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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 0-22026
RENT-WAY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1407782
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
</TABLE>
ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
814-455-5378
(REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AS OF MARCH 31, 1998
Common Stock 10,884,410
</TABLE>
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RENT-WAY, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the three month period ended March 31, 1998, the Company generated record
revenues, operating income, and net income. The Company's total revenues
increased by 103.6% compared to the same three month period last year. Operating
income and net income increased by 109.8% and 138.2%, respectively, when
compared to the same three month period last year. The increase in revenue,
operating income and net income are primarily due to acquisitions made during
fiscal 1998, improved same store operating profits, and a reduction in certain
expenses as a percentage of revenue resulting from economies of scale. In
addition, the Company experienced an 8% increase in same store revenue compared
to the same period last year.
On March 23, 1998, the Company signed a contract to purchase a new building to
be used as a corporate headquarters. The total purchase price of the building
was $3,650,000 with $1,650,000 of the purchase price deferred, without interest
charges, for one year. The closing of the purchase is subject to normal due
diligence and other contingent items.
On February 5, 1998, the company amended its existing senior credit facility
with a syndicate of banks led by National City Bank of Pennsylvania. The amended
facility (the "Facility"), co-led by National City Bank of Pennsylvania, acting
as syndication and administrative agent, and NationsBank, N.A. as documentation
agent, provides for loans and letters of credit up to $120.0 million.
On February 5, 1998, the Company completed the acquisition of Champion Rentals,
Inc. ("Champion"), a privately-owned rental purchase chain with 145 locations in
the southeast United States. The Company paid approximately $69.7 million in
cash plus the assumption of $17.4 million in liabilities. Pursuant to the terms
of the purchase agreement, $2.5 million of the purchase price was placed in an
escrow account as a source of payment for seller's breaches of representations
and warranties and final purchase price adjustments. The acquisition of Champion
was funded with borrowings drawn on the Company's existing senior credit
facility (see note 5). The Champion acquisition substantially increases market
penetration in several of the Company's established areas of operation, while
opening the door to new markets such as Alabama, Arkansas, Georgia, Louisiana,
North Carolina and Tennessee. Of Champion Rentals' 145 stores, 25 were opened in
1997.
On January 7, 1998, the Company signed an asset purchase agreement and acquired
Ace TV Rentals, ("ACE"), a privately-owned 50 store rental-purchase chain with
locations in South Carolina and California. The Company paid approximately $25.2
million in cash plus the assumption of certain liabilities, with $750,000 placed
in an escrow account as a source of payment for seller's breaches of
representations and warranties and final purchase price adjustments. ACE, with
annualized revenues of approximately $22 million, operates 46 stores in South
Carolina and four stores in California, two new markets for the Company.
On December 2, 1997, the Company completed a public offering consisting of
2,500,000 shares of common stock offered by the Company and 87,250 shares of
common stock offered by certain selling shareholders. In addition, on December
30, 1997, the underwriters exercised a 30 day option to purchase 388,088 shares
of common stock to cover over-allotments. The shares were offered at a price of
$17.25 per share. The Company received net proceeds (less underwriters discount
and selling expenses) of $46,982,586 including the underwriters exercise of the
over-allotment option. The Company used these proceeds to repay outstanding
borrowings of $23.0 million under the Company's credit agreement with a
syndicate of banks led by National City Bank of Pennsylvania (See Note 5). The
remaining proceeds have been invested in short-term commercial paper and
repurchase agreements.
On October 8, 1997, the Company exercised its option to convert $7,000,000 in
subordinated convertible notes, ("the Notes") held by Massachusetts Mutual Life
Insurance Company. The Company was able to exercise this option when the market
price of the Company's common stock remained above $16.50 per share for a twenty
consecutive date period. The Notes converted into 704,223 shares of the
Company's common stock, at a conversion price of $9.94 per share.
