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BESTWAY, INC. FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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
BESTWAY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 81-0332743
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Stemmons Freeway, Suite 320 75247
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(214) 630-6655
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 126-2). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, $.01 par value, outstanding as of
October 31, 2003, was 1,678,922.
BESTWAY, INC. FORM 10-Q
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
October 31, 2003
PAGE NOS.
---------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of
October 31, 2003 and July 31, 2003 3
b) Condensed Consolidated Statements of Operations
for the Three Months Ended October 31, 2003 and 2002 4
c) Condensed Consolidated Statements of Cash Flows
for the Three Months Ended October 31, 2003 and 2002 5
d) Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended October 31, 2003 6
e) Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
ITEM 4. Controls and Procedures 15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K, Signatures 16
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
OCTOBER 31, JULY 31,
2003 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 319,214 $ 305,869
Prepaid expenses 191,356 189,882
Taxes receivable 180,976 180,976
Deferred income taxes 263,165 302,034
Other assets 73,544 45,026
Rental merchandise, at cost 22,352,332 22,488,380
less accumulated depreciation 8,646,455 8,630,316
------------ ------------
13,705,877 13,858,064
------------ ------------
Property and equipment, at cost 8,656,431 8,702,135
less accumulated depreciation 6,156,080 5,969,337
------------ ------------
2,500,351 2,732,798
------------ ------------
Employee advance 822,222 855,556
Non-competes, net of amortization 278,785 306,668
Goodwill, net of amortization 1,225,295 1,225,295
------------ ------------
Total assets $ 19,560,785 $ 20,002,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,172,840 $ 751,328
Accrued interest-related parties 20,667 20,667
Other accrued liabilities 1,431,942 1,460,081
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 5,547,096 6,451,299
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10.00 par value,
1,000,000 authorized, none issued -- --
Common stock, $.01 par value, 5,000,000 authorized,
1,783,267 issued at October 31, 2003 and 1,782,517 issued at
July 31, 2003 17,832 17,825
Paid-in capital 16,303,597 16,298,662
Less treasury stock, at cost, 104,345 at October 31, 2003 and
July 31, 2003 (563,083) (563,083)
Accumulated deficit (7,370,106) (7,434,611)
------------ ------------
Total stockholders' equity 8,388,240 8,318,793
------------ ------------
Total liabilities and stockholders' equity $ 19,560,785 $ 20,002,168
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
October 31, October 31,
2003 2002
------------ ------------
Revenues:
Rental and fee income $ 8,894,938 $ 7,994,191
Sales of merchandise 164,089 278,771
------------ ------------
9,059,027 8,272,962
------------ ------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 1,759,171 1,620,547
Other 328,441 372,537
Cost of merchandise sold 156,359 352,240
Salaries and wages 2,641,325 2,444,473
Advertising 463,889 384,990
Occupancy 618,270 589,060
Other operating expenses 2,837,956 2,654,078
Interest expense 152,814 175,165
(Gain) loss on sale of property and equipment (2,572) 786
------------ ------------
8,955,653 8,593,876
------------ ------------
Income (loss) before income taxes 103,374 (320,914)
------------ ------------
Income tax expense (benefit) 38,869 (84,224)
------------ ------------
Net income (loss) $ 64,505 $ (236,690)
------------ ------------
Basic and diluted net income (loss) per share $ .04 $ (.14)
============ ============
Weighted average common shares outstanding 1,678,672 1,652,572
============ ============
Diluted weighted average common shares outstanding 1,835,559 1,652,572
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
October 31, October 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 64,505 $ (236,690)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,087,612 1,993,084
Net book value of rental units retired 725,892 909,453
(Gain) loss on sale of property and equipment (2,572) 786
Deferred income taxes 38,869 (84,224)
Non-cash compensation expense 33,334 38,089
Changes in operating assets and liabilities other than cash:
Prepaid expenses (1,474) 29,089
Other assets (28,518) 3,233
Accounts payable 5,656 229,104
Other accrued liabilities (28,139) (276,429)
------------ ------------
Net cash flows provided by operating activities 2,895,165 2,605,495
------------ ------------
Cash flows from investing activities:
Purchase of rental units and equipment (1,917,022) (2,132,949)
Additions to property and equipment (81,938) (256,505)
Proceeds from sale of property and equipment 16,401 5,737
------------ ------------
Net cash flows used in investing activities (1,982,559) (2,383,717)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 200,000 200,000
Repayment of notes payable (1,104,203) (503,828)
Stock options exercised 4,942 --
------------ ------------
Net cash flows used in financing activities (899,261) (303,828)
------------ ------------
Cash and cash equivalents at beginning of period 305,869 506,175
------------ ------------
Cash and cash equivalents at end of period $ 319,214 $ 424,125
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
For the three months ended October 31, 2003:
COMMON STOCK TREASURY STOCK TOTAL
-------------------------- PAID-IN -------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at July 31, 2003 1,782,517 $ 17,825 $ 16,298,662 (104,345) $ (563,083) $ (7,434,611) $ 8,318,793
Stock options exercised 750 7 4,935 4,942
Net income for the three months
ended October 31, 2003 64,505 64,505
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at October 31, 2003 1,783,267 $ 17,832 $ 16,303,597 (104,345) $ (563,083) $ (7,370,106) $ 8,388,240
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
BESTWAY, INC. FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Bestway, Inc. and its consolidated subsidiaries (the "Company") is
engaged in the rental and sale of home electronics, furniture,
appliances and computers to the general public. At October 31, 2003,
the Company operated 69 stores in seven states: Alabama, Arkansas,
Georgia, Mississippi, North Carolina, South Carolina and Tennessee. The
Company's corporate office is located in Dallas, Texas.
