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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
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
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(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
7800 Stemmons Freeway, Suite 320 75247
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 630-6655
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
(None) (None)
- ---------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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
---- ----
The aggregate market value of voting stock held by non affiliates of the
registrant as of October 11, 1996 was approximately $5,606,728.
The number of shares of Common Stock, $.01 par value, outstanding as of
July 31, 1996, was 1,747,717.
Registrants Proxy Statement for 1996 is incorporated by reference in Part
III, Items 10-13 of this Form 10-K.
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BESTWAY, INC. FORM 10-K
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TABLE OF CONTENTS
PART I Page
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Item 1. Business 3 - 5
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 10
Item 8. Financial Statements and Supplementary Data 10
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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BESTWAY, INC. FORM 10-K
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PART I
ITEM 1. BUSINESS
General
Bestway, Inc. and its consolidated subsidiaries ("Bestway" or the
"Company") has been engaged in the rental-purchase industry since 1987. The
Company owns and operates a total of sixty-two stores located in the states of
Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and
Tennessee. The stores operations are controlled and monitored through the
Company's management information system networked with its home office in
Dallas, Texas.
The Company created an additional line of business for its rental-purchase
operations by entering the retail used car sales business. The Company test
marketed the concept through the opening of a single prototype retail sales
facility, Bestway Auto Center, in Tullahoma, Tennessee. In December 1995,
management made the decision to dispose of Bestway Auto's assets and in the
process create a potential for a future opportunity in an operating used car
sales business. Accordingly, in February 1996, the Company exchanged cash and
its capital stock in Bestway Auto for a 49% Common Stock interest in Value Auto
Sales, Inc. ("Value Auto") and non-voting, non-dividend paying Preferred Stock
of Value Auto. Subsequently the Company evaluated the viability of its auto
sales business and management made the decision to abandon the additional line
of business and write off its investment in Value Auto.
The Company's rental-purchase program offers brand name durable household
goods, electronics, appliances and jewelry to customers on a week-to-week or
month-to-month basis. These products are furnished to customers under
full-service rental agreements which require that the charge for each rental
period be paid in advance, but no additional advance payment or security
deposit is required. At the end of each rental period, the customer has the
option of retaining the product for an additional rental period or returning
the product without further obligation. If the product is returned, it is
serviced and then offered for rent to another customer. The rental agreements
contain options under which customers may own the merchandise under specified
terms. The Company's rental agreements typically have a twelve to twenty-four
month term with weekly or monthly payment options. The most distinguishing
factor of this form of retailing is the cancelability of the rental agreement
at any time without further obligation by returning the product to the dealer.
The industry primarily serves customers in the low to middle income sector who
may have a need for a product, but do not wish or are unable to purchase it for
cash or on credit.
Acquisitions
In April 1996, the Company acquired 15 stores located in three states in
which the Company had no previous operations from All Star Rental, Inc. (the
"All Star Acquisition"). The Company acquired substantially all of the assets
and certain liabilities of All Star. The assets acquired primarily include All
Star's idle inventory, rental contracts, vehicles, store furniture and
fixtures, computers and leasehold improvements. In addition, the Company
assumed the leases for 15 of All Star's former store locations. The Company
delivered 115,647 shares of voting Common Stock, $.01 par value per share, as
the aggregate purchase price in connection with the All Star Acquisition. Such
amount was based on a multiple of All Star's average monthly revenues less
certain assumed liabilities. Management believes that the All Star stores
suffered from a lack of new and higher quality merchandise. Immediately
following the acquisition, the Company made a substantial investment in
additional merchandise and significantly upgraded the quality of merchandise in
the stores.
In July 1996, the Company acquired 8 stores located in two states,
including one state in which the Company had no previous operations, from REJA,
Inc. (the "REJA Acquisition"). The Company acquired substantially all of the
assets of REJA. The assets acquired primarily include REJA's idle inventory,
rental contracts, vehicles, store furniture and fixtures, computers and
leasehold improvements. In addition, the Company assumed the leases for 8 of
REJA's former store locations. The Company combined one REJA store location
with an existing store. The Company delivered 132,000 shares of voting Common
Stock, $.01 par value per share and $500,000, as the aggregate purchase price
in connection with the REJA acquisition.
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BESTWAY, INC. FORM 10-K
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Management believes that the acquisitions provide the Company with certain
strategic benefits including (i) greater market share in certain regions, (ii)
increased geographic presence, and (iii) increased revenues without significant
increase to corporate overhead. Management believes that substantial
opportunity exists to improve the performance of the stores. There can be no
assurance that the stores will perform in accordance with expectations or that
the Company will not encounter unanticipated problems or liabilities in
connection with these stores.
Products
The Company generally purchases products directly from the manufacturers
and local distributors. Products offered by the Company include a variety of
brands, styles and models of television sets, audio equipment, video cassette
recorders, washers and dryers, refrigerators and freezers, microwave ovens,
furniture and jewelry. Although the Company presently expects to continue
relationships with its existing suppliers, there are numerous sources of
products, and the Company does not believe its operations are dependent on any
one or more of its present suppliers.
Advertising
The Company markets its products and services by selecting prominent store
locations in retail shopping areas on main traffic thoroughfares near targeted
customers' residences or job locations. Additionally, the Company solicits new
business by acquainting potential customers with the Company's products and
services through mailing lists and local media advertising programs. The
Company also has programs which reward existing customers with rental discounts
or cash payments for the referral of new customers.
Competition
The rental-purchase industry is highly competitive. Competition is based
primarily on store location, product selection and availability, customer
service and rental rates and terms. Several of the Company's competitors are
national and regional and some have significantly greater financial and
operating resources and name recognition than the Company. In addition, the
Company faces competition from sources outside the rental-purchase industry,
such as department stores, discount stores and retail outlets. These
competitors may offer an installment sales program or may compete with the
Company simply on the basis of product and price. There is no assurance that
the Company will be able to compete successfully against these competitors.
Because capital and other requirements for entry into the rental-purchase
industry is relatively low, competition may arise from new sources not
currently competing with the Company. Increased competition could have a
material adverse effect on the Company's sales and profitability.
Personnel
At July 31, 1996, the Company employed approximately 267 full-time
employees, of which 14 are located at the corporate office in Dallas, Texas.
The Company has various incentive programs for all personnel. None of the
Company's employees are represented by a labor union. The Company considers its
relations with its employees to be satisfactory.
Company Stores
The number of stores operated by the Company has increased from 35 as
of July 31, 1995 to 62 as of July 31, 1996. The following table shows the
number of stores opened, acquired and combined during the year.
