<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission File Number: 0-22026
RENT-WAY, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1407782
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(State of incorporation) (IRS Employer Identification No.)
3230 WEST LAKE ROAD, ERIE, PENNSYLVANIA 16505
---------------------------------------------
(Address of principal executive offices)
814/836-0618
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(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
- ------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) 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. X YES NO
----- -----
Check if there is no disclosure of delinquent filers in response to Items 405
of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
------------------
Total revenues of the issuer for the fiscal year ended September 30, 1996 were
$51,171,337.
Based on the closing sales price on November 1996 the aggregate market value of
stock held by non-affiliates of the issuer was $51,318,535.
------------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding as of December 20, 1996
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Common Stock 6,659,180
<PAGE> 2
FORM 10-KSB
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Location in Form 10-KSB Incorporated Document
- ----------------------- ---------------------
PART III
<S> <C>
ITEM 9 Directors, Executive Officers, Promoters and Incorporated herein by reference to the
Control Persons; Compliance with Section Company's definitive Proxy Statement for
16(a) of the Exchange Act the Annual Meeting of Shareholders to be
held March 12,1997.
ITEM 10 Executive Compensation Incorporated herein by reference to the
Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be
held March 12, 1997.
ITEM 11 Security Ownership of Certain Beneficial Incorporated herein by reference to the
Owners and Management Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be
held March 12, 1997.
ITEM 12 Certain Relationships and Related Incorporated herein by reference to the
Transactions Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be
held March 12, 1997.
</TABLE>
<PAGE> 3
RENT-WAY, INC.
PART I
ITEM I BUSINESS
GENERAL
Rent-Way, Inc., ("the Company") has been engaged in the rental-purchase
business since 1981 and currently operates 108 stores in eleven states and the
District of Columbia. The Company offers home entertainment equipment,
furniture, major appliances and jewelry to customers under full-service
rental-purchase agreements that generally allow the customer to obtain
ownership of the merchandise at the conclusion of an agreed upon rental period.
Management believes that these rental-purchase arrangements appeal to a wide
variety of customers by allowing them to obtain merchandise that they might
otherwise be unable or unwilling to obtain due to insufficient cash resources
or lack of access to credit or because they have a temporary, short-term need
for the merchandise or a desire to rent rather than purchase the merchandise.
The Company was formed in 1981 to operate a rental-purchase store in Erie,
Pennsylvania. By 1993, as a result of acquisitions and new store openings, the
Company was operating 19 stores in three states. During the year ended
September 30, 1994, the Company opened three new stores and in May 1994 added
20 stores through the acquisition of D.A.M.S.L. Corp. ("DAMSL"). In February
1995, the Company acquired the rental merchandise and rental-purchase contracts
of five rental-purchase stores. In July 1995, the Company added 45 stores
through the acquisition of McKenzie Leasing Corporation ("McKenzie").
1996 ACQUISITIONS
In May and June 1996, the Company acquired the rental merchandise and
rental-purchase contracts of 16 rental-purchase stores, including eight stores
located in Virginia, in which the Company had no previous operations. In July
1996, the Company acquired 11 stores in Maryland, Delaware and Pennsylvania
through the acquisition of all of the outstanding stock of Diamond Leasing
Corporation. The purchase price consisted of 20,538 shares of the Company's
Common Stock and $4,102,296 in cash (the "Diamond Acquisition"). In August
1996, the Company acquired the rental merchandise and rental-purchase contracts
of four rental-purchase stores located in Maryland and Washington, D.C. and one
store in Peoria, Illinois.
Management believes these recent acquisitions provide the Company with certain
strategic benefits including increased market share and operating efficiencies
in certain regions and improved economies of scale for certain corporate
expenses including advertising and purchasing. Management also believes that
improved merchandising, marketing and operational methods should improve the
performance of stores acquired in fiscal year 1996. There can be no assurance
that the acquired stores will perform in accordance with expectations or that
the Company will not encounter unanticipated problems or liabilities in
connection with these stores.
THE RENTAL-PURCHASE INDUSTRY
Begun in the mid-to-late 1960's, the rental-purchase business is a relatively
new segment of the retail industry offering an attractive alternative to
traditional retail installment sales. The rental-purchase industry provides
durable household products to consumers generally on a week-to-week or
month-to-month basis under a full service rental agreement which in most cases
includes a purchase option. The customer may cancel the rental agreement at any
time without further obligation by returning the product to the dealer. APRO,
the industry's trade association, estimated that at the end of 1995 the
rental-purchase industry comprised approximately 7,500 stores providing 5.4
million products to 2.8 million households in the United States. Management
believes that its customers generally have annual household incomes ranging
from $20,000 to $40,000. Based on APRO estimates, the rental-purchase industry
attained gross revenues of $3.9 billion in 1995. Although according to
information from APRO and management estimates, the ten largest industry
participants account for 37.5% of the total rental-purchase stores, the largest
industry participant, Rent-a-Center, accounts for approximately 50% of such
stores and management estimates that the majority of the industry consists of
operations with fewer than 20 stores.
3
<PAGE> 4
RENT-WAY, INC.
PART 1 - Continued
Rental-purchase operators have historically been financed by a few commercial
lenders who specialize in the industry. In recent years, however, most of these
lenders have reduced the amount of debt their customers can carry, limited
their business with new operators in the rental-purchase industry or withdrawn
from the market altogether. Consequently, many rental-purchase dealers have
either attempted to reduce debt by investing more equity in their businesses or
attempted to sell their stores and rental contracts to other dealers having
greater financial resources. Management believes that this trend toward
consolidation of operations in the industry presents an opportunity for solidly
capitalized rental-purchase operators to acquire additional stores on favorable
terms. In addition, management believes that many smaller industry operators
lack the management information systems capabilities necessary to manage a
large and multi-state rental-purchase operation efficiently and profitably.
STRATEGY
Management believes that the Company's continued success depends significantly
on successful implementation of the following business strategies.
Acquiring and Opening New Stores
The Company currently intends to expand its operations by acquiring existing
stores and opening new stores, both within its present market area and in
geographic regions not currently served by the Company. The majority of such
expansion is expected to be accomplished through acquisitions. The Company
believes that acquisitions can effectively increase the Company's market share
and operating efficiencies while simultaneously expanding its customer base. In
addition, in pursuing its growth strategies, the Company expects to benefit
from both enhanced purchasing power and the ability to exploit economies of
scale for certain fixed operational expenses. The Company continually reviews
acquisition opportunities, and management believes that a number of acquisition
opportunities currently exist. In identifying targets for acquisition, the
Company intends to focus on operations that complement the Company's existing
markets, while remaining open to the possibility of making strategic
acquisitions in other areas. Management believes that its senior management has
a level of ability and experience that allows the Company a competitive
advantage in the evaluation and consummation of acquisition opportunities.
Although the present state of the rental-purchase industry makes acquisition
opportunities more attractive economically than the opening of new stores,
management anticipates that the consolidation of the industry will cause this
emphasis on acquisitions to diminish over time.
Customer-Focused Philosophy
Management believes that through continued adherence to its "Welcome, Wanted
and Important" philosophy it can increase its new and repeat customer base, and
thus the number of units it has on rent, thereby increasing revenues and
profits. The "Welcome, Wanted and Important" program is a method by which the
Company seeks to create a store atmosphere conducive to customer loyalty. The
Company attempts to create this atmosphere through the effective use of
advertising and merchandising strategies, by maintaining the clean,
well-stocked appearance of its stores, and by providing a high level of
customer service (such as the institution of a 1-800-RENTWAY complaint and
comment line). The Company's advertising emphasizes brand name merchandise from
leading manufacturers. In addition, merchandise selection within each product
category is periodically updated to incorporate the latest offerings from
suppliers. The Company's stores are maintained so as to be appealing to both
customers and employees. All acquired stores are promptly evaluated and, if
necessary, remodeled. Services provided by the Company to the customer include
home delivery and ordinary maintenance and repair services during the term of
the contract at no additional charge. Store managers also work closely with
each customer in choosing merchandise, setting delivery dates and arranging a
suitable payment schedule. Under the "Welcome, Wanted and Important" program,
store managers are empowered, encouraged and trained to make decisions
regarding operations at the stores subject only to certain Company-wide
operating guidelines and general policies.
4
<PAGE> 5
RENT-WAY, INC.
PART I - Continued
Expanding the Company's Product Lines
One of the Company's principal strategies is to provide the rental-purchase
customer with the opportunity to obtain merchandise of higher quality than its
competitors on competitive terms. To this end, the Company attempts to maintain
a broad selection of products while emphasizing higher priced merchandise. The
Company intends to continue expanding its offerings of higher priced products
in all product areas. Management believes that previous offerings of higher
priced products have succeeded in both increasing the Company's profitability
and attracting new customers to the Company's existing stores. In addition, the
Company selectively tests new merchandise such as personal computers and
cellular phones. Management believes that opportunities exist to provide
additional or non-traditional merchandise to its customers.
Monitoring Store Performance
Each store is provided with a management information system that allows
management to track rental and collection activity on a daily basis. The system
generates detailed reports that track inventory movement within each product
category and the number and frequency of past due accounts and other collection
activity. In addition, physical inventories are conducted at each store to
ensure the accuracy of the management information system data. Senior
management monitors this information to ensure adherence to established
operating guidelines. The Company's management information system contributes
significantly to management's ability to enhance the operating performance of
existing stores and to integrate and enhance the performance of newly acquired
stores.
Results-Oriented Compensation
Management believes that an important reason for its positive financial
performance and growth has been the structure of its management compensation
system, which provides incentives for both regional and store-level managers to
increase store revenues and profits. As a result, a significant portion of
regional and store managers' total compensation is dependent upon store
performance. As further incentive, the Company grants many of its managers
stock options in the Company. Management believes that the Company's emphasis
on incentive-based compensation has been instrumental in the Company's ability
to attract, retain and incentivize its regional and store managers.
Manager Training
Management believes that well-trained store managers are important to the
Company's efforts to maximize individual store performance. The Company employs
two full-time trainers who conduct classroom programs in the areas of sales,
store operations and personnel management. These training programs often
continue for several months and culminate in an exam. The Company also offers
its managers the opportunity to attend, at the Company's expense, leadership
and management programs offered by leading management and organization experts.
5
<PAGE> 6
RENT-WAY, INC.
PART I - Continued
OPERATIONS
Company Stores
The Company currently operates 108 stores in eleven states and the District of
Columbia as follows:
<TABLE>
<CAPTION>
LOCATION NUMBER OF STORES
-------- ----------------
<S> <C>
Pennsylvania 21
New York 20
Indiana 16
Ohio 10
Maryland 9
Illinois 8
Virginia 7
Michigan 7
Florida 4
Delaware 4
New Jersey 1
Washington D.C. 1
---
Total 108
===
</TABLE>
The Company's stores average approximately 3,000 square feet in floor space and
are generally located in strip shopping centers in or near low to middle income
neighborhoods. Often, such shopping centers offer convenient free parking to
the Company's customers. The Company's stores are generally uniform in interior
appearance and design and have displays of the available merchandise. The
stores have separate storage areas but generally do not use warehouse
facilities. In selecting store locations, the Company uses a variety of market
information sources to locate the section of a town or city which is readily
accessible by low to middle income consumers. The Company believes that the
best locations are in neighborhood shopping centers that include a supermarket.
