================================================================================
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 March 31, 2000
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)
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Pennsylvania 25-1407782
------------ ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
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 April 25, 2000
------------ --------------------------------
Common Stock 23,662,650
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<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited)
<S> <C> <C> <C>
and September 30, 1999 3
Condensed Consolidated Statements of Operations, Three and Six Months
Ended March 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows, Six Months Ended
March 31, 2000 and 1999(unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II Other Information
Item 1. Material Developments in Connection With Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(all dollars in thousands)
March 31, September 30,
2000 1999
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Cash $ 6,587 $ 8,646
Prepaid expenses 15,565 9,610
Rental merchandise, net 260,300 202,145
Property and equipment, net 55,622 50,578
Goodwill, net 308,012 305,900
Deferred financing costs, net 2,756 3,688
Non-compete and prepaid consulting fees, net 4,393 5,494
Other assets 19,548 11,333
--------------- ---------------
Total assets $ 672,783 $ 597,394
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 11,648 $ 8,417
Other liabilities 14,034 15,861
Income tax payable 11,985 2,316
Deferred income taxes 4,397 5,218
Debt 312,125 288,130
--------------- ---------------
Total liabilities 354,189 319,942
Contingencies (see note 9) - -
Shareholders' equity:
Preferred stock, without par value; 1,000 shares authorized;
no shares issued and outstanding - -
Common stock, without par value; 50,000 shares
authorized; 23,653 and 21,976 shares issued and
outstanding, respectively 276,841 256,755
Retained earnings 41,753 20,697
--------------- ---------------
Total shareholders' equity 318,594 277,452
--------------- ---------------
Total liabilities and shareholders' equity $ 672,783 $ 597,394
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<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 six months ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
Revenues:
<S> <C> <C> <C> <C>
Rental revenue $ 127,019 $ 109,237 $ 247,001 $ 216,467
Other revenue 21,868 16,513 42,797 33,243
----------- ----------- ---------- -----------
Total revenues 148,887 125,750 289,798 249,710
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise 36,317 32,140 67,476 63,464
Property and equipment 3,876 2,240 7,587 4,425
Amortization of goodwill and other intangibles 3,278 2,454 6,537 4,949
Salaries and wages 35,148 32,157 71,305 65,485
Advertising 5,882 6,190 11,491 13,977
Occupancy 10,980 8,133 21,289 16,280
Name change expense -- -- -- 86
Business combination costs -- 432 -- 16,800
Other operating expenses 28,179 25,651 56,322 54,978
----------- ----------- ---------- -----------
Total costs and operating expenses 123,660 109,397 242,007 240,444
----------- ----------- ---------- -----------
Operating income 25,227 16,353 47,791 9,266
Other income (expense):
Interest expense (7,146) (4,172) (12,974) (7,785)
Equity in loss of subsidiary (197) -- (197) --
Interest income 70 3 84 29
Other income (expense), net (52) (29) (198) (220)
----------- ----------- ---------- -----------
Income before income taxes and extraordinary item 17,902 12,155 34,506 1,290
Income tax expense 6,976 5,040 13,450 3,705
----------- ----------- ---------- -----------
Income (loss) before extraordinary item 10,926 7,115 21,056 (2,415)
Extraordinary item, net of tax benefit -- -- -- (519)
----------- ----------- ---------- -----------
Net income (loss) $ 10,926 $ 7,115 $ 21,056 $ (2,934)
=========== =========== ========== ===========
Earnings (loss) per common share (Note 2):
Basic earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.48 $ 0.34 $ 0.94 $ (0.11)
=========== =========== ========== ===========
Net income (loss) $ 0.48 $ 0.34 $ 0.94 $ (0.14)
=========== =========== ========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.46 $ 0.32 $ 0.90 $ (0.11)
=========== =========== ========== ===========
Net income (loss) $ 0.46 $ 0.32 $ 0.90 $ (0.14)
=========== =========== ========== ===========
Weighted average common shares outstanding:
Basic 22,673 21,125 22,326 21,166
=========== =========== ========== ===========
Diluted 23,920 23,142 23,834 21,166
=========== =========== ========== ===========
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 six months ended
March 31,
2000 1999
---------- ----------
(unaudited) (unaudited)
Operating activities:
<S> <C> <C>
Net income (loss) $ 21,056 $ (2,934)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 81,817 73,045
Equity in loss of subsidiary 197 --
Deferred income taxes (821) 512
Extraordinary item -- 519
Changes in assets and liabilities:
Prepaid expenses (5,955) (2,351)
Rental merchandise (124,931) (89,851)
Non-compete and prepaid consulting fees 1,101 1,349
Income tax receivable -- 1,529
Other assets 757 2,741
Accounts payable (3,307) 1,011
Income taxes payable 9,669 3,573
Other liabilities (2,269) 677
------------- --------------
Net cash used in operating activities (22,686) (10,180)
Investing activities:
Purchase of businesses, net of cash acquired (16,159) (589)
Purchases of property and equipment (12,631) (10,383)
Loans to related parties (1,917) --
------------- --------------
Net cash used in investing activities (30,707) (10,972)
Financing activities:
Proceeds from borrowings 103,000 267,142
Payments on borrowings including early extinguishment (59,005) (248,919)
Book overdraft 6,538 --
Deferred finance costs -- (1,334)
Proceeds from common stock issuance 801 1,702
------------- --------------
Net cash provided by financing activities 51,334 18,591
------------- --------------
Decrease in cash (2,059) (2,561)
Cash at beginning of period 8,646 5,326
------------- --------------
Cash at end of period $ 6,587 $ 2,765
============= ==============
Supplemental disclosure of noncash financing activity:
Common stock issed to extinguish debt $ 20,000 $ --
============= ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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. The results of operations for the interim periods are not necessarily
indicative of the results for the full year. Certain amounts in the March 31,
1999, financial statements have been reclassified to conform to the March 31,
2000, presentation.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
The Company has no items of other comprehensive income.
In 1999, the Company adopted Statement of Financial Accounting Standards,
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. During fiscal 1999, the Company
determined it had only one segment and the adoption of SFAS No. 131 had no
impact on the consolidated financial statements and the related disclosure
information. The acquisition of dPi Teleconnect LLC (see Note 4) resulted in the
recognition of a separate operating segment (see Note 5).
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, 1999.