Number of Stores
----------------
Open at July 31, 1995 35
Opened 4
Acquired 24
Combined (1)
--
Open at July 31, 1996 62
==
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BESTWAY, INC. FORM 10-K
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Regulation
FEDERAL REGULATION Although certain proposed federal regulations are under
consideration, no federal legislation has been enacted regulating
rental-purchase transactions. As of July 31, 1996, four bills have been
introduced in Congress that would regulate the rental-purchase industry. Two of
the bills are supported by the Association of Progressive Rental Organization
("APRO") and mandate certain disclosures to customers similar to those required
by most state legislation. The Company does not believe that these laws, if
enacted, will have a material adverse effect upon the Company's operations.
The other two bills include certain credit sale requirements and would
subject rental-purchase transactions to interest rate, finance charge and fee
limitations, as well as the Federal Truth in Lending Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Fair Credit
Reporting Act. These bills would also require the lessor to make certain
disclosures to customers about the terms of the rental-purchase transaction.
The Company believes that in the event federal legislation is enacted
regulating rental-purchase transactions as credit sales, the Company would be
able to adapt to the new laws and remain profitable by repositioning itself as
a rent-to-rent business. However, there can be no assurance that the proposed
legislation, if enacted, would not have a material adverse effect on the
business of the Company.
STATE REGULATION With some variations in individual states, most state
legislation requires the lessor to make prescribed disclosures to a customer
about the rental-purchase agreement and transaction. These laws require certain
contractual and advertising disclosures concerning the rental-purchase
agreement and the nature of the transaction and also provide varying levels of
substantive consumer protection, such as requiring a grace period for late
payments and contract reinstatement rights in the event the agreement is
terminated for nonpayment of rentals and, in some instances, limits certain
fees that may be charged. Some states require written disclosure of all
material aspects of the transaction, including the cash price of the
merchandise, the purchase option prices during the term of the agreement and
the total amount of rentals that must be paid in order to acquire ownership of
the merchandise and prohibit confession-of-judgement clauses.
ITEM 2. PROPERTIES
All store locations, with the exception of one, and the home office
facility in Dallas, Texas are leased. Store facilities typically are showroom
locations of approximately 3,700 square feet in retail centers on heavy traffic
thoroughfares near customers' residences or work places. Almost all available
rental merchandise is kept in the showroom area which comprises the majority of
the available square footage. Store location is considered critical to the
success of the store.
The Company's store locations by state at July 31, 1996, are as follows:
State Number of Stores
----- ----------------
Alabama 15
Arkansas 1
Georgia 2
Mississippi 17
North Carolina 5
South Carolina 8
Tennessee 14
--
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ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the Company's business to which the Company or any of its
subsidiaries is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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BESTWAY, INC. FORM 10-K
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
The Company's Common Stock began trading on the Nasdaq Small-Cap Market on
December 19, 1995 under the symbol "BSTW". Prior thereto, the Company's Common
Stock was quoted in the "pink sheets" and was traded on a limited basis. The
following table sets forth, for the periods indicated, the high and low sales
price per share of the Common Stock as reported on the Nasdaq Small-Cap Market.
Year ended July 31, 1996
--------------------------
High Low
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Second Quarter $ 9 $ 8 7/8
Third Quarter $11 1/2 $ 9 1/2
Fourth Quarter $11 $ 9
At July 31, 1996, there were 496 stockholders of record of the
Company's Common Stock, calculated based on the number of recordholders.
The Company has not paid cash dividends on its Common Stock since its
inception and intends to retain earnings for operations. The Company is a party
to a loan agreement which prohibits the payment of cash dividends on Common
Stock.
On May 16, 1996, the Company decreased the authorized number of shares of
Common Stock from 20,000,000 shares to 5,000,000 shares.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal year
ended July 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- -----
Revenues from continuing operations $ 18,923,852 $ 16,423,262 $ 16,369,149 $ 12,436,708 $ 9,518,822
Income from continuing
operations before tax
and extraordinary item 902,903 1,072,112 722,902 843,606 197,674
Current income tax expense 49,099 101,047 35,319 5,245 --
Deferred income tax expense (benefit) 321,574 (2,013,784) -- -- --
Loss on capital restructure -- -- -- 381,755 --
Gain on debt restructure,
net of fees -- -- -- -- 1,963,833
Loss from discontinued operations,
net of taxes 394,568 -- -- -- --
Net income 137,662 2,984,849 687,583 456,606 2,161,507
Net income per common
and common equivalent share .09 1.99 .46 1.22 8.10
Cash flows provided by operation 7,365,631 6,542,227 6,370,945 5,619,132 3,855,181
Total assets 18,925,440 13,709,895 11,083,279 8,614,802 7,255,177
Notes payable 9,048,928 6,070,302 6,485,659 4,617,688 8,167,836
Stockholders' equity/(deficit) 7,417,190 6,041,293 3,060,154 2,372,571 (3,671,089)
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BESTWAY, INC. FORM 10-K
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the year ended July 31, 1996, the Company opened four new stores
and acquired a single store location in November 1995. The All Star Acquisition
added 15 stores in April 1996 and the REJA Acquisition added 8 stores in July
1996, of which one was combined with an existing store location. The Company
purchased new merchandise, purchased new delivery vans and is in the process of
upgrading the acquired stores' appearance and incorporating the Company's
existing broad-based training program for the acquired stores' employees.
Results of Operations for the Fiscal Year Ended July 31, 1996 Compared to 1995
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Income, expressed as a percentage
of revenues.
Year Ended
July 31
----------------
1996 1995
---- ----
Revenues
Rental income 98.9% 99.0%
Sales of merchandise 1.1 1.0
----- -----
Total revenues 100.0 100.0
----- -----
Cost and operating expenses
Depreciation and amortization -
Rental merchandise 23.5 24.1
Other 5.9 5.7
Cost of merchandise sold 1.1 .9
Salaries and wages 25.0 24.4
Advertising 3.7 4.4
Occupancy 4.9 4.6
Other operating expenses 27.8 26.3
Interest expense 3.1 3.1
Loss on sale of property and equipment .2 --
----- -----
Total cost and operating expenses 95.2 93.5
----- -----
Income before continuing operations and income tax provision 4.8 6.5
----- -----
Current income tax expense .2 .6
Deferred income tax expense (benefit) 1.7 (12.3)
----- -----
1.9 (11.7)
----- -----
Income from continuing operations 2.9 18.2
----- -----
Discontinue operation:
Loss from discontinued business, net of taxes .8 --
Loss on disposal of business, net of taxes 1.3 --
----- -----
Loss from discontinued operations 2.1 --
----- -----
Net income 0.8% 18.2%
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BESTWAY, INC. FORM 10-K
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued
Total revenue increased $2,500,590 or 15.2% to $18,923,852 as compared to
$16,423,262 in fiscal year 1995. The increase was due to the inclusion of
approximately four months operations for the stores acquired in the All Star
Acquisition, one month operations for the stores acquired in the REJA
Acquisition, nine months operations for a single store acquisition, operations
for four internal new store openings and increased same store revenues. The
stores acquired in the All Star Acquisition, which was consummated on April 12,
1996, accounted for $1,647,143 (66%) of the increase, the stores acquired in
the REJA Acquisition, which was consummated on July 1, 1996, accounted for
$190,384 (8%) of the increase, the single store acquisition, which was
consummated on November 8, 1995, accounted for $173,752 (7%) of the increase,
internal new store openings, which were opened in September 1995, October 1995
and March 1996, accounted for $443,318 (18%) of the increase, while the
Company's same stores accounted for $45,993 (1%) of the increase. The Company
receives rental revenues from various products including televisions and video
cassette recorders, household appliances, as well as home furniture and
jewelry. In fiscal year 1996, approximately 19% of the Company's rental revenue
was derived from appliances, 23% from home furniture, 31% from electronics, 12%
from various other products such as jewelry and 15% from various services and
charges to rental customers including reinstatement fees and liability waiver
fees.
