<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
REGISTRATION NO. 333-48769
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RAINBOW RENTALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OHIO 7359 34-1512520
(PRIMARY STANDARD
(STATE OR OTHER JURISDICTION OF INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE
INCORPORATION OR ORGANIZATION) NUMBER) IDENTIFICATION NUMBER)
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3711 Starr Centre Drive
Canfield, Ohio 44406
(330) 533-5363
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WAYLAND J. RUSSELL
Chairman and Chief Executive Officer
3711 Starr Centre Drive
Canfield, Ohio 44406
(330) 533-5363
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
Copies to:
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MARC H. MORGENSTERN, ESQ. GLENN W. STURM, ESQ.
Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A. Nelson Mullins Riley & Scarborough, L.L.P.
1301 East Ninth Street, Suite 2600 999 Peachtree Street, N.E., Suite 1400
Cleveland, Ohio 44114 Atlanta, Georgia 30309
(216) 696-3311 (404) 817-6000
Fax:(216) 696-1009 Fax:(404) 817-6050
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement has become effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1998
PROSPECTUS
2,250,000 SHARES
RAINBOW RENTAL LOGO
COMMON STOCK
------------------------
All of the 2,250,000 shares of Common Stock, without par value (the "Common
Stock"), offered hereby (the "Offering") are being sold by Rainbow Rentals, Inc.
(the "Company").
Prior to the Offering, there has been no public market for the shares of
Common Stock. It is currently estimated that the initial public offering price
of the Common Stock will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. The Company has filed an
application for listing of the shares of Common Stock on the Nasdaq National
Market under the symbol "RBOW."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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============================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
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- ------------------------------------------------------------------------------------------------------------
Per Share...................................... $ $ $
- ------------------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
============================================================================================================
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(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting Offering expenses payable by the Company estimated to be
$600,000.
(3) The shareholders of the Company (the "Selling Shareholders") have granted
the Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 337,500 additional shares of Common Stock,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ , and $ , respectively, and the
Proceeds to Selling Shareholders will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if received and accepted by them,
subject to their right to reject orders, in whole or in part, and to certain
other conditions. It is expected that delivery of the certificates representing
such shares will be made against payment therefor at the offices of The
Robinson-Humphrey Company, Atlanta, Georgia, on or about , 1998.
THE ROBINSON-HUMPHREY COMPANY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
SUNTRUST EQUITABLE SECURITIES
, 1998
<PAGE> 3
[STORE LOCATIONS AND PHOTOS]
[PICTURES (INSIDE FRONT & BACK COVER)
MAP OF EASTERN U.S.
EXTERIOR OF STORE
INTERIOR OF STORE
DELIVERY TRUCK -- SHOWING DELIVERY]
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITERS IN THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Company's Consolidated Financial Statements, including the related notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise noted, the
information contained in this Prospectus assumes that the Underwriters'
over-allotment option has not been exercised.
All industry data set forth in this Prospectus is based on published
industry sources, as prepared by The Association of Progressive Rental
Organizations ("APRO"). The APRO 1997 Rental-Purchase Industry Survey is based
on numbers reported to APRO through December 31, 1996 by its members, and
represents the latest period for which such data are available.
THE COMPANY
The Company operates 66 rental-purchase stores in eight states:
Connecticut, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island
and Tennessee. The Company was founded in 1986 by four individuals, including
the three current shareholders-officers of the Company, who average over 18
years of experience in the rental-purchase industry. 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. The Company believes that its
rental-purchase program is an attractive alternative to a credit or installment
sale for persons who have difficulty obtaining credit or have a temporary,
short-term need for goods. Based on APRO estimates, the Company believes its
stores are among the industry's leaders in average monthly rental rate ("AMRR")
on its agreements, number of rental-purchase agreements per store and collection
performance. In addition, the Company believes its level of customer referrals
and repeat business are among the highest in the industry.
APRO estimated that gross revenue in the rental-purchase industry was
approximately $4.1 billion, and that there were over 2.9 million customers in
1996. The rental-purchase industry is highly fragmented. APRO estimated that
there were approximately 7,500 rental-purchase stores at the end of 1996, with
the majority of companies owning fewer than 20 stores. The rental-purchase
industry is experiencing increasing consolidation due to a combination of
increased competition from larger regional and national chains and decreased
availability of traditional financing to smaller rental-purchase companies. The
Company believes that its significant store base and regional presence make it
well positioned in the current industry environment.
The Company's operating strategy is to deliver a high degree of customer
satisfaction by providing an appealing store environment; quality, name brand,
durable merchandise; personal customer service; experienced, well-trained
associates; decentralized management; and sophisticated management information
systems. The Company believes its high levels of customer satisfaction allow the
Company to maintain a high AMRR on its agreements, a large number of
rental-purchase agreements per store and a significant level of customer
referrals and repeat business. By delivering high volume and superior operating
performance in each store, the Company is able to achieve increased
profitability by spreading fixed costs over higher revenues. In 1997, the
Company's average revenue in those stores opened three full years or more ("core
stores") was approximately $1.0 million. The Company attempts to differentiate
itself from its competitors and increase customer loyalty by not requiring
common industry fees, such as application, delivery, damage-waiver and insurance
fees. As a result, its customers are able to spend more of their payments on the
merchandise.
The Company's growth strategy is to accelerate its new store opening
program, increase comparable store revenue and profitability and pursue
opportunistic acquisitions. Beginning with six stores in 1986, the Company
opened 56 additional stores through April 30, 1998. The Company has increased
revenues from $0.6 million in 1986 to $55.3 million in 1997. The Company
believes the rental-purchase market is significantly under-penetrated and
provides substantial new store expansion potential, particularly within the
Midwest, Mid-Atlantic and New England markets. Because most of its public
competitors have grown primarily
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through acquisitions, management believes that the state of the industry
presents an opportunity for the Company to capitalize on its demonstrated
ability to open new stores. The Company has developed a consistent, replicable
model for opening new stores and management believes its strategy of opening new
stores provides controllable and predictable growth in revenue and operating
income. The Company expects to increase comparable store revenue and
profitability by increasing both the number of rental-purchase agreements per
store and the monthly rental rates of such agreements. In addition, the Company
strives to enhance profitability at its existing stores by empowering store
associates, leveraging fixed costs and marketing innovative, high margin product
offerings, such as computers. The Company intends to examine both fill-in
acquisitions (acquisitions in markets already served by the Company) and new
market acquisitions (acquisitions in markets not then served by the Company) on
an opportunistic basis.
The Company's principal executive offices are located at 3711 Starr Centre
Drive, Canfield, Ohio 44406, and its telephone number is (330)533-5363.
THE OFFERING
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Common Stock Offered....................................... 2,250,000 Shares
Common Stock to be outstanding after the Offering(1)....... 5,925,735 Shares
Use of Proceeds............................................ To repay outstanding indebtedness and for general
corporate purposes.
Proposed Nasdaq National Market Symbol..................... RBOW
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(1) Excludes 400,000 shares of Common Stock reserved for issuance under the
Company's Stock Option Plan, including 305,000 shares issuable pursuant to
options outstanding at an exercise price equal to the initial public
offering price per share. See "Management -- Stock Option Plan."
RISK FACTORS
An investment in the shares of Common Stock involves significant risks that
a potential investor should carefully consider. See "Risk Factors" beginning on
page 7 for certain information that should be considered by prospective
purchasers of the Common Stock offered hereby.
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SUMMARY FINANCIAL AND OPERATING DATA
The summary historical financial and operating data set forth below should
be read in conjunction with the Selected Financial Data, Management's Discussion
and Analysis of Financial Condition and Results of Operations, and the
Consolidated Financial Statements and related notes thereto included elsewhere
herein. The as adjusted financial data give effect to the consummation of the
Offering and the application of the net proceeds therefrom. Effective as of the
close of business on December 31, 1994, the Company changed its method of
depreciating rental-purchase merchandise from the straight-line basis to the
units of activity method (see "Selected Financial Data," Note 3). Therefore, the
financial information presented for 1993 and 1994 reflects the Company's use of
the straight-line basis and has not been restated because such restatement was
deemed impractical. As a result, certain financial information for 1993 and 1994
may not be comparable to later periods.
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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STATEMENT OF INCOME DATA:
Revenues:
Rental revenue..................... $ 29,909 $ 33,700 $ 39,721 $ 43,815 $ 52,153 $ 12,128 14,168
Fees............................... 830 957 1,151 1,284 1,588 331 432
Merchandise sales.................. 1,357 1,626 1,687 1,461 1,587 500 536
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................... 32,096 36,283 42,559 46,560 55,328 12,959 15,136
Operating expenses:
Merchandise costs:
Depreciation and other
merchandise costs................ 11,365 13,156 15,428 16,351 19,145 4,432 5,065
Amortization of acquired
rental-purchase agreements....... -- -- 807 652 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total merchandise costs.......... 11,365 13,156 16,235 17,003 19,145 4,432 5,065
Store operating expenses:
Salaries and related expenses...... 7,010 7,020 9,136 9,655 11,532 2,627 3,301
Occupancy expenses................. 2,068 2,567 3,092 3,416 4,068 946 1,122
Advertising expenses............... 1,907 2,280 2,576 2,837 3,283 764 820
Other store expenses............... 3,353 3,980 4,746 5,437 6,554 1,470 1,772
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total store operating expenses... 14,338 15,847 19,550 21,345 25,437 5,807 7,015
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total merchandise costs and
store operating expenses....... 25,703 29,003 35,785 38,348 44,582 10,239 12,080
General and administrative
expenses........................... 2,170 2,662 3,216 3,934 3,946 1,045 1,196
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses......... 27,873 31,665 39,001 42,282 48,528 11,284 13,276
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income................. 4,223 4,618 3,558 4,278 6,800 1,675 1,860
Interest expense..................... 526 726 898 834 1,822 224 470
Other expense (income), net.......... 283 52 183 453 329 (30) 33
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes......... 3,414 3,840 2,477 2,991 4,649 1,481 1,357
Income taxes......................... 1,445 1,642 1,253 972 1,968 630 577
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 1,969 $ 2,198 $ 1,224 $ 2,019 $ 2,681 $ 851 $ 780
========== ========== ========== ========== ========== ========== ==========
Basic net income per common share.... $ .31 $ .34 $ .19 $ .32 $ .59 $ .13 $ .21
========== ========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding........................ 6,392,610 6,392,610 6,392,610 6,392,610 4,509,406 6,392,610 3,675,735
OPERATING DATA:
Stores open at end of period....... 42 46 51 55 62 57 64
Comparable store revenue
growth (1)....................... 15.0% 6.7% 8.0% 2.0% 9.9% 10.2% 8.0%
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AS OF MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
(UNAUDITED)
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BALANCE SHEET DATA:
Rental-purchase merchandise, net.......................... $ 23,958 $ 23,958
Total assets.............................................. 31,386 32,595
Total debt................................................ 21,445 237
Total liabilities......................................... 27,553 6,345
Shareholders' equity...................................... 3,833 26,250
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(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) Adjusted to give effect to the application of estimated net proceeds to be
received by the Company from the sale of shares of Common Stock offered
hereby.
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RISK FACTORS
In addition to other information in this Prospectus, prospective purchasers
of the Common Stock offered hereby should consider carefully the following
factors before deciding to invest in the Common Stock. To the extent this
Prospectus contains certain forward-looking statements, actual results could
differ materially from those projected in the forward-looking statements as a
result of any number of factors, including the risk factors set forth below and
elsewhere in this Prospectus.
GOVERNMENT REGULATION
There are currently 45 states that have enacted laws specifically
regulating rental-purchase transactions, including all of the states in which
the Company operates. These laws generally require certain contractual and
advertising disclosures and also provide varying levels of substantive consumer
protection, such as requiring a grace period for late fees and contract
reinstatement rights in the event a rental-purchase agreement is terminated. The
rental-purchase laws of some states, including Michigan, New York, Ohio and
Pennsylvania, limit the total dollar amount of rentals that may be charged over
the life of a rental-purchase agreement. If the Company acquires or opens new
stores in states in which it does not currently operate, the Company will become
subject to the rental-purchase laws of such states, if any. Furthermore, there
can be no assurance that new or revised rental-purchase laws will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
No federal legislation has been enacted regulating or otherwise governing
rental-purchase transactions. From time to time, legislation has been introduced
in Congress that would regulate rental-purchase transactions, including
legislation that would subject rental-purchase transactions to implied interest
rate, finance charge and fee limitations, as well as the Federal Truth in
Lending Act. During 1997, two bills were introduced in Congress that would
regulate the rental-purchase industry. One of the bills is supported by APRO,
and the Company does not believe that this bill, if enacted, would have a
material adverse effect upon the Company's business, financial condition and
results of operations. The other bill would regulate rental-purchase
transactions as credit sales and would require the Company to reposition itself
as a rent-to-rent business. Any such federal legislation, if enacted, could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."
EXPANSION RISKS
The inability of the Company to execute its expansion plans, make new
stores profitable or improve the profitability of acquired stores could have a
material adverse effect on the Company's business, financial condition and
results of operations. Accomplishing the Company's expansion plans will depend
on a number of factors, the most important of which is the Company's ability to
hire, train and retain managers and other personnel who satisfy the Company's
standards for performance, professionalism and service. Other risk factors
associated with the opening of new stores, some of which are beyond the control
of the Company, include: locating and obtaining acceptable sites, securing
favorable financing, obtaining necessary zoning or other regulatory approvals,
avoiding unexpected delays in opening due to construction delays or the failure
of vendors to deliver equipment, fixtures or rental-purchase merchandise,
incurring significant start-up costs before the viability of the stores is
established and integrating new stores into the Company's systems and
operations. In general, new stores operate at a loss for up to 15 months after
opening. There can be no assurance that future new stores will obtain
profitability in the expected time frame, if at all. In addition, the Company's
growth strategy will place significant demands on the Company's management. With
respect to acquisitions, there can be no assurance that the Company will be able
to locate or acquire suitable acquisition candidates, or that any operations,
once acquired, can be effectively and profitably integrated into the Company's
existing operations. Additionally, acquisitions may negatively impact the
Company's operating results, particularly during the period immediately
following an acquisition. The Company may acquire operations that are
unprofitable or have inconsistent profitability. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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COMPETITION
The rental-purchase industry is extremely competitive. The Company competes
with other rental-purchase businesses, as well as rental stores that do not
offer their customers a purchase option. Competition is based primarily on
rental rates and terms, product selection and availability and customer service.
With respect to customers that are able to purchase a product for cash or on
credit, the Company also competes with department stores, discount stores and
other retail outlets. Several competitors in the rental-purchase business are
national or regional in scope. The Company has generally strived to open new
stores in markets with a lower concentration of rental-purchase stores. As the
Company's competitors expand geographically into the Company's existing markets,
the Company's competition in those markets may increase and there will be fewer
relatively underserved areas available for penetration by the Company. Many of
the Company's competitors have financial and operating resources exceeding those
of the Company. See "Business -- Competition."
RISK ASSOCIATED WITH THE RENTAL-PURCHASE BUSINESS
The operating success of the Company, like other participants in the
rental-purchase industry, depends upon a number of factors. These factors
include the ability to maintain and increase the number of units on rent, the
collection of rental payments when due and the control of inventory and other
costs. In addition, the failure of the Company's management information systems
to monitor the stores, the failure of the Company's internal audit personnel to
detect adequately any problems with a store, or the failure of store managers to
follow operating guidelines, could have a material adverse effect on the
Company's business, financial condition or results of operations. The
rental-purchase industry is also affected by changes in consumer confidence,
preferences and attitudes, as well as general economic factors. Failure to
respond to changing market trends could adversely affect the Company's business,
financial condition or results of operations. Additionally, a significant
portion of the Company's revenues are derived from the rental of computers and
peripherals. The failure of the Company to react to changes in consumer
preferences and technological advancements could adversely affect the value of
the Company's inventory and the Company's business, financial condition or
results of operations.
DEPENDENCE ON KEY INDIVIDUALS
The continued growth and success of the Company's business is highly
dependent upon the continued services of certain of its executive officers:
Wayland J. Russell, Lawrence S. Hendricks and Michael J. Viveiros. The loss of
the services of one or more of these individuals could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company carries key person insurance policies on the lives of each of these
individuals. The Company does not have employment contracts or noncompetition
agreements with any of its executive officers or employees.
VOTING CONTROL BY MANAGEMENT
Upon completion of the Offering, the three founding executive officers of
the Company will hold approximately 62.0% of the outstanding shares of Common
Stock (approximately 56.3% if the Underwriters' over-allotment option is
exercised in full). As a result, these shareholders, voting together, will
continue to control the outcome of matters requiring a shareholder vote,
including electing directors, adopting or amending provisions of the Company's
Articles of Incorporation or Code of Regulations and approving mergers or
similar transactions such as the sale of all or substantially all of the
Company's assets. Purchasers in this Offering will become minority shareholders
and will be unable to control the management or business policies of the
Company. See "Management" and "Principal and Selling Shareholders."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for shares of Common
Stock. The Company has filed an application for listing of the shares of Common
Stock on the Nasdaq National Market; however, there can be no assurance that an
active market will develop or be sustained following the Offering. The initial
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<PAGE> 10
public offering price of the Common Stock offered hereby will be determined
through negotiation between the Company and the Representatives and may not
reflect the market price of the Common Stock after the Offering. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price of the Common Stock. Market prices
for the Common Stock following this Offering will be influenced by a number of
factors, including the Company's operating results and other factors affecting
the Company specifically and the rental-purchase industry and the stock market
generally, as well as the depth and liquidity of the market for the Common
Stock.
