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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------
Commission File Number 0-22026
RENT-WAY, INC.
(Exact name of registrant as specified in its charter)
--------------
PENNSYLVANIA 25-1407782
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
-------------------------------------------
(Address of principal executive offices)
(814) 455-5378
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 28, 2003
----------------------- --------------------------------
Common Stock 25,685,538
RENT-WAY, INC.
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and
September 30, 2002......................................................... 3
Condensed Consolidated Statements of Operations, three and six months
ended March 31, 2003 and 2002 (unaudited).................................. 4
Condensed Consolidated Statements of Cash Flows, six months ended March
31, 2003 and 2002 (unaudited).............................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 26
Item 4. Controls and Procedures......................................................... 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders............................. 28
Item 6. Exhibits and Reports on Form 8-K................................................ 28
Signatures............................................................................... 30
Certifications........................................................................... 31
2
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All dollar amounts in thousands)
MARCH 31, SEPTEMBER 30,
2003 2002
--------- -------------
(unaudited)
ASSETS
Cash and cash equivalents .............................. $ 10,233 $ 7,295
Prepaid expenses ....................................... 12,129 10,361
Income tax receivable .................................. 4,380 4,191
Rental merchandise, net ................................ 177,560 147,608
Rental merchandise deposits and credits due from
vendors ................................................ 815 995
Property and equipment, net ............................ 40,870 49,190
Goodwill ............................................... 188,499 188,499
Deferred financing costs, net .......................... 1,469 1,870
Intangible assets, net ................................. 911 1,700
Other assets ........................................... 26,965 4,176
Assets held for sale (Note 3) .......................... -- 94,909
--------- ---------
Total assets ................................... $ 463,831 $ 510,794
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable ....................................... $ 32,589 $ 17,643
Liabilities related to assets held for sale (Note 3) ... -- 3,286
Other liabilities ...................................... 111,179 76,061
Deferred tax liability ................................. 2,977 --
Debt ................................................... 213,960 277,207
--------- ---------
Total liabilities .............................. 360,705 374,197
Contingencies (See Note 13) ............................ -- --
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000,000 shares
authorized; no shares issued and outstanding ........... -- --
Common stock, without par value; 50,000,000 shares
authorized; 25,685,538 and 25,685,538 shares issued
and outstanding, respectively .......................... 302,218 302,218
Common stock warrants; 100,000 outstanding ............. 644 644
Loans to shareholders .................................. -- (282)
Accumulated other comprehensive income ................. 314 787
Accumulated deficit .................................... (200,050) (166,770)
--------- ---------
Total shareholders' equity ..................... 103,126 136,597
--------- ---------
Total liabilities and shareholders' equity ..... $ 463,831 $ 510,794
========= =========
The accompanying notes are an integral part of these financial statements.
3
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (All
dollar amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES:
Rental revenue ............................ $ 104,489 $ 102,361 $ 201,277 $ 198,374
Prepaid phone service revenue ............. 9,931 10,192 19,192 19,395
Other revenues ............................ 15,819 16,472 29,608 31,829
--------- --------- --------- ---------
Total revenues ..................... 130,239 129,025 250,077 249,598
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise .................... 33,320 36,611 62,013 70,486
Property and equipment ................ 5,153 6,140 10,809 12,817
Amortization of intangibles ........... 474 615 952 1,230
Cost of prepaid phone service ............. 6,012 6,363 11,739 11,845
Salaries and wages ........................ 32,562 29,716 66,306 60,546
Advertising, net .......................... 4,721 5,213 13,481 15,397
Occupancy ................................. 8,445 7,940 16,105 16,463
Restructuring costs ....................... 2,215 -- 2,215 --
Other operating expenses .................. 29,815 26,124 54,440 50,117
--------- --------- --------- ---------
Total costs and operating
expenses .......................... 122,717 118,722 238,060 238,901
--------- --------- --------- ---------
Operating income .................. 7,522 10,303 12,017 10,697
OTHER INCOME (EXPENSE):
Settlement of class action lawsuit ........ (14,000) -- (14,000) --
Interest expense .......................... (9,249) (10,593) (18,345) (25,027)
Interest income ........................... 43 95 54 308
Other income .............................. 1,795 2,609 3,282 4,389
--------- --------- --------- ---------
Income (loss) before income taxes,
cumulative effect of change in
accounting principle and
discontinued operations ................ (13,889) 2,414 (16,992) (9,633)
Income tax expense ........................ 672 2,014 2,102 12,636
--------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle and
discontinued operations ................... (14,561) 400 (19,094) (22,269)
Cumulative effect of change in
accounting principle ...................... -- -- -- (41,527)
Income (loss) from discontinued
operations ................................ (13,357) 1,197 (14,184) 1,171
--------- --------- --------- ---------
Net income (loss) .................. $ (27,918) $ 1,597 $ (33,278) $ (62,625)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON
SHARE (NOTE 5):
Basic earnings (loss) per common share:
Income (loss) before cumulative
effect of change in accounting
principle and discontinued
operations ............................ $ (0.57) $ 0.02 $ (0.74) $ (0.91)
========= ========= ========= =========
Net income (loss) .................... $ (1.09) $ 0.07 $ (1.30) $ (2.55)
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income (loss) before cumulative
effect of change in accounting
principle and discontinued
operations ............................. $ (0.57) $ 0.02 $ (0.74) $ (0.91)
========= ========= ========= =========
Net loss ............................. $ (1.09) $ 0.07 $ (1.30) $ (2.55)
========= ========= ========= =========
Weighted average common shares outstanding:
Basic ................................ 25,686 24,530 25,686 24,521
========= ========= ========= =========
Diluted .............................. 25,686 24,633 25,686 24,521
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Six Months Ended
March 31,
-------------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss ...................................................... $ (33,278) $ (62,625)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
(Income) loss from discontinued operations ................ 14,184 (1,171)
Depreciation and amortization ............................. 73,774 84,533
Deferred income taxes ..................................... 2,977 (4,772)
Write-off of deferred financing costs ..................... -- 3,810
Goodwill impairment ....................................... -- 58,935
Write-off of property and equipment ....................... 1,493 1,230
Gain on sale of assets .................................... (584) (476)
Changes in assets and liabilities:
Prepaid expenses .......................................... (1,768) (768)
Rental merchandise ........................................ (91,976) (84,822)
Rental merchandise deposits and credits due from vendors .. 180 1,045
Income tax receivable ..................................... (189) 3,267
Other assets .............................................. (13,551) 1,941
Accounts payable .......................................... 6,873 5,525
Other liabilities ......................................... 26,634 (3,390)
--------- ---------
Net cash provided by (used in) continuing operations ... (15,231) 2,262
Net cash used in discontinued operations ............. (7,253) (507)
--------- ---------
Net cash provided by (used in) operating activities .. (22,484) 2,769
--------- ---------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .............. (259) (1,095)
Purchases of property and equipment ....................... (4,114) (5,690)
Proceeds from sale of stores and other assets ............. 90,456 1,833
--------- ---------
Net cash provided by (used in) investing activities .... 86,083 (4,952)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings .................................. 336,007 358,000
Payments on borrowings .................................... (399,254) (347,038)
Payment on capital leases ................................. (5,035) (6,369)
Book overdraft ............................................ 8,073 (1,313)
Proceeds from stock issuance .............................. -- 105
Deferred financing costs .................................. (734) (2,644)
Payment of shareholder/director loans ..................... 282 321
--------- ---------
Net cash provided by (used in) financing activities .... (60,661) 1,062
--------- ---------
Increase (decrease) in cash .......................... 2,938 (1,121)
--------- ---------
Cash and cash equivalents at beginning of period .............. 7,295 10,515
--------- ---------
Cash and cash equivalents at end of period .................... $ 10,233 $ 9,394
========= =========
The accompanying notes are an integral part of these financial statements.
5
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. Rent-Way, Inc., (the "Company" or "Rent-Way") is a
corporation organized under the laws of the Commonwealth of Pennsylvania. The
Company operates a chain of rental-purchase stores that rent durable household
products such as home entertainment equipment, furniture, computers, major
appliances and jewelry to consumers on a weekly or monthly basis. Commencing
January 1, 2000, the Company also provides prepaid local phone service to
consumers on a monthly basis through its majority-owned subsidiary, dPi
Teleconnect, LLC ("DPI"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-Q, and therefore, do not include all information and notes necessary for
a fair presentation of financial position, results of operations and cash flows
in conformity with accounting principles generally accepted in the United States
of America. In the opinion of management, all adjustments which, except as
discussed herein, consist of normal recurring adjustments and are necessary for
a fair statement of the financial position, results of operations and cash flows
of the Company have been made. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The condensed consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
inter-company transactions and balances have been eliminated.
These financial statements and the notes thereto should be read in conjunction
with the Company's audited financial statements included in its Annual Report on
Form 10-K for the fiscal year ended September 30, 2002.
DISCONTINUED OPERATIONS. On December 17, 2002, the Company entered into a
definitive purchase agreement to sell rental merchandise and related contracts
of 295 stores to Rent-A-Center, Inc. Rent-A-Center, Inc. purchased certain fixed
assets and assumed related store leases of 125 of these stores. Accordingly, for
financial statement purposes, the assets, liabilities, results of operations and
cash flows of this component have been segregated from those of continuing
operations and are presented in the Company's financial statements as
discontinued operations (see Note 3).
RECLASSIFICATIONS. Certain amounts in the Condensed Consolidated Balance Sheet
for September 30, 2002, the Condensed Consolidated Statement of Operations for
the three- and six-months ended March 31, 2002, and the Condensed Consolidated
Statement of Cash Flows for the six-months ended March 31, 2002, were
reclassified to conform to the March 31, 2003, presentation.
2. LIQUIDITY:
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's current credit
facility expires December 31, 2003. The Company is in discussions with its
lenders to restructure or replace the credit facility. There can be no assurance
that the Company will be successful in amending or replacing the facility. The
Company's ability to operate as a going concern is largely dependent on its
ability to successfully negotiate with its bank lenders an amendment or
restructuring of the Company's existing credit facility.