Total cost and operating expenses increased $2,669,799 or 17.4% to
$18,020,949 primarily as a result of the opening of four new stores and costs
and operating expenses associated with the All Star and REJA Acquisitions. The
four new stores incurred operating losses of approximately $58,000. Total cost
and operating expenses increased from 93.5% to 95.2% of total revenues. This
1.7% net increase resulted primarily from a 1.5% increase in other operating
expenses as a percentage of total revenues. This increase in other operating
expenses occurred primarily because of certain indirect acquisition costs of
approximately $75,000 relating to the All Star and REJA Acquisitions and a .9%
net increase in costs associated with the write-off of rental merchandise as a
percentage of total revenues. Salaries and wages increased $720,590 or 17.9% to
$4,734,879 and increased from 24.4% to 25.0% of total revenues primarily due to
the addition of key management personnel in operations, real estate management
and human resource departments added in preparation for expansion. Occupancy
expense increased $171,592 or 22.6% to $931,205 and increased from 4.6% to 4.9%
of total revenues primarily due to the opening of four new store locations and
the All Star and REJA Acquisitions.
In fiscal year 1995, the Company formed a new subsidiary, Bestway Auto,
Inc., ("Bestway Auto") due to the Company's entry into the retail used car
sales and finance business. The Company test marketed the concept through the
opening of a single prototype retail sales facility which experienced losses,
before income taxes, of $144,111. In February 1996, the Company exchanged cash
and its capital stock in Bestway Auto for a 49% Common Stock interest in Value
Auto and a non-voting, non-dividend paying Preferred Stock of Value Auto. For
the period February 1, 1996 through July 31, 1996, the Company's equity
interest in the operating losses of Value Auto was approximately $67,000. Based
on Management's assessment of the future operating results of the Company's
auto sales business, management has concluded that the Company will abandon the
auto sales business and its investment in Value Auto should be written off.
(see Note 10).
Financial Condition, Liquidity and Capital Resources
On April 12, 1996, the Company amended its August 19, 1993 Second
Amendment to First Amended and Restated Revolving Credit Loan Agreement with
its senior collateralized lender. In the amendment, the Company increased the
maximum amount available under the line of credit from $4,000,000 to $7,500,000
and extended the maturity date from August 18, 1996 to August 18, 1997.
On July 19, 1996 the Company extended its maturity on the $100,000
subordinated note payable to director and stockholder dated July 19, 1993. The
note which matured on July 19, 1996 was extended until August 19, 1997. On
August 26, 1996, the Company extended its maturity on the $500,000 subordinated
note payable to affiliate date March 4, 1992 from August 31, 1996 to August 31,
1997. For the year ended July 31, 1996, the Company's net cash flows from
operating activities was $7,365,631 as compared to $6,542,227 for the year
ended July 31, 1995. The increase was primarily due to an increase in cash
generating earnings.
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BESTWAY, INC. FORM 10-K
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued
For the year ended July 31, 1996, the Company's net cash flows used in
investing activities was $8,758,450 as compared to $6,070,711 for the year
ended July 31, 1995. The Company's investing activities reflect the investment
in Value Auto Partners, Ltd., the REJA Acquisition, and significant increases
in purchases of rental units and property and equipment. The increased
investing activities were necessary to fund the four new store openings,
upgrade the quality of merchandise in the All Star stores and purchase new
delivery vans. The Company's investing activities reflect its continuing
replacement of rental merchandise that was purchased by customers either by
full pay out under the rental agreement or by exercise of the customers early
purchase option.
For the year ended July 31, 1996, the Company's net cash flows from
financing activities was $1,388,990 as compared to $(415,357) for the year
ended July 31, 1995. The increase in financing activities principally reflects
increased borrowings on the Company's debt.
With the Company having available credit of $2,444,973 under the
$7,500,000 amended line of credit at July 31, 1996, management believes the
Company has adequate resources to meet its future cash obligations.
During March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The standard is effective for financial statements
for fiscal years beginning after December 15, 1995. The Company's analysis of
this new standard indicates that the standard should not have a material effect
on its financial position or results of operations.
SFAS No. 123 entitled "Accounting for Stock-Based Compensation" was issued
in 1995 and will be effective for the Company in fiscal year 1997. The
statement defines a fair value based method of accounting for stock-based
compensation but allows a company to continue to measure compensation costs
using the intrinsic value based method in accordance with Accounting Principal
Board Opinion No. 25. The Company expects to continue to use the intrinsic
value based method, but will provide the required disclosures.
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.
Results of Operations for the Fiscal Year Ended July 31, 1995 Compared to 1994
Revenue increased $54,113 or 0.3% to $16,423,262 as compared to
$16,369,149 in fiscal year 1994. Same store revenue, which includes all stores
opened prior to fiscal year 1994, increased $733,732 and the Company's
Mississippi stores acquired in fiscal year 1994 and three new stores opened in
fiscal 1994 increased $1,081,251 and $517,717, respectively. Additionally, the
Company experienced a decline of $2,278,587 in revenue as a result of the asset
purchase agreement with another rental dealer in which the Company sold
substantially all of the rental inventory being rented by customers pursuant to
rental agreements at four stores in Missouri and two stores in Illinois. The
Company's improved performance is primarily due to the implementation of a
marketing program based on increasing the Company's share of the customer's
business and the implementation of a broad-based training program designed to
improve customer satisfaction skills of the Company's employees and to reduce
employee turnover. The Company receives rental revenue from various products
including televisions and video cassette recorders, household appliances, as
well as home furniture and jewelry. In fiscal year 1995, approximately 18% of
the Company's rental revenue was derived from appliances, 23% from home
furniture, 30% from electronics, 14% from various other products such as
jewelry and 15% from various services and charges to rental customers including
reinstatement fees and liability waiver fees.
