1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ Commission file number 0-8568 BESTWAY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 81-0332743 - ---------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7800 Stemmons, Suite 320, Dallas, Texas 75247 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (214) 630-6655 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of Common Stock, $.01 par value, outstanding as of April 30 1997, was 1,749,967. 2 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTER ENDED April 30, 1997 PART I - FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. Consolidated Unaudited Financial Statements 3-8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K, Signatures 12 Page 2 of 12 3 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS April 30, 1997 July 31, 1996 -------------- ------------- Cash $ 507,009 $ 325,513 Restricted cash 119,342 119,342 Prepaid expenses 222,347 342,912 Deferred tax asset 1,732,745 1,821,701 Investment in partnership -- 423,560 Other assets 165,545 121,473 Rental merchandise, at cost 15,413,677 14,309,351 less accumulated depreciation 5,539,148 4,716,054 ------------ ------------ 9,874,529 9,593,297 ------------ ------------ Property and equipment, at cost 4,869,488 4,768,700 less accumulated depreciation 2,080,852 2,340,664 ------------ ------------ 2,788,636 2,428,036 ------------ ------------ Non-competes, net of amortization 666,467 959,339 Goodwill, net of amortization 2,521,172 2,790,267 ------------ ------------ Total assets $ 18,597,792 $ 18,925,440 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 780,342 $ 976,869 Accrued interest - related parties 12,023 12,023 Accrued interest - other 41,312 49,253 Income taxes payable 63,935 66,031 Other accrued liabilities 1,339,593 1,355,146 Notes payable - related parties 3,600,000 3,600,000 Notes payable - other 5,176,110 5,448,928 Commitments and contingencies Stockholders' Equity: Preferred stock, $10.00 par value 1,000,000 authorized, none issued -- -- Common stock, $.01 par value, 5,000,000 authorized, 1,749,967 and 1,747,717 issued and outstanding at, April 30, 1997 and July 31, 1996, respectively 17,500 17,477 Paid-in capital 16,089,897 16,078,670 Accumulated deficit (8,522,920) (8,678,957) ------------ ------------ Total stockholders' equity 7,584,477 7,417,190 ------------ ------------ Total liabilities and stockholders' equity $ 18,597,792 $ 18,925,440 ============ ============ The accompanying notes are an integral part of the financial statements. Page 3 of 12 4 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended April 30, April 30, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Revenues: Rental income $ 6,095,233 $ 4,521,249 $ 18,370,039 $ 12,813,278 Sales of merchandise 113,217 74,589 228,731 158,653 ------------ ------------ ------------ ------------ 6,208,450 4,595,838 18,598,770 12,971,931 ------------ ------------ ------------ ------------ Cost and Operating Expenses: Depreciation and amortization: Rental merchandise 1,328,729 1,072,287 4,118,726 3,057,516 Other 422,063 264,118 1,265,776 760,629 Cost of merchandise sold 104,825 69,392 219,938 152,148 Salaries and wages 1,559,393 1,126,830 4,716,112 3,249,420 Advertising 147,379 186,668 603,250 499,276 Occupancy 360,425 231,990 1,032,402 623,349 Other operating expenses 1,913,233 1,285,468 5,336,342 3,456,276 Equity in loss of partnership -- -- 193,981 -- Write off of investment in partnership -- -- 229,579 -- Interest expense 180,385 130,895 579,162 377,407 Loss (gain) on sale of property and equipment 12,462 (5,643) 12,898 21,568 ------------ ------------ ------------ ------------ 6,028,894 4,362,005 18,308,166 12,197,589 ------------ ------------ ------------ ------------ Income from continuing operations before income tax provision: 179,556 233,833 290,604 774,342 ------------ ------------ ------------ ------------ Current income tax expense 15,619 36,188 45,611 76,419 Deferred income tax expense 67,962 81,549 88,956 279,175 ------------ ------------ ------------ ------------ Income from continuing operations 95,975 116,096 156,037 418,748 ------------ ------------ ------------ ------------ Discontinued operation: Loss from discontinued business (net of income tax benefit of $54,186) -- -- -- 89,925 ------------ ------------ ------------ ------------ Net income $ 95,975 $ 116,096 $ 156,037 $ 328,823 ============ ============ ============ ============ Net income per share from continuing operations $ .05 $ .08 $ .09 $ .28 Net loss per share from discontinued operations -- -- -- .06 ------------ ------------ ------------ ------------ Net income per share $ .05 $ .08 $ .09 $ .22 ============ ============ ============ ============ Weighted average common shares outstanding 1,749,967 1,538,619 1,749,717 1,512,920 ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements. Page 4 of 12 5 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended --------------------------------- April 30, 1997 April 30, 1996 -------------- -------------- Cash flows from operating activities: Net income $ 156,037 $ 328,823 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,384,502 3,818,140 Net book value of rental units retired 1,414,154 874,612 Loss on sale of