<PAGE> 1
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-24333
RAINBOW RENTALS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1512520
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3711 Starr Centre Drive
Canfield, Ohio 44406
----------------------------------------
(Address of principal executive offices)
330-533-5363
-------------------------------
(Registrant's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 13, 1998: 5,925,735
1
<PAGE> 2
RAINBOW RENTALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1998 3
Condensed Consolidated Statements of Income - for
the three and six months ended June 30, 1997 and 1998 4
Condensed Consolidated Statements of
Shareholders Equity 5
Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 1997 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 2. Changes in Securities and Use of Proceeds 13
ITEM 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE> 3
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash $ 77,095 $ 13,973
Rental-purchase merchandise, net 23,411,079 24,041,630
Prepaid expenses and other current assets 770,089 354,957
Income tax receivable 399,000 52,382
------------ -----------
Total current assets 24,657,263 24,462,942
Property and equipment, net 3,441,884 3,439,581
Deferred income taxes 1,041,000 984,000
Other assets, net 2,100,204 1,840,989
============ ===========
Total assets $ 31,240,351 $30,727,512
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ 80,000 $ 80,000
Accounts payable 1,000,399 1,741,335
Accrued income taxes 128,947 40,774
Accrued compensation and related costs 1,090,735 1,038,485
Other liabilities and accrued expenses 1,562,381 949,900
Deferred income taxes 1,201,000 1,509,000
------------ -----------
Total current liabilities 5,063,462 5,359,494
Long-term debt 12,463,929 404,666
Notes payable 10,488,035 -
Obligations under capital leases, excluding current installments 171,105 141,586
------------ -----------
Total liabilities 28,186,531 5,905,746
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,
3,675,735 and 5,925,735 issued and outstanding at
December 31, 1997 and June 30, 1998, respectively 60,150 11,039,062
Retained earnings 14,088,286 15,689,232
Treasury stock, 2,716,875 and 466,875 common shares at
December 31, 1997 and June 30, 1998, respectively, at cost (11,094,616) (1,906,528)
------------ -----------
Total shareholders' equity 3,053,820 24,821,766
------------ -----------
Total liabilities and shareholders equity $ 31,240,351 $30,727,512
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue $12,997,612 $14,763,939 $25,126,378 $28,932,364
Fees 390,421 483,934 721,095 915,981
Merchandise sales 386,100 353,459 886,091 889,008
----------- ----------- ----------- -----------
Total revenues 13,774,133 15,601,332 26,733,564 30,737,353
Operating expenses
Merchandise costs
Depreciation and other merchandise
costs 4,708,075 5,325,757 9,139,928 10,390,978
Store operating expenses
Salaries and related expenses 2,914,794 3,482,331 5,542,295 6,783,041
Occupancy expenses 966,159 1,179,440 1,911,796 2,301,259
Advertising expenses 850,240 920,099 1,614,767 1,740,550
Other store expenses 1,589,477 1,871,611 3,059,212 3,643,157
----------- ----------- ----------- -----------
Total store operating expenses 6,320,670 7,453,481 12,128,070 14,468,007
----------- ----------- ----------- -----------
Total merchandise costs and store
operating expenses 11,028,745 12,779,238 21,267,998 24,858,985
General and administrative expenses 1,040,372 1,155,970 2,085,992 2,352,722
----------- ----------- ----------- -----------
Total operating expenses 12,069,117 13,935,208 23,353,990 27,211,707
----------- ----------- ----------- -----------
Operating income 1,705,016 1,666,124 3,379,574 3,525,646
Interest expense 556,510 372,907 780,621 842,613
Other expense (income), net 38,909 (134,551) 8,555 (100,913)
----------- ----------- ----------- -----------
Income before income taxes 1,109,597 1,427,768 2,590,398 2,783,946
Income taxes 471,577 606,000 1,100,915 1,183,000
=========== =========== =========== ===========
Net income $ 638,020 $ 821,768 $ 1,489,483 $ 1,600,946
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted earnings per share: $ 0.15 $ 0.19 $ 0.28 $ 0.40
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 4,302,706 4,318,592 5,341,885 3,998,939
=========== =========== =========== ===========
Diluted 4,302,706 4,320,133 5,341,885 3,999,714
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained Treasury Shareholders'
Stock Earnings Stock Equity
----- -------- ----- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 60,150 $ 11,407,288 $ - $ 11,467,438
Net income - 2,680,998 - 2,680,998
Acquisition of 2,716,875 common shares - - (11,094,616) (11,094,616)
--------------------------------------------------------------------------------
Balance at December 31, 1997 60,150 14,088,286 (11,094,616) 3,053,820
Net income (unaudited) 1,600,946 1,600,946
Issuance of 2,250,000 common shares 10,978,912 - 9,188,088 20,167,000
================================================================================
Balance at June 30, 1998 (unaudited) $ 11,039,062 $ 15,689,232 $ (1,906,528) $ 24,821,766
================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,489,483 $ 1,600,946
Reconciliation of net income to net cash provided
by (used in) operating activities
Depreciation of property and equipment and
amortization of loan fees, noncompete
and consulting agreements 924,045 933,568
Depreciation of merchandise inventory 8,082,291 9,302,787
Deferred income taxes 496,500 365,000
Gain on disposal of property and equipment (109,420) (131,089)
Purchases of merchandise inventory (12,492,050) (10,976,460)
Merchandise inventory disposed, net 1,069,023 1,062,533
(Increase) decrease in
Short-term investments 27,012 -
Prepaid expenses and other current assets 118,698 415,132
Income tax receivable (301,190) 346,618
Increase (decrease) in
Accounts payable (286,817) 740,936
Accrued income taxes (202,716) (88,173)
Accrued compensation and related costs (39,305) (52,250)
Other liabilities and accrued expenses 48,015 (612,481)
------------ ------------
Net cash provided by (used in) operating activities (1,176,431) 2,907,067
------------ ------------
Cash flows from investing activities
Purchase of property and equipment, net (906,483) (745,514)
Proceeds on the sale of property and equipment 159,100 185,142
------------ ------------
Net cash used in investing activities (747,383) (560,372)
------------ ------------
Cash flows from financing activities
Proceeds from long-term debt borrowings 34,036,000 29,650,000
Current installments and repayments of long-term debt (29,686,274) (41,709,263)
Proceeds from stock offering, net of related expenses - 20,167,000
Decrease in notes payable (39,954) (10,488,035)
Loan origination fees paid (147,500) -
Payment in connection with Redemption Agreement (2,699,771) -
Principal payments under capital lease obligations (10,757) (29,519)
------------ ------------
Net cash provided by (used in) financing activities 1,451,744 (2,409,817)
------------ ------------
Net decrease in cash (472,070) (63,122)
Cash at beginning of period 472,070 77,095
============ ============
Cash at end of period $ - $ 13,973
============ ============
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 684,314 $ 925,320
Income taxes 1,108,321 559,555
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 66 stores in eight states: Connecticut, Massachusetts,
Michigan, New York, Ohio, Pennsylvania, Rhode Island, and Tennessee. The
Company's corporate headquarters is located in Canfield, Ohio.
The consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q. Therefore, certain information and disclosures,
normally required with financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or omitted. In the
opinion of management, the financial statements contain all adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows of the Company. The
results of operations for the periods presented are not necessarily indicative
of the results for the entire year.
It is suggested these financial statements be read in conjunction with the
financial statements and notes included in the Company's Prospectus.
2. Public Offering of Stock and Stock Option Plan
On June 4, 1998, the Company completed its initial public offering of
2,250,000 shares of Common Stock, without par value, at $10 per share. The net
proceeds of approximately $20.2 million, after deducting underwriters' discounts
and offering expenses, were used to retire approximately $10.9 million of
indebtedness due a former shareholder-officer of the Company. The balance of the
net proceeds were used to reduce borrowings with a lending institution.
Also on June 4, 1998, the Company granted 306,200 options at the initial
public offering price of $10 per share under the provisions of its stock option
plan. A balance of 93,800 shares remain reserved for issuance in the future.
3. 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 potential common stock.
The following table shows the amounts used in computing earnings per share.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income available to common shareholders $ 638,020 $ 821,768 $1,489,483 $1,600,946
Denominator:
Basic weighted average shares 4,302,706 4,318,592 5,341,885 3,998,939
Effect of dilutive stock options - 1,541 - 775
========== ========== ========== ==========
Diluted weighted average shares 4,302,706 4,320,133 5,341,885 3,999,714
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.15 $ 0.19 $ 0.28 $ 0.40
========== ========== ========== ==========
</TABLE>
4. Subsequent Events
On July 1, 1998, the Company acquired the rental-purchase merchandise and
customer rental agreements of a rental-purchase store located in Elyria, Ohio
for a cash purchase price of approximately $0.5 million. The acquisition will be
accounted for as a purchase with the acquired assets recorded at their estimated
fair values on the date of acquisition.
Effective July 15, 1998, the Company amended its revolving loan agreement
with a lending institution. The amendment decreases the maximum revolving loan
amount to $10.0 million and extends the maturity date of the agreement to July
15, 2001.
7
<PAGE> 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
At June 30, 1998 the Company operated 66 rental-purchase stores in
eight 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. Two stores were
opened in the second quarter ended June 30, 1998.
On June 4, 1998, the Company completed its initial public offering
consisting of 2,250,000 shares of common stock at $10.00 per share. Proceeds
from the offering after deducting underwriters' discounts and offering expenses
totaled $20.2 million. The proceeds were used to repay substantially all
outstanding debt.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenues.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue 94.4% 94.6% 94.0% 94.1%
Fees 2.8 3.1 2.7 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
Depreciation and other merchandise
costs 34.2 34.1 34.2 33.8
Store operating expenses
Salaries and related expenses 21.2 22.3 20.7 22.1
Occupancy expenses 7.0 7.6 7.2 7.5
Advertising expenses 6.2 5.9 6.0 5.7
Other store expenses 11.5 12.0 11.5 11.8
------ ------ ------ ------
Total store operating expenses 45.9 47.8 45.4 47.1
------ ------ ------ ------
Total merchandise costs and store
operating expenses 80.1 81.9 79.6 80.9
General and administrative expenses 7.5 7.4 7.8 7.6
------ ------ ------ ------
Total operating expenses 87.6 89.3 87.4 88.5
------ ------ ------ ------
Operating income 12.4 10.7 12.6 11.5
Interest expense 4.1 2.4 2.9 2.7
Other expense (income), net 0.3 ( 0.9) 0.0 ( 0.3)
------ ------ ------ ------
Income before income taxes 8.0 9.2 9.7 9.1
Income taxes 3.4 3.9 4.1 3.9
====== ====== ====== ======
Net income 4.6% 5.3% 5.6% 5.2%
====== ====== ====== ======
</TABLE>
8
<PAGE> 9
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1998
For the three months ended June 30, 1998, total revenues increased from
$13.8 million to $15.6 million, an increase of 13.3% over the comparable 1997
period. The increase was due to improved comparable store revenue and revenue
from the ten stores opened since April 1, 1997 (including five stores opened in
1998). Revenue from comparable stores increased 5.1% and accounted for 38.4% of
the increase. Revenue from stores opened in 1997 and 1998 accounted for 49.8%
and 11.8% of the increase, respectively.
