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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-22026
RENT-WAY, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1407782
(State of incorporation) (I.R.S. Employer Identification
No.)
One RentWay Place, Erie, Pennsylvania 16505
(Address of principal executive offices)
814-455-5378
(Issuer's telephone number)
Securities registered pursuant to Section 12(b)
of the Exchange Act:
Common Stock, no par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes [X] No
Check if there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-K contained herein, 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-K or any amendment to this
Form 10-K. [ ]
Based on the closing sales price on December 23, 1998 the aggregate market
value of stock held by non-affiliates of the issuer was $487,306,054.
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 23 , 1998 Common Stock 21,125,887
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Documents Incorporated by Reference Portions of the registrant's definitive
proxy statement for the annual meeting of shareholders to be held March 10, 1999
are incorporated by reference into Part III of this Form 10-K
<PAGE>
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, as of December 15, 1998, operates 865 stores that
provide quality brand name merchandise in 34 states. 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 and had completed its initial
public offering. As of September 30, 1998, principally as a result of
acquisitions, the Company was operating 405 stores in 25 states. On December 10,
1998, the Company completed its merger with Home Choice Holdings, Inc. ("Home
Choice"). Home Choice was one of the largest operators in the rental-purchase
industry with 459 stores in 26 states primarily in the Southeast, Midwest and
Southwest portions of the United States. In connection with the merger, the
Company issued 10,024,821 million shares to the stockholders of Home Choice
based on an exchange ratio of 0.588 Rent-Way shares for each Home Choice share.
As a result of the merger, the Company is the second largest company in the
rental purchase industry operating 865 stores in 34 states.
The Company's principal executive offices are located at One RentWay Place,
Erie, Pennsylvania 16505, and its telephone number is (814) 455-5378.
Fiscal 1998 Acquisitions
On January 7, 1998, the Company completed the asset purchase of South
Carolina Rentals, Inc., Paradise Valley Holdings, Inc., and L & B Rents, Inc.,
(collectively, "Ace Rentals"). The consideration paid in exchange for the assets
was approximately $25.3 million in cash and the assumption of approximately $0.5
million in liabilities. Ace Rentals operated 46 rental-purchase stores in South
Carolina and 4 stores in California and had annual revenues of approximately
$22.0 million.
On February 5, 1998, the Company acquired all of the stock of Champion
Rentals, Inc. ("Champion") for a purchase price of approximately $69.1 million.
Champion operated a chain of 145 rental-purchase stores located in Alabama,
Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, Ohio, South
Carolina, Tennessee, and Virginia with annual revenues of approximately $75.0
million.
On July 21, 1998, the Company acquired the stock of Fast Rentals, Inc.
("Fast Rentals") for a purchase price of $2.0 million. Fast operated a chain of
eight rental-purchase stores in Alabama and Georgia.
On September 10, 1998, the Company completed the asset purchase of Cari
Rentals, Inc. ("Cari"). The purchase price was approximately $7.3 million. Cari
operated a 23-store rental purchase chain with stores located in Iowa, Missouri,
Nebraska, and South Dakota and had annual revenues of approximately $7.7
million.
The Rental-Purchase Industry
Begun in the mid-to-late 1960s, the rental-purchase business is a relatively
new segment of the retail industry offering an alternative to traditional retail
installment sales. The rental-purchase industry provides brand name merchandise
to customers 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 rental- purchase operator.
The Association of Progressive Rental Organizations ("APRO"), the industry's
trade association, estimated that at the end of 1998 the U.S. rental-purchase
industry comprised approximately 7,500 stores providing 6.4 million products to
2.9 million households. 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 had gross revenues of $4.4 billion in
1998. The U.S. rental-purchase industry is highly fragmented, but is
experiencing increasing consolidation. Based on APRO estimates, management
believes that the ten largest industry participants account for approximately
50% of total industry stores and that the majority of the industry consists of
operations with fewer than 20 stores. See "--Strategy", "--Competition."
Management believes that the rental-purchase industry is experiencing
increasing consolidation due to, among other factors, the recognition by smaller
operators of the increased operating efficiencies and better competitive
position achievable by combining with larger operators, greater availability of
capital for larger operators, and the willingness of older operators to sell as
a means of resolving business succession issues. Management believes that this
trend toward consolidation of operations in the industry presents an opportunity
for well-capitalized rental-purchase operators to continue to acquire additional
stores on favorable terms.
Strategy
Management believes that the Company's continued success depends 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 areas and in
geographic regions not currently served by the Company. At present, the majority
of that expansion is expected to be accomplished through acquisitions. The
Company believes that acquisitions can effectively increase the Company's market
share 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
operating expenses.
The Company continually reviews acquisition opportunities, and management
believes that a number of acquisition opportunities currently exist. The Company
presently has no plans, proposals, arrangements or understandings with respect
to significant acquisitions. 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 acquisitions in other areas.
The Company has not established formal criteria for potential acquisitions.
Generally, however, the Company seeks to acquire rental-purchase businesses that
operate profitably and are located in geographic markets that complement the
Company's existing stores or that the Company views as growth markets for the
rental-purchase industry. The Company seeks to acquire such businesses at
purchase prices that will permit the Company a prompt return on its investment
in the form of increased earnings. The Company has no formal policy with respect
to acquisitions with related entities. To date, no related party acquisitions
have been considered nor does the Company anticipate considering such
acquisitions in the future. Management believes that senior management's ability
and experience provides the Company with a competitive advantage in the
evaluation and consummation of acquisition opportunities.
Following consummation of an acquisition, the Company appoints a dedicated
team to oversee and monitor the integration of the acquired stores, including
determining staffing, store merchandise and facility needs, budgets and
performance goals. All acquired stores are promptly evaluated and, if necessary,
remodeled. Management seeks to integrate acquired stores and the management
information system of such stores within one to three months following an
acquisition.
In addition, the Company has formed a dedicated team to identify and open
new stores in locations that complement the Company's existing stores.
Customer-Focused Philosophy
Management believes that through the continued adherence to its "Welcome,
Wanted and Important" business philosophy, it should be able to increase its new
and repeat customer base, and thus the number of units it has on rent, thereby
increasing revenues and net income. The "Welcome, Wanted and Important"
philosophy 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 and well-stocked appearance of its stores and by providing
a high level of customer service (such as the institution of a toll-free
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. Services provided by the Company to the
customer include home delivery, installations, ordinary maintenance and repair
services and pick-up 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. As part of the
"Welcome, Wanted and Important" philosophy, store managers are empowered,
encouraged and trained to make decisions regarding store operations subject only
to certain Company-wide operating guidelines and general policies. Personnel of
acquired stores are also evaluated for their ability to operate in accordance
with the Company's customer focused philosophy.
<PAGE>
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 the
merchandise available from its competitors on competitive terms. To this end,
the Company attempts to maintain a broad selection of products while emphasizing
better quality, higher priced merchandise. The Company intends to continue
expanding its offerings of better quality, higher priced products in all product
areas. Management believes that previous offerings of better quality, 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. 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 by piece and by product
category and the number and frequency of past due accounts and other collection
activity. In addition, physical inventories are regularly 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. Management believes the Company's management information
system enhances its ability to monitor and affect the operating performance of
existing stores and to integrate and improve the performance of newly acquired
stores.
Results-Oriented Compensation
Management believes that an important reason for the Company's positive
financial performance and growth has been the structure of its management
compensation system, which provides incentives for regional and store managers
to increase both store revenues and operating profits. A significant portion of
the Company's regional and store managers' total compensation is dependent upon
store performance. As further incentive, the Company grants managers stock
options. Management believes that the Company's emphasis on incentive-based
compensation is instrumental in the Company's ability to attract, retain and
motivate its regional and store managers.
Manager Training and Empowerment
Management believes that well-trained and empowered store managers are
important to the Company's efforts to maximize individual store performance. The
Company employs three 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
requires its managers to attend, at Company expense, leadership and management
programs offered by leading management and organization experts. The Company
empowers its store managers by permitting them to make significant decisions
involving store operations including personnel, merchandise, and collection
decisions.
Operations
Company Stores
<TABLE>
<CAPTION>
As of December 15, 1998, the Company operates 865 stores in 34 states as
follows:
Number of Number of Number of
Location Stores Location Stores Location Stores
---------------- ------ ---------------- ------ ---------------- ------
<S> <C> <C> <C>
Texas................ 137 Pennsylvania...... 25 Iowa............... 8
Florida.............. 103 Tennessee......... 25 West Virginia...... 8
Ohio................. 67 New York.......... 20 Nevada............. 7
South Carolina....... 64 Kentucky.......... 19 Oklahoma........... 7
Georgia.............. 42 Colorado.......... 13 New Mexico......... 5
Louisiana............ 42 Missouri.......... 13 California......... 4
North Carolina....... 39 Mississippi....... 12 Delaware........... 4
Arkansas............. 33 Nebraska.......... 12 Washington......... 4
Virginia............. 31 Illinois.......... 11 Utah............... 3
Indiana.............. 30 Maryland.......... 11 South Dakota....... 2
Michigan............. 28 Arizona........... 9 Idaho.............. 1
Alabama.............. 26
</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 display of 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 areas of a town or city that are readily accessible to low and
middle income consumers. The Company believes that within these areas 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. Generally, the Company refurbishes its
stores every two to three years.
Product Selection
The Company offers brand name home entertainment equipment (such as
television sets, VCRs, camcorders 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, JVC, Sharp and Panasonic brands in home entertainment equipment,
the Kenmore, Crosley and General Electric brands in major appliances and the
Ashley brand in furniture. 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, 1998, payments under rental-purchase
contracts for home entertainment products accounted for approximately 47.1%,
furniture for 26.3%, appliances for 22.6%, jewelry for 3.5% and other items for
0.5% of the Company's rental revenues. Customers may request either new
merchandise or previously rented merchandise. Weekly rentals currently range
from $4.99 to $59.99 for home entertainment equipment, from $1.99 to $49.99 for
furniture, from $3.99 to $36.99 for major appliances and from $1.99 to $34.99
for jewelry. 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.
Rental-Purchase Agreements
Merchandise is provided to customers under written rental-purchase
agreements that 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 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
rent merchandise on a week-to-week and, to a lesser extent, on a month-to-month
basis with rent 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 rent 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 typically
made in cash or by check or money order. The Company does not extend credit. See
"--Government Regulation."
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, 1998, 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 electronic products, such as camcorders and VCRs, generally being
rented for shorter periods, while appliances and furniture are generally rented
for longer periods. 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 greater 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, installation and pick-up 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. Repair
services are provided through in-house service technicians, independent
contractors or under factory warranties. The Company offers Rent-Way Plus, a
fee-based membership program that provides special loss and damage protection
and an additional one year of service protection on rental merchandise,
preferred treatment in the event of involuntary 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, 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. See "--Government
Regulation." 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. If an item on rent is not
returned or payment thereon is not received within 90 days of its due date, the
Company's policy is to charge off the item. Charge-offs due to lost or stolen
merchandise were approximately 2.6% and 3.0% of the Company's revenues for the
years ended September 30, 1998 and 1997, respectively. The charge-off rate for
chains with over 40 stores reporting to APRO in 1998 was 2.8%.
Management
The Company's stores are organized geographically with several levels of
management. At the individual store level, each store manager is responsible for
customer relations, deliveries and pickups, inventory management, staffing and
certain marketing efforts. A Company store normally employs one store manager,
one assistant manager, 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 regional manager, each of whom 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
directors of operations, located at the Company's headquarters, who monitor the
operations of their respective regions and, through the regional managers,
individual store performance. The directors of operations report to the Vice
President - Operations 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.
Management Information System
The Company believes that its proprietary management information system
provides it with a competitive advantage over many small rental-purchase
operations. The Company uses an integrated computerized management information
and control system to track each unit of merchandise and each rental-purchase
agreement. The Company's system also includes extensive management software and
report generating capabilities. 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, idle items, items on rent, delinquent accounts and other
account information. Management 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, senior management, regional managers and store
managers can closely monitor the productivity of stores under their supervision
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, and merchandise units in repair and customer transactions.
The Company has successfully integrated all of the stores acquired in fiscal
year 1998 into its management information system. The integration of the stores
acquired in the Home Choice merger is currently ongoing. While the Company
believes its management information system is adequate to meet its needs for the
foreseeable future, it continues to upgrade the system over time.
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 a list of products approved by
senior management. All purchase orders are executed through regional managers
and the Company's purchasing department to insure that inventory levels and mix
throughout the store regions are appropriate. 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 its existing relationships,
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
and, in certain markets, through television advertising and, to a lesser extent,
through radio and secondary print media advertisement. The Company also solicits
business by telephoning former and prospective customers. The Company has
recently begun dedicating an increasing percentage of its marketing dollars to
television advertising to build brand recognition in markets where it is
economically attractive to do so. The Company's print advertisements emphasize
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 revenue for the year ended September 30, 1998 was
4.8% as a percentage of total revenues. As the Company obtains new stores in its
existing markets, the advertising expenses of each store in the market can be
reduced by listing all stores in the same market-wide advertisement.
Competition
The rental-purchase industry is highly competitive. The Company competes
with other rental-purchase businesses and, to a lesser extent, with 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 that offer an installment sales program or
offer comparable products and prices. The Company's largest industry competitor,
Renter's Choice, is national in scope and has significantly greater financial
and operating resources and name recognition than does the Company.
Personnel
As of September 30, 1998, the Company had approximately 2,439 employees, of
whom 101 are located at the corporate office in Erie, Pennsylvania. None of the
Company's employees are represented by a labor union. Management believes its
relations with its employees are good.
