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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------
Commission File Number 0-22026
RENT-WAY, INC.
(Exact name of registrant as specified in its charter)
--------------
PENNSYLVANIA 25-1407782
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
-------------------------------------------
(Address of principal executive offices)
(814) 455-5378
--------------
(Registrant's telephone number)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of February 11, 2003
---------------------------- -----------------------------------
Common Stock 25,685,538
RENT-WAY, INC.
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2002 (unaudited) and
September 30, 2002......................................................... 3
Condensed Consolidated Statements of Operations, three months ended December
31, 2002 and 2001 (unaudited).............................................. 4
Condensed Consolidated Statements of Cash Flows, three months ended December
31, 2002 and 2001 (unaudited).............................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 21
PART II OTHER INFORMATION
Item 4. Controls and Procedures......................................................... 23
Item 6. Exhibits and Reports on Form 8-K................................................ 23
Signatures............................................................................... 24
Certifications........................................................................... 25
2
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
DECEMBER 31, SEPTEMBER 30,
2002 2002
--------------- -------------
(unaudited)
ASSETS
Cash and cash equivalents............................. $ 6,017 $ 7,295
Prepaid expenses...................................... 9,895 10,361
Income tax receivable................................. 4,407 4,191
Rental merchandise, net............................... 179,140 147,608
Rental merchandise deposits and credits due from vendors 919 995
Property and equipment, net........................... 46,090 49,190
Goodwill.............................................. 188,499 188,499
Deferred financing costs, net......................... 1,956 1,870
Intangible assets, net................................ 1,385 1,700
Other assets.......................................... 4,566 4,176
Assets held for sale (Note 3)......................... 100,686 94,909
--------- ---------
Total assets.................................. $ 543,560 $ 510,794
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable...................................... $ 45,091 $ 17,643
Liabilities held for sale (Note 3).................... 2,461 3,286
Other liabilities..................................... 78,074 76,061
Deferred tax liability................................ 1,650 -
Debt.................................................. 285,037 277,207
--------- ---------
Total liabilities............................. 412,313 374,197
Contingencies (See Note 11)........................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000,000 shares
authorized;
no shares issued and outstanding................. -- --
Common stock, without par value; 50,000,000 shares
authorized; 25,685,538 and 24,516,478 shares issued
and
outstanding, respectively........................ 302,218 302,218
Common stock warrants; 100,000 outstanding............ 644 644
Loans to shareholders................................. (34) (282)
Accumulated other comprehensive income................ 551 787
Accumulated deficit................................... (172,132) (166,770)
--------- ---------
Total shareholders' equity.................... 131,247 136,597
--------- ---------
Total liabilities and shareholders' equity.... $ 543,560 $ 510,794
========= =========
The accompanying notes are an integral part of these financial statements.
3
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
--------------------------------------
2002 2001
---------------- ----------------
REVENUES:
Rental revenue.................................. $ 96,787 $ 96,840
Prepaid phone service revenue................... 9,261 9,203
Other revenues.................................. 13,790 14,560
-------- --------
Total revenues........................... 119,838 120,603
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise.......................... 28,693 33,874
Property and equipment...................... 5,656 6,398
Amortization of intangibles................. 478 615
Cost of prepaid phone service................... 5,727 5,482
Salaries and wages.............................. 33,745 30,486
Advertising, net................................ 8,760 10,320
Occupancy....................................... 7,660 8,033
Other operating expenses........................ 24,625 24,089
-------- --------
Total costs and operating expenses...... 115,344 119,297
-------- --------
Operating income........................ 4,494 1,306
OTHER INCOME (EXPENSE):
Interest expense................................ (11,168) (16,569)
Interest income................................. 11 213
Other income.................................... 1,487 1,778
-------- --------
Loss before income taxes................. (5,176) (13,272)
Income tax expense.............................. 1,430 10,622
-------- --------
Loss before cumulative effect of change in
accounting principle and discontinued operations (6,606) (23,894)
Cumulative effect of change in accounting
principle.................................... -- (41,527)
Income from discontinued operations............. 1,245 1,199
-------- --------
Net loss ................................ $ (5,361) $(64,222)
======== ========
LOSS PER COMMON SHARE (NOTE 5):
Basic loss per common share:
Loss before cumulative effect of change in
accounting principle and discontinued
operations.............................. $ (0.26) $ (0.97)
======== ========
Net loss................................... $ (0.21) $ (2.62)
======== ========
Diluted loss per common share:
Loss before cumulative effect of change in
accounting principle and discontinued
operations.............................. $ (0.26) $ (0.97)
======== ========
Net loss................................... $ (0.21) $ (2.62)
======== ========
Weighted average common shares outstanding:
Basic...................................... 25,686 24,512
======== ========
Diluted.................................... 25,686 24,512
======== ========
The accompanying notes are an integral part of these financial statements.
4
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended
December 31,
---------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (5,361) $ (64,222)
Income from discontinued operations 1,245 1,199
--------- ---------
Loss from continuing operations (6,606) (65,421)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 34,988 40,887
Deferred income taxes 1,430 (6,786)
Write-off of deferred financing costs -- 3,810
Goodwill impairment -- 58,935
Write-off of property and equipment 102 537
Gain on sale of assets (195) (544)
Changes in assets and liabilities:
Prepaid expenses 466 5,058
Rental merchandise (53,900) (64,300)
Rental merchandise deposits and credits due from
vendors 75 558
Income tax receivable 4 986
Other assets (392) 1,624
Accounts payable 3,875 (521)
Other liabilities 2,056 (11,901)
--------- ---------
Net cash used in continuing operations (18,097) (37,078)
Net cash provided by (used in) discontinued
operations (133) 1,199
--------- ---------
Net cash used in operating activities (18,230) (35,879)
--------- ---------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (259) (885)
Purchases of property and equipment (1,991) (3,316)
Proceeds from sale of stores and other assets 303 867
--------- ---------
Net cash used in investing activities (1,947) (3,334)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings 174,000 205,000
Payments on borrowings (168,858) (176,272)
Book overdraft 13,509 10,120
Deferred financing costs -- (2,643)
Proceeds from common stock and warrant issuance -- 26
Interest on shareholder loans (3) --
Payment of loans by directors 251 351
Interest on loans to directors -- (18)
--------- ---------
Net cash provided by financing activities 18,899 36,564
--------- ---------
Decrease in cash (1,278) (2,649)
--------- ---------
Cash and cash equivalents at beginning of period 7,295 10,515
--------- ---------
Cash and cash equivalents at end of period $ 6,017 $ 7,866
========= =========
The accompanying notes are an integral part of these financial statements.
5
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. Rent-Way, Inc., (the "Company" or "Rent-Way") is a
corporation organized under the laws of the Commonwealth of Pennsylvania. The
Company operates a chain of rental-purchase stores that rent durable household
products such as home entertainment equipment, furniture, computers, major
appliances and jewelry to consumers on a weekly or monthly basis. Commencing
January 1, 2000, the Company also provides prepaid local phone service to
consumers on a monthly basis through its majority-owned subsidiary, dPi
Teleconnect, LLC ("DPI"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-Q, and therefore, do not include all information and notes necessary for
a fair presentation of financial position, results of operations and cash flows
in conformity with accounting principles generally accepted in the United States
of America. In the opinion of management, all adjustments which, except as
discussed herein, consist of normal recurring adjustments and are necessary for
a fair statement of the financial position, results of operations and cash flows
of the Company have been made. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The condensed consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
inter-company transactions and balances have been eliminated.
