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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________TO ______________
Commission file number 0-8568
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BESTWAY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 81-0332743
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7800 STEMMONS FREEWAY, SUITE 320
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)
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Registrant's telephone number, including area code: (214) 630-6655
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(TITLE OF CLASS)
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of voting common stock held by non-affiliates
of the registrant as of October 27, 1999 was approximately $4,347,291.00.
The number of shares of Common Stock, $.01 par value, outstanding as of
July 31, 1999 was 1,756,917.
Registrants Proxy Statement for 1999 is incorporated by reference in Part
III, Items 10-13 of this Form 10-K.
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TABLE OF CONTENTS
PAGE(S)
-------
PART I
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 7-12
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the Registrant 13
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners and Management 13
Item 13. Certain Relationships and Related Transactions 13
PART IV
Item 14. Exhibits and Reports on Form 8-K 13-14
SIGNATURES 15
INDEX Consolidated Financial Statements F-1
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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 seventy 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'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.
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
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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, 1999 the Company employed approximately 328 full-time
employees, of which 16 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 65 as of
July 31, 1998 to 70 as of July 31, 1999. The following table shows the number of
stores opened, acquired and closed during the year.
NUMBER OF
STORES
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Open at July 31, 1998 65
Opened 11
Acquired 2
Closed 5
Sold 3
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Open at July 31, 1999 70
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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, 1998, 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
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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-judgment 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 4,100 square feet in retail centers on heavy traffic
thoroughfares near customers' residences or work places. Almost all available
rental merchandise is kept in the showroom area which comprises the majority of
the available square footage. Store location is considered critical to the
success of the store.
The Company's store locations by state at July 31, 1999, are as follows:
NUMBER OF
STATE STORES
- -------------- ----------
Alabama 19
Arkansas 1
Georgia 2
Mississippi 15
North Carolina 12
South Carolina 6
Tennessee 15
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Open at July 31, 1999 70
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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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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is publicly traded on the Nasdaq Small-Cap
Market under the symbol "BSTW".
The following table sets forth, for the periods indicated, the high and
low sales price per share of the Common Stock as reported on the Nasdaq
Small-Cap Market.
Year ended July 31, 1999 Year ended July 31, 1998
-------------------------------------- ---------------------------------------
High Low High Low
------------------ ------------------ ------------------ -------------------
First Quarter $ 6 - 1/2 $ 6 - 1/4 $ 9 $ 6 - 1/2
Second Quarter $ 9 - 1/4 $ 5 $ 10 - 1/4 $ 7
Third Quarter $ 11 - 1/2 $ 6 $ 8 - 15/16 $ 6
Fourth Quarter $ 9 - 1/2 $ 6 $ 8 - 1/2 $ 6 - 1/8
At July 31, 1999, there were 440 stockholders of record of the Company's
Common Stock.
The Company has not paid cash dividends on its Common Stock since its
inception and intends to retain earnings for operations. The Company is a party
to a loan agreement which prohibits the payment of cash dividends on Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JULY 31,
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1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
Revenues from continuing
operations $ 29,365,753 $ 25,875,934 $ 24,662,812 $ 18,923,852 $ 16,423,262
Income from continuing
operations before income tax 1,107,509 1,381,813 320,004 902,903 1,072,112
Current income tax expense 94,713 155,064 34,322 49,099 101,047
Deferred income tax
expense (benefit) 397,912 433,012 119,622 321,574 (2,013,784)
Loss from discontinued
operations, net of taxes -- -- -- 394,568 --
Net income 614,884 793,737 166,060 137,662 2,984,849
Basic and diluted net income
per share 0.35 0.45 0.10 0.09 1.99
Cash flows provided by
operations 11,320,309 9,478,714 9,895,993 7,365,631 6,542,227
Total assets 21,218,412 18,673,950 18,373,967 18,925,440 13,709,895
Notes payable 9,244,012 8,230,043 8,171,945 9,048,928 6,070,302
Stockholder's equity 8,971,630 8,396,362 7,594,500 7,417,190 6,041,293
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information set forth under Item 6, "Selected Financial Data," and the
financial statements of the Company and the accompanying notes thereto included
elsewhere in this Report.
The Company currently operates 70 rental-purchase stores located in seven
states. The number of stores operated by the Company has increased from 35 as of
July 31, 1995 to 70 as of July 31, 1999. During the year ended July 31, 1999,
the Company opened eleven new store locations, acquired two stores, closed five
stores, and sold three stores.
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,
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1999 1998
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Revenues:
Rental income 99.0% 99.0%
Sales of merchandise 1.0 1.0
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Total revenues 100.0 100.0
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 21.5 21.8
Other 4.7 5.9
Cost of merchandise sold 1.0 1.0
Salaries and wages 27.5 25.6
Advertising 4.4 3.3
Occupancy 6.5 6.1
Other operating expenses 28.1 27.8
Interest expense 2.7 3.1
Loss on sale of property and equipment -- 0.1
Gain on sale of assets (0.2) --
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Total cost and operating expenses 96.2 94.7
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Income before income tax provision 3.8 5.3
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Current income tax expense 0.3 0.6
Deferred income tax expense 1.4 1.7
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Net income 2.1% 3.0%
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 1999 COMPARED TO
1998
For the fiscal year ended July 31, 1999 compared to the fiscal year ended
July 31, 1998, total revenue increased $3,489,819 or 13.5% to $29,365,753 from
$25,875,934. The increase in total revenue was primarily attributable to the
inclusion of two stores purchased in the fourth quarter of fiscal year 1998,
inclusion of two stores purchased in the second quarter of fiscal year 1999,
inclusion of eleven new store openings in fiscal year 1999 and improved same
store revenues. Revenue from same stores improved $2,087,604, or 8.9% and
accounted for 59.8% of the increase. Same store revenues represent those
revenues earned in stores that were operated by the Company for the entire year
ending July 31, 1999 and 1998. The improvement was primarily attributable to an
increase in both the number of items on rent and in revenue earned per item.