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. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging-Activities-Deferral of the Effective Date of SFAS No. 133-an Amendment
of FASB Statement 133." This Statement delays the effective date for this
standard until fiscal years beginning after June 15, 2000. 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 adopted this statement on October
1, 1999, resulting in no significant effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The
Company is in the process of determining the impact this adoption will have on
its consolidated financial statements.
<PAGE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated Financial Statements - continued
(all dollars in thousands, except per share data)
2. Earnings (loss) per Common Share:
Basic earnings (loss) per common share is computed using income (loss)
available to common shareholders divided by the weighted average number of
common shares outstanding. Diluted earnings (loss) per common share is
computed using income (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. Because operating results were a loss for the six month period ended
March 31, 1999, basic and diluted loss per common share were the same.
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 six months
ended ended
March 31, March 31,
(unaudited) (unaudited)
-------------------------- ---------------------------
COMPUTATION OF EARNINGS (LOSS) PER SHARE: 2000 1999 2000 1999
----------------------------------------- ------------ ----------- ------------ -------------
BASIC
<S> <C> <C> <C> <C>
Earnings (loss) applicable to common shares........ $ 10,926 $ 7,115 $ 21,056 $ (2,934)
=========== ============ =========== ============
Weighted average number of common shares
outstanding during the period.................... 22,673 21,125 22,326 21,166
=========== ============ =========== ============
Basic earnings (loss) per common share:
Earnings (loss) before extraordinary item......... $ 0.48 $ 0.34 $ 0.94 $ (0.11)
=========== ============ =========== ============
Net income (loss)................................. $ 0.48 $ 0.34 $ 0.94 $ (0.14)
=========== ============ =========== ============
DILUTED
Earnings (loss) applicable to common shares......... $ 10,926 $ 7,115 $ 21,056 $ (2,934)
Interest on 7% convertible debentures (net of tax).. 70 210 280 --
----------- ------------ ----------- ------------
Earnings (loss) applicable for diluted earnings per
share............................................... $ 10,996 $ 7,325 $ 21,336 $ (2,934)
=========== ============ =========== ============
Weighted average number of common shares
outstanding during the period used in basic
calculation....................................... 22,673 21,125 22,326 21,166
Shares issuable upon exercise of stock options,
warrants and escrowed shares...................... 360 521 315 --
Shares issued on conversion of 7% convertible
debentures........................................ 887 1,496 1,193 --
----------- ------------ ----------- ------------
Weighted average number of shares used in
calculation of diluted earnings (loss) per share. 23,920 23,142 23,834 21,166
=========== ============ =========== ============
Earnings (loss) per common share:
Earnings (loss) before extraordinary item......... $ 0.46 $ 0.32 $ 0.90 $ (0.11)
=========== ============ =========== ============
Net income (loss)................................. $ 0.46 $ 0.32 $ 0.90 $ (0.14)
=========== ============ =========== ============
</TABLE>
3. Mergers and Acquisitions:
On March 22, 2000, the Company purchased a portion of the rental merchandise
and rental contracts of ABC Television and Appliance Rental, Inc., doing
business as Prime Time Rentals ("Prime Time"), a thirty-store rental-purchase
chain. The Company purchased the assets of ten stores located in Alabama and
Tennessee with annual revenues of approximately $3,800 in exchange for
consideration of $3,000 in cash. Pursuant to the terms of the acquisition, $400
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. Prime Time's assets were recorded at their estimated fair values
at the date of the acquisition. The excess of the fair value of net assets
acquired, ("goodwill") of $2,341 is being amortized over 20 years on a
straight-line basis. The total cost of net assets acquired was $3,000 and
consisted of assets of $3,101 less acquisition costs of $101. Assets acquired at
estimated fair value, other than goodwill, include rental merchandise of $700
and a non-compete agreement of $60. The Condensed Consolidated Statements of
Operations for the three and six months ended March 31, 2000 include the results
of operations of Prime Time since the date of the acquisition.
<PAGE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated Financial Statements - continued
(all dollars in thousands, except per share data)
3. Mergers and Acquisitions (continued):
On September 23, 1999, the Company acquired all of the outstanding shares
of RentaVision, Inc. ("RentaVision"), a rental-purchase chain located in 16
states with annual revenues of approximately $75,000. The consideration paid in
exchange for all the outstanding shares of RentaVision was $73,874 consisting of
$68,774 in cash and 278,801 shares of the Company's common stock (restricted
shares). Pursuant to the terms of the purchase agreement, 181,201 shares of
common stock equivalent to $4,000 of the purchase price was 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. As of March
31, 2000, the Company had not released any funds from the escrow account due to
final settlement of the purchase price. The acquisition was accounted for using
the purchase method of accounting. RentaVision's assets and liabilities were
recorded at their fair values as of the date of the acquisition. The excess of
the acquisition cost over the estimated fair value of the net assets acquired
("goodwill") of $90,144 is being amortized on a straight-line basis over 30
years. The total cost of the net assets acquired was $73,874 and consisted of
assets of $106,134 less liabilities assumed of $25,610 and acquisition costs of
$6,650. Assets acquired (at fair value) other than goodwill consisted primarily
of rental merchandise of $12,267, non-compete agreement of $1,000, customer
contracts of $1,200, cash of $725, and other assets of $798. Liabilities assumed
(at fair value) consisted primarily of debt of $21,527, accrued liabilities of
$3,125, and trade accounts payable of $958. The Condensed Consolidated Statement
of Operations for the three and six months ended March 31, 2000 includes the
results of operations of RentaVision for the entire period.
On June 30, 1999, the Company acquired all the outstanding shares of
America's Rent-To-Own Center, Inc., ("America's Rent-To-Own"). At the time of
the acquisition, America's Rent-To-Own 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 Rent-To-Own consisted of 231,140 shares of the
Company's common stock (restricted shares). 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. As of March 31, 2000, the Company had not released any funds
from the escrow account due to final settlement of the purchase price. The
acquisition was accounted for using the purchase method of accounting. America's
Rent-To-Own assets and liabilities were recorded at their fair value at the date
of the acquisition. The excess of the acquisition cost over the fair value of
net assets acquired, ("goodwill") of $4,847 is being amortized on a straight
line basis over 30 years. The total cost of the net assets acquired was $4,838
and consisted of assets of $7,273 less liabilities assumed of $2,149 and
acquisition costs of $286. Assets acquired, other than goodwill (at fair value)
consisted of rental merchandise of $1,269, receivables of $632, prepaid and
other assets of $65, a deferred tax asset of $400, and a non-compete agreement
of $60. Liabilities assumed (at fair value) consisted of debt of $1,295, accrued
liabilities of $474 and trade accounts payables of $380. The Company is in the
process of finalizing the purchase price allocation. The Condensed Consolidated
Statement of Operations for the three and six months ended March 31, 2000
includes the results of operations of America's Rent-To-Own for the entire
period.
