##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended July 31, 2004ORo
    
    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.
  Delaware
    
    81-0332743(State of other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 7800 Stemmons Freeway, Suite 320
Dallas, Texas 75247
(Address of principal executive offices, including zip code)  Registrants telephone number, including area code: (214) 630-6655    (Title of Class)
Common Stock, $.01 par value 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes o No þ The aggregate market value of voting common stock held by non-affiliates
of the registrant as of October 11, 2004 was approximately $6,043,997. The number of shares of Common Stock, $.01 par value, outstanding as of
October 11, 2004 was 1,683,272. DOCUMENTS INCORPORATED BY REFERENCE Certain information called for by Part III is incorporated by reference to
the definitive proxy statement for the annual meeting of the stockholders of
Bestway, Inc., which will be filed with the Securities and Exchange Commission
not later than 120 days after July 31, 2004. 1




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Bestway, Inc.
    
    FORM 10-K
  
 TABLE OF CONTENTS Page(s)PART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    9Item 3. Legal Proceedings
    
    
    9Item 4. Submission of Matters to a Vote of Security Holders
    
    
    10PART IIItem 5. Market for Registrants Common Stock and Related
Security Holder Matters
    
    
    10Item 6. Selected Financial Data
    
    
    11Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 8. Financial Statements
    
    
    22Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures
    
    
    42Item 9A. Controls and Procedures
    
    
    42Item 9B. Other Information
    
    
    42PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    42Item 11. Executive Compensation
    
    
    42Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    42Item 13. Certain Relationships and Related Transactions
    
    
    42Item 14. Principal Accountant Fees and Services
    
    
    42PART IVItem 15. Exhibits and Financial Statements
    
    
    43SIGNATURES
    
    
    45SubsidiariesConsent of PricewaterhouseCoopers LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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Bestway, Inc.
    
    FORM 10-K
 
 PART I 
 ITEM 1.  BUSINESS General Bestway, Inc. and its consolidated subsidiaries (Bestway or the
Company) have been engaged in the rental-purchase industry since 1987. The
Company owns and operates a total of sixty-nine stores located in the states of
Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and
Tennessee. The stores operations are controlled and monitored through the
Companys management information system networked with its home office in
Dallas, Texas. The Company is a Delaware corporation in 1987 and its principal
executive offices are located at 7800 Stemmons Freeway, Suite 320, Dallas,
Texas 75247. The Companys rental-purchase program offers quality, name brand, durable
products, such as home electronics, household appliances, computers, and
furniture, under flexible rental-purchase agreements that typically allow the
customer to obtain ownership of the merchandise at the conclusion of an agreed
upon rental period. The rental agreements contain options under which
customers may own the merchandise under specified terms. The Companys rental
agreements typically have a 12 to 30 month term with weekly or monthly payment
options. Customers have the option to return the product at any time without
further obligation and also have the option to purchase the product at any time
during the rental term. Industry Overview The rental-purchase industry provides an alternative to traditional retail
installment sales, appealing to individuals with a need for acquiring the use
of household products who cannot afford a cash purchase, may be unable to
qualify for credit, and are unwilling or unable to wait until they can save for
a purchase. Other customers value the flexibility offered by the rental
transaction, which allows for the return of merchandise at any time without
obligation for further payments. The industry also serves customers having
short-term needs or seeking to try products before committing to purchase them.
Rental-purchase transactions include delivery and pick-up service as well as
repair service and warranty. Rental-purchase transactions are made on a
week-to-week or month-to-month basis and provide customers with the opportunity
for ownership if the product is rented for a continuous term, generally 12 to
30 months. Customers may cancel agreements at any time without further
obligation by returning the product or requesting its pick-up by the store.
Returned merchandise is held for re-rental or sale by the Company. Rental
renewal payments are generally made in person, in cash, by check, by money
order, or by credit card. The Association of Progressive Rental Organization (APRO), the
industrys trade association, estimates there are approximately 8,300
rent-to-own stores in the United States. According to APRO, industry-wide
revenues were approximately $5.97 billion in 2003. APRO also estimates there
were approximately 2.9 million households served during 2003. The industrys
three largest public companies currently operate approximately 4,300 stores, or
52% of the total rental-purchase stores in operation. The rental-purchase industry serves a diverse customer base. According to
APRO, approximately 92% of rental-purchase customers have combined annual
household incomes between $15,000 and $50,000. Estimates also show that the
majority of rental-purchase customers are between the ages of 25
and 44 and over 93% of rental-purchase customers have high school diplomas.
According to an April 2000 Federal Trade Commission study, 75% of
rental-purchase customers were satisfied with their 3




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Bestway, Inc.
    
    FORM 10-K
 experience with
rental-purchase transactions. The study noted that customers gave a wide
variety of reasons for their satisfaction, favorably noting many aspects of the
transaction, the merchandise and services and the treatment they received from
store employees. The Company believes the rental-purchase industry remains
under-penetrated, providing growth opportunities with new store openings or
acquisitions for companies that are well capitalized and have access to both
debt and equity capital. Products The Company generally purchases products directly from manufacturers and
local distributors who then ship the products directly to each store, therefore
eliminating the need for warehouses. Products offered by the Company include a
wide variety of name brands, styles and models in four major categories,
including home electronics, furniture, appliances and computers. Our largest
suppliers include Ashley, Sears, Zenith, Dell and ORourke, who accounted for
approximately 18.4%, 13.6%, 13.5%, 13.0% and 11.5%, respectively, of
merchandise purchased in 2004. No other supplier accounted for more than 10%
of merchandise purchased during this period. Although the Company presently
expects to continue relationships with its existing suppliers, there are
numerous sources of products available to the Company, and the Company does not
believe its operations are dependent on any one or more of its present
suppliers. As of July 31, 2004, rental-purchase agreements for home electronics
accounted for approximately 27.3% of the Companys total agreements on rent;
furniture accounted for 39.5% of the Companys total agreements on rent;
appliances accounted for 24.7% of the Companys total agreements on rent; and
computers accounted for 8.5% of the Companys total agreements on rent. Advertising The Company markets its products and services by selecting prominent store
locations in retail shopping areas on main traffic thoroughfares near targeted
customers residences or job locations. We promote the products and services
in our stores primarily through direct mail advertising. Our advertisements
emphasize such features as product and name brand selection, same day delivery,
low price guarantee, as well as the absence of credit investigations and
long-term obligations. In addition, the Company has a toll-free phone number
that automatically connects the call with the store nearest them. The Company
also has programs which reward existing customers with rental discounts for the
referral of new customers. Competition The rental-purchase industry is highly competitive. Competition is based
primarily on store location, product selection and availability, customer
service and rental rates and terms. Several of the Companys competitors are
national or regional companies and some have significantly greater financial
and operating resources and name recognition than the Company. In addition, the
Company faces competition from sources outside the rental-purchase industry,
such as department stores, discount stores and retail outlets. These
competitors may offer an installment sales program or may compete with the
Company simply on the basis of product and price. There is no assurance that
the Company will be able to compete successfully against these competitors.
Because capital and other requirements for entry into the rental-purchase
industry are relatively low, competition may arise from new sources not
currently competing with
the Company. Increased competition could have a material adverse effect on the
Companys sales and profitability. 4




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Bestway, Inc.
    
    FORM 10-K
 Personnel At July 31, 2004, the Company employed approximately 332 full-time
employees, of which 13 are located at the corporate office in Dallas, Texas.
None of the Companys employees are represented by a labor union. The Company
considers its relations with its employees to be satisfactory. Company Stores The following table sets forth the number of stores opened, and the number
of stores consolidated, closed or sold during such time period: Year Ended July 31,2002
    
    2003
    
    2004Stores open at beginning of period
    
    
    83
    
    
    
    69
    
    
    
    69Stores opened
    
    
    
    
    
    
    
    
    
    
    Stores consolidated/closed/sold
    
    
    14
    
    
    
    
    
    
    
    Stores open at end of period
    
    
    69
    
    
    
    69
    
    
    
    69
 Government Regulation Federal Regulation No comprehensive federal legislation has been enacted
regulating or otherwise impacting rental-purchase transactions. The Company
does comply with the Federal Trade Commission recommendations for disclosure in
rental-purchase transactions. From time to time, legislation has been
introduced in Congress that would regulate rental-purchase transactions,
including legislation that would subject rental-purchase transactions to
interest rates, finance charges, fee disclosures and limitations, as well as
the Federal Truth in Lending Act. Any adverse federal legislation, if enacted,
could have a materially adverse effect on the Company. State Regulation Currently 47 states, the District of Columbia, Guam and
Puerto Rico have legislation regulating rental-purchase transactions. The
Company currently operates its stores in states that have enacted laws
specifically regulating rental-purchase transactions. In North Carolina,
rental-purchase transactions with purchase options equal to 10% or less of the
cash price are regulated as credit sales. The Companys rental-purchase
transactions in North Carolina all have purchase options greater than 10% of
the cash price and are not subject to regulation. The Companys policy is to
operate only in states where there is an absence, in managements opinion, of
unfavorable legislation regarding rental-purchase transactions. There can be
no assurance against the enactment of new or revised rental-purchase laws that
would have a materially adverse effect on the Company. Service Mark The Company owns the federally registered service mark Bestway Rental.
The Company believes the Bestway Rental mark has acquired significant market
recognition and goodwill in communities in which its stores are located. 5




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Bestway, Inc.
    
    FORM 10-K
 U.S. Securities and Exchange Commission Reports All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and all amendments to those reports, filed with or
furnished to the U.S. Securities and Exchange Commission (SEC) on or after
June 13, 1995 are available free of charge through our internet website,
www.bestwayrto.com, as soon as reasonably practical after we have
electronically filed such material with, or furnished it to, the SEC. The general public may read and copy any materials the Company files with
the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including the Company. Risk Factors Set forth below are important risks and uncertainties that could affect
the Companys business results or cause its actual results to differ materially
from those expressed in forward-looking statements made by the Company. Competitors could impede the Companys ability to attract new customers or
could attract current customers away from the Company. The Companys business
is highly competitive. The Companys competitors include national, regional
and local operators of rent-to-own stores and credit retailers. The Company
competes in the rent-to-rent market with national and local companies. Some of
the Companys competitors have significantly greater financial and operating
resources, and in certain markets, greater name recognition, than the Company.
Greater financial resources may allow these competitors to grow faster than the
Company, including through acquisitions. This in turn may allow them to enter
new markets before the Company can, which may decrease its opportunities in
those markets. Greater name recognition, or better public perception of a
competitors reputation, may help them attract market share away from the
Company, even in its established markets. Any loss of the services of the Companys key executives, or its inability
to attract and retain qualified executives, could have an adverse impact on its
operations. The Company believes that it has benefited substantially from the
leadership provided by David A. Kraemer, President and Chief Executive Officer,
and that the loss of his services at any time in the near future could hurt the
Companys business and operations. The Company is also dependent on the
continued services of the rest of its management team, including its key
executives. The loss of these individuals, without adequate replacement, could
also injure the Companys business. Additionally, the Company needs a growing
number of qualified managers to operate its stores successfully. If it is
unable to attract and retain qualified individuals or the costs to do so
increase significantly, the Companys operations would be materially adversely
affected. Any failure to meet the Companys debt obligations could harm its
business, financial condition and results of operations. If the Companys cash
flow and capital resources are insufficient to fund its debt obligations, it
may be forced to sell assets, seek additional equity or debt capital or
restructure its debt. In addition, any failure to make scheduled payments of
interest and/or principal on the Companys outstanding indebtedness would
likely result in a reduction of its credit rating, which could harm its ability
to incur additional indebtedness on acceptable terms. The Companys cash flow
and capital resources may be insufficient for payment of interest on and/or principal of its debt in
the future and any 6




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Bestway, Inc.
    
