<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: September 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 September 30, 1998: 5,925,735
Exhibit index appears on page 14.
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RAINBOW RENTALS, INC.
INDEX
<TABLE>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of 3
December 31, 1997 and September 30, 1998
Condensed Consolidated Statements of Income - for
the three and nine months ended September 30, 1997 4
and 1998
Condensed Consolidated Statements of
Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows -
for the nine months ended September 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 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE> 3
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 77,095 $ 563,810
Rental-purchase merchandise, net 23,411,079 23,907,504
Prepaid expenses and other current assets 823,779 632,148
Income tax receivable 399,000 -
------------------- ------------------
Total current assets 24,710,953 25,103,462
Property and equipment, net 3,441,884 3,507,604
Deferred income taxes 1,041,000 950,000
Goodwill, net - 899,985
Other assets, net 2,100,204 1,884,063
------------------- ------------------
Total assets $ 31,294,041 $ 32,345,114
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ 80,000 $ 80,000
Accounts payable 1,000,399 2,143,903
Accrued income taxes 128,947 218,856
Accrued compensation and related costs 1,090,735 1,469,771
Other liabilities and accrued expenses 1,616,071 984,733
Deferred income taxes 1,201,000 1,545,000
------------------- ------------------
Total current liabilities 5,117,152 6,442,263
Long-term debt, excluding current installments 12,463,929 -
Notes payable 10,488,035 -
Obligations under capital leases, excluding current installments 171,105 126,235
------------------- ------------------
Total liabilities 28,240,221 6,568,498
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 September 30, 1998, respectively 60,150 11,039,062
Retained earnings 14,088,286 16,644,082
Treasury stock, 2,716,875 and 466,875 common shares at
December 31, 1997 and September 30, 1998, respectively, at cost (11,094,616) (1,906,528)
------------------- ------------------
Total shareholders' equity 3,053,820 25,776,616
------------------- ------------------
Total liabilities and shareholders' equity $ 31,294,041 $ 32,345,114
=================== ==================
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue $13,189,614 $15,045,247 $38,315,992 $43,977,611
Fees 433,206 523,474 1,154,301 1,439,455
Merchandise sales 391,443 333,655 1,277,535 1,222,663
----------- ----------- ----------- -----------
Total revenues 14,014,263 15,902,376 40,747,828 46,639,729
Operating expenses
Merchandise costs
Depreciation and other merchandise
costs 4,869,176 5,481,576 14,009,102 15,872,554
Store operating expenses
Salaries and related expenses 3,020,092 3,458,608 8,630,929 10,241,649
Occupancy expenses 1,058,556 1,154,927 2,970,404 3,456,186
Advertising expenses 830,121 926,159 2,444,888 2,666,709
Other store expenses 1,511,238 1,949,448 4,464,290 5,608,147
----------- ----------- ----------- -----------
Total store operating expenses 6,420,007 7,489,142 18,510,511 21,972,691
----------- ----------- ----------- -----------
Total merchandise costs and store
operating expenses 11,289,183 12,970,718 32,519,613 37,845,245
General and administrative expenses 920,185 1,135,092 3,043,750 3,472,272
----------- ----------- ----------- -----------
Total operating expenses 12,209,368 14,105,810 35,563,363 41,317,517
----------- ----------- ----------- -----------
Operating income 1,804,895 1,796,566 5,184,465 5,322,212
Interest expense 548,955 41,157 1,329,575 883,770
Other expense, net 164,533 109,559 173,089 8,646
----------- ----------- ----------- -----------
Income before income taxes 1,091,407 1,645,850 3,681,801 4,429,796
Income taxes 463,845 691,000 1,564,760 1,874,000
=========== =========== =========== ===========
Net income $ 627,562 $ 954,850 $ 2,117,041 $ 2,555,796
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic earnings per share: $ 0.17 $ 0.16 $ 0.44 $ 0.55
=========== =========== =========== ===========
Diluted earnings per share: $ 0.17 $ 0.16 $ 0.44 $ 0.55
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 3,675,735 5,925,735 4,780,398 4,648,262
=========== =========== =========== ===========
Diluted 3,675,735 5,925,735 4,780,398 4,648,262
=========== =========== =========== ===========
</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) 2,555,796 2,555,796
Issuance of 2,250,000 common shares 10,978,912 - 9,188,088 20,167,000
------------ ------------ ------------ ------------
Balance at September 30, 1998 (unaudited) $ 11,039,062 $ 16,644,082 $ (1,906,528) $ 25,776,616