For the three months ended June 30, 1998 total merchandise costs
increased from $4.7 million to $5.3 million, an increase of 13.1% over the
comparable 1997 period, but remained relatively constant as a percentage of
total revenues.
For the three months ended June 30, 1998, total store operating
expenses increased from $6.3 million to $7.5 million, an increase of 17.9%, and
as a percentage of total revenues increased from 45.9% to 47.8 %. Salaries and
related expenses increased from $2.9 million to $3.5 million, an increase of
19.5%, and as a percentage of total revenues increased from 21.2 % to 22.3%. The
increase was due to additional personnel at the Company's comparable stores
necessitated by the increase in rental-purchase agreements in 1997, as well as
additional personnel at stores, opened since April 1, 1997, operating at revenue
levels below those of core stores. Occupancy expenses increased from $1.0
million to $1.2 million, an increase of 22.1%, and as a percentage of total
revenues increased from 7.0% to 7.6% due to the increase in number of stores
opened. Advertising expenses remained steady at $0.9 million, and as a
percentage of total revenues decreased from 6.2% to 5.9%. Other store expenses
increased from $1.6 million to $1.9 million, an increase of 17.8%, and as a
percentage of total revenues increased from 11.5% to 12.0%. The increase was
primarily due to the opening of stores in 1997 and 1998 and the increase in
rental-purchase agreements at core stores in 1997.
For the three months ended June 30, 1998, general and administrative
expenses increased from $1.0 million to $1.2 million, an increase of 11.1% over
the comparable 1997 period but remained relatively constant as a percentage of
total revenues. The dollar increase was due to the addition of a fifth regional
manager, increased travel expenses and additional administrative personnel.
For the three months ended June 30, 1998, operating income remained
relatively constant at $1.7 million but as a percentage of total revenues
decreased from 12.4% to 10.7%. The decrease was mainly due to newly opened
stores operating at revenue levels below those of core stores and other factors
discussed above.
For the three months ended June 30, 1998, interest expense decreased
from $0.6 million to $0.4 million, a decrease of 33.0%, and as a percentage of
total revenues decreased from 4.1% to 2.4%. The decrease is attributable to the
retirement of substantially all outstanding debt with the proceeds received from
the Company's initial public stock offering on June 4, 1998.
For the three months ended June 30, 1998, other expense (income), net
reflected income of $0.1 million compared to expense of $38,909 in the
comparable 1997 period due primarily to a one-time refund of workers'
compensation premiums of $0.2 million received from the State of Ohio.
For the three months ended June 30, 1998, net income increased from
$0.6 million to $0.8 million, an increase of 28.8% over the comparable 1997
period, and as a percentage of total revenues increased from 4.6% to 5.3% due to
the factors discussed above.
9
<PAGE> 10
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1998
For the six months ended June 30, 1998, total revenues increased from
$26.7 million to $30.7 million, an increase of 15.0% over the comparable 1997
period. The increase was primarily due to an increase in comparable store
revenue and revenue from the seven stores opened during 1997 and, to a lesser
extent, the five stores opened in 1998. Revenue from comparable stores increased
$1.6 million and accounted for 39.5% of the increase, stores opened in 1997
accounted for $2.2 million, or 54.6% of the increase and 1998 new store openings
accounted for $0.2 million, or 5.9% of the increase.
For the six months ended June 30, 1998, total merchandise costs
increased from $9.1 million to $10.4 million, an increase of 13.7% over the
comparable 1997 period, but as a percentage of total revenues decreased from
34.2% to 33.8% due to improved margins.
For the six months ended June 30, 1998, total store operating expenses
increased from $12.1 million to $14.5 million, an increase of 19.3% over the
comparable 1997 period, and as a percentage of total revenues increased from
45.4% to 47.1%. Salaries and related expenses increased from $5.5 million to
$6.8 million, an increase of 22.4%, and as a percentage of total revenues
increased from 20.7 % to 22.1%. The increase was due to additional personnel at
the Company's comparable stores necessitated by the increase in rental-purchase
agreements in 1997, as well as additional personnel at stores, opened in 1997
and 1998, operating at revenue levels below those of core stores. Occupancy
expenses increased from $1.9 million to $2.3 million, an increase of 20.4%, and
as a percentage of total revenues increased from 7.2% to 7.5% due to the
increase in number of stores opened. Advertising expenses increased from $1.6
million to $1.7 million, an increase of 7.8%, but as a percentage of total
revenues, decreased from 6.0% to 5.7%. Other store expenses increased from $3.1
million to $3.6 million, an increase of 19.1%, and as a percentage of total
revenues increased from 11.5% to 11.8%. The increase was primarily due to the
opening of stores in 1997 and 1998.
For the six months ended June 30, 1998, general and administrative
expenses increased from $2.1 million to $2.4 million, an increase of 12.8% over
the comparable 1997 period. The increase was due to the addition of a fifth
regional manager ,increased travel expenses and additional administrative
personnel. As a percentage of total revenues, general and administrative
expenses decreased from 7.8% to 7.6%.
For the six months ended June 30, 1998, operating income increased from
$3.4 million to $3.5 million, an increase of 4.3% over the comparable 1997
period, but as a percentage of total revenues decreased from 12.6% to 11.5%. The
decrease was mainly due to new store openings and factors discussed above.
For the six months ended June 30, 1998, interest expense remained
constant at $0.8 million but as a percentage of total revenues decreased from
2.9% to 2.7%.
For the six months ended June 30, 1998, other expense (income), net
reflected income of $0.1 million compared to expense of $8,555 for the
comparable 1997 period primarily due to a one-time refund of workers'
compensation premiums of $0.2 million received from the State of Ohio, offset by
amortization associated with the shareholder buyout.