Revenue from the two stores purchased in the fourth quarter of fiscal 1998
accounted for $450,811, or 12.9% of the increase. Revenue from the two stores
purchased in the second quarter of fiscal year 1999 accounted for $621,774, or
17.8% of the increase. Revenue from the eleven new store openings in fiscal year
1999 accounted for $1,178,701, or 33.8% of the increase. Revenue decreased
$849,071, or 24.3% due to closing and merging one store location in fiscal year
1998, closing and merging five store locations in fiscal year 1999 and selling
three stores in fiscal year 1999, respectively.
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 1999, approximately 18% of the Company's
rental revenue was derived from appliances, 26% from home furniture, 28% from
electronics, 9% from various other products including jewelry and 19% from
various services and charges to rental customers including reinstatement fees,
club program and liability waiver fees.
Total costs and operating expenses increased $3,764,123, or 15.4% to
$28,258,244 from $24,494,121 and increased 1.5% as a percentage of total
revenues to 96.2% from 94.7%. The increase was primarily the result of expenses
associated with the two stores acquired and eleven stores opened in fiscal year
1999.
Depreciation of rental merchandise increased $669,829, or 11.9% to
$6,313,128 from $5,643,299. Depreciation of rental merchandise expressed as a
percent of total store revenue decreased .3% to 21.5% from 21.8%. Other
depreciation and amortization decreased $153,039, or 10.1% to $1,366,752 from
$1,519,791 and as a percentage of total store revenue decreased 1.2% to 4.7%
from 5.9%. The decrease was primarily due to the full amortization of certain
noncompetes at the end of fiscal year 1998.
Salaries and wages increased $1,460,747, or 22.1% to $8,079,443 from
$6,618,696. Salaries and wages expressed as a percent of total store revenue
increased 1.9% to 27.5% from 25.6%. Salaries and wages increased by $231,241, or
15.8% of the total increase due to additional personnel for the stores acquired
in the fourth quarter of fiscal year 1998 and for the stores acquired in the
second quarter of fiscal year 1999. Additional personnel for the eleven new
internal stores opened in fiscal year 1999 increased salaries and wages by
$477,124, or 32.7% of the total increase. Salaries and wages increased $440,476,
or 30.2% of the total increase due to additional personnel at the Company's same
stores necessitated by the increase in the number of items on rent. Advertising
expense increased $437,778, or 50.5% to $1,305,293 from $867,515. Advertising
expense expressed as a percent of total store revenue increased 1.1% to 4.4%
from 3.3% primarily due to the stores acquired in the fourth quarter of 1998,
stores acquired in the second quarter of 1999 and the eleven new internal stores
opened in fiscal year 1999. Occupancy expense increased $327,338 or 20.9% to
$1,896,208 from $1,568,870 and as a percentage of total revenues increased .4%
to 6.5% from 6.1% primarily due to stores acquired and
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BESTWAY, INC. FORM 10-K
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opened in fiscal year 1999. Other operating expenses increased $1,081,615, or
15.1% to $8,263,178 from $7,181,563 and as a percentage of total revenues
increased .3% to 28.1% from 27.8%. The increase was primarily attributable to
the acquired and new stores offset by decreases in expenses relating to the
write-off of rental merchandise and insurance premiums.
For the fiscal year ended July 31, 1999 compared to the fiscal year ended
July 31, 1998, income from operations before income tax provision decreased
$274,304, or 19.9% to $1,107,509 from $1,381,813 and as a percentage of total
revenues decreased 1.5% to 3.8% from 5.3%. The decrease was primarily due to
operating losses of $307,963 from the eleven new internal store openings during
fiscal 1999. The new stores operated at a lower average revenue per store as
compared to the Company's existing stores and, therefore, had higher salaries
and wages, advertising and occupancy expenses as a percentage of revenues.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended July 31, 1999, the Company's net cash flows
from operating activities was $11,320,309 as compared to $9,478,714 for the
fiscal year ended July 31, 1998. The increase was primarily due to increased
cash flow from two stores acquired in 1999 and increased cash flow from eleven
new internal store openings during fiscal year 1999.
For the fiscal year ended July 31, 1999, the Company's net cash flows
used in investing activities was $11,983,602 as compared to $9,398,556 for the
year ended July 31, 1998. The Company's investing activities reflects a $523,896
outflow, net of cash acquired, for the two store acquisition during the second
quarter, a $1,166,295 increase in additions to property and equipment primarily
for the eleven new internal store openings during the year, a $1,361,853
increase in the purchase of rental units and equipment and a $289,696 inflow
from the sale of three store locations in fiscal year 1999.
For the fiscal year ended July 31, 1999, the Company's net cash flows
provided by financing activities was $974,353 as compared to $66,223 for the
year ended July 31, 1998. The increase in financing activities principally
reflects increased borrowings on the Company's debt.
