23
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------
Commission File Number 0-22026
RENT-WAY, INC.
(Exact name of registrant as specified in its charter)
--------------
PENNSYLVANIA 25-1407782
---------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
(Address of principal executive offices)
(814) 455-5378
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes......X No
--------------- ------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 8, 2002
---------------------------- --------------------------------
Common Stock 25,685,538
RENT-WAY, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002
(unaudited) and September 30, 2001 3
Condensed Consolidated Statements of Operations, three and nine
months ended June 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows, nine months
ended June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited)
6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(All dollars in thousands)
JUNE 30, SEPTEMBER 30,
2002 2001
--------------- ----------
(unaudited)
ASSETS
Cash and cash equivalents $ 9,372 $ 10,515
Prepaid expenses 13,245 13,534
Income tax receivable 4,924 8,239
Rental merchandise, net 217,287 218,973
Rental merchandise, deposit 1,137 2,486
Property and equipment, net 57,070 68,792
Goodwill, net 292,084 292,084
Deferred financing costs, net 2,245 4,136
Non-compete and prepaid consulting fees, net 1,569 1,693
Other assets 3,869 7,725
--------- ---------
Total assets $ 602,802 $ 628,177
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 17,077 $ 24,212
Other liabilities 82,415 90,914
Deferred tax liability 15,512 --
Debt 302,693 307,009
--------- ---------
Total liabilities 417,697 422,135
Contingencies (See Note 11) -- --
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000,000 shares
authorized;
no shares issued and outstanding -- --
Common stock, without par value; 50,000,000 shares
authorized; 25,571,779 and 24,509,978 shares issued
and outstanding, respectively 301,412 295,610
Common Stock Warrants; 100,000 outstanding 343 --
Loans to shareholders (277) (924)
Accumulated other comprehensive income 1,012 1,654
Accumulated deficit (117,385) (90,298)
--------- ---------
Total shareholders' equity 185,105 206,042
--------- ---------
Total liabilities and shareholders' equity $ 602,802 $ 628,177
========= =========
The accompanying notes are an integral part of these financial statements.
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------- ---------------------------------------
2002 2001 2002 2001
--------------------- -------------- --------------------- -------------
REVENUES:
Rental revenue $130,103 $133,583 $387,624 $402,920
Prepaid phone service revenue 9,841 8,942 29,236 26,316
Other revenues 19,571 22,454 60,761 69,448
-------- -------- -------- --------
Total revenues 159,515 164,979 477,621 498,684
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise 43,542 52,437 136,469 151,228
Property and equipment 6,409 7,829 20,024 23,477
Amortization of goodwill and other 609 4,245 1,839 13,083
intangibles
Cost of prepaid phone service 6,341 4,609 18,186 14,660
Salaries and wages 38,422 39,005 115,213 119,977
Advertising, net 5,808 3,810 21,540 16,777
Occupancy 10,984 11,462 33,701 36,195
Other operating expenses 38,065 39,201 105,196 119,950
-------- -------- -------- --------
Total costs and operating expenses 150,180 162,598 452,168 495,347
-------- -------- -------- --------
Operating income 9,335 2,381 25,453 3,337
OTHER INCOME (EXPENSE):
Interest expense (11,862) (10,909) (37,768) (32,900)
Interest income 24 58 332 180
Other income (expense), net (1,536) (227) 2,850 (9,090)
--------- -------- -------- --------
Loss before income taxes (4,039) (8,697) (9,133) (38,473)
Income tax expense 1,950 -- 14,586 --
-------- -------- -------- --------
Loss before extraordinary item (5,989) (8,697) (23,719) (38,473)
Extraordinary item -- -- (3,368) --
-------- -------- --------- --------
Net loss $ (5,989) $ (8,697) $ (27,087) $(38,473)
======== ======== ========= ========
LOSS PER COMMON SHARE (NOTE 3):
Basic loss per common share:
Loss before extraordinary item $ (0.24) $ (0.35) $ (0.96) $ (1.57)
========= ========= ========= ========
Net loss $ (0.24) $ (0.35) $ (1.09) $ (1.57)
========= ========= ========= ========
Diluted loss per common share:
Loss before extraordinary item $ (0.24) $ (0.35) $ (0.96) $ (1.57)
========= ========= ========= ========
Net loss $ (0.24) $ (0.35) $ (1.09) $ (1.57)
========= ========= ========= ========
Weighted average common shares outstanding:
Basic 25,364 24,510 24,802 24,498
======== ======== ======== ========
Diluted 25,364 24,510 24,802 24,498
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollars in thousands)
(Unaudited)
Nine Months Ended
June 30,
----------------------------------------
2002 2001
--------------------- --------------
OPERATING ACTIVITIES:
Net loss $ (27,087) $ (38,473)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 158,711 185,803
Deferred income taxes 15,512 --
Write-off of deferred financing costs 3,810 --
Write-off of property and equipment 1,484 1,186
Gain on sale of assets (511) (316)
Changes in assets and liabilities:
Prepaid expenses 289 3,904
Rental merchandise (135,304) (128,534)
Rental merchandise deposits and credits due from 1,349 30,617
vendors
Income tax receivable 3,315 11,984
Other assets 2,602 6,258
Accounts payable (10,528) (29,735)
Other liabilities (747) 17,641
---------- ----------
Net cash provided by operating activities 12,895 60,335
---------- ----------
INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (1,095) (658)
Purchases of property and equipment (9,074) (8,479)
Proceeds from sale of stores and other assets 2,038 3,779
---------- ----------
Net cash used in investing activities (8,131) (5,358)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from borrowings 522,000 369,720
Payments on borrowings (535,152) (425,247)
Book overdraft 3,393 3,628
Deferred financing costs (2,940) (252)
Proceeds from common stock and warrant issuance 6,145 425
Payment of loans by directors 684 --
Interest on loans to directors (37) (55)
Loans to director -- (159)
---------- ----------
Net cash used in financing activities (5,907) (51,940)
---------- ----------
Increase (decrease) in cash (1,143) 3,037
---------- ----------
Cash and cash equivalents at beginning of period 10,515 10,654
---------- ----------
Cash and cash equivalents at end of period $ 9,372 $ 13,691
========== ==========
The accompanying notes are an integral part of these financial statements.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollars in thousands, except per share data)
(Unaudited)
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, computers, major appliances and jewelry to
consumers on a weekly or monthly basis. Commencing January 1, 2000, the Company
also provides prepaid local phone service to consumers on a monthly basis
through its majority-owned subsidiary, dPi Teleconnect, LLC ("DPI"). 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 accounting
principles generally accepted in the United States of America. In the opinion of
management, all adjustments (which, except as discussed herein, consist of
normal recurring adjustments), 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.
The condensed consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
inter-company transactions and balances have been eliminated.
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, 2001.
Certain amounts in the June 30, 2001, condensed consolidated financial
statements were reclassified to conform to June 30, 2002 presentation.
