<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22026
RENT-WAY, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of incorporation)
25-1407782
(I.R.S. Employer Identification No.)
ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
(Address of principal executive offices)
(814) 455-5378
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class
- --------------------------------------------------------------------------------
Common Stock
Outstanding as of December 31, 1998
- --------------------------------------------------------------------------------
21,159,468
================================================================================
<PAGE> 2
RENT-WAY, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and September 30, 1998...............3
Consolidated Statements of Operations, Three Months Ended December 31, 1998 and 1997.....4
Consolidated Statements of Cash Flows, Three Months Ended December 31, 1998 and 1997.....5
Notes to Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.........................................................................13
Item 4. Submission of Matters to a Vote of Security Holders..................................18
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................................19
Signatures...................................................................................20
</TABLE>
2
<PAGE> 3
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(all dollars in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash ............................................... $ 3,211 $ 5,326
Prepaid expenses ................................... 8,406 7,819
Income tax receivable .............................. 2,625 1,972
Rental merchandise, net ............................ 197,043 176,022
Deferred income taxes .............................. 2,324 2,912
Property and equipment, net ........................ 38,989 38,519
Goodwill, net ...................................... 224,206 225,354
Deferred financing costs, net ...................... 2,136 1,575
Non-compete and prepaid consulting fees, net ....... 6,233 6,950
Other assets ....................................... 6,971 8,993
-------- --------
Total assets .................................. $492,144 $475,442
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable ................................... $ 23,070 $ 28,145
Other liabilities .................................. 22,529 19,831
Debt ............................................... 208,162 179,603
-------- --------
Total liabilities ............................. 253,761 227,579
Contingencies (see note 7) ......................... -- --
Shareholders' equity:
Preferred stock, without par value;
1,000,000 shares authorized;
no shares issued and outstanding.................. -- --
Common stock, without par value;
50,000,000 shares authorized;
21,159,468 and 21,060,820 shares issued and
outstanding, respectively......................... 242,320 241,749
Retained earnings (accumulated deficit) ............ (3,937) 6,114
-------- --------
Total shareholders' equity .................... 238,383 247,863
-------- --------
Total liabilities and shareholders' equity .... $492,144 $475,442
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(all dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES:
Rental revenue .................................. $109,634 $76,757
Other revenue ................................... 14,325 11,151
-------- -------
Total revenues ............................. 123,959 87,908
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise ............................ 31,324 21,994
Property and equipment ........................ 2,185 1,633
Amortization of goodwill ...................... 2,495 2,385
Salaries and wages .............................. 33,328 26,807
Advertising ..................................... 7,787 5,930
Occupancy ....................................... 8,147 6,449
Name change expense ............................. 86 743
Business combination costs ...................... 16,368 71
Other operating expenses ........................ 29,327 24,293
-------- -------
Total costs and operating expenses ......... 131,047 90,305
-------- -------
Operating loss ............................. (7,088) (2,397)
OTHER INCOME (EXPENSE):
Interest expense ................................ (3,613) (1,705)
Interest income ................................. 26 141
Other income (expense), net ..................... (191) (50)
-------- -------
Loss before income taxes and
extraordinary item........................ (10,866) (4,011)
Income tax benefit .............................. (1,335) (904)
-------- -------
Loss before extraordinary item ........... (9,531) (3,107)
Extraordinary item, net of tax benefit .......... (519) --
-------- -------
Net loss ........................................ $(10,050) $(3,107)
======== =======
LOSS PER COMMON SHARE (SEE NOTE 3):
Basic loss per common share:
Loss before extraordinary item ........... $ (0.45) $ (0.17)
======== =======
Net loss ................................. $ (0.48) $ (0.17)
======== =======
Diluted loss per common share:
Loss before extraordinary item ........... $ (0.45) $ (0.17)
======== =======
Net loss ................................. $ (0.48) $ (0.17)
======== =======
Weighted average common shares outstanding:
Basic .................................... 21,088 18,507
======== =======
Diluted .................................. 21,088 18,507
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(all dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .............................................. $(10,050) $ (3,107)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sale of property and equipment .............. -- 138
Depreciation and amortization ....................... 36,004 33,985
Deferred income taxes ............................... 588 (2,286)
Extraordinary item .................................. 519 --
Changes in assets and liabilities:
Prepaid expenses .................................... (587) (1,681)
Rental merchandise .................................. (52,345) (52,043)
Prepaid consulting fees ............................. 717 (89)
