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BESTWAY, INC. FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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.
----------------------------------------------------
(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
April 30, 2004, was 1,682,522.
BESTWAY, INC. FORM 10-Q
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
April 30, 2004
PAGE NOS.
---------
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets as of April 30,
2004 and July 31, 2003 3
b) Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended April 30, 2004 and 2003 4
c) Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 2004 and 2003 5
d) Condensed Consolidated Statements of Stockholders'
Equity for the Nine Months Ended April 30, 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
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 30, JULY 31,
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 269,150 $ 305,869
Prepaid expenses 183,008 189,882
Taxes receivable 22,998 180,976
Deferred income taxes 114,201 302,034
Other assets 27,811 45,026
Rental merchandise, at cost 23,275,494 22,488,380
less accumulated depreciation 8,564,982 8,630,316
------------ ------------
14,710,512 13,858,064
------------ ------------
Property and equipment, at cost 8,609,998 8,702,135
less accumulated depreciation 6,186,534 5,969,337
------------ ------------
2,423,464 2,732,798
------------ ------------
Employee advance 733,333 855,556
Non-competes, net of amortization 224,380 306,668
Goodwill, net of amortization 1,225,295 1,225,295
------------ ------------
Total assets $ 19,934,152 $ 20,002,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,234,755 $ 751,328
Accrued interest-related parties 20,000 20,667
Other accrued liabilities 1,479,727 1,460,081
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 5,538,402 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,
1,786,867 issued at April 30, 2004 and 1,782,517 issued at
July 31, 2003 17,868 17,825
Paid-in capital 16,329,371 16,298,662
Less treasury stock, at cost, 104,345 at April 30, 2004 and
July 31, 2003 (563,083) (563,083)
Accumulated deficit (7,122,888) (7,434,611)
------------ ------------
Total stockholders' equity 8,661,268 8,318,793
------------ ------------
Total liabilities and stockholders' equity $ 19,934,152 $ 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 NINE MONTHS ENDED
APRIL 30, APRIL 30,
2004 2003 2004 2003
---------- ----------- ----------- ------------
Revenues:
Rental and fee income $9,220,420 $ 8,864,582 $27,486,235 $ 25,361,440
Sales of merchandise 227,459 349,282 584,865 1,019,645
---------- ----------- ----------- ------------
9,447,879 9,213,864 28,071,100 26,381,085
---------- ----------- ----------- ------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 1,822,500 1,743,587 5,444,319 5,092,456
Other 297,030 375,044 934,011 1,126,988
Cost of merchandise sold 197,387 339,328 534,258 1,119,152
Salaries and wages 2,791,719 2,581,090 8,205,923 7,688,478
Advertising 427,364 465,942 1,345,968 1,278,865
Occupancy 635,834 606,458 1,886,787 1,788,640
Other operating expenses 2,991,515 2,696,548 8,775,926 7,849,943
Interest expense 128,404 168,648 417,614 518,916
Loss (gain) on sale of property and
equipment 15,085 1,475 26,738 (7,086)
---------- ----------- ----------- ------------
9,306,838 8,978,120 27,571,544 26,456,352
---------- ----------- ----------- ------------
Income (loss) before income taxes 141,041 235,744 499,556 (75,267)
---------- ----------- ----------- ------------
Income tax expense (benefit) 53,031 88,638 187,833 (28,300)
---------- ----------- ----------- ------------
Net income (loss) $ 88,010 $ 147,106 $ 311,723 $ (46,967)
---------- ----------- ----------- ------------
Basic net income (loss) per share $ .05 $ .09 $ .19 $ (.03)
========== =========== =========== ============
Diluted net income (loss) per share $ .05 $ .08 $ .17 $ (.03)
========== =========== =========== ============
Weighted average common shares
outstanding 1,682,122 1,677,572 1,680,628 1,667,283
========== =========== =========== ============
Diluted weighted average common
shares outstanding 1,817,171 1,813,456 1,826,630 1,667,283