Government Regulation
Forty-six states have enacted laws regulating or otherwise impacting the
rental-purchase transaction, including all of the states in which the Company's
stores are located. 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. No federal legislation has been
enacted regulating the rental-purchase transaction. The Company instructs its
managers in procedures required by applicable law 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 registered the "Rent-Way" service mark under the Lanham Act.
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 "RentWay - the Right
Way" and the related designs have also been registered by the Company. The
Company has also prepared applications to register the following service marks:
"RentWay. The Right Way. Right Away.", "Lifetime Reinstatement", and "We're
Changing the Way America Rents". In connection with the Home Choice merger, the
Company acquired the "Home Choice" service mark, which is registered under the
Lanham Act. Substantially all of the stores acquired in the Home Choice merger
will initially be operated under the Home Choice name.
Related Party Transactions
Although the Company has in the past and may in the future enter into
transactions with related parties, the Company has adopted no formal policies,
procedures or controls with respect to such transactions. Generally, however,
the Company requires that any transactions with related entities be on terms no
less favorable to the Company than would be available from an unrelated third
party.
<PAGE>
ITEM 2 DESCRIPTION OF PROPERTIES
The Company leases all of its stores under operating leases that generally
have terms of three to five years and require the Company to pay real estate
taxes, utilities and maintenance. 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 is in Erie, Pennsylvania and consists of
approximately 34,000 square feet. It was acquired in June 1998. The Company also
owns an office building in Erie, Pennsylvania, which is used for storage.
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 its acquisition of McKenzie Leasing Corporation in 1995, for which
it is being indemnified and held harmless. In addition, the Company has been
sued in an action brought 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 action 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.
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "RWY." The Company began trading on the New York Stock Exchange
October 8, 1998. The Company's common stock was previously traded on the NASDAQ
National Market under the symbol "RWAY". The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Common Stock
as reported on the NASDAQ National Market.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1998 1997
---------------------- -------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter. $20.50 $15.75 $ 12.63 $ 8.25
Second Quarter 24.75 17.31 12.81 8.75
Third Quarter. 33.63 25.13 14.75 8.63
Fourth Quarter 32.00 22.00 21.31 12.88
</TABLE>
Immediately prior to the Home Choice merger, there were 127 record
shareholders of the Common Stock.
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 facility prohibits the payment of dividends.
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data for the years ended September 30,
1994, 1995, 1996, 1997 and 1998 were derived from the Company's financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. The
historical financial data are qualified in their entirety by, and should be read
in conjunction with, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements of the Company and the
notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
Year Ended September 30,
1994(1) 1995(2) 1996(3) 1997(4) 1998(5)
Statement of income data:
Revenues:
<S> <C> <C> <C> <C> <C>
Rental revenue............................ $ 12,111 $ 24,080 $ 43,891 $77,498 $157,714
Other revenue............................. 1,897 4,114 7,280 10,948 19,613
-------- -------- -------- ------- ----------
Total revenues.......................... 14,008 28,194 51,171 88,446 177,327
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise...................... 4,073 8,312 13,229 20,314 39,236
Property and equipment.................. 331 525 775 1,530 2,894
Amortization of goodwill................ 108 334 875 1,926 4,334
Salaries and wages........................ 4,024 6,909 13,101 22,810 45,182
Advertising............................... 540 1,259 2,123 3,899 8,481
Occupancy................................. 1,006 1,888 3,269 5,988 11,938
Other operating expenses.................. 3,256 6,387 11,148 18,193 36,606
-------- -------- -------- ------- ----------
Total costs and operating expenses...... 13,338 25,614 44,520 74,660 148,671
-------- -------- -------- ------- ---------
Operating income........................ 670 2,580 6,651 13,786 28,656
Interest expense.......................... (542) (1,162) (1,493) (3,130) (6,507)
Other income (expense), net............... 89 36 70 (342)
-------- -------- -------- -------
(351)
Income before income taxes and
extraordinary 217 1,454 5,228 10,314 21,798
item.................................
Income tax expense (benefit).............. -- 445 2,381 4,629 9,221
-------- -------- -------- ------- ----------
Income before extraordinary item........ 217 1,009 2,847 5,685 12,577
Extraordinary item........................ -- -- -- (269) --
-------- -------- -------- ------- --------
Net income.............................. 217 1,009 2,847 5,416 12,577
Preferred stock (dividend) /gain on
redemption............................ -- (38) (129) 280 --
-------- -------- -------- ------- --------
Earnings applicable to common shares.... $ 217 $ 971 $ 2,718 $ 5,696 $12,577
======== ======== ======== ======= ========
Earnings per common share--Diluted........ $ 0.06 $ 0.22 $ 0.46 $ 0.75 $ 1.08
======== ======== ======== ======== ==========
Balance sheet data (at end of period):
Rental merchandise, net................. $ 7,068 $ 12,593 $ 17,862 $35,132 $ 77,953
Goodwill, net........................... 4,336 14,893 21,867 43,447 136,399
Total assets............................ 15,129 36,155 49,974 96,288 250,577
Debt.................................... 7,255 19,151 12,979 48,156 119,042
Total liabilities....................... 9,167 22,545 18,134 55,331 138,286
Redeemable preferred stock.............. -- 2,750 1,121 -- --
Shareholders' equity.................... 5,962 10,860 30,719 40,957 112,292
- ----------
</TABLE>
(1) During the year ended September 30, 1994, the Company acquired 20
rental-purchase stores through its acquisition of D.A.M.S.L. Corp on May 18,
1994, which affects the comparability of the historical financial
information for the periods presented.
(2) During the year ended September 30, 1995, the Company acquired 50
rental-purchase stores, 46 through the acquisition of McKenzie Leasing
Corporation on July 21, 1995, which affects the comparability of the
historical financial information for the periods presented.
(3) During the year ended September 30, 1996, the Company acquired 32
rental-purchase stores in four separate transactions, which affects the
comparability of the historical financial information for the periods
presented.
(4) During the year ended September 30, 1997, the Company acquired 92
rental-purchase stores, 15 of which were acquired on January 2, 1997 from
Bill Coleman TV, Inc. and 70 of which were acquired on February 6, 1997
from Perry Electronics, Inc. d/b/a Rental King, which affects the
comparability of the historical financial information for the periods
presented.
(5) During the year ended September 30, 1998, the Company acquired 226
rental-purchase stores, 50 of which were acquired on January 7, 1998 from
Ace Rentals, 145 of which were acquired on February 5, 1998 from Champion,
eight of which were acquired on July 21, 1998 from Fast Rentals, and 23 of
which were acquired on September 10, 1998 from Cari, which affects the
comparability of the historical financial information for the periods
presented.
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
As of September 30, 1998, the Company operated 405 rental-purchase stores
located in 25 states. Primarily through acquisitions, the number of stores
operated by the Company has increased from 19 as of September 30, 1993 to 405 as
of September 30, 1998. The following table shows the number of stores opened,
acquired and/or combined during this six-year period.
<TABLE>
<CAPTION>
Years Ended September 30,
Stores 1993 1994 1995 1996 1997 1998
-------------------------- ------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Open at Beginning of 17 19 40 83 108 184
Period....................
Opened.................... 2 3 -- -- -- 13
Acquired.................. -- 20 50 32 92 226
Closed or Combined........ -- 2 7 16
------ ------ -------- ----- -----
7 18
- --
Open at End of Period..... 19 40 83 108 184
====== ====== ====== ===== =====
405
</TABLE>
During the year ended September 30, 1998, the Company acquired 226 stores
(the "1998 Acquisitions"). On January 7, 1998, the Company acquired 46 stores in
South Carolina and 4 stores in California from Ace Rentals (the "Ace Rentals
Acquisition"). On February 5, 1998, the Company acquired 145 stores located in
Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, Ohio,
South Carolina, Tennessee, and Virginia from Champion (the "Champion
Acquisition"). In July 1998, the Company acquired eight rental purchase stores
in Alabama and Georgia from Fast Rentals (the "Fast Rentals Acquisition"). In
September 1998, the Company acquired 23 stores located in Iowa, Missouri,
Nebraska, and South Dakota from Cari Rentals (the "Cari Rentals Acquisition").
In connection with these acquisitions, as with all of its acquisitions, the
Company implemented 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 store employees.
On December 10, 1998, the Company completed the merger with Home Choice
Holdings, Inc. ("Home Choice") and now operates 865 stores in 34 states. The
Company is currently the second largest company in the rental-purchase industry.
The Company has begun integrating the stores acquired from Home Choice into the
Company's operations, which integration expected to be completed the second
quarter of fiscal 1999. The Company has incurred approximately $10 million of
expenses in the first quarter of fiscal 1999 relating to the Home Choice merger.
Although the Company's goal is to realize cost savings and synergies and to
improve performance of the Home Choice stores, there can be no assurance that
such goal will be realized or that the Company will not incur additional
expenses in connection with the integration of the Home Choice stores.
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, 1998, 1997 and 1996 as a percentage of total revenues.
<TABLE>
<CAPTION>
Years ended
September 30,
1998 1997 1996
--------- --------- -------
Revenues:.........................
<S> <C> <C> <C>
Rental revenue.................. 88.9% 87.6% 85.8%
Other revenue................... 11.1 12.4 14.2
-------- -------- --------
Total revenues............... 100.0 100.0 100.0
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise........... 22.1 23.0 25.9
Property and equipment....... 1.6 1.7 1.5
Amortization of goodwill..... 2.5 2.2 1.7
Salaries and wages.............. 25.5 25.8 25.6
Advertising..................... 4.8 4.4 4.1
Occupancy....................... 6.7 6.8 6.4
Other operating expense......... 20.6 20.6 21.8
-------- -------- --------
Total costs and operating 83.8 84.5 87.0
-------- -------- --------
expenses..........................
Operating income................ 16.2 15.5 13.0
Interest expense................ (3.7) (3.5) (2.9)
Other income (expenses), net.... (0.2) (0.4) 0.1
-------- -------- --------
Income before income taxes
and extraordinary item.. 12.3 11.6 10.2
Income tax expense.............. (5.2) (5.2) (4.6)
-------- -------- --------
Income before extraordinary 7.1 6.4 5.6
item..............................
Extraordinary item.............. -- (0.3) --
------ -------- -------
Net income................... 7.1% 6.1% 5.6%
======== ======== ========
</TABLE>
<PAGE>
Comparison of Years Ended September 30, 1998 and 1997
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, total revenues increased to $177.3 million from $88.4
million, or 100.0%. The increase was due to the inclusion of a full year's
results for the stores acquired by the Company in fiscal 1997 (the "1997
Acquisitions"), a partial year's operations for the stores acquired in the 1998
Acquisitions, a partial year's operations for the stores opened in fiscal 1998,
and increased same store revenues. The stores acquired in the Champion
Acquisition, consummated on February 5, 1998, accounted for $51.1 million, or
57.5%, of the increase, the stores acquired in the Ace Rentals Acquisition,
consummated on January 7, 1998, accounted for $15.9 million, or 17.9%, of the
increase, the stores acquired in the 1997 Acquisitions accounted for $17.8
million, or 20.0%, of the increase, the Company's same stores accounted for $2.0
million, or 2.3%, of the increase, other 1998 Acquisitions accounted for $1.1
million, or 1.2%, of the increase and stores opened in fiscal 1998 accounted for
$1.0 million, or 1.1% of the increase.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, total costs and operating expenses increased to $148.7
million from $74.7 million principally as a result of costs and operating
expenses associated with the 1997 Acquisitions, the Ace Rentals Acquisition, and
the Champion Acquisition, but decreased to 83.8% from 84.5% of total revenues.
This resulted principally from a decrease in depreciation expense as a
percentage of total revenues and salaries and wages as a percentage of total
revenues. Depreciation expense related to rental merchandise increased to $39.2
million from $20.3 million, but decreased to 22.1% from 23.0% 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
collectible rent. Amortization of goodwill increased to 2.5% from 2.2% of total
revenues principally because of the increase in goodwill related to the Ace
Rentals Acquisition and the Champion Acquisition. Salaries and wages increased
by $22.4 million to $45.2 million from $22.8 million principally due to the
addition of 318 new stores and additions to corporate personnel. The 318 new
stores from recent acquisitions produced additional store and regional manager
payroll costs of $16.1 million and $1.8 million, respectively. The additions to
corporate personnel resulted in additional salaries and wages of $3.7 million.
Same store payroll increased $0.3 million. New store openings produced
additional payroll expense of $0.5 million. Salaries and wages as a percentage
of total revenues decreased 0.3% to 25.5% from 25.8%. Advertising expense
increased to $8.5 million from $3.9 million principally due to the addition of
stores associated with the Ace Rentals Acquisition and the Champion Acquisition.
