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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 January 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-8568
BESTWAY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 81-0332743
- ------------------------------- ----------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Stemmons Freeway, Suite 320
Dallas, Texas 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
January 31, 2004, was 1,681,422.
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
January 31, 2004
PAGE NOS.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of
January 31, 2004 and July 31, 2003 3
b) Condensed Consolidated Statements of Operations
for the Three and Six Months Ended January 31, 2004 and 2003 4
c) Condensed Consolidated Statements of Cash Flows
for the Six Months Ended January 31, 2004 and 2003 5
d) Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended January 31, 2004 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 18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 6. Exhibits and Reports on Form 8-K, Signatures 19
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JANUARY 31, JULY 31,
2004 2003
--------------- ---------------
ASSETS
Cash and cash equivalents $ 823,058 $ 305,869
Prepaid expenses 132,756 189,882
Taxes receivable 22,998 180,976
Deferred income taxes 167,232 302,034
Other assets 75,874 45,026
Rental merchandise, at cost 22,281,007 22,488,380
less accumulated depreciation 8,525,392 8,630,316
--------------- ---------------
13,755,615 13,858,064
--------------- ---------------
Property and equipment, at cost 8,589,597 8,702,135
less accumulated depreciation 6,183,307 5,969,337
--------------- ---------------
2,406,290 2,732,798
--------------- ---------------
Employee advance 783,333 855,556
Non-competes, net of amortization 250,902 306,668
Goodwill, net of amortization 1,225,295 1,225,295
=============== ===============
Total assets $ 19,643,353 $ 20,002,168
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,073,947 $ 751,328
Accrued interest-related parties 20,667 20,667
Other accrued liabilities 1,240,839 1,460,081
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 5,742,797 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,
1,785,767 issued at January 31, 2004 and 1,782,517 issued at
July 31, 2003 17,857 17,825
Paid-in capital 16,321,227 16,298,662
Less treasury stock, at cost, 104,345 at January 31, 2004 and
July 31, 2003 (563,083) (563,083)
Accumulated deficit (7,210,898) (7,434,611)
--------------- ---------------
Total stockholders' equity 8,565,103 8,318,793
=============== ===============
Total liabilities and stockholders' equity $ 19,643,353 $ 20,002,168
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
January 31, January 31,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Revenues:
Rental and fee income $ 9,370,876 $ 8,502,669 $ 18,265,815 $ 16,496,860
Sales of merchandise 193,317 391,591 357,406 670,362
--------------- --------------- --------------- ---------------
9,564,193 8,894,260 18,623,221 17,167,222
--------------- --------------- --------------- ---------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 1,862,648 1,728,322 3,621,819 3,348,869
Other 308,540 379,407 636,981 751,944
Cost of merchandise sold 180,512 427,584 336,871 779,824
Salaries and wages 2,772,879 2,662,915 5,414,204 5,107,388
Advertising 454,715 427,932 918,604 812,923
Occupancy 632,683 593,122 1,250,953 1,182,182
Other operating expenses 2,946,454 2,499,317 5,784,411 5,153,395
Interest expense 136,396 175,103 289,210 350,268
Loss (gain) on sale of property and
equipment 14,225 (9,347) 11,653 (8,561)
--------------- --------------- --------------- ---------------
9,309,052 8,884,355 18,264,706 17,478,232
--------------- --------------- --------------- ---------------
Income (loss) before income taxes 255,141 9,905 358,515 (311,010)
--------------- --------------- --------------- ---------------
Income tax expense (benefit) 95,933 (32,714) 134,802 (116,938)
--------------- --------------- --------------- ---------------
Net income (loss) $ 159,208 $ 42,619 $ 223,713 $ (194,072)
--------------- --------------- --------------- ---------------
Basic net income (loss) per share $ .09 $ .03 $ .13 $ (.12)
=============== =============== =============== ===============
Diluted net income (loss) per share $ .09 $ .02 $ .12 $ (.12)
=============== =============== =============== ===============
Weighted average common shares
outstanding 1,681,089 1,671,705 1,679,880 1,662,139
=============== =============== =============== ===============
Diluted weighted average common