At July 31, 1999, the Company was in violation of the cash flow coverage
covenant provision of its Revolving Credit Loan Agreement (the "Agreement"). The
Company obtained a waiver of such violation from the lender as of July 31, 1999.
The Company is currently involved in discussions with the lender and expects to
extend the maturity date of the Agreement and to renegotiate certain financial
covenants. Although there can be no assurances, management does not anticipate a
future violation of any covenants.
With the Company having available credit of approximately $2,362,999
under the $8,500,000 Revolving Credit Loan Agreement, management believes the
Company has adequate resources to meet its future cash obligations.
On January 11, 1999, the Company signed an asset purchase agreement with
King Rentals, Inc. to acquire all the assets of two store locations in Alabama.
The Company paid $525,000 in cash for all the assets involved in the daily
operations of the stores including all idle rental inventory and all rental
inventory. Additionally, the Company obtained the seller's former store
locations by assuming the lease agreements. The Company funded the purchase
through borrowings under the Revolving Credit Agreement.
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On February 1, 1999, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation to sell all the assets of one store location
in Mississippi. The Company received $90,000 in cash for all the assets involved
in the daily operations of the store including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's store locations.
On March 14, 1999, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of two store locations in
Tennessee. The Company received $196,996 in cash for all the assets involved in
the daily operations of the stores including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's store locations.
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.
YEAR 2000
The Company is coordinating the identification, evaluation, and
implementation of changes to computer systems and applications necessary to
achieve a Year 2000 date conversion with no adverse effect on customers or
disruption to business operations. These actions are necessary to ensure that
the systems and applications will recognize and process the Year 2000 and
beyond. The principal areas of risk identified by the Company are purchased
software, computer hardware and systems other than information technology
systems.
The Company uses purchased software programs for a variety of functions,
including general ledger, accounts payable, payroll, fixed assets and treasury.
Currently, the Company's general ledger, accounts payable, payroll and fixed
assets systems are Year 2000 compliant. The Company is coordinating with banks
with which it does business to ensure the compliance of the electronic transfer
software used by each bank as well as the compliance of each bank's internal
systems. Additionally, the Company has upgraded all software for individual
workstations and laptops to be Year 2000 compliant.
The Company believes it has identified all computer hardware used in
connection with its operations that must be modified, upgraded or replaced. The
Company has upgraded all of its critical hardware to be Year 2000 compliant.
As part of the Year 2000 readiness process significant services
providers, vendors, suppliers and customers that are believed to be critical to
business operations after January 1, 2000, have been identified and steps are
underway in the attempt to reasonably ascertain their stage of Year 2000
readiness. The failure to correct a material Year 2000 problem could result in
the interruption in, or a failure of, certain normal business activities and
operations, liquidity and financial condition. The Company does not expect the
Year 2000 problem to have a material impact on the Company; however, due to
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third party suppliers, Year 2000
failures may have a material impact on the Company. The Company has incurred
approximately $5,000 of compliance costs to date and the total cost of
compliance and its effect on the Company's future results of operations is not
expected to be material. The Company has begun to develop contingency plans for
its Year 2000 issues. The Company's contingency planning is primarily focused on
precautionary measures associated with significant service providers, vendors
and suppliers.
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RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 1998 COMPARED TO
1997
For the fiscal year ended July 31, 1998 compared to the fiscal year ended
July 31, 1997, total revenue increased $1,213,122, or 4.9% to $25,875,934 from
$24,662,812. The increase in total revenue was primarily attributable to the
inclusion of two stores purchased in the fourth quarter of fiscal year 1998,
inclusion of a full year's operating results for two new internal store openings
during the fourth quarter of fiscal year 1997 and operating results from a
single new internal store opening during the first quarter of fiscal year 1998.
Same store revenues increased by $626,069, or 2.6% to $25,007,842 for 1998 from
$24,381,773 in 1997. Same store revenues represent those revenues earned in
stores that were operated by the Company for the entire year ending July 31,
1998 and 1997. This improvement was primarily attributable to an increase in
both the number of items on rent and in revenue earned per item on rent.
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 1998, approximately 18% of the Company's
rental revenue was derived from appliances, 25% from home furniture, 29% from
electronics, 10% from various other products including jewelry and 18% from
various services and charges to rental customers including reinstatement fees,
club program and liability waiver fees.
Total costs and operating expenses increased $151,313, or 0.6%. Costs and
operating expenses associated with the Company's core business increased
$574,873, but as a percentage of total store revenue, decreased from 97.0% in
1997 to 94.7% in 1998. This decrease is primarily due to a decrease in
depreciation and amortization, salaries and wages and other operating costs
offset by increased occupancy and advertising costs.
Depreciation of rental merchandise increased by $210,384, or 3.9% to
$5,643,299 for 1998 from $5,432,915 for 1997. Depreciation of rental merchandise
expressed as a percent of total store rental and fee revenue decreased from
22.0% in 1997 to 21.8% in 1998. The decrease was primarily attributable to
higher rental rates on rental merchandise.
Salaries and wages increased $269,154, or 4.2% to $6,618,696 for 1998
from $6,349,542 for 1997. Salaries and wages expressed as a percent of total
store revenue decreased from 25.8% in 1997 to 25.6% in 1998. New and acquired
stores produced additional salaries and wages of $173,826 for the year.