Advertising expense increased to 4.8% from 4.4% of total revenues. Occupancy
expense increased to $11.9 million from $6.0 million principally due to the
addition of stores associated with the Ace Rentals Acquisition and the Champion
Acquisition, but decreased to 6.7% from 6.8% of total revenues. Other operating
expenses increased to $36.6 million from $18.2 million primarily due to the
addition of the stores acquired in the Ace Rentals Acquisition and the Champion
Acquisition. Other operating expense as a percentage of total revenue remained
constant at 20.6%.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, operating income increased to $28.7 million from $13.8
million, or 107.9%, and increased to 16.2% from 15.5% of total revenues. The
$14.9 million increase in operating income and the 0.7% increase in operating
income as a percentage of total revenues occurred principally because of the
successful integration and conversion of the stores acquired in the 1997
Acquisitions, the Ace Rentals Acquisition, and the Champion Acquisition, the
increase in same-store revenues, and the other factors discussed above.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, interest expense increased to $6.5 million from $3.1
million, and increased to 3.7% from 3.5% of total revenues due to an increase in
debt to $119.0 million from $48.2 million. This increase is principally the
result of the Champion Acquisition and the extinguishment of its existing debt
with $81.0 million in funds drawn on the Company's senior credit facility.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, income tax expense increased to $9.2 million from $4.6
million principally because the Company generated greater taxable income. The
Company is recording income tax expense based on an effective tax rate of 42.3%,
which is higher than the statutory tax rates, principally because amortization
expense related to goodwill incurred in connection with certain acquisitions is
not deductible for tax purposes.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, net income increased to $12.6 million from $5.4 million, or
132.2%. The increase, which resulted in net income increasing to 7.1% from 6.1%
of total revenues, was due to the factors discussed above.
Comparison of Years Ended September 30, 1997 and 1996
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, total revenues increased to $88.4 million from $51.2
million, or 72.8%. The increase was due to the inclusion of a full year's
results for the stores acquired by the Company in fiscal 1996 (the "1996
Acquisitions"), a partial year's operations for the stores acquired in the 1997
Acquisitions, and increased same store revenues. The stores acquired in the
Company's acquisition of Perry Electronics, Inc. d/b/a/ Rental King (the "Rental
King Acquisition"), consummated on February 6, 1997, accounted for $16.8
million, or 45.2%, of the increase, the stores acquired in the Company's
acquisition of Bill Coleman TV, Inc. (the "Coleman Acquisition"), consummated on
January 2, 1997, accounted for $6.1 million, or 16.4%, of the increase, the
stores acquired in the 1996 Acquisitions accounted for $11.2 million, or 30.1%,
of the increase, the Company's same stores accounted for $2.4 million, or 6.5%,
of the increase, and other 1997 Acquisitions accounted for $0.7 million, or
1.8%, of the increase.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, total costs and operating expenses increased to $74.7
million from $44.5 million principally as a result of costs and operating
expenses associated with the 1996 Acquisitions, the Coleman Acquisition, and the
Rental King Acquisition, but decreased to 84.5% from 87.0% of total revenues.
This resulted principally from a decrease in depreciation expense as a
percentage of total revenues and other operating expenses as a percentage of
total revenues. Depreciation expense related to rental merchandise increased to
$20.3 million from $13.2 million, but decreased to 23.0% from 25.9% 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
collectible rent. Amortization of goodwill increased to 2.2% from 1.7% of total
revenues principally because of the increase in goodwill related to the Coleman
Acquisition and the Rental King Acquisition. Salaries and wages increased to
$22.8 million from $13.1 million principally due to the addition of the store
personnel associated with the 1996 Acquisitions, the Coleman Acquisition, the
Rental King Acquisition, and the addition of several key management personnel in
the Company's operations, human resource, marketing, accounting, and information
systems departments. Salaries and wages were 25.8% and 25.6% of total revenues
for the years ended September 30, 1997 and 1996, respectively. Advertising
expense increased to $3.9 million from $2.1 million principally due to the
addition of stores associated with the Coleman Acquisition and the Rental King
Acquisition. Advertising expense increased to 4.4% from 4.1% of total revenues.
Occupancy expense increased to $6.0 million from $3.3 million principally due to
the addition of stores associated with the Coleman Acquisition and the Rental
King Acquisition, and increased to 6.8% from 6.4% of total revenues. Other
operating expenses increased to $18.2 million from $11.1 million principally due
to the addition of the stores acquired in the Coleman Acquisition and the Rental
King Acquisition, but decreased to 20.6% from 21.8% of total revenues.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, operating income increased to $13.8 million from $6.7
million, or 107.3%, and increased to 15.5% from 13.0% of total revenues. The
$7.1 million increase in operating income and the 2.5% increase in operating
income as a percentage of total revenues occurred principally because of the
successful integration and conversion of the stores acquired in the 1996
Acquisitions, the Coleman Acquisition in January 1997, and the Rental King
Acquisition in February 1997, the increase in same-store revenues, and the other
factors discussed above.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, interest expense increased to $3.1 million from $1.5
million, and increased to 3.5% from 2.9% of total revenues principally due to
borrowings drawn on the Company's credit facility in connection with the Coleman
Acquisition and the issuance by the Company of $20.0 million of 7% Convertible
Subordinated Debentures due 2007 (the "Debentures") in connection with the
Rental King Acquisition.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, income tax expense increased to $4.6 million from $2.4
million principally because the Company generated greater taxable income and
because of the decrease in the Company's net deferred tax asset for the year
ended September 30, 1997. The decrease in the deferred tax asset of $0.4 million
was comprised of the deferred tax provision of $1.2 million, offset by $0.8
million of deferred tax asset recorded in connection with the Coleman
Acquisition. Sufficient taxable income exists in the carryback periods to
recognize the deferred tax asset, accordingly, no valuation allowance has been
recognized. The Company is recording income tax expense based on an effective
tax rate of 44.9%, which is higher than the statutory tax rates, principally
because amortization expense related to goodwill incurred in connection with
certain acquisitions is not deductible for tax purposes.
For the year ended September 30, 1997 as compared to the year ended
September 30, 1996, net income increased to $5.4 million from $2.8 million, or
90.2%. The increase, which resulted in net income increasing to 6.1% from 5.6%
of total revenues, was due to the factors discussed above.
Liquidity and Capital Resources
On December 10, 1998 the Company entered into a new collateralized term loan
and revolving credit facility (the "New Facility") with a syndicate of banks led
by National City Bank of Pennsylvania ("National City Bank"), NationsBank, N.A.
("NationsBank") and Harris Trust and Savings Bank ("Harris Trust") providing for
term loans of approximately $115.0 million and revolving loans and letters of
credit of up to approximately $92.0 million (subject to an initial availability
of $87.0 million and, thereafter, to formula-based availability), with the
ability to add other banks to the syndicate during the first 90 days of the New
Facility to increase the term loans to $125.0 million and the maximum amount of
the revolving loans and letters of credit to $100.0 million. The syndicate
consists of eight banks, with National City Bank, NationsBank and Harris Trust
each committed for a ratable share of 16.86746%, Star Bank committed for a
ratable share of 12.04819%, LaSalle National Bank committed for a ratable share
of 10.84337%, each of Sun Trust Bank, Central Florida, National Association and
Manufacturers Traders Trust Company committed for a ratable share of 9.63855%
and Mercantile Bank of St. Louis, N.A. committed for a ratable share of
7.22891%. Of the approximately $202.0 million initially available under the New
Facility, approximately $111.0 million was used to refinance previously existing
senior indebtedness of the Company and $71.0 million was used to pay
indebtedness of Home Choice assumed in connection with the Home Choice merger.
The New 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. Under
the New Facility, the Company is restricted from incurring additional
indebtedness except additional purchase money indebtedness not exceeding
$100,000, subordinated intercompany indebtedness, indebtedness incurred in
connection with certain acquisitions permitted under the New Facility, certain
capitalized leases or purchases of fixed assets with payments that do not exceed
$10 million in the aggregate in any fiscal year, and any other lease, which is
not a capitalized lease, or the rental of any real or personal property of
another entity with payments that do not (other than for leases of retail store
sites and motor vehicles) exceed $250,000 in the aggregate in any fiscal year.
The Company is also required to comply with the following financial covenants:
maintain a maximum leverage ratio with respect to total funded debt of 4.0 to
1.0 (decreasing periodically until reaching 2.5 to 1.0 by July 1, 2002),
maintain a minimum interest coverage ratio of 3.0 to 1.0 (increasing
periodically until reaching 5.0 to 1.0 by April 1, 2002), maintain a minimum net
worth of $217 million (increasing with earnings and acquisitions) and maintain a
minimum fixed charge coverage ratio of 1.2 to 1.0.
On June 1, 1998, the Company purchased a 34,000 square foot building to be
used as its new corporate headquarters. The purchase price of the building was
$3.7 million. The Company paid $2.0 million in cash at the time of closing, and
delivered a one year, non-interest bearing secured promissory note for the
remainder of the purchase price.
On February 5, 1998, the Company amended its then existing senior credit
facility with a syndicate of banks led by National City Bank of Pennsylvania.
The amended facility (the "Amended Facility"), co-led by National City Bank of
Pennsylvania, acting as syndication and administrative agent, and NationsBank,
N.A. as documentation agent, provided for loans and letters of credit up to
$120.0 million. Of the $120.0 million available under the Amended 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 to Financial Statements).
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 $47.0 million. The Company used
these proceeds to repay outstanding borrowings of $23.0 million under the
Company's then existing credit agreement (see note 7 to Financial Statements).
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 governing the Notes allowed the Company to
force conversion when the market price of the Company's common stock exceeded
$16.50 per share for a twenty 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.
For the year ended September 30, 1998, the Company's net cash provided by
operating activities increased to $4.1 million from $0.7 million for the year
ended September 30, 1997. This increase was primarily due to a $22.8 million
increase in non-cash depreciation and amortization, a $7.2 million increase in
net income, and a $3.4 million increase in deferred income taxes offset by a
$29.9 million increase in rental merchandise purchases and a $1.8 million
increase in prepaid expenses. The increase in depreciation and amortization and
rental merchandise resulted primarily from the Ace Rentals Acquisition and the
Champion Acquisition, which significantly increased the size of the Company.
For the year ended September 30, 1998 as compared to the year ended
September 30, 1997, the Company's net cash used in investing activities
increased to $119.0 million from $30.6 million. The increase in net cash used in
investing activities was principally due to the 1998 Acquisitions and the
remodeling costs and computer hardware costs incurred in connection with the Ace
Rentals Acquisition and the Champion Acquisition.
For the year ended September 30, 1998, as compared to the year ended
September 30, 1997, the Company's net cash provided by financing activities
increased to $115.5 million from $30.4 million. This 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 credit facility
in connection with the Champion Acquisition (see Note 4 to Financial
Statements). 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,
Preferred Stock and Convertible Debt. During fiscal 1998, the Company's
acquisitions were financed by a combination of cash generated by the Company's
public stock offering and borrowings under the Amended Facility.
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.
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 September 30, 1998:
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Dates (1)
(dollars in millions): 1998 1999 2001 2002 2003 Thereafter
-------------------------------------- ---------------------- --------------- ----------
Debt:
<S> <C> <C>
Existing credit facility, Base $17.3
rate option...........................
--Actual floating rate............... 8.750%
Existing credit facility, Euro-rate option.. $80.0
--Actual floating rate............... 7.594%
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 5.965%
rate..................................
--Actual variable interest rate
receive rate, (based on 3 month 5.594%
LIBOR)..............................
NationsBank, notional amount........ $20.0
--Actual fixed interest rate pay 5.760%
rate..................................
--Actual variable interest rate
receive rate, (based on 3 month 5.594%
LIBOR)..............................
Manufacturers and Traders Trust,
notional amount..................... $10.0
--Actual fixed interest rate pay 5.925%
rate..................................
--Actual variable interest rate
receive rate, (based on 3 month 5.594%
LIBOR)..............................
(1) reflects the terms of the current financing
</TABLE>
Inflation
During the year ended September 30, 1998, 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 Company's 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
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" effective for fiscal years beginning after December 15,
1997. The Company adopted this standard in fiscal 1998. The adoption of SFAS No.
129 had no impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
has had no items of other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. This Statement requires that public business
enterprises report certain information about operating segments in annual and
interim financial statements. It also requires that public business enterprises
report certain information about their products and services, the geographic
areas in which they operate, and their major customers. The Company is currently
evaluating the provisions of this statement.
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is currently
evaluating the provisions of this statement.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998 with earlier application permitted, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company is currently evaluating the provisions of this
statement.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998 with
earlier application permitted, provides guidance on financial reporting of start
up costs and organization costs. The Company is currently evaluating the
provisions of this statement.
YEAR 2000 ISSUES
The Company utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its operations. During
fiscal 1998 the Company began to implement plans to ensure those systems
continue to meet its internal and external requirements. All the Company's
remote locations operate on an internally developed point of sale system. This
system utilizes a peer to peer, Windows 95 local area network. Communications
between remote locations and the corporate office are handled via e-mail through
the internet. After completion of testing, the Company has determined that its
point of sale system is Year 2000 compliant. As a result of the Company's
growth, a decision was made to upgrade information systems at the corporate
office. The installation and implementation of a Year 2000 compliant PeopleSoft
software package will be complete by January 1, 1999. This package encompasses
all accounting functions, payroll, human resources and benefit administration
requirements. The system will operate in an n-tier environment on a Windows NT
platform. The cost of all hardware, software, training and implementation costs
is expected to be approximately $1.5 million, the majority of which was incurred
in fiscal 1998. In addition to the PeopleSoft package, the Company is
implementing a Year 2000 compliant J. Driscoll Package for cash management. This
package will operate on the same platform as the PeopleSoft package.
The Company has developed questionnaires and contacted key suppliers
regarding their Year 2000 compliance to determine any impact on its operations.
In general, the suppliers have developed or are in the process of developing
plans to address Year 2000 issues. The Company will continue to monitor and
evaluate the progress of its suppliers on this critical matter. The Company is
also reviewing its non-information technology systems to determine the extent of
any changes that may be necessary and believes that there will be minimal
changes required for compliance.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
CAUTIONARY STATEMENT
This Report on Form 10-K and the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's Annual Report to Shareholders, any Report on Form 10-Q
or Current Report on 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.
