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, 2002

OR

[ ] 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 0-8568

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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. [X]

The aggregate market value of voting common stock held by
non-affiliates of the registrant as of October 17, 2002 was approximately
$4,153,078.

The number of shares of Common Stock, $.01 par value, outstanding as of
October 17, 2002 was 1,652,572.

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, 2002.

BESTWAY, INC. FORM 10-K
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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 sixty-nine 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 high quality, durable
products such as electronics, appliances, computers, furniture and accessories
under flexible rental-purchase agreements that typically allow the customer to
obtain ownership of the merchandise at the conclusion of an agreed upon rental
period. 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.

RECENT DEVELOPMENTS

On July 8, 2002, the Company announced the appointment of David A.
Kraemer as President and Chief Executive Officer. Mr. Kraemer has 19 years
experience in the rent-to-own industry, where he most recently served as
Executive Vice President of Rent-A-Center. He had been with
Rent-A-Center/Renters Choice since 1995 where as Executive Vice-President he was
responsible for the operations of over 1000 stores.

On the same date, the Company announced the termination of Teresa A.
Sheffield, the Company's President and Chief Operating Officer, after the
transition of Mr. Kraemer. Ms. Sheffield's termination was effective July 22,
2002. The Company also announced that R. Brooks Reed, the Company's Chairman and
Chief Executive Officer, would remain as Chairman.

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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, freezers, and furniture. 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. We promote the products and
services in our stores primarily through direct mail advertising. Our
advertisements emphasize such features as product and brand-name selection,
prompt delivery, and the absence of credit investigations or long-term
obligations. The Company also has programs which reward existing customers with
rental discounts or cash payments for the referral of new customers.

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, 2002, the Company employed approximately 323 full-time
employees, of which 11 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.

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COMPANY STORES

The number of stores operated by the Company has decreased from 83 as
of July 31, 2001 to 69 as of July 31, 2002. The following table shows the number
of stores opened, consolidated and sold during such time period:

REGULATION

Federal Regulation - No comprehensive federal legislation has been
enacted regulating or otherwise impacting rental-purchase transactions. The
Company does comply with the Federal Trade Commission recommendations for
disclosure in rental-purchase transactions. From time to time, legislation has
been introduced in Congress that would regulate rental-purchase transactions,
including legislation that would subject rental-purchase transactions to
interest rates, finance charges and fee limitations, as well as the Federal
Truth in Lending Act. Any adverse federal legislation, if enacted, could have a
material adverse effect on the Company.

State Regulation - Currently 47 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 the Bestway Rental mark has acquired significant
market recognition and goodwill in 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.

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The Company's store locations by state, at July 31, 2002, are as
follows:

ITEM 3. LEGAL PROCEEDINGS

In December 2001, the Company settled a lawsuit brought by
approximately fifteen plaintiffs who have asserted claims against a number of
defendants, including the Company, who were involved in the production of oil
and gas or who owned oil and gas facilities in Montana. Plaintiffs alleged that
the Company is the successor in interest to Amarco Resources Corporation,
which, in the past, owned interests in two wells in the oil field. One of these
wells is an alleged source of contamination of groundwater. The settlement was
for approximately $130,000, including attorney's fees.

There are no other 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.

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, 2002, there were 408 stockholders of record of the
Company's Common Stock.

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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 its Common
Stock.

ITEM 6. SELECTED FINANCIAL DATA

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 69 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 a high of 83 as of July 31, 2001 to 69 as of July 31,
2002. During the year ended July 31, 2002, the Company consolidated one store
location, and sold thirteen stores.

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

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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2002 COMPARED TO THE
FISCAL YEAR ENDED JULY 31, 2001

For the fiscal year ended July 31, 2002 compared to the fiscal year
ended July 31, 2001, total revenue decreased $2,379,118, or 6.6%, to $33,533,928
from $35,913,046. The decrease in total revenue was primarily attributable to
the consolidation or sale of fourteen store locations in fiscal year 2002 and
the full year's impact from selling three store locations in fiscal year 2001.
The decrease was offset by the inclusion of a full year's results for the stores
opened in fiscal 2001, and modestly increased revenues in same stores. Revenue
decreased $3,625,150, or 152.4% due to the consolidation or sale of store
locations in fiscal years 2002 and 2001. Revenue from stores opened in fiscal
year 2001 increased $1,091,666, or 45.9%. Revenue from same stores increased
$154,366 or .5% and accounted for 6.5% of the change 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, 2002 and 2001.

