10-K 1 d00550e10vk.txt FORM 10-K FOR FISCAL YEAR END JULY 31, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ---------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------- ----------------- Commission file number 0-8568 ---------- BESTWAY, INC. (Exact name of registrant as specified in its charter) DELAWARE 81-0332743 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7800 STEMMONS FREEWAY, SUITE 320 DALLAS, TEXAS 75247 (Address of principal executive offices, including zip code) ---------- Registrant's telephone number, including area code: (214) 630-6655 ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: (TITLE OF CLASS) Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting common stock held by non-affiliates of the registrant as of October 17, 2002 was approximately $4,153,078. The number of shares of Common Stock, $.01 par value, outstanding as of October 17, 2002 was 1,652,572. DOCUMENTS INCORPORATED BY REFERENCE Certain information called for by Part III is incorporated by reference to the definitive proxy statement for the annual meeting of the stockholders of Bestway, Inc., which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2002. BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE(S) ------- PART I Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 6 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 16 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 PART IV Item 14. Exhibits and Reports on Form 8-K 17 SIGNATURES 19
2 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Bestway, Inc. and its consolidated subsidiaries ("Bestway" or the "Company") have been engaged in the rental-purchase industry since 1987. The Company owns and operates a total of sixty-nine 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 is a Delaware corporation and its principal executive offices are located at 7800 Stemmons Freeway, Suite 320, Dallas, Texas 75247. The Company's rental-purchase program offers high quality, durable products such as electronics, appliances, computers, furniture and accessories under flexible rental-purchase agreements that typically allow the customer to obtain ownership of the merchandise at the conclusion of an agreed upon rental period. 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 12 to 24 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. RECENT DEVELOPMENTS On July 8, 2002, the Company announced the appointment of David A. Kraemer as President and Chief Executive Officer. Mr. Kraemer has 19 years experience in the rent-to-own industry, where he most recently served as Executive Vice President of Rent-A-Center. He had been with Rent-A-Center/Renters Choice since 1995 where as Executive Vice-President he was responsible for the operations of over 1000 stores. On the same date, the Company announced the termination of Teresa A. Sheffield, the Company's President and Chief Operating Officer, after the transition of Mr. Kraemer. Ms. Sheffield's termination was effective July 22, 2002. The Company also announced that R. Brooks Reed, the Company's Chairman and Chief Executive Officer, would remain as Chairman. 3 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- PRODUCTS The Company generally purchases products directly from the manufacturers and local distributors. Products offered by the Company include a wide variety of brands, styles and models of, among other things, televisions, DVD players, home entertainment centers, stereos, videocassette recorders, computers, washers and dryers, refrigerators, freezers, and furniture. 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. We promote the products and services in our stores primarily through direct mail advertising. Our advertisements emphasize such features as product and brand-name selection, prompt delivery, and the absence of credit investigations or long-term obligations. 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 or regional companies 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 are 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, 2002, the Company employed approximately 323 full-time employees, of which 11 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. 4 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- COMPANY STORES The number of stores operated by the Company has decreased from 83 as of July 31, 2001 to 69 as of July 31, 2002. The following table shows the number of stores opened, consolidated and sold during such time period:
NUMBER OF STORES ------------- Open at July 31, 2001 83 Opened 0 Consolidated 1 Sold 13 ------------- Open at July 31, 2002 69 =============
REGULATION Federal Regulation - No comprehensive federal legislation has been enacted regulating or otherwise impacting rental-purchase transactions. The Company does comply with the Federal Trade Commission recommendations for disclosure in rental-purchase transactions. From time to time, legislation has been introduced in Congress that would regulate rental-purchase transactions, including legislation that would subject rental-purchase transactions to interest rates, finance charges and fee limitations, as well as the Federal Truth in Lending Act. Any adverse federal legislation, if enacted, could have a material adverse effect on the Company. State Regulation - Currently 47 states and Puerto Rico have legislation regulating rental-purchase transactions. The Company currently operates its stores in states that have enacted laws specifically regulating rental-purchase transactions. The Company's policy is to operate only in states where there is an absence, in management's opinion, of unfavorable legislation regarding rental-purchase transactions. There can be no assurance against the enactment of new or revised rental-purchase laws that would have a material adverse effect on the Company. SERVICE MARK The Company owns the federally registered service mark "Bestway Rental". The Company believes the Bestway Rental mark has acquired significant market recognition and goodwill in communities in which its stores are located. ITEM 2. PROPERTIES All store locations, with the exception of one, and the home office facility in Dallas, Texas are leased. Store facilities typically are showroom locations of approximately 4,100 square feet in retail centers on heavy traffic thoroughfares near customers' residences or work places. Almost all available rental merchandise is kept in the showroom area which comprises the majority of the available square footage. Store location is considered critical to the success of the store. 5 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- The Company's store locations by state, at July 31, 2002, are as follows:
NUMBER OF STATE STORES ------------------ ------------ Alabama 22 Arkansas 6 Georgia 3 Mississippi 11 North Carolina 12 South Carolina 2 Tennessee 13 ------------ Open at July 31, 2002 69 ============
ITEM 3. LEGAL PROCEEDINGS In December 2001, the Company settled a lawsuit brought by approximately fifteen plaintiffs who have asserted claims against a number of defendants, including the Company, who were involved in the production of oil and gas or who owned oil and gas facilities in Montana. Plaintiffs alleged that the Company is the successor in interest to Amarco Resources Corporation, which, in the past, owned interests in two wells in the oil field. One of these wells is an alleged source of contamination of groundwater. The settlement was for approximately $130,000, including attorney's fees. There are no other 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. To the Company's knowledge, no litigation has been threatened against the Company or any of its subsidiaries other than routine actions and administrative proceedings, which in the aggregate, are not expected to have a material adverse effect on the business or financial condition of the Company. 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is publicly traded on the Nasdaq Small-Cap Market under the symbol "BSTW". The following table sets forth, for the periods indicated, the high and low sales price per share of the Common Stock as reported on the Nasdaq Small-Cap Market.
YEAR ENDED JULY 31, 2002 YEAR ENDED JULY 31, 2001 --------------------------- --------------------------- HIGH LOW HIGH LOW ------------ ------------ ------------ ------------ First Quarter $ 5.55 $ 4.30 $ 5.72 $ 3.50 Second Quarter $ 4.56 $ 3.99 $ 5.00 $ 3.88 Third Quarter $ 4.50 $ 4.00 $ 5.00 $ 3.75 Fourth Quarter $ 7.00 $ 3.80 $ 7.13 $ 4.00
At July 31, 2002, there were 408 stockholders of record of the Company's Common Stock. 6 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- 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 its Common Stock. ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JULY 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Revenues $ 33,533,928 $ 35,913,046 $ 34,909,758 $ 29,365,753 $ 25,875,934 Income (loss) before income taxes (965,012) (28,297) 1,068,199 1,107,509 1,381,813 Current income tax expense (benefit) (116,109) -- 180,845 94,713 155,064 Deferred income tax expense (benefit) (106,824) 97,488 397,413 397,912 433,012 Net income (loss) (742,079) (125,785) 489,941 614,884 793,737 Basic and diluted net income (loss) per share (0.45) (0.07) 0.28 0.35 0.45 Cash flows provided by operations 10,210,071 11,661,342 12,759,621 11,320,309 9,478,714 Total assets 21,304,413 24,312,260 25,617,543 21,218,412 18,673,950 Notes payable 10,967,192 13,081,731 13,294,945 9,244,012 8,230,043 Stockholders' equity 8,123,715 8,973,601 9,174,511 8,971,630 8,396,362
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the information set forth under Item 6, "Selected Financial Data," and the financial statements of the Company and the accompanying notes thereto included elsewhere in this report. The Company currently operates 69 rental-purchase stores located in seven states. The number of stores operated by the Company has increased from 35 as of July 31, 1995 to a high of 83 as of July 31, 2001 to 69 as of July 31, 2002. During the year ended July 31, 2002, the Company consolidated one store location, and sold thirteen stores. 7 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Operations, expressed as a percentage of revenues.