Advertising expense increased $67,315, or 8.4% to $867,515 for 1998 from
$800,200 in 1997. Advertising expense expressed as a percent of total store
revenue increased to 3.3% in 1998 from 3.2% in 1997. Occupancy expense increased
$177,059, or 12.7% to $1,568,870 for 1998 from $1,391,811 for 1997. Occupancy
expense expressed as a percent of total store revenue increased to 6. 1 % in
1998 from 5.6% in 1997 primarily due to the increase in number of stores opened
and the relocation of certain existing stores to locations that are larger in
square footage. Other operating expenses decreased $159,479, or 2.2% to
$7,181,563 for 1998 from $7,341,042 for 1997. Other operating expenses expressed
as a percent of total store revenue decreased from 29.8% in 1997 to 27.8% in
1998 primarily due to managements' streamlining efforts to focus on profit and
growth in 1998 which resulted in increased same store revenues and lower
operating costs as a percentage of revenue, offset by increased write-offs of
rental merchandise. Interest expense increased $38,494, or 5.1% to $795,232 for
1998 from $756,738 for 1997 and as a percentage of total store revenue remained
consistent with the prior year at 3.1%.
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Costs and operating expenses decreased $423,560, or 1.6% as a percentage
of total store revenue due to losses incurred during 1997 on the Company's
investment in Value Auto Partners, Ltd. (the Partnership). As a result of losses
incurred by the Partnership, and based on management's assessment of the
recoverability of the carrying amount of the investment, during the second
quarter of fiscal year 1997 management concluded that the investment should be
written off. The Company's equity in Partnership losses was $193,981, or 0.8% as
a percentage of total store revenue. The write-off of the remaining balance of
the investment in the Partnership resulted in a pretax loss of $229,579, or 0.9%
as a percentage of total store revenue for 1997.
For the fiscal year ended July 31, 1998 compared to the fiscal year ended
July 31, 1997, net income increased $627,677, or 378% to $793,737 for 1998 from
$166,060 for 1997. Net income expressed as a percent of total store revenue
increased to 3.0% in 1998 from 0.7% in 1997 due to the factors discussed above.
CAUTIONARY STATEMENT
This Report on Form 10-K and the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's Annual Report to Shareholders, any Report on Form 10-Q
or Form 8-K or any other written or oral statements made by or on behalf of the
Company may include forward looking statements. Forward-looking statements
represent the Company's expectations or beliefs concerning future events. Any
forward-looking statements made by or on behalf of the Company are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors include,
but are not limited to, (i) the ability of the Company to open or acquire
additional rental-purchase stores on favorable terms, (ii) the ability of the
Company to improve the performance of such acquired stores and to integrate such
opened or acquired stores into the Company's operations, and (iii) the impact of
state and federal laws regulating or otherwise affecting the rental-purchase
transaction. Undo reliance should not be placed on any forward-looking
statements made by or on behalf of the Company as such statements speak only as
of the date made. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
the occurrence of future events or otherwise.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its Revolving Credit Loan Agreement. The
Company's exposure to interest rate risk due to changes in the prime rate is not
expected to be material. At July 31, 1999, the fair value of the obligation
outstanding approximates its related carrying value because the obligation bears
interest at the current market rate.
12
13
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
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-18 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1999, 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 1999, 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 1999, 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 1999, and is incorporated
herein by reference.
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, 1999.
(b) Exhibits
13
14
BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DOCUMENT
------- ------------------------------------------------------
10.1 Extension Agreement to First Amendment and
Restated Promissory Note dated August 19, 1997
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
Filed electronically only, not attached to printed reports
(c) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the year ended
July 31, 1999.
14
15
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 28, 1999 /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 28 day of October 1999.
SIGNATURE TITLE
--------- -----
/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/ Teresa A. Sheffield President and Chief Operating Officer
- --------------------------------------------------------
TERESA A. SHEFFIELD
/s/ Beth A. Durrett Chief Financial Officer
- --------------------------------------------------------
BETH A. DURRETT
/s/ Joe R. McElroy Vice President - Real Estate
- --------------------------------------------------------
JOE R. MCELROY
15
16
BESTWAY, INC. FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE(S)
-------
Report of Independent Accountants F-1
Financial Statements:
Consolidated Balance Sheets as of July 31, 1999 and 1998 F-2
Consolidated Statements of Income for the years ended
July 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years ended
July 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6 - F-16
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Bestway, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Bestway, Inc. at
July 31, 1999 and 1998 and the results of their operations and their cash flows
for each of the three years in the period ended July 31, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
October 15, 1999
18
BESTWAY, INC. FORM 10-K
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JULY 31,
--------------------------------
1999 1998
-------------- --------------
ASSETS
Cash and cash equivalents $ 812,179 $ 501,119
Prepaid expenses 172,226 182,118
Deferred income taxes 871,152 1,269,065
Other assets 63,202 46,773
Rental merchandise, at cost 20,164,761 17,723,833
less accumulated depreciation 7,339,287 6,315,080
-------------- --------------
12,825,474 11,408,753
-------------- --------------
Property and equipment, at cost 7,247,516 5,366,471
less accumulated depreciation 3,398,724 2,816,429
-------------- --------------
3,848,792 2,550,042
-------------- --------------
Non-competes, net of amortization 262,783 393,056
Goodwill, net of amortization 2,362,604 2,323,024
-------------- --------------
Total assets $ 21,218,412 $ 18,673,950
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,384,696 $ 865,162
Accrued interest - related parties 20,667 15,500
Income taxes payable 56,406 184,419
Other accrued liabilities 1,541,001 982,464
Notes payable-related parties 3,000,000 3,000,000
Notes payable-other 6,244,012 5,230,043
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Preferred stock, $10.00 par value,
1,000,000 authorized, none issued -- --
Common stock, $.01 par value, 5,000,000 authorized,
1,756,917 and 1,751,592 issued at July 31, 1999
and July 31, 1998, respectively 17,569 17,516
Paid-in capital 16,124,578 16,098,006
Less treasury stock, at cost, 11,200 at July 31, 1999 (66,241) --
Accumulated deficit (7,104,276) (7,719,160)
-------------- --------------
Total stockholders' equity 8,971,630 8,396,362
-------------- --------------
Total liabilities and stockholders' equity $ 21,218,412 $ 18,673,950
============== ==============
The accompanying notes are an integral part of the financial statements.
