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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 June 30, 1999
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 25-1407782
(State or other jurisdiction of incorporation)
(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 Outstanding as of July 22, 1999
----------------- -------------------------------
Common Stock 21,631,489
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RENT-WAY, INC.
<TABLE>
<CAPTION>
Page
Part I Financial Information
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of June 30, 1999 and
September 30, 1998 3
Condensed Consolidated Statements of Operations, Three and
Nine Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows, Nine Months
Ended June 30,1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 15
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(all dollars in thousands)
June 30, September 30,
1999 1998
(unaudited) (unaudited)
ASSETS
<S> <C> <C>
Cash $ 6,914 $ 5,326
Prepaid expenses 12,188 7,819
Income tax receivable 443 1,972
Rental merchandise, net 189,728 176,022
Deferred income taxes 2,325 2,912
Property and equipment, net 46,490 38,519
Goodwill, net 222,534 225,354
Deferred financing costs, net 2,105 1,575
Non-compete and prepaid consulting fees, net 5,079 6,950
Other assets 7,645 8,993
---------------- ---------------
Total assets $ 495,451 $ 475,442
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 11,495 $ 28,145
Other liabilities 18,528 19,831
Income tax payable 6,971 -
Debt 198,245 179,603
---------------- ---------------
Total liabilities 235,239 227,579
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; 21,390,582 and 21,060,820 shares issued and
outstanding, respectively 248,910 241,749
Retained earnings 11,302 6,114
---------------- ---------------
Total shareholders' equity 260,212 247,863
---------------- ---------------
Total liabilities and shareholders' equity $ 495,451 $ 475,442
================ ===============
The accompanying notes are an integral part of
these financial statements.
</TABLE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(all dollars in thousands, except per share data)
For the three months ended For the nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Revenues:
<S> <C> <C> <C> <C>
Rental revenue $ 110,070 $ 105,064 $ 330,368 $ 280,095
Other revenue 11,881 13,482 41,293 38,019
-------------- -------------- -------------- -------------
Total revenues 121,951 118,546 371,661 318,114
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 29,905 28,999 93,369 79,082
Property and equipment 2,487 1,829 6,912 5,318
Amortization of goodwill and other intangibles 2,300 2,976 7,249 8,361
Salaries and wages 31,956 31,435 97,440 87,618
Advertising 5,346 6,896 19,323 19,163
Occupancy 8,549 8,004 24,829 21,973
Name change expense - 227 86 1,377
Business combination costs - 70 16,800 11,185
Other operating expenses 23,742 30,716 78,721 80,541
-------------- -------------- -------------- -------------
Total costs and operating expenses 104,285 111,152 344,729 314,618
-------------- -------------- -------------- -------------
Operating income 17,666 7,394 26,932 3,496
Other income (expense):
Interest expense (4,007) (3,183) (11,791) (7,564)
Interest income - 90 29 236
Other income (expense), net (116) (868) (337) (817)
--------------- --------------- --------------- -------------
Income (loss) before income taxes
and extraordinary item 13,543 3,433 14,833 (4,649)
Income tax expense 5,420 1,758 9,126 1,766
-------------- -------------- -------------- -------------
Income (loss) before extraordinary item 8,123 1,675 5,707 (6,415)
Extraordinary item, net of tax benefit - - (519) -
-------------- -------------- -------------- -------------
Net income (loss) $ 8,123 $ 1,675 $ 5,188 $ (6,415)
============== ============== ============== =============
Earnings (loss) per common share (Note 3): Basic earnings (loss) per common
share:
Income (loss) before extraordinary item $ 0.38 $ 0.08 $ 0.27 $ (0.32)
============== ============== ============== =============
Net income (loss) $ 0.38 $ 0.08 $ 0.24 $ (0.32)
============== ============== ============== =============
Diluted earnings (loss) per share:
Income (loss) before extraordinary item $ 0.36 $ 0.08 $ 0.27 $ (0.32)
============== ============== ============== =============
Net income (loss) $ 0.36 $ 0.08 $ 0.24 $ (0.32)
============== ============== ============== =============
Weighted average common shares outstanding:
Basic 21,335 20,681 21,222 20,065
============== ============== ============== =============
Diluted 23,378 22,945 21,222 20,065
============== ============== ============== =============
The accompanying notes are an integral part of
these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(all dollars in thousands)
For the nine months ended
June 30,
1999 1998
----------- ----------
(unaudited) (unaudited)
Operating activities:
<S> <C> <C>
Net income (loss) $ 5,188 $ (6,415)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss on sale of property and equipment - 1,070
Depreciation and amortization 109,832 105,272
Deferred income taxes 587 (4,299)
Extraordinary item 519 -
Changes in assets and liabilities:
Prepaid expenses (4,272) (1,983)
Rental merchandise (105,664) (122,882)
Income tax receivable 1,529 515
Other assets 1,871 (2,358)
Accounts payable (16,772) 4,487
Income taxes payable 6,971 1,126
Other liabilities (1,825) 2,992
--------------- --------------
Net cash used in operating activities (2,036) (22,475)
--------------- --------------
Investing activities:
Purchase of businesses, net of cash acquired (1,054) (101,808)
Purchases of property and equipment (15,503) (20,653)
Proceeds from sale of property and equipment - (594)
Dispositions of stores, net of cash sold - 3,032
Payments received on notes receivable - 487
--------------- ---------------
Net cash used in investing activities (16,557) (119,536)
--------------- ---------------
Financing activities:
Book overdraft - 8,294
Proceeds from borrowings 273,556 192,767
Payments on borrowings including early extinguishment (256,322) (102,348)
Deferred finance costs (1,366) (457)
Proceeds from common stock issuance 4,313 48,557
--------------- ---------------
Net cash provided by financing activities 20,181 146,813
--------------- ---------------
Increase in cash 1,588 4,802
Cash at beginning of period 5,326 5,608
--------------- ---------------
Cash at end of period $ 6,914 $ 10,410
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,956 $ 7,180
Income taxes $ 2,270 $ 3,312
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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, 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 1998 financial statements
have been reclassified to conform to the 1999 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.