<PAGE>
<TABLE>
<CAPTION>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
<S> <C>
Index to Financial Statements......................................... 17
Report of Independent Accountants................................... 18
Financial Statements:
Balance Sheets, September 30, 1998 and 1997....................... 19
Statements of Income, Years Ended September 30, 1998, 1997 and 20
1996..............................................................
Statements of Shareholders' Equity, Years Ended September 30,
1998, 1997 and 1996............................................... 21
Statements of Cash Flows, Years Ended September 30, 1998, 1997 22
and 1996..........................................................
Notes to Financial Statements..................................... 23
</TABLE>
<PAGE>
RENT-WAY, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Rent-Way, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of income, shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Rent-Way, Inc. at September 30,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Cleveland, Ohio
December 10, 1998
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
BALANCE SHEETS
September 30,
1998 1997
------------ ------------
Assets
<S> <C> <C>
Cash.................................................... $ 1,175,378 $ 598,664
Prepaid expenses........................................ 4,777,638 1,452,265
Income tax refund....................................... 168,669 --
Rental merchandise, net................................. 77,953,003 35,132,316
Deferred income taxes................................... -- 1,071,927
Property and equipment, net............................. 19,637,086 8,518,222
Goodwill, net of accumulated amortization of
$7,583,499 and$3,249,684, respectively................. 136,399,925 43,446,776
Deferred financing costs, net of accumulated
amortization of $571,375 and $231,225, respectively.... 1,574,675 1,475,088
Non-compete agreements and prepaid consulting fees,net.. 3,059,529 1,743,514
Other assets............................................ 5,831,516 2,849,166
------------ -----------
$250,577,419 $96,287,938
============ ===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable........................................ $ 10,582,419 $ 3,067,294
Other liabilities....................................... 5,141,683 3,411,605
Income taxes payable.................................... -- 695,743
Deferred income taxes................................... 3,519,585 --
Debt.................................................... 119,042,134 48,156,426
------------ -----------
138,285,821 55,331,068
Commitments and contingencies (Note 9).................. -- --
Shareholders' equity:
Preferred stock, without par value; 1,000,000 shares
authorized;no shares issued and outstanding at
September 30,1998 and 1997, respectively............... -- --
Common stock, without par value; 20,000,000 shares
authorized; 11,049,569 and 7,059,451 shares issued and
outstanding at September 30, 1998 and 1997,
respectively........................................... 91,516,893 32,759,595
Retained earnings....................................... 20,774,705 8,197,275
------------ -----------
Total shareholders' equity............................ 112,291,598 40,956,870
------------ -----------
$250,577,419 $96,287,938
============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
STATEMENTS OF INCOME
For the Years Ended September 30,
1998 1997 1996
-------------- -------------- -------------
Revenues:
<S> <C> <C> <C>
Rental revenue.............................. $ 157,714,104 $77,498,328 $43,890,708
Other revenue............................... 19,612,726 10,947,965 7,280,629
------------- ----------- -----------
Total revenues............................ 177,326,830 88,446,293 51,171,337
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise........................ 39,236,049 20,314,482 13,229,173
Property and equipment.................... 2,893,365 1,530,133 775,169
Amortization of goodwill.................. 4,333,816 1,926,287 874,668
Salaries and wages.......................... 45,182,116 22,809,722 13,100,891
Advertising................................. 8,481,269 3,898,610 2,123,324
Occupancy................................... 11,938,305 5,987,604 3,269,406
Other operating expenses.................... 36,605,705 18,193,294 11,147,645
------------- ----------- -----------
Total costs and operating expenses.......... 148,670,625 74,660,132 44,520,276
-------------- ----------- -----------
Operating income....................... 28,656,205 13,786,161 6,651,061
Other income (expense):
Interest expense............................ (6,507,275) (3,129,894) (1,493,143)
Amortization--deferred financing costs...... (357,672) (239,086) (93,649)
Interest income............................. 109,655 920 60,267
Other income (expense), net................. (102,941) (103,681) 103,838
------------- ----------- -----------
Income before income taxes and
extraordinary item..................... 21,797,972 10,314,420 5,228,374
Income tax expense.......................... 9,220,542 4,629,477 2,381,062
------------- ----------- -----------
Income before extraordinary item....... 12,577,430 5,684,943 2,847,312
Extraordinary item (Notes 1 and 7).......... -- (269,017) --
----------- ----------- -----------
Net income............................. 12,577,430 5,415,926 2,847,312
Preferred stock (dividend) / gain on
redemption (Note 10)........................ -- 280,175 (128,969)
----------- ----------- -----------
Earnings applicable to common shares........ $ 12,577,430 $ 5,696,101 $ 2,718,343
============= =========== ===========
Earnings per common share:
Basic earnings per share (adjusted to give
effect to any preferred stock(dividend)/
gain on redemption):
Income before extraordinary item....... $ 1.22 $ 0.89 $ 0.51
============== =========== ===========
Net income............................. $ 1.22 $ 0.85 $ 0.51
============== =========== ===========
Diluted earnings per share (adjusted to
give effect to any preferred stock
(dividend)/gain on redemption):
Income before extraordinary item....... $ 1.08 $ 0.78 $ 0.46
============= =========== ===========
Net income............................. $ 1.08 $ 0.75 $ 0.46
============= =========== ===========
Weighted average number of shares outstanding:
Basic.................................. 10,317,338 6,692,008 5,345,878
============ =========== ===========
Diluted................................ 12,458,279 8,921,515 5,960,506
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997 and 1996
Common Stock Total
Retained Shareholders'
Shares Amount Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995......... 4,424,984 $10,749,051 $ 111,290 $10,860,341
Net income.......................... -- -- 2,847,312 2,847,312
Public stock offering .............. 2,185,812 16,760,056 -- 16,760,056
Common stock returned to treasury
(Note 4)......................... (14,578) -- -- --
Exercise of "put" right to principle
shareholder (Note 12)............ (8,600) (381,748) -- (381,748)
Repayment of loan to related party
(Note 12)........................ (10,800) 134,578 -- 134,578
Purchases of business (Note 4)...... 20,358 187,500 -- 187,500
Issuance of common stock under stock
option plans (Note 13)........... 49,025 309,279 -- 309,279
Issuance of common stock to 401(k)
Plan (Note 15)................... 12,979 148,509 -- 148,509
Preferred stock dividends (Note 10). -- -- (147,150) (147,150)
---------- ----------- ---------- -----------
Balance at September 30, 1996......... 6,659,180 27,907,225 2,811,452 30,718,677
---------- ----------- ---------- -----------
Net income.......................... -- -- 5,415,926 5,415,926
Common stock returned to treasury
(Note 4)......................... (65,657) -- -- --
Purchases of business (Note 4)...... -- 107,500 -- 107,500
Issuance of common stock under stock
option plans including tax benefit
(Note 13)........................ 443,610 4,192,401 -- 4,192,401
Issuance of common stock to 401(k)
Plan (Note 15)................... 22,318 272,294 -- 272,294
Preferred stock (dividends)/gain on
redemption (Note 10)............. -- 280,175 (30,103) 250,072
---------- ----------- ---------- -----------
Balance at September 30, 1997......... 7,059,451 32,759,595 8,197,275 40,956,870
---------- ----------- --------- ----------
Net income.......................... -- -- 12,577,430 12,577,430
Public stock offering,
net of expenses (Note 3)........... 2,888,088 47,053,064 -- 47,053,064
Conversion of Mass Mutual debt
(Note 7)........................... 704,223 7,000,000 -- 7,000,000
Write-off deferred finance costs on
convertible debt (Note7).......... -- (24,933) -- (24,933)
Purchase of business (Note 4)....... 15,620 424,989 -- 424,989
Issuance of common stock to 401(k)
Plan (Note 15).................... 17,826 383,283 -- 383,283
Issuance of common stock under
stock option plans including tax
benefit (Note 13)................. 364,361 3,920,895 -- 3,920,895
----------- --------- ----------- ------------
11,049,569 $ 91,516,893 $20,774,705 $112,291,598
=========== ============ =========== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
1998 1997 1996
-------------- -------------- ---------
Operating activities:
<S> <C> <C> <C>
Net income.................................... $ 12,577,430 $ 5,415,926 $ 2,847,312
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............... 46,820,902 24,009,988 14,879,010
Deferred income taxes....................... 4,591,512 1,189,082 681,490
Deferred financing costs write-off.......... -- 323,772 --
Issuance of common stock to 401(k) plan..... 383,283 272,294 148,509
Changes in assets and liabilities:
Prepaid expenses............................ (1,874,996) (41,640) (235,413)
Rental merchandise.......................... (57,519,645) (27,613,433) (20,448,195)
Income tax refund........................... (168,670) -- --
Other assets................................ (2,321,174) (653,249) (710,547)
Accounts payable............................ 3,561,442 (884,788) (406,871)
Income taxes payable........................ (695,743) (530,847) 1,400,937
Other liabilities........................... (1,287,063) (836,883) 616,281
------------- ------------ ------------
Net cash provided by (used in) operating
activities............................. 4,067,278 650,222 (1,227,487)
------------- ------------ ------------
Investing activities:
Purchase of businesses, net of cash
acquired of $2,282,221in 1998, $60,132
in 1997, $38,759 in 1996................. (105,997,187) (25,949,875) (8,601,764)
Purchases of property and equipment......... (12,982,979) (5,122,164) (2,053,245)
Proceeds from the sale of property and
equipment and land and building lots..... -- 476,786 9,680
------------- ------------ ------------
Net cash used in investing activities.... (118,980,166) (30,595,253) (10,645,329)
------------- ------------ ------------
Financing activities:
Principal payments on capital lease
obligation............................... -- -- (6,638)
Proceeds from borrowings.................... 195,547,020 41,022,110 23,866,711
Payments on borrowings...................... (130,574,118) (12,318,899) (28,195,016)
Deferred financing costs.................... (457,259) (1,660,714) --
Issuance of common stock.................... 50,973,959 4,192,401 17,069,335
Preferred stock dividend.................... -- (30,103) (147,150)
Preferred stock redemption.................. -- (840,525) (1,629,300)
Loan to related party....................... -- -- 134,578
------------ ------------ ------------
Net cash provided by financing
activities.............................. 115,489,602 30,364,270 11,092,520
------------ ------------ ------------
Increase (decrease) in cash.............. 576,714 419,239 (780,296)
Cash at beginning of year..................... 598,664 179,425 959,721
------------ ------------ ------------
Cash at end of year........................... $ 1,175,378 $ 598,664 $ 179,425
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................. $ 6,234,480 $ 2,747,871 $ 1,537,317
Income taxes............................. $ 3,273,575 $ 1,936,924 $ 307,841
In addition, the Company entered into various transactions during the year which involved non-cash investing and financing
activities (Notes 4, 7, 10, 13,
14 and 15).
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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 twenty-five states. The stores are
primarily located in the Midwestern, Eastern and Southern regions of the United
States.
Basis of Presentation--The Company presents an unclassified balance sheet to
conform to practice in the industry in which it operates.
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 dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
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.
The Company uses the units of activity depreciation method. 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.
Other Revenue--Other revenue includes revenue from various services and
charges to rental customers, including late fees, liability waiver fees,
processing fees, and sales of used merchandise. Other revenue is recognized as
collected. This method of revenue recognition does not produce materially
different results than if other revenue was recognized when earned.
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. The Company's corporate headquarters and other buildings
are depreciated over a 40 year term on a straight-line basis. 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 reviews the recoverability of the carrying value of goodwill and
other long-term assets using an undiscounted cash flow method.
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. Each acquisition is
independently evaluated to determine the appropriate period for amortization of
the resulting goodwill. Currently, amortization of goodwill is calculated on a
straight line basis over periods ranging from ten to thirty years. 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, 1998 and 1997, the Company concluded that
there was no impairment of goodwill. Deferred financing costs are stated at cost
less amortization calculated on a straight-line basis over the term of the
related debt agreements,
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
which range from four to ten years. Non-compete agreements and a prepaid
consulting fees 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 Expense--External costs incurred in producing media advertising
are expensed the first time the advertising takes place.
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--In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", effective for periods ending after December 15, 1997.
The Company adopted this standard during fiscal 1998, and all prior periods have
been restated to reflect the impact of this statement. Basic earnings per common
share is computed using income available to common shareholders divided by the
weighted average number of common shares outstanding. Diluted earnings per
common share is computed using income available to common shareholders adjusted
for anticipated interest savings, net of related taxes, for convertible
subordinated notes and debentures and the weighted average number of shares
outstanding is adjusted for the potential impact of options, warrants and
convertible subordinated notes and debentures.
Fair Value Disclosures--Fair values of fixed interest debt instruments have
been determined through a combination of management's estimates, information
obtained from independent third parties, and discounted cash flow analysis. Fair
values of other assets and liabilities are estimated to approximate their
carrying values.
Derivative Financial Instruments--The Company uses derivative financial
instruments to reduce the impact on interest expense of fluctuations in interest
rates on a portion of its Amended Facility (see Notes 7 and 8). The Company does
not enter into derivative financial instruments for trading or speculative
purposes.
Extraordinary Item--As a result of the refinancing of its senior credit
facility in November 1996, the Company incurred an extraordinary charge, net of
tax benefit, of $269,017. The extraordinary charge was composed of a $124,590
($74,754 net of tax benefit) prepayment penalty for early retirement of debt and
a $323,772 ($194,263 net of tax benefit) write-off of deferred finance costs
associated with the refinanced debt (See Note 7).