F - 2
19
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
FISCAL YEARS ENDED JULY 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Rental income $ 29,066,438 $ 25,614,663 $ 24,382,493
Sales of merchandise 299,315 261,271 280,319
------------ ------------ ------------
29,365,753 25,875,934 24,662,812
------------ ------------ ------------
Cost and operating expenses:
Depreciation and amortization:
Rental merchandise 6,313,128 5,643,299 5,432,915
Other 1,366,752 1,519,791 1,567,194
Cost of merchandise sold 281,954 253,884 273,898
Salaries and wages 8,079,443 6,618,696 6,349,542
Advertising 1,305,293 867,515 800,200
Occupancy 1,896,208 1,568,870 1,391,811
Other operating expenses 8,263,178 7,181,563 7,341,042
Equity in loss of partnership -- -- 193,981
Write off of investment in partnership -- -- 229,579
Interest expense 796,611 795,232 756,738
Loss on sale of property and equipment 25,452 45,271 5,908
Gain on sale of assets (69,775) -- --
------------ ------------ ------------
28,258,244 24,494,121 24,342,808
------------ ------------ ------------
Income from operations before income taxes: 1,107,509 1,381,813 320,004
------------ ------------ ------------
Current income tax expense 94,713 155,064 34,322
Deferred income tax expense 397,912 433,012 119,622
------------ ------------ ------------
Net income $ 614,884 $ 793,737 $ 166,060
============ ============ ============
Basic and diluted net income per share $ 0.35 $ 0.45 $ 0.10
============ ============ ============
Weighted average common shares outstanding 1,747,575 1,750,384 1,749,780
============ ============ ============
Diluted weighted average common shares outstanding 1,786,445 1,795,552 1,793,926
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F - 3
20
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FISCAL YEARS ENDED JULY 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 614,884 $ 793,737 $ 166,060
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,679,880 7,163,090 7,000,109
Net book value or rental units retired 2,216,789 1,635,606 1,765,015
Loss on sale of property and equipment 25,452 45,271 5,908
Gain on sale of assets (69,775) -- --
Loss on equity investment in partnership -- -- 193,981
Loss on partnership investment -- -- 229,579
Deferred income taxes 397,912 433,012 119,622
Changes in operating assets and liabilities other than cash:
Prepaid expenses 9,892 (54,141) 214,935
Other assets (16,429) 22,116 52,584
Accounts payable 26,013 (462,054) 350,347
Income taxes payable (128,013) 131,771 (13,383)
Other accrued liabilities 563,704 (229,694) (188,764)
------------ ------------ ------------
Total adjustments 455,167 (592,002) 415,719
------------ ------------ ------------
Net cash flows from operating activities 11,320,309 9,478,714 9,895,993
------------ ------------ ------------
Cash flows from investing activities:
Purchase of rental units and equipment (9,705,046) (8,343,193) (7,746,883)
Additions to property and equipment (2,098,317) (932,022) (1,311,597)
Proceeds from sale of property and equipment 53,961 159,040 57,445
Asset purchase net of cash acquired (523,896) (401,723) --
Proceeds from restricted cash -- 119,342 --
Proceeds from sale of assets 289,696 -- --
------------ ------------ ------------
Net cash flows used in investing activities (11,983,602) (9,398,556) (9,001,035)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of notes payable 2,425,000 3,483,932 2,325,000
Repayment of notes payable (1,411,031) (3,425,834) (3,201,983)
Treasury stock purchase (66,241) -- --
Stock issuance 26,625 8,125 11,250
------------ ------------ ------------
Net cash flows provided by (used in) financing activities 974,353 66,223 (865,733)
------------ ------------ ------------
Cash and cash equivalents at the beginning of year 501,119 354,738 325,513
------------ ------------ ------------
Cash and cash equivalents at the end of the year $ 812,179 $ 501,119 $ 354,738
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F - 4
21
BESTWAY, INC. FORM 10-K
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the years ended July 31, 1999, 1998, and 1997.