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Management is actively seeking merger and acquisition candidates with financial
and geographic profiles consistent with the Company's growth objectives.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's unaudited Statements of Income, expressed as a percentage of
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
Rental revenue......................................... 89.1% 88.0% 88.7% 87.7%
Other revenue.......................................... 10.9 12.0 11.3 12.3
----- ----- ----- -----
Total revenues...................................... 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise..................................... 22.2 23.1 22.6 23.3
Property and equipment................................. 1.4 1.4 1.6 1.5
Amortization of goodwill............................... 2.3 2.1 2.3 2.0
----- ----- ----- -----
Total depreciation and amortization................. 25.9 26.6 26.5 26.8
Salaries and wages....................................... 24.8 25.1 25.3 26.3
Advertising.............................................. 5.3 5.0 5.1 5.1
Occupancy................................................ 6.7 7.1 6.8 6.9
Other operating expenses................................. 22.1 21.4 20.8 20.6
----- ----- ----- -----
Total costs and operating expenses.................. 84.8 85.2 84.5 85.7
----- ----- ----- -----
Operating income......................................... 15.2 14.8 15.5 14.3
Interest expense......................................... (3.4) (3.9) (3.3) (3.3)
Other income............................................. -- (0.1) 0.2 --
----- ----- ----- -----
Income before income taxes and extraordinary item........ 11.8 10.8 12.4 11.0
Income tax expense....................................... 5.1 5.1 5.3 5.1
----- ----- ----- -----
Income before extraordinary item......................... 6.7 5.7 7.1 5.9
Extraordinary item....................................... -- -- -- (0.7)
----- ----- ----- -----
Net income............................................... 6.7% 5.7% 7.1% 5.2%
----- ----- ----- -----
Gain on redemption of preferred stock.................... -- -- -- 0.7
----- ----- ----- -----
Earnings applicable to common shares..................... 6.7% 5.7% 7.1% 5.9%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, total revenues increased by $23.4 million (103.6%) to $45.9
million from $22.5 million. The increase was principally due to increased same
store revenues and the inclusion of the results for the stores acquired during
fiscal 1998. The stores acquired in the Champion acquisition accounted for $12.3
million (52.6%) of the increase, the stores acquired in the ACE acquisition
accounted for $5.6 million (23.9%) of the increase, the stores acquired in the
Rental King acquisition accounted for $2.8 million (12.0%) of the increase, the
stores acquired in other fiscal 1997 acquisitions accounted for $1.3 million
(5.5%) of the increase, and the Company's same stores accounted for $1.4 million
(6.0%) of the increase. Other revenue increased by $2.3 million (85.4%) to $5.0
million from $2.7 million principally due to stores acquired in 1997.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, total costs and operating expenses increased to $38.9 million
from $19.2 million primarily as a result of the costs and operating expenses
associated with stores acquired in fiscal 1997 and 1998, but decreased to 84.8%
from 85.2% of total
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revenue. This decrease of 0.4% resulted primarily from a 0.7% decrease in
depreciation and amortization as a percentage of total revenues a 0.3% decrease
in salaries and wages as a percentage of total revenues, and a 0.4% decrease in
occupancy expense as a percentage of total revenues offset by a 0.7% increase in
other operating expenses and a 0.3% increase in advertising. Depreciation
expense related to rental merchandise increased by $5.0 million to $10.2 million
from $5.2 million, but decreased 0.9% as a percentage of total revenues due to
increases in weekly rental rates, lower purchase costs of rental merchandise due
to increased volume, and improvements in the realization of potential
collectible rental revenue. Amortization of goodwill increased by $0.6 million
primarily because of the increase in goodwill related to the stores acquired in
fiscal 1997 and 1998. Amortization of goodwill was 2.3% and 2.1% of total
revenues for the three months ended March 31, 1998 and 1997, respectively.
Salaries and wages increased to $11.4 million from $5.7 million, but decreased
0.3% as a percentage of total revenues to 24.8% from 25.1%. The $5.7 million
increase is principally due to the addition of 198 new locations and an overall
strengthening of corporate personnel. Advertising expense increased $1.3 million
or 0.3% as a percentage of total revenues to $2.4 million from $1.1 million
principally due to the addition of the stores acquired in fiscal 1997 and 1998.
Occupancy expense increased to $3.1 million from $1.6 million, but decreased
0.4% as a percentage of total revenues to 6.7% from 7.1%. The $1.5 million
increase is primarily due to the addition of the stores acquired in fiscal 1997
and 1998. Other operating expenses increased by $5.3 million to $10.1 million
from $4.8 million, or 0.7% as a percentage of total revenues mainly due to the
addition of the stores acquired in fiscal 1997 and 1998.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, operating income increased by $3.7 million (109.8%) to $7.0
million from $3.3 million, and increased to 15.2% from 14.8% of total revenues.
The improvement in operating income was principally due to the stores acquired
in 1997 and 1998 and the factors discussed above.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, interest expense increased $0.7 million to $1.6 million from
$0.9 million due to an increase in debt of $90.8 million from $20.1 million to
$110.9 million. This increase is principally the result of the purchase of
Champion on February 5, 1998 and the extinguishment of its existing debt with
$81.0 million in funds drawn on the Company's senior credit facility.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, income tax expense increased to $2.3 million from $1.1 million
because the Company generated greater taxable income. The Company's income tax
rate of 43.0% is higher than the statutory tax rates because amortization
expense related to goodwill incurred in connection with certain acquisitions is
not deductible for purposes of computing income tax.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997, net income increased by $1.8 million (138.2%) to $3.1 million
from $1.3 million. The increase was due to the factors discussed above.
