UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
March 23, 1998 (January 6, 1998) Date
of Report (Date of earliest event reported)
Rent-Way, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 000-22026 25-1407782
(State or other jurisdiction (Commission File Number) (IRS Employer
of corporation) Identification No.)
3230 West Lake Road, Erie, Pennsylvania 16505
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (814) 836-0618
<PAGE>
Item 2. Acquisition or Disposition of Assets
On January 6, 1998, Rent-Way, Inc. (the "Company") completed the asset purchase
of South Carolina Rentals, Inc., Paradise Valley Holdings, Inc., and L&B Rents,
Inc., ("ACE Rentals"), a rental-purchase chain, for consideration of
$25,246,514. Prior to the acquisition, ACE Rentals was controlled by James S.
Archer. The amount and form of consideration paid was determined through arm's
length negotiations. Pursuant to terms of the acquisition, $750,000 of the
purchase price was placed in escrow and held subject to terms of the escrow
agreement. The cash paid for the acquisition was from a combination of funds
received in connection with a public stock offering on December 2, 1997 and the
balance drawn on the Company's existing credit facility with National City Bank
of Pennsylvania.
ACE Rentals operated a chain of 50 rental-purchase stores located in South
Carolina and California. Annual revenues were approximately $22.0 million.
<TABLE>
<CAPTION>
Item 7. Financial Statements and Exhibits
a. Combined financial statements of business acquired:
Audited Financial Statements of South Carolina Rentals,
Inc., Paradise Valley Holdings, Inc., L&B Rents, Inc.,
collectively ACE Rentals.
<S> <C>
Report of Independent Accountants 4
Balance Sheet - December 31, 1997 5
Statement of Operations and Accumulated Deficit - Year 6
Ended December 31, 1997
Statement of Cash Flows - Year Ended December 31, 1997 7
Notes to Financial Statements 8
b. Pro-forma condensed financial information:
Rent-Way, Inc. and South Carolina Rentals, Inc., Paradise
Valley Holdings, Inc., L&B Rents,Inc., collectively ACE
Rentals.
Unaudited Pro Forma Balance Sheet - December 31, 1997 18
Notes to Unaudited Pro Forma Balance Sheet 19
Unaudited Pro Forma Statement of Income
For the Three Months Ended December 31, 1997 21
Unaudited Pro Forma Statement of Income
For the Year Ended September 30, 1997 22
Notes to Unaudited Pro Forma Statements of Income 23
</TABLE>
<PAGE>
c. Exhibits in Accordance with the Provisions of Item 601
of Regulation S-K:
Exhibit
(2)-1 Asset Purchase Agreement between Rent-Way, Inc., South
Carolina Rentals, Inc., Paradise Valley Holdings, Inc.,
L&B Rents, Inc., and James S. Archer dated November 21,
1997.*
(2)-2 Closing Letter Agreement dated January 6, 1998.
Amendment to the Asset Purchase Agreement between
Rent-Way, Inc., South Carolina Rentals, Inc., Paradise
Valley Holdings, Inc., L&B Rents, Inc., and James S.
Archer dated November 21, 1997.*
* Previously filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Rent-Way, Inc.
(Registrant)
Date March 20, 1998
/s/ Jeffrey A. Conway
(Signature)
Jeffrey A. Conway
Chief Financial Officer
-2-
<PAGE>
Report of Independent Accountants
To the Shareholders and Director of
South Carolina Rentals, Inc.,
Paradise Valley Holdings, Inc., and
L&B Rents, Inc.