2. BUSINESS RATIONALIZATION:
The Company periodically closes under-performing stores and takes other actions
to maximize its overall profitability. In connection with the closing of stores
and taking other actions, it incurs employee severance, fixed asset write offs,
lease termination costs and other direct exit costs related to these activities.
Employee severance costs related to the closing of under-performing stores were
immaterial in each of the periods reported below. The net amount of these costs
were as follows:
Fixed Lease
Asset Termination
Write Offs Costs Total
Balance at September 30, 2000................ $ -- $ 2,430 $ 2,430
Fiscal 2001 Provision........................ 1,646 5,043 6,689
Amount utilized in fiscal 2001............... (1,646) (2,389) (4,035)
-------- -------- --------
Balance at September 30, 2001................ -- 5,084 5,084
-------- -------- --------
Fiscal 2002 Provision ....................... 369 567 936
Amount utilized in fiscal 2002............... (369) (2,764) (3,133)
-------- -------- --------
Balance at June 30, 2002..................... $ -- $ 2,887 $ 2,887
======== ======== ========
Lease termination costs will be paid according to the contract terms.
The Company recorded employee severance costs of $141 in the three months ended
June 30, 2002.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
3. LOSS PER COMMON SHARE:
Basic loss per common share is computed using loss available to common
shareholders divided by the weighted average number of common shares
outstanding. Diluted loss per common share is computed using loss available to
common shareholders and the weighted average number of shares outstanding
adjusted for the potential impact of options and warrants where the effects are
dilutive. Because operating results were a loss for the three- and nine-month
periods ended June 30, 2002, and 2001, basic and diluted loss per common share
were the same.
The following table reconciles the basic and diluted loss per common share
computation:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ -------------------------
2002 2001 2002 2001
------------- -------------- ----------- ------------
COMPUTATION OF LOSS PER SHARE:
BASIC
Loss for basic loss per share...................... $ (5,989) $ (8,697) $(27,087) $(38,473)
======== ======== ======== ========
Weighted average common shares outstanding ........ 25,364 24,510 24,802 24,498
======== ======== ======= ========
Basic loss per common share:
Loss before extraordinary item................... $ (0.24) $ (0.35) $ (0.96) $ (1.57)
======== ======== ======== ========
Net loss......................................... $ (0.24) $ (0.35) $ (1.09) $ (1.57)
======== ======== ======== ========
DILUTED
Loss for diluted loss per share.................... $ (5,989) $ (8,697) $(27,087) $(38,473)
======== ======== ======== ========
Weighted average common shares used in calculating
basic loss per share............................. 25,364 24,510 24,802 24,498
Shares issuable upon exercise of stock options, -- -- -- --
warrants and escrowed shares (1)................. -------- -------- ------- --------
Weighted average number of shares used in calculation
of diluted loss per share........................ 25,364 24,510 24,802 24,498
======== ======== ======= ========
Diluted loss per common share:
Loss before extraordinary item................... $ (0.24) $ (0.35) $ (0.96) $ (1.57)
======== ======== ======== ========
Net loss......................................... $ (0.24) $ (0.35) $ (1.09) $ (1.57)
======== ======== ======== ========
(1) Including the effects of these items for the periods ended 2002
would be antidilutive. Therefore, 352 and 188 of antidilutive
common shares are excluded from consideration in the calculation
of diluted loss per share for the three- and nine- months ended
June 30, 2002. Excludes contingent warrants issuable under certain
debt and equity agreements. There were 147 and 122 antidilutive
common shares excluded from consideration in the calculation of
diluted loss per share for the three- and nine-months ended June 30, 2001.
4. GOODWILL--ADOPTION OF STATEMENT 142:
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations,
ceases upon adoption. Thus, no amortization for such goodwill and indefinite
lived intangibles was recognized in the accompanying consolidated statements of
operations for the three- and nine- months ended June 30, 2002, compared to
$3,497 and $10,489 for the comparable periods of the prior year. On an annual
basis and when there is reason to suspect that their values have been diminished
or impaired, these assets must be tested for impairment, and a write down may be
necessary. SFAS 142 allows up to six months from the date of adoption to
complete the initial step one impairment test for such goodwill and indefinite
lived intangibles.
In accordance with the provisions of SFAS 142, the Company completed step one of
the impairment test for such goodwill and indefinite lived intangibles that
existed on the Company's balance sheet at the date of its adoption. Based upon
its preliminary
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
4. GOODWILL--ADOPTION OF STATEMENT 142, continued:
analysis from the step one impairment test, the Company has determined that
goodwill is impaired in the household rental segment and the amount of the write
down could be approximately $50,000. In accordance with the provisions of SFAS
142, the Company will complete step two of the impairment test and record the
determined write down no later than September 30, 2002. In accordance with the
transitional implementation guidance of SFAS 142, the write down will be
recorded retroactive to the Company's first quarter results of operations. As
required by SFAS 142, the results for the prior year's quarter have not been
restated. A reconciliation of the previously reported net loss and loss per
share as if SFAS 142 had been adopted as of October 1, 2000, is presented as
follows:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net loss...................................$ (5,989) $ (8,697) $(27,087) $(38,473)
Add back: Goodwill amortization..................... -- 3,497 -- 10,489
------- ------- -------- --------
Adjusted net loss...................................$ (5,989) $ (5,200) $(27,087) $(27,984)
======= ======= ========= =========
Basic loss per share
Reported basic loss per share...................$ (0.24) $ (0.35) $ (1.09) $ (1.57)
Goodwill amortization............................ -- 0.14 -- 0.43
------- -------- -------- ---------
Adjusted basic loss per share...................$ (0.24) $ (0.21) $ (1.09) $ (1.14)
========= ========= ========= =========
Diluted loss per share:
Reported diluted loss per share.................$ (0.24) $ (0.35) $ (1.09) $ (1.57)
Goodwill amortization............................ -- 0.14 -- 0.43
------- -------- -------- ---------
Adjusted diluted loss per share.................$ (0.24) $ (0.21) $ (1.09) $ (1.14)
========= ========= ========= =========
The following table shows the net carrying value of goodwill as of June 30,
2002, for the Company's segments:
Prepaid
Household Telephone Total
Rental Segment Service Segment Segments
-------------- --------------- --------
Goodwill $ 285,490 $ 6,594 $ 292,084
The following table reflects the components of amortizable intangible assets at
June 30, 2002:
Net Carrying
Amount
Amortizable intangible assets:
Non-compete agreements $ 1,019
Customer contracts 550
Exclusivity agreement 569
---------
$ 2,138
=========
There were no changes to the amortization methods and lives of the amortizable
intangible assets.
5. DEBT:
On June 24, 2002, the Company amended its credit facility. The amendment
modified the maximum leverage ratio, the minimum interest coverage ratio and the
fixed charge coverage ratio covenants.
The Company's credit facility, co-led by National City Bank of Pennsylvania,
acting as administrative agent, Bank of America, N.A., acting as documentation
agent, and Bank of Montreal and Harris Trust and Savings Bank, acting as
syndication agents, provided for loans and letters of credit of up to a maximum
of $363,548 (revolving notes and letters of credit up to a maximum of $75,000
and varying based on the applicable period, Term Loans A $117,567, and Term
Loans B $170,981).
