ITEM 1. BUSINESS
General
Bestway, Inc. and its consolidated subsidiaries ("Bestway" or the "Company") has been engaged in the rental-purchase industry since 1987. The Company owns and operates a total of sixty-two stores located in the states of Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. The stores operations are controlled and monitored through the Company's management information system networked with its home office in Dallas, Texas.
The Company created an additional line of business for its rental-purchase operations by entering the retail used car sales business. The Company test marketed the concept through the opening of a single prototype retail sales facility, Bestway Auto Center, in Tullahoma, Tennessee. In December 1995, management made the decision to dispose of Bestway Auto's assets and in the process create a potential for a future opportunity in an operating used car sales business. Accordingly, in February 1996, the Company exchanged cash and its capital stock in Bestway Auto for a 49% Common Stock interest in Value Auto Sales, Inc. ("Value Auto") and non-voting, non-dividend paying Preferred Stock of Value Auto. Subsequently the Company evaluated the viability of its auto sales business and management made the decision to abandon the additional line of business and write off its investment in Value Auto.
The Company's rental-purchase program offers brand name durable household goods, electronics, appliances and jewelry to customers on a week-to-week or month-to-month basis. These products are furnished to customers under full-service rental agreements which require that the charge for each rental period be paid in advance, but no additional advance payment or security deposit is required. At the end of each rental period, the customer has the option of retaining the product for an additional rental period or returning the product without further obligation. If the product is returned, it is serviced and then offered for rent to another customer. The rental agreements contain options under which customers may own the merchandise under specified terms. The Company's rental agreements typically have a twelve to twenty-four month term with weekly or monthly payment options. The most distinguishing factor of this form of retailing is the cancelability of the rental agreement at any time without further obligation by returning the product to the dealer. The industry primarily serves customers in the low to middle income sector who may have a need for a product, but do not wish or are unable to purchase it for cash or on credit.
Acquisitions
In April 1996, the Company acquired 15 stores located in three states in which the Company had no previous operations from All Star Rental, Inc. (the "All Star Acquisition"). The Company acquired substantially all of the assets and certain liabilities of All Star. The assets acquired primarily include All Star's idle inventory, rental contracts, vehicles, store furniture and fixtures, computers and leasehold improvements. In addition, the Company assumed the leases for 15 of All Star's former store locations. The Company delivered 115,647 shares of voting Common Stock, $.01 par value per share, as the aggregate purchase price in connection with the All Star Acquisition. Such amount was based on a multiple of All Star's average monthly revenues less certain assumed liabilities. Management believes that the All Star stores suffered from a lack of new and higher quality merchandise. Immediately following the acquisition, the Company made a substantial investment in additional merchandise and significantly upgraded the quality of merchandise in the stores.
In July 1996, the Company acquired 8 stores located in two states, including one state in which the Company had no previous operations, from REJA, Inc. (the "REJA Acquisition"). The Company acquired substantially all of the assets of REJA. The assets acquired primarily include REJA's idle inventory, rental contracts, vehicles, store furniture and fixtures, computers and leasehold improvements. In addition, the Company assumed the leases for 8 of REJA's former store locations. The Company combined one REJA store location with an existing store. The Company delivered 132,000 shares of voting Common Stock, $.01 par value per share and $500,000, as the aggregate purchase price in connection with the REJA acquisition.
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Management believes that the acquisitions provide the Company with certain strategic benefits including (i) greater market share in certain regions, (ii) increased geographic presence, and (iii) increased revenues without significant increase to corporate overhead. Management believes that substantial opportunity exists to improve the performance of the stores. There can be no assurance that the stores will perform in accordance with expectations or that the Company will not encounter unanticipated problems or liabilities in connection with these stores.
Products
The Company generally purchases products directly from the manufacturers and local distributors. Products offered by the Company include a variety of brands, styles and models of television sets, audio equipment, video cassette recorders, washers and dryers, refrigerators and freezers, microwave ovens, furniture and jewelry. Although the Company presently expects to continue relationships with its existing suppliers, there are numerous sources of products, and the Company does not believe its operations are dependent on any one or more of its present suppliers.
Advertising
The Company markets its products and services by selecting prominent store locations in retail shopping areas on main traffic thoroughfares near targeted customers' residences or job locations. Additionally, the Company solicits new business by acquainting potential customers with the Company's products and services through mailing lists and local media advertising programs. The Company also has programs which reward existing customers with rental discounts or cash payments for the referral of new customers.