These financial statements and the notes thereto should be read in conjunction
with the Company's audited financial statements included in its Annual Report on
Form 10-K for the fiscal year ended September 30, 2002.
DISCONTINUED OPERATIONS. On December 17, 2002, the Company entered into a
definitive purchase agreement to sell 295 stores to Rent-A-Center. Accordingly,
for financial statement purposes, the assets, liabilities, results of operations
and cash flows of this component have been segregated from those of continuing
operations and are presented in the Company's financial statements as
discontinued operations (see Note 3).
RECLASSIFICATIONS. Certain amounts in the September 30, 2002, Consolidated
Balance Sheet, Condensed Consolidated Statement of Operations for the
three-months ended December 31, 2001, and Condensed Consolidated Statement of
Cash Flows for the three months ended December 31, 2001, were reclassified to
conform to the December 31, 2002, presentation.
2. LIQUIDITY:
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's current credit
facility expires December 31, 2003. The Company is in discussions with its
lenders to restructure or replace the credit facility. There can be no assurance
that the Company will be successful in amending or replacing the facility. The
Company's ability to operate as a going concern is largely dependent on its
ability to successfully negotiate with its bank lenders an amendment or
restructuring of the Company's existing credit facility.
3. DISCONTINUED OPERATIONS:
On December 17, 2002, the Company entered into a definitive purchase agreement
to sell 295 stores to Rent-A-Center, Inc. for approximately $101,500. These
stores are all included in the household rental segment. The transaction closed
on February 8, 2003. The final purchase price for the stores will be
approximately $100,400. As required under the Company's credit agreement, all
proceeds of the sale, net of transaction costs, store closing and similar
expenses, will be used to pay existing bank debt. Of the approximate $100,400
purchase price, $10,000 is being held back by Rent-A-Center to secure the
Company's indemnification obligations, $5,000 for 90 days following closing and
$5,000 for 18 months following closing. Also, there is a $24,500 escrow held by
National City Bank for 180 days to fund transaction expenses. The assets being
sold include rental merchandise, vehicles under capital leases and certain fixed
assets. Vehicle lease obligations will be paid by the Company out of the
proceeds from the sale. The Company will record receivables for these based upon
its ability to fully satisfy the indemnification obligations of the agreement.
Subsequent to the completion of the sale, the Company will operate 766 stores in
33 states.
This asset group is distinguishable as a component of the Company and classified
as held for sale in accordance with Statement of
6
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
3. DISCONTINUED OPERATIONS, continued:
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment on Disposal of Long-Lived Assets." Direct costs to transact the sale
are comprised of, but not limited to, broker commissions, legal and title
transfer fees and closing costs, and will reduce any gain on sale.
In connection with the sale of the stores, the Company has and will continue to
incur additional direct costs related to the sale and exit costs related to
these discontinued operations. Costs associated with an exit activity include,
but are not limited to termination benefits, costs to terminate a contract that
is not a capital lease and costs to consolidate facilities or relocate
employees, in accordance with Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." There will be a transition period as defined in the asset purchase
agreement comprised of a period of thirty days from the date immediately
following the closing date. During this transition period, the Company will be
liable for certain exit costs attributable to the operation and transition of
the purchased stores, including, but not limited to, rent, utilities, costs
applicable to office equipment, costs associated with vehicles, employee
payroll, health and other employee benefits, workers compensation claims, health
care claims and all other costs related to transition personnel. The Company
will accrue for employee separation costs as costs are incurred. These costs
will be included in the results of discontinued operations in accordance with
SFAS 146.
Related operating results have been reported as discontinued operations in
accordance with SFAS 144. The Company has reclassified the results of operations
of the component to be disposed for the prior period in accordance with
provisions of SFAS 144. There have been no corporate expenses (including
advertising expense) included in expenses from discontinued operations. Revenues
and net income from the discontinued operations were as follows:
Three Months Ended Three Months Ended
December 31,2002 December 31,2001
---------------------- --------------------
Revenues $ 31,290 $ 33,501
Expenses from discontinued operations (including (28,679) (32,302)
exit costs)
Rental merchandise fair value adjustment (1,366) --
Income tax benefit -- --
---------- -----------
Net income from discontinued operations $ 1,245 $ 1,199
========= ==========
Assets and liabilities of the stores held for sale included in the Condensed
Consolidated Balance Sheet are as follows:
December 31, September 30,
2002 2002
-------- --------
Assets:
Rental Merchandise, net(1) $ 54,792 $ 48,456
Goodwill 41,291 41,291
Property and equipment, net 4,456 5,126
Costs of sale 110 --
Utility Deposits 37 36
-------- --------
$100,686 $ 94,909
======== ========
Liabilities:
Vehicle lease obligation $ 2,363 $ 3,181
Customer deposits 98 105
-------- --------
$ 2,461 $ 3,286
======== ========
(1) Rental merchandise and property and equipment classified as held for sale
are long-lived assets and have not been depreciated while classified as
held for sale in accordance with SFAS 144. Held for sale assets are
carried at the lower of carrying amount or fair value. The Company
recorded a write-down for rental merchandise to fair value of $1.4
million, which is reported in Income from Discontinued Operations in the
Condensed Consolidated Statement of Operations for the three months ended
December 31, 2002.
7
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
3. DISCONTINUED OPERATIONS, continued:
Property and equipment held for sale was comprised of the following:
December 31, September 30,
2002 2002
------- -------
Leasehold improvements $ 3,290 $ 3,274
Computer equipment 592 596
Furniture and fixtures 819 818
Vehicles 5,500 5,500
Accumulated depreciation (5,745) (5,062)
------- -------
Property and equipment, net $ 4,456 $ 5,126
======= =======
4. BUSINESS RATIONALIZATION:
The Company periodically closes under-performing stores and takes other actions
to maximize its overall profitability. In connection with the closing of stores
and taking other actions, it incurs employee severance, fixed asset write offs,
lease termination costs and other direct exit costs related to these activities.
The Company recorded employee severance costs of $127 in the three months ended
December 31, 2002. The net amount of these costs were as follows:
Fixed Lease
Asset Termination
Write Offs Costs Total
---------- -------- --------
Balance at September 30, 2001................ $ -- $ 5,084 $ 5,084
Fiscal 2002 Provision ....................... 373 458 831
Amount utilized in fiscal 2002............... (373) (3,407) (3,780)
-------- -------- --------
Balance at September 30, 2002................ $ -- 2,135 $ 2,135
--------- -------- --------
Fiscal 2003 Provision (Q1)................... 10 92 102
Amount utilized in Fiscal 2003, (Q1)......... (10) (392) (402)
--------- -------- --------
Balance at December 31, 2002................. $ -- $ 1,835 $ 1,835
========= ======== ========
Lease termination costs will be paid according to the contract terms.
5. LOSS PER COMMON SHARE:
Basic loss per common share is computed using loss available to common
shareholders divided by the weighted average number of common shares
outstanding. Diluted loss per common share is computed using loss available to
common shareholders and the weighted average number of shares outstanding
adjusted for the potential impact of options and warrants where the effects are
dilutive. Because operating results were a loss for the three-month period ended
December 31, 2002, and 2001, basic and diluted loss per common share were the
same.
