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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year ended: December 31, 2000
OR
[ ] 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.
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(Exact name of Registrant as specified in its charter)
Ohio 34-1512520
- -------------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3711 STARR CENTRE DRIVE
CANFIELD, OHIO 44406
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(Address of principal executive offices)
(Zip Code)
330-533-5363
-----------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
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 of
1934 during the preceding 12 months (or 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $15,817,813 at March 19, 2001. The number of common
shares outstanding at March 19, 2001 was 5,925,735.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be mailed to
shareholders in connection with the registrant's 2001 Annual Meeting of
Shareholders are incorporated by reference into Part III, Items 10-13.
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RAINBOW RENTALS, INC.
INDEX
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 4a. Directors and Executive Officers 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Company 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1986 with six stores, the Company currently operates 112
rental-purchase stores under the Rainbow Rentals trade name in Connecticut,
Massachusetts, Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode
Island, South Carolina, Tennessee and Virginia. The Company has opened 84 of its
112 current locations, with the balance of the additional locations having been
acquired. The Company offers quality, name brand, durable merchandise, including
home electronics, furniture, appliances and computers. Generally,
rental-purchase merchandise is rented to individuals under flexible agreements
that allow customers to own the merchandise after making a specified number of
rental payments (ranging from 12 to 24 months). Customers have the option to
return the merchandise at any time without further obligation and also have the
option to purchase the merchandise at any time during the rental term.
During 2000, the Company opened a total of eleven new stores. Of the
stores opened in 2000, all but one were in new markets including three in North
Carolina and five in Virginia. In addition, the Company completed two
acquisitions, netting an additional seven stores, and two acquisitions of
rental-purchase merchandise and rental-purchase agreements, for an aggregate
purchase price of $3.7 million.
INDUSTRY OVERVIEW
The rental-purchase industry provides an alternative to traditional
retail installment sales, appealing to individuals with poor or limited credit
histories and to individuals with an aversion to debt. Rental-purchase programs
permit customers to have immediate possession of products without the assumption
of debt. In addition, the industry serves customers having short-term needs or
seeking to try products, such as computers, before committing to purchase them.
Rental-purchase transactions include delivery and pick-up service and a repair
warranty for the rental term. Most rental-purchase transactions are made on a
week-to-week or month-to-month basis and provide customers with the opportunity
for outright ownership if the merchandise is rented for a continuous term,
generally 12 to 24 months. Customers may cancel agreements at any time without
further obligation by returning the merchandise or requesting its pick-up by the
store. Returned merchandise is held for re-rental or sale. Rental renewal
payments are generally made in person, in cash, by check or money order, or by
mail.
The Association of Progressive Rentals Organizations (APRO), the
industry's trade association, estimated that the rental-purchase industry
generated $5.0 billion in revenues and over 3.1 million customers were served in
1999 (the latest year for which statistics are available). Management believes
that the majority of its customers are wage earners with annual household income
between $15,000 and $35,000. The U.S. Census Bureau reported that in 1999 there
were approximately 28 million households with annual income between $15,000 and
$35,000. The rental-purchase industry continues to experience consolidation
characterized by large multi-store chains acquiring smaller, highly leveraged
operators. More recently the larger companies have begun new store opening
programs. The number of stores however, remains unchanged as APRO estimates
there were approximately 8,000 stores in operation at December 31, 1999.
Management believes the industry's three largest public companies currently
operate approximately 3,900 stores or 49% of the total rental-purchase stores in
operation.
Management believes the rental-purchase industry is under-penetrated
and is highly fragmented, providing growth opportunities for companies that are
well capitalized and have access to both debt and equity capital. Management
believes that the number of large acquisition targets has declined, slowing the
recent trend of consolidations. As a result, more recently, industry growth has
predominantly occurred through new store openings. As large consolidators have
begun to concentrate on new store openings, management believes that in addition
to capitalizing on its established new store-opening program, there will be
greater opportunities for the Company to make acquisitions.
OPERATING STRATEGY
The Company's operating strategy is to maintain a high Average Monthly
Rental Rate (AMRR) on its rental-purchase agreements, a high number of customers
per store, and a high level of customer referrals and repeat business, all
accompanied by a low level of delinquencies. The Company seeks to achieve these
objectives by applying its "More, Better, Different" philosophy to its customers
and associates by utilizing the following operating techniques.
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Customer Service. Management believes the rental-purchase
industry is a neighborhood business built on the relationship between
the customer and store personnel. Beginning with the store manager and
ending with the account manager, the Company's customer service policy
is to treat all customers at all times with "Respect and Dignity".
Bilingual associates are employed in many stores to serve the needs of
Spanish-speaking customers and a toll free customer service hotline is
posted in every store to encourage customers to voice their concerns.
The Company strives to make the rental-process convenient by enabling
customers to initiate transactions over the phone or via the Internet,
and once the order is approved, take delivery of the merchandise
without coming into the store. In addition, the Company focuses on
customer convenience by locating stores on main arteries near national
discount retailers or grocery stores and by setting renewal payment
dates based on the customer's wage or other income schedule. By not
imposing many of the fees that are standard in the industry, the
Company enables its customers to afford higher quality merchandise with
additional features and benefits.
Quality Merchandise. The Company's merchandising strategy is
to offer its customers a wide range of new and pre-rented, quality,
name brand, and durable merchandise. Management recognizes that its
customers desire many of the higher end products found in the large
national electronic, appliance and furniture stores. Accordingly, the
Company provides its customers with items such as large screen
televisions, leather furniture and computers with nationally recognized
brand names and other popular features. This strategy has enabled the
Company to maintain a high AMRR. In addition, by providing name brand
and durable products that maintain their quality throughout the rental
period, the Company has maintained a high level of repeat and referral
business.
Store Environment. The Company believes it is essential that
its stores provide an appealing and attractive shopping environment
while conveying a sense of quality, safety and convenience. Company
stores are generally located on main arteries, near residential or
commercial areas and in strip shopping centers near national discount
retailers or grocery stores. The Company generally maintains a uniform
store size (4,500 square feet, on average), color scheme, store layout
and display signs. Stores are intended to provide an appealing retail
environment and are modeled to resemble a quality electronics and
furniture showroom.
Experienced Associates. The Company's operations and
profitability are largely dependent on the services of its store-level
personnel, senior management and executive officers (collectively, the
"associates"). The Company's regional managers and store managers have
extensive experience in the industry and have worked with the Company
for an average of approximately twelve years and six years,
respectively (excluding managers from newly opened and acquired
stores). The Company's founding executive officers have worked in the
rental-purchase industry for an average of over 20 years and co-founded
the Company in 1986. The Company attempts to attract and retain its
quality associates through compensation and benefits that meet or
exceed industry averages and through various ongoing proprietary
training programs. Management believes its associate development
programs enhance the Company's operations by ensuring conformity to
established operating standards, reducing associate turnover, enhancing
associate productivity and improving associate morale.
Decentralized Management. The Company's decentralized
management approach provides store managers with a significant degree
of autonomy and accountability, allowing them to operate their stores
much as owners of their own small business. Within guidelines set by
the Company, store managers are responsible for developing customer
relationships, managing customer service, maintaining appropriate
levels, quality and mix of merchandise inventory, meeting operational
standards and achieving store profitability benchmarks. Managers are
eligible for bonuses equal to as much as 60% of total compensation,
based on store operating income. The Company supports its decentralized
structure with strong regional supervision, management information
systems, operational audit procedures, operating guidelines and
experienced associates.
As the Company continues to grow, a key element to ensure the
quality of its store operations is the Regional Management team.
Currently this group consists of 13 former store managers who have been
with the Company for an average of 12 years. They generally live within
their geographic area to reduce travel time and expense and are tied
directly to their region's profitability through incentive based
compensation that makes up nearly 50% of their total compensation.
Senior management is able to stay in touch with store operations
through regular communication with the regional managers by either
telephone
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conferences or quarterly meetings. Management intends on maintaining an
average region size of no more than 10 stores.
GROWTH STRATEGY
The Company's growth strategy is to accelerate its new store-opening
program, increase comparable store revenue and profitability and continue to
make opportunistic and operationally sound acquisitions.
New Store Openings. Beginning with six stores in 1986, the
Company has opened 84 of its current 112 store locations and has
developed a consistent, replicable model for opening new stores. The
Company believes the rental-purchase market is significantly
under-penetrated and provides substantial new store expansion
potential. The Company currently plans to continue opening new stores
in current and new markets within the Midwest, Mid-Atlantic and New
England states. The Company believes its model for opening new stores
has resulted in more predictable growth and greater operational control
than is typically achieved through acquisitions. Because the Company's
growth strategy emphasizes internal growth primarily through new store
openings, management believes the current state of the industry
presents an opportunity for the Company to capitalize on its
demonstrated ability to open new stores.
Increase Comparable Store Revenue and Profitability. The
Company continually strives to increase revenue per store by enhancing
individual store operations and offering a new and different product
selection. The Company has demonstrated an ability to recognize
increasing customer demand for products and to provide such products.
For example, the Company recognized its customers' desire for computers
and has developed an effective strategy to meet this demand.
Accordingly, the Company was the first in the industry to offer
computers and remains the leader in this product category generating
nearly 20% of its revenue from computer rentals and sales. In addition,
the Company is able to achieve increased profitability by leveraging
its stores' fixed costs over the higher revenues generated by existing
stores and by placing new stores in existing markets.
