BESTWAY INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED JULY 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO _________________

Commission file number 0-8568

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BESTWAY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 81-0332743
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

7800 STEMMONS FREEWAY, SUITE 320
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)

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Registrant's telephone number, including area code: (214) 630-6655

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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

(TITLE OF CLASS)
Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of voting common stock held by non-affiliates
of the registrant as of October 16, 2001 was approximately $2,130,537.

The number of shares of Common Stock, $.01 par value, outstanding as of
October 16, 2001 was 1,685,472.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III is incorporated by reference
to the definitive proxy statement for the annual meeting of the stockholders of
Bestway, Inc., which will be filed with the Securities and Exchange Commission
not later than 120 days after July 31, 2001.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

Bestway, Inc. and its consolidated subsidiaries ("Bestway" or the
"Company") have been engaged in the rental-purchase industry since 1987. The
Company owns and operates a total of eighty-three stores located in the states
of Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and
Tennessee. The stores' operations are controlled and monitored through the
Company's management information system networked with its home office in
Dallas, Texas. The Company is a Delaware corporation and its principal executive
offices are located at 7800 Stemmons Freeway, Suite 320, Dallas, Texas 75247.

The Company's rental-purchase program offers brand name durable household
goods, electronics, appliances and jewelry to customers on a week-to-week or
month-to-month basis. These products are furnished to customers under
full-service rental agreements which require that the charge for each rental
period be paid in advance, but no additional advance payment or security deposit
is required. At the end of each rental period, the customer has the option of
retaining the product for an additional rental period or returning the product
without further obligation. If the product is returned, it is serviced and then
offered for rent to another customer. The rental agreements contain options
under which customers may own the merchandise under specified terms. The
Company's rental agreements typically have a 12 to 24 month term with weekly or
monthly payment options. The most distinguishing factor of this form of
retailing is the cancelability of the rental agreement at any time without
further obligation by returning the product to the dealer. The industry
primarily serves customers in the low to middle income sector who may have a
need for a product, but do not wish or are unable to purchase it for cash or on
credit.

PRODUCTS

The Company generally purchases products directly from the manufacturers
and local distributors. Products offered by the Company include a wide variety
of brands, styles and models of, among other things, televisions, DVD players,
home entertainment centers, stereos, videocassette recorders, computers, washers
and dryers, refrigerators and freezers, microwave ovens, furniture and jewelry.
Although the Company presently expects to continue relationships with its
existing suppliers, there are numerous sources of products, and the Company does
not believe its operations are dependent on any one or more of its present
suppliers.

ADVERTISING

The Company markets its products and services by selecting prominent
store locations in retail shopping areas on main traffic thoroughfares near
targeted customers' residences or job locations. Substantially all of the
advertising is developed and produced by the Company's in-house advertising
department. Additionally, the Company solicits new business by acquainting
potential customers with the Company's products and services through mailing
lists and local media advertising programs. The Company also has programs which
reward existing customers with rental discounts or cash payments for the
referral of new customers.

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COMPETITION

The rental-purchase industry is highly competitive. Competition is based
primarily on store location, product selection and availability, customer
service and rental rates and terms. Several of the Company's competitors are
national or regional companies and some have significantly greater financial and
operating resources and name recognition than the Company. In addition, the
Company faces competition from sources outside the rental-purchase industry,
such as 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. There is no assurance that the Company will be
able to compete successfully against these competitors. Because capital and
other requirements for entry into the rental-purchase industry are relatively
low, competition may arise from new sources not currently competing with the
Company. Increased competition could have a material adverse effect on the
Company's sales and profitability.

PERSONNEL

At July 31, 2001 the Company employed approximately 351 full-time
employees, of which 13 are located at the corporate office in Dallas, Texas. The
Company has various incentive programs for all personnel. None of the Company's
employees are represented by a labor union. The Company considers its relations
with its employees to be satisfactory.

COMPANY STORES

The number of stores operated by the Company has increased from 77 as of
July 31, 2000 to 83 as of July 31, 2001. The following table shows the number of
stores opened, closed and sold during such time period.

REGULATION

Federal Regulation - No comprehensive federal legislation has been
enacted regulating or otherwise impacting the rental-purchase transactions. The
Company instructs its managers in procedures required by applicable law through
training seminars and policy manuals and believes that it has operated in
compliance with the requirements of applicable law in all material respects.
Management believes that in the event federal legislation is enacted regulating
rental-purchase transactions as credit sales, the Company would be able to adapt
to the new laws and remain profitable by repositioning itself as a rent-to-rent
business.

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State Regulation - Currently 46 states and Puerto Rico have legislation
regulating rental-purchase transactions. The Company currently operates its
stores in states that have enacted laws specifically regulating rental-purchase
transactions. The Company's policy is to operate only in states where there is
an absence, in management's opinion, of unfavorable legislation regarding
rental-purchase transactions. There can be no assurance against the enactment of
new or revised rental-purchase laws that would have a material adverse effect on
the Company.

SERVICE MARK

The Company owns the federally registered service mark "Bestway Rental".
The Company believes that the Bestway Rental mark has acquired significant
market recognition and goodwill in the communities in which its stores are
located.