(ACE Rentals):
We have audited the accompanying combined balance sheet of South Carolina
Rentals, Inc., Paradise Valley Holdings, Inc., and L&B Rents, Inc., collectively
referred to as ACE Rentals, as of December 31, 1997, and the related combined
statements of operations and accumulated deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the ACE
Rentals' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of ACE Rentals
as of December 31, 1997, and the combined results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
March 6, 1998
<PAGE>
<TABLE>
<CAPTION>
Combined Balance Sheet
as of December 31, 1997
ASSETS
<S> <C>
Cash and cash equivalents $ 740,243
Investments 100,761
Accounts receivable 117,838
Note receivable 40,000
Rental merchandise, net 5,905,773
Deferred income taxes 2,472,700
Property and equipment, net 1,124,943
Other assets 275,072
--- ------------
Total assets $ 10,777,330
== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable $ 750,265
Other liabilities 1,519,716
Deferred revenue 58,658
Debt:
Shareholders and relatives 6,966,955
Other 1,049,584
8,016,539
---------------
Total liabilities 10,345,178
Commitments and contingencies (Note 7) 2,553,917
PVH common stock, without par value; 1,000 shares authorized; 950 shares issued
and outstanding which are subject to certain put and call options (Note 1) 1,000,000
Shareholders' deficit:
SCR common stock $.01 par value; 2,000,000 shares authorized; 100,000
shares issued and outstanding 1,000
PVH common stock, without par value; 1,000 shares authorized; 50 shares
issued and outstanding; net of receivable from controlling shareholder -
L&B common stock, $1.00 par value; 100,000 shares authorized; 1,000
shares issued and outstanding 1,000
SCR additional paid-in capital 62,270
L&B additional paid-in capital 334,510
Accumulated deficit (3,520,545)
---------------
Total shareholders' deficit (3,121,765)
---------------
Total liabilities and shareholders' deficit $ 10,777,330
== =============
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Combined Statement of Operations and Accumulated Deficit
for the year ended December 31, 1997
Revenues:
<S> <C>
Rental revenue $ 18,021,017
Other revenue 4,243,735
-----------------
Total revenues 22,264,752
Costs and operating expenses:
Rental merchandise depreciation 4,801,421
Property and equipment depreciation and amortization 599,344
Salaries and wages 6,415,631
Advertising 1,606,979
Occupancy 1,617,879
Other operating expenses 6,982,233
-----------------
Total costs and operating expenses 22,023,487
Operating income 241,265
Other income (expense):
Interest expense (1,557,692)
Interest income 19,389
Other, net (91,987)
------------------
Loss before income taxes (1,389,025)
Income tax benefit 336,000
-----------------
Net loss (1,053,025)
------------------
Accumulated deficit, beginning of year (2,467,520)
------------------
Accumulated deficit, end of year $ (3,520,545)
==================
Unaudited pro forma income data (Note 10):
Net loss, as reported $ (1,053,025)
Pro forma income tax benefit 206,252
-----------------
Pro forma net loss $ (846,773)
==================
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Combined Statement of Cash Flows
for the year ended December 31, 1997
Operating activities
<S> <C>
Net loss $ (1,053,025)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 5,400,765
Loss on the disposal of property and equipment 25,342
Deferred income taxes (336,000)
Changes in assets and liabilities:
Accounts receivable 37,710
Rental merchandise (4,727,084)
Other assets 15,517
Accounts payable 90,560
Deferred revenue 6,599
Other liabilities 643,847
------------------
Net cash provided by operating activities 104,231
------------------
Investing activities:
Note receivable 135,000
Purchase of investments (100,761)
Purchases of property and equipment (525,050)
Proceeds from the sale of property and equipment 13,322
------------------
Net cash used in investing activities (477,489)
-------------------
Financing activities:
Proceeds from the issuance of debt 2,363,595
Payments on debt (3,252,921)
Issuance of PVH common stock 1,000,000
------------------
Net cash provided by financing activities 110,674
------------------
Decrease in cash and cash equivalents (262,584)
Cash and cash equivalents at beginning of year 1,002,827
------------------
Cash and cash equivalents at end of year $ 740,243
------------------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 1,035,352
==================
Income taxes $ -
==================
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE>
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies:
Organization and Business: South Carolina Rentals, Inc. ("SCR"), Paradise
Valley Holdings, Inc. ("PVH"), and L&B Rentals, Inc. ("L&B"), collectively
referred to as "ACE Rentals", are included in the combined financial
statements of ACE Rentals. The purpose of the combined financial
statements is to present the financial position, results of operations and
cash flows of the above entities that are under the control of one
shareholder (the "Controlling Shareholder") who also serves as the Chief
Executive Officer and the sole director. ACE Rentals operates a chain of
stores that rent durable household products such as home entertainment
equipment, furniture, major appliances, video merchandise and jewelry to
consumers on a weekly or monthly basis. The stores are located in the
states of South Carolina and California. The following briefly describes
the three entities included in the combined financial statements of ACE
Rentals:
SCR is incorporated in the state of Georgia and operated 33 rental
purchase stores and 3 separate video rental stores in the state of
South Carolina. SCR has 2,000,000 shares of authorized $.01 par value
common stock of which 100,000 shares are issued and outstanding and are
owned by the Controlling Shareholder.
PVH is incorporated in the state of Georgia and operated 10 rental
purchase stores in the state of South Carolina. PVH has 1,000 shares of
authorized, issued and outstanding no par value common stock of which
50 shares are owned by the Controlling Shareholder. The Controlling
Shareholder exercises control over PVH through a voting agreement with
its Majority Shareholder. The voting agreement allows the Controlling
Shareholder to vote the 950 shares ("Majority Shares") owned by the
Majority Shareholder. The voting agreement terminates at the
Controlling Shareholder's discretion or on September 16, 1999.
