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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-22026
RENT-WAY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-1407782
(STATE OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION) NO.)
3230 WEST LAKE ROAD, ERIE, PENNSYLVANIA 16505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
814-836-0618
(ISSUER'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) 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
Check if there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-K in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sales price on November 4, 1997 the aggregate market value
of stock held by non-affiliates of the issuer was $117,806,561.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AS OF NOVEMBER 4, 1997
Common Stock 7,772,613
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RENT-WAY, INC.
PART I
ITEM I BUSINESS
GENERAL
Rent-Way, Inc. (the "Company") has been engaged in the rental-purchase
business since 1981 and currently operates 184 stores that provide quality brand
name merchandise in 14 states and the District of Columbia. The Company offers
home entertainment equipment, furniture, major 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. Management believes that these rental-purchase arrangements
appeal to a wide variety of customers by allowing them to obtain merchandise
that they might otherwise be unable or unwilling to obtain due to insufficient
cash resources or lack of access to credit or because they have a temporary,
short-term need for the merchandise or a desire to rent rather than purchase the
merchandise.
The Company was formed in 1981 to operate a rental-purchase store in Erie,
Pennsylvania. By 1993, as a result of acquisitions and new store openings, the
Company was operating 19 stores in three states and had completed its initial
public offering. As of September 30, 1997, principally as a result of
acquisitions, the Company was operating 184 stores in 14 states and the District
of Columbia.
The Company's principal executive offices are located at 3230 West Lake
Road, Erie, Pennsylvania 16505, and its telephone number is (814) 836-0618.
FISCAL 1997 ACQUISITIONS
On January 2, 1997, the Company acquired all of the outstanding stock of
Bill Coleman TV, Inc. ("Bill Coleman TV") for a purchase price consisting of
approximately $6.7 million in cash, an option to purchase 25,000 shares of the
Company's Common Stock at an exercise price of $8.875 per share and the
assumption of certain liabilities (the "Coleman Acquisition"). Bill Coleman TV
operated 15 rental-purchase stores in Michigan and had revenues of approximately
$8.6 million for the twelve months ended December 31, 1996.
On February 6, 1997, the Company acquired all of the outstanding stock of
Perry Electronics, Inc. d/b/a Rental King ("Rental King") for a purchase price
of $23.0 million consisting of cash and the assumption of certain liabilities
(the "Rental King Acquisition"). Rental King operated 70 rental-purchase stores
in Ohio, Michigan, Florida, Colorado, Indiana, West Virginia and Kentucky and
had revenues of approximately $24.0 million for the twelve months ended December
31, 1996.
The Company also acquired a four store rental-purchase chain with stores
located in Pennsylvania in July 1997 and three rental-purchase stores located in
the Washington, D.C. area in September 1997.
PENDING ACQUISITION
On October 6, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of the Ace TV Rentals rental-purchase chain
("Ace Rentals") for a purchase price of approximately $24.5 million (the "Ace
Rentals Acquisition"). Ace Rentals operates 46 stores in South Carolina and 4
stores in California.
The Company expects to close the acquisition in early January 1998, subject
to the satisfaction of certain conditions, including negotiation of a definitive
purchase agreement. Consummation of the Ace Rentals Acquisition will provide the
Company with a presence in the southeastern United States, which the Company
believes to be a growing rental-purchase market.
THE RENTAL-PURCHASE INDUSTRY
Begun in the mid-to-late 1960s, the rental-purchase business is a
relatively new segment of the retail industry offering an alternative to
traditional retail installment sales. The rental-purchase industry provides
brand name merchandise to customers generally on a week-to-week or
month-to-month basis under a full service rental
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agreement, which in most cases includes a purchase option. The customer may
cancel the rental agreement at any time without further obligation by returning
the product to the rental-purchase operator.
APRO, the industry's trade association, estimated that at the end of 1996
the U.S. rental-purchase industry comprised approximately 7,500 stores providing
5.8 million products to 2.9 million households. Management believes that its
customers generally have annual household incomes ranging from $20,000 to
$40,000. Based on APRO estimates, the rental-purchase industry had gross
revenues of $4.1 billion in 1996. The U.S. rental-purchase industry is highly
fragmented. Management estimates that the ten largest industry participants
account for less than 50% of total industry stores and that the majority of the
industry consists of operations with fewer than 20 stores. See "--Strategy",
"--Competition."
Management believes that the rental-purchase industry is experiencing
increasing consolidation due to, among other factors, the recognition by smaller
operators of the increased operating efficiencies and better competitive
position achievable through larger organizations, greater availability of
capital for larger organizations, and the willingness of an older generation of
operators to resolve succession issues through disposition of the business. In
addition, management believes that many smaller industry operators lack the
management information systems necessary to manage a large multi-store
rental-purchase operation efficiently and profitably. Management believes that
this trend toward consolidation of operations in the industry presents an
opportunity for well-capitalized rental-purchase operators to continue to
acquire additional stores on favorable terms.
STRATEGY
Management believes that the Company's continued success depends on
successful implementation of the following business strategies:
Acquiring and Opening New Stores
The Company currently intends to expand its operations by acquiring
existing stores and opening new stores, both within its present market areas and
in geographic regions not currently served by the Company. At present, the
majority of that expansion is expected to be accomplished through acquisitions.
The Company believes that acquisitions can effectively increase the Company's
market share while simultaneously expanding its customer base. In addition, in
pursuing its growth strategies, the Company expects to benefit from both
enhanced purchasing power and the ability to exploit economies of scale for
certain fixed operational expenses. The Company continually reviews acquisition
opportunities, and management believes that a number of acquisition
opportunities currently exist. Except as disclosed herein, the Company presently
has no plans, proposals, arrangements or understandings with respect to
significant acquisitions. See "Pending Acquisition".
In identifying targets for acquisition, the Company intends to focus on
operations that complement the Company's existing markets, while remaining open
to the possibility of making acquisitions in other areas. The Company has not
established formal criteria for potential acquisitions. Generally, however, the
Company seeks to acquire rental-purchase businesses that operate profitably and
are located in geographic markets that complement the Company's existing stores
or that the Company views as growth markets for the rental-purchase industry.
The Company seeks to acquire such businesses at purchase prices that will permit
the Company a prompt return on its investment in the form of increased earnings.
The Company has no formal policy with respect to acquisitions with related
entities. To date, no related party acquisitions have been considered nor does
the Company anticipate considering such acquisitions in the future. Management
believes that its senior management has a level of ability and experience that
provides the Company with a competitive advantage in the evaluation and
consummation of acquisition opportunities.
Customer-Focused Philosophy
Management believes that through the continued adherence to its "Welcome,
Wanted and Important" business philosophy it should be able to increase its new
and repeat customer base, and thus the number of units it has on rent, thereby
increasing revenues and net income. The "Welcome, Wanted and Important"
philosophy is a method by which the Company seeks to create a store atmosphere
conducive to customer loyalty. The Company attempts to create this atmosphere
through the effective use of advertising and merchandising strategies, by
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maintaining the clean and well-stocked appearance of its stores, and by
providing a high level of customer service (such as the institution of a
toll-free 1-800-RENTWAY complaint and comment line). The Company's advertising
emphasizes brand name merchandise from leading manufacturers. In addition,
merchandise selection within each product category is periodically updated to
incorporate the latest offerings from suppliers. Services provided by the
Company to the customer include home delivery, installations, ordinary
maintenance and repair services and pick-up during the term of the contract at
no additional charge. Store managers also work closely with each customer in
choosing merchandise, setting delivery dates and arranging a suitable payment
schedule. As part of the "Welcome, Wanted and Important" philosophy, store
managers are empowered, encouraged and trained to make decisions regarding store
operations subject only to certain Company-wide operating guidelines and general
policies. All acquired stores are promptly evaluated and, if necessary,
remodeled.
Expanding the Company's Product Lines
One of the Company's principal strategies is to provide the rental-purchase
customer with the opportunity to obtain merchandise of higher quality than the
merchandise available from its competitors on competitive terms. To this end,
the Company attempts to maintain a broad selection of products while emphasizing
higher priced merchandise. The Company intends to continue expanding its
offerings of higher priced products in all product areas. Management believes
that previous offerings of higher priced products have succeeded in both
increasing the Company's profitability and attracting new customers to the
Company's existing stores. In addition, the Company selectively tests new
merchandise. Management believes that opportunities exist to provide additional
or non-traditional merchandise to its customers.
Monitoring Store Performance
Each store is provided with a management information system that allows
management to track rental and collection activity on a daily basis. The system
generates detailed reports that track inventory movement by piece and by product
category and the number and frequency of past due accounts and other collection
activity. In addition, physical inventories are regularly conducted at each
store to ensure the accuracy of the management information system data. Senior
management monitors this information to ensure adherence to established
operating guidelines. Management believes the Company's management information
system enhances its ability to monitor and affect the operating performance of
existing stores and to integrate and improve the performance of newly acquired
stores.
Results-Oriented Compensation
Management believes that an important reason for the Company's positive
financial performance and growth has been the structure of its management
compensation system, which provides incentives for both regional and store
managers to increase store revenues and operating profits. A significant portion
of the Company's regional and store managers' total compensation is dependent
upon store performance. As further incentive, the Company grants managers stock
options in the Company. Management believes that the Company's emphasis on
incentive-based compensation has been instrumental in the Company's ability to
attract, retain and motivate its regional and store managers.
Manager Training
Management believes that well-trained store managers are important to the
Company's efforts to maximize individual store performance. The Company employs
a full-time trainer who conducts classroom programs in the areas of sales, store
operations and personnel management. These training programs often continue for
several months and culminate in an exam. The Company requires its managers to
attend, at Company expense, leadership and management programs offered by
leading management and organization experts.
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OPERATIONS
Company Stores
The Company currently operates 184 stores in 14 states and the District of
Columbia, as follows:
NUMBER OF
LOCATION STORES
----------------------------------------------------------------- ---------
Ohio............................................................. 49
Michigan......................................................... 28
Pennsylvania..................................................... 24
New York......................................................... 20
Indiana.......................................................... 17
Maryland......................................................... 11
Illinois......................................................... 8
Virginia......................................................... 8
Florida.......................................................... 7
Delaware......................................................... 4
Colorado......................................................... 3
West Virginia.................................................... 2
Kentucky......................................................... 1
New Jersey....................................................... 1
Washington, D.C. ................................................ 1
The Company's stores average approximately 3,000 square feet in floor space
and are generally located in strip shopping centers in or near low to middle
income neighborhoods. Often, such shopping centers offer convenient free parking
to the Company's customers. The Company's stores are generally uniform in
interior appearance and design and display of available merchandise. The stores
have separate storage areas but generally do not use warehouse facilities. In
selecting store locations, the Company uses a variety of market information
sources to locate areas of a town or city that are readily accessible to low and
middle income consumers. The Company believes that within these areas the best
locations are in neighborhood shopping centers that include a supermarket. The
Company believes this type of location makes frequent rental payments at its
stores more convenient for its customers.
Product Selection
The Company offers brand name home entertainment equipment (such as
television sets, video recorders, video cameras and stereos), furniture, major
appliances and jewelry. Major appliances offered by the Company include
refrigerators, ranges, washers and dryers. The Company's product line currently
includes the Zenith, RCA, Pioneer and JVC brands in home entertainment
equipment, the Kenmore and Crosley brands in major appliances and the Ashley
brand in furniture. The Company closely monitors customer rental requests and
adjusts its product mix to offer rental merchandise desired by customers.
For the year ended September 30, 1997, payments under rental-purchase
contracts for home entertainment products accounted for approximately 44.1%,
furniture for 27.4%, appliances for 24.5%, jewelry for 2.8% and miscellaneous
other items for 1.2% of the Company's rental revenues. Customers may request
either new merchandise or previously rented merchandise. Previously rented
merchandise is typically offered at the same weekly or monthly rental rate as is
offered for new merchandise, but with an opportunity to obtain ownership of the
merchandise after fewer rental payments. Weekly rentals currently range from
$4.99 to $59.99 for home entertainment equipment, from $1.99 to $49.99 for
furniture, from $3.99 to $36.99 for major appliances and from $1.99 to $34.99
for jewelry.
Rental-Purchase Agreements
Merchandise is provided to customers under written rental-purchase
agreements that set forth the terms and conditions of the transaction. The
Company uses standard form rental-purchase agreements which are reviewed
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by legal counsel and customized to meet the legal requirements of the various
states in which they are to be used. Generally, the rental-purchase agreement is
signed at the store, but may be signed at the customer's residence if the
customer orders the product by telephone and requests home delivery. Customers
rent merchandise on a week-to-week and, to a lesser extent, on a month-to-month
basis. The rent for the first week or month and each succeeding week or month
during the term of the agreement is payable in advance. At the end of the
initial and each subsequent rental period, the customer retains the merchandise
for an additional week or month by paying the required rent or may terminate the
agreement without further obligation. If the customer decides to terminate the
agreement, the merchandise is returned to the store and is then available for
rent to another customer. The Company retains title to the merchandise during
the term of the rental-purchase agreement. If a customer rents merchandise for a
sufficient period of time, usually 12 to 24 months, ownership is transferred to
the customer without further payments being required. Rental payments are
typically made in cash, by check or money order. The Company does not extend
credit. See "--Government Regulation."
Product Turnover
Generally, a minimum rental term of between 12 and 24 months is required to
obtain ownership of new merchandise. Based upon merchandise returns for the year
ended September 30, 1997, the Company believes that the average period of time
during which customers rent merchandise is 16 to 17 weeks. However, turnover
varies significantly based on the type of merchandise being rented, with certain
consumer electronic products, such as camcorders and VCRs, generally being
rented for shorter periods, while appliances and furniture are generally rented
for longer periods. Each rental-purchase transaction requires delivery and
pickup of the product, weekly or monthly payment processing and, in some cases,
repair and refurbishment of the product. In order to cover the relatively high
operating expenses generated by greater product turnover, rental-purchase
agreements require larger aggregate payments than are generally charged under
installment purchase or credit plans.
Customer Service
The Company offers same day delivery, installation and pick-up of its
merchandise at no additional cost to the customer. The Company also provides any
required service or repair without charge, except for damage in excess of normal
wear and tear. If the product cannot be repaired at the customer's residence,
the Company provides a temporary replacement while the product is being
repaired. The customer is fully liable for damage, loss or destruction of the
merchandise, unless the customer purchases an optional loss/damage waiver. Most
of the products offered by the Company are covered by a manufacturer's warranty
for varying periods, which, subject to the terms of the warranty, is transferred
to the customer in the event that the customer obtains ownership. Repair
services are provided through in-house service technicians, independent
contractors or under factory warranties. The Company recently introduced
Rent-Way Plus, a fee-based membership program that provides special loss and
damage protection and an additional one year of service protection on rental
merchandise, preferred treatment in the event of involuntary job loss,
accidental death and dismemberment insurance and discounted emergency roadside
assistance, as well as other discounts on merchandise and services.
COLLECTIONS
Management believes that effective collection procedures are important to
the Company's success in the rental-purchase business. The Company's collection
procedures increase the revenue per product with minimal associated costs,
decrease the likelihood of default and reduce charge-offs. Senior management, as
well as store managers use the Company's computerized management information
system to monitor cash collections on a daily basis. In the event a customer
fails to make a rental payment when due, store management will attempt to
contact the customer to obtain payment and reinstate the contract or will
terminate the account and arrange to regain possession of the merchandise.
However, store managers are given latitude to determine the appropriate
collection action to be pursued based on individual circumstances. Depending on
state regulatory requirements, the Company charges for the reinstatement of
terminated accounts or collects a delinquent account fee. Such fees are standard
in the industry and may be subject to state law limitations. See "--Government
Regulation." Despite the fact that the Company is not subject to the federal
Fair Debt Collection Practices Act, it is the Company's policy to abide by the
restrictions of such law in its collection procedures. Charge-offs due to lost
or
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stolen merchandise were approximately 3.0% and 2.7% of the Company's revenues
for the years ended September 30, 1997 and 1996, respectively. The charge-off
rate for chains with over 20 stores reporting to APRO in 1996 was 2.9%.
MANAGEMENT
The Company's stores are organized geographically with several levels of
management. At the individual store level, each store manager is responsible for
customer and credit relations, deliveries and pickups, inventory management,
staffing and certain marketing efforts. A Company store normally employs one
store manager, one assistant manager, two account managers, one full-time office
manager, and one full-time delivery and installation technician. The staffing of
a store depends on the number of rental-purchase contracts serviced by the
store.