    FORM 10-K
 such alternative measures may be unsuccessful or may not
permit the Company to meet scheduled debt service obligations, which could
cause it to default on its obligations and impair its liquidity. Some of the Companys stockholders currently own a significant amount of
its Common Stock and would be able to control the election of directors and the
approval of significant corporate transactions. ODonnell & Masur, L.P.
beneficially owned approximately 51.9% of the Companys outstanding common
stock as of October 11, 2004. As a result, it is able to exercise significant
influence over, and in most cases control, matters requiring stockholder
approval, including the election of directors, changes to the Companys charter
documents and significant corporate transactions. This concentration of
ownership makes it unlikely that any other holder or group of holders of the
Companys Common Stock will be able to affect the way the Company is managed or
the direction of its business. Such continued concentrated ownership also will
make it impossible for another company to acquire the Company and for the
Companys stockholders to receive any related takeover premium for their shares
unless the acquisition is approved by this stockholder. A sluggish economy could adversely impact the Companys financial results
and growth. A sluggish economy, lack of consumer confidence in the stock
market and other national and world events, including acts of terrorism and/or
war, have created a significant amount of uncertainty about future prospects of
national and world economies. The overall long-term effect on the Company and
the rent-to-own industry is also uncertain. At the present time, it is not
possible to predict either the severity or duration of such declines, but
weaker performance will, in turn, have an adverse impact on the Companys
business, financial condition, and results of operations. Numerous risks associated with the rent-to-own business could have an
adverse impact on the Companys financial results and growth prospects. The
operating success of the Company, like other participants in the rent-to-own
industry, depends upon a number of factors. These factors include the ability
to maintain and increase the number of units on rent, the collection of the
rental payments when due and the control of inventory and other costs. In
addition, the failure of the Companys management information systems to
monitor the stores, the failure of the Companys operational internal audit
personnel to adequately detect any problems with a store, or the failure of
store managers to follow operating guidelines, could have a material adverse
affect on the Companys business, financial condition or results of operations.
The rent-to-own industry is also affected by changes in consumer confidence,
preferences and attitudes, as well as general economic factors. Failure to
respond to changing market trends could adversely affect the Companys
business, financial condition or results of operations. In addition, the
failure of the Company to react to changes in consumer preferences and
technological advancements could adversely affect the value of the Companys
inventory and the Companys business, financial condition or results of
operations. The volatility of the Companys share price and potential fluctuations in
quarterly results could have an adverse impact on the Companys financial
results and growth prospects. The Company believes that various factors such
as general economic conditions and changes or volatility in the financial
markets, changing market conditions in the rent-to-own industry and quarterly
or annual variations in the financial results of other public companies that
are part of the rent-to-own industry, all of which may be unrelated to the
Companys performance, could cause the market price of the Companys Common
Stock to fluctuate substantially. Additionally, quarterly revenues and
operating income are difficult to forecast. The Companys expense levels are
based, in part, on its expectations as to future revenues. If revenue levels
are below expectations, the Company may be unable or unwilling to reduce
expenses proportionately and operating results would likely be adversely affected. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is 7




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Bestway, Inc.
    
    FORM 10-K
 likely that in some
future quarter the Companys operating results will differ from the
expectations of public market analysts and investors. In such event, the market
price of the Common Stock would likely be materially adversely affected. Litigation involving the Company could have an adverse impact on the
Companys financial results and growth prospects. Due to the consumer-oriented
nature of the rent-to-own industry and the application of certain laws and
regulations, industry participants may be named as defendants in litigation
alleging violations of state laws and regulations and consumer tort law,
including fraud. Many of these actions involve alleged violations of consumer
protection laws. In the event a significant judgment is rendered in the future
against the Company or others within the rent-to-own industry in connection
with any such litigation, such judgment could have a material adverse affect on
the Companys business, financial condition or results of operations. Government regulation of the rent-to-own industry could have an adverse
impact on the Companys financial results and growth prospects. Forty-seven
states have enacted laws specifically regulating rental-purchase transactions,
including all of the states in which the Company operates. These laws generally
require certain contractual and advertising disclosures and also provide
varying levels of substantive consumer protection, such as requiring a grace
period for late fees and contract reinstatement rights in the event a
rental-purchase agreement is terminated. If the Company acquires or opens new
stores in states in which it does not currently operate, the Company will
become subject to the rental-purchase laws of such states, if any.
Furthermore, there can be no assurance that new or revised rental-purchase laws
will not have a material adverse affect on the Companys business, financial
condition and results of operations. Operating a public company involves substantial costs to comply with the
reporting obligations under federal securities laws which are continuing to
increase as provisions of the Sarbanes Oxley Act of 2002 are implemented. The
Company may not reach sufficient size to justify the costs of public reporting
and compliance. If the Company decides to become a private company at some
point as a result of such costs, then the Companys stockholders may lose their
ability to sell their shares or to sell them at a premium over what they paid
for them. While the Company believes that it currently has adequate control
structures in place, the Company remains exposed to increased costs and
potential risks from recent legislation requiring companies to evaluate
controls under Section 404 of the Sarbanes Oxley Act of 2002. 8




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Bestway, Inc.
    
    FORM 10-K
 
 ITEM 2. PROPERTIES All store locations, with the exception of one location, and the corporate
office facility in Dallas, Texas are leased. Store facilities typically are
showroom locations of approximately 4,100 square feet in retail centers on
heavy traffic thoroughfares near customers residences or work places. Almost
all available rental merchandise is kept in the showroom area which comprises
the majority of the available square footage. Store location is considered
critical to the success of each store. The Companys store locations by state, at July 31, 2004, are as follows: Number ofState
    
    StoresAlabama
    
    
    22Arkansas
    
    
    6Georgia
    
    
    3Mississippi
    
    
    11North Carolina
    
    
    12South Carolina
    
    
    2Tennessee
    
    
    13Total at July 31, 2004
    
    
    69
 
 ITEM 3. LEGAL PROCEEDINGS In July 2003, the County Court of the Second Judicial District of Bolivar
County, Mississippi entered final judgment against the Company in a lawsuit
brought by a former lessor. The lessor alleged that the Company had breached
the terms and conditions of a lease agreement for a store location in
Mississippi when the Company vacated the premises and failed to properly notify
the lessor of its intentions not to exercise an option extending the original
lease term. The judgment against the Company was for approximately $70,000,
including attorneys fees. The Company has appealed the judgment, filed brief
and record excerpts, challenged late filings of the lessor and was denied a
request to render judgment in favor of the Company. While the Company believes
that it has a meritorious defense to the plaintiffs claims, the Company has
accrued the $70,000 judgment. In December 2001, the Company settled a lawsuit brought by approximately
fifteen plaintiffs in the Billings Division of the United States District Court
for the State of Montana who have asserted claims against a number of
defendants, including the Company, who were involved in the production of oil
and gas or who owned oil and gas facilities in Montana. Plaintiffs alleged
that the Company is the successor in interest to Amarco Resources Corporation,
which, in the past, owned interests in two wells in the oil field. One of
these wells is an alleged source of contamination of groundwater. The
settlement was for approximately $130,000, including attorneys fees. There are no other legal proceedings other than ordinary routine
litigation incidental to the Companys business to which the Company or any of
its subsidiaries is a party or to which any of its property is subject. To the
Companys knowledge, no other litigation has been threatened against the
Company or any of its subsidiaries other than routine actions and
administrative proceedings, which in the aggregate, are not expected to have a material adverse effect on the
business or financial condition of the Company. 9




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Bestway, Inc.
    
    FORM 10-K
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Companys Common Stock is publicly traded on the Nasdaq Small-Cap
Market under the symbol BSTW. The following table sets forth, for the periods indicated, the high and
low sales price per share of the Common Stock as reported on the Nasdaq
Small-Cap Market. Year ended July 31, 2004
    
    Year ended July 31, 2003High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    17.60
    
    
    $
    11.65
    
    
    $
    10.50
    
    
    $
    6.60Second Quarter
    
    $
    16.05
    
    
    $
    11.75
    
    
    $
    12.03
    
    
    $
    6.01Third Quarter
    
    $
    15.15
    
    
    $
    10.70
    
    
    $
    20.25
    
    
    $
    10.30Fourth Quarter
    
    $
    15.00
    
    
    $
    10.65
    
    
    $
    16.85
    
    
    $
    12.11
 At July 31, 2004, there were 366 stockholders of record of the Companys
Common Stock. The Company has not paid cash dividends on its Common Stock since its
inception and intends to continue to retain earnings for operations. In
addition, the Company is a party to a loan agreement which prohibits the
payment of cash dividends on its Common Stock. 10




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Bestway, Inc.
    
    FORM 10-K
 Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of July 31, 2004 regarding
compensation plans (including individual compensation arrangements) under which
equity securities of the Company are authorized for issuance. See Note 9 to
the Consolidated Financial Statements for information regarding the material
features of these plans. Number ofsecurities remainingNumber of
    
    
    
    
    
    available forsecurities to be
    
    
    
    
    
    future issuanceissued upon
    
    
    
    
    
    under equityexercise of
    
    
    
    
    
    compensation plansoutstanding
    
    Weighted average
    
    (excluding securitiesoptions, warrants
    
    exercise price of
    
    reflected inand rights
    
    outstanding options,
    
    initial column)Plan category
    
    as of July 31, 2004
    
    warrants and rights
    
    as of July 31, 2004Equity compensation
plans approved by security
shareholders
    
    
    280,145
    
    
    $
    6.86
    
    
    
    64,955Equity compensation
plans not approved by
security shareholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    280,145
    
    
    $
    6.86
    
    
    
    64,955
 
 ITEM 6. SELECTED FINANCIAL DATA Fiscal Year Ended July 31,2004
    
    2003 (1)
    
    2002
    
    2001
    
    2000Revenues
    
    $
    37,916,130
    
    
    $
    35,506,828
    
    
    $
    33,533,928
    
    
    $
    35,913,046
    
    
    $
    34,909,758Income (loss) before income taxes
    
    
    597,169
    
    
    
    70,337
    
    
    
    (965,012
    )
    
    
    (28,297
    )
    
    
    1,068,199Current income tax (benefit) expense
    
    
    76,078
    
    
    
    (158,292
    )
    
    
    (116,109
    )
    
    
    
    
    
    
    180,845Deferred income tax
expense (benefit)
    
    
    155,290
    
    
    
    181,041
    
    
    
    (106,824
    )
    
    
    97,488
    
    
    
    397,413Net income (loss)
    
    
    365,801
    
    
    
    47,588
    
    
    
    (742,079
    )
    
    
    (125,785
    )
    
    
    489,941Basic net income (loss) per share
    
    
    0.22
    
    
    
    0.03
    
    
    
    (0.45
    )
    
    
    (0.07
    )
    
    
    0.28Diluted net income (loss) per share
    
    
    0.20
    
    
    
    0.03
    
    
    
    (0.45
    )
    
    
    (0.07
    )
    
    
    0.28Net cash flows provided by
operating activities
    
    
    12,722,041
    
    
    
    12,112,730
    
    
    
    10,210,071
    
    
    
    11,661,342
    
    
    
    12,759,621Total assets
    
    
    19,375,622
    
    
    
    20,002,168
    
    
    
    21,304,413
    
    
    
    24,312,260
    
    
    
    25,617,543Notes payable
    
    
    8,433,907
    
    
    
    9,451,299
    
    
    
    10,967,192
    
    
    
    13,081,731
    
    
    
    13,294,945Total stockholders equity
    
    
    8,718,534
    
    
    
    8,318,793
    
    
    
    8,123,715
    
    
    
    8,973,601
    
    
    
    9,174,511
  (1)
    
    Effective August 1, 2002, in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles(SFAS 142),
and the Company ceased goodwill amortization. 11