The Majority Shares are also subject to certain put and call options,
as follows: (1) PVH or the Controlling Shareholder can purchase the
Majority Shares for $1,000,000, (2) PVH's Majority Shareholder can sell
the Majority Shares for $1,000,000 to PVH, or (3) the Majority
Shareholder receives $1,000,0000 if all of the stock or substantially
all of the assets of PVH are sold to a third party. The call options do
not expire whereas the put options expire on September 16, 1999.
L&B is incorporated in the state of California and operates 4 rental
purchase stores also in California. L&B has 100,000 shares of
authorized $1 par value common stock of which 1,000 shares are issued
and outstanding and 750 shares are owned by the Controlling
Shareholder.
Basis of Preparation: ACE Rentals changed its accounting policy in 1997 to
adopt the use of an unclassified balance sheet rather than a classified
balance sheet to conform to practice in the rental purchase industry.
Accounting Estimates: The preparation of combined financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the combined financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents consist of mutual funds that
are readily marketable.
<PAGE>
Notes to Combined Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Investments: Investments include a note receivable that is readily
marketable. At its acquisition date, management's intent was to sell the
note receivable in the near term and, accordingly, classified the security
as trading. During 1997, no unrealized holding gain or loss on the note
receivable was recognized in the combined statement of operations.
Rental Merchandise, Rental Revenue and Depreciation: Rental merchandise,
other than video merchandise, is rented to customers pursuant to rental
agreements which provide for either weekly or monthly rental payments
collected in advance. Rental purchase agreements may be terminated at any
time by the customers by the surrender of the rental merchandise to ACE
Rentals. Generally, the customer has the right to acquire title through
either a purchase option or through completion of all payments pursuant to
the rental agreement. Video rental merchandise is rented on a daily basis.
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 and the customers' payment is
nonrefundable. This method of revenue recognition does not produce
materially different results than if rental revenue was recognized over the
weekly or monthly rental term.
Merchandise rented to customers or available for rent is classified in the
balance sheet as rental merchandise and is valued at cost on a specific
identification method. Write-offs of rental merchandise arising from
customers' failure to return merchandise and losses due to excessive wear
and tear of merchandise are recognized using the direct write-off method,
which is materially consistent with the results that would be recognized
under the allowance method.
Rental merchandise is depreciated using the units of use method. Under the
units of use method, rental merchandise is depreciated based on the
percentage of current period revenues, whether collected or not, to total
estimated revenues for generally 24 months. The units of use method does
not produce materially different results than the straight-line method of
depreciation. If rental merchandise is sold prior to the completion of
rental agreement term, the remaining cost of the rental merchandise is
written off in that period.
License Fees: ACE Rentals capitalized costs related to the acquisition of
license agreements for the right to use certain software products for an
indefinite period. Such costs are being amortized on the straight-line
method over a ten year period.
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: Property and equipment,
including leasehold improvements are recorded at cost. Additions and
improvements that significantly add to the asset value or extend the lives
of depreciable assets are capitalized. Upon sale or other retirement of
depreciable property, the cost and accumulated depreciation are removed
from the related accounts and any gain or loss is reflected in the results
of operations. Depreciation of furniture and fixtures, signs and vehicles
is provided over the estimated useful lives of the respective assets that
range from three to ten 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, if applicable.
<PAGE>
Notes to Combined Financial Statements, Continued
1. Summary of Significant Accounting Policies, Continued:
Deferred Revenue: ACE Rentals offers insurance coverage to customers for
lost, stolen, or damaged rental merchandise. The insurance coverage is
provided by an outside party for 8.5 percent of the premiums collected. ACE
Rentals recognizes 65.0 percent of the premiums collected as received as a
commission. The remaining 26.5 percent of the premium, from which claims
are paid, is deferred and recognized in revenue on a straight line basis
over a three month period, unless a claim is collected in the interim. At
the completion of the three month period, the insurer remits the remaining
funds, if any, for which claims have not been paid.
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. PVH and L&B
shareholders have elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under those provisions, PVH and L&B do not
pay federal, certain state, or local income taxes on their taxable income
or receive tax benefits. Instead, PVH and L&B shareholders are liable for
or receive the benefits for income taxes on their respective share of the
taxable income on their individual returns. However, PVH and L&B pay
certain state taxes as provided by the states in which they conduct
business. SCR is taxed as a C Corporation.
Advertising Costs: ACE Rentals primarily advertises through television
commercials and printed advertisements. The costs of video production,
commercial time, and printing are expensed in the period incurred.
2. New Accounting Standards:
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. SFAS No. 128
had no impact on ACE Rentals' combined financial statements.