For the six months ended March 31, 1997 compared to the six months ended March
31, 1996, total revenues increased by $34.4 million (89.9%) to $72.6 million
from $38.2 million. The increase was principally due to increased same store
revenues and the inclusion of the stores acquired in fiscal 1997 acquisitions,
the ACE acquisition, and the Champion acquisition. Stores acquired in fiscal
1997 accounted for $14.8 million (43.0%) of the increase, stores acquired in the
ACE acquisition accounted for $5.6 million (16.3%) of the increase, stores
acquired in the Champion acquisition accounted for $12.3 million (35.8%) of the
increase and the Company's same stores accounted for $1.7 million (4.9%) of the
increase. Other revenue increased $3.5 million (74.5%) to $8.2 million from $4.7
million principally due to stores acquired in 1997 and 1998.
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, total costs and operating expenses increased to $61.3 million from
$32.7 million primarily as a result of the costs and operating expenses
associated with stores acquired in 1997 and 1998, but decreased to 84.5% from
85.7% of total revenues. This decrease of 1.2% resulted primarily from a 0.3%
decrease in depreciation and amortization as a percentage of total revenues, a
1.0% decrease in salaries and wages as a percentage of total revenues, and a
0.1% decrease in occupancy expense as a percentage of total revenues.
Depreciation expense related to rental merchandise increased by $7.5 million to
$16.4 million from $8.9 million, but decreased by 0.7% as a percentage of total
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revenues primarily due to increases in weekly rental rates, lower purchase costs
of rental merchandise due to increasing volume, and improvements in the
realization of potential collectible rental revenue. Amortization of goodwill
increased by $0.9 million primarily because of the increase in goodwill related
to stores acquired in 1997 and 1998. Salaries and wages increased to $18.4
million from $10.0 million, but decreased 1.0% as a percentage of total revenues
to 25.3% from 26.3%. The $8.4 million increase is principally due to the
addition of 198 new locations, up grades in the regional manager position, and
an overall strengthening of corporate personnel. Advertising expense increased
$1.7 million to $3.7 million from $2.0 million principally due to the addition
of the stores acquired in 1997 and 1998. Advertising expense as a percentage of
total revenues remained constant at 5.1%. Occupancy expense increased $2.3
million to $4.9 million from $2.6 million mainly due to the addition of the
stores acquired in 1997 and 1998. Other operating expenses increased $7.2
million to $15.1 million from $7.9 million, or 0.2% as a percentage of total
revenues principally due to the addition of the stores acquired in 1997 and
1998.
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, operating income increased by $5.8 million (106.0%) to $11.3 million
from $5.5 million, and increased to 15.5% from 14.3% of total revenues. The
improvement in operating income was principally due to the stores acquired in
1997 and 1998 and the factors discussed above.
For the six months ended March 31, 1998 compared to the six months ended 1997,
interest expense increased by $1.2 million to $2.4 million from $1.2 million due
to an increase in debt of $62.7 million from $48.2 million to $110.9 million.
This increase is the result of the purchase of Champion on February 5, 1998 and
the extinguishment of its existing debt with $81.0 million in funds drawn on the
Company's senior credit facility.
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, income tax expense increased to $3.9 million from $2.0 million because
the Company generated greater taxable income. The Company is accruing income tax
expense based on an effective tax rate of 43.0%, 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.
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, net income increased by $3.1 million (159.2%) to $5.1 million from
$2.0 million. The increase was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On February 5, 1998, the company amended its existing senior credit facility
with a syndicate of banks led by National City Bank of Pennsylvania. The amended
facility (the "Facility"), co-led by National City Bank of Pennsylvania, acting
as syndication and administrative agent, and NationsBank, N.A. as documentation
agent, provides for loans and letters of credit up to $120.0 million.
Of the $120.0 million available under the Facility, approximately $7.0 million
was outstanding at the date of the amendment and approximately $81.0 million was
used for the acquisition of Champion and the extinguishment of its existing debt
(see Note 4). The Facility expires on February 5, 2001. The Facility requires
the Company to comply with certain covenants, including financial covenants.