The Company receives rental revenue from various products including
televisions, DVD players, videocassette recorders, household appliances, as well
as computers and furniture. In fiscal year 2002, approximately 16% of the
Company's rental revenue was derived from appliances, 25% from furniture, 29%
from electronics, 8% from computers, 4% from various other products and 18% from
various services and charges to rental customers including reinstatement fees,
club fees and liability waiver fees.

Total costs and operating expenses decreased $1,442,403, or 4.0% to
$34,498,940 from $35,941,343 and increased 2.8% as a percentage of total revenue
to 102.9% from 100.1%. In fiscal year 2001, the Company developed its
administrative and management organization to accommodate an anticipated growth
in revenue. However, the Company experienced operating losses with new store
openings in 2001 and a lack of revenue growth in same stores. In fiscal year
2002, the Company sold, or consolidated fourteen under-performing stores and
implemented a program to reduce operating expenses at the store and corporate
level. In addition, in connection with the transition of the Company's new
President and Chief Executive Officer, the Company has implemented strategies to
improve profitability, including reviewing the Company's product offerings and
price value relationships.

Depreciation of rental merchandise decreased $1,062,932, or 13.7% to
$6,671,484 from $7,734,416 and decreased 1.6% as a percentage of total revenue
to 19.9% from 21.5%. The decrease as a percentage of revenues was primarily due
to an increase in average revenue earned per item. Other depreciation and
amortization decreased $140,173, or 7.1% to $1,831,646 from $1,971,819 and did
not change as a percentage of total revenue.

Cost of merchandise sold increased $413,090, or 102.9% to $814,433 from
$401,343 and increased 1.3% as a percentage of total revenue to 2.4% from 1.1%.
The increase was a result of an increase in the number of items sold in 2002
compared to 2001. During 2002, the Company undertook a merchandise reduction
sales initiative to dispose of lower margin merchandise. In 2002, the Company
recorded merchandise sales of $869,908 with a remaining value of $814,433, or a
margin of $55,475. In fiscal year 2001, the Company recorded merchandise sales
of $424,211 with a remaining value of $401,343, or a margin of $22,868.

Salaries and wages decreased $485,180, or 4.7% to $9,857,770 from
$10,342,950 and as a percentage of total revenue increased 0.6% to 29.4% from
28.8%. The decrease was primarily attributable to salaries and wages associated
with reduction in corporate staffing levels and the consolidation or sale of
fourteen under-performing stores in fiscal year 2002, offset by increased
salaries and wages of $400,850 paid pursuant to a separation agreement related
to the Company's former President and Chief Operating Officer.

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Advertising expense decreased $312,744, or 21.7% to $1,130,535 from
$1,443,279 and as a percentage of total revenue decreased 0.6% to 3.4% from
4.0%. The decrease is primarily attributable to advertising expense associated
with the consolidation or sale of fourteen under-performing stores in fiscal
year 2002.

Occupancy expense decreased $113,281, or 4.3% to $2,536,071 from
$2,649,352 and as a percentage of total revenue increased 0.1% to 7.5% from
7.4%. The decrease is primarily attributable to occupancy expense associated
with the consolidation or sale of fourteen under-performing stores in fiscal
year 2002, offset by the addition of the stores opened in fiscal year 2001.

Other operating expenses increased $636,494, or 6.3% to $10,788,044
from $10,151,550 and as a percentage of total revenue increased 3.9% to 32.2%
from 28.3%. Other operating expenses increased approximately $739,000 due to
write-offs of rental merchandise, including approximately $315,000 associated
with the Company's decision to discontinue carrying jewelry in its product
selection. Other operating expenses increased approximately $130,000 in
connection with a legal settlement. The increases were offset by the
consolidation or sale of fourteen under-performing stores in fiscal year 2002.

Interest expense decreased $522,262, or 39.7% to $794,433 from
$1,316,695 and as a percentage of total revenue decreased 1.3% to 2.4% from
3.7%. The decrease in interest is primarily attributable to decreased
indebtedness and a lower effective interest rate.