Income taxes receivable ............................. (654) 503
Other assets ........................................ 2,021 (3,071)
Accounts payable .................................... (10,265) 10,942
Income taxes payable ................................ -- (936)
Other liabilities ................................... 2,699 (628)
-------- --------
Net cash used in operating activities ............ (31,353) (18,273)
-------- --------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ........ (727) (1,639)
Purchases of property and equipment ................. (3,275) (6,354)
Proceeds from sale of property and equipment ........ -- (672)
Dispositions of stores, net of cash sold ............ -- 3,032
Payments received on notes receivable ............... -- 605
--------
Net cash used in investing activities ............ (4,002) (5,028)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings ............................ 208,475 29,507
Payments on borrowings including early
extinguishment.................................... 179,916) (37,460)
Book overdraft ...................................... 5,190 1,643
Deferred finance costs .............................. (1,080) 64
Proceeds from common stock issuance ................. 571 47,319
-------- --------
Net cash provided by financing activities ........ 33,240 41,073
-------- --------
Increase (decrease) in cash ...................... (2,115) 17,772
Cash at beginning of period ........................... 5,326 5,608
-------- --------
Cash at end of period ................................. $ 3,211 $ 23,380
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................... $ 3,956 $ 1,490
Income taxes ................................... $ 14 $ 2,175
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all dollars in thousands, except per share data)
1. BASIS OF PRESENTATION:
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 rental-purchase stores that rent durable household products such as home
entertainment equipment, furniture, and major appliances and jewelry to
consumers on a weekly or monthly basis. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q, and therefore, do not include all information and
notes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments (which, except as
discussed herein consist of normal recurring adjustments), which are necessary
for a fair statement of the financial position, results of operations and cash
flows of the Company have been made. Certain amounts in the 1997 financial
statements have been reclassified to conform to the 1998 presentation and have
been restated to reflect the merger discussed in Note 2 herein. The results of
operations for the interim periods are not necessarily indicative of the results
for the full year.
The Company utilizes derivative financial instruments to reduce its exposure
resulting from fluctuations in interest rates. The derivative financial
instruments in effect at December 31, 1998 consist of eight interest rate swap
agreements. The interest rate swap agreements are used by the Company to convert
part of the Company's floating interest rate debt to a fixed interest rate.
Interest rate expense under swap agreements, which qualify for hedge accounting,
are recorded at the net effective interest rate of hedged transactions. The
Company's practice is not to hold or issue derivative financial instruments for
trading or speculative purposes (see Note 6).
The Company has no items of other comprehensive income.
These financial statements and the notes thereto should be read in
conjunction with the Company's audited financial statements included in its
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
2. MERGER WITH HOME CHOICE HOLDINGS, INC:
On December 10, 1998, the Company completed a merger (the "Merger") with
Home Choice Holdings, Inc. ("HMCH"). The Merger, as per the terms of the
agreement, was recorded as a pooling of interests, in accordance with Accounting
Principles Board ("APB") Opinion No. 16. Under the terms of the agreement the
Company issued 0.588 shares of common stock for each outstanding share of HMCH
common stock. The Merger increased the outstanding shares of the Company by
approximately 10,025,000 shares. On a combined basis the Company is the second
largest rental-purchase chain in the industry, with 865 stores in 35 states. The
corporate offices of the combined company are located in Erie, Pennsylvania.
None of HMCH's Board of Directors or executive officers retained a position with
the combined company. Gerald A. Ryan remains as Chairman of the Board of the
combined company, with William E. Morgenstern as President and Chief Executive
Officer and Jeffrey A. Conway as Chief Financial Officer.
In conjunction with the Merger, certain costs were incurred which were
recorded by the Company during the quarter ended December 31, 1998. These costs
aggregated $16,368 and included (i) investment banker fees of $6,476, (ii) proxy
preparation, printing and other professional fees of $1,180, (iii) employee
severance and stay-put arrangement costs of $3,371, (iv) due diligence and other
costs of $874, (v) costs related to closing or disposing of duplicate corporate
headquarters, equipment and stores in overlapping markets of $3,016 and (vi)
write-off of prepaid assets which will not be used of $1,451. The costs related
to stay-put arrangements with certain employees are being amortized over the
required periods of service, which will result in related costs of $435 being
recorded by the Company in the quarter ended March 31, 1999.
In addition, the Company identified a large number of rental-merchandise
items, which failed to meet the accepted quality standards of the Company's
operating procedures. Accordingly, resulting from compliance with standard
operating procedures, the Company experienced an excessive amount of inventory
deletions during the three month period ended December 31, 1998. The amount of
inventory write-offs, included in other operating expenses in the Condensed
Consolidated Statement of Operations for this period, exceeded the average for
previous quarters by approximately $1,100.