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis should be read in conjunction with
the information set forth under Item 6, Selected Financial Data, and the
financial statements of the Company and the accompanying notes thereto included
elsewhere in this report. The Company currently operates 69 rental-purchase stores located in seven
states. The number of stores operated by the Company has increased from 35 as
of July 31, 1995 to a high of 83 as of July 31, 2001 to 69 as of July 31, 2004. Our stores offer quality, name brand, durable products, such as home
electronics, household appliances, computers and furniture, under flexible
rental-purchase agreements that typically allow the customer to obtain
ownership of the merchandise at the conclusion of an agreed upon rental period
(ranging from 12 to 30 months). Customers have the option to return the
product at any time without further obligation, and also have the option to
purchase the product at any time during the rental period. We are currently focusing our strategic efforts to improve profitability by:  
    
    driving same store sales growth through targeted marketing;
    
    training and developing our associates to execute Bestway programs; and
    
    expansion through new store openings and aggressively
pursue acquisitions that compliment our existing stores and meet
our return on investment criteria. 12




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 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. Year Ended July 31,2004
    
    2003Revenues:Rental and fee income
    
    
    95.5
    %
    
    
    94.7
    %Sales of merchandise
    
    
    4.5
    
    
    
    5.3100.0
    %
    
    
    100.0
    %Cost and operating expenses:Depreciation and amortization:Rental merchandise
    
    
    19.8
    
    
    
    19.3Other
    
    
    3.2
    
    
    
    4.2Cost of merchandise sold
    
    
    3.3
    
    
    
    4.7Salaries and wages
    
    
    29.1
    
    
    
    29.4Advertising
    
    
    4.6
    
    
    
    4.6Occupancy
    
    
    6.6
    
    
    
    6.7Other operating expenses
    
    
    30.3
    
    
    
    28.9Interest expense
    
    
    1.4
    
    
    
    2.0Loss on sale of property and equipment
    
    
    0.1
    
    
    
    98.4
    
    
    
    99.8Income before income taxes
    
    
    1.6
    
    
    
    0.2Current income tax (benefit)
    
    
    0.2
    
    
    
    (0.4
    )Deferred income tax expense
    
    
    0.4
    
    
    
    0.5Net income
    
    
    1.0
    %
    
    
    0.1
    %
 13




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Results of Operations for the Fiscal Year Ended July 31, 2004 Compared to the
Fiscal Year Ended July 31, 2003 Total revenue increased $2,409,302, or 6.8% to $37,916,130 for the fiscal
year ended July 31, 2004 from $35,506,828 for the fiscal year ended July 31,
2003. The increase was primarily attributable to increased revenues in same
stores. The Company receives rental and fee revenue from various products,
including home electronics, household appliances, computers and furniture. In
fiscal year 2004, approximately 16% of the Companys rental and fee revenue was
derived from appliances, 31% from furniture, 30% from electronics, 9% from
computers, and 14% from various services and charges to rental customers
including reinstatement fees, preferred customer membership fees and liability
waiver fees. Revenue from same stores increased $2,214,812, or 6.4%. Same store
revenues represent those revenues earned in stores that were opened by the
Company for the entire twelve months ended July 31, 2004 and 2003. The Company
purchased all the rental agreements of two store locations and consolidated
them with two existing stores in the third quarter of fiscal year 2004. The
improvement in same store revenue was primarily attributable to the success of
our efforts on improving store operations through increasing our customer base
and increasing the average price per unit on rent as a result of upgrading our
rental merchandise. Sales of merchandise decreased $175,990, or 9.3% to
$1,712,831 for the fiscal year ended July 31, 2004 from $1,888,821 for the
fiscal year ended July 31, 2003. The decrease in sales of merchandise is
primarily attributable to a decrease in the number of items sold in the fiscal
year ended July 31, 2004 from the number of items sold in the fiscal year ended
July 31, 2003, resulting from the Company eliminating lower-cost, lower-margin
merchandise from our product mix in 2003. In fiscal year 2003, the Company implemented strategies to improve
profitability, including eliminating lower-cost, lower-margin merchandise from
our product mix, focusing on higher revenue-generating merchandise, investing
in training and developing our people and implementing a more aggressive and
targeted marketing campaign. As a result, total costs and operating expenses
increased $1,882,470, or 5.3% to $37,318,961 for the fiscal year ended July 31,
2004 from $35,436,491 for the fiscal year ended July 31, 2003 and decreased
1.4% as a percentage of total revenue to 98.4% from 99.8%. Depreciation of rental merchandise increased $622,624, or 9.1% to
$7,490,990 for the fiscal year ended July 31, 2004 from $6,868,366 for the
fiscal year ended July 31, 2003. This increase was primarily attributable to
an increase in rental and fee income. Depreciation of rental merchandise
expressed as a percentage of total revenue increased to 19.8% in 2004 from
19.3% in 2003. This increase in 2004 was primarily a result of pricing
reductions made during the fourth quarter of 2004. Other depreciation and
amortization decreased $252,163, or 17.0% to $1,228,166 for the fiscal year
ended July 31, 2004 from $1,480,329 for the fiscal year ended July 31, 2003.
Other depreciation and amortization expressed as a percentage of total revenue
decreased 1.0% to 3.2% from 4.2% primarily due to older vehicles fully
depreciated are replaced by new leased vehicles and the full amortization of
certain non-competes. Costs of merchandise sold decreased $440,363, or 26.2% to $1,241,408 for
the fiscal year ended July 31, 2004 from $1,681,771 for the fiscal year ended
July 31, 2003. The decrease in cost of merchandise sold was primarily
attributable to better inventory management, which increased the effective
inventory life, resulting in fewer items cash sold and improved margins. 14




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Salaries and wages increased $620,218, or 5.9% to $11,053,364 for the
fiscal year ended July 31, 2004 from $10,433,146 for the fiscal year ended July
31, 2003. Salaries and wages expressed as a percentage of total revenue
decreased .3% to 29.1% for the fiscal year ended July 31, 2004 from 29.4% for
the fiscal year ended July 31, 2003. Store level labor costs increased due to
additional store staffing and higher pay rates, as well as increased corporate
level salaries and bonus costs. Advertising expense increased $76,411, or 4.6% to $1,725,515 for the
fiscal year ended July 31, 2004 from $1,649,104 for the fiscal year ended July
31, 2003 and remained constant at 4.6% as a percentage of total revenue. The
increase is attributable to the Companys investment in implementing a more
aggressive and targeted marketing campaign, offset by a decrease in print
costs. Occupancy expense increased $117,002, or 4.9% to $2,500,809 for the fiscal
year ended July 31, 2004 from $2,383,807 for the fiscal year ended July 31,
2003. This increase was primarily attributable to expansions or relocations of
certain stores based on targeted market analysis. Occupancy expense as a
percentage of total revenue decreased .1% to 6.6% from 6.7%. Other operating expenses increased $1,245,293, or 12.1% to $11,500,903 for
the fiscal year ended July 31, 2004 from $10,255,610 for the fiscal year ended
July 31, 2003 and increased 1.4% as a percentage of total revenue to 30.3% from
28.9%. The increase was primarily attributable to a number of factors,
including increased store level recruiting costs, vehicle fuel and lease costs,
as well as increased legal and audit expense. Interest expense decreased $148,199, or 21.3% to $545,986 for the fiscal
year ended July 31, 2004 from $694,185 for the fiscal year ended July 31, 2003
and decreased .6% as a percentage of total revenue to 1.4% from 2.0%. The
decrease was primarily attributable to decreased indebtedness and a lower
effective interest rate. Income before income taxes increased $526,832, or 749.0% to $597,169 for
the fiscal year ended July 31, 2004 from $70,337 for the fiscal year ended July
31, 2003. Income before income taxes as a percentage of total revenue
increased 1.4% for the fiscal year ended July 31, 2004 to 1.6% from .2% for the
fiscal year ended July 31, 2003. The increase is primarily attributable to
growth in total revenue, offset by an increase in total cost and operating
expenses, which resulted in a favorable cost-benefit relationship. 15




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Results of Operations for the Fiscal Year Ended July 31, 2003 Compared to the
Fiscal Year Ended July 31, 2002 Total revenue increased $1,972,900, or 5.9% to $35,506,828 for the fiscal
year ended July 31, 2003 from $33,533,928 for the fiscal year ended July 31,
2002. The increase was primarily attributable to increased revenues in same
stores and an increase in sales of merchandise. Such increases were offset by
the consolidation or sale of fourteen store locations in fiscal year 2002.
Same store revenues represent those revenues earned in stores that were
operated by the Company for the entire twelve months ended July 31, 2003 and
2002. The Company receives rental revenue from various products, including home
electronics, household appliances, computers and furniture. In fiscal year
2003, approximately 16% of the Companys rental revenue was derived from
appliances, 26% from furniture, 30% from electronics, 9% from computers, 2%
from various other products and 17% from various services and charges to rental
customers, including reinstatement fees, preferred customer membership fees and
liability waiver fees. Revenue from same stores increased $3,806,232, or 12.0%. Same store
revenues represent those revenues earned in stores that were operated by the
Company for the entire twelve months ended July 31, 2003 and 2002. The
improvement was primarily attributable to an increase in the number of
customers served, the number of agreements on rent, as well as revenue earned
per agreement on rent. Of the increase in revenue from same stores, sales of
merchandise increased $271,115 or 16.8% to $1,888,821 from $1,617,706 in 2002.
The increase in sales of merchandise was primarily attributable to an increase
in the number of items sold in 2003 from the number of items sold in 2002 due
to the Company eliminating lower-cost, lower-margin merchandise from our
product mix. Revenue decreased $1,833,332 due to the consolidation or sale of
fourteen store locations in 2002. Total costs and operating expenses increased $937,551 or 2.7% to
$35,436,491 for the fiscal year ended July 31, 2003 from $34,498,940 for the
fiscal year ended July 31, 2002 and decreased 3.1% as a percentage of total
revenue to 99.8% from 102.9%. In fiscal year 2002, the Company sold, or
consolidated fourteen stores, announced the appointment of a new President and
Chief Executive Officer and incurred approximately $1,140,000 associated with
the changes in our executive management team, write-offs of rental merchandise
and discontinuance of jewelry as a product offering. In fiscal year 2003, the
Company implemented strategies to improve profitability, including eliminating
lower-cost, lower-margin merchandise from our product mix, focusing on higher
revenue-generating merchandise, investing in training and developing our people
and implementing a more aggressive and targeted marketing campaign. Depreciation of rental merchandise increased $196,882, or 3.0% to
$6,868,366 for the fiscal year ended July 31, 2003 from $6,671,484 for the
fiscal year ended July 31, 2002 and decreased .6% as a percentage of total
revenue to 19.3% from 19.9%. Depreciation of rental merchandise expressed as
a percentage of rental income excluding fees decreased .8% to 24.2% from 25.0%
primarily due to improved product margins. Other depreciation and amortization
decreased $351,317, or 19.2% to $1,480,329 for the fiscal year ended July 31,
2003 from $1,831,646 for the fiscal year ended July 31, 2002 and decreased 1.3%
as a percentage of total revenue to 4.2% from 5.5% primarily due to the
application of SFAS 142. Under SFAS 142, amortization of goodwill ceased
effective August 1, 2002. 16