The Company entered into several transactions to sell thirteen
under-performing stores during fiscal year 2002. The Company recognized a net
loss of $50,122 on these store sale transactions.

For the fiscal year ended July 31, 2002 compared to the fiscal year
ended July 31, 2001, loss before income taxes increased $936,715, or 3,310.0% to
a loss of $965,012 compared to a loss of $28,297. Loss from operations before
income taxes as a percentage of total revenue increased 2.8% to 2.9% compared to
..1% primarily as a result of costs associated with changes in our executive
management team, write-offs of rental merchandise and the discontinuation of
certain product offerings.

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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% 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, furniture and jewelry. In fiscal year 2001, approximately 16% of the
Company's rental revenue was derived from appliances, 27% from 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 fee.

Total costs 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, 2002, the Company's net cash flows
provided by operating activities were $10,210,071 as compared to $11,661,342 for
the fiscal year ended July 31, 2001. The decline in cash provided by operations
was primarily due to a $1,000,000 cash advance to the Company's President and
Chief Executive Officer and increased outflow for working capital commitments.

For the fiscal year ended July 31, 2002, the Company's net cash flow
used in investing activities were $8,600,346 as compared to $11,233,249 for the
year ended July 31, 2001. The Company's investing activities reflects a $260,982
decrease in the purchase of rental units and a $1,469,441 decrease in purchases
of property and equipment due to no new store openings in fiscal year 2002 as
compared to three new stores opened in fiscal year 2001. For the fiscal year
ended July 31, 2002, cash used for acquisitions was $984,007 offset by sale
proceeds from thirteen store sales of $2,208,625.

For the fiscal year ended July 31, 2002, the Company's net cash flow
used in financing activities was $2,222,346 as compared to $288,339 for the year
ended July 31, 2001. The decrease in financing activities principally reflects
increased repayments of the Company's debt.

On October 26, 2001, the Company and its 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.

On October 26, 2001, the Company amended its Revolving Credit Loan
Agreement (the "Agreement") with its lender. 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.

On December 1, 2001, and March 14, 2002, the Company further amended
the Agreement. In the amendments, the lender decreased the maximum amount of
revolving credit under the Agreement from $17,500,000 to $11,500,000, extended
the maturity date from September 1, 2002 to October 1, 2003 and modified the
required minimum tangible net worth provision and the interest ratio coverage
calculation.

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The Company's capital requirements relate primarily to purchasing
rental merchandise and working capital requirements for new and existing stores.
The Company's primary source of liquidity and capital are from operations and
borrowings. For the fiscal year ended July 31, 2002, the Company has generated
sufficient cash flows from operations to meet its operating and investing needs.
Management believes that operating cash flows combined with available credit of
$2,988,026 under the Agreement provide adequate resources to meet the Company's
future cash obligations.

CRITICAL ACCOUNTING POLICIES

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. The Company bases its estimates on historical experience
and on various other assumptions or conditions that are believed to be
reasonable under the circumstances. Actual results could differ from those
estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. The Company believes that
the following critical accounting policies involve significant judgments and
estimates used in the preparation of our consolidated financial statements.

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 and furniture.

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.

Intangible assets

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.

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RECENTLY ISSUED ACCOUNTING PRINCIPLES

In June 2001, the Financial Accounting Standards Board (FASB or the
"Board") issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets, collectively referred to as the "Standards". SFAS 141
supersedes Accounting Principles Board Opinion (APB) No. 16, Business
Combination. The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
(2) provide specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill, and (3) require that unamortized negative
goodwill be written off immediately as an extraordinary gain instead of being
deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142
the Company reclassify the carrying amounts of certain intangible assets into or
out of goodwill, based on certain criteria. SFAS 142 supersedes APB 17,
Intangible Assets, and is effective for fiscal years beginning after December
15, 2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions of
SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived intangibles
assets be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired), (3) require that reporting
units be identified for the purpose of assessing potential future impairments of
goodwill, and (4) remove the forty-year limitation on the amortization period of
intangible assets that have finite lives.

The Company will adopt the provisions of SFAS 142 in its first quarter
ended October 31, 2002. The Company is in the process of preparing for its
adoption of SFAS 142 and is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. In connection with the
adoption of SFAS 142, the Company expects that is will no longer record
approximately $250,000 of amortization relating to its existing goodwill.

SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the first quarter of fiscal year 2003. The second step of
the goodwill impairment test measures the amount of the impairment loss
(measured as of the beginning of the year of adoption), if any, and must be
completed by the end of the Company's fiscal year. Intangible assets deemed to
have an indefinite life will be tested for impairment using a one-step process
which compares the fair value to the carrying amount of the asset as of the
beginning of the fiscal year, and pursuant to the requirements of SFAS 142 will
be completed during the first quarter of fiscal year 2003. Any impairment loss
resulting from the transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principle in the first quarter of
fiscal year 2003. The Company does not expect that the results of these
impairment tests will have a material impact on the Company's results of
operations and financial position.

In July 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets which is effective for fiscal years
beginning after December 15, 2001. SFAS 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 SFAS 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.

14

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other things, SFAS 145 rescinds both SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and the amendment to SFAS 4, SFAS
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through
this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS
64) that gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. Generally, SFAS 145 is effective for transactions occurring after May
15, 2002. The Company does not expect SFAS 145 to have a material impact on the
Company's results of operations or its financial position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses significant
issues relating to the recognition, measurement, and reporting of costs
associated with exit and disposal activities, including restructuring
activities, and nullifies the guidance in Emerging Issues Task Force Issue No.
94-3 ("EITF 94-3"), Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). The provisions of this statement are effective for exit and
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect SFAS 146 to have a material
impact on the Company's results of operations or its financial position.

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, (iii) the impact of
state and federal laws regulating or otherwise affecting rental-purchase
transactions, (iv) the impact of general economic conditions in the United
States and (v) the impact of terrorist activity, threats of terrorist activity
and responses thereto on the economy in general and the rental-purchase industry
in particular. 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.

15

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

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, 2002, the Company had $7,900,000 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-19 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 2002, 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 2002, 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 2002, 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 2002, and is incorporated
herein by reference.

16

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

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, 2002.

(b) Exhibits

17

21* Subsidiaries

23* Consent of PricewaterhouseCoopers LLP

- ----------

*Filed herewith

(c) Reports on Form 8-K for the quarter ended July 31, 2002:

The Company filed a current report of Form 8-K on July 10, 2002 to
report the appointment of a new President and Chief Executive Officer.

18

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 24, 2002 /s/ David A. Kraemer
-------------------------------------
President 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 24th day of October 2002.

19

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

CERTIFICATION

I, David A. Kraemer, Chief Executive Officer of Bestway, Inc., certify
that:

1. I have reviewed this annual report on Form 10-K of Bestway,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and

3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Bestway, Inc. as of, and
for, the periods presented in this annual report.

Date: October 24, 2002 By: /s/ DAVID A. KRAEMER
--------------------------------
Name: David A. Kraemer
Title: Chief Executive Officer

20

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

CERTIFICATION

I, Beth A. Durrett, Chief Financial Officer of Bestway, Inc., certify
that:

1. I have reviewed this annual report on Form 10-K of Bestway,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and

3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Bestway, Inc. as of, and
for, the periods presented in this annual report.

Date: October 24, 2002 By: /s/ BETH A. DURRETT
-----------------------------------
Name: Beth A. Durrett
Title: Chief Financial Officer

21

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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 2002, 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 disclosures 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.

/s/ PRICEWATERHOUSECOOPERS LLP

October 14, 2002
Dallas, Texas

F-1

BESTWAY, INC. FORM 10-K

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

See accompanying notes to consolidated financial statements.

F-2

BESTWAY, INC. FORM 10-K

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

See accompanying notes to consolidated financial statements.

F-3

BESTWAY, INC. FORM 10-K

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

See accompanying notes to consolidated financial statements.

F-4

BESTWAY, INC. FORM 10-K

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

See accompanying notes to consolidated financial statements.

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
consolidation.