For the six months ended June 30, 1998, net income increased from $1.5
million to $1.6 million, an increase of 7.5% over the comparable 1997 period,
and as a percentage of total revenues decreased from 5.6% to 5.2% due to the
factors discussed above.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchasing
additional and replacement rental-purchase merchandise and expenditures relating
to new store openings. For the six months ended June 30, 1997 and 1998, the
Company purchased merchandise for aggregate amounts of approximately $12.5
million and $11.0 million, respectively.
For the six months ended June 30, 1998, operating activities
provided positive cash flow of $2.9 million compared to negative cash flow of
$1.2 million for the comparable 1997 period primarily due to an improvement in
net income before depreciation and amortization of $1.3 million, a decrease in
purchases of merchandise inventory of $1.5 million, and an increase in accounts
payable of $1.0 million.
On June 4, 1998, the Company completed its initial public
offering of 2,250,000 shares of common stock at $10.00 per share. The net
proceeds, after underwriting discounts and offering expenses, of $20.2 million
were used to retire approximately $10.9 million of indebtedness (including
accrued interest) due a former shareholder-officer of the Company and his
affiliates. The balance of the net proceeds was used to reduce borrowings with
Bank of America National Trust and Savings Association (formerly known as Bank
of America Illinois).
Effective July 15, 1998, the Company amended its Loan and Security
Agreement with Bank of America National Trust and Savings Association (the
"Credit Facility"). The amendment decreases the maximum revolving loan amount
from $16.0 million to $10.0 million, decreases the interest rate from prime plus
0.25% to prime, and extends the maturity of the Credit Facility from May 21,
2000 to July 15, 2001. At June 30, 1998, the Company's outstanding borrowings
under the Credit Facility were $0.4 million.
The Company plans to continue and expand its store opening program. In
1998, the Company expects to incur approximately $500,000 to open and operate
each new store until the store generates a positive cash flow. Included among
the cash requirements for a new store are expenditures of approximately $60,000
for leasehold improvements, furnishings and fixtures and computers;
approximately $425,000 for rental-purchase merchandise and approximately $15,000
to fund initial, anticipated operating losses. These costs do not include any
interest carrying charge or general corporate overhead. Stores generally become
profitable (excluding the store's share of corporate overhead) within 15 months.
Store opening expenses are charged to operations as incurred. The timing of
store openings and the number of stores in the maturation process will have an
effect on quarter-to-quarter comparisons. Each store needs a period of time to
build its customer base and develop a recurring revenue stream from
rental-purchase agreements' continuations and renewals.
In additions to new store openings, the Company may increase its number
of stores or rental-purchase agreements through selective acquisitions.
Management believes there are currently a number of acquisition opportunities in
the rental-purchase industry, and from time to time additional acquisition
opportunities may arise. Potential acquisitions may vary in size and the Company
may consider larger acquisitions that could be material to the Company.
Management believes the cash flow from operations and available borrowings under
the Credit Facility will be adequate to fund its operations and expansion plans
for at least the next 12 months. Should the Company determine to accelerate its
new store openings, or should a large acquisition materialize, the Company may
incur additional bank indebtedness and may issue its equity or debt securities,
the availability and terms of which will depend upon market and other
conditions. There can be no assurance such additional financing will be
available or, if available, will be on terms acceptable to the Company.
11
<PAGE> 12
YEAR 2000 CONSIDERATIONS
The Company is assessing its computer systems to ensure they are
capable of processing periods for the year 2000 and beyond. The Company's
assessment of its computer systems will be complete by December, 1998. The
Company does not believe the cost of compliance will have a material adverse
effect on its business, financial condition or results of operations. The
Company anticipates it will be compliant prior to the year 2000.
CAUTIONARY STATEMENT
This Report on Form 10-Q contains certain "forward looking statements"
with respect to the Company's operations, industry, financial condition and
liquidity. These forward-looking statements are subject to risks and
uncertainties, many of which are beyond the Company's control, which could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to, (i) changes in the
government's regulation of the industry and (ii) the ability of the Company to
execute effectively its expansion program.
Undo reliance should not be placed on any forward-looking statements
made by or on behalf of the Company as such statements speak only as of the date
hereof. The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or circumstances or otherwise. There can be no assurance the events described in
these forward-looking statements will occur.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 4, 1998, the Company's initial Registration Statement
(No. 333-48749) became effective. The Registration Statement related to the
Company's initial public offering of 2,250,000 shares of Common Stock, without
par value. The Shares were sold to the underwriters at $9.30 per share, with the
price to the public at $10.00 per share. An additional 337,500 Shares (Wayland
J. Russell - 182,500 shares, Lawrence S. Hendricks - 91,000 shares, and Michael
J. Viveiros - 64,000 shares) were sold by the Company's shareholder-officers
upon exercise of the underwriters' over-allotment option on June 26, 1998. As a
consequence, all of the 2,587,500 Shares initially registered for sale were sold
in the offering with the aggregate offering price for the Shares totaling
$25,875,000. The offering's managing underwriters were The Robinson-Humphrey
Company, Dain Rauscher Wessels, Inc., and Sun Trust Equitable Securities. The
following table shows the use of proceeds received by the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Gross proceeds $22,500,000
Underwriters' discounts $1,575,000
Other expenses 758,000
----------
Total expenses 2,333,000
===========
Net proceeds, after expenses $20,167,000
===========
</TABLE>
Approximately $10.9 million of the net proceeds were used to retire
indebtedness due a former shareholder-officer of the Company and his affiliates.
The balance of the net proceeds was used to reduce borrowings under the
Company's revolving credit facility. The foregoing use of proceeds is consistent
with the statements made in the Prospectus dated June 4, 1998.
