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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: June 30, 1999
[ ] 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
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(Address of principal executive offices)
330-533-5363
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(Registrant's telephone number)
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(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 June 30, 1999: 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
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Income - for
the three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of
Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1999 and 1998 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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
Current assets
Cash $ 757 $ --
Rental-purchase merchandise, net 29,997 25,246
Prepaid expenses and other current assets 854 706
-------- --------
Total current assets 31,608 25,952
Property and equipment, net 4,047 3,394
Deferred income taxes 1,132 1,058
Goodwill, net 8,414 910
Other assets, net 1,843 1,754
-------- --------
Total assets $ 47,044 $ 33,068
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ 54 $ 80
Accounts payable 2,184 1,242
Accrued income taxes 530 290
Accrued compensation and related costs 1,504 1,429
Other liabilities and accrued expenses 1,404 1,166
Deferred income taxes 2,287 1,913
-------- --------
Total current liabilities 7,963 6,120
Long-term debt 9,775 --
Obligations under capital leases, excluding current installments 104 110
-------- --------
Total liabilities 17,842 6,230
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 11,039 11,039
Retained earnings 20,070 17,706
Treasury stock, 466,875 common shares at cost (1,907) (1,907)
-------- --------
Total shareholders' equity 29,202 26,838
-------- --------
Total liabilities and shareholders' equity $ 47,044 $ 33,068
======== ========
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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
------------------------- -------------------------
Revenues
Rental revenue $ 19,094 $ 14,764 $ 36,054 $ 28,932
Fees 695 484 1,281 916
Merchandise sales 567 353 1,280 889
----------- ----------- ----------- -----------
Total revenues 20,356 15,601 38,615 30,737
Operating expenses
Merchandise costs 6,681 5,326 12,796 10,391
Store expenses
Salaries and related 4,635 3,482 8,761 6,783
Occupancy 1,472 1,179 2,857 2,301
Advertising 1,039 920 1,916 1,741
Other expenses 2,533 1,872 4,755 3,643
----------- ----------- ----------- -----------
Total store expenses 9,679 7,453 18,289 14,468
----------- ----------- ----------- -----------
Total merchandise costs and store
expenses 16,360 12,779 31,085 24,859
General and administrative expenses 1,421 1,156 2,735 2,353
Amortization 121 -- 182 --
----------- ----------- ----------- -----------
Total operating expenses 17,902 13,935 34,002 27,212
----------- ----------- ----------- -----------
Operating income 2,454 1,666 4,613 3,525
Interest expense 202 373 300 842
Other expense (income), net 148 (135) 271 (101)
----------- ----------- ----------- -----------
Income before income taxes 2,104 1,428 4,042 2,784
Income taxes 874 606 1,678 1,183
----------- ----------- ----------- -----------
Net income $ 1,230 $ 822 $ 2,364 $ 1,601
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE:
Basic $ 0.21 $ 0.19 $ 0.40 $ 0.40
=========== =========== =========== ===========
Diluted $ 0.21 $ 0.19 $ 0.40 $ 0.40
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,925,735 4,318,592 5,925,735 3,998,939
----------- ----------- ----------- -----------
Diluted 5,959,430 4,320,133 5,948,336 3,999,714
----------- ----------- ----------- -----------
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)
TOTAL
COMMON STOCK RETAINED TREASURY SHAREHOLDERS'
NUMBER COST EARNINGS STOCK EQUITY
------ ---- -------- ----- ------
Balance at December 31, 1996 6,392,610 $ 60 $ 11,407 $ -- $ 11,467
Net income -- -- 2,681 -- 2,681
Acquisition of common shares (2,716,875) -- -- (11,095) (11,095)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 3,675,735 60 14,088 (11,095) 3,053
Net income -- -- 3,618 -- 3,618
Issuance of common shares 2,250,000 10,979 -- 9,188 20,167
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 5,925,735 11,039 17,706 (1,907) 26,838
Net income (unaudited) -- -- 2,364 -- 2,364
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 (unaudited) 5,925,735 $ 11,039 $ 20,070 $ (1,907) $ 29,202
========== ========== ========== ========== ==========
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 THE SIX MONTHS ENDED
JUNE 30,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows from operating activities
Net income 2,364 1,601
Reconciliation of net income to net cash provided by operating
activities
Depreciation of property and equipment and
amortization of intangibles 1,168 933