The Representatives have advised the Company that they intend to make a
market for the Common Stock, although they are under no obligation to do so.
Were such market making to be discontinued, investors would encounter difficulty
effecting purchase or sale transactions in the absence of alternative market
makers.
VOLATILITY OF SHARE PRICE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company believes that various factors such as general economic
conditions and changes or volatility in the financial markets, changing market
conditions in the rental-purchase industry and quarterly or annual variations in
the financial results of other public companies that are part of the
rental-purchase industry, all of which may be unrelated to the Company's
performance, could cause the market price of the Common Stock to fluctuate
substantially. Additionally, quarterly revenues and operating income are
difficult to forecast. The Company's expense levels are based, in part, on its
expectations as to future revenues and timing of new store openings. If revenue
levels are below expectations, the Company may be unable or unwilling to reduce
expenses proportionately and operating results would likely be adversely
affected. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will differ from the expectations of public market analysts and
investors. In such event, the market price of the Common Stock would likely be
materially adversely affected.
LITIGATION
Due to the consumer-oriented nature of the rental-purchase industry and the
application of certain laws and regulations, industry participants may be named
as defendants in litigation alleging violations of state laws and regulations
and consumer law torts, including fraud. Many of these actions involve alleged
violations of consumer protection laws. As of the date of this Prospectus, the
Company is unaware of such litigation in those states in which the Company
operates. While the Company currently has no material litigation pending, in the
event a significant judgment is rendered in the future against the Company or
others within the rental-purchase industry in connection with any such
litigation, such judgment could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"Business -- Regulation" and "Business -- Legal Proceedings."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,925,735 shares of
Common Stock outstanding, including 3,675,735 shares of Common Stock held by
executive officers. All of the shares of Common Stock held by the executive
officers are subject to lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this Prospectus without the prior written
consent of The Robinson-Humphrey Company. In addition, shares of Common Stock
issuable upon exercise of stock options granted under the Company's stock option
plan will be available for future sale in the public market, but no such shares
will become available for sale until after the first anniversary of the date of
this Offering. Sales of such shares in the public market, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock or impair the Company's ability to raise additional capital in the future
through the sale of equity securities. The 3,675,735 shares of Common Stock held
by the executive officers are deemed "restricted" securities within the meaning
of Rule 144 under the Securities Act and may not be sold in the absence of
registration under the
9
<PAGE> 11
Securities Act unless an exemption from registration is available, including the
exemptions contained in Rule 144. See "Management -- Stock Option Plan," "Shares
Eligible for Future Sale" and "Underwriting."
PREFERRED SHARES; STATE ANTI-TAKEOVER LAWS
The Board of Directors of the Company is authorized to issue, from time to
time, without any further action on the part of the Company's shareholders, up
to 2,000,000 preferred shares in one or more series, with such relative rights,
powers, preferences and conversion rights as are determined by the Board of
Directors at the time of issuance. The issuance of preferred shares could
adversely affect the holders of Common Stock. In addition, certain statutory
provisions of Ohio law could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Description of Capital
Stock -- Preferred Shares and Certain Provisions of Ohio Law."
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value per share of Common Stock of
approximately $6.89 per share. See "Dilution."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its shares of
Common Stock in the foreseeable future. See "Dividend Policy."
10
<PAGE> 12
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including
statements with respect to the Company's operations, industry, financial
condition and liquidity. These forward-looking statements are subject to risks
and uncertainties, many of which are beyond the Company's control, which could
cause actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors," including, among other things (i) changes in the
government's regulation of the industry and (ii) the ability of the Company to
execute effectively its expansion program. Prospective investors are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. 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.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock being offered by the
Company are estimated to be approximately $22.4 million assuming an initial
public offering price of $11.00 per share and after deducting the estimated
underwriting discounts and offering expenses payable by the Company. The Company
intends to use approximately $10.9 million to retire indebtedness (including
accrued interest) due a former shareholder-officer of the Company and his
affiliates (the "Redemption Debt") incurred in connection with the April 1997
redemption of shares owned by them (the "Redemption Transaction"). The
Redemption Transaction consisted of the repurchase of 2,716,875 shares for $11.1
million and $2.3 million in severance, non-competition and consulting payments,
of which $10.5 million was evidenced by the Redemption Debt. The Redemption Debt
bears interest at 8.0% and matures on various dates ranging from December 1,
1999 to December 1, 2012. See Notes 4 and 11 of the Consolidated Financial
Statements. The balance of the net proceeds will be used to repay borrowings
under the Company's existing revolving credit facility with Bank of America
Illinois (the "Credit Facility"), which had an outstanding balance of $10.3
million as of March 31, 1998, and for general corporate purposes. The Credit
Facility bears interest at the rate of prime plus 0.25% (presently 8.75%) and
borrowings under the Credit Facility are due on May 21, 2000. The Company
expects to enter into an amended $10.0 million Credit Facility, conditioned on
completion of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the actual capitalization of the Company (i)
as of March 31, 1998, and (ii) as adjusted to reflect the sale of the 2,250,000
shares of Common Stock by the Company at an assumed initial public offering
price of $11.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-term debt:
Credit Facility........................................... $ 10,267 $ --
Capitalized lease obligations............................. 237 237
Redemption Debt (including accrued interest of $453)...... 10,941(1) --
-------- -------
Total long-term debt................................... 21,445 237
-------- -------
Shareholders' equity:
Serial preferred stock, no par value, 2,000,000 shares
authorized, none issued................................ -- --
Common Stock, no par value, 10,000,000 shares authorized,
3,675,735 issued and outstanding at March 31, 1998 and
5,925,735 issued and outstanding, as adjusted.......... 60 13,288
-------- -------
Treasury stock, 2,716,875 shares of Common Stock at March
31, 1998 and 466,875, as adjusted, at cost............. (11,095)(1) (1,906)
-------- -------
Retained earnings......................................... 14,868 14,868
-------- -------
Total shareholders' equity............................. 3,833 26,250
-------- -------
Total capitalization................................. $ 25,278 $26,487
======== =======
</TABLE>
- ---------------
(1) Reflects the Redemption Transaction. See Note 4 of the Company's
Consolidated Financial Statements.
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."
12
<PAGE> 14
DILUTION
As of March 31, 1998, the net tangible book value of the Company was
approximately $2.0 million, or $0.54 per share. "Net tangible book value per
share" represents the total tangible assets of the Company, less all
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 2,250,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per share
and the application of the net proceeds as set forth under "Use of Proceeds,"
the pro forma net tangible book value of the Company as of March 31, 1998 would
be $24.4 million or $4.11 per share. This represents an immediate increase in
net tangible book value per share of $3.57 to current shareholders and an
immediate dilution of $6.89 per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................................... $ 11.00
Net tangible book value per share before the Offering....................................... $ 0.54
Increase in pro forma net tangible book value attributable to the Offering.................. 3.57
---------
Pro forma net tangible book value per share after the Offering................................ 4.11
---------
Dilution per share to new investors........................................................... $ 6.89
=========
</TABLE>
13
<PAGE> 15
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, 1997, are derived from the
consolidated financial statements of the Company and subsidiary, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The selected financial data presented below under the
captions "Statement of Income Data" and "Balance Sheet Data" for, and as of the
end of the three months ended March 31, 1998 and 1997 are derived from the
unaudited consolidated financial statements of the Company and subsidiary,
which, in the opinion of the Company, reflect all adjustments necessary for a
fair presentation. The consolidated financial statements as of March 31, 1998
and 1997 and as of December 31, 1996 and 1997, and for the three month period
ended March 31, 1998 and 1997 and each of the years in the three-year period
ended December 31, 1997, and the report thereon, are included elsewhere in this
Prospectus. Results for the three-month period ended March 31, 1998 are not
necessarily indicative of results for the year ending December 31, 1998. The
information presented under the caption "Operating Data" is unaudited. Effective
as of the close of business on December 31, 1994, the Company changed its method
of depreciating rental-purchase merchandise from the straight-line basis to the
units of activity method. Therefore, the financial information presented for
1993 and 1994 reflects the Company's use of the straight-line basis and has not
been restated because such restatement was deemed impractical. As a result,
certain financial information for 1993 and 1994 may not be comparable to later
periods. 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 herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- --------- --------- --------- --------- --------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental revenue................ $ 29,909 $ 33,700 $ 39,721 $ 43,815 $ 52,153 $ 12,128 $ 14,168
Fees.......................... 830 957 1,151 1,284 1,588 331 432
Merchandise sales............. 1,357 1,626 1,687 1,461 1,587 500 536
---------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 32,096 36,283 42,559 46,560 55,328 12,959 15,136
Operating expenses:
Merchandise costs:
Depreciation and other
merchandise costs........... 11,365 13,156 15,428 16,351 19,145 4,432 5,065
Amortization of acquired
rental-purchase
agreements.................. -- -- 807 652 -- -- --
---------- --------- --------- --------- --------- --------- ---------
Total merchandise costs..... 11,365 13,156 16,235 17,003 19,145 4,432 5,065
Store operating expenses:
Salaries and related
expenses.................... 7,010 7,020 9,136 9,655 11,532 2,627 3,301
Occupancy expenses............ 2,068 2,567 3,092 3,416 4,068 946 1,122
Advertising expenses.......... 1,907 2,280 2,576 2,837 3,283 764 820
Other store expenses.......... 3,353 3,980 4,746 5,437 6,554 1,470 1,772
---------- --------- --------- --------- --------- --------- ---------
Total store operating
expenses.................. 14,338 15,847 19,550 21,345 25,437 5,807 7,015
---------- --------- --------- --------- --------- --------- ---------
Total merchandise costs and
store operating
expenses.................. 25,703 29,003 35,785 38,348 44,582 10,239 12,080
General and administrative
expenses...................... 2,170 2,662 3,216 3,934 3,946 1,045 1,196
---------- --------- --------- --------- --------- --------- ---------
Total operating expenses.... 27,873 31,665 39,001 42,282 48,528 11,284 13,276
---------- --------- --------- --------- --------- --------- ---------
Operating income............ 4,223 4,618 3,558 4,278 6,800 1,675 1,860
Interest expense................ 526 726 898 834 1,822 224 470
Other expense (income), net..... 283 52 183 453 329 (30) 33
---------- --------- --------- --------- --------- --------- ---------
Income before income taxes.... 3,414 3,840 2,477 2,991 4,649 1,481 1,357
Income taxes.................... 1,445 1,642 1,253 972 1,968 630 577
---------- --------- --------- --------- --------- --------- ---------
Net income.................... $ 1,969 $ 2,198 $ 1,224 $ 2,019 $ 2,681 $ 851 $ 780
========== ========= ========= ========= ========= ========= =========
Basic net income per common
share....................... $ .31 $ .34 $ .19 $ .32 $ .59 $ .13 $ .21
========== ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding................. 6,392,610 6,392,610 6,392,610 6,392,610 4,509,406 6,392,610 3,675,735
OPERATING DATA:
Stores open at end of
period...................... 42 46 51 55 62 57 64
Comparable store revenue
growth(1)................... 15.0% 6.7% 8.0% 2.0% 9.9% 10.2% 8.0%
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AS OF
------------------------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
---------- --------- --------- --------- --------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental-purchase merchandise,
net......................... $ 10,362 $ 13,378(2) $ 15,676 $ 19,740 $ 23,411 $ 23,958
Total assets.................. 14,573 17,097(2) 20,932 25,401 31,240 31,386
Total debt.................... 6,578 6,843 8,651 9,850 23,844(3) 21,445
Total liabilities............. 10,155 8,873 11,484 13,934 28,187(3) 27,553
Shareholders' equity.......... 4,418 8,224(2) 9,448 11,467 3,053(3) 3,833
</TABLE>
- ---------------
(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 change in the method of depreciating
rental-purchase merchandise from the straight-line basis to the units of
activity method of $1.6 million at December 31, 1994. See Note 1(b) of the
Company's Consolidated Financial Statements.
(3) Includes the effect of the redemption of shares from a prior
shareholder-officer. See Note 4 of the Company's Consolidated Financial
Statements.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto and Selected
Financial Data included elsewhere in this Prospectus.
GENERAL
Primarily through the opening of new stores, the Company has increased its
number of stores from 42 as of December 31, 1993, to 62 as of December 31, 1997.
The Company currently operates 66 rental-purchase stores in eight states,
providing quality, name brand, durable merchandise, including home electronics,
furniture, appliances and computers. Generally, rental-purchase merchandise is
rented to individuals under flexible agreements that allow customers to own the
merchandise after making a specified number of rental payments (ranging from 12
to 24 months). Customers have the option to return the merchandise at any time
without further obligation, and also have the option to purchase the merchandise
at any time during the rental term.
On March 1, 1995, the Company acquired certain assets, including fixed
assets, inventory and customer rental-purchase agreements from an Ohio
competitor, Dial-To-Own ("DTO"). Immediately following the acquisition, three of
the DTO stores were consolidated into existing Company stores and the remaining
seven stores were integrated into the Company over the next 15 months. During
this time period, the Company devoted significant capital and human resources to
the turnaround and integration of these stores including efforts relating to:
store relocations and remodeling; the infusion of quality, name brand, durable
merchandise; the addition of more experienced and better trained associates; and
the implementation of the Company's operational policies and procedures.
During 1996 and 1997, the Company returned to its primary strategy of
opening new stores and opened four and seven stores, respectively. Virtually all
of the new stores were located in new or underserved markets in Nashville,
Tennessee; Hartford, Connecticut; Eastern Pennsylvania; and Springfield,
Massachusetts. Through April 30, 1998, the Company opened five additional stores
in existing markets.
COMPONENTS OF INCOME AND EXPENSES
Revenue. The Company collects rental payments in advance, generally on a
weekly or monthly basis. This rental revenue is recognized when collected. Fees
include fees for reinstatement of expired agreements and fees for in-home
collection. These fees are recognized when collected. 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
used merchandise. These amounts are recognized as revenue when the merchandise
is sold.
Depreciation and Other Merchandise Costs. Under the units of activity
depreciation method, rental-purchase merchandise is depreciated as revenue is
collected. Rental-purchase merchandise is not depreciated during periods when it
is not on rent and therefore not generating rental revenue. Other merchandise
costs include the remaining book value of merchandise sold or otherwise
disposed, together with the cost of replacement parts and accessories.
Amortization of Acquired Rental-Purchase Agreements. The excess of the
purchase price over the fair market value of the assets acquired from the DTO
stores was amortized over an 18 month period utilizing the straight line method
and was fully amortized by August 1996.
Salaries and Related Expenses. Salaries and related expenses include all
salaries and wages paid to store level associates, related benefits, taxes and
workers' compensation premiums.
Occupancy Expenses. Occupancy expenses include rent, repairs and
maintenance of physical store locations, utility costs and depreciation of store
leasehold improvements. The Company has no leases that include percentage rent
provisions.
16
<PAGE> 18
Advertising Expenses. Advertising expenses include television, radio and
print media costs as well as the expenses (including payroll) of the Company's
internal advertising department.
Other Store Expenses. Other store expenses include delivery expenses,
insurance, costs associated with maintaining merchandise inventory, 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
maintaining the Company's corporate-level departments. In addition, all costs
associated with the Company's annual and semi-annual manager meetings and
committee meetings, 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 was approximately $227,000, $243,000 and $208,000 in
1995, 1996, and 1997, respectively, and the amount of contributions for 1998
will be approximately $230,000. 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.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental revenue.................................. 93.3% 94.1% 94.3% 93.6% 93.6%
Fees............................................ 2.7 2.8 2.9 2.6 2.9
Merchandise sales............................... 4.0 3.1 2.8 3.8 3.5
----- ----- ----- ----- -----
Total revenue........................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Merchandise costs:
Depreciation and other merchandise costs........ 36.3 35.1 34.6 34.2 33.5
Amortization of acquired rental-purchase
agreements................................... 1.9 1.4 0.0 -- --
----- ----- ----- ----- -----
Total merchandise costs................. 38.2 36.5 34.6 34.2 33.5
Store operating expenses:
Salaries and related expenses................... 21.5 20.7 20.8 20.3 21.8
Occupancy expenses.............................. 7.3 7.3 7.4 7.3 7.4
Advertising expenses............................ 6.0 6.1 6.0 5.9 5.4
Other store expenses............................ 11.1 11.7 11.8 11.3 11.7
----- ----- ----- ----- -----
Total store operating expenses.......... 45.9 45.8 46.0 44.8 46.3
----- ----- ----- ----- -----
Total merchandise costs and store
operating expenses.................... 84.1 82.3 80.6 79.0 79.8
General and administrative expenses............... 7.5 8.4 7.1 8.1 7.9
----- ----- ----- ----- -----
Total operating expenses................ 91.6 90.7 87.7 87.1 87.7
----- ----- ----- ----- -----
Operating income........................ 8.4 9.3 12.3 12.9 12.3
Interest expense.................................. 2.1 1.8 3.3 1.7 3.1
Other expense (income), net....................... 0.4 1.0 0.6 (0.2) 0.2
----- ----- ----- ----- -----
Income before income taxes...................... 5.9 6.5 8.4 11.4 9.0
Income taxes...................................... 2.9 2.1 3.6 4.9 3.8
----- ----- ----- ----- -----
Net income...................................... 3.0% 4.4% 4.8% 6.5% 5.2%
===== ===== ===== ===== =====
</TABLE>
17
<PAGE> 19
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Total Revenue. For the quarter ended March 31, 1998, total revenue
increased from $13.0 million to $15.1 million, an increase of 16.8% over the
comparable 1997 period. This increase was due primarily to an improvement in
comparable store revenue and revenue derived from the seven stores opened in
1997. An increase in comparable store revenue of 8.0% accounted for 47.7% of the
increase, with revenue from new stores accounting for the remainder of the
increase.