Acquisitions. During 2000, the Company continued to capitalize
on the "opportunistic acquisition" segment of its growth strategy. The
Company acquired the assets of 12 rental-purchase stores from two
competitors in Virginia and South Carolina, which the Company
consolidated into seven locations. During the year, the Company also
acquired the rental-purchase merchandise and rental-purchase agreements
of two other stores in Pennsylvania. Management believes it will have
increased opportunities to augment its growth through acquisitions of
smaller chains overlooked by the large consolidators.
STORES
Currently, the Company operates 112 stores in eleven states, as set
forth in the following table:
Location Number of Stores
-------- ----------------
Ohio ............................................................ 26
Pennsylvania .................................................... 23
Massachusetts ................................................... 11
Virginia ........................................................ 10
Connecticut ..................................................... 8
Tennessee ....................................................... 8
New York ........................................................ 7
South Carolina .................................................. 7
Michigan ........................................................ 7
North Carolina .................................................. 3
Rhode Island .................................................... 2
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The following table sets forth the number of stores opened, acquired and
consolidated or closed since the Company commenced operations in 1986. Several
stores have been enlarged or relocated.
YEAR ENDED DECEMBER 31,
------ ------ ------ ------- ------ ------ ------ ----- ------ -------- -----
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Stores open at beginning
of period ............. 0 6 15 20 24 28 36 38 42 46 51
Stores opened ............... 6 9 5 4 4 8 2 4 4 0 4
Stores acquired ............. 0 0 0 0 0 0 0 0 0 7(1) 0
Stores consolidated/closed... 0 0 0 0 0 0 0 0 0 2 0
- - - - - - - - - - -
Stores open at end of period. 6 15 20 24 28 36 38 42 46 51 55
= == == == == == == == == == ==
MARCH
(Continued) 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Stores open at beginning
of period . . . . . . . 55 62 70 92 110
Stores opened. . . . . . . . 7 8 9 11 2
Stores acquired. . . . . . . 0 1 13(2) 7(3) 0
Stores consolidated/closed . 0 1 0 0 0
- - - - -
Stores open at end of period 62 70 92 110 112
== == === === ===
(1) The Company acquired 10 stores and immediately consolidated three into
existing Company stores.
(2) The Company acquired 19 stores and consolidated six into existing Company
stores.
(3) The Company acquired 12 stores and consolidated five into existing Company
stores.
The Company focuses on internal growth by opening new stores. In
investigating a new market, the Company reviews demographic statistics, cost of
advertising and the number and nature of competitors. In addition, the Company
investigates the regulatory environment of the state in which the new market
exists. It is the Company's policy to operate in those states where there is an
absence of unfavorable legislation regarding rental-purchase transactions.
The most critical step in the selection of a new store location is a
site inspection. Many factors are reviewed prior to choosing a new store
location, including proximity to national discount retailers or grocery stores,
traffic patterns and proximity to the Company's other stores. In 2000, the
Company hired a Director of Real Estate.
In order to enhance the early profitability of its new stores, the
Company maintains a separate "new store region". Generally, within two years
after a store is opened, the store formally joins its geographic region and the
regional manager of that particular region assumes oversight of the store.
MERCHANDISE
The Company's merchandising strategy is to carry a wide variety of
quality, name brand, durable merchandise in four major categories, including
home electronics, furniture, appliances and computers. Choices of merchandise
reflect the Company's belief that customers want to rent the same quality of
merchandise that is available from more traditional retailers, and that
customers are willing to pay for value and quality. In addition, by focusing on
its manufacturers' mid-point and better range products, the Company avoids
frequent service problems associated with inferior products. The Company
purchases merchandise directly from the manufacturers and through distributors
generally through volume price discounts.
As of December 31, 2000, rental-purchase agreements for home
electronics accounted for approximately 33.8%, furniture accounted for 28.5%,
appliances accounted for 21.1%, and computers accounted for 16.6% of the
Company's total units on rent. Customers may request either new merchandise or
previously rented merchandise. Previously rented merchandise is generally
offered at the same weekly or monthly rental rate as is offered for new
merchandise, but with an opportunity to obtain ownership of the merchandise
after fewer rental payments.
RETENTION, TRAINING AND EMPOWERMENT OF ASSOCIATES
Management believes a key to its success in retaining quality
associates is its policy of promoting all of its store managers from within.
Excluding managers retained from acquired stores, all current store managers
began their careers with the Company as account managers.
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The Company places great importance on training, both in terms of
initial training for potential managers and continued education of its current
management team. The Company has developed a formal training program that each
associate must successfully complete before becoming eligible for promotion to
store manager. The training program for potential managers is run by the
Company's Vice President of Operations and consists of a six to twelve month
program involving formal class training as well on-site store training. In
addition, the Company has designated one store as its "training store". All
manager trainees spend at least one week under the tutelage of the "training
store manager". Also, trainees are sent to various stores to receive a more
broad on the job training experience and to assist troubled stores. After an
associate becomes a store manager, the training continues. Managers' meetings
are conducted twice annually at a central location and all store managers,
regional managers, department heads and executive management of the Company are
required to attend. At such sessions, prior performance is critiqued, operating
procedures are reviewed and revised, new merchandise is showcased and managers
receive eight to 10 hours of classroom training in the areas of financial
management, product information, inventory management, customer service, credit
management, personnel management and other areas of store operations. In
addition, the Company recently began holding training sessions for store
personnel below the level of manager in areas such as customer service,
collection techniques, sales training and safety. The Company also began
producing training videos to assist in the on-going training of store
associates.
The Company believes open communication with regional and
store level management is essential to understanding existing markets,
increasing associate morale and retaining associates. In order to facilitate
open lines of communication, the Company has formed a network of committees, a
majority of whose members are store managers. The Company currently has three
committees to assist senior management in areas of pricing, product selection,
advertising and computer operations. In addition, one committee, comprised of
top performing managers, serves as a sounding board for new concepts and
innovative operational and sales techniques.
THE RENTAL PROCESS
MARKETING
The Company uses advertising (primarily direct mail) to introduce and
reinforce the benefits of its rental-purchase program to existing and potential
customers and to make such customers aware of new products. Substantially all of
the advertising is developed and produced by the Company's in-house advertising
department. The Company advertises in both English and Spanish. Most of the
Company's advertisements encourage customers to "shop by phone" or via the
internet and feature the Company's toll-free telephone number and web address.
When the toll-free number is dialed, the call is automatically routed to the
Company store closest to the source of the call. Each product displayed in the
Company's direct mailing piece is numbered for easy reference during telephone
orders. Store managers and sales associates are trained to explain the
rental-purchase program clearly and to obtain orders over the telephone. The
Company initiates a majority of its rental-purchase agreements over the
telephone. Several direct marketing tools are also employed to solicit the
Company's existing customer base. The Company has developed a preferred customer
program, directed at current and past customers. Under this program, special
promotions, including significant discounts and new product offerings, are
periodically run for these customers to encourage additional rentals.
APPROVAL PROCESS
The Company does not conduct a formal credit review. The Company's
order approval process is designed to verify a customer's stability in his or
her community and serves as a successful method of loss prevention. Since
merchandise is rented rather than purchased, the Company focuses on a customer's
credibility, not the customer's credit history. If a customer does not pay
promptly, the rental-purchase merchandise is simply returned or picked up. The
approval process is designed to take less than one hour. Merchandise is
generally delivered on the same day that the order is received.
THE RENTAL-PURCHASE AGREEMENT
Merchandise is provided to customers under written rental-purchase
agreements that set forth the terms and conditions of the transaction in a
straightforward and understandable manner. The Company has developed its own
agreements, which have been reviewed by legal counsel and meet the legal
requirements of the state in which they are used. The Company's flexible rental
program allows a customer to choose weekly, bi-weekly, semi-monthly, or monthly
rental periods with rent paid in advance. At the end of each rental period, the
customer can renew the
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agreement by making a renewal payment, terminate the agreement, or purchase the
merchandise for a price based upon a predetermined formula. If the customer
elects to terminate the agreement, the merchandise is returned to the store and
made available for rent to another customer. The Company retains title to the
merchandise during the term of the rental-purchase agreement. If the customer
renews the agreement for a specified number of rental periods, ownership is
transferred to the customer upon receipt of the last renewal payment.
CUSTOMER SERVICE AND MANAGEMENT
In addition to the enjoyment of quality products, customers are
afforded many services provided by well-trained and professionally attired
customer management personnel who treat customers with "Respect and Dignity".
The Company does not impose many of the fees standard in the industry, such as
waiver fees, club fees, processing or delivery fees, and provides additional
service under the rental-purchase agreement at no additional cost, including
delivery and installation, product training, maintenance to ensure the product
continues to perform, and pick-up service to return the merchandise if
requested. By limiting the add-on fees charged, the Company enables its
customers to spend more of their rental renewal payment on the merchandise.
Rental income represented approximately 94% of the Company's total revenue in
2000. In addition, customers are able to upgrade products, reinstate a
previously terminated agreement and are given free service for 90 days after
they purchase the merchandise.