ITEM 2. PROPERTIES

All store locations, with the exception of one, and the home office
facility in Dallas, Texas are leased. Store facilities typically are showroom
locations of approximately 4,100 square feet in retail centers on heavy traffic
thoroughfares near customers' residences or work places. Almost all available
rental merchandise is kept in the showroom area which comprises the majority of
the available square footage. Store location is considered critical to the
success of the store.

The Company's store locations by state at July 31, 2001, are as follows:

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings other than ordinary routine litigation
incidental to the Company's business to which the Company or any of its
subsidiaries is a party or to which any of its property is subject. To the
Company's knowledge, no litigation has been threatened against the Company or
any of its subsidiaries other than routine actions and administrative
proceedings, which in the aggregate, are not expected to have a material adverse
effect on the business or financial condition of the Company.

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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.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

The Company's Common Stock is publicly traded on the Nasdaq Small-Cap
Market under the symbol "BSTW".

The following table sets forth, for the periods indicated, the high and
low sales price per share of the Common Stock as reported on the Nasdaq
Small-Cap Market.

At July 31, 2001, there were 415 stockholders of record of the Company's
Common Stock.

The Company has not paid cash dividends on its Common Stock since its
inception and intends to retain earnings for operations. The Company is a party
to a loan agreement which prohibits the payment of cash dividends on Common
Stock.

ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the information set forth under Item 6, "Selected Financial Data," and the
financial statements of the Company and the accompanying notes thereto included
elsewhere in this Report.

The Company currently operates 83 rental-purchase stores located in seven
states. The number of stores operated by the Company has increased from 35 as of
July 31, 1995 to 83 as of July 31, 2001. During the year ended July 31, 2001,
the Company opened nine new store locations, and sold three stores.

The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Income, expressed as a percentage
of revenues.

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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2001 COMPARED TO THE
FISCAL YEAR ENDED JULY 31, 2000

For the fiscal year ended July 31, 2001 compared to the fiscal year ended
July 31, 2000, total revenue increased $1,003,288, or 2.9%, to $35,913,046 from
$34,909,758. The increase in total revenue was primarily attributable to the
inclusion of nine new store openings in fiscal 2001 and improved same store
revenue, which was offset by decreased revenues due to the sale of three stores
in fiscal year 2001. Revenue from the nine new store openings in fiscal year
2001 accounted for $1,954,744, or 194.8% of the increase. Revenue from same
stores increased $712,297, or 2.2% and accounted for 71.0% of the increase in
revenue. Same store revenues represent those revenues earned in stores that were
operated by the Company for the entire twelve months ended July 31, 2001 and
2000. Revenue decreased $1,663,753, or 165.8% due to selling three locations in
fiscal year 2001.

The Company receives rental revenue from various products, including
televisions, DVD players and videocassette recorders, household appliances,
computers, home furniture and jewelry. In fiscal year 2001, approximately 16% of
the Company's rental revenue was derived from appliances, 27% from home
furniture, 32% from electronics, 7% from various other products including
jewelry and 18% from various services and charges to rental customers including
reinstatement fees, club program and liability waiver fees.

Total cost and operating expenses increased $2,099,784 or 6.2%, to
$35,941,343 from $33,841,559 and increased 3.1% as a percentage of total
revenues to 100.1% from 97.0%. The increase was primarily the result of expenses
associated with the nine new stores opened in fiscal year 2001.

Depreciation of rental merchandise increased $91,527, or 1.2% to
$7,734,416 from $7,642,889. Depreciation of rental merchandise expressed as a
percent of total revenue decreased .4% to 21.5% from 21.9%. The decrease as a
percentage of revenues was primarily due to an increase in average revenue
earned per item. Other depreciation and amortization expense increased $353,653,
or 21.9% to $1,971,819 from $1,618,166 and as a percentage of total revenue
increased .9% to 5.5% from 4.6%. The increase was primarily due to increased
property and equipment.

Salaries and wages increased $683,806, or 7.1%, to $10,342,950 from
$9,659,144 and as a percentage of total revenue increased 1.1% to 28.8% from
27.7%. Additional personnel for the nine new stores increased salaries and wages
by $730,757, or 106.9% of the total increase. Advertising expense decreased
$343,082, or 19.2% and as a percentage of total revenue decreased 1.1% to 4.0%
from 5.1%. Occupancy expense increased $451,105, or 20.5% to $2,649,352 from
$2,198,247 and as a percentage of total revenue increased 1.1% to 7.4% from 6.3%
primarily due to the nine new store openings in fiscal year 2001. Other
operating expenses increased $722,035, or 7.7% to $10,151,550 from $9,429,515
and as a percentage of total revenue increased 1.3% to 28.3% from 27.0%. The
increase was primarily attributable to the nine new stores opened in fiscal year
2001, increased write-offs of rental merchandise and increased insurance costs.
Interest expense increased $205,316, or 18.5% to $1,316,695 from $1,111,379. The
increase in interest expense is primarily attributed to the additional
indebtedness related to the new stores opened in fiscal year 2001.