The condensed consolidated financial statements included herein have
been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to
make the information presented not misleading and that all adjustments
deemed necessary for a fair statement of the results for the interim
period have been reflected. Such adjustments are of a normal recurring
nature. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Form
10-K, particularly with regard to disclosure relating to significant
accounting policies. The year-end condensed consolidated balance sheet
data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation utilizing the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued
to Employees, and related Interpretations. Accordingly, no compensation
expense is recognized for fixed option plans because the exercise
prices of employee stock options equal or exceed the market prices of
the underlying stock on the date of grant. The Company sponsors a stock
option plan for the benefit of its employees.
The following table represents the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value based
method and recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
2003 2002
------------ ------------
Net income (loss)
As reported $ 64,505 $ (236,690)
Pro forma $ 16,355 $ (267,105)
Basic and diluted earnings (loss) per common share
As reported $ .04 $ (.14)
Pro forma $ .01 $ (.16)
7
BESTWAY, INC. FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average common
shares outstanding during the period. Diluted earnings per common share
includes common stock equivalents, consisting of stock options, which
are dilutive to net income per share. For the three months ended
October 31, 2003 and 2002, 5,000 and 189,590 shares, respectively, of
common stock options were excluded from the calculation of diluted
earnings per common share because their effect would be antidilutive.
4. RENTAL MERCHANDISE
Rental merchandise rented to customers, or available for rent, is
recorded at cost, net of accumulated depreciation. Merchandise rented
to customers is depreciated on the income-forecast basis over the term
of the rental agreement, generally ranging from 12 to 30 months. Under
the income-forecast basis, merchandise held for rent is not
depreciated.
Rental merchandise which is damaged and inoperable, deemed obsolete, or
not returned by the customer after becoming delinquent on payments, is
written-off as such impairment is incurred. For the three months ended
October 31, 2003 and 2002, $364,490 and $385,966, respectively, of such
impairments were incurred and are included in other operating expenses
in the accompanying condensed consolidated statements of operations.
5. NOTES PAYABLE
On October 1, 2003, the Company 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 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 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.
6. NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("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 provisions of
FIN 46 were effective for all arrangements entered into after January
31, 2003. As amended by FASB Staff Position ("FSP") No. FIN 46-6, for
arrangements entered into prior to January 31, 2003, the provisions of
FIN 46 are effective at the end of the first interim or annual period
ending after December 15, 2003. 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.
8
BESTWAY, INC. FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
7. LEGAL CONTINGENCIES
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.
9
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q and the foregoing Management's Discussion and
analysis of Financial Condition and Results of Operations contains
various "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements
represent the Company's expectations or beliefs concerning future
events. Any forward-looking statements made by or on behalf of the
Company are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to, (i)
the ability of the Company to open or acquire additional
rental-purchase stores on favorable terms, (ii) the ability of the
Company to improve the performance of such opened or acquired stores
and to integrate such acquired stores into the Company's operations,
(iii) the impact of state and federal laws regulating or otherwise
affecting rental-purchase transactions, (iv) the impact of general
economic conditions in the United States and (v) the impact of
terrorist activity, threats or terrorist activity and responses thereto
on the economy in general and the rental-purchase industry in
particular. Undue reliance should not be placed on any forward-looking
statements made by or on behalf of the Company as such statements speak
only as of the date made. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a
result of new information, the occurrence of future events or
otherwise.
GENERAL
The Company currently operates 69 rental-purchase stores located in
seven states. 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.