In March 1997, the FASB also issued SFAS No. 129, "Disclosure of
Information about Capital Structure" effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 129 will have no impact
on the ACE Rentals' combined financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" both effective for fiscal years beginning after
December 15, 1997. Management does not believe the adoption of SFAS No. 130
or SFAS No. 131 will have a material impact on ACE Rentals' combined
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
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 ACE Rentals' combined financial statements.
<PAGE>
Notes to Combined Financial Statements, Continued
3. Note Receivable:
On September 9, 1996, ACE Rentals executed a note receivable for an
original principal amount of $175,000 to Cottrell Associates International,
Inc. that was guaranteed by ACE Rentals' outside corporate counsel. The
terms of the loan included no stated interest rate with a redemption
principal amount of $225,000 due on September 24, 1996. If the loan was not
paid on September 24, 1996, ACE Rentals was to receive an 18.0% interest
rate on the unpaid balance.
At December 31, 1997, the original principal amount had an outstanding
balance of $40,000. ACE Rentals has not recorded income related to the
difference between the original principal and the redemption principal or
interest income on the delinquent balance due to the lack of principal
payments by Cottrell Associates International, Inc. and the delayed
payments made by ACE Rentals' corporate counsel in the capacity of
guarantor.
4. Rental Merchandise and Property and Equipment:
<TABLE>
<CAPTION>
Cost and accumulated depreciation of rental merchandise at December 31,
1997 were as follows:
<S> <C>
Rental merchandise $ 10,761,811
Video merchandise 1,056,669
Less accumulated depreciation (5,912,707)
-----------------
$ 5,905,773
================
Property and equipment at December 31, 1997 consists of the following:
Signs $ 170,178
Vehicles 1,741,413
Furniture and fixtures 834,076
Building 141,650
Leasehold improvements 495,752
----------------
3,383,069
Less accumulated depreciation and
amortization (2,258,126)
-----------------
$ 1,124,943
=================
5. Other Liabilities:
Other liabilities at December 31, 1997 consist of the following:
Accrued salaries, wages and payroll taxes $ 316,403
Accrued vacation 103,386
Accrued sales and property taxes 93,918
Accrued interest 866,715
Other 139,294
-----------------
$ 1,519,716
=================
</TABLE>
Notes to Combined Financial Statements, Continued
6. Debt:
<TABLE>
<CAPTION>
Debt at December 31, 1997 consists of the following:
Balance Interest Rates Maturity Date
--------------- ------------------------ -------------------------
SCR:
<S> <C> <C>
Due to Controlling Shareholder $ 1,725,000 13.25% On demand
Due to Controlling Shareholder 2,223,041 13.00% On demand
Due to Controlling Shareholder 468,914 21.00% On demand
Due to relative of Controlling Shareholder 125,000 14.00% 7/98
Due to Majority Shareholder 1,000,000 15.00% 7/98
Vehicle financing obligations 352,659 7.24% - 10.00% 12/98 to 10/17
Mortgage loan 66,119 Index rate + 2.55%
PVH:
Due to Majority Shareholder 1,000,000 12.00% 9/99
Due to relative of Majority Shareholder 275,000 12.00% 9/99
Due to relative of Controlling Shareholder 150,000 12.00% 9/99
Investor notes 401,000 12.00% 9/99
Vehicle financing obligations 160,070 8.74% - 8.84% 3/00 to 11/01
L&B:
Vehicle financing obligations 69,736 10.99% 3/98 to 4/01
---------------
$ 8,016,539
===============
</TABLE>
The amounts due the Controlling Shareholder and relatives, the Majority
Shareholder and relative, and investor notes are not collateralized and pay
interest on a monthly basis with the exception of certain amounts due the
Controlling Shareholder for which no interest payments have occurred.
The Vehicle Financing Obligations are due in monthly installments,
collateralized by the related equipment, and the original terms do not
exceed four years.
The mortgage loan is due in monthly installments that are adjusted annually
based on the index rate as defined in the mortgage loan agreement. The
index rate at December 31, 1997 was 4.97 percent. The mortgage loan is
collateralized by a mortgage on the underlying property.
The amounts due by PVH to the Majority Shareholder and relative, the
relative of the Controlling Shareholder and $300,000 of investor notes are
subject to a participation fee. The participation fee is equal to 20
percent of the principal amount and is payable at the maturity date. In the
event of a sale of 50 percent or more in value of the assets or shares of
stock of PVH prior to September 30, 1999, PVH is required to pay in
addition to the principal and interest, the greater of (i) the 20 percent
participation fee described above or (ii) a prorata share, based on the
ratio of the amount loaned to PVH by the investor to the amounts due by PVH
(excluding payables) of 25 percent of the net cash proceeds of the sale,
after payment of all debt, and payables of PVH incurred in the normal and
ordinary course of business.
ACE Rentals weighted average interest rate on short-term borrowings was
14.1 percent for the year ended December 31, 1997.