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For the fiscal year ended July 31, 2001 compared to the fiscal year ended
July 31, 2000, income before income tax provision decreased $1,096,496, or
102.6%, to a loss of $28,297 compared to income of $1,068,199. Income from
operations before income tax provision as a percentage of total revenues
decreased 3.1% to a negative .1% from 3.0%. The loss is primarily the result of
expenses associated with the nine store openings in fiscal year 2001 and
marginal revenue growth in same stores after the Company's administrative and
management organization had been developed to accommodate an anticipated higher
growth in revenue. The Company experienced operating losses of $407,173 from the
nine new stores opened in fiscal year 2001. The new stores operated at lower
average revenue per store as compared to the Company's existing stores and,
therefore, had higher salaries and wages and occupancy expenses as a percentage
of revenues. The Company has implemented a program to reduce operating expenses
at the store and corporate level to increase profitability.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

For the fiscal year ended July 31, 2001, the Company's net cash flows
from operating activities were $11,661,342 as compared to $12,759,621 for the
fiscal year ended July 31, 2000. The decrease was primarily due to increased
outflow for working capital commitments.

For the fiscal year ended July 31, 2001, the Company's net cash flows
used in investing activities were $11,233,249 as compared to $16,356,631 for the
year ended July 31, 2000. The Company's investing activities reflects a
$3,789,497 decrease in the purchase of rental units and equipment and a $936,808
decrease in the additions to property and equipment. The decreases were
primarily due to fewer store openings and the sale of three stores in fiscal
year 2001.

For the fiscal year ended July 31, 2001, the Company's net cash flows
used in financing activities were $288,339 as compared to net cash flows
provided by financing activities of $3,763,873 for the year ended July 31, 2000.
The decrease in financing activities principally reflects net cash flows
provided by financing activities of increased repayments of the Company's debt.

On June 14, 2001, the Company amended its November 18, 1997 Third
Amendment to First Amended and Restated Revolving Credit Loan Agreement (the
"Agreement") with its senior collateralized lender. The amendment revised
certain covenants.

At May 30, June 30, and July 31, 2001, the Company was in violation of
the interest coverage ratio provision of the Agreement. The Company obtained
waivers of such violations from the lender. On October 26, 2001, the lender
amended the Agreement. In the amendment, the lender extended the maturity date
from February 28, 2002 to September 1, 2002, waived all violations of the
interest coverage provision of the Agreement through September 30, 2001 and
waived compliance with the interest coverage provision of the Agreement at
October 31, 2001. Although there can be no assurances, the Company expects to be
in compliance with such covenant after October 31, 2001.

On October 26, 2001, the Company and the lender amended the subordinated
note payable to a limited partnership and stockholder dated August 18, 1999. The
amendment extended the maturity date from February 28, 2002 to November 1, 2003.

With the Company having available credit of approximately $2,303,546
under the Revolving Credit Loan Agreement, management believes the Company has
adequate resources to meet is future cash obligations.

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On March 20, 2001, the Company signed an asset purchase agreement with
Paradise Valley Holdings, Inc. to acquire all rental contracts associated with a
single store location in Tennessee for $99,295 in cash.

On February 20, 2001, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of one store location
in South Carolina. The Company received $122,374 in cash for all the assets
involved in the daily operation of the store including all rental inventory
being rented by customers. Idle inventory was transferred to the Company's
existing store locations.

On March 20, 2001, the Company entered into an asset purchase agreement
with Paradise Valley Holdings, Inc. to sell all the assets of one store location
in Tennessee. The Company received $124,836 in cash for all the assets involved
in the daily operation of the stores including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's existing store
locations.

On April 4, 2001, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation to sell all the assets of one store location
in Mississippi. The Company received $150,000 in cash for all the assets
involved in the daily operation of the stores including all rental inventory
being rented by customers. Idle inventory was transferred to the Company's
existing store locations.

RECENTLY ISSUED ACCOUNTING PRINCIPLES

On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), Accounting for
Derivative Instruments and Hedging Activities. FAS 133 was amended by Statement
of Financial Accounting Standards No. 137, which modified the effective date of
FAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. FAS 133, as amended, requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The adoption of FAS
133 did not have a material impact on the Company's results of operations or its
financial position.

In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards Number 141, ("FAS 141") Business Combinations
and Number 142, ("FAS 142") Goodwill and Other Intangible Assets. FAS 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of FAS 142 will be effective for fiscal years
beginning after December 15, 2001. The Company does not expect the adoption of
FAS 142 to have a material impact on the Company's results of operations or its
financial position.

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In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("FAS 144") which is effective for fiscal years
beginning after December 15, 2001. FAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and establishes a
single accounting model, based on the framework established in FAS 121, for long
lived assets to be disposed of by sale. The Company does not expect the adoption
of this statement to have a material impact on the Company's results of
operations or its financial position.