COMMON STOCK TREASURY STOCK
----------------------- PAID-IN -------------------------- ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT
---------- ---------- ----------- ----------- ----------- -----------
Balance at July 31, 1996 1,747,717 $ 17,477 $16,078,670 -- $ -- $(8,678,957)
---------- ---------- ----------- ----------- ----------- -----------
Stock options exercised 2,250 23 11,227 -- -- --
Net income for the year ended July 31, 1997 -- -- -- -- -- 166,060
---------- ---------- ----------- ----------- ----------- -----------
Balance at July 31, 1997 1,749,967 17,500 16,089,897 -- -- (8,512,897)
---------- ---------- ----------- ----------- ----------- -----------
Stock options exercised 1,625 16 8,109 -- -- --
Net income for the year ended July 31, 1998 -- -- -- -- -- 793,737
---------- ---------- ----------- ----------- ----------- -----------
Balance at July 31, 1998 1,751,592 17,516 16,098,006 -- -- (7,719,160)
---------- ---------- ----------- ----------- ----------- -----------
Stock options exercised 5,325 53 26,572 -- -- --
Treasury stock purchases -- -- -- (11,200) (66,241) --
Net income for the year ended July 31, 1999 -- -- -- -- -- 614,884
---------- ---------- ----------- ----------- ----------- -----------
Balance at July 31, 1999 1,756,917 $ 17,569 $16,124,578 (11,200) $ (66,241) $(7,104,276)
========== ========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F - 5
22
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. Intercompany balances
and transactions have been eliminated in the consolidated financial statements.
The Company owns and operates a total of seventy stores located in
various states. The store operations are controlled and monitored through the
Company's management information system networked with its home office in
Dallas, Texas. The Company's store locations by state as of July 31, 1999, are
as follows:
NUMBER OF
STATE STORES
------------------ ---------------
Alabama 19
Arkansas 1
Georgia 2
Mississippi 15
North Carolina 12
South Carolina 6
Tennessee 15
---------------
70
===============
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 1999,
approximately 18% of the Company's rental revenue was derived from appliances,
26% from home furniture, 28% from electronics, 9% from various other products
such as jewelry and 19% from various services and charges to rental customers
including reinstatement fees, club fees and liability waiver fees. In fiscal
year 1998, approximately 18% of the Company's rental revenue was derived from
appliances, 25% from home furniture, 29% from electronics, 10% from various
other products such as jewelry and 18% from various services and charges to
rental customers including reinstatement fees and liability wavier fees.
F - 6
23
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major improvements to
property and equipment are capitalized. Maintenance and repair expenditures are
charged to expense as incurred. As fixed assets are sold or retired, the
applicable cost and accumulated depreciation are eliminated from the accounts
and any gain or loss is recorded.
Depreciation of property and equipment is provided over the estimated
useful lives, on the straight-line basis as defined below. Leasehold
improvements are amortized over the shorter of the useful life of the asset or
the term of the lease and renewal period, if applicable.
LIVES (YEARS)
------------
Furniture and fixtures 7
Vehicles 5
Computer equipment 3
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit, and
highly liquid instruments with maturities of three months or less when
purchased. The carrying amount of cash and cash equivalents is the estimated
fair value at July 31, 1998 and 1999.
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 15 to 20 years. Accumulated amortization of goodwill was $2,280,923 and
$2,036,464 at July 31, 1999 and 1998, 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, the July
1, 1996 acquisition of 8 stores in Arkansas and Mississippi, the May 22, 1998
acquisition of one store in North Carolina and the May 29, 1998 acquisition of
one store in Tennessee and is being amortized on a straight-line basis over
periods from 2 to 5 years. Accumulated amortization of the non-competes was
$1,443,394 and $1,313,122 at July 31, 1999 and 1998, respectively.
F - 7
24
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
EARNINGS PER COMMON SHARE
Basic and diluted net income 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. For the fiscal year ended July 31, 1999, 1998 and 1997, 38,870, 45,168
and 44,146 shares of common stock options were included in the denominator for
the calculation of diluted net income per share.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly deferred tax
assets, and liabilities, disclosure of contingent assets and liabilities and
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
NEW ACCOUNTING STANDARDS
During the first quarter of fiscal year 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information and SFAS No. 132, Employer's Disclosures about Pensions
and Other Postretirement Benefits. The adoption of these statements had no
impact on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years financial
statements in order to conform to the current year's presentation.
F - 8
25
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. ACQUISITIONS AND DISPOSITIONS
On May 22, 1998, the Company signed an Asset Purchase Agreement with
Ideal Rent to Own, Inc. to acquire all the assets of a single store location in
North Carolina. The Company paid approximately $140,000 in cash for all assets
involved in the daily operations of the store including all idle rental
inventory, all rental contracts, vehicles, store furniture and fixtures,
computer and leasehold improvements. Additionally, the Company obtained the
seller's former store location by assuming the lease agreement.
On May 29, 1998, the Company signed an Asset Purchase Agreement with
Grand Rental Station, Inc. to acquire all the assets of a single store location
in Tennessee. The Company paid $262,000 in cash for all the assets involved in
the daily operations of the store 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 location by assuming the lease agreement.
On January 11, 1999, the Company signed an asset purchase agreement with
King Rental, Inc. to acquire all the assets of two store locations in Alabama.
The Company paid $525,000 in cash for all the assets involved in the daily
operations of the stories including all idle rental inventory and all rental
inventory. Additionally, the Company obtained the seller's former store
locations by assuming the lease agreements. The Company funded the purchase
through borrowings under the Revolving Credit Loan Agreement.
The acquisitions have been accounted for under the purchase method and,
accordingly, the operating results from the acquired stores are included in the
accompanying consolidated statements of income from the date of acquisition. The
acquisitions resulted in $284,040 of goodwill which is being amortized on a
straight-line basis over 15 years.