8
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
5. LOSS PER COMMON SHARE, continued:
The following table reconciles the basic and diluted loss per common share
computation:
Three Months Ended
December 31,
(unaudited)
2002 2001
-------- --------
COMPUTATION OF LOSS PER SHARE:
Loss before cumulative effect of change in accounting principle and
discontinued operations.......................................... $ (6,606) $(23,894)
Cumulative effect of change in accounting principle................. -- (41,527)
Discontinued operations............................................. 1,245 1,199
-------- --------
Net loss............................................................ $ (5,361) $(64,222)
======== ========
Weighted average common shares used in calculating basic loss
per share........................................................ 25,686 24,512
Add incremental shares representing:
Shares issuable upon exercise of stock options, warrants and
escrowed shares (1).............................................. -- --
-------- --------
Weighted average number of shares used in calculation of
diluted loss per share (in 000's)................................ 25,686 24,512
======== ========
BASIC loss per share
Loss before cumulative effect of change in accounting
principle and discontinued operations............................ $ (0.26) $ (0.97)
Cumulative effect of change in accounting principle ................ -- (1.69)
Discontinued operations............................................. 0.05 0.04
-------- --------
Net loss............................................................ $ (0.21) $ (2.62)
======== ========
DILUTED loss per share
Loss before cumulative effect of change in accounting
principle and discontinued operations............................ $ (0.26) $ (0.97)
Cumulative effect of change in accounting principle ................ -- (1.69)
Discontinued operations............................................. 0.05 0.04
-------- --------
Net loss............................................................ $ (0.21) $ (2.62)
======== ========
(1) Including the effects of these items for the periods ended 2002 and 2001
would be antidilutive. Therefore, 7,854 and 2,264 of antidilutive common
shares are excluded from consideration in the calculation of diluted loss
per share for the three-months ended December 31, 2002, and December 31,
2001, respectively.
6. GOODWILL -- ADOPTION OF STATEMENT 142:
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations,
ceases upon adoption. Thus, no amortization for such goodwill and indefinite
lived intangibles was recognized in the accompanying Condensed Consolidated
Statements of Operations for the three-months ended December 31, 2002 and 2001.
On an annual basis and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for impairment, and a
write down may be necessary.
In accordance with the provisions of SFAS 142, during fiscal 2002 the Company
performed, with the assistance of an independent valuation firm, the impairment
test of the carrying value of goodwill. This assessment resulted in an
impairment write-down of $58,900, recorded in "Cumulative Effect of Change in
Accounting Principle" in the amount of $41,500 (net of $17,400 in income taxes).
In accordance with the transitional implementation guidance of SFAS 142, the
write down was recorded retroactive to the Company's first quarter results of
operations.
The Rent-A-Center transaction (see Note 3) is an event that triggers an
impairment assessment under the provisions of SFAS 142. The Company performed an
impairment test of the carrying value of goodwill remaining after allocation of
the fair value of goodwill to the assets held for sale as set forth in the
Rent-A-Center purchase agreement as of December 17, 2002, the date of the
agreement. There is no impairment of goodwill as a result of this assessment.
9
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
6. GOODWILL -- ADOPTION OF STATEMENT 142, continued:
The following table shows the net carrying value of goodwill as of December 31,
2002, and September 30, 2002, for the Company's segments:
Prepaid
Household Telephone Total
Rental Segment Service Segment Segments
-------------- --------------- --------
Goodwill $ 181,905 $ 6,594 $188,499
Goodwill, assets held for sale 41,291 -- 41,291
--------- ---------- --------
$ 223,196 $ 6,594 $229,790
========= ========= ========
The following table reflects the components of amortizable intangible assets at
December 31, 2002:
Net
Purchase Cumulative Carrying
Amount Amortization Amount
------------ ------------- ------------
Amortizable intangible assets:
Non-compete agreements $ 2,630 $ (1,823) $ 807
Customer contracts 1,164 (814) 350
Exclusivity agreement 2,050 (1,822) 228
------------ ------------ ------------
$ 5,844 $ (4,459) $ 1,385
============ ============ ============
There were no changes to the amortization methods and lives of the amortizable
intangible assets.
7. DEBT:
Debt consists of the following:
December September
31, 2002 30, 2002
--------- ---------
Senior credit facility.......... $ 284,954 $ 277,121
Notes Payable................... 83 86
--------- ---------
$ 285,037 $ 277,207
========= =========
The Company's credit facility dated September 23, 1999, as amended November 17,
1999; December 6, 1999; December 7, 1999; June 28, 2000; October 5, 2001 and
June 24, 2002 is co-led by National City Bank of Pennsylvania, acting as
administrative agent, Bank of America, N.A., acting as documentation agent, and
Bank of Montreal and Harris Trust and Savings Bank, acting as syndication
agents, provided for loans of $284,954 (revolving notes of $36,098 and Terms
Loans A $82,981, and Term Loans B $165,875). The credit facility is secured by
substantially all of the Company's assets.
Under the credit facility, the Company may borrow funds under a base rate option
plan or euro-rate option plan. Under the base rate option plan, the Company may
borrow funds based on a spread of prime rate plus 450 to 500 basis points. In
addition, payment-in-kind interest at a rate of 200 to 500 basis points per
annum is due and payable in cash on the maturity date of the term loans. The
payment-in-kind margin is determined based on the ratio of debt to cash flows
from operations during the period.
Under the euro-rate option, the Company may borrow funds based on a spread of
the LIBOR plus 550 to 600 basis points. In addition, payment-in-kind interest at
a rate of 200 to 500 basis points per annum is due and payable in cash on the
maturity date of the term loans. The payment-in-kind margin is determined based
on the ratio of debt to cash flows from operations during the period.
Borrowings under the euro-rate option require the Company to select a fixed
interest period during which the euro-rate is applicable with the borrowed
amount not to be repaid prior to the last day of the selected interest period.
In addition, borrowing tranches under the euro-rate option must be in multiples
of $1,000. Commitment fees associated with the credit facility are in a range
from 0.375% to 0.500% for each bank's unused commitment.
The principal amount of the Term Notes A under the credit facility is payable in
quarterly payments due on the last day of each
10
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
7. DEBT, continued:
December, March, June, and September, beginning with the quarter ended December
31, 2001, as follows:
Quarters ending on following date Amount of principal payment due on payment date
- --------------------------------- -----------------------------------------------
12/31/01 through 6/30/02 $5,722
9/30/02 through 6/30/03 $7,153
9/30/03 $8,583
12/31/03 remaining principal balance outstanding
The principal amount of Term Notes B under the amended facility is payable in
eight quarterly payments due on the last day of each December, March, June, and
September beginning with the quarter ended December 31, 2001, and continuing
through the quarter ending September 30, 2003, each payment equal to $444. The
remaining principal balance is due on December 31, 2003.
The credit facility requires the Company to meet certain financial covenants and
ratios including maximum leverage, minimum interest coverage, minimum net worth,
fixed charge coverage, and rental merchandise usage ratios. In addition, the
Company must meet requirements regarding monthly, quarterly, and annual
financial reporting. The credit facility also contains non-financial covenants,
which restrict actions of the Company with respect to the payment of dividends,
acquisitions, mergers, disposition of assets or subsidiaries, issuance of
capital stock, and capital expenditures. The Company may at any time repay
outstanding borrowings, in whole or part, without premium or penalty, except
with respect to restrictions identified with the selection of the euro rate
option. As of December 31, 2002, the Company was in compliance with all
covenants contained in the credit facility.