YEAR ENDED JULY 31, ----------------------------- 2002 2001 ------------ ------------ Revenues: Rental income 97.4% 98.8% Sales of merchandise 2.6 1.2 ------------ ------------ Total revenues 100.0 100.0 Cost and operating expenses: Depreciation and amortization: Rental merchandise 19.9 21.5 Other 5.5 5.5 Cost of merchandise sold 2.4 1.1 Salaries and wages 29.4 28.8 Advertising 3.4 4.0 Occupancy 7.5 7.4 Other operating expenses 32.2 28.3 Interest expense 2.4 3.7 Gain on sale of property and equipment .1 -- Loss (gain) on sale of assets .1 (0.2) ------------ ------------ Total cost and operating expenses 102.9 100.1 ------------ ------------ Loss before income tax provision (2.9) (0.1) ------------ ------------ Current income tax expense (0.4) -- Deferred income tax expense (benefit) (0.3) 0.3 ------------ ------------ Net loss (2.2)% (0.4)% ============ ============
8 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2002 COMPARED TO THE FISCAL YEAR ENDED JULY 31, 2001 For the fiscal year ended July 31, 2002 compared to the fiscal year ended July 31, 2001, total revenue decreased $2,379,118, or 6.6%, to $33,533,928 from $35,913,046. The decrease in total revenue was primarily attributable to the consolidation or sale of fourteen store locations in fiscal year 2002 and the full year's impact from selling three store locations in fiscal year 2001. The decrease was offset by the inclusion of a full year's results for the stores opened in fiscal 2001, and modestly increased revenues in same stores. Revenue decreased $3,625,150, or 152.4% due to the consolidation or sale of store locations in fiscal years 2002 and 2001. Revenue from stores opened in fiscal year 2001 increased $1,091,666, or 45.9%. Revenue from same stores increased $154,366 or .5% and accounted for 6.5% of the change in revenue. Same store revenues represent those revenues earned in stores that were operated by the Company for the entire twelve months ended July 31, 2002 and 2001. The Company receives rental revenue from various products including televisions, DVD players, videocassette recorders, household appliances, as well as computers and furniture. In fiscal year 2002, approximately 16% of the Company's rental revenue was derived from appliances, 25% from furniture, 29% from electronics, 8% from computers, 4% from various other products and 18% from various services and charges to rental customers including reinstatement fees, club fees and liability waiver fees. Total costs and operating expenses decreased $1,442,403, or 4.0% to $34,498,940 from $35,941,343 and increased 2.8% as a percentage of total revenue to 102.9% from 100.1%. In fiscal year 2001, the Company developed its administrative and management organization to accommodate an anticipated growth in revenue. However, the Company experienced operating losses with new store openings in 2001 and a lack of revenue growth in same stores. In fiscal year 2002, the Company sold, or consolidated fourteen under-performing stores and implemented a program to reduce operating expenses at the store and corporate level. In addition, in connection with the transition of the Company's new President and Chief Executive Officer, the Company has implemented strategies to improve profitability, including reviewing the Company's product offerings and price value relationships. Depreciation of rental merchandise decreased $1,062,932, or 13.7% to $6,671,484 from $7,734,416 and decreased 1.6% as a percentage of total revenue to 19.9% from 21.5%. The decrease as a percentage of revenues was primarily due to an increase in average revenue earned per item. Other depreciation and amortization decreased $140,173, or 7.1% to $1,831,646 from $1,971,819 and did not change as a percentage of total revenue. Cost of merchandise sold increased $413,090, or 102.9% to $814,433 from $401,343 and increased 1.3% as a percentage of total revenue to 2.4% from 1.1%. The increase was a result of an increase in the number of items sold in 2002 compared to 2001. During 2002, the Company undertook a merchandise reduction sales initiative to dispose of lower margin merchandise. In 2002, the Company recorded merchandise sales of $869,908 with a remaining value of $814,433, or a margin of $55,475. In fiscal year 2001, the Company recorded merchandise sales of $424,211 with a remaining value of $401,343, or a margin of $22,868. Salaries and wages decreased $485,180, or 4.7% to $9,857,770 from $10,342,950 and as a percentage of total revenue increased 0.6% to 29.4% from 28.8%. The decrease was primarily attributable to salaries and wages associated with reduction in corporate staffing levels and the consolidation or sale of fourteen under-performing stores in fiscal year 2002, offset by increased salaries and wages of $400,850 paid pursuant to a separation agreement related to the Company's former President and Chief Operating Officer. 9 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- Advertising expense decreased $312,744, or 21.7% to $1,130,535 from $1,443,279 and as a percentage of total revenue decreased 0.6% to 3.4% from 4.0%. The decrease is primarily attributable to advertising expense associated with the consolidation or sale of fourteen under-performing stores in fiscal year 2002. Occupancy expense decreased $113,281, or 4.3% to $2,536,071 from $2,649,352 and as a percentage of total revenue increased 0.1% to 7.5% from 7.4%. The decrease is primarily attributable to occupancy expense associated with the consolidation or sale of fourteen under-performing stores in fiscal year 2002, offset by the addition of the stores opened in fiscal year 2001. Other operating expenses increased $636,494, or 6.3% to $10,788,044 from $10,151,550 and as a percentage of total revenue increased 3.9% to 32.2% from 28.3%. Other operating expenses increased approximately $739,000 due to write-offs of rental merchandise, including approximately $315,000 associated with the Company's decision to discontinue carrying jewelry in its product selection. Other operating expenses increased approximately $130,000 in connection with a legal settlement. The increases were offset by the consolidation or sale of fourteen under-performing stores in fiscal year 2002. Interest expense decreased $522,262, or 39.7% to $794,433 from $1,316,695 and as a percentage of total revenue decreased 1.3% to 2.4% from 3.7%. The decrease in interest is primarily attributable to decreased indebtedness and a lower effective interest rate. The Company entered into several transactions to sell thirteen under-performing stores during fiscal year 2002. The Company recognized a net loss of $50,122 on these store sale transactions. For the fiscal year ended July 31, 2002 compared to the fiscal year ended July 31, 2001, loss before income taxes increased $936,715, or 3,310.0% to a loss of $965,012 compared to a loss of $28,297. Loss from operations before income taxes as a percentage of total revenue increased 2.8% to 2.9% compared to .1% primarily as a result of costs associated with changes in our executive management team, write-offs of rental merchandise and the discontinuation of certain product offerings. 10 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 2001 COMPARED TO THE FISCAL YEAR ENDED JULY 31, 2000 For the fiscal year ended July 31, 2001 compared to the fiscal year ended July 31, 2000, total revenue increased $1,003,288, or 2.9%, to $35,913,046 from $34,909,758. The increase in total revenue was primarily attributable to the inclusion of nine new store openings in fiscal 2001 and improved same store revenue, which was offset by decreased revenues due to the sale of three stores in fiscal year 2001. Revenue from the nine new store openings in fiscal year 2001 accounted for $1,954,744, or 194.8% of the increase. Revenue from same stores increased $712,297, or 2.2% and accounted for 71.0% of the increase in revenue. Same store revenues represent those revenues earned in stores that were operated by the Company for the entire twelve months ended July 31, 2001 and 2000. Revenue decreased $1,663,753, or 165% due to selling three locations in fiscal year 2001. The Company receives rental revenue from various products including televisions, DVD players and videocassette recorders, household appliances, computers, furniture and jewelry. In fiscal year 2001, approximately 16% of the Company's rental revenue was derived from appliances, 27% from furniture, 32% from electronics, 7% from various other products including jewelry and 18% from various services and charges to rental customers including reinstatement fees, club program and liability waiver fee. Total costs and operating expenses increased $2,099,784 or 6.2%, to $35,941,343, from $33,841,559 and increased 3.1% as a percentage of total revenues to 100.1% from 97.0%. The increase was primarily the result of expenses associated with the nine new stores opened in fiscal year 2001. Depreciation of rental merchandise increased $91,527, or 1.2% to $7,734,416 from $7,642,889. Depreciation of rental merchandise expressed as a percent of total revenue decreased .4% to 