In conjunction with the Merger, the Company entered into a new
syndicated loan facility, (see Note 5). As a result of this refinancing, the
Company wrote off the remainder of deferred financing costs associated with its
and
6
<PAGE> 7
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
2. MERGER WITH HOME CHOICE HOLDINGS, INC (continued):
HMCH's previous credit facilities. The amount of the remaining deferred
financing costs was $865 ($519 net of tax benefit). This amount appears as an
extraordinary item on the Company's Condensed Consolidated Statement of
Operations.
The revenues, extraordinary item and net income (loss) of the separate companies
are as follows:
<TABLE>
<CAPTION>
Three months ended December 31, 1998
--------------------------------------------------------
Revenues Extraordinary Item Net Income (Loss)
-------- ------------------ -----------------
<S> <C> <C> <C>
Rent-Way October 1, 1998 to
November 30, 1998 $ 37,171 $-- $ 2,231
HMCH October 1, 1998 to
November 30, 1998 44,270 -- (230)
Rent-Way and HMCH December
1, 1998 to December 31, 1998 42,518 $519 (12,051)
======== ==== ========
Total $123,959 $519 $(10,050)
======== ==== ========
<CAPTION>
Three months ended December 31, 1997
---------------------------------------------------------
Rent-Way $266,666 $-- $ 2,035
HMCH 61,242 -- (5,142)
======== ==== ========
Total $ 87,908 $-- $ (3,107)
======== ==== ========
</TABLE>
3. LOSS PER COMMON SHARE:
Basic loss per common share is computed using income available to common
shareholders divided by the weighted average number of common shares
outstanding. Diluted loss per common share is computed using income available to
common shareholders adjusted for anticipated interest savings, net of related
taxes, for convertible subordinated debentures and the weighted average number
of shares outstanding is adjusted for the potential impact of options, warrants
and convertible subordinated debentures where the effects are dilutive. The
weighted average shares outstanding prior to December 10, 1998 include the
historical weighted average shares of HMCH, adjusted for the exchange ratio of
0.588 (see Note 2). Because operating results were losses, basic and diluted
earnings per common share were the same for both periods.
7
<PAGE> 8
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
3. LOSS PER COMMON SHARE (continued):
The following table discloses the reconciliation of numerators and
denominators of the basic and diluted loss per common share computation:
FOR THE THREE MONTHS
ENDED
DECEMBER 31,
(UNAUDITED)
-------------------------
COMPUTATION OF LOSS PER SHARE: 1998 1997
- ------------------------------ -------- -------
BASIC
Loss applicable to common shares for basic
earnings per share..................... $(10,050) $(3,107)
======== =======
Weighted average number of common shares
outstanding during the period.......... 21,088 18,507
======== =======
Basic loss per common share:
Loss before extraordinary item......... $ (0.45) $ (0.17)
======== =======
Net loss............................... $ (0.48) $ (0.17)
======== =======
DILUTED
Loss applicable to common shares......... $(10,050) $(3,107)
======== =======
Weighted average number of common shares
outstanding during the period.......... 21,088 18,507
======== =======
Loss per common share:
Loss before extraordinary item......... $ (0.45) $ (0.17)
======== =======
Net loss............................... $ (0.48) $ (0.17)
======== =======
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 23
rental purchase stores located in Iowa, Missouri, Nebraska and South Dakota,
with annual revenues of approximately $7,700 in exchange for consideration of
$7,325 consisting of 16,000 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 in cash. Pursuant to the terms of the acquisition, $500 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 $6,090 is being amortized on a
straight line basis over 30 years. The total cost of the net assets acquired was
$7,325 ($425 in common stock and $6,900 in cash) and consisted of assets of
$7,540 less acquisition costs of $215. Assets acquired (at fair value) other
than goodwill consisted primarily of rental merchandise of $1,400 and a
non-compete agreement of $50. The Condensed Consolidated Statement of Operations
for the three months ended December 31, 1998 includes the results of operations
of Cari for the entire period.
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 in cash. Pursuant to the terms
of the acquisition, $200 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 $2,320 is being amortized on a straight line basis over 30
years. The total cost of the net assets acquired was $2,047 and consisted of
assets of $3,060 less liabilities assumed of $858 and acquisition costs of $155.