In the event that the leverage ratio as measured at June 30, 2003, for the four
fiscal quarters then ended, is equal to or greater than 2.25 to 1.00, the
Company will issue to the lenders warrants (the "Lender Warrants") for the
purchase of the Company's common stock and will deliver the Registration Rights
Agreement in the form provided for in the Lender Warrants. The shares of common
stock that will be obtained by the lenders upon the exercise of the Lender
Warrants shall equal 15% of the total outstanding voting power of all the
outstanding shares of the Company immediately prior to the exercise of the
Lender Warrants. The Lender Warrants shall be allocated to the lenders based
upon each lender's ratable share. The Company shall at all times maintain a
sufficient number of authorized shares of its common stock to permit the
exercise by the lenders of the conversion of the Lender Warrants into shares of
the Company's common stock. The Company will be required to issue the Lender
Warrants based on the current leverage ratio.
As a result of the amendment of the credit facility that occurred on October 5,
2001, the Company wrote off a portion of the bank fees associated with previous
amendments to the credit facility. The amount of deferred finance costs was
$4,089 of which $3,368 related to the term loans and was recorded originally as
an extraordinary item and $442 relating to the revolving notes and was recorded
in interest expense on the Company's Consolidated Statement of Operations for
the year ended September 30, 2002.
Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections." The Company
reclassified the write-off of $3,368 deferred finance costs originally recorded
as an extraordinary item to interest expense in the three months ended December
31, 2001.
As of December 31, 2002, the Company's credit facility debt under both the
euro-rate option and the base-rate options plans were as follows:
BORROWING OPTION PLAN AMOUNT RATE
- --------------------- ------ ----
Euro-rate tranche................. $ 82,980 6.90000%
Euro-rate tranche................. 165,875 7.40000%
Euro-rate tranche................. 10,000 7.27000%
Euro-rate tranche................. 5,000 7.32652%
Euro-rate tranche................. 10,000 6.92000%
Base-rate tranche................. 11,099 8.75000%
---------
Total $ 284,954
=========
The rates listed in the above table do not include payment-in-kind interest,
which is interest accrued but not paid currently. As of December 31, 2002,
payment-in-kind interest is accruing at 450 basis points on the Term Loans A and
revolving notes and 500 basis points on the Term Loans B.
11
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
7. DEBT, continued:
On December 13, 2002, the Company amended its credit facility. This amendment
modified the maximum leverage ratio, the minimum interest coverage ratio, the
minimum consolidated net worth and the fixed charge coverage ratio covenants for
periods after December 31, 2002, through December 31, 2003. In consideration for
the amendment to the credit facility, the Company paid $500 as an amendment fee.
The amendment fee was payable the earlier of the receipt of proceeds from
material asset sales, or December 31, 2003. In the event the Company fails to
comply with its covenants in the credit facility, it would be unable to borrow
under the facility. The Company believes it will be able to comply with
covenants based upon its fiscal 2003 projections.
On January 2, 2003, the Company amended its credit facility. The amendment
provided for a supplemental $10,000 term loan to the Company, which is payable
in full on the earlier of the Rent-A-Center transaction closing date or March
31, 2003. In consideration for the amendment to the credit facility, the Company
paid $250 as an amendment fee. This amendment fee was payable the earlier of the
receipt of proceeds from material asset sales, or December 31, 2003.
Upon closing of the Rent-A-Center transaction, the Company shall fund $24,500
into a cash collateral account to be used by the Company for the payment of
certain expenses incurred as a result of the sale. In addition, the Company must
make a mandatory prepayment of principal equal to the net after-tax cash
proceeds of the sale less the amount funded into the cash collateral account.
The mandatory prepayment shall be applied first to the outstanding principal
balance of the supplemental term loans advanced in the January 2 amendment,
second to the revolving credit loans in the amount of $5,000, and third ratably
to the outstanding principal balance of the Term Loans A and B. Any subsequent
proceeds received from the Rent-A-Center transaction shall be applied ratably to
the outstanding principal balance of Term Loans A and B.
8. SHAREHOLDERS' EQUITY:
On April 18, 2002, the Company sold 1.0 million restricted common shares and
warrants to acquire 100,000 common shares to Calm Waters Partnership and two
other investors (the "Investors") for $6,000. The warrants have an exercise
price of $9.35 per share, subject to adjustment. The Company is required to
issue 333,000 additional warrants to the Investors on or about April 1, 2003, at
an expected exercise price of $1.50 per share, because it failed to meet certain
financial benchmarks.
9. DERIVATIVE FINANCIAL INSTRUMENTS:
At December 31, 2002, the Company had interest rate swaps on a notional debt
amount of $163,100 and a fair market value of ($8,507). The variable pay
interest rate ranges from 5.09% to 6.97%. The maturity dates run through August
2005.
The Company's interest rate swaps do not meet the qualifications for hedge
accounting treatment under Statement of Financial Accounting Standards No. 133.
For the quarter ended December 31, 2002, the Company's positive change in the
fair market value of the interest rate swap portfolio of $1,205 was recorded to
other income/expense in the Company's Condensed Consolidated Statements of
Operations.
10. COMPREHENSIVE INCOME:
Comprehensive income encompasses net income and changes in the components of
accumulated other comprehensive income not reflected in the Company's Condensed
Consolidated Statements of Operations during the periods presented. Accumulated
other comprehensive income consists of the transition asset recorded at the time
of adoption of SFAS No. 133.
12
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
10. COMPREHENSIVE INCOME, continued:
Other Comprehensive Accumulated Other
Income Comprehensive Income
------ --------------------
Net loss for the three
months ended December 31, 2002 $ (5,361) $ --
SFAS 133 Transition amount 787 787
Amortization of SFAS 133
Transition amount (236) (236)
-------- ----------
Total for three months ended
December 31, 2002 $ (4,810) $ 551
======== ==========
11. CONTINGENCIES:
The Company, its firm of independent accountants, and certain of its current and
former officers were served with a consolidated class action complaint filed in
the U.S. District Court for the Western District of Pennsylvania. The complaint
alleges that, among other things, as a result of accounting irregularities, the
Company's fiscal 1998, 1999, and 2000 financial statements were materially false
and misleading thus constituting violations of federal securities laws by the
Company, by its firm of independent accountants and by certain officers. The
action alleges that the defendants violated Sections 10(b) and/or Section 20(a)
of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The action
seeks damages in unspecified amounts. The action purports to be brought on
behalf of purchasers of the Company's common stock during various periods, all
of which fall between December 10, 1998, and October 27, 2000. Rent-Way filed a
motion to dismiss the complaint, which was denied. Discovery regarding class
certification issues has begun and is continuing.
Certain of the Company's officers and directors and the Company, as nominal
defendant, have been sued in a shareholder derivative action brought on behalf
of the Company in the U.S. District Court for the Western District of
Pennsylvania. The derivative complaint purports to assert claims on behalf of
the Company against the defendants for violation of duties asserted to be owed
by the defendants to the Company and which relate to the events which gave rise
to the purported class actions described above. All proceedings in the
derivative case have been stayed pending the resolution of the class action
lawsuit.
Pursuant to its bylaws, the Company is obligated under certain circumstances to
indemnify its officers and directors for the costs they incur as a result of the
investigations and lawsuits and against claims within the lawsuits.
The Company is presently unable to predict or determine the final outcome of, or
to estimate the amounts or potential range of loss with respect to, the
investigations and the lawsuits described above. Management believes that an
adverse outcome with respect to such proceedings could have a material adverse
impact on the Company's financial position, results of operations or cash flows.