Under the credit facility, the Company may borrow funds under a base rate option
plan or euro-rate option plan. Under the base rate option, the Company may
borrow funds based on a spread of prime rate plus 450 to 500 basis points. In
addition, payment-in- kind interest at a rate of 200 to 500 basis points per
annum is due and payable in cash on the maturity date of the term loans. The
payment-in-kind margin is determined based on the ratio of debt to cash flows
from operations during the period. Under the euro-rate option, the Company may
borrow funds based on a spread of LIBOR plus 550 to 600 basis points. Borrowings
under the euro-rate option require the Company to select a fixed interest period
during which the euro-rate is applicable with the borrowed amount not to be
repaid prior to the last day of the selected interest period. In addition,
borrowing tranches under the euro-rate option must be in multiples of $1,000.
Commitment fees associated with the credit facility are in a range from 0.375%
to 0.500% for each bank's unused commitment.
The principal amount of Term Notes A under the credit facility is payable in
quarterly payments due on the last day of each December, March, June, and
September, beginning with the quarter ended December 31, 2001, as follows:
Quarters ending on following date Amount of principal payment due on payment date
--------------------------------- -----------------------------------------------
12/31/01 through 6/30/02 $5,722
9/30/02 through 6/30/03 $7,153
9/30/03 $8,583
12/31/03 remaining principal balance outstanding
The principal amount of Term Notes B under the credit facility is payable in
eight quarterly payments due on the last day of each December, March, June, and
September beginning with the quarter ended December 31, 2001, and continuing
through the quarter ending September 30, 2003, each payment equal to $444. The
remaining principal balance is due on December 31, 2003.
The aggregate amount of all the revolving credit loans and letters of credit may
not exceed the lender's revolving credit ratable share of the following amounts
during the following applicable period of time:
Maximum available for
Revolving Credit Loans
Applicable period and Letters of Credit
----------------- -----------------------
Closing date through 12/24/01 $61,128
12/25/01 through 2/28/02 $75,000
3/01/02 through 6/30/02 $61,128
7/01/02 through 9/30/02 $55,000
10/01/02 through Expiration date $50,000
The credit facility requires the Company to meet certain financial covenants and
ratios including maximum leverage, minimum interest coverage, minimum net worth,
fixed charge coverage, and rental merchandise usage ratios. In addition, the
Company must meet requirements regarding monthly, quarterly, and annual
financial reporting. The credit facility also contains non-financial covenants,
which restrict actions of the Company with respect to the payment of dividends,
acquisitions, mergers, disposition of assets or subsidiaries, issuance of
capital stock, and capital expenditures. The Company may at any time repay
outstanding borrowings, in whole or part, without premium or penalty, except
with respect to restrictions identified with the selection of the euro rate
option. As of June 30, 2002, the Company was in compliance with all covenants
contained in the credit facility.
In the event that the leverage ratio as measured at June 30, 2003, for the four
fiscal quarters then ended, is equal to or greater than 2.25 to 1.00, the
Company will issue to the lenders under the credit facility warrants (the
"Lender Warrants") for the purchase of the Company's common stock and will
deliver a registration rights agreement in the form provided for in the Lender
Warrants.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
5. DEBT, continued:
The shares of common stock that will be obtained by the lenders upon the
exercise of the Lender Warrants are to equal 15% of the total outstanding voting
power of all the outstanding shares of the Company immediately prior to the
exercise of the Lender Warrants. The Lender Warrants are to be allocated to the
lenders based upon each lender's ratable share. The Company is required to at
all times maintain a sufficient number of authorized shares of its common stock
to permit the exercise by the lenders of the conversion of the Lender Warrants
into shares of the Company's common stock.
As a result of the amendment of the credit facility that occurred October 5,
2001, the Company wrote off a portion of the bank fees associated with previous
amendments to the credit facility. The amount of deferred finance costs was
$3,810 of which $3,368 related to the term loans and was recorded as an
extraordinary item and $442 related to the revolving notes and was recorded in
interest expense on the Company's Consolidated Statement of Operations for the
nine months ended June 30, 2002.
As of June 30, 2002, the Company's credit facility debt under both the euro-rate
option and base-rate option plans were as follows:
BORROWING OPTION PLAN AMOUNT RATE
--------------------- ------ --------
Euro-rate.tranche. $103,009 7.5475%
Euro-rate.tranche. 167,207 8.0475%
Euro-rate tranche. 20,000 7.4400%
Euro-rate tranche. 5,000 7.3700%
Base-rate.tranche. 7,387 9.2500%
--------
$302,603
The rates listed in the above table do not include payment-in-kind interest. As
of June 30, 2002, payment-in-kind interest is accruing at 450 basis points on
the Term Loans A and revolving notes and 500 basis points on the Term Loans B.
6. SHAREHOLDERS' EQUITY:
On April 18, 2002, the Company sold 1 million restricted common shares and
warrants to acquire 100,000 common shares to Calm Waters Partnership and two
other investors (the "Investors") for $6,000. The warrants have an exercise
price of $9.35 per share, subject to adjustment. In addition, the agreement
calls for the Investors to purchase an additional 2,640,000 common shares for
$16,500 and to receive a warrant to purchase 250,000 shares of common stock at
an exercise price equal to the greater of 105% of the last reported sale price
of common stock on the day preceding the second closing date or $1.50. The
Investors' obligation to purchase the additional shares is subject to certain
conditions including that a replacement of the Company's existing credit
facility occur on or prior to December 31, 2002, as well as conditions related
to the Company's existing class action litigation and ongoing investigations,
among others. The Company has also agreed to issue additional warrants to the
Investors, if it fails to meet certain financial benchmarks.
7. DERIVATIVE FINANCIAL INSTRUMENTS:
At June 30, 2002, the Company had interest rate swaps on a notional debt amount
of $183,100 and a fair market value of ($8,293). The variable pay interest rate
ranges from 5.09% to 6.97%. The maturity dates run through August 2005.
The Company's interest rate swaps do not meet the qualifications for hedge
accounting treatment under Statement of Financial Accounting Standards No. 133.
For the quarter ended June 30, 2002, the Company's negative change in the fair
market value of the interest rate swap portfolio of $1,695 was charged to other
income/expense in the Company's Consolidated Statements of Operations.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
8. STOCK OPTIONS:
On June 13, 2002, option holders of the Company (other than officers and
directors) were issued new options in replacement of options previously
cancelled pursuant to the Company's exchange offer. The new options were
issuable on the date six months and one day after the date of cancellation. The
exercise price of the new options is $11.67 per share, which was the closing
price of the Company's common stock on the New York Stock Exchange on June 13.
As of December 10, 2001 (the expiration date of the Company's offer), 1,109,580
options to acquire common stock were cancelled pursuant to the offer; on June
13, 2002. 1,008,272 options were issued in replacement thereof.