========== =========== =========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BESTWAY, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
APRIL 30, APRIL 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 311,723 $ (46,967)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,378,330 6,219,444
Net book value of rental units retired 2,299,273 2,651,141
Loss (gain) on sale of property and equipment 26,738 (7,086)
Deferred income taxes 187,833 (28,300)
Non-cash compensation expense 122,223 104,390
Changes in operating assets and liabilities other than cash:
Prepaid expenses 6,874 99,745
Taxes receivable 157,978 135,413
Other assets 17,215 21,084
Accounts payable 22,277 (48,212)
Other accrued liabilities 18,979 (447,009)
----------- -----------
Net cash flows provided by operating activities 9,549,443 8,653,643
----------- -----------
Cash flows from investing activities:
Purchase of rental merchandise (8,084,248) (8,714,344)
Additions to property and equipment (620,213) (361,568)
Asset purchase net of cash acquired (50,641) -
Proceeds from sale of property and equipment 51,085 11,357
----------- -----------
Net cash flows used in investing activities (8,704,017) (9,064,555)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,800,000 1,600,000
Repayment of notes payable (2,712,897) (1,511,783)
Stock options exercised 30,752 139,350
----------- -----------
Net cash flows (used in) provided by financing activities (882,145) 227,567
----------- -----------
Cash and cash equivalents at beginning of period 305,869 506,175
----------- -----------
Cash and cash equivalents at end of period $ 269,150 $ 322,830
=========== ===========
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 nine months ended April 30, 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 4,350 43 30,709 30,752
Net income for the nine months
ended April 30, 2004 311,723 311,723
--------- -------- ----------- -------- --------- ----------- ----------
Balance at April 30, 2004 1,786,867 $ 17,868 $16,329,371 (104,345) $(563,083) $(7,122,888) $8,661,268
========= ======== =========== ======== ========= =========== ==========
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 April 30, 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
BESTWAY, INC. FORM 10-Q
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 NINE MONTHS ENDED
------------------ --------------------
APRIL 30, APRIL 30,
2004 2003 2004 2003
------- -------- -------- ---------
Net income (loss)
As reported $88,010 $147,106 $311,723 $ (46,967)
Pro forma $52,712 $117,596 $211,791 $(118,975)
Basic earnings (loss) per
common share
As reported $ .05 $ .09 $ .19 $ (.03)
Pro forma $ .03 $ .07 $ .13 $ (.07)
Diluted earnings (loss) per
common share
As reported $ .05 $ .08 $ .17 $ (.03)
Pro forma $ .05 $ .06 $ .12 $ (.07)
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average common
shares outstanding during the period. Diluted earnings per common share
includes common stock equivalents, consisting of stock options, which are
dilutive to net income per share. For the three and nine months ended
April 30, 2004 and 2003, 30,811 and 18,700 and 0 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 nine months ended
April 30, 2004 and 2003, $1,041,849 and $997,587, respectively, of such
impairments were incurred and are included in other operating expenses in
the accompanying condensed consolidated statements of operations.
8
BESTWAY, INC. FORM 10-Q
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 December 2003, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin 104, "Revenue Recognition" ("SAB 104"). SAB 104
updates existing Staff Accounting Bulletin Topic 13, "Revenue Recognition"
to be consistent with recently issued guidance, primarily Emerging Issues
Task Force Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." The adoption of SAB 104 did not have a material impact on
our consolidated financial statements.
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.
8. ACQUISITIONS
On April 9, 2004, the Company entered into an asset purchase agreement
with Prime Time Rental, Inc. to acquire all the rental agreements of two
stores for approximately $51,000.