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BESTWAY, INC. FORM 10-K
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued
Results of Operations for the Fiscal Year Ended July 31, 1995 Compared to
1994, continued
Cost and operating expenses, which primarily consist of depreciation and
amortization, salaries and wages, advertising, other operating expenses and
interest expense decreased to 93.5% from 95.6% of total revenues. The three new
store locations opened in fiscal year 1994 experienced revenues in excess of
direct store operating expenses of approximately $187,000 in fiscal year 1995
compared to losses of approximately $134,000 in fiscal year 1994. Total store
operating margins including the three new stores, Mississippi stores acquired
September 10, 1993 and same stores increased 29.3% as a result of increased
revenues, as well as, better merchandising strategies and due to upgrading the
Company's sales and support resources. Interest expense increased to 3.1% from
2.4% of total revenues due to increased borrowings for the purchase of new
delivery vans and a 1.5% increase in the interest rate at July 31, 1995
compared to July 31, 1994.
Based on a positive earnings trend and estimates of future taxable income,
the Company has recognized a portion of its net deferred tax asset through a
$2,013,784 reduction in the valuation allowance. The effect on earnings per
share of this reduction in the valuation allowance is approximately $1.34.
Accordingly, without this reduction earnings per share would have been $.65.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and
notes thereto appearing at pages F-1 to F-16 hereof.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 1996, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 1996, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 1996, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required will be contained in the Company's Proxy
Statement for the Annual Meeting of Shareholders for 1996, and is incorporated
herein by reference.
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BESTWAY, INC. FORM 10-K
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PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following are filed as Exhibits to this Annual Report filed as
Form 10-K for the year ended July 31, 1996.
(b) Exhibits
Exhibit
Number Document
-------- --------
2.1 (a) Agreement for the Purchase and Sale of Assets by and
among All Star Rental, Inc., Robert D. Simons, Keith
Crosby and Bestway, Inc. (1)
2.1 (b) Agreement for the Purchase and Sale of Assets by and
among REJA, Inc., Gus Blass III, Tucker Morse, D.
Eugene Fortson, Warren Stephenson, Rod Reed and
Bestway, Inc. (2)
3.1 Amended and Restated Certificate of Incorporation (3)
10.1 Second Amendment to First Amended and Restated
Revolving Credit Loan Agreement (1)
21 Subsidiaries
27 Financial Data Schedule
Filed electronically only, not attached to
printed reports
(1) Filed as exhibits to Form 8-K on April 25,
1996, incorporate herein by reference.
(2) Filed as exhibit to Form 8-K on July 11,
1996, incorporated herein by reference.
(3) Filed as exhibit to Form 10-Q on June 14,
1996, incorporated herein by reference.
(c) Reports on Form 8-K
(1) On April 25, 1996, the Company filed a Form 8-K
disclosing the Purchase and Sale of Assets by and among
the Company, All Star Rental, Inc. and Robert D. Simons
and Keith Crosby, the sole shareholders of All Star.
(2) On April 25, 1996, the Company filed a Form 8-K
disclosing the Second Amendment to First Amended and
Restated Revolving Credit Loan Agreement by and among the
Company, the Company's senior secured lender and certain
subsidiaries of the Company to increase the maximum
amount of revolving credit under such loan and extend the
termination date of such agreement.
(3) On June 24, 1996, the Company filed a Form 8-KA amending
the previously filed Form 8-K on April 25,1996 to include
the financial statements of All Star Rental, Inc. for the
years ended December 31, 1995 and 1994. In addition, pro
forma financial information was included as of January
31, 1996, for the year ended July 31, 1995 and for the
six months ended January 31, 1996.
(4) On July 11, 1996, the Company filed a Form 8-K
disclosing the Purchase and Sale of Assets by and among
the Company, REJA, Inc. and Gus Blass III, Tucker Morse,
D. Eugene Fortson, Warren Stephenson and Rod Reed.
11
12
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BESTWAY, INC.
October 22, 1996 /s/ R. Brooks Reed
----------------------------------------
R. BROOKS REED, CHAIRMAN OF THE BOARD
OF DIRECTORS AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 22 day of October 1996.
/s/ R. Brooks Reed Chairman of the Board of Directors
- ------------------------- and Chief Executive Officer
R. BROOKS REED
/s/ Jack E. Meyer Director
- -------------------------
JACK E. MEYER
/s/ James A. O'Donnell Director
- -------------------------
JAMES A. O'DONNELL
/s/ Beth A. Durrett Vice President - Controller
- -------------------------
BETH A. DURRETT
/s/ Teresa A. Sheffield Vice President - Operations
- -------------------------
TERESA A. SHEFFIELD
12
13
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
BESTWAY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of July 31, 1996 and 1995 F-3
Consolidated Statements of Income for the years ended July 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended July 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the years ended July 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-16
F-1
14
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Bestway, Inc.:
We have audited the accompanying consolidated balance sheets of Bestway, Inc.
as of July 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended July 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Bestway, Inc. as of July 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
October 11, 1996
15
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
July 31, 1996 July 31, 1995
------------- -------------
ASSETS
Cash $ 325,513 $ 329,342
Restricted cash 119,342 119,342
Prepaid expenses 342,912 129,311
Deferred tax asset 1,821,701 2,013,784
Investment in partnership 423,560 --
Other assets 121,473 209,506
Rental merchandise, at cost 14,309,351 10,596,609
less accumulated depreciation 4,716,054 4,189,727
------------ ------------
9,593,297 6,406,882
------------ ------------
Property and equipment, at cost 4,768,700 3,584,071
less accumulated depreciation 2,340,664 1,702,486
------------ ------------
2,428,036 1,881,585
------------ ------------
Non-competes, net of amortization 959,339 581,977
Goodwill, net of amortization 2,790,267 2,038,166
------------ ------------
Total assets $ 18,925,440 $ 13,709,895
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 976,869 $ 718,861
Accrued interest - related parties 12,023 12,013
Accrued interest - other 49,253 22,043
Income taxes payable 66,031 85,061
Other accrued liabilities 1,355,146 760,322
Notes payable-related parties 3,600,000 3,600,000
Notes payable-other 5,448,928 2,470,302
Commitments and contingencies (Notes 7 and 13)
Stockholders' Equity:
Preferred Stock, $10.00 par value,
1,000,000 authorized, none issued -- --
Common Stock, $.01 par value, 5,000,000 authorized,
1,747,717 and 1,500,070 issued and outstanding at July 31,
1996 and July 31, 1995, respectively 17,477 15,001
Paid-in capital 16,078,670 14,842,911
Accumulated deficit (8,678,957) (8,816,619)
------------ ------------
Total stockholders' equity 7,417,190 6,041,293
------------ ------------
Total liabilities and stockholders' equity $ 18,925,440 $ 13,709,895
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
16
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended
---------------------------------------------
July 31, 1996 July 31, 1995 July 31, 1994
------------- ------------- -------------
Revenues:
Rental income $ 18,710,098 $ 16,261,267 $ 16,162,227
Sales of merchandise 213,754 161,995 206,922
------------ ------------ ------------