The Company is subject to legal proceedings and claims in the ordinary course of
its business that have not been finally adjudicated. Certain of these cases have
resulted in initial claims totaling $14,042. However, all but $562 such claims
are, in the opinion of management, covered by insurance policies or
indemnification agreements, or create only remote potential of any liability
exposure to the Company, and therefore should not have a material effect on the
Company's financial position, results of operations or cash flows. Additionally,
threatened claims exist for which management is not yet able to reasonably
estimate a potential loss. In management's opinion, none of these threatened
claims will have a material adverse effect on the Company's financial position,
results of operations or cash flows.
The Company is self-insured for certain losses related to workers' compensation,
employee medical, vehicle and general liability.
The Company has purchased stop-loss coverage in order to limit its exposure to
any significant levels of claims. Self-insurance reserves are accrued based upon
the Company's estimates of the aggregate liability for uninsured claims incurred
using certain actuarial assumptions followed in the insurance industry and the
Company's historical experience. The Company has obtained letters of credit of
$6,000 to guarantee the payment of future claims.
13
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
12. INCOME TAXES:
During the first quarter of fiscal 2003, the Company recorded income tax expense
of $1,430 due to the Company's inability to book the reversal of the deferred
tax liability associated with tax deductible goodwill to offset a portion of its
deferred tax asset following the adoption of SFAS 142. The deferred tax asset,
net of liabilities excluding goodwill, increased from $63,944 at September 30,
2002, to $65,433 at December 31, 2002. This represented an increase of $1,489
for the quarter. A full valuation allowance has been provided against the
deferred tax asset. A deferred tax liability of $1,430 has been established for
goodwill.
13. SEGMENT INFORMATION:
Rent-Way is a national rental-purchase chain that provides a variety of services
to its customers including rental of household items and prepaid local telephone
service on a week-by-week or a month-by-month basis. The Company has determined
that its reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by product category. The
Company's reportable segments are household rentals and prepaid telephone
service. Its household rental segment rents name brand merchandise such as
furniture, appliances, electronics and computers on a weekly, biweekly,
semimonthly or bimonthly basis. Its prepaid telephone service segment provides a
local dial tone on a month-by-month basis.
The financial results of the Company's segments follow the same accounting
policies as described in "Summary of Significant Accounting Policies" (see Note
1).
Household Prepaid
Rental Telephone Inter-segment
For the three months ended December 31, 2002 Service Service Activity Total
- -------------------------------------------- --------------- ------------ ------------ ------------
Total revenue................... $ 110,988 $ 9,275 $ (425) $ 119,838
=============== ============ ============ ============
Operating income (loss)......... $ 4,678 $ (345) $ 161 $ 4,494
=============== ============ ============ ============
Net loss........................ $ (5,105) $ (387) $ 131 $ (5,361)
=============== ============ ============ ============
Total Assets.................... $ 542,899 $ 4,500 $ (3,839) $ 543,560
=============== ============ ============ ============
14. SUBSEQUENT EVENT:
On February 8, 2003, the Company closed the sale of 295 stores to Rent-A-Center,
Inc. for $100,400, of which $10,000 is being held back by Rent-A-Center to
secure Rent-Way's indemnification obligations, $5,000 for 90 days and $5,000 for
18 months. As required under the Company's credit agreement, all proceeds of the
sale, net of transaction, store closing and similar expenses, will be used to
pay existing bank debt. Subsequent to the sale, Rent-Way operates 766 stores in
33 states.
15. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require new prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Certain sections of this Statement shall be effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. All other sections of this Statement
are effective for financial statements for fiscal years ending after December
15, 2002. The Company is currently evaluating the provisions of this Statement.
In June 2001, FASB issued Statement of Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 addresses
financial accounting and reporting obligations associated with the retirement of
tangible, long-lived assets and the associated asset retirement costs. The
Company adopted this Standard effective October 1, 2002. This Standard had no
impact to these financial statements upon its adoption.
14
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
(Unaudited)
15. RECENT ACCOUNTING PRONOUNCEMENTS, continued:
On November 25, 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34". The Interpretation requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that obligation. The Company has
evaluated the provisions of this Interpretation and determined it does not have
an impact on these financial statements upon its adoption.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to improve financial
reporting by enterprises involved with variable interest entities. This
interpretation applies to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable
interest entities that are not currently consolidated and is evaluating the
provisions of this interpretation.
15
RENT-WAY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Effective upon closing of the Rent-A-Center transaction, Rent-Way operates 766
stores located in 33 states. The Company offers quality brand name home
entertainment equipment, computers, furniture, appliances, and jewelry to
customers under full-service rental-purchase agreements that generally allow the
customer to obtain ownership of the merchandise at the conclusion of an agreed
upon rental period. The Company also provides prepaid local phone service to
consumers on a monthly basis through its majority-owned subsidiary, dPi
Teleconnect, L.L.C. ("DPI").
USE OF ESTIMATES IN OUR FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews its estimates,
including those related to litigation, liability for self-insurance, impairment
of goodwill and other intangibles, based on currently available information.
Changes in facts and circumstances may result in revised estimates.
SIGNIFICANT ACCOUNTING POLICIES
Revenue. Rental merchandise is rented to customers pursuant to rental
agreements, which provide for either weekly, biweekly, semi-monthly or monthly
rental payments collected in advance. Revenue is recognized as collected, not
over the rental term, since at the time of collection the rental merchandise has
been placed in service and costs of installation and delivery have been
incurred. This method of revenue recognition does not produce materially
different results than if rental revenue was recognized over the weekly,
biweekly, semi-monthly or monthly rental term.
Rental Merchandise Depreciation. The Company uses the units of activity
depreciation method for all rental merchandise except computers. Under the units
of activity method, rental merchandise is depreciated as revenue is collected.
Thus rental merchandise is not depreciated during periods when it is not on rent
and therefore not generating rental revenue. Personal computers, added to the
Company's product line in June 1999, are principally depreciated on the
straight-line basis beginning on acquisition date over 12 months to 24 months,
depending on the type of computer. Write-offs of rental merchandise arising from
customers' failure to return merchandise, obsolescence and losses due to
excessive wear and tear of merchandise are recognized using the direct write-off
method, which is materially consistent with the results that would be recognized
under the allowance method.
Prepaid Phone Service. Prepaid phone service is provided to customers on a
prepaid month-to-month basis. Prepaid phone service revenues are comprised of
monthly service revenues and activation revenues. Monthly service revenues are
recognized on a straight-line basis over the related monthly service period,
commencing when the service period begins. The cost of monthly service is also
recognized over the monthly service period and is included in "cost of prepaid
phone service" in the Statement of Operations. Activation revenues are
recognized on a straight-line basis over the average life of the customer
relationship. Activation costs are expensed as incurred and are included in
"cost of prepaid phone service" in the Statement of Operations.
Closed Store Reserves. From time to time, the Company closes or consolidates
retail stores. An estimate is recorded of the future obligation related to
closed stores based upon the present value of the future lease payments and
related commitments, net of estimated sublease income. At December 31, 2002 and
2001, the reserve for closed stores was $1.8 million and $4.5 million,
respectively, with the increase primarily related to stores closed during the
period. If the estimates related to sublease income are not correct, the actual
liability may be more or less than the liability recorded.
