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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-24333
RAINBOW RENTALS, INC.
------------------------------
(Exact name of Registrant as specified in its charter)
OHIO 34-1512520
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3711 Starr Centre Drive
CANFIELD, OHIO 44406
------------------------------------------
(Address of principal executive offices)
330-533-5363
-----------------
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
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
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- ----------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of March 31, 2000: 5,925,735
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RAINBOW RENTALS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Income - for
the three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of
Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows -
for the three months ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 11
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
ASSETS
Current assets
Cash $ 41 $ 440
Rental-purchase merchandise, net 32,486 33,042
Prepaid expenses and other current assets 1,553 1,423
-------- --------
Total current assets 34,080 34,905
Property and equipment, net 4,713 4,352
Deferred income taxes 1,362 1,312
Goodwill, net 8,097 8,205
Other assets, net 1,412 1,550
-------- --------
Total assets $ 49,664 $ 50,324
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ 86 $ 21
Accounts payable 2,015 1,679
Accrued income taxes 241 432
Accrued compensation and related costs 829 1,622
Other liabilities and accrued expenses 1,497 1,510
Deferred income taxes 2,873 2,673
-------- --------
Total current liabilities 7,541 7,937
Long-term debt 8,895 10,398
Obligations under capital leases, excluding current installments - 103
-------- --------
Total liabilities 16,436 18,438
Shareholders' equity
Serial preferred stock, no par value, 2,000,000 shares
authorized,
none issued - -
Common stock, no par value; 10,000,000 shares authorized,
5,925,735 issued and outstanding 11,039 11,039
Retained earnings 24,096 22,754
Treasury stock, 466,875 common shares at cost (1,907) (1,907)
-------- --------
Total shareholders' equity 33,228 31,886
-------- --------
Total liabilities and shareholders' equity $ 49,664 $ 50,324
======== ========
See accompanying notes to condensed consolidated financial statements.
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
(UNAUDITED) (UNAUDITED)
--------------- ---------------
Revenues
Rental revenue $ 20,761 $ 16,961
Fees 671 586
Merchandise sales 1,030 713
-------------- -------------
Total revenues 22,462 18,260
Operating expenses
Merchandise costs 7,507 6,114
Store expenses
Salaries and related 5,135 4,127
Occupancy 1,618 1,385
Advertising 1,046 877
Other expenses 2,861 2,222
--------------- ---------------
Total store expenses 10,660 8,611
--------------- ---------------
Total merchandise costs and store expenses 18,167 14,725
General and administrative expenses 1,618 1,314
Amortization 132 61
--------------- ---------------
Total operating expenses 19,917 16,100
--------------- ---------------
Operating income 2,545 2,160
Interest expense 198 98
Other expense, net 73 124
--------------- ---------------
Income before income taxes 2,274 1,938
Income taxes 932 804
--------------- ---------------
Net income $ 1,342 $ 1,134
=============== ===============
EARNINGS PER COMMON SHARE:
Basic and diluted earnings per share: $ 0.23 $ 0.19
=============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,925,735 5,925,735
=============== ===============
Diluted 5,925,735 5,936,202
=============== ===============
See accompanying notes to condensed consolidated financial statements.
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK Total
------------ Retained Treasury Shareholders'
NUMBER COST EARNINGS STOCK EQUITY
------ ---- -------- ----- ------
Balance at December 31, 1998 5,925,735 11,039 17,706 (1,907) 26,838
Net income - - 5,048 - 5,048
-------------- --------------- ------------- --------------- ---------------
Balance at December 31, 1999 5,925,735 11,039 22,754 (1,907) 31,886
Net income (unaudited) - - 1,342 - 1,342
------------------------------------------------------------------------------------
Balance at March 31, 2000 (unaudited) 5,925,735 $ 11,039 $ 24,096 $ (1,907) $ 33,228
============== =============== ============= =============== ===============
See accompanying notes to condensed consolidated financial statements.
