1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Initial Report (Date of earliest event reported) to which this form
8-K/A is an amendment: MARCH 1, 1999.
Commission file number 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 Number)
3711 Starr Centre Drive
Canfield, Ohio 44406
Telephone: (330) 533-5363
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
2
RAINBOW RENTALS, INC.
Amendment No. 1 on Form 8-K/A
to
Current Report on Form 8-K
Introduction
This Amendment No. 1 on Form 8-K/A (this "Amendment") is being filed by
Rainbow Rentals, Inc. (the "Company") to amend Item 7 of the Company's Current
Report on Form 8-K dated March 1, 1999 (the "Initial Report") relating to the
acquisition on March 1, 1999 of substantially all of the assets of Blue Ribbon
Rentals, Inc. and Blue Ribbon Rentals II, Inc. (collectively "Blue Ribbon").
Pursuant to the instructions to Item 7 of Form 8-K, the Company is filing this
Amendment (not later than 60 days after the date that the Initial Report was
required to be filed) in order to include the financial statements and proforma
financial information required with respect to the Blue Ribbon acquisition.
Pursuant to Rule 12b-15 of the SEC Rules, the complete text of Item 7, as
amended, is set forth herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of businesses acquired.
Table of Contents..........................................................................F-1
Report of Independent Certified Public Accountants.........................................F-2
Combined Balance Sheet of Blue Ribbon Rentals, Inc. and Blue Ribbon
Rentals II, Inc. as of December 31, 1997...............................................F-3
Combined Statement of Earnings and Retained Earnings of Blue Ribbon
Rentals, Inc. and Blue Ribbon Rentals II, Inc. for the year ended
December 31, 1997......................................................................F-4
Combined Statement of Cash Flows of Blue Ribbon Rentals, Inc. and
Blue Ribbon Rentals II, Inc. for the year ended December 31, 1997.....................F-5
Notes to the Combined Financial Statements of Blue Ribbon Rentals, Inc. and
Blue Ribbon Rentals II, Inc............................................................F-6
Combined Balance Sheet of Blue Ribbon Rentals, Inc. and Blue Ribbon
Rentals II, Inc. as of September 30, 1998 (unaudited)..................................F-7
Combined Statements of Earnings and Retained Earnings of Blue Ribbon
Rentals, Inc. and Blue Ribbon Rentals II, Inc. for the nine months
ended September 30, 1998 and 1997 (unaudited)..........................................F-8
Combined Statements of Cash Flows of Blue Ribbon Rentals, Inc. and
Blue Ribbon Rentals II, Inc. for the nine months ended September 30,
1998 and 1997 (unaudited)..............................................................F-9
Notes to the (unaudited) Combined Financial Statements of Blue Ribbon Rentals, Inc. and
Blue Ribbon Rentals II, Inc............................................................F-10
(b) Unaudited proforma financial information reflecting the effect of the
Blue Ribbon acquisition on the condensed consolidated financial
statements of Rainbow Rentals, Inc.
Unaudited Proforma Condensed Consolidated Statement of Income for the year ended
December 31, 1997..................................................................F-11
Unaudited Proforma Condensed Consolidated Statement of Income for the nine months
ended September 31, 1998...........................................................F-12
Notes to Unaudited Proforma Condensed Consolidated Statements of Income...................F-13
3
(c) The exhibits furnished in connection with this Report are as follows:
Exhibit No. Description
- ----------- -----------
4.1 Consent and Amendment No. 11 to Loan and Security Agreement
between Rainbow Rentals, Inc. and Bank of America National
Trust & Savings Association, dated March 1, 1999 is hereby
incorporated by reference to the Company's Current Report on
Form 8-K dated March 16, 1999.
10.1 Amended and Restated Asset Purchase Agreement dated March 1,
1999 among Rainbow Rentals, Inc., Blue Ribbon Rentals, Inc.,
Blue Ribbon Rentals II, Inc. and William Wendell, is hereby
incorporated by reference to the Company's Current Report on
Form 8-K dated March 16, 1999.
The Registrant hereby undertakes to furnish supplementally a copy of any
schedule or exhibit to the Amended and Restated Asset Purchase Agreement omitted
herefrom, as permitted by Item 601(b)(2) of Regulation S-K, to the Commission
upon request.
4
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.
Dated: May 14, 1999
RAINBOW RENTALS, INC.
By /S/ WAYLAND J. RUSSELL
------------------------------------
Chairman and Chief Executive Officer
By /S/ MICHAEL A. PECCHIA
------------------------------------
Chief Financial Officer
5
REPORT ON
BLUE RIBBON RENTALS, INC.