Total Merchandise Costs. Total merchandise costs increased from $4.4
million to $5.1 million, an increase of 14.3% over the comparable 1997 period,
but decreased from 34.2% to 33.5% of total revenue due to improved margins.
Salaries and Related Expenses. Salaries and related expenses increased
from $2.6 million to $3.3 million, an increase of 25.7% over the same quarter in
1997. As a percentage of total revenue, salaries and related expenses increased
from 20.3% to 21.8%. This increase was due to additional personnel at the
Company's comparable core stores necessitated by the increase in rental-purchase
agreements in 1997, as well as the addition of personnel at the nine stores
opened since the beginning of 1997 that are operating at revenue levels below
those of core stores.
Occupancy Expenses. Occupancy expenses increased from $0.9 million to $1.1
million, an increase of 18.6% over the same quarter in 1997 reflecting an
increase in the number of stores. As a percentage of total revenue, occupancy
expenses remained relatively constant.
Advertising Expenses. Advertising expenses remained relatively constant at
$0.8 million, and as a percentage of total revenue decreased from 5.9% to 5.4%.
Other Store Expenses. Other store expenses increased from $1.5 million to
$1.7 million, an increase of 20.5% over the comparable 1997 period. This
increase was due primarily to the number of rental-purchase agreements added in
1997 and the impact of new stores openings. As a percentage of total revenue,
other store expenses increased from 11.3% to 11.7%
General and Administrative Expenses. General and administrative expenses
increased from $1.0 million to $1.2 million, an increase of 14.4% over the
comparable 1997 period, but decreased from 8.1% to 7.9% as a percentage of total
revenues. The increased costs associated with the addition of a fifth regional
manager, professional services and travel expenses, as well as additional
support service personnel, were partially offset by a decrease in executive
expenses associated with the Redemption Transaction.
Total Operating Expenses. As a result of all of the factors discussed
above, total operating expenses increased from $11.3 million to $13.3 million,
an increase of 17.7% over the 1997 comparable period, and increased from 87.1%
to 87.7% as a percentage of total revenue.
Operating Income. Operating income increased 11.1%, from $1.7 million in
the 1997 first quarter to $1.9 million in the 1998 period, but decreased as a
percentage of total revenue from 12.9% to 12.3%.
Interest Expense. Interest expense increased from $0.2 million to $0.5
million, an increase of 109.8% over the comparable period in 1997, and as a
percentage of total revenue increased from 1.7% to 3.1%. The increase is
attributable to increased indebtedness related to the Redemption Transaction.
Other Expense (Income), Net. The change of $0.1 million in other expense
(income) is due to amortization associated with the Redemption Debt, partially
offset by the gain recognized on the sale of delivery vehicles.
Income Tax Expense. Income tax expense remained relatively constant at
$0.6 million, but, as a percentage of total revenue, decreased from 4.9% in 1997
to 3.8% in 1998.
Net Income. As a result of all of the factors discussed above, net income
remained relatively constant at $0.8 million, but as a percentage of total
revenue decreased from 6.5% to 5.2%.
18
<PAGE> 20
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Total Revenue. For 1997, total revenue increased from $46.6 million to
$55.3 million, an increase of 18.8% over the prior year. The increase was due to
an increase in comparable store revenue, the inclusion of a full year's results
for stores opened in 1996, and new store openings. An increase in comparable
store revenue accounted for $4.5 million, or 51.7%, of the increase, stores
opened in 1996 accounted for $2.4 million, or 27.6% of the increase, and new
store openings accounted for $1.8 million, or 20.7%, of the increase. Comparable
store revenue increased 9.9%, consisting of core store revenue increases of $3.0
million or 7.4%, and increases in revenue of stores acquired in 1995 of $1.5
million or 33.1%.
Total Merchandise Costs. Total merchandise costs increased from $17.0
million to $19.1 million, an increase of 12.6% over the prior year. Depreciation
and other merchandise costs increased from $16.4 million to $19.1 million in
1997, an increase of 17.1% over the prior year, but decreased from 35.1% to
34.6% of total revenue due to improved margins. Amortization of acquired
rental-purchase agreements (related to the DTO acquisition) was $0.7 million in
1996. Amortization of acquired rental-purchase agreements from the acquisition
of DTO were fully amortized by August 1996.
Salaries and Related Expenses. Salaries and related expenses increased
from $9.7 million to $11.5 million, an increase of 19.4% over the prior year.
This increase was due to additional personnel at the new stores and an increase
in rental-purchase agreements at existing stores. As a percentage of total
revenue, salaries and related expenses remained relatively constant at 20.8%.
Occupancy Expenses. Occupancy expenses increased from $3.4 million to $4.1
million in 1997, an increase of 19.1% over the prior year. This increase was due
primarily to rent increases and new store openings. As a percentage of total
revenue, occupancy expenses remained relatively constant at 7.4%.
Advertising Expenses. Advertising expenses increased from $2.8 million to
$3.3 million, an increase of 15.7% over the prior year. This increase was due to
new store openings. As a percentage of total revenue, advertising expenses
remained relatively constant at 6.0%.
Other Store Expenses. Other store expenses increased from $5.4 million to
$6.6 million, an increase of 20.5% over the prior year. This increase was due
primarily to the increased number of stores opened, as well as increased number
of rental-purchase agreements in existing stores. As a percentage of total
revenue, other store expenses remained relatively constant at 11.8%.
General and Administrative Expenses. General and administrative expenses
remained constant at $3.9 million, and, as a percentage of total revenue,
decreased from 8.4% in 1996 to 7.1% in 1997. The increased costs associated with
the addition of a fourth regional manager, professional services and additional
support service personnel were offset by a decrease in executive expenses
associated with the Redemption Transaction.
Total Operating Expenses. As a result of all of the factors discussed
above, total operating expenses increased from $42.3 million to $48.5 million in
1997, an increase of 14.8% over the prior year, but decreased from 90.7% of
total revenue to 87.7%.
Operating Income. Operating income increased from $4.3 million to $6.8
million, an increase of 59.0% over the prior year, and increased from 9.3% to
12.3% of total revenue in 1996 and 1997, respectively. The $2.5 million increase
in operating income and the 3.0% increase in operating margins were due
primarily to the improved performance of the DTO stores, the maturation of
stores opened in 1996, growth of rental-purchase agreements in core stores and
the stabilization of corporate expenses, partially offset by operating losses
associated with new store openings.
Interest Expense. Interest expense increased from $0.8 million to $1.8
million, an increase of 118.5% over the prior year, and as a percentage of total
revenue increased from 1.8% in 1996 to 3.3% in 1997. The increase is
attributable to the increased indebtedness related to the Redemption
Transaction.
19
<PAGE> 21
Other Expense (Income), Net. Other expense decreased from $0.5 million to
$0.3 million. In 1996, the Company recognized a one time charge for the loss of
a lawsuit brought by a former associate as well as a charge associated with the
upgrade of the Company's management information systems and remodeling of the
Company's corporate headquarters. During 1997, the amortization of non-compete
and consulting agreements executed in connection with the Redemption Transaction
was offset by gains from the sale of delivery vehicles.
Income Tax Expense. Income tax expense increased from $1.0 million to $2.0
million, an increase of 102.5% over the prior year. The increase was due to
increased income before taxes in 1997 as well as a higher effective tax rate in
1997 as compared to 1996 caused by prior year refunds of state taxes recognized
during 1996.
Net Income. As a result of all of the factors discussed above, net income
increased from $2.0 million to $2.7 million, an increase of 32.8% over the prior
year, and increased from 4.4% to 4.8% of total revenue, in 1996 and 1997,
respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
Total Revenue. For 1996 total revenue increased from $42.6 million to
$46.6 million, an increase of 9.4% over the prior year. The increase was due to
the inclusion in 1996 of a full year's revenue from DTO stores, new store
openings during 1996, and an increase in comparable store revenue. The increase
in revenue of the DTO stores acquired by the Company on March 1, 1995, accounted
for $1.9 million, or 48.3% of the increase, new store openings accounted for
$1.3 million, or 32.0% of the increase and comparable store revenue increased
$0.8 million, or 19.7% of the increase. Comparable store revenue increased 2.0%
in 1996 reflecting an increase in AMRR offset by a decrease in the number of
rental-purchase agreements per store.
Total Merchandise Costs. Total merchandise costs increased from $16.2
million to $17.0 million, an increase of 4.7% over the prior year. Depreciation
and other merchandise costs increased from $15.4 million to $16.4 million, an
increase of 6.0% over the prior year, due to new store openings, increases in
costs associated with the growth of the DTO stores and an increase in the
average cost per unit. Total merchandise costs decreased from 38.2% of total
revenue in 1995 to 36.5% in 1996 due to improved margins. Amortization of
acquired rental-purchase agreements (related to the DTO acquisition) decreased
from $0.8 million to $0.7 million, a 19.2% decrease from the prior year, as the
value of acquired rental-purchase agreements were fully amortized over an
18-month period ending in August 1996.
Salaries and Related Expenses. Salaries and related expenses increased
from $9.1 million to $9.7 million, an increase of 5.7% from the prior year, due
primarily to the hiring of personnel to support four new stores and the growth
of the DTO stores. Salaries and related expenses decreased as a percentage of
total revenue from 21.5% to 20.7% in 1995 and 1996, respectively.
Occupancy Expenses. Occupancy expenses increased from $3.1 million to $3.4
million, an increase of 10.5% over the prior year, but remained constant at 7.3%
of total revenue. The dollar increase reflects the cost of relocation of some
DTO stores and new store openings.
Advertising Expenses. Advertising expenses increased from $2.6 million to
$2.8 million, an increase of 10.1% over the prior year, due to new store
openings. As a percentage of total revenue, advertising expenses remained
relatively constant at 6.1%.
Other Store Expenses. Other store expenses increased from $4.7 million to
$5.4 million, an increase of 14.6% over the prior year. As a percentage of total
revenue, other store expenses increased from 11.1% of total revenue in 1995 to
11.7% in 1996, primarily due to the inclusion for the full year of the DTO
stores that generated lower revenues than the Company's existing stores.
General and Administrative Expenses. General and administrative expenses
increased from $3.2 million to $3.9 million, an increase of 22.3% over the prior
year. As a percentage of total revenue, these expenses increased from 7.5% of
total revenue in 1995 to 8.4% in 1996, primarily due to increased costs
associated with
20
<PAGE> 22
expanding the Company's infrastructure and increased travel expenses. Costs
associated with expansion of the Company's infrastructure included employment of
regional managers, upgrading the Company's computer hardware and software, and
the employment of a corporate controller.
Total Operating Expenses. As a result of all of the factors discussed
above, total operating expenses increased from $39.0 million to $42.3 million,
an increase of 8.4% over the prior year, but decreased from 91.6% of total
revenue in 1995 to 90.7% in 1996.
Operating Income. Operating income increased from $3.6 million to $4.3
million, an increase of 20.2% over the prior year, and increased from 8.4% to
9.3% of total revenue in 1995 and 1996, respectively. The increase is reflective
of the continued successful integration of the DTO stores and increased
profitability of comparable stores, partially offset by operating losses
associated with new store openings and increase in expenses associated with the
Company's internal growth.
Interest Expense. Interest expense decreased from $0.9 million to $0.8
million, a 7.1% decrease from the prior year, and as a percentage of total
revenue decreased from 2.1% in 1995 to 1.8% in 1996. The decrease is due to a
reduction in interest rates offsetting an increase in indebtedness.
Other Expense (Income), Net. Other expense increased from $0.2 million to
$0.5 million. The increase resulted from the Company recognizing a one time
charge for the loss of a lawsuit brought by a former associate as well as a
charge associated with the upgrade of the Company's management information
system and remodeling of the Company's corporate headquarters.
Income Tax Expense. Income tax expense decreased from $1.3 million to $1.0
million, a decrease of 22.4% from the prior year, and as a percentage of total
revenue decreased from 2.9% to 2.1%. The decrease is attributable to a lower
effective tax rate resulting from the 1996 receipt of state tax refunds from
prior years.
Net Income. As a result of all of the factors discussed above, net income
increased from $1.2 million to $2.0 million, an increase of 65.0% over the prior
year, and increased from 3.0% to 4.4% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchasing
additional and replacement rental-purchase merchandise and expenditures relating
to new store openings. During the years ended December 31, 1996 and 1997, the
Company purchased merchandise for aggregate amounts of approximately $20.5
million and $22.5 million, respectively.
Cash provided by operating activities decreased from $1.6 million in 1996
to $0.7 million in 1997, primarily due to the opening of seven new stores and
the purchase of merchandise necessary to fund the increase in the number of
rental-purchase agreements. Cash used in investing activities decreased from
$2.4 million in 1996 to $0.8 million in 1997 because the Company began leasing
its delivery vehicles under operating leases as opposed to purchasing them
outright as in prior years. During 1997, cash used in financing activities was
$0.3 million compared to cash provided by financing activities in 1996 of $1.1
million.
Historically, the Company's growth was financed through cash flow from
operations, borrowings under the Credit Facility and trade credit. At March 31,
1998, the outstanding balance of the Credit Facility was approximately $10.3
million. The remaining portion of the net proceeds of this Offering will be used
to repay a portion of indebtedness due under the Credit Facility. Borrowings
under the Credit Facility bear interest at a variable rate equal to prime plus
0.25% (8.75% per annum at March 31, 1998), are secured by a lien on
substantially all of the Company's assets and are personally guaranteed by the
Company's Chairman and Chief Executive Officer. Borrowings under the Credit
Facility are due on May 21, 2000. The Credit Facility includes certain cash flow
and net worth requirements, as well as covenants which limit the ability of the
Company to incur additional indebtedness, grant liens, transfer assets out of
the ordinary course of business, pay dividends, engage in merger transactions
and make capital expenditures (which do not include the purchase of
rental-purchase merchandise) in excess of a specified amount. Following
completion of the Offering, the Company anticipates entering into an amended
$10.0 million Credit Facility.
21
<PAGE> 23
In April 1997, the Company completed the Redemption Transaction. The
Redemption Transaction, which included noncompete, consulting and severance
agreements, amounted to a payment by the Company of $13.5 million, of which
$10.5 million is evidenced by subordinated notes payable referred to as the
Redemption Debt. This Redemption Debt bears interest at a fixed rate of 8.0% and
is payable in 180 equal installments beginning January 1, 1998. Although the
Redemption Debt does not have a prepayment penalty, upon completion of the
Offering, pursuant to the terms of the Redemption Debt, all such indebtedness
becomes immediately due and payable. A portion of the net proceeds of the
Offering will be used to repay the Redemption Debt.
The Company plans to continue and expand its store opening program. In
1998, the Company expects to incur approximately $500,000 to open and operate
each new store until the store generates a positive cash flow. Included among
the cash requirements for a new store are expenditures of approximately $60,000
for leasehold improvements, furnishings and fixtures and computers;
approximately $425,000 for rental-purchase merchandise and approximately $15,000
to fund initial, anticipated operating losses. These costs do not include any
interest carrying charge or general corporate overhead. Stores generally become
profitable (excluding the store's share of corporate overhead) within 15 months.
On a continuous basis, the Company remodels and refurbishes stores. Store
opening expenses are charged to operations as incurred. The timing of store
openings and the number of stores in the maturation process will have an effect
on quarter-to-quarter comparisons. Each store needs a period of time to build
its customer base and develop a recurring revenue stream from rental-purchase
agreements' continuations and renewals.
In addition to new store openings, the Company may increase its number of
stores or rental-purchase agreements through selective acquisitions. Management
believes that there are currently a number of acquisition opportunities in the
rental-purchase industry, and that from time to time additional acquisition
opportunities may arise. Potential acquisitions may vary in size and the Company
may consider larger acquisitions that could be material to the Company.
Management believes that the proceeds of this Offering, together with cash flow
from operations and additional borrowings under the Credit Facility, as proposed
to be amended, will be adequate to fund its operations and expansion plans for
at least the next 12 months. Should the Company determine to accelerate its new
store openings, or should a large acquisition materialize, the Company may incur
additional bank indebtedness and may issue its equity or debt securities, the
availability and terms of which will depend upon market and other conditions.
There can be no assurance that such additional financing will be available or,
if available, will be on terms acceptable to the Company.
INFLATION
During the years ended December 31, 1995, 1996 and 1997, 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.