On February 1, 1999, the Company entered into an asset purchase agreement
with Griffin Acceptance Corporation to sell all the assets of one store location
in Mississippi. The Company received $90,000 in cash for all the assets involved
in the daily operations of the stores including all rental inventory being
rented by customers. Idle inventory was transferred to the Company's existing
store locations. The Company recognized a gain of $31,393 on the sale.
On May 14, 1999, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of two store locations in
Tennessee. The Company received $196,996 in cash for all the assets involved in
the daily operations of the stores including all rental inventory being rented
by customers. Idle inventory was transferred to the Company's existing store
locations. The Company recognized a gain of $38,382 on the sale.
F - 9
26
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
JULY 31,
----------------------------
1999 1998
----------- -----------
Building and leaseholds $ 2,775,651 $ 1,875,178
Vehicles 2,841,626 2,263,613
Furniture and fixtures 1,047,391 783,875
Computer equipment 582,848 443,805
----------- -----------
7,247,516 5,366,471
Accumulated depreciation (3,398,724) (2,816,429)
----------- -----------
$ 3,848,792 $ 2,550,042
=========== ===========
4. NOTE PAYABLE
Notes payable consists of the following:
YEARS ENDED JULY 31,
------------------------
1999 1998
----------- -----------
Senior collateralized debt
Revolving Credit Loan Agreement dated August 19, 1993, amended November
18, 1997, interest payable monthly at prime plus 1.5%; note matures on
November 30, 1999; note collateralized by substantially all the Company's
assets $ 6,137,001 $ 5,112,001
Subordinated debt
Note payable to limited partnership and stockholder dated July 19, 1993,
amended August 18, 1999, interest paid quarterly at 8% beginning October
1, 1993; note, as amended, matures on August 19, 2001 3,000,000 3,000,000
Other notes payable
Note payable to bank dated April 11, 1994, principal payable monthly,
interest payable monthly at 9% per annum; note matures on April 15, 2006;
note collateralized by associated real estate 107,011 118,042
----------- -----------
$ 9,244,012 $ 8,230,043
=========== ===========
F - 10
27
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At July 31, 1999 and 1998 the prime rate was 8.0% and 8.5%, respectively.
On August 18, 1997, the Company amended its August 19, 1993 Second
Amendment to First Amended and Restated Revolving Credit Loan Agreement (the
"Agreement") with its senior collateralized lender. In the amendment, the
Company extended the maturity date from August 19, 1997 to November 18, 1997. On
November 18, 1997, the Company further amended the Agreement. Pursuant to the
Third Amendment of the Agreement, the Company revised certain covenants,
increased the maximum amount of revolving credit under such loan Agreement from
$7,500,000 to $8,500,000 and extended the maturity date of such Agreement by two
years from November 18, 1997 to November 30, 1999. The Agreement includes
restrictive covenants, the most restrictive of which prohibits the payment of
dividends. At July 31, 1999, the Company had the capacity to borrow $2,362,999
under the $8,500,000 amended line of credit.
At July 31, 1999, the Company was in violation of the cash flow coverage
covenant provision of its loan Agreement. The Company obtained a waiver of such
violation from the lender as of July 31, 1999. The Company is currently involved
in discussions with the lender and expects to extend the maturity date of the
Agreement and to renegotiate certain financial covenants. Although there can be
no assurances, management does not anticipate a future violation of any
covenants.
On August 18, 1999, the Company amended its subordinated note payable to
limited partnership and stockholder dated July 19, 1993. In the amendment, the
Company extended the maturity date from August 19, 1999 to August 19, 2001.
At July 31, 1999, 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.
Following is a summary of maturities of notes payable, as amended, for
each of the periods ending July 31:
2000 $6,149,047
2001 14,328
2002 3,014,520
2003 15,882
2004 17,370
Thereafter 32,865
----------
$9,244,012
==========
F - 11
28
BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. INCOME TAXES
The provisions for income tax on income from continuing operations
consists of the following for the years ended July 31:
1999 1998 1997
--------- --------- ---------
Current:
Federal $ 131,174 $ 76,344 $ 15,180
State (36,461) 78,720 19,142
--------- --------- ---------
94,713 155,064 34,322
--------- --------- ---------
Deferred:
Federal 311,024 460,661 131,933
State 86,888 (27,649) (12,311)
--------- --------- ---------
397,912 433,012 119,622
--------- --------- ---------
Total income tax provision $ 492,625 $ 588,076 $ 153,944
========= ========= =========
Significant components of the Company's deferred income tax assets at
July 31, 1999 and 1998, respectively, are as follows:
Net operating loss carryforward $ 903,198 $ 489,290
Investment tax credit carryforward 18,706 25,721
Minimum tax credit carryover 231,670 100,496
Property and equipment 211,759 110,919
Unrealized loss 59,154 145,545
Intangible assets 364,254 422,815
Accrued expenses 204,475
----------- -----------
Total deferred tax assets 1,993,216 1,294,786
Rental merchandise (1,103,357) --
----------- -----------
Total deferred tax liabilities (1,103,357) --
----------- -----------
Valuation allowance (18,706) (25,721)
----------- -----------
Net deferred tax asset $ 871,153 $ 1,269,065
=========== ===========
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. In fiscal 1999 and 1998, the valuation
allowance was reduced $7,015 and $11,012, respectively as a result of the
expiration of investment tax credit carryforwards.