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Cost of merchandise sold increased $406,069, or 31.8% to $1,681,771 for
the fiscal year ended July 31, 2003 from $1,275,702 for the fiscal year ended
July 31, 2002. The increase in cost of merchandise sold was primarily
attributable to an increase in the number of items sold in the year ended July
31, 2003. During the years ended July 31, 2003 and 2002, the Companys margin
related to merchandise sales was income of $207,050 and $342,004, respectively.
The Companys decrease in 2003 was the result of eliminating lower-cost,
lower-margin merchandise from our product mix by lowering cash purchase prices
on products identified as generating margins lower than industry norms. Salaries and wages increased $575,376, or 5.8% to $10,433,146 for the
fiscal year ended July 31, 2003 from $9,857,770 for the fiscal year ended July
31, 2002 and as a percentage of total revenue remained consistent at 29.4%.
The increase was primarily attributable to increased same store level labor
costs of $1,320,640 due to the Company increasing minimum staffing levels from
three to four associates to better serve the customer, and investing in
training and developing store personnel. Such increases were offset by
salaries and wages associated with the consolidation or sale of fourteen stores
in 2002 and the payment of certain amounts pursuant to a separation agreement
related to the Companys former President and Chief Operating Officer in 2002. Advertising expense increased $518,569, or 45.8% to $1,649,104 for the
fiscal year ended July 31, 2003 from $1,130,535 for the fiscal year ended July
31, 2002 and increased 1.2% as a percentage of total revenue to 4.6% from 3.4%.
The increase is primarily attributable to increased same store level
advertising costs of $722,836 due to the Companys investment in implementing a
more aggressive and targeted marketing campaign, which was offset by the
consolidation or sale of fourteen stores in 2002. Occupancy expense decreased $152,264, or 6.0% to $2,383,807 for the fiscal
year ended July 31, 2003 from $2,536,071 for the fiscal year ended July 31,
2002 due to the consolidation or sale of fourteen stores in 2002. Occupancy
expense as a percentage of total revenue decreased .8% to 6.7% from 7.5%
primarily due to the increase in same store revenue. Other operating expenses decreased $71,165 or .7% to $10,255,610 for the
fiscal year ended July 31, 2003 from $10,326,775 for the fiscal year ended July
31, 2002 and decreased 1.9% as a percentage of total revenue to 28.9% from
30.8%. The decrease was attributable to the consolidation or sale of fourteen
stores in 2002 and approximately $739,000 due to write-offs of rental
merchandise, including approximately $315,000 associated with the Companys
decision to discontinue carrying jewelry in its product selection in 2002. The
decrease was offset by increased same store level other operating expenses of
$913,215. The increase in same store operating expenses was attributable to a
number of factors, including increased write-offs and repairs of rental
merchandise, increased insurance costs and increased store level recruiting
costs. Interest expense decreased $100,248, or 12.6% to $694,185 for the fiscal
year ended July 31, 2003 from $794,433 for the fiscal year ended July 31, 2002
and decreased .4% as a percentage of total revenue to 2.0% from 2.4%. The
decrease in interest is primarily attributable to decreased indebtedness and a
lower effective interest rate. Loss on sale of assets decreased $50,122, or 100.0% from the twelve months
ended July 31, 2002. The Company entered into several transactions in the year
ended July 31, 2002 to sell under-performing stores and as a result recognized
a net loss of $50,122 on these store sale transactions. 17




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Income before income taxes increased $1,035,349, or 107.3% to income of
$70,337 for the year ended July 31, 2003 compared to a loss of $965,012 for the
fiscal year ended July 31, 2002. Income before income taxes as a percentage of
total revenue increased to income of .2% for the year ended July 31, 2003
compared to a loss of 2.9% in 2002. This increase was primarily the result of
approximately $1,140,000 associated with changes in our executive management
team, write-offs of rental merchandise and the discontinuance of jewelry as a
product selection in 2002. The Companys operating philosophy initiated at the
beginning of the year was to eliminate lower-cost, lower-margin merchandise
from our product mix, focus on higher revenue-generating merchandise, and
increase the Companys investment in store personnel and advertising. Financial Condition, Liquidity and Capital Resources For the fiscal year ended July 31, 2004, the Companys net cash flows from
operating activities were $12,722,041 as compared to $12,112,730 for the fiscal
year ended July 31, 2003. The increase in cash provided by operations was
primarily due to increased revenues and decreased outflow for working capital
commitments. For the fiscal year ended July 31, 2004, the Companys net cash flows used
in investing activities were $11,351,982 as compared to $10,940,243 for the
fiscal year ended July 31, 2003. The Companys investing activities reflects a
$317,167 increase in property and equipment primarily used for the remodel or
relocation of certain stores, as well as $50,641 used for the purchase of all
rental agreements of two stores. For the fiscal year ended July 31, 2004, the Companys net cash flows used
in financing activities were $983,452 as compared to $1,372,793 for the fiscal
year ended July 31, 2003. The decrease in financing activities principally
reflects decreased repayments of the Companys debt. On October 1, 2003 and February 25, 2004, the Company amended and restated
its Revolving Credit Loan Agreement with its lender. In the amendments, the
lender extended the maturity date from May 31, 2004 to May 31, 2006, modified
the minimum effective tangible net worth provision, modified the maximum
debt-to-effective tangible net worth provision, eliminated the idle inventory
covenant, and modified the interest rate from prime plus 1.5% to
prime plus .75%. The amendments added a maximum year-to-date acquisition covenant. On October 1, 2003 and February 25, 2004, the Company amended the
subordinated note payable to a limited partnership, which is a stockholder of
the Company, dated October 26, 2001. The amendments extended the maturity date
from May 31, 2004 to May 31, 2006. On August 13, 2004, the Company further amended and restated its Revolving
Credit Loan Agreement with its lender. In the amendment, the lender extended
the maturity date from May 31, 2006 to May 31, 2007 and modified certain
covenants relating to Interest Coverage Ratio and Profitability, as well as
increased the aggregate amount for Capital Expenditures and Acquisitions. On August 13, 2004, the Company further amended the subordinated note
payable to a limited partnership, which is a stockholder of the Company, dated
October 26, 2001. The amendment extended the maturity date from May 31, 2006 to
May 31, 2007. The Companys capital requirements relate primarily to purchasing rental
merchandise and working capital requirements for new and existing stores. The
Companys primary source of liquidity and capital are from operations and
borrowings. For the fiscal year ended July 31, 2004, the Company 18




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 has generated
sufficient cash flows from operations to meet its operating and investing
needs. Management believes that operating cash flows combined with available
line of credit of $6,100,000 under the Revolving Credit Loan Agreement provide
adequate resources to meet the Companys future cash obligations through at
least the next twelve months. Disclosures about Contractual Obligations and Commercial Commitments as of July
31, 2004: Operating
    
    NotesYear Ended July 31,
    
    Leases
    
    Payable (1)
    
    Total2005
    
    $
    2,435,549
    
    
    $
    18,860
    
    
    $
    2,454,4092006
    
    
    2,071,474
    
    
    
    8,415,047
    
    
    
    10,486,5212007
    
    
    1,610,159
    
    
    
    
    
    
    
    1,610,1592008
    
    
    1,285,935
    
    
    
    
    
    
    
    1,285,9352009
    
    
    661,234
    
    
    
    
    
    
    
    661,234Thereafter
    
    
    263,784
    
    
    
    
    
    
    
    263,784$
    8,328,135
    
    
    $
    8,433,907
    
    
    $
    16,762,042
 (1) On August 13, 2004, the Company amended and restated its Revolving Credit
Loan Agreement and subordinated notes payable to extend the maturity date to
May 31, 2007. Consequently, the obligations under these agreements are due in
the year ended July 31, 2007. The Company has guarantees under certain operating leases, amounting to
$424,740 as of July 31, 2004, for the residual values of vehicles at the end of
the respective operating lease periods. Based upon the expectation that none
of these leased assets will have a residual value at the end of the lease term
that is materially less than the value specified in the related operating lease
agreement, the Company does not believe it is probable that it will be required
to fund any amounts under the terms of these guarantee arrangements.
Accordingly, no accruals have been recognized for these guarantees. Related Party Transactions Interest expense relating to notes payable to affiliates amounted to
$244,001, $243,335 and $242,668 for the years ended July 31, 2004, 2003 and
2002, respectively. As of July 31, 2002, the Company had advanced $1,000,000 to the President
and Chief Executive Officer in the form of a promissory note (the Note). The
Note matures on January 1, 2008 and bears interest at the lesser of i) the
Applicable Federal Rate or ii) the maximum nonusurious rate as defined in the
Note. Per the terms of the Note, the Company will forgive one-fifth of the
principal and all related accrued interest on December 31 of each year
beginning in 2003 through 2007. If the President and Chief Executive Officers
employment is terminated with cause by the Company or without good reason by
the President and Chief Executive Officer all outstanding unearned principal
and accrued interest must be repaid. As of July 31, 2004, $683,333 of the Note
remained outstanding. Critical Accounting Policies The preparation of the Companys financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions relating to the reporting 19




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. The Company bases its estimates on historical experience
and on various other assumptions or conditions that are believed to be
reasonable under the circumstances. Actual results could differ from those
estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. The Company believes that
the following critical accounting policies involve significant judgments and
estimates used in the preparation of our consolidated financial statements. Rental merchandise, related rental revenue and depreciation Rental merchandise is rented to customers pursuant to rental agreements
which provide for either weekly or monthly rental terms with rental payments
for the first week or month collected in advance. Rental revenue is recognized
as collected since at the time of collection the rental merchandise has been
placed in service and costs of installation and delivery have been incurred.
Rental agreements generally cover a period of 12 to 30 months with a majority
of rental agreements specifying 18 months. At the end of each rental period,
the customer can renew the rental agreement, return the merchandise with no
obligation, or purchase the merchandise by exercising their early purchase
option. Amounts received from such sales are included in revenue when received.
Past due or stolen merchandise is expensed generally within three months from
the due date. The Company receives rental revenue from various products
including home electronics, furniture, appliances and computers. Merchandise rented to customers, or available for rent, is recorded at
cost net of accumulated depreciation, which equals the carrying amount, and is
classified in the consolidated balance sheets as rental merchandise.
Merchandise rented to customers is depreciated on the income-forecast basis
over the term of the rental agreement ranging from 12 to 30 months. When not on
rent, merchandise is not depreciated. Intangible assets The Company continually evaluates the propriety of the carrying amount of
goodwill and other intangibles based on the estimated future undiscounted cash
flows of the related investment, as well as the amortization period to
determine whether current events and circumstances warrant adjustments to
carrying value and/or revised estimates of useful lives. At this time, the
Company believes no impairment of the goodwill and other intangibles has
occurred and that no reduction of the estimated useful lives is warranted. 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. Cautionary Statement This Report on Form 10-K and the foregoing Managements Discussion and
Analysis of Financial Condition and Results of Operations contains various
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Companys Annual Report to Shareholders, any
Report on Form 10-Q or Form 8-K or any other written or oral statements made by
or on behalf of the Company may include 20




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 forward-looking statements.
Forward-looking statements represent the Companys expectations or beliefs
concerning future events. Any forward-looking statements made by or on behalf
of the Company are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to, (i) the ability of the
Company to open or acquire additional rental-purchase stores on favorable
terms, (ii) the ability of the Company to improve the performance of such
acquired stores and to integrate such opened or acquired stores into the
Companys operations, (iii) the impact of state and federal laws regulating or
otherwise affecting rental-purchase transactions, (iv) the impact of general
economic conditions in the United States and (v) the impact of terrorist
activity, threats of terrorist activity and responses thereto on the economy in
general and the rental-purchase industry in particular. Undue reliance should
not be placed on any forward-looking statements made by or on behalf of the
Company as such statements speak only as of the date made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, the occurrence of future
events or otherwise. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its Revolving Credit Loan Agreement. At
July 31, 2004, the Company had $5,400,000 outstanding on its Revolving Credit
Loan Agreement at an interest rate of prime plus .75% and the fair value of the
obligation outstanding approximates its related carrying value because the
obligation bears interest at the current market rate. 21




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 
 ITEM 8.  Financial Statements Page(s)Report of Independent Registered Public Accounting Firm
    
