##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003OR[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____to ____.


Commission File No. 0-24333

RAINBOW RENTALS, INC.
(Exact name of Registrant as specified in its charter)

Ohio
(State of Incorporation)
    
    34-1512520
(IRS Employer Identification No.)


3711 Starr Centre Drive
Canfield, Ohio 44406
(Address of principal executive offices)

330-533-5363
(Registrants telephone number)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes [x]    No [  ]

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
Yes [  ]    No [x]

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

CLASS
Common stock, no par value
    
    SHARES OUTSTANDING AT OCTOBER 31, 2003
5,929,319






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RAINBOW RENTALS, INC.
INDEX

PART I.
    
    
    
    FINANCIAL INFORMATION
    
    Page No.Item 1.
    
    Financial StatementsBalance Sheets
    
    3Statements of Income
    
    4Statements of Shareholders Equity
    
    5Statements of Cash Flows
    
    6Notes to Financial Statements
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    13Item 4.
    
    Disclosure Controls and Procedures
    
    13PART II.
    
    
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    14SIGNATURES
    
    
    
    
    
    15


2



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##### 



RAINBOW RENTALS, INC.
BALANCE SHEETS
(Dollars in thousands)

(unaudited)September 30,
    
    December 31,2003
    
    2002AssetsCurrent assetsCash and cash equivalents
    
    $
    251
    
    
    $
    1,080Rental-purchase merchandise, net
    
    
    38,634
    
    
    
    39,342Income tax receivable
    
    
    190
    
    
    
    939Prepaid expenses and other current assets
    
    
    2,239
    
    
    
    1,926Total current assets
    
    
    41,314
    
    
    
    43,287Property and equipment, net
    
    
    6,156
    
    
    
    5,558Deferred income taxes
    
    
    2,124
    
    
    
    1,989Goodwill, net
    
    
    9,236
    
    
    
    9,236Other assets, net
    
    
    443
    
    
    
    843Total assets
    
    $
    59,273
    
    
    $
    60,913Liabilities and Shareholders EquityCurrent liabilitiesDeferred revenue
    
    $
    992
    
    
    $
    1,215Accounts payable
    
    
    2,855
    
    
    
    2,175Accrued compensation and related costs
    
    
    2,326
    
    
    
    2,402Other liabilities and accrued expenses
    
    
    2,556
    
    
    
    2,403Deferred income taxes
    
    
    7,293
    
    
    
    6,343Total current liabilities
    
    
    16,022
    
    
    
    14,538Long-term debt
    
    
    3,500
    
    
    
    7,550Total liabilities
    
    
    19,522
    
    
    
    22,088Commitments and contingenciesShareholders equitySerial preferred stock, no par value; 2,000,000 shares authorized,
none issued
    
    
    
    
    
    
    Common stock, no par value; 10,000,000 shares authorized,6,392,610 issued and 5,929,319 outstanding atSeptember 30, 2003 and December 31, 2002
    
    
    11,039
    
    
    
    11,039Additional paid-in capital
    
    
    4
    
    
    
    4Retained earnings
    
    
    30,600
    
    
    
    29,674Treasury stock, at cost, 463,291 shares atSeptember 30, 2003 and December 31, 2002
    
    
    (1,892
    )
    
    
    (1,892
    )Total shareholders equity
    
    
    39,751
    
    
    
    38,825Total liabilities and shareholders equity
    
    $
    59,273
    
    
    $
    60,913


See accompanying notes to financial statements.