Management's philosophy is "customers will pay you because they want
to, not because they have to" and every renewal date offers the opportunity to
sell the customer on the benefits of maintaining a good account with the
Company. Management believes a thorough understanding by the customer of all the
terms of the rental agreement is the first step of successful customer
management. A large majority of all renewal payments are made timely without the
involvement of store personnel and renewal payments are generally made at the
store by cash, check or money order or by mail. Customer management personnel
are given extensive training to assist the customer in maintaining a good
account with the Company. Customer management begins upon delivery of the
merchandise in the customer's home. The day after a renewal payment is missed
the account manager contacts the customer by phone to ascertain if there is any
problem with the merchandise, to remind them of the Company's appreciation for
their patronage and to encourage the customer's continued use of the product by
renewing the agreement. If the initial telephone contact does not lead to
renewal or return of the merchandise, then the account manager will make
personal visits to the customer's home in an effort to renew the agreement or
pick-up the merchandise. In cases where the customer refuses to return the
merchandise, the Company uses various legal methods to recover the merchandise.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes a flexible, proprietary, Windows NT -based
management information system to support its rental activities, to assist in
compliance with applicable laws and regulations and to monitor its decentralized
store network. This proprietary system was the industry's first Windows-based
system and is constantly upgraded and modified by the Company to conform to
operational changes and the Company's philosophy of customer management. In
addition, the Company has a company-wide Intranet allowing for easy
communication and fast and effective transfer of data between corporate
headquarters and stores.
The system provides store managers with all of the relevant store-level
financial and operating data as well as individual profiles on each store's
customers to assist in the marketing effort. Senior management has immediate
access to data on a daily basis that provides them with the ability to analyze
performance indicators on both a store, regional and corporate level. Critical
data, such as outstanding agreements, idle inventory, revenue, delinquencies,
cash receipts and deposits are available the following day. In addition,
regional managers have remote access to this data each morning by utilizing the
Company's Intranet. On a daily, weekly, and monthly basis reports are generated
that provide information about products, margins, collection performance and
other operating and financial indicators to enable senior management, regional
managers and store managers to monitor the productivity of stores. In addition,
on a monthly basis, store results are compared to each other and ranked on
critical operating statistics and financial benchmarks. These reports create a
healthy competitive environment among store managers and are the basis for
annual awards given out at the Company's annual award ceremony. Similar reports
are generated for customer management personnel as well as regional managers.
The Company's system maintains all standard agreements, and all
agreements are printed off the system on an as-needed basis at each store. In
addition, where there is a change in state laws, the Company can make timely
modifications on its systems to the standard agreements in the various states.
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COMPETITION
The Company competes with other national, regional and local
rental-purchase businesses, as well as rental stores that do not offer their
customers a purchase option. With respect to customers desiring to purchase
merchandise for cash or on credit, the Company competes with department stores,
consumer electronic stores and discount stores. Competition is based primarily
on product selection and availability, customer service and rental rates and
terms. The Company's three largest competitors, Rent-A-Center, Inc., Rent-Way,
Inc., and Aaron Rents, Inc., have significantly greater financial and operating
resources and name recognition than the Company.
PERSONNEL
As of March 19, 2001, the Company had approximately 900 associates,
including 580 full-time associates. Approximately 40 associates are located at
the Company's corporate headquarters in Canfield, Ohio. None of the Company's
associates is represented by a labor union. Management believes its relations
with its associates are good.
GOVERNMENT REGULATION
There are currently 46 states that have legislation regulating
rental-purchase transactions. The Company's policy is to operate in states
where there is an absence of unfavorable legislation regarding rental-purchase
transactions. There can be no assurance against the enactment of new or revised
rental-purchase laws that would have a material adverse effect on the Company.
No federal legislation has been enacted regulating or otherwise governing
rental-purchase transactions. The Company instructs its managers in procedures
required by applicable law through training seminars and policy manuals and
believes that it has operated in compliance with the requirements of applicable
law in all material respects. In addition, the Company provides its customers
with a toll-free number to telephone corporate headquarters to report any
irregularities in service or misconduct by its associates.
SERVICE MARKS
The Company owns the federally registered service mark "Rainbow
Rentals." The Company believes that the Rainbow Rentals mark has acquired
significant market recognition and goodwill in the communities in which its
stores are located.
ITEM 2. PROPERTIES
The Company leases all of its stores under operating leases that expire
at various times through 2006. Store leases generally provide for fixed monthly
rental payments, plus payment for real estate taxes, insurance and common area
maintenance. Most of these leases contain renewal options for additional periods
ranging from three to five years at rates generally adjusted for increases in
the cost of living. There is no assurance the Company can renew the leases that
do not contain renewal options, or if it can renew them, that the terms will be
favorable to the Company. Store sizes range from approximately 2,500 to 7,500
square feet, and average approximately 4,500 square feet. Management believes
suitable store space is generally available for lease and the Company would be
able to relocate any of its stores without significant difficulty should it be
unable or unwilling to renew a particular lease. Management also believes
additional store space is available to meet the requirements of its new store
opening program. The Company leases its corporate office located at 3711 Starr
Centre Drive, Canfield, Ohio from a corporation owned by three of its executive
officers (See "Related Party Transactions"). The corporate office consists of
approximately 10,000 square feet and is leased through January 31, 2006. In
2000, the rental amount was $120,000. The Company believes the rental is at
market rate and the other provisions of the lease are on terms no less favorable
to the Company than could be obtained from unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is also subject to various legal proceedings and claims
that arise in the ordinary course of business. The Company believes the amount
of any ultimate liability with respect to these actions will not have a material
adverse effect on the Company's liquidity or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company and their ages as
of March 19, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Wayland J. Russell 49 Chairman of the Board of Directors and
Chief Executive Officer
Lawrence S. Hendricks 43 Chief Operating Officer and Director
Michael J. Viveiros 45 President and Director
Michael A. Pecchia 40 Chief Financial Officer and Secretary
Brian L. Burton 60 Director
Ivan J. Winfield 66 Director
WAYLAND J. RUSSELL, Chairman of the Board and Chief Executive Officer
since February 1997, having previously served as the Company's President since
its inception in 1986. Mr. Russell has served as a director of the Company since
its inception in 1986.
LAWRENCE S. HENDRICKS, Chief Operating Officer since February 1997,
having previously served as Vice President for Store Operations since the
Company's inception in 1986. Mr. Hendricks has served as a director of the
Company since its inception in 1986.
MICHAEL J. VIVEIROS, President since February 1997, having previously
served as Vice President since the Company's inception in 1986. Mr. Viveiros has
served as a director of the Company since its inception in 1986.
MICHAEL A. PECCHIA, Chief Financial Officer of the Company since
February 1997, having previously served as the Company's Controller from 1991 to
1996 and Treasurer and Secretary since 1991. Mr. Pecchia also served as a
director of the Company from February 1997 to June 1998.
BRIAN L. BURTON, President of Vertical Merchandising Systems, a
division of Wesco, Inc., a distributor of impulse merchandising systems to
supermarkets, for over five years. Mr. Burton has served as a director of the
Company since June 1998. From 1987 to 1991, Mr. Burton was a private retail
consultant.
IVAN J. WINFIELD, Executive in Residence at Baldwin-Wallace College,
Cleveland, Ohio, and business consultant since September 1995. Prior thereto,
Mr. Winfield was a Managing Partner of Coopers & Lybrand from 1978 to 1994. He
is a director of Boykin Lodging Co., HMI Industries, Inc. and OfficeMax, Inc.
Mr. Winfield has served as a director of the Company since June 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common shares trade on the National Market of the Nasdaq
Stock Market, Inc. under the symbol "RBOW". The following table shows the high
and low closing sale prices of the common shares for 2000 and 1999. The price to
the public in the initial public offering was $10.00 per share.
2000 1999
HIGH LOW HIGH LOW
---- --- ---- ---
Quarter end March 31st 10.81 7.63 12.38 9.75
Quarter end June 30th 11.63 8.62 13.50 9.63
Quarter end September 30th 14.00 5.50 11.38 9.00
Quarter end December 31st 8.00 5.25 9.50 7.19
As of March 19, 2001, the Company believed there were approximately 350
beneficial owners of the Company's common shares.