3. DISCONTINUED OPERATIONS:
On December 17, 2002, the Company entered into a definitive purchase agreement
to sell rental merchandise and related contracts of 295 stores to Rent-A-Center,
Inc. for approximately $101,500. These stores are all included in the household
rental segment. Rent-A-Center, Inc. purchased certain fixed assets and assumed
related store leases of 125 of these stores. The transaction closed on February
8, 2003. The final purchase price for the stores was approximately $100,400. As
required under the Company's credit agreement, all proceeds of the sale, net of
transaction costs, store closing and similar expenses, were used to pay existing
bank debt. Of the approximate $100,400 purchase price, $10,000 is being held
back by Rent-A-Center, Inc., to secure the Company's indemnification
obligations, $5,000 for 90 days following closing and an additional $5,000 for
18 months following closing. The $5,000 held back by Rent-A-Center, Inc. for 18
months was discounted by $820 to record at the present value. The $820 discount
will be amortized into income over the 18-month hold back period. Also, there is
a $24,500 escrow held by National City Bank for 180 days to fund
transaction-related expenses. The assets sold include rental merchandise,
vehicles under capital leases and certain fixed assets. Vehicle lease
obligations were paid by the Company out of the proceeds from the sale. The
Company recorded receivables for these
6
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
3. DISCONTINUED OPERATIONS, continued:
based upon its ability to fully satisfy the indemnification obligations of the
agreement. The Company now operates 753 stores in 33 states.
The asset group is distinguishable as a component of the Company and classified
as held for sale in accordance with Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment on Disposal of Long-Lived
Assets." Direct costs to transact the sale are comprised of, but not limited to,
broker commissions, legal and title transfer fees and closing costs.
In connection with the sale of the stores, the Company has and will continue to
incur additional direct costs related to the sale and exit costs related to
these discontinued operations. Costs associated with an exit activity include,
but are not limited to termination benefits, costs to terminate a contract that
is not a capital lease and costs to consolidate facilities or relocate
employees, in accordance with Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." There was a transition period as defined in the asset purchase
agreement comprised of a period of thirty days from the date immediately
following the closing date. During this transition period, the Company was
liable for certain exit costs attributable to the operation and transition of
the purchased stores, including, but not limited to, rent, utilities, costs
applicable to office equipment, costs associated with vehicles, employee
payroll, health and other employee benefits, workers compensation claims, health
care claims and all other costs related to transition personnel. The Company
accrued for employee separation costs as costs were incurred. These costs are
included in the results of discontinued operations in accordance with SFAS 146.
Related operating results have been reported as discontinued operations in
accordance with SFAS 144. The Company has reclassified the results of operations
of the component to be disposed for the prior period in accordance with
provisions of SFAS 144. There have been no corporate expenses (including
advertising expense) included in expenses from discontinued operations. Interest
on debt that is required to be repaid as a result of the disposal transaction is
allocated to income (loss) from discontinued operations. The effective interest
rate on the outstanding debt of the Company at the end of the period reported is
applied to the $68,643 estimated debt pay-down from the proceeds. The amount of
interest reclassified to loss from discontinued operations is $964 and $2,135
for the three-month periods and $3,036 and $4,270 for the six-month periods
ending March 31, 2003 and 2002, respectively. Revenues and net income (loss)
from the discontinued operations were as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
Operating revenues ........................... $ 15,065 $ 34,977 $ 46,355 $ 68,508
Operating expenses from discontinued
operations (including exit costs) (2) ........ (15,352) (31,645) (44,030) (63,067)
Rental merchandise fair value adjustment ..... (3,395) -- (4,762) --
Reserve for present value of future minimum
lease payments on vacated stores (1) ......... (7,915) -- (7,915) --
Loss on sale of stores ....................... (796) -- (796) --
Interest expense ............................. (964) (2,135) (3,036) (4,270)
Income tax benefit ........................... -- -- -- --
-------- -------- -------- --------
Net income (loss) from discontinued
operations ................................... $(13,357) $ 1,197 $(14,184) $ 1,171
======== ======== ======== ========
(1) The reserve for future lease payments on vacated stores relates to the
170 stores for which Rent-A-Center, Inc. did not assume the leases.
These costs are associated with the exit activity related to the sale
of the 295 stores to Rent-A-Center, Inc., and are recorded in
accordance with SFAS 146.
(2) The Company recorded exit costs associated with the operation and
transition of the stores to Rent-A-Center, Inc. for 30 days after
closing in accordance with SFAS 146.
7
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
3. DISCONTINUED OPERATIONS, continued:
Assets and liabilities of the stores held for sale included in the Condensed
Consolidated Balance Sheet are as follows:
March 31, September 30,
2003 2002
--------- -------------
Assets:
Rental Merchandise, net(1) $ -- $ 48,456
Goodwill .................. -- 41,291
Property and equipment,
net(1) .................... -- 5,126
Costs of sale ............. -- --
Utility Deposits .......... -- 36
-------- --------
-- $ 94,909
======== ========
Liabilities:
Vehicle lease obligation .. $ -- $ 3,181
Customer deposits ......... -- 105
-------- --------
$ -- $ 3,286
======== ========
(1) Rental merchandise and property and equipment classified as held for
sale are long-lived assets and have not been depreciated subsequent to
December 17, 2002 (the measurement date) while classified as held for
sale in accordance with SFAS 144. Held for sale assets are carried at
the lower of carrying amount or fair value. The Company recorded a
write-down for rental merchandise to fair value of $1,367 and $3,395
million based upon initial and subsequent estimates, which is reported
in Income (Loss) from Discontinued Operations in the Condensed
Consolidated Statement of Operations for the three-months ended
December 31, 2002 and March 31, 2003, respectively.
Property and equipment held for sale was comprised of the following:
March 31, September 30,
2003 2002
--------- -------------
Leasehold improvements .... $ -- $ 3,274
Computer equipment ........ -- 596
Furniture and fixtures .... -- 818
Vehicles .................. -- 5,500
Accumulated depreciation .. -- (5,062)
--------- -------
Property and equipment,
net ....................... $ -- $ 5,126
========= =======
4. BUSINESS RATIONALIZATION:
The Company periodically closes under-performing stores and takes other actions
to maximize its overall profitability. In connection with the closing of stores
and taking other actions, it incurs employee severance, fixed asset write offs,
lease termination costs and other direct exit costs related to these activities.
The Company recorded employee severance costs of $810 of which $685 is employee
severance cost and termination benefits included in discontinued operations in
the six months ended March 31, 2003. The Company recorded $1,530 of fixed asset
write-offs associated with restructuring costs that are included in the $1,739
fixed asset write-off provided for and utilized during the quarter ended March
31, 2003. There were no fixed asset write-offs included in discontinued
operations. There was $7,915 of lease termination costs recorded in discontinued
operations not included in the business rationalization footnote. See Note 3.
The net amount of these costs were as follows:
Fixed Asset Lease
Write Offs Termination Costs Total
----------- ----------------- -----
Balance at September 30,
2001 ......................... $ -- $ 5,084 $ 5,084
Fiscal 2002 Provision ........ 373 458 831
Amount utilized in fiscal
2002 ......................... (373) (3,407) (3,780)
------- ------- -------
Balance at September 30, 2002 -- 2,135 2,135
Fiscal 2003 Provision ........ 1,739 236 1,975
Amount utilized in Fiscal
2003 ......................... (1,739) (1,269) (3,008)
------- ------- -------
Balance at March 31, 2003 .... $ -- $ 1,102 $ 1,102
======= ======= =======
Lease termination costs will be paid according to the contract terms.
8
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
5. EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings (loss) per common share is computed using income (loss) available
to common shareholders divided by the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share is computed using income
(loss) available to common shareholders and the weighted average number of
shares outstanding adjusted for the potential impact of options and warrants
where the effects are dilutive. Because operating results were a loss for the
three- and six-month period ended March 31, 2003 and the six-month period ended
March 31, 2002, basic and diluted loss per common share were the same.
The following table reconciles the basic and diluted earnings (loss) per common
share computation:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
COMPUTATION OF EARNINGS (LOSS) PER SHARE:
Income (loss) before cumulative effect of change
in accounting principle and discontinued operations...... $(14,561) $ 400 $(19,094) $(22,269)
Cumulative effect of change in accounting principle...... -- -- -- (41,527)
Income (loss) from discontinued operations............... (13,357) 1,197 (14,184) 1,171
-------- -------- -------- --------
Net income (loss)........................................ $(27,918) $ 1,597 $(33,278) $(62,625)
======== ======== ======== ========
Weighted average common shares used in
calculating basic earnings (loss) per share.............. 25,686 24,530 25,686 24,521
Add incremental shares representing:
Shares issuable upon exercise of stock options,
warrants and escrowed shares (1)........................ -- 103 -- --
-------- -------- -------- --------
Weighted average number of shares used in
calculation of diluted earnings (loss) per share
(in 000's)............................................... 25,686 24,633 25,686 24,521
======== ======== ======== ========
BASIC earnings (loss) per share
Income (loss) before cumulative effect of
change in accounting principle and discontinued
operations............................................... $ (0.57) $ 0.02 $ (0.74) $ (0.91)
Cumulative effect of change in accounting
principle ............................................... -- -- -- (1.69)
Income (loss) from discontinued operations............... (0.52) 0.05 (0.56) 0.05
-------- -------- -------- --------
Net income (loss)........................................ $ (1.09) $ 0.07 $ (1.30) $ (2.55)
======== ======== ======== ========
DILUTED earnings (loss) per share
Income (loss) before cumulative effect of
change in accounting principle and discontinued
operations............................................... $ (0.57) $ 0.02 $ (0.74) $ (0.91)
Cumulative effect of change in accounting
principle ............................................... -- -- -- (1.69)
Income (loss) from discontinued operations............... (0.52) 0.05 (0.56) 0.05
-------- -------- -------- --------
Net income (loss)........................................ $ (1.09) $ 0.07 $ (1.30) $ (2.55)
======== ======== ======== ========
(1) Including the effects of these items for the periods ended March 31,
2003 and 2002, would be antidilutive. Therefore, 7,813 of antidilutive
common shares are excluded from consideration in the calculation of
diluted loss per share for the three-months and six-months ended March
31, 2003; and, 5,467 and 5,398 of anitdilutive common shares are
excluded from consideration in the calculation of diluted loss per
share for the three-months and six-months ended March 31, 2002,
respectively.
6. GOODWILL--ADOPTION OF STATEMENT 142:
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations,
ceases upon adoption. Thus, no amortization for such goodwill and indefinite
lived intangibles was recognized in the accompanying Condensed Consolidated
Statements of Operations for the three-and six-months ended March 31, 2003 and
2002. On an annual basis and when there is reason to suspect that their values
have been diminished or impaired, these assets must be tested for impairment,
and a write down may be necessary.
In accordance with the provisions of SFAS 142, during fiscal 2002 the Company
performed, with the assistance of an independent
9
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
6. GOODWILL--ADOPTION OF STATEMENT 142, continued
valuation firm, the impairment test of the carrying value of goodwill. This
assessment resulted in an impairment write-down of $58,900, recorded in
"Cumulative Effect of Change in Accounting Principle" in the amount of $41,500
(net of $17,400 in income taxes). In accordance with the transitional
implementation guidance of SFAS 142, the write down was recorded retroactive to
the Company's first quarter results of operations.