Competition
The rental-purchase industry is highly competitive. Competition is based primarily on store location, product selection and availability, customer service and rental rates and terms. Several of the Company's competitors are national and regional and some have significantly greater financial and operating resources and name recognition than the Company. In addition, the Company faces competition from sources outside the rental-purchase industry, such as department stores, discount stores and retail outlets. These competitors may offer an installment sales program or may compete with the Company simply on the basis of product and price. There is no assurance that the Company will be able to compete successfully against these competitors. Because capital and other requirements for entry into the rental-purchase industry is relatively low, competition may arise from new sources not currently competing with the Company. Increased competition could have a material adverse effect on the Company's sales and profitability.
Personnel
At July 31, 1996, the Company employed approximately 267 full-time employees, of which 14 are located at the corporate office in Dallas, Texas. The Company has various incentive programs for all personnel. None of the Company's employees are represented by a labor union. The Company considers its relations with its employees to be satisfactory.
Company Stores
The number of stores operated by the Company has increased from 35 as of July 31, 1995 to 62 as of July 31, 1996. The following table shows the number of stores opened, acquired and combined during the year.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- Regulation
FEDERAL REGULATION Although certain proposed federal regulations are under consideration, no federal legislation has been enacted regulating rental-purchase transactions. As of July 31, 1996, four bills have been introduced in Congress that would regulate the rental-purchase industry. Two of the bills are supported by the Association of Progressive Rental Organization ("APRO") and mandate certain disclosures to customers similar to those required by most state legislation. The Company does not believe that these laws, if enacted, will have a material adverse effect upon the Company's operations.
The other two bills include certain credit sale requirements and would subject rental-purchase transactions to interest rate, finance charge and fee limitations, as well as the Federal Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. These bills would also require the lessor to make certain disclosures to customers about the terms of the rental-purchase transaction. The Company believes that in the event federal legislation is enacted regulating rental-purchase transactions as credit sales, the Company would be able to adapt to the new laws and remain profitable by repositioning itself as a rent-to-rent business. However, there can be no assurance that the proposed legislation, if enacted, would not have a material adverse effect on the business of the Company.
STATE REGULATION With some variations in individual states, most state legislation requires the lessor to make prescribed disclosures to a customer about the rental-purchase agreement and transaction. These laws require certain contractual and advertising disclosures concerning the rental-purchase agreement and the nature of the transaction and also provide varying levels of substantive consumer protection, such as requiring a grace period for late payments and contract reinstatement rights in the event the agreement is terminated for nonpayment of rentals and, in some instances, limits certain fees that may be charged. Some states require written disclosure of all material aspects of the transaction, including the cash price of the merchandise, the purchase option prices during the term of the agreement and the total amount of rentals that must be paid in order to acquire ownership of the merchandise and prohibit confession-of-judgement clauses.
ITEM 2.
ITEM 2. PROPERTIES
All store locations, with the exception of one, and the home office facility in Dallas, Texas are leased. Store facilities typically are showroom locations of approximately 3,700 square feet in retail centers on heavy traffic thoroughfares near customers' residences or work places. Almost all available rental merchandise is kept in the showroom area which comprises the majority of the available square footage. Store location is considered critical to the success of the store.
The Company's store locations by state at July 31, 1996, are as follows:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation incidental to the Company's business to which the Company or any of its subsidiaries is a party or to which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
The Company's Common Stock began trading on the Nasdaq Small-Cap Market on December 19, 1995 under the symbol "BSTW". Prior thereto, the Company's Common Stock was quoted in the "pink sheets" and was traded on a limited basis. The following table sets forth, for the periods indicated, the high and low sales price per share of the Common Stock as reported on the Nasdaq Small-Cap Market.
At July 31, 1996, there were 496 stockholders of record of the Company's Common Stock, calculated based on the number of recordholders.
The Company has not paid cash dividends on its Common Stock since its inception and intends to retain earnings for operations. The Company is a party to a loan agreement which prohibits the payment of cash dividends on Common Stock.
On May 16, 1996, the Company decreased the authorized number of shares of Common Stock from 20,000,000 shares to 5,000,000 shares.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the year ended July 31, 1996, the Company opened four new stores and acquired a single store location in November 1995. The All Star Acquisition added 15 stores in April 1996 and the REJA Acquisition added 8 stores in July 1996, of which one was combined with an existing store location. The Company purchased new merchandise, purchased new delivery vans and is in the process of upgrading the acquired stores' appearance and incorporating the Company's existing broad-based training program for the acquired stores' employees.