21.5% from 21.9%. The decrease as a percentage of revenues was primarily due to an increase in average revenue earned per item. Other depreciation and amortization expense increased $353,653, or 21.9% to 1,971,819 from $1,618,166 and as a percentage of total revenue increased .9% to 5.5% from 4.6%. The increase was primarily due to increased property and equipment. Salaries and wages increased $683,806, or 7.1%, to $10,342,950 from $9,659,144 and as a percentage of total revenue increased 1.1% to 28.8% from 27.7%. Additional personnel for the nine new stores increased salaries and wages by $730,757 or 106.9% of the total increase. Advertising expense decreased $343,082, or 19.2% and as a percentage of total revenue decreased 1.1% to 4.0% from 5.1%. Occupancy expense increased $451,105, or 20.5% to 2,649,352 from $2,198,247 and as a percentage of total revenue increased 1.1% to 7.4% from 6.3% primarily due to the nine new store openings in fiscal year 2001. Other operating expenses increased $722,035, or 7.7% to $10,151,550 from $9,429,515 and as a percentage of total revenue increased 1.3% to 28.3% from 27.0%. The increase was primarily attributable to the nine new stores opened in fiscal year 2001, increased write-offs of rental merchandise and increased insurance costs. Interest expense increased $205,316, or 18.5% to $1,316,695 from $1,111,379. The increase in interest expense is primarily attributed to the additional indebtedness related to the new stores opened in fiscal year 2001. 11 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- For the fiscal year ended July 31, 2001 compared to the fiscal year ended July 31, 2000, income before income tax provision decreased $1,096,496, or 102.6%, to a loss of $28,297 compared to income of $1,068,199. Income from operations before income tax provision as a percentage of total revenues decreased 3.1% to a negative .1% from 3.0%. The loss is primarily the result of expenses associated with the nine store openings in fiscal year 2001 and marginal revenue growth in same stores after the Company's administrative and management organization had been developed to accommodate an anticipated higher growth in revenue. The Company experienced operating losses of $407,173 from the nine new stores opened in fiscal year 2001. The new stores operated at lower average revenue per store as compared to the Company's existing stores and, therefore, had higher salaries and wages and occupancy expenses as a percentage of revenues. The Company has implemented a program to reduce operating expenses at the store and corporate level to increase profitability. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the fiscal year ended July 31, 2002, the Company's net cash flows provided by operating activities were $10,210,071 as compared to $11,661,342 for the fiscal year ended July 31, 2001. The decline in cash provided by operations was primarily due to a $1,000,000 cash advance to the Company's President and Chief Executive Officer and increased outflow for working capital commitments. For the fiscal year ended July 31, 2002, the Company's net cash flow used in investing activities were $8,600,346 as compared to $11,233,249 for the year ended July 31, 2001. The Company's investing activities reflects a $260,982 decrease in the purchase of rental units and a $1,469,441 decrease in purchases of property and equipment due to no new store openings in fiscal year 2002 as compared to three new stores opened in fiscal year 2001. For the fiscal year ended July 31, 2002, cash used for acquisitions was $984,007 offset by sale proceeds from thirteen store sales of $2,208,625. For the fiscal year ended July 31, 2002, the Company's net cash flow used in financing activities was $2,222,346 as compared to $288,339 for the year ended July 31, 2001. The decrease in financing activities principally reflects increased repayments of the Company's debt. On October 26, 2001, the Company and its lender amended the subordinated note payable to a limited partnership and stockholder dated August 18, 1999. The amendment extended the maturity date from February 28, 2002 to November 1, 2003. On October 26, 2001, the Company amended its Revolving Credit Loan Agreement (the "Agreement") with its lender. In the amendment, the lender extended the maturity date from February 28, 2002 to September 1, 2002, waived all violations of the interest coverage provision of the Agreement through September 30, 2001 and waived compliance with the interest coverage provision of the Agreement at October 31, 2001. On December 1, 2001, and March 14, 2002, the Company further amended the Agreement. In the amendments, the lender decreased the maximum amount of revolving credit under the Agreement from $17,500,000 to $11,500,000, extended the maturity date from September 1, 2002 to October 1, 2003 and modified the required minimum tangible net worth provision and the interest ratio coverage calculation. 12 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- The Company's capital requirements relate primarily to purchasing rental merchandise and working capital requirements for new and existing stores. The Company's primary source of liquidity and capital are from operations and borrowings. For the fiscal year ended July 31, 2002, the Company has generated sufficient cash flows from operations to meet its operating and investing needs. Management believes that operating cash flows combined with available credit of $2,988,026 under the Agreement provide adequate resources to meet the Company's future cash obligations. CRITICAL ACCOUNTING POLICIES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions or conditions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and may result in materially different results under different assumptions and conditions. The Company believes that the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements. 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, DVD players, videocassette recorders, household appliances, as well as computers and furniture. 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. Intangible assets 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 no impairment of the goodwill and other intangibles has occurred and that no reduction of the estimated useful lives is warranted. 13 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRINCIPLES In June 2001, the Financial Accounting Standards Board (FASB or the "Board") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, collectively referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion (APB) No. 16, Business Combination. The provisions of SFAS 141 (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142 the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangibles assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives. The Company will adopt the provisions of SFAS 142 in its first quarter ended October 31, 2002. The Company is in the process of preparing for its adoption of SFAS 142 and is making the determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets, and liabilities should be allocated to those reporting units. In connection with the adoption of SFAS 142, the Company expects that is will no longer record approximately $250,000 of amortization relating to its existing goodwill. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first step of the goodwill impairment test during the first quarter of fiscal year 2003. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year, and pursuant to the requirements of SFAS 142 will be completed during the first quarter of fiscal year 2003. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal year 2003. The Company does not expect that the results of these impairment tests will have a material impact on the Company's results of operations and financial position. In July 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes a single accounting model, based on the framework established in SFAS 121, for long lived assets to be disposed of by sale. The Company does not expect the adoption of this statement to have a material impact on the Company's results of operations or its financial position. 14 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS 145 rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the amendment to SFAS 4, SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The Company does not expect SFAS 145 to have a material impact on the Company's results of operations or its financial position. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect SFAS 146 to have a material impact on the Company's results of operations or its financial position. 