ITEM 6 EXHIBITS
A. EXHIBIT NO.
-----------
4.4 Amendment No. 10 to Loan and Security Agreement dated
as of October 5, 1992, by and between Bank of America
National Trust and Savings Association and
Registrant, as amended (Exhibit 4.2 to Registration
Statement), together with Third Amended and Restated
Supplement A
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
-------------------
NONE
13
<PAGE> 14
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
/S/ MICHAEL A. PECCHIA
-----------------------
Michael A. Pecchia,
Chief Financial Officer
DATE: AUGUST 13, 1998
<PAGE> 1
EXHIBIT 4.4
RAINBOW RENTALS, INC.
AMENDMENT NO. 10 TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 10 ("Amendment") to Loan and Security
Agreement is made as of July 15, 1998, between Rainbow Rentals, Inc. (formerly
known as Rainbow Home Rentals, Inc.) ("Borrower") and Bank of America National
Trust and Savings Association (formerly known as Bank of America Illinois,
formerly known as Continental Bank Illinois, formerly known as Continental Bank
N.A.) ("Lender").
Reference is made to that certain Loan and Security Agreement
between Borrower and Lender dated October 5, 1992 (as amended, the "Loan
Agreement").
Borrower has consummated an initial public offering of its
capital stock in connection with which it received net cash proceeds in excess
of Twenty Million Dollars ($20,000,000).
Borrower has requested that the Loan Agreement be amended in
certain respects.
Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
Release of Guaranty; Consent to Repayment of Subordinated
Debt. The Lender hereby agrees that the obligations of Wayland Russell and Donna
Russell under that certain Guaranty dated October 5, 1992 are hereby released.
Lender hereby consents to the repayment in full of the "Subordinated Redemption
Notes," the "Subordinated Severance Note" and the "Subordinated Consulting Note"
(as each such term is defined in that certain Consent and Amendment No. 8 dated
as of April 21, 1997 between Borrower and Lender), subject to Lender's receipt
of such notes marked cancelled.
Amendments to Loan Agreement. The Loan Agreement is hereby
amended as follows:
Section 1.1 of the Loan Agreement is hereby amended by
amending and restating the definition of "Liabilities" as follows:
"Liabilities" means all of the liabilities, obligations and
indebtedness of Borrower to Lender or any affiliate of Lender of any
kind or nature, however created, arising or evidenced, whether direct
or indirect, absolute or contingent, now or hereafter existing or due
or to become due, and including but not limited to (a) Borrower's
obligations under any Note, (b) Borrower's obligations under this
Agreement, (c) Borrower's obligations with respect to any Letter of
Credit or any Application therefor, (d) interest, charges, expenses,
Attorneys' Fees and other sums chargeable to Borrower by Lender under
this Agreement or any Related Agreement and (e) the obligations of
Borrower under any Related Agreement, including obligations of
performance. "Liabilities" shall also include any and all amendments,
extensions, renewals, refundings or refinancings of any of the
foregoing.
Section 1.1 of the Loan Agreement is hereby amended by
amending and restating the definition of "Termination Date" as follows:
"Termination Date" means July 15, 2001.
Section 1.1 of the Loan Agreement is hereby amended by
inserting the following definitions in the appropriate places, alphabetically:
"Applicable Margin" means, at any time, (a) with respect to
the unpaid principal amount of each IBOR Rate Loan, two percent (2%)
per annum; (b) with respect to the unpaid principal
<PAGE> 2
amount of each Reference Rate Loan, zero percent (0%); and (c) with
respect to the outstanding Letters of Credit, two percent (2%) per
annum.
"Minimum Net Worth Amount" means (i) during the period
commencing on June 30, 1998 and ending September 29, 1998, an amount
equal to Twenty-Four Million Dollars ($24,000,000) and (ii) at any time
thereafter the sum of (A) Twenty-Four Million Dollars ($24,000,000),
plus (B) fifty percent (50%) of net income of Borrower, determined in
accordance with GAAP on a consolidated basis, for each calendar quarter
period that has ended on or after September 30, 1998; provided, that
any net loss of Borrower, determined in accordance with GAAP on a
consolidated basis, for any calendar quarter period shall not be taken
into account in the foregoing calculation.
Section 2.2(b) of the Loan Agreement is hereby amended and
restated as follows:
(b) Borrower agrees to pay Lender, on demand, Lender's
standard administrative operating fees and charges in effect from time
to time for issuing and administering any Letters of Credit. With
respect to standby Letter of Credit, Borrower further agrees to pay
Lender a per annum commission equal to the Applicable Margin then in
effect for Letters of Credit (calculated on the basis of a year
consisting of three hundred sixty (360) days and paid for actual days
elapsed) of the daily average of the undrawn amount of each such
standby Letter of Credit and on each L/C Draft accepted by Lender in
connection therewith. Such standby Letter of Credit commissions shall
be paid quarterly in arrears. With respect to commercial and
documentary Letters of Credit, Borrower further agrees to pay Lender a
per annum commission equal to the Applicable Margin then in effect for
Letters of Credit of the maximum undrawn amount of each such Letter of
Credit. Such commercial and documentary Letter of Credit commissions
shall be paid quarterly in arrears. Lender may provide for the payment
of any fees, charges or commissions due hereunder by advancing the
amount thereof to Borrower as a Revolving Loan. At all times that any
Default Rate is being charged under this Agreement, the Letter of
Credit commission shall be equal to the otherwise applicable commission
plus two percent (2.0%).
Section 2.4.2 of the Loan Agreement is hereby amended to
replace the phrase "three-eighths of one percent (0.375%)" with the phrase
"three hundred fifteen one thousandths of one percent (0.315%)".