Company Insurance Programs. The Company is primarily self-insured for health,
workers' compensation, automobile, and general liability costs. The
self-insurance liability for health costs is determined actuarially based on
claims filed and an estimate of claims incurred but not yet reported. The
self-insurance liability for workers' compensation, automobile and general
liability costs are determined actuarially based on claims filed and company
experience. Losses in the workers' compensation, automobile and general
liability programs are pre-funded based on the insurance company's loss
estimates. Loss estimates will be adjusted for developed incurred losses at 18
months from policy inception and every 12 months thereafter. Retrospective
adjustments to loss estimates are recorded when determinable and probable.
16
RENT-WAY, INC.
Discontinued Operations. On December 17, 2002, the Company entered into a
definitive purchase agreement to sell 295 stores to Rent-A-Center, which
transaction has since closed. Accordingly, for financial statement purposes, the
assets, liabilities, results of operations and cash flows of this component have
been segregated from those of continuing operations and are presented in the
Company's financial statements as discontinued operations (see Note 3).
RESULTS OF OPERATIONS
The following discussion relates only to continuing operations.
The following table sets forth, for the periods indicated, certain items from
the Company's unaudited Condensed Consolidated Statements of Operations,
expressed as a percentage of revenues.
Three Months Ended
December 31,
-----------------
2002 2001
----- -----
REVENUES:
Rental revenue ....................................... 80.8% 80.3%
Prepaid phone service revenue ........................ 7.7 7.6
Other revenue ........................................ 11.5 12.1
----- -----
Total revenues .................................... 100.0 100.0
COSTS AND OPERATING EXPENSES:
Depreciation and amortization
Rental merchandise ................................... 23.9 28.1
Property and equipment ............................... 4.7 5.3
Amortization of other intangibles ................... 0.4 0.5
----- -----
Total depreciation and amortization ............... 29.0 33.9
Cost of prepaid phone service .......................... 4.8 4.6
Salaries and wages ..................................... 28.2 25.3
Advertising ............................................ 7.3 8.5
Occupancy .............................................. 6.4 6.7
Other operating expenses ............................... 20.5 20.0
----- -----
Total costs and operating expenses ................ 96.2 99.0
----- -----
Operating income .................................. 3.8 1.0
Interest expense ....................................... (9.3) (13.7)
Interest income ........................................ -- 0.2
Other income ........................................... 1.2 1.5
----- -----
Loss before income taxes .......................... (4.3) (11.0)
Income tax expense ..................................... 1.2 8.8
----- -----
Net loss before cumulative effect of change in
accounting principle and discontinued operations ....... (5.5) (19.8)
Cumulative effect of change in accounting principle -- (34.4)
Income from discontinued operations ........... 1.0 1.0
----- -----
Net loss ...................................... (4.5)% (53.2)%
===== =====
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
Total revenues. Total revenues decreased $0.8 million, or 0.6%, to $119.8
million from $120.6 million. The decrease is attributable to a decrease in
revenues of $0.8 million in the household rental segment. The $0.8 million
decrease in revenue in the household rental segment is due to the closing,
merging or selling of 13 under-performing stores since December 31, 2001.
Same store revenues increased 0.2%. This increase in same store revenues is due
to an increase in both rental revenues and early purchase option and sales
revenue offset by a decrease in fee revenue. The decrease in fee revenue was
8.3% as compared to the same period last year, and is attributed to fewer
rental-purchase agreements in the portfolio and reductions in liability damage
waiver fees due to customers shifting to the Preferred Customer Club program.
The Preferred Customer Club program is a fee-based membership program that
provides special loss and damage protection and, at a discounted rate, an
additional one year of service protection on rental merchandise, preferred
treatment in the event of involuntary job loss and accidental death and
dismemberment insurance. The increase in rental revenue was 1.0% as compared to
the same period last year. This increase is the result of improvements in
collections. Early purchase option and sales revenue increased 2.6% as compared
to the same period last year. The three-month period last year had a significant
amount of product sales to eliminate lower-end, lower-margin merchandise for the
Company's product mix. The Company lowered cash purchase prices on merchandise
identified as generating margins lower than industry norms.
Depreciation and Amortization. Depreciation expense related to rental
merchandise decreased to 23.9% as a percentage of total
17
RENT-WAY, INC.
revenues from 28.1%. In fiscal 2002, the Company took steps to increase gross
profit margins on rental contracts. These steps included increasing weekly
rental rates of personal computers to competitive market rates, implementing a
program to eliminate free Internet service by replacing it with a prepaid,
unlimited Internet product, increasing rental rates on certain core products to
competitive market rates, and introducing higher-end, higher-margin merchandise
to the stores. The Company expects depreciation expense as a percentage of total
revenues to continue decreasing during the remainder of fiscal 2003 as product
margins improve due to continued execution of the Company's pricing strategy.
Depreciation expense related to property and equipment decreased to 4.7% as a
percentage of total revenues from 5.3%. This decrease is primarily due to the
closing or selling of 13 stores since December 31, 2001. This decrease is also
due to the expiration of depreciation periods for certain fixed assets. Without
new store openings and store acquisitions, the Company is undertaking fewer
store build-out projects than in previous periods.
Amortization of goodwill and other intangibles decreased to 0.4% from 0.5% as a
percentage of total revenues. This is due to the expiration of the amortization
periods for certain non-compete agreements and customer contracts. Amortization
expense decreased $0.1 million as compared to the same period last year. On
October 1, 2001, the Company adopted SFAS 142. SFAS 142 requires the cessation
of amortization of goodwill and other indefinite-lived intangibles on the
balance sheet. Goodwill and other indefinite lived intangibles on the balance
sheet must then be tested for impairment at least annually.
Cost of Prepaid Phone Service. The cost of prepaid phone service increased to
$5.7 million or 4.8% of total revenues from $5.5 million, or 4.6% as a
percentage of total revenues. The cost of prepaid phone service as a percentage
of prepaid phone service revenue increased to 61.8% from 59.6%. The increase is
primarily due to the growth in the number of customer lines serviced and an
increase in the mix of new customers to the total customer base. The increase in
new customers results in higher costs due to ILEC activation fees. This increase
is also the result of the FCC allowing the ILECs to increase End User
Communication Line ("EUCL") monthly charges for residential lines during
mid-year calendar 2001. The Company has reacted to the EUCL increases by
adjusting retail prices to the customer based on targeted margins. These price
increases were implemented in the first quarter of fiscal 2002.
Salaries and Wages. Salaries and wages increased by $3.2 million to $33.7
million from $30.5 million. A portion of this increase, $1.5 million, is due to
a new bonus program implemented during the first quarter of 2003. This new bonus
program better aligns the store and field management incentive programs with the
Company's strategic objectives. In addition, the Company initiated an employee
upgrade program directed at attracting and keeping better talent. This resulted
in higher salaries during the first quarter of 2003. Salaries and wages
increased to 28.2% as a percentage of total revenues from 25.3%.
Advertising. Advertising expense decreased from $10.3 million to $8.8 million.
This decrease is primarily due to $1.5 million of media costs incurred in the
fourth quarter of fiscal year 2002 related to the fiscal year 2003 advertising
campaign entitled "Fall Kickoff Extravaganza." The Company has also implemented
a more balanced media investment strategy in 2003.
Occupancy. Occupancy expense decreased to $7.7 million from $8.0 million
primarily due to the closing of 13 under-performing stores since December 31,
2001.