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. CAUTIONARY STATEMENT This Report on Form 10-K and the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's Annual Report to Shareholders, any Report on Form 10-Q or Form 8-K or any other written or oral statements made by or on behalf of the Company may include forward-looking statements. Forward-looking statements represent the Company's expectations or beliefs concerning future events. Any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, (i) the ability of the Company to open or acquire additional rental-purchase stores on favorable terms, (ii) the ability of the Company to improve the performance of such acquired stores and to integrate such opened or acquired stores into the Company's operations, (iii) the impact of state and federal laws regulating or otherwise affecting rental-purchase transactions, (iv) the impact of general economic conditions in the United States and (v) the impact of terrorist activity, threats of terrorist activity and responses thereto on the economy in general and the rental-purchase industry in particular. Undo reliance should not be placed on any forward-looking statements made by or on behalf of the Company as such statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, the occurrence of future events or otherwise. 15 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk associated with the floating rate portion of the interest charged on its Revolving Credit Loan Agreement. At July 31, 2002, the Company had $7,900,000 outstanding on its Revolving Credit Loan Agreement at an interest rate of prime plus .75% and the fair value of the obligation outstanding approximates its related carrying value because the obligation bears interest at the current market rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is hereby made to the Consolidated Financial Statements and notes thereto appearing at pages F-1 to F-19 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 2002, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 2002, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 2002, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required will be contained in the Company's Proxy Statement for the Annual Meeting of Shareholders for 2002, and is incorporated herein by reference. 16 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following are filed as Exhibits to this Annual Report filed as Form 10-K for the year ended July 31, 2002. (b) Exhibits
EXHIBIT NUMBER DOCUMENT ------- ---------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Bestway, incorporated by reference to Bestway's Current Report on Form 8-K, filed September 2, 1993. 3.2 Amended and Restated Bylaws of Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K, for the year ended December 31, 1984. 4.1 Specimen stock certificate representing shares of Bestway's common stock, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.1 Incentive Stock Option Plan of Bestway, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.2 Form of Incentive Stock Option Agreement pursuant to Incentive Stock Option Plan, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.3 First Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Quarterly Report on Form 10-Q for the year ended April 30, 1995. 10.4 Second Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed April 25, 1996. 10.5 Third Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed December 1, 1997. 10.6 Fifth Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed January 13, 2000. 10.7 First Amended and Restated Promissory Note, dated August 19, 1997, by Bestway in favor of O'Donnell & Masur, L.P. and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K, for the year ended July 31, 1997. 10.8 Extension Agreement for the First Amended and Restated Promissory Note, dated August 19, 1997, between O'Donnell & Masur, L.P. and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 1999. 10.9 Modification Letter dated October 19, 2000 modifying certain covenants of the Loan Agreement between Comerica Bank-Texas and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 2000. 10.10 Amendment Number One to Bestway Incentive Stock Option Plan, dated December 4, 2000, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 2001. 10.11* Employment Agreement, dated July 8, 2002, between Bestway and David A. Kraemer. 10.12* Severance Agreement, dated July 22, 2002, between Bestway and Teresa A. Sheffield. 99.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17 21* Subsidiaries 23* Consent of PricewaterhouseCoopers LLP
---------- *Filed herewith (c) Reports on Form 8-K for the quarter ended July 31, 2002: The Company filed a current report of Form 8-K on July 10, 2002 to report the appointment of a new President and Chief Executive Officer. 18 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BESTWAY, INC. October 24, 2002 /s/ David A. Kraemer ------------------------------------- President 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 24th day of October 2002.
SIGNATURE TITLE ------------------------------------- -------------------------------------- /s/ R. Brooks Reed Chairman of the Board of Directors ------------------------------------- R. BROOKS REED /s/ Jack E. Meyer Director ------------------------------------- JACK E. MEYER /s/ James A. O'Donnell Director ------------------------------------- JAMES A. O'DONNELL /s/ Bernard J. Hinterlong Director ------------------------------------- BERNARD J. HINTERLONG /s/ David A. Kraemer President and Chief Executive Officer ------------------------------------- DAVID A. KRAEMER /s/ Beth A. Durrett Chief Financial Officer ------------------------------------- BETH A. DURRETT
19 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- CERTIFICATION I, David A. Kraemer, Chief Executive Officer of Bestway, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Bestway, Inc.; 2. Based on my knowledge, this annual 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 annual report; and 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Bestway, Inc. as of, and for, the periods presented in this annual report. Date: October 24, 2002 By: /s/ DAVID A. KRAEMER -------------------------------- Name: David A. Kraemer Title: Chief Executive Officer 20 BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- CERTIFICATION I, Beth A. Durrett, Chief Financial Officer of Bestway, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Bestway, Inc.; 2. Based on my knowledge, this annual 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 annual report; and 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Bestway, Inc. as of, and for, the periods presented in this annual report. Date: October 24, 2002 By: /s/ BETH A. DURRETT ----------------------------------- Name: Beth A. Durrett Title: Chief Financial Officer 21 BESTWAY, INC. FORM 10-K --------------------------------------------------------------------------------
PAGE(S) Report of Independent Accountants F-1 Financial Statements: Consolidated Balance Sheets as of July 31, 2002 and 2001 F-2 Consolidated Statements of Operations for the years ended July 31, 2002, 2001 and 2000 F-3 Consolidated Statements of Cash Flows for the years ended July 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Stockholders' Equity for the years ended July 31, 2002, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-6
BESTWAY, INC. FORM 10-K -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Bestway, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Bestway, Inc. and its subsidiaries at July 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP October 14, 2002 Dallas, Texas F-1 BESTWAY, INC. FORM 10-K CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------
JULY 31, ---------------------------- 2002 2001 ------------ ------------ ASSETS Cash and cash equivalents $ 506,175 $ 1,118,796 Prepaid expenses 312,925 198,605 Taxes receivable 159,585 133,350 Deferred income taxes 483,075 376,251 Other assets 52,032 47,635 Rental merchandise, at cost 22,730,226 25,005,000 less accumulated depreciation 9,289,369 9,832,300 ------------ ------------ 13,440,857 15,172,700 ------------ ------------ Property and equipment, at cost 9,060,208 10,314,472 less accumulated depreciation 5,393,259 5,047,414 ------------ ------------ 3,666,949 5,267,058 ------------ ------------ Employee advance 988,889 -- Non-competes, net of amortization 468,631 274,671 Goodwill, net of amortization 1,225,295 1,723,194 ------------ ------------ Total assets $ 21,304,413 $ 24,312,260 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 671,365 $ 735,461 Accrued interest - related parties 20,667 20,000 Other accrued liabilities 1,521,474 1,501,467 Notes payable-related parties 3,000,000 3,000,000 Notes payable-other 7,967,192 10,081,731 Commitments and contingencies (Notes 7 and 10) Stockholders' equity: Preferred stock, $10.00 par value, 1,000,000 authorized, none issued -- -- Common stock, $.01 par value, 5,000,000 authorized, 1,756,917 issued at July 31, 2002 and July 31, 2001 17,569 17,569 Paid-in capital 16,151,428 16,124,578 Less treasury stock, at cost, 104,345 at July 31, 2002 and 71,045 at July 31, 2001 (563,083) (428,426) Accumulated deficit (7,482,199) (6,740,120) ------------ ------------ Total stockholders' equity 8,123,715 8,973,601 ------------ ------------ Total liabilities and stockholders' equity $ 21,304,413 $ 24,312,260 ============ ============
See accompanying notes to consolidated financial statements. F-2 BESTWAY, INC. FORM 10-K CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------
