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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, 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
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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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of voting common stock held by
non-affiliates of the registrant as of October 13, 2003 was approximately
$7,106,395.
The number of shares of Common Stock, $.01 par value, outstanding as of
October 13, 2003 was 1,678,922.
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, 2003.
1
BESTWAY, INC. FORM 10-K
TABLE OF CONTENTS
PAGE(S)
-------
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements 22
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures 44
Item 9A. Controls and Procedures 44
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
PART IV
Item 15. Exhibits, Financial Statements and Reports on Form 8-K 45
SIGNATURES 47
2
BESTWAY, INC. FORM 10-K
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 quality, name brand,
durable products, such as home electronics, household appliances, computers, and
furniture, 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. 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 30 month term with weekly or monthly payment options.
Customer have the option to return the product at any time without further
obligation and also have the option to purchase the product at any time during
the rental term.
INDUSTRY OVERVIEW
The rental-purchase industry provides an alternative to traditional
retail installment sales, appealing to individuals with a need for acquiring the
use of household products who cannot afford a cash purchase, may be unable to
qualify for credit, and are unwilling or unable to wait until they can save for
a purchase. Other customers value the flexibility offered by the rental
transaction, which allows for the return of merchandise at any time without
obligation for further payments. The industry also serves customers having
short-term needs or seeking to try products before committing to purchase them.
Rental-purchase transactions include delivery and pick-up service as well as
repair service and warranty. Rental-purchase transactions are made on a
week-to-week or month-to-month basis and provide customers with the opportunity
for ownership if the product is rented for a continuous term, generally 12 to 30
months. Customers may cancel agreements at any time without further obligation
by returning the product or requesting its pick-up by the store. Returned
merchandise is held for re-rental or sale by the Company. Rental renewal
payments are generally made in person, in cash, by check, by money order, or by
credit card.
The Association of Progressive Rental Organization ("APRO"), the
industry's trade association, estimates there are approximately 8,300
rent-to-own stores in the United States. According to APRO, industry-wide
revenues were approximately $5.6 billion in 2002. APRO also estimates there were
approximately 2.8 million households served during 2002. The industry's four
largest public companies currently operate approximately 4,200 stores, or 51% of
the total rental-purchase stores in operation.
3
BESTWAY, INC. FORM 10-K
The rental-purchase industry serves a diverse customer base. According
to APRO, approximately 92% of rental-purchase customers have annual household
incomes between $15,000 and $49,999. Estimates also show that the majority of
rental-purchase customers are between the ages of 25 and 44 and over 92% of
rental-purchase customers are high school graduates. The U.S. Census Bureau
reported that in 2000 there were approximately 44 million households with annual
income between $15,000 and $49,999. The Company believes the rental-purchase
industry remains under-penetrated, providing growth opportunities with new store
openings or acquisitions for companies that are well capitalized and have access
to both debt and equity capital.
PRODUCTS
The Company generally purchases products directly from manufacturers
and local distributors who then ship the products directly to each store,
therefore eliminating of the need for warehouses. Products offered by the
Company include a wide variety of name brands, styles and models in four major
categories, including home electronics, furniture, appliances and computers. Our
largest suppliers include Ashley, O'Rourke, Sears and Hitachi, who accounted for
approximately 22.7%, 15.2%, 14.9%, and 14.5%, respectively, of merchandise
purchased in 2003. No other supplier accounted for more than 10% of merchandise
purchased during this period. Although the Company presently expects to continue
relationships with its existing suppliers, there are numerous sources of
products available to the Company, and the Company does not believe its
operations are dependent on any one or more of its present suppliers.
As of July 31, 2003, rental-purchase agreements for home electronics
accounted for approximately 29.4% of the Company's total agreements on rent;
furniture accounted for 38.5% of the Company's total agreements on rent;
appliances accounted for 25.6% of the Company's total agreements on rent; and
computers accounted for 6.5% of the Company's total agreements on rent.
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 name brand selection,
prompt delivery and a toll-free phone number that automatically connects the
caller with the store nearest them. As well as the absence of credit
investigations and long-term obligations. The company also has programs which
reward existing customers with rental discounts 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.
4
BESTWAY, INC. FORM 10-K
PERSONNEL
At July 31, 2003, the Company employed approximately 325 full-time
employees, of which 12 are located at the corporate office in Dallas, Texas.
None of the Company's employees are represented by a labor union. The Company
considers its relations with its employees to be satisfactory.
COMPANY STORES
The following table sets forth the number of stores opened, and the
number of stores consolidated, closed or sold during such time period:
YEAR ENDED JULY 31,
2001 2002 2003
---- ---- ----
Stores open at beginning of period 77 83 69
Stores opened 9 - -
Stores consolidated/closed/sold 3 14 -
-- -- --
Stores open at end of period 83 69 69
-- -- --
GOVERNMENT 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, fee disclosures and limitations, as well as the
Federal Truth in Lending Act. Any adverse federal legislation, if enacted, could
have a materially adverse effect on the Company.
State Regulation - Currently 47 states, the District of Columbia, Guam
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. In North Carolina,
rental-purchase transactions with purchase options equal to 10% or less of the
cash price are regulated as credit sales. The Company's rental-purchase
transactions in North Carolina all have purchase options greater than 10% of the
cash price and are not subject to regulation. 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 materially 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.
5
BESTWAY, INC. FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS
All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, and all amendments to those reports, filed with
or furnished to the U.S. Securities and Exchange Commission ("SEC") on or after
June 13, 1995 are available free of charge through our internet website,
www.bestwayrto.com, as soon as reasonably practical after we have electronically
filed such material with, or furnished it to, the SEC.
The general public may read and copy any materials the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549, and may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer, and the SEC maintains an Internet website at www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including the Company.
RISK FACTORS
Set forth below are important risks and uncertainties that could affect
the Company's business results or cause its actual results to differ materially
from those expressed in forward-looking statements made by the Company.
Competitors could impede the Company's ability to attract new customers
or could attract current customers away from the Company. The Company's business
is highly competitive. The Company's competitors include national, regional and
local operators of rent-to-own stores and credit retailers. The Company competes
in the rent-to-rent market with national and local companies. Some of the
Company's competitors have significantly greater financial and operating
resources, and in certain markets, greater name recognition, than the Company.
Greater financial resources may allow these competitors to grow faster than the
Company, including through acquisitions. This in turn may allow them to enter
new markets before the Company can, which may decrease its opportunities in
those markets. Greater name recognition, or better public perception of a
competitor's reputation, may help them attract market share away from the
Company, even in its established markets.
Any loss of the services of the Company's key executives, or its
inability to attract and retain qualified executives, could have an adverse
impact on its operations. The Company believes that it has benefited
substantially from the leadership provided by David A. Kraemer, President and
Chief Executive Officer, and that the loss of his services at any time in the
near future could hurt the Company's business and operations. The Company is
also dependent on the continued services of the rest of its management team,
including its key executives. The loss of these individuals, without adequate
replacement, could also injure the Company's business. Additionally, the Company
needs a growing number of qualified managers to operate its stores successfully.
If it is unable to attract and retain qualified individuals or the costs to do
so increase significantly, the Company's operations would be materially
adversely affected.
