<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, 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
----------------------------------------
(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, 1999: 5,925,735
<PAGE> 2
RAINBOW RENTALS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of 3
September 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Income - for the
three and nine months ended September 30, 1999
and 1998 4
Condensed Consolidated Statements of
Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows -
for the nine months ended September 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 6. Exhibits and Reports on Form 8-K 13
2
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash $ 173 $ -
Rental-purchase merchandise, net 30,088 25,246
Prepaid expenses and other current assets 1,832 706
-------- --------
Total current assets 32,093 25,952
Property and equipment, net 4,220 3,394
Deferred income taxes 1,182 1,058
Goodwill, net 8,308 910
Other assets, net 1,705 1,754
-------- --------
Total assets $ 47,508 $ 33,068
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ 39 $ 80
Accounts payable 2,779 1,242
Accrued income taxes 373 290
Accrued compensation and related costs 1,947 1,429
Other liabilities and accrued expenses 1,094 1,166
Deferred income taxes 2,537 1,913
-------- --------
Total current liabilities 8,769 6,120
Long-term debt 8,208 -
Obligations under capital leases, excluding current installments 102 110
-------- --------
Total liabilities 17,079 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 and outstanding 11,039 11,039
Retained earnings 21,297 17,706
Treasury stock, 466,875 common shares at cost (1,907) (1,907)
-------- --------
Total shareholders' equity 30,429 26,838
-------- --------
Total liabilities and shareholders' equity $ 47,508 $ 33,068
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue $ 19,150 $ 15,045 $ 55,205 $ 43,978
Fees 671 523 1,952 1,439
Merchandise sales 490 334 1,770 1,223
----------- ----------- ----------- -----------
Total revenues 20,311 15,902 58,927 46,640
Operating expenses
Merchandise costs 6,765 5,482 19,560 15,872
Store expenses
Salaries and related 4,537 3,459 13,298 10,242
Occupancy 1,510 1,155 4,367 3,456
Advertising 814 926 2,730 2,667
Other expenses 2,831 1,949 7,587 5,608
----------- ----------- ----------- -----------
Total store expenses 9,692 7,489 27,982 21,973
----------- ----------- ----------- -----------
Total merchandise costs and store
expenses 16,457 12,971 47,542 37,845
General and administrative expenses 1,390 1,135 4,125 3,472
Amortization 130 13 312 13
----------- ----------- ----------- -----------
Total operating expenses 17,977 14,119 51,979 41,330
----------- ----------- ----------- -----------
Operating income 2,334 1,783 6,948 5,310
Interest expense 191 41 491 884
Other expense (income), net 47 96 319 (4)
----------- ----------- ----------- -----------
Income before income taxes 2,096 1,646 6,138 4,430
Income taxes 869 691 2,547 1,874
----------- ----------- ----------- -----------
Net income $ 1,227 $ 955 $ 3,591 $ 2,556
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic earnings per share: $ 0.21 $ 0.16 $ 0.61 $ 0.55
=========== =========== =========== ===========
Diluted earnings per share: $ 0.21 $ 0.16 $ 0.60 $ 0.55
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,925,735 5,925,735 5,925,735 4,648,262
=========== =========== =========== ===========
Diluted 5,935,861 5,925,735 5,944,289 4,648,262
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------ RETAINED TREASURY SHAREHOLDERS'
NUMBER COST EARNINGS STOCK EQUITY
------ ---- -------- ----- ------
<S> <C> <C> <C> <C> <C>
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) - - 3,591 - 3,591
========== ========== ========== ========== ==========
Balance at September 30, 1999
(unaudited) 5,925,735 $ 11,039 $ 21,297 $ (1,907) $ 30,429
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,591 $ 2,556
Reconciliation of net income to net cash provided by operating
activities
Depreciation of property and equipment and
amortization of intangibles 1,812 1,445
Depreciation of rental-purchase merchandise 15,871 14,277
Deferred income taxes 500 435
Gain on disposal of property and equipment (101) (164)
Purchases of rental-purchase merchandise (20,957) (15,774)
