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BESTWAY, INC. FORM 10-Q
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
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
BESTWAY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 81-0332743
- ------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Stemmons Freeway, Suite 320 75247
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(214) 630-6655
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 126-2). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.01 par value, outstanding as of
April 30, 2003, was 1,677,572.
BESTWAY, INC. FORM 10-Q
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QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
April 30, 2003
PAGE NOS.
---------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of
April 30, 2003 (unaudited) and July 31, 2002 3
b) Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended April 30, 2003
and 2002 (unaudited) 4
c) Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended April 30, 2003
and 2002 (unaudited) 5
d) Condensed Consolidated Statement of Stockholders' Equity
for the Nine Months Ended April 30, 2003 (unaudited) 6
e) Notes to the Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
ITEM 4. Controls and Procedures 18
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K, Signatures 19
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
APRIL 30, JULY 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 322,830 $ 506,175
Prepaid expenses 213,180 312,925
Taxes receivable 24,172 159,585
Deferred income taxes 511,375 483,075
Other assets 30,948 52,032
Rental merchandise, at cost 23,194,440 22,730,226
less accumulated depreciation 8,340,239 9,289,369
------------ ------------
14,854,201 13,440,857
------------ ------------
Property and equipment, at cost 8,983,085 9,060,208
less accumulated depreciation 5,956,952 5,393,259
------------ ------------
3,026,133 3,666,949
------------ ------------
Employee advance 888,889 988,889
Non-competes, net of amortization 339,756 468,631
Goodwill, net of amortization 1,225,295 1,225,295
------------ ------------
Total assets $ 21,436,779 $ 21,304,413
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,065,750 $ 671,365
Accrued interest - related parties 20,000 20,667
Other accrued liabilities 1,075,132 1,521,474
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 8,055,409 7,967,192
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10.00 par value,
1,000,000 authorized, none issued - -
Common stock, $.01 par value, 5,000,000 authorized,
1,781,917 issued at April 30, 2003 and 1,756,917 issued
at July 31, 2002 17,819 17,569
Paid-in capital 16,294,918 16,151,428
Less treasury stock, at cost, 104,345 at April 30, 2003 and
July 31, 2002 (563,083) (563,083)
Accumulated deficit (7,529,166) (7,482,199)
------------ ------------
Total stockholders' equity 8,220,488 8,123,715
------------ ------------
Total liabilities and stockholders' equity $ 21,436,779 $ 21,304,413
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Rental and fees $ 8,864,582 $ 8,176,532 $ 25,361,440 $ 24,732,029
Sales of merchandise 349,282 247,019 1,019,645 635,877
------------ ------------ ------------ ------------
9,213,864 8,423,551 26,381,085 25,367,906
------------ ------------ ------------ ------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 1,743,587 1,632,058 5,092,456 5,053,778
Other 375,044 436,300 1,126,988 1,369,311
Cost of merchandise sold 339,328 221,584 1,119,152 583,405
Salaries and wages 2,581,090 2,190,094 7,688,478 7,129,162
Advertising 465,942 201,225 1,278,865 1,001,756
Occupancy 606,458 606,864 1,788,640 1,938,756
Other operating expenses 2,696,548 2,314,555 7,849,943 7,442,632
Interest expense 168,648 178,465 518,916 625,517
Loss (gain) on sale of property
and equipment 1,475 (11,534) (7,086) (16,143)
Loss on sale of assets - 121,687 - 65,795
------------ ------------ ------------ ------------
8,978,120 7,891,298 26,456,352 25,193,969
------------ ------------ ------------ ------------
Income (loss) before income taxes 235,744 532,253 (75,267) 173,937
------------ ------------ ------------ ------------
Income tax expense (benefit) 88,638 230,746 (28,300) 138,035
------------ ------------ ------------ ------------
Net income (loss) $ 147,106 $ 301,507 $ (46,967) $ 35,902
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ .09 $ .19 $ (.03) $ .02
============ ============ ============ ============
Diluted earnings (loss) per share $ .08 $ .19 $ (.03) $ .02