On January 1, 1999, the Company formed four new entities: Rent-Way TTIG,
L.P., an Indiana limited partnership, Rent-Way of Tomorrow, Inc., Rent-Way
of Michigan, Inc., and Rent-Way Developments, Inc., all Delaware
corporations.
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 and its Current Report on Form 8-K filed December 24, 1998 and an
amendment thereto filed on February 22, 1999.
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. 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. Following the Merger,
Gerald A. Ryan remained 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 nine months ended June 30, 1999. These
costs aggregated $16,800 and included (i) investment banker fees of
$6,476, (ii) proxy preparation, printing and other professional fees of
$1,341, (iii) employee severance and stay-put arrangement costs of $4,516,
(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 $2,142 and (vi) write-off of prepaid assets which
will not be used of $1,451.
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 the nine month
period ended June 30, 1999 was approximately $1,100.
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):
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 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 for the nine month period ended June 30, 1999.
The revenues, extraordinary item and net income (loss) of the separate
companies are as follows:
<TABLE>
<CAPTION>
Three months ended June 30, 1998
---------------------------------------------------------
Extraordinary Net Income
Revenues Item (Loss)
--------------- ----------------- ---------------
<S> <C> <C> <C>
Rent-Way $ 52,492 $ -- $ 3,637
HMCH --
66,054 (1,962)
=============== ================= ===============
Total $ 118,546 $ -- $ 1,675
=============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended June 30, 1999
---------------------------------------------------------
Extraordinary Net Income
Revenues Item (Loss)
---------------- ----------------- ---------------
Rent-Way October 1, 1998 to
<S> <C> <C> <C> <C> <C>
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 June 30, 1999 290,220 (519) 3,187
================ ================= ===============
Total $ 371,661 $ (519) $ 5,188
================ ================= ===============
Nine months ended June 30,1998
---------------------------------------------------------
Rent-Way $ 125,060 $ -- $ 8,757
HMCH 193,054 -- (15,172)
================ ================= ===============
Total $ 318,114 $ -- $ (6,415)
================ ================= ===============
</TABLE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
3. Earnings (loss) per Common Share:
Basic earnings (loss) per common share is computed using earnings (loss)
available to common shareholders divided by the weighted average number of
common shares outstanding. Diluted earnings (loss) per common share is
computed using earnings (loss) available to common shareholders adjusted
for anticipated interest savings, net of related taxes, on conversion of
the Company's convertible subordinated debentures and the weighted average
number of shares outstanding is adjusted for the potential impact of
options, warrants and the 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 produced a loss for the nine month period ended June 30, 1998,
basic and diluted loss per common share were the same for this period.