<PAGE>
Notes to Combined Financial Statements, Continued
<TABLE>
<CAPTION>
At December 31, 1997, aggregate annual maturities of debt are as follows:
<S> <C>
1998 $ 5,804,394
1999 2,017,241
2000 130,142
2001 12,206
2002 3,391
Thereafter 49,165
---------------
$ 8,016,539
===============
</TABLE>
7. Commitments and Contingencies:
ACE Rentals leases space for 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 ACE Rentals. At December 31, 1997, future minimum
rental payments under non-cancellable operating leases were as follows:
<TABLE>
<S> <C>
1998 $ 1,086,211
1999 729,939
2000 418,101
2001 288,605
2002 96,569
Thereafter 413,656
---------------
$ 3,033,081
===============
</TABLE>
Rent expense under operating leases for 1997 was $1,243,757.
On March 13, 1997, SCR entered into a Foreclosure Agreement and Release
with Transamerica Commercial Financial Corporation ("TCFC") whereby SCR
paid $3,050,000 (the "Settlement Payment"), including $50,000 of interest,
to TCFC in exchange for a Conditional Release from amounts due TCFC under
the Term Loan and Security Agreement dated April 1, 1993. The Controlling
Shareholder loaned $2,050,000 to SCR and returned 950 shares of PVH common
stock that were subsequently reissued to Majority Shareholder for
$1,000,000. The proceeds from the loan to SCR and PVH common stock sale
were used to repay TCFC. The amount due TCFC at March 13, 1997 was
$5,539,667. SCR accounted for this repayment as a troubled debt
restructuring in accordance with the provisions of SFAS No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructuring". Accordingly, due
to the contingencies described in the following paragraph, the remaining
debt of $2,539,667 is recorded as a loss contingency and will be recorded
as an extraordinary gain upon the expiration of the contingencies.
<PAGE>
Notes to Combined Financial Statements, Continued
7. Commitments and Contingencies, Continued:
The Conditional Release discharges SCR and the Controlling Shareholder
("Guarantor") of liability under the Term Loan and Security Agreement
contingent on the satisfaction of the following three events for the next
five years: (1) no event of default by SCR or Guarantor under the terms of
the Forbearance Agreement and Release; (2) neither SCR nor Guarantor files
for or is made the subject of any action or petition, on or before the
Application Date seeking relief in bankruptcy or seeking reorganization,
arrangement, receivership, composition, readjustments, liquidation,
insolvency protection or similar relief or is the subject of any order for
relief under Title 11 of the U.S. Code, as amended, (3) neither SCR,
Guarantor, nor TCFC receives notice of any claim, demand, suit, proceeding,
or inquiry against or directed to TCFC, Guarantor, or TCFC relating to any
payment made to TCFC or any interest asserted by any person, entity or
governmental agency or body against any funds paid to TCFC, and which
results in the payment by or on behalf of TCFC of any of the Settlement
Payment to any person, entity, or governmental agency or body.
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 that in total are
$14,250. In management's opinion, the claims will be settled without a
material effect on the results of operations, cash flows or financial
position of ACE Rentals.
Additional claims exist in the range of $2,000 to $200,000 for which
management believes it has meritorious defenses but for which the
likelihood of an unfavorable outcome is currently not determinable. In
management's opinion, the claims will be settled without a material effect
on the results of operations, cash flows or financial position of ACE
Rentals.
8. Income Taxes:
<TABLE>
<CAPTION>
ACE Rentals 1997 income tax benefit consists of the following components:
<S> <C>
Current expense:
Federal $ -
State and local -
---------------
-
---------------
Deferred expense:
Federal 260,300
State and local 75,700
---------------
336,000
---------------
$ 336,000
===============
</TABLE>
<PAGE>
Notes to Combined Financial Statements, Continued
8. Income Taxes, Continued:
A reconciliation of the income tax benefit compared with the amount at the
U.S. statutory tax rate of 34% for 1997 is shown below:
<TABLE>
<CAPTION>
<S> <C>
Tax benefit at U.S. statutory rate $ 472,269
State and local income taxes,
net of federal benefit 82,503
Benefit of S Corporation losses received by
shareholders (206,252)
Other (12,520)
----------------
Income tax benefit $ 336,000
===============
At December 31, 1997, the components of the deferred tax asset are as
follows:
Tax loss carryforwards $ 1,452,700
Contingent liability (Note 7) 1,019,000
Other 1,000
---------------
$ 2,472,700
===============
</TABLE>
Tax loss carryforwards begin to expire in the year 2004 and will remain
with SCR after the consummation of the Asset Purchase Agreement (Note 10).
9. Related Party Transactions:
The Controlling Shareholder receives a management fee of $20,000 per month
from ACE Rentals for services rendered.