    
    23Financial Statements:Consolidated Balance Sheets as of July 31, 2004 and 2003
    
    
    24Consolidated Statements of Operations for the years ended
July 31, 2004, 2003 and 2002
    
    
    25Consolidated Statements of Cash Flows for the years ended
July 31, 2004, 2003 and 2002
    
    
    26Consolidated Statements of Stockholders Equity for the years
ended July 31, 2004, 2003 and 2002
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
 22




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of
Bestway, Inc. In our opinion, the consolidated financial statements listed in the
accompanying index presents fairly, in all material respects, the financial
position of Bestway, Inc. and its subsidiaries at July 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the three
years in the period ended July 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
connection with its adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective August 1, 2002. /s/ PricewaterhouseCoopers LLP Dallas, Texas
October 15, 2004 23




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-KConsolidated Balance Sheets
 July 31,2004
    
    2003AssetsCash and cash equivalents
    
    $
    692,476
    
    
    $
    305,869Prepaid expenses
    
    
    208,447
    
    
    
    189,882Taxes receivable
    
    
    
    
    
    
    180,976Deferred income taxes
    
    
    148,232
    
    
    
    302,034Other assets
    
    
    35,172
    
    
    
    45,026Rental merchandise, at cost
    
    
    22,926,368
    
    
    
    22,488,380less accumulated depreciation
    
    
    8,980,273
    
    
    
    8,630,31613,946,095
    
    
    
    13,858,064Property and equipment, at cost
    
    
    8,594,130
    
    
    
    8,702,135less accumulated depreciation
    
    
    6,358,145
    
    
    
    5,969,3372,235,985
    
    
    
    2,732,798Employee advance
    
    
    683,333
    
    
    
    855,556Non-competes, net of amortization
    
    
    200,587
    
    
    
    306,668Goodwill, net of amortization
    
    
    1,225,295
    
    
    
    1,225,295Total assets
    
    $
    19,375,622
    
    
    $
    20,002,168Liabilities and Stockholders EquityAccounts payable
    
    $
    606,009
    
    
    $
    751,328Accrued interest - related parties
    
    
    20,667
    
    
    
    20,667Other accrued liabilities
    
    
    1,543,425
    
    
    
    1,460,081Income tax payable
    
    
    53,080
    
    
    
    Notes payable-related parties
    
    
    3,000,000
    
    
    
    3,000,000Notes payable-other
    
    
    5,433,907
    
    
    
    6,451,299Commitments and contingencies (Notes 7 and 10)Stockholders equity:Preferred stock, $10.00 par value,
1,000,000 authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 5,000,000 authorized,
1,787,617 issued at July 31, 2004 and 1,782,517
issued at
July 31, 2003
    
    
    17,876
    
    
    
    17,825Paid-in capital
    
    
    16,332,551
    
    
    
    16,298,662Less treasury stock, at cost, 104,345 at July 31,
2004 and
July 31, 2003
    
    
    (563,083
    )
    
    
    (563,083
    )Accumulated deficit
    
    
    (7,068,810
    )
    
    
    (7,434,611
    )Total stockholders equity
    
    
    8,718,534
    
    
    
    8,318,793Total liabilities and stockholders equity
    
    $
    19,375,622
    
    
    $
    20,002,168
 See accompanying notes to consolidated financial statements. 24




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-KConsolidated Statements of Operations
 Fiscal Years Ended July 31,2004
    
    2003
    
    2002Revenues:Rental and fee income
    
    $
    36,203,299
    
    
    $
    33,618,007
    
    
    $
    31,916,222Sales of merchandise
    
    
    1,712,831
    
    
    
    1,888,821
    
    
    
    1,617,70637,916,130
    
    
    
    35,506,828
    
    
    
    33,533,928Cost and operating expenses:Depreciation and amortization:Rental merchandise
    
    
    7,490,990
    
    
    
    6,868,366
    
    
    
    6,671,484Other
    
    
    1,228,166
    
    
    
    1,480,329
    
    
    
    1,831,646Cost of merchandise sold
    
    
    1,241,408
    
    
    
    1,681,771
    
    
    
    1,275,702Salaries and wages
    
    
    11,053,364
    
    
    
    10,433,146
    
    
    
    9,857,770Advertising
    
    
    1,725,515
    
    
    
    1,649,104
    
    
    
    1,130,535Occupancy
    
    
    2,500,809
    
    
    
    2,383,807
    
    
    
    2,536,071Other operating expenses
    
    
    11,500,903
    
    
    
    10,255,610
    
    
    
    10,326,775Interest expense
    
    
    545,986
    
    
    
    694,185
    
    
    
    794,433Loss (gain) on sale of property and
equipment
    
    
    31,820
    
    
    
    (9,827
    )
    
    
    24,402Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    50,12237,318,961
    
    
    
    35,436,491
    
    
    
    34,498,940Income (loss) before income taxes:
    
    
    597,169
    
    
    
    70,337
    
    
    
    (965,012
    )Current income tax (benefit)
    
    
    76,078
    
    
    
    (158,292
    )
    
    
    (116,109
    )Deferred income tax expense (benefit)
    
    
    155,290
    
    
    
    181,041
    
    
    
    (106,824
    )Net income (loss)
    
    $
    365,801
    
    
    $
    47,588
    
    
    $
    (742,079
    )Basic net income (loss) per share
    
    $
    0.22
    
    
    $
    0.03
    
    
    $
    (0.45
    )Diluted net income (loss) per share
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    (0.45
    )Weighted average common shares outstanding
    
    
    1,681,289
    
    
    
    1,669,955
    
    
    
    1,648,322Diluted weighted average common shares
outstanding
    
    
    1,823,286
    
    
    
    1,774,409
    
    
    
    1,648,322
 See accompanying notes to consolidated financial statements. 25




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-KConsolidated Statements Of Cash Flows
 Fiscal Years Ended July 31,2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    365,801
    
    
    $
    47,588
    
    
    $
    (742,079
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    8,719,156
    
    
    
    8,348,695
    
    
    
    8,503,129Net book value of rental units retired
    
    
    2,967,352
    
    
    
    3,349,494
    
    
    
    3,780,825Non-cash compensation expense
    
    
    172,223
    
    
    
    137,723
    
    
    
    Loss (gain) on sale of property and equipment
    
    
    31,820
    
    
    
    (9,827
    )
    
    
    24,402Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    50,122Deferred income taxes
    
    
    155,290
    
    
    
    181,041
    
    
    
    (106,824
    )Changes in operating assets and liabilities other
than cash:Prepaid expenses
    
    
    (18,565
    )
    
    
    123,043
    
    
    
    (114,320
    )Taxes receivable
    
    
    180,976
    
    
    
    (21,391
    )
    
    
    (26,235
    )Taxes payable
    
    
    53,080
    
    
    
    
    
    
    
    Employee advance
    
    
    
    
    
    
    
    
    
    
    (988,889
    )Other assets
    
    
    9,854
    
    
    
    7,006
    
    
    
    (4,397
    )Accounts payable
    
    
    1,710
    
    
    
    10,751
    
    
    
    (79,337
    )Other accrued liabilities
    
    
    83,344
    
    
    
    (61,393
    )
    
    
    (86,326
    )Net cash flows provided by operating
activities
    
    
    12,722,041
    
    
    
    12,112,730
    
    
    
    10,210,071Cash flows from investing activities:Purchase of rental units and equipment
    
    
    (10,644,261
    )
    
    
    (10,565,857
    )
    
    
    (9,593,006
    )Additions to property and equipment
    
    
    (708,665
    )
    
    
    (391,498
    )
    
    
    (287,261
    )Proceeds from sale of property and equipment
    
    
    51,585
    
    
    
    17,112
    
    
    
    55,303Asset purchases net of cash acquired
    
    
    (50,641
    )
    
    
    
    
    
    
    (984,007
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    2,208,625Net cash flows used in investing activities
    
    
    (11,351,982
    )
    
    
    (10,940,243
    )
    
    
    (8,600,346
    )Cash flows from financing activities:Proceeds of notes payable
    
    
    2,400,000
    
    
    
    1,600,000
    
    
    
    2,050,000Repayment of notes payable
    
    
    (3,417,392
    )
    
    
    (3,115,893
    )
    
    
    (4,164,539
    )Treasury stock purchase
    
    
    
    
    
    
    
    
    
    
    (277,857
    )Treasury stock issuance
    
    
    
    
    
    
    
    
    
    
    170,050Stock options exercised
    
    
    33,940
    
    
    
    143,100
    
    
    
    Net cash flows used in financing activities
    
    
    (983,452
    )
    
    
    (1,372,793
    )
    
    
    (2,222,346
    )Cash and cash equivalents at the beginning of year
    
    
    305,869
    
    
    
    506,175
    
    
    
    1,118,796Cash and cash equivalents at the end of the year
    
    $
    692,476
    
    
    $
    305,869
    
    
    $
    506,175
 See accompanying notes to consolidated financial statements. 26




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##### Table of Contents



Bestway, Inc.Consolidated Statements of Stockholders Equity
    
    FORM 10-K
 For the Years Ended July 31, 2004, 2003 and 2002Common Stock
    
    Paid-in
    
    Treasury Stock
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Shares
    
    Amount
    
    Deficit
    
    EquityBalance at July 31, 2001
    
    
    1,756,917
    
    
    $
    17,569
    
    
    $
    16,124,578
    
    
    
    (71,045
    )
    
    $
    (428,426
    )
    
    $
    (6,740,120
    )
    
    $
    8,973,601Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,100
    )
    
    
    (277,857
    )
    
    
    
    
    
    
    (277,857
    )Treasury stock issued
    
    
    
    
    
    
    
    
    
    
    26,850
    
    
    
    35,800
    
    
    
    143,200
    
    
    
    
    
    
    
    170,050Net loss for the year ended
July 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (742,079
    )
    
    
    (742,079
    )Balance at July 31, 2002
    
    
    1,756,917
    
    
    $
    17,569
    
    
    $
    16,151,428
    
    
    
    (104,345
    )
    
    $
    (563,083
    )
    
    $
    (7,482,199
    )
    
    $
    8,123,715Stock options exercised
    
    
    25,600
    
    
    
    256
    
    
    
    142,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,100Stock option compensation
expense
    
    
    
    
    
    
    
    
    
    
    4,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,390Net income for the year ended
July 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,588
    
    
    
    47,588Balance at July 31, 2003
    
    
    1,782,517
    
    
    $
    17,825
    
    
    $
    16,298,662
    
    
    
    (104,345
    )
    
    $
    (563,083
    )
    
    $
    (7,434,611
    )
    
    $
    8,318,793Stock options exercised
    
    
    5,100
    
    
    
    51
    
    
    
    33,889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,940Net income for the year ended
July 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365,801
    
    
    
    365,801Balance at July 31, 2004
    
    
    1,787,617
    
    
    $
    17,876
    
    
    $
    16,332,551
    
    
    
    (104,345
    )
    
    $
    (563,083
    )
    
    $
    (7,068,810
    )
    
    $
    8,718,534
 See accompanying notes to consolidated financial statements. 27




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  1.
    
    BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIESBusiness and basis of presentationThe consolidated financial statements of Bestway, Inc. (the Company),
include the Companys wholly-owned operating subsidiaries, Bestway Rental,
Inc. which operates under the registered trade name Bestway Rent-To-Own,
U.S. Credit-Service Corporation and Westdale Data Service, Inc.
Intercompany balances and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to
conform to current year presentation.The Company owns and operates a total of sixty-nine stores located in
various states. The store operations are controlled and monitored through
the Companys management information system networked with its home office
in Dallas, Texas. The Companys store locations by state as of July 31,
2004, are as follows: Number ofState
    
    StoresAlabama
    
    
    22Arkansas
    
    
    6Georgia
    
    
    3Mississippi
    
    
    11North Carolina
    
    
    12South Carolina
    
    
    2Tennessee
    
    
    1369
  Summary of significant accounting policiesRental merchandise, related rental revenue and depreciationRental merchandise is rented to customers pursuant to rental agreements
which provide for either weekly or monthly rental terms with rental
payments for the first week or month collected in advance. Rental revenue
is recognized as collected since at the time of collection the rental
merchandise has been placed in service and costs of installation and
delivery have been incurred. Rental agreements generally cover a period of
12 to 30 months with a majority of rental agreements specifying 18 months.
At the end of each rental period, the customer can renew the rental
agreement, return the merchandise with no obligation, or purchase the
merchandise by exercising their early purchase option. Amounts received
from such sales are included in revenue when received. Past due or stolen
merchandise is expensed generally within three months from the due date.
The Company receives rental and fee revenue from various products including
home electronics, household appliances, as well as computers and furniture.
In fiscal year 2004, approximately 16% of the Companys rental and fee
revenue was derived from appliances, 31% from furniture, 30% from
electronics, 9% from computers, and 14% from various services and charges
to rental customers including reinstatement fees, preferred customer
membership fees and liability waiver fees. In fiscal year 2003,
approximately 16% of the Companys rental and fee 28




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  revenue was derived from
appliances, 26% from furniture, 30% from electronics, 10% from computers,
2% from various other products and 16% from various services and charges to
rental customers including reinstatement fees, preferred customer
membership fees and liability wavier fees. In fiscal year 2002,
approximately 16% of the Companys rental and fee revenue was derived from
appliances, 25% from furniture, 30% from electronics, 8% from computers, 4%
from various other products and 17% from various services and charges to
rental customers, including reinstatement fees, preferred customer
membership fees and liability waiver fees.Merchandise rented to customers, or available for rent, is recorded at
historical cost net of accumulated depreciation, which equals the carrying
amount, and is classified in the consolidated balance sheets as rental
merchandise. Merchandise rented to customers is depreciated on the
income-forecast basis over the term of the rental agreement ranging from 12
to 30 months. When not on rent, merchandise is not depreciated.Rental merchandise which is damaged and inoperable, deemed obsolete, or not
returned by the customer after becoming delinquent on payments, is written
off as such impairment is incurred. For the fiscal years ended July 31,
2004, 2003 and 2002, $1,385,931, $1,410,312 and $2,018,208, respectively,
of such impairments were incurred and are included in other operating
expenses in the accompanying consolidated statements of operations.
Included in the amount for 2002 is approximately $315,000 related to the
Companys decision to discontinue carrying jewelry in its product
selection.Sales of merchandiseSales of merchandise includes revenue from cash sales of primarily used
merchandise and early purchase options.Property and equipmentProperty and equipment are recorded at cost. Major improvements to property
and equipment are capitalized. Maintenance and repair expenditures are
charged to expense as incurred. As fixed assets are sold or retired, the
applicable cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is recorded.Depreciation of property and equipment is provided over the estimated
useful lives, on the straight-line basis as defined below. Leasehold
improvements are amortized over the shorter of the useful life of the asset
or the term of the lease and renewal period, if applicable. Lives (years)Building
    
    
    40Furniture and fixtures
    
    
    7Vehicles
    
    
    5Computer equipment
    
    
    3
 29




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  Cash and cash equivalentsCash and cash equivalents consist of cash on hand and on deposit, and
highly liquid instruments with maturities of three months or less when
purchased. The carrying amount of cash and cash equivalents is the
estimated fair value at July 31, 2004 and 2003.Intangible assetsEffective August 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles(SFAS 142).
SFAS 142 addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition and for goodwill and
other intangible assets subsequent to their acquisition. The Companys
consolidated balance sheet at July 31, 2002 included goodwill, net of
accumulated amortization, totaling $1,225,295, which is related to various
store acquisitions. The Company applied the provisions of SFAS 142 on
August 1, 2002 and discontinued amortization of goodwill.Amortization of goodwill was $252,349 for the year ended July 31, 2002. As
of July 31, 2004 and 2003, goodwill totaled $1,225,295. The carrying value
of goodwill is evaluated annually. The Company believes that no impairment
of goodwill existed at July 31, 2004 and 2003.The following pro forma financial information compares the Companys net
income (loss) for the years ended July 31, 2004, 2003 and 2002 had the
provisions of SFAS 142 been applied on August 1, 2001: Year Ended July 31,2004
    
    2003
    
    2002Reported net income (loss)
    
    $
    365,801
    
    
    $
    47,588
    
    
    $
    (742,079
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    252,349Adjusted net income (loss)
    
    
    365,801
    
    
    
    47,588
    
    
    
    (489,730
    )Basic net income (loss) per share:Reported net income (loss)
    
    
    0.22
    
    
    
    0.03
    
    
    
    (0.45
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.15Adjusted net income (loss)
    
    $
    0.22
    
    
    $
    0.03
    
    
    $
    (0.30
    )Diluted net income (loss) per share:Reported net income (loss)
    
    
    0.20
    
    
    
    0.03
    
    
    
    (0.45
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.15Adjusted net income (loss)
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    (0.30
    )Weighted average common shares outstanding
    
    
    1,681,289
    
    
    
    1,669,955
    
    
    
    1,648,322Diluted weighted average common shares
outstanding
    
    
    1,823,286
    
    
    
    1,774,409
    
    
    
    1,648,322
 30




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  The Companys adoption of SFAS 142 had no effect on the Companys acquired
identifiable intangible assets that are subject to amortization. Intangible
assets are amortized over their useful economic life and tested for impairment
in accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.The following table presents intangible assets at July 31, 2004 and 2003: July 31, 2004
    
    July 31, 2003Carrying
    
    Accumulated
    
    Carrying
    AccumulatedValue
    
    Amortization
    
    Value
    AmortizationNon-compete Agreements
    
    $
    2,342,915
    
    
    $
    2,142,328
    
    
    $
    2,342,915
    
    
    $
    2,036,247
  During the year ended July 31, 2004, 2003 and 2002, the Company recorded
total amortization expense of $106,081, $161,964, and $139,316,
respectively. Amortization expense is estimated at $84,384, $62,616,
$28,712, $10,020 and $10,020 for years ended July 31, 2005 through 2009,
respectively.Income taxesDeferred income taxes are recognized for the tax consequences in the future
years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable earnings. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
more likely than not to be realized. Income tax expense is the total of
tax payable for the period and the change during the period in deferred tax
assets and liabilities which impacted operations.Investment tax credits are accounted for on the flow-through method.Stock-based compensationThe Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plan. In 1995, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123,
Accounting for Stock-Based Compensation, (SFAS No. 123) which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of its stock-based compensation plan. Adoption of the
cost recognition provisions of SFAS No. 123 is optional and the Company has
decided not to elect the provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 are required by SFAS 123 and are presented below. 31




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  Pro forma net income and net income per common shareHad the compensation cost for the Companys stock-based compensation plan
been determined consistent with SFAS No. 123, the Companys net income
(loss) and net income (loss) per common share for 2004, 2003 and 2002 would
approximate the pro forma amounts below: As Reported
    
    Pro Forma
    
    As Reported
    
    Pro Forma
    
    As Reported
    
    Pro Forma7/31/04
    
    7/31/04
    
    7/31/03
    
    7/31/03
    
    7/31/02
    
    7/31/02Net income (loss)
    
    $
    365,801
    
    
    $
    175,225
    
    
    $
    47,588
    
    
    $
    (166,446
    )
    
    $
    (742,079
    )
    
    $
    (771,424
    )Basic net
income (loss) per common share
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.10
    )
    
    $
    (0.45
    )
    
    $
    (0.47
    )Diluted net
income (loss) per common share
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.10
    )
    
    $
    (0.45
    )
    
    $
    (0.47
    )
  The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest
rate of 3.64%, 3.31% and 4.12% for 2004, 2003, and 2002, respectively; the
expected life of options is 7.51 years, 6.61 years and 5.00 years for 2004,
2003 and 2002, respectively; and a volatility of 112.14%, 59.60% and 46.84%
for options granted in 2004, 2003 and 2002, respectively.The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards
granted prior to the 1996 fiscal year.Earnings per common shareBasic net income per common share is based on the weighted average common
 shares outstanding during the period. Diluted net income per share
includes common stock equivalents, consisting of stock options, which are
dilutive to net income per share. For the fiscal years ended July 31,
2004, July 31, 2003 and July 31, 2002, 16,971, 49,043 and 110,060,
respectively, shares of common stock options were excluded from the
calculation of diluted income per share because their effect would be
antidilutive.Advertising costsCosts incurred for producing and communicating advertising are charged to
expense as incurred.EstimatesThe preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly
deferred tax assets, and liabilities, disclosure of contingent assets and
liabilities and reported amounts of revenues and expenses. Actual results
could differ significantly from those estimates. 32




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  2.
    
    ACQUISITIONS AND DISPOSITIONSOn September 11, 2001, the Company entered into an asset purchase agreement
with Instant Rentals to acquire all the rental contracts with a single
store located in Tennessee for approximately $148,000.On October 22, 2001, the Company entered into an asset purchase agreement
with Zajacs Electronics Service Center, Inc. to acquire all rental
contracts associated with a single store located in Alabama for
approximately $296,000.On January 10, 2002, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to acquire all rental contracts associated with a
single store located in Mississippi for approximately $176,000.On April 25, 2002, the Company entered into an asset purchase agreement
with Showcase TV and Appliance Rental to acquire all the rental contracts
with a single store located in Alabama for approximately $188,000.On May 30, 2002, the Company entered into an asset purchase agreement with
Affordable Rent to Own, Inc. to acquire all the rental contracts with a
single store located in Mississippi for approximately $176,000.
Additionally, the Company obtained the store location by assuming the lease
agreement.On April 9, 2004, the Company entered into an asset purchase agreement with
Prime Time Rental, Inc. to acquire all the rental agreements of two stores
for approximately $51,000.The acquisitions have been accounted for under the purchase method and,
accordingly, the operating results from the acquired stores are included in
the accompanying consolidated statements of operations from the date of
acquisition.On September 5, 2001, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of one store in North
Carolina. The Company received approximately $114,000 in cash for all the
assets involved in the daily operation of the store including all rental
inventory being rented by customers. Idle inventory was transferred to the
Companys existing store locations. The Company recognized a loss of
$10,898 on the sale.On October 5, 2001, the Company entered into an asset purchase agreement
with Value Rental, LLC to sell all the assets of one store in Tennessee.
The Company received approximately $217,000 in cash for all the assets
involved in the daily operation of the store including all rental inventory
being rented by customers, idle inventory, furniture and fixtures and
vehicles. The Company recognized a gain of $82,022 on the sale.On December 11, 2001, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of one store in South
Carolina. The Company received approximately $187,000 in cash for all the
assets involved in the daily operation of the store including all rental
inventory being rented by customers and approximately $25,000 of idle
inventory. Remaining idle inventory was transferred to the Companys
existing store locations. Additionally, Rent-A-Center obtained the
Companys store location by assuming the lease agreement. The Company
recognized a gain of $12,554 on the sale. 33




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  On January 10, 2002, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of one store in Tennessee.
The Company received approximately $126,000 in cash for all the assets
involved in the daily operation of the store including all rental inventory
being rented by customers. Idle inventory was transferred to the Companys
existing store locations. The Company recognized a loss of $28,036 on the
sale.On January 10, 2002, the Company entered into an asset purchase agreement
with Aaron Rents, Inc. to sell all the assets of one store in Alabama. The
Company received approximately $117,000 in cash for all the assets involved
in the daily operation of the store including all rental inventory being
rented by customers. Idle inventory was transferred to the Companys
existing store locations. The Company recognized a loss of $10,683 on the
sale.On February 8, 2002, the Company entered into an asset purchase agreement
with Aaron Rents, Inc. to sell all the assets of one store in North
Carolina. The Company received approximately $133,000 in cash for all the
assets involved in the daily operation of the store including all rental
inventory being rented by customers. Idle inventory was transferred to the
Companys existing store locations. The Company recognized a gain of
$4,812 on the sale.On February 12, 2002, the Company entered into an asset purchase agreement
with Rent-A-Center, Inc. to sell all the assets of five stores in South
Carolina and one store location in Georgia. The Company received
approximately $1,137,000 in cash for all the assets involved in the daily
operation of the stores including all rental inventory being rented by
customers and approximately $28,000 of idle inventory. Additionally,
Rent-A-Center obtained two of the Companys store locations by assuming the
lease agreement. The Company recognized a loss of $137,058 on the sale.On March 25, 2002, the Company entered into an asset purchase agreement
with Aaron Rents, Inc. to sell all the assets of one store in Tennessee.
The Company received approximately $175,000 in cash for all the assets
involved in the daily operation of the store including all rental inventory
being rented by customers. Idle inventory was transferred to the Companys
existing store locations. The Company recognized a gain of $15,797 on the
sale.3.
    