4. dPi Teleconnect L.L.C. Acquisition:
On January 4, 2000, the Company acquired a 49% interest in dPi Teleconnect
L.L.C. ("DPI"). DPI, a privately held Delaware limited liability company,
provides prepaid local phone service on a month by month basis. In exchange for
its 49% interest, the Company paid consideration of $6,400 in cash. As part of
the purchase agreement with DPI, the Company retains an option to purchase an
additional 21% interest, which it will exercise pending receipt of various state
and regulatory approvals. The consideration for the additional interest is
$1,100 in cash. As of March 31, 2000, the Company had advanced this additional
consideration to the principals of DPI in the form of a non-interest bearing
note. In addition to the option to increase its ownership interest, the Company
has agreed to fund working capital requirements for DPI over the next three
years, for a maximum amount of $3,000 at the higher of the prime rate plus 200
basis points or the rate at which the Company is able to borrow funds. As of
March 31, 2000, the Company paid the first installation of working capital to
DPI in the amount of $1,000. The DPI acquisition has been accounted for using
the equity method in accordance with APB No. 18. When the Company exercises its
option to acquire the additional 21%, the financial statements will be presented
on a consolidated basis. The excess of the acquisition cost over the estimated
fair value of net assets acquired ("goodwill") of $6,750 is being amortized on a
straight-line basis over 15 years. The total cost of net liabilities acquired
was $149 with acquisition costs of $201. The purchase price allocation is
subject to refinement upon finalization of the review of fair value of assets
acquired.
<PAGE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated Financial Statements - continued
(all dollars in thousands, except per share data)
5. Segment Information:
Rent-Way, Inc. is a national rental-purchase chain, which provides a variety
of services to its customers including rental of house-hold items and local
telephone service on a week by week or month by month basis. The Company has
determined that its reportable segments are those that are based on the
Company's method of internal reporting, which disaggregates its business by
product category. The Company's reportable segments are: household rentals and
prepaid telephone service. Its household rental segment rents name brand
merchandise such as furniture, appliances, electronics and computers on a week
by week or month by month basis. Its prepaid telephone service segment provides
a local dial tone on a month by month basis.
The financial results of the Company's segments follow the same accounting
policies as described in "Summary of Significant Accounting Policies" (see Note
1). The information presented below does not include the results of the prepaid
telephone service segment prior to January 4, 2000 (see Note 4).
<TABLE>
<CAPTION>
Rental Phone Total
For the three months ended March 31, 2000 Segment Segment Segments
----------------------------------------- ------- ------- --------
<S> <C> <C> <C>
Total revenue................................. $ 148,887 $ 3,592 $ 152,479
========= ========= ==========
Operating income (loss)....................... $ 25,227 $ (395) $ 24,832
========= ========= ==========
Net income (loss)............................. $ 11,123 $ (403) $ 10,720
========= ========= ==========
For the six months ended March 31, 2000
---------------------------------------
Total revenue................................. $ 289,798 $ 3,592 $ 293,390
========= ========= ==========
Operating income (loss)....................... $ 47,791 $ (395) $ 47,396
========= ========= ==========
Net income (loss)............................. $ 21,253 $ (403) $ 20,850
========= ========= ==========
Total Assets............................... $ 672,980 $ 1,261 $ 674,241
========= ========= ==========
</TABLE>
The following is a reconciliation of segment information to the Company's
Condensed Consolidated totals:
<TABLE>
<CAPTION>
Period Ended March 31, 2000
---------------------------
Three months Six months
============ ==========
Total revenue:
<S> <C> <C>
Total segments........................... $ 152,479 $ 293,390
Elimination of non-consolidated revenue.. (3,592) (3,592)
------------ -----------
As reported.............................. $ 148,887 $ 289,798
============ ===========
Net income:
Total segments........................... $ 10,720 $ 20,850
Equity in loss of subsidiary............. (197) (197)
Elimination of non-consolidated loss..... 403 403
------------ -----------
As reported.............................. $ 10,926 $ 21,056
============ ===========
Total assets at March 31, 2000:
Total segments........................... $ 674,241
Equity in loss of subsidiary............. (197)
Elimination of non-consolidated assets... (1,261)
-----------
As reported.............................. $ 672,783
===========
</TABLE>
<PAGE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated Financial Statements - continued
(all dollars in thousands, except per share data)
6. Debt:
On March 29, 2000, the Company made the required $3,750 principal payment
on its Term Notes A and the required $250 principal payment on its Term Notes B.
As of March 31, 2000, the Company's debt under both the euro-rate option and
base-rate option plans were as follows:
<TABLE>
<CAPTION>
Borrowing option plan Amount Rate Expiration Date
--------------------- ------ ---- ---------------
<S> <C> <C> <C> <C>
Euro-rate tranche.................................. $ 117,500 8.78% 06/30/00
Euro-rate tranche.................................. 99,500 9.78% 06/30/00
Euro-rate tranche.................................. 60,000 8.78% 06/30/00
Base-rate.......................................... 35,000 10.00% 09/30/04
----------------
$ 312,000
================
</TABLE>
At March 31, 2000, the Company had $95,000 principal amount of the revolving
credit facility outstanding under the Facility and $1,700 in letters of credit
outstanding. At March 31, 2000 there was $3,300 of unused revolving notes and
letters of credit available under the Facility.
By notice to the holders thereof dated December 10, 1999, the Company called
for a mandatory redemption of its $20 million 7% Convertible Subordinated
Debentures due 2007. The Company had the right to redeem the debentures on
February 5, 2000, at a price of 103%. On February 6, 2000, $20,000 of 7%
Subordinated Convertible Debentures converted into 1,495 shares of the Company's
common stock. The debentures were convertible into shares of common stock,
without par value, at a conversion price of $13.37 per share at the option of
the shareholders at any time on notice therefrom. Unamortized deferred financing
costs in the amount of $715 were charged to equity in connection with the
conversion.