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2000 COMPARED TO THE
FISCAL YEAR ENDED JULY 31, 1999

For the fiscal year ending July 31, 2000 compared to the fiscal year
ended July 31, 1999, total revenue increased $5,544,005, or 18.9%, to
$34,909,758 from $29,365,753. The increase in total revenue was primarily
attributable to the inclusion of two stores acquired and eleven new store
openings in fiscal year 1999, the inclusion of twelve new store openings in
fiscal year 2000, and improved same store revenues offset by decreased revenue
due to selling four store locations and merging one location in fiscal year
2000. Revenue from the two stores acquired in 1999 accounted for $453,617, or
8.2% of the increase. Revenue from the eleven new store openings in fiscal year
1999 accounted for $3,373,157 or 60.8% of the increase. Revenue from the twelve
new store openings in fiscal year 2000 accounted for $2,632,600, or 47.5% of the
increase. The increase in revenue from new stores is primarily a result of an
increase in customers and the inclusion of a full year's results for stores
opened in 1999. Revenue from same stores improved $1,396,560 or 5.8% and
accounted for 25.2% of the increase. Same store revenues represent those
revenues earned in stores that were operated by the Company for the entire year
ending July 31, 2000 and 1999. The improvement was primarily attributable to an
increase in both the number of items rented and in revenue earned per item.
Revenue decreased $2,311,929, or 41.7%, due to selling four locations and
merging one location in fiscal year 2000, respectively.

The Company receives rental revenue from various products including
televisions, DVD players and videocassette recorders, household appliances, as
well as computers, home furniture and jewelry. In fiscal year 2000,
approximately 17% of the Company's rental revenue was derived from appliances,
25% from home furniture, 28% from electronics, 11% from various other products
including jewelry and 19% from various services and charges to rental customers
including reinstatement fees, club program fees and liability waiver fee.

Total cost and operating expenses increased $5,583,315, or 19.8%, to
$33,841,559 from $28,258,244 and increased .8% as a percentage of total revenue
to 97.0% from 96.2%. The increase was primarily the result of expenses
associated with the twelve stores opened in fiscal year 2000.

Depreciation of rental merchandise increased $1,329,761, or 21.1% to
$7,642,889 from $6,313,128. Depreciation of rental merchandise expressed as a
percent of total revenue increased .4% to 21.9% from 21.5%. Other depreciation
and amortization increased $251,414, or 18.4% to $1,618,166 from $1,366,752 and
as a percentage of total revenue decreased .1% to 4.6% from 4.7%.

Salaries and wages increased $1,579,701, or 19.6%, to $9,659,144 from
$8,079,443 and as a percentage of total store revenue increased .2% to 27.7%
from 27.5%. Additional personnel for the twelve new internal stores opened in
fiscal year 2000 increased salaries and wages by $895,387, or 56.7% of the total
increase. Salaries and wages increased $623,461, or 39.5% of the total increase
due to additional personnel for the eleven new internal stores opened and the
two stores acquired in fiscal year 1999, respectively. Salaries and wages
increased $351,136, or 22.2% of the total increase due to higher staffing

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costs associated with higher turnover in same stores during fiscal year 2000.
Salaries and wages decreased $360,963, or 22.9%, due to selling four locations
and merging one location in fiscal year 2000, respectively. Advertising expense
increased $481,068, or 36.9%, to $1,786,361 from $1,305,293. Advertising expense
expressed as a percent of total store revenue increased .7% to 5.1% from 4.4%
primarily due to the twelve and eleven new stores opened in fiscal year 2000 and
fiscal year 1999, respectively. Occupancy expense increased $302,039, or 15.9%,
to $2,198,247 from $1,896,208 and as a percentage of total revenues decreased
.2% to 6.3% from 6.5% primarily due to the twelve and eleven new stores opened
in fiscal year 2000 and fiscal year 1999, respectively. Other operating expenses
increased $1,166,337, or 14.1%, to $9,429,515 from $8,263,178 and as a
percentage of total revenues decreased 1.1% to 27.0% from 28.1%. The increase
was primarily attributed to the twelve new stores opened in fiscal year 2000 and
increased write-offs of rental merchandise. Interest expense increased $314,768,
or 39.5%, to $1,111,379 from $796,611 and as a percentage of total revenue
increased .5% to 3.2% from 2.7%. The increase in interest expense is primarily
attributable to the indebtedness related to the internal new store locations in
fiscal year 2000 and fiscal year 1999, respectively.

For the fiscal year ended July 31, 2000 compared to the fiscal year ended
July 31, 1999, income before income tax provision decreased $39,310, or 3.5%, to
$1,068,199 from $1,107,509 and as a percentage of total revenues decreased .8%
to 3.0% from 3.8%. The Company experienced operating losses of $397,721 from the
twelve new stores opened in fiscal year 2000. The new stores operated at a lower
average revenue per store as compared to the Company's existing stores and,
therefore, had higher salaries and wages, advertising and occupancy expenses as
a percentage of revenues.

For the fiscal year ended July 31, 2000 compared to the fiscal year ended
July 31, 1999, income tax expense increased $85,633, or 17.4%, to $578,258 from
$492,625 and as a percentage of total revenues decreased .1% to 1.6% from 1.7%.

INFLATION

Although the Company cannot precisely determine the effects of inflation
on its business, it is management's belief that the effects on revenues and
operating results have not been significant.

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 open or 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
opened or 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.