shares outstanding 1,825,787 1,752,091 1,831,179 1,662,139
=============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
2004 2003
----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 223,713 $ (194,072)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,258,800 4,100,813
Net book value of rental units retired 1,501,804 1,814,993
Loss (gain) on sale of property and equipment 11,653 (8,561)
Deferred income taxes 134,802 (116,938)
Non-cash compensation expense 72,223 72,154
Changes in operating assets and liabilities other than cash:
Prepaid expenses 57,126 83,720
Taxes receivable 157,978 135,413
Other assets (30,848) 4,358
Accounts payable 156,006 109,453
Other accrued liabilities (219,242) (582,839)
----------------- ----------------
Net cash flows provided by operating activities 6,324,015 5,418,494
----------------- ----------------
Cash flows from investing activities:
Purchase of rental merchandise (4,854,562) (5,397,129)
Additions to property and equipment (290,061) (308,870)
Proceeds from sale of property and equipment 23,702 11,357
----------------- ----------------
Net cash flows used in investing activities (5,120,921) (5,694,642)
================= ================
Cash flows from financing activities:
Proceeds from notes payable 800,000 800,000
Repayment of notes payable (1,508,502) (707,753)
Stock options exercised 22,597 139,350
----------------- ----------------
Net cash flows (used in) provided by financing activities (685,905) 231,597
----------------- ----------------
Cash and cash equivalents at beginning of period 305,869 506,175
================= ================
Cash and cash equivalents at end of period $ 823,058 $ 461,624
================= ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the six months ended January 31, 2004:
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 3,250 32 22,565 22,597
Net income for the six months
ended January 31, 2004 223,713 223,713
--------- ------------ ------------ -------- ------------ ------------ ------------
Balance at January 31, 2004 1,785,767 $ 17,857 $ 16,321,227 (104,345) $ (563,083) $ (7,210,898) $ 8,565,103
========= ============ ============ ======== ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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 January 31, 2004,
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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 SIX MONTHS ENDED
----------------------------- ------------------------------
JANUARY 31, JANUARY 31,
2004 2003 2004 2003
------------- ------------- ------------- --------------
Net income (loss)
As reported $ 159,208 $ 42,619 $ 223,713 $ (194,072)
Pro forma $ 124,618 $ 19,100 $ 159,078 $ (236,570)
Basic earnings (loss) per
common share
As reported $ .09 $ .03 $ .13 $ (.12)
Pro forma $ .07 $ .01 $ .09 $ (.14)
Diluted earnings (loss) per
common share
As reported $ .09 $ .02 $ .12 $ (.12)
Pro forma $ .07 $ .01 $ .09 $ (.14)
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average common
shares outstanding during the period. Diluted earnings per common share
includes common stock equivalents, consisting of stock options, which
are dilutive to net income per share. For the three and six months
ended January 31, 2004 and 2003, 20,413 and 0 and 21,391 and 265,595
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 six months ended
January 31, 2004 and 2003, $723,041 and $699,585, respectively, of such
impairments were incurred and are included in other operating expenses
in the accompanying condensed consolidated statements of operations.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. NOTES PAYABLE
On October 1, 2003 and February 25, 2004, the Company amended and
restated its Revolving Credit Loan Agreement with its lender. In the
amendments, the lender extended the maturity date from May 31, 2004 to
May 31, 2006, modified the minimum effective tangible net worth
provision, modified the maximum debt-to-effective tangible net worth
provision, eliminated the idle inventory covenant, modified the
interest rate from prime plus 1.50% to prime plus .75%. The amendments
added a maximum year-to-date acquisition covenant.
On October 1, 2003 and February 25, 2004, the Company amended the
subordinated note payable to a limited partnership, which is a
stockholder of the Company, dated October 26, 2001. The amendments
extended the maturity date from May 31, 2004 to May 31, 2006.
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, FSP
No. FIN 46-7 and FSP No. FIN 46-8, 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 March 14, 2004. 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.