7. Derivative Financial Instruments:
The fair value of the interest rate swap agreements based on settlement cost
as estimated by independent dealers as of March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Notional Fair
Amount Value
---------- --------
<S> <C> <C>
Interest rate swap, National City Bank........................ $ 30,000 $ 929
Interest rate swap, Bank of America........................... $ 20,000 $ 217
Interest rate swap, Manufacturers' and Traders Trust Company.. $ 10,000 $ 302
Interest rate swap, Harris Bank............................... $ 20,000 $ 1,303
Interest rate swap, SunTrust Bank............................. $ 10,000 $ 646
Interest rate swap, LaSalle Bank.............................. $ 10,000 $ 649
Interest rate swap, Bank of America........................... $ 10,000 $ 640
Interest rate swap, Harris Bank............................... $ 10,000 $ 641
Interest rate swap, PNC Bank.................................. $ 5,000 $ 34
</TABLE>
8. Related Party Transactions:
As of March 31, 2000, the Company had full recourse notes receivable (the
"Notes") of $1,255 from various officers and directors of the Company. The Notes
were approved by the Board of Directors for the purpose of certain option
exercises. The Notes are reflected as a reduction to common stock in the
Company's condensed consolidated balance sheets.
The Company acts as an agent for DPI, in regard to revenue collection. The
Company collects the revenue from the DPI customer, retains a commission and
remits the balance to DPI. For the three- and six-month periods ending March 31,
2000, the Company's commission was $180 and $297 respectively.
<PAGE>
RENT-WAY, INC.
Notes to Unaudited Condensed Consolidated Financial Statements - continued
(all dollars in thousands, except per share data)
9. 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 $1,800 to $4,600. 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. The Company
intends to vigorously defend itself against the claims. The Company believes
that it has sufficient insurance coverage for any damages that might be awarded
and that the final disposition of the action will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Additional claims exist in the range of $280 to $370 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.
10. Income Taxes:
The fiscal 1999 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 on 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%.
<PAGE>
RENT-WAY, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (all dollars in thousands)
Overview
Rent-Way is the second largest operator in the rental purchase industry with
1,093 stores located in 41 states. The Company offers quality brand name home
entertainment equipment, furniture, appliances, and jewelry to customers under
full-service rental-purchase agreements that generally allow the customer to
obtain ownership of the merchandise at the conclusion of an agreed upon rental
period.
On June 30, 1999, the Company acquired America's Rent-To-Own Center, Inc.
("America's Rent-To-Own"). 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. America's Rent-To-Own operated 21
rental-purchase stores in Arkansas, Kansas, Missouri, and Oklahoma and had
annual revenues of approximately $8 million.
On September 23, 1999, the Company acquired all the stock of RentaVision,
Inc. ("RentaVision") for a purchase price of approximately $74 million.
RentaVision operated a chain of 250 rental-purchase stores in 16 states, 50 of
which have been opened during the past year. RentaVision had annual revenues of
approximately $75 million.
The Company completed the management information systems integration of all
stores acquired in the America's Rent-To-Own acquisition by July 31, 1999, all
stores acquired in the RentaVision acquisition by November 11, 1999, and all
stores acquired in the Prime Time acquisition by April 12, 2000. In addition,
the Company consolidated all back office functions such as accounting, payroll,
and human resources. The Company closed and merged 47 stores located in
overlapping markets. The Company also closed RentaVision's five warehouse
locations. The Company uses a direct-ship policy from their vendors to the
stores. This policy has minimized the amount of rental merchandise not on rent.
On January 4, 2000, the Company acquired a 49% interest in dPi Teleconnect,
L.L.C. ("DPI"), a privately-held provider of prepaid local phone service. The
Company has the option to acquire an additional 21% interest upon receipt of
regulatory approvals. In fiscal 1999, the Company began to act as an agent for
DPI. The Company successfully tested this service in 70 of its stores. The
Company received the benefit of additional traffic in these stores, as well as,
a 10% commission from the sale of the service. DPI is currently licensed to
offer prepaid local phone service in 21 states and is working to expand to over
40 states by the end of 2000.
On February 6, 2000, $20,000 in subordinated convertible debentures were
converted at a conversion price of $13.37 per share into 1,495,986 shares of
common stock, with no par value. The Company had previously called the
debentures for redemption on February 5, 2000, at a price of 103%.
On March 22, 2000, the Company acquired a portion of the assets of ABC
television and Appliance Rental Inc. ("Prime Time"), a thirty-store
rental-purchase chain. The Company purchased the assets of ten stores located in
Alabama and Tennessee with estimated annual revenue of $3,800 in exchange for
consideration of $3,000 in cash.
Management continues to actively seek acquisition candidates with financial
and geographic profiles consistent with the Company's growth objectives.
<PAGE>
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 Six Months
Ended March 31 Ended March 31
----------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue.............................. 85.3% 88.0% 85.2% 86.7%
Other revenue............................... 14.7 12.0 14.8 13.3
----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise.......................... 24.4 25.6 23.3 25.4
Property and equipment...................... 2.6 1.8 2.6 1.8
Amortization of goodwill.................... 2.2 2.0 2.3 2.0
----- ----- ----- -----
Total depreciation and amortization.... 29.2 29.4 28.2 29.2
Salaries and wages............................ 23.6 25.6 24.6 26.2
Advertising................................... 4.0 4.9 4.0 5.6
Occupancy..................................... 7.4 6.5 7.3 6.5
Name change expense........................... -- -- -- 0.1
Business combination costs.................... -- 0.2 -- 6.7
Other operating expenses...................... 18.9 20.4 19.4 22.0
----- ----- ----- -----
Total costs and operating expenses.......... 83.1 87.0 83.5 96.3
----- ----- ----- -----
Operating income............................ 16.9 13.0 16.5 3.7
Interest expense.............................. (4.8) (3.3) (4.5) (3.1)
Equity in loss of subsidiary.................. (0.1) -- (0.1) --
Interest income............................... 0.1 -- 0.1 --
Other income.................................. (0.1) -- (0.1) (0.1)
----- ----- ----- -----
Income before income taxes and
extraordinary item........................... 12.0 9.7 11.9 0.5
Income tax expense (benefit).................. 4.7 4.0 4.6 (1.5)
----- ----- ----- -----
Income (loss) before extraordinary item..... 7.3 5.7 7.3 (1.0)
Extraordinary item............................ -- -- -- (0.2)%
----- ----- ----- -----
Net income (loss)............................. 7.3% 5.7% 7.3% (1.2)%
===== ===== ===== =====
</TABLE>
Comparison of Three Months Ended March 31, 2000 and 1999
Total revenues. Total revenues increased $23.1 million, or 18.4% to
$148.9 million from $125.8 million. The increase is attributable to the addition
of the stores acquired and opened in fiscal 1999 and 2000 and increased same
store revenues. The stores acquired in the RentaVision and America's Rent-To-Own
acquisitions accounted for $21.4 million and $2.2 million of the increase,
respectively. Stores opened in fiscal 1999 and 2000 accounted for $1.9 million
of the increase. The Company experienced a 2.7% increase in same store revenues
compared to the same period last year. Increase in same store revenues for the
Rent-Way stores and Home Choice stores were 5.1% and 0.6%, respectively. The
increase in same store revenues was primarily due to 0.9% increase as a
percentage of total revenues in jewelry rentals, a 0.2% increase as a percentage
of total revenues in prepaid dialtone service sales, and a 0.7% increase as a
percentage of total revenues in merchandise sales offset by a 0.5% decrease as a
percentage of total revenues in appliance rentals and a 0.2% decrease as a
percentage of total revenues in pager rentals. The Company expects increased
same store revenues for the rest of the fiscal 2000 due to, among many other
factors, the addition of new products and services. During the last quarter of
fiscal 1999, the Company added personal computers to its product line. The
Company will also act as an agent to provide prepaid phone service through DPI.