============ ============ ============ ============
</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 NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,117,041 $ 2,555,796
Reconciliation of net income to net cash provided
by operating activities
Depreciation of property and equipment and
amortization of loan fees, noncompete and
consulting agreements and goodwill 1,543,704 1,445,017
Depreciation of merchandise inventory 12,395,275 14,277,346
Deferred income taxes 744,750 435,000
Gain on disposal of property and equipment (165,239) (164,246)
Purchases of merchandise inventory (16,079,555) (15,773,740)
Merchandise inventory disposed, net 1,342,124 1,469,728
(Increase) decrease in
Short-term investments 27,012 -
Prepaid expenses and other current assets 236,470 191,631
Income tax receivable (147,019) 399,000
Increase (decrease) in
Accounts payable (148,687) 1,143,504
Accrued income taxes (191,390) 89,909
Accrued compensation and related costs 382,837 379,036
Other liabilities and accrued expenses 97,355 (631,338)
------------ ------------
Net cash provided by operating activities 2,154,678 5,816,643
------------ ------------
Cash flows from investing activities
Purchase of property and equipment, net (962,920) (1,139,052)
Proceeds on the sale of property and equipment 230,505 221,485
Acquisitions of assets -- (1,554,286)
------------ ------------
Net cash used in investing activities (732,415) (2,471,853)
------------ ------------
Cash flows from financing activities
Proceeds from long-term debt borrowings 45,286,000 31,810,000
Current installments and repayments of long-term debt (44,260,930) (44,273,929)
Proceeds from stock offering, net of related expenses - 20,167,000
Decrease in notes payable (47,553) (10,488,035)
Loan origination fees paid (147,500) (28,241)
Payment in connection with Redemption Agreement (2,699,771) -
Principal payments under capital lease obligations (24,579) (44,870)
------------ ------------
Net cash used in financing activities (1,894,333) (2,858,075)
------------ ------------
Net increase (decrease) in cash (472,070) 486,715
Cash at beginning of period 472,070 77,095
------------ ------------
Cash at end of period $ - $ 563,810
============ ============
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 791,699 $ 971,365
Income taxes 1,158,419 950,091
</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 70 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
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 and his affiliates.
The balance of the net proceeds were used to reduce borrowings with a lending
institution.
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 common stock equivalents.
The following table shows the amounts used in computing earnings per
share.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income available to common shareholders $ 627,562 $ 954,850 $ 2,117,041 $2,555,796
Denominator:
Basic weighted average shares 3,675,735 5,925,735 4,780,398 4,648,262
Effect of dilutive stock options - - - -
--------- --------- ----------- ----------
Diluted weighted average shares 3,675,735 5,925,735 4,780,398 4,648,262
========= ========= =========== ==========
Basic earnings per share $ 0.17 $ 0.16 $ 0.44 $ 0.55
========= ========= =========== ==========
Diluted earnings per share $ 0.17 $ 0.16 $ 0.44 $ 0.55
========= ========= =========== ==========
</TABLE>
7
<PAGE> 8
4. Acquisitions
On July 1, 1998, the Company acquired approximately 900 rental-purchase
agreements from Eppy's Furniture, Inc., a rental-purchase store located in
Lorain, Ohio for approximately $475,000. The acquisition was accounted for as a
purchase; accordingly, all identifiable assets were recorded at estimated fair
value at the date of acquisition. The excess of the acquisition cost over the
estimated fair value of the assets acquired ("goodwill") was approximately
$264,000. The acquired rental-purchase agreements were merged with agreements at
an existing store in Elyria, Ohio.
On August 1, 1998, the Company acquired certain assets of Choice Rental
of Massachusetts, Inc., a Massachusetts competitor, for approximately $1.1
million. The acquisition was accounted for as a purchase; accordingly, all
identifiable assets were recorded at estimated fair value at the date of
acquisition. The excess of the acquisition cost over the estimated fair value of
the assets acquired ("goodwill") was approximately $645,000.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
At September 30, 1998 the Company operated 70 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. Three stores were
opened and two acquisitions were made in the third quarter ended September 30,
1998.
During the third quarter of 1998 the Company completed two acquisitions
in the aggregate amount of approximately $1,575,000.