The following table discloses the reconciliation of numerators and
denominators of the basic and diluted earnings (loss) per common share
computation:
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
June 30, June 30,
(unaudited) (unaudited)
Computation of Earnings (Loss) per share: 1999 1998 1999 1998
----------------------------------------- ------------ ------------ ------------ --------
Basic
<S> <C> <C> <C> <C>
Earnings (loss) applicable to common shares........ $ 8,123 $ 1,675 $ 5,188 $ (6,415)
============ ============ ============ ============
Weighted average number of common shares
outstanding during the period.................... 21,335 20,681 21,222 20,065
============ ============ ============ ============
Basic earnings (loss) per common share:
Earnings (loss) before extraordinary item........ $ 0.38 $ 0.08 $ 0.27 $ (0.32)
============ ============ ============ ============
Net income (loss)................................ $ 0.38 $ 0.08 $ 0.24 $ (0.32)
============ ============ ============ ============
Diluted
Earnings (loss) applicable to common shares........ $ 8,123 $ 1,675 $ 5,188 $ (6,415)
Interest on 7% convertible debentures (net of tax)(1). 210 210 -- --
------------ ------------ ------------ ------------
Earnings (loss) applicable for diluted earnings per
share............................................. $ 8,333 $ 1,885 $ 5,188 $ (6,415)
============ ============ ============ =============
Weighted average number of common shares
outstanding during the period used in basic
calculation........................................ 21,335 20,681 21,222 20,065
Shares issuable upon exercise of stock options,
warrants and escrowed shares (1)..................... 547 768 -- --
Shares issued on conversion of 7% convertible
debentures (1)....................................... 1,496 1,496 -- --
------------ ------------ ------------ ------------
Weighted average number of shares used in
calculation of diluted earnings (loss)
per share............. 23,378 22,945 21,222 20,065
============ ============ ============ ============
Earnings (loss) per common share:
Earnings (loss) before extraordinary item........ $ 0.36 $ 0.08 $ 0.27 $ (0.32)
============ ============ ============ =============
Net income (loss)................................ $ 0.36 $ 0.08 $ 0.24 $ (0.32)
============ ============ ============ ============
(1) Including the effects of these items for the nine months ended June 30, 1999 would be anti-dilutive.
Therefore, they are excluded from the calculation of diluted earnings per share for that period.
</TABLE>
4. Acquisitions:
On June 30, 1999, the Company acquired all the outstanding shares of
America's Rent-To-Own Center, Inc., ("America's"). At the time of the
acquisition, America's operated a chain of 21 rental-purchase stores
located in Arkansas, Kansas, Missouri, and Oklahoma with annual revenues
of approximately $8,000. The consideration paid in exchange for all the
outstanding shares of America's consisted of 231,140 shares of the
Company's common stock (unregistered shares subject to the provisions of
Rule 144 of the Securities and Exchange Act). Pursuant to the terms of the
purchase agreement approximately $800 or 32,454 shares of the Company's
common stock were placed in escrow subject to the terms and conditions of
the escrow agreement to secure seller's representations and warranties and
any purchase price adjustments. The acquisition was accounted for using
the purchase method of
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
4. Acquisitions (continued):
accounting. America's assets and liabilities were recorded at their
estimated fair value at the date of the acquisition. The excess of the
acquisition costs over the estimated fair values of the net assets acquired
("goodwill") of $2,846 is being amortized on a straight line basis over 30
years. The total cost of the net assets acquired was $2,849 and consisted of
assets of $4,864 less liabilities assumed of $2,015. The acquisition of
America's was funded with shares of the Company's common stock. On a preliminary
basis, assets acquired, other than goodwill, at their estimated fair value
consisted of rental merchandise of $1,269, receivables of $593, prepaid and
other assets of $96 and a non-compete agreement of $60. Liabilities assumed at
their estimated fair value consisted of debt of $1,408, accrued liabilities of
$485 and trade accounts payables of $122. The Company is in the process of
finalizing the purchase price allocation. The acquisition had no impact on the
Condensed Consolidated Statements of Operations for either the three or nine
month periods ended June 30, 1999.
In March, April, and May 1999, the Company purchased the rental
merchandise and rental-purchase contracts of three rental-purchase stores
located in Pennsylvania, North Carolina, and Indiana, respectively, with
combined annual revenues of approximately $830. The Company paid cash in
exchange for the assets and each acquisition was accounted for using the
purchase method of accounting. The acquired assets were recorded at their
estimated fair values at the date of acquisition. Goodwill of $371 is
being amortized on a straight line basis over 20 years. The total cost of
the net assets acquired was $590. The Condensed Consolidated Statements of
Operations for the three and nine month periods ended June 30, 1999
include the results of operations for these stores from the date of
acquisition.
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. Goodwill of $6,099 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
$7,557 less acquisition costs of $232. 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 Statements
of Operations for the three and nine month periods ended June 30, 1999
include 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 $3,600 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
seller's 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. Goodwill of $2,321 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 $3,061 less
liabilities assumed of $858 and acquisition costs of $156. 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 Statements of Operations for
the three and nine month periods ended June 30, 1999 include the results
of operations of Fast Rentals for the entire period.
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
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
4. Acquisitions (continued):
$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 remaining
balance of $1,000 was released February 5, 1999 per the terms of the
escrow agreement. The sellers received $800 of this amount and the balance
was returned to the Company. 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. Goodwill of
$67,550 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
$91,030 less liabilities assumed of $18,408 and acquisition costs of
$3,572. 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 Statements of Operations for the three and nine
month periods ended June 30, 1999 include 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. 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 Statements of Operations for the three and nine
month periods ended June 30, 1999 include 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. 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 Statements of
Operations for the three and nine month periods ended June 30, 1999
include the results of operations for these acquisitions for the entire
period.
The following are pro forma results of operations for the three nine month
period ended June 30, 1998 assuming the acquisitions of Champion and Ace
Rentals had occurred on October 1, 1997. The results are not necessarily
indicative of future operations or what would have occurred had the
acquisitions been consummated as of that date.