6
BESTWAY, INC. FORM 10-K
Any failure to meet the Company's debt obligations could harm its
business, financial condition and results of operations. If the Company's cash
flow and capital resources are insufficient to fund its debt obligations, it may
be forced to sell assets, seek additional equity or debt capital or restructure
its debt. In addition, any failure to make scheduled payments of interest and/or
principal on the Company's outstanding indebtedness would likely result in a
reduction of its credit rating, which could harm its ability to incur additional
indebtedness on acceptable terms. The Company's cash flow and capital resources
may be insufficient for payment of interest on and/or principal of its debt in
the future and any such alternative measures may be unsuccessful or may not
permit the Company to meet scheduled debt service obligations, which could cause
it to default on its obligations and impair its liquidity.
Some of the Company's stockholders currently own a significant amount
of its Common Stock and would be able to control the election of directors and
the approval of significant corporate transactions. O'Donnell & Masur, L.P.
beneficially owned approximately 52.9% of the Company's outstanding common stock
as of October 13, 2003. As a result, it is able to exercise significant
influence over, and in most cases control, matters requiring stockholder
approval, including the election of directors, changes to the Company's charter
documents and significant corporate transactions. This concentration of
ownership makes it unlikely that any other holder or group of holders of the
Company's Common Stock will be able to affect the way the Company is managed or
the direction of its business. Such continued concentrated ownership also will
make it impossible for another company to acquire the Company and for the
Company's stockholders to receive any related takeover premium for their shares
unless the acquisition is approved by this stockholder.
A sluggish economy could adversely impact the Company's financial
results and growth. A sluggish economy, lack of consumer confidence in the stock
market and other national and world events, including acts of terrorism and/or
war, have created a significant amount of uncertainty about future prospects of
national and world economies. The overall long-term effect on the Company and
the rent-to-own industry is also uncertain. At the present time, it is not
possible to predict either the severity or duration of such declines, but weaker
performance will, in turn, have an adverse impact on the Company's business,
financial condition, and results of operations.
Numerous risks associated with the rent-to-own business could have an
adverse impact on the Company's financial results and growth prospects. The
operating success of the Company, like other participants in the rent-to-own
industry, depends upon a number of factors. These factors include the ability to
maintain and increase the number of units on rent, the collection of the rental
payments when due and the control of inventory and other costs. In addition, the
failure of the Company's management information systems to monitor the stores,
the failure of the Company's operational internal audit personnel to adequately
detect any problems with a store, or the failure of store managers to follow
operating guidelines, could have a material adverse affect on the Company's
business, financial condition or results of operations. The rent-to-own industry
is also affected by changes in consumer confidence, preferences and attitudes,
as well as general economic factors. Failure to respond to changing market
trends could adversely affect the Company's business, financial condition or
results of operations. In addition, the failure of the Company to react to
changes in consumer preferences and technological advancements could adversely
affect the value of the Company's inventory and the Company's business,
financial condition or results of operations.
7
BESTWAY, INC. FORM 10-K
The volatility of the Company's share price and potential fluctuations
in quarterly results could have an adverse impact on the Company's financial
results and growth prospects. The Company believes that various factors such as
general economic conditions and changes or volatility in the financial markets,
changing market conditions in the rent-to-own industry and quarterly or annual
variations in the financial results of other public companies that are part of
the rent-to-own industry, all of which may be unrelated to the Company's
performance, could cause the market price of the Company's Common Stock to
fluctuate substantially. Additionally, quarterly revenues and operating income
are difficult to forecast. The Company's expense levels are based, in part, on
its expectations as to future revenues. If revenue levels are below
expectations, the Company may be unable or unwilling to reduce expenses
proportionately and operating results would likely be adversely affected. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter the Company's operating results will differ
from the expectations of public market analysts and investors. In such event,
the market price of the Common Stock would likely be materially adversely
affected.
Litigation involving the Company could have an adverse impact on the
Company's financial results and growth prospects. Due to the consumer-oriented
nature of the rent-to-own industry and the application of certain laws and
regulations, industry participants may be named as defendants in litigation
alleging violations of state laws and regulations and consumer tort law,
including fraud. Many of these actions involve alleged violations of consumer
protection laws. In the event a significant judgment is rendered in the future
against the Company or others within the rent-to-own industry in connection with
any such litigation, such judgment could have a material adverse affect on the
Company's business, financial condition or results of operations.
Government regulation of the rent-to-own industry could have
an adverse impact on the Company's financial results and growth prospects.
Forty-seven states have enacted laws specifically regulating rental-purchase
transactions, including all of the states in which the Company operates. These
laws generally require certain contractual and advertising disclosures and also
provide varying levels of substantive consumer protection, such as requiring a
grace period for late fees and contract reinstatement rights in the event a
rental-purchase agreement is terminated. If the Company acquires or opens new
stores in states in which it does not currently operate, the Company will become
subject to the rental-purchase laws of such states, if any. Furthermore, there
can be no assurance that new or revised rental-purchase laws will not have a
material adverse affect on the Company's business, financial condition and
results of operations.
8
BESTWAY, INC. FORM 10-K
ITEM 2. PROPERTIES
All store locations, with the exception of one, and the corporate
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 each store.
The Company's store locations by state, at July 31, 2003, are as
follows:
NUMBER OF
STATE STORES
----- ------
Alabama 22
Arkansas 6
Georgia 3
Mississippi 11
North Carolina 12
South Carolina 2
Tennessee 13
--
Total at July 31, 2003 69
==
ITEM 3. LEGAL PROCEEDINGS
In December 2001, the Company settled a lawsuit brought by
approximately fifteen plaintiffs in the Billings Division of the United States
District Court for the State of Montana 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 attorneys' fees.
In July 2003, the County Court of the Second Judicial District of
Bolivar County, Mississippi entered final judgment against the Company in a
lawsuit brought by a former lessor. The lessor alleged that the Company had
breached the terms and conditions of a lease agreement for a store location in
Mississippi when the Company vacated the premises and failed to properly notify
the lessor of its intentions not to exercise an option extending the original
lease term. The judgment against the Company was for approximately $70,000,
including attorneys' fees. The Company has appealed the judgment and believes
that it has a meritorious defense to the plaintiff's claims. Accordingly, to
date, no amount related to the lawsuit has been accrued in the Company's balance
sheet.
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 other 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.
9
BESTWAY, INC. FORM 10-K
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.
YEAR ENDED JULY 31, 2003 YEAR ENDED JULY 31, 2002
------------------------- ------------------------
HIGH LOW HIGH LOW
--------- --------- -------- ---------
First Quarter $ 10.50 $ 6.60 $ 5.55 $ 4.30
Second Quarter $ 12.03 $ 6.01 $ 4.56 $ 3.99
Third Quarter $ 20.25 $ 10.30 $ 4.50 $ 4.00
Fourth Quarter $ 16.85 $ 12.11 $ 7.00 $ 3.80
At July 31, 2003, there were 381 stockholders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since its
inception and intends to continue to retain earnings for operations. In
addition, the Company is a party to a loan agreement which prohibits the payment
of cash dividends on its Common Stock.
10
BESTWAY, INC. FORM 10-K
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of July 31, 2003 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance. See Note 9 to the
Consolidated Financial Statements for information regarding the material
features of these plans.