3



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##### 



RAINBOW RENTALS, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share amount)

(unaudited)
    
    (unaudited)For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002RevenuesRental revenue
    
    $
    24,017
    
    
    $
    22,921
    
    
    $
    72,474
    
    
    $
    69,523Fees
    
    
    681
    
    
    
    699
    
    
    
    1,996
    
    
    
    2,052Merchandise sales
    
    
    739
    
    
    
    724
    
    
    
    2,487
    
    
    
    2,570Total revenues
    
    
    25,437
    
    
    
    24,344
    
    
    
    76,957
    
    
    
    74,145Operating expensesMerchandise costs
    
    
    8,347
    
    
    
    8,355
    
    
    
    25,101
    
    
    
    25,562Store expensesSalaries and related
    
    
    6,674
    
    
    
    6,055
    
    
    
    19,801
    
    
    
    17,863Occupancy
    
    
    2,481
    
    
    
    2,539
    
    
    
    7,458
    
    
    
    7,090Advertising
    
    
    1,324
    
    
    
    1,310
    
    
    
    4,800
    
    
    
    4,586Other expenses
    
    
    3,875
    
    
    
    3,318
    
    
    
    10,965
    
    
    
    10,123Total store expenses
    
    
    14,354
    
    
    
    13,222
    
    
    
    43,024
    
    
    
    39,662Total merchandise costs and store expenses
    
    
    22,701
    
    
    
    21,577
    
    
    
    68,125
    
    
    
    65,224General and administrative expenses
    
    
    2,138
    
    
    
    1,962
    
    
    
    6,561
    
    
    
    5,794Amortization of intangible assets
    
    
    45
    
    
    
    45
    
    
    
    135
    
    
    
    130Total operating expenses
    
    
    24,884
    
    
    
    23,584
    
    
    
    74,821
    
    
    
    71,148Operating income
    
    
    553
    
    
    
    760
    
    
    
    2,136
    
    
    
    2,997Interest expense
    
    
    137
    
    
    
    135
    
    
    
    434
    
    
    
    487Other expense
    
    
    57
    
    
    
    57
    
    
    
    171
    
    
    
    171Income from continuing operations, before income taxes
    
    
    359
    
    
    
    568
    
    
    
    1,531
    
    
    
    2,339Income tax expense
    
    
    142
    
    
    
    207
    
    
    
    605
    
    
    
    924Income from continuing operations
    
    
    217
    
    
    
    361
    
    
    
    926
    
    
    
    1,415Discontinued operationsLoss from operations of discontinued store, net of tax
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    (76
    )Net income
    
    $
    217
    
    
    $
    335
    
    
    $
    926
    
    
    $
    1,339Basic earnings per common share:Basic earnings per share from continuing operations
    
    $
    0.04
    
    
    
    0.06
    
    
    $
    0.16
    
    
    $
    0.24Basic loss per share from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Basic earnings per share
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    0.23Diluted earnings per common share:Diluted earnings per share from continuing operations
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    0.24Diluted loss per share from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Diluted earnings per share
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    0.23Weighted average common shares outstanding:Basic
    
    
    5,929,319
    
    
    
    5,929,319
    
    
    
    5,929,319
    
    
    
    5,927,564Diluted
    
    
    5,938,185
    
    
    
    5,932,648
    
    
    
    5,933,255
    
    
    
    5,944,081See accompanying notes to financial statements


4



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##### 



RAINBOW RENTALS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)

TotalCommon Stock
    
    Additional
    
    Retained
    
    Treasury
    
    ShareholdersShares
    
    Cost
    
    Paid-in Capital
    
    Earnings
    
    Stock
    
    EquityBalance at December 31, 2001
    
    
    5,925,735
    
    
    $
    11,039
    
    
    $
    
    
    
    $
    28,033
    
    
    $
    (1,907
    )
    
    $
    37,165Exercise of stock options
    
    
    3,584
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    15
    
    
    
    19Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,641
    
    
    
    
    
    
    
    1,641Balance at December 31, 2002
    
    
    5,929,319
    
    
    
    11,039
    
    
    
    4
    
    
    
    29,674
    
    
    
    (1,892
    )
    
    
    38,825Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    926
    
    
    
    
    
    
    
    926Balance at September 30, 2003 (unaudited)
    
    
    5,929,319
    
    
    $
    11,039
    
    
    $
    4
    
    
    $
    30,600
    
    
    $
    (1,892
    )
    