AND
BLUE RIBBON RENTALS II, INC.
GRANT THORNTON LLP
CERTIFIED PUBLIC ACCOUNTANTS
6
F-1
BLUE RIBBON RENTALS, INC.
AND
BLUE RIBBON RENTALS II, INC.
T A B L E O F C O N T E N T S
PAGE
----
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS..................................................... F-2
FINANCIAL STATEMENTS
COMBINED BALANCE SHEET......................................... F-3
COMBINED STATEMENT OF EARNINGS AND
RETAINED EARNINGS........................................... F-4
COMBINED STATEMENT OF CASH FLOWS............................... F-5
NOTES TO COMBINED FINANCIAL STATEMENTS......................... F-6
7
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
BLUE RIBBON RENTALS, INC.
AND BLUE RIBBON RENTALS II, INC.
We have audited the accompanying combined balance sheet (see Note A) of Blue
Ribbon Rentals, Inc. and Blue Ribbon Rentals II, Inc. (collectively referred to
as the "Company") as of December 31, 1997, and the related combined statements
of earnings and retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Company as of
December 31, 1997, and the results of its combined operations and cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Cleveland, Ohio
April 14, 1999
8
F-3
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
COMBINED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS
Cash $ 356,582
Accounts receivable 33,740
----------
Total Current Assets 390,322
PROPERTY HELD FOR RENT - AT COST (NOTE A) 6,066,599
Less accumulated depreciation 2,618,827
----------
3,447,772
PROPERTY AND EQUIPMENT - NET (NOTES A AND B) 862,546
OTHER ASSETS 64,272
----------
4,764,912
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 50,117
Accounts payable 237,755
Accounts payable - related parties (note D) 848,532
Accrued expenses 317,706
----------
Total Current Liabilities 1,454,110
LONG-TERM DEBT (NOTE C) 1,018,661
SHAREHOLDER'S EQUITY
Common stock of Blue Ribbon Rentals, Inc.; 750 shares authorized at no par
value; 50 shares issued and outstanding 500
Common stock of Blue Ribbon Rentals II, Inc.; 850 shares authorized at no par
value; 100 shares issued and outstanding 500
Additional paid-in capital 492,348
Retained earnings 1,798,793
----------
2,292,141
----------
$4,764,912
==========
The accompanying notes are an integral part of this statement.
9
F-4
Blue Ribbon Rentals, Inc.
And
Blue Ribbon Rentals II, Inc.
COMBINED STATEMENT OF EARNINGS AND RETAINED EARNINGS
For the year ended December 31, 1997
REVENUE:
Rental income $ 8,032,491
Late charge income 486,851
Other income 282,474
-----------
8,801,816
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Property held for rent 2,040,849
Property and equipment 306,019
Rental property charged off 494,018
Operating expenses 5,334,136
-----------
Total Costs and Operating Expenses 8,175,022
-----------
Operating income 626,794
OTHER INCOME (EXPENSE):
Interest income 147,634
Interest expense (254,263)
Gain on sale of property and equipment 7,964
Gain on sale of assets from store location 46,603
(52,062)
NET EARNINGS 574,732
Retained earnings - beginning 1,224,061
-----------
Retained earnings - ending $ 1,798,793
===========
The accompanying notes are an integral part of this statement.
10
F-5
Blue Ribbon Rentals, Inc.
And
Blue Ribbon Rentals II, Inc.
COMBINED STATEMENT OF CASH FLOWS
For the year ended December 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 574,732
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,346,868
Cost of rental property sold or charged off 911,181
Purchase of property held for rent (3,626,651)
Gain on sale of property and equipment (7,964)
Gain on sale of assets from store location (46,603)
Changes in operating assets and liabilities:
Increase in accounts receivable (6,160)
Decrease in other assets 63,375
Increase in accounts payable 45,952
Decrease in accrued expenses (29,333)
-----------
Net cash provided by operating activities 225,397
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (514,273)
Proceeds from sale of property and equipment 16,790
Proceeds from sale of store location 90,267
-----------
Net cash used in investing activities (407,216)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (179,818)
Net borrowings (repayments) from:
Notes payable (532,000)
Related parties 1,148,213
-----------
Net cash used in financing activities 436,395
-----------
NET INCREASE IN CASH 254,576
Cash at beginning of year 102,006
-----------
Cash at end of year $ 356,582
===========
The accompanying notes are an integral part of this statement.