The Company owns and operates a total of sixty-nine 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, 2002, 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 and
furniture. In fiscal year 2002, approximately 16% of the Company's
rental revenue was derived from appliances, 25% from furniture, 29% from
electronics, 8% from computers, 4% from various other products and 18%
from various services and charges to rental customers including
reinstatement fees, club fees and liability waiver fees. In fiscal year
2001, approximately 16% of

F-6

BESTWAY, INC. FORM 10-K

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

the Company's rental revenue was derived from appliances, 27% from
furniture, 32% from electronics, 7% from various other products and 18%
from various services and charges to rental customers including
reinstatement fees and liability wavier fees. In fiscal year 2000,
approximately 17% of the Company's rental revenue was derived from
appliances, 25% from furniture, 28% from electronics, 11% from various
other products 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, 2002, 2001 and 2000, $2,018,208, $1,782,795 and $1,747,354,
respectively, of such impairments were incurred and are included in
other operating expenses in the accompanying consolidated statements of
operations. Included in the amount for 2002 is approximately $315,000
related to the Company's decision to discontinue carrying jewelry in its
product selection.

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.

F-7

BESTWAY, INC. FORM 10-K

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

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, 2002 and 2001.

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
$3,418,233 and $2,785,621 at July 31, 2002 and 2001, 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 $1,874,283 and $1,707,559 at July 31, 2002 and 2001, 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, 2002 and July 31, 2001, 88,872 and 218,390, 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

In June 2001, the Financial Accounting Standards Board (FASB or the
"Board") issued Statement of Financial Accounting Standards No. 141
("SFAS 141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill
and Other Intangible Assets, collectively referred to as the
"Standards". SFAS 141 supersedes Accounting Principles Board Opinion
(APB) No. 16, Business Combination. The provisions of SFAS 141 (1)
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible
assets apart from goodwill, and (3) require that unamortized negative
goodwill be written off immediately as an extraordinary gain instead of
being deferred and amortized. SFAS 141 also requires that upon adoption
of SFAS 142 the Company reclassify the carrying amounts of certain
intangible assets into or out of goodwill, based on certain criteria.
SFAS 142 supersedes APB 17, Intangible Assets, and is effective for
fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS 142 (1) prohibit
the amortization of goodwill and indefinite-lived intangible assets, (2)
require that goodwill and indefinite-lived intangibles assets be tested
annually for impairment (and in interim periods if certain events occur
indicating that the carrying value of goodwill and/or indefinite-lived
intangible assets may be impaired), (3) require that reporting units be
identified for the purpose of assessing potential future impairments of
goodwill, and (4) remove the forty-year limitation on the amortization
period of intangible assets that have finite lives.

The Company will adopt the provisions of SFAS 142 in its first quarter
ended October 31, 2002. The Company is in the process of preparing for
its adoption of SFAS 142 and is making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets,
other assets, and liabilities should be allocated to those reporting
units. In connection with the adoption of SFAS 142, the Company expects
that is will no longer record approximately $250,000 of amortization
relating to its existing goodwill.

SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of
the fiscal year. However, a company has six months from the date of
adoption to complete the first step. The Company expects to complete
that first step of the goodwill impairment test during the first quarter
of fiscal year 2003. The second step of the goodwill impairment test
measures the amount of the impairment loss (measured as of the beginning
of the year of adoption), if any, and must be completed by the end of
the Company's fiscal year. Intangible assets deemed to have an
indefinite life will be tested for impairment using a one-step process
which compares the fair value to the carrying amount of the asset as of
the beginning of the fiscal year, and pursuant to the requirements of
SFAS 142 will be completed during the first

F-9

BESTWAY, INC. FORM 10-K

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

quarter of fiscal year 2003. Any impairment loss resulting from the
transitional impairment tests will be reflected as the cumulative effect
of a change in accounting principle in the first quarter of fiscal year
2003. The Company does not expect that the results of these impairment
tests will have a material impact on the Company's results of operations
and financial position.

In July 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets which is effective for
fiscal years beginning after December 15, 2001. SFAS 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 SFAS 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.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other things, SFAS 145 rescinds both SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the
amendment to SFAS 4, SFAS 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. Through this rescission, SFAS 145 eliminates
the requirement (in both SFAS 4 and SFAS 64) that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as
an extraordinary item, net of the related income tax effect. Generally,
SFAS 145 is effective for transactions occurring after May 15, 2002. The
Company does not expect SFAS 145 to have a material impact on the
Company's results of operations or its financial position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses
significant issues relating to the recognition, measurement, and
reporting of costs associated with exit and disposal activities,
including restructuring activities, and nullifies the guidance in
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
The provisions of this statement are effective for exit and disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect SFAS 146 to have a
material impact on the Company's results of operations or its financial
position.