Results of Operations for the Fiscal Year Ended July 31, 1996 Compared to 1995
The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Income, expressed as a percentage of revenues.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Total revenue increased $2,500,590 or 15.2% to $18,923,852 as compared to $16,423,262 in fiscal year 1995. The increase was due to the inclusion of approximately four months operations for the stores acquired in the All Star Acquisition, one month operations for the stores acquired in the REJA Acquisition, nine months operations for a single store acquisition, operations for four internal new store openings and increased same store revenues. The stores acquired in the All Star Acquisition, which was consummated on April 12, 1996, accounted for $1,647,143 (66%) of the increase, the stores acquired in the REJA Acquisition, which was consummated on July 1, 1996, accounted for $190,384 (8%) of the increase, the single store acquisition, which was consummated on November 8, 1995, accounted for $173,752 (7%) of the increase, internal new store openings, which were opened in September 1995, October 1995 and March 1996, accounted for $443,318 (18%) of the increase, while the Company's same stores accounted for $45,993 (1%) of the increase. The Company receives rental revenues from various products including televisions and video cassette recorders, household appliances, as well as home furniture and jewelry. In fiscal year 1996, approximately 19% of the Company's rental revenue was derived from appliances, 23% from home furniture, 31% from electronics, 12% from various other products such as jewelry and 15% from various services and charges to rental customers including reinstatement fees and liability waiver fees.
Total cost and operating expenses increased $2,669,799 or 17.4% to $18,020,949 primarily as a result of the opening of four new stores and costs and operating expenses associated with the All Star and REJA Acquisitions. The four new stores incurred operating losses of approximately $58,000. Total cost and operating expenses increased from 93.5% to 95.2% of total revenues. This 1.7% net increase resulted primarily from a 1.5% increase in other operating expenses as a percentage of total revenues. This increase in other operating expenses occurred primarily because of certain indirect acquisition costs of approximately $75,000 relating to the All Star and REJA Acquisitions and a .9% net increase in costs associated with the write-off of rental merchandise as a percentage of total revenues. Salaries and wages increased $720,590 or 17.9% to $4,734,879 and increased from 24.4% to 25.0% of total revenues primarily due to the addition of key management personnel in operations, real estate management and human resource departments added in preparation for expansion. Occupancy expense increased $171,592 or 22.6% to $931,205 and increased from 4.6% to 4.9% of total revenues primarily due to the opening of four new store locations and the All Star and REJA Acquisitions.
In fiscal year 1995, the Company formed a new subsidiary, Bestway Auto, Inc., ("Bestway Auto") due to the Company's entry into the retail used car sales and finance business. The Company test marketed the concept through the opening of a single prototype retail sales facility which experienced losses, before income taxes, of $144,111. In February 1996, the Company exchanged cash and its capital stock in Bestway Auto for a 49% Common Stock interest in Value Auto and a non-voting, non-dividend paying Preferred Stock of Value Auto. For the period February 1, 1996 through July 31, 1996, the Company's equity interest in the operating losses of Value Auto was approximately $67,000. Based on Management's assessment of the future operating results of the Company's auto sales business, management has concluded that the Company will abandon the auto sales business and its investment in Value Auto should be written off. (see Note 10).
Financial Condition, Liquidity and Capital Resources
On April 12, 1996, the Company amended its August 19, 1993 Second Amendment to First Amended and Restated Revolving Credit Loan Agreement with its senior collateralized lender. In the amendment, the Company increased the maximum amount available under the line of credit from $4,000,000 to $7,500,000 and extended the maturity date from August 18, 1996 to August 18, 1997.
On July 19, 1996 the Company extended its maturity on the $100,000 subordinated note payable to director and stockholder dated July 19, 1993. The note which matured on July 19, 1996 was extended until August 19, 1997. On August 26, 1996, the Company extended its maturity on the $500,000 subordinated note payable to affiliate date March 4, 1992 from August 31, 1996 to August 31, 1997. For the year ended July 31, 1996, the Company's net cash flows from operating activities was $7,365,631 as compared to $6,542,227 for the year ended July 31, 1995. The increase was primarily due to an increase in cash generating earnings.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
For the year ended July 31, 1996, the Company's net cash flows used in investing activities was $8,758,450 as compared to $6,070,711 for the year ended July 31, 1995. The Company's investing activities reflect the investment in Value Auto Partners, Ltd., the REJA Acquisition, and significant increases in purchases of rental units and property and equipment. The increased investing activities were necessary to fund the four new store openings, upgrade the quality of merchandise in the All Star stores and purchase new delivery vans. The Company's investing activities reflect its continuing replacement of rental merchandise that was purchased by customers either by full pay out under the rental agreement or by exercise of the customers early purchase option.