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
(UNAUDITED) (UNAUDITED)
----------------- ----------------
Cash flows from operating activities
Net income $ 1,342 $ 1,134
Reconciliation of net income to net cash provided
by operating activities
Depreciation of property and equipment and
amortization of intangibles 622 545
Depreciation of rental-purchase merchandise 5,876 4,856
Deferred income taxes 150 100
Gain on disposal of property and equipment (81) (14)
Purchases of rental-purchase merchandise (6,945) (6,216)
Rental-purchase merchandise disposed, net 1,627 1,230
Change in
Prepaid expenses and other current assets (130) (232)
Accounts payable 336 1,124
Accrued income taxes (161) 109
Accrued compensation and related costs (793) 82
Other liabilities and accrued expenses (43) 118
----------------- ----------------
Net cash provided by operating activities 1,800 2,836
----------------- ----------------
Cash flows from investing activities
Purchase of property and equipment, net (751) (445)
Proceeds from disposal of property and equipment 93 36
Acquisitions (note 3) - (11,687)
----------------- ----------------
Net cash used in investing activities (658) (12,096)
----------------- ----------------
Cash flows from financing activities
Proceeds from long-term debt borrowings 7,330 14,510
Current installments and repayments of long-term debt (8,833) (5,010)
Loan origination fees paid - (20)
Principal payments under capital lease obligations (38) (16)
----------------- ----------------
Net cash provided by (used in) financing activities (1,541) 9,464
----------------- ----------------
Net increase (decrease) in cash (399) 204
Cash at beginning of period 440 -
----------------- ----------------
Cash at end of period $ 41 $ 204
================= ================
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 204 $ 16
Income taxes 973 625
See accompanying notes to condensed consolidated financial statements.
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RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. Basis of Presentation
Rainbow Rentals, Inc. (Company) is engaged in the rental and sale of
home electronics, furniture, appliances, and computers to the general public.
The Company operates 97 stores in ten states: Connecticut, Massachusetts,
Michigan, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee
and Virginia. The Company's corporate headquarters is located in Canfield, Ohio.
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q. Therefore, certain information and
disclosures, normally required with financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted.
In the opinion of management, the financial statements contain all adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows of the Company. The
results of operations for the periods presented are not necessarily indicative
of the results for the entire year. It is suggested these financial statements
be read in conjunction with the financial statements and notes included in the
Company's Annual Report for fiscal year ended December 31, 1999.
2. Earnings Per Share
Basic earnings per common share are computed using net income available
to common shareholders divided by the weighted average number of common shares
outstanding. For computation of diluted earnings per share, the weighted average
number of common shares outstanding is increased to give effect to stock options
considered to be common stock equivalents.
The following table shows the amounts used in computing earnings per
share.
For the three months ended
March 31,
2000 1999
---- ----
Numerator:
Net income available to common shareholders $ 1,342 $ 1,134
Denominator:
Basic weighted average shares 5,925,735 5,925,735
Effect of dilutive stock options - 10,467
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Diluted weighted average shares 5,925,735 5,936,202
========== ===========
Basic earnings per share $ 0.23 $ 0.19
========== ===========
Diluted earnings per share $ 0.23 $ 0.19
========== ===========
3. Acquisitions
On February 1, 1999, the Company acquired certain assets of Rental Mart
of PA, Inc. ("Rental Mart") for approximately $1.3 million in cash. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, all identifiable assets were recorded at their estimated fair value
at the date of acquisition. The excess of the acquisition cost over the
estimated fair value of the net assets acquired ("goodwill" of $0.8 million) is
being amortized on a straight-line basis over twenty years. Assets acquired,
other than goodwill, consisted primarily of rental-purchase merchandise and a
non-compete agreement.
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On March 1, 1999, the Company acquired certain assets of Blue Ribbon
Rentals, Inc., and Blue Ribbon Rentals II, Inc. ("Blue Ribbon") for
approximately $10.4 million in cash. The acquisition was accounted for using the
purchase method of accounting. Accordingly, all identifiable assets were
recorded at their estimated fair value at the date of acquisition. The excess of
the acquisition cost over the estimated fair value of the net assets acquired
("goodwill" of $6.9 million) is being amortized on a straight-line basis over
twenty years. Assets acquired, other than goodwill, consisted primarily of
rental-purchase merchandise of $3.1 million, property and equipment of $0.3
million and a non-compete agreement of $0.3 million.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
At March 31, 2000 the Company operated 95 rental-purchase stores in
nine states, providing quality, name brand, durable merchandise, including home
electronics, furniture, appliances and computers. Generally, rental-purchase
merchandise is rented to individuals under flexible agreements that allow
customers to own the merchandise after making a specified number of rental
payments (ranging from 12 to 24 months). Customers have the option to return the
merchandise at any time without further obligation, and also have the option to
purchase the merchandise at any time during the rental term.