The Company believes this type of location makes frequent rental payments at
its stores more convenient for its customers.
Product Selection
The Company offers brand name home entertainment equipment (such as television
sets, video recorders, video cameras and stereos), furniture, major appliances
and jewelry. Major appliances offered by the Company include refrigerators,
ranges, washers and dryers. The Company's product line currently includes the
Zenith, RCA, Pioneer and JVC brands in home entertainment equipment and the
Crosley and Kenmore brands in major appliances. The Company closely monitors
customer rental requests and adjusts its product mix to offer rental
merchandise desired by customers.
For the year ended September 30, 1996, payments under rental-purchase contracts
for home entertainment products accounted for approximately 44%, furniture for
27%, appliances for 28% and jewelry for 1% of the Company's revenues. Customers
may request either new merchandise or previously rented merchandise. Previously
rented merchandise is typically offered at the same weekly or monthly rental
rate as is offered for new merchandise, but with an opportunity to obtain
ownership of the merchandise after fewer rental payments. Weekly rentals
currently range from $4.59 to $44.95 for home entertainment equipment, from
$1.99 to $49.99 for furniture, from $4.59 to $38.99 for major appliances and
$3.99 to $30.99 for jewelry.
6
<PAGE> 7
RENT-WAY, INC.
PART I - Continued
Rental-Purchase Agreements
Merchandise is provided to customers under written rental-purchase agreements
which set forth the terms and conditions of the transaction. The Company uses
standard form rental-purchase agreements which are reviewed by legal counsel
and customized to meet the legal requirements of the various states in which
they are intended to be used. Generally, the rental-purchase agreement is
signed at the store, but may be signed at the customer's residence if the
customer orders the product by telephone and requests home delivery. Customers
may elect to rent merchandise on a week-to-week or month-to-month basis. The
rental for the first week or month and each succeeding week or month during the
term of the agreement is payable in advance. At the end of the initial and each
subsequent rental period, the customer retains the merchandise for an
additional week or month by paying the required rental or may terminate the
agreement without further obligation. If the customer decides to terminate the
agreement, the merchandise is returned to the store and is then available for
rent to another customer. The Company retains title to the merchandise during
the term of the rental-purchase agreement. If a customer rents merchandise for
a sufficient period of time, usually 12 to 24 months, ownership is transferred
to the customer without further payments being required. Rental payments are
made in cash or by check, money order or credit card. The Company does not
extend credit.
Product Turnover
Generally, a minimum rental term of between 12 and 24 months is required to
obtain ownership of new merchandise. Based upon merchandise returns for the
year ended September 30, 1996, the Company believes that the average period of
time during which customers rent merchandise is 16 to 17 weeks. However,
turnover varies significantly based on the type of merchandise being rented,
with certain consumer electronics products, such as camcorders and VCRs,
generally being rented for shorter periods, while appliances and furniture are
generally rented for longer periods. At September 30, 1996, the Company's
stores contained an average of 1,121 items of merchandise per store, of which
approximately 829 items were subject to rental-purchase agreements and
approximately 292 items were available in inventory, which management believes
is representative of the average inventory on rent and idle inventory at any
given time. Each rental-purchase transaction requires delivery and pickup of
the product, weekly or monthly payment processing and, in some cases, repair
and refurbishment of the product. In order to cover the relatively high
operating expenses generated by product turnover, rental-purchase agreements
require larger aggregate payments than are generally charged under installment
purchase or credit plans.
Customer Service
The Company offers same day delivery and installation of its merchandise at no
additional cost to the customer. The Company also provides any required service
or repair without charge, except for damage in excess of normal wear and tear.
If the product cannot be repaired at the customer's residence, the Company
provides a temporary replacement while the product is being repaired. The
customer is fully liable for damage, loss or destruction of the merchandise,
unless the customer purchases an optional loss/damage waiver. Most of the
products offered by the Company are covered by a manufacturer's warranty for
varying periods, which, subject to the terms of the warranty, is transferred to
the customer in the event that the customer obtains ownership. In addition, the
Company utilizes in-house service technicians to maintain and repair its
merchandise in approximately one-half of its stores. Repair services are
provided through independent contractors or under factory warranties. The
Company recently introduced Rent-Way Plus, a fee-based membership program that
provides special loss and damage protection and an additional two-years of
service protection on rental merchandise purchased by a
7
<PAGE> 8
RENT-WAY, INC.
PART I - Continued
customer, preferred treatment in the event of voluntary job loss, accidental
death and dismemberment insurance and discounted emergency roadside assistance,
as well as other discounts on merchandise and services.
Collections
Management believes that effective collection procedures are important to the
Company's success in the rental-purchase business. The Company's collection
procedures increase the revenue per product with minimal associated costs,
decrease the likelihood of default and reduce charge-offs. Senior management as
well as store managers use the Company's computerized management information
system to monitor cash collections on a daily basis. In the event a customer
fails to make a rental payment when due, generally store management will
attempt to contact the customer to obtain payment and reinstate the contract or
will terminate the account and arrange to regain possession of the merchandise.
However, store managers are given latitude to determine the appropriate
collection action to be pursued based on individual circumstances. Depending on
state regulatory requirements, the Company charges for the reinstatement of
terminated accounts or collects a delinquent account fee. Such fees are
standard in the industry and may be subject to state law limitations. Despite
the fact that the Company is not subject to the Federal Fair Debt Collection
Practices Act, it is the Company's policy to abide by the restrictions of such
law in its collection procedures. Charge-offs due to lost or stolen merchandise
were approximately 2.7% and 3.6% of the Company's revenues for the years ended
September 30, 1996 and 1995, respectively. The three-year average charge-off
rate for the largest chains in the industry reporting to APRO in 1996 was 2.3%.
Management
The Company's network of stores is organized geographically with several levels
of management. At the individual store level, each store manager is responsible
for customer and credit relations, deliveries and pickups, inventory
management, staffing and certain marketing efforts. A Company store normally
employs one store manager, one assistant manger, two account managers, one
full-time office manager, and one full-time delivery and installation
technician. The staffing of a store depends on the number of rental-purchase
contracts serviced by the store. Each store manager reports to one of 17
regional managers who typically oversees six to eight stores. Regional managers
are primarily responsible for monitoring individual store performance and
inventory levels within their respective regions. The Company's regional
managers, in turn, report to three Directors of Operations, located at the
Company's headquarters, who monitor the operations of their respective division
and, through the regional managers, individual store performance. The Directors
of Operations report to the Vice President and Chief Operating Officer who is
responsible for overall Company-wide store operations.
Senior management at the Company's headquarters directs and coordinates
purchasing, financial planning and controls, management information systems,
employee training, personnel matters and acquisitions. Headquarters personnel
also evaluate the performance of each store and conduct on-site reviews.
8
<PAGE> 9
RENT-WAY, INC.
PART I - Continued
MANAGEMENT INFORMATION SYSTEM
The Company's management information system provides it with a competitive
advantage over many small rental-purchase operations. The Company uses
integrated computerized management information and control systems to track
each unit of merchandise and each rental-purchase agreement. The Company's
systems also include extensive management software and report generating
capabilities. The reports for all stores are reviewed daily by senior
management and any irregularities are addressed the following business day.
Each store is equipped with a computer system that tracks individual components
of revenue, each item in idle and rented inventory, total items on rent,
delinquent accounts and other account information. The Company electronically
gathers each day's activity report through the computer located at the
headquarters office. This system provides the Company's management with access
to operating and financial information about any store location or region in
which the Company operates and generates management reports on a daily, weekly,
month-to-date and year-to-date basis for each store and every rental-purchase
transaction. Utilizing the management information system, executive management,
regional managers and store managers can closely monitor the productivity of
stores under their supervision as compared to Company prescribed guidelines.
This system has enabled the Company to expand its operations while maintaining
a high degree of control over cash receipts, inventory, merchandise units in
repair and customer transactions. The Company has successfully integrated all
acquired stores into its management information system.
PURCHASING AND DISTRIBUTION
The Company's general product mix is determined by senior management, based on
an analysis of customer rental patterns and introduction of new products on a
test basis. Individual store managers are responsible for determining the
particular product selection for their store from the list of products approved
by senior management. All purchase orders are executed through regional
managers and the Company's purchase department to insure that inventory levels
and mix throughout the store regions are appropriate. The Company maintains
only minimal warehouse space for storage of merchandise and merchandise is
generally shipped by vendors directly to each store, where it is held for
rental.
The Company purchases its merchandise directly from manufacturers or
distributors. The Company generally does not enter into written contracts with
its suppliers. Although the Company currently expects to continue relationships
with its existing suppliers, management believes there are numerous sources of
products available to the Company, and does not believe that the success of the
Company's operations is dependent on any one or more of its present suppliers.
MARKETING
The Company promotes its products and services primarily through direct mail
advertising and, to a lesser extent, television, radio and secondary print
media advertisement. The Company also solicits business by telephoning former
and prospective customers. Company advertisements emphasize such features as
product and brand name selection, prompt delivery and repair and the absence of
any downpayment, credit investigation or long-term obligation. Advertising
expense as a percentage of revenues for the year ended September 30, 1996 was
approximately 4.1%. As the Company obtains new stores in its existing market
areas, the advertising expenses of each store in the area can be reduced by
listing all stores in the same market-wide advertisement.
9
<PAGE> 10
RENT-WAY, INC.
PART I - Continued
COMPETITION
The rental-purchase industry is highly competitive. The Company competes with
other rental-purchase businesses as well as rental stores that do not offer
their customers a purchase option. Competition is based primarily on rental
rates and terms, product selection and availability, and customer service. With
respect to consumers who are able to purchase a product for cash or on credit,
the Company also competes with 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. Several
competitors in the rental-purchase business are national or regional in scope
and have significantly greater financial and operating resources and name
recognition than does the Company. Based upon APRO's most recent information
and management estimates, the Company's share of the rental-purchase market in
the United States is approximately 1.3%.
PERSONNEL
As of September 30, 1996, the Company had approximately 630 employees, of
which 43 are located at the corporate headquarters in Erie, Pennsylvania.
None of the Company's employees is represented by a labor union. Management
believes its relations with its employees are good.