Other Operating Expense. Other operating expense increased by $0.5 million and
increased to 20.5% as a percentage of total revenues from 20.0%. During the
first quarter of fiscal 2002, accounting fees, legal fees and consulting fees
related to the investigation, shareholder litigation and the fiscal 2000 audit
were $0.4 million. During the first quarter of fiscal 2003, accounting and legal
fees related to the investigation and shareholder litigation and consulting fees
related to bank refinancing were $1.0 million.
Interest Expense. Interest expense decreased from 13.7% to 9.3% as a percentage
of total revenues. The Company's credit facility requires the Company to accrue
additional payment-in-kind interest at a rate of 200 to 500 basis points that is
due and payable on the maturity date of its term loans. This payment-in-kind
interest amounted to $3.5 million in the three-month period ended December 31,
2002 and $3.7 million for the three-month period ending December 31, 2001.
Deferred financing costs of $3.4 million were reclassified from an extraordinary
item as reported in fiscal 2002 to interest expense for the three-month period
ended December 31, 2001, as a result of adoption of SFAS 145.
Other Income. Other income was $1.5 million for the three months ended December
31, 2002, compared to $1.8 million in the three months ended December 31, 2001.
This change is primarily due to a decrease in the positive change in the fair
market value of the interest rate swap portfolio.
Income Tax Expense. During the first quarter of fiscal 2003, the Company
recorded income tax expense of $1.4 million due to the
18
RENT-WAY, INC.
Company's inability to book the reversal of the deferred tax liability
associated with tax deductible goodwill to offset a portion of its deferred tax
asset following the adoption of SFAS 142. During the first quarter of fiscal
2002, the Company recorded income tax expense of $10.6 million due to the
Company's inability to look to the reversal of the deferred tax liability
associated with tax deductible goodwill to offset a portion of its deferred tax
asset following the adoption of SFAS 142 on October 1, 2001.
Cumulative Effect of Change in Accounting Principle. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. During the quarter ended September 30, 2002, the Company performed,
with the assistance of an independent valuation firm, the phase two impairment
test of the carrying value to determine the amount of the write down. This
assessment resulted in an impairment write-down of $58.9 million, recorded in
"Cumulative Effect of Change in Accounting Principle" in the amount of $41.5
million (net of $17.4 million in income taxes). In accordance with the
transitional implementation guidance of SFAS 142, the write down was recorded
retroactive to the Company's first quarter results of operations (see Note 6).
Income From Discontinued Operations. On December 17, 2002, the Company entered
into a definitive purchase agreement to sell 295 stores to Rent-A-Center, Inc.
for approximately $101.5 million, which transaction has since closed. These
stores are all included in the household rental segment. Related operating
results, in accordance with SFAS 144, have been reported as discontinued
operations (see Note 3).
Net Loss. The Company generated a net loss of $5.4 million in the period as a
result of the factors described above compared to a net loss of $64.2 million in
the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's current credit
facility expires December 31, 2003. The Company is in discussions with its
lenders to restructure or replace the credit facility. There can be no assurance
that the Company will be successful in amending or replacing the facility. The
Company's ability to operate as a going concern is largely dependent on its
ability to successfully negotiate with its bank lenders an amendment or
restructuring of the Company's existing credit facility.
The Company's capital requirements relate primarily to purchasing additional
rental merchandise and replacing rental merchandise that has been sold or is no
longer suitable for rent. The Company funds its capital requirements through
cash from operations and borrows under its bank credit facility.
On December 13, 2002, the Company amended its bank credit facility. This
amendment modified the maximum leverage ratio, the minimum interest coverage
ratio, the minimum consolidated net worth and the fixed charge coverage ratio
covenants for periods after December 31, 2002, through December 31, 2003. In
consideration for this amendment, the Company paid $0.3 million as an amendment
fee. This fee was paid on February 10, 2003, in connection with the closing of
the Rent-A-Center transaction. In the event the Company fails to comply with
its covenants in the credit facility, it would be unable to borrow under the
facility. The Company expects to be able to comply with covenants based upon its
fiscal 2003 projections.
On January 2, 2003, the Company amended its bank credit facility. The amendment
provided for a supplemental $10.0 million term loan to the Company, which is
payable in full on the earlier of the Rent-A-Center transaction closing date or
March 31, 2003. In consideration for this amendment, the Company paid $0.3
million as an amendment fee. This amendment fee was payable the earlier of the
receipt of proceeds from material asset sales, or December 31, 2003.
For the three months ended December 31, 2002, operations used $19.5 million of
cash flow compared to operations using $35.9 million for the three months ended
December 31, 2001. The decrease in cash used by the fiscal 2003 period was
primarily a result of the increase in other liabilities due to the accrual of
payment-in-kind interest, and the increase in accounts payable offset by a
decrease in prepaid expenses, other assets and deferred financing costs. The
first quarter of the Company's fiscal year is typically the period with the
highest volume of rental merchandise purchases due to buying for the holiday
season. As a result, both rental merchandise and accounts payable are expected
to increase during this period.
Net cash used in investing activities was $0.7 million for the three months
ended December 31, 2002, compared to $3.3 million used in investing activities
for the three months ended December 31, 2001. In the fiscal 2003 period, the
purchase of property and equipment accounted for $0.7 million offset by sale
proceeds from store sales of $0.3 million. In the fiscal 2002 period, the
purchase of property and equipment accounted for $3.3 million offset by sale
proceeds from store sales of $0.9 million.
For the three months ended December 31, 2002, financing activities provided
$18.9 million as compared to $36.6 million in the three
19
RENT-WAY, INC.
months ended December 31, 2001. In the fiscal 2003 period, the Company borrowed
$174.0 million and repaid $168.9 million. In the fiscal 2002 period, the
borrowings were $205.0 million and repayments were $176.3 million. The company
also incurred $2.6 million in deferred financing costs during the first quarter
of fiscal 2002.
The following table presents obligations and commitments to make future payments
under contracts and contingent commitments at December 31, 2002, and does not
give effect to contractual obligations arising out of the Rent-A-Center
transaction:
Contractual Cash Due in less Due in Due in Due after
Obligation* Total than one year 1-3 years 4-5 years 5 years
-------- ------------- --------- --------- ---------
Long-term debt (1) ...... $284,954 $284,954 $ -- $ -- $ --
Capital lease obligations 16,473 1,523 14,570 380 --
Operating leases ........ 126,598 33,107 66,437 17,074 9,980
Notes Payable ........... 83 13 68 2 --
-------- -------- -------- -------- --------
Total cash obligations .. $428,108 $319,597 $ 81,075 $ 17,456 $ 9,980
======== ======== ======== ======== ========
*Excludes the 401(k) restorative payments program as well as contingent
liabilities including liabilities related to the ongoing litigation as these
items cannot be estimated.
(1) Consists of Term Notes A, Term Notes B and revolving notes.
Amount of Commitment Expiration Per Period
Other Commercial Total Amounts Less than Over
Commitments Committed one year 1-3 years 4-5 years 5 years
------------- --------- --------- --------- --------
Lines of credit ......... $ -- $ -- $ -- $ -- $ --
Standby letters of credit 8,820 8,820 -- -- --
Guarantees .............. -- -- -- -- --
------ ------ ------- ------- -------
Total commercial
commitments ............. $8,820 $8,820 $ -- $ -- $ --
====== ====== ======= ======= =======
SEASONALITY AND INFLATION
The Company's operating results are subject to seasonality. The first quarter
typically has a greater number of rental-purchase agreements entered into
because of traditional holiday shopping patterns. Management plans for these
seasonal variances and takes particular advantage of the first 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.