The Rent-A-Center, Inc., transaction (see Note 3) is an event that triggers an
impairment assessment under the provisions of SFAS 142. The Company performed an
impairment test of the carrying value of goodwill remaining after allocation of
the fair value of goodwill to the assets held for sale. There was no impairment
of goodwill as a result of this event. Goodwill held for sale was determined
based on the ratio of the fair value of the 295 stores sold to Rent-A-Center,
Inc., to the fair value of the entire Company before the sale of the stores.
Goodwill allocated to the disposal group was $41,291.
The following table shows the net carrying value of goodwill as of March 31,
2003 for the Company's segments:
Prepaid
Household Telephone Total
Rental Segment Service Segment Segments
-------------- --------------- --------
Goodwill........ $ 181,905 $ 6,594 $ 188,499
The following table reflects the components of amortizable intangible assets at
March 31, 2003:
Net
Purchase Cumulative Carrying
Amount Amortization Amount
-------- ------------ --------
Amortizable intangible assets:
Non-compete agreements ... $ 2,630 $(1,947) $ 683
Customer contracts ....... 1,164 (993) 171
Exclusivity agreement .... 2,050 (1,993) 57
------- ------- -------
$ 5,844 $(4,933) $ 911
======= ======= =======
There were no changes to the amortization methods and lives of the amortizable
intangible assets.
7. DEBT:
Debt consists of the following:
March 31, September 30,
2003 2002
--------- -------------
Senior credit facility............. $ 213,881 $ 277,121
Notes Payable...................... 79 86
--------- ---------
$ 213,960 $ 277,207
========= =========
The Company's credit facility dated September 23, 1999, as amended November 17,
1999; December 6, 1999; December 7, 1999; June 28, 2000; October 5, 2001 and
June 24, 2002 is co-led by National City Bank of Pennsylvania, acting as
administrative agent, Bank of America, N.A., acting as documentation agent, and
Bank of Montreal and Harris Trust and Savings Bank, acting as syndication
agents, provided for loans of $213,881 (revolving notes of $31,263 and Terms
Loans A $53,382, and Term Loans B $129,236). The credit facility is
collateralized by substantially all of the Company's assets.
Under the credit facility, the Company may borrow funds under a base rate option
plan or euro-rate option plan. Under the base rate option plan, the Company may
borrow funds based on a spread of prime rate plus 450 to 500 basis points. In
addition, payment-in-kind interest at a rate of 200 to 500 basis points per
annum is due and payable in cash on the maturity date of the term loans. The
payment-in-kind margin is determined based on the ratio of debt to cash flows
from operations during the period.
Under the euro-rate option, the Company may borrow funds based on a spread of
the LIBOR plus 550 to 600 basis points. In addition, payment-in-kind interest at
a rate of 200 to 500 basis points per annum is due and payable in cash on the
maturity date of the term
10
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
7. DEBT, continued:
loans. The payment-in-kind margin is determined based on the ratio of debt to
cash flows from operations during the period. Borrowings under the euro-rate
option require the Company to select a fixed interest period during which the
euro-rate is applicable with the borrowed amount not to be repaid prior to the
last day of the selected interest period. In addition, borrowing tranches under
the euro-rate option must be in multiples of $1,000. Commitment fees associated
with the credit facility are in a range from 0.375% to 0.500% for each bank's
unused commitment.
The principal amount of the Term Notes A under the credit facility is payable in
quarterly payments due on the last day of each December, March, June, and
September, beginning with the quarter ended December 31, 2001, as follows:
Quarters ending on following date Amount of principal payment due on payment date
--------------------------------- -----------------------------------------------
12/31/01 through 6/30/02 $5,722
9/30/02 through 6/30/03 $7,153
9/30/03 $8,583
12/31/03 remaining principal balance outstanding
The principal amount of Term Notes B under the amended facility is payable in
eight quarterly payments due on the last day of each December, March, June, and
September beginning with the quarter ended December 31, 2001, and continuing
through the quarter ending September 30, 2003, each payment equal to $444. The
remaining principal balance is due on December 31, 2003.
The credit facility requires the Company to meet certain financial covenants and
ratios including maximum leverage, minimum interest coverage, minimum net worth,
fixed charge coverage, and rental merchandise usage ratios. In addition, the
Company must meet requirements regarding monthly, quarterly, and annual
financial reporting. The credit facility also contains non-financial covenants,
which restrict actions of the Company with respect to the payment of dividends,
acquisitions, mergers, disposition of assets or subsidiaries, issuance of
capital stock, and capital expenditures. The Company may at any time repay
outstanding borrowings, in whole or part, without premium or penalty, except
with respect to restrictions identified with the selection of the euro rate
option. As of March 31, 2003, the Company was in compliance with all covenants
contained in the credit facility.
In the event that the leverage ratio as measured at June 30, 2003, for the four
fiscal quarters then ended, is equal to or greater than 2.25 to 1.00, the
Company will issue to the lenders warrants (the "Lender Warrants") for the
purchase of the Company's common stock and will deliver the Registration Rights
Agreement in the form provided for in the Lender Warrants. The shares of common
stock that will be obtained by the lenders upon the exercise of the Lender
Warrants shall equal 15% of the total outstanding voting power of all the
outstanding shares of the Company immediately prior to the exercise of the
Lender Warrants. The Lender Warrants shall be allocated to the lenders based
upon each lender's ratable share. The Company shall at all times maintain a
sufficient number of authorized shares of its common stock to permit the
exercise by the lenders of the conversion of the Lender Warrants into shares of
the Company's common stock. The Company would be required to issue the Lender
Warrants based on the current leverage ratio at March 31, 2003.
As a result of the amendment of the credit facility that occurred on October 5,
2001, the Company wrote off a portion of the bank fees associated with previous
amendments to the credit facility. The amount of deferred finance costs was
$4,089 of which $3,368 related to the term loans and was recorded originally as
an extraordinary item and $442 relating to the revolving notes and was recorded
in interest expense on the Company's Consolidated Statement of Operations for
the year ended September 30, 2002. Effective October 1, 2002, the Company
adopted Statement of Financial Accounting Standards No. 145 (SFAS 145),
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections." The Company reclassified the write-off of $3,368
deferred finance costs originally recorded as an extraordinary item to interest
expense in the three months ended December 31, 2001.
11
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
7. DEBT, continued:
As of March 31, 2003, the Company's credit facility debt under both the
euro-rate option and the base-rate options plans were as follows:
BORROWING OPTION PLAN AMOUNT RATE
--------------------- ------ ----
Euro-rate tranche................. $ 53,382 6.79000%
Euro-rate tranche................. 129,236 7.29000%
Euro-rate tranche................. 10,000 6.88000%
Euro-rate tranche................. 10,000 6.84000%
Base-rate tranche................. 11,263 8.75000%
---------
Total $ 213,881
=========
The rates listed in the above table do not include payment-in-kind interest,
which is interest accrued but not paid currently. As of December 31, 2002,
payment-in-kind interest is accruing at 450 basis points on the Term Loans A and
revolving notes and 500 basis points on the Term Loans B.
On December 13, 2002, the Company amended its credit facility. This amendment
modified the maximum leverage ratio, the minimum interest coverage ratio, the
minimum consolidated net worth and the fixed charge coverage ratio covenants for
periods after December 31, 2002, through December 31, 2003. In consideration for
the amendment to the credit facility, the Company paid $500 as an amendment fee.
The amendment fee was payable the earlier of the receipt of proceeds from
material asset sales, or December 31, 2003. In the event the Company fails to
comply with its covenants in the credit facility, it would be unable to borrow
under the facility. The Company believes it will be able to comply with
covenants based upon its fiscal 2003 projections. The financial covenants
required under the provisions of the amended senior credit facility include the
following:
The leverage ratio (which is debt, including capital lease and letter
of credit obligations, but not including payment-in-kind interest,
plus three times occupancy expense for the four quarters then ended
over the sum of cash flow from operations and occupancy expense for
the four quarters then ended) cannot exceed 4.60 to 1.00 through March
31, 2003 or 4.50 to 1.00 thereafter.
The interest coverage ratio (which is the consolidated cash flow from
operations (net income, amortization, interest expense and income tax
expense less non-cash credits to income) over interest expense for the
four quarters then ended) must be at least 0.90 to 1.00 through March
31, 2003 and 1.00 to 1.00 thereafter.
The consolidated net worth shall not be less than $165,000 plus 75% of
net income with no deduction for losses, 90% of net proceeds from
additional equity and 90% of any incremental additive equity
associated with any acquisition.
The fixed charge coverage ratio (which is consolidated cash flow from
operations minus capital expenditures (excluding rental merchandise)
to fixed charges (cash interest expense, income taxes and the current
portion of long-term debt including capital leases)) must be at least
0.60 to 1.00 through March 31, 2003 and 0.65 to 1.00 thereafter.
The Company must maintain interest rate protection agreements in an
amount of at least $160,000 during the period through May 30, 2003 and
$100,000 after May 31, 2003.
The Company cannot make any individual payments exceeding $1,000 or
$20,000 in the aggregate for a fiscal year to purchase fixed assets
including capital and operating leases (excluding leases of vehicles
or store sites).
The Company cannot allow the book value of rental merchandise under
lease to be less than 77% of the total value of rental merchandise
held for rent at the end of each fiscal quarter. The value of jewelry
cannot exceed 7.5% of the total value of rental merchandise.
On January 2, 2003, the Company amended its credit facility. The amendment
provided for a supplemental $10,000 term loan to the
12
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
7. DEBT, continued:
Company, which was payable in full on the earlier of the Rent-A-Center, Inc.,
transaction closing date or March 31, 2003. In consideration for the amendment
to the credit facility, the Company paid $250 as an amendment fee. This
amendment fee was paid on February 8, 2003.
Upon closing of the Rent-A-Center, Inc., transaction, the Company funded $24,500
into a cash collateral account to be used by the Company for the payment of
certain expenses incurred as a result of the sale. In addition, the Company made
a mandatory prepayment of principal equal to the net after-tax cash proceeds of
the sale less the amount funded into the cash collateral account.
The mandatory prepayment was applied first to the outstanding principal balance
of the supplemental term loans advanced in the January 2 amendment, second to
the revolving credit loans in the amount of $5,000, and third ratably to the
outstanding principal balance of the Term Loans A and B. Any subsequent proceeds
received from the Rent-A-Center, Inc., transaction shall be applied ratably to
the outstanding principal balance of Term Loans A and B.