Rental-purchase merchandise disposed, net 3,854 1,470
(Increase) decrease in
Prepaid expenses and other current assets (1,126) 192
Income tax receivable - 399
Increase (decrease) in
Accounts payable 1,312 1,143
Accrued income taxes 84 90
Accrued compensation and related costs 518 379
Other liabilities and accrued expenses (72) (631)
-------- --------
Net cash provided by operating activities 5,286 5,817
-------- --------
Cash flows from investing activities
Purchase of property and equipment, net (1,778) (1,139)
Proceeds on the sale of property and equipment 231 221
Acquisitions (11,687) (1,554)
-------- --------
Net cash used in investing activities (13,234) (2,472)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt borrowings 29,330 31,810
Current installments and repayments of long-term debt (21,122) (44,274)
Proceeds from stock offering, net of related expenses - 20,167
Decrease in notes payable - (10,488)
Loan origination fees paid (37) (28)
Principal payments under capital lease obligations (50) (45)
-------- --------
Net cash provided by (used in) financing activities 8,121 (2,858)
-------- --------
Net increase in cash 173 487
Cash at beginning of period - 77
-------- --------
Cash at end of period $ 173 $ 564
======== ========
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 400 $ 971
Income taxes 2,048 950
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
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 91 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.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income available to common shareholders $ 1,227 $ 955 $ 3,591 $ 2,556
Denominator:
Basic weighted average shares 5,925,735 5,925,735 5,925,735 4,648,262
Effect of dilutive stock options 10,126 - 18,554 -
---------- ---------- ---------- ----------
Diluted weighted average shares 5,935,861 5,925,735 5,944,289 4,648,262
========== ========== ========== ==========
Basic earnings per share $ 0.21 $ 0.16 $ 0.61 $ 0.55
========== ========== ========== ==========
Diluted earnings per share $ 0.21 $ 0.16 $ 0.60 $ 0.55
========== ========== ========== ==========
</TABLE>
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.
7
<PAGE> 8
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 September 30, 1999 the Company operated 91 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. The Company opened
two new stores during the third quarter.
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 SIX MONTHS ENDED
-------------------------- ------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Rental revenue 94.3% 94.6% 93.7% 94.3%
Fees 3.3 3.3 3.3 3.1
Merchandise sales 2.4 2.1 3.0 2.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Merchandise costs 33.3 34.5 33.2 34.0
Store expenses
Salaries and related 22.4 21.7 22.6 22.0
Occupancy 7.4 7.3 7.4 7.4
Advertising 4.0 5.8 4.6 5.7
Other expenses 13.9 12.2 12.9 12.0
----- ----- ----- -----
Total store expenses 47.7 47.0 47.5 47.1
----- ----- ----- -----
Total merchandise costs and store expenses 81.0 81.5 80.7 81.1
General and administrative expenses 6.8 7.2 7.0 7.5
Amortization 0.7 0.1 0.5 0.0
----- ----- ----- -----
Total operating expenses 88.5 88.8 88.2 88.6
----- ----- ----- -----
Operating income 11.5 11.2 11.8 11.4
Interest expense 0.9 0.3 0.8 1.9
Other expense (income), net 0.3 0.6 0.6 0.0
----- ----- ----- -----
Income before income taxes 10.3 10.3 10.4 9.5
Income taxes 4.3 4.3 4.3 4.0
----- ----- ----- -----
Net income 6.0% 6.0% 6.1% 5.5%
===== ===== ==== =====
</TABLE>
8
<PAGE> 9
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the three months ended September 30, 1999, total revenues increased
to $20.3 million from $15.9 million, an increase of 27.7% over the comparable
1998 period. The increase was due to revenue from the stores opened and acquired
in 1999, an increase in comparable store revenue and the inclusion of a full
three months' results from the four stores opened and acquired in the third
quarter of 1998. The increase in revenue from the stores opened and acquired in
1999 accounted for $2.8 million, or 63.7% of the increase, the increase in
comparable store revenue accounted for $1.0 million, or 22.5% of the increase
and the four stores opened and acquired in the third quarter of 1998 accounted
for $0.6 million, or 13.8% of the increase.