FISCAL YEARS ENDED JULY 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Revenues: Rental income $ 32,664,020 $ 35,488,835 $ 34,473,255 Sales of merchandise 869,908 424,211 436,503 ------------ ------------ ------------ 33,533,928 35,913,046 34,909,758 ------------ ------------ ------------ Cost and operating expenses: Depreciation and amortization: Rental merchandise 6,671,484 7,734,416 7,642,889 Other 1,831,646 1,971,819 1,618,166 Cost of merchandise sold 814,433 401,343 424,096 Salaries and wages 9,857,770 10,342,950 9,659,144 Advertising 1,130,535 1,443,279 1,786,361 Occupancy 2,536,071 2,649,352 2,198,247 Other operating expenses 10,788,044 10,151,550 9,429,515 Interest expense 794,433 1,316,695 1,111,379 Loss (gain) on sale of property and equipment 24,402 3,048 (16,961) Loss (gain) on sale of assets 50,122 (73,109) (11,277) ------------ ------------ ------------ 34,498,940 35,941,343 33,841,559 ------------ ------------ ------------ Income (loss) before income taxes: (965,012) (28,297) 1,068,199 ------------ ------------ ------------ Current income tax expense (benefit) (116,109) -- 180,845 Deferred income tax expense (benefit) (106,824) 97,488 397,413 ------------ ------------ ------------ Net income (loss) $ (742,079) $ (125,785) $ 489,941 ============ ============ ============ Basic and diluted net income (loss) per share $ (0.45) $ (0.07) $ 0.28 ============ ============ ============ Weighted average common shares outstanding 1,648,322 1,692,972 1,723,030 ============ ============ ============ Diluted weighted average common shares outstanding 1,648,322 1,692,972 1,740,828 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 BESTWAY, INC. FORM 10-K CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
FISCAL YEARS ENDED JULY 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ (742,079) $ (125,785) $ 489,941 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,503,129 9,706,235 9,261,055 Net book value of rental units retired 3,780,825 2,868,499 2,381,370 (Gain) loss on sale of property and equipment 24,402 3,048 (16,961) (Gain) loss on sale of assets 50,122 (73,109) (11,277) Deferred income taxes (106,824) 97,488 397,413 Changes in operating assets and liabilities other than cash: Prepaid expenses (114,320) (21,772) (4,607) Taxes receivable (26,235) (133,350) -- Employee advance (988,889) -- -- Other assets (4,397) 70,266 (54,699) Accounts payable (79,337) (557,450) 241,265 Income taxes payable -- (135,796) 79,390 Other accrued liabilities (86,326) (36,932) (3,269) ------------ ------------ ------------ Net cash flows provided by operating activities 10,210,071 11,661,342 12,759,621 ------------ ------------ ------------ Cash flows from investing activities: Purchase of rental units and equipment (9,593,006) (9,853,988) (13,643,485) Additions to property and equipment (287,261) (1,756,702) (2,693,510) Proceeds from sale of property and equipment 55,303 79,526 59,942 Asset purchases net of cash acquired (984,007) (99,295) (549,047) Proceeds from sale of assets 2,208,625 397,210 469,469 ------------ ------------ ------------ Net cash flows used in investing activities (8,600,346) (11,233,249) (16,356,631) ------------ ------------ ------------ Cash flows from financing activities: Proceeds of notes payable 2,050,000 3,700,000 4,412,999 Repayment of notes payable (4,164,539) (3,913,214) (362,066) Treasury stock purchase (277,857) (75,125) (287,060) Treasury stock issuance 170,050 -- -- ------------ ------------ ------------ Net cash flows provided by (used in) financing activities (2,222,346) (288,339) 3,763,873 ------------ ------------ ------------ Cash and cash equivalents at the beginning of year 1,118,796 979,042 812,179 ------------ ------------ ------------ Cash and cash equivalents at the end of the year $ 506,175 $ 1,118,796 $ 979,042 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 BESTWAY, INC. FORM 10-K CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 2002, 2001 AND 2000 ----------------------------------------------------------------------------------------------- COMMON STOCK TREASURY STOCK TOTAL ----------------------- PAID-IN ------------------------ ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY ---------- ---------- ---------- ---------- ---------- ------------ ------------- Balance at July 31, 1999 1,756,917 $ 17,569 $16,124,578 (11,200) $ (66,241) $ (7,104,276) $ 8,971,630 ---------- ---------- ----------- ---------- ---------- ------------ ------------ Treasury stock purchases -- -- -- (44,745) (287,060) -- (287,060) Net income for the year ended July 31, 2000 -- -- -- -- -- 489,941 489,941 ---------- ---------- ----------- ---------- ---------- ------------ ------------ Balance at July 31, 2000 1,756,917 17,569 16,124,578 (55,945) (353,301) (6,614,335) 9,174,511 ---------- ---------- ----------- ---------- ---------- ------------ ------------ Treasury stock purchases -- -- -- (15,100) (75,125) -- (75,125) Net loss for the year ended July 31, 2001 -- -- -- -- -- (125,785) (125,785) ---------- ---------- ----------- ---------- ---------- ------------ ------------ Balance at July 31, 2001 1,756,917 17,569 16,124,578 (71,045) (428,426) (6,740,120) 8,973,601 ---------- ---------- ----------- ---------- ---------- ------------ ------------ Treasury stock purchases -- -- -- (69,100) (277,857) -- (277,857) Treasury stock issued 26,850 35,800 143,200 -- 170,050 Net loss for the year ended July 31, 2002 -- -- -- -- -- (742,079) (742,079) ---------- ---------- ----------- ---------- ---------- ------------ ------------ Balance at July 31, 2002 1,756,917 $ 17,569 $16,151,428 (104,345) $ (563,083) $ (7,482,199) $ 8,123,715 ========== ========== =========== ========== ========== ============ ============
See accompanying notes to consolidated financial statements. F-5 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND BASIS OF PRESENTATION The consolidated financial statements of Bestway, Inc. (the "Company"), include the Company's wholly-owned operating subsidiaries, Bestway Rental, Inc. which operates under the registered trade name "Bestway Rent-To-Own", U.S. Credit-Service Corporation and Westdale Data Service, Inc. Intercompany balances and transactions have been eliminated in consolidation. The Company owns and operates a total of sixty-nine stores located in various states. The store operations are controlled and monitored through the Company's management information system networked with its home office in Dallas, Texas. The Company's store locations by state as of July 31, 2002, are as follows:
NUMBER OF STATE STORES ------------------- --------- Alabama 22 Arkansas 6 Georgia 3 Mississippi 11 North Carolina 12 South Carolina 2 Tennessee 13 -------- 69 ========
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, DVD players, videocassette recorders, household appliances, as well as computers and furniture. In fiscal year 2002, approximately 16% of the Company's rental revenue was derived from appliances, 25% from furniture, 29% from electronics, 8% from computers, 4% from various other products and 18% from various services and charges to rental customers including reinstatement fees, club fees and liability waiver fees. In fiscal year 2001, approximately 16% of F-6 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- the Company's rental revenue was derived from appliances, 27% from furniture, 32% from electronics, 7% from various other products and 18% from various services and charges to rental customers including reinstatement fees and liability wavier fees. In fiscal year 2000, approximately 17% of the Company's rental revenue was derived from appliances, 25% from furniture, 28% from electronics, 11% from various other products and 19% 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. Rental merchandise which is damaged and inoperable, deemed obsolete, or not returned by the customer after becoming delinquent on payments, is written off as such impairment is incurred. For the fiscal years ended July 31, 2002, 2001 and 2000, $2,018,208, $1,782,795 and $1,747,354, respectively, of such impairments were incurred and are included in other operating expenses in the accompanying consolidated statements of operations. Included in the amount for 2002 is approximately $315,000 related to the Company's decision to discontinue carrying jewelry in its product selection. Sales of merchandise Sales of merchandise includes revenue from cash sales of primarily used merchandise. Property and equipment Property and equipment are recorded at cost. Major improvements to property and equipment are capitalized. Maintenance and repair expenditures are charged to expense as incurred. As fixed assets are sold or retired, the applicable cost and accumulated depreciation are eliminated from the accounts and any gain or loss is recorded. Depreciation of property and equipment is provided over the estimated useful lives, on the straight-line basis as defined below. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease and renewal period, if applicable.