During the first quarter, the Company opened three new stores in
existing markets.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenue.
FOR THE THREE MONTHS ENDED
2000 1999
---- ----
STATEMENT OF INCOME DATA:
Revenues
Rental revenue 92.4 % 92.9 %
Fees 3.0 3.2
Merchandise sales 4.6 3.9
----- -----
Total revenues 100.0 100.0
Operating expenses
Merchandise costs 33.4 33.5
Store expenses
Salaries and related 22.9 22.6
Occupancy 7.2 7.6
Advertising 4.7 4.8
Other expenses 12.7 12.2
----- -----
Total store expenses 47.5 47.2
----- -----
Total merchandise costs and store expenses 80.9 80.7
General and administrative expenses 7.2 7.2
Amortization of goodwill and noncompete agreements 0.6 0.3
----- -----
Total operating expenses 88.7 88.2
----- -----
Operating income 11.3 11.8
Interest expense 0.9 0.5
Other expense, net 0.3 0.7
----- -----
Income before income taxes 10.1 10.6
Income taxes 4.1 4.4
----- -----
Net income 6.0 % 6.2 %
===== =====
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
For the three months ended March 31, 2000, total revenues increased to
$22.5 million from $18.3 million, an increase of 23.0% over the comparable 1999
period. The inclusion of a full three months' results from the 13 stores
acquired during the first quarter of 1999 accounted for 42.1% of the Company's
total increase in revenue or $1.8 million. Revenue from comparable stores
(stores in operation on January 1, 1999) accounted for 32.1% of the increase, or
$1.4 million, primarily as a result of the growth of stores opened in 1998 and
an increase in revenue collected per unit. Revenue from the nine stores opened
in 1999 accounted for 24.9% of the total increase in revenue, or $1.0 million.
For the three months ended March 31, 2000, merchandise costs increased
to $7.5 million from $6.1 million, an increase of 22.8% over the comparable 1999
period, but as a percentage of total revenues, decreased to 33.4% from 33.5%.
The increase in costs was primarily due to merchandise costs associated with
stores opened and acquired in 1999 and 1998.
For the three months ended March 31, 2000, total store expenses
increased to $10.7 million from $8.6 million, an increase 23.8% over the
comparable 1999 period. The increase in total store expenses was primarily due
to the inclusion of a full three months' results from the 13 stores acquired in
the first quarter of 1999 and from the nine stores added in 1999. This increase
accounted for 78.8% of the total increase, or $1.6 million. Store expenses of
comparable stores accounted for 12.7% of the increase, or $0.3 million, mainly
due to a slight increase in salaries and an increase in the cost of insurance.
The three new stores opened during the first quarter accounted for the remaining
increase of 8.5%, or $0.2 million. As a percentage of total revenues, total
store expenses increased to 47.5% from 47.2%. Salaries and related expenses
increased as a percentage of revenue to 22.9% from 22.6% mainly from stores
opened in 1999, and to a lesser degree, a slight increase in salaries of
comparable stores. Occupancy decreased as a percentage of revenue to 7.2% from
7.6% mainly due to an increase in comparable store revenue on a relatively fixed
base of expense. Other expenses increased as a percentage of revenue to 12.7%
from 12.2% primarily due to an increase in the cost of insurance.
For the three months ended March 31, 2000, general and administrative
expenses increased to $1.6 million from $1.3 million, an increase of 23.1% over
the comparable 1999 period. The increase was primarily due to the addition of
three regional managers and an increase in incentive bonuses paid to executive
officers and regional managers. As a percentage of total revenues, general and
administrative expenses remained constant at 7.2%.
For the three months ended March 31, 2000, amortization of goodwill and
non-compete agreements relating to stores acquired in 1999 and 1998 increased to
$132,000 from $61,000 in the comparable 1999 period. The increase was due to the
inclusion of a full three months' amortization relating to the acquisitions made
in the first quarter of 1999.