Depreciation of rental-purchase merchandise 10,325 9,303
Deferred income taxes 300 365
Gain on disposal of property and equipment (12) (131)
Purchases of rental-purchase merchandise (13,945) (10,976)
Rental-purchase merchandise disposed, net 2,439 1,062
(Increase) decrease in
Prepaid expenses and other current assets (148) 415
Income tax receivable -- 347
Increase (decrease) in
Accounts payable 717 741
Accrued income taxes 240 (88)
Accrued compensation and related costs 75 (52)
Other liabilities and accrued expenses 238 (613)
-------- --------
Net cash provided by operating activities 3,761 2,907
-------- --------
Cash flows from investing activities
Purchase of property and equipment, net (1,159) (745)
Proceeds on the sale of property and equipment 99 185
Acquisitions (11,687) --
-------- --------
Net cash used in investing activities (12,747) (560)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt borrowings 21,775 29,650
Current installments and repayments of long-term debt (11,980) (41,709)
Proceeds from stock offering, net of related expenses -- 20,167
Decrease in notes payable -- (10,488)
Loan origination fees paid (20) --
Principal payments under capital lease obligations (32) (30)
-------- --------
Net cash provided by (used in) financing activities 9,743 (2,410)
-------- --------
Net increase (decrease) in cash 757 (63)
Cash at beginning of period -- 77
-------- --------
Cash at end of period $ 757 $ 14
======== ========
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 222 $ 925
Income taxes $ 1,197 $ 560
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 89 stores in nine states: Connecticut, Massachusetts,
Michigan, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, and
Tennessee. The Company's corporate headquarters are 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, 1998.
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 For the six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Net income available to common shareholders $ 1,230 $ 822 $ 2,364 $ 1,601
Denominator:
Basic weighted average shares 5,925,735 4,318,592 5,925,735 3,998,939
Effect of dilutive stock options 33,695 1,541 22,601 775
---------- ---------- ---------- ----------
Diluted weighted average shares 5,959,430 4,320,133 5,948,336 3,999,714
========== ========== ========== ==========
Basic earnings per share $ 0.21 $ 0.19 $ 0.40 $ 0.40
========== ========== ========== ==========
Diluted earnings per share $ 0.21 $ 0.19 $ 0.40 $ 0.40
========== ========== ========== ==========
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 June 30, 1999 the Company operated 89 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 second quarter, the Company opened five new stores including
its first store in South Carolina. One of the new store openings was a result of
closing and relocating two of the stores acquired in the first quarter.
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 FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
STATEMENT OF INCOME DATA:
Revenues
Rental revenue 93.8% 94.6% 93.4% 94.1%
Fees 3.4 3.1 3.3 3.0
Merchandise sales 2.8 2.3 3.3 2.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Merchandise costs 32.8 34.1 33.1 33.5
Store expenses
Salaries and related 22.8 22.3 22.7 22.1
Occupancy 7.2 7.6 7.4 7.5
Advertising 5.1 5.9 5.0 5.7
Other expenses 12.4 12.0 12.3 11.8
----- ----- ----- -----
Total store expenses 47.5 47.8 47.4 47.1
----- ----- ----- -----
Total merchandise costs and store
expenses 80.3 81.9 80.5 80.9
General and administrative expenses 7.0 7.4 7.1 7.6
Amortization 0.6 0.0 0.5 0.0
----- ----- ----- -----
Total operating expenses 87.9 89.3 88.1 88.5
----- ----- ----- -----
Operating income 12.1 10.7 11.9 11.5
Interest expense 1.0 2.4 0.8 2.7
Other expense (income), net 0.8 (0.9) 0.7 (0.3)
----- ----- ----- -----
Income before income taxes 10.3 9.2 10.4 9.1
Income taxes 4.3 3.9 4.3 3.9
----- ----- ----- -----
Net income 6.0% 5.3% 6.1% 5.2%
===== ===== ===== =====
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COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
For the three months ended June 30, 1999, total revenues increased to
$20.4 million from $15.6 million, an increase of 30.5% over the comparable 1998
period. The increase was due to revenue from the stores opened and acquired in
1999, the inclusion of a full three months' results from the nine stores opened
and acquired in 1998 and an increase in comparable store revenue. The increase
in revenue from the stores opened and acquired in 1999 accounted for $2.6
million, or 54.0% of the increase, stores opened and acquired in 1998 accounted
for $1.2 million, or 24.3% of the increase, and the increase in comparable store
revenue accounted for $1.0 million, or 21.7% of the increase.
For the three months ended June 30, 1999, merchandise costs increased
to $6.7 million from $5.3 million, an increase of 25.5% over the comparable 1998
period, but as a percentage of total revenues, decreased to 32.8% from 34.1%.