LIVES (YEARS) ------------- Building 40 Furniture and fixtures 7 Vehicles 5 Computer equipment 3
F-7 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Cash and cash equivalents Cash and cash equivalents consist of cash on hand and on deposit, and highly liquid instruments with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents is the estimated fair value at July 31, 2002 and 2001. Intangible assets Goodwill represents the cost in excess of the fair value of net tangible assets of acquired businesses and is being amortized on a straight-line basis over 15 to 20 years. Accumulated amortization of goodwill was $3,418,233 and $2,785,621 at July 31, 2002 and 2001, respectively. The non-competes are being amortized on a straight-line basis over periods from 2 to 5 years. Accumulated amortization of the non-competes was $1,874,283 and $1,707,559 at July 31, 2002 and 2001, 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 no impairment of the goodwill and other intangibles has occurred and that no reduction of the estimated useful lives is warranted. Income taxes Deferred income taxes are recognized for the tax consequences in the future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Income tax expense is the total of tax payable for the period and the change during the period in deferred tax assets and liabilities which impacted operations. Investment tax credits are accounted for on the "flow-through" method. Earnings per common share Basic net income per common share is based on the weighted average common shares outstanding during the period. Diluted net income per share includes common stock equivalents, consisting of stock options, which are dilutive to net income per share. For the fiscal years ended July 31, 2002 and July 31, 2001, 88,872 and 218,390, respectively, shares of common stock options were excluded from the calculation of diluted income per share because their effect would be antidilutive. Advertising costs Advertising costs are expensed as incurred. F-8 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, particularly deferred tax assets, and liabilities, disclosure of contingent assets and liabilities and reported amounts of revenues and expenses. Actual results could differ significantly from those estimates. Recently Issued Accounting Principles In June 2001, the Financial Accounting Standards Board (FASB or the "Board") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, collectively referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion (APB) No. 16, Business Combination. The provisions of SFAS 141 (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142 the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangibles assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives. The Company will adopt the provisions of SFAS 142 in its first quarter ended October 31, 2002. The Company is in the process of preparing for its adoption of SFAS 142 and is making the determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets, and liabilities should be allocated to those reporting units. In connection with the adoption of SFAS 142, the Company expects that is will no longer record approximately $250,000 of amortization relating to its existing goodwill. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first step of the goodwill impairment test during the first quarter of fiscal year 2003. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year, and pursuant to the requirements of SFAS 142 will be completed during the first F-9 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- quarter of fiscal year 2003. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal year 2003. The Company does not expect that the results of these impairment tests will have a material impact on the Company's results of operations and financial position. In July 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which is effective for fiscal years beginning after December 15, 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes a single accounting model, based on the framework established in SFAS 121, for long lived assets to be disposed of by sale. The Company does not expect the adoption of this statement to have a material impact on the Company's results of operations or its financial position. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS 145 rescinds both SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and the amendment to SFAS 4, SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The Company does not expect SFAS 145 to have a material impact on the Company's results of operations or its financial position. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect SFAS 146 to have a material impact on the Company's results of operations or its financial position. 2. ACQUISITIONS AND DISPOSITIONS On March 20, 2001, the Company signed an asset purchase agreement with Paradise Valley Holdings, Inc. to acquire all rental contracts associated with a single store located in Tennessee for approximately $499,000. On September 11, 2001, the Company entered into an asset purchase agreement with Instant Rentals to acquire all the rental contracts with a single store located in Tennessee for approximately $148,000. On October 22, 2001, the Company entered into an asset purchase agreement with Zajac's Electronics Service Center, Inc. to acquire all rental contracts associated with a single store located in Alabama for approximately $296,000. F-10 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- On January 10, 2002, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to acquire all rental contracts associated with a single store located in Mississippi for approximately $176,000. On April 25, 2002, the Company entered into an asset purchase agreement with Showcase TV and Appliance Rental to acquire all the rental contracts with a single store located in Alabama for approximately $188,000. On May 30, 2002, the Company entered into an asset purchase agreement with Affordable Rent to Own, Inc. to acquire all the rental contracts with a single store located in Mississippi for approximately $176,000. Additionally, the Company obtained the store location by assuming the lease agreement. The acquisitions have been accounted for under the purchase method and, accordingly, the operating results from the acquired stores are included in the accompanying consolidated statements of operations from the date of acquisition. On February 20, 2001, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to sell all the assets of one store location in South Carolina. The Company received $122,374 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a loss of $2,029 on the sale. On March 20, 2001, the Company entered into an asset purchase agreement with Paradise Valley Holdings, Inc. to sell all the assets of one store in Tennessee. The Company received $124,836 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a gain of $12,236 on the sale. On April 4, 2001, the Company entered into an asset purchase agreement with Griffin Acceptance Corporation, Inc. to sell all the assets of one store in Mississippi. The Company received $150,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a gain of $62,902 on the sale. On September 5, 2001, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to sell all the assets of one store in North Carolina. The Company received approximately $114,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a loss of $10,898 on the sale. On October 5, 2001, the Company entered into an asset purchase agreement with Value Rental, LLC to sell all the assets of one store in Tennessee. The Company received approximately $217,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers, idle inventory, furniture and fixtures and vehicles. The Company recognized a gain of $82,022 on the sale. F-11 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- On December 11, 2001, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to sell all the assets of one store in South Carolina. The Company received approximately $187,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers and approximately $25,000 of idle inventory. Remaining idle inventory was transferred to the Company's existing store locations. Additionally, Rent-A-Center obtained the Company's store location by assuming the lease agreement. The Company recognized a gain of $12,554 on the sale. On January 10, 2002, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to sell all the assets of one store in Tennessee. The