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 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
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 NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- -----
Revenues:
Rental and fee income 97.6% 96.2% 97.9% 96.1%
Sales of merchandise 2.4 3.8 2.1 3.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 19.3 18.9 19.4 19.3
Other 3.1 4.1 3.3 4.3
Cost of merchandise sold 2.1 3.7 1.9 4.2
Salaries and wages 29.5 28.0 29.2 29.1
Advertising 4.5 5.0 4.8 4.8
Occupancy 6.7 6.6 6.7 6.8
Other operating expenses 31.7 29.3 31.3 29.8
Interest expense 1.4 1.8 1.5 2.0
Loss (gain) on sale of property
and equipment .2 - .1 -
----- ----- ----- -----
Total cost and operating expenses 98.5 97.4 98.2 100.3
----- ----- ----- -----
Income (loss) before income taxes 1.5 2.6 1.8 (0.3)
----- ----- ----- -----
Income tax expense (benefit) .6 1.0 .7 (0.1)
----- ----- ----- -----
Net income (loss) .9% 1.6% 1.1% (0.2)%
===== ===== ===== =====
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 APRIL 30, 2004 AND 2003
Total revenue increased $234,015, or 2.5% to $9,447,879 for the three
months ended April 30, 2004 from $9,213,864 for the three months ended
April 30, 2003. The increase was primarily attributable to a 2.1% increase
in same store revenues. Same store revenues represent those revenues
earned in stores that were opened by the Company for the entire three
months ended April 30, 2004 and 2003. The Company purchased all the rental
agreements of two store locations and consolidated them with two existing
stores during the three months ended April 30, 2004. Of the increase in
total revenue, rental and fee income increased $355,838, or 4.0% to
$9,220,420 for the three months ended April 30, 2004 from $8,864,582 for
the three months ended April 30, 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 as a result of upgrading our rental
merchandise. Sales of merchandise decreased $121,823, or 34.9% to $227,459
for the three months ended April 30, 2004 from $349,282 for the three
months ended April 30, 2003. The decrease in sales of merchandise is
primarily attributable to a decrease in the number of items sold in the
three months ended April 30, 2004 from the number of items sold in the
three months ended April 30, 2003.
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. As a result, total costs and
operating expenses increased $328,718, or 3.7% to $9,306,838 for the three
months ended April 30, 2004 from $8,978,120 for the three months ended
April 30, 2003 and increased 1.1% as a percentage of total revenue to
98.5% from 97.4%.
Depreciation of rental merchandise increased $78,913, or 4.5% to
$1,822,500 for the three months ended April 30, 2004 from $1,743,587 for
the three months ended April 30, 2003 and increased .4% as a percentage of
total revenue to 19.3% from 18.9%. This increase was primarily
attributable to an increase in rental and fee income. Other depreciation
and amortization decreased $78,014, or 20.8% to $297,030 for the three
months ended April 30, 2004 from $375,044 for the three months ended April
30, 2003. Other depreciation and amortization expressed as a percentage of
total revenue decreased 1.0% to 3.1% from 4.1% primarily due to older
vehicles fully depreciated are replaced by new leased vehicles and the
full amortization of certain non-competes.
Cost of merchandise sold decreased $141,941, or 41.8% to $197,387 for the
three months ended April 30, 2004 from $339,328 for the three months ended
April 30, 2003. The decrease in cost of merchandise sold was primarily
attributable to better inventory management, which resulted in a decrease
in the number of items sold in the three months ended April 30, 2004.
During the three months ended April 30, 2004 and 2003, the Company's
margin related to merchandise sales was income of $30,072 and $9,954,
respectively.
12
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
Salaries and wages increased $210,629, or 8.2% to $2,791,719 for the three
months ended April 30, 2004 from $2,581,090 for the three months ended
April 30, 2003. Salaries and wages expressed as a percentage of total
revenues increased 1.5% to 29.5% for the three months ended April 30, 2004
from 28.0% for the three months ended April 30, 2003. This increase was
primarily attributable to increased store level labor costs due to
additional store staffing and higher pay rates, as well as increased
corporate level bonus costs.
Advertising expense decreased $38,578, or 8.3% to $427,364 for the three
months ended April 30, 2004 from $465,942 for the three months ended April
30, 2003. Advertising expense as a percentage of total revenue decreased
.5% to 4.5% from 5.0% primarily due to a decrease in print costs.
Occupancy expense increased $29,376, or 4.8% to $635,834 for the three
months ended April 30, 2004 from $606,458 for the three months ended April
30, 2003. This increase was primarily attributable to expansions or
relocations of certain stores based on targeted market analysis. Occupancy
expense as a percentage of total revenue increased .1% to 6.7% from 6.6%.