GOVERNMENT REGULATION
Forty-five states, including all the states in which the Company's stores are
located, other than New Jersey, have enacted laws regulating or otherwise
impacting the rental-purchase transaction. These laws generally require certain
contractual and advertising disclosures concerning the nature of the
transaction and also provide varying levels of substantive consumer protection,
such as requiring a grace period for late payments and contract reinstatement
rights in the event the agreement is terminated for nonpayment of rentals. The
rental-purchase laws in some states, including Michigan, New York, Ohio and
Pennsylvania limit the total amount of rentals that may be charged over the
life of the rental-purchase agreement. Michigan law limits the amount that may
be charged to 2.22 times the price that would have been charged had the product
been purchased rather than leased. New York, Ohio and Pennsylvania law limit
the amount that may be charged under the rental-purchase agreement to two times
the price that would have been charged had the merchandise been purchased
rather than leased. No federal legislation has been enacted regulating
rental-purchase transactions.
The Company instructs its managers in its required procedures through training
seminars and policy manuals and believes that it has operated in compliance
with the requirements of applicable law in all material respects. In addition,
the Company provides its customers with a toll-free number, 1-800-RENTWAY, to
telephone corporate headquarters to report any irregularities in service or
misconduct by its employees. Any such calls are reviewed daily and are the
subject of immediate follow-up investigation by senior management.
SERVICE MARKS
The Company has been using the service mark "Rent-Way" and has filed an
application to register such mark under the Lanham Act. Such registration was
approved on October 29, 1996. The Company believes that this mark has acquired
significant market recognition and goodwill in the communities in which its
stores are located. The service mark "Rent-Way Because There's Really Only One
Way" and the related design have also been registered by the Company.
10
<PAGE> 11
RENT-WAY, INC.
PART I - Continued
ITEM 2 DESCRIPTION OF PROPERTIES
The Company currently leases all of its 108 stores under operating leases that
generally have terms of three to five years and require the Company to pay for
real estate taxes, common area maintenance and utilities. The Company has
optional renewal privileges on most of its leases for additional periods
ranging from three to five years at rental rates generally adjusted for
increases in the cost of living. There is no assurance that the Company can
renew the leases that do not contain renewal options, or that if it can renew
them, that the terms will be favorable to the Company. Management believes that
suitable store space is generally available for lease and that the Company
would be able to relocate any of its stores without significant difficulty
should it be unable to renew a particular lease. Management also expects that
additional space will be readily available at competitive rates in the event
the Company desires to open new stores. The Company's corporate office was
acquired by the Company in 1995 and consists of approximately 14,000 square
feet. The Company leases certain warehouse space in New Castle, Delaware,
Buffalo, New York and Pittsburgh, Pennsylvania and owns storage space in
an office building in Erie, Pennsylvania which was formerly the Company's
corporate offices.
ITEM 3 LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings arising
in the ordinary course of its business. The Company is not currently a party to
any material litigation, except litigation to which it succeeded to as a result
of the McKenzie Acquisition for which it is being indemnified and held harmless
and an action brought against the Company in October 1996 in New York Supreme
Court requesting damages in the amount of $50.0 million arising out of an
accident whereby a Company truck struck and injured a child riding a bike. Such
action is being defended by the Company's insurance carriers and management
believes it has sufficient available insurance coverage such that this
litigation will not have a material adverse effect on 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.
11
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RENT-WAY, INC.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is (and has been since August 31, 1995) traded on
the Nasdaq National Market under the symbol "RWAY." Prior thereto, and since
August 12, 1993 (the date on which the Company completed its initial public
offering), the Company's Common Stock was traded on the Nasdaq Small-Cap
Market. The following table sets forth, for the periods indicated, the high and
low sales price per share (as adjusted to reflect the 50% stock dividend on
August 4, 1995) of the Common Stock as reported on the Nasdaq Small-Cap Market
and the Nasdaq National Market.
The Company has not paid any cash dividends to shareholders. The declaration of
any cash or stock dividends will be at the discretion of the Board of
Directors, and will depend upon earnings, capital requirements and the
financial position of the Company, general economic conditions and other
pertinent factors. At this time, the Company does not intend to pay any cash
dividends in the foreseeable future. Management intends to reinvest earnings,
if any, in the development and expansion of the Company's business for an
indefinite period of time. The Company's Credit Agreement and Convertible
Subordinated Notes restrict the payment of dividends.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1996 September 30, 1995
------------------ ------------------
High Low High Low
----- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $10.50 $8.38 $6.75 $5.75
Second Quarter 10.13 7.38 8.50 6.42
Third Quarter 15.50 9.75 10.00 7.92
Fourth Quarter 14.13 11.00 11.13 8.92
</TABLE>
As of December 20, 1996, there were 120 record holders of the Common Stock.
In July 1996, the Company issued 20,538 shares of Common Stock to the
shareholders of Diamond Leasing Corporation in connection with the Diamond
Acquisition. Such shares were issued pursuant to an exemption from registration
contained in Section 4 (2) of the Securities Act of 1933, as amended.
12
<PAGE> 13
RENT-WAY, INC.
PART II - Continued
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company currently operates 108 rental-purchase stores located in 11 states
and the District of Columbia. The number of stores operated by the Company has
increased from 19 as of September 30, 1993 to 108 as of September 30, 1996. The
following table shows the number of stores opened, acquired and/or combined
during this three year period.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
STORES 1993 1994 1995 1996
------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Open at Beginning of Period 17 19 40 83
Opened 2 3 -- --
Acquired -- 20 50 32
Closed or Combined -- 2 7 7
--- --- --- ----
Open at End of Period 19 40 83 108
=== === === ====
</TABLE>
During the year ended September 30, 1996, the Company entered into a series of
acquisitions in which the Company acquired the rental merchandise and rental
contracts of 32 stores (the "1996 Acquisitions"). In May and June 1996, the
Company acquired the rental merchandise and rental purchase contracts of 16
stores in New York, Pennsylvania, and Virginia. In July 1996, the Company
acquired 11 stores located in Maryland, Delaware and Pennsylvania in the
Diamond Acquisition. In August 1996, the Company purchased the rental
merchandise and rental-purchase contracts of four rental-purchase stores
located in Maryland, Washington, D.C. and one store in Peoria, Illinois. In
connection with the 1996 Acquisitions, the Company implemented or is in the
process of implementing a strategy to improve the operations of the acquired
stores. As part of this strategy, the Company purchases new merchandise,
upgrades the appearance of the stores, increases the amount of advertising
utilized per store, and implements a training program for the store employees.
13
<PAGE> 14
RENT-WAY, INC.
PART II - Continued
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following table
expresses certain items of the Company's Statements of Income for the years
ended September 30, 1996 and 1995 as a percentage of total revenue.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Revenues:
Rental revenue 85.8% 85.4%
Other revenue 14.2 14.6
------ ------
Total revenues 100.0 100.0
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 25.9 29.5
Property and equipment 1.5 1.9
Amortization of goodwill 1.7 1.2
------ ------
Total depreciation and amortization 29.1 32.6
Salaries and wages 25.6 24.5
Advertising 4.1 4.5
Occupancy 6.4 6.7
Other operating expense 21.8 22.6
------ ------
Total costs and operating expenses 87.0 90.9
------ ------
Operating income 13.0 9.1
Interest expense (2.9) (4.1)
Other income, net .1 .2
------ ------
Income before income taxes 10.2 5.2
Income tax expense (4.6) (1.6)
------ -------
Net income 5.6% 3.6%
====== ======
</TABLE>
14
<PAGE> 15
RENT-WAY, INC.
PART II - Continued
ITEM 6, continued:
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, total revenues increased by $23.0 million (81%) to $51.2 million from
$28.2 million. The increase was due to the inclusion of a full year's results
for the stores acquired in the acquisition of McKenzie (the "McKenzie
Acquisition"), a partial year's operations for the stores acquired in the 1996
Acquisitions and increased same store revenues. The stores acquired in the
McKenzie Acquisition, which was consummated July 21, 1995, accounted for $19.7
million (86%) of the increase, the stores acquired in the 1996 Acquisitions
accounted for $2.5 million (11%) of the increase, and the Company's same stores
accounted for $0.8 million (3%) of the increase. Other revenue increased $3.2
million (77%) from $4.1 million to $7.3 million principally due to the McKenzie
Acquisition.
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, total costs and operating expenses increased from $25.6 million to
$44.5 million primarily as a result of costs and operating expenses associated
with the McKenzie Acquisition and 1996 Acquisitions, but decreased from 90.9%
to 87.0% of total revenues. This 3.9% net decrease resulted primarily from a
decrease in depreciation expense as a percentage of total revenue. Depreciation
expense related to rental merchandise increased by $4.9 million to $13.2
million from $8.3 million, but decreased by 3.6% as a percentage of total
revenues principally due to increases in weekly rental rates, lower purchase
costs of rental merchandise due to increased volume, and improved realization
of potential collectible rent. Amortization of goodwill increased by 0.5% of
total revenues primarily because of the increase in goodwill related to the
McKenzie Acquisition. Salaries and wages increased by $6.2 million from $6.9
million to $13.1 million principally due to the addition of the store personnel
associated with the McKenzie Acquisition, the 1996 Acquisitions, and the
addition of several key management personnel in the operations, legal, human
resource, accounting, and information systems departments. Salaries and wages
were 25.6% and 24.5% of total revenues for the years ended September 30, 1996
and 1995, respectively. Advertising expense increased $864,000 to $2.1 million
from $1.3 million principally due to the addition of stores associated with the
McKenzie Acquisition. Advertising expense decreased by 0.4% of total revenues
to 4.1% from 4.5%. Occupancy expense increased $1.4 million to $3.3 million
from $1.9 million principally due to the addition of stores associated with the
McKenzie Acquisition, but decreased to 6.4% from 6.7% of total revenues. Other
operating expenses increased $4.7 million to $11.1 million from $6.4 million
primarily due to the addition of the stores acquired in the McKenzie
Acquisition, but decreased to 21.8% from 22.6% of total revenues.
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, operating income increased by $4.1 million (158%) from $2.6 million
to $6.7 million, and increased from 9.1% to 13.0% of total revenues. The $4.1
million increase in operating income and the 3.9% increase in operating income
as a percentage of total revenues occurred principally because of the increase
in same-store revenues, the successful integration and conversion of the stores
acquired in the McKenzie Acquisition in July 1995, and the factors discussed
above.
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, interest expense increased $331,000 to $1.5 million from $1.2
million, but decreased to 2.9% from 4.1% of total revenues primarily due to the
repayment of $13.2 million of outstanding borrowings under the Company's
collateralized credit agreement with First Source Financial LLP in March 1996.
15
<PAGE> 16
RENT-WAY, INC.
PART II - Continued
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, income tax expense increased from $0.4 million to $2.4 million
principally because the Company generated greater taxable income and because
income tax expense was offset by an increase in the Company's net deferred tax
asset in the year ended September 30, 1995. The Company is accruing income tax
expense based on an effective tax rate of 45.5%, which is higher than the
statutory tax rates, because amortization expense related to goodwill incurred
in connection with its acquisitions is not deductible for purposes of computing
income tax.