NUMBER OF
SECURITIES REMAINING
NUMBER OF AVAILABLE FOR
SECURITIES TO BE FUTURE ISSUANCE
ISSUED UPON UNDER EQUITY
EXERCISE OF COMPENSATION PLANS
OUTSTANDING WEIGHTED AVERAGE (EXCLUDING SECURITIES
OPTIONS, WARRANTS EXERCISE PRICE OF REFLECTED IN
AND RIGHTS OUTSTANDING OPTIONS, INITIAL COLUMN)
AS OF JULY 31, 2003 WARRANTS AND RIGHTS AS OF JULY 31, 2003
------------------- -------------------- ----------------------
PLAN CATEGORY
Equity compensation
plans approved by security
shareholders 276,995 $ 6.46 73,205
Equity compensation
plans not approved by
security shareholders - - -
------- --------
Total 276,995 $ 6.46 73,205
======= ========
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JULY 31,
---------------------------------------------------------------------------------
2003(1) 2002 2001 2000 1999
------------ ------------ ------------ ----------- -----------
Revenues $ 35,506,828 $ 33,533,928 $ 35,913,046 $34,909,758 $29,365,753
Income (loss) before income taxes 70,337 (965,012) (28,297) 1,068,199 1,107,509
Current income tax (benefit) expense (158,292) (116,109) - 180,845 94,713
Deferred income tax
expense (benefit) 181,041 (106,824) 97,488 397,413 397,912
Net income (loss) 47,588 (742,079) (125,785) 489,941 614,884
Basic and diluted net income (loss)
per share 0.03 (0.45) (0.07) 0.28 0.35
Net cash flows provided by
operating activities 12,112,730 10,210,071 11,661,342 12,759,621 11,320,309
Total assets 20,002,168 21,304,413 24,312,260 25,617,543 21,218,412
Notes payable 9,451,299 10,967,192 13,081,731 13,294,945 9,244,012
Total stockholders' equity 8,318,793 8,123,715 8,973,601 9,174,511 8,971,630
(1) Effective August 1, 2002, in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles ("SFAS 142"), and
the Company ceased goodwill amortization.
11
BESTWAY, INC. FORM 10-K
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,
2003.
Our stores offer quality, name brand, durable products, such as home
electronics, household appliances, computers and furniture, 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 (ranging
from 12 to 30 months). Customers have the option to return the product at any
time without further obligation, and also have the option to purchase the
product at any time during the rental period.
We are currently focusing our strategic efforts to improve
profitability by:
- driving same store sales growth through targeted
marketing;
- improving gross margins as a result of focusing on
higher revenue-generating merchandise;
- eliminating lower-cost, lower-margin merchandise; and
- training and developing our associates to execute
Bestway programs.
12
BESTWAY, INC. FORM 10-K
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.
YEAR ENDED JULY 31,
-------------------
2003 2002
---- ----
Revenues:
Rental and fee income 96.7% 97.4%
Sales of merchandise 3.3 2.6
---- -----
100% 100%
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 19.3 19.9
Other 4.2 5.5
Cost of merchandise sold 3.5 2.4
Salaries and wages 29.4 29.4
Advertising 4.6 3.4
Occupancy 6.7 7.5
Other operating expenses 30.1 32.2
Interest expense 2.0 2.4
Loss on sale of property and equipment - .1
Loss on sale of assets - .1
---- -----
99.8 102.9
---- -----
Income (loss) before income taxes 0.2 (2.9)
---- -----
Current income tax (benefit) (0.4) (0.4)
Deferred income tax expense (benefit) 0.5 (0.3)
---- -----
Net income (loss) 0.1% (2.2)%
==== =====
13
BESTWAY, INC. FORM 10-K
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2003 COMPARED TO THE
FISCAL YEAR ENDED JULY 31, 2002
Total revenue increased $1,972,900, or 5.9% to $35,506,828 for the
fiscal year ended July 31, 2003 from $33,533,928 for the fiscal year ended July
31, 2002. The increase was primarily attributable to increased revenues in same
stores and an increase in sales of merchandise. Such increases were offset by
the consolidation or sale of fourteen store locations in fiscal year 2002. Same
store revenues represent those revenues earned in stores that were operated by
the Company for the entire twelve months ended July 31, 2003 and 2002.
The Company receives rental revenue from various products, including
home electronics, household appliances, computers and furniture. In fiscal year
2003, approximately 16% of the Company's rental revenue was derived from
appliances, 26% from furniture, 30% from electronics, 9% from computers, 2% from
various other products and 17% from various services and charges to rental
customers, including reinstatement fees, preferred customer membership fees and
liability waiver fees.
Revenue from same stores increased $3,806,232, or 12.0%. Same store
revenues represent those revenues earned in stores that were operated by the
Company for the entire twelve months ended July 31, 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. Of the increase in revenue from same stores, sales of
merchandise increased $298,684, or 34.3% to $1,168,592 from $869,908 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 eliminating lower-cost, lower-margin merchandise from our product
mix. Revenue decreased $1,833,332 due to the consolidation or sale of fourteen
store locations in 2002.
Total costs and operating expenses increased $937,551 or 2.7% to
$35,436,491 for the fiscal year ended July 31, 2003 from $34,498,940 for the
fiscal year ended July 31, 2002 and decreased 3.1% as a percentage of total
revenue to 99.8% from 102.9%. In fiscal year 2002, the Company sold, or
consolidated fourteen stores, announced the appointment of a new President and
Chief Executive Officer and incurred approximately $1,140,000 associated with
the changes in our executive management team, write-offs of rental merchandise
and discontinuance of jewelry as a product offering. In fiscal year 2003, the
Company implemented strategies to improve profitability, including eliminating
lower-cost, lower-margin merchandise from our product mix, focusing on higher
revenue-generating merchandise, investing in training and developing our people
and implementing a more aggressive and targeted marketing campaign.
Depreciation of rental merchandise increased $196,882, or 3.0% to
$6,868,366 for the fiscal year ended July 31, 2003 from $6,671,484 for the
fiscal year ended July 31, 2002 and decreased .6% as a percentage of total
revenue to 19.3% from 19.9%. Depreciation of rental merchandise expressed as a
percentage of rental income excluding fees decreased .8% to 24.2% from 25.0%
primarily due to improved product margins. Other depreciation and amortization
decreased $351,317, or 19.2% to $1,480,329 for the fiscal year ended July 31,
2003 from $1,831,646 for the fiscal year ended July 31, 2002 and decreased 1.3%
as a percentage of total revenue to 4.2% from 5.5% primarily due to the
application of SFAS 142. Under SFAS 142, amortization of goodwill ceased
effective August 1, 2002.
14
BESTWAY, INC. FORM 10-K
Cost of merchandise sold increased $443,099, or 54.4% to $1,257,532 for
the fiscal year ended July 31, 2003 from $814,433 for the fiscal year ended July
31, 2002. The increase in cost of merchandise sold was primarily attributable to
an increase in the number of items sold in the year ended July 31, 2003. During
the years ended July 31, 2003 and 2002, the Company's margin related to
merchandise sales was a loss of $88,940 and income of $55,475, respectively. The
Company's loss in 2003 was the result of eliminating lower-cost, lower-margin
merchandise from our product mix by lowering cash purchase prices on products
identified as generating margins lower than industry norms.