11
F-6
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.
PRINCIPLES OF COMBINATION
-------------------------
The combined financial statements include the financial statements of Blue
Ribbon Rentals, Inc. and the financial statements of Blue Ribbon Rentals II,
Inc. (collectively referred to as the "Company"). The financial statements
of the companies have been combined due to common ownership of the
companies.
NATURE OF BUSINESS
------------------
Blue Ribbon Rentals, Inc. and Blue Ribbon Rentals II, Inc. are Ohio
corporations which operate in the rent-to-own industry. Blue Ribbon Rentals,
Inc. operates a chain of eight stores located in Northeast Ohio and Blue
Ribbon Rentals II, Inc. operates a chain of seven stores located in
Northeast Ohio and Western Pennsylvania.
USE OF ESTIMATES
----------------
The 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY HELD FOR RENT
----------------------
Rental property consists of consumer durable goods such as consumer audio
and visual products, appliances and furniture held for rent or rented in the
normal course of business. Rental property is rented to customers pursuant
to rental agreements which provide for either weekly or monthly rental
payment terms. Generally, the rental agreements provide for 78 to 104 weekly
payments or 18 to 24 monthly payments. The rental agreements provide for
ownership of the property to pass to the customer after a stated number of
rental payments have been made. The rental agreements may be terminated at
any time by the customer, and, if terminated, the rental property is
returned to the Company. The customer can elect to exercise an option to
purchase the rental property for amounts established at the initiation of
the rental agreement, which typically are less than the future remaining
agreement payments.
12
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
PROPERTY HELD FOR RENT - CONTINUED
Payments due under rental agreements in force at December 31, 1997 would
approximate $11,000,000 if collected in full over the terms of the
agreements.
Property held for rent is stated at cost less accumulated depreciation and
an allowance for skips, stolen and charge-offs. The Company depreciates the
property over its estimated useful life with the property being fully
depreciated 24 months after acquisition. For tax purposes, the Company uses
3 years MACRS.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
INCOME TAXES
------------
The Company has elected to be taxed as an S Corporation under the provisions
of Section 1361 of the Internal Revenue Code and, therefore, is not subject
to federal and certain state income taxes. Instead, the shareholder is taxed
on the Company's taxable income, whether or not distributed. Accordingly, a
provision for these income taxes is not provided in these financial
statements.
RENTAL REVENUE
--------------
Revenue from property held for rent is recognized over the terms of the
lease period. Amounts received from the sale of property held for rent, in
excess of the carrying value of such property, are included in rental
income.
STATEMENT OF CASH FLOWS
-----------------------
For purposes of the statement of cash flows, management considers all highly
liquid investments with a maturity of less than three months to be cash
equivalents. Cash paid for interest amounted to $68,962 for the year ended
December 31, 1997.
13
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997:
Building and land $ 18,000
Leasehold improvements 743,952
Vehicles 858,418
Equipment 332,198
Furniture and fixtures 64,167
----------
2,016,735
Less accumulated depreciation 1,154,189
==========
$ 862,546
==========
NOTE C - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997:
Revolving loans - bank $1,000,000
Notes payable - bank 68,778
------------
1,068,778
Less current portion 50,117
============
$1,018,661
============
14
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE C - LONG-TERM DEBT - CONTINUED
The revolving loans - bank represent amounts due under two revolving credit
arrangements (one for each Company) with Star Bank, N.A. The agreements were
amended in 1997, to provide for combined maximum borrowings of $1.7 million,
subject to formulas contained therein. The amended agreements run through
June 30, 1999 and provide for interest at the bank's prime rate (8.5% at
December 31, 1997) plus 3/4%. Borrowings under the agreements are
collateralized by substantially all of the Company's assets and an insurance
policy on the life of the sole shareholder in the amount of $1,500,000.
The notes payable - bank represents amounts payable in monthly principal and
interest installments aggregating approximately $4,600. Interest on the
notes range from 9% to 9.5%. The notes are collateralized by certain
vehicles.
NOTE D - RELATED PARTY TRANSACTIONS
The Company is affiliated with numerous other entities by virtue of common
management and control. The Company periodically advances monies to and
receives advances from its sole shareholder and other affiliated entities.
The net amount due to related parties was $848,532 at December 31, 1997,
which consists of $1,574,210 due from the related parties to Blue Ribbon
Rentals, Inc. and $2,422,742 due to related parties from Blue Ribbon Rentals
II, Inc. The balances bear interest at the rate of 10% per annum. Interest
income recognized on advances to related parties amounted to $143,922 and
interest expense incurred on advances from related parties amounted to
$182,535 in 1997.