    PROPERTY AND EQUIPMENTProperty and equipment consisted of the following: July 31,2004
    
    2003Building and leaseholds
    
    $
    3,879,837
    
    
    $
    3,800,476Vehicles
    
    
    2,981,325
    
    
    
    3,261,702Furniture and fixtures
    
    
    972,346
    
    
    
    1,005,047Computer equipment
    
    
    760,622
    
    
    
    634,9108,594,130
    
    
    
    8,702,135Accumulated depreciation
    
    
    (6,358,145
    )
    
    
    (5,969,337
    )$
    2,235,985
    
    
    $
    2,732,798
 34




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  Depreciation expense for property and equipment was $1,122,085, $1,318,365
and $1,417,979 for 2004, 2003 and 2002, respectively.4.
    
    NOTES PAYABLENotes payable consists of the following: Years Ended July 31,2004
    
    2003Senior collateralized debtRevolving Credit Loan Agreement dated October 1,
2003, amended February 25, 2004, borrowing limit
is $11,500,000, interest payable monthly at prime
plus .75%, note matures on May 31, 2006; note
collateralized by substantially all the Companys
assets
    
    $
    5,400,000
    
    
    $
    6,400,000Subordinated debtNote payable to limited partnership and
stockholder dated October 26, 2001, amended
February 25, 2004, interest paid quarterly at
8% beginning October 1, 1993; note, as amended,
matures on May 31, 2006
    
    
    3,000,000
    
    
    
    3,000,000Other notes payableNote payable to bank dated April 11, 1994,
principal payable monthly, interest payable at 9%
per annum; note matures on April 15, 2006;
note collateralized by associated real estate
    
    
    33,907
    
    
    
    51,299$
    8,433,907
    
    
    $
    9,451,299
  At July 31, 2004 and 2003 the prime rate was 4.25% and 4.00%,
respectively.Under the terms of the Revolving Credit Loan Agreement, the Company cannot
declare or pay any cash dividends.On October 1, 2003 and February 25, 2004, the Company amended and restated
its Revolving Credit Loan Agreement with its lender. In the amendments,
the lender extended the maturity date from May 31, 2004 to May 31, 2006,
modified the minimum effective tangible net worth provision, modified the
maximum debt-to-effective tangible net worth provision, eliminated the idle
inventory covenant, and modified the interest rate from prime plus 1.50% to
prime plus .75%. The amendments added a maximum year-to-date acquisition
covenant.On October 1, 2003 and February 25, 2004, the Company amended the
subordinated note payable to a limited partnership, which is a stockholder
of the Company, dated October 26, 2001. The amendments extended the
maturity date from May 31, 2004 to May 31, 2006. 35




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  On August 13, 2004, the Company further amended and restated its Revolving
Credit Loan Agreement with its lender. In the amendment, the lender
extended the maturity date from May 31, 2006 to May 31, 2007 and modified
certain covenants relating to Interest Coverage Ratio and Profitability, as
well as increased the aggregate amount for Capital Expenditures and
Acquisitions.On August 13, 2004, the Company further amended the subordinated note
payable to a limited partnership, which is a stockholder of the Company,
dated October 26, 2001. The amendment extended the maturity date from May
31, 2006 to May 31, 2007.At July 31, 2004, the carrying value of the Companys senior collateralized
debt and other notes payable approximated fair value, estimated primarily
based on the borrowing rates available to the Company for debt with similar
terms and average maturities. It is not practicable to estimate the fair
value of the Companys subordinated debt because it is with a related
party.Following is a summary of maturities of notes payable for each of the
periods ending July 31: 2005
    
    $
    18,8602006
    
    
    8,415,0472007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    $
    8,433,907
  5.
    
    INCOME TAXESThe provisions for income tax consists of the following for the years
ended July 31: 2004
    
    2003
    
    2002Current:Federal
    
    $
    
    
    
    $
    (163,103
    )
    
    $
    (116,109
    )State
    
    
    76,078
    
    
    
    4,811
    
    
    
    76,078
    
    
    
    (158,292
    )
    
    
    (116,109
    )Deferred:Federal
    
    
    210,962
    
    
    
    196,946
    
    
    
    (102,139
    )State
    
    
    (55,672
    )
    
    
    (15,905
    )
    
    
    (4,685
    )155,290
    
    
    
    181,041
    
    
    
    (106,824
    )Total income tax provision
    
    $
    231,368
    
    
    $
    22,749
    
    
    $
    (222,933
    )
 36




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  Significant components of the Companys deferred income tax assets at July
31, 2004 and 2003, respectively, are as follows: 2004
    
    2003Net operating loss carryforward
    
    $
    1,725,640
    
    
    $
    1,652,253Property and equipment
    
    
    818,355
    
    
    
    715,056Intangible assets
    
    
    313,585
    
    
    
    356,591Accrued expenses
    
    
    211,104
    
    
    
    101,405Total deferred tax assets
    
    
    3,068,684
    
    
    
    2,825,305Rental merchandise
    
    
    (2,920,452
    )
    
    
    (2,523,271
    )Total deferred tax liabilities
    
    
    (2,920,452
    )
    
    
    (2,523,271
    )Net deferred tax asset
    
    $
    148,232
    
    
    $
    302,034
  Deferred tax assets are reduced by a valuation allowance if, based on
available evidence, it is more likely than not that some portion of all of
the deferred tax assets will not be realized.The following is the reconciliation of the U.S. statutory tax rate to the
Companys effective tax rate for the years ended July 31: 2004
    
    2003
    
    2002Federal income tax expense (benefit) at
statutory rate of 34%
    
    $
    203,037
    
    
    $
    24,421
    
    
    $
    (280,270
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    58,117State income tax
    
    
    13,468
    
    
    
    (7,322
    )
    
    
    (3,092
    )Other
    
    
    14,863
    
    
    
    5,650
    
    
    
    2,312Provision for income tax expense
(benefit)
    
    $
    231,368
    
    
    $
    22,749
    
    
    $
    (222,933
    )
  At July 31, 2004, the Company has a Federal net operating loss carryforward
of approximately $4,924,865 expiring from 2006 to 2023. The Company has
State net operating loss carryforwards totaling $788,702 which expires from
2017 to 2019. Utilization of the U.S. federal net operating loss
carryforwards may be limited by the separate return loss year rules and
could be affected by ownership changes which could occur in the future.6.
    
    RELATED PARTY TRANSACTIONSInterest expense relating to notes payable to affiliates amounted to
$244,001, $243,335 and $242,668 for the years ended July 31, 2004, 2003 and
2002, respectively.As of July 31, 2002, the Company had advanced $1,000,000 to the President
and Chief Executive Officer in the form of a promissory note (the Note).
The Note matures on January 1, 2008 and bears interest at the lesser of i)
the Applicable Federal Rate or ii) the maximum nonusurious rate as 37




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  defined
in the Note. Per the terms of the Note, the Company will forgive one-fifth
of the principal and all related accrued interest on December 31 of each
year beginning in 2003 through 2007. If the President and Chief Executive
Officers employment is terminated with cause by the Company or without
good reason by the President and Chief Executive Officer all outstanding
unearned principal and accrued interest must be repaid. As of July 31,
2004, $683,333 of the Note remained outstanding.7.
    
    LEASESThe Company leases all store facilities, with the exception of one, under
operating leases with terms ranging from one to ten years. Many leases
contain escalation clauses. In fiscal year 2003, the Company began the
replacement of certain older fully depreciated delivery vehicles with
leased delivery vehicles. Future minimum lease obligations under
noncancelable operating leases for the Company at July 31, 2004 are as
follows: 2005
    
    $
    2,435,5492006
    
    
    2,071,4742007
    
    
    1,610,1592008
    
    
    1,285,9352009
    
    
    661,234Thereafter
    
    
    263,784$
    8,328,135
  8.
    
    GUARANTEESThe Company adopted FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, during 2003, which required the prospective recognition and
measurement of certain guarantees and indemnifications. Accordingly, any
contractual guarantees or indemnifications the Company has issued or
modified subsequent to December 31, 2002 are subject to evaluation. If
required, a liability for the fair value of the obligation undertaken will
be recognized.The Company has guarantees under certain operating leases, amounting to
$424,740 as of July 31, 2004, for the residual values of vehicles at the
end of the respective operating lease periods. Under these leases, if the
fair market value of the leased asset at the end of the lease term is less
than an agreed-upon value as set forth in the related operating lease
agreement, the Company will be responsible to the lessor for the amount of
such deficiency. Based upon the expectation that none of these leased
assets will have a residual value at the end of the lease term that is
materially less than the value specified in the related operating lease
agreement, the Company does not believe it is probable that it will be
required to fund any amounts under the terms of these arrangements.
Accordingly, no accruals have been recognized for these guarantees.9.
    
    SUPPLEMENTAL DATA TO STATEMENT OF CASH FLOWSCash interest payments for the years ended July 31, 2004, 2003 and 2002 are
$545,986, $694,185 and $793,766, respectively. Cash tax payments for the
years ended July 31, 2004, 2003 and 2002 are $6,292, $734 and $89,874,
respectively. 38




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  10.
    