DIVIDEND POLICY
The Company has never paid cash dividends on its shares of common
stock. The Company currently intends to retain all earnings from its operations
to finance the growth and development of its business and, consequently, does
not expect to pay dividends on its shares of common stock in the foreseeable
future. The payment of future dividends will be at the sole discretion of the
Company's Board of Directors and will depend on, among other things, future
earnings, capital requirements, the general financial condition of the Company
and general business conditions. In addition, the payment of dividends by the
Company is limited by certain covenants in the Company's Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Income Data" and "Balance Sheet Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 2000, are derived
from the consolidated financial statements of the Company. The data presented
below should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial
Statements and the related notes thereto included elsewhere in this annual
report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Revenues
Rental revenue $ 86,099 $ 75,932 $ 59,932 $ 52,153 $ 43,815
Fees 2,849 2,639 1,959 1,588 1,284
Merchandise sales 2,947 2,287 1,588 1,587 1,461
---------- ---------- ---------- ---------- ----------
Total revenues 91,895 80,858 63,479 55,328 46,560
Operating expenses
Merchandise costs 30,775 26,758 21,765 19,145 17,003
Store expenses
Salaries and related 21,774 18,374 13,943 11,809 9,655
Occupancy 7,478 6,027 4,671 4,068 3,416
Advertising 4,446 3,662 3,500 3,283 2,837
Other expenses 11,807 10,310 7,686 6,127 5,437
---------- ---------- ---------- ---------- ----------
Total store expenses 45,505 38,373 29,800 25,287 21,345
---------- ---------- ---------- ---------- ----------
Total merchandise costs and
store expenses 76,280 65,131 51,565 44,432 38,348
General and administrative expenses 6,795 5,585 4,607 4,096 3,934
Amortization of goodwill and
noncompete agreements 608 456 33 - -
---------- ---------- ---------- ---------- ----------
Total operating expenses 83,683 71,172 56,205 48,528 42,282
---------- ---------- ---------- ---------- ----------
Operating income 8,212 9,686 7,274 6,800 4,278
Interest expense 933 697 918 1,822 834
Other expense, net 380 361 76 329 453
---------- ---------- ---------- ---------- ----------
Income before income taxes 6,899 8,628 6,280 4,649 2,991
Income taxes 2,794 3,580 2,662 1,968 972
---------- ---------- ---------- ---------- ----------
Net income $ 4,105 $ 5,048 $ 3,618 $ 2,681 $ 2,019
========== ========== ========== ========== ==========
Basic and diluted earnings per common
share $ 0.69 $ 0.85 $ 0.73 $ 0.59 $ 0.32
========== ========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 5,925,735 5,925,735 4,970,256 4,509,406 6,392,610
Diluted 5,930,157 5,930,887 4,970,256 4,509,406 6,392,610
OPERATING DATA:
Stores open at end of period 110 92 70 62 55
Comparable store revenue growth (1) 1.7% 4.4% 3.8% 9.9% 2.0%
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YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Rental-purchase merchandise, net $36,545 $33,042 $25,246 $23,411 $19,740
Total assets 58,429 50,324 33,068 31,293 25,401
Total debt 12,340 10,522 190(3) 23,203(2) 9,850
Total liabilities 22,438 18,438 6,230(3) 28,240(2) 13,934
Shareholders' equity 35,991 31,886 26,838(3) 3,053(2) 11,467
(1) Comparable store revenue growth is the percentage increase in revenue from
the same number of stores over a two-year period. Only stores that have
been open 12 months in both periods are included in the comparison.
(2) Includes the effect of the redemption of shares from a prior
shareholder-officer.
(3) Includes the effect of the Company's initial public offering and subsequent
elimination of debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of
the Company's financial position and results of operations for the years ended
December 31, 2000, 1999 and 1998. This discussion should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
herein.
GENERAL
At December 31, 2000, the Company operated 110 rental-purchase stores
in 11 states, providing quality, name brand, durable merchandise, including home
electronics, furniture, appliances and computers. Generally, rental-purchase
merchandise is rented to individuals under flexible agreements that allow
customers to own the merchandise after making a specified number of rental
payments (ranging from 12 to 24 months). Customers have the option to return the
merchandise at any time without further obligation, and also have the option to
purchase the merchandise at any time during the rental term.
During 2000, the Company's growth was primarily the result of opening
11 new store locations. Of the stores opened in 2000, all but one were in new
markets including three in North Carolina and five in Virginia. In addition, the
Company completed several acquisitions that, following store consolidations,
added seven new locations bringing the total number of stores added during 2000
to 18. This represents a 20% increase in store fronts. In the last three years
the Company has added 48 stores, which represents an average growth rate of 19%.
Of the 48 stores added since 1997, 28 were a result of new store openings and 20
stores were added through acquisitions.
COMPONENTS OF INCOME AND EXPENSES
Revenues. The Company collects rental renewal payments in advance,
under weekly, biweekly, semi-monthly and monthly rental-purchase agreements.
Rental revenue is recognized over the lease term. Fees include amounts for
reinstatement of expired agreements and amounts for in-home collection. Fees are
recognized when earned. Rental-purchase agreements generally include an early
purchase option. Merchandise sales include amounts received upon sales of
merchandise pursuant to such options and upon the sale of new rental
merchandise. These amounts are recognized as revenue when the merchandise is
sold.
Merchandise Costs. Merchandise costs include depreciation of
rental-purchase merchandise under the units of activity depreciation method.
Rental-purchase merchandise is depreciated as revenue is earned. Rental-purchase
merchandise is not depreciated during periods when it is not on rent and
therefore not generating rental revenue. Merchandise costs also include the
remaining book value of merchandise sold or otherwise disposed, the cost of
replacement parts and accessories and other miscellaneous merchandise costs. The
Company monitors the value of rental-purchase merchandise for possible
impairment and, if necessary, reduces the carrying value of the related asset to
fair value.
Salaries and Related. Salaries and related includes all salaries and
wages paid to store level associates, related benefits, taxes and workers'
compensation premiums.
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Occupancy. Occupancy includes rent, repairs and maintenance of the
physical store locations, utility costs and depreciation of store leasehold
improvements. The Company has no leases that include percentage rent provisions.
Advertising. Advertising includes print media, radio, television and
production costs as well as the expenses (including payroll) of the Company's
internal advertising department.
Other Expenses. Other expenses include delivery expenses, insurance,
costs associated with maintaining rental-purchase merchandise, telephone
expenses, store computer and office expenses and personal property taxes, among
other items.
General and Administrative Expenses. General and administrative
expenses include all personnel, occupancy and other operating expenses
associated with the Company's corporate-level support departments and regional
store supervision. In addition, all costs associated with the Company's annual
and semi-annual manager meetings, committee meetings and training, as well as
charitable contributions and state taxes not based on income, are included.
For several years, the Company has made significant contributions to
charitable organizations, including organizations for which directors and
officers serve or have served as trustees or officers. The aggregate amount of
charitable contributions (including donated rental-purchase merchandise) was
approximately $0.5 million, $0.4 million and $0.2 million in 2000, 1999, and
1998, respectively. For subsequent years, the Board of Directors has determined
to limit charitable contributions to an amount not to exceed 10% of the prior
year's net income.
Amortization. Amortization includes the amortization of goodwill and
non-compete agreements related to acquisitions.
Income Tax Expense. Income tax expense includes the combined effect of
all federal, state and local income taxes imposed upon the Company by various
taxing jurisdictions.
NEW STORE OPENINGS
The Company's primary method of growth is through the opening of new
store locations. New store openings are dilutive to earnings for the first nine
to twelve months as they build a customer base and develop a recurring revenue
stream. Generally, new stores have a maturation period of approximately three
years. The timing of new store openings and the number of stores in various
stages of the three year maturation process will have an effect on quarterly and
annual comparisons.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenues.
YEAR ENDED DECEMBER 31,
2000 1999 1998
----- ----- -----
STATEMENT OF INCOME DATA:
Revenues
Rental revenue ..................................... 93.7% 93.9% 94.4%
Fees ............................................... 3.1 3.3 3.1
Merchandise sales .................................. 3.2 2.8 2.5
----- ----- -----
Total revenues ........................... 100.0 100.0 100.0
Operating expenses
Merchandise costs .................................. 33.5 33.1 34.3
Store expenses
Salaries and related .......................... 23.7 22.7 21.9
Occupancy ..................................... 8.1 7.5 7.4
Advertising ................................... 4.8 4.5 5.5
Other expenses ................................ 12.9 12.7 12.1
----- ----- -----
Total store expenses ..................... 49.5 47.4 46.9
----- ----- -----
Total merchandise costs and store expenses 83.0 80.5 81.2
General and administrative expenses ................... 7.4 6.9 7.2
Amortization of goodwill and noncompete agreements .... 0.7 0.6 0.1
----- ----- -----
Total operating expenses ................. 91.1 88.0 88.5
----- ----- -----
Operating income ......................... 8.9 12.0 11.5
Interest expense ...................................... 1.0 0.9 1.4
Other expense, net .................................... 0.4 0.4 0.2
----- ----- -----
Income before income taxes ......................... 7.5 10.7 9.9
Income taxes .......................................... 3.0 4.5 4.2
----- ----- -----
Net income ......................................... 4.5% 6.2% 5.7%
===== ===== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
For the year ended December 31, 2000, total revenues increased to $91.9
million from $80.9 million, an increase of 13.6% over the prior year. Revenue
from the 18 stores opened and acquired in 2000 accounted for 36.6% of the total
increase in revenue, or $4.0 million. The increase in revenue from the nine
stores opened in 1999, which accounted for 35.1% of the increase, or $3.9
million, was due to the ramp-up of the stores' customer base as well as the
inclusion of a full year's results in 2000. The inclusion of a full year's
results from the 13 stores acquired in 1999 accounted for 17.6% of the increase,
or $1.9 million. Revenue from comparable stores (stores in operation on January
1, 1999) increased 1.7% and accounted for 10.7% of the increase, or $1.2
million. An increase in revenue earned per customer was offset by a decline in
the number of customers per store.
For the year ended December 31, 2000, merchandise costs increased to
$30.8 million from $26.8 million, an increase of 15.0% over the prior year
primarily due to merchandise costs associated with stores opened and acquired in
2000. As a percentage of total revenues, merchandise costs increased to 33.5%
from 33.1%. The slight decrease in gross margins was mainly from the cost of
inventory accessory items in 2000.