Salaries and wages increased $575,376, or 5.8% to $10,433,146 for the
fiscal year ended July 31, 2003 from $9,857,770 for the fiscal year ended July
31, 2002 and as a percentage of total revenue remained consistent at 29.4%. The
increase was primarily attributable to increased same store level labor costs of
$1,320,640 due to the Company increasing minimum staffing levels from three to
four associates to better serve the customer, and investing in training and
developing store personnel. Such increases were offset by salaries and wages
associated with the consolidation or sale of fourteen stores in 2002 and the
payment of certain amounts pursuant to a separation agreement related to the
Company's former President and Chief Operating Officer in 2002.
Advertising expense increased $518,569, or 45.8% to $1,649,104 for the
fiscal year ended July 31, 2003 from $1,130,535 for the fiscal year ended July
31, 2002 and increased 1.2% as a percentage of total revenue to 4.6% from 3.4%.
The increase is primarily attributable to increased same store level advertising
costs of $722,836 due to the Company's investment in implementing a more
aggressive and targeted marketing campaign, which was offset by the
consolidation or sale of fourteen stores in 2002.
Occupancy expense decreased $152,264, or 6.0% to $2,383,807 for the
fiscal year ended July 31, 2003 from $2,536,071 for the fiscal year ended July
31, 2002 due to the consolidation or sale of fourteen stores in 2002. Occupancy
expense as a percentage of total revenue decreased .8% to 6.7% from 7.5%
primarily due to the increase in same store revenue.
Other operating expenses decreased $108,195, or 1.0% to $10,679,849 for
the fiscal year ended July 31, 2003 from $10,788,044 for the fiscal year ended
July 31, 2002 and decreased 2.1% as a percentage of total revenue to 30.1% from
32.2%. The decrease was attributable to the consolidation or sale of fourteen
stores in 2002 and 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 in 2002. The
decrease was offset by increased same store level other operating expenses of
$913,215. The increase in same store operating expenses was attributable to a
number of factors, including increased write-offs and repairs of rental
merchandise, increased insurance costs and increased store level recruiting
costs.
Interest expense decreased $100,248, or 12.6% to $694,185 for the
fiscal year ended July 31, 2003 from $794,433 for the fiscal year ended July 31,
2002 and decreased .4% as a percentage of total revenue to 2.0% from 2.4%. The
decrease in interest is primarily attributable to decreased indebtedness and a
lower effective interest rate.
Loss on sale of assets decreased $50,122, or 100.0% from the twelve
months ended July 31, 2002. The Company entered into several transactions in the
year ended July 31, 2002 to sell under-performing stores and as a result
recognized a net loss of $50,122 on these store sale transactions.
15
BESTWAY, INC. FORM 10-K
Income before income taxes increased $1,035,349, or 107.3% to income of
$70,337 for the year ended July 31, 2003 compared to a loss of $965,012 for the
fiscal year ended July 31, 2002. Income before income taxes as a percentage of
total revenue increased to income of .2% for the year ended July 31, 2003
compared to a loss of 2.9% in 2002. This increase was primarily the result of
approximately $1,140,000 associated with changes in our executive management
team, write-offs of rental merchandise and the discontinuance of jewelry as a
product selection in 2002. The Company's operating philosophy initiated at the
beginning of the year was to eliminate lower-cost, lower-margin merchandise from
our product mix, focus on higher revenue-generating merchandise, and increase
the Company's investment in store personnel and advertising.
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
home electronics, household appliances, 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, preferred customer membership fees and
liability waiver fees.
Total costs and operating expenses decreased $1,442,403, or 4.0% to
$34,498,940 for the fiscal year ended July 31, 2002 from $35,941,343 for the
fiscal year ended July 31, 2001 and increased 2.8% as a percentage of total
revenues to 102.9% from 100.1%. In fiscal year 2001, the Company developed its
own 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 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 for the fiscal year ended July 31, 2002 from $7,734,416 for the
fiscal year ended July 31, 2001 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.
16
BESTWAY, INC. FORM 10-K
Cost of merchandise sold increased $413,090, or 102.9% to $814,433 for
the fiscal year ended July 31, 2002 from $401,343 for the fiscal year ended July
31, 2001 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 for the
fiscal year ended July 31, 2002 from $10,342,950 for the fiscal year ended July
31, 2001 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 reductions in corporate staffing levels and the consolidation or sale of
fourteen under-performing stores in fiscal year 2002, which was 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.
Advertising expense decreased $312,744, or 21.7% to $1,130,535 for the
fiscal year ended July 31, 2002 from $1,443,279 for the fiscal year ended July
31, 2001 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 for the
fiscal year ended July 31, 2002 from $2,649,352 for the fiscal year ended July
31, 2001 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,
which was 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 for
the fiscal year ended July 31, 2002 from $10,151,550 for the fiscal year ended
July 31, 2001 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 the payment of 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 for the
fiscal year ended July 31, 2002 from $1,316,695 for the fiscal year ended July
31, 2001 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.
17
BESTWAY, INC. FORM 10-K
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended July 31, 2003, the Company's net cash flows
from operating activities were $12,112,730 as compared to $10,210,071 for the
fiscal year ended July 31, 2002. The increase in cash provided by operations was
primarily due to increased revenues and decreased outflow for working capital
commitments.
For the fiscal year ended July 31, 2003, the Company's net cash flows
used in investing activities were $10,940,243 as compared to $8,600,346 for the
fiscal year ended July 31, 2002. The Company's investing activities reflect a
$972,851 increase in the purchase of rental units. The increase in the amount of
rental merchandise purchased during the year ended July 31, 2003 is a result of
strong consumer demand. For the 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 year ended July 31, 2003, the Company's net cash flows used in
financing activities were $1,372,793 as compared to net cash flows used in
financing activities of $2,222,346 for the year ended July 31, 2002. The
decrease in financing activities principally reflects decreased repayments of
the Company's debt. Debt repayments were higher in 2002 due to increased cash
flows from the sale of 13 stores.
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 effective 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 such minimum effective tangible net
worth provision. The Company obtained a waiver of such violations from the
lender and has been in compliance thereafter.
On December 13, 2002, the Company amended the subordinated note payable
to a limited partnership, which is a stockholder of the Company, dated October
26, 2001. The amendment extended the maturity date from November 1, 2003 to May
31, 2004.
On October 1, 2003, the Company further amended and restated its
Revolving Credit Loan Agreement with its lender. In the amendment, the lender
extended the maturity date from May 31, 2004 to May 31, 2005, modified the
minimum effective tangible net worth provision, modified the maximum
debt-to-effective tangible net worth provision, and eliminated the idle
inventory coverage and capital expenditure covenant.
On October 1, 2003, the Company further amended the subordinated note
payable to a limited partnership, which is a stockholder of the Company, dated
October 26, 2001. The amendment extended the maturity date from May 31, 2004 to
May 31, 2005.
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 year ended July 31, 2003, 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 line of
credit of $5,100,000 under the Revolving Credit Loan Agreement provide adequate
resources to meet the Company's future cash obligations through at least the
next twelve months.