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
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 of 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
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 SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2004 2003 2004 2003
------- ------- ------- --------
Revenues:
Rental and fee income 98.0% 95.6% 98.1% 96.1%
Sales of merchandise 2.0 4.4 1.9 3.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 19.5 19.4 19.5 19.5
Other 3.2 4.3 3.4 4.4
Cost of merchandise sold 1.9 4.8 1.8 4.5
Salaries and wages 29.0 29.9 29.1 29.8
Advertising 4.8 4.8 4.9 4.7
Occupancy 6.6 6.7 6.7 6.9
Other operating expenses 30.8 28.1 31.1 30.0
Interest expense 1.4 2.0 1.6 2.0
Loss (gain) on sale of property
and equipment 0.1 (0.1) -- --
----- ----- ----- -----
Total cost and operating 97.3 99.9 98.1 101.8
===== ===== ===== =====
Income (loss) before income taxes 2.7 0.1 1.9 (1.8)
----- ----- ----- -----
Income tax expense (benefit) 1.0 (0.4) (0.7) (0.7)
----- ----- ----- -----
Net income (loss) 1.7% 0.5% 2.6% (1.1)%
===== ===== ===== =====
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
Total revenue increased $669,933, or 7.5% to $9,564,193 for the three
months ended January 31, 2004 from $8,894,260 for the three months
ended January 31, 2003. 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 January 31, 2004 and 2003. Of the increase in revenue from
same stores, rental and fee income increased $868,207, or 10.2% to
$9,370,876 for the three months ended January 31, 2004 from $8,502,669
for the three months ended January 31, 2003. The increase in rental and
fee income is directly attributable to the success of our efforts on
improving store operations through increasing our customer base and
increasing the average price per unit on rent by upgrading our rental
merchandise. Sales of merchandise decreased $198,274, or 50.6% to
$193,317 for the three months ended January 31, 2004 from $391,591 for
the three months ended January 31, 2003 as the Company discontinued and
liquidated lower-margin merchandise in December, 2002.
Total costs and operating expenses increased $424,697, or 4.8% to
$9,309,052 for the three months ended January 31, 2004 from $8,884,355
for the three months ended January 31, 2003 and decreased 2.6% as a
percentage of total revenue to 97.3% from 99.9%. 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 $134,326, or 7.8% to
$1,862,648 for the three months ended January 31, 2004 from $1,728,322
for the three months ended January 31, 2003 and increased .1% as a
percentage of total revenue to 19.5% from 19.4%. Depreciation of rental
merchandise expressed as a percentage of rental and fee income
decreased .5% to 19.8% from 20.3% primarily due to increased margins as
a result of improved buying of new merchandise and eliminating
lower-cost, lower-margin merchandise from our product mix. Other
depreciation and amortization decreased $70,867, or 18.7% to $308,540
for the three months ended January 31, 2004 from $379,407 for the three
months ended January 31, 2003. Other depreciation and amortization
expressed as a percentage of total revenue decreased 1.1% to 3.2% from
4.3% primarily due to fully depreciated vehicles replaced by leased
vehicles and the full amortization of certain non-competes during
fiscal year 2003.
Cost of merchandise sold decreased $247,072, or 57.8% to $180,512 for
the three months ended January 31, 2004 from $427,584 for the three
months ended January 31, 2003. The decrease in cost of merchandise sold
was primarily attributable to a decrease in the number of items sold in
the three months ended January 31, 2004 and the Company discontinued
and liquidated lower-margin merchandise in December 2002. During the
three months ended January 31, 2004 and 2003, the Company's margin
related to merchandise sales was income of $12,805 and a loss of
$35,993, respectively. The Company's loss in the three months ended
January 31, 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Salaries and wages increased $109,964, or 4.1% to $2,772,879 for the
three months ended January 31, 2004 from $2,662,915 for the three
months ended January 31, 2003. Salaries and wages expressed as a
percentage of total revenues decreased to 29.0% for the three months
ended January 31, 2004 from 29.9% for the three months ended January
31, 2003. This decrease was primarily attributable to an increase in
same store revenues in the second quarter of 2004 as compared to 2003.
Advertising expense increased $26,783, or 6.3% to $454,715 for the
three months ended January 31, 2004 from $427,932 for the three months
ended January 31, 2003 and remained constant as a percentage of total
revenue at 4.8%.
Occupancy expense increased $39,561, or 6.7% to $632,683 for the three
months ended January 31, 2004 from $593,122 for the three months ended
January 31, 2003. This increase was primarily attributable to
expansions and relocations of certain stores based on targeted market
analysis. Occupancy expense as a percentage of total revenue decreased
.1% to 6.6% from 6.7% primarily due to the increase in same store
revenues.