For the year ended December 31, 2000, total store expenses increased to
$45.5 million from $38.4 million, an increase of 18.5% over the prior year. The
increase in total store expenses was primarily due to expenses associated with
the 18 stores opened and acquired in 2000. This increase accounted for 52.0% of
the total increase in store expenses, or $3.7 million. An increase in store
expenses from the nine stores opened in 1999 and the inclusion of a full year's
results from the 13 stores acquired in 1999 accounted for 43.7% of the increase,
or $3.1 million. As a percentage of total revenues, total store expenses
increased to 49.5% from 47.4% mainly due to the number and timing of new store
openings and acquisitions in 2000 and 1999. Total store expenses of comparable
stores, however, decreased as a percentage of revenue to 45.5% from 45.8%
primarily from the growth and profitability of stores opened in 1998. Salaries
and related expenses increased as a percentage of revenue to 23.7% from 22.7%.
In addition to the increase from the timing of new store openings and
acquisitions in 2000 and 1999, salaries and related expenses of comparable
stores increased as a percentage of revenue to 22.3% from 21.9% due to
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increased turnover and related staffing shortages during the summer and fall
months. Increases in part-time hours, over-time pay, and training costs, as well
as an increase in the pay rates of key store personnel due to a tight labor
market, resulted in higher payroll and related expenses in comparable stores.
The addition of a Human Resource Director during 2000 improved turnover and
staffing in stores during the fourth quarter. The increases in occupancy,
advertising and other expenses, as well as the increase of these items as a
percentage of revenue, was due to the stores added in 2000 and 1999.
For the year ended December 31, 2000, general and administrative
expenses increased to $6.8 million from $5.6 million, an increase of 21.6% over
the prior year and as a percentage of total revenue increased to 7.4% from 6.9%.
The increase was primarily due to the expansion of the Company's regional
management team, the addition of several key support personnel, and increased
training costs all of which were necessitated by the Company's current and
anticipated growth. In addition, travel costs associated with relocating
managers and staffing stores increased due to higher turnover of store
personnel.
For the year ended December 31, 2000, operating income decreased to
$8.2 million from $9.7 million, a decrease of 15.2% from the prior year and, as
a percentage of total revenues, decreased to 8.9% from 12.0% due to the factors
discussed above.
For the year ended December 31, 2000, interest expense increased to
$0.9 million from $0.7 million in the comparable 1999 year due to higher average
outstanding debt and interest rates.
For the year ended December 31, 2000, the Company's effective tax rate
decreased to 40.5% from 41.5% for the prior year due to lower effective state
tax rates.
For the year ended December 31, 2000, net income decreased to $4.1
million from $5.0 million, a decrease of 18.6% from the prior year, and as a
percentage of total revenues decreased to 4.5% from 6.2% due to the factors
discussed above.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
For the year ended December 31, 1999, total revenues increased to $80.9
million from $63.5 million, an increase of 27.4% over the prior year. Revenue
from the 13 stores acquired in 1999, and from one store acquired in August 1998
accounted for 51.3% of the Company's total increase in revenue or $8.9 million.
The Company's new store expansion program accounted for 33.2% of the total
increase in revenue, or $5.8 million, including $4.5 million from stores opened
in 1998 and $1.3 million from stores opened during 1999. The increase in revenue
from new stores is primarily a result of an increase in customers and the
inclusion of a full year's results for stores opened in 1998. Revenue from
comparable stores or stores opened or acquired prior to 1998 increased 4.4%
primarily as a result of the growth of stores opened in 1997 and an increase in
revenue collected per unit.
For the year ended December 31, 1999, merchandise costs increased to
$26.8 million from $21.8 million, an increase of 22.9% over the prior year, but
decreased to 33.1% from 34.3% of total revenues. The increase in costs was
primarily due to merchandise costs associated with stores opened and acquired in
1999 and 1998. The improvement in gross margins was primarily due to improved
pricing, primarily of pre-rented merchandise, as well as an increase in the
rentals of higher-margin products.
For the year ended December 31, 1999, total store expenses increased to
$38.4 million from $29.8 million, an increase of 28.8% over the prior year, and
as a percentage of total revenues increased to 47.4% from 46.9%. The increase in
total store expenses was primarily due to expenses associated with the 22 stores
opened and acquired in 1999 and the inclusion of a full year's results for the
nine stores added in 1998. This increase accounted for 86.0% of the total
increase in store expenses, or $7.4 million. Expenses of the 13 stores acquired
in 1999, stated as a percentage of revenue, were higher than the Company's
existing store base. In addition, expenses of stores opened during 1999 exceeded
revenue, resulting in the increase of store expenses as a percentage of revenue
from 46.9% to 47.4%. Comparable store expenses increased in proportion to the
increase in revenue and were driven by the growth of stores opened in 1997.
Salaries and related expenses increased as a percentage of revenue primarily due
to new stores added in 1999 and 1998 and, to a lesser degree, from higher
staffing costs associated with higher turnover in comparable stores during 1999.
Advertising expenses decreased significantly as a percentage of revenue to 4.5%
from 5.5%, due to management's efforts to reduce advertising costs, an increase
in promotional funds received from major suppliers under cooperative advertising
agreements, and the opening and acquisition of stores in existing markets
allowing advertising costs to be spread over a higher revenue base. Other
expenses increased as a
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percentage of revenue primarily due to new stores added in 1999 and 1998, and to
a lesser degree increases in insurance and delivery costs of comparable stores.
For the year ended December 31, 1999, general and administrative
expenses increased to $5.6 million from $4.6 million, an increase of 21.2% over
the prior year. The increase was primarily due to the addition of two regional
managers and an increase in legal and professional fees. As a percentage of
total revenues, general and administrative expenses decreased to 6.9% 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 year ended December 31, 1999, amortization of goodwill and
non-compete agreements relating to stores acquired in 1999 and 1998 increased to
$0.5 million from $0 in the prior year. The increase was due to amortization
associated with the acquisitions in 1999 and a full year of amortization
relating to acquisitions made in 1998.
For the year ended December 31, 1999, operating income increased to
$9.7 million from $7.3 million, an increase of 33.2% over the prior year. This
increase is attributed to the growth and profitability of the stores opened in
1998, the acquisition of 13 stores during 1999, and an increase in comparable
store operating income due primarily to the growth of stores opened in 1997.
This increase in store level operating income was offset partially by losses
from new stores opened in 1999, increases in corporate overhead associated with
the Company's growth and higher goodwill amortization associated with the 1999
acquisitions. As a percentage of revenue, operating income increased to 12.0%
from 11.5% as a result of improved store level margins due to improved gross
margins of rental-merchandise, the growth of stores opened in 1998 and 1997, and
lower general and administrative expenses as a percentage of total revenue.
For the year ended December 31, 1999, interest expense decreased to
$0.7 million from $0.9 million, a decrease of 24.1% from the prior year. The
decrease is attributable to the retirement of substantially all outstanding debt
from the proceeds received from the Company's initial public offering in June,
1998, offset by interest expense attributable to the indebtedness related to the
acquisitions completed in the first quarter of 1999.
For the year ended December 31, 1999, other expense, net increased to
$0.4 million from $0.1 million in the prior year. Other expense, net consists
mainly of amortization expense associated with the shareholder buyout during
1997. For 1998, other expense, net also includes a one-time refund of workers'
compensation premiums of $0.2 million received from the State of Ohio.
For the year ended December 31, 1999, the Company's effective tax rate
decreased to 41.5% from 42.4% for the prior year due to lower effective state
tax rates.
For the year ended December 31, 1999, net income increased to $5.0
million from $3.6 million, an increase of 39.5% over the prior year, and as a
percentage of total revenues increased to 6.2% from 5.7% 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 and acquisitions, and working capital requirements for new
and existing stores. For the years ended December 31, 2000, 1999 and 1998
purchases of rental merchandise (excluding acquisitions) amounted to $33.0
million, $31.2 million and $22.9 million, respectively. The increase in 2000
reflects merchandise inventory purchased for new store openings and acquisitions
(excludes acquired inventory), offsetting a decline in purchases for comparable
stores. The increase in 1999 was attributable to new store openings,
acquisitions and an increase in purchases for comparable stores.
For the year ended December 31, 2000, cash provided by operating
activities increased to $5.2 million from $3.8 million in the prior year. Cash
used in investing activities decreased to $6.0 million from $13.7 million while
cash provided by financing activities decreased to $1.8 million from $10.3
million due to the reduction in the number and cost of stores acquired in 2000
as compared to 1999. In 2000, the Company acquired 12 stores (7 net of
consolidation) for $3.7 million compared to 19 stores (13 net of consolidation)
for $11.7 million in 1999.
For the year ended December 31, 1999, cash provided by operating
activities decreased to $3.8 million from $5.5 million for the prior year. The
decrease was primarily due to an increase in rental merchandise purchases and
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prepaid expenses offset by an increase in net income. Cash used in investing
activities increased to $13.7 million from $2.7 million due primarily to the
acquisition of 19 stores. Cash provided by financing activities was $10.3
million as compared to cash used in financing activities in the prior year of
$2.9 million. Proceeds from the Company's initial public offering in June 1998
were used to retire substantially all of the Company's debt in 1998 and in 1999
the Company borrowed approximately $10 million to finance the acquisitions
completed in the first quarter of 1999.
The Company currently has a $16.0 million Credit Facility (the "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 March
19, 2001 was approximately $5.0 million. The Company has begun negotiations with
its lead bank to increase its existing credit line agreement to between $25
million and $35 million in order to ensure it has sufficient capital for future
growth.
