UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] 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 of Incorporation) (IRS Employer 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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT APRIL 30, 2002
----- ------------------------------------
Common stock, no par value 5,925,735
RAINBOW RENTALS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4
Statements of Shareholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
RAINBOW RENTALS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 1,419 $ 1,839
Rental-purchase merchandise, net 38,794 39,330
Income tax receivable 1,275 -
Prepaid expenses and other current assets 2,379 2,143
-------- --------
Total current assets 43,867 43,312
Property and equipment, net 5,279 5,177
Deferred income taxes 1,549 1,546
Goodwill, net 9,098 9,098
Other assets, net 1,154 988
-------- --------
Total assets $ 60,947 $ 60,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Deferred revenue $ 1,166 $ 1,263
Accounts payable 2,960 3,827
Accrued income taxes - 306
Accrued compensation and related costs 1,498 2,082
Other liabilities and accrued expenses 2,121 2,062
Deferred income taxes 5,708 3,976
-------- --------
Total current liabilities 13,453 13,516
Long-term debt 9,800 9,440
-------- --------
Total liabilities 23,253 22,956
Commitments and contingencies
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,
6,392,610 issued and 5,925,735 outstanding 11,039 11,039
Retained earnings 28,562 28,033
Treasury stock, 466,875 common shares at cost (1,907) (1,907)
-------- --------
Total shareholders' equity 37,694 37,165
-------- --------
Total liabilities and shareholders' equity $ 60,947 $ 60,121
======== ========
See accompanying notes to financial statements.
3
RAINBOW RENTALS, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
2002 2001
---------- ----------
Revenues
Rental revenue $ 23,146 $ 22,466
Fees 638 686
Merchandise sales 1,181 1,138
---------- ----------
Total revenues 24,965 24,290
Operating expenses
Merchandise costs 8,827 8,388
Store expenses
Salaries and related 6,024 5,710
Occupancy 2,307 2,092
Advertising 1,586 1,524
Other expenses 3,184 3,344
---------- ----------
Total store expenses 13,101 12,670
---------- ----------
Total merchandise costs and store expenses 21,928 21,058
General and administrative expenses 1,794 1,855
Amortization of goodwill and noncompete agreements 41 175
---------- ----------
Total operating expenses 23,763 23,088
---------- ----------
Operating income 1,202 1,202
Interest expense 185 226
Other expense, net 129 85
---------- ----------
Income before income taxes 888 891
Income taxes 359 360
---------- ----------
Net income $ 529 $ 531
========== ==========
EARNINGS PER COMMON SHARE:
Basic and diluted earnings per share $ 0.09 $ 0.09
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,925,735 5,925,735
========== ==========
Diluted 5,947,262 5,935,968
========== ==========
PRO FORMA NET INCOME DATA:
Net income as reported $ 529 $ 531
Pro forma adjustment for goodwill amortization, net of tax - 81
---------- ----------
Pro forma net income $ 529 $ 612
========== ==========
PRO FORMA EARNINGS PER COMMON SHARE:
Pro forma basic and diluted earnings per share $ 0.09 $ 0.10
========== ==========
See accompanying notes to financial statements.
4
RAINBOW RENTALS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK TOTAL
------------ RETAINED TREASURY SHAREHOLDERS'
SHARES COST EARNINGS STOCK EQUITY
--------- --------- --------- --------- ---------
Balance at December 31, 2000 5,925,735 $ 11,039 $ 26,859 $ (1,907) $ 35,991
Net income - - 1,174 - 1,174
--------- --------- --------- --------- ---------
Balance at December 31, 2001 5,925,735 11,039 28,033 (1,907) 37,165
Net income (unaudited) - - 529 - 529
--------- --------- --------- --------- ---------
Balance at March 31, 2002 (unaudited) 5,925,735 $ 11,039 $ 28,562 $ (1,907) $ 37,694
========= ========= ========= ========= =========
See accompanying notes to financial statements.