Phoenix Ad Group, Inc., a corporation in which the Controlling Shareholder
is the sole shareholder, purchases and places advertising for ACE Rentals
and employs an employee that provides substantial services to ACE Rentals
including accounting and recordkeeping. In exchange for such services, ACE
Rentals paid advertising and consulting fees to Phoenix Ad Group, Inc.
that amounted to $183,120 in 1997.
In March 1997, ACE Rentals moved a rental purchase store into a building
purchased in January 1997 by the Controlling Shareholder. Additionally,
ACE Rentals rents a storage facility in Athens, Georgia from the
Controlling Shareholder. Rent expense for 1997 totaled $39,400 for both
the rental purchase store location and storage facility owned by the
Controlling Shareholder.
The Majority Shareholder (Note 1) and a relative receive a management fee
of $13,333 per month for an agreement to render certain management and
consulting services to PVH on a periodic basis. The management fee will
continue until one of the following events occurs: (1) PVH or the
Controlling Shareholder exercises the options to purchase the Majority
Shares, (2) the Majority Shareholder exercises the option to sell the
shares to PVH or (3) all of the stock or substantially all of the assets
of PVH are sold to a third party.
<PAGE>
Notes to Combined Financial Statements, Continued
9. Related Party Transactions, Continued:
In the normal course of business, ACE Rentals advances funds to employees
or allows employees to purchase rental merchandise that is repaid through
subsequent payroll deductions. At December 31, 1997, the balance due from
employees was $25,156.
10. Subsequent Events:
On January 6, 1998, ACE Rentals consummated an Asset Purchase Agreement
with Rent-Way, Inc. that resulted in the sale of substantially all of ACE
Rentals assets effective January 1, 1998. The sales price was $24,375,000,
subject to certain adjustments defined in the Asset Purchase Agreement.
Additionally, Rent-Way, Inc. assumed the vehicle financing obligations
disclosed in Note 6. The proceeds from the sale were used to pay the
principal, accrued interest and participation fees for certain notes
payable, repurchase the Majority Shares and to fund the opening of ten new
store locations in Tennessee and North Carolina.
Prior to the consummation of the Asset Purchase Agreement with Rent-Way,
Inc., PVH and L&B operated as S Corporations and, as such, were not liable
for or benefited by federal and certain state and local income taxes
(benefits). As a result, the earnings or losses of PVH and L&B have been
reported for federal and certain state and local income tax purposes
directly to the shareholders rather than PVH or L&B. Accordingly, net
loss, as reported in the accompanying combined statements of operations
does not include a benefit for these income taxes.
Effective with the acquisition of assets by Rent-Way, Inc., the operations
of PVH and L&B will be included with the Rent-Way, Inc. federal and state
and local income tax filings. Accordingly, for informational purposes, the
combined statement of operations include unaudited pro forma adjustments
for additional income tax benefits which would have been recorded if PVH
and L&B had been taxed as a C Corporations, based on the tax laws in
effect during 1997.
<TABLE>
<CAPTION>
Unaudited pro forma income tax benefit for 1997 is as follows:
Current:
<S> <C>
Federal $ -
State and local -
-------------
-
-------------
Deferred:
Federal 420,062
State and local 122,190
-------------
542,252
-------------
Total $ 542,252
=============
</TABLE>
<PAGE>
Notes to Combined Financial Statements, Continued
10. Subsequent Events, Continued:
<TABLE>
<CAPTION>
The difference between unaudited pro forma income taxes at the statutory
federal income tax rate of 34% and the unaudited pro forma taxes reported
in the statements of operation are as follows:
<S> <C>
Federal tax at statutory rate $ 472,269
Additional state and local income taxes
net of federal benefit 82,503
Other (12,520)
--------------
$ 542,252
=============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rent-Way, Inc.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
December 31, 1997
ACE Pro Forma
Rent-Way Rentals Adjustments Pro Forma (1)
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash $ 19,810,498 $ 740,243 $ (21,240,243)(2)(4) $ (689,502)
Prepaid expenses 3,133,187 3,133,187
Rental merchandise,net 40,819,639 5,905,773 (885,339) (2) 45,840,073
Deferred income taxes 1,129,133 2,472,700 (2,472,700) (2) 1,129,133
Property and equipment, net 9,063,397 1,124,943 (245,819) (2) 9,942,521
Goodwill, net 43,369,291 19,429,421 (3) 62,798,712
Deferred financing costs, net 1,327,872 1,327,872
Prepaid consulting fee 1,832,384 1,832,384
Other assets 3,160,442 533,671 (33,671)(2)(3) 3,660,442
---------------- --------------- --------------- ----------------
================ =============== =============== ================
Total assets $ 123,645,843 $ 10,777,330 $ (5,448,351) $ 128,974,822
================ =============== =============== ================
================ =============== =============== ================
.