For the three months ended September 30, 1999, merchandise costs
increased to $6.8 million from $5.5 million, an increase of 23.4% over the
comparable 1998 period, but as a percentage of total revenues, decreased to
33.3% from 34.5%. 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 September 30, 1999, total store expenses
increased to $9.7 million from $7.5 million, an increase of 29.4% over the
comparable 1998 period, and as a percentage of total revenues increased slightly
to 47.7% from 47.0%. Salaries and related increased to $4.5 million from $3.5
million, an increase of 31.2% over the comparable 1998 period and as a
percentage of total revenues increased to 22.4% from 21.7%. The increases are
primarily attributable to additional expenses and personnel associated with
stores opened and acquired in 1999. Advertising decreased to $0.8 million from
$0.9 million, a decrease of 12.1% and as a percentage of total revenues
decreased to 4.0% from 5.8%. The decrease was attributable to management's
efforts to reduce advertising costs and an increase in promotional funds
received from major suppliers under cooperative advertising agreements. Other
expenses increased to $2.8 million from $1.9 million, an increase of 45.2% over
the comparable 1998 period and as a percentage of total revenues increased to
13.9% from 12.2%. The increase was primarily due to expenses associated with
stores opened and acquired in 1999 and, to a lesser extent, an increase in
expenses of comparable stores mainly due to an increase in expenses associated
with delivery vehicles.
For the three months ended September 30, 1999, general and
administrative expenses increased to $1.4 million from $1.1 million, an increase
of 22.4% over the comparable 1998 period. As a percentage of total revenues,
general and administrative expenses decreased to 6.8% from 7.2% due to the
Company's continued ability to add stores and increase revenues without a
corresponding increase in corporate overhead.
For the three months ended September 30, 1999, amortization of goodwill
and non-compete agreements relating to stores acquired in 1999 and 1998 amounted
to $130,000 compared to $13,000 in the third quarter of 1998.
For the three months ended September 30, 1999, operating income
increased to $2.3 million from $1.8 million, an increase of 30.9% 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 due to the growth of stores opened in 1997 and, to a lesser
extent, an increase in the rentals of higher-margin merchandise. As a percentage
of total revenues, operating income increased to 11.5% from 11.2% mainly due to
improved margins on rental merchandise and other factors associated with store
expenses as discussed above.
For the three months ended September 30, 1999, interest expense
increased to $191,000 from $41,000 in the comparable 1998 period due to the
indebtedness related to the acquisitions completed in the first quarter.
For the three months ended September 30, 1999, the Company's effective
tax rate decreased to 41.5% from 42.0% for the comparable 1998 period due to
lower effective state tax rates.
For the three months ended September 30, 1999, net income increased to
$1.2 million from $1.0 million, an increase of 28.4% over the comparable 1998
period, and as a percentage of total revenues remained constant at 6.0% due to
the factors discussed above.
9
<PAGE> 10
- -------------------------------------------------------------------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine months ended September 30, 1999, total revenues increased
to $58.9 million from $46.6 million, an increase of 26.3% over the comparable
1998 period. The increase was due to revenue from the stores opened and acquired
in 1999, the inclusion of a full nine 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
$6.4 million, or 51.7% of the increase, stores opened and acquired in 1998
accounted for $4.2 million, or 34.5% of the increase, and the increase in
comparable store revenue accounted for $1.7 million, or 13.8% of the increase.