18
BESTWAY, INC. FORM 10-K
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS AS OF JULY
31, 2003:
OPERATING NOTES
YEAR ENDED JULY 31, LEASES PAYABLE TOTAL
- ------------------- ------ ------- -----
2004 $2,294,634 $ 17,242 $ 2,311,876
2005 2,039,866 9,418,860 11,458,726
2006 1,682,514 15,197 1,697,711
2007 1,170,830 - 1,170,830
2008 799,188 - 799,188
Thereafter 570,782 - 570,782
---------- ----------- -----------
$8,557,814 $ 9,451,299 $18,009,113
========== =========== ===========
RELATED PARTY TRANSACTIONS
Interest expense relating to notes payable to affiliates amounted to
$243,335, $242,668 and $243,334 for the years ended July 31, 2003, 2002 and
2001, respectively.
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, 2003, $855,556 of the Note remained
outstanding.
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 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 30 months with a majority of rental
agreements specifying 18 months. At the end
19
BESTWAY, INC. FORM 10-K
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 home electronics, furniture, appliances and
computers.
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 30 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.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
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.
In November 2002, the Financial Accounting Standards Board ("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 obligation 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 the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 addresses the
criteria for consolidation by business enterprises of variable interest
entities. The Company does not have variable interest entities and therefore,
FIN 46 will have no impact on the Company's financial position or results of
operations.
20
BESTWAY, INC. FORM 10-K
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 modeified after May 51, 2003 and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 did not have a material impact on the
Company's consolidated financial statements.
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.
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, 2003, the Company had $6,400,000 outstanding on its Revolving Credit
Loan Agreement at an interest rate of prime plus 1.5% and the fair value of the
obligation outstanding approximates its related carrying value because the
obligation bears interest at the current market rate.
21
BESTWAY, INC. FORM 10-K
ITEM 8. FINANCIAL STATEMENTS
PAGE(S)
-------
Report of Independent Auditors 23
Financial Statements:
Consolidated Balance Sheets as of July 31, 2003 and 2002 24
Consolidated Statements of Operations for the years ended
July 31, 2003, 2002 and 2001 25
Consolidated Statements of Cash Flows for the years ended
July 31, 2003, 2002 and 2001 26
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 2003, 2002 and 2001 27
Notes to Consolidated Financial Statements 28
22
BESTWAY, INC. FORM 10-K
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 2003, 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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
connection with its adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective August 1, 2002.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
October 6, 2003
23
BESTWAY, INC. FORM 10-K
CONSOLIDATED BALANCE SHEETS
JULY 31,
-----------------------------------
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 305,869 $ 506,175
Prepaid expenses 189,882 312,925
Taxes receivable 180,976 159,585
Deferred income taxes 302,034 483,075
Other assets 45,026 52,032
Rental merchandise, at cost 22,488,380 22,730,226
less accumulated depreciation 8,630,316 9,289,369
------------ ------------
13,858,064 13,440,857
------------ ------------
Property and equipment, at cost 8,702,135 9,060,208
less accumulated depreciation 5,969,337 5,393,259
------------ ------------
2,732,798 3,666,949
------------ ------------
Employee advance 855,556 988,889
Non-competes, net of amortization 306,668 468,631
Goodwill, net of amortization 1,225,295 1,225,295
------------ ------------
Total assets $ 20,002,168 $ 21,304,413
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 751,328 $ 671,365
Accrued interest - related parties 20,667 20,667
Other accrued liabilities 1,460,081 1,521,474
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 6,451,299 7,967,192
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Preferred stock, $10.00 par value,
1,000,000 authorized, none issued - -
Common stock, $.01 par value, 5,000,000 authorized,
1,782,517 issued at July 31, 2003 and 1,756,917 issued at
July 31, 2002 17,825 17,569
Paid-in capital 16,298,662 16,151,428
Less treasury stock, at cost, 104,345 at July 31, 2003 and
July 31, 2002 (563,083) (563,083)
Accumulated deficit (7,434,611) (7,482,199)
------------ ------------
Total stockholders' equity 8,318,793 8,123,715
------------ ------------
Total liabilities and stockholders' equity $ 20,002,168 $ 21,304,413
============ ============
See accompanying notes to consolidated financial statements.
24
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JULY 31,
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Rental and fee income $ 34,338,236 $ 32,664,020 $ 35,488,835
Sales of merchandise 1,168,592 869,908 424,211
------------ ------------ ------------
35,506,828 33,533,928 35,913,046
------------ ------------ ------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 6,868,366 6,671,484 7,734,416
Other 1,480,329 1,831,646 1,971,819
Cost of merchandise sold 1,257,532 814,433 401,343
Salaries and wages 10,433,146 9,857,770 10,342,950
Advertising 1,649,104 1,130,535 1,443,279
Occupancy 2,383,807 2,536,071 2,649,352
Other operating expenses 10,679,849 10,788,044 10,151,550
Interest expense 694,185 794,433 1,316,695
(Gain) loss on sale of property and equipment (9,827) 24,402 3,048
Loss (gain) on sale of assets - 50,122 (73,109)
------------ ------------ ------------
35,436,491 34,498,940 35,941,343
------------ ------------ ------------
Income (loss) before income taxes: 70,337 (965,012) (28,297)
------------ ------------ ------------
Current income tax (benefit) (158,292) (116,109) -
Deferred income tax expense (benefit) 181,041 (106,824) 97,488
------------ ------------ ------------
Net income (loss) $ 47,588 $ (742,079) $ (125,785)
============ ============ ============
Basic and diluted net income (loss) per share $ 0.03 $ (0.45) $ (0.07)
============ ============ ============
Weighted average common shares outstanding 1,669,955 1,648,322 1,692,972
============ ============ ============
Diluted weighted average common shares outstanding 1,774,409 1,648,322 1,692,972
============ ============ ============
See accompanying notes to consolidated financial statements.
25
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JULY 31,
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 47,588 $ (742,079) $ (125,785)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,348,695 8,503,129 9,706,235
Net book value of rental units retired 3,349,494 3,780,825 2,868,499
Non-cash compensation expense 137,723 - -
(Gain) loss on sale of property and equipment (9,827) 24,402 3,048
Loss (gain) on sale of assets - 50,122 (73,109)
Deferred income taxes 181,041 (106,824) 97,488
Changes in operating assets and liabilities other than cash:
Prepaid expenses 123,043 (114,320) (21,772)
Taxes receivable (21,391) (26,235) (133,350)
Employee advance - (988,889) -
Other assets 7,006 (4,397) 70,266
Accounts payable 10,751 (79,337) (557,450)
Income taxes payable - - (135,796)
Other accrued liabilities (61,393) (86,326) (36,932)
------------ ------------ ------------
Net cash flows provided by operating activities 12,112,730 10,210,071 11,661,342
------------ ------------ ------------
Cash flows from investing activities:
Purchase of rental units and equipment (10,565,857) (9,593,006) (9,853,988)
Additions to property and equipment (391,498) (287,261) (1,756,702)
Proceeds from sale of property and equipment 17,112 55,303 79,526
Asset purchases net of cash acquired - (984,007) (99,295)
Proceeds from sale of assets - 2,208,625 397,210
------------ ------------ ------------
Net cash flows used in investing activities (10,940,243) (8,600,346) (11,233,249)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of notes payable 1,600,000 2,050,000 3,700,000
Repayment of notes payable (3,115,893) (4,164,539) (3,913,214)
Treasury stock purchase - (277,857) (75,125)
Treasury stock issuance - 170,050 -
Stock options exercised 143,100 - -
------------ ------------ ------------
Net cash flows used in financing activities (1,372,793) (2,222,346) (288,339)
------------ ------------ ------------
Cash and cash equivalents at the beginning of year 506,175 1,118,796 979,042
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 305,869 $ 506,175 $ 1,118,796
============ ============ ============
See accompanying notes to consolidated financial statements.