    $
    39,751See accompanying notes to financial statements


5



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##### 



RAINBOW RENTALS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)

(unaudited)For the nine months endedSeptember 30,2003
    
    2002Cash flows from operating activitiesIncome from continuing operations
    
    $
    926
    
    
    $
    1,415Reconciliation of income from continuing operations to net
cash provided by operating activities of continuing operationsDepreciation of property and equipment and
amortization of intangibles
    
    
    1,845
    
    
    
    1,844Depreciation and write-down of rental-purchase merchandise
    
    
    20,058
    
    
    
    20,674Purchases of rental-purchase merchandise
    
    
    (24,579
    )
    
    
    (22,117
    )Rental-purchase merchandise disposed, net
    
    
    5,230
    
    
    
    4,969Deferred income taxes
    
    
    815
    
    
    
    2,677Loss on disposal of property and equipment
    
    
    6
    
    
    
    60(Increase) decrease in
   Income tax receivable
    
    
    749
    
    
    
    (2,009
    )Prepaid expenses and other assets
    
    
    (305
    )
    
    
    363Increase (decrease) in
   Accounts payable
    
    
    680
    
    
    
    (1,107
    )Accrued income taxes
    
    
    
    
    
    
    (306
    )Accrued compensation and related costs
    
    
    (76
    )
    
    
    (310
    )Deferred revenue and other liabilities and accrued expenses
    
    
    (70
    )
    
    
    170Net cash provided by operating activities of continuing operations
    
    
    5,279
    
    
    
    6,323Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (128
    )Net cash provided by operating activities
    
    
    5,279
    
    
    
    6,195Cash flows from investing activitiesPurchase of property and equipment
    
    
    (2,079
    )
    
    
    (1,881
    )Proceeds from the sale of property and equipment
    
    
    21
    
    
    
    37Acquisitions
    
    
    
    
    
    
    (315
    )Net cash used in investing activities of continuing operations
    
    
    (2,058
    )
    
    
    (2,159
    )Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (64
    )Net cash used in investing activities
    
    
    (2,058
    )
    
    
    (2,223
    )Cash flows from financing activitiesProceeds from long-term debt
    
    
    20,950
    
    
    
    25,464Current installments and repayments of long-term debt
    
    
    (25,000
    )
    
    
    (29,404
    )Proceeds from stock options exercised
    
    
    
    
    
    
    19Loan fees paid
    
    
    
    
    
    
    (316
    )Net cash used in financing activities
    
    
    (4,050
    )
    
    
    (4,237
    )Net decrease in cash
    
    
    (829
    )
    
    
    (265
    )Cash at beginning of period
    
    
    1,080
    
    
    
    1,839Cash at end of period
    
    $
    251
    
    
    $
    1,574Supplemental cash flow informationNet cash paid (refunded) during the period for
 Interest
    
    $
    371
    
    
    $
    389Income taxes
    
    
    (833
    )
    
    
    639
See accompanying notes to financial statements


6



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RAINBOW RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

1. Basis of Presentation

Rainbow Rentals, Inc. (the Company) is engaged in the rental and sale of
home electronics, furniture, appliances and computers to the general public.
At September 30, 2003 the Company operated 125 stores in 15 states:
Connecticut, Georgia, Indiana, Kentucky, Maryland, Massachusetts, Michigan, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee and Virginia. The Companys corporate office is located in
Canfield, Ohio.

The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Therefore, certain information and disclosures,
normally required with financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted. In the opinion of management, the financial
statements contain all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows of the Company. The results of operations for the
periods presented are not necessarily indicative of the results for the entire
year. It is suggested these financial statements be read in conjunction with
the financial statements and notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2002.

Certain reclassifications have been made to prior year financial data in
order to conform to the 2003 presentation.