Stock-Based Compensation--The Company accounts for stock based compensation
issued to its employees and non-employee directors in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting For Stock Issued to
Employees" and has elected to adopt the "disclosure only" provisions of SFAS No.
123, "Accounting for Stock-Based Compensation".
Reclassifications--Certain amounts in the September 30, 1996 and 1997,
financial statements were reclassified to conform to the September 30, 1998,
presentation.
2. NEW ACCOUNTING STANDARDS:
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" effective for fiscal years beginning after December 15,
1997. The Company adopted this standard in fiscal 1998. The adoption of SFAS No.
129 had no impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
has had no items of other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. This Statement requires that public business
enterprises report certain information about operating segments in annual and
interim financial statements. It also requires that public business enterprises
report certain information about their products and services, the geographic
areas in which they operate, and their major customers. The Company is currently
evaluating the provisions of this statement.
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. NEW ACCOUNTING STANDARDS, Continued:
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is currently
evaluating the provisions of this statement.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued in March 1998 and effective for fiscal years
beginning after December 15, 1998 with earlier application permitted, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company is currently evaluating the provisions of this
statement.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"), issued in April
1998 and effective for fiscal years beginning after December 15, 1998 with
earlier application permitted, provides guidance on financial reporting of start
up costs and organization costs. The Company is currently evaluating the
provisions of this statement.
3. PUBLIC STOCK OFFERING:
On December 2, 1997, the Company completed a public stock 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 $47,053,064 including the
underwriters exercise of the over-allotment option. The Company used these
proceeds to repay outstanding borrowings of $23,022,110 under the Company's
credit agreement (see Note 7) and to fund the asset purchase of South Carolina
Rentals, Inc., Paradise Valley Holdings, Inc. and L & B Rents, Inc. ("Ace
Rentals") (see Note 4).
4. ACQUISITIONS:
On September 10, 1998, the Company purchased the rental merchandise and
rental contracts of Cari Rentals, Inc. ("Cari"), a privately owned chain of
twenty-three rental purchase stores located in Iowa, Missouri, Nebraska and
South Dakota, with annual revenues of approximately $7.7 million in exchange for
consideration of $7,325,000 consisting of 15,620 shares of the Company's common
stock (unregistered shares subject to the provisions of Rule 144 of the
Securities and Exchange Act) and $6,900,011 in cash. Pursuant to the terms of
the acquisition, $500,000 of the purchase price was placed in escrow subject to
the terms and conditions of the escrow agreement. The escrow agreement provides
for the release of escrow pending the completion of a financial audit and
resolution of any purchase price adjustments. The acquisition was accounted for
using the purchase method of accounting. Cari Rentals' assets were recorded at
their fair values as of the date of the acquisition. The excess of the
acquisition cost over the fair values of the net assets acquired, ("goodwill")
of $5,934,013 is being amortized on a straight line basis over thirty years. The
total cost of the net assets acquired was $7,325,000 ($424,989 in common stock
and $6,900,011 in cash) and consisted of assets of $7,384,241 less acquisition
costs of $59,241. Assets acquired (at fair value) other than goodwill consisted
primarily of rental merchandise of $1,400,228 and a non-compete agreement of
$50,000. The Statement of Income for the year ended September 30, 1998 includes
the results of operations of Cari since the date of the acquisition.
On July 21, 1998, the Company acquired all the outstanding shares of Fast
Rentals, Inc. ("Fast Rentals"), a privately owned chain of eight rental purchase
stores located in Alabama and Georgia with annual revenues of approximately $3.6
million in exchange for consideration of $2,047,449 in cash. Pursuant to the
terms of the acquisition, $200,000 of the purchase price was placed in escrow,
subject to the terms of the escrow agreement to satisfy sellers' representations
and warranties and any purchase price adjustments. The acquisition was accounted
for using the purchase method of accounting. Fast Rentals' assets and
liabilities were recorded at their fair values as of the date of the
acquisition. The excess of the acquisition cost over the fair values of the net
assets acquired ("goodwill") of $2,265,911 is being amortized over thirty years
on a straight line basis. The total cost of the net assets acquired was
$2,047,449 and consisted of assets of $3,005,809 less liabilities assumed of
$857,830 and acquisition costs of $100,530. Assets acquired (at fair value)
other than goodwill consisted primarily of rental merchandise of $619,542,
prepaid expenses of $33,272, other
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS, Continued:
assets of $12,084 and a non-compete agreement of $75,000. Liabilities assumed
(at fair value) consisted primarily of trade payables of $28,940, accrued
liabilities of $42,842 and debt of $786,048. The Statement of Income for the
year ended September 30, 1998 includes the results of operations of Fast Rentals
since the date of the acquisition.
On February 5, 1998, the Company acquired all the outstanding shares of
Champion Rentals, Inc. ("Champion"). At the time of the acquisition, Champion
operated a chain of 145 rental-purchase stores located in Alabama, Arkansas,
Florida, Georgia, Kentucky, Louisiana, North Carolina, Ohio, South Carolina,
Tennessee and Virginia with annual revenues of approximately $75.0 million. The
consideration paid in exchange for all the outstanding shares of Champion was
$69,050,000 in cash. Pursuant to terms of the purchase agreement $2.5 million of
the purchase price was placed in escrow subject to the terms of the escrow
agreement to satisfy sellers' representations and warranties and any purchase
price adjustments. Per the terms of the escrow agreement, $1,500,000 of the
escrowed amount was released in September 1998, following the completion of an
audit of Champion's closing date financial statements. As a result of this
audit, $900,000 of the released amount was given to the sellers with the balance
being returned to the Company. The balance of $1,000,000 will be held for a one
year period from the date of the closing. The acquisition was accounted for
using the purchase method of accounting. Champion's assets and liabilities were
recorded at their fair values at the date of the acquisition. The excess of the
acquisition cost over the fair values of the net assets acquired, ("goodwill")
of $66,998,681 is being amortized on a straight line basis over thirty years.
The total costs of net assets acquired was $69,050,000 and consisted of assets
of $91,098,829 less liabilities assumed of $18,407,607and acquisition costs of
$3,641,222. The acquisition of Champion was funded with borrowings drawn on the
Company's existing senior credit facility (see Note 7). Assets acquired (at fair
value), other than goodwill consisted primarily of rental merchandise of
$18,133,867, property and equipment of $780,000, other assets of $3,218,161,
prepaid expenses of $508,120, non-compete agreement of $1,000,000 and customer
contracts of $460,000. Liabilities assumed (at fair value) consisted primarily
of trade payables of $3,924,743, accrued liabilities of $2,356,106 and debt of
$12,126,758. The Statement of Income for the year ended September 30, 1998
includes the results of operations of Champion since the date of the
acquisition.
On January 7, 1998, the Company completed the asset purchase of South
Carolina Rentals, Inc., Paradise Valley Holdings, Inc., and L & B Rents, Inc.,
(collectively, "Ace Rentals"), assuming effective control of the results of
operations as of January 1, 1998. At the time of the acquisition, Ace Rentals
operated a chain of fifty rental-purchase stores located in California and South
Carolina with annual revenues of approximately $22.0 million. The consideration
paid in exchange for the assets of Ace Rentals was $25,348,514 in cash. Pursuant
to the terms of the purchase agreement, $750,000 of the purchase price was
placed in escrow, subject to the terms of the escrow agreement to satisfy
seller's representations and warranties and any purchase price adjustments. In
May 1998, $375,000 of the $750,000 escrow was released in accordance with the
terms and conditions of the escrow agreement with the balance to be released
pending resolution of certain issues. The acquisition was accounted for using
the purchase method of accounting. Ace Rentals' assets and certain liabilities
were recorded at their fair values at the date of the acquisition. The excess of
the acquisition cost over the fair values of the net assets acquired,
("goodwill") of $21,494,612 is being amortized on a straight line basis over
thirty years. The total costs of net assets acquired was $25,348,514 and
consisted of assets of $26,767,315 less a liability assumed of $477,851 and
acquisition costs of $940,950. The acquisition of Ace Rentals was primarily
funded with proceeds received in connection with the Company's public stock
offering (see Note 3) with the balance being drawn on the Company's existing
senior credit facility (see Note 7). Assets acquired (at fair value) other than
goodwill consisted primarily of rental merchandise of $4,383,453, property and
equipment of $249,250, non-compete agreement of $500,000 and $140,000 in
customer contracts. The liability assumed (at fair value) was $477,851 of
vehicle related debt. The Statement of Income for the year ended September 30,
1998 includes the results of operations of Ace Rentals since January 1, 1998.
On January 24, 1997, the Company signed a definitive purchase agreement to
acquire all the outstanding shares of Perry Electronics, Inc. d/b/a Rental King
("Rental King"). On February 6, 1997, the Company consummated the transaction
and acquired all the outstanding shares of Rental King, assuming effective
control of the results of operations as of February 1, 1997. At the time of
acquisition, Rental King operated a chain of seventy rental-purchase stores in
Colorado, Florida, Indiana, Kentucky, Michigan, Ohio and West Virginia with
annual revenues of approximately $24.0 million. The consideration paid in
exchange for all the outstanding shares of Rental King was $17,284,618 in cash.
Pursuant to the terms of the purchase agreement, $2.0 million of the purchase
price was placed in escrow, subject to the terms of the escrow agreement to
satisfy seller's representations and warranties and any purchase price
adjustments. In June 1997, the full amount of the escrow account was released.
The acquisition was accounted for using the purchase method of accounting.
Rental King's assets and liabilities were recorded at their fair values at the
time of the acquisition. The excess of the acquisition cost over the fair values
of the net assets acquired, ("goodwill") of $17,311,831 is being amortized on a
straight line basis over twenty years. The total costs of the net assets
acquired was $17,284,618 and consisted of assets of $25,289,547 less liabilities
assumed of $6,337,325 and acquisition costs of $1,667,604. The acquisition of
Rental King was primarily funded by the net proceeds received on a private
placement of $20.0 million in subordinated convertible debentures (see Note 7).
The balance of the cash paid on closing was drawn upon the Company's existing
line of credit (see Note 7). Assets acquired (at fair value) other than
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS, Continued:
goodwill consisted primarily of rental merchandise of $6,386,000, property and
equipment of $744,615, other assets of $347,101 and non-compete agreements of
$500,000. Liabilities assumed (at fair value) consisted primarily of trade
payables of $488,561, accrued liabilities of $2,085,270, bank debt of $2,939,494
and notes payable of $824,000. The Statements of Income for the years ended
September 30, 1998 and 1997 include the results of operations of Rental King
since the date of the acquisition.
On January 2, 1997, the Company acquired all the outstanding shares of Bill
Coleman TV, Inc., ("Coleman"), a privately owned chain of fifteen
rental-purchase stores operating in Michigan with annual revenues of
approximately $7.5 million, in exchange for consideration consisting of
$2,679,921 in cash and an option to purchase 25,000 shares of the Company's
common stock at an exercise price of $8.875 per share with a fair market value
of $107,500. The 25,000 stock options are 100% exercisable and expire five years
from the date of the grant. The acquisition was accounted for using the purchase
method of accounting. Coleman's assets and liabilities were recorded at their
fair values as of the acquisition date. The excess of the acquisition cost over
the fair values of the net assets acquired, ("goodwill") of $3,796,670 is being
amortized on a straight line basis over twenty years. The total cost of the net
assets acquired was $2,787,421 ($2,679,921 in cash and $107,500 in stock
options) and consisted of assets of $7,991,676 less liabilities assumed of
$4,548,836 and acquisition costs of $655,419. Assets acquired (at fair value)
other than goodwill, consisted primarily of rental merchandise of $2,401,000,
property and equipment of $42,000, a note receivable of $506,368, a non-compete
agreement of $300,000 and other assets of $945,638. Liabilities assumed (at fair
value) consisted primarily of trade accounts payable of $1,838,190, debt of
$2,474,155 and note payable of $236,491. The Statements of Income for the years
ended September 30, 1998 and 1997 include the operations of Coleman since the
date of the acquisition.
In July and September 1997, the Company purchased the rental merchandise and
rental-purchase contracts of seven rental-purchase stores located in
Pennsylvania, Maryland, and Virginia, with combined annual revenues of
approximately $4.3 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 fair values at the date of acquisition.
The excess of the acquisition cost over the fair values of the assets acquired,
("goodwill") of $2,747,754 is being amortized on a straight line basis over
twenty years. The total cost of the net assets acquired was $3,809,878 and
consisted primarily of assets of $3,978,369 less acquisition costs of $168,491.
The Statements of Income for the years ended September 30, 1998 and 1997 include
the operating results for these stores since the respective dates of
acquisition.
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. Based on the terms of the escrow agreement
$175,000 was released upon completion of the financial statement audit with the
remaining $150,000 being 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 fair values as of the acquisition
date. The excess of the acquisition cost over the fair values of the net assets
acquired ("goodwill") of $4,437,772 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
$7,250,676 less liabilities assumed of $2,363,136 and acquisition costs of
$597,744. Assets acquired (at fair value) other than goodwill consisted
primarily of rental merchandise of $1,359,808, property and equipment of
$310,850, non-compete agreements of $300,000 and other assets of $842,236.
Liabilities assumed (at fair value) consisted primarily of trade accounts
payable of $582,693, other liabilities of $334,205 and bank debt of $1,446,238.
The Statements of Income for the years ended September 30, 1998, 1997 and 1996,
include the operations of DLC since the date of the acquisition.