9. COMPREHENSIVE INCOME:
Comprehensive income encompasses net income and changes in the components of
accumulated other comprehensive income not reflected in the Company's Condensed
Consolidated Statements of Operations during the periods presented. Accumulated
other comprehensive income consists of the transition asset recorded at the time
of adoption of SFAS No. 133.
Other Accumulated Other
Comprehensive Comprehensive
Income Income
Net loss for the three months ended December 31, 2001 $ (22,695)
SFAS 133 Transition amount 1,654 $ 1,654
Amortization of SFAS 133 Transition amount (214) (214)
------------ ------------
Total for three months ended December 31, 2001 (21,255) 1,440
------------ ------------
Net income for the three months ended March 31, 2002 1,597
Amortization of SFAS 133 Transition amount (214) (214)
------------ ------------
Total for the six months ended March 31, 2002 (19,872) 1,226
------------ ------------
Net loss for the three months ended June 30, 2002 (5,989)
Amortization of SFAS 133 Transition amount (214) (214)
------------ ------------
Total for the nine months ended June 30, 2002 $ (26,075) $ 1,012
============ ============
10. INSURANCE CHARGE AND RECOVERY
The Company recorded in income a reimbursement of defense costs related to the
derivative and class action lawsuits in the amount of $1,900 in the three-month
period ending June 30, 2002.
The Company recorded a charge of $4,600 against income for the three-month
period ending June 30, 2002. This charge consisted of a $3,600 retrospective
upward adjustment of the Company's fiscal 2001 property/casualty insurance
premium and a $1,000 upward adjustment of the Company's pre-2001
property/casualty insurance premium reserves.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
11. CONTINGENCIES:
Rent-Way and certain of its current and former officers were served with a
consolidated class action complaint filed in the U.S. District Court for the
Western District of Pennsylvania. The complaint alleges that, among other
things, as a result of accounting irregularities, the Company's previously
issued financial statements were materially false and misleading thus
constituting violations of federal securities laws by the Company, by its
auditors and by certain officers. The actions allege that the defendants
violated Sections 10(b) and/or Section 20(a) of the Securities Exchange Act and
Rule 10b-5 promulgated thereunder. The actions seek damages in unspecified
amounts. The actions purport to be brought on behalf of purchasers of the
Company's common stock during various periods, all of which fall between
December 10, 1998, and October 27, 2000. A motion to dismiss the complaint filed
by Rent-Way was denied on July 11, 2002. Rent-Way must file an answer to the
complaint by August 9, 2002, and is continuing to evaluate the complaint and
possible defenses thereto. Pending determination of the motion to dismiss, the
Company's obligation to answer the complaint is stayed.
Certain of Rent-Way's officers and directors and Rent-Way, as nominal defendant,
have been sued in a shareholder derivative action brought on behalf of Rent-Way
in the U.S. District Court for the Western District of Pennsylvania. The
derivative complaint purports to assert claims on behalf of Rent-Way against the
defendants for violation of duties asserted to be owed by the defendants to
Rent-Way and which relate to the events which gave rise to the purported class
actions described above. All proceedings in the derivative case have been
stayed, pending the resolution of the class action. Rent-Way cannot predict the
outcome of the litigation. Pursuant to its bylaws, Rent-Way is obligated to
indemnify its officers and directors under certain circumstances against claims
made in these lawsuits. Rent-Way may also be obligated to indemnify certain of
its officers and directors for the costs they incur as a result of the lawsuits.
While it is not feasible to predict or determine the final outcome or timing of
these or similar proceedings, or to estimate the amounts or potential range of
loss with respect to these matters, management believes that an adverse outcome
with respect to such proceedings could have a material adverse impact on the
Company's financial position and results of operations.
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 initial claims totaling $21,500. However, all but $1,127 of such
claims are, in the opinion of management, covered by insurance policies or
indemnification agreements and therefore should not have a material effect on
the financial position or results of operations of the Company. Additionally,
threatened claims exist for which management is not yet able to reasonably
estimate a potential loss. In management's opinion, none of these claims will
have a material adverse effect on the financial position or results of
operations of the Company.
The Company is self-insured for certain losses related to workers' compensation,
vehicle, general liability, and employee medical and employee dental claims.
The Company has purchased stop-loss coverage in order to limit its exposure to
any significant levels of claims. Self-insurance reserves are accrued based upon
the Company's estimates of the aggregate liability for uninsured claims incurred
using certain actuarial assumptions followed in the insurance industry and the
Company's historical experience. The Company has obtained letters of credit of
$6,100 to guarantee the payment of future claims. The face value of the letters
of credit approximates their market value at June 30, 2002.
In January 2002, the Company made an additional cash contribution of $255 to the
Rent-Way, Inc. 401(k) Retirement Savings Plan in order to restore a portion of
the loss in value of Rent-Way stock held in participant accounts under the plan,
which resulted from the Company's disclosure of accounting improprieties in
October 2000. The Company has agreed to make additional contributions in future
years to the extent Rent-Way's stock price does not reach certain levels.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
12. INCOME TAXES:
The Company recorded income tax expense of $1,897 for the quarter ended June 30,
2002, in connection with the adoption of SFAS 142, which no longer permits the
deferred tax liability related to tax deductible goodwill to offset the portion
of the deferred tax asset related to the Company's NOL position. The Company
also recorded income tax expense of $53 for local taxes. The deferred tax asset,
net of deferred tax liabilities excluding this tax-deductible goodwill,
increased from $34,198 at September 30, 2001, to $49,899 at June 30, 2002. This
represented an increase of $15,701 for the nine months ended June 30,2002, of
which $10,622 relates to the additional need for a deferred tax valuation
allowance as a result of the adoption of SFAS 142 on October 1, 2001. A full
valuation allowance has been provided against deferred tax assets of $49,899.
The Company recorded income tax expense on an equal basis throughout the year
due to the inability to accurately calculate an effective tax rate.
13. SEGMENT INFORMATION:
Rent-Way is a national rental-purchase chain that provides a variety of services
to its customers including rental of household items and prepaid local telephone
service on a week-by-week or a 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 weekly, biweekly,
semimonthly or bimonthly 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).
Household Prepaid
Rental Telephone Inter-segment
For the three months ended June 30,2002 Service Service Activity Total Segment
--------------------------------------- --------------- ------------ ------------ ------------
Total revenue................... $ 150,163 $ 9,841 $ (489) $ 159,515
=============== ============ ============ ============
Operating income (loss)......... $ 9,528 $ (221) $ 28 $ 9,335
=============== ============= ============ ============
Net loss........................ $ (5,713) $ (276) $ -- $ (5,989)
=============== ============ ============ ============
Household Prepaid
Rental Telephone Inter-segment
For the nine months ended June 30,2002 Service Service Activity Total Segment
--------------------------------------- --------------------------------- -------------- --------------
Total revenue................. $ 449,928 $ 29,236 $ (1,543) $ 477,621
=============== ============ ============ ============
Operating income.............. $ 24,897 $ 480 $ 76 $ 25,453
=============== ============ ============ ============
Net income (loss)............. $ (27,360) $ 276 $ (3) $ (27,087)
=============== ============ ============ ============
Total Assets.................. $ 603,287 $ 3,988 $ (4,473) $ 602,802
=============== ============ ============ ============
14. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, FASB issued Statement of Financial Accounting Standard No. 143
"Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is currently evaluating the
provisions of this statement.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the provisions of this statement.