2. Long-Term Debt

The Company entered into a revolving financing agreement (the Credit
Facility) in January 2002 that matures in January 2005. The agreement allows
the Company to borrow up to $25.0 million; however, borrowings are limited to
32% of the Companys net rental purchase merchandise, less outstanding letters
of credit, which totaled $2.9 million at September 30, 2003. Excess
availability at September 30, 2003 was approximately $6.0 million. The
Companys tangible assets, primarily rental purchase merchandise, serve as the
security for the debt. The Company can elect interest to be charged on a
portion of the outstanding debt balance at the London Interbank Offering Rate
(LIBOR) plus a range of 250  325 basis points and the remaining debt balance,
if any, would be at the prime rate plus a range of 50  125 basis points. In
addition, the Company must pay a commitment fee equal to a range of 37.5 to 50
basis points per annum on the unused portion of the loan commitment. The
interest rate ranges above are all dependent on the Companys most recent
quarterly leverage ratio. Borrowings under the Credit Facility mature three
years after the date of the loan. At September 30, 2003, the outstanding loan
balance totaled $3.5 million with a weighted average interest rate of 7.03%.

The Credit Facility requires the Company to meet certain quarterly
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum net worth, fixed charge coverage and rental merchandise usage
ratios. The Credit Facility contains non-financial covenants that limit
actions of the Company with respect to additional indebtedness, certain loans
and investments, payment of dividends, acquisitions, mergers and
consolidations, dispositions of assets or subsidiaries, issuance of capital
stock, capital expenditures and leases. At September 30, 2003, the Company was
in compliance with the covenants and financial reporting requirements.

7



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3. Earnings Per Share

Basic earnings per common share are computed using net income available to
common shareholders divided by the weighted average number of common shares
outstanding. For computation of diluted earnings per share, the weighted
average number of common shares outstanding is increased to give effect to
stock options considered to be common stock equivalents.

The following table shows the amounts used in computing earnings per share.

For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Numerator:Net income available to common shareholders
    
    $
    217
    
    
    $
    335
    
    
    $
    926
    
    
    $
    1,339Denominator:Basic weighted average shares
    
    
    5,929,319
    
    
    
    5,929,319
    
    
    
    5,929,319
    
    
    
    5,927,564Effect of dilutive stock options
    
    
    8,866
    
    
    
    3,329
    
    
    
    3,936
    
    
    
    16,517Diluted weighted average shares
    
    
    5,938,185
    
    
    
    5,932,648
    
    
    
    5,933,255
    
    
    
    5,944,081Basic earnings per share
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    0.23Diluted earnings per share
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.16
    
    
    $
    0.23


Stock options of 437,548 and 388,700 shares for the three months ended
September 30, 2003 and 2002, respectively, were not included in diluted
earnings per share because their effects were anti-dilutive. For the nine
months ended September 30, 2003 and 2002, stock options of 432,483 and 329,067,
respectively, were not included in diluted earnings per share because their
effects were anti-dilutive.

4. Stock-Based Compensation

The Company sponsors a stock option and incentive plan for the benefit of
its employees. In December 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,which
amended SFAS No. 123, Accounting for Stock-Based Compensation.SFAS No. 148
requires companies electing not to expense stock options to provide the pro
forma net income and earnings per share information not only annually, but also
on a quarterly basis. No stock-based compensation costs are reflected in net
income since all stock options were granted with an exercise price equal to the
market price on the date of grant, consistent with the provisions of Accounting
Principles Board (APB) 25.

The following table illustrates the effect on net income and earnings per
share had compensation costs for stock options been measured using SFAS No.
123:

(unaudited)
    
    (unaudited)For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net incomeAs reported
    
    $
    217
    
    
    $
    335
    
    
    $
    926
    
    
    $
    1,339Pro forma
    
    
    164
    
    
    
    275
    
    
    
    791
    
    
    
    1,216Basic earnings per common shareAs reported
    
    
    0.04
    
    
    
    0.06
    
    
    
    0.16
    
    
    
    0.23Pro forma
    
    
    0.03
    
    
    
    0.05
    
    
    