The dollar increase was primarily due to merchandise costs associated with
stores opened and acquired in 1999 and 1998. The percentage decrease is a result
of improved pricing, primarily of pre-rented merchandise, as well as an increase
in the rentals of higher-margin merchandise.
For the three months ended June 30, 1999, total store expenses
increased to $9.7 million from $7.5 million, an increase of 29.8% over the
comparable 1998 period, but as a percentage of total revenues decreased to 47.5%
from 47.8%. The dollar increase was due to expenses associated with stores
opened and acquired in 1999 and the inclusion of a full three months' expenses
from stores opened and acquired in 1998. Salaries and related increased to $4.6
million from $3.5 million, an increase of 33.1% over the comparable 1998 period
and as a percentage of total revenues increased to 22.8% from 22.3%. The
increase was due to additional personnel associated with stores opened and
acquired in 1999 and the inclusion of a full three months of salaries and
related expenses from stores opened and acquired in 1998. Occupancy increased to
$1.5 million from $1.2 million, an increase of 24.8% over the comparable 1998
period due to occupancy expenses associated with stores opened and acquired in
1999 and the inclusion of a full three months of occupancy expenses from stores
opened and acquired in 1998. As a percentage of total revenues, occupancy
decreased to 7.2% from 7.6% mainly due to the increase in comparable store
revenue on a relatively fixed base of expense. Advertising remained relatively
constant at $1.0 million but as a percentage of total revenues decreased to 5.1%
from 5.9% primarily due to acquiring stores in existing markets which resulted
in increased revenues without a corresponding increase in expense. Other
expenses increased to $2.5 million from $1.9 million, an increase of 35.4% over
the comparable 1998 period and as a percentage of total revenues increased to
12.4% from 12.0%. The increase was due to expenses associated with stores opened
and acquired in 1999 and the inclusion of a full three months' expenses from
stores opened and acquired in 1998.
For the three months ended June 30, 1999, general and administrative
expenses increased to $1.4 million from $1.2 million, an increase of 22.9% over
the comparable 1998 period. As a percentage of total revenues, general and
administrative expenses decreased to 7.0% from 7.4% due to the Company's ability
to add stores and increase revenues without a corresponding increase in
corporate overhead.
For the three months ended June 30, 1999, amortization of goodwill and
non-compete agreements relating to stores acquired in 1999 and 1998 amounted to
$121,000. No amortization occurred in the second quarter of 1998.
For the three months ended June 30, 1999, operating income increased to
$2.5 million from $1.7 million, an increase of 47.3% over the comparable 1998
period due to the growth of stores opened in 1998, operating income from the
stores acquired in 1999, and an increase in operating income of comparable
stores. As a percentage of total revenues, operating income increased to 12.1%
from 10.7% mainly due to improved margins on rental merchandise and other
factors associated with store expenses as discussed above.
For the three months ended June 30, 1999, interest expense decreased to
$0.2 million from $0.4 million, a decrease of 46.0% from the comparable 1998
period, and as a percentage of total revenues decreased to 1.0% from 2.4%. The
decrease is attributable to the retirement of substantially all outstanding debt
with the proceeds received from the Company's initial public offering in June
1998, partially offset by interest expense attributable to the indebtedness
related to the acquisitions completed in the first quarter.
For the three months ended June 30, 1999, other expense (income), net
reflected expense of $0.1 million compared to income of $0.1 million for the
comparable 1998 period primarily due to a one-time refund of workers'
compensation premiums of $0.2 million received from the State of Ohio in 1998.
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For the three months ended June 30, 1999, the Company's effective tax
rate decreased to 41.5% from 42.5% for the comparable 1998 period.
For the three months ended June 30, 1999, net income increased to $1.2
million from $0.8 million, an increase of 49.9% over the comparable 1998 period,
and as a percentage of total revenues increased to 6.0% from 5.3% due to the
factors discussed above.
.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
For the six months ended June 30, 1999, total revenues increased to
$38.6 million from $30.7 million, an increase of 25.6% over the comparable 1998
period. The increase was due to revenue from the stores opened and acquired in
1999, the inclusion of a full six months' results from the nine stores opened
and acquired in 1998, and an increase in comparable store revenue. The increase
in revenue from the stores opened and acquired in 1999 accounted for $3.5
million, or 44.9% of the increase, stores opened and acquired in 1998 accounted
for $3.2 million, or 40.3% of the increase, and the increase in comparable store
revenue accounted for $1.2 million, or 14.8% of the increase.