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BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following is the reconciliation of the U.S. statutory tax rate to the
Company's effective tax rate on income from continuing operations for the years
ended July 31:
1999 1998 1997
---------- --------- ---------
Federal income tax at statutory rate of 34% $ 376,553 $ 469,816 $ 108,801
Goodwill amortization 58,152 58,152 58,152
State income tax 46,411 52,071 (8,413)
Other 11,509 8,037 (4,596)
---------- --------- ---------
Provision for income tax $ 492,625 $ 588,076 $ 153,944
========== ========= =========
During 1999, the net operating loss carryforwards were increased by
$1,217,376 and in 1998 reduced by $2,239,563. At July 31, 1999, the Company has
Federal net operating loss carryforward of approximately $2,644,467 expiring
from 2006 to 2014. The Company has State net operating loss carryforward of
$112,347 which expires from 2004 to 2014. The Company has investment tax credit
carryforwards of approximately $18,706 which expire between 2000 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, 1999, $93,000 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 each of the years ended July 31,
1999, 1998 and 1997 was $30,000.
Interest expense relating to notes payable to affiliates amounted to
approximately $243,333 for the years ended July 31, 1999, $182,500 for the year
ended July 31, 1998 and $192,000 for year ended July 31, 1997.
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, 1999 by fiscal year are as follows:
2000 $ 1,685,563
2001 1,491,090
2002 1,099,453
2003 836,029
2004 508,806
Thereafter 486,578
-----------
$ 6,107,519
===========
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BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS
Cash interest payments for the years ended July 31, 1999, 1998 and 1997
are $791,444, $836,995 and $760,745, respectively. Cash tax payments for the
years ended July 31, 1999, 1998 and 1997 are $74,768, $23,293 and $47,706,
respectively.
9. INCENTIVE PLANS
STOCK OPTION PLAN
The Company has a stock option plan (the "Plan") for officers and
employees of the Company or its affiliates, under which the maximum number of
shares which may be granted in the aggregate is 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 such exercise can not at
any time be less than 25 shares unless the remaining shares that have become so
purchasable are less than 25 shares.
All options granted to the employees have an exercise price no less than
the fair market value of the stock at grant date. The options vest under one of
the following conditions: (i) one-third each year, beginning on the first
anniversary of the date of grant, (ii) one-half each year, beginning on the
first anniversary of the date of grant, or (iii) one-fourth each year, beginning
on the first anniversary of the date of grant.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Plan. In 1995, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which, if fully adopted by the Company, would
change the methods the Company applies in recognizing the cost of the Plan.
Adoption of the cost recognition provisions of SFAS No. 123 is optional and the
Company has decided not to elect the provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of SFAS
123 are required by SFAS 123 and are presented below.
In accordance with APB 25, the Company has not recognized any
compensation cost for the stock options granted.
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BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock options as of July 31,
1999, 1998 and 1997 and the changes during the year ended on those dates is
presented below:
1999 1998 1997
------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES AVERAGE # SHARES AVERAGE # SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- ----------- ----------- ------------ ------------ ------------
Outstanding at beginning of year 147,150 $ 5.53 184,650 $ 5.47 117,650 $ 5.00
Granted 71,710 $ 6.22 27,750 $ 7.00 72,000 $ 6.19
Exercised 5,325 $ 5.00 1,625 $ 5.00 2,250 $ 5.00
Forfeited 20,500 $ 6.58 63,625 $ 6.22 2,750 $ 5.00
Expired -- $ -- -- $ -- -- $ --
Outstanding at end of year 193,035 $ 5.69 147,150 $ 5.53 184,650 $ 5.47
Exercisable at end of year 112,173 $ 5.25 80,920 $ 5.14 52,575 $ 5.00
Available for grant at end of year 25,015 76,225 40,350
Weighted average fair value of
options granted $ 2.62 $ 2.71 $ 2.46
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate
of 5.48% for 1999 and 5.71% for 1998; the expected life of options is 5 years;
and a volatility of 37.98% and 32.37% for options granted in 1999 and 1998,
respectively.
At July 31, 1999, exercise prices for all options outstanding ranged from
$5.00 to $7.00 and the weighted-average remaining contractual life for options
outstanding was 7.43 years.
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS No. 123, the Company's net income and net
income per common share for 1997, 1998 and 1999 would approximate the pro forma
amounts below:
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
7/31/99 7/31/99 7/31/98 7/31/98 7/31/97 7/31/97
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 614,884 $ 559,413 $ 793,737 $ 769,394 $ 166,060 $ 152,201
Basic net income per common share $ 0.35 $ 0.32 $ 0.45 $ 0.44 $ 0.10 $ 0.09
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards granted
prior to the 1996 fiscal year.
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BESTWAY, INC. FORM 10-K
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999, 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.
10. 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.
11. SUBSEQUENT EVENT
On October 7, 1999, the Company entered into an asset purchase agreement
with Panco Electronics and Appliances, Inc., to acquire all rental contracts
associated with a single store location in Mississippi for approximately $93,000
in cash.
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BESTWAY, INC. FORM 10-K
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT
------- ------------------------------------------------------
10.1 Extension Agreement to First Amendment and
Restated Promissory Note dated August 19, 1997
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
Filed electronically only, not attached to printed reports