In the event of a prolonged recession, the Company acknowledges the possibility
of a decrease in demand, particularly for higher-end products.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require new prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Certain sections of this Statement shall be effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. All other sections of this Statement
are effective for financial statements for fiscal years ending after December
15, 2002. The Company is currently evaluating the provisions of this Statement.
In June 2001, FASB issued Statement of Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 addresses
financial accounting and reporting obligations associated with the retirement of
tangible, long-lived assets and the associated asset retirement costs. The
Company adopted this Standard effective October 1, 2002. This Standard had no
impact to these financial statements upon its adoption.
On November 25, 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB
20
RENT-WAY, INC.
Interpretation No. 34". The interpretation requires that upon issuance of a
guarantee, the entity must recognize a liability for the fair value of the
obligation it assumes under that obligation. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued separately identified consideration. The Company has evaluated
the provisions of this interpretation and determined it does not have an impact
on these financial statements upon its adoption.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to improve financial
reporting by enterprises involved with variable interest entities. This
interpretation applies to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable
interest entities that are not currently consolidated and is evaluating the
provisions of this interpretation.
CAUTIONARY STATEMENT
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. See particularly Item 2, "Management's
Discussion and Analysis of Financial Condition," among others. These statements
may be identified by terms and phrases such as "anticipate", "believe",
"intend", "estimate", "expect", "continue", "should", "could", "may", "plan",
"project", "predict", "will" and similar expressions and relate to future events
and occurrences. These statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements.
Factors that could cause actual results to differ materially from those
expressed or implied in such statements include but are not limited to:
Rent-Way's ability to control and normalize operating expenses and to continue
to realize operating efficiencies.
Rent-Way's ability to make principal and interest payments on or to refinance on
maturity its high-level of outstanding bank debt.
The outcome of the class action and derivative lawsuits commenced against
Rent-Way and its officers and directors and any proceedings or investigations
involving Rent-Way, its officers and directors commenced by governmental
authorities, including the Securities and Exchange Commission and the United
States Department of Justice.
Rent-Way's ability to develop, implement, and maintain reliable and adequate
internal accounting systems and controls.
Rent-Way's ability to retain existing senior management and attract additional
management employees.
General economic, business, and demographic conditions, including demand for
Rent-Way's products and services.
General conditions relating to the rental-purchase industry and the prepaid
local phone service industry, including the impact of state and federal laws
regulating or otherwise affecting the rental-purchase transaction and prepaid
local phone service transaction.
Competition in the rental-purchase industry and prepaid local phone service
industry, including competition with traditional retailers.
Rent-Way's ability to enter into and to maintain relationships with vendors of
its rental merchandise including its ability to obtain goods and services on
favorable credit terms.
Rent-Way's ability to reduce corporate and other expenses following the
completion of the Rent-A-Center transaction.
Given these factors, undue reliance should not be placed on any forward-looking
statements and statements regarding Rent-Way's future prospects and performance.
Such statements speak only as of the date made. Rent-Way undertakes no
obligation to update or revise any such statements whether as a result of new
information, the occurrence of future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. As of December 31, 2002, the Company had $284.9
million in loans with floating interest rates indexed to current LIBOR and prime
rates. Because the floating rates expose the Company to the risk of increased
interest cost if interest rates rise, the Company began a policy in 1998 of
managing interest rate risk by utilizing interest rate swap agreements to
convert a portion of the floating interest rate loans to fixed interest rates.
21
RENT-WAY, INC.
As of December 31, 2002, the Company has $163.1 million in interest rate swap
agreements that lock in a LIBOR rate ranging from 5.09% to 6.97%. This
effectively fixes the interest rate on 57% of the loans or $163.1 million, thus
hedging this risk. These interest rate swap agreements have maturities ranging
from 2002 to 2005. Falling interest rates and/or a flattening of the yield curve
will negatively impact the market value of the interest rate swaps.
Given the Company's current capital structure, including interest rate swap
agreements, there is $121.9 million, or 43% of the Company's total debt, in
floating rate loans. A hypothetical 1.0% change in the LIBOR rate would affect
pre-tax earnings by approximately $1.2 million.
The Company does not enter into derivative financial instruments for trading or
speculative purposes. The interest rate swap agreements are entered into with
major financial institutions thereby minimizing the risk of credit loss.
22
RENT-WAY, INC.
PART II--OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon the evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
this evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
See exhibit index.
b. REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K in the quarter ended
December 31, 2002:
(1) On December 20, 2002, the Company filed a Current Report on Form
8-K, which reported the issuance of a press release regarding
financial results for its fourth quarter and fiscal year ended
September 30, 2002.
(2) On December 19, 2002, the company filed a Current Report on Form
8-K, which reported the issuance of a press release announcing the
sale of 295 stores to Rent-A-Center.
(3) On December 5, 2002, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing it will
host a conference call in connection with the release of financial
results for its fourth quarter and fiscal year which ended September
30, 2002.
(4) On October 11, 2002, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing the timing
of 2003 guidance and fourth quarter sales in line with expectations.
23
RENT-WAY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Rent-Way, Inc.
--------------
(Registrant)
By:
February 14, 2003 /S/ WILLIAM A. MCDONNELL
- ------------------------------- ---------------------------------
Date (Signature)
William A. McDonnell
Vice President and
Chief Financial Officer
By:
February 14, 2003 /S/ JOHN A. LOMBARDI
- ------------------------------- ----------------------------------
Date (Signature)
John A. Lombardi
Chief Accounting Officer
and Controller
24
CERTIFICATION
I, William E. Morgenstern, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-Way, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchanged Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
/S/ WILLIAM E. MORGENSTERN
----------------------------------------
Signature
CHAIRMAN & CEO
----------------------------------------
Title
CERTIFICATION
I, William A. McDonnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-Way, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchanged Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
/S/ WILLIAM A. MCDONNELL
----------------------------------------
Signature
VICE PRESIDENT & CFO
----------------------------------------
Title
25
EXHIBIT INDEX
No. Exhibit Name
- --- ------------
3.1 Articles of Incorporation of Rent-Way, Inc., as amended (incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on Form
10-K for the year ended September 30, 1997, filed November 6, 1997.)
3.2 Bylaws of Rent-Way, Inc., as amended (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended September 30, 2000, filed July 2, 2001.)
10.1* Amendment No. 9 to Credit Agreement dated as of January 2, 2003,
between the Company and the Lenders parties thereto.
10.2* Employment Agreement between William Short and the Company dated as of
July 1, 2002.
10.3* Amendment No. 1 to the Asset Purchase Agreement, dated December 31,
2002, by and among Rent-A-Center East, Inc., and the Company, Rent-Way
of Michigan, Inc., and Rent-Way of TTIG, L.P.
10.4* Amendment No. 2 to the Asset Purchase Agreement, dated January 7,
2003, by and among Rent-A-Center East, Inc., and the Company, Rent-Way
of Michigan, Inc., and Rent-Way of TTIG, L.P.
10.5* Amendment No. 3 to the Asset Purchase Agreement, dated February 7,
2003, by and among Rent-A-Center East, Inc., the Company, Rent-Way of
Michigan, Inc., and Rent-Way of TTIG, L.P.
10.6* Amendment No. 4 to the Asset Purchase Agreement, dated February 10,
2003, by and among Rent-A-Center East, Inc. and the Company, Rent-Way
of Michigan, Inc., and Rent-Way of TTIG, L.P.
99.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ----------------
*Filed herewith.
26