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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its Revolving Credit Loan Agreement. At July
31, 2001, the Company had $10,000,000 outstanding on its Revolving Credit Loan
Agreement at an interest rate of prime plus .75% and the fair value of the
obligation outstanding approximates its related carrying value because the
obligation bears interest at the current market rate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is hereby made to the Consolidated Financial Statements and
notes thereto appearing at pages F-1 to F-18 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 2001, and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 2001, and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 2001, and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 2001, and is incorporated
herein by reference.

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PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following are filed as Exhibits to this Annual Report filed as
Form 10-K for the year ended July 31, 2001.

(b) Exhibits

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*Filed herewith

(c) Reports on Form 8-K

None.

14

BESTWAY, INC. FORM 10-K
--------------------------------------------------------------------------------

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.

BESTWAY, INC.

October 26, 2001 /s/ R. Brooks Reed
----------------------------------------
R. BROOKS REED, CHAIRMAN OF THE BOARD
OF DIRECTORS AND CHIEF EXECUTIVE OFFICER

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 in the capacities indicated on the 26th day of October 2001.

15

BESTWAY, INC. FORM 10-K
--------------------------------------------------------------------------------

BESTWAY, INC. FORM 10-K
--------------------------------------------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Bestway, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Bestway,
Inc. and its subsidiaries at July 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 2001, in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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 disclosure in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS

Dallas, Texas
October 22, 2001, except as to
the last two paragraphs of Note 4,
which are as of October 26, 2001

BESTWAY, INC. FORM 10-K

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

F-2

BESTWAY, INC. FORM 10-K

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

F-3

BESTWAY, INC. FORM 10-K

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

F-4

BESTWAY, INC. FORM 10-K

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

F-5

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

BUSINESS AND BASIS OF PRESENTATION

The consolidated financial statements of Bestway, Inc. (the "Company"),
include the Company's wholly-owned operating subsidiaries, Bestway Rental, Inc.
which operates under the registered trade name "Bestway Rent-To-Own", U.S.
Credit-Service Corporation and Westdale Data Service, Inc. Intercompany balances
and transactions have been eliminated in the consolidated financial statements.

The Company owns and operates a total of eighty-three stores located in
various states. The store operations are controlled and monitored through the
Company's management information system networked with its home office in
Dallas, Texas. The Company's store locations by state as of July 31, 2001, are
as follows:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Rental merchandise, related rental revenue and depreciation

Rental merchandise is rented to customers pursuant to rental agreements
which provide for either weekly or monthly rental terms with nonrefundable
rental payments for the first week or month 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. Rental agreements generally cover a period of 12 to 24
months with a majority of rental agreements specifying 18 months. At the end of
each rental period, the customer can renew the rental agreement, return the
merchandise with no obligation, or purchase the merchandise by exercising their
early purchase option. Amounts received from such sales are included in revenue
when received. Past due or stolen merchandise is expensed generally within three
months from the due date. The Company receives rental revenue from various
products including televisions, DVD players, videocassette recorders, household
appliances, as well as computers, home furniture and jewelry. In fiscal year
2001, approximately 16% of the Company's rental revenue was derived from
appliances, 27% from home furniture, 32% from electronics, 7% from various other
products such as jewelry and 18% from various services and charges to rental
customers including reinstatement fees, club fees and liability waiver fees. In
fiscal year 2000, approximately 17% of the Company's rental

F-6

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

revenue was derived from appliances, 25% from home furniture, 28% from
electronics, 11% from various other products such as jewelry and 19% from
various services and charges to rental customers including reinstatement fees
and liability wavier fees. In fiscal year 1999, approximately 18% of the
Company's rental revenue was derived from appliances, 26% from home furniture,
28% from electronics, 9% from various other products such as jewelry and 19%
from various services and charges to rental customers, including reinstatement
fees and liability waiver fees.

Merchandise rented to customers, or available for rent, is recorded at
cost net of accumulated depreciation, which equals the carrying amount, and is
classified in the consolidated balance sheets as rental merchandise. Merchandise
rented to customers is depreciated on the income-forecast basis over the term of
the rental agreement ranging from 12 to 24 months. When not on rent, merchandise
is not depreciated.

Rental merchandise which is damaged and inoperable, deemed obsolete, or
not returned by the customer after becoming delinquent on payments, is written
off as such impairment is incurred. For the fiscal years ended July 31, 2001,
2000 and 1999, $1,782,795, $1,747,354 and $1,378,571, respectively, of such
impairments were incurred and are included in other operating expenses in the
accompanying consolidated statements of operations.

Sales of merchandise

Sales of merchandise includes revenue from cash sales of primarily used
merchandise.

Property and equipment

Property and equipment are recorded at cost. Major improvements to
property and equipment are capitalized. Maintenance and repair expenditures are
charged to expense as incurred. As fixed assets are sold or retired, the
applicable cost and accumulated depreciation are eliminated from the accounts
and any gain or loss is recorded.

Depreciation of property and equipment is provided over the estimated
useful lives, on the straight-line basis as defined below. 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.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and on deposit, and
highly liquid instruments with maturities of three months or less when
purchased. The carrying amount of cash and cash equivalents is the estimated
fair value at July 31, 2001 and 2000.