22
<PAGE> 24
QUARTERLY RESULTS
The following table represents certain unaudited financial information for
the quarters indicated.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue................................. $ 15,136
Operating income........................ 1,860
Net income.............................. 780
Basic net income per common share....... $ .21
Weighted average
common shares outstanding............ 3,676
Year ended December 31, 1997
Revenue................................. $ 12,959 $ 13,686 $ 14,102 $ 14,581
Operating income........................ 1,675 1,705 1,805 1,615
Net income.............................. 851 638 628 564
Basic net income per common share....... $ .13 $ .15 $ .17 $ .15
Weighted average
common shares outstanding(1)......... 6,393..... 4,303 3,676 3,676
Year ended December 31, 1996
Revenue................................. $ 11,052 $ 11,571 $ 11,664 $ 12,273
Operating income........................ 961 878 1,180 1,259
Net income.............................. 474 407 647 491
Basic net income per common share....... $ .07 $ .06 $ .10 $ .08
Weighted average
common shares outstanding............ 6,393 6,393 6,393 6,393
</TABLE>
- ---------------
(1) Reflects the Redemption Transaction completed in April 1997. See Note 4 of
the Company's Consolidated Financial Statements.
YEAR 2000 CONSIDERATIONS
The Company currently is assessing its computer systems to ensure that they
are capable of processing periods for the year 2000 and beyond. The Company's
assessment of its computer systems will be complete by December, 1998. The
Company does not believe that the cost of compliance will have a material
adverse effect on its business, financial condition or results of operations.
The Company anticipates that it will be compliant prior to the year 2000.
23
<PAGE> 25
BUSINESS
GENERAL
The Company operates 66 rental-purchase stores primarily under the Rainbow
Rentals trade name in Connecticut, Massachusetts, Michigan, New York, Ohio,
Pennsylvania, Rhode Island and Tennessee. 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.
Based on APRO estimates, the Company believes its stores are among the
industry's leaders in average monthly rental rate ("AMRR") on each agreement, in
the number of rental-purchase agreements per store and in collection
performance. In addition, the Company believes its level of customer referrals
and repeat business are among the highest in the industry. The Company believes
it has achieved these results by providing an appealing store environment,
quality merchandise, personal customer service, experienced associates,
decentralized store management and sophisticated management information systems.
The Company's higher level of revenues per store also enable it to achieve
increased profitability by leveraging a store's fixed costs. Since inception in
1986, the Company has grown primarily through implementation of its growth
strategy which includes: opening new stores, growing comparable store revenue
and profitability and, to a lesser extent, making opportunistic acquisitions.
INDUSTRY OVERVIEW
APRO estimated that the rental-purchase industry generated $4.1 billion in
revenues and that there were over 2.9 million customers in 1996. The
rental-purchase industry is highly fragmented. APRO estimated that there were
approximately 7,500 stores in operation at December 31, 1996 with a majority of
companies owning fewer than 20 stores and servicing small geographic areas.
Management believes the rental-purchase industry's potential market is
under-penetrated.
The industry is experiencing increased consolidation characterized by
multi-store companies gaining market share, primarily through acquisition and,
to a lesser extent, through internal growth, at the expense of smaller, often
highly leveraged, companies. Based on APRO estimates, the ten largest industry
participants account for less than 50% of rental-purchase industry stores. The
Company believes that growth will be concentrated in those national or regional
chains that are well-capitalized, with access to bank or other institutional
lenders and, in some instances, the public capital markets. Management believes
that the recent trend of consolidation will subside in the near future as the
number of acquisition targets declines and that, as a result, industry growth
will predominately occur through new store openings.
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, like computers, before committing to purchase them.
Rental-purchase transactions generally 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. APRO estimates that, for chains with more than 20 stores,
approximately four out of five agreements terminate with the product being
returned. Returned merchandise is held for re-rental or sale. Rental payments
are generally made in person, in cash or by check, money order or credit card.
Successful rental-purchase operations are able to combine high levels of
rental-purchase agreements with high AMRR. Since a substantial portion of a
store's overhead is fixed, e.g., store and vehicle rent, salaries and insurance,
changes in AMRR or number of rental-purchase agreements can significantly impact
store-level
24
<PAGE> 26
revenue and profitability. According to APRO, the AMRR in 1996 for chains with
more than 20 stores was approximately $51 and the average number of
rental-purchase agreements per store totaled 621.
Companies in the rental-purchase industry generally market to customers
with income at or below the median family income level. According to U.S. Census
Bureau data, the median family income in 1995 (the latest date for which such
information is available) was approximately $34,000. Management believes that
the majority of rental-purchase customers are wage-earners.
OPERATING STRATEGY
The Company's operating strategy is to maintain a high AMRR on its
agreements, a high number of rental-purchase agreements 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 the
following operating techniques:
Store Environment. The Company believes it is essential that its
stores appeal to its customers and convey a sense of convenience, quality
and safety. 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, color scheme, store layout and display signs. The
Company's parking areas and store fronts are well lighted. Stores are
intended to provide an appealing retail environment and are modeled to
resemble a quality electronics and furniture showroom. The Company believes
that the appearance and location of its stores are important factors in
attracting and retaining customers.
Quality Merchandise. The Company's merchandising strategy, "More,
Better, Different," is guided by its philosophy of providing its customers
with quality, name brand, durable merchandise. The Company believes this
type of merchandise attracts customers due to brand awareness and generates
excitement by providing customers the opportunity to rent nationally
recognized merchandise with popular features. Better quality merchandise
generally is more durable in the customers' homes, withstands multiple
pickups and deliveries and results in fewer service problems for the
Company. The Company's decision to rent quality, name brand, durable
merchandise has been instrumental in its ability to secure a high AMRR on
its agreements.
Customer Service. The Company's customer service policy is to treat
all customers with "Respect and Dignity." The Company strives to
distinguish itself from its competitors through its commitment to customer
service and professionalism at every stage of the rental process. Customers
are able to initiate transactions and obtain merchandise without visiting a
Company store by calling the Company's toll-free telephone number and
providing the necessary information over the telephone. The Company employs
bilingual associates who are able to facilitate transactions in Spanish.
Company associates deliver the merchandise to the customers' homes. The
Company imposes few fees in addition to the monthly rental rate. As a
result, its customers are able to spend more of their payments on the
merchandise. The Company operates a toll-free customer response line during
business hours to address any customer concerns. In addition, the Company
operates product service centers in most regions to service its products
and strives to respond to service requests the next business day after a
call. The Company believes its tactic of offering personal customer service
minimizes delinquencies and losses and maximizes its repeat and referral
business.
Experienced Associates. The Company's operations and profitability
are largely dependent on the services of its executive officers, senior
management and store level personnel (collectively, the "associates"). The
Company's founding executive officers have worked in the rental-purchase
industry for an average of over 18 years and co-founded the Company in
1986. The Company's regional managers and store managers also have
extensive experience in the industry and have worked with the Company for
an average of approximately 11 years and six years, respectively. The
Company has been able to attract and retain its quality associates through
compensation and benefits that exceed industry averages and through various
ongoing proprietary training programs. Management believes that its
associate develop-
25
<PAGE> 27
ment 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 entrepreneurial
approach provides store managers with a significant degree of autonomy and
accountability. Within guidelines set by the Company, store managers are
responsible for: (i) managing the development of customer relationships,
the service and collection of accounts, store inventory and growth of
number of rental-purchase agreements in their store; and (ii) monitoring
store-level financial statements. Performance goals are established for
each store and each store manager's incentive compensation is tied to the
pre-tax operating earnings of the store (after certain corporate
allocations). Store managers, therefore, operate much as "owners" of their
own small businesses. Management believes that this decentralized
operational structure results in better customer service, enhances personal
knowledge of local market conditions and improves collection rates because
collections are handled through direct contact with customers. The Company
supports its decentralized structure with strong management information
systems, internal audit procedures, operating guidelines and experienced
associates.
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 system
provides store managers with relevant store-level financial and operating
data. In addition, this system provides individual profiles on each of the
stores' customers, enabling managers to focus their marketing efforts on a
localized and individualized basis. The Company's senior management has
immediate access to data from the management information systems that
provides them with the ability to analyze performance indicators at the
store and corporate level on a daily basis. Management believes that the
Company's information system is scalable and will support the Company's
growth plan.
GROWTH STRATEGY
The Company's growth strategy is to accelerate its new store opening
program and to increase comparable store revenue and profitability. In addition,
the Company will, to a lesser extent, make opportunistic acquisitions.
New Store Openings. Beginning with six stores in 1986, the Company
opened 56 additional stores through April 30, 1998, 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. In investigating a new market, the
Company reviews demographic statistics, cost of advertising and the number
and nature of competitors. The Company believes that 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 and, only to a lesser extent, through acquisitions,
management believes that the 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, computers have become
a significant percentage of the Company's overall revenues. In addition,
the Company is able to achieve increased profitability by leveraging its
stores' fixed costs, such as advertising and purchasing, over the higher
revenues generated by existing stores and by placing new stores in existing
markets.
26
<PAGE> 28
Acquisitions. While the majority of the Company's growth is expected
to come from opening new stores, the Company also may make fill-in
acquisitions on an opportunistic basis and purchase agreements from
competitors exiting the business or a particular geographic area. The
Company believes that it will have the opportunity to consummate more
acquisitions due, in part, to potential store overlap among consolidating
competitors.
STORES
As of April 30, 1998, the Company operated 66 stores in eight states, as
set forth in the following table.
<TABLE>
<CAPTION>
LOCATION NUMBER OF STORES
-------- ----------------
<S> <C>
Pennsylvania................................................ 19
Ohio........................................................ 16
Massachusetts............................................... 10
Tennessee................................................... 6
Michigan.................................................... 5
New York.................................................... 5
Connecticut................................................. 3
Rhode Island................................................ 2
</TABLE>
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------- APRIL 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stores open at beginning
of period............... 0 6 15 20 24 28 36 38 42 46 51 55 62
Stores opened............. 6 9 5 4 4 8 2 4 4 0 4 7 5
Stores acquired........... 0 0 0 0 0 0 0 0 0 7* 0 0 0
Stores
consolidated/closed..... 0 0 0 0 0 0 0 0 0 2 0 0 1
-- -- -- -- -- -- -- -- -- -- -- -- --
Stores open at end of
period.................. 6 15 20 24 28 36 38 42 46 51 55 62 66
== == == == == == == == == == == == ==
</TABLE>
- ---------------
* The Company acquired ten DTO stores and immediately consolidated three 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 only in those states where there
is an absence of unfavorable legislation regarding rental-purchase transactions.
The Company has developed a number of criteria that are reviewed prior to
choosing a new store location. These criteria include, among others: proximity
to national discount retailers or grocery stores, shopping patterns, traffic
patterns, accessibility, availability of personnel and proximity to the
Company's other stores. The Company seeks to locate its stores on main arteries
near residential or commercial areas in strip shopping centers containing
national discount retailers or grocery stores. In general, the strip shopping
centers in which the Company's stores are located contain large storefronts on
street level. This enables potential customers to view and recognize the
Company's stores from the street, which the Company believes results in
increased recognition of the Company's name.
The most critical step in the selection of a new store location is a site
inspection by senior management. Once the Company's senior management selects a
market for a new store, a senior manager investigates a number of potential
store locations. The Company's construction manager accompanies a senior manager
to several of the most promising store locations to evaluate the construction
cost of a particular location and to design the layout of the store.
In order to enhance the early profitability of its new stores, the Company
employs a "new store" supervisor whose sole responsibility is to manage and
address issues inherent in new store operations. This supervisor assists new
store managers in developing customer relationships, monitoring store financial
27
<PAGE> 29
statements and increasing the number of agreements. Generally, within two years
after a store is opened, the store formally joins its geographic region and the
regional manager of that particular geographic region assumes oversight of the
store.
The Company has developed a new store format that it utilizes in all new
stores. Existing stores are refurbished consistent with this new store format,
as necessary. Existing stores are typically remodeled every five years. With
this new store format, the Company has modified the store layout by placing the
counter near the center of the store to facilitate visibility of the
merchandise, by positioning computers close to the counter and ready for
customer use, by improving store lighting to enhance in-store viewing of the
merchandise and by adding interior graphics, including lithograph images,
containing the Company name and product categories. At March 31, 1998, the
Company's rental-purchase stores averaged approximately 4,250 square feet.
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. Store managers may order
merchandise from the Company's authorized product and vendor list, which
contains approximately 500 products, with a variety of models and styles.
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 effect of offering the "higher end" products is an AMRR in 1996 of
approximately $77 and approximately $79 in 1997, which the Company believes is
significantly higher than its rental-purchase competitors. The Company purchases
merchandise directly from the manufacturers and through distributors, generally
at volume price discounts.
The following table shows the percentage product mix of rentals, based on
revenue, by major merchandise category.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Home Electronics............................................ 42.2% 39.1% 36.3%
Furniture................................................... 30.8 29.2 28.1
Appliances.................................................. 22.4 22.7 21.4
Computers................................................... 4.6 9.0 14.2
----- ----- -----
Total....................................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Home Electronics. The home electronics offered by the Company include
audio/video systems, stereo systems, portable stereos, CD players, video
cassette recorders, video cameras, TV/VCR combinations, big screen and
traditional size televisions and entertainment centers. Major home electronics
brands include Zenith, RCA, Magnavox, JVC and Pioneer. Weekly rental rates for
home electronics range from $4.99 to $49.99.
Furniture. Furniture includes living room and bedroom groups, dinettes,
curio cabinets, hutches, recliners, occasional tables, clocks and add-ons such
as lamps and paintings. Certain furniture may be special ordered by customers.
With these special orders, customers have a choice of fabric, style and product
mix. Typically, such orders are delivered within three to four weeks after the
order is placed. Major furniture brands include England-Corsair, Ashley,
Stoneville, Barn Door and Holland House. Weekly rental rates for furniture range
from $4.99 to $40.99.
Appliances. Appliances include refrigerators, freezers, ranges, microwave
ovens, air conditioners and clothes washers and dryers. Whirlpool is the
Company's primary vendor of appliances. Weekly rental rates for appliances range
from $7.99 to $28.99.
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Computers. The Company began the rental of computers in 1993. Currently,
this product category includes computers, printers, fax machines and scanners.
The Company believes it derives a greater percentage of rental revenue from
computers than any of its rental-purchase competitors. Computer rentals generate
higher rental rates per unit than other product categories. As new generations
of computers become available, the Company reduces the rental rates and/or
rental terms on older models, which make the computers affordable to a customer
base that would otherwise be unwilling or unable to afford the higher rates for
the new units. In addition, significant training is provided for customers to
maintain or increase the utility of the rental computer, and Company associates
receive extensive training in marketing personal computers. Major computer
brands in this category include Packard Bell, Acer and Canon. Weekly rental
rates for computers range from $19.99 to $39.99.
The Company has elected not to rent certain categories of merchandise, such
as pagers, cellular phones and jewelry. The Company believes these products do
not conform to its concept of renting durable consumer merchandise and because,
in many instances, it is difficult to differentiate value among these items.
Moreover, with pagers and cellular phones, revenue is generated primarily from
the sale of air time (which is not a part of the Company's business) rather than
from the rental of the hardware.
STORE OPERATIONS
A typical mature store has a store manager, an assistant manager, two or
three account managers, one or more full or part-time clerical staff associates
and may have a two-person delivery team. The store manager and assistant manager
are responsible for the operation of the store. Customers are assigned an
account manager who makes deliveries and monitors the accounts. The account
manager is responsible for securing timely rental renewal payments and will pick
up rental-purchase merchandise, as necessary. The clerical staff records
in-store and mailed payments, establishes and maintains customer files and
prepares reports necessary to the store's operations. All stores are open Monday
through Saturday with evening hours on Friday.
Store managers are given the authority to make operating decisions and to
hire non-management store personnel. Most of a store's inventory is ordered by
the store's manager from the Company's authorized product and vendor list. Once
ordered, merchandise is drop-shipped directly to each store by the manufacturer
or distributor. The Company believes that the latitude granted to its store
managers is a key to manager accountability. No approval by the Company's senior
management is required to order merchandise, except for non-stock items. With
respect to previously rented merchandise, individual store managers may vary the
number of months required for full ownership of such merchandise, but generally
not the rental rate. The Company has idle inventory standards that are closely
monitored and designed to provide for adequate display merchandise without
building up excess inventory. In the case of furniture, special delivery
schedules have been obtained so that managers have a designated delivery date.
All of these factors help keep store inventory as low as possible while
maintaining sufficient quantities for store displays and customer deliveries.
The Company believes open communication with 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 four committees: the Managers Advisory
Committee ("MAC"), the Product/Pricing Committee, the Advertising Committee and
the Computer Committee. The MAC consists of top performing store managers and is
designed to be a sounding board for new concepts and innovative operational and
sales techniques. Each of the Product/Pricing, Advertising and Computer
Committees consists of store managers. Committee assignments are for two year
terms. These managers have significant impact on their respective committee
assignments. In addition, the Company holds store managers' meetings twice
annually and all store managers, regional managers, department heads and
executive officers are required to attend. Finally, to address regional-specific
issues, senior management regularly travels to the individual markets to meet
with store associates.