RENT-WAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(All dollars in thousands, except per share data)
(Unaudited)
14. RECENT ACCOUNTING PRONOUNCEMENTS, continued:
In April 2002, FASB issued Statement of Financial Accounting Standards No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 updates, clarifies,
and simplifies existing accounting pronouncements. The Company is currently
evaluating the provisions of this statement.
In August 2002, FASB issued Statement of Financial Accounting Standards No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146 address financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company is currently evaluating
the provisions of this statement.
RENT-WAY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Rent-Way is the second largest operator in the rental purchase industry with
1,062 stores located in 42 states as of June 30, 2002. The Company offers
quality brand name home entertainment equipment, computers, 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. The Company also
provides prepaid local phone service to consumers on a monthly basis through its
majority-owned subsidiary, dPi Teleconnect, L.L.C. ("DPI").
USE OF ESTIMATES IN OUR FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, management reviews its estimates,
including those related to litigation, liability for self-insurance, impairment
of goodwill and other intangibles, based on currently available information.
Changes in facts and circumstances may result in revised estimates.
SIGNIFICANT ACCOUNTING POLICIES
Revenue. Rental merchandise is rented to customers pursuant to rental
agreements, which provide for either weekly, biweekly, semi-monthly or monthly
rental payments collected in advance. Revenue is recognized as collected, not
over the rental term, since at the time of collection the rental merchandise has
been placed in service and costs of installation and delivery have been
incurred. This method of revenue recognition does not produce materially
different results than if rental revenue was recognized over the weekly,
biweekly, semi-monthly or monthly rental term.
Rental Merchandise Depreciation. The Company uses the units of activity
depreciation method for all rental merchandise except computers. Under the units
of activity method, rental merchandise is depreciated as revenue is collected.
Thus rental merchandise is not depreciated during periods when it is not on rent
and therefore not generating rental revenue. Personal computers, added to the
Company's product line in June 1999, are principally depreciated on the
straight-line basis beginning on acquisition date over 12 months to 24 months,
depending on the type of computer. Write-offs of rental merchandise arising from
customers' failure to return merchandise, obsolescence and losses due to
excessive wear and tear of merchandise are recognized using the direct write-off
method, which is materially consistent with the results that would be recognized
under the allowance method.
Prepaid Phone Service. Prepaid phone service is provided to customers on a
prepaid month-to-month basis. Prepaid phone service revenues are comprised of
monthly service revenues and activation revenues. Monthly service revenues are
recognized on a straight-line basis over the related monthly service period,
commencing when the service period begins. The cost of monthly service is also
recognized over the monthly service period and is included in "cost of prepaid
phone service" in the Statement of Operations. Activation revenues are
recognized on a straight-line basis over the average life of the customer
relationship. Activation costs are expensed as incurred and are included in
"cost of prepaid phone service" in the Statement of Operations.
Closed Store Reserves. From time to time, the Company closes or consolidates
retail stores. An estimate is recorded of the future obligation related to
closed stores based upon the present value of the future lease payments and
related commitments, net of estimated sublease income. At June 30, 2002 and
2001, the reserve for closed stores was $2.9 million and $2.3 million,
respectively, with the increase primarily related to stores closed during the
period. If the estimates related to sublease income are not correct, the actual
liability may be more or less than the liability recorded.
Company Insurance Programs. The Company is primarily self-insured for health,
workers' compensation, automobile, and general liability costs. The
self-insurance liability for health costs is determined actuarially based on
claims filed and an estimate of claims incurred but not yet reported. The
self-insurance liability for workers' compensation, automobile and general
liability costs are determined actuarially based on claims filed and company
experience. Losses in the workers' compensation, automobile and general
liability programs are pre-funded based on the insurance company's loss
estimates. Loss estimates will be adjusted for developed incurred losses at 18
months from policy inception and every 12 months thereafter. Retrospective
adjustments to loss estimates are recorded when determinable and probable.
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.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------ ----------------------------------
2002 2001 2002 2001
---------------- -------------- ------------- ----------------
REVENUES:
Rental revenue.................. 81.6% 81.0% 81.2% 80.8%
Prepaid phone service revenue... 6.2 5.4 6.1 5.3
Other revenue................... 12.2 13.6 12.7 13.9
------ ------ ------ ----
Total revenues............... 100.0 100.0 100.0 100.0
COSTS AND OPERATING EXPENSES:
Depreciation and amortization
Rental merchandise.............. 27.3 31.8 28.6 30.3
Property and equipment.......... 4.0 4.7 4.2 4.7
Amortization of goodwill and
other intangibles......... 0.4 2.6 0.4 2.6
------ ------ ------ ----
Total depreciation and
amortization.......... 31.7 38.7 33.2 37.2
Cost of prepaid phone service..... 4.0 2.8 3.8 2.9
Salaries and wages................ 24.1 23.6 24.1 24.1
Advertising....................... 3.6 2.3 4.5 3.4
Occupancy......................... 6.9 6.9 7.1 7.3
Other operating expenses.......... 23.9 23.8 22.0 24.1
------ ------ ------ ----
Total costs and operating expenses 94.1 98.6 94.7 99.3
------ ------ ------ ----
Operating income............. 5.9 1.4 5.3 0.7
Interest expense.................. (7.4) (6.6) (7.9) (6.6)
Interest income................... -- -- 0.1 --
Other income (expense)............ (1.0) (0.1) 0.6 (1.8)
------- ----- ------ ----
Loss before income taxes..... (2.5) (5.3) (1.9) (7.7)
Income tax expense ............... 1.2 -- 3.1 --
------- ----- ------ ----
Net loss before extraordinary item (3.8) (5.3) (5.0) (7.7)
Extraordinary item................ -- -- (0.7) --
------- ----- ------ ----
Net loss.......................... (3.8)% (5.3)% (5.7)% (7.7)%
======= ====== ====== ====
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Total revenues. Total revenues decreased $5.5 million, or 3.3%, to $159.5
million from $165.0 million. The decrease is attributable to a decrease in
revenues of $6.4 million in the household rental segment offset by an increase
in revenues of $0.9 million in the prepaid telephone service segment. The $6.4
million decrease in revenue in the household rental segment is due to the
closing, merging or selling of 74 under-performing stores since June 30, 2001,
and a 1.1% decrease in same store revenues.