F-7

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Intangible assets

Goodwill represents the cost in excess of the fair value of net tangible
assets of acquired businesses and is being amortized on a straight-line basis
over 15 to 20 years. Accumulated amortization of goodwill was $2,785,621 and
$2,533,272 at July 31, 2001 and 2000, respectively.

The non-competes are being amortized on a straight-line basis over
periods from 2 to 5 years. Accumulated amortization of the non-competes was
$1,707,559 and $1,554,873 at July 31, 2001 and 2000, respectively.

The Company continually evaluates the propriety of the carrying amount of
goodwill and other intangibles based on the estimated future undiscounted cash
flows of the related investment, as well as the amortization period to determine
whether current events and circumstances warrant adjustments to carrying value
and/or revised estimates of useful lives. At this time, the Company believes no
impairment of the goodwill and other intangibles has occurred and that no
reduction of the estimated useful lives is warranted.

Income taxes

Deferred income taxes are recognized for the tax consequences in the
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts more likely than not to
be realized. Income tax expense is the total of tax payable for the period and
the change during the period in deferred tax assets and liabilities which
impacted operations.

Investment tax credits are accounted for on the "flow-through" method.

Earnings per common share

Basic net income per common share is based on the weighted average common
shares outstanding during the period. Diluted net income per share includes
common stock equivalents, consisting of stock options, which are dilutive to net
income per share. For the fiscal years ended July 31, 2001 and July 31, 2000,
218,390 and 77,474, respectively, shares of common stock options were excluded
from the calculation of diluted income per share because their effect would be
antidilutive.

Advertising costs

Advertising costs are expensed as incurred.

F-8

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly deferred tax
assets, and liabilities, disclosure of contingent assets and liabilities and
reported amounts of revenues and expenses. Actual results could differ
significantly from those estimates.

Recently issued accounting principles

On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), Accounting for
Derivative Instruments and Hedging Activities. FAS 133 was amended by Statement
of Financial Accounting Standards No. 137, which modified the effective date of
FAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. FAS 133, as amended, requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The adoption of FAS
133 did not have a material impact on the Company's results of operations and
its financial position.

In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards Number 141, ("FAS 141") Business Combinations
and Number 142, ("FAS 142") Goodwill and Other Intangible Assets. FAS 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of FAS 142 will be effective for fiscal years
beginning after December 15, 2001. The company does not expect the adoption of
FAS 142 to have a material impact on the Company's results of operations and its
financial position.

In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("FAS 144") which is effective for fiscal years
beginning after December 15, 2001. FAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and establishes a
single accounting model, based on the framework established in FAS 121, for long
lived assets to be disposed of by sale. The Company does not expect the adoption
of this statement to have a material impact on the Company's results of
operations or its financial position.

F-9

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

2. ACQUISITIONS AND DISPOSITIONS

On January 11, 1999, the Company signed an asset purchase agreement with
King Rental, Inc. to acquire all the assets of two store locations in Alabama.
The Company paid $525,000 in cash for all the assets involved in the daily
operations of the stories including all idle rental inventory and all rental
inventory. Additionally, the Company obtained the seller's former store
locations by assuming the lease agreements. The Company funded the purchase
through borrowings under the Revolving Credit Loan Agreement.

On October 7, 1999, the Company signed an asset purchase agreement with
Panco Electronics and Appliances, Inc. to acquire all rental contracts
associated with a single store location in Mississippi for approximately $93,000
in cash.

On April 20, 2000, the Company entered into an asset purchase agreement
with BHC, Inc. to acquire all rental contracts associated with a single store
located in Mississippi for approximately $80,000 in cash.

On May 10, 2000, the Company signed an asset purchase agreement with Cato
TV and Appliance to acquire all rental contracts associated with a single store
location in Tennessee for approximately $150,000.

On May 19, 2000, the Company signed an asset purchase agreement with
Rent-A-Center, Inc. to acquire all rental contracts associated with a single
store location in Tennessee for approximately $174,000.

On July 12, 2000, the Company signed an asset purchase agreement with
AROA, Inc. to acquire all rental contracts associated with a single store
location in Alabama for approximately $53,000.

On March 2001, the Company signed an asset purchase agreement with
Paradise Valley Holdings, Inc. to acquire all rental contracts associated with a
single store located in Tennessee for $99,295 in cash.

The acquisitions have been accounted for under the purchase method and,
accordingly, the operating results from the acquired stores are included in the
accompanying consolidated statements of income from the date of acquisition. The
acquisitions resulted in $284,040 of goodwill which is being amortized on a
straight-line basis over 15 years.

On February 1, 1999, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation to sell all the assets of one store location
in Mississippi. The Company received $90,000 in cash for all the assets involved
in the daily operations of the stores including all rental inventory being
rented by customers. Idle inventory was transferred to the Company's existing
store locations. The Company recognized a gain of $31,393 on the sale.

F-10

On May 14, 1999, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of two store locations in
Tennessee. The Company received $196,996 in cash for all the assets involved in
the daily operations of the stores including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's existing store
locations. The Company recognized a gain of $38,382 on the sale.

On January 7, 2000, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of one store location in
Mississippi. The Company received $109,747 in cash for all the assets involved
in the daily operation of the store including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's existing store
location. The Company recognized a gain of $4,073 on the sale.