8. STOCK OPTIONS:
The Company accounts for stock based compensation issued to its employees and
directors in accordance with APB No. 25, and has elected to adopt the
"disclosure only" provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require new prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
For SFAS No. 148 purposes, the fair value of each option granted under the 1992
Plan, the 1995 Plan, and the 1999 Plan is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for options granted in fiscal 2002, 2001 and 2000: expected
volatility ranging from 47.41% to 95.23%, risk-free interest rates between 3.40%
and 6.81%, and an expected life of five years.
If the Company had elected to recognize the compensation cost of its stock
option plans based on the fair value of the awards under those plans in
accordance with SFAS No. 148, net loss and loss per common share would have been
increased to the pro-forma amounts below:
For the Six-Month Period Ended March 31,
2003 2002
-------- --------
Net loss before cumulative effect of change in
accounting principle and extraordinary item:
As reported ................................. $(19,094) $(22,269)
Compensation expense ........................ (3,395) (5,913)
-------- --------
Pro-forma ................................... $(22,489) $(28,182)
======== ========
Net loss:
As reported ................................. $(33,278) $(62,625)
Compensation expense ........................ (3,395) (5,913)
-------- --------
Pro-forma ................................... $(36,673) $(68,538)
======== ========
Diluted loss per common share:
Net loss before cumulative effect of change in
accounting principle and extraordinary item
As reported ................................. $ (0.74) $ (0.91)
======== ========
Pro-forma ................................... $ (0.88) $ (1.15)
======== ========
Net loss
As reported ................................. $ (1.30) $ (2.55)
======== ========
Pro-forma ................................... $ (1.43) $ (2.79)
======== ========
13
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
8. STOCK OPTIONS, continued:
During fiscal year 2002, there was a cancellation/re-issuance program for
certain options. The re-issued options vest 50% on the re-issuance date
(6/13/02) and 50% on the first anniversary. There have been no options granted
during fiscal year 2003 thru March 31, 2003.
9. SHAREHOLDERS' EQUITY:
On April 18, 2002, the Company sold 1.0 million restricted common shares and
warrants to acquire 100,000 common shares to Calm Waters Partnership and two
other investors (the "Investors") for $6,000. The warrants have an exercise
price of $9.35 per share, subject to adjustment. The Company is required to
issue 333,000 additional warrants to the Investors during the third quarter of
fiscal year 2003, at an expected exercise price of $1.50 per share, because it
failed to meet certain financial benchmarks.
10. DERIVATIVE FINANCIAL INSTRUMENTS:
At March 31, 2003, the Company had interest rate swaps on a notional debt amount
of $163,100 and a fair market value of ($7,132). The variable pay interest rate
ranges from 5.09% to 6.97%. The maturity dates run through August 2005.
The Company's interest rate swaps do not meet the qualifications for hedge
accounting treatment under Statement of Financial Accounting Standards No. 133.
The Company's positive change in the fair market value of the interest rate swap
portfolio was $1,375 and $2,580 for the three-months and six-months ended March
31, 2003, respectively. This was recorded to other income in the Company's
Condensed Consolidated Statements of Operations.
11. COMPREHENSIVE INCOME:
Comprehensive income encompasses net income and changes in the components of
accumulated other comprehensive income not reflected in the Company's Condensed
Consolidated Statements of Operations during the periods presented. Accumulated
other comprehensive income consists of the transition asset recorded at the time
of adoption of SFAS No. 133.
Accumulated Other
Comprehensive Comprehensive
Income (Loss) Income (Loss)
------------- -----------------
Net loss for the three months
ended December 31,
2002..................... $ (5,361) $ --
SFAS 133 Transition amount .. -- 787
Amortization of SFAS 133
Transition amount ....... (236) (236)
-------- --------
Total for three months ended
December 31, 2002 ........ $ (5,597) $ 551
======== ========
Net loss for the three months
ended March 31, 2003 .... $(27,918) $ --
SFAS 133 Transition amount .. -- 551
Amortization of SFAS 133
Transition amount ....... (237) (237)
-------- --------
Total for three months ended
March 31, 2003 .......... $(28,155) $ 314
======== ========
12. NON-RECURRING ITEMS:
Restructuring Costs. During the second quarter of fiscal year 2003, the Company
formulated a plan to restructure the corporate office through reductions in the
corporate workforce to rationalize corporate costs for the 766 remaining stores
subsequent to the sale to Rent-A-Center, Inc. As a result of this plan, the
Company paid total pre-tax restructuring charges of $2,215 in the quarter ending
March 31, 2003. The restructuring costs include $685 of employee severance and
termination benefits and $1,530 of fixed asset write-offs in the household
rental segment. These restructuring activities were completed during the fiscal
quarter ended March 31, 2003.
14
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
12. NON-RECURRING ITEMS, continued:
Settlement of Class Action Lawsuit. In April 2003, the Company entered into a
settlement agreement with the lead plaintiff in the shareholder class action
currently pending in the U.S. District Court for the Western District of
Pennsylvania. The settlement agreement provides for the release of the Company
and all other defendants except for the former controller and the independent
accountants in return for the payment of $25,000 to the class. The $25,000
payment consists of $21,000 in cash, of which $11,000 is to be funded by
insurance, and $4,000 in two-year, unsecured subordinated notes bearing interest
at 6%. The settlement is subject to several conditions described in footnote 13
below. Based on this settlement agreement, the Company believes that losses
associated with proceedings discussed above are probable and estimable and has
recorded a net $14,000 charge for this settlement. The estimate of the potential
impact on the Company's financial position or overall results of operations for
the above legal proceedings could change in the future based upon future events.
13. CONTINGENCIES:
As previously reported, the Company, its independent accountants, and certain of
its current and former officers have been named in a consolidated class action
complaint filed in the U.S. District Court for the Western District of
Pennsylvania alleging violations of the securities laws and seeking damages in
unspecified amounts purportedly on behalf of a class of shareholders. On April
18, 2003, the Company entered into an agreement settling the class action. The
settlement requires the Company to pay the class the sum of $25,000, $21,000 in
cash and $4,000 in two year 6% unsecured subordinated notes. Of the $21,000
payable in cash, $11,000 is to be funded from available insurance proceeds. The
settlement agreement provides for the release of the Company and all other
defendants except the Company's former controller and the Company's independent
accountants. The settlement is subject to several conditions including Court
approval, approximately 5% of shares purchased during the class period not
opting out of the settlement and a refinancing or restructuring of the Company's
existing senior credit facility on or before July 31, 2003. The Company's
independent accountants have opposed the motion of the lead plaintiff in the
class action, Cramer Rosenthal McGlynn LLC, seeking class certification and
appointment as class representative. If the motion is not granted, the Court
could reject the settlement.
As previously reported, certain of the Company's officers and directors and the
Company, as nominal defendant, have been sued in a shareholder derivative action
brought on behalf of the Company in the U.S. District Court for the Western
District of Pennsylvania. The derivative complaint purports to assert claims on
behalf of the Company against the defendants relating to the events which gave
rise to the purported class action described above. The derivative action has
been stayed pending resolution of the class action. On April 11, 2003, the
Company filed a motion to vacate the stay and dismiss the complaint as to all
defendants, or in the alternative to require the plaintiff to post a bond as
security for the Company's litigation costs. The Court has vacated the stay and
the motion to dismiss is pending.
The Company is presently unable to predict or determine the final outcome of, or
to estimate the amounts or potential range of loss with respect to, the
shareholder derivative lawsuit described above. In addition, the class action
settlement is subject to satisfaction of several conditions. The Company cannot
make assurances that those conditions will be satisfied.
Pursuant to its bylaws, the Company is obligated under certain circumstances to
indemnify its officers and directors for the costs they incur as a result of
investigations and lawsuits as well as against claims within the lawsuits.
The Company is subject to legal proceedings and claims in the ordinary course of
its business that have not been finally adjudicated. Certain of these cases,
exclusive of the class action and derivative suit mentioned above, have resulted
in initial claims totaling $24,676. However, all but $536 of such claims are, in
the opinion of management, covered by insurance policies or indemnification
agreements, or create only remote potential of any liability exposure to the
Company, and therefore should not have a material effect on the Company's
financial position, results of operations or cash flows. Additionally,
threatened claims exist for which management is not yet able to reasonably
estimate a potential loss. In management's opinion, none of these threatened
claims will have a material adverse effect on the Company's financial position,
results of operations or cash flows.
The Company is self-insured for certain losses related to workers' compensation,
employee medical, vehicle and general liability. The Company has purchased
stop-loss coverage in order to limit its exposure to any significant levels of
claims. Self-insurance reserves are accrued based upon the Company's estimates
of the aggregate liability for uninsured claims incurred using certain actuarial
15
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
13. CONTINGENCIES, continued:
assumptions followed in the insurance industry and the Company's historical
experience. The Company has obtained letters of credit of $6,000 to guarantee
the payment of future claims.
14. INCOME TAXES:
During the first six months of fiscal 2003, the Company recorded income tax
expense and a deferred tax liability of $2,977 because the Company can no longer
look to the reversal of the deferred tax liability associated with tax
deductible goodwill to offset a portion of its deferred tax asset, following the
adoption of SFAS 142. Also during the first six months of fiscal 2003, a tax
benefit of $875 was recorded resulting from the carryback of certain AMT net
operating losses, which were allowed as a result of the Jobs Creation and
Workers Assistance Act of 2002, which suspended the AMT utilization limits for a
two-year period. Of this amount, $673 was received in the current quarter. The
deferred tax asset, net of liabilities excluding goodwill, increased from
$63,944 at September 30, 2002, to $71,214 at March 31, 2003. This increase of
$7,270 for the six months ended March 31, 2003, is the tax effect of losses
before income taxes, reduced by the tax effect of expenses which are
nondeductible for tax, primarily nondeductible goodwill allocated to the sale of
the stores. A full valuation allowance has been provided against the net
deferred tax assets.
15. SEGMENT INFORMATION:
Rent-Way is a national rental-purchase chain that provides a variety of services
to its customers including rental of household items and prepaid local telephone
service on a week-by-week or a month-by-month basis. The Company has determined
that its reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by product category. The
Company's reportable segments are household rentals and prepaid telephone
service. Its household rental segment rents name brand merchandise such as
furniture, appliances, electronics and computers on a weekly, biweekly,
semimonthly or bimonthly basis. Its prepaid telephone service segment provides a
local dial tone on a month-by-month basis.
The financial results of the Company's segments follow the same accounting
policies as described in "Summary of Significant Accounting Policies" (see Note
1).