For the three months ended March 31, 2000, operating income increased
to $2.5 million from $2.2 million, an increase of 17.9% over the comparable 1999
period. The increase is attributed to the increased profitability of comparable
stores, the increase in revenue collected per unit, the growth of stores opened
in 1998, and a full three months' operating income from the 13 stores acquired
in the first quarter of 1999. This increase in store level operating income was
partially offset by anticipated losses from new stores opened within the last 12
months and increased amortization associated with the 1999 acquisitions. As a
percentage of total revenues, operating income decreased slightly to 11.3% from
11.8% due to factors discussed above.
For the three months ended March 31, 2000, interest expense increased
to $198,000 from $98,000 in the comparable 1999 period. The increase was due to
the inclusion of three months of interest expense attributable to the
indebtedness related to the Blue Ribbon acquisition on March 1, 1999.
For the three months ended March 31, 2000, the Company's effective tax
rate decreased to 41.0% from 41.5% due to lower effective state tax rates.
For the three months ended March 31, 2000, net income increased to $1.3
million from $1.1 million, an increase of 18.4% over the comparable 1999 period,
and as a percentage of total revenues decreased to 6.0% from 6.2% due to the
factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchasing
additional and replacement rental-purchase merchandise, expenditures related to
new store openings, acquisitions and working capital requirements for new and
existing stores. For the three months ended March 31, 2000 and 1999, purchases
of rental merchandise (excluding acquisitions) amounted to $6.9 million and $6.2
million, respectively. The increase is attributed to the 22 stores opened and
acquired during 1999 offset by a significant reduction of inventories of idle
rental merchandise.
For the three months ended March 31, 2000, cash provided by operating
activities decreased to $1.8 million from $2.8 million for the comparable 1999
period. The decrease was due to decreases in accounts payable, accrued income
taxes and accrued compensation. Cash used in investing activities decreased to
$0.7 million from $12.1 million. The amount for 1999 includes the acquisition of
19 stores from Rental Mart and Blue Ribbon. Cash used in financing activities
was $1.5 million as compared to cash provided by financing activities in the
comparable 1999 period of $9.5 million. Borrowings under a revolving loan
agreement with a lending institution (the "Credit Facility") to finance the two
acquisitions accounted for the cash provided in 1999.
The Company currently has a $16.0 million Credit Facility with a
maturity date of March 1, 2002. The Credit Facility includes certain cash flow,
net worth and idle inventory requirements, as well as covenants which limit the
ability of the Company to incur additional indebtedness, grant liens, transfer
assets outside the ordinary course of business, pay dividends, engage in
acquisition transactions and make capital expenditures (excluding the purchase
of rental merchandise) in excess of a specified amount. Availability under the
Company's Credit Facility as of May 12, 2000 was approximately $8.0 million.
The Company plans to open an additional 8 stores during the remainder of
the year and to increase the number of new store openings thereafter. The
Company further believes that it will continue to have the opportunity to
increase the number of its stores and rental-purchase agreements through
selective acquisitions. Potential acquisitions may vary in size and the Company
may consider larger acquisitions that could be material to the Company. To
provide any additional funds necessary for the continued pursuit of its growth
strategies, the Company may use cash flow from operations, borrow additional
amounts under its Credit Facility, seek to obtain additional debt or equity
financing, or use its own equity securities, the availability of which will
depend upon market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company.
FORWARD- LOOKING STATEMENTS
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Such risks and uncertainties include,
but are not limited to, (i) the ability of the Company to execute effectively
its expansion program and (ii) changes in the government's regulation of the
industry. The Company undertakes no obligation to publicly update or revise any
of these forward-looking statements, whether as a result of new information,
future events or circumstances, or otherwise. There can be no assurance that the
events described in these forward-looking statements will occur. For further
information, please refer to the Company's filings with the Securities and
Exchange Commission, including specifically the Risk Factors contained in the
Company's prospectus dated June 4, 1998.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
A. EXHIBIT NO.
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27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
NONE
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SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
RAINBOW RENTALS, INC.
(Registrant)
/e/ WAYLAND J. RUSSELL
------------------------------------
Wayland J. Russell, Chairman and
Chief Executive Officer
/e/ MICHAEL A. PECCHIA
------------------------------------
Michael A. Pecchia,
Chief Financial Officer
Date: May 13, 2000
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