5
RAINBOW RENTALS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
Cash flows from operating activities
Net income $ 529 $ 531
Reconciliation of net income to net cash provided
by operating activities
Depreciation of property and equipment and
amortization of intangibles 629 722
Depreciation of rental-purchase merchandise 6,990 6,615
Write-down of rental purchase merchandise 55 -
Deferred income taxes 1,729 300
Loss on disposal of property and equipment 24 -
Purchases of rental-purchase merchandise (8,306) (8,490)
Rental-purchase merchandise disposed, net 1,797 1,743
Increase in
Income tax receivable (1,275) (47)
Prepaid expenses and other assets (240) (220)
Increase (decrease) in
Accounts payable (867) 792
Accrued income taxes (306) -
Accrued compensation and related costs (584) (693)
Other liabilities and accrued expenses (38) 777
-------- --------
Net cash provided by operating activities 137 2,030
-------- --------
Cash flows from investing activities
Purchase of property and equipment, net (617) (578)
Proceeds from sale of property and equipment 1 10
Acquisitions - (247)
-------- --------
Net cash used in investing activities (616) (815)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt 19,814 5,865
Current installments and repayments of long-term debt (19,454) (7,300)
Loan fees paid (301) -
-------- --------
Net cash provided by (used in) financing activities 59 (1,435)
-------- --------
Net decrease in cash (420) (220)
Cash at beginning of period 1,839 1,426
-------- --------
Cash at end of period $ 1,419 $ 1,206
======== ========
Supplemental cash flow information
Net cash paid during the period for
Interest $ 120 $ 195
Income taxes 211 169
See accompanying notes to financial statements.
6
RAINBOW RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
Rainbow Rentals, Inc. (the "Company") is engaged in the rental and sale of
home electronics, furniture, appliances and computers to the general public. At
March 31, 2002 the Company operated 114 stores in 11 states: Connecticut,
Massachusetts, Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode
Island, South Carolina, Tennessee and Virginia. The Company has since opened two
additional stores in April 2002. The Company's corporate office is located in
Canfield, Ohio.
The 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
accounting principles generally accepted in the United States of America, 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 on Form
10-K for fiscal year ended December 31, 2001.
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,
2002 2001
---------- -------------
(Dollars in thousands, except per share amounts)
Numerator:
Net income available to common shareholders $ 529 $ 531
Denominator:
Basic weighted average shares 5,925,735 5,925,735
Effect of dilutive stock options 21,527 10,233
---------- -------------
Diluted weighted average shares 5,947,262 5,935,968
========== =============
Basic earnings per share $ 0.09 $ 0.09
========== =============
Diluted earnings per share $ 0.09 $ 0.09
========== =============
3. Long-Term Debt
The Company entered into a revolving financing agreement (the "Credit
Facility") with a syndicate of three financial institutions on January 11, 2002,
which refinanced its existing debt at that time. The agreement allows the
Company to borrow up to $25.0 million, on which interest is charged, at the
Company's option, at the London Interbank Offering Rate (LIBOR) plus 3% with the
remaining balance at the prime rate plus 1%, or combination thereof. In
addition, the Company must pay a commitment fee equal to 0.50% per annum on the
unused portion of the loan commitment. Borrowings under the Credit Facility
mature three years after the date of the loan. At March 31, 2002, the
outstanding loan balance totaled $9.8
7
million with a weighted average interest rate of 5.06%. Excess availability at
March 31, 2002 was approximately $1.7 million.
The amount of outstanding borrowings under the Credit Facility is primarily
limited to 32% of the Company's rental purchase merchandise, which serves as the
security for the debt. The Credit Facility requires the Company to meet certain
quarterly financial covenants and ratios including maximum leverage, minimum
interest coverage, minimum net worth, fixed charge coverage and rental
merchandise usage ratios. The Company must meet requirements regarding monthly,
quarterly and annual financial reporting. The Credit Facility contains
non-financial covenants that restrict actions of the Company with respect to
additional indebtedness, certain loans and investments, payment of dividends,
acquisitions, mergers and consolidations, dispositions of assets or
subsidiaries, issuance of capital stock, capital expenditures and leases. At
March 31, 2002, the Company was in compliance with the covenants and financial
reporting requirements.
4. Goodwill
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually, or
more frequently if circumstances indicate potential impairment. In the first
quarter of 2002, the Company ceased amortization of goodwill and is currently
assessing goodwill for impairment. No impairment losses were recorded upon the
initial adoption of SFAS No. 142.
The pro forma effect of the adoption of SFAS No. 142 on net income and
earnings per share is as follows:
(unaudited)
For the three months ended
March 31,
2002 2001
------- -------
(Dollars in thousands, except per share amounts)
Net income, as reported $ 529 $ 531
Goodwill amortization, net of tax - 81
------- -------
Net income, as adjusted $ 529 $ 612
======= =======
Basic and diluted earnings per common share, as reported $ 0.09 $ 0.09
Goodwill amortization, net of tax - 0.01
------- -------
Basic and diluted earnings per common share, as adjusted $ 0.09 $ 0.10
======= =======
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 30 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.