Each store manager reports to one of 29 regional managers, each of whom
typically oversees six to eight stores. Regional managers are primarily
responsible for monitoring individual store performance and inventory levels
within their respective regions. The Company's regional managers, in turn,
report to four directors of operations, located at the Company's headquarters,
who monitor the operations of their respective regions and, through the regional
managers, individual store performance. The directors of operations report to
the Chief Operating Officer who is responsible for overall Company-wide store
operations. Senior management at the Company's headquarters directs and
coordinates purchasing, financial planning and controls, management information
systems, employee training, personnel matters and acquisitions. Headquarters
personnel also evaluate the performance of each store and conduct on-site
reviews.
MANAGEMENT INFORMATION SYSTEM
The Company believes that its proprietary management information system
provides it with a competitive advantage over many small rental-purchase
operations. The Company uses an integrated computerized management information
and control system to track each unit of merchandise and each rental-purchase
agreement. The Company's system also includes extensive management software and
report generating capabilities. Reports for all stores are reviewed daily by
senior management and any irregularities are addressed the following business
day. Each store is equipped with a computer system that tracks individual
components of revenue, idle items, items on rent, delinquent accounts and other
account information. Management electronically gathers each day's activity
report through the computer located at the headquarters office. This system
provides the Company's management with access to operating and financial
information about any store location or region in which the Company operates and
generates management reports on a daily, weekly, month-to-date and year-to-date
basis for each store and every rental-purchase transaction. Utilizing the
management information system, senior management, regional managers and store
managers can closely monitor the productivity of stores under their supervision
compared to Company-prescribed guidelines. This system has enabled the Company
to expand its operations while maintaining a high degree of control over cash
receipts, inventory, merchandise units in repair and customer transactions. To
date, the Company has successfully integrated all of its acquired stores into
its management information system. The Company believes the information system
is adequate to meet its needs for the foreseeable future.
PURCHASING AND DISTRIBUTION
The Company's general product mix is determined by senior management, based
on an analysis of customer rental patterns and introduction of new products on a
test basis. Individual store managers are responsible for determining the
particular product selection for their store from a list of products approved by
senior management. All purchase orders are executed through regional managers
and the Company's purchasing department to insure that inventory levels and mix
throughout the store regions are appropriate. The Company maintains only minimal
warehouse space for storage of merchandise, and merchandise is generally shipped
by vendors directly to each store, where it is held for rental. The Company
purchases its merchandise directly from manufacturers or distributors. The
Company generally does not enter into written contracts with its suppliers.
Although the Company currently expects to continue its existing relationships,
management believes there are
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numerous sources of products available to the Company, and does not believe that
the success of the Company's operations is dependent on any one or more of its
present suppliers.
MARKETING
The Company promotes its products and services primarily through direct
mail solicitations and, in certain markets, through television advertising and,
to a lesser extent, through radio and secondary print media advertisement. The
Company also solicits business by telephoning former and prospective customers.
The Company has recently begun dedicating an increasing percentage of its
marketing dollars to television advertising to build brand recognition in
markets where it is economically attractive to do so. The Company's print
advertisements emphasize product and brand name selection, prompt delivery and
repair, and the absence of any downpayment, credit investigation or long-term
obligation. Advertising expense as a percentage of revenue for the year ended
September 30, 1997 was approximately 4.4%. As the Company obtains new stores in
its existing markets, the advertising expenses of each store in the market can
be reduced by listing all stores in the same market-wide advertisement.
COMPETITION
The rental-purchase industry is highly competitive. The Company competes
with other rental-purchase businesses and, to a lesser extent, with rental
stores that do not offer their customers a purchase option. Competition is based
primarily on rental rates and terms, product selection and availability, and
customer service. With respect to consumers who are able to purchase a product
for cash or on credit, the Company also competes with department stores,
discount stores and retail outlets. These competitors may offer an installment
sales program or may compete with the Company simply on the basis of product and
price. Several competitors in the rental-purchase business are national in scope
and have significantly greater financial and operating resources and name
recognition than does the Company.
PERSONNEL
As of September 30, 1997, the Company had approximately 944 employees, of
whom 58 are located at the corporate office in Erie, Pennsylvania. None of the
Company's employees is represented by a labor union. Management believes its
relations with its employees are good.
GOVERNMENT REGULATION
Forty-five states have enacted laws regulating or otherwise impacting the
rental-purchase transaction, including all of the states in which the Company's
stores are located other than New Jersey. These laws generally require certain
contractual and advertising disclosures concerning the nature of the transaction
and also provide varying levels of substantive consumer protection, such as
requiring a grace period for late payments and contract reinstatement rights in
the event the agreement is terminated for nonpayment of rentals. No federal
legislation has been enacted regulating rental-purchase transactions. The
Company instructs its managers in its required procedures through training
seminars and policy manuals and believes that it has operated in compliance with
the requirements of applicable law in all material respects. In addition, the
Company provides its customers with a toll-free number, 1-800-RENTWAY, to
telephone corporate headquarters to report any irregularities in service or
misconduct by its employees. Any such calls are reviewed daily and are the
subject of immediate follow-up investigation by senior management.
SERVICE MARKS
The Company has registered the "Rent-Way" service mark under the Lanham
Act. The Company believes that this mark has acquired significant market
recognition and goodwill in the communities in which its stores are located. The
service mark "Rent-Way Because There's Really Only One Way" and the related
design have also been registered by the Company.
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RELATED PARTY TRANSACTIONS
Although the Company has in the past and may in the future enter into
transactions with related parties, the Company has adopted no formal policies,
procedures or controls with respect to such transactions. Generally, however,
the Company requires that any transactions with related entities be on terms no
less favorable to the Company than would be available from an unrelated third
party.
ITEM 2 DESCRIPTION OF PROPERTIES
The Company leases all of its stores under operating leases that generally
have terms of three to five years and require the Company to pay real estate
taxes, utilities and maintenance. The Company has optional renewal privileges on
most of its leases for additional periods ranging from three to five years at
rental rates generally adjusted for increases in the cost of living. There is no
assurance that the Company can renew the leases that do not contain renewal
options, or that if it can renew them, that the terms will be favorable to the
Company. Management believes that suitable store space is generally available
for lease and that the Company would be able to relocate any of its stores
without significant difficulty should it be unable to renew a particular lease.
Management also expects that additional space will be readily available at
competitive rates in the event the Company desires to open new stores. The
Company's corporate office is in Erie, Pennsylvania, and consists of two
adjacent buildings, the first building consisting of approximately 14,000 square
feet was acquired in 1995 and the second building, consisting of approximately
13,000 square feet, was acquired in 1997. The Company also leases warehouse
space in Pittsburgh, Pennsylvania, and owns an office building in Erie,
Pennsylvania, which is used for storage.
ITEM 3 LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of its business. The Company is not currently a
party to any material litigation, except litigation to which it succeeded to as
a result of its acquisition of McKenzie Leasing Corporation in 1995, for which
it is being indemnified and held harmless. The Company has been sued in an
action brought in New York Supreme Court requesting damages in the amount of
$50.0 million arising out of an accident whereby a Company truck struck and
injured a child riding a bike. Such action is being defended by the Company's
insurance carriers and management believes it has sufficient available insurance
coverage such that this action will not have a material adverse effect on the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "RWAY." The following table sets forth, for the periods indicated,
the high and low last trade price per share of the Common Stock as reported on
the Nasdaq National Market.
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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HIGH LOW HIGH LOW
First Quarter.............................. $12.63 $ 8.25 $10.50 $ 8.38
Second Quarter............................. 12.81 8.75 10.13 7.38
Third Quarter.............................. 14.75 8.63 15.50 9.75
Fourth Quarter............................. 21.31 12.88 14.13 11.00
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As of November 5, 1997, there were 117 record holders of the Common Stock.
The Company has not paid any cash dividends to shareholders. The
declaration of any cash or stock dividends will be at the discretion of the
Board of Directors, and will depend upon earnings, capital requirements and the
financial position of the Company, general economic conditions and other
pertinent factors. At this time, the Company does not intend to pay any cash
dividends in the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business for an
indefinite period of time. The Company's credit facility prohibits the payment
of dividends.
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data for the years ended September 30,
1993, 1994, 1995, 1996 and 1997 were derived from the Company's financial
statements audited by Coopers & Lybrand L.L.P., independent auditors. The
historical financial data are qualified in their entirety by, and should be read
in conjunction with, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements of the Company and the
notes thereto included elsewhere in this document.
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
1993 1994(1) 1995(2) 1996(3) 1997(4)
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STATEMENT OF INCOME DATA:
REVENUES:
Rental revenue.................................. $7,490 $12,111 $24,080 $43,891 $77,498
Other revenue................................... 957 1,897 4,114 7,280 10,545
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Total revenues................................ 8,447 14,008 28,194 51,171 88,043
COSTS AND OPERATING EXPENSES:
DEPRECIATION AND AMORTIZATION:
Rental merchandise............................ 2,410 4,073 8,312 13,229 20,314
Property and equipment........................ 216 331 525 775 1,530
Amortization of goodwill...................... 7 108 334 875 1,926
Salaries and wages.............................. 2,205 4,024 6,909 13,101 22,810
Advertising..................................... 410 540 1,259 2,123 3,899
Occupancy....................................... 589 1,006 1,888 3,269 5,988
Other operating expenses........................ 1,921 3,256 6,387 11,148 17,790
------ ------- ------- ------- -------
Total costs and operating expenses............ 7,758 13,338 25,614 44,520 74,257
------ ------- ------- ------- -------
Operating income.............................. 689 670 2,580 6,651 13,786
Interest expense................................ (580) (542) (1,162) (1,493) (3,130)
Other income (expense), net..................... 32 89 36 70 (342)
------ ------- ------- ------- -------
Income before income taxes and extraordinary
item....................................... 141 217 1,454 5,228 10,314
Income tax expense (benefit).................... (32) -- 445 2,381 4,629
------ ------- ------- ------- -------
Income before extraordinary item.............. 173 217 1,009 2,847 5,685
Extraordinary item.............................. -- -- -- -- (269)
------ ------- ------- ------- -------
Net income.................................... 173 217 1,009 2,847 5,416
Preferred stock (dividend) /gain on
redemption.................................... -- -- (38) (129) 280
------ ------- ------- ------- -------
Earnings applicable to common shares.......... $ 173 $ 217 $ 971 $ 2,718 $ 5,696
====== ======= ======= ======= =======
Earnings per common share--fully diluted........ $ 0.07 $ 0.06 $ 0.22 $ 0.45 $ 0.72
====== ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Rental merchandise, net....................... $2,723 $ 7,068 $12,593 $17,862 $35,132
Goodwill, net................................. 436 4,336 14,893 21,867 43,447
Total assets.................................. 7,784 15,129 36,155 49,974 96,288
Debt.......................................... 3,858 7,255 19,151 12,979 48,156
Total liabilities............................. 4,840 9,167 22,545 18,134 55,331
Redeemable preferred stock.................... -- -- 2,750 1,121 --
Shareholders' equity.......................... 2,944 5,962 10,860 30,719 40,957
10
11
- ---------
(1) During the year ended September 30, 1994, the Company acquired 20
rental-purchase stores through its acquisition of D.A.M.S.L. Corp on May 18,
1994, which affects the comparability of the historical financial
information for the periods presented.
(2) During the year ended September 30, 1995, the Company acquired 50
rental-purchase stores, 46 through the acquisition of McKenzie Leasing
Corporation on July 21, 1995, which affects the comparability of the
historical financial information for the periods presented.
(3) During the year ended September 30, 1996, the Company acquired 32
rental-purchase stores in four separate transactions, which affects the
comparability of the historical financial information for the periods
presented.
(4) During the year ended September 30, 1997, the Company acquired 92
rental-purchase stores, 15 of which were acquired on January 2, 1997 from
Bill Coleman TV, Inc. and 70 of which were acquired on February 6, 1997 from
Perry Electronics, Inc. d/b/a Rental King.
11
12
RENT-WAY, INC.
PART II
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As of September 30, 1997, the Company operated 184 rental-purchase stores
located in 14 states and the District of Columbia. Primarily through the
acquisitions, the number of stores operated by the Company has increased from 19
as of September 30, 1993 to 184 as of September 30, 1997. The following table
shows the number of stores opened, acquired and/or combined during this
five-year period.
YEARS ENDED SEPTEMBER 30,
------------------------------------
STORES 1993 1994 1995 1996 1997
---------------------------------------------------- ---- ---- ---- ---- ----
Open at Beginning of Period......................... 17 19 40 83 108
Opened.............................................. 2 3 -- -- --
Acquired............................................ -- 20 50 32 92
Closed or Combined.................................. -- 2 7 7 16
-- -- --
--- ---
Open at End of Period............................... 19 40 83 108 184
== == == === ===
During the year ended September 30, 1997, the Company entered into several
acquisitions in which the Company acquired 92 stores (the "1997 Acquisitions").
On January 2, 1997, the Company acquired 15 stores in Michigan in the Coleman
Acquisition. On February 6, 1997, the Company acquired 70 stores located in
Colorado, Florida, Indiana, Kentucky, Michigan, West Virginia, and Ohio in the
Rental King Acquisition. In July and September 1997, the Company acquired seven
rental purchase stores located in Pennsylvania, Maryland, and Virginia. In
connection with the acquisition of stores, the Company implements a strategy to
improve the operations of the acquired stores. As part of this strategy, the
Company purchases new merchandise, upgrades the appearance of the stores,
increases the amount of advertising utilized per store, and implements a
training program for the store employees.
On October 6, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of the Ace Rentals rental-purchase chain. Ace
Rentals operates 46 stores in South Carolina and four stores in California. The
Company expects to close the acquisition in early January 1998, subject to the
satisfaction of certain conditions, including the negotiation of a definitive
purchase agreement. Consummation of Ace Rentals Acquisition will provide the
Company with a presence in the southeastern United States, which the Company
believes to be a growing rental-purchase market.
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13
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
table expresses certain items of the Company's Statements of Income for the
years ended September 30, 1997, 1996 and 1995 as a percentage of total revenues.
YEARS ENDED
SEPTEMBER 30,
-------------------------
1997 1996 1995
----- ----- -----
Revenues:...................................................
Rental revenue............................................ 88.0% 85.8% 85.4%
Other revenue............................................. 12.0 14.2 14.6
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise..................................... 23.1 25.9 29.5
Property and equipment................................. 1.7 1.5 1.9
Amortization of goodwill............................... 2.2 1.7 1.2
Salaries and wages........................................ 25.9 25.6 24.5
Advertising............................................... 4.4 4.1 4.5
Occupancy................................................. 6.8 6.4 6.7
Other operating expense................................... 20.2 21.8 22.6
----- ----- -----
Total costs and operating expenses..................... 84.3 87.0 90.9
----- ----- -----
Operating income.......................................... 15.7 13.0 9.1
Interest expense.......................................... (3.6) (2.9) (4.1)
Other income (expenses), net.............................. (0.4) .1 .2
----- ----- -----
Income before income taxes............................. 11.7 10.2 5.2
Income tax expense........................................ (5.3) (4.6) (1.6)
----- ----- -----
Income before extraordinary item....................... 6.4 5.6 3.6
Extraordinary item........................................ (0.2) -- --
----- ----- -----
Net income............................................. 6.2% 5.6% 3.6%
===== ===== =====
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1997 AND 1996
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, total revenues increased to $88.0 million from $51.2
million, or 72.1%. The increase was due to the inclusion of a full year's
results for the stores acquired by the Company in fiscal 1996 (the "1996
Acquisitions"), a partial year's operations for the stores acquired in the 1997
Acquisitions, and increased same store revenues. The stores acquired in the
Rental King Acquisition, consummated on February 6, 1997, accounted for $16.8
million, or 45.5%, of the increase, the stores acquired in the Coleman
Acquisition, consummated on January 2, 1997, accounted for $6.1 million, or
16.5%, of the increase, the stores acquired in the 1996 Acquisitions accounted
for $11.1 million, or 30.1%, of the increase, the Company's same stores
accounted for $2.3 million, or 6.2%, of the increase, and other 1997
Acquisitions accounted for $0.6 million, or 1.7%, of the increase.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, total costs and operating expenses increased to $74.3
million from $44.5 million principally as a result of costs and operating
expenses associated with the 1996 Acquisitions, the Coleman Acquisition, and the
Rental King Acquisition, but decreased to 84.3% from 87.0% of total revenues.