property and equipment 12,898 31,072 Loss on discontinued operations -- 89,925 Equity in loss of partnership 193,981 -- Write off of investment in partnership 229,579 -- Deferred income taxes 88,956 279,176 Changes in operating assets and liabilities other than cash: Prepaid expenses 120,565 (163,414) Other assets (44,072) 68,098 Accounts payable (196,527) 444,560 Accrued interest payable (7,941) 7,114 Income taxes payable (2,096) 5,437 Other accrued liabilities (15,553) (161,991) ------------ ------------ Total adjustments (145,624) 199,804 ------------ ------------ Net cash flows from operating activities 7,334,483 5,621,552 ------------ ------------ Cash flows from investing activities: Purchase of rental units and equipment (5,812,664) (4,856,330) Additions to property and equipment (1,114,574) (674,281) Proceeds from sale of property and equipment 35,819 14,978 Purchase of investments -- (555,266) ------------ ------------ Net cash flows used in investing activities (6,891,419) (6,070,899) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock 11,250 -- Proceeds from notes payable 1,825,000 3,393,410 Repayment of notes payable (2,097,818) (2,919,070) ------------ ------------ Net cash flows (used in) provided by financing activities (261,568) 474,340 ------------ ------------ Cash at August 1, 1996 and 1995, respectively 325,513 329,342 ------------ ------------ Cash at the end of the quarter $ 507,009 $ 354,335 ============ ============ Supplemental cash flow information: Fair value of assets acquired -- $ 2,656,373 Liabilities assumed and incurred -- 2,078,138 Common stock issued -- 578,235 The accompanying notes are an integral part of the financial statements. Page 5 of 12 6 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the nine months ended April 30, 1997 (Unaudited) Common Stock ------------------------- Paid-In Accumulated Shares Amount Capital Deficit ----------- ----------- ----------- ----------- Balance at July 31, 1996 1,747,717 $ 17,477 $16,078,670 $(8,678,957) Stock options exercised 2,250 23 11,227 -- Net income for the nine months ended April 30, 1997 -- -- -- 156,037 ----------- ----------- ----------- ----------- Balance at April 30, 1997 1,749,967 $ 17,500 $16,089,897 $(8,522,920) =========== =========== =========== =========== The accompanying notes are an integral part of the financial statements. Page 6 of 12 7 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Reference to Previous Disclosures The consolidated financial statements included herein have been prepared by the Company without audit. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted or are incorporated herein by reference to the financial statements included in the Company's 1996 Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading and that all adjustments deemed necessary for a fair statement of the results for the interim period have been reflected. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 1996 Form 10-K, particularly with regard to disclosure relating to significant accounting policies. Earnings Per Common Share Earnings per common share is based on the weighted average of common shares outstanding during the period and the effect of considering common stock equivalents (stock options) under the treasury stock method. Primary and fully diluted earnings per common share are not shown because the effect of the stock options is immaterial. During February 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 128, "Earnings per Share," effective for periods ending after December 15, 1997. The impact of this statement, when adopted, will not be material. 2. Impairment of Long-Lived Assets As of August 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes accounting standards for the impairment of long-lived assets. The adoption of SFAS No. 121 did not have a material effect on the Company's earnings. 3. Investment in Partnership On October 19, 1995, the Company became a 50% limited partner in a newly formed partnership, Value Auto Partners, Ltd. ("the Partnership"). The purpose of the Partnership is to engage in the financing of used cars. The Company accounts for its Partnership interest by the equity method. As of January 31, 1997, the Company had contributed $437,500 to the Partnership and had received distributions of approximately $14,000. The Company's equity in Partnership losses was $193,981 for the six months ended January 31, 1997. As a result of losses incurred by the Partnership, and based on management's assessment of the recoverability of the carrying amount of the investment, management concluded that the investment should be written off. Accordingly, during the second quarter the Company recorded a pretax charge of $229,579 which represented the remaining carrying amount of its investment in the Partnership. The charge resulted in a deferred tax benefit of $86,322. Page 7 of 12 8 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, con't. 3. Investment in Partnership, con't. Shown below is the unaudited summarized financial information related to the Partnership: For the period ended January 31, 1997: Revenues $ 51,905 Costs and expenses 439,867 ---------- Net loss $(387,962) ========== At January 31, 1997: Assets $1,516,532 ========== Liabilities 1,301,961 Partners' Capital 214,571 ---------- $1,516,532 ========== 4. Notes Payable On May 15, 1997, the Company paid in full a $500,000 subordinated note payable to an affiliate. 