    0.13
    
    
    
    0.21Diluted earnings per common shareAs reported
    
    
    0.04
    
    
    
    0.06
    
    
    
    0.16
    
    
    
    0.23Pro forma
    
    
    0.03
    
    
    
    0.05
    
    
    
    0.13
    
    
    
    0.20


8



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Forward-Looking Statements

Statements made in this Form 10-Q, other than those concerning historical
information, or, in future filings by Rainbow Rentals, Inc. with the Securities
and Exchange Commission (SEC), in the Companys press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, constitute forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, and are
made pursuant to the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements use such words as may, will, should, expects, plans,
anticipates, estimates, believes, thinks, continues, indicates,
outlook, looks, goals, initiatives, projects, or variations thereof.
Forward-looking statements are based on managements current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date made. These statements are likely to address the Companys growth
strategy, future financial performance (including sales and earnings),
strategic initiatives, marketing and expansion plans and the impact of
operating initiatives. Forward-looking statements are subject to a number of
risks, uncertainties and other factors, many of which are outside the control
of the Company that could cause the Companys actual results to differ
materially from those expressed or implied in such statements. These risks and
uncertainties include the following: risks associated with general economic
conditions; failure to adequately execute plans and unforeseen circumstances
beyond the Companys control in connection with development, implementation and
execution of new business processes, procedures and programs; greater than
expected expenses associated with the Companys activities; the effects of new
accounting standards; and other risks and uncertainties described in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002, and
in other reports and exhibits to reports filed with the SEC. You are strongly
urged to review such filings for a more detailed discussion of such risks and
uncertainties. The Companys SEC filings are available, at no charge, at
www.sec.gov and through the Companys web site at www.rainbowrentals.com. The
foregoing list of important factors is not exclusive. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

Item 2: Managements Discussion and Analysis of Financial Condition and
Results of Operations

General

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, which generally occur over a period ranging from 12
to 30 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.

New Store Openings

The Companys primary method of growth is through the opening of new store
locations. New stores have a maturation period of approximately three years
and generally are dilutive to earnings during the first year of operation as
they build a customer base and develop a recurring revenue stream. The timing
and performance of new store openings and the number of stores in various
stages of the three-year maturation process will have an affect on quarterly
comparisons. During the first nine months of 2003, the Company opened six
stores (including two in the current quarter) and closed three stores, which
were consolidated into existing Rainbow locations. There are no additional
store openings planned for the remainder of 2003.

9



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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.

(unaudited)
    
    (unaudited)For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002RevenuesRental revenue
    
    
    94.4
    %
    
    
    94.1
    %
    
    
    94.2
    %
    
    
    93.7
    %Fees
    
    
    2.7
    
    
    
    2.9
    
    
    
    2.6
    
    
    
    2.8Merchandise sales
    
    
    2.9
    
    
    
    3.0
    
    
    
    3.2
    
    
    
    3.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expensesMerchandise costs
    
    
    32.8
    
    
    
    34.3
    
    
    
    32.6
    
    
    
    34.5Store expensesSalaries and related
    
    
    26.2
    
    
    
    24.9
    
    
    
    25.7
    
    
    
    24.1Occupancy
    
    
    9.8
    
    
    
    10.4
    
    
    
    9.7
    
    
    
    9.6Advertising
    
    
    5.2
    
    
    
    5.4
    
    
    
    6.2
    
    
    
    6.2Other expenses
    
    
    15.2
    
    
    
    13.6
    
    
    
    14.3
    
    
    
    13.6Total store expenses
    
    
    56.4
    
    
    
    54.3
    
    
    
    55.9
    
    
    
    53.5Total merchandise costs and store expenses
    
    
    89.2
    
    
    
    88.6
    
    
    
    88.5
    
    
    
    88.0General and administrative expenses
    
    
    8.4
    
    
    
    8.1
    
    
    
    8.5
    
    
    
    7.8Amortization of intangible assets
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Total operating expenses
    