    INCENTIVE PLANSStock option planThe Company has a stock option plan (the Plan) for officers and employees
of the Company or its affiliates, under which the maximum number of shares,
which may be granted in the aggregate, is 385,000 of the Companys Common
Stock. The Plan, which became effective June 30, 1995, provides for the
options to be granted, become exercisable, and terminate upon terms
established by the Board of Directors (the Committee). Shares become
exercisable from time to time (but not sooner than six months after the
date of grant) over such period and upon such terms as the Committee may
determine, but such exercise can not at any time be less than 25 shares
unless the remaining shares that have become so purchasable are less than
25 shares.All options granted to the employees have an exercise price no less than
the fair market value of the stock at grant date. The options vest under
one of the following conditions: (i) one-third each year, beginning on the
first anniversary of the date of grant, (ii) one-half each year, beginning
on the first anniversary of the date of grant, or (iii) one-fourth each
year, beginning on the first anniversary of the date of grant. Options
granted under the Plan expire in 10 years from the date of grant.A summary of the status of the Companys stock options as of July 31, 2004,
2003 and 2002 and the changes during the year ended on those dates is
presented below: Stock Options2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted# Shares
    
    Average
    
    # Shares
    
    Average
    
    # Shares
    
    AverageUnderlying
    
    Exercise
    
    Underlying
    
    Exercise
    
    Underlying
    
    ExerciseOptions
    
    Prices
    
    Options
    
    Prices
    
    Options
    
    PricesOutstanding at beginning of year
    
    
    276,995
    
    
    $
    6.46
    
    
    
    200,590
    
    
    $
    4.70
    
    
    
    191,890
    
    
    $
    5.47Granted
    
    
    20,000
    
    
    $
    14.29
    
    
    
    126,505
    
    
    $
    9.08
    
    
    
    106,000
    
    
    $
    4.02Exercised
    
    
    5,100
    
    
    $
    6.65
    
    
    
    25,600
    
    
    $
    5.59
    
    
    
    
    
    
    
    N/AForfeited
    
    
    11,750
    
    
    $
    10.19
    
    
    
    24,500
    
    
    $
    5.78
    
    
    
    97,300
    
    
    $
    5.48Outstanding at end of year
    
    
    280,145
    
    
    $
    6.86
    
    
    
    276,995
    
    
    $
    6.46
    
    
    
    200,590
    
    
    $
    4.70Exercisable at end of year
    
    
    127,453
    
    
    $
    5.39
    
    
    
    92,385
    
    
    $
    5.52
    
    
    
    90,115
    
    
    $
    5.36Available for grant at end of year
    
    
    64,955
    
    
    
    
    
    
    
    73,205
    
    
    
    
    
    
    
    75,210
    
    
    
    Weighted average fair value of
options granted
    
    
    
    
    
    $
    12.74
    
    
    
    
    
    
    $
    5.51
    
    
    
    
    
    
    $
    1.85
 39




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  The following table summarizes information about stock options
outstanding at July 31, 2004: Options Outstanding
    
    Options ExercisableWeightedNumber of
    
    Average Remaining
    
    Weighted Average
    
    Number of
    
    Weighted AverageExercise Price
    
    Options
    
    Contractual Life
    
    Exercise Price
    
    options
    
    Exercise Price$4.00 to $7.00
    
    
    154,140
    
    
    
6.87 years
    
    
    $
    4.46
    
    
    
    114,953
    
    
    $
    4.62$7.95 to $8.81
    
    
    92,505
    
    
    
8.40 years
    
    
    $
    8.16
    
    
    
    4,500
    
    
    $
    8.81$13.50 to $16.50
    
    
    28,000
    
    
    
9.04 years
    
    
    $
    14.51
    
    
    
    8,000
    
    
    $
    14.50$4.00 to $16.50
    
    
    280,145
    
    
 
7.65 years
    
    
    $
    6.86
    
    
    
    127,453
    
    
    $
    5.39
  401(k)PlanThe Company established a Retirement Savings Plan (the Savings Plan),
effective as of September 1, 1994, which is intended to qualify under
Section 401(k) of the Internal Revenue Code the Code. Employees who have
been employed with the Company for one year or more are eligible for
participation in the Savings Plan. Employees may elect to reduce up to 15%
of their annual compensation (subject to certain limitations under the
Code) by having such amounts contributed to the Savings Plan. The Board
intends to conduct a review at the end of each fiscal year to determine
whether the Company will make any additional or matching contribution to
the Savings Plan. For the year ended July 31, 2004, 2003 and 2002, the
Company contributed approximately $104,000, $81,000 and $105,000,
respectively, to the Savings Plan. All assets of the Savings Plan are held
in trust.11.
    
    LEGAL CONTINGENCIESIn July 2003, the County Court of the Second Judicial District of Bolivar
County, Mississippi entered final judgment against the Company in a lawsuit
brought by a former lessor. The lessor alleged that the Company had
breached the terms and conditions of a lease agreement for a store location
in Mississippi when the Company vacated the premises and failed to properly
notify the lessor of its intentions not to exercise an option extending the
original lease term. The judgment against the Company was for
approximately $70,000, including attorney fees. The Company has appealed
the judgment, filed brief and record excerpts, challenged late filings of
the lessor and was denied a request to render judgment in favor of the
Company. While the Company believes that it has a meritorious defense to
the plaintiffs claims, the Company has accrued the $70,000 judgment.In December 2001, the Company settled a lawsuit brought by approximately
fifteen plaintiffs in the Billings Division of the United States District
Court for the State of Montana who have asserted claims against a number of
defendants, including the Company, who were involved in the production of
oil and gas or who owned oil and gas facilities in Montana. Plaintiffs
alleged that the Company is the successor in interest to Amarco Resources
Corporation, which, in the past, owned interests in two wells in the oil
field. One of these wells is an alleged source of contamination of
groundwater. The settlement was for approximately $130,000, including
attorneys fees. 40




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##### Table of Contents



Bestway, Inc.Notes to Consolidated Financial Statements
    
    FORM 10-K
  The Company is subject to various other legal proceedings and claims that
arise in the ordinary course of business. Management believes that the
final outcome of such matters will not have a material adverse effect on
the financial position, results of operations or liquidity of the Company.12.
    
    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)The following table represents certain unaudited financial information for
the periods indicated: October 31
    
    January 31
    
    April 30
    
    July 31Year ended July 31, 2004Revenue
    
    $
    9,059,027
    
    
    $
    9,564,193
    
    
    $
    9,447,879
    
    
    $
    9,845,031Cost and operating expenses
    
    
    8,955,653
    
    
    
    9,309,052
    
    
    
    9,306,838
    
    
    
    9,747,418Income before income taxes
    
    
    103,374
    
    
    
    255,141
    
    
    
    141,041
    
    
    
    97,613Income tax expense
    
    
    38,869
    
    
    
    95,933
    
    
    
    53,031
    
    
    
    43,535Net income
    
    
    64,505
    
    
    
    159,208
    
    
    
    88,010
    
    
    
    54,078Basic net income per share
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.04Diluted net income per share
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.02Year ended July 31, 2003Revenue
    
    $
    8,272,962
    
    
    $
    8,894,260
    
    
    $
    9,213,864
    
    
    $
    9,125,742Cost and operating expenses
    
    
    8,593,876
    
    
    
    8,884,355
    
    
    
    8,978,120
    
    
    
    8,980,140Income (loss) before income taxes
    
    
    (320,914
    )
    
    
    9,905
    
    
    
    235,744
    
    
    
    145,602Income tax expense (benefit)
    
    
    (84,224
    )
    
    
    (32,714
    )
    
    
    88,638
    
    
    
    51,049Net income (loss)
    
    
    (236,690
    )
    
    
    42,619
    
    
    
    147,106
    
    
    
    94,553Basic net income
(loss) per share
    
    $
    (0.14
    )
    
    $
    0.03
    
    
    $
    0.09
    
    
    $
    0.06Diluted net income (loss)
per share
    
    $
    (0.14
    )
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.05
 41




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL DISCLOSURE
 None. 
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 The management of the Company, including the Companys principal executive
officer and principal financial officer, have evaluated the effectiveness of
the Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934) as of July 31, 2004. Based on such
evaluation, the Companys principal executive officer and principal financial
officer have concluded that as of July 31, 2004, such disclosure controls and
procedures are effective for the purpose of ensuring that material information
required to be in this Annual Report is made known to them by others on a
timely basis. There have not been any changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934) during the quarter and year ending July 31,
2004 that have materially affected or are reasonably likely to materially
affect the Companys internal control over financial reporting. 
 ITEM 9B.
    
    OTHER INFORMATION
 None 
 PART III 
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 The information required will be contained in the Companys Proxy
Statement for the Annual Meeting of Shareholders for 2004, and is incorporated
herein by reference. 
 ITEM 11.
    
    EXECUTIVE COMPENSATION
 The information required will be contained in the Companys Proxy
Statement for the Annual Meeting of Shareholders for 2004, and is incorporated
herein by reference. 
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
 The information required will be contained in the Companys Proxy
Statement for the Annual Meeting of Shareholders for 2004, and is incorporated
herein by reference. 
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 The information required will be contained in the Companys Proxy
Statement for the Annual Meeting of Shareholders for 2004, and is incorporated
herein by reference. 
 ITEM 14.
    
    PRINCIPAL AND ACCOUNTANT FEES AND SERVICES
 The information required will be contained in the Companys Proxy
Statement for the Annual Meeting of Shareholders for 2004, and is incorporated
herein by reference. 42




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##### Table of Contents



Bestway, Inc.
    
    FORM 10-K
 
 PART IV 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENTS(a)
    
    The following consolidated financial statements of Bestway, Inc.are included in Part II, Item 8:
 Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders Equity
Notes to Consolidated Financial Statements 43




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Bestway, Inc.
    
    FORM 10-K
 Exhibits Exhibit Number
    
    Document3.1
    
    Amended and Restated Certificate of Incorporation of Bestway,
incorporated by reference to Bestways Current Report on Form
8-K, filed September 2, 1993.3.2
    
    Restated and Amended Bylaws of Bestway, incorporated by
reference to Bestways Annual Report on Form 10-K, for the
year ended December 31, 1984.3.3
    
    Amendment No. 1 to the Restated and Amended Bylaws of Bestway.4.1
    
    Specimen stock certificate representing shares of Bestways
common stock, incorporated by reference to Bestways
Registration Statement on Form S-8, filed June 22, 1995.10.1
    
    Incentive Stock Option Plan of Bestway, incorporated by
reference to Bestways Registration Statement on Form S-8,
filed June 22, 1995.10.2
    
    Form of Incentive Stock Option Agreement pursuant to
Incentive Stock Option Plan, incorporated by reference to
Bestways Registration Statement on Form S-8, filed June 22,
1995.10.3
    
    Second Amended and Restated Revolving Credit Loan dated
October 1, 2003, by and between Bestway and Comerica
Bank-Texas, incorporated by reference to Bestways Current
Report on Form 8-K filed October 3, 2003.10.4
    
    Second Amended and Restated Promissory Note, dated October
26, 2001, by Bestway in favor of ODonnell & Masur, L.P.10.5
    
    Extension Agreement for the Second Amended and Restated
Promissory Note, dated October 1, 2003, between ODonnell &
Masur, L.P. and Bestway, incorporated by reference in
Bestways Current Report on Form 8-K, filed October 3, 2003.10.6
    
    Amendment Number One to Bestway Incentive Stock Option Plan,
dated December 4, 2000, incorporated by reference to
Bestways Annual Report on Form 10-K for the year ended July
31, 2001.10.7
    
    Amendment Number Two to Bestway Incentive Stock Option Plan,
dated November 26, 2002, incorporated by reference to
Bestways Registration Statement on Form S-8, filed March 20,
2003.10.8
    
    Employment Agreement, dated July 8, 2002, between Bestway and
David A. Kraemer, incorporated by reference to Bestways
Annual Report on Form 10-K for the year ended July 31, 2002.10.9
    
    Severance Agreement, dated July 22, 2002, between Bestway and
Teresa A. Sheffield, incorporated by reference to Bestways
Annual Report on Form 10-K for the year ended July 31, 2002.21*
    
    Subsidiaries23*
    
    Consent of PricewaterhouseCoopers LLP31.1*
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
    44




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Bestway, Inc.
    
    FORM 10-K
 
 SIGNATURES Pursuant to the requirements of section 13 or 15(d) 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.October 25, 2004
    
    /s/ David A. KraemerPresident and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 25th day of October 2004. Signature
    
    Title/s/ R. Brooks Reed
    
    Chairman of the Board of DirectorsR. BROOKS REED/s/ Jack E. Meyer
    
    DirectorJACK E. MEYER/s/ James A. ODonnell
    
    DirectorJAMES A. ODONNELL/s/ Bernard J. Hinterlong
    
    DirectorBERNARD J. HINTERLONG/s/ David A. Kraemer
    
    Director, President and Chief
Executive OfficerDAVID A. KRAEMER/s/ Beth A. Durrett
    
    Chief Financial Officer and SecretaryBETH A. DURRETT
 45