Company received approximately $126,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a loss of $28,036 on the sale. On January 10, 2002, the Company entered into an asset purchase agreement with Aaron Rents, Inc. to sell all the assets of one store in Alabama. The Company received approximately $117,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a loss of $10,683 on the sale. On February 8, 2002, the Company entered into an asset purchase agreement with Aaron Rents, Inc. to sell all the assets of one store in North Carolina. The Company received approximately $133,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a gain of $4,812 on the sale. On February 12, 2002, the Company entered into an asset purchase agreement with Rent-A-Center, Inc. to sell all the assets of five stores in South Carolina and one store location in Georgia. The Company received approximately $1,137,000 in cash for all the assets involved in the daily operation of the stores including all rental inventory being rented by customers and approximately $28,000 of idle inventory. Additionally, Rent-A-Center obtained two of the Company's store locations by assuming the lease agreement. The Company recognized a loss of $137,058 on the sale. On March 25, 2002, the Company entered into an asset purchase agreement with Aaron Rents, Inc. to sell all the assets of one store in Tennessee. The Company received approximately $175,000 in cash for all the assets involved in the daily operation of the store including all rental inventory being rented by customers. Idle inventory was transferred to the Company's existing store locations. The Company recognized a gain of $15,797 on the sale. F-12 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JULY 31, ---------------------------- 2002 2001 ------------ ------------ Building and leaseholds $ 3,849,666 $ 4,389,927 Vehicles 3,510,662 3,794,570 Furniture and fixtures 1,069,302 1,382,586 Computer equipment 630,578 747,389 ------------ ------------ 9,060,208 10,314,472 Accumulated depreciation (5,393,259) (5,047,414) ------------ ------------ $ 3,666,949 $ 5,267,058 ============ ============
Depreciation expense for property and equipment was $1,417,979, $1,566,788 and $1,254,334 for 2002, 2001 and 2000. 4. NOTES PAYABLE Notes payable consists of the following:
YEARS ENDED JULY 31, --------------------------- 2002 2001 ------------ ------------ Senior collateralized debt Revolving Credit Loan Agreement dated August 19, 1993, amended March 14, 2002, borrowing limit is $11,500,000, interest payable monthly at prime plus .75%, note matures on October 1, 2003; not collateralized by substantially all the Company's assets $ 7,900,000 $ 10,000,000 Subordinated debt Note payable to limited partnership and stockholder dated July 19, 1993, amended October 26, 2001, interest paid quarterly at 8% beginning October 1, 1993; note, as amended, matures on November 1, 2003 3,000,000 3,000,000 Other notes payable Note payable to bank dated April 11, 1994, principal payable monthly; interest payable at 9% per annum; note matures on April 15, 2006; note collateralized by associated real estate 67,192 81,731 ------------ ------------ $ 10,967,192 $ 13,081,731 ============ ============
At July 31, 2002 and 2001 the prime rate was 5.5% and 7.5%, respectively. F-13 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- On October 26, 2001, the Company and its lender amended the subordinated note payable to a limited partnership and stockholder dated August 18, 1999. The amendment extended the maturity date from February 28, 2002 to November 1, 2003. On October 26, 2001, the Company amended its Revolving Credit Loan Agreement (the "Agreement") with its lender. In the amendment, the lender extended the maturity date from February 28, 2002 to September 1, 2002, waived all violations of the interest coverage provision of the Agreement through September 30, 2001 and waived compliance with the interest coverage provision of the Agreement at October 31, 2001. On December 1, 2001, and March 14, 2002, the Company further amended the Agreement. In the amendments, the lender decreased the maximum amount of revolving credit under the Agreement from $17,500,000 to $11,500,000, extended the maturity date from September 1, 2002 to October 1, 2003 and modified the required minimum tangible net worth provision and the interest ratio coverage calculation. The Agreement also contains certain financial covenants, including an interest coverage ratio, debt ratio, maximum idle inventory requirements and a minimum tangible net worth provision. At July 31, 2002 the Company was in default of the minimum tangible net worth provision. The Company is retroactively in compliance after receiving a waiver on September 27, 2002. At July 31, 2002, the carrying value of the Company's senior collateralized debt and other notes payable approximated fair value, estimated primarily based on the borrowing rates available to the Company for debt with similar terms and average maturities. It is not practicable to estimate the fair value of the Company's subordinated debt because it is with a related party. Following is a summary of maturities of notes payable for each of the periods ending July 31: 2003 $ 15,765 2004 10,917,242 2005 18,860 2006 15,325 2007 -- Thereafter -- ------------ $ 10,967,192 ============
F-14 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 5. INCOME TAXES The provisions for income tax consists of the following for the years ended July 31:
2002 2001 2000 ------------ ------------ ------------ Current: Federal $ (116,109) $ -- $ 96,327 State -- -- 84,518 ------------ ------------ ------------ (116,109) -- 180,845 ------------ ------------ ------------ Deferred: Federal (102,139) 79,564 342,372 State (4,685) 17,924 55,041 ------------ ------------ ------------ (106,824) 97,488 397,413 ------------ ------------ ------------ Total income tax provision $ (222,933) $ 97,488 $ 578,258 ============ ============ ============
Significant components of the Company's deferred income tax assets at July 31, 2002 and 2001, respectively, are as follows:
2002 2001 ------------ ------------ Net operating loss carryforward $ 1,106,485 $ 1,040,589 Investment tax credit carryforward 2,688 2,688 Minimum tax credit carryover 208,833 325,586 Property and equipment 548,122 259,533 Intangible assets 378,568 381,968 Accrued expenses 383,102 154,700 ------------ ------------ Total deferred tax assets 2,627,798 2,165,064 Rental merchandise (2,142,035) (1,786,125) ------------ ------------ Total deferred tax liabilities (2,142,035) (1,786,125) ------------ ------------ Valuation allowance (2,688) (2,688) ------------ ------------ Net deferred tax asset $ 483,075 $ 376,251 ============ ============
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. F-15 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The following is the reconciliation of the U.S. statutory tax rate to the Company's effective tax rate for the years ended July 31:
2002 2001 2000 ------------ ------------ ------------ Federal income tax expense (benefit) at statutory rate of 34% $ (280,270) $ (9,621) $ 363,188 Goodwill amortization 58,117 71,192 58,117 State income tax (3,092) 33,202 129,498 Other 2,312 2,715 27,455 ------------ ------------ ------------ Provision for income tax expense (benefit) $ (222,933) $ 97,488 $ 578,258 ============ ============ ============
During 2002, the net operating loss carryforwards were decreased by $106,238 and during 2001, the net operating loss carryforwards were decreased by $1,070,271. At July 31, 2002, the Company has a Federal net operating loss carryforward of approximately $3,252,228 expiring from 2006 to 2021. The Company has a State net operating loss carryforward of $20,055 which expires from 2004 to 2021. The Company has investment tax credit carryforwards of approximately $2,688 which expire in fiscal year 2003. 6. RELATED PARTY TRANSACTIONS Interest expense relating to notes payable to affiliates amounted to $242,668 for the years ended July 31, 2002, $243,334 for the year ended July 31, 2001 and $244,667 for year ended July 31, 2000. As of July 31, 2002, the Company had advanced $1,000,000 to the President and Chief Executive Officer in the form of a promissory note (the "Note"). The Note matures on January 1, 2008 and bears interest at the lesser of i) the Applicable Federal Rate or ii) the maximum nonusurious rate as defined in the Note. Per the terms of the Note, the Company will forgive one-fifth of the principal and all related accrued interest on December 31 of each year beginning in 2003 through 2007. If the President and Chief Executive Officer's employment is terminated with cause by the Company or without good reason by the President and Chief Executive Officer all outstanding unearned principal and accrued interest must be repaid. As of July 31, 2002, $988,889 of the Note remained outstanding. Effective July 22, 2002, the Company terminated its President and Chief Operating Officer. In connection with the separation agreement, the Company recorded an approximate $400,850 charge which is reflected in salaries and wages in the accompanying statement of operations for the year ended July 31, 2002. F-16 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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. Future minimum lease obligations under noncancelable operating leases for the Company at July 31, 2002 are as follows: 2002 $ 2,179,010 2003 2,002,902 2004 1,754,272 2005 1,403,808 2006 861,858 Thereafter 987,702 ----------- $ 9,189,552 ===========
8. SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWS Cash interest payments for the years ended July 31, 2002, 2001 and 2000 are $793,766, $1,317,362 and $1,111,380, respectively. Cash tax payments for the years ended July 31, 2002, 2001 and 2000 are $89,874, $478,643 and $101,455, respectively. 9. INCENTIVE PLANS STOCK OPTION PLAN The Company has a stock option plan (the "Plan") for officers and employees of the Company or its affiliates, under which the maximum number of shares, which may be granted in the aggregate, is 285,000 of the Company's Common Stock. The Plan, which became effective June 30, 1995, provides for the options to be granted, become exercisable, and terminate upon terms established by the Board of Directors (the "Committee"). Shares become exercisable from time to time (but not sooner than six months after the date of grant) over such period and upon such terms as the Committee may determine, but such exercise can not at any time be less than 25 shares unless the remaining shares that have become so purchasable are less than 25 shares. All options granted to the employees have an exercise price no less than the fair market value of the stock at grant date. The options vest under one of the following conditions: (i) one-third each year, beginning on the first anniversary of the date of grant, (ii) one-half each year, beginning on the first anniversary of the date of grant, or (iii) one-fourth each year, beginning on the first anniversary of the date of grant. The Company applies APB Opinion 25 and related Interpretations in accounting for the Plan. In 1995, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plan. Adoption of the cost recognition provisions of SFAS No. 123 is optional and the Company has decided not to elect the provisions of SFAS 123. However, pro forma disclosures as if the F-17 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Company adopted the cost recognition provisions of SFAS 123 are required by SFAS 123 and are presented below. In accordance with APB 25, the Company has not recognized any compensation cost for the stock options granted. A summary of the status of the Company's stock options as of July 31, 2002, 2001 and 2000 and the changes during the year ended on those dates is presented below:
STOCK OPTIONS --------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED # SHARES AVERAGE # SHARES AVERAGE # SHARES AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 191,890 $ 5.47 194,360 $ 5.79 193,035 $ 5.69 Granted 106,000 $ 4.02 24,030 $ 4.06 17,500 $ 6.75 Exercised -- N/A -- $ 6.24 -- N/A Forfeited 97,300 $ 5.48 26,500 $ -- 16,175 $ 5.94 Expired -- N/A -- N/A -- N/A Outstanding at end of year 200,590 $ 4.70 191,890 $ 5.45 194,360 $ 5.79 Exercisable at end of year 90,115 $ 5.36 158,018 $ 5.38 146,228 $ 5.41 Available for grant at end of year 75,210 83,910 21,440 Weighted average fair value of options granted $ 1.85 $ 1.82 $ 3.34
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate of 4.12%, 6.06% and 5.48% for 2002, 2001, and 2000, respectively; the expected life of options is 5 years; and a volatility of 46.84%, 43.03%, and 41.39% for options granted in 2002, 2001 and 2000, respectively. At July 31, 2002, exercise prices for all options outstanding ranged from $4.00 to $7.00 and the weighted-average remaining contractual life for options outstanding was 5.9 years. PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE Had the compensation cost for the Company's stock-based compensation plan been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per common share for 2002, 2001 and 2000 would approximate the pro forma amounts below:
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA 7/31/02 7/31/02 7/31/01 7/31/01 7/31/00 7/31/00 ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (742,079) $ (771,424) $ (125,785) $ (148,177) $ 489,941 $ 489,922 Basic net income (loss) per common share $ (0.45) $ (0.47) $ (.07) $ (.08) $ 0.28 $ 0.28
F-18 BESTWAY, INC. FORM 10-K NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards granted prior to the 1996 fiscal year. 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. For the year ended July 31, 2002, the Company contributed approximately $105,000 to the Savings Plan. For the years ended July 31, 2001 and 2000, the Company made matching contributions of approximately $145,000, to the Savings Plan. All assets of the Savings Plan are held in trust. 10. LEGAL CONTINGENCIES In December 2001, the Company settled a lawsuit brought by approximately fifteen plaintiffs who have asserted claims against a number of defendants, including the Company, who were involved in the production of oil and gas or who owned oil and gas facilities in Montana. Plaintiffs alleged that the Company is the successor in interest to Amarco Resources Corporation, which, in the past, owned interests in two wells in the oil field. One of these wells is an alleged source of contamination of groundwater. The settlement was for approximately $130,000, including attorney's fees. The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Company. F-19 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ---------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Bestway, incorporated by reference to Bestway's Current Report on Form 8-K, filed September 2, 1993. 3.2 Amended and Restated Bylaws of Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K, for the year ended December 31, 1984. 4.1 Specimen stock certificate representing shares of Bestway's common stock, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.1 Incentive Stock Option Plan of Bestway, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.2 Form of Incentive Stock Option Agreement pursuant to Incentive Stock Option Plan, incorporated by reference to Bestway's Registration Statement on Form S-8, filed June 22, 1995. 10.3 First Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Quarterly Report on Form 10-Q for the year ended April 30, 1995. 10.4 Second Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed April 25, 1996. 10.5 Third Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed December 1, 1997. 10.6 Fifth Amendment to the First Amended and Restated Revolving Credit Loan, dated March 15, 1995, by and between Bestway and Comerica Bank-Texas, incorporated by reference to Bestway's Current Report on Form 8-K, filed January 13, 2000. 10.7 First Amended and Restated Promissory Note, dated August 19, 1997, by Bestway in favor of O'Donnell & Masur, L.P. and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K, for the year ended July 31, 1997. 10.8 Extension Agreement for the First Amended and Restated Promissory Note, dated August 19, 1997, between O'Donnell & Masur, L.P. and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 1999. 10.9 Modification Letter dated October 19, 2000 modifying certain covenants of the Loan Agreement between Comerica Bank-Texas and Bestway, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 2000. 10.10 Amendment Number One to Bestway Incentive Stock Option Plan, dated December 4, 2000, incorporated by reference to Bestway's Annual Report on Form 10-K for the year ended July 31, 2001. 10.11* Employment Agreement, dated July 8, 2002, between Bestway and David A. Kraemer. 10.12* Severance Agreement, dated July 22, 2002, between Bestway and Teresa A. Sheffield. 99.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21* Subsidiaries 23* Consent of PricewaterhouseCoopers LLP
---------- *Filed herewith