============ ============ ============ ============
Weighted average common
shares outstanding 1,677,572 1,622,272 1,667,283 1,654,361
============ ============ ============ ============
Diluted weighted average common
shares outstanding 1,813,456 1,622,302 1,667,283 1,655,530
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (46,967) $ 35,902
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,219,444 6,423,089
Net book value of rental units retired 2,651,141 2,332,902
Gain on sale of property and equipment (7,086) (16,143)
Loss on sale of assets - 65,795
Deferred income taxes (28,300) 138,035
Non-cash compensation expense 104,390 -
Changes in operating assets and liabilities other than cash:
Prepaid expenses 99,745 (153,228)
Taxes receivable 135,413 (50,779)
Other assets 21,084 (1,112)
Accounts payable (48,212) (197,539)
Other accrued liabilities (447,009) (555,955)
----------- -----------
Net cash provided by operating activities 8,653,643 8,020,967
----------- -----------
Cash flows from investing activities:
Purchase of rental units and equipment (8,714,344) (7,561,590)
Additions to property and equipment (361,568) (164,723)
Proceeds from sale of property and equipment 11,357 52,653
Asset purchase net of cash acquired - (807,979)
Proceeds from sale of assets - 2,192,952
----------- -----------
Net cash used in investing activities (9,064,555) (6,288,687)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,600,000 850,000
Repayment of notes payable (1,511,783) (3,260,781)
Treasury stock purchase - (259,857)
Stock options exercised 139,350 -
----------- -----------
Net cash provided by (used in) financing activities 227,567 (2,670,638)
----------- -----------
Cash and cash equivalents at beginning of period 506,175 1,118,796
----------- -----------
Cash and cash equivalents at end of period $ 322,830 $ 180,438
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended April 30, 2003 (Unaudited)
COMMON STOCK TREASURY STOCK TOTAL
----------------------- PAID-IN -------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
--------- ----------- ----------- ------------ ------------ ------------ -------------
Balance at July 31, 2002 1,756,917 $ 17,569 $16,151,428 (104,345) $ (563,083) $(7,482,199) $ 8,123,715
Stock options exercised 25,000 250 139,100 - - - 139,350
Stock option
compensation expense 4,390 4,390
Net loss for the nine months
ended April 30, 2003 - - - - - (46,967) (46,967)
--------- ----------- ----------- -------- ----------- ----------- -------------
Balance at April 30, 2003 1,781,917 $ 17,819 $16,294,918 (104,345) $ (563,083) $(7,529,166) $ 8,220,488
========= =========== =========== ======== =========== =========== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
BESTWAY, INC. FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Bestway, Inc. and its consolidated subsidiaries (the "Company") is
engaged in the rental and sale of home electronics, furniture,
appliances and computers to the general public. At April 30, 2003, the
Company operated 69 stores in seven states: Alabama, Arkansas, Georgia,
Mississippi, North Carolina, South Carolina and Tennessee. The
Company's corporate office is located in Dallas, Texas.
The condensed consolidated financial statements included herein have
been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to
make the information presented not misleading and that all adjustments
deemed necessary for a fair statement of the results for the interim
period have been reflected. Such adjustments are of a normal recurring
nature. It is suggested that these unaudited consolidated financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's 2002 Form 10-K, particularly
with regard to disclosure relating to significant accounting policies.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
2. STOCK-BASED COMPENSATION
The Company sponsors a stock option plan for the benefit of its
employees. In December 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosures, which amended SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 148 requires companies electing not
to expense stock options to provide the pro forma net income and
earnings per share information not only annually, but also on a
quarterly basis. We follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") in accounting
for our stock-based compensation plan. Under APB 25, no compensation
expense is recognized for our stock-based compensation plan when the
exercise price of awards under our plan are at current market prices of
our stock on the date of grant.