5. Reclassifications Certain reclassifications were made to the prior year financial statements to conform with the current year presentation. Page 8 of 12 9 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Operations, expressed as a percentage of revenues. Three Months Ended Nine Months Ended April 30, April 30, 1997 1996 1997 1996 ---- ---- ---- ---- Revenues Rental income 98.2% 98.4% 98.8% 98.8% Sales of merchandise 1.8 1.6 1.2 1.2 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost and operating expenses Depreciation and amortization: Rental merchandise 21.4 23.3 22.1 23.6 Other 6.8 5.8 6.8 5.9 Cost of merchandise sold 1.7 1.5 1.2 1.2 Salaries and wages 25.1 24.5 25.4 25.0 Advertising 2.4 4.1 3.2 3.8 Occupancy 5.8 5.0 5.6 4.8 Other operating expenses 30.8 28.0 28.7 26.6 Equity in loss of partnership -- -- 1.0 -- Write off of investment in partnership -- -- 1.2 -- Interest expense 2.9 2.8 3.1 2.9 Loss (gain) on sale of property and equipment .2 (.1) .1 .2 ----- ----- ----- ----- Total cost and operating expenses 97.1 94.9 98.4 94.0 ----- ----- ----- ----- Income from continuing operations before income tax provision 2.9 5.1 1.6 6.0 ----- ----- ----- ----- Current income tax expense .3 .8 .2 .6 Deferred income tax expense 1.1 1.8 .5 2.2 ----- ----- ----- ----- Income from continuing operations 1.5 2.5 .9 3.2 ----- ----- ----- ----- Discontinued operation: Loss from discontinued business, net of taxes -- -- -- .7 ----- ----- ----- ----- Net income 1.5% 2.5% .9% 2.5% ===== ===== ===== ===== Comparison of Three Months Ended April 30, 1997 and 1996 For the three months ended April 30, 1997 compared to the three months ended April 30 1996, total revenues increased by $1,612,612 (35.1%) to $6,208,450 from $4,595,838. The increase was primarily due to the inclusion of the operating results for the stores acquired and opened during fiscal year 1996. The stores acquired and opened in 1996 accounted for $1,502,671 (93.2%) while the Company's same stores accounted for $109,941 (6.8%) of the increase. The Company's same store revenues for the quarter, as a percent, increased 2.5%. For the three months ended April 30,1997 compared to the three months ended April 30, 1996, total costs and operating expenses increased $1,666,889 to $6,028,894 from $4,362,005 and as a percentage of total revenues increased to 97.1% from 94.9%. This 2.2% increase is primarily the result of costs and operating expenses associated with the stores acquired and opened in 1996. Depreciation Page 9 of 12 10 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't. Comparison of Three Months Ended April 30, 1997 and 1996, con't. expense related to rental merchandise increased $256,442 to $1,328,729 from $1,072,287, but decreased by 1.9% as a percentage of total revenues. Other depreciation and amortization increased $157,945 to $422,063 from $264,118 and as a percentage of total revenues increased 1.0% to 6.8% from 5.8%. Amortization of intangibles increased $98,618 due to the increase related to the stores acquired in 1996. Other depreciation increased $59,327 primarily due to the increase related to the stores acquired and opened in 1996. Salaries and wages increased $432,563 to $1,559,393 from $1,126,830 and as a percentage of total revenues increased 0.6% to 25.1% from 24.5% primarily due to the addition of the stores acquired and opened in 1996, increased same store payroll and the addition of key management personnel. The acquired and new locations produced additional payroll expense of $313,333 for the three month period. Same store payroll increased $76,843 for the three month period. The addition of key management personnel produced additional payroll expense of $42,387 for the three month period. Occupancy expense increased $128,435 to $360,425 from $231,990 and as a percentage of total revenues increased 0.8% to 5.8% from 5.0% primarily due to the addition of the stores acquired and opened in 1996. Other operating expenses increased $627,765 to $1,913,233 from $1,285,468 and as a percentage of total revenues increased 2.8% to 30.8% from 28.0% primarily due to the addition of the stores acquired and opened in 1996. Interest expense increased $49,490 to $180,385 from $130,895 and as a percentage of total revenues increased 0.1% to 2.9% from 2.8% primarily due to increased borrowings on the Company's senior debt as a result of the stores acquired in 1996. Comparison of Nine Months Ended April 30, 1997 and 1996 For the nine months ended April 30, 1997 compared to the nine months ended April 30, 1996, total revenues increased by $5,626,839 (43.4%) to $18,598,770 from $12,971,931. The increase was due to the inclusion of the operating results for the stores acquired and opened during fiscal year 1996. The stores acquired and opened in 1996 accounted for $5,608,703 (99.7%) while the Company's same stores accounted for $18,136 (0.3%) of the increase. For the nine months ended April 30, 1997 compared to the nine months ended April 30, 1996, total costs and operating expenses increased $6,110,577 to $18,308,166 from $12,197,589. Costs and operating expenses increased $423,560 or 2.2% as a percentage of total revenues due to losses incurred on the Company's investment in the Partnership. The Company's equity in Partnership losses was $193,981 or 1.0% as a percentage of total revenues. The write off of the remaining balance of the investment in the Partnership resulted in a pretax loss of $229,579 or 1.2% as a percentage of total revenues for the nine months ended April 30, 1997. Cost and operating expenses associated with the Company's core business increased $5,687,017 and as a percentage of total revenues increased to 96.2% from 94.0%. This 2.2% increase is primarily the result of the costs and operating expenses associated with the stores acquired and opened in 1996. Depreciation expense related to rental merchandise increased $1,061,210 to $4,118,726 from $3,057,516, but decreased by 1.5% as a percentage of total revenues. Other depreciation and amortization increased $505,147 to $1,265,776 from $760,629 and as a percentage of total revenues increased 0.9% to 6.8% from 5.9%. Amortization of intangibles increased $295,854 due to the increase related to the stores acquired in 1996. Other deprecation increased $209,293 primarily due to the stores acquired and opened in 1996. Salaries and wages increased $1,466,692 to $4,716,112 from $3,249,420 and as a percentage of total revenues increased 0.4% to 25.4% from 25.0% primarily due to the addition of the stores acquired and opened in 1996, increased same store payroll and the addition of key management personnel. The acquired and new locations produced additional payroll expense of $1,117,613 for the nine month period. Same store payroll increased $89,301 for the nine month period. The addition of key management personnel produced additional payroll expense of $259,778 for the nine month period. Occupancy expense increased Page 10 of 12 11 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't Comparison of Nine Months Ended April 30, 1997 and 1996, con't. $409,053 to $1,032,402 from $623,349 and as a percentage of total revenues increased 0.8% to 5.6% from 4.8% primarily due to the addition of the stores acquired and opened in 1996. Other operating expense increased $1,880,066 to $5,336,342 from $3,456,276 and as a percentage of total revenues increased 2.1% to 28.7% from 26.6% primarily due to the addition of the stores acquired and opened in 1996. Interest expense increased $201,775 to $579,162 from $377,407 and as a percentage of total revenues increased 0.2% to 3.1% from 2.9% primarily due to increased borrowings on the Company senior debt as a result of the stores acquired in 1996. Financial Condition, Liquidity and Capital Resources On May 15, 1997 the Company paid in full a $500,000 subordinated note payable to an affiliate. For the nine months ended April 30, 1997, the Company's net cash flows from operating activities was $7,334,483 as compared to $5,621,552 for the nine months ended April 30, 1996. The increase was primarily due to an increase in cash generating earnings. For the nine months ended April 30, 1997, the Company's net cash flows used in investing activities was $6,891,419 as compared to $6,070,899 for the nine months ended April 30, 1996. The Company's investing activities reflect significant increases in purchases of rental units and property and equipment as a result of the stores acquired in 1996. The Company's investing activities reflect its continuing replacement of rental merchandise that was purchased by customers either by full payout under the rental agreement or by exercise of the customers early purchase option. For the nine months ended April 30, 1997, the Company's net cash flows used in financing activities was $261,568 as compared to $474,340 net cash flows provided from financing activities for the nine months ended April 30, 1996. The decrease in financing activities principally reflects increased repayments on the Company's debt. With the Company having available credit of $2,569,973 under the $7,500,000 amended line of credit at April 30, 1997, management believes the Company has adequate resources to meet its future cash obligations. During February 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 128, "Earnings per Share," effective for periods ending after December 15, 1997. The impact of this statement, when adopted, will not be material. Inflation Although the Company cannot precisely determine the effects of inflation on its business, it is management's belief that the effects on revenues and operating results have not been significant. Page 11 of 12 12 BESTWAY, INC. FORM 10-Q - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, SIGNATURES (a) Exhibits required by Item 601 of Regulation S-K 27 Financial Data Schedule Filed electronically only, not attached to printed reports (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the nine months ended April 30, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BESTWAY, INC. June 16, 1997 /s/ Beth A. Durrett ----------------------------------- Beth A. Durrett Vice President - Controller (Principal Financial Officer and duly authorized to sign on behalf of the Registrant) Page 12 of 12