On June 4, 1998, the Company completed its initial public offering
consisting of 2,250,000 shares of common stock at $10 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.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenue.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue 94.1% 94.6% 94.0% 94.3%
Fees 3.1 3.3 2.8 3.1
Merchandise sales 2.8 2.1 3.2 2.6
-------------- -------------- ------------- --------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Merchandise costs
Depreciation and other merchandise
costs 34.7 34.5 34.4 34.0
Store operating expenses
Salaries and related expenses 21.5 21.7 21.2 22.0
Occupancy expenses 7.6 7.3 7.3 7.4
Advertising expenses 5.9 5.8 6.0 5.7
Other store expenses 10.8 12.2 10.9 12.0
-------------- -------------- ------------- --------------
Total store operating expenses 45.8 47.0 45.4 47.1
-------------- -------------- ------------- --------------
Total merchandise costs and store
operating expenses 80.5 81.5 79.8 81.1
General and administrative expenses 6.6 7.2 7.5 7.5
-------------- -------------- ------------- --------------
Total operating expenses 87.1 88.7 87.3 88.6
-------------- -------------- ------------- --------------
Operating income 12.9 11.3 12.7 11.4
Interest expense 3.9 0.3 3.3 1.9
Other expense, net 1.2 0.7 0.4 0.0
-------------- -------------- ------------- --------------
Income before income taxes 7.8 10.3 9.0 9.5
Income taxes 3.3 4.3 3.8 4.0
-------------- -------------- ------------- --------------
Net income 4.5% 6.0% 5.2% 5.5%
============== ============== ============= ==============
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
For the three months ended September 30, 1998, total revenues increased
from $14.0 million to $15.9 million, an increase of 13.5% over the comparable
1997 period. The increase was due to improved comparable store revenue and
revenue from the nine stores opened or acquired in 1998. Revenue from comparable
stores increased 7.5% and accounted for 55.9% of the increase. Revenue from
stores opened and acquired in 1998 accounted for 44.1% of the increase.
For the three months ended September 30, 1998 total merchandise costs
increased from $4.9 million to $5.5 million, an increase of 12.6% over the
comparable 1997 period, but as a percentage of total revenues decreased from
34.7% in 1997 to 34.5% in 1998. The dollar increase was primarily due to
merchandise costs associated with stores opened and acquired in 1997 and 1998.
9
<PAGE> 10
For the three months ended September 30, 1998, total store operating
expenses increased from $6.4 million to $7.5 million, an increase of 16.7% over
the comparable 1997 period, and as a percentage of total revenues increased from
45.8% to 47.0%. The increase was primarily due to operating expenses associated
with stores opened and acquired in 1997 and 1998. Salaries and related expenses
increased from $3.0 million to $3.5 million, an increase of 14.5%, and as a
percentage of total revenues increased from 21.5% to 21.7% mainly due to stores
opened and acquired in 1997 and 1998. Occupancy expenses increased from $1.1
million to $1.2 million, but decreased as a percentage of total revenues 7.6% to
7.3%. The dollar increase was due to the nine stores opened or acquired in 1998.
Advertising expenses increased slightly from $0.8 million to $0.9 million, but
decreased as a percentage of total revenues from 5.9% to 5.8%. Other store
expenses increased from $1.5 million to $1.9 million, and as a percentage of
total revenues increased from 10.8% to 12.2%. The increase was primarily due to
expenses associated with stores opened and acquired in 1998 and, to a lesser
degree, an increase in expenses of comparable stores.
For the three months ended September 30, 1998, general and
administrative expenses increased from $0.9 million to $1.1 million, an increase
of 23.4% over the comparable 1997 period, and as a percentage of total revenues
increased from 6.6% to 7.2%. The increase was necessitated by the Company's
current and anticipated growth in the number of stores.
For the three months ended September 30, 1998, operating income
remained relatively constant at $1.8 million, but as a percentage of total
revenues decreased from 12.9% to 11.3%. The decrease was mainly due to newly
opened and acquired stores operating at revenue levels below those of core
stores and other factors discussed above.
For the three months ended September 30, 1998, interest expense
decreased from $0.5 million to $41,157, and as a percentage of total revenues
decreased from 3.9% to 0.3%. 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 September 30, 1998, net income increased
from $0.6 million to $1.0 million, an increase of 52.2% over the comparable 1997
period, and as a percentage of total revenues increased from 4.5% to 6.0% due to
the factors discussed above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
For the nine months ended September 30, 1998, total revenues increased
from $40.7 million to $46.6 million, an increase of 14.5% 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 nine stores opened or acquired in 1998. Revenue from comparable
stores increased $1.8 million and accounted for 31.2% of the increase, stores
opened in 1997 accounted for $3.0 million, or 50.7% of the increase and new
store openings and acquisitions accounted for $1.1 million, or 18.1% of the
increase.
For the nine months ended September 30, 1998, total merchandise costs
increased from $14.0 million to $15.9 million, an increase of 13.3% over the
comparable 1997 period, but as a percentage of total revenues decreased from
34.4% to 34.0% due to improved margins.