18,923,852 16,423,262 16,369,149
------------ ------------ ------------
Cost and Operating Expenses:
Depreciation and amortization:
Rental merchandise 4,452,326 3,959,484 4,177,992
Other 1,111,976 937,690 766,665
Cost of merchandise sold 208,785 140,038 226,734
Salaries and wages 4,734,879 4,014,289 4,051,757
Advertising 709,237 726,967 818,366
Occupancy 931,205 759,613 779,785
Other operating expenses 5,263,871 4,302,231 4,514,984
Interest expense 569,532 510,838 399,883
Gain on sale of assets -- -- (190,095)
Loss on sale of property and equipment 39,138 -- 100,176
------------ ------------ ------------
18,020,949 15,351,150 15,646,247
------------ ------------ ------------
Income from continuing operations before income tax
provision (benefit): 902,903 1,072,112 722,902
------------ ------------ ------------
Current income tax expense 49,099 101,047 35,319
Deferred income tax expense (benefit) 321,574 (2,013,784) --
------------ ------------ ------------
370,673 (1,912,737) 35,319
------------ ------------ ------------
Income from continuing operations 532,230 2,984,849 687,583
------------ ------------ ------------
Discontinued operations (Note 10):
Loss from discontinued business
(net of income tax benefit of $78,147) 156,425 -- --
------------ ------------ ------------
Loss on disposal of business
(net of income tax benefit of $68,535) 238,143 -- --
------------ ------------ ------------
Loss from discontinued operations, net 394,568 -- --
------------ ------------ ------------
Net income $ 137,662 $ 2,984,849 $ 687,583
============ ============ ============
Net income per share from continuing operations $ .34 $ 1.99 $ .46
============ ============ ============
Net loss per share from discontinued operations (.25) -- --
------------ ------------ ============
Net income per share $ .09 $ 1.99 $ .46
------------ ============ ------------
Weighted average common shares outstanding 1,549,619 1,502,239 1,505,276
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
17
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
-------------------------------------------
July 31, 1996 July 31, 1995 July 31, 1994
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 137,662 $ 2,984,849 $ 687,583
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,564,300 4,897,174 4,944,657
Net book value of rental units retired 1,237,172 775,319 989,817
Gain on sale of assets -- -- (190,095)
Loss on sale of property and equipment 39,138 -- 100,176
Loss on discontinued operations 394,568 -- --
Deferred income taxes 321,574 (2,013,784) --
Other -- (3,710) --
Changes in operating assets and liabilities other than cash:
Prepaid expenses (212,911) 20,971 (63,552)
Other assets 75,140 (179,426) (10,564)
Accounts payable (147,613) (68,639) 141,556
Income taxes payable (1,841) 49,742 30,074
Other accrued liabilities (41,558) 79,731 (258,707)
----------- ----------- -----------
Total adjustments (328,783) (97,621) (161,192)
----------- ----------- -----------
Net cash flows from operating activities 7,365,631 6,542,227 6,370,945
----------- ----------- -----------
Cash flows from investing activities:
Purchase of rental units and equipment (6,609,139) (5,432,430) (5,468,075)
Additions to property and equipment (1,122,102) (668,701) (1,391,867)
Proceeds from sale of property and equipment 15,278 30,420 2,500
Proceeds from insurance recovery 43,254 -- --
Proceeds from sale of assets -- -- 777,015
Purchase of investments (586,541) -- --
Investment in restricted cash -- -- (119,342)
Mississippi asset purchase -- -- (2,116,761)
REJA asset purchase, net of cash acquired (499,200) -- --
----------- ----------- -----------
Net cash flows used in investing activities (8,758,450) (6,070,711) (8,316,530)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds of notes payable 5,025,000 996,800 3,088,438
Repayment of notes payable (3,636,010) (1,412,157) (1,220,467)
----------- ----------- -----------
Net cash flows provided by (used in) financing activities 1,388,990 (415,357) 1,867,971
----------- ----------- -----------
Cash at the beginning of the year 329,342 273,183 350,797
----------- ----------- -----------
Cash at the end of the year $ 325,513 $ 329,342 $ 273,183
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
18
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For years ended July 31, 1996, 1995, and 1994
Common Stock
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
Balance at July 31, 1993 1,505,276 $ 15,053 $ 14,846,569 $(12,489,051)
------------ ------------ ------------ ------------
Net income for the year ended July 31, 1994 -- -- -- 687,583
------------ ------------ ------------ ------------
Balance at July 31, 1994 1,505,276 15,053 14,846,569 (11,801,468)
------------ ------------ ------------ ------------
Stock cancellation (8,950) (89) (13,335) --
Stock awards 3,744 37 9,677 --
Net income for the year ended July 31, 1995 -- -- -- 2,984,849
------------ ------------ ------------ ------------
Balance at July 31, 1995 1,500,070 15,001 14,842,911 (8,816,619)
------------ ------------ ------------ ------------
Stock issued in acquisitions 247,647 2,476 1,235,759 --
Net income for the year ended July 31, 1996 -- -- -- 137,662
------------ ------------ ------------ ------------
Balance at July 31, 1996 1,747,717 $ 17,477 $ 16,078,670 $ (8,678,957)
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
19
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements of Bestway, Inc. (the
"Company"), include the Company's wholly-owned operating subsidiaries,
Bestway Rental, Inc. which operates under the registered trade name
"Bestway Rent-To-Own," U.S. Credit-Service Corporation and Westdale Data
Service, Inc. and a 50% interest in Value Auto Partners, Ltd., which is
accounted for by the equity method. Intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
The Company owns and operates a total of sixty-two stores located in
various states. The stores operations are controlled and monitored
through the Company's management information system networked with its
home office in Dallas, Texas. The Company's store locations by state as
of July 31, 1996, are as follows:
State Number of Stores
------ ----------------
Alabama 15
Arkansas 1
Georgia 2
Mississippi 17
North Carolina 5
South Carolina 8
Tennessee 14
--
62
==
Rental Merchandise, Related Rental Revenue and Depreciation
Rental merchandise is rented to customers pursuant to rental
agreements which provide for either weekly or monthly rental terms with
nonrefundable rental payments for the first week or month collected in
advance. Rental revenue is recognized as collected since at the time of
collection the rental merchandise has been placed in service and costs of
installation and delivery have been incurred. Rental agreements generally
cover a period of 12 to 24 months with a majority of rental agreements
specifying 18 months. At the end of each rental period, the customer can
renew the rental agreement, return the merchandise with no obligation, or
purchase the merchandise by exercising their early purchase option.
Amounts received from such sales are included in revenue when received.
Past due or stolen merchandise is expensed generally within three months
from the due date. The Company receives rental revenue from various
products including televisions and video cassette recorders, household
appliances, as well as home furniture and jewelry. In fiscal year 1996,
approximately 19% of the Company's rental revenue was derived from
appliances, 23% from home furniture, 31% from electronics, 12% from
various other products such as jewelry and 15% from various services and
charges to rental customers including reinstatement fees and liability
waiver fees. In fiscal year 1995, approximately 18% of the Company's
rental revenue was derived from appliances, 23% from home furniture, 30%
from electronics, 14% from various other products such as jewelry and 15%
from various services and charges to rental customers including
reinstatement fees and liability waiver fees.