These covenants generally restrict the Company from incurring additional
indebtedness, granting additional liens on its assets, making dividends or
distributions, disposing of assets other than in the ordinary course, issuing
additional stock, making additional acquisitions or making capital expenditures,
in each case subject to certain exceptions. The Company is also required to
comply with the following financial covenants: maintain a maximum leverage ratio
with respect to total funded debt and senior funded debt of 3.75 to 1 and 3.25
to 1, respectively, dropping to 3.5 to 1 and 3.0 to 1, respectively, for
quarters ended on and after September 30, 1998; maintain a minimum interest
coverage ratio of 3.5 to 1; and maintain a minimum net worth of $90 million.
On October 8, 1997, the Company exercised its right to convert $7,000,000 in
subordinated convertible notes, ("the Notes") held by Massachusetts Mutual Life
Insurance Company. The indebture allowed the Company to force conversion when
the market price of the Company's common stock exceeded $16.50 per share for a
twenty
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consecutive day period. The Notes converted into 704,223 shares of the Company's
common stock, at a conversion price of $9.94 per share.
On December 2, 1997, the Company completed a public offering of 2,587,250
shares of Common Stock. Of the 2,587,250 shares of Common Stock offered,
2,500,000 shares were offered by the Company and 87,250 were offered by certain
selling shareholders. The Company also granted the underwriters an option to
purchase an additional 388,088 shares of Common Stock to cover over-allotments.
On December 30, 1997, the Underwriters exercised this option. The shares were
offered at a price of $17.25 per share. The Company received net proceeds (less
underwriters discount and selling expenses) of $46,982,586 including the
underwriters exercise of the over-allotment option. The Company used these
proceeds to repay outstanding borrowings of $23.0 million under the Company's
credit agreement with a syndicate of banks led by National City Bank of
Pennsylvania (see note 5).
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, the Company's net cash used in operating activities increased to $1.2
million from $0.7 million. This increase was principally due to a $13.1 million
increase in rental merchandise purchases, a $1.9 million increase in prepaid
expenses and a $0.4 million increase in prepaid consulting fees offset by a $9.2
million increase in non-cash amortization and depreciation, a $2.6 million
increase in accounts payable and a $3.1 million increase in net income. These
increases in resulted primarily from the stores acquired in 1998.
For the six months ended March 31, 1998 compared to the six months ended March
31, 1997, the Company's net cash used in investing activities increased by $77.1
million. This increase is primarily due to the acquisitions of Champion Rentals
and ACE Rentals.
For the six months ended March 31, 1998, compared to the six months ended March
31, 1997, the Company's net cash provided by financing activities increased to
$101.1 million from $25.6 million. The increase in net cash provided by
financing activities was principally due to funds received from the Company's
public stock offering and funds drawn on the Company's line of credit in
conjunction with the Champion acquisition, (see note 3).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. The Company's policy is to manage interest rate
risk by utilizing interest rate swap agreements to convert a portion of the
floating interest rate debt to fixed interest rates. The company does not enter
into derivative financial instruments for trading or speculative purposes. The
interest rate swap agreements are entered into with major financial institutions
thereby minimizing the risk of credit loss.
The following table presents information about the Company's market sensitive
financial instruments. The table illustrates the principle and notional amounts,
as well as the date of maturity, actual and weighted average pay and receive
rates for all significant financial and derivative financial instruments in
effect as of March 31, 1998:
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<TABLE>
<CAPTION>
EXPECTED MATURITY DATES
(DOLLARS IN MILLIONS): 1998 1999 2001 2002 2003 THEREAFTER
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<S> <C> <C> <C> <C> <C> <C>
Debt:
Existing credit facility Base
rate option.................. $ 4.3
- Actual floating rate, receive
rate......................... 9.0%
Euro-rate option............... $ 83.0
- Actual floating rate, receive
rate......................... 5.625%
Convertible Subordinated
Debentures................... $20.0
- Actual fixed interest rate... 7.0%
Interest rate swap agreements:
National City Bank, notional
amount....................... $ 30.0
- Actual fixed interest rate,
pay rate..................... 5.965%
NationsBank, notional amount... $ 20.0
- Actual fixed interest rate,
pay rate..................... 5.760%
Manufacturers and Traders
Trust,....................... $ 10.0
notional amount Actual
fixed interest rate,
payrate................. 5.925%
</TABLE>
INFLATION
During the three months ended March 31, 1998, the cost of rental merchandise,
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 commensurably higher rental for its
merchandise. This trend is expected to continue in the foreseeable future.
OTHER MATTERS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits" effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 132 will have no impact on the
Company's financial statements.
CAUTIONARY STATEMENT
This Report on Form 10-Q 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. 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENT-WAY, INC.
Dated: November 5, 1998
By: /s/ JEFFREY A. CONWAY
-----------------------------------
Jeffrey A. Conway
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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