Household Prepaid
For the three months ended Rental Telephone Inter-segment
March 31, 2003 Service Service Activity Total
- -------------------------------- --------- --------- --------- ---------
Total revenue ............ $ 120,687 $ 9,944 $ (392) $ 130,239
========= ========= ========= =========
Operating income (loss)... $ 7,542 $ (50) $ 30 $ 7,522
========= ========= ========= =========
Net loss ................. $ (27,834) $ (84) $ -- $ (27,918)
========= ========= ========= =========
Total Assets ............. $ 461,842 $ 5,320 $ (3,331) $ 463,831
========= ========= ========= =========
Household Prepaid
For the six months ended Rental Telephone Inter-segment
March 31, 2003 Service Service Activity Total
- -------------------------------- --------- --------- --------- ---------
Total revenue ............ $ 231,675 $ 19,219 $ (817) $ 250,077
========= ========= ========= =========
Operating income (loss)... $ 12,221 $ (395) $ 191 $ 12,017
========= ========= ========= =========
Net loss ................. $ (32,938) $ (471) $ 131 $ (33,278)
========= ========= ========= =========
Total Assets ............. $ 461,842 $ 5,320 $ (3,331) $ 463,831
========= ========= ========= =========
16. RECENT ACCOUNTING PRONOUNCEMENTS:
On November 25, 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34". The Interpretation requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that obligation. The Company has
evaluated the provisions of this Interpretation and determined it does not have
an impact on these financial statements upon its adoption.
16
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
(Unaudited)
16. RECENT ACCOUNTING PRONOUNCEMENTS, continued:
On January 15, 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to improve financial
reporting by enterprises involved with variable interest entities. This
interpretation applies to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable
interest entities that are not currently consolidated and is evaluating the
provisions of this interpretation.
On April 30, 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 clarifies 1) the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative, 2) when a derivative contains a financing
component and amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003. The
Company is currently evaluating the provisions of this Statement.
17
RENT-WAY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Rent-Way operates 753 stores located in 33 states. The Company offers quality
brand name home entertainment equipment, computers, furniture, appliances, and
jewelry to customers under full-service rental-purchase agreements that
generally allow the customer to obtain ownership of the merchandise at the
conclusion of an agreed upon rental period. The Company also provides prepaid
local phone service to consumers on a monthly basis through its majority-owned
subsidiary, dPi Teleconnect, L.L.C. ("DPI").
USE OF ESTIMATES IN OUR FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews its estimates,
including those related to litigation, liability for self-insurance, impairment
of goodwill and other intangibles, based on currently available information.
Changes in facts and circumstances may result in revised estimates.
SIGNIFICANT ACCOUNTING POLICIES
Revenue. Rental merchandise is rented to customers pursuant to rental
agreements, which provide for either weekly, biweekly, semi-monthly or monthly
rental payments collected in advance. Revenue is recognized as collected, not
over the rental term, since at the time of collection the rental merchandise has
been placed in service and costs of installation and delivery have been
incurred. This method of revenue recognition does not produce materially
different results than if rental revenue was recognized over the weekly,
biweekly, semi-monthly or monthly rental term.
Rental Merchandise Depreciation. The Company uses the units of activity
depreciation method for all rental merchandise except computers. Under the units
of activity method, rental merchandise is depreciated as revenue is collected.
Thus rental merchandise is not depreciated during periods when it is not on rent
and therefore not generating rental revenue. Personal computers, added to the
Company's product line in June 1999, are principally depreciated on the
straight-line basis beginning on acquisition date over 12 months to 24 months,
depending on the type of computer. Write-offs of rental merchandise arising from
customers' failure to return merchandise, obsolescence and losses due to
excessive wear and tear of merchandise are recognized using the direct write-off
method, which is materially consistent with the results that would be recognized
under the allowance method.
Prepaid Phone Service. Prepaid phone service is provided to customers on a
prepaid month-to-month basis. Prepaid phone service revenues are comprised of
monthly service revenues and activation revenues. Monthly service revenues are
recognized on a straight-line basis over the related monthly service period,
commencing when the service period begins. The cost of monthly service is also
recognized over the monthly service period and is included in "cost of prepaid
phone service" in the Statement of Operations. Activation revenues are
recognized on a straight-line basis over the average life of the customer
relationship. Activation costs are expensed as incurred and are included in
"cost of prepaid phone service" in the Statement of Operations.
Closed Store Reserves. From time to time, the Company closes or consolidates
retail stores. An estimate is recorded of the future obligation related to
closed stores based upon the present value of the future lease payments and
related commitments, net of estimated sublease income. At March 31, 2003 and
2002, the reserve for closed stores for normal operating activities was $1.1
million and $3.7 million, respectively, with the decrease primarily related to
the number of stores closed during the period. In addition, there was a $7.9
million reserve for vacated stores related to the 170 stores for which
Rent-A-Center, Inc. did not assume the leases and is included in net loss from
discontinued operations.
Company Insurance Programs. The Company is primarily self-insured for health,
workers' compensation, automobile, and general liability costs. The
self-insurance liability for health costs is determined actuarially based on
claims filed and an estimate of claims incurred but not yet reported. The
self-insurance liability for workers' compensation, automobile and general
liability costs are determined actuarially based on claims filed and company
experience. Losses in the workers' compensation, automobile and general
liability programs are pre-funded based on the insurance company's loss
estimates. Loss estimates will be adjusted for developed incurred losses at 18
months from policy inception and every 12 months thereafter. Retrospective
adjustments to loss estimates are recorded when determinable and probable.
18
RENT-WAY, INC.
Legal Expenditures. Legal costs are recorded as incurred. The Company's
experience with outside legal counsel is that services rendered are billed
within 30 days of the close of the month the work was performed.
The Company executed an interim agreement for reimbursement and advancement of
defense costs with its insurance carrier related to the shareholder class action
lawsuit. The insurance carrier reimburses the Company for claim defense costs,
claim investigative costs, and settlement costs incurred by the Company, its
directors and officers. The Company offsets current legal costs with
reimbursements when they have been agreed in principle with the insurance
carrier.
Discontinued Operations. On December 17, 2002, the Company entered into a
definitive purchase agreement to sell rental merchandise and related contracts
of 295 stores to Rent-A-Center, Inc., which transaction has since closed.
Accordingly, for financial statement purposes, the assets, liabilities, results
of operations and cash flows of this component have been segregated from those
of continuing operations and are presented in the Company's financial statements
as discontinued operations (see Note 3).
RESULTS OF OPERATIONS
The following discussion relates only to continuing operations.
The following table sets forth, for the periods indicated, certain items from
the Company's unaudited Condensed Consolidated Statements of Operations,
expressed as a percentage of revenues.
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
----- ----- ----- -----
REVENUES:
Rental revenue ................... 80.2% 79.3% 80.5% 79.4%
Prepaid phone service revenue .... 7.6 7.9 7.7 7.8
Other revenue .................... 12.2 12.8 11.8 12.8
----- ----- ----- -----
Total revenues ................ 100.0 100.0 100.0 100.0
COSTS AND OPERATING EXPENSES:
Depreciation and amortization
Rental merchandise ............... 25.6 28.4 24.8 28.2
Property and equipment ........... 3.9 4.8 4.3 5.1
Amortization of other intangibles 0.4 0.5 0.4 0.5
----- ----- ----- -----
Total depreciation and
amortization .............. 29.9 33.7 29.5 33.8
Cost of prepaid phone service ...... 4.6 4.9 4.7 4.7
Salaries and wages ................. 25.0 23.0 26.5 24.3
Advertising, net ................... 3.6 4.0 5.4 6.2
Occupancy .......................... 6.5 6.2 6.4 6.6
Restructuring costs ................ 1.7 -- 0.9 --
Other operating expenses ........... 22.9 20.2 21.8 20.1
----- ----- ----- -----
Total costs and operating
expenses ................. 94.2 92.0 95.2 95.7
----- ----- ----- -----
Operating income .............. 5.8 8.0 4.8 4.3
Settlement of class action lawsuit . (10.8) -- (5.6) --
Interest expense ................... (7.1) (8.2) (7.3) (10.0)
Interest income .................... -- 0.1 -- 0.1
Other income ....................... 1.4 2.0 1.3 1.8
----- ----- ----- -----
Income (loss) before income
taxes, cumulative effect of
change in accounting principle
and discontinued operations ... (10.7) 1.9 (6.8) (3.8)
Income tax expense ................. 0.5 1.6 0.8 5.1
----- ----- ----- -----
Income (loss) before cumulative
effect of change in accounting
principle and discontinued
operations principle
and discontinued operations .......... (11.2) 0.3 (7.6) (8.9)
Cumulative effect of change in
accounting principle ................. -- -- -- (16.6)
Income (loss) from discontinued
operations ........................... (10.2) 0.9 (5.7) 0.5
----- ----- ----- -----
Net income (loss) ................... (21.4)% 1.2% (13.3)% (25.0)%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenues. Total revenues increased $1.2 million, or 0.9%, to $130.2
million from $129.0 million. The increase is attributable to an increase in
revenues of $1.5 million in the household rental segment offset by a $0.3
million decrease in revenues in the prepaid telephone service segment. The $1.5
million increase in the household rental segment is due to a 1.9% increase in
same store revenues.
19
RENT-WAY, INC.
This increase in same store revenues is due to an increase in both rental
revenues and early purchase option and sales revenue offset by a decrease in fee
revenue. The decrease in fee revenue was 5.0% as compared to the same period
last year, and is attributed to fewer rental-purchase agreements in the
portfolio and reductions in liability damage waiver fees due to customers
shifting to the Preferred Customer Club program. The Preferred Customer Club
program is a fee-based membership program that provides special loss and damage
protection and, at a discounted rate, an additional one year of service
protection on rental merchandise, preferred treatment in the event of
involuntary job loss and accidental death and dismemberment insurance. The
increase in rental revenue was 0.9% as compared to the same period last year.
This increase is the result of improvements in collections. Early purchase
option and sales revenue increased 21.3% as compared to the same period last
year. This increase is primarily due to more customers exercising the early
purchase option as a result of an "120 days same as cash" promotion. This
increase is also due to an increase in sales and early pay outs on computers due
to the maturity of the computer rental program.
Depreciation and Amortization. Depreciation expense related to rental
merchandise decreased to 25.6% as a percentage of total revenues from 28.4%. In
fiscal 2002, the Company took steps to increase gross profit margins on rental
contracts. These steps included increasing weekly rental rates of personal
computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product,
increasing rental rates on certain core products to competitive market rates,
and introducing higher-end, higher-margin merchandise to the stores. The Company
expects depreciation expense as a percentage of total revenues to continue
decreasing during the remainder of fiscal 2003 as product margins improve due to
continued execution of the Company's pricing strategy.