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
4. Acquisitions (continued):
<TABLE>
<CAPTION>
Unaudited Pro Forma Operations
Nine months ended
June 30, 1998
-------------
<S> <C>
Revenues.................................. $ 337,974
Net loss.................................. $ (4,379)
Pro forma diluted loss per common ======================
share..................................... $ (0.21)
======================
</TABLE>
5. Debt:
On December 10, 1998, the Company entered into a new collaterized term loan
and revolving credit facility (the "Facility") due December 10, 2003 with a
syndicate of banks led by National City Bank of Pennsylvania, NationsBank,
N.A., and Harris Trust and Savings Bank.
On March 10, 1999, the Company made two Credit Agreement Joinders (the
"Joinders") to the Facility. The Joinders were made by PNC Bank, National
Association and Bank Austria Creditanstalt Corporate Finance, Inc. (the "New
Banks"). Each of the New Banks agreed to make a revolving credit commitment
in the amount of $3,889 and a term loan commitment in the amount of $4,861.
The Joinders increase the term loans available under the Facility to
$125,000 and the revolving loans and letters of credit available under the
Facility to $100,000. Following the Joinders, the syndicate members and
their ratable share of the Facility are as follows:
<TABLE>
<CAPTION>
<S> <C>
National City Bank of Pennsylvania........................... 15.5556%
NationsBank, N.A............................................. 15.5556%
Harris Trust and Savings Bank................................ 15.5556%
Firstar Bank, N.A............................................ 11.1111%
LaSalle National Bank........................................ 10.0000%
SunTrust Bank, Central Florida, National
Association.................................................. 8.8889%
Manufacturers and Traders Trust Company...................... 8.8889%
Mercantile Bank of St. Louis, N.A............................ 6.6667%
PNC Bank, National Association............................... 3.8889%
Bank Austria Creditanstalt Corporate Finance,
Inc.......................................................... 3.8889%
</TABLE>
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:
<TABLE>
<CAPTION>
Quarter (s) Ending on Percentage of Principal (as of the
Following Date or In The last day of the Syndication Period)
Following Period Due on Each Quarterly Payment Date
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
As of June 30, 1999 total indebtedness under the Facility was $176,000 of
which $51,000 was related to the revolving credit portion thereof.
On January 1, 1999, the Company amended the Facility to add Rent-Way of
TTIG, L.P., an Indiana limited partnership, as a co-borrower. The amendment
also causes Rent-Way of Tomorrow, Inc., Rent-Way of Michigan, Inc., and
Rent-Way Developments, Inc., new subsidiaries of the Company incorporated in
Delaware, to become guarantors of the Facility.
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
5. Debt (continued):
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 $217,000 (increasing with
earnings and acquisitions) and maintain a minimum fixed charge coverage
ratio of 1.2 to 1.0. As of June 30, 1999, the Company was in compliance with
all covenants contained in the Facility.
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 nine months ended June 30,
1999.
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). Interest rate expense under the swap agreements,
which qualify for hedge accounting, is recorded as the net effective
interest rate of the hedged transactions. The Company does not enter into
derivative financial instruments for trading or speculative purposes. As of
June 30, 1999, the Company had in place eight interest rate swaps, under
which the Company agreed with counterparties to exchange, at quarterly
intervals, the 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 institutions which are counterparties to interest rate swap
agreements, and it does not appear that any counterparty will fail to meet
their obligation. The following table illustrates the notional amounts
outstanding, maturity dates and the fixed pay and variable receive rates of
each of the interest rate swap agreements at June 30, 1999:
<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% 5.000%
Interest rate swap, Bank of America....................... $ 20,000 May 2003 5.760% 5.000%
Interest rate swap, Manufacturers and Traders Trust Company $ 10,000 May 2003 5.925% 5.000%
Interest rate swap, Harris Bank........................... $ 20,000 Dec 2003 5.090% 5.000%
Interest rate swap, SunTrust Bank......................... $ 10,000 Dec 2003 5.105% 5.000%
Interest rate swap, LaSalle Bank.......................... $ 10,000 Dec 2003 5.095% 5.000%
Interest rate swap, Bank of America....................... $ 10,000 Dec 2003 5.120% 5.000%
Interest rate swap, Harris Bank........................... $ 10,000 Dec 2003 5.120% 5.000%
The fair value of the interest rate swap agreements based on settlement
cost as estimated by a dealer as of June 30, 1999 are as
follows:
Notional Fair
Amount Value
Interest rate swap, National City Bank....................... $ 30,000 $ 128
Interest rate swap, Bank of America.......................... $ 20,000 $ (91)
Interest rate swap, Manufacturers and Traders Trust Company.. $ 10,000 $ 41
Interest rate swap, Harris Bank.............................. $ 20,000 $ 834
Interest rate swap, SunTrust Bank............................ $ 10,000 $ 429
Interest rate swap, LaSalle Bank............................. $ 10,000 $ 418
Interest rate swap, Bank of America.......................... $ 10,000 $ 398
Interest rate swap, Harris Bank.............................. $ 10,000 $ 405
</TABLE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
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 $1,113 to
$2,841. The majority of such claims are, in the opinion of management,
covered under 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 $929 to $1,117 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 under 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", as amended, effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. 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.