For the year ended July 31, 1996, the Company's net cash flows from financing activities was $1,388,990 as compared to $(415,357) for the year ended July 31, 1995. The increase in financing activities principally reflects increased borrowings on the Company's debt.
With the Company having available credit of $2,444,973 under the $7,500,000 amended line of credit at July 31, 1996, management believes the Company has adequate resources to meet its future cash obligations.
During March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The standard is effective for financial statements for fiscal years beginning after December 15, 1995. The Company's analysis of this new standard indicates that the standard should not have a material effect on its financial position or results of operations.
SFAS No. 123 entitled "Accounting for Stock-Based Compensation" was issued in 1995 and will be effective for the Company in fiscal year 1997. The statement defines a fair value based method of accounting for stock-based compensation but allows a company to continue to measure compensation costs using the intrinsic value based method in accordance with Accounting Principal Board Opinion No. 25. The Company expects to continue to use the intrinsic value based method, but will provide the required disclosures.
Inflation
Although the Company cannot precisely determine the effects of inflation on its business, it is management's belief that the effects on revenues and operating results have not been significant.
Results of Operations for the Fiscal Year Ended July 31, 1995 Compared to 1994
Revenue increased $54,113 or 0.3% to $16,423,262 as compared to $16,369,149 in fiscal year 1994. Same store revenue, which includes all stores opened prior to fiscal year 1994, increased $733,732 and the Company's Mississippi stores acquired in fiscal year 1994 and three new stores opened in fiscal 1994 increased $1,081,251 and $517,717, respectively. Additionally, the Company experienced a decline of $2,278,587 in revenue as a result of the asset purchase agreement with another rental dealer in which the Company sold substantially all of the rental inventory being rented by customers pursuant to rental agreements at four stores in Missouri and two stores in Illinois. The Company's improved performance is primarily due to the implementation of a marketing program based on increasing the Company's share of the customer's business and the implementation of a broad-based training program designed to improve customer satisfaction skills of the Company's employees and to reduce employee turnover. The Company receives rental revenue from various products including televisions and video cassette recorders, household appliances, as well as home furniture and jewelry. In fiscal year 1995, approximately 18% of the Company's rental revenue was derived from appliances, 23% from home furniture, 30% from electronics, 14% from various other products such as jewelry and 15% from various services and charges to rental customers including reinstatement fees and liability waiver fees.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Results of Operations for the Fiscal Year Ended July 31, 1995 Compared to 1994, continued
Cost and operating expenses, which primarily consist of depreciation and amortization, salaries and wages, advertising, other operating expenses and interest expense decreased to 93.5% from 95.6% of total revenues. The three new store locations opened in fiscal year 1994 experienced revenues in excess of direct store operating expenses of approximately $187,000 in fiscal year 1995 compared to losses of approximately $134,000 in fiscal year 1994. Total store operating margins including the three new stores, Mississippi stores acquired September 10, 1993 and same stores increased 29.3% as a result of increased revenues, as well as, better merchandising strategies and due to upgrading the Company's sales and support resources. Interest expense increased to 3.1% from 2.4% of total revenues due to increased borrowings for the purchase of new delivery vans and a 1.5% increase in the interest rate at July 31, 1995 compared to July 31, 1994.
Based on a positive earnings trend and estimates of future taxable income, the Company has recognized a portion of its net deferred tax asset through a $2,013,784 reduction in the valuation allowance. The effect on earnings per share of this reduction in the valuation allowance is approximately $1.34. Accordingly, without this reduction earnings per share would have been $.65.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Consolidated Financial Statements and notes thereto appearing at pages to hereof.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 1996, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 1996, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 1996, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 1996, and is incorporated herein by reference.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following are filed as Exhibits to this Annual Report filed as Form 10-K for the year ended July 31, 1996.