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RECRUITING, RETENTION AND TRAINING OF ASSOCIATES
The rental-purchase industry is management intensive and the success of a
rental-purchase store is primarily the result of the store manager's
performance. In order to attract and retain quality personnel, the Company
endeavors to pay its associates more than the industry average and provides a
health benefits package paid entirely by the Company. The Company focuses on
promotions from within, and every Company associate has the opportunity to
advance due to the Company's growth. All but three current store managers began
their careers with the Company as account managers and the three who did not
begin their careers with the Company were managers of the DTO stores at the time
of its 1995 acquisition by the Company. The Company believes it has among the
lowest turnover rate of store managers in the industry, as the Company's
managers have been employed by the Company for an average of approximately six
years. In addition, the Company's five regional managers have been employed by
the Company for an average of approximately 11 years. All associates are trained
to provide a high level of personalized customer service and to maintain a
professional appearance. Because each customer has the opportunity to terminate
an agreement at any time, it is important that the Company maintain a high
degree of customer satisfaction.
In order to recruit quality personnel to staff existing and new stores, the
Company employs a personnel manager whose primary responsibility is to
coordinate recruiting efforts within the Company's markets. This individual
gives presentations regarding Company career opportunities at community colleges
and other institutions, coordinates with the career placement offices at the
colleges and institutions, receives and reviews resumes and conducts initial
telephone interviews. If the personnel manager believes a candidate is qualified
for a position with the Company, the personnel manager directs the candidate to
the appropriate regional manager for additional evaluation and interviews. This
recruiting system has proven adequate to satisfy the Company's on-going staffing
requirements and has produced a sufficient number of manager trainee candidates
to staff the Company's planned growth.
The Company places great importance on training quality personnel and
believes that its managers are among the best trained in the industry. Store
manager candidates, all of whom are assistant managers who have worked for the
Company for at least six months, are nominated by their respective store
managers. In order to become a store manager, a candidate must be selected by
executive officers and senior management and must graduate from the management
training program conducted by executive officers and senior management. Classes
of candidates for store manager positions are generally comprised of 10 to 12
candidates, and the Company conducts two or three classes per year. The training
program is conducted over a six-month period, during which time candidates
receive further experience as assistant managers and are frequently tested on
class materials. As manager opportunities arise, graduates of the training
program are assigned to their own stores.
After an associate becomes a store manager, the training continues. Twice
annually, the Company conducts a managers' meeting at a central location. 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 and other areas of store operations.
The Company's philosophy is to treat store managers much as "owners" of
their stores, and therefore the Company has always provided extensive
operational and financial information to store managers. At the end of each
year, store managers prepare projections for the upcoming year that must be
approved by executive officers and senior management. Each month actual results
are compared to projected results, and managers must be able to explain
significant discrepancies. Because approximately 50% of the compensation of the
managers of mature stores is based on profitability, store managers are
attentive to their store's financial statements and play an active role in the
analysis of store performance.
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THE RENTAL PROCESS
Marketing
The Company uses advertising 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. The Company focuses on direct mail, radio and
television advertising that is designed to make existing and prospective
customers aware of special promotions and to encourage immediate customer
response. Substantially all of the design, production and placement of the
Company's advertising is performed by the Company's five member in-house
advertising department. The Company advertises in both English and Spanish,
making the Company's rental-purchase program and products accessible and
understandable to a wider range of customers. The Company currently operates in
21 different advertising markets and seeks to cluster stores, where appropriate,
to reach its target markets efficiently. Many of the Company's vendors
participate in a co-operative advertising program and contribute a certain
portion to the Company's advertising costs.
Direct mail is used extensively because it allows the Company to target
specific zip codes near its stores' locations and those areas where potential
customers reside. The Company's advertising department creates color flyers to
use as direct mail, which show many products in a menu-like format. In a typical
month, the Company distributes approximately 3.5 million color flyers in the
targeted zip codes. Television and radio are used in more mature markets where
the expense can be spread over a number of stores. The Company's vehicles are
adorned with the Company's distinctive color decals, effectively becoming
rolling billboards. In addition to mass marketing, several direct marketing
tools are employed to solicit the Company's existing customer base. In addition,
the Company has developed a preferred customer program, directed at current and
past customers, which currently contains approximately 54,000 names. Under this
program, special promotions, including significant discounts and new product
offerings, are periodically run for these customers to encourage additional
rentals.
The Company attempts to remove as many obstacles as possible to the
completion of rental-purchase transactions. Customers are not required to visit
the store to initiate transactions. Most of the Company's advertisements,
whether direct mail, television or radio, encourage customers to "shop by phone"
and feature the Company's toll-free telephone number. 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. Customers may give all information required by
the order form to a Company representative over the telephone, and once the
requisite approval is obtained, delivery is scheduled. The Company initiates a
significant number of its customer rental-purchase agreements over the
telephone.
Approval
Although the Company does not conduct a formal credit review, the Company's
order approval process provides a mechanism for qualifying a customer. This
process is designed to verify a customer's stability in his or her community and
serves as a successful method of loss prevention. The Company's customer
qualification process consists of obtaining the customer's name, address,
landlord or mortgage holder, source of income and four personal references, two
of whom generally must be family members. Information is verified over the
telephone by store associates contacting the personal references and other
sources. Generally, the Company will verify employment and residence status.
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.
The Rental-Purchase Agreement
The Company strives to make the rental-purchase transaction as simple and
as accessible as possible for the customer. This includes providing a complete
explanation of the entire rental-purchase program at the beginning of the rental
period. An agreement is intended to be straightforward and understandable by a
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customer and includes the total amount required to be paid for ownership of the
merchandise, as well as all other required disclosures. The Company's flexible
payment program allows a customer to choose weekly, bi-weekly, semi-monthly or
monthly rentals. To facilitate timely payments, the Company attempts to match a
customer's payment schedule with his or her wage or other income schedule. At
the end of each rental period, a customer will renew the agreement, terminate
the agreement or purchase the merchandise. If a customer elects to continue to
rent the merchandise, the customer pays the next period's rental. If a customer
elects to terminate an agreement, the Company will pick up the merchandise or
the merchandise will be returned by the customer and in either case, will be
held by the Company for re-rental. If a customer terminates a rental, but
subsequently elects to re-rent the same item or a similar item within a
designated period of time, the customer generally will be granted a
reinstatement of the previously terminated agreement. A customer may purchase a
rented product at any time for a price based on a predetermined formula.
During the term of an agreement, all service and repair is provided by the
Company or an authorized manufacturer's service representative at no additional
cost to the customer, unless damage is caused by the customer's misuse or abuse.
Most products are covered by manufacturers' warranties for varying periods. The
Company also provides service and repair for 90 days after the merchandise is
purchased by a customer. The Company believes this benefit is not generally
offered by its rental-purchase competitors.
The Company seeks to establish long-term relationships with its customers.
Accordingly, unlike many of its rental-purchase competitors, the Company does
not require an application fee, nor does it charge for delivery and set-up. The
Company does not sell credit life, disability, unemployment, or damage-waiver
insurance. The Company charges only two fees: a reinstatement fee if an
agreement is terminated and then reinstated and a fee if a Company associate is
required to visit the customer's residence to collect a rental payment. By
limiting the add-on fees charged, the Company enables its customers to spend
more of their payment on the merchandise, which, the Company believes, directly
results in higher customer retention and repeat and referral business. Rental
income represented approximately 94% to 95% of the Company's total revenue in
each of 1996 and 1997.
Delivery and Installation
After an order is approved, it is assigned to an account manager. The
Company requires that, before merchandise is placed in a customer's residence,
the account manager or delivery team must ensure that the customer understands
all aspects of the agreement. Accordingly, the forms are explained in detail and
each section is initialed by a customer prior to his or her execution of the
rental-purchase agreement. The Company believes that a thorough understanding by
a customer of all the terms of the agreement is the first step of a successful
rental-purchase program. Merchandise is generally delivered by an account
manager or a delivery team on the same day that the order is approved, which is
generally the same day that the order is received. Deliveries are made in
vehicles that are leased new and regularly cleaned and maintained. All vehicles
have the Company's logo on the side in order to enhance name recognition in
local markets. Vehicles are generally retained for a period of not more than 36
months.
A delivery of home electronics, appliances or computers includes
installation by a Company associate enabling the customer to immediately enjoy
the benefits of the product. In addition, the Company offers an initial training
session to each customer who rents a personal computer to ensure that he or she
will be able to recognize the usefulness and utility of the computer. The
Company utilizes individuals in each market to assist customers on an ongoing
basis with computer training and troubleshooting at no additional charge. The
Company believes these services increase the likelihood that customers will
continue renting the merchandise.
Account managers and delivery associates receive extensive training on many
aspects of the rental-purchase transaction, including delivery and installation
of products, explanation of agreements and customer service throughout the
rental term. Along with two weeks of on-the-job training, all account managers
and delivery associates are given a detailed "Account Manager Training Manual"
that they are expected to learn and refer to in the performance of their duties.
In addition, both account managers and store managers are instructed to follow
up with customers after delivery to ensure they are satisfied with the
merchandise and installation.
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Account Management
Once a customer accepts delivery of merchandise, the next priority is
ensuring that the customer continues renting and makes all payments in a timely
manner. The goal is to treat each customer with respect and dignity because it
is the Company's philosophy that "customers will pay you because they want to,
not because they have to." Most customers make rental payments in person. This
affords the Company an opportunity to enhance the customer relationship, while
displaying merchandise for future rentals. A customer pays in cash or by check,
money order, or credit card.
A significant portion of all rental-purchase payments are made without any
collection efforts by the Company. If rental payments are not made on or before
the agreement renewal date, an account manager first contacts the customer by
telephone. If the initial telephone contact does not lead to renewal or return
of the merchandise, then the account manager makes a personal visit to the
customer. Company procedures require that all account management efforts be
performed in a professional and courteous manner. Account managers receive
extensive training, and are expected to learn and refer to the "Account Manager
Training Manual" in the performance of their duties. In cases where the customer
chooses not to renew the agreement, the merchandise is returned to the store and
reconditioned for a subsequent re-rental. In cases where the customer refuses to
return the merchandise, the Company uses various legal methods to recover the
merchandise, including enlisting the personal references which were obtained on
the original order form. The Company believes its account management procedures
are responsible for its low charge-off rate of 1.8% of net revenues in 1996 and
1997.
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS
The Company's proprietary computer software programs were originally
developed in 1989, have been upgraded, and continue to be upgraded and rewritten
by the Company on an ongoing basis in order to meet the Company's information
needs and to conform with the Company's philosophy of decentralization and
customer management. The Windows NT operating system and Company-wide Intranet
provide management with timely operational and financial information and
flexibility. In 1996, the Company invested approximately $200,000 to upgrade all
of its stores' computers and $250,000 to purchase and install hardware and
software at its corporate headquarters. The Company's corporate headquarters
operates under a client-server platform, utilizes a proprietary Windows NT-based
enterprise software system and licenses its accounting software. In 1997, the
Company installed a Company-wide Intranet which enables e-mail communications
from the corporate headquarters to the stores and between stores several times
daily. The Intranet also allows for a fast and cost effective transfer of data
from the stores to the corporate headquarters on a daily basis. The Company
believes that both its store and corporate information systems will be able to
meet its growth plans.
The Company's computer system maintains all standard agreements, and all
agreements are printed off the system on an as-needed basis at each store. The
Company has formatted all documents, including standard agreements, sales
material and collection material, to contain "customer-friendly" terminology. In
addition, when there is a change in state law, the Company can make
modifications on its system to the standard agreements in that particular state
and, since the Company does not pre-order its agreements but rather prints them
on an as-needed basis, the Company incurs minimal expense as a result of such
modification.
Customer payments are made at or mailed to the individual stores. Such
payments are deposited nightly. A record of each transaction is transmitted
overnight to the corporate headquarters. Critical data, such as outstanding
agreements, idle inventory, revenue, delinquency percentage and cash receipts
are available to management the following day on both a store-by-store basis and
an aggregate basis. Also, regional managers have remote access to this data each
morning by electronically transferring files to their laptop computers.
On a daily, weekly and monthly basis, reports are generated that provide
critical information for each of the Company's products, a detailed accounting
of total rent due and collected and customer information. On a monthly basis,
store operating results are compared to each other and ranked on 10 critical
operating statistics and eight key financial indicators. Operational and profit
"Rating Sheets" are generated each month and year
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to date, store managers are rated and annual awards are given to the top rated
stores for each year. In addition, stores are grouped by size and compared to
their own group by nine operational and financial statistics.
ACQUISITIONS
In March 1995, the Company acquired the Ohio operations of DTO. The DTO
acquisition provided the Company immediate access to three new markets:
Columbus, Dayton and Toledo, Ohio. Three stores in the Cleveland and Akron
markets were immediately consolidated into existing Company operations. The DTO
operations were significantly below Company standards in such areas as product
selection, store size, number of agreements per store and delinquency
percentages. The Company introduced its standard merchandise into the remaining
seven DTO stores and reduced weekly delinquencies. At March 31, 1995, the
average number of agreements at the seven former DTO stores was 513. At March
31, 1998, the average number of agreements at the seven former DTO stores was
1,017.
COMPETITION
The Company competes with other national and regional 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. Many of
the Company's largest national competitors have significantly greater financial
and operating resources and name recognition than the Company. See "Risk
Factors -- Competition."
PERSONNEL
As of March 31, 1998, the Company had approximately 576 associates,
including 374 full-time associates. Approximately 35 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.
SERVICE MARKS
The Company owns the federally registered service marks "Rainbow Rentals"
and "Spectrum Rents." Currently some stores located in New York and Tennessee
operate under the Spectrum Rents name, and all other stores operate under the
Rainbow Rentals name. The Company intends to have all stores operating under the
Rainbow Rentals name by 1999. The Company believes that the Rainbow Rentals mark
has acquired significant market recognition and goodwill in the communities in
which its stores are located.
PROPERTIES
The Company currently leases all of its 66 stores and its corporate
headquarters. The corporate headquarters is leased through January 31, 2006 from
a company owned by the current shareholders of the Company. See "Certain
Transactions."
The Company's stores range in size from 2,400 square feet to 6,200 square
feet; several of the small stores were acquired in the DTO acquisition effected
in 1995. The various lease terms expire between May, 1998 and 2006; many of the
leases contain three to five year renewal options. All leases provide for fixed
rental amounts and no leases contain percentage rent clauses. The Company
believes its policy of renting its stores on short term leases gives it
flexibility to respond to shifting customer patterns, changing space
requirements and the availability of more desirable locations.
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GOVERNMENT REGULATION
State Regulation
There are currently 45 states that have legislation regulating
rental-purchase transactions, all of which require operators to provide certain
disclosure to customers regarding the terms of rental-purchase transactions.
Three states (Minnesota, North Carolina and Wisconsin) regulate rental-purchase
transactions as credit sales subject to interest rate limitations and other
consumer lending restrictions. In addition, recent court decisions in New Jersey
have created a legal environment in that state which is prohibitive to
rental-purchase transactions. The Company does not operate in, nor does the
Company intend to operate in, any of these four states. All of the eight states
in which the Company operates impose certain contractual and advertising
disclosure requirements concerning the nature of rental-purchase transactions
and also provide varying levels of substantive consumer protection.
With some variations in individual states, most state legislation requires
the lessor to make prescribed disclosures to customers about agreements and
rental-purchase transactions. Such legislation also prescribes grace periods for
nonpayment and time periods during which customers may reinstate agreements,
prohibits or limits certain types of collection or other practices and, in some
instances, limits certain fees that may be charged. Some states, including
Michigan and Ohio, limit the total rental payments that can be charged. Such
limitations, however, do not become applicable unless the total rental payments
required under agreements exceed 200% of the "disclosed cash price" in Ohio or,
in Michigan, 2.22 times the price that would have been charged had the product
been purchased rather than rented. If the Company opens or acquires new stores
in states in which it does not currently operate, the Company will become
subject to the rental-purchase laws of such states, if any. The Company operates
its stores only in states that have enacted laws specifically regulating
rental-purchase transactions. This policy provides the Company with a measure of
certainty regarding its legal obligations to its customers. 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. See "Risk Factors --
Government Regulation."
Federal Legislation
No federal legislation has been enacted regulating or otherwise governing
rental-purchase transactions. From time to time legislation has been introduced
in Congress that would regulate rental-purchase transactions including
legislation that would subject rental-purchase transactions to implied interest
rate, finance charge and fee limitations, as well as the Federal Truth in
Lending Act. Recently, two bills have been introduced in Congress that would
regulate the rental-purchase industry. One of the bills is supported by APRO and
mandates certain disclosures to customers similar to those required by most
state legislation. The Company does not believe that this bill, if enacted,
would have a material adverse effect upon the Company's operations. The other
bill includes certain credit sale requirements and would subject rental-purchase
transactions to implied interest rate, finance charge and fee limitations, as
well as the Federal Truth in Lending Act, the Equal Credit Opportunity Act, the
Fair Debt Collection Practices Act and the Fair Credit Reporting Act. Any such
federal legislation, if enacted, could have a material adverse effect on the
Company and would require the Company to reposition itself as a rent-to-rent
business. See "Risk Factors -- Government Regulation."