In accordance with the recognition criteria of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the Company
recognized a net deferred tax asset of $1.4 million as of September 30, 1995.
The Company's net deferred tax asset increased by $63,000 during the year ended
September 30, 1996 to $1.5 million. Recognition of the Company's net deferred
tax asset is based on management's estimate of taxable income in future years.
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, net income increased by approximately $1.8 million (182%) to $2.8
million from $1.0 million. The increase, which resulted in net income
increasing from 3.6% to 5.6% of total revenues, was due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On March 26, 1996, the Company completed a public offering consisting of
1,850,000 shares of Common Stock offered by the Company and 388,750 shares of
Common Stock offered by certain selling shareholders, at a price of $8.50 per
share, and received net proceeds (less underwriters discount and selling
expenses) of $14.3 million. On April 4, 1996, the Company's underwriters
exercised an over-allotment option for 335,812 additional shares of Common
Stock, which resulted in additional net proceeds (less underwriters discount)
of $2.7 million. The Company used these proceeds to pay down $13.2 million of
its senior indebtedness with First Source Financial LLP ($8.4 million of
revolving loan commitment and $4.8 million working capital commitment) and to
redeem $1.1 million of the Company's outstanding Series A Preferred Stock
pursuant to an agreement with the holders thereof. In November 1996, the
Company obtained a $40.0 million secured revolving credit facility from a
syndicate of banks, led by National City Bank of Pennsylvania. Approximately
$7.0 million of the new credit facility was used to refinance existing senior
indebtedness, with the remainder of such facility available for use in the
acquisition of new stores. Currently, the Company has approximately $23.0
million of availability on the collateralized revolving credit facility. In
November 1996, the Company redeemed the remaining balance of the Series A
Preferred Stock issued in connection with the McKenzie Acquisition, consisting
of 11,207 shares with a face value of $1,120,700. Pursuant to an agreement with
the holders thereof, the Company redeemed such shares for $840,525,
representing a discount of 25% from face value.
For the year ended September 30, 1996, the Company's net cash provided by (used
in) operating activities was $(1.2) million as compared to $0.3 million for the
year ended September 30, 1995. The decrease was primarily due to a $9.9 million
increase in rental merchandise purchases offset by a $1.8 million increase in
net income, a $5.7 million increase in non-cash depreciation, and a $1.2
million increase in income taxes payable. The increase in depreciation and
amortization and rental merchandise resulted primarily from the McKenzie
Acquisition, which significantly increased the size of the Company.
For the year ended September 30, 1996 as compared to the year ended September
30, 1995, the Company's net cash used in investing activities increased from
$3.6 million to $10.6 million. The increase in net cash used in investing
activities was principally due to the 1996 Acquisitions and the remodeling and
computer conversion costs incurred in connection with the McKenzie Acquisition.
16
<PAGE> 17
RENT-WAY, INC.
PART II - Continued
For the year ended September 30, 1996, as compared to the year ended September
30, 1995, the Company's net cash provided by financing activities increased
from $4.0 million to $11.1 million. The increase in net cash provided by
financing activities was principally due to cash received in connection with
the Company's public offering net of the extinguishment of debt with First
Source Financial LLP and the redemption of the Series A Preferred Stock issued
in connection with the McKenzie Acquisition.
Historically, the Company's growth has been financed through internally
generated working capital, borrowings under its available credit facilities
and, in connection with acquisitions, issuances of its Common Stock and
Preferred Stock. During 1996 the Company's acquisitions were financed by a
combination of cash generated by the Company's public stock offering and
borrowings under the existing credit facility.
Certain provisions of the Credit Agreement at September 30, 1996 restrict the
Company's ability to consummate or enter into agreements regarding
acquisitions. Pursuant to the Credit Agreement, without the consent of First
Source Financial LLP, the Company may not consummate acquisitions whereby the
aggregate gross purchase price of such acquisitions exceeds $5.0 million in any
fiscal year or $15.0 million in the aggregate while any commitment under the
Credit Agreement remains outstanding. The Company refinanced with a syndicate
of banks led by National City Bank of Pennsylvania. The new collateralized
agreement calls for a $30.0 million limit on acquisitions where the
consideration given is other than capital common stock, and a $15.0 million
($50.0 million total outstanding) limit on acquisitions where the consideration
given is capital common stock.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing additional rental merchandise and replacing
rental merchandise that has been sold or is no longer suitable for rent.
The Company intends to increase the number of stores it operates primarily
through acquisitions. Such acquisitions will vary in size and the Company will
consider large acquisitions that could be material to the Company. To provide
any additional funds necessary for the continued pursuit of its growth
strategies, the Company may incur, from time-to-time, additional short and
long-term bank or other institutional indebtedness and may issue, in public or
private transactions, its equity and debt securities, the availability of which
will depend upon market and other conditions. There can be no assurance that
such additional financing will be available on terms acceptable to the Company.
INFLATION
During the year ended September 30, 1996, the cost of rental merchandise, store
lease rental expense and salaries and wages have increased modestly. These
increases have not had a significant effect on the results of operations
because the Company has been able to charge commensurately higher rental for
its merchandise. This trend is expected to continue in the foreseeable future.
OTHER MATTERS
Effective July 1, 1995, the Company changed its depreciation method for rental
merchandise from the straight-line method to the units of activity method for
new purchases. This change had no significant impact on the Company's financial
position or results of operations.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of" for the year ended
September 30, 1995. The adoption of SFAS No. 121 had no impact on the Company's
financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 -
"Accounting for Stock-based Compensation" effective for transactions entered
into after December 15, 1995. The Company intends on adopting this Standard's
disclosure-only provisions in fiscal 1996. Management does not believe the
adoption of this standard will have a significant impact on the financial
statements of the Company.
17
<PAGE> 18
RENT-WAY, INC.
PART II - Continued
CAUTIONARY STATEMENT
This Report on Form 10-KSB 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 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 acquired stores into the Company's operations, and (iii)
the impact of state and federal laws regulating or otherwise affecting the
rental-purchase transaction.
Undo reliance should not be placed on any forward-looking statements made by or
on behalf of the Company as such statements speak only as of the date made. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, the
occurrence of future events or otherwise.
18
<PAGE> 19
RENT-WAY, INC.
<TABLE>
<CAPTION>
ITEM 7 FINANCIAL STATEMENTS PAGE
----
<S> <C>
Index to Financial Statements
Report of Independent Accountants 20
Financial Statements:
Balance Sheet, September 30, 1996 21
Statements of Income, Years Ended
September 30, 1996 and 1995 22
Statements of Shareholders' Equity,
Years Ended September 30, 1996 and 1995 23
Statements of Cash Flows, Years Ended
September 30, 1996 and 1995 24
Notes to Financial Statements 25
</TABLE>
19
<PAGE> 20
RENT-WAY, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Rent-Way, Inc.
We have audited the accompanying balance sheet of Rent-Way,
Inc. as of September 30, 1996, and the related statements of
income, shareholders' equity and cash flows for the years
ended September 30, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Rent-Way, Inc. as of September 30, 1996, and the
results of its operations and its cash flows for the years
ended September 30, 1996 and 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
December 23, 1996
20
<PAGE> 21
RENT-WAY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Cash $ 179,425
Prepaid expenses 1,266,087
Rental merchandise, net 17,862,420
Deferred income taxes 1,473,522
Property and equipment, net 4,616,362
Goodwill, net of accumulated amortization of $1,323,399 21,866,806
Deferred financing costs, net of accumulated amortization of $109,874 377,232
Prepaid consulting fee, net of accumulated amortization of $208,333 1,041,667
Other assets 1,290,217
-----------
$49,973,738
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,746,797
Other liabilities 2,181,899
Income taxes payable 1,226,590
Debt 12,979,075
-----------
18,134,361
Commitments and Contingencies (Note 8) --
Redeemable preferred stock, Series A, without par value; 30,000 shares
authorized; 11,207 shares issued and outstanding 1,120,700
SHAREHOLDERS' EQUITY:
Common stock, without par value; 10,000,000 shares
authorized; 6,659,180 shares issued and outstanding 27,793,225
Preferred stock, without par value; 970,000 shares authorized --
Contributed capital 114,000
Retained earnings 2,811,452
-----------
Total shareholders' equity 30,718,677
-----------
$49,973,738
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
21
<PAGE> 22
RENT-WAY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Rental revenue $43,890,708 $24,080,270
Other revenue 7,280,629 4,114,153
----------- -----------
Total revenues 51,171,337 28,194,423
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise 13,229,173 8,312,014
Property and equipment 775,169 525,060
Amortization of goodwill 874,668 334,003
Salaries and wages 13,100,891 6,908,648
Advertising 2,123,324 1,259,514
Occupancy 3,269,406 1,887,870
Other operating expenses 11,147,645 6,387,333
----------- -----------
Total costs and operating expenses 44,520,276 25,614,442
----------- -----------
Operating income 6,651,061 2,579,981
OTHER INCOME (EXPENSE):
Interest expense (1,493,143) (1,162,384)
Amortization - deferred financing expense (93,649) (16,229)
Interest income 60,267 66,277
Other income (expense), net 103,838 (13,435)
----------- -----------
Income before income taxes 5,228,374 1,454,210
Income tax expense 2,381,062 445,440
----------- -----------
Net income 2,847,312 1,008,770
Preferred stock dividend requirements (128,969) (37,973)
----------- ------------
Earnings applicable to common shares $ 2,718,343 $ 970,797
=========== ===========
EARNINGS PER COMMON SHARE:
Primary $ 0.46 $ 0.22
=========== ===========
Fully diluted $ 0.45 $ 0.22
=========== ===========
Weighted average number of shares outstanding:
Primary 5,964,319 4,400,066
=========== ===========
Fully diluted 6,070,445 4,500,287
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
22
<PAGE> 23
RENT-WAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
------------------------- CONTRIBUTED EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 2,705,000 $ 6,745,053 $114,000 $ (897,480) $ 5,961,573
Net income for the year 1,008,770 1,008,770
Purchases of business
(See Notes 3 and 12) 432,792 4,072,149 --- --- 4,072,149
Issuance of common stock
under stock option plans
(See Notes 12 and 13) 11,706 114,427 --- --- 114,427
Three for two common
stock split in the form of
a 50% stock dividend
(See Note 12) 1,574,749 --- --- --- ---
Common stock returned to
treasury (See Note 3) (299,263) --- --- --- ---
Loan to related party
(See Note 11) --- (296,578) --- --- (296,578)
--------- ----------- -------- ---------- -----------
Balance at September 30, 1995 4,424,984 10,635,051 114,000 111,290 10,860,341
--------- ----------- -------- ---------- -----------
Net income for the year 2,847,312 2,847,312
Public stock offering 2,185,812 16,760,056 --- --- 16,760,056
(See Note 2)
Common stock returned (14,578) --- --- --- ---
to treasury
(See Note 3)
Exercise of "put" right to (8,600) (381,748) --- --- (381,748)
principle shareholder
(See Note 11)
Repayment of loan to
related party (10,800) 134,578 --- --- 134,578
(See Note 11)
Purchases of business 20,358 187,500 --- --- 187,500
(See Note 3)
Issuance of common stock
under stock option plans
(See Note 13) 49,025 309,279 --- --- 309,279
Issuance of common stock
to 401(k) Plan (See note 15) 12,979 148,509 --- --- 148,509
Preferred stock dividends
(See Note 9) --- --- --- (147,150) (147,150)
--------- ----------- -------- ---------- -----------
Balance at September 30, 1996 6,659,180 $27,793,225 $114,000 $2,811,452 $30,718,677
========= =========== ======== ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
23
<PAGE> 24
RENT-WAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,847,312 $ 1,008,770
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization 14,879,010 9,187,129
Deferred income taxes (681,490) 111,620
Issuance of common stock to 401(k) plan 148,509 ---
Changes in assets and liabilities:
Prepaid expenses (235,413) (1,302,726)
Rental merchandise (19,085,215) (9,220,014)
Other assets (710,547) (225,072)
Accounts payable (406,871) 431,956
Income taxes payable 1,400,937 172,508
Other current liabilities 616,281 162,477
------------ -----------
Net cash (used in) provided by operating activities (1,227,487) 326,648
------------ -----------
INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired of $38,759
in 1996 and $228,556 in 1995 (8,601,764) (1,660,411)
Purchases of property and equipment (2,053,245) (1,960,485)
Net proceeds from the sale of property and equipment
and land and building lots 9,680 133,051
Closing and development fees payable --- (161,458)
------------ -----------
Net cash used in investing activities (10,645,329) (3,649,303)
------------- -----------
FINANCING ACTIVITIES:
Principal payments on capital lease obligation (6,638) (7,082)
Proceeds from borrowings 23,866,711 11,955,257
Payments on borrowings (28,195,016) (7,529,709)
Deferred financing costs --- (481,553)
Issuance of common stock 17,069,335 114,427
Preferred stock dividend (147,150) ---
Preferred stock redemption (1,629,300) ---
Loan to related party 134,578 (21,639)
------------ -----------
Net cash provided by financing activities 11,092,520 4,029,701
------------ -----------
(Decrease) Increase in cash (780,296) 707,046
Cash at beginning of year 959,721 252,675
------------ -----------
Cash at end of year $ 179,425 $ 959,721
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,537,317 $ 1,039,473
Income taxes $ 307,841 $ 161,313
</TABLE>
In addition, the Company entered into various transactions during the year
which involved non-cash investing and financing activities (See Notes 3, 5, 6,
11, and 15).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
24
<PAGE> 25
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION - Rent-Way, Inc. (the "Company" or
"Rent-Way") is a corporation organized under the laws of the
Commonwealth of Pennsylvania. The Company operates a chain of stores
that rent durable household products such as home entertainment
equipment, furniture, major appliances and jewelry to consumers on a
weekly or monthly basis in eleven states and the District of Columbia.