10
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's unaudited Condensed Consolidated Statements of
Operations, expressed as a percentage of revenues:
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
2003 2002
---------- ----------
Revenues:
Rental and fee income 98.2% 96.6%
Sales of merchandise 1.8 3.4
---------- ----------
100.0 100.0
---------- ----------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 19.4 19.6
Other 3.6 4.5
Cost of merchandise sold 1.7 4.3
Salaries and wages 29.2 29.5
Advertising 5.1 4.7
Occupancy 6.8 7.1
Other operating expenses 31.4 32.1
Interest expense 1.7 2.1
(Gain) loss on sale of property and equipment -- --
---------- ----------
98.9 103.9
---------- ----------
Income (loss) before income taxes 1.1 (3.9)
---------- ----------
Income tax expense (benefit) 0.4 (1.0)
---------- ----------
Net income (loss) 0.7% (2.9)%
========== ==========
11
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 2003 AND 2002
Total revenue increased $786,065, or 9.5% to $9,059,027 for the quarter
ended October 31, 2003 from $8,272,962 for the quarter ended October
31, 2002. The increase was attributable to increased revenues in same
stores. Same store revenues represent those revenues earned in stores
that were opened by the Company for the entire three months ended
October 31, 2003 and 2002. The improvement was attributable to an
increase in the number of customers served, as well as revenue earned
per agreement on rent, mainly in furniture and home electronics. Of the
increase in revenue from same stores, sales of merchandise decreased
$114,682, or 41.1% to $164,089 for the quarter ended October 31, 2003
from $278,771 for the quarter ended October 31, 2002. The decrease in
sales of merchandise was primarily attributable to a decrease in the
number of items sold in the quarter ended October 31, 2003 from the
number of items sold in the quarter ended October 31, 2002.
Total costs and operating expenses increased $361,777, or 4.2% to
$8,955,653 for the quarter ended October 31, 2003 from $8,593,876 for
the quarter ended October 31, 2002 and decreased 5.0% as a percentage
of total revenue to 98.9% from 103.9%. 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 $138,624, or 8.6% to
$1,759,171 for the quarter ended October 31, 2003 from $1,620,547 for
the quarter ended October 31, 2002 and decreased .2% as a percentage of
total revenue to 19.4% from 19.6%. Depreciation of rental merchandise
expressed as a percentage of rental income excluding fees decreased
1.0% to 23.6% from 24.6% primarily due to improved product margins.
Other depreciation and amortization decreased $44,096, or 11.8% to
$328,441 for the quarter ended October 31, 2003 from $372,537 for the
quarter ended October 31, 2002 and decreased .9% as a percentage of
total revenue to 3.6% from 4.5% primarily due to the full amortization
of certain non-competes during fiscal year 2003.
Cost of merchandise sold decreased $195,881, or 55.6% to $156,359 for
the quarter ended October 31, 2003 from $352,240 for the quarter ended
October 31, 2002. The decrease in cost of merchandise sold was
primarily attributable to a decrease in the number of items sold in the
quarter ended October 31, 2003. During the quarter ended October 31,
2003 and 2002, the Company's margin related to merchandise sales was
income of $7,730 and a loss of $73,469, respectively. The Company's
loss in the quarter ended October 31, 2002 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 $196,852, or 8.1% to $2,641,325 for the
quarter ended October 31, 2003 from $2,444,473 for the quarter ended
October 31, 2002 and as a percentage of total revenue decreased .3% to
29.2% from 29.5%. The increase was primarily attributable to increased
store level labor costs of $164,546 due to additional store staffing
and higher pay rates.
Advertising expense increased $78,899, or 20.5% to $463,889 for the
quarter ended October 31, 2003 from $384,990 for the quarter ended
October 31, 2002 and increased .4% as a percentage of total revenue to
5.1% from 4.7%. The increase is attributable to the Company's
investment in implementing a more aggressive and targeted marketing
campaign.
12
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Occupancy expense increased $29,210, or 5.0% to $618,270 for the
quarter ended October 31, 2003 from $589,060 for the quarter ended
October 31, 2002. Occupancy expense as a percentage of total revenue
decreased .3% to 6.8% from 7.1% primarily due to the increase in
revenue.
Other operating expenses increased $183,878, or 6.9% to $2,837,956 for
the quarter ended October 31, 2003 from $2,654,078 for the quarter
ended October 31, 2002 and decreased .7% to 31.4% from 32.1%. The
increase was attributable to a number of factors, including increased
repairs of rental merchandise, increased store level recruiting costs
and increased legal expense. The increase was offset by decreased group
insurance costs.
