UNITED STATES
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 March 31, 2003
OR
| o |
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.
| Ohio (State of Incorporation) |
34-1512520 (IRS Employer 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 checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| CLASS | SHARES OUTSTANDING AT APRIL 30, 2003 | |
|
|
||
| Common stock, no par value | 5,929,319 |
RAINBOW RENTALS, INC.
INDEX
| Page No. | ||||||
| PART I | FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements | |||||
| Balance Sheets | 3 | |||||
| Statements of Income | 4 | |||||
| Statements of Shareholders’ Equity | 5 | |||||
| Statements of Cash Flows | 6 | |||||
| Notes to Financial Statements | 7 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 12 | ||||
| Item 4. | Disclosure Controls and Procedures | 12 | ||||
| PART II | OTHER INFORMATION | |||||
| Item 6. | Exhibits and Reports on Form 8-K | 13 | ||||
| SIGNATURES | 14 | |||||
| SARBANES-OXLEY CERTIFICATIONS | 15 | |||||
2
RAINBOW RENTALS, INC.
BALANCE SHEETS
(Dollars in thousands)
| (unaudited) | ||||||||||
| March 31, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
Assets |
||||||||||
Current assets |
||||||||||
Cash and cash equivalents |
$ | 1,182 | $ | 1,080 | ||||||
Rental-purchase merchandise, net |
38,969 | 39,342 | ||||||||
Income tax receivable |
1,264 | 939 | ||||||||
Prepaid expenses and other current assets |
1,976 | 1,843 | ||||||||
Total current assets |
43,391 | 43,204 | ||||||||
Property and equipment, net |
5,680 | 5,558 | ||||||||
Deferred income taxes |
2,033 | 1,989 | ||||||||
Goodwill, net |
9,236 | 9,236 | ||||||||
Other assets, net |
705 | 843 | ||||||||
Total assets |
$ | 61,045 | $ | 60,830 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||
Current liabilities |
||||||||||
Deferred revenue |
$ | 1,251 | $ | 1,215 | ||||||
Accounts payable |
2,681 | 2,175 | ||||||||
Accrued compensation and related costs |
1,735 | 2,402 | ||||||||
Other liabilities and accrued expenses |
2,526 | 2,320 | ||||||||
Deferred income taxes |
6,926 | 6,343 | ||||||||
Total current liabilities |
15,119 | 14,455 | ||||||||
Long-term debt |
6,700 | 7,550 | ||||||||
Total liabilities |
21,819 | 22,005 | ||||||||
Commitments and contingencies |
||||||||||
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,
6,392,610 issued and 5,929,319 outstanding at
March 31, 2003 and December 31, 2002 |
11,039 | 11,039 | ||||||||
Additional paid-in capital |
4 | 4 | ||||||||
Retained earnings |
30,075 | 29,674 | ||||||||
Treasury stock, at cost, 463,291 shares at
March 31, 2003 and December 31, 2002 |
(1,892 | ) | (1,892 | ) | ||||||
Total shareholders’ equity |
39,226 | 38,825 | ||||||||
Total liabilities and shareholders’ equity |
$ | 61,045 | $ | 60,830 | ||||||
See accompanying notes to financial statements.
3
RAINBOW RENTALS, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
| (unaudited) | |||||||||||
| For the three months ended | |||||||||||
| March 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Revenues |
|||||||||||
Rental revenue |
$ | 24,014 | $ | 23,146 | |||||||
Fees |
638 | 638 | |||||||||
Merchandise sales |
1,093 | 1,181 | |||||||||
Total revenues |
25,745 | 24,965 | |||||||||
Operating expenses |
|||||||||||
Merchandise costs |
8,777 | 8,827 | |||||||||
Store expenses |
|||||||||||
Salaries and related |
6,394 | 6,024 | |||||||||
Occupancy |
2,576 | 2,322 | |||||||||
Advertising |
1,579 | 1,586 | |||||||||
Other expenses |
3,486 | 3,317 | |||||||||
Total store expenses |
14,035 | 13,249 | |||||||||
Total merchandise costs and store expenses |
22,812 | 22,076 | |||||||||
General and administrative expenses |
2,025 | 1,715 | |||||||||
Amortization of intangible assets |
45 | 41 | |||||||||
Total operating expenses |
24,882 | 23,832 | |||||||||
Operating income |
863 | 1,133 | |||||||||
Interest expense |
143 | 185 | |||||||||
Other expense, net |
57 | 57 | |||||||||
Income from continuing operations,
before income taxes |
663 | 891 | |||||||||
Income tax expense |
262 | 360 | |||||||||
Income from continuing operations |
401 | 531 | |||||||||
Discontinued operations |
|||||||||||
Loss from operations of discontinued store, net of tax |
— | (2 | ) | ||||||||
Net income |
$ | 401 | $ | 529 | |||||||
Basic earnings per common share: |
|||||||||||
Basic earnings per share from continuing operations |
$ | 0.07 | $ | 0.09 | |||||||
Basic loss per share from discontinued operations |
— | — | |||||||||
Basic earnings per share |
$ | 0.07 | $ | 0.09 | |||||||
Diluted earnings per common share: |
|||||||||||
Diluted earnings per share from continuing operations |
$ | 0.07 | $ | 0.09 | |||||||
Diluted loss per share from discontinued operations |
— | — | |||||||||
Diluted earnings per share |
$ | 0.07 | $ | 0.09 | |||||||
Weighted average common shares outstanding: |
|||||||||||
Basic |
5,929,319 | 5,925,735 | |||||||||
Diluted |
5,930,063 | 5,947,262 | |||||||||
See accompanying notes to financial statements.