Certain Tax Issues
The Company uses the units of activity method of depreciation for financial
reporting purposes. Under the units of activity method, which is widely used in
the industry, rental-purchase merchandise is depreciated as revenue is
collected. Rental-purchase merchandise is not depreciated during periods when it
is not on rent therefore not generating rental revenue. The Tax Relief Act of
1997 mandates the use of the three-year Modified Accelerated Cost Recovery
System ("MACRS") as the depreciation method for tax purposes of rental-purchase
merchandise purchased after August 5, 1997. As a result, the Company adopted the
three-year MACRS method for tax book purposes beginning with rental-purchase
merchandise purchased after August 5, 1997. The change caused no material change
in prior periods' earnings and the Company believes
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this change will not significantly impact the Company's financial condition or
results of operations in the future. The Company continues to use the units of
activity method of depreciation for financial reporting purposes in keeping with
industry convention. For additional information regarding the Company's method
of depreciating rental-purchase merchandise, see "Management's Discussion and
Analysis of Financial Conditions" and "Results of Operations -- Components of
Income and Expenses."
LEGAL PROCEEDINGS
In the ordinary course of business, the Company is party to various legal
actions that it believes are ordinary in nature and incidental to the operation
of its business. In the opinion of the Company the outcome of the proceedings to
which it is currently a party will not have a material adverse effect upon its
operations or financial condition.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table lists the executive officers, directors and director
designees of the Company, their ages and offices:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Wayland J. Russell........................ 46 Chairman of the Board of Directors and
Chief Executive Officer
Lawrence S. Hendricks..................... 40 Chief Operating Officer and Director
Michael J. Viveiros....................... 42 President and Director
Michael A. Pecchia........................ 37 Chief Financial Officer and Secretary
Brian L. Burton........................... 57 Director Designee(1)
Ivan J. Winfield.......................... 64 Director Designee(1)
</TABLE>
- ---------------
(1) Messrs. Burton and Winfield have consented to become members of the Board of
Directors immediately following completion of the Offering.
All directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. Executive officers are
elected by and serve at the discretion of the Board of Directors until their
successors are duly chosen and qualified. The Board of Directors has, in
anticipation of the Offering, been increased from three members to five members.
None of the above-named director designees is an employee of the Company.
WAYLAND J. RUSSELL, a co-founder of the Company, has been its Chairman of
the Board of Directors and Chief Executive Officer since February 1997, having
previously served as the Company's President since its inception in 1986. He has
been a director of the Company since 1986. Mr. Russell began his career in the
rental-purchase business in 1977 as a store manager for Remco, Inc. He joined
Rent-A-Center, Inc. in 1980 as an Operations Manager. Two years later, he
resigned to start his own rental-purchase operation, which he sold to Crown
Leasing Corp. in 1983. Following such sale, he held several positions with Crown
Leasing Corp., the last as Vice President in charge of Personnel and Operations
until April 1986.
LAWRENCE S. HENDRICKS, a co-founder of the Company, has been Chief
Operating Officer of the Company since February 1997, having previously served
as Vice President for Store Operations since the Company's inception in 1986. He
has been a director of the Company since 1986. From 1982 through April 1986, Mr.
Hendricks held various positions with Crown Leasing Corp., the last as a
Regional Manager.
MICHAEL J. VIVEIROS, a co-founder of the Company, has been President of the
Company since February 1997, having previously served as Vice President since
the Company's inception in 1986. He has been a director of the Company since
1986. Mr. Viveiros began his career in the rental-purchase business as an
Assistant Manager with Crown Leasing Corp. and received several promotions
therefrom, the last to Regional Manager.
MICHAEL A. PECCHIA, a certified public accountant, has been the Chief
Financial Officer of the Company since February 1997, having previously served
from 1991 through 1997 as the Company's Treasurer and Secretary. Mr. Pecchia
also served as a director of the Company from February 1997 to the effective
date of this Prospectus. Prior to joining the Company, Mr. Pecchia was a manager
with Hill, Barth and King, CPA, a regional certified public accounting firm
headquartered in Youngstown, Ohio, which he joined in January 1983.
BRIAN L. BURTON has consented to become a director of the Company upon
completion of the Offering. Mr. Burton has been President of Vertical
Merchandising Systems, Inc., a distributor of impulse merchandising systems to
supermarkets, for over six years. From 1987 to 1991, Mr. Burton was a private
consultant and worked on various assignments for several retailers. Prior
thereto, he was Executive Vice President and Chief
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Operating and Financial Officer of Fabri-Centers of America, Inc., a publicly
traded fabric and craft retailer. Mr. Burton was employed at Fabri-Centers from
1968 to 1987.
IVAN J. WINFIELD has consented to become a director of the Company upon
completion of the Offering. Mr. Winfield was a Managing Partner of Coopers &
Lybrand from 1978 to 1994, and was a partner of the accounting firm from 1970
until his retirement. He has served since September 1995 as an Associate
Professor at Baldwin-Wallace College, Cleveland, Ohio, and as a business
consultant. He is a director of Boykin Lodging Co., HMI Industries, Inc.,
International Total Services, Inc. and OfficeMax, Inc. and a trustee of Fairport
Mutual Funds.
BOARD COMMITTEES AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Previously, the Board of Directors had no committees. Decisions concerning
compensation of executive officers in 1997 were made by the executive officers.
Immediately after the Offering, the Company will establish two committees: (i) a
Compensation Committee to make recommendations to the Board concerning salaries,
incentive compensation and stock option grants for employees and consultants to
the Company; and (ii) an Audit Committee to review the results and scope of the
audit and other services provided by the Company's independent auditors and to
recommend and approve the selection of the auditors. Messrs. Russell, Burton and
Winfield will be the members of the Audit and Compensation Committees.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned during the year ended December 31, 1997 by the Chief
Executive Officer and each of the other executive officers of the Company whose
compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION(2)
------------------ -------- ------- --------------- ---------------
<S> <C> <C> <C> <C>
Wayland J. Russell..................... $278,250 $14,000 $26,458 $7,917
Lawrence S. Hendricks.................. 208,687 10,500 17,633 7,917
Michael J. Viveiros.................... 208,687 10,500 23,069 7,917
</TABLE>
- ---------------
(1) Includes the value of perquisites, reported as taxable wages for 1997. The
amount of perquisites for each of the above-named executive officers is not
expected to exceed SEC-reporting thresholds for 1998 and subsequent years.
(2) Amount represents contribution to the Company's 401(k) Plan.
STOCK OPTION PLAN
The Rainbow Rentals, Inc. 1998 Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company effective May 1, 1998. Pursuant to the provisions of the Option Plan,
employees of the Company may be offered the opportunity to acquire shares of
Common Stock by the grant of stock options ("Options"), including both incentive
stock options ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and nonqualified stock options ("NQSOs").
Consultants and directors of the Company may receive only NQSOs under the Option
Plan. A total of 400,000 shares of Common Stock have been reserved for issuance
upon the exercise of Options under the Option 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. As of the date of this Prospectus, no Options have
been granted under the Option Plan. The director designees will each receive
Options to purchase 10,000 shares of Common Stock under the Option Plan upon
their appointment to the Board, immediately following the Offering.
38
<PAGE> 40
DIRECTORS' FEES
Following completion of the Offering, the Company intends to pay each
outside director a fee of $10,000 for up to four meetings per year, together
with reimbursement of out-of-pocket expenses incurred in connection with the
directors' attendance at such meetings. In addition, each outside director will
receive $2,500 per meeting for each meeting attended in excess of four per year.
No additional compensation is to be paid for committee meetings held on the same
day as a Board of Directors' meeting. Officers of the Company who are also
directors receive no additional compensation for serving as directors.
CERTAIN TRANSACTIONS
Mr. Russell and his spouse have personally guaranteed the secured Credit
Facility provided by Bank of America Illinois. Proceeds of the Offering will be
used to reduce the indebtedness owed under the Credit Facility.
The Company's headquarters facility is leased from an entity owned by the
Company's existing shareholders under a ten-year triple-net lease, with three
two-year options. In 1997, the rental amount was $103,000. The Company believes
that the rental is at market rate and that the other provisions of the lease are
on terms no less favorable to the Company than could be obtained from unrelated
parties. The Company has adopted a policy that future transactions with
affiliates, if any, will be on terms no less favorable than could be obtained
from unrelated parties.
Mr. Russell has personally loaned certain amounts to the Company since the
Company's inception in 1986. At December 31, 1995 and December 31, 1996, the
amount of such indebtedness was $215,000 and $159,000, respectively. The Company
satisfied this obligation in full as of December 31, 1997.
Alex Russell, the father of Mr. Wayland Russell, personally loaned the
Company $142,000 pursuant to a promissory note dated December 17, 1991. The
Company satisfied this obligation in full as of December 31, 1997.
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 was approximately $227,000, $243,000 and $208,000 in
1995, 1996 and 1997 respectively, and the amount of contributions for 1998 will
be approximately $230,000.
PRINCIPAL AND SELLING SHAREHOLDERS
The following sets forth certain information with respect to the ownership
of the Company's Common Stock on the date of this Prospectus and to reflect the
sale of the shares pursuant to the Offering. Unless otherwise indicated below,
the persons named below have the sole voting and investment power with respect
to the number of shares set forth opposite their names.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING(2)
------------------------- -------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
--------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Wayland J. Russell............................. 2,716,875 73.9% 2,716,875 45.8%
Lawrence S. Hendricks.......................... 639,240 17.4 639,240 10.8
Michael J. Viveiros............................ 319,620 8.7 319,620 5.4
All executive officers, directors and director
designees as a group (six persons)........... 3,675,735 100.0% 3,675,735 62.0%
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address for all persons listed above is c/o
Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio 44406.
(2) Assumes that the over-allotment option is not exercised by the Underwriters.
Messrs. Russell, Hendricks and Viveiros have granted the Underwriters a
30-day option to purchase the following number of
39
<PAGE> 41
additional shares of Common Stock, solely for the purpose of covering
over-allotments: Mr. Russell, 182,500; Mr. Hendricks, 91,000; and Mr.
Viveiros, 64,000. If the option is exercised, the percentage of shares owned
after the Offering will be 42.8% for Mr. Russell, 9.3% for Mr. Hendricks,
and 4.3% for Mr. Viveiros.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. No predictions can be made as to the effect, if any, that future sales of
Common Stock, and issuance of options to acquire shares of Common Stock, or the
availability of shares of Common Stock for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales may occur, could have a
material adverse effect on the market price of the Common Stock. See "Risk
Factors -- Shares Eligible for Future Sale" and "Management -- Stock Option
Plan."
Upon the consummation of the Offering, the Company will have 5,925,735
shares of Common Stock outstanding. Of these shares, the 2,250,000 shares of
Common Stock sold by the Company in the Offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by an "affiliate" of the Company (as that term is defined under the
Securities Act). Any such affiliate will be subject to the resale limitations of
Rule 144 adopted under the Securities Act. The remaining 3,675,735 shares of
Common Stock outstanding are "restricted securities" for purposes of Rule 144
and are held by "affiliates" of the Company within the meaning of Rule 144 under
the Securities Act. Restricted securities may not be resold in a public
distribution except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom, including the exemptions
provided by Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including a person who may be deemed to be an "affiliate" of the
Company, is entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
1.0% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the outstanding shares of Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. However, a person (or persons
whose shares are aggregated) who is not an "affiliate" of the Company during the
90 days preceding a proposed sale by such person and who has beneficially owned
"restricted securities" for at least two years is entitled to sell such shares
under Rule 144 without regard to the volume, manner of sale or notice
requirements.
The Company and each of its executive officers, directors and shareholders
have entered into lock-up agreements with the Representatives, pursuant to which
they have agreed not to, directly or indirectly, sell, offer to sell, contract
to sell, solicit an offer to buy, grant any option for the purchase or sale of,
assign, pledge, distribute or otherwise transfer, dispose of or encumber (or
make any announcement with respect to any of the foregoing), any of their shares
of Common Stock (other than those being sold pursuant to this Offering) or any
options, rights, warrants or other securities convertible into or exercisable or
exchangeable for shares of Common Stock or evidencing any right to purchase or
subscribe for shares of Common Stock for a period of 180 days following the date
of this Prospectus without the prior written consent of The Robinson-Humphrey
Company, LLC.
The Company has reserved 400,000 shares of Common Stock for issuance under
its Option Plan. Currently, there are 305,000 options granted. See
"Management -- Stock Option Plan." The Company intends to file a registration
statement on Form S-8 under the Securities Act to register all of the shares of
Common Stock reserved for issuance under the Option Plan. Such registration
statement is expected to be filed as soon as practicable after the date of the
Offering and will automatically become effective upon filing. Shares of Common
Stock issued under the Option Plan after the registration statement is filed may
thereafter be sold in the public market, subject, in the case of the various
holders, to the Rule 144 volume limitations applicable to affiliates, the
lock-up agreement described above and any transfer or vesting restrictions
imposed on the date of the grant.
40
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Company's Amended and Restated
Articles of Incorporation (the "Articles") and Amended and Restated Code of
Regulations (the "Regulations"), each to become effective upon consummation of
the Offering and each filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, without par value, 1,000,000 Voting Preferred Shares, without par
value and 1,000,000 Non-Voting Preferred Shares, without par value.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of shareholders. Shareholders have no
right to cumulate their votes in the election of directors. The holders of
shares of Common Stock have no preemptive or other rights to subscribe for
additional shares. All outstanding shares of Common Stock are, and those offered
hereby will be, validly issued, fully paid and nonassessable. Subject to
preferences that may be applicable to holders of any outstanding Preferred
Shares, holders of shares of Common Stock are entitled to such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
Upon liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to shareholders are distributable ratably among the
holders of outstanding Common Stock, subject to prior distribution rights of
creditors of the Company and to the preferential rights of any outstanding
Preferred Shares.
At present, there is no established trading market for the Common Stock.
The Common Stock is expected to be approved for inclusion in the Nasdaq National
Market under the symbol "RBOW".
The transfer agent and registrar for the Common Stock is National City
Bank, Cleveland, Ohio.
PREFERRED SHARES
The Company's Articles provide that, subject to certain limitations
prescribed by law, the Board of Directors, without further action by the
shareholders, may issue up to an aggregate of 1,000,000 Voting Preferred Shares
and up to an aggregate of 1,000,000 Non-Voting Preferred Shares (together,
without distinction, the "Preferred Shares") in one or more series and may fix
or alter the relative, participating, optional or other rights, preferences,
privileges and restrictions, including the redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
preferences and conversion rights and the description of and number of shares
constituting any wholly unissued series of Preferred Shares. The Board of
Directors, without further shareholder approval, can issue Preferred Shares with
conversion rights, which could adversely affect the voting power of the holders
of Common Stock. Voting Preferred Shares vote together with Common Stock as one
class on all matters, except where a class vote is required by law. No Preferred
Shares are presently outstanding and the Company currently has no plans to issue
Preferred Shares. These additional Preferred Shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. The issuance of Preferred
Shares in certain circumstances may have the effect of delaying or preventing a
change of control of the Company without further action by the shareholders, may
discourage bids for the Company's Common Stock at a premium over the market
price and may adversely affect the market price and the voting and other rights
of the holders of Common Stock.
LIMITATION OF DIRECTOR LIABILITY
Under Ohio law, a director's liability to the Company or its shareholders
for damages is limited to only those situations where it is proved by clear and
convincing evidence that the director's action or failure to act was undertaken
with deliberate intent to cause injury to the Company or undertaken with
reckless disregard for the best interests of the Company, and those situations
involving unlawful loans, asset distributions, dividend payments or share
repurchases. As a result, shareholders may be unable to recover monetary
41
<PAGE> 43
damages against directors for actions which constitute gross negligence or which
are in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions.
The Company's Regulations contain provisions indemnifying Directors and
officers of the Company to the fullest extent permitted by law and providing for
the advancement of expenses incurred in connection with an action upon the
receipt of an appropriate undertaking to repay said amount if it is determined
that the individual in question is not entitled to indemnification.
CERTAIN PROVISIONS OF OHIO LAW
As an Ohio corporation, the Company is subject to certain provisions of
Ohio law which may discourage or render more difficult an unsolicited takeover
of the Company. Among these are provisions that: (i) prohibit certain mergers,
sales of assets, issuances or purchases of securities, liquidation or
dissolution, or reclassification of the then outstanding shares of an Ohio
corporation involving certain holders of stock representing 10% or more of the
voting power, unless such transactions are either approved by the Directors in
office prior to the 10% shareholder becoming such or involve a 10% shareholder
which has been such for at least three years and certain requirements related to
the price and form of consideration to be received by shareholders are met; and
(ii) provide Ohio corporations with the right to recover profits realized under
certain circumstances by persons engaged in "greenmailing" or who otherwise sell
securities of a corporation within 18 months of proposing to acquire such
corporation.
In addition, pursuant to Section 1701.831 of the Ohio Revised Code, the
purchase of certain levels of voting power of the Company (one-fifth or more,
one-third or more, or a majority) can be made only with the prior authorization
of the holders of at least a majority of the total voting power of the Company
and the separate prior authorization of the holders of at least a majority of
the voting power held by shareholders other than the proposed purchaser,
officers of the Company and Directors of the Company who are also employees. In
light of the fact that, upon completion of the Offering, the three current
shareholders of the Company will own over 50% of the Company's outstanding
shares of Common Stock, acquisition of the foregoing levels of voting power by
third parties may not be possible unless the current shareholders vote in favor
thereof.
42
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), among the Company and the Underwriters named below
(the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom The Robinson-Humphrey
Company, LLC, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
("Dain Rauscher Wessels") and SunTrust Equitable Securities Corporation are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite their respective names. The Underwriters are committed to purchase all
of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting Underwriters may be increased as set forth in the
Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
The Robinson-Humphrey Company, LLC..........................