The DPI service is currently offered in over 200 stores. Management believes
that opportunities exist to provide additional non-traditional merchandise to
its customers.
Depreciation and amortization. Depreciation expense related to rental
merchandise decreased 1.2% as a percentage of total revenues to 24.4% from
25.6%. This decrease is primarily due to increases in weekly rental rates, lower
purchase costs of rental merchandise due to increased volume, and improved
realization of potential collectible rent. In addition, depreciation expense as
a percentage of total revenues has shown solid improvement in the stores
acquired in the Home Choice merger. Acquired merchandise with high remaining
values has worked its way out of the Company's system and the stores are
replacing poorly priced and termed agreements with new agreements priced and
termed in accordance with Rent-Way operating procedures.
Depreciation expense related to property and equipment increased to
2.6% as a percentage of total revenues from 1.8%. This increase is principally
due to the depreciation expense related to new store signage and remodels
associated with the Home Choice stores, new computers and equipment installed in
the RentaVision stores, and the computer and software costs associated with the
Company's implementation of the PeopleSoft software package in January 1999.
Amortization of goodwill increased to 2.2% as a percentage of total
revenues from 2.0%. This increase is due to the addition of the goodwill
associated with the RentaVision and America's Rent-To-Own acquisitions.
Salaries and wages. Salaries and wages increased by $3.0 million to
$35.1 million from $32.1 million, but decreased 2.0% as a percentage of total
revenues to 23.6% from 25.6%. This 2.0% decrease as a percentage of total
revenues is due to the Company's ability to spread corporate and regional
managers' payroll over an increased store revenue base. The decrease is also
attributable to the Company bringing Home Choice payroll and store personnel
levels within the Company's standards. As a result of these factors, the Company
expects a further decline in salaries and wages as a percentage of total
revenues during the remainder of fiscal 2000.
Advertising. Advertising expense decreased to $5.9 million from $6.2
million and decreased to 4.0% as a percentage of total revenues from 4.9%. This
decrease is due to the Company's ability to focus advertising efforts in cluster
markets. It is also due to the Company's participation in co-operative
advertising programs with its vendors. As part of these co-operative programs,
the Company is able to recoup a portion of its advertising costs from its
vendors in the form of rebates for advertising their products in Rent-Way ads.
Occupancy. Occupancy expense increased to $11.0 million from $8.1
million, or 0.9% as a percentage of total revenues to 7.4% from 6.5%. This
increase is primarily due to the addition of the RentaVision stores. The
RentaVision stores have lower revenue averages to charge fixed rental costs
against. The Company expects occupancy expense as a percentage of total revenues
to decrease as the RentaVision per store revenue averages increase. Fifty of the
250 stores acquired were opened in the past twelve months.
Business combination costs. In conjunction with the Company's merger
with Home Choice Holdings, Inc. (the "Merger") on December 10, 1998, the Company
incurred $0.4 million in costs in the quarter ended March 31, 1999.
Other operating expenses. Other operating expenses increased to $28.2
million from $25.7 million but decreased to 18.9% as a percentage of total
revenues from 20.4%. This decrease is the result of the efficiencies gained by
the Company from its ability to spread certain fixed costs over an increased
store revenue base. These decreased fixed costs include liability insurance,
legal and professional fees, state and local taxes, and office supplies.
Operating income. Operating income increased to 16.9% of total revenues
from 13.0% of total revenues due to the factors discussed above. The Company
anticipates its operating income to remain at or increase above 16.9% in fiscal
2000 as a result of its continued ability to leverage costs over an increased
store revenue base.
Interest expense. Interest expense increased to 4.8% from 3.3% as a
percentage of total revenues. This increase is mainly due to the $68.8 million
in funds drawn on the Company's senior credit facility to consummate the
RentaVision acquisition. In addition, the Company has purchased rental
merchandise at a higher rate in an effort to supplement the merchandise in the
RentaVision stores with newer merchandise and a broader product selection.
Equity in earnings of subsidiary. In conjunction with the Company's
purchase of a 49% ownership interest in dPi, a charge of $197 reflects the
unconsolidated loss for the period. The Company currently uses the equity method
to account for this acquisition. Once the Company exercises the option to
acquire the additional 21%, the consolidation method of accounting will be used.
Income tax expense. Income tax expense increased to 4.7% as a
percentage of total revenues from 4.0% of total revenues. The increase was due
to an increase in pretax book income and operating income. The Company's
effective tax rate is 39.0%
Net income. Net income increased to 7.3% of total revenues from 5.7% of
total revenues due to the factors discussed above.