The Company leases its store locations on a month-to-month basis from the
shareholder and an affiliated entity. These related parties lease the
properties from unrelated parties under leases expiring at various dates
through 2008.
Rent expense for the fifteen store locations and the home office leased on a
month-to-month basis from the shareholder and an affiliated entity
approximated $370,000 in 1997.
NOTE E - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which covers substantially all
employees meeting minimum age and service requirements. Contributions under
the plan are at the discretion of the Board of Directors and approximated
$17,300 for 1997.
15
F-7
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
COMBINED BALANCE SHEET (UNAUDITED)
September 30, 1998
ASSETS
CURRENT ASSETS
Cash $ 408,605
Accounts receivable 53,148
Prepaid expenses 32,997
----------
Total Current Assets 494,750
PROPERTY HELD FOR RENT - AT COST 6,367,938
Less accumulated depreciation 2,993,617
----------
3,374,321
PROPERTY AND EQUIPMENT - NET 666,647
OTHER ASSETS 76,558
----------
$4,612,276
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 31,522
Accounts payable 232,806
Accounts payable - related parties 512,564
Accrued expenses 464,848
----------
Total Current Liabilities 1,241,740
LONG-TERM DEBT
10,039
SHAREHOLDER'S EQUITY
Common stock of Blue Ribbon Rentals, Inc.; 750 shares authorized at no par
value; 50 shares issued and outstanding 500
Common stock of Blue Ribbon Rentals II, Inc.; 850 shares authorized at no par
value; 100 shares issued and outstanding 500
Additional paid-in capital 492,348
Retained earnings 2,867,149
----------
3,360,497
----------
$4,612,276
==========
See accompanying notes to unaudited condensed combined financial statements.
16
F-8
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
COMBINED STATEMENT OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
For the nine months ended September 30, 1998 and September 30, 1997
SEPTEMBER, 1998 SEPTEMBER, 1997
--------------- ---------------
REVENUE:
Rental income $ 6,751,308 $ 5,843,019
Late charge income 423,136 364,611
Other income 285,735 202,100
----------- -----------
7,460,179 6,409,730
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Property held for rent 1,778,504 1,522,010
Property and equipment 247,956 214,164
Rental property charged off 437,629 366,168
Operating expenses 3,874,417 3,632,817
----------- -----------
Total Costs and Operating Expenses 6,338,506 5,735,159
----------- -----------
Operating income 1,121,673 674,571
OTHER INCOME (EXPENSE):
Interest income 121,464 115,407
Interest expense (178,789) (192,543)
Gain on sale of property and equipment 4,008 9,009
Gain on sale of assets from store location - 46,603
----------- -----------
(53,317) (21,524)
----------- -----------
NET EARNINGS 1,068,356 653,047
Retained Earnings - beginning 1,798,793 1,224,061
----------- -----------
Retained Earnings - ending $ 2,867,149 $ 1,877,108
=========== ===========
See accompanying notes to unaudited condensed combined financial statements.
17
F-9
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
COMBINED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1998 and September 30, 1997
SEPTEMBER, 1998 SEPTEMBER, 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,068,356 $ 653,047
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,026,460 1,736,174
Cost of rental property sold or charged off 485,795 704,260
Purchase of property held for rent (2,290,870) (2,252,063)
Gain on sale of property and equipment 4,008 (9,009)
Loss (Gain) on sale of assets from store location - (46,603)
Changes in operating assets and liabilities:
Increase in accounts receivable (19,408) (24,358)
Increase in other assets and prepaid expenses (45,283) (98,836)
Decrease in accounts payable (4,949) 44,410
Increase in accrued expenses 147,142 127,128
----------- -----------
Net cash provided by operating activities 1,371,251 834,150
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 43,957 (439,937)
Proceeds from sale of store location - 90,262
----------- -----------
Net cash provided by (used in) investing activities 43,957 (349,675)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt
Net borrowings (repayments) from:
Notes payable (1,027,217) (1,675,596)
Related parties (335,968) 1,420,204
----------- -----------
Net cash used in financing activities (255,392) (1,363,185)
NET INCREASE IN CASH 229,083 52,023
Cash at beginning of year 356,582 102,006
----------- -----------
Cash at end of year $ 408,605 $ 331,089
=========== ===========
See accompanying notes to unaudited condensed combined financial statements.
18
F-10
Blue Ribbon Rentals, Inc.
and
Blue Ribbon Rentals II, Inc.