The stores are primarily located in the Mid-West, Eastern and Southern
regions of the United States.
BASIS OF PRESENTATION - The financial statements include the accounts
of Rent-Way, Inc. and its former wholly owned subsidiary, DAMSL Corp.
("DAMSL") which was merged into Rent-Way on July 31, 1995. The Company
changed its accounting policy to adopt the use of an unclassified
balance sheet as of September 30, 1995 to conform to practice in the
industry in which it operates. The adoption of this accounting
presentation had no impact on shareholders' equity or results of
operations.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. The
resolution of certain matters in future periods may differ from the
estimates included in the Company's financial statements.
RENTAL MERCHANDISE, RENTAL REVENUE AND DEPRECIATION - Rental
merchandise is rented to customers pursuant to rental agreements which
provide for either weekly or monthly rental payments 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. This method of
revenue recognition does not produce materially different results than
if rental revenue was recognized over the weekly or monthly rental
term. At the end of each rental period, the customer can renew the
rental agreement.
Merchandise rented to customers or available for rent is classified in
the balance sheet as rental merchandise and is valued at cost on a
specific identification method. Write-offs of rental merchandise
arising from customers' failure to return merchandise and losses due to
excessive wear and tear of merchandise are recognized using the direct
write-off method, which is materially consistent with the results that
would be recognized under the allowance method.
Rental merchandise purchased prior to July 1, 1995 was depreciated on
the straight-line method, with a 10% salvage value, over various
periods ranging from 15 to 30 months (most rental merchandise was
depreciated over a 21 month period). Effective July 1, 1995, the
Company changed its depreciation method from the straight line method
to the units of activity method for new purchases. Under the units of
activity method, rental merchandise is depreciated as revenue is
collected. Rental merchandise is not depreciated during periods when it
is not on rent and therefore not generating rental revenue. This change
in accounting principle was made to more accurately match revenues and
expenses. The effect of the change was not significant.
Rental merchandise in the stores acquired from McKenzie Leasing
Corporation, ("MLC" See Note 3) is being depreciated on
the straight-line method over a 15 month period. Rental merchandise in
stores acquired during 1996 is being depreciated under the units of
activity method (See Note 3).
OTHER REVENUE - Other revenue includes revenue from various services
and charges to rental customers, including late fees, liability waiver
fees, and sales of used merchandise.
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION -
Property and equipment are stated at cost. Additions and improvements
that significantly extend the lives of depreciable assets are
capitalized. Upon sale or other retirement of depreciable property, the
cost and accumulated depreciation are removed from the related accounts
and any gain or loss is reflected in the results of operations.
Depreciation of furniture and fixtures, signs and vehicles is provided
over the estimated useful lives of the respective assets (three to five
years) on a straight-line basis. 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. The Company's corporate
headquarters and other buildings are depreciated over a 20 year term on
a straight-line basis.
25
<PAGE> 26
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121 - "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" for the
year ended September 30, 1995. The adoption of SFAS No. 121 had no
impact on the Company's financial position or results of operations.
INCOME TAXES - Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax and
financial statement basis of assets and liabilities at year end.
Deferred income taxes are adjusted for tax rate changes as they occur.
INTANGIBLE ASSETS - Goodwill is stated at cost less amortization
calculated on a straight-line basis over either a 10 or 20 year period.
Periodically, the Company will determine if there has been permanent
impairment of goodwill by comparing anticipated undiscounted future net
cash flows from operating activities of the acquired store locations
with the carrying value of the related goodwill. At September 30, 1996,
the Company concluded that there was no impairment of goodwill. Deferred
financing fees are stated at cost less amortization calculated on a
straight-line basis over the term of the related debt agreements, which
range from three to seven years. Non-Compete Agreements are stated at
cost less amortization calculated on a straight-line basis over the
term of the related Agreements, which range from two to seven years.
ADVERTISING REBATES - The Company participates in vendor advertising
rebate programs with the majority of its rental merchandise suppliers.
Rebates are recognized in the period earned. On a quarterly basis,
management calculates the amount of the rebate and either submits a
request for payment or credits the balance due the respective vendor.
EARNINGS PER COMMON SHARE - Primary and fully diluted earnings per
common share are computed based on net income after preferred stock
dividend requirements. The weighted average number of common shares
outstanding during each year is adjusted to give effect to stock options
and warrants considered to be dilutive common stock equivalents. Primary
and fully diluted weighted average common shares outstanding have been
adjusted to reflect escrowed shares returned to the Company in
connection with certain of the Company's Acquired stores. (See Note 3)
RECLASSIFICATIONS - Certain amounts in the September 30, 1995, financial
statements were reclassified to conform to the September 30, 1996,
presentation.
2. PUBLIC STOCK OFFERING:
On March 26, 1996, the Company completed a public offering consisting of
1,850,000 shares of common stock offered by the Company and 388,750
shares of common stock offered by certain selling shareholders. In
addition, the underwriters exercised a 30 day option to purchase up to
335,812 shares of common stock, to cover over-allotments.
The shares were offered at a price of $8.50 per share. The Company
received net proceeds (less underwriters discount and selling expenses) of
$16,760,056 including the underwriters exercise of the over-allotment
option. The Company used these proceeds to repay outstanding borrowings of
$13.2 million under the Company's collateralized credit agreement with
First Source Financial LLP (See Note 7), to redeem a portion of its
outstanding Series A Preferred Stock (See Note 9) and for general
corporate purposes.
26
<PAGE> 27
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
3. ACQUISITIONS:
On July 25, 1996 the Company acquired all the outstanding shares of
Diamond Leasing Corporation ("DLC"); a chain of 11 rental-purchase stores
operating in Delaware, Maryland and Pennsylvania with annual revenues of
approximately $7.0 million in exchange for consideration consisting of
20,358 (unregistered shares subject to the provisions of Rule 144 of the
Securities and Exchange Act) shares of the Company's common stock and
$4,102,296 in cash. Pursuant to the terms of the acquisition, $325,000 of
the purchase price was placed in escrow subject to the terms of the
escrow agreement. The escrow agreement provides that $175,000 will be
held pending completion of a financial audit of DLC and $150,000 will be
held for a three year period from the date of closing. The acquisition
was accounted for using the purchase method of accounting. DLC's assets
and liabilities were recorded at their estimated fair values as of the
acquisition date. The fair values of rental merchandise and certain
liabilities, and the final purchase price will be finalized upon the
completion of certain additional procedures. The excess of the
acquisition costs over the fair value of the assets acquired ("goodwill")
of $4,278,941 is being amortized on a straight-line basis over twenty
years. The total cost of the net assets acquired was $4,289,796 ($187,500
in common stock and $4,102,296 in cash) and consisted of assets of
$7,091,845 less liabilities assumed of $2,363,136 and acquisition costs
of $438,913. Assets acquired (at estimated fair value) other than
goodwill consisted principally of rental merchandise of $1,359,808,
property and equipment of $310,850, non-compete agreements of $300,000
and deferred tax assets of $744,808. Liabilities assumed (at estimated
fair value) consisted principally of trade accounts payable of $582,693
and bank debt of $1,446,238. The Statement of Income for the year ended
September 30, 1996, includes the operations of DLC from the date of
acquisition.
During 1996, the Company also purchased from 5 separate entities the
rental merchandise and contracts of 21 stores in Maryland, New York,
Pennsylvania, Virginia and the District of Columbia with combined annual
revenues of approximately $4.2 million. The Company paid cash in
exchange for the assets and each acquisition was recorded using the
purchase method of accounting. The acquired assets were recorded at
their estimated fair value at the date of acquisition. The excess of the
purchase price over the fair value of the assets acquired ("goodwill")
$3,028,796 is being amortized on a straight line basis over twenty
years. The total cost of the net assets acquired was $3,763,250 and
consisted of assets of $3,893,796 less liabilities assumed of $44,814
and acquisition costs of $85,732. The Statement of Income for the year
ended September 30, 1996 includes the operating results for these stores
from the respective dates of acquisition.