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%.
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements - continued (all
dollars in thousands, except per
share data)
10. Stock Options:
In March 1999, the Board of Directors of the Company adopted, and the
shareholders have approved, the Rent-Way, Inc. 1999 Stock Option Plan (the
"1999 Plan") which authorizes the issuance of up to 2,500,000 shares of
common stock pursuant to stock options granted to officers, directors, key
employees, consultants, and advisors of the Company. The option exercise
price will be at least equal to the fair market value of the Company's
common stock on the grant date. The 1999 Plan will expire in March 2009
unless terminated earlier by the Board of Directors. The authorized number
of shares, the exercise price of outstanding options, and the number of
shares under option are subject to appropriate adjustment for stock
dividends, stock splits, reverse stock splits, recapitalizations, and
similar transactions. The 1999 Plan is administered by the Stock Option
Committee of the Board of Directors who select the optionees and determine
the terms and provisions of each option grant within the parameters set
forth in the 1999 Plan. As of June 30, 1999, 550,000 options at an exercise
price of $27.88 were granted under the 1999 Plan.
RENT-WAY, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
During the three and nine month periods ended June 30, 1999, the Company
generated record revenues. The Company's total revenues increased by 2.9%
and 16.8% compared to the same three and nine month periods last year.
The increase in revenue is primarily due to acquisitions made during
fiscal 1998 and new stores opened in fiscal 1998 and 1999. Overall, for
the three months ended June 30, 1999, the Company experienced a 0.8%
decrease in same store revenues compared to the same period last year.
For Rent-Way same stores (based on 328 stores), revenues increased 5.0%,
and for Home Choice same stores (based on 389 stores), revenues decreased
5.3%, in each case as compared to the same period in fiscal 1998.
On June 30, 1999, the Company acquired America's Rent-To-Own Center, Inc.
("America's"), a privately-owned rental purchase chain with 21 locations
in Arkansas, Kansas, Missouri, and Oklahoma. The transaction value was
approximately $7 million and was paid for with a combination of 231,140
shares of Rent-Way's common stock and the assumption of certain
liabilities. The America's stores, with annualized revenues of
approximately $8 million, increase market penetration in the Company's
established areas of operation.
On May 25, 1999, the Company announced its new store opening plan
designed to complement its acquisition strategy. The Company plans to
open 40-60 new stores in the next twelve months with 25 new locations
open by the end of this calendar year. Since October 1, 1998, the Company
has opened 6 new locations in Tarboro, NC, Cambridge, MD, Colorado
Springs, CO, Milford, DE, Fort Worth, TX, and Houston, TX.
On March 10, 1999, the Company made two Credit Agreement Joinders to its
existing collaterized revolving and term credit facility with a syndicate
of banks led by National City Bank of Pennsylvania, NationsBank, N.A.,
and Harris Trust and Savings Bank (the "Facility"). The Joinders were
made by PNC Bank, National Association and Bank Austria Creditanstalt
Corporate Finance, Inc. As a result of these Joinders, term loans
available under the Facility increased to $125.0 million and revolving
loans and letters of credit increased to $100.0 million.
On January 1, 1999, the Company formed four new entities: Rent-Way TTIG,
L.P., an Indiana limited partnership, and Rent-Way of Tomorrow, Inc.,
Rent-Way of Michigan, Inc., and Rent-Way Developments, Inc., all Delaware
corporations. On January 1, 1999, the Company amended the Facility to add
Rent-Way of TTIG, L.P., as a co-borrower and Rent-Way of Tomorrow, Inc.,
Rent-Way of Michigan, Inc., and Rent-Way Developments, Inc., as
guarantors.
On December 10, 1998, the Company completed its merger (the "Merger")
with Home Choice Holdings, Inc. ("Home Choice" or "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 approximately 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 became the second largest company in the rental-purchase
industry, and now operates 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 remained 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 completed the process of consolidating all corporate
operations to its current offices in Erie, Pennsylvania. In addition, the
Company has completed converting all the HMCH stores to the Rent-Way
point of sale computer system.
On December 10, 1998, the Company entered into the Facility. A portion of
the Facility was used to refinance the debt of HMCH assumed in the Merger
and to refinance debt under the Company's previous credit facility.
Subject to compliance with certain formulas, the remaining portion of the
Facility is 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.