This resulted principally from a decrease in depreciation expense as a
percentage of total revenues and other operating expenses as a percentage of
total revenues. Depreciation expense related to rental merchandise increased to
$20.3 million from $13.2 million, but decreased to 23.1% from 25.9% of total
revenues principally due to increases in weekly rental rates, lower purchase
costs of rental merchandise due to increased volume, and improved realization of
collectible rent. Amortization of goodwill increased to 2.2% from 1.7% of total
revenues principally because of the increase in goodwill related to
13
14
the Coleman Acquisition and the Rental King Acquisition. Salaries and wages
increased to $22.8 million from $13.1 million principally due to the addition of
the store personnel associated with the 1996 Acquisitions, the Coleman
Acquisition, the Rental King Acquisition, and the addition of several key
management personnel in the Company's operations, human resource, marketing,
accounting, and information systems departments. Salaries and wages were 25.9%
and 25.6% of total revenues for the years ended September 30, 1997 and 1996,
respectively. Advertising expense increased to $3.9 million from $2.1 million
principally due to the addition of stores associated with the Coleman
Acquisition and the Rental King Acquisition. Advertising expense increased to
4.4% from 4.1% of total revenues. Occupancy expense increased to $6.0 million
from $3.3 million principally due to the addition of stores associated with the
Coleman Acquisition and the Rental King Acquisition, and increased to 6.8% from
6.4% of total revenues. Other operating expenses increased to $17.8 million from
$11.1 million primarily due to the addition of the stores acquired in the
Coleman Acquisition and the Rental King Acquisition, but decreased to 20.2% from
21.8% of total revenues.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, operating income increased to $13.8 million from $6.7
million, or 107.3%, and increased to 15.7% from 13.0% of total revenues. The
$7.1 million increase in operating income and the 2.7% increase in operating
income as a percentage of total revenues occurred principally because of the
successful integration and conversion of the stores acquired in the 1996
Acquisitions, the Coleman Acquisition in January 1997, and the Rental King
Acquisition in February 1997, the increase in same-store revenues, and the other
factors discussed above.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, interest expense increased to $3.1 million from $1.5
million, and increased to 3.6% from 2.9% of total revenues principally due to
borrowings drawn on the Company's credit facility in connection with the Coleman
Acquisition and the issuance by the Company of its $20.0 million of 7%
Convertible Subordinated Debentures due 2007 (the "Debentures") in connection
with the Rental King Acquisition.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, income tax expense increased to $4.6 million from $2.4
million principally because the Company generated greater taxable income and
because of the decrease in the Company's net deferred tax asset for the year
ended September 30, 1997. The decrease in the deferred tax asset of $0.4 million
was comprised of the deferred tax provision of $1.2 million, which is offset by
$0.8 million of deferred tax asset recorded in connection with the Coleman
Acquisition. Sufficient taxable income exists in the carryback periods to
recognize the deferred tax asset, accordingly, no valuation allowance has been
recognized. The Company is recording income tax expense based on an effective
tax rate of 44.9%, which is higher than the statutory tax rates, principally due
to amortization expense related to goodwill incurred in connection with certain
acquisitions that is not deductible for tax purposes.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, net income increased to $5.4 million from $2.8 million, or
90.2%. The increase, which resulted in net income increasing to 6.2% from 5.6%
of total revenues, was due to the factors discussed above.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, total revenues increased to $51.2 million from $28.2
million, or 81.5%. The increase was due to the inclusion of a full year's
results for the stores acquired in the McKenzie Leasing Corporation Acquisition
(the "McKenzie Acquisition") a partial year's operations for the stores acquired
in the 1996 Acquisitions and increased same store revenues. The stores acquired
in the McKenzie Acquisition, which was consummated July 21, 1995, accounted for
$19.7 million, or 85.6%, of the increase, the stores acquired in the 1996
Acquisitions accounted for $2.5 million, or 10.9%, of the increase, and the
Company's same stores accounted for $0.8 million, or 3.5%, of the increase.
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, total costs and operating expenses increased to $44.5
million from $25.6 million principally as a result of costs and operating
expenses associated with the McKenzie Acquisition and the 1996 Acquisitions, but
decreased to 87.0% from 90.9% of total revenues. This 3.9% net decrease resulted
primarily from a decrease in depreciation expense as a percentage of total
revenues. Depreciation expense related to rental merchandise increased to $13.2
million from
14
15
$8.3 million, but decreased to 25.9% from 29.5% of total revenues principally
due to increases in weekly rental rates, lower purchase costs of rental
merchandise due to increased volume, and improved realization of collectible
rent. Amortization of goodwill increased to 1.7% from 1.2% of total revenues
principally because of the increase in goodwill related to the McKenzie
Acquisition. Salaries and wages increased to $13.1 million from $6.9 million
principally due to the addition of the store personnel associated with the
McKenzie Acquisition, the 1996 Acquisitions, and the addition of several key
Company management personnel in the operations, legal, human resource,
accounting, and information systems departments. Salaries and wages were 25.6%
and 24.5% of total revenues for the years ended September 30, 1996 and 1995,
respectively. Advertising expense increased to $2.1 million from $1.3 million
principally due to the addition of stores associated with the McKenzie
Acquisition. Advertising expense decreased to 4.1% from 4.5% of total revenues.
Occupancy expense increased to $3.3 million from $1.9 million principally due to
the addition of stores associated with the McKenzie Acquisition, but decreased
to 6.4% from 6.7% of total revenues. Other operating expenses increased to $11.1
million from $6.4 million principally due to the addition of the stores acquired
in the McKenzie Acquisition, but decreased to 21.8% from 22.6% of total
revenues.
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, operating income increased to $6.7 million from $2.6
million, or 157.8%, and increased to 13.0% from 9.1% of total revenues. The $4.1
million increase in operating income and the 3.9% increase in operating income
as a percentage of total revenues occurred principally because of the successful
integration and conversion of the stores acquired in the McKenzie Acquisition in
July 1995, the increase in same-store revenues, and the factors discussed above.
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, interest expense increased to $1.5 million from $1.2
million, but decreased to 2.9% from 4.1% of total revenues principally due to
the repayment of $13.2 million of outstanding borrowings under the Company's
collateralized credit agreement with First Source Financial LLP in March 1996.
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, income tax expense increased to $2.4 million from $0.4
million principally because the Company generated greater taxable income and
because of the increase in the deferred tax expense. The deferred tax asset
increased by $0.1 million resulting from the recording of $0.8 million of
deferred tax asset acquired from Diamond Leasing Corporation which is offset by
$0.7 million deferred tax expense. The Company believes it is more likely than
not to realize the net deferred tax asset, and accordingly no valuation
allowance has been recognized. This conclusion is based on the Company's taxable
income in carryback periods and, to the extent necessary, management's estimate
of taxable income in future periods. The Company is recording income tax expense
based on an effective tax rate of 45.5%, which is higher than the statutory tax
rates, principally due to amortization expense related to goodwill incurred in
connection with its acquisitions that is not deductible for tax purposes.
For the year ended September 30, 1996 as compared to the year ended
September 30, 1995, net income increased to $2.8 million from $1.0 million, or
182.3%. The increase, which resulted in net income increasing to 5.6% from 3.6%
of total revenues, was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On November 22, 1996, the Company entered into a new collateralized
revolving credit facility (the "New Facility") with a syndicate of banks led by
National City Bank of Pennsylvania ("National City Bank"), providing for loans
or letters of credit up to $40.0 million, subject to formula-based availability.
The syndicate consists of four banks, with National City Bank, LaSalle National
Bank, and Harris Trust and Savings Bank each committed for a ratable share of
27.25%, and Heller Financial, Inc. committed for an 18.25% ratable share. The
New Facility replaces the existing $15.0 million collateralized credit agreement
with First Source Financial LLP. Of the $40.0 million available under the New
Facility, approximately $7.0 million was used to refinance previously existing
senior indebtedness and $0.8 million was used to redeem the Company's Series A
Redeemable Preferred Stock. The Company redeemed the preferred stock at a 25%
discount to face value resulting in a gain of $0.3 million. As of September 30,
1997, the unused portion of the New Facility was approximately $19.0 million
with approximately $12.0 million of availability.
15
16
On February 6, 1997, the Company completed the private placement of the
Debentures. The Debentures are due February 1, 2007 and are convertible into
shares of common stock, without par value, of the Company at a conversion price
of $13.37 per share. The Debentures will become subject to redemption at the
option of the Company on February 5, 2000 at a price of 103%. The redemption
price will decrease at a rate of 1% per year, reaching a price of 100% in the
year 2003 and remaining fixed until the date of maturity. The indebtedness
evidenced by the Debentures is subordinated and junior in right of payment to
the extent of payment in full of all amounts due on all senior indebtedness. The
Debentures bear an annual interest rate of 7% with semi-annual payments in
August and February, beginning August 1, 1997. The Company filed a registration
statement to register for resale the Debentures and the shares of Common Stock
underlying the Debentures with the Securities and Exchange Commission on May 9,
1997 and the registration statement became effective on June 19, 1997. The net
proceeds raised on issuance of the Debentures were used in conjunction with the
Rental King Acquisition (see Note 3 to the financial statements).
On October 8, 1997, the Company exercised its right to convert mandatorily
the $7.0 million 10% Convertible Subordinated Notes ("the Notes") held by
Massachusetts Mutual Life Insurance Company and certain of its affiliates. The
Notes were convertible by the Company at a conversion price of $9.94 per share
upon the Company's Common Stock trading at a price above $16.50 per share for 20
consecutive days during any 30-day period. The Notes converted into 704,225
shares of Common Stock, which have been registered for resale pursuant to a
shelf registration statement filed by the Company that became effective in June
1997.
For the year ended September 30, 1997, the Company's net cash provided by
(used in) operating activities increased to $0.7 million from ($1.2) million for
the year ended September 30, 1996. The increase was principally due to a $7.2
million increase in rental merchandise purchases, a $2.6 million increase in net
income, a $9.1 million increase in non-cash depreciation and amortization, a
$1.5 million decrease in other liabilities, a $1.9 million decrease in income
taxes payable and a $0.5 million increase in deferred income taxes. The increase
in depreciation and amortization and rental merchandise resulted primarily from
the Coleman Acquisition and the Rental King Acquisition, which significantly
increased the size of the Company.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, the Company's net cash used in investing activities
increased to ($30.6) million from ($10.6) million. The increase in net cash used
in investing activities was principally due to the 1997 Acquisitions and the
remodeling costs and computer hardware costs incurred in connection with the
Coleman Acquisition and the Rental King Acquisition.
For the year ended September 30, 1997, as compared to the year ended
September 30, 1996, the Company's net cash provided by financing activities
increased to $30.4 million from $11.1 million. The increase in net cash provided
by financing activities was principally due to cash received in connection with
the Company's private placement of the Debentures issued in connection with the
Rental King Acquisition. Historically, the Company's growth has been financed
through internally generated working capital, borrowings under its available
credit facilities and, in connection with acquisitions, issuances of its Common
Stock, Preferred Stock and Convertible Debt. During fiscal 1997, the Company's
acquisitions were financed by a combination of cash generated by the Company's
private placement of the Debentures and borrowings under the New Facility.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing additional rental merchandise and replacing
rental merchandise that has been sold or is no longer suitable for rent. The
Company intends to increase the number of stores it operates primarily through
acquisitions. Such acquisitions will vary in size and the Company will consider
large acquisitions that could be material to the Company. To provide any
additional funds necessary for the continued pursuit of its growth strategies,
the Company may incur, from time-to-time, additional short and long-term bank or
other institutional indebtedness and may issue, in public or private
transactions, its equity and debt securities, the availability of which will
depend upon market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company.
INFLATION
During the year ended September 30, 1997, the cost of rental merchandise,
store lease rental expense and salaries and wages have increased modestly. These
increases have not had a significant effect on the Company's
16
17
results of operations because the Company has been able to charge commensurately
higher rental for its merchandise. This trend is expected to continue in the
foreseeable future.
OTHER MATTERS
Effective July 1, 1995, the Company changed its depreciation method for
rental merchandise from the straight-line method to the units of activity method
for new purchases. This change had no significant impact on the Company's
financial position or results of operations.
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" for
the year ended September 30, 1995. The adoption of SFAS No. 121 had no impact on
the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company adopted this Standard's disclosure-only provisions in fiscal 1997.
The adoption of this standard had no impact on the Company's financial position
or results of operations.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share, effective
for periods ending after December 15, 1997. The Company has disclosed the
estimated impact of SFAS 128 on the years ended September 30, 1997, 1996 and
1995 (see Note 2 to the financial statements).
In March 1997, the FASB also issued SFAS NO. 129, "Disclosure of
Information about Capital Structure" effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 129 will have no impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", both effective for fiscal years beginning after December
15, 1997. The Company is currently studying the provisions of these SFAS's and
has not adopted such provisions in its September 30, 1997 financial statements.
CAUTIONARY STATEMENT
This Report on Form 10-K and the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations contains various
"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. The Company's Annual Report to Shareholders, any Report on Form 10-Q
or Form 8-K or any other written or oral statements made by or on behalf of the
Company may include forward looking statements. Forward-looking statements
represent the Company's expectations or beliefs concerning future events. Any
forward-looking statements made by or on behalf of the Company are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors include,
but are not limited to, (i) the ability of the Company to acquire additional
rental-purchase stores on favorable terms, (ii) the ability of the Company to
improve the performance of such acquired stores and to integrate such acquired
stores into the Company's operations, and (iii) the impact of state and federal
laws regulating or otherwise affecting the rental-purchase transaction.
Undo reliance should not be placed on any forward-looking statements made
by or on behalf of the Company as such statements speak only as of the date
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, the
occurrence of future events or otherwise.
17
18
ITEM 8 FINANCIAL STATEMENTS
PAGE
----
Index to Financial Statements........................................................ 18
Report of Independent Accountants.................................................. 19
Financial Statements:
Balance Sheets, September 30 1997 and 1996......................................... 20
Statements of Income, Years Ended September 30, 1997, 1996 and 1995................ 21
Statements of Shareholders' Equity, Years Ended September 30, 1997, 1996 and
1995............................................................................ 22
Statements of Cash Flows, Years Ended September 30, 1997, 1996 and 1995............ 23
Notes to Financial Statements...................................................... 24
18
19
RENT-WAY, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS RENT-WAY, INC.:
We have audited the accompanying balance sheets of Rent-Way, Inc. as of
September 30, 1997 and 1996, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rent-Way, Inc. as of
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
October 31, 1997
19
20
RENT-WAY, INC.
BALANCE SHEETS
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
ASSETS
Cash............................................................. $ 598,664 $ 179,425
Prepaid expenses................................................. 1,452,265 986,987
Rental merchandise, net.......................................... 35,132,316 17,862,420
Deferred income taxes............................................ 1,071,927 1,473,522
Property and equipment, net...................................... 8,518,222 4,616,362
Goodwill, net of accumulated amortization of $3,249,684 and
$1,323,399, respectively....................................... 43,446,776 21,866,806
Deferred financing costs, net of accumulated amortization of
$231,225 and $109,874, respectively............................ 1,475,088 377,232
Non-compete agreements and prepaid consulting fee, net of
accumulated amortization of $606,420 and $229,167,
respectively................................................... 1,743,514 1,320,767
Other assets..................................................... 2,849,166 1,290,217
----------- -----------
$96,287,938 $49,973,738
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................. $ 3,067,294 $ 1,746,797
Other liabilities................................................ 3,411,605 2,181,899
Income taxes payable............................................. 695,743 1,226,590
Debt............................................................. 48,156,426 12,979,075
----------- -----------
55,331,068 18,134,361
Commitments and Contingencies (Note 8)........................... -- --
Redeemable preferred stock, Series A, without par value; (Note
9)............................................................. -- 1,120,700
Shareholders' equity:
Preferred stock, without par value; 1,000,000 shares authorized;
no shares issued and outstanding at September 30, 1997......... -- --
Common stock, without par value; 20,000,000 shares authorized;
7,059,451 and 6,659,180 shares issued and outstanding,
respectively................................................... 32,759,595 27,907,225
Retained earnings................................................ 8,197,275 2,811,452
----------- -----------
Total shareholders' equity..................................... 40,956,870 30,718,677
----------- -----------
$96,287,938 $49,973,738
=========== ===========
The accompanying notes are an integral part of these financial statements.