4
RAINBOW RENTALS, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)
| Common Stock | Total | ||||||||||||||||||||||||
| Additional | Retained | Treasury | Shareholders' | ||||||||||||||||||||||
| Shares | Cost | Paid-in Capital | Earnings | Stock | Equity | ||||||||||||||||||||
Balance at December 31, 2001 |
$ | 5,925,735 | $ | 11,039 | $ | — | $ | 28,033 | $ | (1,907 | ) | 37,165 | |||||||||||||
Exercise of stock options |
3,584 | — | 4 | — | 15 | 19 | |||||||||||||||||||
Net income |
— | — | — | 1,641 | — | 1,641 | |||||||||||||||||||
Balance at December 31, 2002 |
5,929,319 | 11,039 | 4 | 29,674 | (1,892 | ) | 38,825 | ||||||||||||||||||
Net income (unaudited) |
— | — | — | 401 | — | 401 | |||||||||||||||||||
Balance at March 31, 2003 (unaudited) |
5,929,319 | $ | 11,039 | $ | 4 | $ | 30,075 | $ | (1,892 | ) | $ | 39,226 | |||||||||||||
See accompanying notes to financial statements.
5
RAINBOW RENTALS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| (unaudited) | ||||||||||||
| For the three months ended | ||||||||||||
| March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities |
||||||||||||
Income from continuing operations |
$ | 401 | $ | 531 | ||||||||
Reconciliation of income from continuing operations to net
cash provided by operating activities of continuing operations |
||||||||||||
Depreciation of property and equipment and
amortization of intangibles |
637 | 629 | ||||||||||
Depreciation and write-down of rental-purchase merchandise |
6,918 | 7,045 | ||||||||||
Purchases of rental-purchase merchandise |
(8,483 | ) | (8,306 | ) | ||||||||
Rental-purchase merchandise disposed, net |
1,938 | 1,797 | ||||||||||
Deferred income taxes |
539 | 1,729 | ||||||||||
Loss on disposal of property and equipment |
8 | 24 | ||||||||||
Increase in |
||||||||||||
Income tax receivable |
(325 | ) | (1,275 | ) | ||||||||
Prepaid expenses and other assets |
(127 | ) | (240 | ) | ||||||||
Increase (decrease) in |
||||||||||||
Accounts payable |
506 | (867 | ) | |||||||||
Accrued income taxes |
— | (306 | ) | |||||||||
Accrued compensation and related costs |
(667 | ) | (584 | ) | ||||||||
Deferred revenue and other liabilities and accrued expenses |
242 | (38 | ) | |||||||||
Net cash provided by operating activities of continuing operations |
1,587 | 139 | ||||||||||
Net cash used in operating activities of discontinued operations |
— | (2 | ) | |||||||||
Net cash provided by operating activities |
1,587 | 137 | ||||||||||
Cash flows from investing activities |
||||||||||||
Purchase of property and equipment, net |
(635 | ) | (617 | ) | ||||||||
Proceeds from the sale of property and equipment |
— | 1 | ||||||||||
Net cash used in investing activities |
(635 | ) | (616 | ) | ||||||||
Cash flows from financing activities |
||||||||||||
Proceeds from long-term debt |
9,400 | 19,814 | ||||||||||
Current installments and repayments of long-term debt |
(10,250 | ) | (19,454 | ) | ||||||||
Loan fees paid |
— | (301 | ) | |||||||||
Net cash provided by (used in) financing activities |
(850 | ) | 59 | |||||||||
Net increase (decrease) in cash |
102 | (420 | ) | |||||||||
Cash at beginning of period |
1,080 | 1,839 | ||||||||||
Cash at end of period |
$ | 1,182 | $ | 1,419 | ||||||||
Supplemental cash flow information |
||||||||||||
Net cash paid during the period for |
||||||||||||
Interest |
$ | 113 | $ | 120 | ||||||||
Income taxes |
90 | 254 | ||||||||||
See accompanying notes to financial statements.