7
BESTWAY, INC. FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the effect on net income and earnings
per share had compensation costs for stock options been measured using
SFAS No. 123:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
APRIL 30, APRIL 30,
2003 2002 2003 2002
------------- ------------ -------------- ------------
Net income (loss)
As reported $ 147,106 $ 301,507 $ (46,967) $ 35,902
Pro forma $ 124,337 $ 294,171 $ (115,273) $ 13,893
Basic earnings (loss) per common share
As reported $ .09 $ .19 $ (.03) $ .02
Pro forma $ .07 $ .18 $ (.07) $ .01
Diluted earnings (loss) per common share
As reported $ .08 $ .19 $ (.03) $ .02
Pro forma $ .07 $ .18 $ (.07) $ .01
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average common
shares outstanding during the period. Diluted earnings per common share
includes common stock equivalents, consisting of stock options, which
are dilutive to net income per share. For the three and nine months
ended April 30, 2003 and 2002, 0 and 265,595 shares and 221,535 and
210,535 shares, respectively, of common stock options were excluded
from the calculation of diluted earnings per common share because their
effect would be antidilutive.
4. RENTAL MERCHANDISE
Rental merchandise rented to customers, or available for rent, is
recorded at cost, net of accumulated depreciation. Merchandise rented
to customers is depreciated on the income-forecast basis over the term
of the rental agreement, generally ranging from 12 to 36 months. Under
the income-forecast basis, merchandise held for rent 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 nine months ended
April 30, 2003 and 2002, $1,326,463 and $1,376,591, respectively, of
such impairments were incurred and are included in other operating
expenses in the accompanying condensed consolidated statements of
operations.
5. NOTES PAYABLE
On October 31, 2002, the Company amended and restated its Revolving
Credit Loan Agreement with its lender. In the amendment, the lender
extended the maturity date from October 1, 2003 to May 31, 2004 and
modified the interest rate, minimum tangible net worth provision, and
minimum interest coverage ratio. The amendment adds a minimum year to
date profitability requirement effective beginning May 31, 2003. At
August 31, 2002 and September 30, 2002 the Company was in violation of
the minimum tangible net worth provision of the Agreement. The Company
obtained a waiver of such violations from the lender and has been in
compliance thereafter.
8
BESTWAY, INC. FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 13, 2002, 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
November 1, 2003 to May 31, 2004.
6. NEW ACCOUNTING STANDARDS
Effective August 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangibles" ("SFAS
142"). SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination) at acquisition and
for goodwill and other intangible assets subsequent to their
acquisition. The Company's consolidated balance sheet included
goodwill, net of accumulated amortization, totaling $1,225,295, which
is related to various store acquisitions. Bestway applied the
provisions of SFAS 142 on August 1, 2002 and discontinued amortization
of goodwill.
In accordance with SFAS 142, goodwill is subject to an annual
impairment test. Based on the initial impairment test conducted as of
August 1, 2002, the Company does not believe goodwill is impaired.
The Company's adoption of SFAS 142 had no effect on the Company's
acquired identifiable intangible assets that are subject to
amortization. During the three and nine months ended April 30, 2003,
the Company recorded total amortization expense of $42,960 and
$128,875, respectively, and as of April 30, 2003 had accumulated
amortization of $2,003,158. Amortization expense is estimated at
$161,958, $106,085, $84,384, $62,616 and $28,712 for the years ended
July 31, 2003 through 2007, respectively.
9
BESTWAY, INC. FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma financial information compares the Company's
net income (loss) for the three and nine months ended April 30, 2003
and 2002 had the provisions of SFAS 142 been applied on August 1, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------
APRIL 30, APRIL 30,
2003 2002 2003 2002
------------- ---------------- ------------- -------------
Reported net income (loss) $ 147,106 $ 301,507 $ (46,967) $ 35,902
Goodwill amortization - 63,087 - 189,262
------------- ---------------- ------------- -------------
Adjusted net income (loss) 147,106 364,594 (46,967) 225,164
Basic earnings (loss) per share:
Reported net income (loss) .09 .19 (.03) .02
Goodwill amortization - .03 - .11
------------- ---------------- ------------- -------------
Adjusted net income (loss) $ .09 $ .22 $ (.03) $ .13
Diluted earnings (loss) per share:
Reported net income (loss) .08 .19 (.03) .02
Goodwill amortization - .03 - .11
------------- ---------------- ------------- -------------
Adjusted net income (loss) $ .08 $ .22 $ (.03) $ .13
Weighted average common shares
outstanding 1,677,572 1,622,272 1,667,283 1,654,361
============= ================ ============= =============
Diluted weighted average common
shares outstanding 1,813,456 1,622,302 1,667,283 1,655,530
============= ================ ============= =============
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities ("SFAS 146"). 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.