20
21
RENT-WAY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUES:
Rental revenue..................................... $77,498,328 $43,890,708 $24,080,270
Other revenue...................................... 10,545,206 7,280,629 4,114,153
----------- ----------- -----------
Total revenues................................... 88,043,534 51,171,337 28,194,423
COSTS AND OPERATING EXPENSES:
DEPRECIATION AND AMORTIZATION:
Rental merchandise............................... 20,314,482 13,229,173 8,312,014
Property and equipment........................... 1,530,133 775,169 525,060
Amortization of goodwill......................... 1,926,287 874,668 334,003
Salaries and wages................................. 22,809,722 13,100,891 6,908,648
Advertising........................................ 3,898,610 2,123,324 1,259,514
Occupancy.......................................... 5,987,604 3,269,406 1,887,870
Other operating expenses........................... 17,790,535 11,147,645 6,387,333
----------- ----------- -----------
Total costs and operating expenses................. 74,257,373 44,520,276 25,614,442
----------- ----------- -----------
Operating income.............................. 13,786,161 6,651,061 2,579,981
OTHER INCOME (EXPENSE):
Interest expense................................... (3,129,894) (1,493,143) (1,162,384)
Amortization--deferred financing costs............. (239,086) (93,649) (16,229)
Interest income.................................... 920 60,267 66,277
Other income (expense), net........................ (103,681) 103,838 (13,435)
----------- ----------- -----------
Income before income taxes and extraordinary
item........................................ 10,314,420 5,228,374 1,454,210
Income tax expense................................. 4,629,477 2,381,062 445,440
----------- ----------- -----------
Income before extraordinary item.............. 5,684,943 2,847,312 1,008,770
Extraordinary item (Notes 1 and 7)................. (269,017) -- --
----------- ----------- -----------
Net income.................................... 5,415,926 2,847,312 1,008,770
Preferred stock (dividend) / gain on redemption
(Note 9)......................................... 280,175 (128,969) (37,973)
----------- ----------- -----------
Earnings applicable to common shares.......... $ 5,696,101 $ 2,718,343 $ 970,797
=========== =========== ===========
EARNINGS PER COMMON SHARE
Primary earnings per share (adjusted to give effect
to any preferred stock (dividend)/gain on
redemption):
Income before extraordinary item.............. $ 0.82 $ 0.46 $ 0.22
=========== =========== ===========
Net income.................................... $ 0.79 $ 0.46 $ 0.22
=========== =========== ===========
Fully diluted earnings per share (adjusted to give
effect to any preferred stock (dividend)/gain on
redemption):
Income before extraordinary item.............. $ 0.74 $ 0.45 $ 0.22
=========== =========== ===========
Net income.................................... $ 0.72 $ 0.45 $ 0.22
=========== =========== ===========
Weighted average number of shares outstanding:
Primary....................................... 7,250,448 5,945,427 4,400,066
=========== =========== ===========
Fully diluted................................. 9,322,925 6,055,523 4,500,287
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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RENT-WAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
COMMON STOCK RETAINED TOTAL
------------------------ EARNINGS SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
--------- ----------- ---------- -------------
Balance at September 30, 1994............. 2,705,000 $ 6,859,053 $ (897,480) $ 5,961,573
Net income for the year................. -- -- 1,008,770 1,008,770
Purchases of business (Notes 4)......... 432,792 4,072,149 -- 4,072,149
Issuance of common stock under stock
option plans (Notes 12 and 13)....... 11,706 114,427 -- 114,427
Three for two common stock split in the
form of a 50% stock dividend (Note
12).................................. 1,574,749 -- -- --
Common stock returned to treasury....... (299,263) -- -- --
Loan to related party (Note 11)......... -- (296,578) -- (296,578)
--------- ----------- ---------- -----------
Balance at September 30, 1995............. 4,424,984 10,749,051 111,290 10,860,341
--------- ----------- ---------- -----------
Net income for the year................. -- -- 2,847,312 2,847,312
Public stock offering (Note 3).......... 2,185,812 16,760,056 -- 16,760,056
Common stock returned to treasury (Note
4)................................... (14,578) -- -- --
Exercise of "put" right to principle
shareholder (Note 11)................ (8,600) (381,748) -- (381,748)
Repayment of loan to related party (Note
11).................................. (10,800) 134,578 -- 134,578
Purchases of business (Note 4).......... 20,358 187,500 -- 187,500
Issuance of common stock under stock
option plans (Note 13)............... 49,025 309,279 -- 309,279
Issuance of common stock to 401(k) Plan
(Note 15)............................ 12,979 148,509 -- 148,509
Preferred stock (dividends) (Note 9).... -- -- (147,150) (147,150)
--------- ----------- ---------- -----------
Balance at September 30, 1996............. 6,659,180 27,907,225 2,811,452 30,718,677
--------- ----------- ---------- -----------
Net income for the year................. -- -- 5,415,926 5,415,926
Common stock returned to treasury (Note
4)................................... (65,657) -- -- --
Purchases of business (Note 4).......... -- 107,500 -- 107,500
Issuance of common stock under stock
option plans including tax benefit
(Note 13)............................ 443,610 4,192,401 -- 4,192,401
Issuance of common stock to 401(k) Plan
(Note 15)............................ 22,318 272,294 -- 272,294
Preferred stock (dividends)/gain on
redemption (Note 9).................. -- 280,175 (30,103) 250,072
--------- ----------- ---------- -----------
Balance at September 30, 1997............. 7,059,451 $32,759,595 $8,197,275 $40,956,870
========= =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
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23
RENT-WAY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
OPERATING ACTIVITIES:
Net income.......................................... $ 5,415,926 $ 2,847,312 $ 1,008,770
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization..................... 24,009,988 14,879,010 9,187,129
Deferred income taxes............................. 1,189,082 681,490 62,308
Deferred finance write-off........................ 323,772 -- --
Issuance of common stock to 401(k) plan........... 272,294 148,509 --
CHANGES IN ASSETS AND LIABILITIES:
Prepaid expenses.................................. (41,640) (235,413) (1,302,726)
Rental merchandise................................ (27,613,433) (20,448,195) (9,170,702)
Other assets...................................... (653,249) (710,547) (225,072)
Accounts payable.................................. (884,788) (406,871) 431,956
Income taxes payable.............................. (530,847) 1,400,937 172,508
Other current liabilities......................... (836,883) 616,281 162,477
------------ ------------ -----------
Net cash provided by (used in) operating
activities................................... 650,222 (1,227,487) 326,648
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired of
$60,132 in 1997, $38,759 in 1996 and $228,556
in 1995........................................ (25,949,875) (8,601,764) (1,660,411)
Purchases of property and equipment............... (5,122,164) (2,053,245) (1,960,485)
Net proceeds from the sale of property and
equipment and land and building lots........... 476,786 9,680 133,051
Closing and development fees payable.............. -- -- (161,458)
------------ ------------ -----------
Net cash used in investing activities.......... (30,595,253) (10,645,329) (3,649,303)
------------ ------------ -----------
FINANCING ACTIVITIES:
Principal payments on capital lease obligation.... -- (6,638) (7,082)
Proceeds from borrowings.......................... 41,022,110 23,866,711 11,955,257
Payments on borrowings............................ (12,318,899) (28,195,016) (7,529,709)
Deferred financing costs.......................... (1,660,714) -- (481,553)
Issuance of common stock.......................... 4,192,401 17,069,335 114,427
Preferred stock dividend.......................... (30,103) (147,150) --
Preferred stock redemption........................ (840,525) (1,629,300) --
Loan to related party............................. -- 134,578 (21,639)
------------ ------------ -----------
Net cash provided by financing activities...... 30,364,270 11,092,520 4,029,701
------------ ------------ -----------
Increase (decrease) in cash.................... 419,239 (780,296) 707,046
Cash at beginning of year........................... 179,425 959,721 252,675
------------ ------------ -----------
Cash at end of year................................. $ 598,664 $ 179,425 $ 959,721
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest....................................... $ 2,747,871 $ 1,537,317 $ 1,039,473
Income taxes................................... $ 1,936,924 $ 307,841 $ 161,313
In addition, the Company entered into various transactions during the year
which involved non-cash investing and financing activities ( Notes 4, 11, and
15).
The accompanying notes are an integral part of these financial statements.
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24
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION--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 stores that rent durable household products such as
home entertainment equipment, furniture, major appliances and jewelry to
consumers on a weekly or monthly basis in fourteen states and the District of
Columbia. The stores are primarily located in the Mid-West, Eastern and Southern
regions of the United States.
BASIS OF PRESENTATION--The Company changed its accounting policy to adopt
the use of an unclassified balance sheet to conform to practice in the industry
in which it operates.
ACCOUNTING ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
RENTAL MERCHANDISE, RENTAL REVENUE AND DEPRECIATION--Rental merchandise is
rented to customers pursuant to rental agreements which provide for either
weekly or monthly rental payments collected in advance. Rental revenue is
recognized as collected, since at the time of collection the rental merchandise
has been placed in service and costs of installation and delivery have been
incurred. This method of revenue recognition does not produce materially
different results than if rental revenue was recognized over the weekly or
monthly rental term. At the end of each rental period, the customer can renew
the rental agreement.
Merchandise rented to customers or available for rent is classified in the
balance sheet as rental merchandise and is valued at cost on a specific
identification method. Write-offs of rental merchandise arising from customers'
failure to return merchandise 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.
Rental merchandise purchased prior to July 1, 1995 is depreciated on the
straight-line method, with a 10% salvage value, over various periods ranging
from 15 to 30 months (most rental merchandise was depreciated over a 21 month
period). Effective July 1, 1995, the Company changed its depreciation method
from the straight line method to the units of activity method for new purchases.
Under the units of activity method, rental merchandise is depreciated as revenue
is collected. Rental merchandise is not depreciated during periods when it is
not on rent and therefore not generating rental revenue. This change in
accounting principle was made to more accurately match revenues and expenses.
The effect of the change was not significant. Rental merchandise in the stores
acquired from McKenzie Leasing Corporation, ("MLC"--See Note 4) was depreciated
on the straight-line method over a 15 month period. Rental merchandise in stores
acquired during 1997 and 1996 is being depreciated under the units of activity
method.
OTHER REVENUE--Other revenue includes revenue from various services and
charges to rental customers, including late fees, liability waiver fees,
processing fees, and sales of used merchandise. Other revenue is recognized as
collected. This method of revenue recognition does not produce materially
different results than if other revenue was recognized when earned.
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION--Property
and equipment are stated at cost. Additions and improvements that significantly
extend the lives of depreciable assets are capitalized. Upon sale or other
retirement of depreciable property, the cost and accumulated depreciation are
removed from the related accounts and any gain or loss is reflected in the
results of operations. The Company's corporate headquarters and other buildings
are depreciated over a 20 year term on a straight-line basis. Depreciation of
furniture and fixtures, signs and vehicles is provided over the estimated useful
lives of the respective assets (three
24
25
to five years) on a straight-line basis. Leasehold improvements are amortized
over the shorter of the useful life of the asset or the term of the lease and
renewal period, if applicable.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" for the year ended September 30,
1995. The adoption of SFAS No. 121 had no impact on the Company's financial
position or results of operations.
INCOME TAXES--Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax and financial
statement basis of assets and liabilities at year end. Deferred income taxes are
adjusted for tax rate changes as they occur.
INTANGIBLE ASSETS--Goodwill is stated at cost. Each acquisition is
independently evaluated to determine the appropriate period for amortization of
the resulting goodwill. Currently, amortization of goodwill is calculated on a
straight line basis over periods ranging from ten to twenty years. Periodically,
the Company will determine if there has been permanent impairment of goodwill by
comparing anticipated undischarged future net cash flows from operating
activities of the acquired store locations with the carrying value of the
related goodwill. At September 30, 1997 and 1996, the Company concluded that
there was no impairment of goodwill. Deferred financing fees are stated at cost
less amortization calculated on a straight-line basis over the term of the
related debt agreements, which range from three to ten years. Non-compete
agreements and a prepaid consulting fee are stated at cost less amortization
calculated on a straight-line basis over the term of the related agreements,
which range from two to seven years.
ADVERTISING REBATES--The Company participates in vendor advertising rebate
programs with the majority of its rental merchandise suppliers. Rebates are
recognized in the period earned. On a quarterly basis, management calculates the
amount of the rebate and either submits a request for payment or credits the
balance due the respective vendor.
EARNINGS PER COMMON SHARE--Primary and fully diluted earnings per common
share are computed based on net income after preferred stock dividend
requirements and the redemption of redeemable preferred stock on a discounted
basis, if applicable. In addition, the fully diluted weighted average number of
common shares outstanding are adjusted to give effect to convertible
subordinated debt and subordinated notes deemed to be an other potentially
dilutive securities. The weighted average number of common shares outstanding
during each year is adjusted to give effect to stock options and warrants
considered to be dilutive common stock equivalents. Primary and fully diluted
weighted average common shares outstanding have been adjusted to reflect
escrowed shares returned to the Company in connection with certain of the
Company's acquisitions (See Note 4).
FAIR VALUE DISCLOSURES--Fair values of fixed interest debt instruments have
been determined through a combination of management's estimates, information
obtained from independent third parties, and discounted cash flow analysis.
EXTRAORDINARY ITEM--As a result of the refinancing of its senior credit
facility in November 1996, the Company incurred an extraordinary charge, net of
tax benefit, of $269,017. The extraordinary charge was composed of a $124,590
($74,754 net of tax benefit) prepayment penalty for early retirement of debt and
a $323,772 ($194,263 net of tax benefit) write-off of deferred finance costs
associated with the refinanced debt (See Note 7).
RECLASSIFICATIONS--Certain amounts in the September 30, 1995 and 1996,
financial statements were reclassified to conform to the September 30, 1997,
presentation.
2. NEW ACCOUNTING STANDARDS:
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company adopted this Standard's disclosure-only provisions in fiscal 1997.
The adoption of this standard had no impact on the Company's financial position
or results of operations.
25
26
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share",
effective for periods ending after December 15, 1997. The Company, in
recognition of requirements SFAS No. 128, has determined the impact of basic and
diluted earnings per common share. Basic earnings per common share is computed
using income available to common shareholders divided by the weighted average
number of common shares outstanding. Diluted earnings per common share is
computed using income available to common shareholders adjusted for anticipated
interest savings, net of related taxes, for convertible subordinated notes and
debentures and the weighted average number of shares outstanding is adjusted for
the potential impact of options, warrants and convertible subordinated notes and
debentures.
The following table discloses the impact of the SFAS No. 128 on the
Company's earnings per common share ("EPS") for the years ended September 30,
1997, 1996, and 1995:
YEAR ENDING SEPTEMBER 30
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Earnings applicable to common shareholders for
Basic EPS................................... $5,696,101 $2,718,343 $ 970,797
Interest on 10% convertible subordinated
notes (net of tax)..................... 420,700 -- --
Interest on 7% convertible subordinated
debentures (net of tax)................ 549,632 -- --
---------- ---------- ----------
Earnings applicable to common shareholders
plus assumed conversions for Diluted EPS.... $6,666,433 $2,718,343 $ 970,797
========== ========== ==========
Weighted average common shares outstanding.... 6,692,008 5,345,878 3,855,934
Plus shares applicable to:
Options and warrants..................... 558,440 614,628 544,132
10% convertible subordinated notes....... 704,225 -- --
7% convertible subordinated debentures... 966,842 -- --
---------- ---------- ----------
Adjusted weighted average common shares
outstanding................................. 8,921,515 5,960,506 4,400,066
========== ========== ==========
Basic EPS (adjusted to give effect to any
preferred stock (dividend) / gain on
redemption):
Income before extraordinary item.............. $ 0.89 $ 0.51 $ 0.25
========== ========== ==========
Net income.................................... $ 0.85 $ 0.51 $ 0.25
========== ========== ==========
Diluted EPS (adjusted to give effect to any
preferred stock (dividend) / gain on
redemption):
Income before extraordinary item.............. $ 0.78 $ 0.46 $ 0.22
========== ========== ==========
Net Income.................................... $ 0.75 $ 0.46 $ 0.22
========== ========== ==========
In March 1997, the FASB also issued SFAS NO. 129, "Disclosure of
Information about Capital Structure" effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 129 will have no impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" both effective for fiscal years beginning after December
15, 1997. The Company is currently studying the provisions of these SFAS's and
has not adopted such provisions in its September 30, 1997 financial statements.
3. PUBLIC STOCK OFFERING:
On March 26, 1996, the Company completed a public offering consisting of
1,850,000 shares of common stock offered by the Company and 388,750 shares of
common stock offered by certain selling shareholders. In addition, the
underwriters exercised a 30 day option to purchase up to 335,812 shares of
common stock, to cover over-allotments. The shares were offered at a price of
$8.50 per share. The Company received net proceeds (less
26
27
underwriters discount and selling expenses) of $16,760,056 including the
underwriters exercise of the over-allotment option. The Company used these
proceeds to repay outstanding borrowings of $13.2 million under the Company's
collateralized credit agreement with First Source Financial LLP (See Note 7), to
redeem a portion of its outstanding Series A Preferred Stock (See Note 9) and
for general corporate purposes.