Other operating expenses increased $447,137, or 17.9% to $2,946,454 for
the three months ended January 31, 2004 from $2,499,317 for the three
months ended January 31, 2003 and increased 2.7% as a percentage of
total revenue to 30.8% from 28.1%. The increase was primarily
attributable to a number of factors, including increased rental
merchandise write-offs, increased store level recruiting costs,
increased vehicle repair and lease costs, as well as increased legal
expense.
Interest expense decreased $38,707, or 22.1% to $136,396 for the three
months ended January 31, 2004 from $175,103 for the three months ended
January 31, 2003 and decreased .6% as a percentage of total revenue to
1.4% from 2.0%. The decrease in interest is attributable to decreased
indebtedness and a lower effective interest rate.
Income before income taxes increased $245,236, or 2475.9% to $255,141
for the three months ended January 31, 2004 compared to $9,905 for the
three months ended January 31, 2003. Income before income taxes as a
percentage of total revenue increased to 2.7% for the three months
ended January 31, 2004 compared to .1% for the three months ended
January 31, 2003. The increase was primarily the result of eliminating
lower-cost, lower-margin merchandise from our product mix, focus on
higher revenue-generating merchandise, and driving top line revenues
through the Company's investment in store personnel and advertising.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
COMPARISON OF SIX MONTHS ENDED JANUARY 31, 2004 AND 2003
Total revenue increased $1,455,999, or 8.5% to $18,623,221 for the six
months ended January 31, 2004 from $17,167,222 for the six months ended
January 31, 2003. 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 six months ended
January 31, 2004 and 2003. Of the increase in revenue from same stores,
rental and fee income increased $1,768,955, or 10.7% to $18,265,815 for
the six months ended January 31, 2004 from $16,496,860 for the six
months ended January 31, 2003. The increase in rental and fee income is
directly attributable to the success of our efforts on improving store
operations through increasing our customer base and increasing the
average price per unit on rent by upgrading our rental merchandise.
Sales of merchandise decreased $312,956, or 46.7% to $357,406 for the
six months ended January 31, 2004 from $670,362 for the six months
ended January 31, 2003. The decrease in sales of merchandise is
primarily attributable to a decrease in the number of items sold in the
six months ended January 31, 2004 from the number of items sold in the
six months ended January 31, 2003.
Total costs and operating expenses increased $786,474, or 4.5% to
$18,264,706 for the six months ended January 31, 2004 from $17,478,232
for the six months ended January 31, 2003 and decreased 3.7% as a
percentage of total revenue to 98.1% from 101.8%. 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 $272,950, or 8.2% to
$3,621,819 for the six months ended January 31, 2004 from $3,348,869
for the six months ended January 31, 2003 and remained constant at
19.5% as a percentage of total revenue. Depreciation of rental
merchandise expressed as a percentage of rental and fee income
decreased .5% to 19.8% from 20.3% primarily due to increased margins as
a result of improved buying of new merchandise and eliminating
lower-cost, lower-margin merchandise from our product mix. Other
depreciation and amortization decreased $114,963, or 15.3% to $636,981
for the six months ended January 31, 2004 from $751,944 for the six
months ended January 31, 2003. Other depreciation and amortization
expressed as a percentage of total revenue decreased 1.0% to 3.4% from
4.4% primarily due to fully depreciated vehicles replaced by leased
vehicles and the full amortization of certain non-competes during
fiscal year 2003.
Cost of merchandise sold decreased $442,953, or 56.8% to $336,871 for
the six months ended January 31, 2004 from $779,824 for the six months
ended January 31, 2003. The decrease in cost of merchandise sold was
primarily attributable to a decrease in the number of items sold in the
six months ended January 31, 2004. During the six months ended January
31, 2004 and 2003, the Company's margin related to merchandise sales
was income of $20,535 and a loss of $109,462, respectively. The
Company's loss in the six months ended January 31, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
Salaries and wages increased $306,816, or 6.0% to $5,414,204 for the
six months ended January 31, 2004 from $5,107,388 for the six months
ended January 31, 2003. Salaries and wages expressed as a percentage of
total revenues decreased to 29.1% for the six months ended January 31,
2004 from 29.8% for the six months ended January 31, 2003. This
decrease was primarily attributable to an increase in same store
revenues in the six months ended January 31, 2004 compared to January
31, 2003.