6
RAINBOW RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
Rainbow Rentals, Inc. (the “Company”) is engaged in the rental and sale of home electronics, furniture, appliances and computers to the general public. At March 31, 2003 the Company operated 120 stores in 13 states: Connecticut, Georgia, Maryland, Massachusetts, Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The Company’s corporate office is located in Canfield, Ohio.
The 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 accounting principles generally accepted in the United States of America, 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 on Form 10-K for fiscal year ended December 31, 2002.
Certain reclassifications have been made to prior year financial data in order to conform to the 2003 presentation.
2. Goodwill
Goodwill is the cost in excess of the fair value of net assets of acquired businesses. These assets are stated at cost and, effective January 1, 2002, are no longer amortized, but evaluated at least annually for impairment, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets in that goodwill and other intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives.
Under SFAS No. 142, the Company was required to test all existing goodwill for impairment as of January 1, 2002, on a “reporting unit” basis. A fair value approach is used to test goodwill for impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. The fair value of a reporting unit and the related implied fair value of the respective goodwill were established using comparative market multiples.
In January 2002, the Company completed the transitional goodwill impairment test in accordance with SFAS No. 142, which resulted in no impairment charge. The Company performed the annual impairment test as of November 30, 2002 resulting in no impairment. The annual impairment test for 2003 will be done as of November 30, 2003; however, if circumstances indicate potential impairment, the Company will test for impairment more frequently.
There were no changes in the carrying amount of goodwill for the three months ended March 31, 2003 and 2002.
3. Long-Term Debt
The Company entered into a revolving financing agreement (the “Credit Facility”) in January 2002 that matures in January 2005. The agreement allows the Company to borrow up to $25.0 million; however, borrowings are limited to 32% of the Company’s net rental purchase merchandise, less outstanding letters of credit, which totaled $2.9 million at March 31, 2003. Excess availability at March 31, 2003 was approximately $2.9 million. The Company’s tangible assets, primarily rental purchase merchandise, serve as the security for the debt. The Company can elect interest to be charged on a portion of the outstanding debt balance at the London Interbank Offering Rate (LIBOR) plus a range of 250 – 325 basis points and the remaining debt balance, if any, would be at the prime rate plus a range of 50 – 125 basis points. In addition, the Company must pay a commitment fee equal to a range of 37.5 to 50 basis points per annum on the unused portion of the loan commitment. The interest rate ranges above are all dependent on the Company’s most recent quarterly leverage ratio. Borrowings under the Credit Facility mature three years after the date of the loan. At March 31, 2003, the outstanding loan balance totaled $6.7 million with a weighted average interest rate of 5.94%.
The Credit Facility requires the Company to meet certain quarterly financial covenants and ratios including maximum leverage, minimum interest coverage, minimum net worth, fixed charge coverage and rental merchandise usage ratios. The
7
Credit Facility contains non-financial covenants that limits actions of the Company with respect to additional indebtedness, certain loans and investments, payment of dividends, acquisitions, mergers and consolidations, dispositions of assets or subsidiaries, issuance of capital stock, capital expenditures and leases. At March 31, 2003, the Company was in compliance with the covenants and financial reporting requirements.
4. Earnings Per Share
Basic earnings per common share are computed using net income available to common shareholders divided by the weighted average number of common shares outstanding. For computation of diluted earnings per share, the weighted average number of common shares outstanding is increased to give effect to stock options considered to be common stock equivalents.
The following table shows the amounts used in computing earnings per share.
| For the three months ended | |||||||||
| March 31, | |||||||||
| 2003 | 2002 | ||||||||
Numerator: |
|||||||||
Net income available to common shareholders |
$ | 401 | $ | 529 | |||||
Denominator: |
|||||||||
Basic weighted average shares |
5,929,319 | 5,925,735 | |||||||
Effect of dilutive stock options |
744 | 21,527 | |||||||
Diluted weighted average shares |
5,930,063 | 5,947 | |||||||