Depreciation expense related to property and equipment decreased to 3.9% as a
percentage of total revenues from 4.8%. This decrease is primarily due to the
closing or selling of 22 stores since March 31, 2002. This decrease is also due
to the expiration of depreciation periods for certain fixed assets. Without new
store openings and store acquisitions, the Company is undertaking fewer store
build-out projects than in previous periods.
Amortization of goodwill and other intangibles decreased to 0.4% from 0.5% as a
percentage of total revenues. This is due to the expiration of the amortization
periods for certain non-compete agreements and customer contracts. Amortization
expense decreased $0.1 million as compared to the same period last year. On
October 1, 2001, the Company adopted SFAS 142. SFAS 142 requires the cessation
of amortization of goodwill and other indefinite-lived intangibles on the
balance sheet. Goodwill and other indefinite lived intangibles on the balance
sheet must then be tested for impairment at least annually.
Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to
$6.0 million or 4.6% of total revenues from $6.4 million, or 4.9% as a
percentage of total revenues. The cost of prepaid phone service as a percentage
of prepaid phone service revenue decreased to 60.5% from 62.4%. This decrease is
the result of the FCC allowing the ILECs to increase End User Communication Line
("EUCL") monthly charges for residential lines during mid-year calendar 2001.
The Company reacted to the EUCL increases by adjusting retail prices to the
customer based on targeted margins. These price increases were implemented in
the first quarter of fiscal 2002.
Salaries and Wages. Salaries and wages increased by $2.9 million to $32.6
million from $29.7 million. A portion of this increase, $0.7 million, is due to
a new bonus program implemented during the first quarter of 2003. This new bonus
program better aligns the store and field management incentive programs with the
Company's strategic objectives. In addition, the Company initiated an employee
upgrade program directed at attracting and keeping better talent. This resulted
in higher salaries during the second quarter of 2003. Salaries and wages
increased to 25.0% as a percentage of total revenues from 23.0%.
Advertising. Advertising expense decreased from $5.2 million to $4.7 million.
This decrease is primarily due to a decrease in radio production and local store
marketing expenses. The Company has implemented a more balanced media investment
strategy in 2003.
Occupancy. Occupancy expense increased to $8.4 million from $7.9 million
primarily due to the lease termination costs associated with the 12 stores
merged in the three month period ended March 31, 2003. In the same three month
period last year, only 5 stores were merged or sold.
Restructuring Costs. During the second quarter of fiscal year 2003, the Company
formulated a plan to restructure the corporate office through reductions in the
corporate workforce to rationalize corporate costs for the stores remaining
subsequent to the sale to Rent-A-Center, Inc. As a result of this plan, the
Company recorded total pre-tax restructuring charges of $2.2 million in the
three-month period ending March 31, 2003. The restructuring costs include $0.7
million of employee severance and termination benefits and $1.5 million of fixed
asset write-offs in the household rental segment. These restructuring activities
were completed during the fiscal quarter ended March 31, 2003.
20
RENT-WAY, INC.
Other Operating Expense. Other operating expense increased by $3.7 million and
increased to 22.9% as a percentage of total revenues from 20.2%. This increase
is principally due to a $1.0 million increase in payroll taxes and health
insurance costs, a $1.9 million increase in property and casualty insurance
costs and a $1.0 million increase in legal, professional and consulting fees.
During the second quarter of fiscal 2002, accounting fees, legal fees and
consulting fees related to the investigation, shareholder litigation and the
fiscal 2000 audit were $0.3 million. During the second quarter of fiscal 2003,
accounting and legal fees related to the investigation and shareholder
litigation and consulting fees related to bank refinancing were $1.3 million.
Settlement of Class Action Lawsuit. The Company reached an agreement to settle
the consolidated class action lawsuit pending against the Company in the U.S.
District Court for the Western District of Pennsylvania. Under the settlement,
the Company will pay $25.0 million to the class, consisting of $4.0 million in
two-year 6% subordinated unsecured notes and $21.0 million in cash, of which
$11.0 million is to be funded from available insurance proceeds. The net $14.0
million was expensed in the second quarter of fiscal 2003.
Interest Expense. Interest expense decreased from 8.2% to 7.1% as a percentage
of total revenues. This decrease is primarily due to an $103.7 million decrease
in debt as compared to the same period last year. Debt was $214.0 million as of
March 31, 2003 as compared to $317.7 million as of March 31, 2002. The decrease
in debt is primarily due to the repayment of $63.6 million with proceeds
received from the sale of the stores to Rent-A-Center, Inc.
Other Income. Other income was $1.8 million for the three months ended March 31,
2003, compared to $2.6 million in the three months ended March 31, 2002. This
change is primarily due to a decrease in the positive change in the fair market
value of the interest rate swap portfolio.
Income Tax Expense. During the second quarter of fiscal 2003, the Company
recorded income tax expense of $1.3 million due to the Company's inability to
look to the reversal of the deferred tax liability associated with tax
deductible goodwill to offset a portion of its deferred tax asset following the
adoption of SFAS 142. Also during the second quarter of fiscal 2003, a tax
benefit of $0.6 million was recorded as a result of carrying back AMT net
operating losses. The net expense for the quarter was $0.7 million. During the
second quarter of fiscal 2002, the Company recorded income tax expense of $2.0
million due to the Company's inability to look to the reversal of the deferred
tax liability associated with tax deductible goodwill to offset a portion of its
deferred tax asset following the adoption of SFAS 142 on October 1, 2001.
Income (Loss)From Discontinued Operations. On December 17, 2002, the Company
entered into a definitive purchase agreement to sell 295 stores to
Rent-A-Center, Inc., for approximately $101.5 million, which transaction has
since closed. These stores are all included in the household rental segment.
Related operating results, in accordance with SFAS 144, have been reported as
discontinued operations (see Note 3). Loss from discontinued operations was
$13.4 million in the period ended March 31, 2003, as compared to income from
discontinued operations of $1.2 million in the same period last year. This
change is mainly due to a $7.9 million charge for lease obligations related to
vacated stores and a $3.6 million decrease in operating income of the stores due
to transition period costs recorded in the three-month period ended March 31,
2003.
Net Income (Loss). The Company generated a net loss of $27.9 million in the
period ended March 31, 2003, as a result of the factors described above compared
to net income of $1.6 million in the same period last year.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenues. Total revenues increased $0.5 million, or 0.2%, to $250.1
million from $249.6 million. The increase is attributable to an increase in
revenues of $0.7 million in the household rental segment offset by a $0.2
million decrease in revenues in the prepaid telephone segment. The $0.7 million
increase in revenue in the household rental segment is due to a 1.1% increase in
same store revenues.
This increase in same store revenues is due to an increase in both rental
revenues and early purchase option and sales revenue offset by a decrease in fee
revenue. The decrease in fee revenue was 5.4% as compared to the same period
last year, and is attributed to fewer rental-purchase agreements in the
portfolio and reductions in liability damage waiver fees due to customers
shifting to the Preferred Customer Club program. The Preferred Customer Club
program is a fee-based membership program that provides special loss and damage
protection and, at a discounted rate, an additional one year of service
protection on rental merchandise, preferred treatment in the event of
involuntary job loss and accidental death and dismemberment insurance. The
increase in rental revenue was 1.1% as compared to the same period last year.
This increase is the result of improvements in collections. Early purchase
option and
21
RENT-WAY, INC.
sales revenue increased 15.5% as compared to the same period last
year. This increase is primarily due to more customers exercising the early
purchase option as a result of a "120 days same as cash" promotion. In addition,
this increase is due to an increase in sales and early payouts on computers due
to the maturity of the computer rental program.
Depreciation and Amortization. Depreciation expense related to rental
merchandise decreased to 24.8% as a percentage of total revenues from 28.2%. In
fiscal 2002, the Company took steps to increase gross profit margins on rental
contracts. These steps included increasing weekly rental rates of personal
computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product,
increasing rental rates on certain core products to competitive market rates,
and introducing higher-end, higher-margin merchandise to the stores. The Company
expects depreciation expense as a percentage of total revenues to continue
decreasing during the remainder of fiscal 2003 as product margins improve due to
continued execution of the Company's pricing strategy.
Depreciation expense related to property and equipment decreased to 4.3% as a
percentage of total revenues from 5.1%. This decrease is primarily due to the
closing or selling of 22 stores since March 31, 2002. This decrease is also due
to the expiration of depreciation periods for certain fixed assets. Without new
store openings and store acquisitions, the Company is undertaking fewer store
build-out projects than in previous periods.
Amortization of goodwill and other intangibles decreased to 0.4% from 0.5% as a
percentage of total revenues. This is due to the expiration of the amortization
periods for certain non-compete agreements and customer contracts. Amortization
expense decreased $0.3 million as compared to the same period last year. On
October 1, 2001, the Company adopted SFAS 142. SFAS 142 requires the cessation
of amortization of goodwill and other indefinite-lived intangibles on the
balance sheet. Goodwill and other indefinite lived intangibles on the balance
sheet must then be tested for impairment at least annually.
Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to
$11.7 million or 4.7% of total revenues from $11.8 million, or 4.7% as a
percentage of total revenues. The cost of prepaid phone service as a percentage
of prepaid phone service revenue increased to 61.2% from 61.1%. The increase is
primarily due to the growth in the number of customer lines serviced and an
increase in the mix of new customers to the total customer base. The increase in
new customers results in higher costs due to ILEC activation fees. This increase
is also the result of the FCC allowing the ILECs to increase End User
Communication Line ("EUCL") monthly charges for residential lines during
mid-year calendar 2001. The Company has reacted to the EUCL increases by
adjusting retail prices to the customer based on targeted margins. These price
increases were implemented in the first quarter of fiscal 2002 and the Company
is starting to see the benefits through improved margins.
Salaries and Wages. Salaries and wages increased by $5.8 million to $66.3
million from $60.5 million. A portion of this increase, $1.2 million, is due to
a new bonus program implemented during the first quarter of 2003. This new bonus
program better aligns the store and field management incentive programs with the
Company's strategic objectives. In addition, the Company initiated an employee
upgrade program directed at attracting and keeping better talent. This resulted
in higher salaries during the first six months of 2003. Salaries and wages
increased to 26.5% as a percentage of total revenues from 24.3%.
Advertising. Advertising expense decreased from $15.4 million to $13.5 million.