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
- --------------------------------------------------------------------------
NATURE OF BUSINESS
------------------
Blue Ribbon Rentals, Inc. and Blue Ribbon Rentals II, Inc. are Ohio
corporations which operate in the rent-to-own industry. Blue Ribbon Rentals,
Inc. operates a chain of eight stores located in Northeast Ohio and Blue Ribbon
Rentals II, Inc. operates a chain of seven stores located in Northeast Ohio and
Western Pennsylvania.
BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed combined financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1998. The
unaudited financial statements should be read in conjunction with the audited
financial statements and footnotes thereto for the year ended December 31, 1997.
PRINCIPLES OF COMBINATION
-------------------------
The combined financial statements include the financial statements of
Blue Ribbon Rentals, Inc. and the financial statements of Blue Ribbon Rentals
II, Inc. (collectively referred to as the "Company"). The financial statements
of the companies have been combined due to common ownership of the companies.
USE OF ESTIMATES
----------------
The 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B - SUBSEQUENT EVENT
- -------------------------
On March 1, 1999, substantially all the assets and operations of the
Company were sold to Rainbow Rentals, Inc.
19
UNAUDITED PROFORMA CONDENSED CONSOLDIATED FINANCIAL INFORMATION
The following unaudited proforma condensed financial statements of
income give effect to the acquisition by Rainbow Rentals, Inc. ( the "Company")
of substantially all the assets and operations of Blue Ribbon Rentals, Inc. and
Blue Ribbon Rentals II, Inc. ( collectively, "Blue Ribbon" ) in a transaction to
be accounted for as a purchase. The unaudited proforma condensed statements of
income are based on the consolidated statements of income of the Company for the
nine months ended September 30, 1998 and the year ended December 31, 1997 and
the combined statements of earnings of Blue Ribbon for the nine months ended
September 30, 1998 and the year ended December 31, 1997. The results of
operations of the Company and Blue Ribbon have been combined to give effect to
the acquisition as if it had occurred on January 1, 1997, the beginning of the
Company's 1997 fiscal year.
The unaudited proforma condensed consolidated financial information is
based upon preliminary fair value allocations relative to the purchase of Blue
Ribbon. The final allocation of the purchase price may vary as additional
information is obtained, and accordingly, the ultimate allocations may differ
from the allocations used in the unaudited proforma consolidated condensed
financial statements. The proforma financial statements were prepared in
accordance with U.S. GAAP. No unaudited proforma condensed balance sheet as of
September 30, 1998 has been included because the Company's consolidated balance
sheet as of March 31, 1999, which reflects the effects of the Blue Ribbon
acquisition, has been made available in the Company's Form 10-Q, filed with the
Securities and Exchange Commission on May 14, 1999.
The unaudited proforma condensed consolidated financial information
presented is not necessarily indicative of the operating results that would have
been reported had the acquisition actually occurred on the dates indicated or
which may be obtained in the future. The proforma condensed statements of income
should be read in conjunction with the audited financial statements and related
notes thereto of Blue Ribbon appearing in the response to Item 7 of this current
report on Form 8-K/A and the historical financial statements, related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" of the Company for the year ended December 31, 1998 and the nine
months ended September 30, 1998, previously filed with the Securities and
Exchange Commission.