The decrease in same store revenues is due to a decrease in both fee revenue and
sales revenue, offset by an increase in rental revenue. The decrease in fee
revenue was 8.7% as compared to the same period last year, and is attributed to
reductions in the Company's collection of liability damage waiver and processing
fees. The decrease in sales revenue was 5.1%, and is attributed to the Company
selling less merchandise in this quarter than last year's quarter. The prior
year quarter had a significant amount of product being sold to eliminate
low-end, low-margin merchandise from its inventory mix. The increase in same
store rental revenue was 0.5%, which has increased due to higher priced
merchandise in the Company's inventory mix.
Depreciation and Amortization. Depreciation expense related to rental
merchandise decreased to 27.3% as a percentage of total revenues from 31.8%. In
fiscal 2001, the Company took steps to increase gross profit margins on rental
contracts. These steps included increasing weekly rental rates of personal
computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product,
increasing rental rates on certain core products to competitive market rates,
and introducing higher-end, higher-margin merchandise to the stores. The Company
expects depreciation expense as a percentage of total revenues to continue
decreasing during the remainder of fiscal 2002 as product margins improve due to
enhanced rental rates and turns as a result of the factors discussed above.
Depreciation expense related to property and equipment decreased to 4.0% as a
percentage of total revenues from 4.7%. This decrease is primarily due to the
closing or selling of 74 stores since June 30, 2001. Amortization of goodwill
and other intangibles decreased to 0.4% as a percentage of total revenues from
2.6%. This decrease is due to the adoption of SFAS 142. SFAS 142 requires the
cessation of amortization of goodwill and other indefinite-lived intangibles on
the balance sheet. Goodwill and other indefinite lived intangibles on the
balance sheet must then be tested for impairment at least annually. The Company
completed the step one transitional goodwill impairment test and determined that
goodwill is impaired in the household rental segment. Based upon its preliminary
analysis, the Company believes the impairment write down could be approximately
$50 million. In accordance with provisions of SFAS 142, the Company will
complete step two of the impairment test and record the determined write down no
later than September 30, 2002.
Cost of Prepaid Phone Service. The cost of prepaid phone service increased to
$6.3 million or 4.0% of total revenues from $4.6 million, or 2.8% as a
percentage of total revenues. Cost of prepaid phone service as a percentage of
prepaid phone service revenue increased to 64.4% from 51.5%. The increase is
primarily due to the growth in the number of customer lines serviced and an
increase in the mix of new customers to the total customer base. The increase in
new customers results in higher costs due to ILEC activation fees. This increase
is also the result of the FCC allowing the ILECs to increase End User
Communication Line ("EUCL") monthly charges for residential lines during
mid-year calendar 2001. The Company has reacted to the EUCL increases by
adjusting retail prices to the customer based on targeted margins. These price
increases were implemented in the first quarter of fiscal 2002.
Salaries and Wages. Salaries and wages decreased by $0.6 million to $38.4
million from $39.0 million, primarily due to the closing or selling of 74
under-performing stores since June 30, 2001, and the Company's efforts to better
manage store staffing levels and overtime. It is also the result of a reduction
in corporate staffing levels. Salaries and wages increased to 24.1% as a
percentage of total revenues from 23.6% because revenues decreased 3.3% from the
comparable period in fiscal 2001.
Advertising. Advertising expense increased from $3.8 million to $5.8 million.
This increase is primarily due to increased usage of network radio spots and
lower co-operative advertising rebates received from the Company's vendors.
Occupancy. Occupancy expense decreased to $11.0 million from $11.5 million
primarily due to the closing of 74 under-performing stores since June 30, 2001.
Other Operating Expense. Other operating expense decreased by $1.1 million but
increased to 23.9% as a percentage of total revenues from 23.8%. The decrease in
expense is primarily due to lower rental merchandise losses, service costs,
travel and entertainment costs, accounting fees, legal fees, and consulting
fees.
During the third quarter of fiscal 2001, accounting fees, legal fees and
consulting fees related to the investigation, shareholder litigation and the
fiscal 2000 audit were $2.0 million. During the third quarter of fiscal 2002,
there was a recovery of accounting and legal fees related to the investigation
and shareholder litigation in the amount of $1.9 million, which offsets $0.7
million of fees for the quarter.
The decrease in other operating expense was partially offset by a charge of
$4,600 against income for the three-month period ending June 30, 2002. This
charge consisted of a $3,600 retrospective upward adjustment of the Company's
fiscal 2001 property/casualty insurance premium and a $1,000 upward adjustment
of the Company's pre-2001 property/casualty insurance premium reserves.
Interest Expense. Interest expense increased from 6.6% to 7.4% as a percentage
of total revenues. The Company's credit facility requires the Company to accrue
additional payment-in-kind interest at a rate of 200 to 500 basis points that is
due and payable on the maturity date of its term loans. This payment-in-kind
interest amounted to $3.3 million in the three-month period ended June 30, 2002.
Offsetting this increase is a decrease in other interest expense of $2.4
million. This decrease is due to a lower effective interest rate. In the
comparable period in fiscal 2001, the Company was in default under its bank
credit facility and operated under a forbearance agreement.
Other Income (Expense). Other expense was $1.5 million for the three months
ended June 30, 2002, compared to other expense of $0.2 million in the three
months ended June 30, 2001. This change is primarily due to a negative change in
the fair market value of the interest rate swap portfolio, which resulted in
expense of $1.7 million for the quarter ended June 30, 2002, compared to an
adverse change of $0.5 million for the quarter ended June 30, 2001.
Income Tax Expense. During the third quarter of fiscal 2002, the Company
recorded income tax expense of $2.0 million as a result of the adoption of SFAS
142 and recording expense for local income taxes. During the third quarter of
fiscal 2001, the Company recorded no income tax benefit related to the operating
losses due to the uncertainty of their realization.
Net Loss. The Company generated a net loss of $6.0 million in the period as a
result of the factors described above compared to a net loss of $8.7 million in
the same period last year.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 2002 AND 2001
Total revenues. Total revenues decreased $21.1 million, or 4.2%, to $477.6
million from $498.7 million. The decrease is attributable to a decrease of $24.0
million in the household rental segment offset by an increase of $2.9 million in
the prepaid telephone service segment. The $24.0 million decrease in revenue in
the household rental segment is due to the closing or selling of 74
under-performing stores since June 30, 2001, and a 2.1% decrease in same store
revenues.
The decrease in same store revenues is due to a decrease in rental revenue, fee
revenue and sales revenue. The decrease in rental revenue for the nine-month
period was 1.1%, primarily due to the company eliminating low-end, low-margin
merchandise for rent. The Company has elected not to carry low-margin products
in its merchandising mix. The decrease in fee revenue was 9.4% as compared to
the same period last year, and is attributed to reductions in the Company's
collection of liability damage waiver and processing fees. The decrease in sales
revenue was 0.8%, and is attributed to the company selling less merchandise for
the nine-month period than last year's period. The prior year had a significant
amount of product being sold to eliminate low-end, low-margin merchandise from
its inventory mix.