    
    97.8
    
    
    
    96.9
    
    
    
    97.2
    
    
    
    96.0Operating income
    
    
    2.2
    
    
    
    3.1
    
    
    
    2.8
    
    
    
    4.0Interest expense
    
    
    0.5
    
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.7Other expense, net
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Income from continuing operations,
before income taxes
    
    
    1.5
    
    
    
    2.3
    
    
    
    2.0
    
    
    
    3.1Income tax expense
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.8
    
    
    
    1.2Income from continuing operations
    
    
    0.9
    
    
    
    1.5
    
    
    
    1.2
    
    
    
    1.9Loss on discontinued operations, net of tax
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Net income
    
    
    0.9
    %
    
    
    1.4
    %
    
    
    1.2
    %
    
    
    1.8
    %


Comparison of Three Months Ended September 30, 2003 and 2002

Total revenues from continuing operations increased $1.10 million, or
4.5%, to $25.44 million for the three months ended September 30, 2003, compared
to $24.34 million for the comparable 2002 period. Revenue from comparable
stores, or stores in operation the entire three month periods ended September
30, 2003 and 2002, increased $257,000, or 1.1%. The increase in comparable
store revenue was primarily affected by the five stores opened during the first
half of 2002 as these stores continued build their customer base. Comparable
store revenue at stores opened prior to 2002 remained flat. The Company
experienced an increase in average rental rates, primarily due to changes in
product mix, which was partially offset by a decline in units on rent, namely
air conditioners and discontinued accessory items. Revenue from the 11 stores
opened after July 1, 2002 accounted for the remaining increase in revenue from
continuing operations.

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Merchandise costs from continuing operations for the three months ended
September 30, 2003 were flat at approximately $8.35 million compared to the
prior year period; however, as a percentage of revenue, costs declined to 32.8%
from 34.3% for the three months ended September 30, 2003 and 2002,
respectively. The decrease was primarily the result of increased rental rates,
lower costs of new merchandise and changes in product mix.

Store expenses from continuing operations increased $1.13 million, or
8.6%, to $14.35 million for the three months ended September 30, 2003 compared
to $13.22 million for the three months ended September 30, 2002. Store
expenses associated with stores opened after July 1, 2002 (non-comparable
stores) accounted for nearly 64%, or $721,000 of the increase. Comparable
store salaries and related expenses increased $276,000, primarily due to
increased wages as a result of additional store staffing and higher pay rates.
Comparable other store expenses increased $416,000, which was attributable to
increased inventory parts and repairs, and to a lesser extent, an increase in
insurance expense due to higher premiums and increased vehicle claims.
Comparable occupancy expense declined $219,000 due mainly to a lease buy-out
and asset write-offs recorded during the third quarter of 2002 associated with
the consolidation of a store. Comparable advertising expenses declined $62,000
due mainly to managements decision during the second quarter of 2003 to
utilize advertising spending that was earmarked for the third quarter of 2003.
Store expenses from continuing operations totaled 56.4% and 54.3% of total
revenue from continuing operations for the three months ended September 30,
2003 and 2002, respectively. Comparable store expenses as a percentage of
comparable store revenue totaled 54.1% and 53.0% for the three months ended
September 30, 2003 and 2002, respectively.

General and administrative expenses increased $176,000, or 9.0% to $2.14
million for the three months ended September 30, 2003 compared to $1.96 million
for the three months ended September 30, 2002. The increase in general and
administrative expenses was primarily attributable to increased legal fees,
corporate payroll and consulting fees totaling $45,000, $46,000 and $56,000,
respectively. General and administrative expenses totaled 8.4% and 8.1% of
total revenues from continuing operations for the three months ended September
30, 2003 and 2002, respectively.

Income tax expense from continuing operations decreased $65,000 to
$142,000 for the three months ended September 30, 2003, from $207,000 for the
three months ended September 30, 2002, and was attributable to a decline in
income from continuing operations.