<PAGE>
Comparison of Six Months Ended March 31, 2000 and 1999
Total revenues. Total revenues increased $40.1 million, or 16.1% to
$289.8 million from $249.7 million. The increase is attributable to the addition
of the stores acquired and opened in fiscal 1999 and 2000 and increased same
store revenues. The stores acquired in the RentaVision and America's Rent-To-Own
acquisitions accounted for $41.4 million and $4.1 million of the increase,
respectively. Stores opened in fiscal 1999 and 2000 accounted for $3.2 million
of the increase. The Company experienced a 2.2% increase in same store revenues
compared to the same period last year. Increase (decrease) in same store
revenues for the Rent-Way stores and Home Choice stores were 4.8% and (0.4)%
respectively. The increase in same store revenues was primarily due to a
1.1%increase as a percentage of total revenues in electronics revenues, a 0.9%
increase as a percentage of total revenues in merchandise sales offset by a 0.6%
decrease as a percentage of total revenues in furniture rentals and a 0.2%
decrease as a percentage of total revenues in pager rentals. The Company expects
increased same store revenues for the rest of the fiscal 2000 due to, among many
other factors, the addition of new products and services. During the last
quarter of fiscal 1999, the Company added personal computers to its product
line. The dPi service is currently offered in over 200 stores. Management
believes that opportunities exist to provide additional non-traditional
merchandise to its customers.
Depreciation and amortization. Depreciation expense related to rental
merchandise decreased 2.1% as a percentage of total revenues to 23.3% from
25.4%. This decrease is primarily due to increases in weekly rental rates, lower
purchase costs of rental merchandise due to increased volume, and improved
realization of potential collectible rent. In addition, depreciation expense as
a percentage of total revenues has shown solid improvement in the stores
acquired in the Home Choice merger. Acquired merchandise with high remaining
values has worked its way out of the Company's system and the stores are
replacing poorly priced and termed agreements with new agreements priced and
termed in accordance with Rent-Way operating procedures.
Depreciation expense related to property and equipment increased to
2.6% as a percentage of total revenues from 1.8%. This increase is principally
due to the depreciation expense related to new store signage and remodels
associated with the Home Choice stores, new computers and equipment installed in
the RentaVision stores, and the computer and software costs associated with the
Company's implementation of the PeopleSoft software package in January 1999.
Amortization of goodwill increased to 2.3% as a percentage of total
revenues from 2.0%. This increase is due to the addition of the goodwill
associated with the RentaVision and America's Rent-To-Own acquisitions.
Salaries and wages. Salaries and wages increased by $5.8 million to
$71.3 million from $65.5 million, but decreased 1.6% as a percentage of total
revenues to 24.6% from 26.2%. This 1.6% decrease as a percentage of total
revenues is due to the Company's ability to spread corporate and regional
managers' payroll over an increased store revenue base. The decrease is also
attributable to the Company bringing Home Choice payroll and store personnel
levels within the Company's standards. As a result of these factors, the Company
expects a further decline in salaries and wages as a percentage of total
revenues during the remainder of fiscal 2000.
Advertising. Advertising expense decreased to $11.5 million from $14.0
million and decreased to 4.0% as a percentage of total revenues from 5.6%. This
decrease is due to the Company's ability to focus advertising efforts in cluster
markets. It is also due to the Company's participation in co-operative
advertising programs with its vendors. As part of these co-operative programs,
the Company is able to recoup a portion of its advertising costs from its
vendors in the form of rebates for advertising their products in Rent-Way ads.
Occupancy. Occupancy expense increased to $21.3 million from $16.3
million, or 0.8% as a percentage of total revenues to 7.3% from 6.5%. This
increase is primarily due to the addition of the RentaVision stores. The
RentaVision stores have lower revenue averages to charge fixed rental costs
against. The Company expects occupancy expense as a percentage of total revenues
to decrease as the RentaVision per store revenue averages increase. Fifty of the
250 stores acquired were opened in the past twelve months.
Name change expense. Name change expense decreased to zero from $0.1
million. In 1997, HomeChoice launched a program to change the name of all of its
stores from the various trade names acquired to "HomeChoice Lease or Own." In
connection with this program, Home Choice incurred nonrecurring costs which
included the write-off of the net carrying values of old signs and branded
supplies and the expensing of new vehicle decals. The Company currently operates
under both the RentWay and HomeChoice trade names.
Business combination costs. In conjunction with the Company's merger
with Home Choice Holdings, Inc. on December 10, 1998, the Company incurred $16.8
million in costs in the six months ended March 31, 1999. These costs included
investment banker fees of $6.5 million, proxy preparation, printing, and other
professional fees of $1.3 million, employee severance and stay-put arrangements
of $4.5 million, due diligence and other costs of $0.9 million, costs related to
closing or disposing of duplicate corporate headquarters, equipment and stores
in overlapping markets of $2.1 million, and the write-off of prepaid assets
which could not be used of $1.5 million.
Other operating expenses. Other operating expenses increased to $56.3
million from $55.0 million but decreased to 19.4% as a percentage of total
revenues from 22.1%. This decrease is due in part to a decrease in inventory
write-offs. In connection with the Merger, 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, the Company experienced an
excessive amount of inventory deletions during the three month period ended
December 31, 1998. The amount of these excessive inventory write-offs was
approximately $1.1 million. This decrease is also the result of the efficiencies
gained by the Company from its ability to spread certain fixed costs over an
increased store revenue base. These decreased fixed costs include liability
insurance, legal and professional fees, state and local taxes, and office
supplies.
Operating income. Operating income increased to 16.5% of total revenues
from 3.7% of total revenues due to the factors discussed above. The Company
anticipates its operating income to remain at or increase above 16.9% in fiscal
2000 as a result of its continued ability to leverage costs over an increased
store revenue base.
Interest expense. Interest expense increased to 4.5% from 3.1% as a
percentage of total revenues. This increase is mainly due to the $68.8 million
in funds drawn on the Company's senior credit facility to consummate the
RentaVision acquisition. In addition, the Company has purchased rental
merchandise at a higher rate in an effort to supplement the merchandise in the
RentaVision stores with newer merchandise and a broader product selection.
Equity in earnings of subsidiary. In conjunction with the Company's
purchase of a 49% ownership interest in dPi, a charge of $197 reflects the
unconsolidated loss for the period. The Company currently uses the equity method
to account for this acquisition. Once the Company exercises the option to
acquire the additional 21%, the consolidation method of accounting will be used.
Income tax expense. Income tax expense increased to 4.6% as a
percentage of total revenues from 1.5% of total revenues. The increase was due
to an increase in pretax income and operating income. The Company's effective
tax rate is 39.0%
Net income. Net income increased to 7.3% of total revenues from a net loss
of 1.2% of total revenues due to the factors discussed above.