During 1996, the Company also purchased from 5 separate entities the rental
merchandise and contracts of 21 rental-purchase 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 fair values at the date
of acquisition. The excess of the acquisition cost over the fair values of the
net assets acquired ("goodwill") of $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 Statements of Income for the years
ended September 30, 1998, 1997 and 1996 include the operating results for these
stores since the respective dates of acquisition.
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS, Continued:
The following are unaudited pro forma results of operations for the years
ended September 30, 1998 and 1997 assuming the acquisitions of Coleman, Rental
King, Ace Rentals and Champion had occurred on October 1, 1997 and 1996. The
unaudited pro forma information does not include the results of operations of
the seven rental-purchase stores acquired in July and September of 1997, the
Fast Rentals Acquisition in July 1998 and the Cari Rentals Acquisition in
September 1998, which were not significant. The results are not necessarily
indicative of future operations or what would have occurred had the acquisitions
been consummated as of October 1, 1997 and 1996.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Information
Years Ended September 30,
1998 1997
-------------- ---------
<S> <C> <C>
Total revenues..................................... $ 203,614,690 $181,522,421
Net income......................................... 12,504,573 5,617,163
Diluted earnings per common share (adjusted to
give effect to any preferred stock
(dividend)/gain on redemption):....................
Income before extraordinary item.............. $ 1.07 $ 0.80
=============== ===========
Net income....................................$ 1.07 $ 0.77
=============== ===========
</TABLE>
5. RENTAL MERCHANDISE AND PROPERTY AND EQUIPMENT:
Cost and accumulated depreciation of rental merchandise consists of the
following:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------- -----------
<S> <C> <C>
Cost.............................................. $111,211,614 $51,848,007
Less accumulated depreciation..................... 33,258,611 16,715,691
------------- -----------
$ 77,953,003 $35,132,316
============= ===========
</TABLE>
The Company uses a direct-ship policy from their vendors to the stores. As a
result, the Company has eliminated the need for internal warehousing and
distribution. This policy has minimized the amount of rental merchandise not on
rent. On-rent and held for rent levels of net rental merchandise consists of the
following:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ -----------
<S> <C> <C>
On-rent merchandise, net.......................... $ 53,816,812 $29,587,990
Held for rent merchandise, net.................... 24,136,191 5,544,326
------------ -----------
$ 77,953,003 $35,132,316
============ ===========
</TABLE>
The Company uses the direct write-off method in accounting for losses (see
Note 1). Losses during fiscal 1998, 1997 and 1996 were incurred as follows:
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Lost merchandise.................................. $ 400,916 $ 284,312 $ 175,843
Stolen merchandise................................ 3,824,019 2,133,604 1,153,856
Discarded merchandise............................. 438,698 254,987 75,915
----------- ----------- -----------
$ 4,663,633 $2,672,903 $1,405,614
============ ========== ==========
</TABLE>
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Signs........................................... $ 2,365,034 $ 1,014,564
Vehicles........................................ 2,296,085 1,524,848
Furniture and fixtures.......................... 6,177,533 2,417,396
Leasehold improvements.......................... 8,944,974 4,657,039
Building........................................ 5,797,355 2,021,852
------------ ------------
25,580,981 11,635,699
Less accumulated depreciation and amortization.... 5,943,895 3,117,477
------------ ------------
$ 19,637,086 $ 8,518,222
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. OTHER LIABILITIES:
Other liabilities consist of the following:
September 30,
1998 1997
-------------- --------
<S> <C> <C>
Accrued salaries, wages and payroll taxes......... $ 1,579,215 $1,120,408
Accrued property taxes............................ 717,620 310,773
Sales taxes payable............................... 1,067,183 434,841
Accrued interest.................................. 852,013 579,218
Accrued bonuses................................... 189,777 275,000
Other............................................. 735,875 691,365
------------ ----------
$ 5,141,683 $3,411,605
============ ==========
</TABLE>
7. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ --------
<S> <C> <C>
Senior Credit Facility............................ $ 97,264,165 $ 21,022,110
Convertible Subordinated Debentures............... 20,000,000 20,000,000
Notes Payable..................................... 1,777,969 134,316
Convertible Subordinated Notes.................... -- 7,000,000
------------- ------------
$ 119,042,134 $ 48,156,426
</TABLE>
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 Amended 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. The syndicate members and their ratable share of the Amended
Facility are as follows:
<TABLE>
<CAPTION>
<S> <C>
National City Bank of Pennsylvania............. 15.0000%
NationsBank, N.A............................... 14.1670%
Harris Trust and Savings Bank.................. 14.1670%
LaSalle National Bank.......................... 14.1670%
Sun Trust Bank, Central Florida, National
Association.................................... 7.0825%
Manufacturers and Traders Trust Company........ 14.1670%
CoreStates Bank, N.A........................... 7.0825%
Star Bank, N.A................................. 14.1670%
</TABLE>
Of the $120.0 million available under the Amended 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
Champion's acquired debt (see Note 4). The Amended Facility expires on May 31,
2003.
Under the Amended Facility, the Company may borrow funds under a base rate
option plan or euro-rate option plan. Under the base rate option plan the
Company may borrow funds based on a spread of prime-rate plus 0.0% to 0.5%. The
actual spread is determined based on the ratio of debt to cash flow from
operations during the period. Under the euro-rate option, the Company may borrow
funds based on a spread of the London Interbank Offer Rate, ("LIBOR") plus 100
to 200 basis points. The actual spread is determined based on the ratio of debt
to cash flow generated from operations during the period. Borrowings under the
euro-rate option require the Company to select a fixed interest period during
which the euro-rate is applicable with the borrowed amount not to be repaid
prior to the last day of the selected interest period. In addition, borrowing
tranches under the euro-rate option must be in multiples of $250,000 and not
less than $1,000,000 in total. Commitment fees associated with the Amended
Facility are equal to 0.125% for each banks' commitment which existed prior to
this amendment and 0.25% for each banks' commitment starting with the date of
this amendment. The Amended Facility requires the Company to meet certain
financial covenants and ratios including maximum leverage, minimum interest
coverage and minimum tangible net worth ratios. In addition, the Company must
meet requirements regarding monthly, quarterly and annual financial reporting.
The Amended Facility also contains non-financial covenants which restrict
actions of the Company with respect to the payment of dividends, acquisitions,
mergers, disposition of assets or subsidiaries, issuance of capital stock and
capital expenditures. The Company may at any time repay outstanding borrowings,
in whole or part, without premium or penalty, except with respect to
restrictions identified above in connection with the selection of the euro-rate
option. As of September 30, 1998, the Company had $80.0 million of floating rate
debt under the euro-rate option and $17.3 million of floating rate debt under
the base rate option, with interest rates of 7.594% and 8.750% respectively. As
of September 30, 1998, the Company was in compliance with all covenants
contained in the Amended Facility.
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. DEBT, Continued:
The Senior Credit Facility (the "Facility") prior to amendment, was with a
syndicate of banks led by National City Bank of Pennsylvania, provided for loans
or letters of credit up to $40.0 million and was signed on November 22, 1996.
The syndicate was composed of four banks, with National City Bank of
Pennsylvania, LaSalle National Bank, and Harris Trust and Savings Bank committed
for an equal ratable share of 27.25%, of the Facility and Heller Financial, Inc.
committed for an 18.25% ratable share. The Facility provided for borrowings at
the prime rate plus 0.5% or borrowings under an euro-rate option and
availability based on a multiple of average monthly revenues. The euro-rate
option allowed the Company to borrow at the LIBOR rate plus 275 basis points for
a fixed interest period. As of September 30, 1997, there was $21.0 million in
outstanding borrowings under the Facility. This balance was comprised of a $9.0
million euro-rate tranche at 8.49% interest, a $9.0 million euro-rate tranche at
8.382% interest and working capital debt of $3.0 million at 9.0% interest. The
Facility required the Company to meet certain financial covenants and ratios
including maximum leverage, minimum interest coverage and minimum tangible net
worth ratios. In addition, the Company was required to meet requirements
regarding monthly, quarterly and annual financial reporting. The Facility also
contained covenants which prohibited the actions of the Company with respect to
the payment of dividends, acquisitions, mergers, disposition of assets or
subsidiaries, issuance of capital stock and capital expenditures. The Company
was permitted, at any time, to repay outstanding borrowings, in whole or part,
without premium or penalty, except with respect to restrictions on the selection
of the euro-rate interest option.
The Company's $20.0 million Convertible Subordinated Debentures
("Debentures") due February 1, 2007 are convertible, at any time, into shares of
common stock, without par value, of the Company at a conversion price of $13.37
per share. The Debentures are subject to redemption at the option of the Company
on February 5, 2000 at a price of 103%. The redemption price will decrease at a
rate of 1% per year, reaching a price of 100% in the year 2003 and remain fixed
until the date of maturity. The indebtedness evidenced by the Debentures is
subordinated and junior in right of payment to all senior indebtedness. The
Debentures bear an annual interest rate of 7% with semi-annual payments in
August and February, beginning August 1, 1997. The terms of the Debentures
require the Company to meet certain annual financial reporting obligations. In
addition, the Company must deliver to the trustee compliance certificates
representing management's compliance to all conditions and covenants in the
indenture governing the Debentures. In addition, the Debentures contain
covenants which prohibit the Company with respect to the payment of dividends
and other distributions.
Notes payable includes the promissory note ("the Note"), entered into by the
Company on June 1, 1998, to pay Zurn Industries, Inc. $1,650,000 on June 1,
1999. The Note represents the remaining balance to be paid for the purchase of
the Company's new corporate headquarters. Notes payable also includes other
amounts due in monthly installments of $2,500, including interest at 18.0%
through December 2006.
The Company's Convertible Subordinated Notes ("Notes") were due July 15,
2002 bearing interest at the rate of 10% per annum payable quarterly on October
15, January 15, April 15 and July 15. The Notes were convertible into the
Company's common stock at a conversion price of $9.94 per share. The Company was
given the right to mandatorily require the noteholders to convert the Notes to
common stock if the market price exceeded $16.50 per share for 20 days during a
30 day consecutive period. In addition, the noteholders received detachable
warrants to purchase 105,000 shares of the Company's common stock at $9.94 per
share. The stock purchase warrants expire on July 15, 2002. The subordinated
note agreement prohibited the payment of dividends and required the maintenance
of certain financial covenants related to fixed charge coverage and consolidated
net worth. On October 8, 1997, the Company exercised its right to convert the
Notes. The Company was able to exercise this right when the market price of the
Company's common stock remained above $16.50 per share for a twenty 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.
The Company's weighted average interest rate was 7.784%, 8.517%, and 9.570%
for the years ended September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998, the carrying values and the estimated fair values of
the Company's significant fixed interest debt instruments are as follows:
<TABLE>
<CAPTION>
September 30, 1998
Carrying Estimated
Values Fair Values
Convertible Subordinated Debentures $20,000,000 $21,403,924
---------- ----------
<S> <C> <C> <C>
7%.................................. $20,000,000 $21,403,924
</TABLE>
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. DEBT, Continued:
At September 30, 1998, aggregate annual maturities of debt are as follows:
<TABLE>
<CAPTION>
September 30, 1998
<S> <C> <C>
1999....................................... $ 1,657,579
2000....................................... 9,061
2001....................................... 10,834
2002....................................... 12,953
2003....................................... 97,279,652
Thereafter................................. 20,072,055
--------------
$ 119,042,134
==============
</TABLE>
8. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company uses derivative financial instruments to reduce the impact on
interest expense of fluctuations in interest rates on a portion of its Amended
Facility (see Note 7). The Company does not enter into derivative financial
instruments for trading or speculative purposes. As of September 30, 1998, the
Company had in place three interest rate swaps, under which the Company agreed
with counterparties to exchange, at quarterly intervals, interest payments on
the Company's variable pay rate of the three-month LIBOR and the counterparties
fixed pay rate for the notional amount of the interest rate swap agreements. The
Company actively evaluates the creditworthiness of the financial institutions
which are counterparties to interest rate swap agreements, and it does not
appear that any counterparty will fail to meet their obligation. The following
table illustrates the notional amounts outstanding, maturity dates and the fixed
pay and variable receive rates of each of the interest rate swap agreements at
September 30, 1998:
<TABLE>
<CAPTION>
Fixed Variable
Notional Maturity Pay Receive
Amount Date Rate Rate
Interest rate swap, National City Bank
<S> <C> <C> <C> <C>
of Pennsylvania....................... $30,000,000 May 2003 5.965% 5.594%
Interest rate swap, NationsBank, N.A.... 20,000,000 May 2003 5.760 5.594
Interest rate swap, Manufacturers' and
Traders Trust Company................. 10,000,000 May 2003 5.925 5.594
</TABLE>
The fair value of the interest rate swap agreements based on settlement
cost as estimated by a dealer as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Notional Fair
Amount Value
Interest rate swap, National City Bank
<S> <C> <C>
of Pennsylvania....................... $30,000,000 $ (1,025,000)
Interest rate swap, NationsBank, N.A.... 20,000,000 (637,598)
Interest rate swap, Manufacturers' and
Traders Trust Company................. 10,000,000 (284,629)
</TABLE>
9. 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, 1998, future
minimum rental payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
September 30, 1998
<S> <C> <C>
1999....................................... $10,264,336
2000....................................... 7,607,072
2001....................................... 4,696,939
2002....................................... 2,400,915
Thereafter................................. 2,056,227
-----------
Total minimum payments required............ $27,025,489
===========
Rent expense under operating leases for the years ended September 30, 1998, 1997, and 1996 was $9,213,516, $4,497,073 and
$2,508,545, respectively.