The Company's primary method of growth is through the opening of new
store locations. New store openings are dilutive to earnings for the first nine
to twelve months as they build a customer base and develop a recurring revenue
stream. Generally, new stores have a maturation period of approximately three
years. The timing of new store openings and the number of stores in various
stages of the three-year maturation process will have an effect on quarterly
comparisons. In 2002, through the date of this report, the Company opened four
stores, two during the first quarter and two during April. Additionally, the
Company acquired 377 accounts from a competitor and consolidated them into an
existing Company store.
8
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenues.
(unaudited)
For the three months ended
March 31,
2002 2001
------ ------
Revenues
Rental revenue 92.7% 92.5%
Fees 2.6 2.8
Merchandise sales 4.7 4.7
------ ------
Total revenues 100.0 100.0
Operating expenses
Merchandise costs 35.4 34.5
Store expenses
Salaries and related 24.1 23.5
Occupancy 9.2 8.6
Advertising 6.3 6.3
Other expenses 12.8 13.8
------ ------
Total store expenses 52.4 52.2
------ ------
Total merchandise costs and store expenses 87.8 86.7
General and administrative expenses 7.2 7.6
Amortization of goodwill and noncompete agreements 0.2 0.7
------ ------
Total operating expenses 95.2 95.0
------ ------
Operating income 4.8 5.0
Interest expense 0.8 0.9
Other expense, net 0.5 0.4
------ ------
Income before income taxes 3.5 3.7
Income taxes 1.4 1.5
------ ------
Net income 2.1% 2.2%
====== ======
Pro forma net income data:
Net income as reported 2.1% 2.2%
Pro forma adjustment for goodwill amortization, net of tax 0.0 0.3
------ ------
Pro forma net income 2.1% 2.5%
====== ======
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Total revenues increased $675,000, or 2.8%, to $25.0 million for the three
months ended March 31, 2002 compared to $24.3 million for the three months ended
March 31, 2001. Revenue from stores opened in 2001 and 2002 increased $649,000
comparing the three months ended March 31, 2002 and 2001. Revenue from
comparable stores (stores in operation on January 1, 2001) modestly increased
$133,000, or 0.6%, which was offset by the loss of revenue recorded during the
prior period associated with an underperforming store sold in May 2001.
Merchandise costs increased $439,000, or 5.2%, to $8.8 million for the
three months ended March 31, 2002 compared to $8.4 million for the three months
ended March 31, 2001. Merchandise costs totaled 35.4% and 34.5% of total
revenues,
9
respectively, for the three months ended March 31, 2002 and 2001. The increase
in merchandise costs as a percentage of revenue was primarily the result of
lowering prices on new and pre-rented merchandise during mid-2001 due to both a
declining customer base and increasing older, pre-rented merchandise. However,
as a result of a recent increase in customers over the past two quarters and an
improvement in the quality of older, pre-rented merchandise, the Company began
to raise rental rates during the first quarter of 2002 to more normal levels.
Gross margins were down nearly 100 basis points comparing the three months ended
March 31, 2002 and 2001; but, were up nearly 150 basis points comparing the
three months ended March 31, 2002 and December 31, 2001.
Store expenses increased $431,000, or 3.4%, to $13.1 million for the three
months ended March 31, 2002 compared to $12.7 million for the three months ended
March 31, 2001. The increase was due to $550,000 associated with stores opened
in 2001 and 2002, partially offset by a decline in comparable store expenses,
resulting from stores operating more efficiently due to financial controls
implemented during 2002. Store expenses totaled 52.4% and 52.2% of total
revenues, respectively, for the three months ended March 31, 2002 and 2001.
Salaries and related expenses increased $314,000, of which $240,000, or 76% of
the increase related to stores opened during 2001 and 2002. The remaining
increase in salaries and related expenses was primarily payroll taxes, namely
increased workers compensation rates. The $215,000 increase in occupancy expense
was primarily due to stores opened in 2001 and 2002 and, to a lesser extent,
normal scheduled rent increases at comparable stores. Other store expenses
decreased $160,000 comparing the 2002 and 2001 quarters. The decrease in other
store expenses was due to a number of factors including modest declines in
inventory repairs and vehicle-related expenses. Costs associated with stores
opened during 2001 and 2002 partially offset the aforementioned decreases in
other store expenses.
General and administrative expenses decreased $61,000, or 3.3%, to $1.8
million for the three months ended March 31, 2002 compared to $1.9 million for
the three months ended March 31, 2001. General and administrative expenses
totaled 7.2% and 7.6% of total revenues, respectively, for the three months
ended March 31, 2002 and 2001.