10
BESTWAY, INC. FORM 10-Q
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN
45 addresses the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees
and also clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The adoption of FIN 45 did not have a material
impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS 150 establishes standards for how an issuer classifies
and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity.
Further, SFAS 150 requires certain obligations that a reporting entity
can or must settle by issuing its own equity shares to be classified as
liabilities. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15,
2003. The Company will adopt the provisions of SFAS 150 for the three
months ending July 31, 2003. The Company does not believe that SFAS 150
will have a material impact on its consolidated financial statements.
11
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q 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. 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 opened or acquired stores
and to integrate such 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 or terrorist activity and responses thereto
on the economy in general and the rental-purchase industry in
particular. Undue 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.
GENERAL
Rental merchandise is rented to customers under flexible agreements
that allow customers to own the merchandise after making a specified
number of rental payments, which generally occur over a period ranging
from 12 to 36 months. Customers have the option to return the
merchandise at any time without further obligation, and also have the
option to purchase the merchandise at any time during the rental term.
On July 8, 2002, the Company announced the appointment of a new
President and Chief Executive Officer who, among other things,
implemented a change in the Company's operating philosophy to eliminate
lower margin product lines, focus on higher revenue merchandise, and
increase the Company's investment in store personnel and advertising.
As a result, the Company experienced increased same store revenues and
improved product margins in the quarter and nine-month period.
12
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's unaudited Consolidated Statements of
Operations, expressed as a percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------- -----------------------
2003 2002 2003 2002
------ ------ ----- ------
Revenues:
Rental and fees 96.2% 97.1% 96.1% 97.5%
Sales of merchandise 3.8 2.9 3.9 2.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 18.9 19.4 19.3 19.9
Other 4.1 5.2 4.3 5.4
Cost of merchandise sold 3.7 2.6 4.2 2.3
Salaries and wages 28.0 26.0 29.1 28.1
Advertising 5.0 2.4 4.8 4.0
Occupancy 6.6 7.2 6.8 7.6
Other operating expenses 29.3 27.5 29.8 29.3
Interest expense 1.8 2.1 2.0 2.5
Gain on sale of property and
equipment - (0.1) - (0.1)
Loss on sale of assets - 1.4 - 0.3
----- ----- ----- -----
Total cost and operating expenses 97.4 93.7 100.3 99.3
----- ----- ----- -----
Income (loss) before income taxes 2.6 6.3 (0.3) 0.7
----- ----- ----- -----
Income tax expense (benefit) 1.0 2.7 (0.1) 0.6
----- ----- ----- -----
Net income (loss) 1.6% 3.6% (0.2)% 0.1%
===== ===== ===== =====
13
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
COMPARISON OF THREE MONTHS ENDED APRIL 30, 2003 AND 2002
Total revenue increased $790,313, or 9.4% to $9,213,864 for the three
months ended April 30, 2003 from $8,423,551 for the three months ended
April 30, 2002. The increase was primarily attributable to increased
revenues in same stores, an increase in sales of merchandise, offset by
the consolidation or sale of fourteen store locations in fiscal year
2002. Revenue from same stores increased $935,240, or 11.3%.
Same store revenues represent those revenues earned in stores that were
operated by the Company for the entire three months ended April 30,
2003 and 2002. The improvement was primarily attributable to an
increase in the number of customers served, the number of agreements on
rent, as well as revenue earned per agreement on rent. Sales of
merchandise increased $102,263, or 41.4% to $349,282 from $247,019 in
2002. The increase in sales of merchandise was primarily attributable
to an increase in the number of items sold in the third quarter of 2003
from the number of items sold in 2002 due to the Company undertaking a
merchandise reduction sales initiative to dispose of lower margin
merchandise. Revenue decreased $144,927 due to the consolidation or
sale of stores in 2002.