On July 21, 1995, the Company acquired McKenzie Leasing Corporation
("MLC"), a privately owned 45 store rental-purchase chain with annual
revenues of approximately $22 million. The Company acquired all of the
common stock of MLC in exchange for 581,688 (unregistered shares subject
to the provisions of Rule 144 of the Securities and Exchange Act and a
shareholder agreement) shares of the Company's common stock, a stock
option to purchase 115,812 shares of the Company's common stock at $9.28
per share and $2,750,000 of redeemable preferred stock (See Note 9). The
115,812 stock options are 100% exercisable and expire five years from
the date of grant. Of the common shares issued, 356,688 shares were
delivered to the former shareholders of MLC and 225,000 were placed in
escrow. See Note 16 regarding disposition of the escrowed shares.
27
<PAGE> 28
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
3. ACQUISITIONS, Continued
The acquisition was accounted for using the purchase method of
accounting. MLC's assets and liabilities were recorded at their estimated
fair values as of the acquisition date. The excess of the acquisition
cost over the fair value the net assets acquired ("goodwill") of
$11,074,492 is being amortized on a straight-line basis over twenty
years. The total cost of the net assets acquired was $6,469,293
($3,684,024 in common stock, $2,750,000 in redeemable preferred stock and
$35,269 in cash) and consisted of assets of $16,631,760 less liabilities
assumed of $8,726,921 and acquisition costs of $1,435,546. Assets
acquired (at estimated fair value) other than goodwill consisted
primarily of Rental merchandise of $4,204,871 and deferred tax assets of
$809,567. Liabilities assumed (at estimated fair value) consisted
primarily of trade accounts payable of $383,478 and bank debt of
$7,470,717. The Statement of Income for the year ended September 30, 1995
includes the operations of MLC from the date of acquisition.
In February 1995, the Company acquired the rental merchandise and
contracts of five rental-purchase stores with combined annual revenues of
approximately $2.0 million. The Company acquired the rental merchandise
and contracts in exchange for 67,500 (unregistered shares subject to the
provisions of Rule 144 of the Securities and Exchange Act) shares of the
Company's common stock and cash. Of the shares issued, 42,750 were
delivered to the sellers and 24,750 were placed in escrow. On February
24, 1996, the escrow terminated by its terms and pursuant thereto 10,172
of such escrowed shares were released to the sellers and 14,578 were
returned to the Company. The allocation of shares released from escrow
was determined by the average market value of the Company's Common Stock
on the twenty trading days preceding February 24, 1996. The acquisitions
were accounted for using the purchase method of accounting. The acquired
assets were recorded at their estimated fair values as of the acquisition
date. The excess of the acquisition cost over the fair value of the net
assets acquired ("goodwill") of $644,705 is being amortized on a
straight-line basis over twenty years. The total cost of the net assets
acquired was $948,145 ($388,125 in common stock and $560,020 in cash) and
consisted of assets of $1,056,609 less acquisition costs of $108,464. The
Statement of Income for the year ended September 30, 1995 includes the
operations of these stores from the date of acquisition.
On May 18, 1994, the Company acquired all of the common stock of
D.A.M.S.L.. Corp. ("DAMSL"), a New York based rental-purchase company,
in exchange for 600,000 (unregistered shares subject to the provisions
of Rule 144 of the Securities and Exchange Act and a shareholder
agreement) of the Company's common stock. Of the shares issued, 300,000
were delivered to the former shareholders of DAMSL, and 300,000 were
placed in escrow. In August, 1995, 299,263 of the escrowed shares were
released to the Company and 737 of the shares were released to the
former shareholders of DAMSL. The allocation of the shares released from
escrow was based on an average market price of $9.31 per share for the
20 days preceding July 5, 1995.
The following are unaudited pro forma results of operations for the years
ended September 30, 1996 and 1995 assuming the acquisitions of DLC and
MLC had occurred on October 1, 1994. The unaudited pro forma information
does not include the results of operations of the five rental-purchase
stores acquired in February 1995 and the twenty-one rental purchase
stores acquired during 1996, which were not significant. The results are
not necessarily indicative of future operations or what would have
occurred had the acquisition been consummated as of October 1, 1994.
<TABLE>
<CAPTION>
Unaudited Pro Forma Operations
Years Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Total revenues $57,190,545 $53,378,690
Net income $ 2,578,430 $ 1,538,514
Earnings per common share $ 0.40 $ 0.29
</TABLE>
28
<PAGE> 29
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
4. RENTAL MERCHANDISE:
Cost and accumulated depreciation of rental merchandise were as follows:
<TABLE>
<CAPTION>
September 30,
1996
-------------
<S> <C>
Cost $28,169,311
Less accumulated depreciation 10,306,891
-----------
$17,862,420
===========
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment consists of the following:
September 30,
1996
-------------
<S> <C>
Signs $ 413,096
Vehicles 1,015,298
Furniture and fixtures 1,211,367
Leasehold improvements 2,525,370
Building 1,377,037
----------
6,542,168
Less accumulated depreciation and amortization 1,925,806
----------
$4,616,362
==========
</TABLE>
6. OTHER LIABILITIES:
Other liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
1996
-------------
<S> <C>
Accrued salaries, wages and payroll taxes $ 621,621
Accrued property taxes 22,998
Sales taxes payable 262,009
Accrued interest 197,195
Accrued bonuses 207,587
Contingent liability 455,521
Accrued rent 167,943
Other 247,025
----------
$2,181,899
==========
</TABLE>
7. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1996
----
<S> <C>
Working Capital Loan Commitment ("WCLC") provides for borrowings up
to $6,000,000 or 40% of net rental merchandise, whichever is lower.
The percentage of net rental merchandise on which borrowings are
limited reduces to 35% on July 1, 1996 and 30% on July 1, 1997. In
addition, maximum borrowings may not exceed $5,000,000 after July 1,
1997. Interest is charged at the rate of prime plus 1.5% per annum
(9.75% at September 30, 1996). Interest payments are due monthly
with the principal due on July 1, 1998. A commitment fee of .5% per
annum is charged on the daily average unused portion of the WCLC. A
prepayment fee is payable at a rate of 3% of the prepaid
</TABLE>
29
<PAGE> 30
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
<S> <C>
7. DEBT, Continued
amount for the period July 21, 1995 to July 20, 1996, 2% of the
prepaid amount for the period July 21, 1996 to July 20, 1997, and 1%
of the prepaid amount for the period July 21, 1997 to July 20, 1998.
The WCLC is collateralized by substantially all the assets of the
Company and restricts payments and distributions to shareholders
(See Note 16). $4,860,000
Revolving Loan Commitment ("RLC") provides for borrowings up to
$9,000,000. Borrowings are reduced by $281,250 on each of October 1,
1995, January 1, 1996, April 1, 1996, July 1, 1996, October 1, 1996,
January 1, 1997, April 1, 1997, July 1, 1997; by $421,875 on each of
October 1, 1997, January 1, 1998, April 1, 1998, July 1, 1998; and
by $562,500 on each of October 1, 1998, January 1, 1999, April 1,
1999, and July 1, 1999; and by $703,125 on each of October 1, 1999,
January 1, 2000, April 1, 2000 and July 1, 2000. Interest payments
are due monthly. Interest is charged at the rate of prime plus 1.5%
(9.75% at September 30, 1996). A commitment fee of 5% per annum is
charged on the daily average unused portion of the RLC. A prepayment
fee is payable at a rate of 3% of the prepaid amount for the period
July 21, 1995 to July 20, 1996, 2% of the prepaid amount for the
period July 21, 1996 to July 20, 1997, and 1% of the prepaid amount
for the period July 21, 1997 to July 20, 1998. The RLC is
collateralized by substantially all the assets of the Company and
restricts payments and distributions to shareholders and certain
acquisition activity (See Note 16). 734,250
Convertible Subordinated Notes due July 15, 2002 bear interest at
the rate of 10% per annum payable quarterly on October 15, January
15, April 15 and July 15. The notes are convertible into the
Company's common stock at a conversion price of $10.00 per share.
The Company has the right to mandatorily require the noteholders to
convert the notes to common stock if the market price exceeds $16.50
per share for 20 days during a 30 day consecutive period. In
addition, the note holders received detachable warrants to purchase
105,000 shares of the Company's common stock at $10.00 per share.
The stock purchase warrants expire on July 15, 2002. The subordinated
note agreement restricts the payment of dividends and requires the
maintenance of certain financial covenants related to fixed charge
coverage and consolidated net worth.
7,000,000
</TABLE>
30
<PAGE> 31
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
<S> <C>
7. DEBT, Continued
Equipment financing obligations due in monthly
installments; collateralized by the related equipment; interest
percentages ranging from 8.9% to 11.9%; original terms not
exceeding 5 years. 243,792
Notes payable due in monthly installments ranging from $500 to
$2,500 including interest at 18.0% through December, 2006. 141,033
-----------
$12,979,075
===========
</TABLE>
At September 30, 1996, aggregate annual maturities of long-term debt,
for the next five fiscal years ending September 30, 2001 and thereafter
are as follows:
<TABLE>
<S> <C>
1997 $ 888,712
1998 4,945,725
1999 24,741
2000 9,061
2001 10,384
Thereafter 7,100,452
-----------
$12,979,075
</TABLE> ===========
8. COMMITMENTS AND CONTINGENCIES:
The Company leases substantially all of its retail stores under
non-cancelable agreements generally for initial periods ranging from
three to five years. The store leases generally contain renewal options
for one or more periods of three to five years. Most leases require the
payment of taxes, insurance and maintenance costs by the Company. At
September 30, 1996, future minimum rental payments under non-cancelable
operating leases for the next five fiscal years ending September 30,
2001 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $2,746,642
1998 1,919,608
1999 1,265,550
2000 866,588
2001 547,052
Thereafter 443,983
----------
Total minimum payments required $7,789,423
==========
</TABLE>
Rent expense under operating leases for the years ended September
30, 1996 and 1995 was $2,508,545 and $1,429,972, respectively.
The Company is subject to legal proceedings and claims in the ordinary
course of its business that have not been finally adjudicated. Certain
of these cases have resulted in contingent liabilities ranging from
$500,000 to $2,530,000. The majority of such claims are, in the opinion
of management, covered by insurance policies and therefore should not
have a material effect on the results of operations or financial
position of the Company.
Additional claims exist in the range of $765,475 to $3,390,000 for
which management believes it has meritorious defenses but for which the
likelihood of an unfavorable outcome is currently not determinable. In
management's opinion, each of these claims will either be indemnified
by the former shareholders of MLC or covered by insurance policies and
therefore will not have a material effect on the results of operations
or financial condition of the Company.