This decrease is primarily due to $1.5 million of media costs incurred in the
fourth quarter of fiscal year 2002 related to the fiscal year 2003 advertising
campaign entitled "Fall Kickoff Extravaganza." The Company has also implemented
a more balanced media investment strategy in 2003.
Occupancy. Occupancy expense decreased to $16.1 million from $16.5 million
primarily due to the closing of 22 under-performing stores since March 31, 2002.
Restructuring Costs. During the second quarter of fiscal year 2003, the Company
formulated a plan to restructure the corporate office through reductions in the
corporate workforce to rationalize corporate costs for the stores remaining
subsequent to the sale to Rent-A-Center, Inc. As a result of this plan, the
Company recorded total pre-tax restructuring charges of $2.2 million in the
six-month period ending March 31, 2003. The restructuring costs include $0.7
million of employee severance and termination benefits and $1.5 million of fixed
asset write-offs in the household rental segment. These restructuring activities
were completed during the fiscal quarter ended March 31, 2003.
Other Operating Expense. Other operating expense increased by $4.3 million and
increased to 21.8% as a percentage of total revenues from 20.1%. This increase
is principally due to a $1.9 million increase in payroll taxes and health
insurance costs, a $2.7 million increase in property and casualty insurance
costs and a $1.7 million increase in legal, professional and consulting fees
offset by a $1.4 million decrease in service costs and a $0.6 million decrease
in telephone expenses. During the first six months of fiscal 2002,
22
RENT-WAY, INC.
accounting fees, legal fees and consulting fees related to the investigation,
shareholder litigation and the fiscal 2000 audit were $0.7 million. During the
six-month period ended March 31, 2003, accounting and legal fees related to the
investigation and shareholder litigation and consulting fees related to bank
refinancing were $2.2 million.
Settlement of Class Action Lawsuit. The Company reached an agreement to settle
the consolidated class action pending against the Company in the U.S. District
Court for the Western District of Pennsylvania. Under the settlement, the
Company will pay $25.0 million to the class, consisting of $4.0 million in
two-year 6% subordinated unsecured notes and $21.0 million in cash, of which
$11.0 million is to be funded from available insurance proceeds. The net $14.0
million was expensed in the second quarter of fiscal 2003.
Interest Expense. Interest expense decreased from 10.0% to 7.3% as a percentage
of total revenues. This decrease is primarily due to a $103.7 million decrease
in debt as compared to the same period last year. Debt was $214.0 million as of
March 31, 2003 as compared to $317.7 million as of March 31, 2002. The decrease
in debt is primarily due to the repayment of $63.6 million with the proceeds
received from the sale of stores to Rent-A-Center, Inc. Deferred financing costs
of $3.4 million were reclassified from an extraordinary item as reported in
fiscal 2002 to interest expense for the six-month period ended March 31, 2002,
as a result of adoption of SFAS 145.
Other Income. Other income was $3.3 million for the six months ended March 31,
2003, compared to $4.4 million in the six months ended March 31, 2002. This
change is primarily due to a decrease in the positive change in the fair market
value of the interest rate swap portfolio.
Income Tax Expense. During the first six months of fiscal 2003, the Company
recorded income tax expense of $3.0 million due to the Company's inability to
book the reversal of the deferred tax liability associated with tax deductible
goodwill to offset a portion of its deferred tax asset following the adoption of
SFAS 142. Also, during the first six months of fiscal 2003, a tax benefit of
$0.9 million was recorded as a result of carrying back AMT net operating losses.
The net expense for the six months was $2.1 million. During the first six months
of fiscal 2002, the Company recorded income tax expense of $12.6 million due to
the Company's inability to look to the reversal of the deferred tax liability
associated with tax deductible goodwill to offset a portion of its deferred tax
asset following the adoption of SFAS 142 on October 1, 2001.
Cumulative Effect of Change in Accounting Principle. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. During the quarter ended September 30, 2002, the Company performed,
with the assistance of an independent valuation firm, the phase two impairment
test of the carrying value to determine the amount of the write down. This
assessment resulted in an impairment write-down of $58.9 million, recorded in
"Cumulative Effect of Change in Accounting Principle" in the amount of $41.5
million (net of $17.4 million in income taxes). In accordance with the
transitional implementation guidance of SFAS 142, the write down was recorded
retroactive to the Company's first quarter results of operations (see Note 6).
Income (Loss) From Discontinued Operations. On December 17, 2002, the Company
entered into a definitive purchase agreement to sell 295 stores to
Rent-A-Center, Inc., for approximately $101.5 million, which transaction has
since closed. These stores are all included in the household rental segment.
Related operating results, in accordance with SFAS 144, have been reported as
discontinued operations (see Note 3). Loss from discontinued operations was
$14.2 million in the six months ending March 31, 2003 as compared to income from
discontinued operations of $1.2 million in the same period last year. This
decrease is mainly due to a $7.9 million charge for lease obligations related to
vacated stores and a $3.4 million decrease in operating income of the stores due
to transition period costs recorded in the six-month period ended March 31,
2003.
Net Loss. The Company generated a net loss of $33.3 million in the period as a
result of the factors described above compared to a net loss of $62.6 million in
the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's current credit
facility expires December 31, 2003. The Company is in discussions with its
lenders to restructure or replace the credit facility. There can be no assurance
that the Company will be successful in amending or replacing the facility. The
Company's ability to operate as a going concern is largely dependent on its
ability to successfully negotiate with its bank lenders an amendment or
restructuring of the Company's existing credit facility.
The Company's capital requirements relate primarily to purchasing additional
rental merchandise and replacing rental merchandise that has been sold or is no
longer suitable for rent. The Company funds its capital requirements through
cash from operations and borrowings under its bank credit facility.
23
RENT-WAY, INC.
On December 13, 2002, the Company amended its bank credit facility. This
amendment modified the maximum leverage ratio, the minimum interest coverage
ratio, the minimum consolidated net worth and the fixed charge coverage ratio
covenants for periods after December 31, 2002, through December 31, 2003. In
consideration for this amendment, the Company paid $0.5 million as an amendment
fee. This fee was paid on February 10, 2003, in connection with the closing of
the Rent-A-Center, Inc., transaction. In the event the Company fails to comply
with its covenants in the credit facility, it would be unable to borrow under
the facility. The Company expects to be able to comply with covenants based upon
its fiscal 2003 projections. The financial covenants required under the
provisions of the amended senior credit facility include the following:
The leverage ratio (which is debt, including capital lease and letter
of credit obligations, but not including payment-in-kind interest,
plus three times occupancy expense for the four quarters then ended
over the sum of cash flow from operations and occupancy expense for
the four quarters then ended) cannot exceed 4.60 to 1.00 through March
31, 2003 or 4.50 to 1.00 thereafter.
The interest coverage ratio (which is the consolidated cash flow from
operations (net income, amortization, interest expense and income tax
expense less non-cash credits to income) over interest expense all for
the four quarters then ended) must be at least 0.90 to 1.00 through
March 31, 2003 and 1.00 to 1.00 thereafter.
The consolidated net worth shall not be less than $165 million plus
75% of net income with no deduction for losses, 90% of net proceeds
from additional equity and 90% of any incremental additive equity
associated with any acquisition.
The fixed charge coverage ratio (which is consolidated cash flow from
operations minus capital expenditures (excluding rental merchandise)
to fixed charges (cash interest expense, income taxes and the current
portion of long-term debt including capital leases)) must be at least
0.60 to 1.00 through March 31, 2003 and 0.65 to 1.00 thereafter.
The Company must maintain interest rate protection agreements in an
amount of at least $160 million during the period through May 30, 2003
and $100 million after May 31, 2003.
The Company cannot make any individual payments exceeding $1 million
or $20 million in the aggregate for a fiscal year to purchase fixed
assets including capital and operating leases (excluding leases of
vehicles or store sites).
The Company cannot allow the book value of rental merchandise under
lease to be less than 77% of the total value of rental merchandise
held for rent at the end of each fiscal quarter. The value of jewelry
cannot exceed 7.5% of the total value of rental merchandise.
On January 2, 2003, the Company amended its bank credit facility. The amendment
provided for a supplemental $10.0 million term loan to the Company, which is
payable in full on the earlier of the Rent-A-Center, Inc., transaction closing
date or March 31, 2003. In consideration for this amendment, the Company paid
$0.3 million as an amendment fee. This amendment fee was paid on February 8,
2003.
For the six months ended March 31, 2003, operations used $22.5 million of cash
flow compared to operations providing $2.8 million for the six months ended
March 31, 2002. The increase in cash used in operating activities is primarily
attributable to the increase in rental merchandise purchases between periods.
The first quarter of the Company's fiscal year is typically the period with the
highest volume of rental merchandise purchases due to buying for the holiday
season. As a result, both rental merchandise and accounts payable are expected
to increase during the period. The increase in other assets is attributable to
an $11.0 million receivable recorded in the second quarter of fiscal year 2003
for insurance proceeds that will be received for the settlement of the class
action lawsuit; and, a receivable of approximately $10.0 million was recorded in
the second quarter of fiscal year 2003 for the Rent-A-Center, Inc., sale hold
back. The increase in other liabilities is attributable to a $25.0 million
dollar liability recorded for settlement of the class action lawsuit. Also,
other liabilities was effected by a $7.9 million liability recorded in the
second quarter of fiscal 2003 for future lease payments in 170 vacated stores
for which Rent-A-Center, Inc., did not assume the leases in the sale.
Net cash provided by investing activities was $86.1 million for the six months
ended March 31, 2003, compared to $5.0 million used in investing activities for
the six months ended March 31, 2002. On February 8, 2003, the Company sold 295
stores to Rent-A-Center,
24
RENT-WAY, INC.
Inc., for $100.4 million. Of the $100.4 million purchase price, $10.0 million is
being held back by Rent-A-Center, Inc., to secure the Company's indemnification
obligations; $5.0 million for 90 days following the closing and $5.0 million for
18 months following the closing. In the fiscal 2003 period, the purchase of
property and equipment accounted for $4.1 million. In the fiscal 2002 period,
the purchase of property and equipment accounted for $5.7 million.
For the six months ended March 31, 2003, financing activities used $60.7 million
as compared to providing $1.1 million in the six months ended March 31, 2002. In
the fiscal 2003 period, the Company borrowed $336.0 million and repaid $399.3
million. In the fiscal 2002 period, the borrowings were $358.0 million and
repayments were $353.4 million. The company also incurred $2.6 million in
deferred financing costs during the six-month period of fiscal 2002.