Dain Rauscher Wessels.......................................
SunTrust Equitable Securities Corporation...................
---------
Total............................................. 2,250,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share in sales to certain other dealers. After the Offering,
the public offering price and other selling terms may be changed.
The Selling Shareholders have granted to the Underwriters an option,
exercisable by the Representatives for 30 days after the date of the Prospectus,
to purchase up to an additional 337,500 shares of Common Stock at the initial
public offering price less the underwriting discount. Such option may be
exercised solely to cover over-allotments, if any. To the extent the
Representatives exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them as shown in the table above bears to the 2,250,000 shares of Common Stock
offered hereby.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
through negotiations among the Company and the Representatives and was not based
upon any independent appraisal or valuation of the Company. Among the factors
which were considered in making such determination were prevailing market and
general economic conditions, the market capitalization of publicly-traded
companies that the Company and the Representatives believed to be comparable to
the Company, the revenues and earnings of the Company in recent periods, the
experience of the Company's management, the economic characteristics of the
business in which the Company competes, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority. The Representatives
intend to make a market in the Common Stock after completion of the Offering.
In connection with the Offering, the Company's officers and directors and
its shareholders have agreed that, during a period of 180 days from the date of
this Prospectus, such holders will not, without the prior written consent of The
Robinson-Humphrey Company, LLC, directly or indirectly, offer, sell, contract to
sell, grant any option with respect to, pledge, hypothecate or otherwise dispose
of, any shares of Common Stock except for a bona fide gift provided that the
donee agrees to be bound by the terms of the donor's lockup agreement. In
addition, the Company has agreed that, during a period of 180 days from the date
of this Prospectus, the Company will not, without the prior written consent of
The Robinson-Humphrey Company, LLC, directly or indirectly, offer, sell,
contract to sell, grant any option with respect to, pledge, hypothecate or
otherwise dispose of any shares of Common Stock except for shares of Common
Stock to be issued in the Offering and upon the exercise of stock options which
are issued under the Company's Stock Option Plan.
43
<PAGE> 45
The Company and, if the over-allotment option is exercised, the Selling
Shareholders have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A.,
Cleveland, Ohio. Certain legal matters will be passed upon for the Underwriters
by Nelson Mullins Riley & Scarborough L.L.P., Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Rainbow Rentals, Inc. and
subsidiary as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company or the Common Stock, reference is made to the Registration Statement and
the exhibits and schedules filed as a part thereof. While all material elements
of the contracts or documents referenced herein are contained in this
Prospectus, statements contained in this Prospectus regarding the contents of
any contract or any other document are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or other
document filed as an exhibit to such Registration Statement. The Registration
Statement, including exhibits thereto, may be inspected, without charge, and
copies of all or any part thereof may be obtained upon payment of prescribed
fees at the public reference facilities of the Commission, maintained by the
Commission at its principal office located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http:\\www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
44
<PAGE> 46
RAINBOW RENTALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rainbow Rentals, Inc.:
We have audited the accompanying consolidated balance sheets of Rainbow
Rentals, Inc. and subsidiary (Company) as of December 31, 1996 and 1997, 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, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Cleveland, OH
March 13, 1998, except as to Note 12,
which is as of March 23, 1998
F-2
<PAGE> 48
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 472 $ 77 $ --
Short-term investments.................................... 27 -- --
Rental-purchase merchandise, net (note 2)................. 19,740 23,411 23,958
Prepaid expenses and other current assets................. 494 771 470
Income tax receivable (note 6)............................ -- 399 330
Deferred income taxes (note 6)............................ 14 -- --
------- ------- -------
Total current assets................................... 20,747 24,658 24,758
Property and equipment, net (note 3)........................ 3,620 3,441 3,390
Deferred income taxes (note 6).............................. 819 1,041 1,090
Other assets, net (notes 10 and 11)......................... 215 2,100 2,148
------- ------- -------
Total assets (note 4).................................. $25,401 $31,240 $31,386
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt (note 4)........... $ 333 $ -- $ --
Current installments of obligations under capital leases
(note 7)............................................... -- 80 80
Accounts payable.......................................... 1,917 1,000 2,132
Accrued income taxes (note 6)............................. 232 129 107
Accrued compensation and related costs.................... 942 1,091 1,025
Other liabilities and accrued expenses.................... 993 1,563 1,556
Deferred income taxes (note 6)............................ -- 1,201 1,741
Notes payable (note 5).................................... 132 -- --
Note payable to shareholder (note 5)...................... 159 -- --
------- ------- -------
Total current liabilities.............................. 4,708 5,064 6,641
Long-term debt, excluding current installments (note 4)..... 9,226 12,464 10,267
Notes payable (note 4)...................................... -- 10,488 10,488
Obligations under capital leases, excluding current
installments (note 7)..................................... -- 171 157
------- ------- -------
Total liabilities...................................... 13,934 28,187 27,553
Shareholders' equity (notes 4, 11 and 12)
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 and 3,675,735 shares issued and outstanding
at December 31, 1996 and 1997, respectively............ 60 60 60
Retained earnings......................................... 11,407 14,088 14,868
Treasury stock, -0- and 2,716,875 common shares at
December 31, 1996 and 1997, respectively, at cost...... -- (11,095) (11,095)
------- ------- -------
Total shareholders' equity............................. 11,467 3,053 3,833
Commitments (note 7)........................................
------- ------- -------
Total liabilities and shareholders' equity............. $25,401 $31,240 $31,386
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 49
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- --------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Rental revenue...................... $39,721 $43,815 $52,153 $12,128 14,168
Fees................................ 1,151 1,284 1,588 331 432
Merchandise sales................... 1,687 1,461 1,587 500 536
------- ------- ------- ------- -------
Total revenues.............. 42,559 46,560 55,328 12,959 15,136
Operating expenses
Merchandise costs
Depreciation and other
merchandise costs.............. 15,428 16,351 19,145 4,432 5,065
Amortization of acquired rental-
purchase agreements............ 807 652 -- -- --
------- ------- ------- ------- -------
Total merchandise costs..... 16,235 17,003 19,145 4,432 5,065
Store operating expenses
Salaries and related expenses.... 9,136 9,655 11,532 2,627 3,301
Occupancy expenses............... 3,092 3,416 4,068 946 1,122
Advertising expenses............. 2,576 2,837 3,283 764 820
Other store expenses............. 4,746 5,437 6,554 1,470 1,772
------- ------- ------- ------- -------
Total store operating
expenses.................. 19,550 21,345 25,437 5,807 7,015
------- ------- ------- ------- -------
Total merchandise costs and
store operating
expenses.................. 35,785 38,348 44,582 10,239 12,080
General and administrative expenses
(notes 5 and 11)................. 3,216 3,934 3,946 1,045 1,196
------- ------- ------- ------- -------
Total operating expenses.... 39,001 42,282 48,528 11,284 13,276
------- ------- ------- ------- -------
Operating income............ 3,558 4,278 6,800 1,675 1,860
Interest expense...................... 898 834 1,822 224 470
Other expense (income), net........... 183 453 329 (30) 33
------- ------- ------- ------- -------
Income before income
taxes..................... 2,477 2,991 4,649 1,481 1,357
Income taxes (note 6)................. 1,253 972 1,968 630 577
------- ------- ------- ------- -------
Net income.................. $ 1,224 $ 2,019 $ 2,681 $ 851 $ 780
======= ======= ======= ======= =======
Basic net income per common share
(note 12)........................... $ .19 $ .32 $ .59 $ .13 $ .21
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.................... $ 60 $ 8,164 $ -- $ 8,224
Net income.................................... -- 1,224 -- 1,224
---- ------- -------- --------
Balance at December 31, 1995.................... 60 9,388 -- 9,448
Net income.................................... -- 2,019 -- 2,019
---- ------- -------- --------
Balance at December 31, 1996.................... 60 11,407 -- 11,467
Net income.................................... -- 2,681 -- 2,681
Acquisition of 2,716,875 common shares (notes
4 and 11).................................. -- -- (11,095) (11,095)
---- ------- -------- --------
Balance at December 31, 1997.................... 60 14,088 (11,095) 3,053
Net income (unaudited)........................ -- 780 -- 780
---- ------- -------- --------
Balance at March 31, 1998 (unaudited)........... $ 60 $14,868 $(11,095) $ 3,833
==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income.................................... $ 1,224 $ 2,019 $ 2,681 $ 851 $ 780
Reconciliation of net income to net cash
provided by operating activities
Depreciation of property and equipment and
amortization of loan fees, customer rental
agreements, noncompete and consulting
agreements................................ 2,162 2,024 1,858 393 478
Depreciation of merchandise inventory....... 13,490 14,475 16,994 3,879 4,489
Deferred income taxes....................... (276) (335) 993 281 491
(Gain) loss on disposal of property and
equipment................................. -- 120 (187) (2) (85)
Purchases of merchandise inventory.......... (17,134) (20,546) (22,499) (6,394) (5,566)
Merchandise inventory disposed, net......... 1,746 2,092 1,834 521 530
(Increase) decrease in
Short-term investments.................... -- (2) 27 -- --
Prepaid expenses and other current
assets.................................. (228) 179 (277) (52) 301
Income tax receivable..................... (314) 314 (399) -- 69
Increase (decrease) in
Accounts payable.......................... 729 571 (917) (201) 1,133
Accrued income taxes...................... (78) 232 (103) (83) (22)
Accrued compensation and related costs.... 7 298 149 (33) (66)
Other liabilities and accrued expenses.... 371 150 570 (233) (7)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 1,699 1,591 724 (1,073) 2,525
-------- -------- -------- -------- --------
Cash flows from investing activities
Purchase of property and equipment, net....... (1,359) (2,371) (1,106) (339) (360)
Proceeds on the sale of property and
equipment................................... -- 3 250 2 140
Acquisition of assets (note 8)................ (2,007) -- -- -- --
Other, net.................................... (51) (30) 9 -- --
-------- -------- -------- -------- --------
Net cash used in investing activities... (3,417) (2,398) (847) (337) (220)
-------- -------- -------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt borrowings....... 46,645 53,644 63,827 15,805 13,835
Current installments and repayments of
long-term debt.............................. (44,843) (52,379) (60,922) (14,869) (16,032)
Increase (decrease) in notes payable.......... 7 (66) (291) 2 --
Loan origination fees paid.................... (107) (63) (147) -- --
Payment in connection with Redemption
Agreement (note 11)......................... -- -- (2,700) -- --
Principal payments under capital lease
obligations................................. -- -- (39) -- (14)
Other......................................... -- -- -- -- (171)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities................................ 1,702 1,136 (272) 938 (2,382)
-------- -------- -------- -------- --------
Net increase (decrease) in cash................. (16) 329 (395) (472) (77)
Cash at beginning of period..................... 159 143 472 472 77
-------- -------- -------- -------- --------
Cash at end of period........................... $ 143 $ 472 $ 77 $ -- $ --
======== ======== ======== ======== ========
Supplemental cash flow information:
Net cash paid during the year for
Interest.................................... $ 896 $ 795 $ 1,066 $ 178 $ 585
Income taxes................................ 2,007 884 1,477 470 69
Supplemental disclosures of noncash financing
activities:
</TABLE>
As discussed in notes 4, 10, and 11, in connection with the 1997 repurchase of
2,716,875 common shares, the Company entered into notes payable of $10,488 and
recorded other assets totaling $2,093.
The noncash addition for vans under capital leases of $290 in 1997 (note 7) has
been excluded from purchases of property and equipment.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 52
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 generally accepted
accounting principles and reflect practices appropriate to the industry in which
the Company operates.
(a) Reporting Entity and Principles of Consolidation
The Company is engaged in the rental and sale of home electronics,
furniture, appliances, and computers to the general public. The Company operates
62 stores in eight states: Connecticut, Massachusetts, Michigan, New York, Ohio,
Pennsylvania, Rhode Island, and Tennessee. The Company's corporate headquarters
is located in Canfield, Ohio.
The consolidated financial statements 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.
(b) 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 agreements which provide for either weekly or monthly rental
terms with rental payments collected in advance. The rental 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 the lower of cost or market. The
Company depreciates inventory using the units of activity method. Under the
units of activity method, merchandise held for rent is not depreciated, and
merchandise on rent is depreciated in the proportion of rents received to total
expected rents provided over the rental contract term. Amounts previously
reported for 1995 and 1996 have been restated to reflect the Company's decision
to change its method of depreciating merchandise from the straight-line basis to
the units of activity method. The Company believes the units of activity method
more accurately matches the recognition of depreciation expense with the
estimated timing of revenue receipts over the rental-purchase agreement period.
The units of activity method is recognized in the rental-purchase industry and
does not consider salvage value.
(c) 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. Leasehold improvements and vehicles held under capital lease
arrangements are amortized over the term of the applicable leases.
(d) Loan Fees
Amortization of capitalized loan fees is computed using the straight-line
method, which approximates the level-yield method, over the term of the
revolving loan (see note 4).
(e) Other Assets
Other assets consist primarily of noncompete and consulting agreements
which arose in connection with the share repurchase from a former officer of the
Company, (see notes 10 and 11). These costs are amortized over the estimated
agreement lives of seven years and three years, respectively.
F-7
<PAGE> 53
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) 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.
(g) Rental Revenue
Merchandise is rented to customers pursuant to rental-purchase agreements
which provide for weekly or monthly rental terms with nonrefundable rental
payments. Rental income is recognized as collected, because at the time of
collection the merchandise has been placed in service and costs of installation
and delivery have been incurred. 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) Advertising Expenses
Costs incurred for producing and communicating advertising are charged to
expense as incurred.
(i) Acquired Rental-Purchase Agreements
Rental agreements purchased in connection with a 1995 acquisition were
amortized over their estimated remaining life of 18 months. These agreements
became fully amortized in 1996.
(j) Basic Net Income per Common Share
Basic net income per common share are based on the weighted average number
of common shares outstanding during each year. Average shares used in the
calculations were 6,392,610, 6,392,610, and 4,509,406 for the years ended 1995,
1996, and 1997, respectively, and 6,392,610 and 3,675,735 for the three months
ended March 31, 1997 and 1998 (unaudited), respectively.
(k) 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.
(l) Reclassification
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation.
F-8
<PAGE> 54
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) RENTAL-PURCHASE MERCHANDISE
Following is a summary of rental-purchase merchandise:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Rental-purchase merchandise, at original
cost...................................... $33,133 $39,926 $40,961
Less: accumulated depreciation.............. (13,393) (16,515) (17,003)
------- ------- -------
$19,740 $23,411 $23,958
======= ======= =======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles.................................... $ 2,768 $ 2,142 $ 1,810
Leasehold improvements...................... 2,685 3,286 3,346
Computer equipment.......................... 665 688 795
Office equipment............................ 995 1,133 1,238
Vehicles held under capital lease........... -- 290 290
------- ------- -------
7,113 7,539 7,479
Less accumulated depreciation and
amortization.............................. 3,493 4,098 4,089
------- ------- -------
Property and equipment, net............ $ 3,620 $ 3,441 $ 3,390
======= ======= =======
</TABLE>
(4) LONG-TERM DEBT AND NOTES PAYABLE
Following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank borrowings under secured revolving
loan...................................... $ 7,726 $12,464 $10,267
Bank term loan under secured revolving loan
agreement payable to bank in monthly
installments through May 1999, interest at
prime plus 0.25% 1,833 -- --
------- ------- -------
9,559 12,464 10,267
Less current installments................... 333 -- --
------- ------- -------
Long-term debt, excluding current
installments.............................. $ 9,226 $12,464 $10,267
======= ======= =======
</TABLE>
On October 5, 1992, the Company entered into a revolving loan agreement
with a lending institution; the originally established maximum revolving loan
amount was $6,000. Between that date and the most recent amendment on May 21,
1997, the agreement was amended several times. Such amendments provided for
changes to the originally established maximum revolving loan amount as well as
the scheduled maturity date and the interest rate charged on the outstanding
revolving loan balance. On May 21, 1997, the revolving loan agreement was
further amended to increase the maximum revolving loan amount to $16,000 and
extend the loan agreement to May 21, 2000, at which time any outstanding balance
will be payable in full. Interest is charged on the outstanding loan balance at
prime plus 0.25%, or 8.75% at December 31, 1997. The Company
F-9
<PAGE> 55
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
can request to have portions of the outstanding principal designated as "IBOR
Portions," which under the terms of the revolving loan agreement would bear
interest at the Interbank Offering Rate (IBOR Rate), plus 3.00%. The IBOR Rate
at December 31, 1997 was 5.72%. At December 31, 1997 no part of the outstanding
principal is designated as an "IBOR Portion."
The revolving loan agreement is secured by substantially all assets,
contract rights, documents, and all rental agreements of the Company; in
addition, the agreement is personally guaranteed by the Company's majority
shareholder. The revolving loan agreement contains various covenants, with which
the Company was in compliance at December 31, 1996 and 1997. The revolving loan
agreement calls for a nonuse fee equal to 0.375% per annum on the daily average
amount by which the maximum revolving amount exceeds the outstanding loan
balance.