Comparison of Nine Months Ended September 30, 2003 and 2002

Total revenues from continuing operations increased $2.81 million, or
3.8%, to $76.96 million for the nine months ended September 30, 2003, compared
to $74.15 million for the nine months ended September 30, 2002. Revenue
increased $3.38 million from the 17 store openings since 2002, or the
non-comparable stores. This was partially offset by a $589,000, or 0.8%,
decline in revenue from comparable stores, or stores in operation the entire
nine-month periods ended September 30, 2003 and 2002. The decline in
comparable store revenue was mainly attributable to a decline in units on rent,
which was largely offset by an increase in average rental rates, partly
attributable to changes in product mix.

Merchandise costs from continuing operations decreased $461,000, or 1.8%,
to $25.10 million for the nine months ended September 30, 2003 compared to
$25.56 million for the nine months ended September 30, 2002. As a percentage
of revenue, merchandise costs declined to 32.6% from 34.5% for the nine months
ended September 30, 2003 and 2002, respectively. The decrease was primarily
the result of increased rental rates and lower costs of new merchandise.

Store expenses from continuing operations increased $3.36 million, or
8.5%, to $43.02 million for the nine months ended September 30, 2003 compared
to $39.66 million for the nine months ended September 30, 2002. Store expenses
associated with stores opened after January 1, 2002 (non-comparable stores)
accounted for $2.45 million of the increase. Store expenses were also affected
by an increase in comparable store salaries and related expenses totaling
$806,000, which was due to increased staffing, wages and higher workers
compensation premium costs. Comparable other store expenses increased
$374,000, which was attributable to increased inventory parts and repairs, and
to a lesser extent, an increase in insurance expense due to higher premiums and
increased vehicle claims. A $170,000 decline in comparable occupancy expense
partially offset the aforementioned increases and was mainly attributable to
higher store closing costs during 2002, namely lease buy-outs and asset
write-offs. Comparable advertising expenses modestly declined during 2003
compared to the previous year. Store expense from continuing operations
totaled 55.9% and 53.5% of total revenue from continuing operations for the
nine months ended September 30, 2003 and 2002, respectively. Comparable store
expenses as a percentage of comparable store revenue totaled 54.0% and 52.2%,
respectively, for the nine months ended September 30, 2003 and 2002.

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General and administrative expenses increased $767,000, or 13.2%, to $6.56
million for the nine months ended September 30, 2003 compared to $5.79 million
for the nine months ended September 30, 2002. The increase in general and
administrative expenses was partially attributable to $329,000 in severance
costs associated with the departure of the Companys Chief Operating Officer in
May 2003, as well as costs related to reorganizing and training the Companys
regional and store managers, higher corporate payroll due mainly to additional
personnel, and an increase in consulting fees. General and administrative
expenses totaled 8.5% and 7.8% of total revenues from continuing operations for
the nine months ended September 30, 2003 and 2002, respectively.

Interest expense decreased $53,000 comparing the nine months ended
September 30, 2003 and 2002 due to lower average outstanding debt.

Income tax expense from continuing operations decreased $319,000 to
$605,000 for the nine months ended September 30, 2003, from $924,000 for the
nine months ended September 30, 2002, and was attributable to a decline in
income from continuing operations. The Companys effective tax rate was 39.5%
for both the nine months ended September 30, 2003 and 2002.

Liquidity and Capital Resources

The Companys primary requirements for capital consist of purchasing
additional and/or replacement rental-purchase merchandise, expenditures related
to new store openings, acquisitions and working capital requirements for new
and existing stores. The primary sources of liquidity and capital are from
operations and borrowings.