For the nine months ended September 30, 1998, total store operating
expenses increased from $18.5 million to $22.0 million, an increase of 18.7%
over the comparable 1997 period, and as a percentage of total revenues increased
from 45.4% to 47.1%. The increase was primarily due to operating expenses
associated with stores opened and
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<PAGE> 11
acquired in 1997 and 1998. Salaries and related expenses increased from $8.6
million to $10.2 million, an increase of 18.7%, and as a percentage of total
revenues increased from 21.2% to 22.0%. The increase was due to stores opened
and acquired in 1997 and 1998 and, to a lesser degree, additional personnel at
the Company's comparable stores necessitated by the increase in rental-purchase
agreements in 1997. Occupancy expenses increased from $3.0 million to $3.5
million, and as a percentage of total revenues increased from 7.3% to 7.4%. The
increase was due to stores opened and acquired in 1997 and 1998. Advertising
expenses increased from $2.4 million to $2.7 million, but as a percentage of
total revenues, decreased from 6.0% to 5.7%. Other store expenses increased from
$4.5 million to $5.6 million, and as a percentage of total revenues increased
from 10.9% to 12.0%. The increase was primarily due to expenses associated with
stores opened and acquired in 1997 and 1998 and, to a lesser degree, an increase
in expenses of comparable stores.
For the nine months ended September 30, 1998, general and
administrative expenses increased from $3.0 million to $3.5 million, an increase
of 14.1% over the comparable 1997 period. The increase was necessitated by the
Company's current and anticipated growth in the number of stores. As a
percentage of total revenues, general and administrative expenses remained
constant at 7.5%.
For the nine months ended September 30, 1998, operating income
increased from $5.2 million to $5.3 million, an increase of 2.7% over the
comparable 1997 period, but as a percentage of total revenues decreased from
12.7% to 11.4%. The decrease was mainly due to newly opened and acquired stores
operating at revenue levels below those of core stores and factors discussed
above.
For the nine months ended September 30, 1998, interest expense
decreased from $1.3 million to $0.9 million, and as a percentage of total
revenues decreased from 3.3% to 1.9%. The decrease was attributable to the
retirement of substantially all outstanding debt with the proceeds received from
the Company's initial public offering of stock on June 4, 1998.
For the nine months ended September 30, 1998, other expense decreased
from $0.2 million to $8,646 due to a one-time refund of workers' compensation
premiums of $0.2 million received from the State of Ohio.
For the nine months ended September 30, 1998, net income increased from
$2.1 million to $2.6 million, an increase of 20.7% over the comparable 1997
period, and as a percentage of total revenues increased from 5.2% to 5.5% 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 and expenditures relating
to new store openings. For the nine months ended September 30, 1997 and 1998,
the Company purchased merchandise for aggregate amounts of approximately $16.1
million and $15.7 million, respectively.
Cash provided by operating activities increased from $2.2 million
in 1997 to $5.8 million in 1998. The increase was primarily due to the growth of
stores opened in 1997, improved cash flow from operations of comparable stores,
and a decrease in purchases of merchandise inventory.
On June 4, 1998, the Company completed its initial public
offering of 2,250,000 shares of common stock at $10 per share. The net proceeds,
after underwriting commissions and offering expenses, of $20.2 million were used
to
11
<PAGE> 12
retire approximately $10.9 million of indebtedness 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).
On 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 decreased the maximum revolving loan amount from $16.0
million to $10.0 million, decreased the interest rate from prime plus 0.25% to
prime, and extended the loan agreement from May 21, 2000 to July 15, 2001. At
September 30, 1998, there were no outstanding borrowings under the Credit
Facility.
The Company plans to continue and expand its store opening program. 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 addition 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.
YEAR 2000 CONSIDERATIONS
The Company is currently completing its assessment of its Year 2000
issues. The Company's assessment process includes a review of its computerized
systems, including both information technology and non-information technology
systems, to ensure they are capable of processing periods for the Year 2000 and
beyond, as well as a review of whether third parties with whom the Company has
material relationships are Year 2000 compliant. Additionally, the Company is
assessing the potential Year 2000 impact on the computerized products it rents
to customers. The Company's assessment will be completed by March 31, 1999.
The Company believes its current systems and any new or upgraded
systems are or will be Year 2000 compliant and any historical or estimated
future costs of remediating any non-compliant system have not been and will not
be material. The Company does not believe the failure of its systems to be Year
2000 compliant will have material adverse effect upon the Company's business,
results of operations or financial condition.
While non-compliance by infrastructure related technologies which
affect utilities, communications and financial institutions may have a material
adverse effect, the Company is currently unaware of any customer, vendor or
supplier which, if not Year 2000 compliant, would have a material adverse effect
upon the Company's business, results of operations or financial condition.
12
<PAGE> 13
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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
A. Exhibit No.
27.1 Financial Data Schedule
B. Reports on Form 8-K
None
14
<PAGE> 15
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: November 10, 1998
15
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