Section 2.5(c) of the Loan Agreement is hereby amended and
restated as follows:
Borrower further agrees to provide to Lender a current
Borrowing Base Certificate within twenty-five (25) days after the end
of each month and at such other times as Lender may request. Such
Borrowing Base Certificate shall be in substantially the same form as
that attached hereto as Exhibit A, executed and certified as accurate
by such officers or employees of Borrower as Borrower designates in
writing to Lender pursuant to duly adopted resolutions of Borrower's
Board of Directors authorizing such action, and accompanied by a cash
receipts report in form and substance satisfactory to Lender.
Clause (a) to Section 5.1.1 of the Loan Agreement is hereby
amended and restated as follows:
(a) Annual Audit Report. Within the earlier of five (5) days
of filing its Form 10-K with the Securities Exchange Commission and
ninety-five (95) days after each Fiscal Year of Borrower, a copy of the
Form 10-K filing by Borrower which shall include the annual audit
report of Borrower and its Subsidiaries prepared on a consolidated
basis and in conformity with GAAP and certified by an independent
public accountant who shall be satisfactory to Lender, together with a
certificate from such accountant containing a computation of, and
showing compliance with, each of the financial ratios and restrictions
contained in this Section 5 or in Supplement A;
Clause (b) to Section 5.1.1 of the Loan Agreement is hereby
amended and restated as follows:
<PAGE> 3
(b) Quarterly Financial Statement. Within the earlier of five
(5) days of filing its Form 10-Q with the Securities and Exchange
Commission and fifty (50) days after each of the first three (3) Fiscal
Quarters of each Fiscal Year of Borrower, a copy of the Form 10-Q
filing by Borrower signed by Borrower's chief financial officer which
shall include the unaudited financial statement of Borrower and its
Subsidiaries prepared in accordance with Regulation S-X as promulgated
by the Securities and Exchange Commission and which consist of at least
a balance sheet as at the close of such Fiscal Quarter and statements
of earnings and cash flows for such Fiscal Quarter and for the period
from the beginning of such Fiscal Year to the close of such Fiscal
Quarter;
Clause (c) of Section 5.1.1 of the Loan Agreement is hereby
amended to replace the number "twenty (20)" contained in the first and second
lines thereof with the number "thirty (30)".
Clause (d) of Section 5.1.1 of the Loan Agreement is hereby
amended to replace the phrase "clauses (a), (b) and (c)" with the phrase
"clauses (a) and (b)".
Section 5.12 of the Loan Agreement is hereby amended and
restated as follows:
5.12 Merger, Purchase and Sale. Not, and not permit any
Subsidiary to: (a) be a party to any merger, liquidation or
consolidation; (b) except for sales or leases of Inventory in the
normal course of business, and except for sale of Equipment permitted
under Section 3.4(b) or the sale of its delivery vans, sell, transfer,
convey, lease or otherwise dispose of any of its assets; (c) sell or
assign, with or without recourse, any Accounts Receivable, Contract
Rights, notes receivable or chattel paper, except as provided in this
Agreement; or (d) purchase or otherwise acquire all or a part of the
assets or business of any Person outside the ordinary course of
business except the acquisition of substantially all of the assets or
equity interests in any Person that is in substantially the same line
of business as Borrower; provided, that (i) the aggregate consideration
for all such acquisitions (including, without limitation, cash purchase
price, liabilities assumed, deferred or financed purchase price and
purchase price characterized as consulting agreements, non-competition
payments and the like) since July 15, 1998 does not exceed Three
Million Dollars ($3,000,000), (ii) after giving effect to such proposed
acquisition, Borrower is in compliance with all covenants and
representations and warranties contained in this Agreement, (iii) no
Default or Event of Default has occurred and is continuing, (iv)
Borrower gives the Lender at least ten (10) Business Days prior written
notice of any such acquisition, (v) the Board of Directors and/or
owners of the entity whose business is proposed to be acquired by
Borrower has approved the proposed transaction; (vi) after giving
effect to the proposed acquisition, the ratio of Funded Debt to
consolidated earnings of Borrower before interest expense and provision
for Taxes (for the most recently ended twelve (12) month period) is
less than 2:25:1.0, and (vii) Borrower takes such actions as Lender
shall request to grant and perfect a security interest in the assets
acquired in favor of Lender to secure the Liabilities.
Section 6.1(n) of the Loan Agreement is hereby amended and
restated as follows:
(n) Ownership; Chairman. If Wayland Russell fails to own at
least twenty-five percent (25%) of the voting stock of Borrower; or if
Wayland Russell fails to be the Chairman of the Board of Directors and
the Chief Executive Officer of Borrower;
Amendment and Restatement of Supplement A of the Loan
Agreement. Supplement A of the Loan Agreement is hereby amended in its entirety
in the form attached hereto as Exhibit A.
Conditions Precedent. The amendment to the Loan Agreement set
forth in this Amendment shall become effective as of the date of this Amendment
upon the satisfaction of the following conditions precedent:
No Default. No Event of Default, or event which, with the
giving of notice or the passage of time, or both, would become an Event of
Default, shall have occurred and be continuing.
<PAGE> 4
Resolutions. Borrower shall have delivered corporate
resolutions, in form and substance satisfactory to Lender, with respect to this
Amendment.
Execution. The delivery of an executed copy of this Amendment
and the acknowledgments hereto to Lender.
Closing Fee. Borrower shall have paid Lender a closing fee of
Twenty Thousand Dollars ($20,000).
Miscellaneous.
Expenses. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrower agrees to pay, and save Lender
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Amendment, the borrowings
under the Loan Agreement, as amended hereby, and the execution and delivery of
any instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. All obligations provided in this Section
5.1 shall survive any termination of this Amendment or the Loan Agreement as
amended hereby.
Governing Law. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois.
Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
Reference to Loan Agreement. Except as herein amended, the
Loan Agreement shall remain in full force and effect and is hereby ratified in
all respects. On and after the effectiveness of the amendments to the Loan
Agreement accomplished hereby, each reference in the Loan Agreement to "this
Agreement," "hereunder," "hereof," "herein" or words of like import, and each
reference to the Loan Agreement in any note and in any Related Agreements, or
other agreements, documents or other instruments executed and delivered pursuant
to the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
Successors. This Amendment shall be binding upon Borrower,
Lender and their respective successors and assigns, and shall inure to the
benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
and delivered at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By__________________________________
Its_________________________________
BANK OF AMERICA ILLINOIS
By__________________________________
Its_________________________________
<PAGE> 6
THIRD AMENDED AND RESTATED SUPPLEMENT A
TO LOAN AND SECURITY AGREEMENT
DATED AS OF OCTOBER 5, 1992
BETWEEN BANK OF AMERICA ILLINOIS
AND RAINBOW RENTALS, INC.
Loan Agreement Reference. This Third Amended and Restated
Supplement A, as it may be amended or modified from time to time, is a part of
the Loan and Security Agreement dated as of October 5, 1992 between Lender and
Borrower (together with all amendments, modifications and supplements thereto,
the "Loan Agreement") and amends and restates in its entirety that certain
Second Amended and Restated Supplement A dated May 21, 1997. Terms used herein
and not otherwise defined shall have the meanings ascribed to them in the Loan
Agreement.
Revolving Credit Amount; Borrowing Base.
Revolving Credit Amount. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such amount,
as adjusted from time to time, is herein called the "Revolving Credit Amount")
is $10,000,000.
Borrowing Base. The term "Borrowing Base," as used herein,
shall mean an amount (the "Cash Receipts Availability") equal to (A) the product
of up to the "Cash Collection Percentage" (as defined below) multiplied by the
net amount of Borrower's actual cash collections of Accounts Receivable from
Account Debtors pursuant to the terms of Rental Agreements for the immediately
preceding two calendar months (exclusive of collections for delivery, insurance,
merchandise, sales and other non-rental payments and after deduction of such
reserves and allowances as Lender deems proper and necessary), divided by (B)
two. "Cash Collection Percentage" (as defined below) means 375%.
Lender's Rights. Borrower agrees that nothing contained in
Supplement A (i) shall be construed as Lender's agreement to resort or look to a
particular type or item of Collateral as security for any specific Loan or
portion of the Liabilities or advance or in any way limit Lender's right to
resort to any or all of the Collateral as security for any of the Liabilities,
(ii) shall be deemed to limit or reduce any Lien upon any portion of the
Collateral or other security for the Liabilities or (iii) shall supersede
Section 2.9 of the Loan Agreement.
Interest.
Revolving Loans.
Interest to Maturity. The unpaid principal balance of the
Revolving Loans (other than Overdraft Loans and Over Advances) shall bear
interest to maturity at a per annum rate equal to the Reference Rate in effect
from time to time plus the Applicable Margin; provided that pursuant to the
provisions of Section 3.1.3 below, from time to time Borrower may elect to have
all or any portion of the Revolving Loans bear interest at the IBOR Rate plus
the Applicable Margin.
Default Rate. If any amount of the Revolving Loans is not paid
when due, whether by acceleration or otherwise, the entire unpaid principal
balance of the Revolving Loans (other than Overdraft Loans and Over Advances)
shall bear interest until paid at a rate per annum equal to the greater of (i)
the rate otherwise from time to time if effect plus 2.00% and (ii) 2.00% above
the rate otherwise in effect at the time such amount becomes due.
Intentionally Omitted.
IBOR Option.
Borrower shall have the right, from time to time, to designate
IBOR Revolving Portions by means of an IBOR Request. All IBOR Requests must be
received by Lender not later than 10:00 a.m., Chicago time, two (2) Banking Days
prior to the date the applicable Interest Rate Period is to begin (or is to be
continued). Notwithstanding
<PAGE> 7
the foregoing, (x) all undesignated portions of the Revolving Loan shall
constitute Reference Rate Loans, (y) Borrower shall not have the right to
designate IBOR Rate Loans at any time that an Event of Default or an Unmatured
Event of Default is in existence, notwithstanding a contrary designation by
Borrower, and (z) in no event may more than four (4) IBOR Rate Loans having
different Interest Rate Periods be outstanding at any one time. Each designation
by Borrower of a IBOR Rate Loan shall be irrevocable; provided, however, that
Borrower may specify in any such IBOR Request a maximum IBOR Rate which it will
accept for the related Interest Rate Period and the IBOR Option elected in such
IBOR Request shall not become effective if the applicable IBOR Rate determined
by Lender shall exceed such specified maximum.
Overdraft Loans; Over Advances. Overdraft Loans and Over
Advances shall bear interest at the rate(s) determined pursuant to Section 2.7
or Section 2.8 of the Loan Agreement, as applicable.
Computation. Interest shall be calculated on the basis of a
year consisting of 360 days and paid for actual days elapsed; provided, that the
computation of interest on IBOR Rate Loans shall include the date on which the
applicable Interest Rate Period began, but shall exclude the last day of the
applicable Interest Rate Period. IBOR Rate Loans not repaid on the last day of
the Interest Rate Period applicable thereto shall be continued or converted into
Reference Rate Loans and shall bear interest at the applicable rate for
Reference Rate Loans of such type from and including the last day of such
Interest Rate Period. Changes in any interest rate provided for herein which are
due to changes in the Reference Rate shall take effect on the date of the change
in the Reference Rate.
Payment. Until maturity, interest on the Loans shall be
payable on the first day of each calendar quarter, and at maturity. After
maturity, whether by acceleration or otherwise, accrued interest shall be
payable on demand; provided, that interest on IBOR Rate Loans shall be payable
in arrears on the last day of the Interest Rate Period applicable thereto and at
maturity.