Liquidity and Capital Resources
The Company's capital requirements relate primarily to acquisitions, new
store openings, and purchasing additional rental merchandise and replacing
rental merchandise that has been sold or is no longer suitable for rent. The
Company intends to increase the number of stores it operates through
acquisitions and new store openings. Such acquisitions will vary in size and the
Company will consider large acquisitions that could be material to the Company.
To provide any additional funds necessary for the continued pursuit of its
growth strategies, the Company may incur, from time-to-time, additional short
and long-term bank or other institutional indebtedness and may issue, in public
or private transactions, its equity and debt securities, depending upon market
and other conditions. There can be no assurance that such additional financing
will be available on terms acceptable to the Company.
Net cash used in operating activities increased to $22.7 million for the six
month period ended March 31, 2000, from $10.2 million for the six month period
ended March 31, 1999. This increase is principally due to a $24.0 million
increase in net income and a $6.1 million increase in income taxes payable
offset by a $35.1 million increase in rental merchandise purchases and a $3.6
million increase in prepaid expenses.
Net cash used in investing activities increased $19.8 million to $30.7
million in the six month period ended March 31, 2000, compared to $11.0 million
in the six month period ended March 31, 1999. The increase in cash used for the
purchase of business was primarily due to the Prime Time acquisition for $3.1
and the purchase of DPI for $6.6. Capital expenditures in the six month period
ended March 31, 2000, included the purchase of new store signage and store
remodeling costs and the purchase of computers and equipment for the stores
acquired from RentaVision.
The Company has begun to construct a 30,000 square foot addition to its
current corporate headquarters facility. The Company estimates the cost at
approximately $3.5 million. The Company plans to fund this project with
borrowings on its senior credit facility. As of March 31, 2000, the Company
incurred $0.7 million in costs related to this project.
Net cash provided by financing activities increased to $51.3 million in the
six month period ended March 31, 2000, from $18.6 million in the six month
period ended March 31, 1999. Cash flows from financing activities have
historically represented the Company's financing of its long term growth.
On September 23, 1999, the Company amended its existing collaterized term
loan and revolving credit facility with a syndicate of banks led by Bank of
Montreal and National City Bank (the "Amended Facility"). The Amended Facility
provides for loans and letters of credit up to $325.0 million. Borrowings under
the Amended Facility bear interest at the Company's option either at a base rate
or a LIBOR based rate. The Amended Facility requires the Company to meet certain
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum tangible net worth, fixed charge coverage, and rental
merchandise usage ratios. As of March 31, 2000, the Company was in compliance
with all covenants contained in the Amended Facility. As of April 17, 2000,
$312.0 million in borrowings is outstanding under the Amended Facility.
On January 10, 2000, the Company acquired a 49% interest in DPI for $6.4
million in cash. The Company has agreed to acquire an additional 21% interest
upon receipt of regulatory approvals. The Company has also committed to provide
DPI $3.0 million in funds to meet working capital requirements as needed.
Management believes that sufficient resources will be available to meet the
Company's short-term cash requirements. The Company believes that it can
adequately fund its short-term cash needs through borrowings under the Amended
Facility and cash generated from operations. Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements, and its rate of growth.
The Company recognizes that its plans to continue to grow through
acquisitions, new store openings and new product development will require more
cash than is currently available under its existing senior credit facility. As a
result, the Company has begun to take steps to secure an increase to its
existing facility. The Company expects to have additional financing available to
support its plans for continued growth.
Seasonality and Inflation
Management believes that operating results may be subject to seasonality.
The first quarter typically has a greater percentage of rentals because of
traditional holiday shopping patterns. Management plans for these seasonal
variances and takes particular advantage of the first quarter with product
promotions, marketing campaigns, and employee incentives. Because many of the
Company's expenses do not fluctuate with seasonal revenue changes, such revenue
changes may cause fluctuations in the Company's quarterly earnings.
During the six months ended March 31, 2000, the cost of rental merchandise,
store lease rental expense and salaries and wages have increased modestly. These
increases have not had a significant effect on the Company's results of
operations because the Company has been able to charge commensurately higher
rental for its merchandise. This trend is expected to continue in the
foreseeable future.
Recent Accounting Pronouncements
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. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging-Activities-Deferral of the Effective Date of SFAS No. 133-an Amendment
of FASB Statement 133." This Statement delays the effective date for this
standard until fiscal years beginning after June 15, 2000. 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 adopted this statement effective
October 1, 1999, resulting in no significant effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The
Company is in the process of determining the impact this adoption will have on
its consolidated financial statements.
Year 2000 Issues
As of the date hereof, the Company has not experienced any significant
business disruptions as a result of Year 2000 issues. However, Year 2000 issues
may arise that are not apparent currently. 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 was
completed in January 1999. This package encompasses all accounting functions,
payroll, human resources and benefit administration requirements. The system
operates in an n-tier environment on a Windows NT platform. The cost of all
hardware, software, training and implementation costs were 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 developed questionnaires and contacted key suppliers regarding
their Year 2000 compliance to determine any impact on its operations. The
Company will continue to monitor its suppliers on this matter. The Company has
reviewed and continues to review 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.
The Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan was and remains 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 Year 2000 issues, 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 improve the performance of the Home Choice
stores and other stores acquired in fiscal 1999 and fiscal 2000, (iv) the
Company's ability to open new stores in favorable locations and on favorable
terms and to cause such stores to become profitable in a timely manner or at
all, and (v) the impact of state and federal laws regulating or otherwise
affecting the rental-purchase transaction.
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>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. The Company's policy is to manage interest rate
risk by utilizing interest rate swap agreements to convert a portion of the
floating interest rate debt to fixed interest rates. The Company does not enter
into derivative financial instruments for trading or speculative purposes. The
interest rate swap agreements are entered into with major financial institutions
thereby minimizing the risk of credit loss.