Depreciation of rental merchandise increased $111,529, or 6.8% to
$1,743,587 for the three months ended April 30, 2003 from $1,632,058 in
2002. Depreciation of rental merchandise expressed as a percentage of
rental income excluding fees decreased .8% to 23.9% from 24.7%. This
decrease is primarily attributable to improved product margins due to
enhanced rental rates and turns. Other depreciation and amortization
decreased $61,256, or 14.0% to $375,044 for the three months ended
April 30, 2003 from $436,300 in 2002 and decreased 1.1% as a percentage
of total revenue to 4.1% from 5.2%. Under SFAS 142, amortization of
goodwill ceased effective August 1, 2002.
Cost of merchandise sold increased $117,744, or 53.1% to $339,328 for
the three months ended April 30, 2003 from $221,584 in 2002. The
increase in cost of merchandise sold was primarily attributable to an
increase in the number of items sold in the third quarter of 2003, or a
margin of $9,954 from the number of items sold in 2002, or a margin of
$25,435. The Company undertook a merchandise reduction sales initiative
to dispose of lower margin merchandise.
Salaries and wages increased $390,996, or 17.9% to $2,581,090 for the
three months ended April 30, 2003 from $2,190,094 in 2002 and increased
2.0% as a percentage of total revenue to 28.0% from 26.0%. The increase
was primarily attributable to increased same store level labor costs
due to the Company's investment in store personnel.
Advertising expense increased $264,717, or 131.6% to $465,942 for the
three months ended April 30, 2003 from $201,225 in 2002 and increased
2.6% as a percentage of total revenue to 5.0% from 2.4%. The increase
was primarily attributable to increased same store level advertising
costs due to the Company's investment in advertising.
Occupancy expense decreased $406 to $606,458 for the three months ended
April 30, 2003 from $606,864 in 2002. Occupancy expense as a percentage
of total revenue decreased .6% to 6.6% from 7.2% primarily due to the
increase in same store revenue.
14
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Other operating expenses increased $381,993, or 16.5% to $2,696,548 for
the three months ended April 30, 2003 from $2,314,555 in 2002 and
increased 1.8% as a percentage of total revenue to 29.3% from 27.5%.
The increase was primarily attributable to increased same store
operating expenses relating to a number of factors including increased
write-offs and repairs of rental merchandise.
Interest expense decreased $9,817, or 5.5% to $168,648 for the three
months ended April 30, 2003 from $178,465 in 2002 and decreased .3% as
a percentage of total revenue to 1.8% from 2.1%. The decrease in
interest is primarily attributable to decreased indebtedness.
Loss on sale of assets decreased $121,687, or 100.0% from the three
months ended April 30, 2002. The Company entered into several
transactions last year to sell under-performing stores and as a result
recognized a net loss of $121,687 on these store sale transactions.
Income before income taxes decreased $296,509, or 55.7% to $235,744 for
the three months ended April 30, 2003 from $532,253 in 2002. Income
before income taxes as a percentage of total revenue decreased to 2.6%
for the three months ended April 30, 2003 from 6.3% in 2002. This
decrease was primarily attributable to the Company's operating
philosophy initiated at the beginning of the year to eliminate lower
margin product lines, focus on higher revenue merchandise, and increase
the Company's investments in store personnel and advertising.