2. ACQUISITIONS AND DISPOSITIONS

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 located in Tennessee for approximately
$499,000.

On September 11, 2001, the Company entered into an asset purchase
agreement with Instant Rentals to acquire all the rental contracts 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-10

BESTWAY, INC. FORM 10-K

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

On January 10, 2002, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to acquire all rental contracts
associated with a single store located in Mississippi for approximately
$176,000.

On April 25, 2002, the Company entered into an asset purchase agreement
with Showcase TV and Appliance Rental to acquire all the rental
contracts with a single store located in Alabama for approximately
$188,000.

On May 30, 2002, the Company entered into an asset purchase agreement
with Affordable Rent to Own, Inc. to acquire all the rental contracts
with a single store located in Mississippi for approximately $176,000.
Additionally, the Company obtained the store location by assuming the
lease agreement.

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 operations from the date
of acquisition.

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 assets 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.

On April 4, 2001, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation, Inc. to sell all the assets 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.

On September 5, 2001, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of one store
in North Carolina. The Company received approximately $114,000 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 loss of $10,898 on the sale.

On October 5, 2001, the Company entered into an asset purchase agreement
with Value Rental, LLC to sell all the assets of one store in Tennessee.
The Company received approximately $217,000 in cash for all the assets
involved in the daily operation of the store including all rental
inventory being rented by customers, idle inventory, furniture and
fixtures and vehicles. The Company recognized a gain of $82,022 on the
sale.

F-11

BESTWAY, INC. FORM 10-K

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

On December 11, 2001, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of one store
in South Carolina. The Company received approximately $187,000 in cash
for all the assets involved in the daily operation of the store
including all rental inventory being rented by customers and
approximately $25,000 of idle inventory. Remaining idle inventory was
transferred to the Company's existing store locations. Additionally,
Rent-A-Center obtained the Company's store location by assuming the
lease agreement. The Company recognized a gain of $12,554 on the sale.

On January 10, 2002, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of one store
in Tennessee. The Company received approximately $126,000 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 loss of $28,036 on the sale.

On January 10, 2002, the Company entered into an asset purchase
agreement with Aaron Rents, Inc. to sell all the assets of one store in
Alabama. The Company received approximately $117,000 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 loss of
$10,683 on the sale.

On February 8, 2002, the Company entered into an asset purchase
agreement with Aaron Rents, Inc. to sell all the assets of one store in
North Carolina. The Company received approximately $133,000 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 $4,812 on the sale.

On February 12, 2002, the Company entered into an asset purchase
agreement with Rent-A-Center, Inc. to sell all the assets of five stores
in South Carolina and one store location in Georgia. The Company
received approximately $1,137,000 in cash for all the assets involved in
the daily operation of the stores including all rental inventory being
rented by customers and approximately $28,000 of idle inventory.
Additionally, Rent-A-Center obtained two of the Company's store
locations by assuming the lease agreement. The Company recognized a loss
of $137,058 on the sale.

On March 25, 2002, the Company entered into an asset purchase agreement
with Aaron Rents, Inc. to sell all the assets of one store in Tennessee.
The Company received approximately $175,000 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
$15,797 on the sale.

F-12

BESTWAY, INC. FORM 10-K

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

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Depreciation expense for property and equipment was $1,417,979,
$1,566,788 and $1,254,334 for 2002, 2001 and 2000.

4. NOTES PAYABLE

Notes payable consists of the following:

At July 31, 2002 and 2001 the prime rate was 5.5% and 7.5%,
respectively.

F-13

BESTWAY, INC. FORM 10-K

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

On October 26, 2001, the Company and its 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.

On October 26, 2001, the Company amended its Revolving Credit Loan
Agreement (the "Agreement") with its lender. 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.

On December 1, 2001, and March 14, 2002, the Company further amended the
Agreement. In the amendments, the lender decreased the maximum amount of
revolving credit under the Agreement from $17,500,000 to $11,500,000,
extended the maturity date from September 1, 2002 to October 1, 2003 and
modified the required minimum tangible net worth provision and the
interest ratio coverage calculation.

The Agreement also contains certain financial covenants, including an
interest coverage ratio, debt ratio, maximum idle inventory requirements
and a minimum tangible net worth provision. At July 31, 2002 the Company
was in default of the minimum tangible net worth provision. The Company
is retroactively in compliance after receiving a waiver on September 27,
2002.