In connection with the acquisitions discussed in Note 3, the purchase
price of the DLC acquisition may be adjusted upon the completion of
certain procedures. Such adjustments will be recorded to the cost of
the acquisition.
31
<PAGE> 32
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. REDEEMABLE PREFERRED STOCK:
On July 21, 1995, in connection with the MLC acquisition (See Note 3)
the Company issued 27,500 shares of Series A Redeemable Preferred Stock
("Preferred Stock"). In preference to shares of common stock, each
share is entitled to receive annual cumulative cash dividends in the
amount of $7 payable in quarterly installments on the first day of
January, April, July and October. During 1996 the Company declared and
paid dividends totalling $147,150. At September 30, 1996, dividends in
arrears totaled $19,792. In the event of liquidation the holders of the
preferred stock are entitled to an amount of $100 per share plus all
accrued and unpaid dividends. Holders of the Preferred Stock have no
voting rights; however, there are certain exceptions including the
right to eight votes per share if the Company fails to pay dividends
for two quarters.
The Company must redeem all outstanding Preferred Stock on June 30,
2006 at a redemption price of $100 per share plus any accrued or unpaid
dividends. The Company has the right to redeem the Preferred Stock at
any time at the rate of $100 per share plus any accrued or unpaid
dividends. The Company also entered into option agreements with the
holders of the Preferred Stock which provide the holders with mandatory
redemption rights. As discussed in Note 16, the Company exercised the
redemption rights for the remaining preferred stock outstanding after
September, 30, 1996.
During 1996 the following redemptions of the Series A Preferred Stock
were made: $429,400 in January, 1996, $67,700 in February, 1996, and
$1,132,200 in April, 1996.
10. INCOME TAXES:
The Company's income tax expense consists of the following components:
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Current expense:
Federal $1,291,972 $312,611
State and local 407,600 70,521
---------- --------
1,699,572 383,132
---------- --------
Deferred expense:
Federal 527,950 48,289
State and local 153,540 14,019
---------- --------
681,490 62,308
---------- --------
Income tax expense $2,381,062 $445,440
========== ========
</TABLE>
A reconciliation of the income tax expense compared with the amount at
the U.S. statutory tax rate of 34% is shown below:
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Tax provision at U.S. statutory rate $1,777,647 $494,431
State and local income taxes,
net of federal benefit 370,352 55,796
Amortization of goodwill 280,702 99,035
Adjustment to tax basis of depreciable
assets -- (209,364)
Other (47,639) 5,542
----------- --------
Income tax expense $2,381,062 $445,440
========== ========
</TABLE>
32
<PAGE> 33
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES, Continued
At September 30, 1996, the components of the net deferred tax asset are
as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Rental merchandise $1,053,184
Property and equipment 346,692
Operating loss carry forwards 342,556
Amortization of goodwill, loan fees
and severance payments (291,182)
Other 22,272
----------
Net deferred tax asset $1,473,522
==========
</TABLE>
11. RELATED PARTY TRANSACTIONS:
On May 21, 1996, the Company was paid in full for a loan made to a
principal shareholder. The loan carried an annual interest rate of 7.6%
and the balance including accrued interest as of May 21, 1996 was
$311,310. The loan was satisfied by the surrender to the Company of
10,800 shares of Common Stock valued at $15.00 per share, with the
balance paid in cash.
The Company leases six locations from a principal shareholder or a
company controlled by a principal shareholder. The Company paid
$238,634 and $217,162 in rent during the years ended September 30, 1996
and 1995 related to these leases, respectively. The leases have an
average remaining lives of one year and require the Company to pay real
estate taxes.
The Company was in possession of land and building lots acquired from
Erie Business Management Corporation ("EBMC"), a corporation controlled
by a principal shareholder of the Company. The Company obtained the right
to require EBMC repurchase any or all of the remaining land and building
lots during a period of 30 days commencing May 31, 1996. Upon exercise of
this "put" right, EBMC would have the option of paying the purchase price
in cash, marketable securities (including Common Stock of the Company) or
a combination of both. On June 4, 1996, the Company exercised its right
to "put" the land and building lots to EBMC. The total amount due from
EBMC was $946,450, comprised of the land and building lots, carrying
costs, accrued interest and the difference between the dividend paid in
1993 to the principal shareholder and any profit recognized by the
Company on any sales of the land or building lots prior to the exercise
of the "put" option. The repurchase was satisfied in full by a
combination of cash, Common Stock of the Company, the surrender for
cancellation of 52,500 stock options held by the principal shareholder
and the conveyance to the Company of a building and related mortgage
owned by the principal shareholder, in which the Company had a 15 year
capital lease. There was no gain or loss recorded by the Company as a
result of its exercise of the "put".
The Company has entered into employment contracts with certain
directors and executive officers. The agreements are for a three year
term commencing October 1, 1995. Payment terms for the years
ending September 30, 1998 are $395,000 and $400,000, respectively.
The Company paid a brokerage fee of $170,000, and issued 37,500 warrants
exercisable at the rate of $10 per share for a five year period ending
September 1, 2000 to a company in which a director of Rent-Way is a
shareholder. The fee was incurred in connection with the acquisition of
McKenzie Leasing Corporation (See Note 3).
In connection with the acquisition of DAMSL (See Note 3) the Company
entered into an employment contract, consulting agreements and
non-compete agreements with the former shareholders of DAMSL. The
employment agreement has payment terms of $172,666, $134,677 and
$162,667 for the three year period ending in May 1996. The payment
terms for the consulting and non-compete agreements are $165,428,
$151,428, $275,428, $255,428, $295,428, $267,428 and $319,428 for 1994
and the six following years. Expenses related to the above agreements
are amortized on a straight-line basis over the terms of the agreements
and aggregated $296,185 and $312,763 for the years ended September 30,
1996 and 1995, respectively.
33
<PAGE> 34
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
11. RELATED PARTY TRANSACTIONS, Continued
In connection with the acquisition of MLC (See Note 3), the Company
entered into consulting and non-compete agreements with McKenzie
Development Corporation ("MDC"), an affiliate of MLC and the principal
shareholders of MDC, the former owners of MLC. The consulting and
non-compete agreements are for seven years and have payment terms of
$1,250,000 on July 21, 1995 and $200,000 per year for each of the
following seven years. Expenses related to the consulting and
non-compete agreements are amortized on a straight-line basis over the
term of the agreements and amounted to $378,571 and $63,095 for the
years ended September 30, 1996 and 1995, respectively.
In connection with the acquisition of DLC (See Note 3), the Company
entered into non-compete agreements with the former owners of DLC. The
agreements are for two and three years respectively and are amortized on
a straight line basis over the term of the agreements. Amortization
expense for the two agreements for the year ended September 30, 1996 was
$20,837.
12. COMMON SHARES:
The Company's Board of Directors declared a three-for-two stock split
in the form of a 50% stock dividend to shareholders of record on August
4, 1995, payable on August 18, 1995. All references in the financial
statements to number of shares, per share amounts, stock option data
and market prices of the Company's common stock reflect the stock split.
13. STOCK OPTIONS:
In June 1992, the Board of Directors of the Company adopted, and the
shareholders have approved, the Rent-Way, Inc. Stock Option Plan of
1992 (the "1992 Plan") which authorizes the issuance of up to 600,000
shares of common stock pursuant to stock options granted to officers,
directors, key employees, consultants, and advisors of the Company. The
option exercise price will be at least equal to the fair market value
of the Company's common stock on the grant date. The 1992 Plan will
expire in June 2002 unless earlier terminated by the Board of
Directors. The authorized number of shares, the exercise price of
outstanding options and the number of shares under option are subject
to appropriate adjustment for stock dividends, stock splits, reverse
stock splits, recapitalizations and similar transactions. The 1992 Plan
is administered by the Compensation Committee of the Board of Directors
who select the optionees and determine the terms and provisions of each
option grant within the parameters set forth in the 1992 Plan.
The 1995 Stock Option Plan (the "1995 Plan") authorizes the issuance of
up to 400,000 shares of Common Stock pursuant to stock options granted
to officers, directors and key employees of the Company. The 1995 Plan
does not provide for stock appreciation rights. The 1995 Plan is
administered by the Compensation Committee of the Board of Directors and
contains terms and provisions substantially identical to those
contained in the 1992 Plan.
The following is a summary of activity (as adjusted to reflect the 50%
stock dividend-See Note 12) of the Company's stock options during the
years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
AVERAGE
PRICE
STOCK OPTIONS SHARES PER SHARE
------------- ------ ---------
<S> <C> <C>
September 30, 1994 489,975 $3.95
Granted 463,061 8.12
Exercised (17,268) 4.71
Forfeited (37,733) 4.82
--------
September 30, 1995 898,035 6.05
Granted 156,000 9.18
Exercised (52,300) 6.56
Forfeited (56,325) 2.62
--------
September 30, 1996 945,410 $6.74
======= =====
</TABLE>
34
<PAGE> 35
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. STOCK OPTIONS, Continued
At September 30, 1996, stock options representing 710,558 shares are
exercisable at prices ranging from $2.33 to $15.13 per share. As a
result of cashless exercise provisions, the 52,300 options exercised
during 1996 resulted in 49,025 additional shares outstanding.
In October 1995 the Financial Accounting Standards Board issued SFAS No.
123 - "Accounting for Stock-Based Compensation" effective for
transactions entered into after December 15, 1995. The Company intends
on adopting this standards disclosure only provisions in fiscal 1996.
Management does not believe the adoption of this standard will have a
significant impact on the financial statements of the Company.
14. STOCK PURCHASE WARRANTS:
During October, November and December 1992, the Company issued warrants
to purchase up to 112,500 shares of common stock at $4.67 per share.
The warrants are exercisable at any time for a period of five years
from their respective issue dates and are subject to anti-dilution
provisions providing for appropriate adjustment in the event of any
reclassification, stock dividend, stock split, or similar transaction,
and stock issuances below the warrant exercise price. The agreements
will expire five years from the respective dates on which the warrants
were issued, subject to earlier termination in certain circumstances.
Upon the closing of the Company's initial public offering in August
1993 the underwriters received warrants to purchase 105,000 shares of
common stock at a price of $6.77 per share exercisable for a period of
four years commencing one year from the date of the offering.
In July, 1995, the Company issued warrants to purchase 105,000 shares of
common stock at $10.00 per share. The warrants are exercisable at any
time for a period of seven years from their issue dates and are subject
to anti-dilution provisions providing for appropriate adjustment in the
event of any reclassification, stock dividend, stock split, or similar
transactions, and stock issuances below the warrant exercise price.