The following table presents obligations and commitments to make future payments
under contracts and contingent commitments at March 31, 2003:
Due in less Due in Due in Due after
Contractual Cash Obligation* Total than one year 1-3 years 4-5 years 5 years
--------- ------------- --------- --------- --------
Long-term debt (1)............. $ 213,881 $ 213,881 $ -- $ -- $ --
Capital lease obligations...... 13,585 1,263 12,011 311 --
Operating leases............... 126,435 28,688 61,811 21,145 14,791
Notes Payable.................. 79 9 68 2 --
Settlement of class action
lawsuit (2).................... 14,000 10,000 4,000 -- --
--------- --------- -------- -------- --------
Total cash obligations......... $ 367,980 $ 253,841 $ 77,890 $ 21,458 $ 14,791
========= ========= ======== ======== ========
*Excludes the 401(k) restorative payments program as well as contingent
liabilities that cannot be estimated.
(1) Consists of Term Notes A, Term Notes B and revolving notes.
(2) Net of insurance proceeds to be funded by the insurance carrier.
Amount of Commitment Expiration Per Period
Other Commercial Total Amounts Less than Over
Commitments Committed one year 1-3 years 4-5 years 5 years
------------- --------- --------- --------- --------
Lines of credit......... $ -- $ -- $ -- $ -- $ --
Standby letters of credit 8,720 8,720 -- -- --
Guarantees.............. -- -- -- -- --
-------- -------- -------- -------- --------
Total commercial
commitments............. $ 8,720 $ 8,720 $ -- $ -- $ --
======== ======== ======== ======== ========
SEASONALITY AND INFLATION
The Company's operating results are subject to seasonality. The first quarter
typically has a greater number of rental-purchase agreements entered into
because of traditional holiday shopping patterns. Management plans for these
seasonal variances and takes particular advantage of the first quarter with
product promotions, marketing campaigns, and employee incentives. Because many
of the Company's expenses do not fluctuate with seasonal revenue changes, such
revenue changes may cause fluctuations in the Company's quarterly earnings.
In the event of a prolonged recession, the Company acknowledges the possibility
of a decrease in demand, particularly for higher-end products.
RECENT ACCOUNTING PRONOUNCEMENTS
On November 25, 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34". The Interpretation requires that
upon issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that obligation. The Company has
evaluated the provisions of this Interpretation and determined it does not have
an impact on these financial statements upon its adoption.
On January 15, 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to improve financial
reporting by enterprises involved with variable interest entities. This
interpretation applies to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has no variable
25
RENT-WAY, INC.
interest entities that are not currently consolidated and is evaluating the
provisions of this interpretation.
On April 30, 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 clarifies 1) the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative, 2) when a derivative contains a financing
component and amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003. The
Company is currently evaluating the provisions of this Statement.
CAUTIONARY STATEMENT
This report includes 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. See particularly Item 2, "Management's
Discussion and Analysis of Financial Condition," among others. These statements
may be identified by terms and phrases such as "anticipate", "believe",
"intend", "estimate", "expect", "continue", "should", "could", "may", "plan",
"project", "predict", "will" and similar expressions and relate to future events
and occurrences. These statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements.
Factors that could cause actual results to differ materially from those
expressed or implied in such statements include but are not limited to:
Rent-Way's ability to control and normalize operating expenses and to continue
to realize operating efficiencies. Rent-Way's ability to make principal and
interest payments on or to refinance on maturity its high-level of outstanding
bank debt.
The outcome of the class action and derivative lawsuits commenced against
Rent-Way and its officers and directors and any proceedings or investigations
involving Rent-Way, its officers and directors commenced by governmental
authorities, including the Securities and Exchange Commission and the United
States Department of Justice.
Rent-Way's ability to develop, implement, and maintain reliable and adequate
internal accounting systems and controls.
Rent-Way's ability to retain existing senior management and attract additional
management employees.
General economic, business, and demographic conditions, including demand for
Rent-Way's products and services.
General conditions relating to the rental-purchase industry and the prepaid
local phone service industry, including the impact of state and federal laws
regulating or otherwise affecting the rental-purchase transaction and prepaid
local phone service transaction.
Competition in the rental-purchase industry and prepaid local phone service
industry, including competition with traditional retailers.
Rent-Way's ability to enter into and to maintain relationships with vendors of
its rental merchandise including its ability to obtain goods and services on
favorable credit terms.
Rent-Way's ability to reduce corporate and other expenses following the
completion of the Rent-A-Center, Inc. transaction.
Given these factors, undue reliance should not be placed on any forward-looking
statements and statements regarding Rent-Way's future prospects and performance.
Such statements speak only as of the date made. Rent-Way undertakes no
obligation to update or revise any such statements whether as a result of new
information, the occurrence of future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. As of March 31, 2003, the Company had $213.8
million in loans with floating interest rates indexed to current LIBOR and prime
rates. Because the floating rates expose the Company to the risk of increased
interest cost if interest rates rise, the Company began a policy in 1998 of
managing interest rate risk by utilizing interest rate swap agreements to
convert a portion of the floating interest rate loans to fixed interest rates.
As of March 31, 2003, the Company has $163.1 million in interest rate swap
agreements that lock in a LIBOR rate ranging from 5.09% to 6.97%. This
effectively fixes the interest rate on 76% of the loans or $163.1 million, thus
hedging this risk. These interest rate swap agreements have maturities ranging
from 2002 to 2005. Falling interest rates and/or a flattening of the yield curve
will negatively impact the market value of the interest rate swaps.
26
RENT-WAY, INC.
Given the Company's current capital structure, including interest rate swap
agreements, there is $50.9 million, or 24% of the Company's total debt, in
floating rate loans. A hypothetical 1.0% change in the LIBOR rate would affect
pre-tax earnings for the year by approximately $0.5 million.
The Company does not enter into derivative financial instruments for trading or
speculative purposes. The interest rate swap agreements are entered into with
major financial institutions thereby minimizing the risk of credit loss.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon the evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
this evaluation.
27
RENT-WAY, INC.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company, its independent auditors, and certain of
its current and former officers have been named in a consolidated class action
complaint filed in the U.S. District Court for the Western District of
Pennsylvania alleging violations of the securities laws and seeking damages in
unspecified amounts purportedly on behalf of a class of shareholders. As of
April 18, 2003, the Company entered into an agreement settling the class action.
The settlement requires the Company to pay the class the sum of $25 million, $21
million in cash and $4 million in two year 6% unsecured subordinated notes. Of
the $21 million payable in cash, $11 million is to be funded from available
insurance proceeds. The settlement agreement provides for the release of the
Company and all other defendants except the Company's former controller and the
Company's auditors. The settlement is subject to several conditions including
Court approval, approximately 5% of shares purchased during the class period not
opting out of the settlement, and a refinancing or restructuring of the
Company's existing senior credit facility on or before July 31, 2003. The
Company's auditors have opposed the motion of the lead plaintiff in the class
action, Cramer Rosenthal McGlynn LLC, seeking certification and appointment as
class representative. If the motion is not granted, the Court could reject the
settlement.
As previously reported, certain of the Company's officers and directors and the
Company, as nominal defendant, have been sued in a shareholder derivative action
brought on behalf of the Company in the U.S. District Court for the Western
District of Pennsylvania. The derivative complaint purports to assert claims on
behalf of the Company against the defendants relating to the events which gave
rise to the purported class action described above. The derivative action has
been stayed pending resolution of the class action. On April 11, 2003, the
Company filed a motion to vacate the stay and dismiss the complaint as to all
defendants, or in the alternative to require the plaintiff to post a bond as
security for the Company's litigation costs. The Court has vacated the stay and
the motion to dismiss is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of Shareholders was held on March 12, 2003, at the
Clarion Hotel, Erie, Pennsylvania. The only matter voted on at the Annual
Meeting was the election of three (3) Class II directors to serve until the 2006
Annual Meting of Shareholders. The result of the vote was as follows:
Name of Director Class Votes For Withheld Authority
---------------- ----- --------- ------------------
William Lerner II 18,126,883 5,673,839
Marc W. Joseffer II 23,245,118 555,604
Jacqueline E. Woods II 23,243,218 557,504
William E. Morgenstern, Gerald A. Ryan, Robert B. Fagenson and John W. Higbee
are the other directors of the Company whose terms of office continue after the
Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
See exhibit index.
b. REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K in the quarter ended
March 31, 2003:
(1) On March 31, 2003, the Company filed a Current Report on Form 8-K, which
reported the effect of the sale of 295 stores to Rent-A-Center, Inc., on
the Company's Unaudited financials.
(2) On March 20, 2003, the Company filed a Current Report on Form 8-K, which
reported the issuance of a press release announcing that Rent-Way
reached an agreement in principle to settle the consolidated class
action.
(3) On February 25, 2003, the company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing the 2003 first
quarter results.
28
RENT-WAY, INC.
(4) On February 25, 2003, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing amended 2003
first quarter results.
(5) On February 24, 2003, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing the close of
the sale of 295 stores to Rent-A-Center, Inc.
(6) On February 24, 2003, the Company filed a Current Report on Form 8-K,
which reported the unaudited pro forma financial information related to
the close of the sale of 295 stores to Rent-A-Center, Inc.
(7) On February 4, 2003, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release announcing the Company
will host a conference call in connection with the release of financial
results for its first quarter ended December 31, 2002.
(8) On January 10, 2003, the Company filed a Current Report on Form 8-K,
which reported the issuance of a press release responding to the action
taken by Standard and Poor's.
29
RENT-WAY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Rent-Way, Inc.
--------------
(Registrant)
By:
May 5, 2003 /S/ WILLIAM A. MCDONNELL
-------------- ------------------------------
Date (Signature)
William A. McDonnell
Vice President and Chief Financial Officer
By:
May 5, 2003 /S/ JOHN A. LOMBARDI
-------------- ------------------------------
Date (Signature)
John A. Lombardi
Chief Accounting Officer and Controller
30
CERTIFICATION
I, William E. Morgenstern, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-Way, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchanged Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 5, 2003
/S/ WILLIAM E. MORGENSTERN
------------------------------------
Signature
CHAIRMAN & CEO
------------------------------------
Title
31
CERTIFICATION
I, William A. McDonnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-Way, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchanged Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 5, 2003
/S/ WILLIAM A. MCDONNELL
------------------------------------
Signature
VICE PRESIDENT & CFO
------------------------------------
Title
32
EXHIBIT INDEX
No. Exhibit Name
- --- ------------
3.1 Articles of Incorporation of Rent-Way, Inc., as amended (incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1997, filed November 6, 1997.)
3.2 Bylaws of Rent-Way, Inc., as amended (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended September 30, 2000, filed July 2, 2001.)
99.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------------
*Filed herewith.
33