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.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Company's unaudited Condensed Consolidated Statements of
Operations, expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------- ---------------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue 90.3% 88.6% 88.9% 88.0%
Other revenue 9.7 11.4 11.1 12.0
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 24.5 24.5 25.1 24.9
Property and equipment 2.0 1.5 1.9 1.7
Amortization of goodwill and
other intangibles 1.9 2.5 2.0 2.6
----- ----- ----- -----
Total depreciation and amortization 28.4 28.5 29.0 29.2
Salaries and wages 26.2 26.5 26.2 27.6
Advertising 4.4 5.8 5.2 6.0
Occupancy 7.0 6.8 6.7 6.9
Name change expense - 0.2 - 0.5
Business combination costs - 0.1 4.5 3.5
Other operating expenses 19.5 25.9 21.2 25.3
----- ----- ----- -----
Total costs and operating expenses 85.5 93.8 92.8 98.9
----- ----- ----- -----
Operating Income 14.5 6.2 7.2 1.1
Interest expense (3.3) (2.7) (3.2) (2.4)
Other income (0.1) (0.6) - (0.2)
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item 11.1 2.9 4.0 (1.5)
Income tax expense 4.4 1.5 2.5 0.5
----- ----- ----- -----
Income (loss) before extraordinary item 6.7 1.4 1.5 (2.0)
Extraordinary item - - ( 0.1) -
----- ----- ----- -----
Net income (loss) 6.7% 1.4% 1.4% (2.0)%
===== ===== ===== =====
</TABLE>
Comparison of Three Months Ended June 30, 1999 and 1998
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, total revenues increased by $3.5 million (2.9%) to
$122.0 million from $118.5 million. The increase was principally due to
increased Rent-Way same store revenues and the inclusion of the results
for the stores acquired during fiscal 1998. The stores acquired in fiscal
1998 acquisitions accounted for $3.5 million of the increase, stores
opened in fiscal 1998 and 1999 accounted for $0.8 million of the
increase, stores opened and acquired by Home Choice in fiscal 1998
accounted for $0.9 million of the increase, and Rent-Way's same stores
accounted for $1.4 million of the increase offset by a $3.1 million
decrease in Home Choice same stores revenues. Other revenue decreased by
$1.6 million (11.9%) to $11.9 million from $13.5 million principally due
to a $2.8 million increase in promotions and coupons to $4.7 million from
$1.9 million for the three months ended June 30, 1999 and 1998,
respectively.
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, total costs and operating expenses decreased to
$104.3 million from $111.2 million, or to 85.5% from 93.8% of total
revenues. Amortization of goodwill and other intangibles decreased by
$0.7 million principally due to a decrease in Home Choice goodwill
amortization. Home Choice's amortization expense decreased $0.6 million
from $1.7 million to $1.1 million. Amortization of goodwill and other
intangibles was 1.9% and 2.5% of total revenues for the three months
ended June 30, 1999 and 1998, respectively. Advertising expense decreased
$1.6 million to $5.3 million from $6.9 million and as a percentage of
total revenues decreased 1.4% to 4.4% from 5.8% principally due to the
Company's ability to focus advertising efforts in cluster markets.
Occupancy expense increased to $8.5 million from $8.0 million, and
increased 0.2% as a percentage of total revenues to 7.0% from 6.8%. This
increase is primarily due to the new stores opened in fiscal 1998 and
1999. These new stores initially have a lower revenue base to offset
fixed costs. Other operating expenses decreased by $7.0 million to $23.7
million from $30.7 million and as a percentage of total revenues
decreased 6.4% to 19.5% from 25.9%. This 6.4% decrease occurred because
of the Company's ability to allocate corporate and fixed costs over a
greater number of stores and increased revenues.
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, operating income increased by $10.3 million (138.9%)
to $17.7 million from $7.4 million, and increased to 14.5% from 6.2% of
total revenues. The improvement in operating income was principally due
to the factors discussed above.
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, interest expense increased $0.8 million to $4.0
million from $3.2 million principally due to the $71.0 million in Home
Choice indebtedness assumed in connection with the Merger.
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, income tax expense increased to $5.4 million from
$1.8 million because the Company generated greater taxable income.
For the three months ended June 30, 1999 compared to the three months
ended June 30, 1998, net income increased by $6.4 million (385.0%) to
$8.1 million from $1.7 million and increased to 6.7% from 1.4% of total
revenues.
Comparison of Nine Months Ended June 30, 1999 and 1998
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, total revenues increased by $53.6 million (16.8%) to
$371.7 million from $318.1 million. The increase was principally due to
increased same store revenues and the inclusion of the stores acquired in
the Ace Rentals acquisition, the Champion acquisition, and other 1998
acquisitions and stores opened in fiscal 1998 and 1999. Stores acquired
in the Ace Rentals acquisition accounted for $5.0 million (9.3%) of the
increase, stores acquired in the Champion acquisition accounted for $28.6
million (53.4%) of the increase, stores acquired in other fiscal 1998
acquisitions accounted for $9.8 million (18.3%) of the increase, stores
opened in fiscal 1998 and 1999 accounted for $2.3 million (4.3%) of the
increase, and the Company's same stores accounted for $7.9 million
(14.7%) of the increase. Other revenue increased $3.3 million (8.6%) to
$41.3 million from $38.0 million principally due to stores opened and
acquired in 1998.