Assets acquired (at fair value) other than goodwill consisted primarily of
rental merchandise of $620, prepaid expenses of $33, other assets of $12 and a
non-compete agreement of $75. Liabilities assumed (at fair value) consisted
primarily of trade payables of $29, accrued liabilities of $43 and debt of $786.
The Condensed Consolidated Statement of Operations for the three months ended
December 31, 1998 includes the results of operations of Fast Rentals for the
entire period.
8
<PAGE> 9
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
4. ACQUISITIONS (continued):
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 $75,000. The
consideration paid in exchange for all the outstanding shares of Champion was
$69,050 in cash. Pursuant to terms of the purchase agreement $2,500 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 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 of
the released amount was given to the sellers with the balance being returned to
the Company. The balance of $1,000 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 $67,689 is being
amortized on a straight line basis over 30 years. The total costs of net assets
acquired was $69,050 and consisted of assets of $91,169 less liabilities assumed
of $18,408 and acquisition costs of $3,711. The acquisition of Champion was
funded with borrowings drawn on the Company's existing senior credit facility.
Assets acquired (at fair value), other than goodwill consisted primarily of
rental merchandise of $18,134, property and equipment of $159, other assets of
$3,219, prepaid expenses of $508, non-compete agreement of $1,000 and customer
contracts of $460. Liabilities assumed (at fair value) consisted primarily of
trade payables of $3,925, accrued liabilities of $2,356 and debt of $12,127. The
Condensed Consolidated Statement of Operations for the three months ended
December 31, 1998 includes the results of operations of Champion for the entire
period.
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 50 rental-purchase stores located in California and South
Carolina with annual revenues of approximately $22,000. The consideration paid
in exchange for the assets of Ace Rentals was $25,348 in cash. Pursuant to the
terms of the purchase agreement, $750 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 of the $750 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 $21,495 is being
amortized on a straight line basis over 30 years. The total costs of net assets
acquired was $25,348 and consisted of assets of $26,767 less a liability assumed
of $478 and acquisition costs of $941. The acquisition of Ace Rentals was
primarily funded with proceeds received in connection with the Company's public
stock offering on December 2, 1997, with the balance being drawn on the
Company's existing senior credit facility. Assets acquired (at fair value) other
than goodwill consisted primarily of rental merchandise of $4,383, property and
equipment of $249, non-compete agreement of $500 and $140 in customer contracts.
The liability assumed (at fair value) was $478 of vehicle related debt. The
Condensed Consolidated Statement of Operations for the three months ended
December 31, 1998 includes the results of operations of Ace Rentals for the
entire period.
During calendar year 1998, the Company also purchased from six separate
entities the rental merchandise and contracts of 17 rental-purchase stores
located in Arizona, Florida, Texas and Washington. 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 the acquisition. The excess of the acquisition price ("goodwill") of
$3,052 is being amoritized on a straight line basis over 30 years. The total
cost of net assets acquired was $4,903. The Condensed Consolidated Statement of
Operations for the three months ended December 31, 1998 includes the results of
operations for these acquisitions for the entire period.
The following are pro forma results of operations for the three months ended
December 31, 1997 assuming the acquisitions of Champion and Ace Rentals had
occurred on October 1, 1996. The results are not necessarily indicative of
future operations or what would have occurred had the acquisitions been
consummated as of that date.
UNAUDITED PRO FORMA
OPERATIONS
THREE MONTHS ENDED
DECEMBER 31, 1997
-------------------
Revenues.................................. $109,056
Net loss.................................. (3,461)
========
Pro forma diluted loss per common share... (0.19)
========
9
<PAGE> 10
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
5. DEBT:
On December 10, 1998, the Company entered into a new collateralized term
loan and revolving credit facility (the "Facility") due December 10, 2003 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 $92,000 (subject to
an initial availability of $87,000 and, thereafter, to formula-based
availability), with the ability to add other banks to the syndicate during the
first 90 days of the Facility to increase the term loans to $125,000 and the
maximum amount of the revolving loans and letters of credit to $100,000. The
principal amount of the term loans are payable in quarterly payments due on the
last day of each September, December, March, and June, beginning with the
quarter ending September 30, 1999 and are as follows:
Percentage of Principal (as
Quarter(s) Ending on of the last day of the
Following Date or In The Syndication Period)
Following Period Due on Each Quarterly Payment Date
- ------------------------ ----------------------------------
9-30-99 through 12-31-99........ 2.8%
3-31-00 through 12-31-00........ 3.6%
3-31-01 through 12-31-01........ 4.4%
3-31-02 through 12-31-02........ 5.2%
3-31-03 through 9-30-03......... 6.0%
With any additional balance which remains outstanding due and
payable on December 10, 2003.