(b) Exhibits
(c) Reports on Form 8-K
(1) On April 25, 1996, the Company filed a Form 8-K disclosing the Purchase and Sale of Assets by and among the Company, All Star Rental, Inc. and Robert D. Simons and Keith Crosby, the sole shareholders of All Star.
(2) On April 25, 1996, the Company filed a Form 8-K disclosing the Second Amendment to First Amended and Restated Revolving Credit Loan Agreement by and among the Company, the Company's senior secured lender and certain subsidiaries of the Company to increase the maximum amount of revolving credit under such loan and extend the termination date of such agreement.
(3) On June 24, 1996, the Company filed a Form 8-KA amending the previously filed Form 8-K on April 25,1996 to include the financial statements of All Star Rental, Inc. for the years ended December 31, 1995 and 1994. In addition, pro forma financial information was included as of January 31, 1996, for the year ended July 31, 1995 and for the six months ended January 31, 1996.
(4) On July 11, 1996, the Company filed a Form 8-K disclosing the Purchase and Sale of Assets by and among the Company, REJA, Inc. and Gus Blass III, Tucker Morse, D. Eugene Fortson, Warren Stephenson and Rod Reed.
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BESTWAY, INC.
October 22, 1996 /s/ R. Brooks Reed ---------------------------------------- R. BROOKS REED, CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 22 day of October 1996.
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BESTWAY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Bestway, Inc.:
We have audited the accompanying consolidated balance sheets of Bestway, Inc. as of July 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bestway, Inc. as of July 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas October 11, 1996
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the financial statements.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the financial statements.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For years ended July 31, 1996, 1995, and 1994
The accompanying notes are an integral part of the financial statements.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation The consolidated financial statements of Bestway, Inc. (the "Company"), include the Company's wholly-owned operating subsidiaries, Bestway Rental, Inc. which operates under the registered trade name "Bestway Rent-To-Own," U.S. Credit-Service Corporation and Westdale Data Service, Inc. and a 50% interest in Value Auto Partners, Ltd., which is accounted for by the equity method. Intercompany balances and transactions have been eliminated in the consolidated financial statements.
The Company owns and operates a total of sixty-two stores located in various states. The stores operations are controlled and monitored through the Company's management information system networked with its home office in Dallas, Texas. The Company's store locations by state as of July 31, 1996, are as follows:
Rental Merchandise, Related Rental Revenue and Depreciation Rental merchandise is rented to customers pursuant to rental agreements which provide for either weekly or monthly rental terms with nonrefundable rental payments for the first week or month collected in advance. Rental revenue is recognized as collected since at the time of collection the rental merchandise has been placed in service and costs of installation and delivery have been incurred. Rental agreements generally cover a period of 12 to 24 months with a majority of rental agreements specifying 18 months. At the end of each rental period, the customer can renew the rental agreement, return the merchandise with no obligation, or purchase the merchandise by exercising their early purchase option. Amounts received from such sales are included in revenue when received. Past due or stolen merchandise is expensed generally within three months from the due date. The Company receives rental revenue from various products including televisions and video cassette recorders, household appliances, as well as home furniture and jewelry. In fiscal year 1996, approximately 19% of the Company's rental revenue was derived from appliances, 23% from home furniture, 31% from electronics, 12% from various other products such as jewelry and 15% from various services and charges to rental customers including reinstatement fees and liability waiver fees. In fiscal year 1995, approximately 18% of the Company's rental revenue was derived from appliances, 23% from home furniture, 30% from electronics, 14% from various other products such as jewelry and 15% from various services and charges to rental customers including reinstatement fees and liability waiver fees.
Merchandise rented to customers, or available for rent, is recorded at cost net of accumulated depreciation, which equals the carrying amount, and is classified in the consolidated balance sheets as rental merchandise. Merchandise rented to customers is depreciated on the income-forecast basis over the term of the rental agreement ranging from 12 to 24 months. When not on rent, merchandise is not depreciated.
Sales of Merchandise Sales of merchandise includes revenue from cash sales of primarily used merchandise.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Property and Equipment Property and equipment are recorded at cost. Major improvements to property and equipment are capitalized. Maintenance and repair expenditures are charged to expense as incurred. As fixed assets are sold or retired, the applicable cost and accumulated depreciation are eliminated from the accounts and any gain or loss is recorded.
Depreciation of property and equipment is provided over the estimated useful lives, which range from 1 to 10 years of the respective assets, on the straight-line basis.