COMPARISON OF NINE MONTH ENDED APRIL 30, 2003 AND 2002
Total revenue increased $1,013,179, or 4.0% to $26,381,085 for the nine
months ended April 30, 2003 from $25,367,906 for the nine months ended
April 30, 2002. The increase was primarily attributable to increased
revenues in same stores, an increase in sales of merchandise, offset by
the consolidation or sale of fourteen store locations in fiscal year
2002. Revenue from same stores increased $2,846,801, or 12.1%.
Same store revenues represent those revenues earned in stores that were
operated by the Company for the entire nine months ended April 30, 2003
and 2002. The improvement was primarily attributable to an increase in
the number of customers served, the number of agreements on rent, as
well as revenue earned per agreement on rent. Sales of merchandise
increased $383,768, or 60.4% to $1,019,645 from $635,877 in 2002. The
increase in sales of merchandise was primarily attributable to an
increase in the number of items sold in 2003 from the number of items
sold in 2002 due to the Company undertaking a merchandise reduction
sales initiative to dispose of lower margin merchandise. Revenue
decreased $1,833,630 due to the consolidation or sale of fourteen
stores in 2002.
Depreciation of rental merchandise increased $38,678, or .8% to
$5,092,456 for the nine months ended April 30, 2003 from $5,053,778 in
2002. Depreciation of rental merchandise expressed as a percentage of
rental income excluding fees decreased .7% to 24.4% from 25.1%. This
decrease is primarily attributable to improved product margins due to
enhanced rental rates and turns. Other depreciation and amortization
decreased $242,323, or 17.7% to $1,126,988 for the nine months ended
April 30, 2003 from $1,369,311 in 2002 and decreased 1.1% as a
percentage of total revenue to 4.3% from 5.4%. Under SFAS 142,
amortization of goodwill ceased effective August 1, 2002.
15
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Cost of merchandise sold increased $535,747, or 91.8% to $1,119,152 for
the nine months ended April 30, 2003 from $583,405 in 2002. The
increase in cost of merchandise sold was primarily attributable to an
increase in the number of items sold in the nine months of 2003, or a
loss of $99,507 from the number of items sold in 2002, or a margin of
$52,472. The Company undertook a merchandise reduction sales initiative
to dispose of lower margin merchandise.
Salaries and wages increased $559,316, or 7.9% to $7,688,478 for the
nine months ended April 30, 2003 from $7,129,162 in 2002. The increase
was primarily attributable to increased same store level labor costs of
approximately $1,031,000 due to the Company's investment in store
personnel, offset by salaries and wages associated with the
consolidation or sale of fourteen stores in 2002.
Advertising expense increased $277,109, or 27.7% to $1,278,865 for the
nine months ended April 30, 2003 from $1,001,756 in 2002 and increased
.8% as a percentage of total revenue to 4.8% from 4.0%. The increase is
primarily attributable to increased same store level advertising costs
of approximately $490,000 due to the Company's investment in
advertising, offset by the consolidation or sale of fourteen stores in
2002.
Occupancy expense decreased $150,116, or 7.7% to $1,788,640 for the
nine months ended April 30, 2003 from $1,938,756 in 2002. Occupancy
expense as a percentage of total revenue decreased .8% to 6.8% from
7.6% primarily due to the increase in same store revenue.
Other operating expenses increased $407,311, or 5.5% to $7,849,943 for
the nine months ended April 30, 2003 from $7,442,632 in 2002 and
increased .5% as a percentage of total revenue to 29.8% from 29.3%. The
increase was primarily attributable to increased same store level other
operating costs of approximately $1,234,000, offset by the
consolidation or sale of fourteen stores in 2002. The increase in same
store operating expenses was primarily attributable to a number of
factors including increased write-offs and repairs of rental
merchandise.
Interest expense decreased $106,601, or 17.0% to $518,916 for the nine
months ended April 30, 2003 from $625,517 in 2002 and decreased .5% as
a percentage of total revenue to 2.0 from 2.5%. The decrease in
interest is primarily attributable to decreased indebtedness and a
lower effective interest rate.
Loss on sale of assets decreased $65,795, or 100.0% from the nine
months ended April 30, 2002. The Company entered into several
transactions last year to sell under-performing stores and as a result
recognized a net loss of $65,795 on these store sale transactions.
Income before income taxes decreased $249,204, or 143.3% to a loss of
$75,267 for the nine months ended April 30, 2003 compared to income of
$173,937 in 2002. Income before income taxes as a percentage of total
revenue decreased to a loss of .3% for the nine months ended April 30,
2003 compared to income of .7% in 2002. This decrease was primarily
attributable to the Company's operating philosophy initiated at the
beginning of the year to eliminate lower margin product lines, focus on
higher revenue merchandise, and increase the Company's investment in
store personnel and advertising.