Advertising expense increased $105,681, or 13.0% to $918,604 for the
six months ended January 31, 2004 from $812,923 for the six months
ended January 31, 2003 and increased .2% as a percentage of total
revenue to 4.9% from 4.7%. The increase is attributable to the
Company's investment in implementing a more aggressive and targeted
marketing campaign.
Occupancy expense increased $68,771, or 5.8% to $1,250,953 for the six
months ended January 31, 2004 from $1,182,182 for the six months ended
January 31, 2003. This increase was primarily attributable to
expansions and relocations of certain stores based on targeted market
analysis. Occupancy expense as a percentage of total revenue decreased
.2% to 6.7% from 6.9% primarily due to the increase in same store
revenues.
Other operating expenses increased $631,016, or 12.2% to $5,784,411 for
the six months ended January 31, 2004 from $5,153,395 for the six
months ended January 31, 2003 and increased 1.1% as a percentage of
total revenue to 31.1% from 30.0%. The increase was primarily
attributable to a number of factors, including increased rental
merchandise write-offs, increased store level recruiting costs,
increased vehicle repair and lease costs, as well as increased legal
expense. The increase was offset by decreased group insurance costs.
Interest expense decreased $61,058, or 17.4% to $289,210 for the six
months ended January 31, 2004 from $350,268 for the six months ended
January 31, 2003 and decreased .4% as a percentage of total revenue to
1.6% from 2.0%. The decrease is attributable to decreased indebtedness
and a lower effective interest rate.
Income before income taxes increased $669,525, or 215.3% to $358,515
for the six months ended January 31, 2004 compared to a loss of
$311,010 for the six months ended January 31, 2003. Income before
income taxes as a percentage of total revenue increased to income of
1.9% for the six months ended January 31, 2004 compared to a loss of
1.8% for the six months ended January 31, 2003. The increase was
primarily the result of eliminating lower-cost, lower-margin
merchandise from our product mix, focusing on higher revenue-generating
merchandise, and driving top line revenues through the Company's
investment in store personnel and advertising.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the six months ended January 31, 2004, the Company's net cash flows
from operating activities were $6,324,015 as compared to $5,418,494 for
the six months ended January 31, 2003. The increase in cash provided by
operations was primarily due to increased revenues and decreased
outflow for working capital commitments.
For the six months ended January 31, 2004, the Company's net cash flows
used in investing activities were $5,120,921 as compared to $5,694,642
for the six months ended January 31, 2003. The Company's investing
activities reflects a $542,567 decrease in rental merchandise purchased
during the six months ended January 31, 2004 as a result of a decrease
in the number of items cash sold and the number of items held for rent.
For the six months ended January 31, 2004, the Company's net cash flows
used in financing activities were $685,905 as compared to net cash
flows provided by financing activities of $231,597 for the six months
ended January 31, 2003. The decrease in financing activities
principally reflects increased repayments of the Company's debt.
On October 1, 2003 and February 25, 2004, the Company amended and
restated its Revolving Credit Loan Agreement with its lender. In the
amendments, the lender extended the maturity date from May 31, 2004 to
May 31, 2006, modified the minimum effective tangible net worth
provision, modified the maximum debt-to-effective tangible net worth
provision, eliminated the idle inventory covenant, modified the
interest rate from prime plus 1.50% to prime plus .75%. The amendments
added a maximum year-to-date acquisition covenant.
On October 1, 2003 and February 25, 2004, the Company amended the
subordinated note payable to a limited partnership, which is a
stockholder of the Company, dated October 26, 2001. The amendments
extended the maturity date from May 31, 2004 to May 31, 2006.
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 six months ended January
31, 2004, 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 $5,800,000 under the Revolving Credit Loan Agreement provide
adequate resources to meet the Company's future cash obligations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CON'T.)
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, FSP
No. FIN 46-7 and FSP No. FIN 46-8, 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 March 14, 2004. 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.
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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.
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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.
- ------------
*Filed herewith
(b) Report on Form 8-k for the quarter ended January 31, 2004:
We filed a Current Report on Form 8-k on December 11, 2003
regarding a press release issued on December 11, 2003 announcing
Bestway's financial and operating results for the quarter ended
October 31, 2003.
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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.
March 16, 2004
/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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