At July 31, 2002, 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:

2003 $ 15,765
2004 10,917,242
2005 18,860
2006 15,325
2007 --
Thereafter --
------------
$ 10,967,192
============

F-14

BESTWAY, INC. FORM 10-K

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

5. INCOME TAXES

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

Significant components of the Company's deferred income tax assets at
July 31, 2002 and 2001, 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.

F-15

BESTWAY, INC. FORM 10-K

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

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 2002, the net operating loss carryforwards were decreased by
$106,238 and during 2001, the net operating loss carryforwards were
decreased by $1,070,271. At July 31, 2002, the Company has a Federal net
operating loss carryforward of approximately $3,252,228 expiring from
2006 to 2021. The Company has a State net operating loss carryforward of
$20,055 which expires from 2004 to 2021. The Company has investment tax
credit carryforwards of approximately $2,688 which expire in fiscal year
2003.

6. RELATED PARTY TRANSACTIONS

Interest expense relating to notes payable to affiliates amounted to
$242,668 for the years ended July 31, 2002, $243,334 for the year ended
July 31, 2001 and $244,667 for year ended July 31, 2000.

As of July 31, 2002, the Company had advanced $1,000,000 to the
President and Chief Executive Officer in the form of a promissory note
(the "Note"). The Note matures on January 1, 2008 and bears interest at
the lesser of i) the Applicable Federal Rate or ii) the maximum
nonusurious rate as defined in the Note. Per the terms of the Note, the
Company will forgive one-fifth of the principal and all related accrued
interest on December 31 of each year beginning in 2003 through 2007. If
the President and Chief Executive Officer's employment is terminated
with cause by the Company or without good reason by the President and
Chief Executive Officer all outstanding unearned principal and accrued
interest must be repaid. As of July 31, 2002, $988,889 of the Note
remained outstanding.

Effective July 22, 2002, the Company terminated its President and Chief
Operating Officer. In connection with the separation agreement, the
Company recorded an approximate $400,850 charge which is reflected in
salaries and wages in the accompanying statement of operations for the
year ended July 31, 2002.

F-16

BESTWAY, INC. FORM 10-K

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

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, 2002
are as follows:

2002 $ 2,179,010
2003 2,002,902
2004 1,754,272
2005 1,403,808
2006 861,858
Thereafter 987,702
-----------
$ 9,189,552
===========

8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS

Cash interest payments for the years ended July 31, 2002, 2001 and 2000
are $793,766, $1,317,362 and $1,111,380, respectively. Cash tax payments
for the years ended July 31, 2002, 2001 and 2000 are $89,874,
$478,643 and $101,455, 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.

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

F-17

BESTWAY, INC. FORM 10-K

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

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,
2002, 2001 and 2000 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 4.12%, 6.06% and 5.48% for 2002, 2001, and 2000,
respectively; the expected life of options is 5 years; and a volatility
of 46.84%, 43.03%, and 41.39% for options granted in 2002, 2001 and
2000, respectively.

At July 31, 2002, exercise prices for all options outstanding ranged
from $4.00 to $7.00 and the weighted-average remaining contractual life
for options outstanding was 5.9 years.

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 2002, 2001 and
2000 would approximate the pro forma amounts below:

F-18

BESTWAY, INC. FORM 10-K

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

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, 2002, the
Company contributed approximately $105,000 to the Savings Plan. For the
years ended July 31, 2001 and 2000, the Company made matching
contributions of approximately $145,000, to the Savings Plan. All assets
of the Savings Plan are held in trust.

10. LEGAL CONTINGENCIES

In December 2001, the Company settled a lawsuit brought by approximately
fifteen plaintiffs who have asserted claims against a number of
defendants, including the Company, who were involved in the production
of oil and gas or who owned oil and gas facilities in Montana.
Plaintiffs alleged that the Company is the successor in interest to
Amarco Resources Corporation, which, in the past, owned interests in two
wells in the oil field. One of these wells is an alleged source of
contamination of groundwater. The settlement was for approximately
$130,000, including attorney's fees.

The Company is subject to various other 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.

F-19

INDEX TO EXHIBITS

- ----------

*Filed herewith