For the nine months ended September 30, 2003 and 2002, cash provided by
operating activities totaled $5.28 million and $6.20 million, respectively.
The decrease in cash provided by operations was primarily affected by increased
purchases of rental purchase merchandise and a decline in income from
operations, which was partially offset by changes in accounts payable (due
mainly to the timing of inventory purchases) and federal tax refunds. Cash
used in investing activities totaled $2.06 million and $2.22 million for the
nine months ended September 30, 2003 and 2002, respectively. The decrease in
cash used in investing activities was primarily due to acquisitions of customer
accounts in 2002, which was partially offset by an increase in property and
equipment purchases in 2003. Cash used in financing activities totaled $4.05
million and $4.24 million for the nine months ended September 30, 2003 and
2002, respectively. This change was mainly attributable to loan fees paid
during 2002, partially offset by higher reductions in debt during 2003 compared
to 2002.

In January 2002, the Company refinanced its debt with a $25.0 million
revolving loan agreement (the Credit Facility) that matures in January 2005.
A borrowing base ($12.4 million at September 30, 2003) measured against rental
purchase merchandise limits borrowings under the Credit Facility to 32% of
rental purchase inventory, less outstanding letters of credit, which totaled
$2.9 million at September 30, 2003. Excess availability was approximately $6.0
million at September 30, 2003. The agreement requires the Company to meet
certain quarterly financial covenants and ratios including maximum leverage,
minimum interest coverage, minimum net worth, fixed charge coverage and rental
merchandise usage ratios. In addition, the Company must meet requirements
regarding monthly, quarterly and annual financial reporting. The agreement
also contains non-financial covenants that limit actions of the Company with
respect to additional indebtedness, certain loans and investments, payment of
dividends, acquisitions, mergers and consolidations, dispositions of assets or
subsidiaries, issuance of capital stock, capital expenditures and leases.

The Company opened six stores (two stores each in three new markets)
during 2003. The Company does not plan to open additional stores during the
remainder of 2003. The Company 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, 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 to the
Company.

New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51.This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The application of this
Interpretation does not presently have an effect on the Companys financial
position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities,which amends and clarifies accounting for derivative
instruments and hedging

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##### 



activities under SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities.SFAS No. 149 provides guidance relating to decisions made
(a) as part of the Derivatives Implementation Group process, (b) in connection
with other FASB projects dealing with financial instruments and (c) regarding
implementation issues raised in the application of the definition of a
derivative and the characteristics of a derivative that contains financing
components. SFAS No. 149 is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The application
of this Statement does not have an effect on the Companys financial position
or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments and Characteristics of both Liabilities and Equity,which
requires freestanding financial instruments such as mandatorily redeemable
shares, forward purchase contracts, written put options to be reported as
liabilities by their issuers as well as related new disclosure requirements.
The provisions of SFAS No. 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The application
of this Statement does not presently have an effect on the Companys financial
position or results of operations.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information about market risk from that
provided in the 2002 Annual Report on Form 10-K.

Item 4: Disclosure Controls and Procedures

The Company evaluated the design and operation of its disclosure controls
and procedures to determine whether they are effective in ensuring that the
disclosure of required information is made timely in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including the Companys principal executive officer and principal
financial officer for the quarter ended September 30, 2003. The principal
executive officer and principal financial officer have concluded, based on
their review, that the Companys disclosure controls and procedures, as defined
at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that
information required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. No significant changes were made to the Companys internal controls over
financial reporting during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting.

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PART II  OTHER INFORMATION
RAINBOW RENTALS, INC.
SEPTEMBER 30, 2003

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 31.1  CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

Exhibit 31.2  CFO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

Exhibit 32  CEO and CFO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports of Form 8-K

Report on Form 8-K dated July 30, 2003 to report the results of operations
for the three and six months ended June 30, 2003.

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SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



| | RAINBOW RENTALS, INC.
(Registrant)
| | ----------------------------------



| | /s/ WAYLAND J. RUSSELL
Wayland J. Russell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003
| | -------------------------------------------------------------------------------------------------------------------------------------



| | /s/ MICHAEL A. PECCHIA
Michael A. Pecchia,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 13, 2003
| | ---------------------------------------------------------------------------------------------------------------------------------------

15