26
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED JULY 31, 2003, 2002 AND 2001
-----------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK TOTAL
------------------- PAID-IN --------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
--------- -------- ----------- -------- ---------- ------------ -----------
Balance at July 31, 2000 1,756,917 $17,569 $16,124,578 (55,945) $(353,301) $(6,614,335) $ 9,174,511
--------- -------- ----------- -------- --------- ----------- -----------
Treasury stock purchases - - - (15,100) (75,125) - (75,125)
Net loss for the year ended
July 31, 2001 - - - - - (125,785) (125,785)
--------- -------- ----------- -------- --------- ----------- -----------
Balance at July 31, 2001 1,756,917 $17,569 $16,124,578 (71,045) $(428,426) $(6,740,120) $ 8,973,601
--------- -------- ----------- -------- --------- ----------- -----------
Treasury stock purchases - - - (69,100) (277,857) - (277,857)
Treasury stock issued 26,850 35,800 143,200 - 170,050
Net loss for the year ended
July 31, 2002 - - - - - (742,079) (742,079)
--------- -------- ----------- -------- --------- ----------- -----------
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 25,600 256 142,844 - - - 143,100
Stock option compensation
expense - - 4,390 - - - 4,390
Net income for the year ended
July 31, 2003 - - - - - 47,588 47,588
--------- -------- ----------- -------- --------- ----------- -----------
Balance at July 31, 2003 1,782,517 $17,825 $16,298,662 (104,345) $(563,083) $(7,434,611) $ 8,318,793
========= ======== =========== ======== ========= =========== ===========
See accompanying notes to consolidated financial statements.
27
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. Certain prior year amounts have been
reclassified to conform to current year presentation.
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, 2003, are as follows:
NUMBER OF
STATE STORES
----- ------
Alabama 22
Arkansas 6
Georgia 3
Mississippi 11
North Carolina 12
South Carolina 2
Tennessee 13
--
69
==
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 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 30 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 home electronics,
household appliances, as well as computers and furniture. In fiscal
year 2003, approximately 16% of the Company's rental revenue was
derived from appliances, 26% from furniture, 30% from electronics, 9%
from computers, 2% from various other products and 17% from various
services and charges to rental customers including reinstatement fees,
preferred customer membership fees and liability waiver fees. 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,
preferred customer membership fees and liability wavier fees. In
28
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 18% from various services and charges
to rental customers, including reinstatement fees, preferred customer
membership fees and liability waiver fees.
Merchandise rented to customers, or available for rent, is recorded at
historical 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 30 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, 2003, 2002 and 2001, $1,410,312, $2,018,208 and $1,201,498,
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.
LIVES (YEARS)
-------------
Building 40
Furniture and fixtures 7
Vehicles 5
Computer equipment 3
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, 2003 and 2002.
29
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets
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 at July 31, 2002
included goodwill, net of accumulated amortization, totaling
$1,225,295, which is related to various store acquisitions. The Company
applied the provisions of SFAS 142 on August 1, 2002 and discontinued
amortization of goodwill.
Amortization of goodwill was $252,349 for the years ended July 31, 2002
and 2001, respectively. As of July 31, 2003 and 2002, goodwill totaled
$1,225,295. The carrying value of goodwill is evaluated annually. The
Company believes that no impairment of goodwill existed at July 31,
2003 and 2002.
The following pro forma financial information compares the Company's
net income (loss) for the years ended July 31, 2003, 2002 and 2001 had
the provisions of SFAS 142 been applied on August 1, 2002:
YEAR ENDED
JULY 31,
----------
2003 2002 2001
---------- ----------- -----------
Reported net income (loss) $ 47,588 $ (742,079) $ (125,785)
Goodwill amortization - 252,349 252,349
---------- ----------- -----------
Adjusted net income (loss) 47,588 (489,730) 126,564
Basic and diluted net income (loss) per share:
Reported net income (loss) 0.03 (0.45) (0.07)
Goodwill amortization - 0.15 0.15
---------- ----------- -----------
Adjusted net income (loss) $ 0.03 $ (0.30) $ .08
Weighted average common shares outstanding 1,669,955 1,648,322 1,692,972
Diluted weighted average common shares outstanding 1,774,409 1,648,322 1,694,660
30
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's adoption of SFAS 142 had no effect on the Company's
acquired identifiable intangible assets that are subject to
amortization. Intangible assets are amortized over their useful
economic life and tested for impairment in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."
The following table presents intangible assets at July 31, 2003 and
July 31, 2002:
JULY 31, 2003 JULY 31, 2002
------------------------------------ ------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
VALUE AMORTIZATION VALUE AMORTIZATION
---------- ------------ ---------- ------------
Non-compete Agreements $2,342,915 $2,036,247 $2,342,915 $1,874,283
During the year ended July 31, 2003, 2002 and 2001, the Company
recorded total amortization expense of $161,964, $139,316, and
$152,682, respectively. Amortization expense is estimated at $106,085,
$84,384, $62,616, $28,712 and $10,020 for years ended July 31, 2004
through 2008, respectively.
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.
Stock-based compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation 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 its stock-based compensation plan.
Adoption of the cost recognition provisions of SFAS No. 123 is optional
and the Company has decided not to elect the provisions of SFAS 123.
However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS 123 are required by SFAS 123 and are
presented below.
In accordance with APB 25, the Company has recognized $4,390 in
compensation cost for stock options granted during the year ended July
31, 2003.
31
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma net income and net income per common share
Had the compensation cost for the Company's stock-based compensation
plan been determined consistent with SFAS No. 123, the Company's net
income (loss) and net income (loss) per common share for 2003, 2002 and
2001 would approximate the pro forma amounts below:
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
7/31/03 7/31/03 7/31/02 7/31/02 7/31/01 7/31/01
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss) $ 47,588 $ (166,446) $ (742,079) $ (771,424) $ (125,785) $ (148,177)
Basic and diluted net income (loss)
per common share $ 0.03 $ (.10) $ (.45) $ (.47) $ (.07) $ (.08)
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 3.31%, 4.12% and 6.06% for 2003, 2002, and 2001,
respectively; the expected life of options is 6.61 years for 2003, and
5.00 years for 2002 and 2001, respectively; and a volatility of 59.60%,
46.84% and 43.03% for options granted in 2003, 2002 and 2001,
respectively.
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.
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, 2003 and July 31, 2002, 49,043 and 110,060, respectively,
shares of common stock options were excluded from the calculation of
diluted income per share because their effect would be antidilutive.
Advertising costs
Costs incurred for producing and communicating advertising are charged
to expense as incurred.
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.
32
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Principles
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.
In November 2002, the Financial Accounting Standards Board ("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 obligation 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 the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). FIN 46
addresses the criteria for consolidation by business enterprises of
variable interest entities. The Company does not have variable interest
entities and therefore, FIN 46 will have no impact on the Company's
financial position or results of operations.