Merchandise rented to customers, or available for rent, is recorded
at cost net of accumulated depreciation, which equals the carrying
amount, and is classified in the consolidated balance sheets as rental
merchandise. Merchandise rented to customers is depreciated on the
income-forecast basis over the term of the rental agreement ranging from
12 to 24 months. When not on rent, merchandise is not depreciated.
Sales of Merchandise
Sales of merchandise includes revenue from cash sales of primarily
used merchandise.
F-7
20
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Property and Equipment
Property and equipment are recorded at cost. Major improvements to
property and equipment are capitalized. Maintenance and repair
expenditures are charged to expense as incurred. As fixed assets are sold
or retired, the applicable cost and accumulated depreciation are
eliminated from the accounts and any gain or loss is recorded.
Depreciation of property and equipment is provided over the
estimated useful lives, which range from 1 to 10 years of the respective
assets, on the straight-line basis.
Restricted Cash
Amount represents escrow money deposited in connection with the
sale of certain stores as required by the Asset Purchase Agreement as
herein defined. Disbursements will be made from this account to satisfy
any taxes owed by the Company, any claims of third parties against the
assets which are the Company's responsibility, or to satisfy any
indemnification rights as specified in the Asset Purchase Agreement. Upon
termination, any amount not payable to third parties will be returned to
the Company.
Intangible Assets
Goodwill represents the cost in excess of the fair value of net
tangible assets of acquired businesses and is being amortized on a
straight-line basis over 20 years. Accumulated amortization of goodwill
was $1,569,221 and $1,382,539 at July 31, 1996 and 1995, respectively.
The non-competes represents the allocation of the purchase price
from the September 10, 1993 acquisition of 12 stores in Mississippi, the
April 12, 1996 acquisition of 15 stores in Georgia, North Carolina and
South Carolina and the July 1, 1996 acquisition of 8 stores in Arkansas
and Mississippi and is being amortized on a straight-line basis over
periods from 2 to 5 years. Accumulated amortization of the non-competes
was $561,900 and $336,933, at July 31, 1996 and 1995, respectively.
The Company continually evaluates the propriety of the carrying
amount of goodwill and other intangibles based on the estimated future
undiscounted cash flows of the related investment, as well as the
amortization period to determine whether current events and circumstances
warrant adjustments to carrying value and/or revised estimates of useful
lives. At this time, the Company believes that no significant impairment
of the goodwill and other intangibles has occurred and that no reduction
of the estimated useful lives is warranted.
Income Taxes
Investment tax credits are accounted for on the "flow-through"
method.
Earning Per Common Share
Earnings per common share is based on the weighted average of common
shares outstanding during the period and the effect of considering
common stock equivalents (stock options) under the treasury stock
method. Primary and fully diluted earnings per common share are not
shown because the effect of the stock options is immaterial.
Advertising Costs
Advertising costs are expensed as incurred.
F-8
21
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
BESTWAY, INC. FORM 10-K NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Estimates
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the reported
amount of assets, particularly deferred tax assets, and liabilities,
disclosure of contingent assets and liabilities and reported amounts of
revenues and expenses. Actual results could differ from those estimates.
2. ACQUISITIONS:
On April 12, 1996, the Company acquired substantially all of the
assets and certain liabilities of All Star Rental, Inc. a privately-owned
South Carolina corporation ("All Star"). The assets acquired by the
Company included the idle inventory, rental contracts, vehicles, store
furniture and fixtures, computers and leasehold improvements. In
addition, the Company assumed the leases for 15 of All Star's former
store locations.
The Company delivered to All Star 115,647 non-registered shares of
the Company's Common Stock valued at $578,235. The aggregate purchase
price in connection with the acquisition was based on a multiple of
average monthly revenues less certain assumed liabilities. The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of All Star are included in the
accompanying consolidated financial statements from the date of
acquisition. The acquisition resulted in $1,226,283 of intangible assets.
These items are being amortized on a straight-line basis over periods not
exceeding 20 years.
On July 1, 1996, the Company acquired substantially all of the
assets of REJA, Inc., a privately-owned Arkansas corporation ("REJA").
The assets acquired by the Company primarily included the idle inventory,
rental contracts, vehicles, store furniture and fixtures, computers and
leasehold improvements. In addition, the Company assumed the leases for 8
of REJA's former store locations.
The Company delivered to REJA 132,000 non-registered shares of the
Company's Common Stock valued at $660,000 and $500,000 cash, as the
aggregate purchase price in connection with the acquisition. The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of REJA are included in the
accompanying consolidated financial statements form the date of
acquisition. The acquisition resulted in $314,829 of intangible assets.
These items are being amortized on a straight-line basis over periods
not exceeding 20 years.
The following summary reflects the unaudited condensed pro forma
revenues, costs and operating expenses and presents the results of the
operations of the Company assuming these acquisitions had been
consummated as of the first day of the Company's fiscal year ended July
31, 1995 and are as follows:
July 31, 1996 July 31, 1995
------------- -------------
(Unaudited) (Unaudited)
Revenues $25,381,168 $24,738,588
Costs and operating expenses 24,693,047 21,513,003
----------- -----------
Net income from continuing operations $ 688,121 $ 3,225,585
=========== ===========
Net income per share from continuing operations $ .39 $ 1.84
=========== ===========
F-9
22
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
On September 10, 1993 the Company acquired for approximately
$2,000,000 a substantial portion of the assets of Action Television
Rental, Inc. and virtually all of the assets of A-1 TV Rental, Inc., both
privately-owned Mississippi corporations in an asset purchase transaction
from an individual.
The purchase price was funded from the Company's senior
collateralized line of credit. The Company acquired all of the assets
involved in the daily operations of the stores including all idle rental
inventory, all rental contracts, vehicles, store furniture and fixtures,
computers and leasehold improvements. Additionally, the Company obtained
the seller's former store locations by assuming the twelve locations
lease agreements.