Restricted Cash Amount represents escrow money deposited in connection with the sale of certain stores as required by the Asset Purchase Agreement as herein defined. Disbursements will be made from this account to satisfy any taxes owed by the Company, any claims of third parties against the assets which are the Company's responsibility, or to satisfy any indemnification rights as specified in the Asset Purchase Agreement. Upon termination, any amount not payable to third parties will be returned to the Company.
Intangible Assets Goodwill represents the cost in excess of the fair value of net tangible assets of acquired businesses and is being amortized on a straight-line basis over 20 years. Accumulated amortization of goodwill was $1,569,221 and $1,382,539 at July 31, 1996 and 1995, respectively.
The non-competes represents the allocation of the purchase price from the September 10, 1993 acquisition of 12 stores in Mississippi, the April 12, 1996 acquisition of 15 stores in Georgia, North Carolina and South Carolina and the July 1, 1996 acquisition of 8 stores in Arkansas and Mississippi and is being amortized on a straight-line basis over periods from 2 to 5 years. Accumulated amortization of the non-competes was $561,900 and $336,933, at July 31, 1996 and 1995, respectively.
The Company continually evaluates the propriety of the carrying amount of goodwill and other intangibles based on the estimated future undiscounted cash flows of the related investment, as well as the amortization period to determine whether current events and circumstances warrant adjustments to carrying value and/or revised estimates of useful lives. At this time, the Company believes that no significant impairment of the goodwill and other intangibles has occurred and that no reduction of the estimated useful lives is warranted.
Income Taxes Investment tax credits are accounted for on the "flow-through" method.
Earning Per Common Share Earnings per common share is based on the weighted average of common shares outstanding during the period and the effect of considering common stock equivalents (stock options) under the treasury stock method. Primary and fully diluted earnings per common share are not shown because the effect of the stock options is immaterial.
Advertising Costs Advertising costs are expensed as incurred.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- BESTWAY, INC. FORM 10-K NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Estimates The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets, particularly deferred tax assets, and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues and expenses. Actual results could differ from those estimates.
2. ACQUISITIONS:
On April 12, 1996, the Company acquired substantially all of the assets and certain liabilities of All Star Rental, Inc. a privately-owned South Carolina corporation ("All Star"). The assets acquired by the Company included the idle inventory, rental contracts, vehicles, store furniture and fixtures, computers and leasehold improvements. In addition, the Company assumed the leases for 15 of All Star's former store locations.
The Company delivered to All Star 115,647 non-registered shares of the Company's Common Stock valued at $578,235. The aggregate purchase price in connection with the acquisition was based on a multiple of average monthly revenues less certain assumed liabilities. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of All Star are included in the accompanying consolidated financial statements from the date of acquisition. The acquisition resulted in $1,226,283 of intangible assets. These items are being amortized on a straight-line basis over periods not exceeding 20 years.
On July 1, 1996, the Company acquired substantially all of the assets of REJA, Inc., a privately-owned Arkansas corporation ("REJA"). The assets acquired by the Company primarily included the idle inventory, rental contracts, vehicles, store furniture and fixtures, computers and leasehold improvements. In addition, the Company assumed the leases for 8 of REJA's former store locations.
The Company delivered to REJA 132,000 non-registered shares of the Company's Common Stock valued at $660,000 and $500,000 cash, as the aggregate purchase price in connection with the acquisition. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of REJA are included in the accompanying consolidated financial statements form the date of acquisition. The acquisition resulted in $314,829 of intangible assets. These items are being amortized on a straight-line basis over periods not exceeding 20 years.
The following summary reflects the unaudited condensed pro forma revenues, costs and operating expenses and presents the results of the operations of the Company assuming these acquisitions had been consummated as of the first day of the Company's fiscal year ended July 31, 1995 and are as follows:
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued)
On September 10, 1993 the Company acquired for approximately $2,000,000 a substantial portion of the assets of Action Television Rental, Inc. and virtually all of the assets of A-1 TV Rental, Inc., both privately-owned Mississippi corporations in an asset purchase transaction from an individual.
The purchase price was funded from the Company's senior collateralized line of credit. The Company acquired all of the assets involved in the daily operations of the stores including all idle rental inventory, all rental contracts, vehicles, store furniture and fixtures, computers and leasehold improvements. Additionally, the Company obtained the seller's former store locations by assuming the twelve locations lease agreements.
