
The conversion to three-year MACRS has required that the cost of rental
merchandise be depreciated over a three-year period while revenue is recognized
over the contract term, typically 18 to 24 months. Management of the Company
believes that conversion to three-year MACRS will not negatively impact the
Company's financial condition or results of operations. The Company was audited
by the IRS for the years 1992 through 1995 and may be required to pay certain
additional taxes and interest and penalties thereon as a result of its use of
the income forecasting method in prior years. In December 1997, the Company
reached a partial settlement with the IRS. The settlement resulted in the
payment of $167,200 in additional income taxes and $50,300 in interest. The
Company is in the process of appealing the remaining unresolved issues. The
Company has converted to the MACRS method of depreciation for tax accounting
purposes only. Management of the Company believes that any such additional taxes
and interest and penalties thereon, if incurred, will not have a material
adverse effect on the Company's financial condition, liquidity or results of
operations.
 
OTHER MATTERS
 
     The Company's business is subject to regulation under state rental-purchase
laws. The management of the Company believes that its operations are in material
compliance with applicable state rental-purchase laws. Although certain proposed
federal regulations are under consideration, no federal legislation has been
enacted regulating rental-purchase transactions. However, there can be no
assurance that the proposed legislation, if enacted, would not have a material
adverse effect on the Company's results of operation and financial condition.
See "Business -- Government Regulation."
 
                                       21
<PAGE>   24
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
INFORMATION REGARDING CERTAIN DIRECTORS*
 
     Billy W. White, Sr.  Mr. White has been a director of the Company since
February 1998. From February 1998 until June 1998, Mr. White served as the
Company's Chief Executive Officer. From February 1998 to May 1998, Mr. White was
also President of the Company. Mr. White was President, Chief Executive Officer
and a director of RTO from August 1996 until February 1998. From 1975 until
August 1996, Mr. White was President and Chief Executive Officer of Action TV &
Appliance Rental, Inc. ("Action"), which he founded in 1975. Since August 1996,
Mr. White has been on the Board of Directors of the Association of Progressive
Rental Organizations ("APRO"), and he served as President of APRO's board from
August 1995 to August 1997. Mr. White has been a member of the Texas Association
of Rental Agents since 1987 and served as President of that organization from
1994 through 1995 and as its Chairman from 1996 through 1997. Mr. White has also
served on the Mesquite (Texas) Economic Development Foundation Board of
Directors from 1993 to the present. Mr. White is the father-in-law of K. David
Belt who was the Company's Chief Financial Officer during the past fiscal year.
 
     Edward W. Phifer, III.  Mr. Phifer has been a director of the Company since
February 1998. Mr. Phifer was a director RTO from December 1996 to February
1998. Mr. Phifer has been a director of E.J. Victor, Inc., a furniture
manufacturer located in Morganton, North Carolina, since 1990. Mr. Phifer has
served as Senior Vice President of E.J. Victor, Inc. since 1990, and since
January 1, 1998 Mr. Phifer has been the President of International Sales for
E.J. Victor, Inc. Prior to 1990, Mr. Phifer spent nine years in sales at
Henredon Furniture Company and 16 years as Vice President, director and a
partner at Hardwoods of Morganton, Inc. a lumber brokerage firm. Mr. Phifer is
the brother-in-law of George D. Johnson, Jr., Chairman of the Board of the
Company.
 
---------------
 
* The information required by Item 10 not contained herein is set forth in the
  definitive proxy statement relating to the 1998 Annual Meeting of Shareholders
  of Alrenco, Inc. filed with the Securities and Exchange Commission pursuant to
  Regulation 14A under the Securities Exchange Act of 1934, as amended. Such
  definitive proxy statement relates to a meeting of shareholders involving the
  election of directors and the portions therefrom required to be set forth in
  this Form 10-K by Item 10 not contained herein are incorporated herein by
  reference pursuant to General Instruction G(3) to Form 10-K.
                                       22
<PAGE>   25
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          HOME CHOICE HOLDINGS, INC.
 
                                          By:      /s/ JOHN T. EGELAND
                                            ------------------------------------
                                                      John T. Egeland
                                                  Chief Financial Officer
 
Dated: November 2, 1998
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                     DATE
                      ---------                                   -----                     ----
<C>                                                    <S>                            <C>
                /s/ JAMES G. STECKART                  Chief Executive Officer        November 2, 1998
-----------------------------------------------------    (principal executive
                  James G. Steckart                      officer)
 
                 /s/ JOHN T. EGELAND                   Chief Financial Officer        November 2, 1998
-----------------------------------------------------    (principal financial and
                   John T. Egeland                       accounting officer)
 
             /s/ GEORGE D. JOHNSON, JR.                Chairman of the Board          November 2, 1998
-----------------------------------------------------
               George D. Johnson, Jr.
 
               /s/ BILLY W. WHITE, SR.                 Director                       November 2, 1998
-----------------------------------------------------
                 Billy W. White, Sr.
 
              /s/ EDWARD W. PHIFER, III                Director                       November 2, 1998
-----------------------------------------------------
                Edward W. Phifer, III
 
                /s/ MICHAEL D. WALTS                   Director                       November 2, 1998
-----------------------------------------------------
                  Michael D. Walts
 
                /s/ THOMAS E. HANNAH                   Director                       November 2, 1998
-----------------------------------------------------
                  Thomas E. Hannah
</TABLE>
 
                                       23