On February 2, 2000, the Company entered into an asset purchase agreement
with MATCAM, Inc. to sell all the assets of one store location in Georgia. The
Company received $110,000 in cash for all the assets involved in the daily
operation of the store including all rental inventory being rented by customers.
Idle inventory was transferred to the Company's existing store location. The
Company recognized a loss of $30,790 on the sale.

On May 19, 2000, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of one store location in
Tennessee. The Company received $153,930 in cash for all the assets involved in
the daily operation of the stores including all rental inventory being rented by
customers. Idle inventory was transferred to the Company's existing store
locations. The Company recognized a gain of $43,790 on the sale.

On July 12, 2000, the Company entered into an asset purchase agreement
with AROA, Inc. to sell all the assets of one store location in Alabama. The
Company received $76,839 in cash for all the assets involved in the daily
operation of the store including all rental inventory being rented by customers.
Idle inventory was transferred to the Company's existing store locations. The
Company recognized a loss of $5,796 on the sale.

On February 20, 2001, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of one store location
in South Carolina. The Company received $122,374 in cash for all the assets
involved in the daily operation of the store including all rental inventory
being rented by customers. Idle inventory was transferred to the Company's
existing store locations. The Company recognized a loss of $2,029 on the sale.

On March 20, 2001, the Company entered into an asset purchase agreement
with Paradise Valley Holdings, Inc. to sell all the asses of one store in
Tennessee. The Company received $124,836 in cash for all the assets involved in
the daily operation of the store including all rental inventory being rented by
customers. Idle inventory was transferred to the Company's existing store
locations. The Company recognized a gain of $12,236 on the sale.

F-11

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

On April 4, 2001, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation, Inc. to sell all the asses of one store in
Mississippi. The Company received $150,000 in cash for all the assets involved
in the daily operation of the store including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's existing store
locations. The Company recognized a gain of $62,902 on the sale.

3. PROPERTY AND EQUIPMENT

4. NOTES PAYABLE

Notes payable consists of the following:

At July 31, 2001 and 2000 the prime rate was 7.5% and 9.5%, respectively.

F-12

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

On June 14, 2001, the Company amended its November 18, 1997 Third
Amendment to First Amended and Restated Revolving Credit Loan Agreement with its
senior collateralized lender. In the amendment, the Company revised certain
covenants.

At July 31, 2001, the carrying value of the Company's senior
collateralized debt and other notes payable approximated fair value, estimated
primarily based on the borrowing rates available to the Company for debt with
similar terms and average maturities. It is not practicable to estimate the fair
value of the Company's subordinated debt because it is with a related party.

Following is a summary of maturities of notes payable for each of the
periods ending July 31:

2002 $13,014,412
2003 15,765
2004 17,242
2005 18,860
2006 15,452
Thereafter --
-----------

$13,081,731
===========

At May 30, June 30, and July 31, 2001, the Company was in violation of
the interest coverage ratio provision of the Agreement. The Company obtained
waivers of such violations from the lender. On October 26, 2001, the lender
amended the Agreement. In the amendment, the lender extended the maturity date
from February 28, 2002 to September 1, 2002, waived all violations of the
interest coverage provision of the Agreement through September 30, 2001 and
waived compliance with the interest coverage provision of the Agreement at
October 31, 2001. Although there can be no assurances, the Company expects to be
in compliance with such covenant after October 31, 2001.

On October 26, 2001, the Company and the lender amended the subordinated
note payable to a limited partnership and stockholder dated August 18, 1999. The
amendment extended the maturity date from February 28, 2002 to November 1, 2003.

5. INCOME TAXES

The provisions for income tax consists of the following for the years
ended July 31:

F-13

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Significant components of the Company's deferred income tax assets at
July 31, 2001 and 2000, respectively, are as follows:

Deferred tax assets are reduced by a valuation allowance if, based on
available evidence, it is more likely than not that some portion of all of the
deferred tax assets will not be realized. In fiscal 2001 and 2000, the valuation
allowance was reduced $0 and $16,018, respectively as a result of the expiration
of investment tax credit carryforwards.

The following is the reconciliation of the U.S. statutory tax rate to the
Company's effective tax rate for the years ended July 31:

During 2001, the net operating loss carryforwards were decreased by
$1,070,271 and during 2000, the net operating loss carryforwards were increased
by $1,588,629. At July 31, 2001, the Company has Federal net operating loss
carryforward of approximately $3,068,457 expiring from 2006 to 2020. The Company
has State net operating loss carryforward of $310,014 which expires from 2004 to
2020. The Company has investment tax credit carryforwards of approximately
$2,688 which expire in fiscal year 2002.

F-14

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

6. RELATED PARTY TRANSACTIONS

The Company has a consulting agreement with a former owner of one of the
Company's operating subsidiaries. As of July 31, 2001, $3,000 recorded in other
accrued liabilities in the Company's financial statements remains to be paid in
2002. If, however, the market price of the Company's Common Stock reaches $50.00
per share, the Company has no further obligation under this consulting
agreement. Consulting fees paid for each of the years ended July 31, 2001, 2000,
and 1999 were $30,000.