The following table presents information about the Company's market
sensitive financial instruments. The table illustrates the principle and
notional amounts, as well as the date of maturity, actual and weighted average
pay and receive rates for all significant financial and derivative financial
instruments in effect as of March 31, 2000:
<TABLE>
<CAPTION>
Expected Maturity Dates
(dollars in millions): 1999 2000 2001 2002 2003 2004 Thereafter
------------------------ ---- ---- ---- ---- ---- ---- ----------
Debt:
<S> <C>
Revolving credit facility, Base rate option... $35.0
--Actual floating rate........................ 10.00%
Revolving credit facility, Euro-rate option... $60.0
--Actual floating rate........................ 8.684%
Term Loan A Euro-rate option.................. $7.5 $20.0 $25.0 $30.0 $35.0
--Actual floating rate........................ 8.684% 8.780% 8.780% 8.780% 8.780%
Term Loan B Euro-rate option.................. $0.5 $1.0 $1.0 $1.0 $1.0 $95.0
--Actual floating rate........................ 9.780% 9.780% 9.780% 9.780% 9.780% 9.780%
Convertible Subordinated Debentures...........
--Actual fixed interest rate..................
Interest rate swap agreements:
National City Bank, notional amount........... $30.0
--Actual fixed interest rate pay rate......... 5.965%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Bank of America, notional amount.............. $20.0
--Actual fixed interest rate pay rate......... 5.760%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Manufacturers and Traders Trust, notional
amount........................................ $10.0
--Actual fixed interest rate pay rate......... 5.925%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Harris Bank, notional amount.................. $20.0
--Actual fixed interest rate pay rate......... 5.090%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
SunTrust Bank, notional amount................ $10.0
--Actual fixed interest rate pay rate......... 5.105%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
LaSalle Bank, notional amount................. $10.0
--Actual fixed interest rate pay rate......... 5.095%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Bank of America, notional amount.............. $10.0
--Actual fixed interest rate pay rate......... 5.120%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Harris Bank, notional amount.................. $10.0
--Actual fixed interest rate pay rate......... 5.120%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
PNC Bank, notional amount..................... $5.0
--Actual fixed interest rate pay rate......... 6.740%
--Actual variable interest rate receive rate,
(based on 3 month LIBOR).................... 6.280%
Letters of credit:
Letter of credit, Base rate option............ $650
--Actual floating rate........................ N/A
Letter of credit, Base rate option............ $300
--Actual floating rate........................ N/A
Letter of credit, Base rate option............ $450
--Actual floating rate........................ N/A
Letter of credit, Base rate option............ $300
--Actual floating rate........................ N/A
</TABLE>
RENT-WAY, INC.
PART II OTHER INFORMATION
ITEM 1. Material Developments in Connection with Legal Proceedings
On December 20,1999, an action seeking $100 million in wrongful death and
punitive damages was brought against the Company. The action arose out of a
collision on November 20,1999, between a Company delivery truck and a passenger
vehicle. The parties have reached a settlement in the amount of $4.0 million,
which has been confirmed by letter agreement. Final terms of a formal written
settlement document are presently being negotiated. The Company has sufficient
insurance coverage for the settlement of this claim, and the final settlement
will not have a material adverse effect on the financial position, result of
operations or cash flows of the Company.
ITEM 2. Changes in Securities and Use of Proceeds
On February 6, 2000, the Company issued 1,495,000 shares of its common
stock to the holders of the Company's 7% Subordinated Convertible Debentures due
2007 on voluntary conversion thereof in a transaction exempt from registration
under section 4(2) of the Securities Act of 1933, as amended.
ITEM 4. Submission of Matters to Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on March 8, 2000
at the Bel Aire Hotel, located at 2800 West Eighth Street, Erie, Pennsylvania at
10:00 a.m. All proposals as described in the Company's Proxy Statement dated
January 31, 2000 were approved. Below are details of the matters voted on at the
meeting:
Election of Directors
Elections were held for three (3) Class II directors to serve until the
2003 Annual Meeting of Shareholders. The results of the votes are as follows:
<TABLE>
<CAPTION>
Votes Broker
----- ------
Name Class Votes For Against Abstentions Non-Votes
---- ----- --------- ------- ----------- ---------
<S> <C> <C> <C> <C>
William Lerner II 17,039,576 573,214 0 4,395,401
Marc Joseffer II 17,039,586 573,204 0 4,395,401
Jacqueline Woods II 17,202,652 410,138 0 4,395,401
</TABLE>
The following directors' terms of office continued after the meeting:
William E Morgenstern, Gerald A. Ryan, Robert Fagenson, and Vincent Carrino.
<PAGE>
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 January 19, 2000, the Company filed a Current Report on Form 8-K
announcing the promotion of Jeffrey A. Conway to the office of President and
Chief Operating Officer and announcing the appointment of William A. McDonnell
as Chief Financial Officer.
(2) On January 19, 2000, the Company filed a Current Report on Form 8-K
announcing its investment in DPI Teleconnect, LLC, a privately-held provider of
prepaid local phone service.
(3) On February 15, 2000, the Company filed a Current Report on Form 8-K
announcing its goal to open 400 new stores over the next three to four years.
(4) On February 29, 2000, the Company filed a Current Report on Form 8-K
announcing its goal to strengthen and augment its computer sales training by
providing all store and regional managers with a state-of-the-art personal
computer for home use at the nominal cost of $3.00 per pay check.
(5) On April 11, 2000, the Company filed a Current Report on Form 8-K
announcing that dPi Teleconnect has agreed in principal to terms with Western
Union which will provide access to all 30,000 Western Union locations for
payments from dPi Teleconnect customers for pre-paid local phone service.
(6) On April 25, 2000, the Company filed a Current Report on Form 8-K
announcing that an agreement in principal has been reached with Gateway, Inc.
The agreement allows the Company to be the exclusive rental-purchase supplier of
Gateway computers and technologies. Also as part of the agreement, Gateway will
invest $7.0 million in the Company.
<PAGE>
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.
RENT-WAY, INC.
By
April 27, 2000 /s/ William A. McDonnell
---------------------- ---------------------------------------
Date William A. McDonnell
Vice President and Chief Financial Officer
April 27, 2000 /s/ Matthew J. Marini
---------------------- ---------------------------------------
Date Matthew J. Marini
Corporate Controller and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000893046
<NAME> Rent-Way, Inc.
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 6,587
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 260,300
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 672,783
<CURRENT-LIABILITIES> 0
<BONDS> 312,125
0
0
<COMMON> 276,841
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 672,783
<SALES> 127,019
<TOTAL-REVENUES> 148,887
<CGS> 36,317
<TOTAL-COSTS> 123,660
<OTHER-EXPENSES> (52)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,146
<INCOME-PRETAX> 17,902
<INCOME-TAX> 6,976
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,926
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.46
</TABLE>