Other operating expenses increased $294,967, or 10.9% to $2,991,515 for
the three months ended April 30, 2004 from $2,696,548 for the three months
ended April 30, 2003 and increased 2.4% as a percentage of total revenue
to 31.7% from 29.3%. The increase was primarily attributable to a number
of factors, including increased rental merchandise write-offs, group
insurance costs, store level recruiting costs, vehicle lease costs, as
well as increased legal expense.
Interest expense decreased $40,244, or 23.9% to $128,404 for the three
months ended April 30, 2004 from $168,648 for the three months ended April
30, 2003 and decreased .4% as a percentage of total revenue to 1.4% from
1.8%. The decrease in interest is attributable to decreased indebtedness
and a lower effective interest rate.
Income before income taxes decreased $94,703, or 40.2% to $141,041 for the
three months ended April 30, 2004 compared to $235,744 for the three
months ended April 30, 2003. Income before income taxes as a percentage of
total revenue decreased to 1.5% for the three months ended April 30, 2004
compared to 2.6% for the three months ended April 30, 2003. The decrease
was primarily the result of increasing the Company's investment in store
personnel and increased other operating expenses.
13
BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
COMPARISON OF NINE MONTHS ENDED APRIL 30, 2004 AND 2003
Total revenue increased $1,690,015, or 6.4% to $28,071,100 for the nine
months ended April 30, 2004 from $26,381,085 for the nine months ended
April 30, 2003. The increase was primarily attributable to a 6.1% increase
in same store revenues. Same store revenues represent those revenues
earned in stores that were opened by the Company for the entire nine
months ended April 30, 2004 and 2003. The Company purchased all the rental
agreements of two store locations and consolidated them with two existing
stores during the three months ended April 30, 2004. Of the increase in
total revenue, rental and fee income increased $2,124,795, or 8.4% to
$27,486,235 for the nine months ended April 30, 2004 from $25,361,440 for
the nine months ended April 30, 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 as a result of upgrading our rental
merchandise. Sales of merchandise decreased $434,780, or 42.6% to $584,865
for the nine months ended April 30, 2004 from $1,019,645 for the nine
months ended April 30, 2003. The decrease in sales of merchandise is
primarily attributable to a decrease in the number of items sold in the
nine months ended April 30, 2004 from the number of items sold in the nine
months ended April 30, 2003.
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. As a result, total costs and
operating expenses increased $1,115,192, or 4.2% to $27,571,544 for the
nine months ended April 30, 2004 from $26,456,352 for the nine months
ended April 30, 2003 and decreased 2.1% as a percentage of total revenue
to 98.2% from 100.3%.
Depreciation of rental merchandise increased $351,863, or 6.9% to
$5,444,319 for the nine months ended April 30, 2004 from $5,092,456 for
the nine months ended April 30, 2003 and increased .1% as a percentage of
total revenue to 19.4% from 19.3%. This increase was primarily
attributable to an increase in rental and fee income. Depreciation of
rental merchandise expressed as a percentage of rental and fee income
decreased .3% to 19.8% from 20.1% primarily due to increased rental rates
and improved buying of new merchandise. Other depreciation and
amortization decreased $192,977, or 17.1% to $934,011 for the nine months
ended April 30, 2004 from $1,126,988 for the nine months ended April 30,
2003. Other depreciation and amortization expressed as a percentage of
total revenue decreased 1.0% to 3.3% from 4.3% primarily due to older
vehicles fully depreciated are replaced by new leased vehicles and the
full amortization of certain non-competes.
Cost of merchandise sold decreased $584,894, or 52.3% to $534,258 for the
nine months ended April 30, 2004 from $1,119,152 for the nine months ended
April 30, 2003. The decrease in cost of merchandise sold was primarily
attributable to better inventory management, which resulted in a decrease
in the number of items sold in the nine months ended April 30, 2004.
During the nine months ended April 30, 2004 and 2003, the Company's margin
related to merchandise sales was income of $50,607 and a loss of $99,507,
respectively. The Company's loss in the nine months ended April 30, 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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BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
Salaries and wages increased $517,445, or 6.7% to $8,205,923 for the nine
months ended April 30, 2004 from $7,688,478 for the nine months ended
April 30, 2003. Salaries and wages expressed as a percentage of total
revenues increased .1% to 29.2% for the nine months ended April 30, 2004
from 29.1% for the nine months ended April 30, 2003. This increase was
primarily attributable to increased store level labor costs due to
additional store staffing and higher pay rates, as well as increased
corporate level bonus costs.