20
F-11
RAINBOW RENTALS, INC. AND SUBSIDIARY
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Historical
------------------------------- Proforma Proforma
Rainbow Blue Ribbon Adjustments Combined
------- ----------- ----------- --------
(note a)
Revenues $ 55,328 $ 8,802 $ - $ 64,130
Operating expenses
Merchandise costs 19,145 2,535 - 21,680
Store expenses 25,287 4,380 - 29,667
---------- ---------- ---------- ----------
Total merchandise costs and store expenses 44,432 6,915 - 51,347
General and administrative 4,096 1,260 (439)(b,f) 4,917
Amortization - - 409(c) 409
---------- ---------- ---------- ----------
Total operating expenses 48,528 8,175 (30) 56,673
Operating income 6,800 627 30 7,457
Interest expense 1,822 107 769(d) 2,698
Other expense (income), net 329 (55) - 274
---------- ---------- ---------- ----------
Income before income taxes 4,649 575 (739) 4,485
Income taxes 1,968 - (68)(e) 1,900
---------- ---------- ---------- ----------
Net income $ 2,681 $ 575 $ (671) $ 2,585
========== ========== ========== ==========
Earnings per common share:
Basic and diluted earnings per common share $ 0.59 $ 0.57
========== ==========
Weighted average common shares outstanding:
Basic and diluted 4,509,406 4,509,406
========== ==========
See accompanying notes to unaudited proforma condensed consolidated financial
statements
21
F-12
RAINBOW RENTALS, INC. AND SUBSIDIARY
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Historical
------------------------------- Proforma Proforma
Rainbow Blue Ribbon Adjustments Combined
------- ----------- ----------- --------
(note a)
Revenues $ 46,640 $ 7,460 $ - $ 54,100
Operating expenses
Merchandise costs 15,872 2,216 - 18,088
Store expenses 21,973 3,573 - 25,546
----------- ----------- ----------- -----------
Total merchandise costs and store expenses 37,845 5,789 - 43,634
General and administrative 3,472 632 -(f) 4,104
Amortization - - 307(c) 307
----------- ----------- ----------- -----------
Total operating expenses 41,317 6,421 307 48,045
Operating income 5,323 1,039 (307) 6,055
Interest expense 884 57 581(d) 1,522
Other expense (income), net 9 (86) - (77)
----------- ----------- ----------- -----------
Income before income taxes 4,430 1,068 (888) 4,610
Income taxes 1,874 - 75(e) 1,949
----------- ----------- ----------- -----------
Net income $ 2,556 $ 1,068 $ (963) $ 2,661
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted earnings per common share $ 0.55 $ 0.57
=========== ===========
Weighted average common shares outstanding:
Basic and diluted 4,648,262 4,648,262
=========== ===========
See accompanying notes to unaudited proforma condensed consolidated financial
statements
22
F-13
Note 1- Proforma adjustments to the statements of income and other disclosure.
(a) The historical combined statement of earnings information of Blue Ribbon
has been reclassified to conform with the statement of income presentation
used by the Company. The most significant reclassification changes involved
separating Blue Ribbon operating expenses into the corresponding store
expenses and general and administrative expenses components.
(b) Reflects elimination of amounts paid to the sole shareholder of Blue Ribbon
to reimburse income taxes paid directly by the sole shareholder relating to
Blue Ribbon taxable income. As Blue Ribbon elected to be taxed as an S
Corporation under the provisions of the Internal Revenue Code, it is not
subject to federal and state income taxes. See proforma footnote (e) for
the effect of recording a provision for income taxes at Blue Ribbon's
estimated effective tax rate.
(c) Reflects the amortization of goodwill of approximately $7.0 million over a
20 year useful life and amortization of a $300,000 agreement not to compete
over the contract life of five years.
(d) Reflects interest expense on borrowings of approximately $10.4 million
incurred in connection with the acquisition of Blue Ribbon. The Company's
Credit Facility used to fund the acquisition bears interest at the prime
rate. The prime rate on March 1, 1999 was 7.75 percent and this rate has
been used for the proforma adjustment. For purposes of the proforma
statements of income, a 1/8 percentage point change in the prime rate would
result in an increase or decrease in income before income taxes of
approximately $13,000 and $10,000 for the year ended December 31, 1997 and
the nine months ended September 30, 1998, respectively.
This adjustment additionally includes the effect of eliminating net
interest paid by Blue Ribbon to its sole shareholder of $38,613 and
$24,556, respectively, during the year ended December 31, 1997 and the nine
months ended September 30, 1998. The net amount due by Blue Ribbon to its
sole shareholder on March 1, 1999 was not assumed by the Company and thus
the interest effect will not impact the Company's results on an ongoing
basis.
(e) Reflects the income tax effect of proforma adjustments to income before
income taxes as well as income taxes calculated on Blue Ribbon's historical
income before income taxes. This adjustment based on Blue Ribbon's
historical earnings was required given Blue Ribbon's elected S Corporation
status under provisions of the Internal Revenue Code. The tax adjustment
was calculated using an estimated combined federal and state statutory rate
of 41.5 percent.
(f) Historical combined financial statements of Blue Ribbon (as reclassified to
conform with the Company's format) include general and administrative
expenses of $1.3 million and $0.6 million, respectively, for the year ended
December 31, 1997 and the nine months ended September 30, 1998. These
expenses are primarily associated with the operation of Blue Ribbon's
headquarters location. These operations were not acquired by the Company.
While the Company's management cannot precisely estimate the impact of the
Blue Ribbon acquisition on its general and administrative expenses,
management does anticipate considerable cost savings given its ability to
absorb additional administrative activities with its pre-acquisition home
office structure. No proforma adjustment has been made to reflect such
anticipated savings.