Funding Indemnification. If any payment of a IBOR Rate Loan
occurs on a date which is not the last day of the applicable Interest Rate
Period, whether because of acceleration, prepayment or otherwise, Borrower will
indemnify Lender for any loss or cost incurred by it resulting therefrom,
including without limitation any loss or cost in liquidating or employing
deposits acquired to fund or maintain such Loan. Lender shall deliver a written
statement as to the amount due, if any, under this Section 3.5. Such written
statement shall set forth in reasonable detail the calculations upon which
Lender determined such amount and shall be final, conclusive and binding on
Borrower in the absence of manifest error. Determination of amounts payable
under this Section 3.5 shall be calculated as though Lender funded its IBOR Rate
Loans through the purchase of a deposit of the type and maturity corresponding
to the IBOR Rate Loan and applicable Interest Rate Period bearing interest at
the IBOR Base Rate, whether or not Lender actually funded the Loan in that
manner. The amount specified in the written statement shall be payable on demand
after receipt by Borrower of the written statement. This Section 3.5 shall apply
to all payments of IBOR Rate Loans prior to the last day of the applicable
Interest Rate Period, including without limitation any such payment required to
be made in order to permit Borrower to pay any installment of principal due in
respect of the Revolving Loan under this Agreement.
Availability of Interest Rate Options. If Lender determines
that maintenance of any of its IBOR Rate Loans would violate any applicable law,
rule, regulation or directive, whether or not having the force of law, Lender
shall suspend the availability of such IBOR Rate Loans and require any IBOR Rate
Loans outstanding and so affected to be repaid; or if Lender determines that (i)
deposits of a type or maturity appropriate to match fund IBOR Rate Loans are not
available, (ii) the IBOR Rate does not accurately reflect the cost of making
such Loans, or (iii) Lender's ability to make or maintain IBOR Rate Loans has
been materially adversely affected by the occurrence of any event after the date
hereof, then Lender shall suspend the availability of the IBOR Rate Loans, as
applicable, after the date of any such determination.
Additional Covenants. From the Closing Date and thereafter
until all of Borrower's Liabilities under the Loan Agreement are paid in full,
Borrower agrees that, unless Lender otherwise consents in writing, it will:
Net Worth. Not permit Borrower's Net Worth at any time to be
less than the Minimum Net Worth Amount as such time.
<PAGE> 8
Capital Expenditures. Not and not permit any of its
Subsidiaries to purchase or otherwise acquire (including without limitation,
acquisition by way of capitalized lease), or commit to purchase or acquire, any
fixed asset, if after giving effect to such purchase or other acquisition, the
aggregate cost of all such fixed assets purchased or otherwise acquired would
exceed $2,000,000 in any Fiscal Year.
Maximum Funded Debt to Earnings Ratio. Not permit, for the
twelve month period ending on the last day of each calendar quarter ending
during any period (inclusive) set forth below, the ratio of (a) Borrower's
Indebtedness for interest bearing borrowed money on the last day of each such
calendar quarter during such period set forth below to (b) Borrower's
consolidated net earnings before interest expense and provision for Taxes for
such twelve month period, to be greater than the ratio set forth below opposite
such twelve month period:
<TABLE>
<CAPTION>
Period Maximum Ratio
------ -------------
<S> <C>
September 30, 1998 and the twelve month period ending on the last 2.50:1.00
day of each calendar quarter thereafter
</TABLE>
For purposes of this Section 4.3 and Section 4.4, (i) consolidated net earnings
shall not include any gains on the sale or other disposition of Investments of
fixed assets and any extraordinary or nonrecurring items of income to the extent
that the aggregate of all such gains and extraordinary or nonrecurring items of
income exceeds the aggregate of losses on such sale or other disposition and
extraordinary or nonrecurring charges, and (ii) interest expense shall include,
without limitation, implicit interest expense on Capitalized Leases, and shall
exclude the amortization of the closing fee, the modification fee, or any other
fee paid to Lender in connection with the Loans.
Minimum Fixed Charge Coverage Ratio. Not permit, for any
period set forth below, the ratio of (a) Borrower's consolidated net earnings
before interest expense and provision for Taxes and the rental payments for
Borrower's stores for such period to (b) the sum of (i) Borrower's interest
expense for such period, (ii) scheduled principal payments with respect to
Borrower's Indebtedness for borrowed money during such period, and (iii) the
rental payments for Borrower's stores for such period, to be less than the ratio
set forth below opposite such period:
<TABLE>
<CAPTION>
Period Maximum Ratio
------ -------------
<S> <C>
July 1, 1998 through September 30, 1998 1.75:1.00
July 1, 1998 through December 31, 1998 1.75:1.00
The period commencing on the first day of each calendar year 1.75:1.00
thereafter (commencing with the calendar year beginning January 1,
1999) and ending on the last day of each calendar quarter during such
calendar year
</TABLE>
Borrower's Initials _______
Lender's Initials _________
Date: July 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,973
<SECURITIES> 0
<RECEIVABLES> 52,382
<ALLOWANCES> 0
<INVENTORY> 24,041,630
<CURRENT-ASSETS> 24,462,942
<PP&E> 3,439,581
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,727,512
<CURRENT-LIABILITIES> 5,359,494
<BONDS> 0
0
0
<COMMON> 11,039,062
<OTHER-SE> 13,782,704
<TOTAL-LIABILITY-AND-EQUITY> 30,727,512
<SALES> 353,459
<TOTAL-REVENUES> 15,601,332
<CGS> 5,325,757
<TOTAL-COSTS> 5,325,757
<OTHER-EXPENSES> 8,609,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,907
<INCOME-PRETAX> 1,427,768
<INCOME-TAX> 606,000
<INCOME-CONTINUING> 821,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 821,768
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