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 modeified after May 51, 2003 and otherwise shall be effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material impact on the
Company's consolidated financial statements.
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.
33
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
34
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.
35
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
JULY 31,
--------------------------------
2003 2002
----------- -----------
Building and leaseholds $ 3,800,476 $ 3,849,666
Vehicles 3,261,702 3,510,662
Furniture and fixtures 1,005,047 1,069,302
Computer equipment 634,910 630,578
----------- -----------
8,702,135 9,060,208
Accumulated depreciation (5,969,337) (5,393,259)
----------- -----------
$ 2,732,798 $ 3,666,949
=========== ===========
Depreciation expense for property and equipment was $1,318,365,
$1,417,979 and $1,566,788 for 2003, 2002 and 2001.
4. NOTES PAYABLE
Notes payable consists of the following:
YEARS ENDED JULY 31,
-------------------------------------
2003 2002
----------- -----------
Senior collateralized debt
Revolving Credit Loan Agreement dated August 19, 1993,
amended October 1, 2003, borrowing limit is $11,500,000,
interest payable monthly at prime plus 1.5%, note
matures on May 31, 2005; note collateralized by
substantially all the Company's assets $ 6,400,000 $ 7,900,000
Subordinated debt
Note payable to limited partnership and stockholder dated
October 26, 2001, amended October 1, 2003, interest paid
quarterly at 8% beginning October 1, 1993; note, as amended,
matures on May 31, 2005 3,000,000 3,000,000
Other notes payable
Note payable to bank dated April 11, 1994, principal payable
monthly; interest payable at 9% per annum; note matures on
April 15, 2006; note collateralized by associated real estate 51,299 67,192
----------- -----------
$ 9,451,299 $10,967,192
=========== ===========
At July 31, 2003 and 2002 the prime rate was 4.00% and 4.75%,
respectively.
Under the terms of the revolving line of credit, the Company cannot
declare or pay any cash dividends.
36
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 13, 2002, the Company and its lender amended the
subordinated note payable to a limited partnership and stockholder
dated October 26, 2001. The amendment extended the maturity date from
November 1, 2003 to May 31, 2004.
On October 31, 2002, the Company amended and restated its Revolving
Credit Loan Agreement (the "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 net worth provision of the
Agreement. The Company obtained a waiver of such violations from the
lender and has been in compliance thereafter.
On October 1, 2003, the Company further amended and restated its
Revolving Credit Loan Agreement with its lender. In the amendment, the
lender extended the maturity date from May 31, 2004 to May 31, 2005,
modified the minimum effective tangible net worth provision, modified
the maximum debt-to-effective tangible net worth provision, and
eliminated the idle inventory coverage and capital expenditure
covenant.
On October 1, 2003, the Company and the lender further amended the
subordinated note payable to a limited partnership and stockholder
dated October 26, 2001. The amendment extended the maturity date from
May 31, 2004 to May 31, 2005.
At July 31, 2003, 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:
2004 $ 17,242
2005 9,418,860
2006 15,197
2007 -
2008 -
Thereafter -
----------
$9,451,299
==========
37
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:
2003 2002 2001
---------- ---------- -------
Current:
Federal $(163,103) $(116,109) $ -
State 4,811 - -
--------- --------- -------
(158,292) (116,109) -
--------- --------- -------
Deferred:
Federal 196,946 (102,139) 79,564
State (15,905) (4,685) 17,924
--------- --------- -------
181,041 (106,824) 97,488
--------- --------- -------
Total income tax provision $ 22,749 $(222,933) $97,488
========= ========= =======
Significant components of the Company's deferred income tax assets at
July 31, 2003 and 2002, respectively, are as follows:
2003 2002
----------- -----------
Net operating loss carryforward $ 1,652,253 $ 1,106,485
Investment tax credit carryforward - 2,688
Minimum tax credit carryover - 208,833
Property and equipment 715,056 548,122
Intangible assets 356,591 378,568
Accrued expenses 101,405 383,102
----------- -----------
Total deferred tax assets 2,825,305 2,627,798
Rental merchandise (2,523,271) (2,142,035)
----------- -----------
Total deferred tax liabilities (2,523,271) (2,142,035)
----------- -----------
Valuation allowance - (2,688)
----------- -----------
Net deferred tax asset $ 302,034 $ 483,075
=========== ===========
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.
38
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:
2003 2002 2001
-------- --------- --------
Federal income tax expense (benefit) at
statutory rate of 34% $ 24,421 $(280,270) $ (9,621)
Goodwill amortization - 58,117 71,192
State income tax (7,322) (3,092) 33,202
Other 5,650 2,312 2,715
-------- --------- --------
Provision for income tax expense (benefit) $ 22,749 $(222,933) $ 97,488
======== ========= ========
During 2003, the net operating loss carryforwards were increased by
$966,496 and during 2002, the net operating loss carryforwards were
decreased by $106,238. At July 31, 2003, the Company has a Federal net
operating loss carryforward of approximately $4,663,686 expiring from
2006 to 2022. The Company has State net operating loss carryforwards
totaling $1,834,711 which expires from 2017 to 2019. Utilization of the
U.S. federal net operating loss carryforwards may be limited by the
separate return loss year rules and could be affected by ownership
changes which could occur in the future.
6. RELATED PARTY TRANSACTIONS
Interest expense relating to notes payable to affiliates amounted to
$243,335, $242,668 and $243,384 for the years ended July 31, 2003, 2002
and 2001, respectively.
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, 2003, $855,556 of the Note
remained outstanding.
39
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, 2003
are as follows:
2004 $ 2,294,634
2005 2,039,866
2006 1,682,514
2007 1,170,830
2008 799,188
Thereafter 570,782
-----------
$ 8,557,814
===========
8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS
Cash interest payments for the years ended July 31, 2003, 2002 and 2001
are $694,185, $793,766 and $1,317,362, respectively. Cash tax payments
for the years ended July 31, 2002 and 2001 are $89,874, and $478,643,
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 385,000 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. Options granted under the Plan expire in 10 years from
the date of grant.
40
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock options as of July 31,
2003, 2002 and 2001 and the changes during the year ended on those
dates is presented below:
STOCK OPTIONS
-------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES AVERAGE # SHARES AVERAGE # SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year 200,590 $ 4.70 191,890 $ 5.47 194,360 $ 5.79
Granted 126,505 $ 9.08 106,000 $ 4.02 24,030 $ 4.06
Exercised 25,600 $ 5.59 - N/A - $ 6.24
Forfeited 24,500 $ 5.78 97,300 $ 5.48 26,500 $ -
Expired - N/A - N/A - N/A
Outstanding at end of year 276,995 $ 6.46 200,590 $ 4.70 191,890 $ 5.45
Exercisable at end of year 92,385 $ 5.52 90,115 $ 5.36 158,018 $ 5.38
Available for grant at end of year 73,205 - 75,210 - 83,910 -
Weighted average fair value of
options granted $ 5.51 $ 1.85 $ 1.82
The following table summarizes information about stock options
outstanding at July 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED
NUMBER OF AVERAGE REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------- --------- ----------------- ---------------- --------- ----------------
$4.00 to $7.00 158,490 7.82 years $ 4.51 86,385 $ 4.90
$7.95 to $8.81 102,505 9.40 years $ 8.22 - -
$13.50 to $16.50 16,000 9.83 years $ 14.50 6,000 $ 14.50
-------- ---- --------- ------ ---------
$4.00 to $16.50 276,995 8.52 years $ 6.46 92,385 $ 5.52
======== ==== ========= ====== =========
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, 2003,
2002 and 2001, the Company contributed approximately $81,000, $105,000
and $145,000, respectively, to the Savings Plan. All assets of the
Savings Plan are held in trust.