Interest expense relating to notes payable to affiliates amounted to
$243,334 for the years ended July 31, 2001, $244,667 for the year ended July 31,
2000 and $243,333 for year ended July 31, 1999.

7. LEASES

The Company leases all store facilities, with the exception of one, under
operating leases with terms ranging from one to ten years. Many leases contain
escalation clauses. Future minimum lease obligations under noncancelable
operating leases for the Company at July 31, 2001 are as follows:

2001 $ 2,421,137
2002 2,277,871
2003 2,014,674
2004 1,770,681
2005 1,453,217
Thereafter 1,979,397
-----------

$11,916,977
===========

8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS

Cash interest payments for the years ended July 31, 2001, 2000 and 1999
are $1,317,362, $1,111,380 and $791,444, respectively. Cash tax payments for the
years ended July 31, 2001, 2000 and 1999 are $478,643, $101,455 and $74,768,
respectively.

9. INCENTIVE PLANS

STOCK OPTION PLAN

The Company has a stock option plan (the "Plan") for officers and
employees of the Company or its affiliates, under which the maximum number of
shares, which may be granted in the aggregate, is 285,000 of the Company's
Common Stock. The Plan, which became effective June 30, 1995, provides for the
options to be granted, become exercisable, and terminate upon terms established
by the Board of Directors (the "Committee"). Shares become exercisable from time
to time (but not sooner than six months after the date of grant) over such
period and upon such terms as the Committee may determine, but such exercise can
not at any time be less than 25 shares unless the remaining shares that have
become so purchasable are less than 25 shares.

F-15

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

All options granted to the employees have an exercise price no less than
the fair market value of the stock at grant date. The options vest under one of
the following conditions: (i) one-third each year, beginning on the first
anniversary of the date of grant, (ii) one-half each year, beginning on the
first anniversary of the date of grant, or (iii) one-fourth each year, beginning
on the first anniversary of the date of grant.

The Company applies APB Opinion 25 and related Interpretations in
accounting for the Plan. In 1995, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which, if fully adopted by the Company, would
change the methods the Company applies in recognizing the cost of the Plan.
Adoption of the cost recognition provisions of SFAS No. 123 is optional and the
Company has decided not to elect the provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of SFAS
123 are required by SFAS 123 and are presented below.

In accordance with APB 25, the Company has not recognized any
compensation cost for the stock options granted.

A summary of the status of the Company's stock options as of July 31,
2001, 2000 and 1999 and the changes during the year ended on those dates is
presented below:

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate
of 5.04%, 6.06% and 5.48% for 2001, 2000, and 1999, respectively; the expected
life of options is 5 years; and a volatility of 43.03%, 41.39%, and 37.98% for
options granted in 2001, 2000 and 1999, respectively.

At July 31, 2001, exercise prices for all options outstanding ranged from
$4 to $7 and the weighted-average remaining contractual life for options
outstanding was 6 years.

F-16

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE

Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS No. 123, the Company's net income (loss)
and net income (loss) per common share for 2001, 2000 and 1999 would approximate
the pro forma amounts below:

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to the 1996 fiscal year.

401(K) PLAN

The Company established a Retirement Savings Plan (the "Savings Plan"),
effective as of September 1, 1994, which is intended to qualify under Section
401(k) of the Internal Revenue Code "the Code". Employees who have been employed
with the Company for one year or more are eligible for participation in the
Savings Plan. Employees may elect to reduce up to 15% of their annual
compensation (subject to certain limitations under the Code) by having such
amounts contributed to the Savings Plan. The Board intends to conduct a review
at the end of each fiscal year to determine whether the Company will make any
additional or matching contribution to the Savings Plan. For the year ended July
31, 2001, the Company contributed approximately $145,000 to the Savings Plan.
For the years ended July 31, 2000 and 1999, the Company made matching
contributions of approximately $145,000 and $0, to the Savings Plan. All assets
of the Savings Plan are held in trust.

10. CONTINGENCIES

The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. Management believes that the final outcome
of such matters will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.

11. SUBSEQUENT EVENTS

DISPOSITIONS

On October 5, 2001, the Company entered into an asset purchase agreement
with Value Rentals, LLC to sell all the assets of one store in Lafayette,
Tennessee. The Company received $216,841 in cash for all the assets involved in
the daily operation of the store including all rental inventory being rented by
customers, idle inventory, furniture and fixtures and vehicles.

F-17

BESTWAY, INC. FORM 10-K

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

On September 5, 2001, the Company entered into an asset purchase
agreement with a Rent-A-Center, Inc. to sell all the assets of one store in
Hickory, North Carolina. The Company received $113,541 in cash for all the
assets involved in the daily operation of the store including all rental
inventory being rented by customers. Idle inventory was transferred to the
Company's existing store locations.

ACQUISITIONS

On September 11, 2001, the Company entered into an asset purchase
agreement with Instant Rentals to acquire all rental contracts associated with a
single store located in Tennessee for approximately $148,000.

On October 22, 2001, the Company entered into an asset purchase agreement
with Zajac's Electronics Service Center, Inc. to acquire all rental contracts
associated with a single store located in Alabama for approximately $296,000.

F-18

INDEX TO EXHIBITS

----------

*Filed herewith