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%, both 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 $202,000 million initially available
under the Facility, approximately $111,000 was used to refinance previously
existing senior indebtedness of the Company and $71,000 was used to pay
indebtedness of HMCH assumed in connection with the HMCH Merger. As of December
31, 1998 total indebtedness under the Facility was $186,300 of which $71,000 was
related to the revolving credit facility.
The Facility requires the Company to comply with certain covenants,
including financial covenants. These covenants generally restrict the Company
from incurring additional indebtedness, granting additional liens on its assets,
making dividends or distributions, disposing of assets other than in the
ordinary course, issuing additional stock, making additional acquisitions or
making capital expenditures, in each case subject to certain exceptions. Under
the Facility, the Company is restricted from incurring additional indebtedness
except additional purchase money indebtedness not exceeding $100, subordinated
intercompany indebtedness, indebtedness incurred in connection with certain
acquisitions permitted under the Facility, certain capitalized leases or
purchases of fixed assets with payments that do not exceed $10,000 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 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.
As a result of entering into the Facility, the Company wrote off the
remaining balance of deferred financing costs associated with its and HMCH's
previous credit facilities. The amount of deferred finance costs, $865 ($519 net
of 40% tax) is shown as an extraordinary item on the Company's Condensed
Consolidated Statement of Operations for the three months ended December 31,
1998.
6. 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 the Facility
(see Note 5). The Company does not enter into derivative financial instruments
for trading or speculative purposes. As of December 31, 1998, the Company had in
place eight interest rate swaps, under which the Company agreed with
counterparties to exchange, at quarterly intervals, interest payments on a
variable pay rate of the three-month LIBOR and a fixed pay rate for the notional
amount of the interest rate swap agreements. The Company actively evaluates the
creditworthiness of the financial
10
<PAGE> 11
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
6. DERIVATIVE FINANCIAL INSTRUMENTS (continued):
institutions which are counterparties to interest rate swap agreements, and
it does not appear that any counter party 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 December 31, 1998:
<TABLE>
<CAPTION>
FIXED VARIABLE
NOTIONAL MATURITY PAY RECEIVE
AMOUNT DATE RATE RATE
-------- -------- ----- -------
<S> <C> <C> <C> <C>
Interest rate swap, National City Bank................ $30,000 May 2003 5.965% 5.544%
Interest rate swap, Bank of America................... $20,000 May 2003 5.760% 5.544%
Interest rate swap, Manufacturers' and Traders Trust
Company............................................... $10,000 May 2003 5.925% 5.544%
Interest rate swap, Harris Bank....................... $20,000 Dec 2003 5.090% 5.544%
Interest rate swap, SunTrust Bank..................... $10,000 Dec 2003 5.105% 5.544%
Interest rate swap, LaSalle Bank...................... $10,000 Dec 2003 5.095% 5.544%
Interest rate swap, Bank of America................... $10,000 Dec 2003 5.120% 5.544%
Interest rate swap, Harris Bank....................... $10,000 Dec 2003 5.120% 5.544%
</TABLE>
The fair value of the interest rate swap agreements based on settlement cost
as estimated by a dealer as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NOTIONAL FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
Interest rate swap, National City Bank......................... $30,000 $(983)
Interest rate swap, Bank of America............................ $20,000 $(635)
Interest rate swap, Manufacturers' and Traders Trust Company... $10,000 $(277)
Interest rate swap, Harris Bank................................ $20,000 $ 105
Interest rate swap, SunTrust Bank.............................. $10,000 $ 35
Interest rate swap, LaSalle Bank............................... $10,000 $ 41
Interest rate swap, Bank of America............................ $10,000 $ 28
Interest rate swap, Harris Bank................................ $10,000 $ 26
</TABLE>
7. CONTINGENCIES:
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 $1,400 to $3,150. The
majority of such claims are, in the opinion of management, covered by insurance
policies and therefore should not have a material effect on the financial
position, results of operations or cash flows of the Company.
Additional claims exist in the range of $1,650 to $2,800 for which
management believes it has meritorious defenses but for which the likelihood of
an unfavorable outcome is currently not determinable. In management's opinion,
each of these claims will either be indemnified by the previous shareholders of
prior acquisitions 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.
8. NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 is not expected to have any 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
11
<PAGE> 12
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
8. NEW ACCOUNTING STANDARDS (continued):
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.