The impact of one and one-half month's activity on the July 31,
1994 income statement is not significant. Accordingly, such information
has not been provided.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
July 31, July 31,
1996 1995
----------- -----------
Building and leaseholds $ 1,669,922 $ 1,426,123
Vehicles 1,746,181 1,036,549
Furniture and fixtures 596,233 452,691
Computer equipment 756,364 668,708
----------- -----------
4,768,700 3,584,071
----------- -----------
Accumulated depreciation (2,340,664) (1,702,486)
----------- -----------
$ 2,428,036 $ 1,881,585
=========== ===========
4. NOTES PAYABLE:
Notes payable consists of the following:
Years Ended
-----------------------
July 31, July 31,
1996 1995
---------- ----------
Senior Collateralized Debt
- --------------------------
Note payable to bank dated August 19, 1993, amended April 12, 1996,
interest payable monthly at prime plus 1.5%; note matures on
August 18, 1997; note collateralized by substantially all the
Company's
assets $5,055,027 $1,950,027
Subordinated Debt
- -----------------
Note payable to limited partnership and stockholder dated July 19,
1993, interest payable quarterly beginning October 1, 1993 at 4.5%
per annum; note, as amended,
matures on August 19, 1997 3,000,000 3,000,000
Note payable to director and stockholder dated July 19,
1993, interest payable quarterly beginning October
1, 1993 at 4.5% per annum; note, as amended, matures
on August 19, 1997 100,000 100,000
F-10
23
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
4. NOTES PAYABLE, Continued
Years Ended
---------------------
July 31, July 31,
1996 1995
--------- --------
Note payable to affiliate dated March 4, 1992, interest payable monthly
at prime plus 1.5%; note, as amended, matures on August 31, 1997;
affiliate has as one of its directors and shareholders the
Company's CEO and Chairman of the Board of Directors 500,000 500,000
Other Notes Payable
- -------------------
Note payable to bank dated July 1, 1994, principal payable monthly,
interest payable monthly at 9% per
annum; note matures July 1, 1997 156,196 312,391
Note payable to individual dated July 15, 1992, principal
payable monthly, interest payable monthly at 9% per annum; note
matures on July 15, 1997 59,359 62,389
Note payable to bank dated April 11, 1994, principal payable monthly,
interest payable monthly at 9% per
annum; note matures on April 15, 2006 137,080 145,495
Notes payable due in monthly installments ranging
from $800 to $1,400 including interest at an
average of 9% per annum through fiscal year
1998 41,266 --
---------- ----------
$9,048,928 $6,070,302
========== ==========
At July 31, 1996 and 1995 the prime rate was 8.25% and 8.75%,
respectively.
On April 12, 1996 the Company amended its August 19, 1993 Second
Amendment to First Amended and Restated Revolving Credit Loan Agreement
with its senior collateralized lender. In the amendment, the Company
increased the maximum amount available under the line of credit from
$4,000,000 to $7,500,000 and extended the maturity date from August 18,
1996 to August 18, 1997. The loan agreement includes restrictive
covenants, the most restrictive of which prohibits the payment of
dividends. At July 31, 1996, the Company had the capacity to borrow
$2,444,973 under the line of credit.
On July 19, 1996 the $100,000 subordinated note payable dated
July 19, 1993 maturing July 19, 1996 was extended until August 19, 1997.
On August 26, 1996 the $500,000 subordinated note payable dated
March 4, 1992 maturing August 31, 1996 was extended until August 31,
1997.
At July 31, 1996, the carrying value of the Company's notes payable
approximated fair value, estimated primarily based on the borrowing
rates available to the Company for debt with similar terms and average
maturities.
F-11
24
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
4. NOTES PAYABLE, Continued
Following is a summary of maturities of notes payable, as amended,
for each of the periods ending July 31:
1997 $ 251,994
1998 8,679,127
1999 11,013
2000 12,046
2001 14,328
Thereafter 80,420
------------
$ 9,048,928
============
5. INCOME TAXES:
Deferred tax assets are reduced by a valuation allowance if, based
on available evidence, it is more likely than not that some portion of
all of the deferred tax assets will not be realized. The valuation
allowance for deferred tax assets decreased by $2,604,882 in 1995 due to
a realization of a portion of the Company's net deferred tax assets and a
change in estimate regarding the future realization of remaining net
operating loss carryfowards and the excess of book amortization over tax.
In fiscal 1995, based on a positive earnings trend and estimates of
future taxable income, the Company recognized a portion of its net
deferred tax asset through a $2,013,784 reduction in the valuation
allowance. The effect on earnings per share of this reduction in the
valuation allowance was approximately $1.34. Accordingly, without this
reduction earnings per share would have been $.65. In fiscal 1996, the
valuation allowance was reduced $147,231 as a result of the expiration of
investment tax credit carryforwards.
The provisions (benefit) for income tax on income from continuing
operations consists of the following for the years ended July 31:
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 16,848 $ 9,482 $ 15,632
State 32,251 91,565 19,687
----------- ----------- -----------
49,099 101,047 35,319
Deferred:
Federal 329,081 (2,001,430) --
State (7,507) (12,354) --
----------- ----------- -----------
321,574 (2,013,784) --
----------- ----------- -----------
Total income tax provision (benefit) $ 370,673 $(1,912,737) $ 35,319
=========== =========== ===========
Significant components of the Company's deferred income tax assets
at July 31, 1996 and 1995, respectively, are as follows:
Caption>
1996 1995
----------- -----------
Net operating loss carryforward $ 1,544,210 $ 1,925,058
Investment tax credit carryforward 420,971 568,208
Minimum tax credit carryover 12,452 --
Property and equipment 36,705 --
Unrealized loss 59,154 --
Intangible assets 169,180 88,726
----------- -----------
Total deferred tax assets 2,242,672 2,581,992
----------- -----------
Valuation allowance (420,971) (568,208)
----------- -----------
Net deferred tax asset $ 1,821,701 $ 2,013,784
=========== ===========
F-12
25
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
5. INCOME TAXES, Continued
The following is the reconciliation of the U.S. statutory tax rate
to the Company's effective tax rate on income from continuing operations
for the years ended July 31:
1996 1995 1994
----------- ----------- -----------
Federal income tax at statutory rate of 34% $ 306,987 $ 364,518 $ 233,778
Goodwill amortization 58,152 58,152 58,152
Alternative minimum tax -- 17,484 15,632
State income tax 13,205 60,432 19,687
Utilization of net operating loss carryforward -- (433,198) (291,930)
Change of estimate of deferred tax asset valuation allowance -- (2,013,784) --
Other (7,671) 33,659 --
----------- ----------- -----------
(Benefit) provision for income tax $ 370,673 $(1,912,737) $ 35,319
=========== =========== ===========
At July 31, 1996, the Company has net operating loss carryforwards
of approximately $4,517,000 expiring from 2002 to 2006. The Company has
investment tax credit carryforwards of approximately $421,000 which
expire between 1997 and 2001.
6. RELATED PARTY TRANSACTIONS:
The Company has a consulting agreement with a former owner of one of
the Company's operating subsidiaries. As of July 31, 1996, $153,000
recorded in other accrued liabilities in the Company's financial
statements remains to be paid over 11 years. If, however, the market
price of the Company's Common Stock reaches $50.00 per share, the Company
has no further obligation under this consulting agreement. Consulting
fees paid for the years ended July 31, 1996, 1995 and 1994 was $30,000,
respectively.
Interest expense relating to notes payable to affiliates amounted
to approximately $192,000 for the years ended July 31, 1996, 1995, and
1994, respectively.