For the nine months ended September 30, 1999, merchandise costs
increased to $19.6 million from $15.9 million, an increase of 23.2% 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 33.2% from 34.0% 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 nine months ended September 30, 1999, total store expenses
increased to $28.0 million from $22.0 million, an increase of 27.3% over the
comparable 1998 period, and as a percentage of total revenues increased to 47.5%
from 47.1%. Salaries and related increased to $13.3 million from $10.2 million,
an increase of 29.8% over the comparable 1998 period and as a percentage of
total revenues increased to 22.6% from 22.0%. The increases are primarily
attributable to additional expenses and personnel associated with stores opened
and acquired in 1999 and the inclusion of a full nine months of such expenses
from stores opened and acquired in 1998. Occupancy increased to $4.4 million
from $3.5 million, but as a percentage of total revenues, remained relatively
constant at 7.4%. Advertising remained constant at $2.7 million, but as a
percentage of total revenues decreased to 4.6% from 5.7%. The percentage
decrease was primarily due to management's efforts to reduce advertising costs
and to a lesser extent, acquiring stores in existing markets which resulted in
increased revenues without a corresponding increase in such expenses. Other
expenses increased to $7.6 million from $5.6 million, an increase of 35.3% over
the comparable 1998 period and as a percentage of total revenues increased to
12.9% from 12.0%. The increase was due to expenses associated with stores opened
and acquired in 1999 and the inclusion of a full nine months' expenses from
stores opened and acquired in 1998.
For the nine months ended September 30, 1999, general and
administrative expenses increased to $4.1 million from $3.5 million, an increase
of 18.8% over the comparable 1998 period. As a percentage of total revenues,
general and administrative expenses decreased to 7.0% from 7.5% due to the
Company's continued ability to add stores and increase revenues without a
corresponding increase in corporate overhead.
For the nine months ended September 30, 1999, amortization of goodwill
and non-compete agreements relating to stores acquired in 1999 and 1998 amounted
to $312,000 compared to $13,000 in the nine months of 1998.
For the nine months ended September 30, 1999, operating income
increased to $6.9 million from $5.3 million, an increase of 30.9% 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 opened and acquired in
1999. As a percentage of total revenues, operating income increased to 11.8%
from 11.4% mainly due to improved margins on rental merchandise and other
factors associated with store expenses as discussed above.
For the nine months ended September 30, 1999, interest expense
decreased to $0.5 million from $0.9 million, a decrease of 44.4% from the
comparable 1998 period, and as a percentage of total revenues decreased to 0.8%
from 1.9%. 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 of 1999.
For the nine months ended September 30, 1999, other expense (income),
net reflected expense of $0.3 million compared to income of $4,000 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.
10
b
<PAGE> 11
For the nine months ended September 30, 1999, the Company's effective
tax rate decreased to 41.5% from 42.3% for the comparable 1998 period due to
lower effective state tax rates.
For the nine months ended September 30, 1999, net income increased to
$3.6 million from $2.6 million, an increase of 40.5% over the comparable 1998
period, and as a percentage of total revenues increased to 6.1% from 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, expenditures related to
new store openings, acquisitions and working capital requirements for new and
existing stores. For the nine months ended September 30, 1999 and 1998,
purchases of rental merchandise (excluding acquisitions) amounted to $21.0
million and $15.8 million, respectively. During the nine months ended September
30, 1999, the Company acquired the assets of 19 rental-purchase stores in the
aggregate amount of $11.7 million.
For the nine months ended September 30, 1999, cash provided by operating
activities decreased to $5.3 million from $5.8 million for the comparable 1998
period. The decrease was primarily due to an increase in rental-purchase
merchandise offset by an increase in net income. Cash used in investing
activities increased to $13.2 million from $2.5 million due primarily to the
acquisition of 19 stores from Rental Mart and Blue Ribbon. Cash provided by
financing activities was $8.1 million as compared to cash used in financing
activities for the comparable 1998 period of $2.9 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.
The Company currently has a $16.0 million Credit Facility with a
maturity date of 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 November 12, 1999 was approximately $9.1
million.
The Company plans to open an additional 3 stores during the remainder of
1999 and plans to open approximately 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
began to assess its Year 2000 readiness and has completed its plans to ensure
that its systems are Year 2000 compliant. 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
11
<PAGE> 12
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,
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. 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.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
A. Exhibit No.
-----------
27.1 Financial Data Schedule
B. Reports on Form 8-K
- -- -------------------
None
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: November 13, 1999
13
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