4. ACQUISITIONS:
On January 24, 1997, the Company signed a definitive purchase agreement to
acquire all the outstanding shares of Perry Electronics, Inc. d/b/a Rental King
("Rental King"). On February 6, 1997, the Company consummated the transaction
and acquired all the outstanding shares of Rental King, assuming effective
control of the results of operations as of February 1, 1997. At the time of
acquisition, Rental King operated a chain of seventy rental-purchase stores in
Colorado, Florida, Indiana, Kentucky, Michigan, Ohio and West Virginia with
annual revenues of approximately $24.0 million. The consideration paid in
exchange for all the outstanding shares of Rental King was $17,284,618 in cash.
Pursuant to the terms of the purchase agreement, $2.0 million of the purchase
price was placed in escrow, subject to the terms of the escrow agreement to
satisfy seller's representations and warranties and any purchase price
adjustments. In June 1997, the full amount of the escrow account was released.
The acquisition was accounted for using the purchase method of accounting.
Rental King's assets and liabilities were recorded at their estimated fair
market values as of the date of the acquisition. The excess of the acquisition
cost over the estimated fair values of the net assets acquired, ("goodwill") of
$17,147,114 is being amortized on a straight line basis over twenty years. The
total costs of the net assets acquired was $17,284,618 and consisted of assets
of $25,124,830 less liabilities assumed of $6,196,982 and acquisition costs of
$1,643,230. The acquisition of Rental King was primarily funded by the net
proceeds received on a private placement of $20.0 million in subordinated
convertible debentures (see Note 7). The balance of the cash paid on closing was
drawn upon the Company's existing line of credit. Assets acquired (at fair
market value) other than goodwill consist primarily of rental merchandise of
$6,386,000, property and equipment of $744,615, other assets of $347,101 and
non-compete agreements of $500,000. Liabilities assumed (at fair market value)
consist primarily of trade payables of $488,561, accrued liabilities of
$1,944,927, bank debt of $2,939,494 and notes payable of $824,000. The statement
of income for the year ended September 30, 1997 includes the results of
operations of Rental King since the date of acquisition.
On January 2, 1997, the Company acquired all the outstanding shares of Bill
Coleman TV, Inc., ("Coleman"), a privately owned chain of fifteen
rental-purchase stores operating in Michigan with annual revenues of
approximately $7.5 million, in exchange for consideration consisting of
$2,679,921 in cash and an option to purchase 25,000 shares of the Company's
common stock at an exercise price of $8.875 per share with a fair market value
of $107,500. The 25,000 stock options are 100% exercisable and expire five years
from the date of the grant. Pursuant to terms of the acquisition, $350,000 of
the purchase price was placed in escrow subject to terms of the escrow agreement
to satisfy sellers' representations and warranties and any purchase price
adjustments. The escrow agreement provides for release of the escrow on
completion of a financial audit of Coleman and final resolution of any purchase
price adjustments. The acquisition was accounted for using the purchase method
of accounting. Coleman's assets and liabilities were recorded at their estimated
fair values as of the acquisition date. The excess of the acquisition cost over
the estimated fair values of the net assets acquired, ("goodwill") of $3,490,490
is being amortized on a straight line basis over twenty years. The total cost of
the net assets acquired was $2,787,421 ($2,679,921 in cash and $107,500 in stock
options) and consisted of assets of $7,685,496 less liabilities assumed of
$4,548,836 and acquisition costs of $349,239. The allocation of the cost of
acquisition will be finalized upon final resolution of the purchase price.
Assets acquired (at fair market value) other than goodwill, consisted primarily
of rental merchandise of $2,401,000, property and equipment of $42,000, deferred
tax assets of $787,487, a note receivable of $506,368, a non-compete agreement
of $300,000 and other assets of $158,151. Liabilities assumed (at fair market
value) consisted primarily of trade accounts payable of $1,838,190, debt of
$2,474,155 and note payable of $236,491. The Statement of Income for the year
ended September 30, 1997 includes the operations of Coleman from the date of
acquisition.
In July and September 1997, the Company purchased the rental merchandise
and rental-purchase contracts of seven rental-purchase stores located in
Pennsylvania, Maryland, and Virginia, with combined annual revenues of
approximately $4.3 million. The Company paid cash in exchange for the assets and
each acquisition was
27
28
recorded using the purchase method of accounting. The acquired assets were
recorded at their estimated fair values at the date of acquisition. The excess
of the acquisition cost over the estimated fair values of the assets acquired,
("goodwill") of $2,681,788 is being amortized on a straight line basis over
twenty years. The total cost of the net assets acquired was $3,809,878 and
consisted of assets of $3,912,403 less acquisition costs of $102,525. The
Statement of Income for the year ended September 30, 1997 includes the operating
results for these stores from the respective dates of acquisition.
On July 25, 1996 the Company acquired all the outstanding shares of Diamond
Leasing Corporation ("DLC"); a chain of 11 rental-purchase stores operating in
Delaware, Maryland and Pennsylvania with annual revenues of approximately $7.0
million in exchange for consideration consisting of 20,358 (unregistered shares
subject to the provisions of Rule 144 of the Securities and Exchange Act) shares
of the Company's common stock and $4,102,296 in cash. Pursuant to the terms of
the acquisition, $325,000 of the purchase price was placed in escrow subject to
the terms of the escrow agreement. Per the terms of the escrow $175,000 was
released upon completion of the financial statement audit with the remaining
$150,000 being held for a three year period from the date of closing. The
acquisition was accounted for using the purchase method of accounting. DLC's
assets and liabilities were recorded at their estimated fair values as of the
acquisition date. The excess of the acquisition cost over the estimated fair
values of the net assets acquired ("goodwill") of $4,406,400 is being amortized
on a straight-line basis over twenty years. The total cost of the net assets
acquired was $4,289,796 ($187,500 in common stock and $4,102,296 in cash) and
consisted of assets of $7,219,304 less liabilities assumed of $2,363,136 and
acquisition costs of $566,372. Assets acquired (at estimated fair value) other
than goodwill consisted principally of rental merchandise of $1,359,808,
property and equipment of $310,850, non-compete agreements of $300,000 and
deferred tax assets of $744,808. Liabilities assumed (at estimated fair value)
consisted principally of trade accounts payable of $582,693 and bank debt of
$1,446,238. The Statement of Income for the year ended September 30, 1996,
includes the operations of DLC from the date of acquisition.
During 1996, the Company also purchased from 5 separate entities the rental
merchandise and contracts of 21 rental-purchase stores in Maryland, New York,
Pennsylvania, Virginia and the District of Columbia with combined annual
revenues of approximately $4.2 million. The Company paid cash in exchange for
the assets and each acquisition was recorded using the purchase method of
accounting. The acquired assets were recorded at their estimated fair values at
the date of acquisition. The excess of the acquisition cost over the estimated
fair values of the net assets acquired ("goodwill") of $3,028,796 is being
amortized on a straight line basis over twenty years. The total cost of the net
assets acquired was $3,763,250 and consisted of assets of $3,893,796 less
liabilities assumed of $44,814 and acquisition costs of $85,732. The Statement
of Income for the year ended September 30, 1996 includes the operating results
for these stores from the respective dates of acquisition.
On July 21, 1995, the Company acquired McKenzie Leasing Corporation
("MLC"), a privately owned 45 store rental-purchase chain with annual revenues
of approximately $22 million. The Company acquired all of the common stock of
MLC in exchange for 581,688 (unregistered shares subject to the provisions of
Rule 144 of the Securities and Exchange Act and a shareholder agreement) shares
of the Company's common stock, a stock option to purchase 115,812 shares of the
Company's common stock at $9.28 per share and $2,750,000 of redeemable preferred
stock (See Note 9). The 115,812 stock options are 100% exercisable and expire
five years from the date of grant. Of the common shares issued, 356,688 shares
were delivered to the former shareholders of MLC and 225,000 were placed in
escrow. In October 1996, 65,657 of the escrowed shares were returned to the
Company and 159,343 were released to the former MLC shareholders. The allocation
of the shares released from escrow was based on the daily average market price
of $13.08 per share for the twenty trading days preceding October 1, 1996. The
acquisition was accounted for using the purchase method of accounting. MLC's
assets and liabilities were recorded at their estimated fair values as of the
acquisition date. The excess of the acquisition cost over the estimated fair
values of the net assets acquired ("goodwill") of $11,074,492 is being amortized
on a straight-line basis over twenty years. The total cost of the net assets
acquired was $6,469,293 ($3,684,024 in common stock, $2,750,000 in redeemable
preferred stock and $35,269 in cash) and consisted of assets of $16,631,760 less
liabilities assumed of $8,726,921 and acquisition costs of $1,435,546. Assets
acquired (at estimated fair value) other than goodwill consisted primarily of
rental merchandise of $4,204,871 and deferred tax assets of $809,567.
Liabilities assumed (at estimated fair value) consisted primarily of trade
accounts payable
28
29
of $383,478 and bank debt of $7,470,717. The Statements of Income for the year
ended September 30, 1995 includes the operations of MLC from the date of
acquisition.
In February 1995, the Company acquired the rental merchandise and contracts
of five rental-purchase stores with combined annual revenues of approximately
$2.0 million. The Company acquired the rental merchandise and contracts in
exchange for 67,500 (unregistered shares subject to the provisions of Rule 144
of the Securities and Exchange Act) shares of the Company's common stock and
cash. Of the shares issued, 42,750 were delivered to the sellers and 24,750 were
placed in escrow. On February 24, 1996, the escrow terminated by its terms and
pursuant thereto 10,172 of such escrowed shares were released to the sellers and
14,578 were returned to the Company. The allocation of shares released from
escrow was determined by the average market value of the Company's common stock
on the twenty trading days preceding February 24, 1996. The acquisitions were
accounted for using the purchase method of accounting. The acquired assets were
recorded at their estimated fair values as of the acquisition date. The excess
of the acquisition cost over the estimated fair values of the net assets
acquired ("goodwill") of $644,705 is being amortized on a straight-line basis
over twenty years. The total cost of the net assets acquired was $948,145
($388,125 in common stock and $560,020 in cash) and consisted of assets of
$1,056,609 less acquisition costs of $108,464. The Statements of Income for the
year ended September 30, 1995 includes the operations of these stores from the
date of acquisition.
The following are unaudited pro forma results of operations for the years
ended September 30, 1997 and 1996 assuming the acquisitions of DLC, MLC, Coleman
and Rental King had occurred on October 1, 1995. The unaudited pro forma
information does not include the results of operations of the five
rental-purchase stores acquired in February 1995, the twenty one rental purchase
stores acquired during 1996,and the seven rental-purchase stores acquired in
July and September of 1997 which were not significant. The results are not
necessarily indicative of future operations or what would have occurred had the
acquisitions been consummated as of October 1, 1995.
UNAUDITED PRO FORMA
OPERATIONS
YEARS ENDED SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
Total revenues........................................... $95,450,978 $90,905,693
Net income............................................... $ 2,485,265 $ 2,366,915
Earnings per common share (adjusted to give effect to any
preferred stock (dividend)/gain on redemption):
Income before extraordinary item.................... $ 0.43 $ 0.37
=========== ===========
Net income.......................................... $ 0.41 $ 0.37
=========== ===========
5. RENTAL MERCHANDISE AND PROPERTY AND EQUIPMENT:
Cost and accumulated depreciation of rental merchandise were as follows:
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
Cost..................................................... $51,848,007 28,169,311
Less accumulated depreciation............................ 16,715,691 10,306,891
----------- ----------
$35,132,316 17,862,420
=========== ==========
The Company uses a direct-ship policy from their vendors to the stores. As
a result, the Company has eliminated the need for internal warehousing and
distribution. This policy has minimized the amount of rental merchandise not on
rent. On-rent and held for rent levels of net rental merchandise were as
follows:
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
On-Rent merchandise...................................... $29,587,990 14,987,462
Held for rent merchandise................................ 5,544,326 2,874,958
----------- ----------
$35,132,316 17,862,420
=========== ==========
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30
The Company uses the direct write-off method in accounting for losses (see
Note 1). Losses during fiscal 1997, 1996 and 1995 were incurred as follows:
SEPTEMBER 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Lost merchandise................................. $ 284,312 $ 175,843 $ 136,226
Stolen merchandise............................... 2,133,604 1,153,856 792,130
Discarded merchandise............................ 254,987 75,915 80,727
---------- ---------- ----------
$2,672,903 $1,405,614 $1,009,083
========== ========== ==========
Property and equipment consists of the following:
SEPTEMBER 30,
--------------------------
1997 1996
----------- ----------
Signs................................................... $ 1,014,564 $ 413,096
Vehicles................................................ 1,524,848 1,015,298
Furniture and fixtures.................................. 2,417,396 1,211,367
Leasehold improvements.................................. 4,657,039 2,525,370
Building................................................ 2,021,852 1,377,037
----------- ----------
11,635,699 6,542,168
Less accumulated depreciation and amortization............ 3,117,477 1,925,806
----------- ----------
$ 8,518,222 $4,616,362
=========== ==========
6. OTHER LIABILITIES:
Other liabilities consist of the following:
SEPTEMBER 30,
-------------------------
1997 1996
---------- ----------
Accrued salaries, wages and payroll taxes.................. $1,120,408 $ 621,621
Accrued property taxes..................................... 310,773 22,998
Sales taxes payable........................................ 434,841 262,009
Accrued interest........................................... 579,218 197,195
Accrued bonuses............................................ 275,000 207,587
Accrued rent............................................... -- 167,943
Other...................................................... 691,365 702,546
---------- ----------
$3,411,605 $2,181,899
========== ==========
7. DEBT:
Debt consists of the following:
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
Working Capital Loan Commitment.......................... $ -- $ 4,860,000
Revolving Loan Commitment................................ -- 734,250
Convertible Subordinated Notes........................... 7,000,000 7,000,000
Revolving Credit Facility................................ 21,022,110 --
Convertible Subordinated Debentures...................... 20,000,000 --
Equipment Financing Obligations.......................... -- 243,792
Notes Payable............................................ 134,316 141,033
----------- -----------
$48,156,426 $12,979,075
=========== ===========
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31
Working Capital Loan Commitment ("WCLC") provided for borrowings up to
$6,000,000 or 40% of net rental merchandise, whichever was lower. The percentage
of net rental merchandise on which borrowings were limited reduced to 35% on
July 1, 1996 and 30% on July 1, 1997. In addition, maximum borrowings could not
exceed $5,000,000 after July 1, 1997. Interest was charged at the rate of prime
plus 1.5% per annum. Interest payments were due monthly with the principal due
on July 1, 1998. A commitment fee of .5% per annum was charged on the daily
average unused portion of the WCLC. A prepayment fee was payable at a rate of 3%
of the prepaid amount for the period July 21, 1995 to July 20, 1996, 2% of the
prepaid amount for the period July 21, 1996 to July 20, 1997, and 1% of the
prepaid amount for the period July 21, 1997 to July 20, 1998. The WCLC was
collateralized by substantially all the assets of the Company and prohibited
payments and dividends to shareholders. On November 22, 1996, the WCLC was
replaced with a new credit facility (See Note 1).
Revolving Loan Commitment ("RLC") provided for borrowings up to $9,000,000.
Borrowings were reduced by $281,250 on each of October 1, 1995, January 1, 1996,
April 1, 1996, July 1, 1996, October 1, 1996, January 1, 1997, April 1, 1997,
July 1, 1997; by $421,875 on each of October 1, 1997, January 1, 1998, April 1,
1998, July 1, 1998; and by $562,500 on each of October 1, 1998, January 1, 1999,
April 1, 1999, and July 1, 1999; and by $703,125 on each of October 1, 1999,
January 1, 2000 , April 1, 2000 and July 1, 2000. Interest payments were due
monthly. Interest was charged at the rate of prime plus 1.5%. A commitment fee
of 5% per annum was charged on the daily average unused portion of the RLC. A
prepayment fee was payable at a rate of 3% of the prepaid amount for the period
July 21, 1995 to July 20, 1996, 2% of the prepaid amount for the period July 21,
1996 to July 20, 1997, and 1% of the prepaid amount for the period July 1, 1997
to July 20, 1998. The RLC was collateralized by substantially all the assets of
the Company and prohibited payments and dividends to shareholders and certain
acquisition activity. On November 22, 1996, the RLC was replaced with a new
credit facility (See Note 1).