The impact of one and one-half month's activity on the July 31, 1994 income statement is not significant. Accordingly, such information has not been provided.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
4. NOTES PAYABLE:
Notes payable consists of the following:
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4. NOTES PAYABLE, Continued
At July 31, 1996 and 1995 the prime rate was 8.25% and 8.75%, respectively.
On April 12, 1996 the Company amended its August 19, 1993 Second Amendment to First Amended and Restated Revolving Credit Loan Agreement with its senior collateralized lender. In the amendment, the Company increased the maximum amount available under the line of credit from $4,000,000 to $7,500,000 and extended the maturity date from August 18, 1996 to August 18, 1997. The loan agreement includes restrictive covenants, the most restrictive of which prohibits the payment of dividends. At July 31, 1996, the Company had the capacity to borrow $2,444,973 under the line of credit.
On July 19, 1996 the $100,000 subordinated note payable dated July 19, 1993 maturing July 19, 1996 was extended until August 19, 1997.
On August 26, 1996 the $500,000 subordinated note payable dated March 4, 1992 maturing August 31, 1996 was extended until August 31, 1997.
At July 31, 1996, the carrying value of the Company's notes payable approximated fair value, estimated primarily based on the borrowing rates available to the Company for debt with similar terms and average maturities.
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NOTES TO FINANCIAL STATEMENTS (Continued)
4. NOTES PAYABLE, Continued
Following is a summary of maturities of notes payable, as amended, for each of the periods ending July 31:
5. INCOME TAXES:
Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion of all of the deferred tax assets will not be realized. The valuation allowance for deferred tax assets decreased by $2,604,882 in 1995 due to a realization of a portion of the Company's net deferred tax assets and a change in estimate regarding the future realization of remaining net operating loss carryfowards and the excess of book amortization over tax. In fiscal 1995, based on a positive earnings trend and estimates of future taxable income, the Company recognized a portion of its net deferred tax asset through a $2,013,784 reduction in the valuation allowance. The effect on earnings per share of this reduction in the valuation allowance was approximately $1.34. Accordingly, without this reduction earnings per share would have been $.65. In fiscal 1996, the valuation allowance was reduced $147,231 as a result of the expiration of investment tax credit carryforwards.
The provisions (benefit) for income tax on income from continuing operations consists of the following for the years ended July 31:
Significant components of the Company's deferred income tax assets at July 31, 1996 and 1995, respectively, are as follows:
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5. INCOME TAXES, Continued
The following is the reconciliation of the U.S. statutory tax rate to the Company's effective tax rate on income from continuing operations for the years ended July 31:
At July 31, 1996, the Company has net operating loss carryforwards of approximately $4,517,000 expiring from 2002 to 2006. The Company has investment tax credit carryforwards of approximately $421,000 which expire between 1997 and 2001.
6. RELATED PARTY TRANSACTIONS:
The Company has a consulting agreement with a former owner of one of the Company's operating subsidiaries. As of July 31, 1996, $153,000 recorded in other accrued liabilities in the Company's financial statements remains to be paid over 11 years. If, however, the market price of the Company's Common Stock reaches $50.00 per share, the Company has no further obligation under this consulting agreement. Consulting fees paid for the years ended July 31, 1996, 1995 and 1994 was $30,000, respectively.
Interest expense relating to notes payable to affiliates amounted to approximately $192,000 for the years ended July 31, 1996, 1995, and 1994, respectively.
7. LEASES:
The Company leases all store facilities, with the exception of one, under operating leases with terms ranging from one to ten years. Many leases contain escalation clauses, and some provide for contingent rentals based on percentages of gross revenue or increases in the consumer price index. Minimum lease obligations for the Company at July 31, 1996 by fiscal year are as follows:
Occupancy expense under operating leases for the years ended July 31, 1996, 1995 and 1994 was $931,205, $759,613 and $779,785, respectively .
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8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS:
Cash interest payments for the years ended July 31, 1996, 1995 and 1994 are $542,835, $506,508 and $370,159, respectively. Cash tax payments for the years ended July 31, 1996, 1995 and 1994 are $50,940, $30,074 and $5,245, respectively.
In fiscal year 1996, the Company delivered 247,647 shares of its Common Stock valued at $1,238,235 in connection with the acquisitions of All Star Rental, Inc. and REJA, Inc. Additionally, the Company assumed liabilities totaling $2,733,493 and paid cash, net of cash acquired, of $499,200 in connection with the acquisitions (see Note 2).