Depreciation and amortization. Depreciation expense related to rental
merchandise decreased to 28.6% as a percentage of total revenues from 30.3%. In
fiscal 2001, the Company took steps to increase gross profit margins on rental
contracts. These steps included increasing weekly rental rates of personal
computers to competitive market rates, implementing a program to eliminate free
Internet service by replacing it with a prepaid, unlimited Internet product,
increasing rental rates on certain core products to competitive market rates,
and introducing higher-end, higher-margin merchandise to the stores. The Company
expects depreciation expense as a percentage of total revenues to continue
decreasing during the remainder of fiscal 2002 as product margins improve due to
enhanced rental rates and turns as a result of the factors discussed above.
Depreciation expense related to property and equipment decreased to 4.2% as a
percentage of total revenues from 4.7%. This decrease is primarily due to the
closing or selling of 74 stores since June 30, 2001.
Amortization of goodwill and other intangibles decreased to 0.4% as a percentage
of total revenues from 2.6%. This decrease is due to the adoption of SFAS 142.
SFAS 142 requires the cessation of amortization of goodwill and other
indefinite-lived intangibles on the balance sheet. Goodwill and other indefinite
lived intangibles on the balance sheet must then be tested for impairment at
least annually. The Company completed the step one transitional goodwill
impairment test and determined that goodwill is impaired in the household rental
segment. Based upon its preliminary analysis, the Company believes the
impairment write down could be up to $50 million. In accordance with provisions
of SFAS 142, the Company will complete step two of the impairment test and
record the determined write down no later than September 30, 2002.
Cost of Prepaid Phone Service. The cost of prepaid phone service increased to
$18.2 million or 3.8% of total revenues from $14.7 million, or 2.9% as a
percentage of total revenues. Cost of prepaid phone service as a percentage of
prepaid phone service revenue increased to 62.2% from 55.7%. The increase is
primarily due to the growth in the number of customer lines serviced and an
increase in the mix of new customers to the total customer base. The increase in
new customers results in higher costs due to ILEC activation fees. This increase
is also the result of the FCC allowing the ILECs to increase EUCL monthly
charges for residential lines during mid-year calendar 2001. The Company has
reacted to the EUCL increases by adjusting retail prices to the customer based
on targeted margins. These price increases were implemented in the first quarter
of fiscal 2002.
Salaries and Wages. Salaries and wages decreased by $4.8 million to $115.2
million from $120.0 million primarily due to the closing or selling of 74
under-performing stores since June 30, 2001, and the Company's efforts to better
manage store staffing levels and overtime. It is also the result of a reduction
in corporate staffing levels. Salaries and wages remained at 24.1% as a
percentage of total revenues.
Advertising. Advertising expense increased from $16.8 million to $21.5 million
primarily due to the increased usage of network radio spots and lower
co-operative advertising rebates received from the Company's vendors.
Occupancy. Occupancy expense decreased to $33.7 million from $36.2 million
primarily due to the closing of 74 under-performing stores since June 30, 2001.
Other Operating Expense. Other operating expense decreased by $14.8 million to
$105.2 million from $120.0 million. This decrease is due to lower rental
merchandise losses, service costs, travel and entertainment costs, accounting
fees, legal fees, and consulting fees. It decreased to 22.0% as a percentage of
total revenues from 24.1%. For the first nine months of fiscal 2001, accounting
fees, legal fees and consulting fees related to the fiscal 2000 audit and
investigation were $5.9 million. For the first nine months of fiscal 2002, fees
related to the accounting investigation and shareholder litigation were $1.4
million, of which $1.9 million was reimbursed as a result of an insurance
recovery.
The decrease in other operating expense was partially offset by a charge of
$4,600 against income for the three-month period ending June 30, 2002. This
charge consisted of a $3,600 retrospective upward adjustment of the Company's
fiscal 2001 property/casualty insurance premium and a $1,000 upward adjustment
of the Company's pre-2001 property/casualty insurance premium reserves.
Interest Expense. Interest expense increased from 6.6% to 7.9% of total
revenues. The Company`s credit facility requires the Company to accrue
additional payment-in-kind interest at a rate of 200 to 500 basis points that is
due and payable on the maturity date of its term loans. This payment-in-kind
interest amounted to $11.1 million in the nine-month period ended June 30, 2002.
Offsetting this increase is a decrease in other interest expense of $6.2
million. This decrease is due to a lower effective interest rate. In the
comparable period in fiscal 2001, the Company was in default under the bank
credit facility and operated under a forbearance agreement.
Other Income (Expense). Other income was $2.9 million for the nine months ended
June 30, 2002, compared to other expense of $9.1 million in the nine months
ended June 30, 2001. This change is primarily due to a positive change in the
fair market value of the interest rate swap portfolio, which resulted in income
of $1.9 million for the nine months ended June 30, 2002, compared to an adverse
change of $9.3 million for the nine months ended June 30, 2001. Other income for
the nine months ended June 30, 2002, also includes gain on the sale of stores.
The Company entered into several small transactions to sell fourteen
under-performing stores. The Company recognized a net gain of $0.8 million on
these store sale transactions.
Income Tax Expense. For the nine months ended June 30, 2002, the Company
recorded income tax expense of $14.6 million in connection with the adoption of
SFAS 142 and recording local income taxes. The Company recorded no income tax
benefit for the nine months ended June 30, 2001, related to the operating losses
due to the uncertainty of their realization.
Extraordinary Item. On October 5, 2001, the Company amended its credit facility
with a syndicate of banks. As a result of the October 5, 2001 amendment, the
Company incurred a non-cash charge of $3.4 million related to the write-off of
substantially all of the bank fees associated with previous amendments to the
facility.
Net Loss. A net loss of $27.1 million was incurred in the period as a result of
the factors described above compared to net loss in the same period last year of
$38.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements relate primarily to purchasing additional
rental merchandise and replacing rental merchandise that has been sold or is no
longer suitable for rent. During fiscal 2001, the Company operated under a
forbearance agreement with its bank lenders through October 5, 2001. The
Company's ability to borrow funds under the forbearance agreement was limited.
The Company obtained an amended credit facility on October 5, 2001, which was
then amended June 24, 2002, that provides the Company with sufficient borrowing
capacity and revised loan covenants. As a result of the October 5, 2001
amendment, the Company incurred a non-cash charge of $3.8 million related to the
write-off of substantially all of the bank fees associated with previous
amendments to the facility.
For the nine months ended June 30, 2002, operations provided $12.9 million of
cash flow compared to operations providing $60.3 million for the nine months
ended June 30, 2001. The decrease in cash provided in the fiscal 2002 period was
primarily a result of the utilization of rental merchandise deposits in 2001,
larger income tax refunds in 2001, and the decrease in other liabilities due to
the payment of accrued interest and payments under the vehicle capital lease
obligation.
Net cash used in investing activities was $8.1 million for the nine months ended
June 30, 2002, compared to $5.4 million used in investing activities for the
nine months ended June 30, 2001. In the fiscal 2002 period, the purchase of
property and equipment accounted for $9.1 million offset by sale proceeds from
store sales of $2.0 million. In the fiscal 2001 period, the purchase of property
and equipment accounted for $8.5 million offset by sale proceeds from store
sales of $3.8 million.