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,009,969 $ 750,265 $ (750,265) (2) 2,009,969
Other liabilities 2,923,559 1,578,374 (1,578,374) (2) 2,923,559
Income tax payable 1,330,951 762,645 (5) 2,093,596
Debt 20,132,835 8,016,539 (2,687,560)(2)(4) 25,461,814
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
Total liabiilities 26,397,314 10,345,178 - (4,253,554) 32,488,938
Commitments and contingencies 2,553,917 (2,553,917) (2)
Common Stock 1,000,000 (1,000,000) (2)
Shareholders' equity:
Common stock 87,016,587 398,780 (398,780) (2) 87,016,587
Retained earnings (deficit) 10,231,942 (3,520,545) 2,757,900 (2)(5) 9,469,297
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
Total shareholders' equity 97,248,529 (3,121,765) 2,359,120 - 96,485,884
---------------- --------------- --------------- ----------------
================ =============== =============== ================
Total liabilities and
Shareholder's equity $ 123,645,843 $ 10,777,330 $ (5,448,351) $ 128,974,822
================ =============== =============== ================
================ =============== =============== ================
Shareholder's equity
See notes to unaudited condensed pro forma balance sheet
</TABLE>
<PAGE>
Rent-Way, Inc.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed balance sheet has been prepared assuming
the acquisition of ACE Rentals had occurred on December 31, 1997. The
acquisition has been accounted for as a purchase in accordance with the
provisions of Accounting Principles Board Opinion No. 16, and accordingly, the
purchase price has been allocated to the net assets acquired based on historical
information available to management and preliminary estimates of fair market
value.
<TABLE>
<CAPTION>
(2) The excess purchase prices over the fair value of the net assets of ACE
Rentals were calculated as follows:
ACE Rentals
----------------
----------------
Purchase price:
<S> <C>
Cash $ 24,375,000
Other acquisition and closing costs 871,514
----------------
----------------
Total purchase price 25,246,514
Less net assets acquired as reported (6,448,251)
Plus fair value adjustments:
Adjustment to record rental
merchandise at fair value 885,339
Adjustment to record property and
equipment at fair value 245,819
----------------
----------------
Excess purchase price over fair value
of net assets $ 19,929,421
================
================
</TABLE>
(3) The excess purchase price over the fair value of the net assets was
allocated to assets and liabilities based on historical information and
preliminary estimates of fair value. The final purchase price allocation is
subject to refinement upon completion of a review of rental merchandise,
property and equipment, and intangibles assets (ie. non-compete
agreements). The excess of purchase price over the fair value of net assets
was allocated to a non-compete agreement and goodwill as follows:
ACE Rentals
----------------
----------------
Adjustment to record non-compete
agreement $ 500,000
Adjustment to recognize goodwill 19,429,421
----------------
----------------
Excess purchase price over fair value
of net assets $ 19,929,421
================
================
(4) The pro forma condensed balance sheet has been prepared assuming a
combination of borrowings from the Company's senior revloving credit
facility and funds from the Company's public stock offering in December
1997, were used to pay for the acquisition and the related acquisition
costs of ACE Rentals.
ACE Rentals
----------------
----------------
Cash payment $ 24,375,000
Payment of acquisition and closing
costs 871,514
----------------
----------------
Total cash paid $ 25,246,514
================
================
Senior revolving credit facility $ 4,746,514
Funds from public stock offering
included in cash 20,500,000
----------------
----------------
Total funding $ 25,246,514
================
================
(5) The pro forma condensed balance sheet has been adjusted to recognize an
increase in income taxes payable resulting from pro forma income statement
adjustments.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
For the Three Months Ended December 31, 1997
ACE Pro Forma
Rent-Way Rentals Adjustments Pro Forma
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue $ 23,515,013 $ 1,602,296 $ - $ 25,117,309
Other revenue 3,151,130 307,749 3,458,879
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total revenues 26,666,143 1,910,045 - 28,576,188
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 6,259,770 568,213 6,827,983
Property and equipment 565,855 20,471 586,326
Amortization of goodwill 590,802 161,912 (1) 752,714
Salaries and wages 6,975,988 459,640 (155,629) (2) 7,279,999
Advertising 1,228,284 125,199 1,353,483
Occupancy 1,841,436 207,439 2,048,875
Other operating expenses 4,927,909 506,028 25,000 (3) 5,458,937
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total costs and
Operating expenses 22,390,044 1,886,990 31,283 24,308,317
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating income 4,276,099 23,055 (31,283) 4,267,871
Other Income (expense):