The Company plans to open approximately 12 new stores in 2001, including
two stores opened in March, 2001. The Company further believes 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 equity securities, 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.
INFLATION
During the years ended December 31, 2000, 1999 and 1998, the cost of
rental-purchase merchandise, lease expense and salaries and wages have increased
modestly. The increases have not had a significant effect on the Company's
results of operations because the Company has been able to charge commensurately
higher rental rates for its rental-purchase merchandise.
MARKET RISK
The Company does not have significant exposure to changing interest
rates, other than the Company's variable-rate Credit Facility. The Company does
not undertake any specific actions to cover its exposure to interest rate risk
and the Company is not party to any interest rate risk management transactions.
The Company does not purchase or hold any derivative financial
instruments.
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, (ii) the ability to attract and retain quality store
personnel and (iii) changes in the government's regulation of the industry. The
Company undertakes no obligation to publicly update or revise any of these
forward-looking statements, whether as a result of new information, future
events or circumstances, or otherwise. There can be no assurance that the events
described in these forward-looking statements will occur. For further
information, please refer to the Company's filings with the Securities and
Exchange Commission, including specifically the Risk Factors contained in the
Company's prospectus dated June 4, 1998.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Market Risk Section under the Management's Discussion and
Analysis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item (other than the information
regarding executive officers set forth at the end of Item 4A of Part I of this
Form 10-K) will be contained in the Company's definitive Proxy Statement for its
2001 Annual Meeting of Shareholders, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Independent Auditors' Report 21
Consolidated Balance Sheets as of December 31, 2000
and 1999 22
Consolidated Statements of Income for the Years 23
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998 24
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 25
Notes to Consolidated Financial Statements 26
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted
because they are not applicable or because required
information is included in the Company's financial
statements and notes thereto.
(a) (3) Exhibits
See the Index to Exhibits included on page 36.
(b) Reports on Form 8-K:
None.
20
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rainbow Rentals, Inc.:
We have audited the accompanying consolidated balance sheets of Rainbow Rentals,
Inc. and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rainbow Rentals,
Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG, LLP
Cleveland, Ohio
March 30, 2001
21
22
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash $ 1,426 $ 440
Rental-purchase merchandise, net 36,545 33,042
Income tax receivable 778 -
Prepaid expenses and other current assets 1,709 1,423
-------- --------
Total current assets 40,458 34,905
Property and equipment, net 5,259 4,352
Deferred income taxes 1,460 1,312
Goodwill, net 9,887 8,205
Other assets, net 1,365 1,550
-------- --------
Total assets $ 58,429 $ 50,324
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of obligations under capital leases $ - $ 21
Accounts payable 2,410 1,679
Accrued income taxes - 432
Accrued compensation and related costs 1,525 1,622
Other liabilities and accrued expenses 2,485 1,510
Deferred income taxes 3,678 2,673
-------- --------
Total current liabilities 10,098 7,937
Long-term debt 12,340 10,398
Obligations under capital leases, excluding current installments - 103
-------- --------
Total liabilities 22,438 18,438
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 5,925,735 outstanding 11,039 11,039
Retained earnings 26,859 22,754
Treasury stock, 466,875 common shares at cost (1,907) (1,907)
-------- --------
Total shareholders' equity 35,991 31,886
-------- --------
Total liabilities and shareholders' equity $ 58,429 $ 50,324
======== ========
See accompanying notes to consolidated financial statements.
22
23
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues
Rental revenue $ 86,099 $ 75,932 $ 59,932
Fees 2,849 2,639 1,959
Merchandise sales 2,947 2,287 1,588
---------- ---------- ----------
Total revenues 91,895 80,858 63,479
Operating expenses
Merchandise costs 30,775 26,758 21,765
Store expenses
Salaries and related 21,774 18,374 13,943
Occupancy 7,478 6,027 4,671
Advertising 4,446 3,662 3,500
Other expenses 11,807 10,310 7,686
---------- ---------- ----------
Total store expenses 45,505 38,373 29,800
---------- ---------- ----------
Total merchandise costs and store
expenses 76,280 65,131 51,565
General and administrative expenses 6,795 5,585 4,607
Amortization of goodwill and noncompete agreements 608 456 33
---------- ---------- ----------
Total operating expenses 83,683 71,172 56,205
---------- ---------- ----------
Operating income 8,212 9,686 7,274
Interest expense 933 697 918
Other expense, net 380 361 76
---------- ---------- ----------
Income before income taxes 6,899 8,628 6,280
Income taxes 2,794 3,580 2,662
---------- ---------- ----------
Net income $ 4,105 $ 5,048 $ 3,618
========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic and diluted earnings per common share $ 0.69 $ 0.85 $ 0.73
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,925,735 5,925,735 4,970,256
========== ========== ==========
Diluted 5,930,157 5,930,887 4,970,256
========== ========== ==========
See accompanying notes to consolidated financial statements.
23
24
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
SERIAL PREFERRED STOCK COMMON STOCK TOTAL
---------------------- ------------ RETAINED TREASURY SHAREHOLDERS'
SHARES COST SHARES COST EARNINGS STOCK EQUITY
------ ------- --------- --------- --------- --------- ---------
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 - - - - 5,048 - 5,048
------ ------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 - - 5,925,735 11,039 22,754 (1,907) 31,886
Net income - - - - 4,105 - 4,105
------ ------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 - $ - 5,925,735 $ 11,039 $ 26,859 $ (1,907) $ 35,991
====== ======= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
24
25
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net income $ 4,105 $ 5,048 $ 3,618
Reconciliation of net income to net cash provided
by operating activities
Depreciation of property and equipment and
amortization of intangibles 2,689 2,446 1,931
Depreciation of rental-purchase merchandise 24,557 21,821 19,607
Loss on write-down of rental-purchase merchandise 110 - -
Deferred income taxes 857 506 695
Gain on disposal of property and equipment (129) (207) (229)
Purchases of rental-purchase merchandise (32,971) (31,244) (22,903)
Rental-purchase merchandise disposed, net 6,121 5,251 1,939
(Increase) decrease in
Income tax receivable (778) - 399
Prepaid expenses and other current assets (286) (717) 118
Increase (decrease) in
Accounts payable 441 212 242
Accrued income taxes (432) 142 161
Accrued compensation and related costs (97) 193 338
Other liabilities and accrued expenses 975 344 (450)
-------- -------- --------
Net cash provided by operating activities 5,162 3,795 5,466
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment, net (2,433) (2,323) (1,422)
Proceeds on the sale of property and equipment 160 360 333
Acquisitions (3,721) (11,687) (1,580)
-------- -------- --------
Net cash used in investing activities (5,994) (13,650) (2,669)
-------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt 32,147 38,420 43,385
Current installments and repayments of long-term debt (30,205) (28,022) (55,849)
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 (124) (66) (61)
-------- -------- --------
Net cash provided by (used in) financing
activities 1,818 10,295 (2,874)
-------- -------- --------
Net increase (decrease) in cash 986 440 (77)
Cash at beginning of year 440 - 77
-------- -------- --------
Cash at end of year $ 1,426 $ 440 $ -
======== ======== ========
Supplemental cash flow information:
Net cash paid during the period for
Interest $ 917 $ 560 $ 1,556
Income taxes 3,055 3,031 1,529
See accompanying notes to consolidated financial statements.
25
26
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Rainbow Rentals, Inc. and
subsidiary (Company), which are summarized below, are consistent with accounting
principles generally accepted in the United States of America and reflect
practices appropriate to the industry in which the Company operates.
(a) Reporting Entity and Principles of Consolidation
The consolidated financial statements include the accounts of Rainbow
Rentals, Inc. and its wholly owned subsidiary, Rainbow Advertising, Inc. All
significant intercompany profits, transactions, and balances have been
eliminated in consolidation. On December 30, 1999 Rainbow Advertising, Inc. was
dissolved and merged into existing operations.
The Company is engaged in the rental and sale of home electronics,
furniture, appliances, and computers to the general public. At December 31,
2000, the Company operated 110 stores in 11 states: Connecticut, Massachusetts,
Michigan, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South
Carolina, Tennessee and Virginia. The Company's corporate headquarters is
located in Canfield, Ohio.
(b) Financial Instruments
The carrying amount of financial instruments including cash, accounts
payable and accrued expenses approximated fair value as of December 31, 2000 and
1999, because of the relatively short maturity of these instruments.
(c) Rental-purchase Merchandise
Rental-purchase merchandise consists of merchandise rented to customers
or in the stores available for rent or sale. Merchandise is rented to customers
pursuant to rental-purchase agreements, which generally provide for weekly,
biweekly, semi-monthly or monthly rental terms with rental renewal payments
collected in advance. The rental-purchase agreements may be terminated at any
time by the customers. If terminated, the merchandise is returned to the
Company.
Rental-purchase merchandise is stated at historical cost, net of
accumulated depreciation. The Company depreciates inventory using the units of
activity method. Under the units of activity method, merchandise on rent is
depreciated in the proportion of rents earned to total expected rents provided
over the rental contract term and merchandise held for rent is not depreciated.
The Company believes the units of activity method more accurately matches the
recognition of depreciation expense with the estimated timing of revenue earned
over the rental-purchase agreement period. The units of activity method is
recognized in the rental-purchase industry and does not consider salvage value.