16
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the nine months ending April 30, 2003, the Company's net cash flows
from operating activities was $8,653,643 as compared to $8,020,967 for
the nine months ending April 30, 2002. The increase in cash provided by
operations was primarily due to decreased outflow for working capital
commitments.
For the nine months ending April 30, 2003, the Company's net cash flows
used in investing activities was $9,064,555 as compared to $6,288,687
for the nine months ending April 30, 2002. The Company's investing
activities reflects a $1,152,754 increase in the purchase of rental
units. The increase in the amount of rental merchandise purchased
during the nine months ending April 30, 2003 is a result of strong
consumer demand. For the nine months ending April 30, 2002, cash used
for acquisitions was $807,979, offset by sale proceeds from thirteen
store sales of $2,192,952.
For the nine months ending April 30, 2003, the Company's net cash flow
provided by financing activities was $227,567 as compared to net cash
flows used in financing activities of $2,670,638 for the nine months
ending April 30, 2002. The decrease in financing activities principally
reflects decreased repayments of the Company's debt.
On October 31, 2002, the Company amended and restated its Revolving
Credit Loan Agreement with its lender. In the amendment, the lender
extended the maturity date from October 1, 2003 to May 31, 2004 and
modified the interest rate, minimum tangible net worth provision, and
minimum interest coverage ratio. The amendment adds a minimum year to
date profitability requirement effective beginning May 31, 2003. At
August 31, 2002 and September 30, 2002 the Company was in violation of
the minimum tangible net worth provision of the Agreement. The Company
obtained a waiver of such violations from the lender and has been in
compliance thereafter.
On December 13, 2002, 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
November 1, 2003 to May 31, 2004.
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. Management believes that operating
cash flows combined with available credit of $3,500,000 under the
Revolving Credit Loan Agreement provide adequate resources to meet the
Company's future cash obligations.
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.
17
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). 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.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN
45 addresses the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees
and also clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The adoption of FIN 45 did not have a material
impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS 150 establishes standards for how an issuer classifies
and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity.
Further, SFAS 150 requires certain obligations that a reporting entity
can or must settle by issuing its own equity shares to be classified as
liabilities. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15,
2003. The Company will adopt the provisions of SFAS 150 for the three
months ending July 31, 2003. The Company does not believe that SFAS 150
will have a material impact on its consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of these disclosure controls and procedures
were effective.
No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
18
BESTWAY, INC. FORM 10-Q
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, SIGNATURES
(a) Exhibits required by Item 601 of Regulation S-K
99.1* Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
------------
*Filed herewith
(b) Report on Form 8-k
The Company did not file any reports on Form 8-k during the
quarter ended April 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BESTWAY, INC.
June 16, 2003
/s/Beth A. Durrett
-----------------------
Beth A. Durrett
Chief Financial Officer
(Principal Financial Officer and duly authorized
to sign on behalf of the Registrant)
19
BESTWAY, INC. FORM 10-Q
CERTIFICATION
I, David A. Kraemer, Chief Executive Officer of Bestway, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Bestway,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of Bestway,
Inc. as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
20
BESTWAY, INC. FORM 10-Q
Date: June 16, 2003 By: /s/ David A. Kraemer
------------------------------
Name: David A. Kraemer
Title: Chief Executive Officer
21
BESTWAY, INC. FORM 10-Q
CERTIFICATION
I, Beth A. Durrett, Chief Financial Officer of Bestway, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Bestway,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of Bestway,
Inc. as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
22
BESTWAY, INC. FORM 10-Q
Date: June 16, 2003 By: /s/ Beth A. Durrett
--------------------------------------
Name: Beth A. Durrett
Title: Chief Financial Officer
23
BESTWAY, INC. FORM 10-Q
EXHIBIT INDEX
Exhibit No. DESCRIPTION
99.1* Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ------------
*Filed herewith