7. LEASES:
The Company leases all store facilities, with the exception of one,
under operating leases with terms ranging from one to ten years. Many
leases contain escalation clauses, and some provide for contingent
rentals based on percentages of gross revenue or increases in the
consumer price index. Minimum lease obligations for the Company at July
31, 1996 by fiscal year are as follows:
1997 $ 962,341
1998 815,435
1999 552,086
2000 328,807
2001 206,660
Thereafter 625,516
----------
$3,490,845
==========
Occupancy expense under operating leases for the years ended July
31, 1996, 1995 and 1994 was $931,205, $759,613 and $779,785,
respectively .
F-13
26
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS:
Cash interest payments for the years ended July 31, 1996, 1995 and
1994 are $542,835, $506,508 and $370,159, respectively. Cash tax payments
for the years ended July 31, 1996, 1995 and 1994 are $50,940, $30,074 and
$5,245, respectively.
In fiscal year 1996, the Company delivered 247,647 shares of its
Common Stock valued at $1,238,235 in connection with the acquisitions of
All Star Rental, Inc. and REJA, Inc. Additionally, the Company assumed
liabilities totaling $2,733,493 and paid cash, net of cash acquired, of
$499,200 in connection with the acquisitions (see Note 2).
9. INCENTIVE PLANS:
STOCK OPTION PLAN The Company has a stock option plan (the "Plan")
for officers and employees of the Company or its affiliates, under which
the maximum number of shares which may be granted in the aggregate is
225,000 of the Company's Common Stock. The Plan, which became effective
June 30, 1995, provides for the options to be granted, become
exercisable, and terminate upon terms established by the Board of
Directors (the "Committee"). Shares become exercisable from time to time
(but not sooner than six months after the date of grant) over such period
and upon such terms as the Committee may determine, but not at any time
as to less than 25 shares unless the remaining shares that have become so
purchasable are less than 25 shares.
The following table summarizes the stock option transactions under
the Plan since its inception.
Option Price
Shares (Per Share)
------- ------------
Options outstanding at July 31, 1994 -- --
Granted (June 30, 1995) 103,400 $5.00
------- -----
Options outstanding at July 31, 1995 103,400 $5.00
Granted (December 7, 1995) 15,000 $5.00
------- -----
Options outstanding at July 31, 1996 118,400 $5.00
======= =====
The options are exercisable as to 25% of the shares on the first
anniversary of the date of grant and as to an additional 25% of the
shares on each of the second, third and fourth anniversary dates of the
date of grant. At July 31, 1996 there were 106,600 shares reserved for
future options, and 25,850 options were exercisable.
In October 1995, the Financial Accounting Standards Board issued
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which introduces a fair-value base method of accounting for
stock-based compensation plans. The Company does not intend to adopt
this new method of accounting and will continue to follow the intrinsic
value method under Accounting Principles Board Opinion No. 25. The
Company, however, will make the disclosures required by SFAS 123.
401(K) PLAN The Company established a Retirement Savings Plan (the
"Savings Plan"), effective as of September 1, 1994, which is intended to
qualify under Section 401(K) of the Internal Revenue Code "the Code".
Employees who have been employed with the Company for one year or more
are eligible for participation in the Savings Plan. Employees may elect
to reduce up to 15% of their annual compensation (subject to certain
limitations under the Code) by having such amounts contributed to the
Savings Plan. The Board intends to conduct a review at the end of each
fiscal year to determine whether the Company will make any additional or
matching contribution to the Savings Plan. As of July 31, 1996, no
additional or matching contributions have been made to the Savings Plan
by the Company. All assets of the Savings Plan are held in trust.
F-14
27
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
10. DISCONTINUED OPERATIONS:
In fiscal year 1995, the Company formed a new subsidiary, Bestway
Auto, Inc., ("Bestway Auto") due to the Company's entry into the retail
used car sales and finance business. The Company test marketed the
concept through the opening of a single prototype retail sales facility
which experienced operating losses for the first six months of fiscal
year 1996. In December 1995, management made the decision to dispose of
Bestway Auto's assets and in the process create a potential for a future
opportunity in an operating used car business. On February 1, 1996 the
Company exchanged $137,200 in cash and its capital stock in Bestway Auto
for a 49% Common Stock interest in Value Auto, and non-voting,
non-dividend paying Preferred Stock in Value Auto. For the period
February 1, 1996 through July 31, 1996, Value Auto generated net losses
amounting to approximately $136,000 and the Company's equity in such
losses amounted to approximately $67,000. As a result of the losses
incurred by both Bestway Auto and Value Auto and management's assessment
of future operating results for the Company's auto sales business,
management concluded that the Company would abandon the auto sales
business and its investment in Value Auto would be written off.
The operations of Bestway Auto and Value Auto have been accounted
for as a discontinued operation and, accordingly, the Company's equity in
their operating results and the loss on disposal are segregated and
reported as discontinued operations in the accompanying Consolidated
Statement of Income. Summarized results of Bestway Auto and Value Auto
are as follows:
Bestway Auto Value Auto
August 1, 1995 - February 1, 1996 -
February 1, 1996 July 31, 1996
---------------- -------------------
Revenues $ 207,468 $ 3,079,689
Costs and expenses 351,579 3,239,426
----------- -----------
Loss before income taxes (144,111) (159,737)
Income tax benefit 54,186 23,961
----------- -----------
Net loss $ (89,925) $ (135,776)
=========== ===========
11. INVESTMENT IN PARTNERSHIP
On October 19, 1995 the Company became a 50% limited partner in a
newly formed partnership, Value Auto Partners, Ltd. ("the Partnership").
The purpose of the Partnership is to engage in the financing of used
cars. The Company accounts for its Partnership interest by the equity
method. As of July 31, 1996 the Company had contributed $437,500 to the
Partnership and has received distributions of approximately $14,000.
Shown below is unaudited summarized financial information related to the
Partnership:
For the period from October 19, 1995 through July 31, 1996:
Revenues $ 56,720
Costs and expenses 9,641
----------
Net income $ 47,079
==========
At July 31, 1996:
Assets $1,088,783
==========
Liabilities 486,250
Partners' capital 602,533
----------
$1,088,783
==========
F-15
28
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
12. SALE OF RENTAL INVENTORY:
On June 16, 1994 the Company entered into an asset purchase
agreement with another renter dealer (the "Asset Purchase Agreement"). In
conjunction with the agreement, the Company closed four stores in
Missouri and two stores in Illinois. The Company sold substantially all
of the rental inventory being rented by customers. Idle inventory was
transferred to the Company's existing store locations. As a result of
this transaction, the Company experienced a gain of approximately
$190,100 on the sale of the rental inventory. A loss of approximately
$76,000 for lease termination fees and write offs of leasehold
improvements is included in loss on sale of property and equipment in the
income statement.
13. CONTINGENCIES:
The Company is subject to various 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.
F-16
29
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21 - Schedule of Subsidiaries
27 - Financial Data Schedule