Convertible Subordinated Notes ("Notes") due July 15, 2002 bear interest at
the rate of 10% per annum payable quarterly on October 15, January 15, April 15
and July 15. The Notes are convertible into the Company's common stock at a
conversion price of $9.94 per share. The Company has the right to mandatorily
require the noteholders to convert the Notes to common stock if the market price
exceeds $16.50 per share for 20 days during a 30 day consecutive period (See
Note 16). In addition, the noteholders received detachable warrants to purchase
105,000 shares of the Company's common stock at $9.94 per share. The stock
purchase warrants expire on July 15, 2002. The subordinated note agreement
prohibits the payment of dividends and requires the maintenance of certain
financial covenants related to fixed charge coverage and consolidated net worth.
Revolving Credit Facility (the "New Facility") with a syndicate of banks
led by National City Bank of Pennsylvania, providing for loans or letters of
credit up to $40.0 million was signed on November 22, 1996. The syndicate is
composed of four banks, with National City Bank of Pennsylvania, LaSalle
National Bank, and Harris Trust and Savings Bank committed for an equal ratable
share of 27.25%, of the New Facility and Heller Financial, Inc. committed for an
18.25% ratable share. The New Facility provides for borrowings at the prime rate
plus 0.5% or borrowings under a Euro-rate option and availability based on a
multiple of average monthly revenues. The Euro-rate option allows the Company to
borrow at the LIBOR rate plus 275 basis points for a fixed interest period. As
of September 30, 1997, there was $21,022,110 in outstanding borrowings under the
New Facility. This balance was comprised of a $9,000,000 Euro-rate tranche at
8.49% interest, a $9,000,000 Euro-rate tranche at 8.382% interest and working
capital debt of $3,022,110 at 9.0% interest. The New Facility expires on
November 22, 1999. The New Facility requires the Company to meet certain
financial covenants and ratios including maximum leverage, minimum interest
coverage and minimum tangible net worth ratios. In addition, the Company must
meet requirements regarding monthly, quarterly and annual financial reporting.
The New Facility also contains covenants which prohibit the 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
on the selection of the Euro-rate interest option. As of September 30, 1997, the
Company was in compliance with the covenants contained in the New Facility. At
September 30, 1997, the Company had approximately $12 million of availability on
the New Facility.
Convertible Subordinated Debentures ("Debentures")due February 1, 2007 and
are convertible, at any time after the registration thereof, into shares of
common stock, without par value, of the Company at a conversion
31
32
price of $13.37 per share. The Debentures are subject to redemption at the
option of the Company on February 5, 2000 at a price of 103%. The redemption
price will decrease at a rate of 1% per year, reaching a price of 100% in the
year 2003 and remain fixed until the date of maturity. The indebtedness
evidenced by the Debentures is subordinated and junior in right of payment to
all senior indebtedness. Included in the senior indebtedness is $7.0 million of
convertible notes held by Massachusetts Mutual Life Insurance Co. and its
affiliates. The Debentures bear an annual interest rate of 7% with semi-annual
payments in August and February, beginning August 1, 1997. The terms of the
Debentures require the Company to meet certain annual financial reporting
obligations. In addition, the Company must deliver to the trustee compliance
certificates representing management's compliance to all conditions and
covenants in the Indenture Agreement. In addition, the Debentures contain
covenants which prohibit the Company with respect to the payment of dividends
and other distributions.
Equipment Financing Obligations due in monthly installments; collateralized
by the related equipment; interest percentages ranging from 8.9% to 11.9%;
original terms not exceeding 5 years.
Notes Payable due in monthly installments ranging from $500 to $2,500
including interest at 18.0% through December, 2006.
The Company's weighted average interest rate was 8.517%, 9.570%, and 9.731%
for the years ended September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997, the carrying values and the estimated fair values of
the Company's fixed interest debt instruments are as follows:
SEPTEMBER 30, 1997
------------------------------
CARRYING ESTIMATED
VALUES FAIR VALUES
-------------- -----------
Convertible Subordinated Notes 10%...................... $ 7,000,000 $ 7,537,632
Convertible Subordinated Debentures 7%.................. 20,000,000 20,947,621
------------ -----------
$ 27,000,000 $28,485,253
============ ===========
At September 30, 1997, aggregate annual maturities of long-term debt are as
follows:
SEPTEMBER 30, 1997
------------------
1998................................................... $ 6,339
1999................................................... 7,579
2000................................................... 21,031,171
2001................................................... 10,834
2002................................................... 7,012,953
Thereafter............................................. 20,087,550
------------
$ 48,156,426
============
32
33
8. COMMITMENTS AND CONTINGENCIES:
The Company leases substantially all of its retail stores under
non-cancelable agreements generally for initial periods ranging from three to
five years. The store leases generally contain renewal options for one or more
periods of three to five years. Most leases require the payment of taxes,
insurance and maintenance costs by the Company. At September 30, 1997, future
minimum rental payments under non-cancelable operating leases are as follows:
SEPTEMBER 30, 1997
------------------
1998................................................... $ 5,017,102
1999................................................... 4,194,472
2000................................................... 2,890,393
2001................................................... 1,753,519
2002................................................... 885,057
Thereafter............................................. 855,205
------------
Total minimum payments required........................ $ 15,595,748
============
Rent expense under operating leases for the years ended September 30, 1997,
and 1996 and 1995 was $4,497,073, $2,508,545 and $1,429,972, respectively.
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 contingent liabilities ranging from $1,111,000 to
$3,125,500. The majority of such claims are, in the opinion of management,
covered by insurance policies and therefore should not have a material effect on
the results of operations or financial position of the Company.
Additional claims exist in the range of $240,000 to $450,000 for which
management believes it has meritorious defenses but for which the likelihood of
an unfavorable outcome is currently not determinable. Additionally, claims exist
for which management is not able to estimate a potential loss. In management's
opinion, each of these claims will either be indemnified by the former
shareholders of companies it has acquired or covered by insurance policies and
therefore will not have a material effect on the results of operations or
financial condition of the Company.
9. REDEEMABLE PREFERRED STOCK:
On July 21, 1995, in connection with the MLC acquisition (See Note 4) the
Company issued 27,500 shares of Series A Redeemable Preferred Stock ("Preferred
Stock"). In preference to shares of common stock, each share is entitled to
receive annual cumulative cash dividends in the amount of 7% payable in
quarterly installments on the first day of January, April, July and October.
During 1997 and 1996 the Company declared and paid dividends totaling $30,103
and $147,150 respectively. At September 30, 1996, dividends in arrears totaled
$19,792. Holders of the Preferred Stock had no voting rights; however, there
were certain exceptions including the right to eight votes per share if the
Company fails to pay dividends for two quarters.
The Company was required to redeem all outstanding Preferred Stock on June
30, 2006 at a redemption price of $100 per share plus any accrued or unpaid
dividends. The Company had the right to redeem the Preferred Stock at any time
at the rate of $100 per share plus any accrued or unpaid dividends. The Company
also entered into option agreements with the holders of the Preferred Stock
which provide the holders with mandatory redemption rights. During 1996 the
following redemptions of the Series A Preferred Stock were made: $429,400 in
January, 1996, $67,700 in February, 1996, and $1,132,200 in April, 1996. In
addition, on November 26, 1996, the Company redeemed the remaining 11,207
outstanding shares. These shares were redeemed at a twenty-five percent discount
for an aggregate purchase price of $840,525 and have reinstated the status of
authorized and unissued preferred shares undesignated as to series. As a result
of redemption on a discounted basis, a net gain on redemption of $280,175 was
recognized. This amount is added to net income in the calculation of earnings
per share.
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34
10. INCOME TAXES:
The Company's income tax expense consists of the following components:
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
---------- ---------- --------
Current expense:
Federal.................................................... $2,617,964 $1,291,972 $312,611
State and local............................................ 822,431 407,600 70,521
---------- ---------- --------
3,440,395 1,699,572 383,132
Deferred expense:
Federal.................................................... 971,154 527,950 48,289
State and local............................................ 217,928 153,540 14,019
---------- ---------- --------
1,189,082 681,490 62,308
---------- ---------- --------
Income tax expense......................................... $4,629,477 $2,381,062 $445,440
========== ========== ========
A reconciliation of the income tax expense compared with the amount at the
U.S. statutory tax rate of 34% is shown below:
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
---------- ---------- ---------
Tax provision at U.S. statutory rate...................... $3,506,902 $1,777,647 $ 494,431
State and local income taxes, net of federal benefit...... 686,637 370,352 55,796
Amortization of goodwill.................................. 382,821 280,702 99,035
Adjustment to tax basis of depreciable assets............. -- -- (209,364)
Other..................................................... 53,117 (47,639) 5,542
---------- ---------- ---------
Income tax expense........................................ $4,629,477 $2,381,062 $ 445,440
========== ========== =========
At September 30, 1997 and 1996, the components of the net deferred tax asset are
as follows:
1997 1996
---------- ----------
Rental merchandise................................................... $ 142,151 $1,053,184
Property and equipment............................................... 650,182 346,692
Operating loss carry forwards........................................ 626,030 342,556
Amortization of goodwill, loan fees, non-compete fees and severance
payments........................................................... (346,436) (291,182)
Other................................................................ -- 22,272
---------- ----------
Net deferred tax asset............................................... $1,071,927 $1,473,522
========== ==========
The change in the deferred tax asset includes $787,487 of deferred tax
assets recorded in connection with the Coleman Acquisition.
The Company believes it is more likely than not to realize the net deferred
tax asset, and accordingly, no valuation allowance has been recognized.
Sufficient taxable income exists in the carryback periods to recognize the
deferred tax asset in 1997 and, to the extent necessary, future taxable income
in 1996.
11. RELATED PARTY TRANSACTIONS:
During fiscal year ended September 30, 1997, the Company leased two
locations from a principle shareholder or a company controlled by a principal
shareholder. Rent paid during this year related to these leases was $92,238. The
Company leased six locations from a principal shareholder or a company
controlled by a principal shareholder during fiscal 1996 and 1995. The Company
paid $238,634 and $217,162 in rent during the years ended September 30, 1996 and
1995 related to these leases, respectively. The leases have an average remaining
lives of one year and require the Company to pay real estate taxes.
34
35
On May 21, 1996, the Company was paid in full for a loan made to a
principal shareholder. The loan carried an annual interest rate of 7.6% and the
balance including accrued interest as of May 21, 1996 was $311,310. The loan was
satisfied by the surrender to the Company of 10,800 shares of Common Stock
valued at $15.00 per share, with the balance paid in cash.
The Company was in possession of land and building lots acquired from Erie
Business Management Corporation ("EBMC"), a corporation controlled by a
principal shareholder of the Company. The Company obtained the right to require
EBMC to repurchase any or all of the remaining land and building lots during a
period of 30 days commencing May 31, 1996. Upon exercise of this "put" right,
EBMC would have the option of paying the purchase price in cash, marketable
securities (including common stock of the Company) or a combination of both. On
June 4, 1996, the Company exercised its right to "put" the land and building
lots to EBMC. The total amount due from EBMC was $946,450, comprised of the land
and building lots, carrying costs, accrued interest the difference between the
dividend paid in 1993 to the principle shareholder and any profit recognized by
the Company and any sales of the land or building lots prior to the exercise of
the "put" option. The repurchase was satisfied in full by a combination of cash,
common stock of the Company, the surrender for cancellation of 52,500 stock
options held by the principal shareholder and the conveyance to the Company of a
building and related mortgage owned by the principal shareholder, in which the
Company had a 15 year capital lease. There was no gain or loss recorded by the
Company as a result of the exercise of the "put".
The Company has entered into employment contracts with certain directors
and executive officers. The agreements are for a three year term commencing
October 1, 1995. The Company paid $510,000 and $393,600 related to these
agreements for the years ended September 30, 1997 and 1996, respectively.
Payments for the year ending September 30, 1998 will be $535,000.
The Company paid a brokerage fee of $170,000, and issued 37,500 warrants
exercisable at the rate of $10 per share for a five year period ending September
1, 2000 to a company in which a director of Rent-Way is a shareholder. The fee
was incurred in connection with the acquisition of MLC (See Note 4).
In connection with the acquisition of D.A.M.S.L. Corp. ("DAMSL") in fiscal
1994, the Company entered into an employment contract, consulting agreements and
non-compete agreements with the former shareholders of DAMSL. The employment
agreement has payment terms of $172,666, $134,677 and $162,667 for the three
year period ended in May 1996. The payment terms for the consulting and
non-compete agreements are $165,428, $151,428, $275,428, $255,428, $295,428,
$267,428 and $319,428 for 1994 and the six following years. Expenses related to
the above agreements are expensed over the terms of the agreements and
aggregated $268,761, $296,185 and $312,763 for the years ended September 30,
1997, 1996 and 1995, respectively.
In connection with the acquisition of MLC (See Note 4), the Company entered
into consulting and non-compete agreements with McKenzie Development Corporation
("MDC"), an affiliate of MLC and the principal shareholders of MDC, the former
owners of MLC. The consulting and non-compete agreements are for seven years and
have payment terms of $1,250,000 on July 21, 1995 and $200,000 per year for each
of the following seven years. Expenses related to the consulting and non-compete
agreements are amortized on a straight-line basis over the term of the
agreements and amounted to $378,571, $378,571 and $63,095 for the years ended
September 30, 1997, 1996 and 1995, respectfully.
In connection with the acquisition of DLC (See Note 4), the Company entered
into non-compete agreements with the former owners of DLC. The agreements are
for two and three years respectively and are amortized on a straight line basis
over the term of the agreements. Amortization expense for the two agreements for
the years ended September 30, 1997 and 1996 was $114,583 and $20,837,
respectively.
12. COMMON SHARES:
The Company's Board of Directors declared a three-for-two stock split in
the form of a 50% stock dividend to shareholders of record on August 4, 1995,
payable on August 18, 1995. All references in the financial statements to number
of shares, per share amounts, stock option data and market prices of the
Company's common stock reflect the stock split.
35
36
13. STOCK OPTIONS:
In June 1992, the Board of Directors of the Company adopted, and the
shareholders have approved, the Rent-Way, Inc. Stock Option Plan of 1992 (the
"1992 Plan") which authorizes the issuance of up to 600,000 shares of common
stock pursuant to stock options granted to officers, directors, key employees,
consultants, and advisors of the Company. The option exercise price will be at
least equal to the fair market value of the Company's common stock on the grant
date. The 1992 Plan will expire in June 2002 unless earlier terminated by the
Board of Directors. The authorized number of shares, the exercise price of
outstanding options and the number of shares under option are subject to
appropriate adjustment for stock dividends, stock splits, reverse stock splits,
recapitalizations and similar transactions. The 1992 Plan is administered by the
Compensation Committee of the Board of Directors who select the optionees and
determine the terms and provisions of each option grant within the parameters
set forth in the 1992 Plan.
The 1995 Stock Option Plan (the "1995 Plan") authorizes the issuance of up
to 800,000 shares of common stock pursuant to stock options granted to officers,
directors and key employees of the Company. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors and contains terms and
provisions substantially identical to those contained in the 1992 Plan.
The following is a summary of activity (as adjusted to reflect the 50%
stock dividend--See Note 12) of the Company's stock options during the years
ended September 30, 1997, 1996 and 1995:
AVERAGE
PRICE
STOCK OPTIONS SHARES PER SHARE
- ---------------------------------------------------------------------- ---------- ---------
September 30, 1994.................................................... 489,975 $3.95
Granted............................................................. 463,061 8.12
Exercised........................................................... (17,268) 4.71
Forfeited........................................................... (37,733) 4.82
September 30, 1995.................................................... 898,035 6.05
Granted............................................................. 156,000 9.18
Exercised........................................................... (52,300) 6.56
Forfeited........................................................... (56,325) 2.62
September 30, 1996.................................................... 945,410 6.74
Granted............................................................. 724,500 10.39
Exercised........................................................... (296,860) 5.80
Forfeited........................................................... (78,156) 8.45
--------- -----
September 30, 1997.................................................... 1,294,894 $8.97
========= =====
At September 30, 1997, stock options representing 768,257 shares are
exercisable at prices ranging from $4.67 to $18.13 per share.
The Company accounts for stock based compensation issued to its employees
and non-employee directors in accordance with Accounting Principles Board
Opinion No. 25 and has elected to adopt the "disclosure only" provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation".
For SFAS No. 123 purposes, the fair value of each option granted under both
the 1992 Plan and the 1995 Plan, is estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options granted in fiscal 1997 and 1996: expected
volatility of 39%, risk-free interest rates between 5.24% and 6.74%, and an
expected life of five years.