In September 1995, the Company issued warrants to purchase 37,500 shares
of common stock at $10.00 per share. The warrants are exercisable at
any time for a period of five years from their issue dates and are
subject to anti-dilution provisions providing for appropriate adjustment
in the event of any reclassification, stock dividend, stock split, or
similar transactions, and stock issuances below the warrant exercise
price.
At September 30, 1996, the following warrants (as adjusted for the 50%
stock dividend - See Note 12) were outstanding:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
DATE OF SHARES PRICE DATE
---- --------- ----- ----
<S> <C> <C> <C>
October 1992 37,500 $4.67 October 1997
November 1992 37,500 $4.67 November 1997
December 1992 37,500 $4.67 December 1997
August 1993 105,000 $6.77 August 1998
July 1995 105,000 $10.00 July 2002
September 1995 37,500 $10.00 September 2000
</TABLE>
15. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1994, the Company established the Rent-Way, Inc.
401(k) Retirement Savings Plan (the "Plan"). Participation in this Plan
is available to all Company employees who meet the necessary service
criteria as defined in the Plan Agreement. Company contributions to the
Plan are based on a percentage of the employees contributions, as
determined by the Board of Directors, and amounted to $148,509 (in the
form of the Company's Common Stock) for the year ended
September 30, 1996 and $32,126 (in cash) for the year ended
September 30, 1995.
35
<PAGE> 36
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
16. SUBSEQUENT EVENTS:
In October 1996, 66,212 of the shares placed into escrow in connection
with MLC acquisition were returned to the Company and 158,788 were
released to the former MLC shareholders. The allocation of the shares
released from escrow was based on a daily average market price of $13.09
per share for the 20 trading days preceding October 1, 1996.
On November 22, 1996 the Company entered into a new secured revolving
credit facility with a syndicate of banks led by National City Bank. The
new agreement provides for an aggregate maximum commitment of $40.0
million and expires in 1999. Of the $40.0 million, $7.0 million will be
used to refinance the existing senior indebtedness with First Source
Financial LLP.
On November 26, 1996 the Company redeemed the remaining balance of the
Series A Redeemable Preferred Stock issued in connection with the MLC
acquisition. On September 30, 1996 the Company had 11,207 outstanding
shares with a value of $100 per share. These shares were redeemed at a
25% discount for $840,525 with an additional $12,639 paid in accrued
dividends.
36
<PAGE> 37
RENT-WAY, INC.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
There has been no change of accountants or reporting disagreements on any
matter of accounting principle, practice, financial statement disclosure or
auditing scope or procedure within the Company's two most recent fiscal years
or the current interim period.
37
<PAGE> 38
RENT-WAY, INC.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning Directors, Executive Officers, Promoters and Control
Persons; and Compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference from the Company's definitive proxy statement for the
annual meeting of shareholders to be held on March 12, 1997, which is being
sent to shareholders on or about January 21, 1997.
ITEM 10 EXECUTIVE COMPENSATION
Information concerning executive compensation and management transactions is
incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of shareholders to be held on March 12, 1997, which is
being sent to shareholders on or about January 21, 1997.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning Certain Beneficial Owners and Management is incorporated
herein by reference from the Company's definitive proxy statement for the
annual meeting of shareholders to be held on March 12, 1997, which is being
sent to shareholders on or about January 21, 1997.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions is
incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of shareholders to be held on March 12, 1997, which is
being sent to shareholders on or about January 21, 1997.
38
<PAGE> 39
RENT-WAY, INC.
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following are filed as Exhibits to this Annual Report filed on
Form 10-KSB for the year ended September 30, 1996:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2-3 Agreement and Plan of Merger By and Among Rent-Way, Inc., McKenzie Leasing Corporation,
Steven A. McKenzie, Brenda J. McKenzie and others dated June 9, 1995.***
2-4 Escrow Agreement By and Among, Steven A. McKenzie, Brenda J. McKenzie, and others dated
July 21,1995
2-5 Stock Purchase Agreement between Rent-Way, Inc., Diamond Leasing Corporation, Kenneth H.
Moye and Lee Brady dated July 20, 1996.*****
3A Amended and Restated Articles of Incorporation of Registrant.*
3B By-Laws of Registrant, as amended.*
4-1 Shareholders' Agreement between Rent-Way, Inc., Marc W. Joseffer, Gerald A. Ryan and
William E. Morgenstern dated May 18, 1994.**
4A.1 Proposed form of Underwriters' Warrant.*
4-2 Shareholder's Agreement between Rent-Way, Inc., David A. Jones, Gerald A. Ryan and William
E. Morgenstern dated May 18, 1994.**
4-3 Shareholders' Agreement By and Among Rent-Way, Inc., Steven A. McKenzie, Brenda J. McKenzie
and others dated July 21, 1995.
4-4 Voting Agreement By and Among McKenzie Leasing Corporation, Steven A. McKenzie, Brenda J.
McKenzie and others dated July 21, 1995.
10-2 Secured Credit Agreement, dated July 21, 1995 Among First Source Financial LLP and
Rent-Way, Inc. and D.A.M.S.L. Corp.***
10-3 Subordinated Note Agreement dated July 15, 1995 among Massachusetts Mutual Life Insurance
Company and Affiliates, thereof and Rent-Way, Inc.***
10A Stock Option Plan of 1992.*
10B 1995 Stock Option Plan.****
10C Form of Non-Plan Stock Option Agreement.*
10E.2 Employment Agreement with Gerald A. Ryan dated October 1, 1995
10E.3 Employment Agreement with William E. Morgenstern dated October 1, 1995
10E.4 Employment Agreement with Jeffrey A. Conway dated October 1, 1995
10M Forms of Loan Agreement with certain lenders and related Warrant and Registration
Agreements and Warrant.*
10P Form of securityholder agreements between Gerald A. Ryan and certain investors.*
11 Statement regarding computation of earnings per share.
23 Consent of experts and counsel
27 Financial Data Schedule.
</TABLE>
* The information required by this Exhibit is included by
reference to the identical exhibit in the Company's prior
Registration Statement on form SB-2 as filed with the Securities
and Exchange Commission on August 10, 1993
(Registration #33-55562-NY).
** The information required by this Exhibit is included by
reference to the identical exhibit in the Company's filing on
Form 8-K with the Securities and Exchange Commission on
May 27, 1994.
*** The information required by this Exhibit is included by
reference to the identical exhibit in the Company's filing on
Form 8-K with the Securities and Exchange Commission on
August 15, 1995.
**** Previously filed as of January 5, 1996, pursuant to the
Company's Registration Statement on Form SB-2
(No. 333-116).
***** The information required by this Exhibit is included by
reference to the identical exhibit in the Company's filing on
Form 8-K with the Securities and Exchange Commission on
August 8, 1996
39
<PAGE> 40
RENT-WAY, INC.
PART IV - Continued
(b) Reports on Form 8-K:
(1) On June 3, 1996, the Company filed a Form 8-K disclosing the
consummation of the acquisition of Family Rentals and
Rent-America.
(2) On August 8, 1996, the Company filed a Form 8-K disclosing
that it had consummated the Stock Purchase Agreement to
acquire Diamond Leasing Corporation.
40
<PAGE> 41
RENT-WAY, INC.
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.
Registrant: RENT-WAY, INC.
/S/ WILLIAM E. MORGENSTERN /S/ JEFFREY A. CONWAY
- ----------------------------- --------------------------
By: William E. Morgenstern By: Jeffrey A. Conway
President and Chief Vice President and Chief
Executive Office Financial Officer
DECEMBER 30, 1996 DECEMBER 30, 1996
- ----------------------------- --------------------------
Date Date
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 and in the capacities and on the dates indicated.
/S/ GERALD A. RYAN DECEMBER 30, 1996
- ----------------------------- --------------------------
Gerald A. Ryan Date
Chairman of the Board of Directors
/S/ WILLIAM E. MORGENSTERN DECEMBER 30, 1996
- ----------------------------- --------------------------
William E. Morgenstern Date
Director
/S/ MARC W. JOSEFFER DECEMBER 30, 1996
- ----------------------------- --------------------------
Marc W. Joseffer Date
Director
- ----------------------------- --------------------------
Robert Fagenson Date
Director
/S/ WILLIAM LERNER DECEMBER 30, 1996
- ----------------------------- --------------------------
William Lerner Date
Secretary and Director
- ----------------------------- --------------------------
Vince Carrino Date
Director
41
<PAGE> 1
RENT-WAY, INC.
EXHIBIT 11
<TABLE>
<CAPTION>
Computation of Earnings Per Share
- ---------------------------------
1996 1995
---- ----
<S> <C> <C>
PRIMARY
Net income $2,847,312 $1,008,770
Less cumulative preferred stock dividends (128,969) (37,973)
---------- ----------
Net income for primary earnings per share $2,718,343 $ 970,797
========== ==========
Weighted average number of common shares
outstanding during the year 5,314,532 3,855,934
Add - common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of stock options, stock warrants and
escrowed shares 649,787 544,132
---------- ----------
Weighted average number of shares used in
calculation of primary income per share 5,964,319 4,400,066
========== ==========
Primary earnings per common share $ .46 $ .22
========== ==========
FULLY DILUTED
Net income for primary earnings per share $2,718,343 $ 970,797
========== ==========
Weighted average number of shares used in
calculating primary income per share 5,314,532 3,855,934
Add - incremental shares representing:
Shares issuable upon exercise of stock options,
stock warrants and escrowed shares
included in primary calculation above 649,787 544,133
Shares issuable upon exercise of stock options
and warrants based on year end market prices 106,126 100,220
---------- ----------
Weighted average number of shares used in
calculation of fully diluted income
per share 6,070,445 4,500,287
========== ==========
Fully diluted earnings per common share $ .45 $ .22
========== ==========
</TABLE>
42
<PAGE> 1
EXHIBIT 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statements of
Rent-Way, Inc. on Form S-8 (File Numbers, 0-22026 and 333-13355) of our report
dated December 23, 1996, on our audits of the financial statements of Rent-Way,
Inc. as of September 30, 1996.
Coopers & Lybrand L.L.P.
Cleveland, Ohio
December 30, 1996
43
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000893046
<NAME> RENT-WAY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 179,425
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 17,862,420
<CURRENT-ASSETS> 0
<PP&E> 4,616,362
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,973,738
<CURRENT-LIABILITIES> 0
<BONDS> 12,979,075
1,120,700
0
<COMMON> 27,793,225
<OTHER-SE> 2,925,452
<TOTAL-LIABILITY-AND-EQUITY> 49,973,738
<SALES> 43,890,708
<TOTAL-REVENUES> 51,171,337
<CGS> 13,229,173
<TOTAL-COSTS> 44,520,276
<OTHER-EXPENSES> 1,422,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,162,384
<INCOME-PRETAX> 5,228,374
<INCOME-TAX> 2,381,062
<INCOME-CONTINUING> 2,847,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,847,312
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
</TABLE>