</TABLE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENCIES, Continued:
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 $2,800,000 to
$5,700,000. The majority of such claims are, in the opinion of management,
covered by insurance policies or indemnification agreements and therefore should
not have a material effect on the financial position, results of operations or
cash flows of the Company.
Additional claims exist in the range of $325,000 to $500,000 for which
management believes it has meritorious defenses but for which the likelihood of
an unfavorable outcome is currently not determinable. Additionally, claims exist
for which management is not able to estimate a potential loss. In management's
opinion, each of these claims will either be indemnified by the former
shareholders of companies it has acquired or covered by insurance policies and
therefore will not have a material effect on the financial position, results of
operations or cash flows of the Company.
10. REDEEMABLE PREFERRED STOCK:
On July 21, 1995, in connection with the acquisition of McKenzie Leasing
Corporation, the Company issued 27,500 shares of Series A Redeemable Preferred
Stock ("Preferred Stock"). In preference to shares of common stock, each share
was 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 1997 and 1996 the Company declared and paid dividends totaling
$30,103 and $147,150 respectively. At September 30, 1996, dividends in arrears
totaled $19,792. Holders of the Preferred Stock had no voting rights; however,
there were certain exceptions including the right to eight votes per share if
the Company failed to pay dividends for two quarters.
The Company was required to 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 had 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 provided the holders with mandatory redemption rights. 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. In
addition, on November 26, 1996, the Company redeemed the remaining 11,207
outstanding shares. These shares were redeemed at a twenty-five percent discount
for an aggregate purchase price of $840,525 and have reinstated the status of
authorized and unissued preferred shares undesignated as to series. As a result
of redemption on a discounted basis, a net gain on redemption of $280,175 was
recognized.
This amount is added to net income in the calculation of earnings per share.
11. INCOME TAXES:
The Company's income tax expense consists of the following components:
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------------------
1998 1997 1996
---- ---- ----
Current expense:
<S> <C> <C> <C>
Federal............................................. $ 3,829,560 $2,617,964 $ 1,291,972
State and local..................................... 799,470 822,431 407,600
-------------- ---------- -------------
4,629,030 3,440,395 1,699,572
Deferred expense:
Federal............................................. 3,326,488 971,154 527,950
State and local..................................... 1,265,024 217,928 153,540
------------ ---------- -------------
4,591,512 1,189,082 681,490
------------ ---------- -------------
Income tax expense.................................... $ 9,220,542 $4,629,477 $ 2,381,062
============ ========== =============
A reconciliation of the income tax expense compared with the amount at the
U.S. statutory tax rate of 34% is shown below:
For the Years Ended September 30,
----------------------------------------------
1998 1997 1996
---- ---- ----
Tax provision at U.S. statutory rate................... $7,411,310 $ 3,506,902 $ 1,777,647
State and local income taxes, net of federal benefit... 1,362,566 686,637 370,352
Amortization of goodwill............................... 387,889 382,821 280,702
Other.................................................. 58,777 53,117 (47,639)
------------- ----------- ------------
Income tax expense..................................... $9,220,542 $ 4,629,477 $ 2,381,062
========== =========== ============
</TABLE>
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES, Continued:
At September 30, 1998 and 1997, the components of the net deferred tax asset
(liability) are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Rental merchandise................................................... $(6,443,013) $ 142,151
Property and equipment............................................... 617,081 650,182
Operating loss carry forwards........................................ 949,807 626,030
Amortization of goodwill, loan fees, non-compete fees and severance
payments........................................................... (1,512,646) (346,436)
Tax credits.......................................................... 2,869,186 --
------------ -----------
Net deferred tax asset(liability).................................... ($3,519,585) $1,071,927
============ ===========
</TABLE>
12. RELATED PARTY TRANSACTIONS:
During fiscal years ended September 30, 1998, and 1997 the Company leased
two locations from a principal shareholder or a company controlled by a
principal shareholder. Rent paid during these years related to these leases was
$87,191 and $92,238, respectively. The Company leased six locations from a
principal shareholder or a company controlled by a principal shareholder during
fiscal 1996. The Company paid $238,634 in rent during the year ended September
30, 1996 related to these leases. The leases have average remaining lives of one
year and require the Company to pay real estate taxes.
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 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 to 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, the difference between the
dividend paid in 1993 to the principle shareholder and any profit recognized by
the Company and 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 the 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. The Company paid $1,281,950, $881,600 and $393,600 related to these
agreements for the years ended September 30, 1998, 1997 and 1996, respectively.
In connection with the acquisition of D.A.M.S.L. Corp. ("DAMSL") in fiscal
1994, the Company entered into consulting and non-compete agreements with the
former shareholders of DAMSL. The remaining payment terms for the consulting and
non-compete agreements are $267,428 and $319,428 for 1999 and 2000,
respectively.
In connection with the acquisition of McKenzie Leasing Corporation ("MLC")
in fiscal 1995, 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.
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 terminated earlier by the
Board of Directors. The authorized number of shares, the exercise price of
outstanding options and the
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. STOCK OPTIONS, Continued:
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 Board of Directors of the Company also adopted, and the shareholders
have approved the 1995 Stock Option Plan (the "1995 Plan") which authorizes the
issuance of up to 2,000,000 shares of common stock pursuant to stock options
granted to officers, directors and key employees of the Company. 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 of the Company's stock options
during the years ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Average
Price
Stock Options Shares Per Share
<S> <C> <C> <C> <C>
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
Granted......... 724,500 10.39
Exercised....... (296,860) 5.80
Forfeited....... (78,156) 8.45
------------
September 30, 1997 1,294,894 8.97
Granted......... 571,410 22.66
Exercised....... (253,461) 8.44
Forfeited....... (67,136) 9.84
-----------
September 30, 1998 1,545,707 14.08
=========== ======
</TABLE>
At September 30, 1998, stock options representing 809,509 shares are
exercisable at prices ranging from $4.67 to $33.63 per share.
The Company accounts for stock based compensation issued to its employees
and non-employee directors in accordance with APB No. 25 and has elected to
adopt the "disclosure only" provisions of SFAS No. 123.
For SFAS No. 123 purposes, the fair value of each option granted under both
the 1992 Plan and the 1995 Plan is estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options granted in fiscal 1998 and 1997: expected
volatility of 40.91%, risk-free interest rates between 6.06% and 4.52%, and an
expected life of five years.
If the Company had elected to recognize the compensation cost of its stock
option plans based on the fair value of the awards under those plans in
accordance with SFAS No. 123, net income and earnings per common share would
have been reduced to the pro-forma amounts below:
<TABLE>
<CAPTION>
September 30,
1998 1997
Net income:
<S> <C> <C>
As reported $12,577,430 $5,415,926
Pro-forma 8,569,673 3,467,832
Diluted earnings per common share (adjusted to
give effect to any preferred stock
(dividend)/gain on redemption):
Income before extraordinary item
As reported $ 1.08 $ 0.78
============ ===========
Pro-forma $ 0.76 $ 0.53
============ ===========
Net income
As reported $ 1.08 $ 0.75
============ ===========
Pro-forma $ 0.76 $ 0.50
============ ===========
</TABLE>
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 July1995, the Company issued warrants to purchase 105,000 shares of
common stock at $9.94 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, 1998, the following warrants were outstanding:
<TABLE>
<CAPTION>
Number of Exercise Expiration Shares Shares
Warrant Date shares Price Date Exercised Remaining
--------------- ---------- -------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
October 1992 37,500 $ 4.67 October 1997 37,500 --
November 1992 37,500 $ 4.67 November 1997 37,500 --
December 1992 37,500 $ 4.67 December 1997 37,500 --
August 1993 105,000 $ 6.76 August 1998 105,000 --
July 1995 105,000 $ 9.94 July 2002 -- 105,000
September 1995 37,500 $ 10.00 September 2000 37,500 --
</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 the 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 $383,283, $272,294 and $148,509 (in the form of the Company's common
stock) for the years ended September 30, 1998, 1997 and 1996, respectively.
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
16. EARNINGS PER SHARE:
The following table discloses the reconciliation of numerators and
denominators of the basic and diluted earnings per share computation:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE 1998 1997 1996
BASIC
<S> <C> <C> <C>
Net income $ 12,577,430 $ 5,415,926 $ 2,847,312
Preferred stock (dividend) / gain on redemption -- 280,175 (128,969)
----------------- ------------------ --------------
Earnings applicable to common shares for basic earnings per share $ 12,577,430 $ 5,696,101 $ 2,718,343
================= ================== ==============
Weighted average of common shares outstanding 10,317,338 6,692,008 5,345,878
================= ================== ==============
Earnings per common share (adjusted to give effect to any preferred stock
(dividend) / gain on redemption):
Income before extraordinary item $ 1.22 $ 0.89 $ 0.51
================= ================= ===============
Earnings applicable to common shares $ 1.22 $ 0.85 $ 0.51
================= ================= ===============
DILUTED
Earnings applicable to common shares for basic earnings per share $ 12,577,430 $ 5,696,101 $ 2,718,343
Interest on 10% convertible notes (net of tax) -- 420,700 --
Interest on 7% convertible debentures (net of tax) 845,000 549,632 --
----------------- ------------------- --------------
Earnings applicable to common shares for diluted earnings per share $ 13,422,430 $ 6,666,433 $ 2,718,343
================ ================= ==============
Weighted average common shares used in calculating basic earnings per 10,317,338 6,692,008 5,345,878
share
Add - incremental shares representing:
Shares issuable upon exercise of stock options, stock warrants and
escrowed shares included in basic calculation above 645,055 558,440 614,628
Shares issued on conversion of 10% convertible notes -- 704,225 --
Shares issued on conversion of 7% convertible debentures 1,495,886 966,842 --
----------------- ----------------- --------------
Weighted average number of shares used in calculation of diluted
earnings per share 12,458,279 8,921,515 5,960,506
================= ================== ===============
Earnings per common share (adjusted to give effect to any
preferred stock (dividend) / gain on redemption):
Income before extraordinary item $ 1.08 $ 0.78 $ 0.46
================= ================== ================
Earnings applicable to common shares $ 1.08 $ 0.75 $ 0.46
================= ================== ================
</TABLE>
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
17. SELECTED QUARTERLY FINANCIAL DATA (unaudited):
- ------------------------------------------- ------------------- ------------------ ------------------ ------------------
Quarter Ended September 30(1)(2) June 30 (1) March 31 (1) December 31
- ------------------------------------------- ------------------- ------------------ ------------------ ------------------
1998:
<S> <C> <C> <C> <C>
Total revenues $ 52,266,802 $ 52,491,456 $ 45,902,429 $ 26,666,143
Gross profit 8,893,304 8,403,355 6,993,447 4,276,009
Income before extraordinary item 3,819,999 3,636,913 3,085,851 2,034,667
Net income 3,819,999 3,636,913 3,085,851 2,034,667
Earnings applicable to common shares 3,819,999 3,636,913 3,085,851 2,034,667
Earnings per common share
Basic
Income before extraordinary item (7) $ 0.36 $ 0.34 $ 0.29 $ 0.24
Net income (7) 0.36 0.34 0.29 0.24
Diluted
Income before extraordinary item $ 0.31 $ 0.30 $ 0.26 $ 0.21
Net income 0.31 0.30 0.26 0.21
Weighted average shares outstanding
Basic 10,728,669 10,700,594 10,727,843 8,535,945
Diluted 12,875,305 12,964,863 12,848,310 10,790,233
- ------------------------------------------- ------------------- ------------------ ------------------ ------------------
Quarter Ended September30(5)(6) June 30 (5) March 31 (5) December 31
- ------------------------------------------- ------------------- ------------------ ------------------ ------------------
1997:
Total revenues $ 25,111,368 $ 24,968,205 $ 22,545,381 $ 15,663,898
Gross profit 4,183,969 4,130,915 3,333,791 2,137,486
Income before extraordinary item (3) 1,834,465 1,605,806 1,295,281 949,391
Net income 1,834,465 1,605,806 1,295,281 680,374
Earnings applicable to common shares (4) 1,834,465 1,605,806 1,295,281 960,549
Earnings per common share
Basic
Income before extraordinary item $ 0.26 $ 0.24 $ 0.20 $ 0.19
Net income 0.26 0.24 0.20 0.15
Diluted
Income before extraordinary item (7) $ 0.22 $ 0.20 $ 0.18 $ 0.17
Net income (7) 0.22 0.20 0.18 0.14
Weighted average shares outstanding
Basic 7,059,451 6,659,569 6,609,853 6,593,876
Diluted 9,872,589 9,434,819 8,687,547 7,026,327
</TABLE>
(1) Includes the results of operations of Ace Rentals since January 1, 1998
and Champion Rentals, Inc. since February 5, 1998(See note 4).
(2) Includes the results of operations of Fast Rentals, Inc. since July
21, 1998 and Cari Rentals, Inc. since September 10,1998 (See note 4).
(3) As a result of the refinancing of its senior credit facility in November
1996, the Company incurred an extraordinary charge, net of tax benefit,
of $269,017 (See notes 1 and 7).
(4) As a result of redemption on a discounted basis of its remaining
redeemable preferred stock outstanding on November 26, 1996, the Company
recognized a net gain on redemption of $280,175 (See note 10).
(5) Includes the results of operations of the Bill Coleman TV, Inc. since
January 2, 1997 and Rental King since February 1, 1997 (See Note 4).