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37
If the Company had elected to recognize the compensation cost of its stock
option plans based on the fair value of the awards under those plans in
accordance with SFAS No. 123, net income and earnings per common share would
have been reduced to the pro-forma amounts below:
1997 1996
---------- ----------
Net income As reported $5,415,926 $2,847,312
Pro-forma 3,467,832 2,072,088
Earnings per common share (adjusted to give
effect to any preferred stock
(dividend)/gain on redemption):
Income before extraordinary item
As reported $ 0.74 $ 0.45
========== ==========
Pro-forma $ 0.53 $ 0.45
========== ==========
Net income
As reported $ 0.72 $ 0.45
========== ==========
Pro-forma $ 0.51 $ 0.32
========== ==========
14. STOCK PURCHASE WARRANTS:
During October, November and December 1992, the Company issued warrants to
purchase up to 112,500 shares of common stock at $4.67 per share. The warrants
are exercisable at any time for a period of five years from their respective
issue dates and are subject to anti-dilution provisions providing for
appropriate adjustment in the event of any reclassification, stock dividend,
stock split, or similar transaction, and stock issuances below the warrant
exercise price. The agreements will expire five years from the respective dates
on which the warrants were issued, subject to earlier termination in certain
circumstances.
Upon the closing of the Company's initial public offering in August 1993
the underwriters received warrants to purchase 105,000 shares of common stock at
a price of $6.77 per share exercisable for a period of four years commencing one
year from the date of the offering.
In July, 1995, the Company issued warrants to purchase 105,000 shares of
common stock at $9.94 per share. The warrants are exercisable at any time for a
period of seven years from their issue dates and are subject to anti-dilution
provisions providing for appropriate adjustment in the event of any
reclassification, stock dividend, stock split, or similar transactions, and
stock issuances below the warrant exercise price.
In September 1995, the Company issued warrants to purchase 37,500 shares of
common stock at $10.00 per share. The warrants are exercisable at any time for a
period of five years from their issue dates and are subject to anti-dilution
provisions providing for appropriate adjustment in the event of any
reclassification, stock dividend, stock split, or similar transactions, and
stock issuances below the warrant exercise price.
At September 30, 1997, the following warrants (as adjusted for the 50%
stock dividend--See Note 12) were outstanding:
NUMBER OF EXERCISE EXPIRATION SHARES SHARES
WARRANT DATE SHARES PRICE DATE EXERCISED REMAINING
- -------------- --------- -------- -------------- --------- ---------
October 1992 37,500 $ 4.67 October 1997 37,500 --
November 1992 37,500 $ 4.67 November 1997 37,500 --
December 1992 37,500 $ 4.67 December 1997 37,500 --
August 1993 105,000 $ 6.76 August 1998 24,000 81,000
July 1995 105,000 $ 9.94 July 2002 -- 105,000
September 1995 37,500 $10.00 September 2000 10,250 27,250
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15. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1994, the Company established the Rent-Way, Inc.
401(k) Retirement Savings Plan (the "Plan"). Participation in this Plan is
available to all Company employees who meet the necessary service criteria as
defined in the Plan Agreement. Company contributions to the Plan are based on a
percentage of the employees' contributions, as determined by the Board of
Directors, and amounted to $272,294 and $148,509 (in the form of the Company's
common stock) for the years ended September 30, 1997 and 1996, respectively, and
$32,126 (in cash) for the year ended September 30, 1995.
16. SUBSEQUENT EVENTS:
On October 8, 1997, the Company exercised its right to manditorily convert
the $7.0 million, 10% convertible subordinated notes ("the Notes") held by
Massachusetts Mutual Life Insurance Company due 2002 (See Note 7). The Notes
were convertible by the Company at a conversion price of $9.94 per share upon
the Company's Common Stock trading at a price above $16.50 per share for 20
consecutive days during any 30 day period. The Notes converted into 704,225
shares of Common Stock, which have been registered for resale pursuant to a
shelf registration statement filed by the Company, that became effective in June
1997.
On October 6, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of the Ace TV Rentals ("Ace Rentals")
rental-purchase chain. Ace Rentals operates 46 stores in South Carolina and 4
stores in California. The Company expects to close the transaction in early
January 1998, subject to the satisfaction of certain conditions. The Company
feels the Ace Rentals acquisition will provide the Company with a presence in
the southeastern United States, which management believes to be a growing
rental-purchase market.
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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
There has been no change of accountants or reporting disagreements on any
matter of accounting principle, practice, financial statement disclosure or
auditing scope or procedure within the Company's two most recent fiscal years or
the current interim period.
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
Certain information regarding the directors and executive officers of the
Company is set forth below.
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
Gerald A. Ryan............................ 62 Chairman of the Board and Director
President, Chief Executive Officer and
William E. Morgenstern.................... 39 Director
William Lerner............................ 61 Director and Secretary
Vincent A. Carrino........................ 38 Director
Robert B. Fagenson........................ 47 Director
Marc W. Joseffer.......................... 49 Director
Jeffrey A. Conway......................... 40 Vice President and Chief Financial Officer
Ronald D. DeMoss.......................... 46 Vice President and General Counsel
Kirk R. Smithee........................... 34 Chief Operating Officer
Gerald A. Ryan, a founder of the Company, has served as Chairman of the
Board of the Company since its formation in 1981. Mr. Ryan has also been
instrumental in the formation of several other companies, including Spectrum
Control, Inc., a company listed on the Nasdaq National Market, which produces
electronic components. He presently serves as Chairman of the Board of Spectrum
Control, Inc. In 1986, Mr. Ryan acquired Skinner Engine Company, a
privately-held company, which manufactures and rebuilds mixers for use in the
rubber industry, and serves as Chairman of the Board of that company. Mr. Ryan
is a Class I director of the Company whose term expires in 1999.
William E. Morgenstern, a founder of the Company, has served as its
President and Chief Executive Officer since its formation in 1981. Mr.
Morgenstern began his rental-purchase industry career with Rent-A-Center in 1979
in Ft. Worth, Texas. While employed by Rent-A-Center, he held the positions of
store manager and district manager for Pennsylvania and New York. Mr.
Morgenstern is former President of the Pennsylvania Association of Rental
Dealers ("PARD"), a trade association that monitors activities in the state
legislature that affect the rental-purchase industry. From 1986 to 1988, he
served on the Board of Directors of APRO, the rental-purchase industry's
national trade association. Mr. Morgenstern is a Class III director of the
Company whose term expires in 1998.
William Lerner has been a director of the Company since November 1992 and
its Secretary since January 1993. Mr. Lerner, a practicing attorney in New York
since 1961 and in Pennsylvania since 1990, is of counsel to Snow Becker Krauss
P.C., New York, New York. Mr. Lerner is also a director of Seitel, Inc., a
company listed on the New York Stock Exchange ("NYSE") that develops and
maintains a seismic data bank for the oil and gas industry, Helm Resources,
Inc., a company listed on the American Stock Exchange with interests in the
packaging and distribution of plastic resins, the distribution of films to cable
television companies and asset based lending activities and
Micros-to-Mainframes, Inc., a company listed on the Nasdaq National Market that
is a provider and systems integrator of advanced technology communications
products and Internet services. From 1986 to 1989, Mr. Lerner was General
Counsel to The Geneva Companies, which provides merger and acquisition services
to privately-owned middle market companies, and from 1989 to 1990 was General
Counsel to Hon Development Company, a southern California real estate
development company. Mr. Lerner is a Class II director of the Company whose term
expires in 2000.
Vincent A. Carrino has been director since January 1995 when he was elected
by the Board for a one-year term expiring in 1996. At the 1996 Annual Meeting of
Shareholders, Mr. Carrino was elected as a Class III director of the Company
whose term expires in 1998. Mr. Carrino founded Brookhaven Capital Management,
Inc., an investment management company headquartered in Menlo Park, California,
in 1986 and has been its President since that date.
Robert B. Fagenson has been a director since August 1993. He has, for more
than the past five years, been President and a director of Fagenson & Co., Inc.,
a NYSE specialist firm, and a Vice President and director of Starr Securities,
Inc., a registered broker-dealer and member of the NYSE. Mr. Fagenson is also a
director of the
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NYSE, of Healthy Planet Products, Inc., a company listed on the American Stock
Exchange that designs, publishes and markets greeting cards, Hudson Hotel
Corporation (formerly Microtel Franchise and Development Corporation), a company
listed on the Nasdaq National Market and a developer of economy lodging
facilities and owner and operator of hotel, motel and resort properties,
AutoInfo, Inc., a company listed on the Nasdaq National Market and a dealer in
computerized products and services for after-market motor vehicle parts, and
Nu-Tech Biomedical, Inc., a company listed on the Nasdaq Small-Cap Market that
researches medicines for the treatment of cancer. Mr. Fagenson is a Class I
director of the Company whose term expires in 1999.
Marc W. Joseffer has been a director of the Company since May 1994 and was
employed by the Company in various management positions from May 1994 through
October 1996. For more than five years prior thereto, he was Vice President and
a principal shareholder of D.A.M.S.L. Corp., a privately-owned company engaged
in the rental-purchase industry. D.A.M.S.L. Corp. was acquired by the Company in
May 1994, at which time Mr. Joseffer was elected a director of the Company by
the Board. Mr. Joseffer is a Class II director of the Company whose term expires
in 2000.
Jeffrey A. Conway was employed by the Company as a financial advisor from
February 1992 through September 1992 and in October 1992 was appointed Vice
President and Chief Financial Officer. He served as Chief Financial Officer of
Rentclub, Inc., a 17 store rental-purchase chain, from June 1990 through
November 1991. From 1979 through June 1987 and from July 1987 to October 1989,
Mr. Conway was employed by the independent accounting firms of Coopers & Lybrand
and Ernst & Young, respectively, as an Audit Manager. Mr. Conway is a certified
public accountant.
Ronald D. DeMoss was elected Vice President and General Counsel of the
Company in February 1996. From June 1990 through November 1995, Mr. DeMoss was
employed as a corporate counsel for Rent-A-Center and, in such capacity, was
involved in the enactment of rental-purchase legislation in 11 states. During
1995, Mr. DeMoss also served as Rent-A-Center's Director of Government
Relations. In August 1996, Mr. DeMoss was elected to APRO's Board of Directors
for a two-year term. Mr. DeMoss also serves on APRO's Government Relations
Committee. From 1981 through 1990, Mr. DeMoss was a practicing attorney in
Wichita, Kansas.
Kirk R. Smithee was hired by the Company in September 1995 as a regional
manager, in July 1996 was named a director of operations and in October 1997 was
promoted to Chief Financial Officer. From September 1987 through September 1995,
Mr. Smithee served in various management positions with Rent-A-Center, including
field training manager, district manager and regional manager.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than ten (10%) of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Executive officers, directors and greater than ten-percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely upon its review
of copies of such forms furnished to it, or written representations from
reporting persons that no such forms were required for those persons, the
Company believes that during fiscal year 1997 all filing requirements applicable
to executive officers, directors, and greater than ten-percent beneficial owners
were complied with, except (i) two reports, covering an aggregate of two
transactions, were filed late by Marc W. Joseffer, a director of the Company,
(ii) one report, covering an aggregate of one transaction, was filed late by
Thomas E. Wurm and (iii) one report, covering an aggregate of one transaction,
was filed late by Ronald D. DeMoss.
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ITEM 11 EXECUTIVE COMPENSATION
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ----------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- ---------------------------------------- ---- -------- -------- ---------- ------------
Gerald A. Ryan.......................... 1997 $150,000 $ 72,221 60,000
Chairman of the Board 1996 122,600 13,750 --
1995 114,000 -- 63,000
William E. Morgenstern.................. 1997 $240,000 $149,506 55,000 $181,012
President and Chief Executive Officer 1996 181,000 14,000 --
1995 144,000 -- 63,000
Jeffrey A. Conway....................... 1997 $120,000 $ 97,250 27,000
Vice President and Chief Financial
Officer 1996 90,000 5,250 --
1995 89,000 -- 30,000
Thomas E. Wurm (3)...................... 1997 $156,500 $ 20,000 55,000
Vice President-Operations 1996 124,000 5,000 10,000
Ronald D. DeMoss........................ 1997 $100,700 $ 7,000 3,000
Vice President and General Counsel 1996 95,000 25,000 30,000
- ---------
(1) The Named Executive Officers did not receive any annual compensation not
properly characterized as salary or bonus, except for certain prerequisites
or other benefits the aggregate incremental costs of which to the Company
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for each such officer. The Company has a medical and health
benefits plan and provides term life insurance for its employees, however,
such plans do not discriminate in scope, terms or operation in favor of
executive officers or directors and are generally available to all salaried
employees. The Company has a 401(k) plan but does not have any other pension
plan or any long-term incentive plan other than the stock option plans
described below.
(2) Represents amounts paid by the Company as withholding taxes in connection
with Mr. Morgenstern's exercise of 60,000 stock options in May 1997. In
return, Mr. Morgenstern surrendered stock options to the Company for
cancellation.
(3) Mr. Wurm resigned effective October 17, 1997.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Ryan pursuant
to which he serves as Chairman of the Board of the Company for a term that
commenced October 1, 1995 and continues until September 30, 1998, unless earlier
terminated in accordance with its terms. The term of the employment agreement is
automatically extended for an additional one year period unless either party
gives notice at least 60 days prior to the date which is one year prior to the
date on which the agreement would otherwise terminate. Mr. Ryan is not required
to render full-time service to the Company. Under the employment agreement, Mr.
Ryan receives an annual salary of $125,000 (subject to annual cost of living
increases) and is eligible to receive an annual bonus in an amount determined by
the Board of Directors. Mr. Ryan is also eligible to participate in employee
benefit plans and to receive fringe benefits made generally available to senior
management.
The Company has entered into an employment agreement with Mr. Morgenstern
pursuant to which he is employed full-time as the President and Chief Executive
Officer of the Company for a term that commenced on October 1, 1995 and
continues to September 30, 1998, unless earlier terminated in accordance with
its terms. The term of the employment agreement is automatically extended for an
additional one year period unless either party gives notice at least 60 days
prior to the date which is one year prior to the date on which the agreement
would otherwise terminate. Under the employment agreement, Mr. Morgenstern
receives an annual salary of $175,000
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(subject to annual cost of living increases) and is eligible to receive an
annual bonus in an amount determined by the Board of Directors. Mr. Morgenstern
is also eligible to participate in all employee benefit plans and to receive
fringe benefits made generally available to senior management.
The Company has entered into an employment agreement with Mr. Conway
pursuant to which he is employed full-time as the Vice President and Chief
Financial Officer of the Company for a term that commenced on October 1, 1995
and continues to September 30, 1998, unless earlier terminated in accordance
with its terms. The term of the employment agreement is automatically extended
for additional two year periods unless either party gives notice at least 60
days prior to the date which is one year prior to the date on which the
agreement would otherwise terminate. Under the employment agreement, Mr. Conway
receives an annual salary of $90,000, $95,000 and $100,000, respectively, during
the first three years of the employment agreement. In each year following the
third year, Mr. Conway's salary would be adjusted for increases in the cost of
living. Mr. Conway is also eligible to receive an annual bonus in an amount
determined by the Board of Directors. Mr. Conway is also eligible to participate
in all employee benefit plans and to receive fringe benefits made generally
available to senior management.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1997, Robert B. Fagenson and
William Lerner served as the members of the Compensation Committee. Other than
Mr. Lerner, who is Secretary of the Company, no person who served as a member of
the Company's Compensation Committee during the fiscal year ended September 30,
1997 was (i) an officer or employee of the Company during such fiscal year or
(ii) formerly an officer of the Company. No executive officer of the Company
served as a member of the compensation or similar committee or Board of
Directors of any other entity of which an executive officer served on the
Compensation Committee or Board of Directors of the Company.
The following table sets forth information concerning stock option grants
to the Named Executive Officers during the fiscal year ended September 30, 1997.
POTENTIAL REALIZABLE VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK PRICE APPRECIATION
NUMBER OF OPTIONS FOR OPTION TERM
SECURITIES GRANTED TO --------------------------------------------
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE EXPIR.