Interest expense decreased $41,000, or 18.1%, from the prior year period
due to lower average outstanding debt and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchasing
additional and/or replacement rental-purchase merchandise, expenditures related
to new store openings, acquisitions and working capital requirements for new and
existing stores. The primary sources of liquidity and capital are from
operations, borrowings and the issuance of capital stock. For the three months
ended March 31, 2002 and 2001, purchases of rental merchandise (excluding
acquired inventory) amounted to $8.3 million and $8.5 million, respectively.
For the three months ended March 31, 2002, cash provided by operations
totaled $137,000 compared to $2.0 million for the three months ended March 31,
2001. The decline in cash provided by operations was due to changes in accounts
payable and other liability accounts as a result of the timing of payments to
vendors. Payments were higher during the quarter ended March 31, 2002 versus the
comparable quarter due to higher fourth quarter 2001 inventory purchases. Cash
used in investing activities totaled $616,000 and $815,000, respectively, for
the three months ended March 31, 2002 and 2001, and the change was primarily
cash used for an acquisition in March 2001. Due to repayments on the Company's
debt during the three months ended March 31, 2001, cash used in financing
activities totaled $1.4 million compared to financing activities providing
$59,000 for the three months ended March 31, 2002.
On January 11, 2002, the Company refinanced its debt with a $25.0 million
revolving loan agreement (the "Credit Facility") that matures in January 2005. A
borrowing base measured against rental purchase merchandise limits borrowings
under the Credit Facility. Excess availability as of March 31 and April 30, 2002
was approximately $1.7 million and $2.2 million, respectively. The agreement
requires the Company to meet certain quarterly financial covenants and ratios
including maximum leverage, minimum interest coverage, minimum net worth, fixed
charge coverage and rental merchandise usage ratios. In addition, the Company
must meet requirements regarding monthly, quarterly and annual financial
reporting. The agreement also contains non-financial covenants that restrict
actions of the Company with respect to additional indebtedness, certain loans
and investments, payment of dividends, acquisitions, mergers and consolidations,
dispositions of assets or subsidiaries, issuance of capital stock, capital
expenditures and leases. In the event of default, the outstanding loan balance
will be subject to the then prime interest rate plus 3%, in addition to the loan
becoming currently due. Interest charged on portions of the outstanding
principal balance is at LIBOR plus 3% and the remaining outstanding balance is
at prime plus 1%. The weighted average interest rate charged on the outstanding
balance at April 30, 2002 was 4.98%.
10
The Company has opened four new stores to date in 2002, including two in
April, and plans to open approximately eight more stores during the remainder of
the year. The Company believes it will continue to have the opportunity to
increase the number of its stores and rental-purchase agreements through
selective acquisitions. During April 2002, the Company acquired 377 accounts
from a competitor and consolidated them into an existing store. 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, 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 or its current lender.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q, other than those concerning historical
information, or, in future filings by Rainbow Rentals, Inc. with the Securities
and Exchange Commission (SEC), in the Company's press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, and are
made pursuant to the "safe harbor" provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements use such words as "may", "will", "should", "expects", "plans",
"anticipates", "estimates", "believes", "thinks", "continues", "indicates",
"outlook", "looks", "goals", "initiatives", "projects", or variations thereof.
Forward-looking statements are based on management's current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date made. These statements are likely to address the Company's growth
strategy, future financial performance (including sales and earnings), strategic
initiatives, marketing and expansion plans and the impact of operating
initiatives. Forward-looking statements are subject to a number of risks,
uncertainties and other factors, many of which are outside the control of the
Company that could cause the Company's actual results to differ materially from
those expressed or implied in such statements. These risks and uncertainties
include the following: risks associated with general economic conditions;
failure to adequately execute plans and unforeseen circumstances beyond the
Company's control in connection with development, implementation and execution
of new business processes, procedures and programs; greater than expected
expenses associated with the Company's activities; the effects of new accounting
standards; and other risks and uncertainties described in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, and in other reports
and exhibits to reports filed with the SEC. You are strongly urged to review
such filings for a more detailed discussion of such risks and uncertainties. The
Company's SEC filings are available, at no charge, at www.sec.gov and through
the Company's web site at www.rainbowrentals.com. The foregoing list of
important factors is not exclusive. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in information about market risk from that
provided in the 2001 Annual Report on Form 10-K.
11
PART II - OTHER INFORMATION
RAINBOW RENTALS, INC.
MARCH 31, 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits: 4.3 First Amendment to Credit Agreement dated as of
March 30, 2002 by and among Rainbow Rentals, Inc., the Banks
party thereto and National City Bank, as agent for the Banks.
B. Reports on Form 8-K: None
12
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)
/s/ WAYLAND J. RUSSELL
---------------------------------
Wayland J. Russell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2002
/s/ MICHAEL A. PECCHIA
---------------------------------
Michael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2002
13