9. INCOME TAXES:
The effective tax rate has been adjusted for certain non-deductible
business combination costs which have been expensed in the quarter ended
December 31, 1998. As a result, the impact in the effective rate for the year
has been entirely reflected in the quarter ended December 31, 1998 and without
these charges would have been approximately 41.5%.
12
<PAGE> 13
RENT-WAY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(all dollars in thousands, except per share data)
GENERAL
During the three month period ended December 31, 1998, the Company generated
record revenues. The Company's total revenues increased by 41.0% compared to the
same three month period last year. The increase in revenue is primarily due to
acquisitions made during fiscal 1998. The Company experienced a 2.8% increase in
same store revenue compared to the same period last year.
On December 10, 1998, the Company completed its merger (the "Merger") with
Home Choice Holdings, Inc. ("HMCH"), pursuant to which HMCH merged with and into
the Company, with the Company being the surviving entity. The Merger was
accounted for as a pooling-of-interests under Accounting Principles Board
("APB") Opinion No. 16. The terms of the Merger called for each outstanding
share of HMCH common stock at the time of the Merger to be converted into 0.588
shares of the Company's common stock. As a result, the Company issued 10,025,000
shares of common stock to the stockholders of HMCH.
Prior to the Merger, the Company operated 405 rental-purchase stores in 25
states, primarily in the northeastern and eastern parts of the United States.
HMCH, at the time of the Merger, operated 460 rental-purchase stores in 26
states, primarily in the southeastern, midwestern and southwestern portions of
the United States. As a result of the Merger, the Company is the second largest
company in the rental-purchase industry, operating 865 rental-purchase stores in
35 states.
The corporate offices of the combined company are located in Erie,
Pennsylvania. None of the HMCH's Board of Directors or executive officers
retained a position with the combined company. Gerald A. Ryan remains as
Chairman of the Board for the combined company with William E. Morgenstern as
President and Chief Executive Officer and Jeffrey A. Conway as Chief Financial
Officer.
The Company has begun the process of consolidating all corporate operations
to its current offices in Erie, Pennsylvania. This process is expected to be
complete by the end of March 1999. In addition, the Company has begun to convert
all the HMCH stores to the Rent-Way point of sale ("POS") computer system. This
conversion process is also expected to be completed in March 1999.
On December 10, 1998, the Company entered into a new collateralized
revolving and term 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 HMCH 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 wrote-off $865,000 ($519,000 net of 40% tax benefit)
of deferred loan costs associated with its and HMCH's previous credit facilities
(see Note 5).
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".
Management is actively seeking merger and acquisition candidates with
financial and geographic profiles consistent with the Company's growth
objectives.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Condensed Consolidated Statements of Operations, expressed as
a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31
-------------------
1998 1997
------ ------
<S> <C> <C>
REVENUES:
Rental revenue 88.4% 87.3%
Other revenue 11.6 12.7
----- -----
Total revenues 100.0 100.0
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise 25.3 25.0
Property and equipment 1.7 1.9
Amortization of goodwill 2.0 2.7
----- -----
Total depreciation and amortization 29.0 29.6
Salaries and wages 26.9 30.5
Advertising 6.3 6.7
Occupancy 6.5 7.3
Name change expense 0.1 0.8
Business combination costs 13.2 0.1
Other operating expenses 23.7 27.7
----- -----
Total costs and operating expenses 105.7 102.7
Operating income (5.7) (2.7)
Interest expense (2.9) (1.9)
Other income 0.1 (0.2)
----- -----
Loss before income taxes and (8.8) (4.5)
extraordinary item
Income tax benefit
(1.1) (1.0)
----- -----
Loss before extraordinary item (7.7)% (3.5)%
===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, total revenues increased by $36.1 million (41.1%) to
$124.0 million from $87.9 million. The increase was principally due to the
inclusion of the results for the stores acquired and opened during fiscal 1998
and increased same store revenues. The stores acquired in the Champion
acquisition accounted for $20.0 million (55.5%) of the increase, the stores
acquired in the Ace Rentals acquisition accounted for $5.1 million (14.1%) of
the increase, the stores acquired in other fiscal 1998 acquisitions accounted
for $2.9 million (8.0%) of the increase, the Company's same stores accounted for
$7.4 million (20.5%) of the increase, and stores opened in fiscal 1998 accounted
for $0.7 million (1.9%) of the increase. Other revenue increased by $3.1 million
(28.5%) to $14.3 million from $11.2 million principally due to stores acquired
in fiscal 1998.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, total costs and operating expenses increased to $131.0
million from $90.3 million, or 3.0% as a percentage of total revenues, primarily
as a result of the $16.4 million in merger costs and $1.1 million in one-time
write-offs associated with the Merger. Depreciation expense related to rental
merchandise increased by $9.3 million to $31.3 million from $22.0 million, or
0.3% as a percentage of total revenues. This 0.3% increase as a percentage of
total revenues is primarily due to increased early purchase option ("EPO")
sales. The remaining value of EPO sales items is charged to depreciation
expense. Amortization of goodwill increased by $0.1 million primarily because of
the increase in goodwill related to the stores acquired in fiscal 1998.