Interest expense (795,409) (97,092) 385,165 (4) (507,336)
Interest income 109,655 12,149 121,804
Other income(expense), net (8,184) 232,104 223,920
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income before income taxes 3,582,161 170,216 353,882 4,106,259
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income tax expense (benefit) 1,547,494 4,600 213,597 (5) 1,765,691
------------- ------------- ------------- -------------
============= ============= ============= =============
Net income $ 2,034,667 $ 165,616 $ 140,285 $ 2,340,568
============= ============= ============= =============
============= ============= ============= =============
Diluted weighted average
Common shares outstanding 10,790,233 416,667 (6) 11,206,900
============= =============
============= =============
Diluted earnings per
Common share $ 0.21 $ 0.23
============= =============
============= =============
See notes to unaudited pro forma condensed statement of income.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rent-Way, Inc.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended September 30, 1997
Year Ended Year Ended
9/30/97 12/31/97 Pro Forma
Rent-Way ACE Rentals Adjustments Pro Forma
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue $ 77,498,328 $ 18,021,017 $ - $ 95,519,345
Other revenue 10,545,206 4,243,735 14,788,941
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Total revenues 88,043,534 22,264,752 - 110,308,286
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 20,314,482 4,801,421 25,115,903
Property and equipment 1,530,133 599,344 2,129,477
Amortization of goodwill 1,926,287 - 647,647 (1) 2,573,934
Salaries and wages 22,809,722 6,415,631 (622,516) (2) 28,602,837
Advertising 3,898,610 1,606,979 5,505,589
Occupancy 5,987,604 1,617,879 7,605,483
Other operating expenses 17,790,535 6,982,233 100,000 (3) 24,872,768
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Total costs and
Operating expenses 74,257,373 22,023,487 125,131 96,405,991
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Operating income 13,786,161 241,265 (125,131) 13,902,295
Other Income (expense):
Interest expense (3,129,894) (1,557,692) 2,958,159 (4) (1,729,427)
Deferred financing expense (239,086) - (239,086)
Interest income 920 19,389 20,309
Other income, net (103,681) (91,987) - (195,668)
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Income before income taxes
and extraordinary items 10,314,420 (1,389,025) 2,833,028 11,758,423
Income tax expense (benefit) 4,629,477 (336,000) 762,645 (5) 5,056,122
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Income (loss) before extraordinary item 5,684,943 (1,053,025) 2,070,383 6,702,301
Extraordinary item (269,017) - - (269,017)
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Net income (loss) 5,415,926 (1,053,025) 2,070,383 6,433,284
Preferred stock
Gain on redemption 280,175 - 280,175
----------------- ----------------- ---------------- ----------------
----------------- ----------------- ---------------- ----------------
Earnings applicable to
Common shares $ 5,696,101 $ (1,053,025) $ 2,070,383 $ 6,713,459
================= ================= ================ ================
================= ================= ================ ================
Diluted weighted average
Common shares outstanding 9,322,925 2,291,667 (6) 11,614,592
================= ================
================= ================
Diluted earnings per
Common share $ 0.72 $ 0.66
================= ================
================= ================
See notes to unaudited pro forma condensed statement of income
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rent-Way, Inc.
UNAUDITED NOTES TO PRO FORMA CONDENSED STATEMENTS OF INCOME
(1) Adjustment to recognize amortization of goodwill on a straight line basis
over thirty years
<S> <C>
Three months ended December 31, 1997 for ACE Rentals $ 161,912
Year ended September 30, 1997 for ACE Rentals $ 647,647
(2) Salaries and wages have been adjusted for the elimination of the former
owner of ACE Rentals
Three months ended December 31, 1997 for ACE Rentals $ (155,629)
Year ended September 30, 1997 for ACE Rentals $ (622,516)
(3) Adjustment for amortization of non-compete agreements on a straight line
basis over five years
Three months ended December 31, 1997 for ACE Rentals $ 25,000
Year ended September 30, 1997 for ACE Rentals $ 100,000
(4) Adjustment to interest expense on borrowings for acquisition offset by
elimination of debt for ACE Rentals and the elimination of the Company's
debt with funds from the public stock offering
Three months ended December 31, 1997 for ACE Rentals $ (385,165)
Year ended September 30, 1997 for ACE Rentals $ (2,958,159)
(5) Adjustment to record income tax expense based on effective tax rate of 43%
Three months ended December 31, 1997 for ACE Rentals $ 213,597
Year ended September 30, 1997 for ACE Rentals $ 762,645
(6) Adjustment to recognize increase in shares outstanding as a result of
public offering
Three months ended December 31, 1997 for ACE Rentals 416,667
Year ended September 30, 1997 for ACE Rentals 2,291,667
</TABLE>