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------- ---------- ---------- -------- -------- -------- --------
Gerald A. Ryan................. 60,000 8.5% 9.38 3/12/02 $155,792 $343,595
William E. Morgenstern......... 55,000 7.8 9.38 3/12/02 142,809 314,962
Jeffrey A. Conway.............. 27,000 3.8 9.38 3/12/02 70,106 154,618
Ronald D. DeMoss............... 3,000 0.4 11.00 11/12/01 9,117 20,147
Thomas E. Wurm................. 50,000 7.1 10.50 10/17/01 145,048 320,518
5,000 0.7 11.00 10/18/01 15,195 33,578
The following table sets forth information concerning stock option
exercises by the Named Executive Officers during the fiscal year ended September
30, 1997 and the number of shares and the value of grants outstanding as of
September 30, 1997 for each such officer:
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AGGREGATE OPTION EXERCISES AND
OPTION VALUES AS OF SEPTEMBER 30, 1997
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT 9/30/97 (#)
SHARES
ACQUIRED ON VALUE --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------ ----------- -----------
Gerald A. Ryan............................. -- -- 120,500 40,000
William E. Morgenstern..................... 45,071 $587,700 118,084 36,666
Jeffrey A. Conway.......................... -- -- 66,000 18,000
Ronald D. DeMoss........................... -- -- 12,750 17,250
Thomas E. Wurm............................. 27,500 83,512 12,500 25,000
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
9/30/97 ($)(1)
--------------------------
NAME EXERCISABLE UNEXERCISABLE
------------------------------------------------------------ ----------- -----------
Gerald A. Ryan.............................................. $1,694,688 $ 470,000
William E. Morgenstern...................................... 1,662,771 430,826
Jeffrey A. Conway........................................... 951,285 211,500
Ronald D. DeMoss............................................ 151,594 227,531
Thomas E. Wurm.............................................. 132,813 253,125
- ---------
(1) Based on the closing sales price of the Common Stock on the Nasdaq National
Market of $21.125 per share on September 30, 1997 less the exercise price.
COMPENSATION OF DIRECTORS
Directors who are not executive officers of the Company (Messrs. Carrino,
Fagenson, Joseffer and Lerner) receive $250 for each Board meeting attended in
person or by telephone and an annual retainer of $2,000, payable quarterly, and
are reimbursed for their out-of-pocket expenses incurred for attendance at
meetings of directors and shareholders. Mr. Lerner receives no compensation for
serving as Secretary to the Company. In addition, on March 12, 1997 the Board of
Directors granted 30,000 stock options to each of Messrs. Joseffer, Fagenson and
Lerner and 60,000 stock options to Mr. Carrino. These options have an exercise
price of $9.375 per share and vest one-third on the date of the grant and
one-third on each anniversary of the date of grant. Directors who are executive
officers of the Company receive no additional compensation for their services as
directors.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the shares of Common
Stock beneficially owned by (i) each beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company; (iii) the
Named Executive Officers of the Company; and (iv) the directors and executive
officers of the Company as a group. This information is presented as of November
4, 1997. Except as otherwise noted, the
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Company believes that the persons listed below have sole investment and voting
power with respect to the shares of Common Stock beneficially owned by them.
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
- ----------------------------------------------------------------------- ------------ -------
Gerald A. Ryan......................................................... 680,576 8.6%
William E. Morgenstern................................................. 510,525 6.5
William Lerner......................................................... 48,000 *
Vincent A. Carrino..................................................... 50,000 *
Robert B. Fagenson (3)................................................. 214,000 2.7
Marc W. Joseffer....................................................... 121,442 1.6
Jeffrey A. Conway...................................................... 133,500 1.7
Ronald D. DeMoss....................................................... 13,250 *
Kirk R. Smithee........................................................ 7,375 *
Directors / Executive Officers as a group (9 persons).................. 1,833,793 21.7
Massachusetts Mutual Life Insurance Company and affiliates, 1295 State
Street Springfield, Massachusetts 01111.............................. 809,223 10.4
- ---------
* Less than one percent (1%).
(1) Unless otherwise indicated, the address for all persons listed above is c/o
Rent-Way, Inc., 3230 West Lake Road, Erie, Pennsylvania 16505.
(2) Includes shares issuable upon exercise of stock options and warrants which
are currently exercisable or which will become exercisable within 60 days.
(3) Includes 6,000 shares owned by the Fagenson & Co., Inc. Employee Pension
plan and Trust, of which Mr. Fagenson is a co-trustee.
ITEM 13 CERTAIN TRANSACTIONS
In connection with the acquisition of D.A.M.S.L. Corp. in May 1994, the
Company entered into a consulting agreement and non-compete agreement with Marc
W. Joseffer, a director of the Company. Mr. Joseffer receives payments from the
Company under a five-year consulting agreement which expires on May 18, 1999.
Annual payments to Mr. Joseffer under such consulting agreement are $132,000,
$120,000, $144,000, $132,000 and $192,000, respectively. Under the terms of the
non-compete agreement entered into by Mr. Joseffer, he receives monthly payments
from the Company of $2,143, which monthly payments continue through March 1999.
The Company leases two store locations from Mr. Joseffer or a company
controlled by him. The Company paid $92,238 in rent and related amounts under
such leases for the year ended September 30, 1997. The Company believes the
lease rate and terms, which include the Company's obligation to pay real estate
taxes, are similar to those obtainable on an arms'-length basis.
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RENT-WAY, INC.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) Financial Statements.
See index to Financial Statements.
(a) Exhibits required by Item 601 of Regulation S-K.
The following are filed as Exhibits to this Annual Report filed on Form
10-K for the year ended September 30, 1997:
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
2.1(1) Asset Purchase Agreement among the Company, AVRentals/Warren, Inc.,
AVRentals/Youngstown, Inc., Best Rentals Northside, Inc. and Dennis Goldman,
dated February 24, 1995.
2.2(4) Agreement and Plan of Merger among the Company, McKenzie Leasing Corporation,
Steve A. McKenzie, Brenda G. McKenzie and others, dated June 9, 1995.
2.3(7) Stock Purchase Agreement by and among the Company, Diamond Leasing
Corporation, Kenneth H. Moye and Lee Brady, dated July 20, 1996.
2.4* Stock Purchase Agreement by and among the Company, Bill Coleman TV, Inc. and
David Coleman, dated January 2, 1997.
2.5(6) Stock Purchase Agreement by and among the Company, Perry Electronics, Inc.,
Robert L. Thomas, Norma J. Thomas, Randall D. Snyder and Niki L. Snyder, dated
January 24, 1997.
2.6(6) Closing Letter Agreement dated February 6, 1997 amending Stock Purchase
Agreement by and among the Company, Perry Electronics, Inc., Robert L. Thomas,
Norma J. Thomas, Randall D. Snyder and Niki L. Snyder.
3.1* Articles of Incorporation of the Company, as amended.
3.2(2) By-Laws of the Company, as amended.
4.1(1) Form of Stock Option Agreement between the Company and each of the
shareholders of McKenzie Leasing Corporation, dated July 21, 1995.
4.2(1) Registration Rights Agreement among the Company, Massachusetts Mutual Life
Insurance Co. and affiliates thereof ("MassMutual"), dated July 15, 1995.
4.3* Shareholder's Agreement between the Company and Lee Brady, dated July 20,
1996.
4.4* Stock Option Agreement between the Company and David Coleman, dated January 2,
1997.
10.1(2) Company's Stock Option Plan of 1992.
10.2(1) Company's 1995 Stock Option Plan.
10.3(2) Form of Non-Plan Stock Option Agreement.
10.4(5) Employment Agreement between William E. Morgenstern and the Company, dated
October 1, 1995.
10.5(5) Employment Agreement between Jeffrey A. Conway and the Company, dated October
1, 1995.
10.6(5) Employment Agreement between Gerald A. Ryan and the Company, dated October 1,
1995.
10.7(1) Consulting Agreement between the Company and Marc Joseffer, dated May 18,
1994.
10.8(1) Non-Competition Agreement between Marc Joseffer and the Company, dated May 18,
1994.
10.9(1) Consulting Agreement between the Company and McKenzie Development Corporation,
dated July 21, 1995.
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EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------
10.10(1) Non-Competition Agreement between the Company and Steve A. McKenzie, dated
July 21, 1995.
10.11(1) Non-Competition Agreement between the Company and Brenda G. McKenzie, dated
July 21, 1995.
10.12(4) Subordinated Note Agreement among the Company and MassMutual, dated July 15,
1995.
10.13(1) Form of MassMutual Subordinated Note, dated July 15, 1995.
10.14(1) Form of MassMutual Warrant, dated July 15, 1995.
10.15* Credit Agreement by and among the Company, the banks party thereto and
National City Bank of Pennsylvania, as Agent, dated November 22, 1996 (the
"Credit Agreement").
10.16* First Amendment to Credit Agreement, dated January 31, 1997.
10.17(8) Form of the Company's 7% Convertible Subordinated Debentures due 2007 (the
"Debentures").
10.18(8) Indenture, dated February 4, 1997, between the Company and Manufacturers and
Traders Trust Company, as Trustee, in respect of the Debentures.
11* Statement regarding computation of earnings per share.
23* Consent of Coopers & Lybrand, L.L.P.
27* Financial Data Schedule.
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* Filed herewith
(1) Previously filed, as of January 5, 1996, pursuant to the Company's
Registration Statement on Form SB-2 (No. 333-116).
(2) Previously filed, as of December 8, 1992, pursuant to the Company's
Registration Statement on Form S-18 (No. 33-55562-NY).
(3) Previously filed, as of July 9, 1993, pursuant to Amendment No. 2 to the
Company's Registration Statement of Form S-18 (No. 33-55562-NY).
(4) Previously filed, as of August 15, 1995, as an exhibit to the Company's
Report on Form 8-K.
(5) Previously filed, as of December 28, 1995, as an exhibit to the Company's
Report on Form 10-KSB.
(6) Previously filed, as of February 21, 1997, as an exhibit to the Company's
Report on Form 8-K.
(7) Previously filed, as of August 8, 1996, as an exhibit to the Company's
Report on Form 8-K.
(8) Previously filed, as of May 9, 1997, pursuant to the Company's Registration
Statement on Form S-3 (No. 333-26835).
(b) Reports on Form 8-K:
(1) On June 3, 1996, the Company filed a Form 8-K disclosing the
consummation of the acquisition of Family Rentals and Rent-America.
(2) On August 8, 1996, the Company filed a Form 8-K disclosing that it
had consummated the Stock Purchase Agreement to acquire Diamond
Leasing Corporation.
(3) On January 7, 1997, the Company filed a Form 8-K disclosing that it
had signed a letter of intent to purchase a 15 store rental-purchase
chain.
(4) On January 7, 1997, the Company filed a Form 8-K disclosing that it
had signed a definitive purchase agreement to acquire Bill Coleman
TV, a 15 store rental-purchase chain.
(5) On January 31, 1997, the Company filed a Form 8-K disclosing that it
had signed a definitive purchase agreement to acquire Rental King, a
privately owned 70 store rental-purchase chain.
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(6) On February 14, 1997, the Company filed a Form 8-K disclosing the
issuance of its $20 million in convertible subordinated debentures
due 2007.
(7) On February 21, 1997, the Company filed a Form 8-K disclosing the
consummation of the acquisition of Rental King, d/b/a/ Perry
Electronics ("Rental King").
(8) On April 21, 1997, the Company filed a Form 8-K/A containing audited
financial statements of Rental King and pro forma financial
statements with respect to the Rental King acquisition.
48
49
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.
Registrant: RENT-WAY, INC.
By: /s/ WILLIAM E. MORGENSTERN
------------------------------------------------
President and Chief
Executive Office
(Principal Executive Officer)
November 6, 1997
-------------------------------------------------
Date
By: /s/ JEFFREY A. CONWAY
----------------------------------------------------
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
November 6, 1997
-----------------------------------------------------
Date
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.
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------ -------------------
/s/ GERALD A. RYAN Chairman of the Board of November 6, 1997
- ------------------------------------- Directors
Gerald A. Ryan
/s/ WILLIAM E. MORGENSTERN Director November 6, 1997
- -------------------------------------
William E. Morgenstern
/s/ MARC W. JOSEFFER Director November 6, 1997
- -------------------------------------
Marc W. Joseffer
/s/ ROBERT FAGENSON Director November 6, 1997
- -------------------------------------
Robert Fagenson
/s/ WILLIAM LERNER Secretary and Director November 6, 1997
- -------------------------------------
William Lerner
/s/ VINCENT CARRINO Director November 6, 1997
- -------------------------------------
Vincent Carrino
49
50
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1(1) Asset Purchase Agreement among the Company, AVRentals/Warren,
Inc., AVRentals/Youngstown, Inc., Best Rentals Northside, Inc. and
Dennis Goldman, dated February 24, 1995.
2.2(4) Agreement and Plan of Merger among the Company, McKenzie
Leasing Corporation, Steve A. McKenzie, Brenda G. McKenzie and
others, dated June 9, 1995.
2.3(7) Stock Purchase Agreement by and among the Company, Diamond
Leasing Corporation, Kenneth H. Moye and Lee Brady, dated
July 20, 1996.
2.4* Stock Purchase Agreement by and among the Company, Bill Coleman
TV, Inc. and David Coleman, dated January 2, 1997.
2.5(6) Stock Purchase Agreement by and among the Company, Perry
Electronics, Inc., Robert L. Thomas, Norma J. Thomas, Randall D.
Snyder and Niki L. Snyder, dated January 24, 1997.
2.6(6) Closing Letter Agreement dated February 6, 1997 amending Stock
Purchase Agreement by and among the Company, Perry Electronics,
Inc., Robert L. Thomas, Norma J. Thomas, Randall D. Snyder and
Niki L. Snyder.
3.1* Articles of Incorporation of the Company, as amended.
3.2(2) By-Laws of the Company, as amended.
4.1(1) Form of Stock Option Agreement between the Company and each of
the shareholders of McKenzie Leasing Corporation, dated July 21,
1995.
4.2(1) Registration Rights Agreement among the Company, Massachusetts
Mutual Life Insurance Co. and affiliates thereof ("MassMutual"),
dated July 15, 1995.
4.3* Shareholder's Agreement between the Company and Lee Brady, dated
July 20, 1996.
4.4* Stock Option Agreement between the Company and David Coleman,
dated January 2, 1997.
10.1(2) Company's Stock Option Plan of 1992.
10.2(1) Company's 1995 Stock Option Plan.
10.3(2) Form of Non-Plan Stock Option Agreement.
51
10.4(5) Employment Agreement between William E. Morgenstern
and the Company, dated October 1, 1995.
10.5(5) Employment Agreement between Jeffrey A. Conway and
the Company, dated October 1, 1995.
10.6(5) Employment Agreement between Gerald A. Ryan and the Company,
dated October 1, 1995.
10.7(1) Consulting Agreement between the Company and Marc Joseffer,
dated May 18, 1994.
10.8(1) Non-Competition Agreement between Marc Joseffer and
the Company, dated May 18, 1994.
10.9(1) Consulting Agreement between the Company and
McKenzie Development Corporation, dated July 21,
1995.
10.10(1) Non-Competition Agreement between the Company and Steve A.
McKenzie, dated July 21, 1995.
10.11(1) Non-Competition Agreement between the Company and Brenda G.
McKenzie, dated July 21, 1995.
10.12(4) Subordinated Note Agreement among the Company and MassMutual,
dated July 15, 1995.
10.13(1) Form of MassMutual Subordinated Note, dated July 15, 1995.
10.14(1) Form of MassMutual Warrant, dated July 15, 1995.
10.15* Credit Agreement by and among the Company, the
banks party thereto and National City Bank of
Pennsylvania, as Agent, dated November 22, 1996
(the "Credit Agreement").
10.16* First Amendment to Credit Agreement, dated January 31, 1997.
10.17(8) Form of the Company's 7% Convertible Subordinated Debentures due
2007 (the "Debentures").
10.18(8) Indenture, dated February 4, 1997, between the Company and
Manufacturers and Traders Trust Company, as Trustee, in respect of
the Debentures.
11* Statement regarding computation of earnings per share.
23* Consent of Coopers & Lybrand, L.L.P.
27* Financial Data Schedule.
52
- -----------------
* Filed herewith
(1) Previously filed, as of January 5, 1996, pursuant to the Company's
Registration Statement on Form SB-2 (No. 333-116).
(2) Previously filed, as of December 8, 1992, pursuant to the Company's
Registration Statement on Form S-18 (No. 33-55562-NY).
(3) Previously filed, as of July 9, 1993, pursuant to Amendment No. 2 to the
Company's Registration Statement of Form S-18 (No. 33-55562-NY).
(4) Previously filed, as of August 15, 1995, as an exhibit to the Company's
Report on Form 8-K.
(5) Previously filed, as of December 28, 1995, as an exhibit to the Company's
Report on Form 10-KSB.
(6) Previously filed, as of February 21, 1997, as an exhibit to the Company's
Report on Form 8-K.
(7) Previously filed, as of August 8, 1996, as an exhibit to the Company's
Report on Form 8-K.
(8) Previously filed, as of May 9, 1997, pursuant to the Company's Registration
Statement on Form S-3 (No. 333-26835).