Advertising expense increased $67,103, or 5.2% to $1,345,968 for the nine
months ended April 30, 2004 from $1,278,865 for the nine months ended
April 30, 2003 and remained constant at 4.8% as a percentage of total
revenue. The increase is attributable to the Company's investment in
implementing a more aggressive and targeted marketing campaign, offset by
a decrease in print costs.
Occupancy expense increased $98,147, or 5.5% to $1,886,787 for the nine
months ended April 30, 2004 from $1,788,640 for the nine months ended
April 30, 2003. This increase was primarily attributable to expansions or
relocations of certain stores based on targeted market analysis. Occupancy
expense as a percentage of total revenue decreased .1% to 6.7% from 6.8%.
Other operating expenses increased $925,983, or 11.8% to $8,775,926 for
the nine months ended April 30, 2004 from $7,849,943 for the nine months
ended April 30, 2003 and increased 1.5% as a percentage of total revenue
to 31.3% from 29.8%. The increase was primarily attributable to a number
of factors, including increased rental merchandise write-offs, store level
recruiting costs, vehicle repair and lease costs, as well as increased
legal expense.
Interest expense decreased $101,302, or 19.5% to $417,614 for the nine
months ended April 30, 2004 from $518,916 for the nine months ended April
30, 2003 and decreased .5% as a percentage of total revenue to 1.5% from
2.0%. The decrease is attributable to decreased indebtedness and a lower
effective interest rate.
Income before income taxes increased $574,823, or 763.7% to $499,556 for
the nine months ended April 30, 2004 compared to a loss of $75,267 for the
nine months ended April 30, 2003. Income before income taxes as a
percentage of total revenue increased to income of 1.8% for the nine
months ended April 30, 2004 compared to a loss of .3% for the nine months
ended April 30, 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 increasing the Company's
investment in store personnel and advertising.
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BESTWAY, INC. FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CON'T.)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended April 30, 2004, the Company's net cash flows
from operating activities were $9,549,443 as compared to $8,653,643 for
the nine months ended April 30, 2003. The increase in cash provided by
operations was primarily due to increased revenues and decreased outflow
for working capital commitments.
For the nine months ended April 30, 2004, the Company's net cash flows
used in investing activities were $8,704,017 as compared to $9,064,555 for
the nine months ended April 30, 2003. The Company's investing activities
reflects a $630,096 decrease in rental merchandise purchased during the
nine months ended April 30, 2004 as a result of a decrease in the number
of items held for rent.
For the nine months ended April 30, 2004, the Company's net cash flows
used in financing activities were $882,145 as compared to net cash flows
provided by financing activities of $227,567 for the nine months ended
April 30, 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 nine months ended April 30, 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 $6,000,000 under the Revolving Credit
Loan Agreement provide adequate resources to meet the Company's future
cash obligations.
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BESTWAY, INC. FORM 10-Q
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 December 2003, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin 104, "Revenue Recognition" ("SAB 104"). SAB 104
updates existing Staff Accounting Bulletin Topic 13, "Revenue Recognition"
to be consistent with recently issued guidance, primarily Emerging Issues
Task Force Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." The adoption of SAB 104 did not have a material impact on
our consolidated financial statements.
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BESTWAY, INC. FORM 10-Q
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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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.
------------
*Filed herewith
(b) Report on Form 8-k for the quarter ended April 30, 2004:
We filed a Current Report on Form 8-k on February 25, 2004 regarding
a press release issued on February 25, 2004 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 March 11, 2004 regarding a
press release issued on March 11, 2004 announcing Bestway's
financial and operating results for the quarter ended January 31,
2004.
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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.
June 14, 2004
/s/ Beth A. Durrett
----------------------
Beth A. Durrett
Chief Financial Officer
(Principal Financial Officer and duly authorized
to sign on behalf of the Registrant)
20