(6) Includes the results of operations of seven rental purchase stores
acquired in July and September 1997.
(7) The sum of the 1998 and 1997 quarterly per share amounts does not
equal annual per share amounts due to the effect of rounding.
<PAGE>
RENT-WAY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
18. SUBSEQUENT EVENTS:
On October 8, 1998, the Company began trading on the New York Stock Exchange
under the symbol "RWY". The Company's common stock had been previously traded on
the NASDAQ National Market System under the symbol "RWAY".
On December 10, 1998, the Company completed the merger with Home Choice
Holdings, Inc. ("Home Choice"). In connection with the merger, the Company
issued 10,024,821 million shares of its Common Stock to the stockholders of Home
Choice based on an exchange ratio of 0.588 Rent-Way shares for each Home Choice
share. This business combination will be accounted for as a pooling-of-interests
combination and, accordingly, the Company's historical financial statements
presented in future reports will be restated to include the historical accounts
and results of operations of Home Choice. The following unaudited pro forma data
summarizes the consolidated results of operations of Rent-Way and Home Choice as
if the combination had been consummated on October 1, 1995.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA INFORMATION
For the Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total revenues........................................ $434,902,440 $319,012,133 $175,332,697
Income (loss) before extraordinary item............... (1,838,221) 1,567,349 3,944,870
Net income (loss)..................................... (1,838,221) 1,578,507 3,944,870
Earnings (loss) per share before extraordinary item...
Basic.............................................. $ (0.09) $ 0.08 $ 0.35
Diluted............................................ $ (0.04) $ 0.07 $ 0.33
Earnings (loss) per share (1)
Basic.............................................. $ (0.09) $ 0.08 $ 0.35
Diluted............................................ $ (0.04) $ 0.07 $ 0.33
</TABLE>
(1) Pro forma earnings (loss) per share are based on the sum of the
historical shares outstanding for basic and diluted earnings per share,
as reported by the Company, and the historical shares outstanding for
Home Choice converted to Company shares at the exchange ratio of .588
Rent-Way shares for each Home Choice share.
Pro forma financial information is not necessarily indicative of results of
operations that would have occurred if the acquisition had occurred on October
1, 1995, or of future results of operations of the combined companies. As a
result of the Company and Home Choice having different fiscal year ends, the
consolidated pro forma amounts for the years ended September 30, 1996 and 1997
include amounts for the Company based on its September 30 year end and for Home
Choice based on its December 31 year end. Pro forma amounts for September 30,
1998 are based on the twelve months ended September 30 for both the Company and
Home Choice. Revenues were $42,739,933 and net losses were $1,553,946,
respectively for the three month period ended December 31, 1997 for Home Choice
and will be reflected as an adjustment to shareholders' equity. The Company
expects to incur approximately $10.0 million of expenses in connection with the
merger which will be expensed in the quarter ended December 31, 1998.
On December 10, 1998, the Company entered into a new collateralized
revolving credit facility with a syndicate of banks led by National City Bank of
Pennsylvania, NationsBank, N.A. and Harris Bank, providing loans or letters of
credit up to $207.5 million. A portion of this facility was used to refinance
the debt of Home Choice acquired in the merger and to refinance debt under the
Company's previous facility. Subject to compliance with certain formulas, the
remaining portion of the facility will be available to finance additional
acquisitions. The Company expects to write-off $722,481 ($433,487 net of tax) of
deferred loan costs associated with the prior credit facility in December 1998
(see Note 7).
<PAGE>
ITEM 9 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.
<PAGE>
RENT-WAY, INC.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS ACT
Information in response to this item is incorporated herein by reference from
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on March 10, 1999, which will be filed with the Securities and
Exchange Commission within 120 days after September 30, 1998.
ITEM 11 EXECUTIVE COMPENSATION
Information in response to this item is incorporated herein by reference from
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on March 10, 1999, which will be filed with the Securities and
Exchange Commission within 120 days after September 30, 1998.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated herein by reference from
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on March 10, 1999, which will be filed with the Securities and
Exchange Commission within 120 days after September 30, 1998.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated herein by reference from
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on March 10, 1999, which will be filed with the Securities and
Exchange Commission within 120 days after September 30, 1998.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1.)Financial Statements.
See Index to Financial Statements appearing at Item B of this Report.
(a)(2.) Financial Statement Schedules
Financial Statement schedules have been omitted because they are
inapplicable or the information is included in the Company's financial
statements and notes thereto.
(a)(3.) Exhibits
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2.1(1) Asset Purchase Agreement among the Company, AV
Rentals/Warren, Inc., AV Rentals/Garystown, Inc.,
Best Rentals Northside, Inc. and C. Dennis
Goldman, dated February 24, 1995.
2.2(4) Agreement and Plan of Merger among the
Company, McKenzie Leasing Corporation, Steve
A. McKenzie, Brenda G. McKenzie and others,
dated June 9, 1995.
2.3(7) Stock Purchase Agreement by and among the
Company, Diamond Leasing Corporation, Kenneth
H. Moye and Lee Brady, dated July 20, 1996.
2.4(9) Stock Purchase Agreement by and among the
Company, Bill Coleman TV, Inc. and
David Coleman, dated January 2, 1997.
2.5(6) Stock Purchase Agreement by and among the
Company, Perry Electronics, Inc., Robert L.
Thomas, Norma J. Thomas, Randall D. Snyder
and Niki L. Snyder, dated January 24, 1997.
2.6(6) Closing Letter Agreement dated February 6,
1997 amending Stock Purchase Agreement by and
among the Company, Perry Electronics, Inc.,
Robert L.Thomas, Norma J. Thomas, Randall D.
Snyder and Niki L. Snyder.
2.7(10) Asset Purchase Agreement by and among the
Company, South Carolina Rentals,Inc.,
Paradise Valley Holdings, Inc., L & B Rents,
Inc. and James S. Archer, dated November 21, 1997.
2.8(11) Stock Purchase Agreement by and among the
Company, Champion Rentals, Inc., Bill C. Ogle, Sr.
and others, dated as of January 30, 1998.
2.9(12) Agreement and Plan of Merger dated September
1, 1998 between the Company and Home Choice
Holdings, Inc.
3.1* Articles of Incorporation of the Company, as amended.
3.2(2) By-Laws of the Company, as amended.
4.1(1) Form of Stock Option Agreement between the
Company and each of the shareholders of
McKenzie Leasing Corporation, dated July 21, 1995.
4.2(1) Registration Rights Agreement among the Company,
Massachusetts Mutual Life Insurance Co. and
affiliates thereof ("MassMutual"), dated July 15, 1995.
4.3(9) Shareholder's Agreement between the Company
and Lee Brady, dated July 20, 1996.
4.4(9) Stock Option Agreement between the Company
and David Coleman, dated January 2, 1997.
10.1(2) Company's Stock Option Plan of 1992.
10.2(1) Company's 1995 Stock Option Plan.
10.3(2) Form of Non-Plan Stock Option Agreement.
10.4(5) Employment Agreement between William E.
Morgenstern and the Company, dated October 1,
1995.
10.5(5) Employment Agreement between Jeffrey A.
Conway and the Company, dated October 1,
1995.
10.6(5) Employment Agreement between Gerald A.
Ryan and the Company, dated October 1,
1995.
10.7(1) Consulting Agreement between the Company
and Marc Joseffer, dated May 18, 1994.
10.8(1) Non-Competition Agreement between Marc
Joseffer and the Company, dated May 18,
1994.
10.9(1) Consulting Agreement between the Company and
McKenzie Development Corporation, dated July
21, 1995.
10.10(1) Non-Competition Agreement between
the Company and Steve A. McKenzie, dated July 21, 1995.
10.11(1) Non-Competition Agreement between the Company
and Brenda G. McKenzie, dated July 21, 1995.
10.12(4) Subordinated Note Agreement among the Company
and MassMutual, dated July 15, 1995.
10.13(1) Form of MassMutual Subordinated Note, dated
July 15, 1995.
10.14(1) Form of MassMutual Warrant, dated July 15, 1995.
10.15(12)Non competition Agreement between the Company
and George D. Johnson, Jr.
10.16* Revolving Credit Facility and Term Loan
Agreement by and among the Company, the banks
party thereto and National City Bank of
Pennsylvania, NationsBank, N.A. and Harris
Bank as Agents, dated December 10, 1998.
10.17(8) Form of the Company's 7% Convertible Subordinated
Debentures due 2007 (the "Debentures").
10.18(8) Indenture, dated February 4, 1997, between
the Company and Manufacturers and Traders
Trust Company, as Trustee, in respect of the
Debentures.
10.19* Non-Compete Agreement between the Company,
South Carolina Rentals, Inc.
Paradise Valley Holdings, Inc., L & B Rents,
Inc. and James S. Archer dated January 7, 1998.
10.20* Non-Compete Agreement between Bill C. Ogle,
Sr., Gary E. Jackson, J. Lee Ogle, Bill C.
Ogle, Jr., Cindy Harper, Teresa Ogle and the
Company, dated February 5, 1998.
10.21* Consulting Agreement between Paul N. Upchurch
and the Company, dated February 5, 1998.
21* Subsidiaries of the Company
23* Consent of PricewaterhouseCoopers LLP.
27* Financial Data Schedule.
- ----------
* Filed herewith
</TABLE>
(1) Previously filed, as of January 5, 1996, pursuant to the Company's
Registration Statement on Form SB-2 (No. 333-116).
(2) Previously filed, as of December 8, 1992, pursuant to the Company's
Registration Statement on Form S-18 (No. 33-55562-NY).
(3) Previously filed, as of July 9, 1993, pursuant to Amendment No. 2 to the
Company's Registration Statement of Form S-18 (No.33-55562-NY).
(4) Previously filed, as of August 15, 1995, as an exhibit to the Company's
Report on Form 8-K.
(5) Previously filed, as of December 28, 1995, as an exhibit to the Company's
Report on Form 10-KSB.
(6) Previously filed, as of February 21, 1997, as an exhibit to the Company's
Report on Form 8-K.
(7) Previously filed, as of August 8, 1996, as an exhibit to the Company's
Report on Form 8-K.
(8) Previously filed, as of May 9, 1997, pursuant to the Company's Registration
Statement on Form S-3 (No. 333-26835).
(9) Previously filed, as of November 6, 1997, as an exhibit to the
Company's Annual Report on Form 10-K.
(10) Previously filed, as of January 20, 1998, as an exhibit to the
Company's Current Report on Form 8-K.
(11) Previously filed, as of February 19, 1998, as an exhibit to the
Company's Current Report on Form 8-K.
(12) Previously filed, as of November 6, 1998, pursuant to the Company's
Registration Statement on Form S-4 (No. 333-66955).
(b) Reports on Form 8-K:
(1) On July 22, 1998, the Company filed a Current Report on Form
8-K disclosing its intention to raise $75.0 million through a
rule 144A private offering of convertible subordinated notes
within the United States.
(2) On July 22, 1998, the Company filed a Current Report on Form
8-K disclosing its issuance of a press release on July 21,
1998, which announced the acquisition of Fast Rentals, Inc.,
an eight-store rental-purchase chain.
(3) On August 12, 1998, the Company filed a Current Report on Form
8-K disclosing its issuance of a press release on August 4,
1998, which announced the indefinite delay of its previously
announced proposed offering of convertible subordinated notes.
(4) On September 14, 1998, the Company filed a Current Report on
Form 8-K disclosing that it had entered into an Agreement and
Plan of Merger, dated as of September 1, 1998, with Home
Choice Holdings, Inc.
(5) On September 16, 1998, the Company filed a Current Report on
Form 8-K disclosing its issuance of a press release on
September 10, 1998, which announced the Company's acquisition
of Cari Rentals, a 23-store rental-purchase chain.
(6) On December 24, 1998, the Company filed a Current Report on
Form 8-K disclosing the consummation of the merger with Home
Choice Holdings, Inc., effective December 10, 1998.
<PAGE>
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.
By: /s/ WILLIAM E. MORGENSTERN
- -------------------------------------------
President and Chief Executive Office
(Principal Executive Officer)
December 29, 1998
Date
By: /s/ JEFFREY A. CONWAY
- -------------------------------------------
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
December 29, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ GERALD A. RYAN Chairman of the Board December 29,
of 1998
Gerald A. Ryan Directors
/s/ WILLIAM E. MORGENSTERN Director December 29,
1998
William E. Morgenstern
/s/ VINCENT CARRINO Director December 29,
1998
Vincent Carrino
/s/ ROBERT FAGENSON Director December 29,
1998
Robert Fagenson
/s/ MARC W. JOSEFFER Director December 29,
1998
Marc W. Joseffer
/s/ WILLIAM LERNER Secretary and Director December 29,
1998
William Lerner
/s/ PAUL N. UPCHURCH Director December 29,
1998
Paul N. Upchurch
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries
RTO Holding Co., Inc., a Delaware corporation
ATRO, Inc., a South Carolina corporation
Action Rent-To-Own Holdings of South Carolina, Inc., a South Carolina
corporation
RTO Operating, Inc., a Delaware corporation doing business as Home Choice
Lease or Own
<PAGE>
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Rent-Way, Inc. on Form S-8 (File Nos. 33-86090, 333-13355 and 333-49355) of our
report dated December 10, 1998 on our audits of the financial statements of
Rent-Way, Inc. as of September 30, 1998 and 1997, and for the years ended
September 30, 1998, 1997 and 1996, which report is included in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Cleveland, Ohio
December 28, 1998
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
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