41
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEGAL CONTINGENCIES
In December 2001, the Company settled a lawsuit brought by
approximately fifteen plaintiffs in the Billings Division of the United
States District Court for the State of Montana 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.
In July 2003, the County Court of the Second Judicial District of
Bolivar County, Mississippi entered final judgment against the Company
in a lawsuit brought by a former lessor. The lessor alleged that the
Company had breached the terms and conditions of a lease agreement for
a store location in Mississippi when the Company vacated the premises
and failed to properly notify the lessor of its intentions not to
exercise an option extending the original lease term. The judgment
against the Company was for approximately $70,000, including attorney
fees. The Company has appealed the judgment and believes that it has a
meritorious defense to the plaintiff's claims. Accordingly, no amount
related to the lawsuit has been accrued in the balance sheet.
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.
42
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table represents certain unaudited financial information
for the periods indicated:
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
------------ ----------- ---------- -----------
Year ended July 31, 2003
Revenue $ 8,272,962 $ 8,894,260 $9,213,864 $ 9,125,742
Cost and operating expenses 8,593,876 8,884,355 8,978,120 8,980,140
------------ ----------- ---------- -----------
Income (loss) before income taxes (320,914) 9,905 235,744 145,602
------------ ----------- ---------- -----------
Income tax expense (benefit) (84,224) (32,714) 88,638 51,049
------------ ----------- ---------- -----------
Net income (loss) (236,690) 42,619 147,106 94,553
------------ ----------- ---------- -----------
Basic net income
(loss) per share ($ 0.14) $ 0.03 $ 0.09 $ 0.06
============ =========== ========== ===========
Diluted net income (loss)
per share ($ 0.14) $ 0.02 $ 0.08 $ 0.05
============ =========== ========== ===========
Year ended July 31, 2002
Revenue $ 8,450,505 $ 8,493,850 $8,423,551 $ 8,166,022
Cost and operating expenses 8,726,707 8,575,964 7,891,298 9,304,971
------------ ----------- ---------- -----------
Income (loss) before income taxes (276,202) (82,114) 532,253 (1,138,949)
------------ ----------- ---------- -----------
Income tax expense (benefit) (84,320) (8,391) 230,746 (360,968)
------------ ----------- ---------- -----------
Net income (loss) (191,882) (73,723) 301,507 (777,981)
------------ ----------- ---------- -----------
Basic and diluted net income
(loss) per share ($ 0.11) ($ 0.04) $ 0.19 ($ 0.48)
============ =========== ========== ============
43
BESTWAY, INC. FORM 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The management of the Company, including the Company's principal
executive officer and principal financial officer, have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934) as of July 31, 2003.
Based on such evaluation, the Company's principal executive officer and
principal financial officer have concluded that as of July 31, 2003, such
disclosure controls and procedures are effective for the purpose of ensuring
that material information required to be in this Annual Report is made known to
them by others on a timely basis. There have not been any changes in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) during the quarter and year
ending July 31, 2003 that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
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 2003, 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 2003, 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 2003, 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 2003, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL AND ACCOUNTANT FEES AND SERVICES
The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 2003, and is incorporated
herein by reference.
44
BESTWAY, INC. FORM 10-K
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of Bestway,
Inc. are included in Part II, Item 8:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K for the quarter ended July 31, 2003:
We filed a Current Report on Form 8-K on June 12, 2003
regarding a press release issued on June 12, 2003 announcing
Bestway's financial and operating results for the quarter
ended April 30, 2003.
45
BESTWAY, INC. FORM 10-K
(c) Exhibits
EXHIBIT
NUMBER DOCUMENT
3.1 Amended and Restated Certificate of Incorporation of Bestway,
incorporated by reference to Bestway's Current Report on Form
8-K, filed September 2, 1993.
3.2 Restated and Amended Bylaws of Bestway, incorporated by
reference to Bestway's Annual Report on Form 10-K, for the
year ended December 31, 1984.
3.3* Amendment No. 1 to the Restated and Amended Bylaws of Bestway.
4.1 Specimen stock certificate representing shares of Bestway's
common stock, incorporated by reference to Bestway's
Registration Statement on Form S-8, filed June 22, 1995.
10.1 Incentive Stock Option Plan of Bestway, incorporated by
reference to Bestway's Registration Statement on Form S-8,
filed June 22, 1995.
10.2 Form of Incentive Stock Option Agreement pursuant to Incentive
Stock Option Plan, incorporated by reference to Bestway's
Registration Statement on Form S-8, filed June 22, 1995.
10.3 Second Amended and Restated Revolving Credit Loan dated
October 1, 2003, by and between Bestway and Comerica
Bank-Texas, incorporated by reference to Bestway's Current
Report on Form 8-K filed October 3, 2003.
10.4* Second Amended and Restated Promissory Note, dated October 26,
2001, by Bestway in favor of O'Donnell & Masur, L.P.
10.5 Extension Agreement for the Second Amended and Restated
Promissory Note, dated October 1, 2003, between O'Donnell &
Masur, L.P. and Bestway, incorporated by reference in
Bestway's Current Report on Form 8-K, filed October 3, 2003.
10.6 Amendment Number One to Bestway Incentive Stock Option Plan,
dated December 4, 2000, incorporated by reference to Bestway's
Annual Report on Form 10-K for the year ended July 31, 2001.
10.7 Amendment Number Two to Bestway Incentive Stock Option Plan,
dated November 26, 2002, incorporated by reference to
Bestway's Registration Statement on Form S-8, filed March 20,
2003.
10.8 Employment Agreement, dated July 8, 2002, between Bestway and
David A. Kraemer, incorporated by reference to Bestway's
Annual Report on Form 10-K for the year ended July 31, 2002.
10.9 Severance Agreement, dated July 22, 2002, between Bestway and
Teresa A. Sheffield, incorporated by reference to Bestway's
Annual Report on Form 10-K for the year ended July 31, 2002.
31.1* Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
21* Subsidiaries
23* Consent of PricewaterhouseCoopers LLP
- ------------------
*Filed herewith
46
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 27, 2003 /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 2003.
SIGNATURE TITLE
--------- -----
/s/ R. Brooks Reed Chairman of the Board of Directors
- -------------------------
R. BROOKS REED
/s/ Jack E. Meyer Director
- -------------------------
JACK E. MEYER
/s/ James A. O'Donnell Director
- -------------------------
JAMES A. O'DONNELL
/s/ Bernard J. Hinterlong Director
- -------------------------
BERNARD J. HINTERLONG
/s/ David A. Kraemer Director, President and Chief Executive Officer
- -------------------------
DAVID A. KRAEMER
/s/ Beth A. Durrett Chief Financial Officer and Secretary
- -------------------------
BETH A. DURRETT
47