For the six months ended June 30, 1999, merchandise costs increased to
$12.8 million from $10.4 million, an increase of 23.1% over the comparable 1998
period, primarily due to merchandise costs associated with stores opened and
acquired in 1999 and 1998. As a percentage of total revenues, merchandise costs
decreased to 33.1% from 33.8% as a result of improved pricing, primarily of
pre-rented merchandise, as well as an increase in the rentals of higher-margin
merchandise.
For the six months ended June 30, 1999, total store expenses increased
to $18.3 million from $14.5 million, an increase of 26.4% over the comparable
1998 period, and as a percentage of total revenues increased to 47.4 % from
47.1%. The increase was due to expenses associated with stores opened and
acquired in 1999 and the inclusion of a full six months' expenses from stores
opened and acquired in 1998. Salaries and related increased to $8.8 million from
$6.8 million, an increase of 29.2% over the comparable 1998 period and as a
percentage of total revenues increased to 22.7% from 22.1%. The increase was due
to additional personnel associated with stores opened and acquired in 1999 and
the inclusion of a full six months of salaries and related expenses from stores
opened and acquired in 1998. Occupancy increased to $2.9 million from $2.3
million, an increase of 24.2% over the comparable 1998 period due to occupancy
expenses associated with stores opened and acquired in 1999 and the inclusion of
a full six months of occupancy expenses from stores opened and acquired in 1998.
As a percentage of total revenues, occupancy remained relatively constant at
7.4% mainly due to the increase in comparable store revenue on a relatively
fixed base of expense. Advertising increased to $1.9 million from $1.7 million,
an increase of 10.1% over the comparable 1998 period, but as a percentage of
total revenues decreased to 5.0% from 5.7% primarily due to acquiring stores in
existing markets which resulted in increased revenues without a corresponding
increase in expense. Other expenses increased to $4.8 million from $3.6 million,
an increase of 30.6% over the comparable 1998 period and as a percentage of
total revenues increased to 12.3% from 11.8%. The increase was due to expenses
associated with stores opened and acquired in 1999 and the inclusion of a full
six months' expenses from stores opened and acquired in 1998.
For the six months ended June 30, 1999, general and administrative
expenses increased to $2.7 million from $2.4 million, an increase of 16.2% over
the comparable 1998 period. As a percentage of total revenues, general and
administrative expenses decreased to 7.1% from 7.6% due to the Company's ability
to add stores and increase revenues without a corresponding increase in
corporate overhead.
For the six months ended June 30, 1999, amortization of goodwill and
non-compete agreements relating to stores acquired in 1999 and 1998 amounted to
$182,000. No amortization occurred in the first half of 1998.
For the six months ended June 30, 1999, operating income increased to
$4.6 million from $3.5 million, an increase of 30.8% over the comparable 1998
period due to the growth of stores opened in 1998 and 1997 and, to a lesser
extent, operating income from the stores acquired in 1999. As a percentage of
total revenues, operating income increased to 11.9% from 11.5% mainly due to
improved margins on rental merchandise and other factors associated with store
expenses as discussed above.
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For the six months ended June 30, 1999, interest expense decreased to
$0.3 million from $0.8 million, a decrease of 64.4% from the comparable 1998
period, and as a percentage of total revenues decreased to 0.8% from 2.7%. The
decrease is attributable to the retirement of substantially all outstanding debt
with the proceeds received from the Company's initial public offering in June
1998, partially offset by interest expense attributable to the indebtedness
related to the acquisitions completed in the first quarter.
For the six months ended June 30, 1999, other expense (income), net
reflected expense of $0.3 million compared to income of $0.1 million for the
comparable 1998 period primarily due to a one-time refund of workers'
compensation premiums of $0.2 million received from the State of Ohio in 1998,
offset by amortization associated with the shareholder buyout.
For the six months ended June 30, 1999, the Company's effective tax
rate decreased to 41.5% from 42.5% for the comparable 1998 period.
For the six months ended June 30, 1999, net income increased to $2.4
million from $1.6 million, an increase of 47.7% over the comparable 1998 period,
and as a percentage of total revenues increased to 6.1% from 5.2% due to the
factors discussed above.
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 six months ended June 30, 1999 and 1998, purchases of
rental merchandise (excluding acquisitions) amounted to $13.9 million and $11.0
million, respectively. During the six months ended June 30, 1999, the Company
acquired the assets of 19 rental-purchase stores in the aggregate amount of
$11.7 million.
For the six months ended June 30, 1999, cash provided by operating
activities increased to $3.8 million from $2.9 million for the comparable 1998
period. The increase was primarily due to increases in net income and accrued
expenses offset by increases in inventory and prepaid expenses. Cash used in
investing activities increased to $12.7 million from $0.6 million due primarily
to the acquisition of 19 stores from Rental Mart and Blue Ribbon. Cash provided
by financing activities was $9.7 million as compared to cash used in financing
activities for the comparable 1998 period of $2.4 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.