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, total costs and operating expenses increased to $344.7
million from $314.6 million primarily as a result of the costs and
operating expenses associated with stores acquired in 1998, but decreased
to 92.8% from 98.9% of total revenues. Depreciation expense related to
rental merchandise increased by $14.3 million to $93.4 million from $79.1
million, or 0.2% as a percentage of total revenues. This 0.2% increase as
a percentage of total revenues is primarily the result of increased early
purchase option ("EPO") sales and the higher remaining values on those
items sold. The remaining value of EPO sales items, which is charged to
depreciation expense, increased $4.6 million, or 1.1% as a percentage of
total revenues, to $7.5 million from $2.9 million. Amortization of
goodwill and other intangibles decreased by $1.2 million, or 0.6% as a
percentage of total revenues principally due to a decrease in Home
Choice's goodwill amortization. Home Choice's amortization expense
decreased $1.8 million from $5.4 million to $3.6 million. Salaries and
wages increased to $97.4 million from $87.6 million, but decreased 1.3%
as a percentage of total revenues to 26.2% from 27.5%. The $9.8 million
increase is principally due to the addition of 251 new locations and
additions to corporate personnel. The 1.3% decrease as a percentage of
total revenues is primarily the result of the Company's ability to
allocate corporate and regional managers' payroll expense over an
increased store revenue base. Advertising expense increased $0.1 million
to $19.3 million from $19.2 million but decreased to 5.2% from 6.0% as a
percentage of total revenues. This 0.8% decrease is primarily due to the
Company's ability to focus advertising efforts in cluster markets. Other
operating expenses decreased $1.8 million to $78.7 million from $80.5
million and decreased 4.1% to 21.2% from 25.3% as a percentage of total
revenues. This 4.1% decrease is primarily due to the Company's ability to
allocate corporate and fixed costs over a greater number of stores and
increased revenues.
For the nine months ended June 30, 1999 compared to the nine months
ended June 30, 1998, operating income increased by $23.4 million
(670.4%) to $26.9 million from $3.5 million and increased to 7.2% from
1.1% of total revenues. The improvement in operating income was
principally due to the stores acquired in 1998 and the factors discussed
above. The results for the nine months ended June 30, 1999 included
$16.8 million of business combination charges related to Rent-Way's
merger with Home Choice on December 10, 1998 and $1.1 million in
one-time inventory write-offs. The results for the nine months ended
June 30, 1998 included $11.2 million in business combination charges
related to Home Choice's predecessor's merger with Alrenco, Inc. which
occurred in February 1998. Excluding these special charges, operating
income increased by $30.1 million (205.4%) to $44.8 million from $14.7
million, and increased to 12.1% from 4.6% of total revenues.
For the nine months ended June 30, 1999 compared to the nine months ended
1998, interest expense increased by $4.2 million to $11.8 million from
$7.6 million due to the $71.0 million in Home Choice indebtedness assumed
in connection with the Merger.
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, income tax expense increased by $7.3 million because the
Company generated greater taxable income.
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, net income increased by $11.6 million (180.9%) to $5.2
million from ($6.4 million). The increase was due to the factors
discussed above. Excluding special charges related to the mergers, net
income increased by $15.6 million (419.3%) to $19.3 million from $3.7
million reported in the same period last year.
Liquidity and Capital Resources
On March 10, 1999, the Company made two Credit Agreement Joinders (the
"Joinders") to the Facility. The Joinders were made by PNC Bank, National
Association and Bank Austria Creditanstalt Corporate Finance, Inc. (the
"New Banks"). Each of the New Banks agreed to make a revolving credit
commitment in the amount of $3.9 million and a term loan commitment in
the amount of $4.9 million. The Joinders increase the term loans
available under the Facility to $125.0 million and the revolving loans
and letters of credit available under the Facility to $100.0 million. The
syndicate members and their ratable share of the Facility are as follows:
<TABLE>
<CAPTION>
<S> <C>
National City Bank of Pennsylvania........................... 15.5556%
NationsBank, N.A............................................. 15.5556%
Harris Trust and Savings Bank................................ 15.5556%
Firstar Bank, N.A............................................ 11.1111%
LaSalle National Bank........................................ 10.0000%
SunTrust Bank, Central Florida, National
Association.................................................. 8.8889%
Manufacturers and Traders Trust Company...................... 8.8889%
Mercantile Bank of St. Louis, N.A............................ 6.6667%
PNC Bank, National Association............................... 3.8889%
Bank Austria Creditanstalt Corporate Finance,
Inc.......................................................... 3.8889%
</TABLE>
As of June 30, 1999, total indebtedness under the Facility was $176.0
million, of which $51.0 million was related to the revolving credit portion of
the Facility.