For the nine months ended June 30, 2002, financing activities used $5.9 million
as compared to $51.9 million used in the nine months ended June 30, 2001. In the
fiscal 2002 period, the Company borrowed $522.0 million and repaid $535.0
million. In the fiscal 2001 period, the borrowings were $369.7 million and
repayments were $425.2 million. In the fiscal 2002 period, the Company sold 1
million restricted common shares to Calm Waters Partnership and two other
investors ("the Investors") for $6 million and authorized a warrant to purchase
100,000 shares of common stock. In addition, the agreement calls for the
Investors to purchase an additional 2,640,000 common shares for $16,500 and to
receive a warrant to purchase 250,000 shares of common stock. The Investors'
obligation to purchase the additional shares is subject to certain conditions
including that a replacement of the Company's existing credit facility occur on
or prior to December 31, 2002, as well as conditions related to the Company's
existing class action litigation and ongoing investigations, among others. The
Company has also agreed to issue additional warrants to investors, if it fails
to meet certain financial benchmarks.
SEASONALITY AND INFLATION
The Company's operating results are 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 nine months ended June 30, 2002, the cost of rental merchandise,
energy costs, store lease rental expense and salaries and wages has 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 2001, FASB issued Statement of Financial Accounting Standard No. 143
"Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is currently evaluating the
provisions of this statement.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the provisions of this statement.
In April 2002, FASB issued Statement of Financial Accounting Standards No. 145
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 updates, clarifies,
and simplifies existing accounting pronouncements. The Company is currently
evaluating the provisions of this statement.
In August 2002, FASB issued Statement of Financial Accounting Standards No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146 address financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company is currently evaluating
the provisions of this statement.
CAUTIONARY STATEMENT
This report includes 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. See particularly Item 2, "Management's
Discussion and Analysis of Financial Condition," among others. These statements
may be identified by terms and phrases such as "anticipate", "believe",
"intend", "estimate", "expect", "continue", "should", "could", "may", "plan",
"project", "predict", "will" and similar expressions and relate to future events
and occurrences. These statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements.
Factors that could cause actual results to differ materially from those
expressed or implied in such statements include but are not limited to:
Rent-Way's ability to control and normalize operating expenses and to continue
to realize operating efficiencies. Rent-Way's ability to make principal and
interest payments on its high-level of outstanding bank debt.
The outcome of any class action and derivative lawsuits commenced against
Rent-Way and its officers and directors and any proceedings or investigations
involving Rent-Way commenced by governmental authorities, including the
Securities and Exchange Commission and the United States Department of Justice.
Rent-Way's ability to develop, implement, and maintain reliable and adequate
internal accounting systems and controls.
Rent-Way's ability to retain existing senior management and attract additional
management employees.
General economic, business, and demographic conditions, including demand for
Rent-Way's products and services.
General conditions relating to the rental-purchase industry and the prepaid
local phone service industry, including the impact of state and federal laws
regulating or otherwise affecting the rental-purchase transaction and prepaid
local phone service transaction.
Competition in the rental-purchase industry and prepaid local phone service
industry, including competition with traditional retailers. Rent-Way's ability
to enter into and to maintain relationships with vendors of its rental
merchandise including its ability to obtain goods and services on favorable
credit terms.
Given these factors, undue reliance should not be placed on any forward-looking
statements and statements regarding Rent-Way's future prospects and performance.
Such statements speak only as of the date made. Rent-Way undertakes no
obligation to update or revise any such statements whether as a result of new
information, the occurrence of future events, or otherwise.
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. As of June 30, 2002, the Company had $302.6
million in loans with floating interest rates indexed to current LIBOR and prime
rates. Because the floating rates expose the Company to the risk of increased
interest cost if interest rates rise, the Company began a policy in 1998 of
managing interest rate risk by utilizing interest rate swap agreements to
convert a portion of the floating interest rate loans to fixed interest rates.
As of June 30, 2002, the Company has $183.1 million in interest rate swap
agreements that lock in a LIBOR rate ranging from 5.09% to 6.97%. This
effectively fixes the interest rate on 60.5% of the loans or $183.1 million,
thus hedging this risk. These interest rate swap agreements have maturities
ranging from 2002 to 2005. Falling interest rates and/or a flattening of the
yield curve will negatively impact the market value of the interest rate swaps.
Given the Company's current capital structure, including interest rate swap
agreements, there is $119.5 million, or 39.5% of the Company's total debt, in
floating rate loans. A hypothetical 1.0% change in the LIBOR rate would affect
pre-tax earnings by approximately $1.2 million.
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.
RENT-WAY, INC.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, its auditors, and certain of its current and former officers
have been named in a consolidated class-action complaint filed in the
Western District of Pennsylvania alleging violations of the securities laws
and seeking damages in unspecified amounts purportedly on behalf of a class
of shareholders. The Company's motion to dismiss the complaint was denied by
the Court on July 11, 2002. The Company is preparing an answer to the
complaint, which is due by August 9, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
3.1 Articles of Incorporation of Rent-Way, Inc., as amended
(incorporated by reference to Exhibit 3.1 to Rent-Way's Annual
Report on Form 10-K for the year ended September 30, 1997, filed
November 6, 1997.)
3.2 Bylaws of Rent-Way, Inc., as amended (incorporated by reference to
Exhibit 3.2 to Rent-Way's Annual Report on Form 10-K
for the year ended September 30, 2000, filed July 2, 2001.)
10.1 Amendment No. 7 to Credit Agreement dated as of June 24, 2002,
between the Company and the lenders parties thereto.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b. REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K in the quarter ended
June 30, 2002:
(1) On May 10, 2002, the Company filed a Current Report on Form 8-K, which
reported the issuance of a press release regarding financial results for
its fiscal quarter ended March 31, 2002.
(2) On April 18, 2002, the company filed a Current Report on Form 8-K, which
reported the issuance of a press release announcing the sale of common
stock and warrants to certain investors.
RENT-WAY, INC.
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.
Rent-Way, Inc.
----------------
(Registrant)
By:
August 9, 2002 /s/ William A. McDonnell
---------------------- --------------------------------------
Date (Signature)
William A. McDonnell
Vice President and Chief Financial Officer
By:
August 9, 2002 /s/ John A. Lombardi
---------------------- --------------------------------------
Date (Signature)
John A. Lombardi
Chief Accounting Officer and Controller
EXHIBIT INDEX
3.3 Articles of Incorporation of Rent-Way, Inc., as amended (incorporated
by reference to Exhibit 3.1 to Rent-Way's Annual Report on Form 10-K
for the year ended September 30, 1997, filed November 6, 1997.)
3.4 Bylaws of Rent-Way, Inc., as amended (incorporated by reference to
Exhibit 3.2 to Rent-Way's Annual Report on Form 10-K
for the year ended September 30, 2000, filed July 2, 2001.)
10.1 Amendment No. 7 to Credit Agreement dated as of June 24, 2002, between
the Company and the lenders parties thereto.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.