9. INCENTIVE PLANS:
STOCK OPTION PLAN The Company has a stock option plan (the "Plan") for officers and employees of the Company or its affiliates, under which the maximum number of shares which may be granted in the aggregate is 225,000 of the Company's Common Stock. The Plan, which became effective June 30, 1995, provides for the options to be granted, become exercisable, and terminate upon terms established by the Board of Directors (the "Committee"). Shares become exercisable from time to time (but not sooner than six months after the date of grant) over such period and upon such terms as the Committee may determine, but not at any time as to less than 25 shares unless the remaining shares that have become so purchasable are less than 25 shares.
The following table summarizes the stock option transactions under the Plan since its inception.
The options are exercisable as to 25% of the shares on the first anniversary of the date of grant and as to an additional 25% of the shares on each of the second, third and fourth anniversary dates of the date of grant. At July 31, 1996 there were 106,600 shares reserved for future options, and 25,850 options were exercisable.
In October 1995, the Financial Accounting Standards Board issued Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which introduces a fair-value base method of accounting for stock-based compensation plans. The Company does not intend to adopt this new method of accounting and will continue to follow the intrinsic value method under Accounting Principles Board Opinion No. 25. The Company, however, will make the disclosures required by SFAS 123.
401(K) PLAN The Company established a Retirement Savings Plan (the "Savings Plan"), effective as of September 1, 1994, which is intended to qualify under Section 401(K) of the Internal Revenue Code "the Code". Employees who have been employed with the Company for one year or more are eligible for participation in the Savings Plan. Employees may elect to reduce up to 15% of their annual compensation (subject to certain limitations under the Code) by having such amounts contributed to the Savings Plan. The Board intends to conduct a review at the end of each fiscal year to determine whether the Company will make any additional or matching contribution to the Savings Plan. As of July 31, 1996, no additional or matching contributions have been made to the Savings Plan by the Company. All assets of the Savings Plan are held in trust.
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued)
10. DISCONTINUED OPERATIONS:
In fiscal year 1995, the Company formed a new subsidiary, Bestway Auto, Inc., ("Bestway Auto") due to the Company's entry into the retail used car sales and finance business. The Company test marketed the concept through the opening of a single prototype retail sales facility which experienced operating losses for the first six months of fiscal year 1996. In December 1995, management made the decision to dispose of Bestway Auto's assets and in the process create a potential for a future opportunity in an operating used car business. On February 1, 1996 the Company exchanged $137,200 in cash and its capital stock in Bestway Auto for a 49% Common Stock interest in Value Auto, and non-voting, non-dividend paying Preferred Stock in Value Auto. For the period February 1, 1996 through July 31, 1996, Value Auto generated net losses amounting to approximately $136,000 and the Company's equity in such losses amounted to approximately $67,000. As a result of the losses incurred by both Bestway Auto and Value Auto and management's assessment of future operating results for the Company's auto sales business, management concluded that the Company would abandon the auto sales business and its investment in Value Auto would be written off.
The operations of Bestway Auto and Value Auto have been accounted for as a discontinued operation and, accordingly, the Company's equity in their operating results and the loss on disposal are segregated and reported as discontinued operations in the accompanying Consolidated Statement of Income. Summarized results of Bestway Auto and Value Auto are as follows:
11. INVESTMENT IN PARTNERSHIP
On October 19, 1995 the Company became a 50% limited partner in a newly formed partnership, Value Auto Partners, Ltd. ("the Partnership"). The purpose of the Partnership is to engage in the financing of used cars. The Company accounts for its Partnership interest by the equity method. As of July 31, 1996 the Company had contributed $437,500 to the Partnership and has received distributions of approximately $14,000. Shown below is unaudited summarized financial information related to the Partnership:
BESTWAY, INC. FORM 10-K - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued)
12. SALE OF RENTAL INVENTORY:
On June 16, 1994 the Company entered into an asset purchase agreement with another renter dealer (the "Asset Purchase Agreement"). In conjunction with the agreement, the Company closed four stores in Missouri and two stores in Illinois. The Company sold substantially all of the rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. As a result of this transaction, the Company experienced a gain of approximately $190,100 on the sale of the rental inventory. A loss of approximately $76,000 for lease termination fees and write offs of leasehold improvements is included in loss on sale of property and equipment in the income statement.
13. CONTINGENCIES:
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company.
INDEX TO EXHIBITS