The Company monitors the value of rental-purchase merchandise for possible
impairment by utilizing the undiscounted cash flow method. Measurement of an
impairment loss is determined by reducing the carrying value of the related
assets to fair value.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the respective
assets which range from three to five years. Leasehold improvements and vehicles
held under capital lease arrangements are amortized over the shorter of the term
of the applicable leases or useful life of the assets.
Continued
26
27
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(e) Goodwill
The excess of cost over fair value of net assets of businesses acquired
is amortized on a straight-line basis over periods ranging from 18 to 20 years.
As of December 31, 2000 and 1999, goodwill was $9,887 and $8,205, respectively,
and is shown net of accumulated amortization of $877 and $392 in those years.
The Company monitors the value of goodwill for possible impairment by utilizing
the undiscounted cash flow method. Measurement of an impairment loss is
determined by reducing the carrying value of the related assets to fair value.
(f) Other Assets
Other assets consist primarily of noncompete agreements and a
consulting agreement which arose in connection with the share repurchase from a
former officer of the Company (see notes 11 and 12). These costs are amortized
over the agreement lives.
(g) Rental Revenue
Merchandise is rented to customers pursuant to rental-purchase
agreements which generally provide for weekly, biweekly, semi-monthly or monthly
rental terms with nonrefundable rental payments. Rental revenue is recognized
over the lease term. A customer may elect to renew the rental-purchase agreement
for a specified number of continuous terms and has the right to acquire title
either through payment of all required rentals or through a purchase option.
Amounts received from such sales, as well as sales of new and used merchandise
available for rent in the stores, are included in merchandise sales.
(h) Stock-Based Compensation
The Company has elected to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its stock-based compensation. In addition, the
disclosures required under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" are contained in note 14 to the
consolidated financial statements.
(i) Advertising Expenses
Costs incurred for producing and communicating advertising are charged
to expense as incurred.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Continued
27
28
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(k) Basic and Diluted Earnings per Common Share
Basic earnings per common share are based on the weighted average
number of common shares outstanding during each year. Diluted earnings per
common share are based on the weighted average number of common shares
outstanding during each year, plus the assumed exercise of stock options. For
1998, stock options would have had an anti-dilutive effect on earnings per
share, therefore, there is no difference between basic and diluted weighted
average common shares outstanding for that period.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements
have been reclassified to conform with the 2000 presentation.
(2) PUBLIC OFFERING OF STOCK
On June 5, 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.
(3) ACQUISITIONS
The Company has made several store acquisitions over the last three
years. All acquisitions made were accounted for using the purchase method of
accounting. Accordingly, all identifiable assets were recorded at their
estimated fair market value at the date of acquisition. The excess of the
acquisition cost over the estimated fair value of the net assets acquired
("goodwill") is being amortized on a straight-line basis over periods ranging
from 18 to 20 years. Assets acquired, other than goodwill, consisted primarily
of rental-purchase merchandise, property and equipment, and noncompete
agreements.
DATE OF PURCHASE RENTAL-PURCHASE
ACQUISITION PRICE GOODWILL MERCHANDISE OTHER
----------- ----- -------- ----------- -----
August 1, 2000 $ 772 $ 448 $ 242 $ 82
July 1, 2000 2,613 1,645 1,011 (43)
March 1, 1999 10,374 6,801 3,166 407
February 1, 1999 1,313 780 458 75
August 1, 1998 1,105 651 310 144
Continued
28
29
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In addition, the Company has acquired the rental-purchase merchandise
and rental-purchase agreements of competitors that were being closed. The
purchase price of such acquisitions totaled $336 in 2000 and $475 in 1998.
(4) RENTAL-PURCHASE MERCHANDISE
Following is a summary of rental-purchase merchandise:
DECEMBER 31,
------------
2000 1999
---- ----
Rental purchase merchandise, at original cost ... $ 63,799 $ 56,927
Less accumulated depreciation ................... (27,254) (23,885)
-------- --------
$ 36,545 $ 33,042
======== ========
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
DECEMBER 31,
------------
2000 1999
---- ----
Vehicles ..................................... $ 456 $ 689
Leasehold improvements ....................... 6,919 5,369
Computer equipment ........................... 1,234 977
Office equipment ............................. 2,633 1,941
Vehicles held under capital lease ............ - 290
------- -------
11,242 9,266
Less accumulated depreciation and amortization 5,983 4,914
------- -------
$ 5,259 $ 4,352
======= =======
(6) LONG-TERM DEBT AND NOTES PAYABLE
The Company has a revolving loan agreement with a lending institution;
the maximum revolving loan amount under this agreement at December 31, 2000 was
$16.0 million. The loan agreement matures March 1, 2002. Interest is charged on
the outstanding loan balance at prime, which was 9.50% at December 31, 2000. The
Company can request to have portions of the outstanding principal designated as
"IBOR Portions," which under the terms of the loan agreement would bear interest
at the Interbank Offering Rate (IBOR Rate), plus 200 basis points. The IBOR Rate
at December 31, 2000 was 6.72%. At December 31, 2000, $10.0 million of the
outstanding principal is designated as an "IBOR Portion."
The loan agreement is secured by substantially all assets, contract
rights, documents, and all rental agreements of the Company. The loan agreement
contains various covenants, with which the Company was in compliance at December
31, 2000, 1999 and 1998. The loan agreement calls for a nonuse fee equal to
0.25% per annum on the daily average amount by which the maximum revolving
amount exceeds the outstanding loan balance. Bank borrowings outstanding under
the loan agreement at December 31, 2000, 1999 and 1998 were $12,340, $10,398,
and $0 respectively.
Continued
29
30
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) RELATED PARTY TRANSACTIONS
The building which serves as the Company's corporate headquarters is
leased from a partnership, owned by the Company's three majority shareholders.
The Company entered into a 10-year building lease agreement, expiring January
2006, at a rental rate which approximates market rates. Total rent paid to the
partnership in 2000, 1999, and 1998 was approximately $120, $113, and $98,
respectively. The future minimum lease payments under this lease are included in
the total lease obligations disclosed in note 9.
(8) INCOME TAXES
The provision for income taxes consists of the following components:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------ ------ ------
Current
Federal ...................... $1,563 $2,567 $1,660
State and Local .............. 374 507 307
------ ------ ------
1,937 3,074 1,967
Deferred
Federal ...................... 783 367 485
State and Local .............. 74 139 210
------ ------ ------
857 506 695
------ ------ ------
Total income tax expense ......... $2,794 $3,580 $2,662
====== ====== ======
A reconciliation between income tax expense reported and income tax
expense computed by applying the federal statutory rate is as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------ -------- --------
Income before income taxes .......................................... $6,899 $8,628 $6,280
Federal statutory tax rate .......................................... 34% 34% 34%
------ -------- --------
State and local income taxes, net of federal income tax benefit ..... 2,346 2,934 2,135
296 426 345
Meals and entertainment and officers' life insurance premiums ....... 33 32 50
Other, net .......................................................... 119 188 132
------ -------- --------
$2,794 $ 3,580 $ 2,662
====== ======== ========
The components of deferred tax assets and liabilities were:
DECEMBER
2000 1999
---- ----
Deferred tax assets
Property and equipment ......................... $ 1,009 $ 799
Intangibles .................................... 281 297
Minimum tax credits ............................ 170 320
Other .......................................... 115 87
------- -------
Total deferred tax assets ................. $ 1,575 $ 1,503
======= =======
Deferred tax liabilities:
Rental-purchase merchandise ................... (3,793) (2,864)
------- -------
Net deferred tax liability .............. $(2,218) $(1,361)
======= =======
Continued
30
31
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Of the total deferred tax assets, $1,460 and $1,312 were classified as
long-term at December 31, 2000 and 1999, respectively, and $115 and $191 were
classified as current at December 31, 2000 and 1999, respectively, and are
netted with the deferred tax liability. No valuation allowance was required for
the deferred tax assets.
(9) LEASES
The Company operates its retail stores and offices under noncancelable
operating leases with terms extending to 2006 and additional option periods
renewable at the request of the Company. Additionally, in 1998 the Company began
to lease its delivery and general use vehicles under operating lease
arrangements. Rental expense charged to operations totaled $7,402, $5,866, and
$4,144 for the years ended December 31, 2000, 1999, and 1998, respectively.
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) as of December 31, 2000 are as
follows:
YEAR ENDING DECEMBER 31,
2001 ......................... $ 7,655
2002 ......................... 5,677
2003 ......................... 4,396
2004 ......................... 2,649
2005 ......................... 1,133
Thereafter .......................... 405
--------
Total minimum lease payments .............. $ 21,915
========
(10) RETIREMENT PLAN
The Company maintains a qualified defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code. The plan, which covers
substantially all employees, provides for the Company to make discretionary
contributions based on salaries of eligible employees plus additional
contributions based upon voluntary employee salary deferrals. Payments upon
retirement or termination of employment are based on vested amounts credited to
individual accounts. In 2000, 1999, and 1998, the Company contributed $31, $26
and $49, respectively.