Interest expense decreased $22,351, or 12.8% to $152,814 for the
quarter ended October 31, 2003 from $175,165 for the quarter ended
October 31, 2002 and decreased .4% to 1.7% from 2.1%. The decrease in
interest is primarily attributable to decreased indebtedness.
Income before income taxes increased $424,288, or 132.2% to income of
$103,374 for the quarter ended October 31, 2003 compared to a loss of
$320,914 for the quarter ended October 31, 2002. Income before income
taxes as a percentage of total revenue increased to income of 1.1% for
the quarter ended October 31, 2003 compared to a loss of 3.9% for the
quarter ended October 31, 2002. The increase was primarily the result
of eliminating lower-cost, lower-margin merchandise from our product
mix, focusing on higher revenue-generating merchandise, and increasing
the Company's investment in store personnel and advertising.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended October 31, 2003, the Company's net cash flows
from operating activities were $2,895,165 as compared to $2,605,495 for
the quarter ended October 31, 2002. The increase in cash provided by
operations was primarily due to increased cash receipts from customers.
For the quarter ended October 31, 2003, the Company's net cash flows
used in investing activities were $1,982,559 as compared to $2,383,717
for the quarter ended October 31, 2002. The Company's investing
activities reflects a $215,927 decrease in the purchase of rental units
and a $174,567 decrease in additions to property and equipment. The
decrease in the amount of rental merchandise purchased during the
quarter ending October 31, 2003 is a result of a decrease in the number
of items cash sold. The decrease in additions to property and equipment
is a result of purchasing laser printers and copy machines in all
stores during the quarter ended October 31, 2002.
For the quarter ended October 31, 2003, the Company's net cash flows
used in financing activities were $899,261 as compared to net cash
flows used in financing activities of $303,828 for the quarter ended
October 31, 2002. The increase in financing activities principally
reflects increased repayments of the Company's debt.
On October 1, 2003, the Company 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.
13
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
On October 1, 2003, 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 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 quarter ended October 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
$6,000,000 under the Revolving Credit Loan Agreement provide adequate
resources to meet the Company's future cash obligations.
INFLATION
Although the Company cannot precisely determine the effects of
inflation on its business, it is management's belief that the effects
on revenues and operating results have not been significant.
RECENTLY ISSUED ACCOUNTING PRINCIPLE
In January 2003, the Financial Accounting Standards Board ("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 provisions of
FIN 46 were effective for all arrangements entered into after January
31, 2003. As amended by FASB Staff Position ("FSP") No. FIN 46-6, for
arrangements entered into prior to January 31, 2003, the provisions of
FIN 46 are effective at the end of the first interim or annual period
ending after December 15, 2003. 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.
14
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to
disclose in the reports it files with the Securities and Exchange
Commission, or SEC and to process, summarize and disclose this
information within the time periods specified in the rules of the SEC.
As of the end of the period covered by this report, Bestway carried out
an evaluation, under the supervision and with the participation of
Bestway's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of Bestway's disclosure
controls and procedures. Based upon that evaluation, Bestway's Chief
Executive Officer and Chief Financial Officer concluded that Bestway's
disclosure controls and procedures, as defined in Rules 13(a) - 15(c)
and 15 (d)-15(e) under the Securities Exchange Act of 1934, are
effective in timely alerting them to material information required to
be included in Bestway's periodic SEC reports.
In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company maintains a system of internal controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's general or specific authorization and that transactions
are recorded as necessary:
- to permit preparation of financial statements in conformity
with generally accepted accounting principles, and
- to maintain accountability for assets.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive Officer and Chief Financial Officer,
there have been no significant changes in such controls or in other
factors that could have significantly affected those controls,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
15
BESTWAY, INC. FORM 10-Q
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, SIGNATURES
(a) Exhibits required by Item 601 of Regulation S-K
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.
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*Filed herewith
(b) Report on Form 8-K for the quarter ended October 31, 2003:
We filed a Current Report on Form 8-K on October 3, 2003
regarding a press release issued on October 2, 2003 announcing
Bestway's amended and restated Revolving Credit Loan Agreement
and Subordinated Note Extension Agreement.
We filed a Current Report on Form 8-K on October 31, 2003
regarding a press release issued on October 20, 2003
announcing Bestway's financial and operating results for the
quarter and year ended July 31, 2003.
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BESTWAY, INC. FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BESTWAY, INC.
December 15, 2003
/s/ Beth A. Durrett
-------------------
Beth A. Durrett
Chief Financial Officer
(Principal Financial Officer and duly authorized
to sign on behalf of the Registrant)
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