In conjunction with the Company's acquisition of the assets of 15 Blue
Ribbon stores on March 1, 1999, the Company increased its Credit Facility to
$16.0 million and extended the maturity date to 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 August
13, 1999 was approximately $7.8 million.
The Company plans to open an additional 5 stores during the remainder of
1999 and plans to open 13 stores in 2000. 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 common stock, 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.
YEAR 2000
The Company utilizes information technology and non-information
technology throughout its operations and has third-party relationships with
vendors who may be affected by Year 2000 issues. Beginning in 1998, the Company
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began to assess its Year 2000 readiness and has begun to implement plans to
ensure that its systems are or will be Year 2000 compliant. The Company
anticipates completing its implementation plan by the third quarter of 1999. All
of the Company's remote locations operate on an internally developed
point-of-sale system which has been tested and determined to be Year 2000
compliant. In addition, all hardware utilized to run both its remote locations
and corporate offices are believed to be Year 2000 compliant. The Company's
proprietary Windows NT-based software system utilized by its corporate office,
updated in February 1999, and its licensed accounting software are Year 2000
compliant. The Company has developed questionnaires and contacted key suppliers
of its rental-purchase merchandise as well as other vendors regarding their Year
2000 compliance to determine any impact on its operations. In general, the
Company's key suppliers and vendors have developed or are in the process of
developing plans to address their Year 2000 issues. Based on the vendors'
responses, the Company does not anticipate that it will experience a material
amount of merchandise returns due to Year 2000 issues. The Company will continue
to monitor and evaluate the progress of its third-party relationships on this
critical matter. The Company is also reviewing its non-information technology
systems to determine the extent of any changes that may be necessary and
believes there will be minimal changes required for compliance.
The Company has spent to date a de minimus amount to implement its Year
2000 readiness plan, including amounts to update its Windows NT-based software
utilized at its corporate office and the hiring of a third party to assist in
the evaluation process of the plan. The Company believes additional costs to
bring its operations into Year 2000 compliance will be immaterial to its results
of operations and financial condition.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance. The Company realizes however, that in spite of its Year 2000
compliance efforts, factors beyond its control may have an adverse effect on its
operations. Therefore, the Company has begun to develop a contingency plan which
may include operating its store locations under the previously utilized manual
point-of-sale system and increasing the amount of rental-purchase merchandise
available for rent prior to the year 2000. Though not yet complete, the Company
believes the plan will be available in the unlikely event the Company's
operations are materially adversely affected by the Year 2000 issues.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held on May 13,
1999.
(b) At the annual meeting, the Company's shareholders elected Wayland
J. Russell, Lawrence S. Hendricks, Michael J. Viveiros, Brian L.
Burton and Ivan J. Winfield, as directors for a one-year term which
expires at the annual meeting of shareholders in 2000.
The following tabulation represents voting for the Directors:
For Withheld Authority
--------- ------------------
Wayland J. Russell 5,067,096 600
Lawrence S. Hendricks 5,066,996 700
Michael J. Viveiros 5,066,996 700
Brian L. Burton 5,066,996 700
Ivan J. Winfield 5,066,996 700
(c) At the annual meeting, the Company's shareholders ratified the
appointment of KPMG LLP as auditors of the Company for 1999. The
holders of 5,066,396 shares of Common Stock voted to ratify the
appointment, the holders of 1,200 shares voted against the
ratification, and the holders of 100 shares abstained.
(d) At the annual meeting, the Company's shareholders approved an
amendment to the Rainbow Rentals, Inc. 1998 Stock Option Plan (the
"Plan"). The amendment to the Plan increased the number of shares
of the Company's Common Stock reserved for issuance thereunder from
400,000 shares to 600,000 shares. The holders of 5,042,196 shares
of Common Stock voted to approve the amendment, the holders of
24,200 shares voted against the amendment, and the holders of 1,300
shares abstained.
ITEM 6. EXHIBITS
A. Exhibit No.
-----------
27.1 Financial Data Schedule
B. Reports on Form 8-K
(1) A Form 8-K was filed on March 16, 1999 to report the acquisition of
Blue Ribbon Rentals, Inc. and Blue Ribbon Rentals II, Inc.
(2) A Form 8-K/A was filed on May 17, 1999 to amend the Company's current
report on Form 8-K in order to include the financial statements and
proforma financial information required with respect to the Blue Ribbon
acquisition.
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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: August 13, 1999
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