(11) OTHER ASSETS
Following is a summary of other assets:
DECEMBER 31,
------------
2000 1999
---- ----
Noncompete and consulting agreements ............ $2,853 $2,571
Loan origination fees and other ................. 113 294
------ ------
2,966 2,865
Less accumulated amortization ................... 1,601 1,315
------ ------
$1,365 $1,550
====== ======
(12) SHAREHOLDER TRANSACTIONS
In connection with a Redemption Agreement with a former
shareholder-officer, the Company entered into noncompete, consulting, and
severance agreements (see note 11), and agreed to pay a total of $13,436 (cash
payment of $2,948 and notes payable of $10,488, which were paid in full in June,
1998), allocated as follows:
Stock repurchase ................................................. $11,095
Noncompete and consulting agreements ............................. 2,093
Severance agreement .............................................. 248
-------
$13,436
=======
Continued
31
32
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The full amount paid for the acquisition of shares was recorded as
treasury stock. As indicated in note 11, the amount allocated to the noncompete
and consulting agreements was recorded in other assets. The severance payment
was expensed to general and administrative expense in 1997.
(13) SHAREHOLDERS' EQUITY
On March 23, 1998, the Company's Board of Directors (Board) approved an
increase in the number of authorized shares and the conversion of all
outstanding shares of common nonvoting stock for an equal number of common
voting stock. Additionally, the Board authorized 2,000,000 shares of Serial
Preferred Stock (consisting of 1,000,000 Voting Preferred Shares and 1,000,000
Non-Voting Preferred Shares). The conversion of nonvoting shares has been
reflected retroactively, by removing reference to common nonvoting shares from
shareholders' equity and calculating earnings per share based on the weighted
average number of common shares outstanding after considering the conversion.
(14) STOCK OPTION PLAN
The Company's Stock Option Plan ("Plan") offers employees the
opportunity to acquire shares of common stock by the grant of stock options,
including both incentive stock options ("ISOs") and nonqualified stock options
("NQSOs"). A total of 600,000 shares of common stock have been reserved for
issuance upon exercise of stock options under the Plan. The purchase price of a
share of common stock pursuant to an ISO shall not be less than the fair market
value of a share of common stock at the grant date. The purchase price of a
share of common stock pursuant to a NQSO may be less than the fair market value
of a share of common stock.
On June 5, 1998, the Company granted 306,200 stock options under the
Plan. In 2000 and 1999, the Company granted additional stock options of 57,500
and 30,500 respectively. Because all stock options were granted with an exercise
price equal to the market price on the date of grant, no compensation expense
has been recognized, consistent with the provisions of APB 25. Stock options
granted become exercisable over a three or four-year vesting period and expire
ten years from the date of grant.
Pro forma information for net income and basic and diluted earnings per
common share is required by SFAS 123 and has been determined as if the Company
had accounted for its stock options under the fair value method of that
statement. The fair value for these stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 2000, 1999 and 1998: risk free interest rate of 6.5% in
2000, 6.3% in 1999 and 5.4% in 1998; dividend yield of -0-%; volatility factor
of the expected market price of the Company's common stock of 40.0% in 2000 and
30.0% in 1999 and 1998; and an expected life of the stock options of seven
years. The weighted average grant date fair value of stock options granted
during 2000, 1999 and 1998 was $4.77, $4.46 and $4.43, respectively.
Had compensation cost for the stock options been determined based on
the fair value at the grant date, the Company's net income and basic and diluted
earnings per common share would have been reduced. For purposes of pro forma
disclosures, the estimated fair value of the stock options is amortized to
expense over the stock options' vesting period. The pro forma amounts for the
years ended December 31, 2000, 1999 and 1998 are indicated below.
2000 1999 1998
---- ---- ----
Net income:
As reported .......................................... $ 4,105 $ 5,048 $ 3,618
Pro forma ............................................ 3,842 4,828 3,506
Basic and diluted earnings per common share:
As reported .......................................... .69 .85 .73
Pro forma ............................................ .65 .81 .71
Continued
32
33
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of the Company's stock option activity and related
information for the years ended December 31, 2000, 1999 and 1998 is as follows:
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
STOCK EXERCISE STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
2000 2000 1999 1999 1998 1998
Outstanding at beginning of year ..... 317,200 $9.96 297,600 $10.00 - $ -
Granted .............................. 57,500 8.84 30,500 9.59 306,200 10.00
Exercised ............................ - - - - - -
Forfeited ............................ (14,900) 9.64 (10,900) 10.00 (8,600) 10.00
------- ------- -------
Outstanding at end of year ......... 359,800 $9.79 317,200 $ 9.96 297,600 $ 10.00
======= ======= =======
Exercisable at end of year .......... 183,942 71,675 -
======= ====== =======
(15) 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:
YEARS ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
Numerator:
Net income available to common shareholders $ 4,105 $ 5,048 $ 3,618
Denominator:
Basic weighted average shares ............. 5,925,735 5,925,735 4,970,256
Effect of dilutive stock options .......... 4,422 5,152 -
---------- ---------- ----------
Diluted weighted average shares ........... 5,930,157 5,930,887 4,970,256
========== ========== ==========
Basic earnings per share .................. $ 0.69 $ 0.85 $ 0.73
========== ========== ==========
Diluted earnings per share ................ $ 0.69 $ 0.85 $ 0.73
========== ========== ==========
Continued
33
34
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) QUARTERLY RESULTS (UNAUDITED)
The following table represents certain unaudited financial information
for the quarters indicated:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 2000
Revenue $ 22,462 $ 22,386 $ 23,527 $ 23,520
Operating income 2,545 2,610 1,357 1,700
Net income 1,342 1,355 579 829
Basic net income per common share $ .23 $ .23 $ .09 $ .14
Weighted average
common shares outstanding 5,925,735 5,925,735 5,925,735 5,925,735
Year ended December 31, 1999
Revenue $ 18,260 $ 20,356 $ 20,311 $ 21,931
Operating income 2,160 2,454 2,334 2,738
Net income 1,134 1,230 1,227 1,457
Basic net income per common share $ .19 $ .21 $ .21 $ .24
Weighted average
common shares outstanding 5,925,735 5,925,735 5,925,735 5,925,735
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAINBOW RENTALS, INC.
By: /e/ WAYLAND J. RUSSELL
----------------------
Wayland J. Russell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on April 2, 2001.
SIGNATURES TITLE
---------- -----
/e/ WAYLAND J. RUSSELL Chairman , Chief Executive Officer and Director
- -----------------------------
Wayland J. Russell
/e/ LAWRENCE S. HENDRICKS Chief Operating Officer and Director
- -----------------------------
Lawrence S. Hendricks
/e/ MICHAEL J. VIVEIROS President and Director
- -----------------------------
Michael J. Viveiros
/e/ MICHAEL A. PECCHIA Chief Financial Officer
- -----------------------------
Michael A. Pecchia
/e/ BRIAN L. BURTON Director
- -----------------------------
Brian L. Burton
/e/ IVAN J. WINFIELD Director
- -----------------------------
Ivan J. Winfield
35
36
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
- --------------------------------------------------------------------------------
2.1(1) Amended and Restated Asset Purchase Agreement dated
March 1, 1999 by and among the Company, Blue Ribbon
Rentals, Inc., Blue Ribbons Rentals II, Inc. and
William Wendell.
- --------------------------------------------------------------------------------
3.1(2) Amended and Restated Articles of Incorporation
- --------------------------------------------------------------------------------
3.2(2) Amended and Restated By-Laws and Code of Regulations
- --------------------------------------------------------------------------------
4.1(2) Loan and Security Agreement dated as of October 5,
1992, by and between the Company and Bank of America
National Trust and Savings Association (formerly Bank
of America, Illinois, formerly Continental Bank,
Illinois, formerly Continental Bank, NA), as amended.
- --------------------------------------------------------------------------------
4.2(3) Consent and Amendment No. 10 and Third Amended and
Restated Supplement A to Loan and Security Agreement
between the Company and Bank of America National Trust
and Savings Association, dated July 15, 1998.
- --------------------------------------------------------------------------------
4.3(1) Consent and Amendment No. 11 and Fourth Amended and
Restated Supplement A to Loan and Security Agreement
between the Company and Bank of America National Trust
and Savings Association, dated March 1, 1999.
- --------------------------------------------------------------------------------
4.4 Consent and Amendment No. 12 and Fifth Amended and
Restated Supplement A to Loan and Security Agreement
between the Company and Bank of America National Trust
and Savings Association, dated March 14, 2001.
- --------------------------------------------------------------------------------
4.5 Consent and Amendment No. 13 and Sixth Amended and
Restated Supplement A to Loan and Security Agreement
between the Company and Bank of America National Trust
and Savings Association, dated March 29, 2001
- --------------------------------------------------------------------------------
4.6(2) Collateral Trademark Security Agreement dated as of
October 5, 1992 by and between the Company and Bank of
America National Trust and Savings Association.
Information concerning certain of the Company's other
long-term debt is set forth in Note 6 of the
consolidated financial statements. The Company hereby
agrees to furnish copies of such instruments to the
Commission upon request.
- --------------------------------------------------------------------------------
10.1(2) 1998 Stock Option Plan
- --------------------------------------------------------------------------------
10.2(2) Lease by and between the Company and Rainbow
Properties, Ltd. dated January 1, 1996 for the
Company's principal executive offices.
- --------------------------------------------------------------------------------
23 Consent of Independent Public Accountants
- --------------------------------------------------------------------------------
(1) Previously filed, as of March 16, 1999, pursuant to the Company's report on
Form 8-K.
(2) Previously filed, as of June 5, 1998, pursuant to the Company's
Registration Statement on Form S-1.
(3) Previously filed, as of August 13, 1998, pursuant to the Company's report
on Form 10-Q.
36