On December 10, 1998, the Company entered the Facility which is due
December 10, 2003. 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:
<TABLE>
<CAPTION>
Quarter (s) Ending on Percentage of Principal (as of
Following Date or In The the last day of the Syndication
Following Period Period)
Due on Each Quarterly Payment Date
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
Of the approximately $202.0 million initially available under the
Facility, approximately $111.0 million was used to refinance previously
existing senior indebtedness of the Company and $71.0 million was used to
pay indebtedness of HMCH assumed in connection with the Merger.
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 $100,000, 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
$10.0 million in the aggregate in any fiscal year, and any other lease,
which is not a capitalized lease, or the rental of any real or personal
property of another entity with payments that do not (other than for
leases of retail store sites and motor vehicles) exceed $250,000 in the
aggregate in any fiscal year. The Company is also required to comply with
the following financial covenants: maintain a maximum leverage ratio with
respect to total funded debt of 4.0 to 1.0 (decreasing periodically until
reaching 2.5 to 1.0 by July 1, 2002), maintain a minimum interest
coverage ratio of 3.0 to 1.0 (increasing periodically until reaching 5.0
to 1.0 by April 1, 2002), maintain a minimum net worth of $217.0 million
(increasing with earnings and acquisitions) and maintain a minimum fixed
charge coverage ratio of 1.2 to 1.0. As of June 30, 1999, the Company was
in compliance with all covenants contained in the Facility.
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 nine months ended June 30, 1999.
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, the Company's net cash used in operating activities
decreased to $2.0 million from $22.5 million. This decrease was
principally due to a $11.6 million increase in net income, a $4.6 million
increase in non-cash depreciation and amortization, a $5.9 million
increase in income taxes payable, a $4.2 million decrease in other
assets, a $1.0 million decrease in income tax receivable, and a $17.2
million decrease in rental merchandise purchases. These changes
resulted primarily from the stores acquired and opened in fiscal 1998.
For the nine months ended June 30, 1999 compared to the nine months ended
June 30, 1998, the Company's net cash used in investing activities
decreased by $103.0 million to $16.6 million from $119.5 million. This
decrease is principally due to a $100.8 million decrease in purchases of
businesses and a $5.2 million decrease in the purchases of property and
equipment.
For the nine months ended June 30, 1999, compared to the nine months
ended June 30, 1998, the Company's net cash provided by financing
activities decreased to $20.2 million from $146.8 million. This decrease
is mainly due to a $73.2 million decrease net borrowings compared to
payments and a $44.2 million decrease in proceeds from common stock.
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 June 30, 1999:
<TABLE>
<CAPTION>
Expected Maturity Dates 1998 1999 2001 2002 2003 Thereafter
----- ----- ---- ---- --------- ----------
------------------------------------------------- --------- -------- -------- ---------- ------------ -------------
Debt:
<S> <C>
Revolving credit facility Base rate option $ 6,000
--Actual floating rate..................... 8.750%
Revolving credit facility Euro-rate option $ 45,000
--Actual floating rate..................... 5.544%
Term loan Euro-rate option................ $ 125,000
--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 June 30, 1999, 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.
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, 2000. 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 believes 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 was 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 operates
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, (iv) the ability of the
Company to open additional new stores, to integrate such stores into its
operations and to operate such new stores profitably, (v) the impact of
state and federal laws regulating or otherwise affecting the
rental-purchase transaction, and (vi) unforeseen issues associated with
the Year 2000 compliance effort.
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.
<PAGE>
RENT-WAY, INC.
ITEM 2. Changes in Securities and Use of Proceeds
c. Recent Sales of Unregistered Securities
On June 30, 1999, the Company issued 231,140 shares of Common Stock
without registration in connection with its acquisition of America's
Rent-to-Own, Inc. The transaction was exempt from registration under
Section 4 (2) of the Securities Act of 1933, as amended.
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 23, 1999 /s/ Jeffrey A. Conway
---------------- -----------------------------------------------
Date Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000893046
<NAME> Rent-Way, Inc.
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 6,914
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 189,728
<CURRENT-ASSETS> 0
<PP&E> 64,822
<DEPRECIATION> 18,332
<TOTAL-ASSETS> 495,451
<CURRENT-LIABILITIES> 0
<BONDS> 198,245
0
0
<COMMON> 248,910
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 495,451
<SALES> 330,368
<TOTAL-REVENUES> 371,661
<CGS> 93,369
<TOTAL-COSTS> 344,729
<OTHER-EXPENSES> 337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,762
<INCOME-PRETAX> 14,833
<INCOME-TAX> 9,126
<INCOME-CONTINUING> 5,707
<DISCONTINUED> 0
<EXTRAORDINARY> 519
<CHANGES> 0
<NET-INCOME> 5,188
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