Amortization of goodwill was 2.0% and 2.7% of total revenues for the three
months ended December 31, 1998 and 1997, respectively. Salaries and wages
increased to $33.3 million from $26.8 million, but decreased 3.6% as a
percentage of total revenues. The $6.5 million increase is principally due to
the addition of 226 new stores and additions to corporate personnel. Advertising
expense increased $1.9 million to $7.8 million from $5.9 million principally due
to the addition of the stores acquired in fiscal 1998. Advertising expense as a
percentage of total revenues decreased 0.4% to 6.3% from 6.7%. Occupancy expense
increased to $8.1 million from $6.4 million, but decreased 0.8% as a percentage
of total revenues to 6.5% from 7.3%. The $1.7 million increase is primarily due
to the addition of the stores acquired in fiscal 1998. Other operating expenses
increased by $5.0 million to $29.3 million from $24.3 million, mainly due to the
addition of the stores acquired in fiscal 1998 and the $1.1 million in one-time
write-offs associated with the Merger. Other operating expenses as a percentage
of total revenues decreased 4.0% to 23.7% from 27.7%.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, operating loss increased by $4.7 million (195.7%) to
($7.1 million) from ($2.4 million). This increase in operating loss is primarily
due to $17.5 million in special charges related to the Merger. Operating income
(loss) excluding these special charges increased $12.8 million (533.0%) to $10.4
million from ($2.4 million).
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, interest expense
14
<PAGE> 15
increased $1.9 million to $3.6 million from $1.7 million principally due to the
in $71.0 million in Home Choice indebtedness assumed in connection with the
Merger.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, income tax benefit increased to $1.3 million from $0.9
million because the Company incurred a greater operating loss.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, net loss increased by $7.0 million (223.5%) to ($10.1
million) from ($3.1 million). This increase is primarily due to the $17.5
million in special charges associated with the Merger. Net income (loss)
excluding these special charges increased $7.0 million (224.5%) to $3.9 million
from ($3.1 million) reported in the same quarter last year.
LIQUIDITY AND CAPITAL RESOURCES
On December 10, 1998, the Company entered into a new collateralized term
loan and revolving credit facility (the "Facility") due December 10, 2003 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 $92,000 (subject to
an initial availability of $87,000 and, thereafter, to formula-based
availability), with the ability to add other banks to the syndicate during the
first 90 days of the Facility to increase the term loans to $125,000 and the
maximum amount of the revolving loans and letters of credit to $100,000. The
principal amount of the term loans are payable in quarterly payments due on the
last day of each September, December, March, and June, beginning with the
quarter ending September 30, 1999 and are as follows:
Percentage of Principal
Quarter(s) Ending on (as of the last day of the
Following Date or In The Syndication Period)
Following Period Due on Each Quarterly Payment Date
- ------------------------ ----------------------------------
9-30-99 through 12-31-99........ 2.8%
3-31-00 through 12-31-00........ 3.6%
3-31-01 through 12-31-01........ 4.4%
3-31-02 through 12-31-02........ 5.2%
3-31-03 through 9-30-03......... 6.0%
With any additional balance which remains outstanding
due and payable on December 10, 2003.
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%, both 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 $202,000 million initially available
under the Facility, approximately $111,000 was used to refinance previously
existing senior indebtedness of the Company and $71,000 was used to pay
indebtedness of HMCH assumed in connection with the HMCH Merger. As of December
31, 1998 total indebtedness under the Facility was $186,300 of which $71,000 was
related to the revolving credit facility.
The Facility requires the Company to comply with certain covenants,
including financial covenants. These covenants generally restrict the Company
from incurring additional indebtedness, granting additional liens on its assets,
making dividends or distributions, disposing of assets other than in the
ordinary course, issuing additional stock, making additional acquisitions or
making capital expenditures, in each case subject to certain exceptions. Under
the Facility, the Company is restricted from incurring additional indebtedness
except additional purchase money indebtedness not exceeding $100, subordinated
intercompany indebtedness, indebtedness incurred in connection with certain
acquisitions permitted under the Facility, certain capitalized leases or
purchases of fixed assets with payments that do not exceed $10,000 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 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.
As a result of entering into the Facility, the Company wrote off the
remaining balance of deferred financing costs associated with its and HMCH's
previous credit facility. The amount of deferred finance costs, $0.9 million
($0.5 million net of 40% tax) is shown as an extraordinary item on the Company's
Condensed Consolidated Statement of Operations for the three months ended
December 31, 1998.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, the Company's net cash
15
<PAGE> 16
used in operating activities increased to $31.4 million from $18.3 million. This
increase was principally due to higher levels of rental-merchandise purchases
during the fall season, a reduction in trade payables to a more current status
and an increase in net losses due to special charges associated with the Merger.
For the three months ended December 31, 1998 compared to the three months
ended December 31, 1997, the Company's net cash used in investing activities
decreased by $1.0 million. This decrease is primarily due to a decrease in
property and computer equipment purchases.
For the three months ended December 31, 1998, compared to the three months
ended December 31, 1997, the Company's net cash provided by financing activities
decreased to $33.2 million from $41.1 million. The decrease in net cash provided
by financing activities was principally due to funds received from the Company's
public stock offering in November 1997.
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 December 31, 1998:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES 1998 1999 2001 2002 2003 THEREAFTER
- ---------------------------------------------- ---- ---- ---- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Debt:
Revolving credit facility Base rate option $ 16.0
--Actual floating rate..................... 8.750%
Revolving credit facility Euro-rate option $ 55.0
--Actual floating rate..................... 5.544%
Term loan Euro-rate option................ $ 115.3
--Actual floating rate..................... 5.544%
Convertible Subordinated Debentures....... $20,000
--Actual fixed interest rate............... 7.0%
Interest rate swap agreements:
National City Bank, notional amount....... $30,000
--Actual fixed interest rate pay rate...... 5.965%
Bank of America, notional amount.......... $20,000
--Actual fixed interest rate pay rate...... 5.760%
Manufacturers and Traders Trust, notional
amount.................................... $10,000
--Actual fixed interest rate pay rate...... 5.925%
Harris Bank, notional amount.............. $20,000
--Actual fixed interest rate pay rate...... 5.090%
SunTrust Bank, notional amount............ $10,000
--Actual fixed interest rate pay rate...... 5.105%
LaSalle Bank, notional amount............. $10,000
--Actual fixed interest rate pay rate...... 5.095%
Bank of America, notional amount.......... $10,000
--Actual fixed interest rate pay rate...... 5.120%
Harris Bank, notional amount.............. $10,000
--Actual fixed interest rate pay rate...... 5.120%
</TABLE>
INFLATION
During the three months ended December 31, 1998, the cost of rental
merchandise, lease rental expense and salaries and wages have increased
modestly. These increases have not had a significant effect on the results of
operations because the Company has been able to charge commensurably higher
rental for its merchandise. This trend is expected to continue in the
foreseeable future.
OTHER MATTERS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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.
16
<PAGE> 17
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 is not expected to have any 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 completed in January 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 has
implemented 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-Q and the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward-looking statements represent the Company's expectations or
beliefs concerning future events. Any forward-looking statements made by or on
behalf of the Company are subject to uncertainties and other factors that could
cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to, (i) the ability
of the Company to acquire additional rental-purchase stores on favorable terms,
(ii) the ability of the Company to improve the performance of such acquired
stores and to integrate such acquired stores into the Company's operations,
(iii) the ability of the Company to integrate the Home Choice stores and systems
into the Company's operations, and (iv) the impact of state and federal laws
regulating or otherwise affecting the rental-purchase transaction.
17
<PAGE> 18
Undue 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Shareholders on December 10, 1998 to
vote to approve the Company's merger with Home Choice Holdings, Inc. The details
of the votes cast at the Special Meeting are as follows: 8,532,747 shares voted
to approve the merger, 36,367 shares voted against approval of the merger and
4,155 shares abstained.
18
<PAGE> 19
RENT-WAY, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
The Exhibits filed as part of this report are listed below.
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------
27 Financial data schedule
B. REPORTS ON FORM 8-K
(1) On December 24, 1998, the Company filed a Current Report on Form 8-K
reporting the consummation of its merger with Home Choice Holdings, Inc.
No financial statements were filed with this Report.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 5, 1999
- --------------------------
Date
/s/ JEFFREY A. CONWAY
- --------------------------
Jeffrey A. Conway
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)
20
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