In 1996, the financial institution had made available to the Company a term
loan of up to $3,000, which had an outstanding balance of $1,833 at December 31,
1996. The loan was paid in full during 1997.
In April 1997, the Company entered into a Stock Redemption Agreement
(Redemption Agreement) with a former shareholder-officer of the Company. The
Redemption Agreement required the Company to repurchase all 2,716,875 shares of
stock owned by the former shareholder-officer and affiliates. The Company
entered into note payable agreements (Redemption Debt) with the
shareholder-officer and certain affiliates of the shareholder-officer amounting
to $10,488. The Redemption Debt, which accrues interest at a rate of 8.0%, is
payable in 180 equal monthly installments of $104, beginning January 1998. The
Company's obligations under the Redemption Debt, for payments of both principal
and interest, are subordinated to the Company's obligations under the revolving
loan agreement described above.
The aggregate amount of principal payments for long-term debt and notes
payable in each of the years following December 31, 1997 are as follows:
1998 -- $-0-; 1999 -- $294; 2000 -- $12,938; 2001 -- $512; and 2002 -- $553.
(5) RELATED PARTY TRANSACTIONS
In February 1995, the building which serves as the Company's corporate
headquarters was purchased by a partnership, owned by the Company's
shareholders. The Company entered into a 10-year building lease agreement with
the partnership at a rental rate which approximates market rates. Total rent
expense paid to the partnership in 1995, 1996, and 1997 was approximately $75,
$100, and $103, respectively.
The Company had a note payable to a shareholder in the amount of $159 at
December 31, 1996 which was repaid during 1997. Interest accrued at a rate equal
to 0.5% below the interest rate paid on the revolving loan at December 31, 1996
and was added to the face value of the note as it accrued.
The Company also had a note payable to a member of a shareholder's family
in the amount of $132 at December 31, 1996 which was repaid during 1997.
Interest accrued at 8.75% per annum and was payable on the first day of each
month.
F-10
<PAGE> 56
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The provision for income taxes consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current
Federal........................................ $1,193 $1,203 $ 738
State and local................................ 336 104 237
------ ------ ------
1,529 1,307 975
Deferred
Federal........................................ (231) (284) 837
State and local................................ (45) (51) 156
------ ------ ------
(276) (335) 993
------ ------ ------
$1,253 $ 972 $1,968
====== ====== ======
</TABLE>
Deferred income tax expense (benefit) resulted from the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax depreciation and amortization of more than
(less than) book:
Rental-purchase merchandise.................... $ (65) $ (4) $1,108
Property and equipment......................... (149) (27) (90)
Noncompete and consulting agreements........... 1 (1) (79)
Customer rental agreements..................... (88) (185) 29
Other, net....................................... 25 (118) 25
------ ------ ------
$ (276) $ (335) $ 993
====== ====== ======
</TABLE>
A reconciliation between income tax expense reported and income tax expense
computed by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1995 1996 1997 1997 1998
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income before income taxes............... $2,477 $2,991 $4,649 $1,481 $1,357
Federal statutory tax rate............... 34% 34% 34% 34% 34%
------ ------ ------ ------ ------
842 1,017 1,581 504 461
State and local income taxes, net of
federal income tax benefit............. 191 37 262 126 115
Meals and entertainment and officers'
insurance premiums..................... 43 20 33 8 7
Other, net............................... 177 (102) 92 (8) (6)
------ ------ ------ ------ ------
$1,253 $ 972 $1,968 $ 630 $ 577
====== ====== ====== ====== ======
</TABLE>
F-11
<PAGE> 57
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following deferred tax assets (liabilities) are reflected in the
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Rental-purchase merchandise.............................. $ (216) $(1,324)
Property and equipment................................... 613 703
Customer rental agreements............................... 273 244
Noncompete and consulting agreements..................... 3 82
Other.................................................... 160 135
------- -------
Net deferred tax asset (liability) $ 833 $ (160)
======= =======
</TABLE>
The net amount of current and noncurrent deferred tax assets (liabilities)
was $833 as of December 31, 1996 and $(160) as of December 31, 1997,
representing deferred tax assets and deferred tax liabilities of $1,119 and
$286, respectively, at December 31, 1996 and $1,178 and $1,338, respectively, at
December 31, 1997. No valuation allowance was required for the deferred tax
assets.
(7) LEASES
The Company has entered into a capital lease arrangement in 1997 for the
financing of new vans. The gross amount of vehicles and the related accumulated
amortization are recorded in property and equipment (see note 3).
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, the Company leases a
number of delivery and general use vehicles under operating lease arrangements.
Rental expense charged to operations totaled $2,175, $2,389, and $3,180 for the
years ended December 31, 1995, 1996, and 1997, respectively. Future minimum
lease payments under noncancelable operating leases (with initial or remaining
lease terms in excess of one year) and future minimum capital lease payments as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ------- ---------
<S> <C> <C>
1998........................................... $ 84 $2,753
1999........................................... 84 2,171
2000........................................... 127 1,740
2001........................................... -- 1,154
2002........................................... -- 566
Thereafter........................................ -- 554
------ ------
Total minimum lease payments........................... 295 $8,938
======
Less amount representing interest...................... 44
------
Present value of net minimum capital lease payments.... 251
Less current installments of obligations under capital
leases.............................................. 80
------
Obligations under capital leases, excluding current
installments........................................... $ 171
======
</TABLE>
(8) ACQUISITION
On March 1, 1995, the Company acquired certain assets of an Ohio competitor
for approximately $2,000. The assets acquired included the fixed assets,
inventory, and customer rental agreements of the competitor's 10 Ohio stores.
This transaction was financed under the amended terms of the Company's existing
revolving loan agreement (see note 4). The acquisition was accounted for as a
purchase; accordingly, the acquired assets
F-12
<PAGE> 58
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were recorded at estimated fair values at the date of acquisition. The results
of operations are included from the date of acquisition.
(9) 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. No retirement plan expenses were incurred in 1995 or 1996;
in 1997, the Company contributed $25.
(10) OTHER ASSETS
Following is a summary of other assets:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Noncompete and consulting agreements.......... $ -- $2,093 $2,093
Loan origination fees......................... 157 304 304
------ ------ ------
157 2,397 2,397
Less accumulated amortization................. 74 418 531
------ ------ ------
83 1,979 1,866
Other......................................... 132 121 282
------ ------ ------
$ 215 $2,100 $2,148
====== ====== ======
</TABLE>
(11) SHAREHOLDER TRANSACTIONS
In connection with the Redemption Agreement (note 4), the Company entered
into noncompete, consulting, and severance agreements with the former
shareholder-officer (see notes 4 and 10), and agreed to pay a total of $13,436
payable as follows (cash payment of $2,948 and notes payable of $10,488)
allocated as follows:
<TABLE>
<S> <C>
Stock repurchase.................................. $11,095
Noncompete and consulting agreements.............. 2,093
Severance agreement............................... 248
-------
$13,436
=======
</TABLE>
The full amount paid for the acquisition of shares has been recorded as
treasury stock, consistent with the cost method of accounting for treasury
stock. As indicated in note 10, the amount allocated to the noncompete and
consulting agreements was recorded in other assets. The severance payment was
charged fully to general and administrative expense in 1997.
(12) SUBSEQUENT EVENTS
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). This Board action was taken in contemplation of a
planned initial public offering of the Company's securities
F-13
<PAGE> 59
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Offering). The conversion of nonvoting shares has been reflected retroactively,
by removing reference to common nonvoting shares from shareholder's equity and
calculating net income per common share based on the combined weighted average
common shares outstanding after considering the conversion.
Also on March 23, 1998, the Board approved a 10,500 for one stock split
distributed in the form of a stock dividend. As a result of this action, an
additional 3,675,384.93 shares of Common Stock will be issued on the effective
date of the Offering to shareholders of record on March 23, 1998. All references
throughout these consolidated financial statements and notes thereto to number
of shares and per share amounts of the Company's Common Stock have been restated
to reflect the stock split.
F-14
<PAGE> 60
======================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS, ANY OF
THE UNDERWRITERS OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Forward-Looking Statements............ 11
Use of Proceeds....................... 11
Capitalization........................ 12
Dividend Policy....................... 12
Dilution.............................. 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 37
Certain Transactions.................. 39
Principal and Selling Shareholders.... 39
Shares Eligible for Future Sale....... 40
Description of Capital Stock.......... 41
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 44
Available Information................. 44
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
======================================================
======================================================
2,250,000 SHARES
[RAINBOW RENTALS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
THE ROBINSON-HUMPHREY
COMPANY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
SUNTRUST EQUITABLE SECURITIES
, 1998
======================================================
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the issuance and distribution of the Common Stock
being registered hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 9,160
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 3,605
Nasdaq National Market Entry Fee............................ 58,125
Transfer Agent and Registrar Fees........................... 7,500
Printing Costs.............................................. 160,000
Accounting Fees and Expenses................................ 175,000
Legal Fees and Expenses (not including Blue Sky)............ 175,000
Blue Sky Fees and Expenses.................................. 5,000
Miscellaneous............................................... 6,610
--------
Total............................................. $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under certain circumstances provided in Article V of the Registrant's
Amended and Restated Code of Regulations and subject to Section 1701.13 of the
Ohio Revised Code (which sets forth the conditions and limitations governing the
indemnification of officers, directors and other persons), the Registrant will
indemnify any Director or officer or any former Director or officer of the
Registrant against losses, damages, or liabilities reasonably incurred by such
Director or officer by reason of the fact that he is or was such Director or
officer in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative. A copy of
the Registrant's Code of Regulations, as amended, is included herein as Exhibit
3.2.
Reference is made to Section 9 of the Underwriting Agreement (Exhibit 1.1
to this Registration Statement) which provides for indemnification of the
Registrant's officers, Directors and controlling persons by the Underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933.
The Registrant intends to purchase and maintain liability insurance for the
benefit of its directors and executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Registrant which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the Registrant
within the past three years.
II-1
<PAGE> 62
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following Exhibits are filed herewith and made a part
hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Articles of Incorporation*
3.2 Form of Amended and Restated Code of Regulations.*
4.1 Specimen certificate for the Common Stock, without par
value, of the Registrant.
4.2 Loan and Security Agreement dated as of October 5, 1992, by
and between Bank of America and the Registrant, as amended.*
4.3 Collateral Trademark Security Agreement dated as of October
5, 1992 by and between Bank of America Illinois and the
Registrant.*
Information concerning certain of the Registrant's other
long-term debt is set forth in Note 4 of the consolidated
financial statements. The Registrant hereby agrees to
furnish copies of such instruments to the Commission upon
request.
5.1 Opinion of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A. as
to the validity of the securities being offered.
10.1 1998 Stock Option Plan*
10.2 Lease by and between Rainbow Properties, Ltd. and the
Registrant dated January 1, 1996 for the Company's principal
executive offices.*
21 List of subsidiaries*
23.1 Consent of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A.
(included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney*
27.1 Financial Data Schedule
99.1 Director designees consent to inclusion of their name in
Prospectus
99.2 Consent of the Association of Progressive Rental
Organizations to inclusion of its name and results of
industry survey in Prospectus
</TABLE>
- ---------------
* Previously filed
(b) FINANCIAL STATEMENT SCHEDULES.
None
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
<PAGE> 63
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide public offering thereof.
II-3
<PAGE> 64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
CLEVELAND, STATE OF OHIO, ON MAY 14, 1998.
RAINBOW RENTALS, INC.
By: /s/ WAYLAND J. RUSSELL
------------------------------------
Wayland J. Russell, Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
WAYLAND J. RUSSELL* Chairman of the Board of Directors and May 14, 1998
- ------------------------------------------------ Chief Executive Officer
Wayland J. Russell (Principal Executive Officer)
LAWRENCE S. HENDRICKS* Chief Operating Officer and Director May 14, 1998
- ------------------------------------------------
Lawrence S. Hendricks
MICHAEL J. VIVEIROS* President and Director May 14, 1998
- ------------------------------------------------
Michael J. Viveiros
MICHAEL A. PECCHIA* Chief Financial Officer May 14, 1998
- ------------------------------------------------ (Principal Financial and Accounting
Michael A. Pecchia Officer)
</TABLE>
* The undersigned, by signing his name hereto, does hereby execute this
Amendment No. 1 to Registration Statement on Form S-1 on behalf of Rainbow
Rentals, Inc. and the above named directors and officers pursuant to a Power of
Attorney, executed on behalf of the Registrant and each such director and
officer, and which has been previously filed with the Commission.
By: /s/ MICHAEL A. PECCHIA
------------------------------------
Michael A. Pecchia, Attorney-in-fact
II-4
<PAGE> 1
Exhibit 1.1
RAINBOW RENTALS, INC.
COMMON STOCK
----------------------
UNDERWRITING AGREEMENT
----------------------
, 1998
THE ROBINSON-HUMPHREY COMPANY, LLC
DAIN RAUSCHER WESSELS
SUNTRUST EQUITABLE SECURITIES CORPORATION
As representatives of the several
Underwriters named in SCHEDULE I hereto,
c/o The Robinson-Humphrey Company, LLC
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Ladies and Gentlemen:
Rainbow Rentals, Inc., a Ohio corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
several Underwriters named in SCHEDULE I hereto (the "Underwriters") 2,250,000
shares of common stock, without par value (the "Common Stock"), of the Company
(the "Firm Shares"), and, subject to the terms and conditions stated herein,
certain shareholders of the Company identified on SCHEDULE II hereto (the
"Selling Shareholders") propose to sell to the Underwriters up to 337,500
additional shares of Common Stock (the "Optional Shares") (the Firm Shares and
the Optional Shares that the Underwriters elect to purchase pursuant to Section
2 hereof are collectively called the "Shares").
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-48769)
with respect to the Shares, including a prospectus subject to
completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (i) if
such registration statement, as it may have been amended, has become
effective under the Act and information has been omitted therefrom in
accordance with Rule 430A under the Act, either (A) if the Company
relies on Rule 434 under the Act, a term sheet relating to the shares
that shall identify the preliminary prospectus that it supplements
containing such information as is required or permitted by
<PAGE> 2
Rules 434, 430A and 424(b) under the Act or (B) if the Company does not
rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement) with
such changes or insertions as are required by Rule 430A or permitted by
Rule 424(b) under the Act and as have been provided to and approved by
the Representatives, or (ii) if such registration statement, as it may
have been amended, has not become effective under the Act, an amendment
to such registration statement, including a form of prospectus, a copy
of which amendment has been provided to and approved by the
Representatives prior to the execution of this Agreement. The Company
may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering
certain additional shares of Common Stock, which registration statement
will be effective upon filing with the Commission. As used in this
Agreement, the term "Original Registration Statement" means the
registration statement initially filed relating to the Shares, as
amended at the time when it was or is declared effective, including all
financial statement schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Rule
462(b) Registration Statement" means any registration statement filed
with the Commission pursuant to Rule 462(b) under the Act (including
the Original Registration Statement and any Preliminary Prospectus or
Prospectus incorporated herein at the time such Original Registration
Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each
prospectus subject to completion included in such registration
statement or any amendment or post-effective amendment thereto
(including the prospectus subject to completion, if any, included in
the Registration Statement at the time it was or is declared
effective); and the term "Prospectus" means (A) if the Company relies
on Rule 434 of the Act, the Term Sheet (as hereinafter defined)
relating to the Shares that is first filed pursuant to Rule 424(b)(7)
of the Act, together with the Preliminary Prospectus identified therein
that such Term Sheet supplements; (B) if the Company does not rely on
Rule 434 of the Act, the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act; or (C) if no prospectus is
required to be so filed, such term means the prospectus included in the
Registration Statement at the effective time of such Registration
Statement; and the term "Term Sheet" means any term sheet that
satisfies the requirements of Rule 434 of the Act. Any reference to the
"date" of a Prospectus that includes a Term Sheet shall mean the date
of the Term Sheet. For purposes of the following representations and
warranties, to the extent reference is made to the Prospectus and at
the relevant time the Prospectus is not yet in existence, such
reference shall be deemed to be to the most recent Preliminary
Prospectus.
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued and no proceeding for that
purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. If the
Registration Statement has become effective under the Act, no stop
order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and no proceeding for that purpose has
been instituted or threatened or, to the best knowledge of the Company,
contemplated by the Commission or the securities authority of any state
or other jurisdiction.
2
<PAGE> 3
(c) When any Preliminary Prospectus was filed with the
Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement
or any amendment thereto was or is declared effective, and at each Time
of Delivery (as hereinafter defined), it (i) contained or will contain
all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (ii) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading. When (A) the Prospectus or any
amendment or supplement thereto is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement or the
amendment thereto containing such amendment or supplement to the
Prospectus was or is declared effective) or (B) any Term Sheet which is
a part of the Prospectus is filed with the Commission pursuant to Rule
434, and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder
and (ii) did not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph
(c) do not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto, the
Prospectus or any amendment or supplement thereto or any Term Sheet in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter through you specifically for use
therein.
(d) If the Company has elected to rely on rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i)
the Company has filed a Rule 462(b) Registration Statement in
compliance with and that is effective upon filing pursuant to rule
462(b) and has received confirmation of its receipt; and (ii) the
Company has given irrevocable instructions for transmission of the
application filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under
the Act, or the Commission has received payment of such filing fee.
(e) The descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings or contracts
and other documents are accurate and fairly present the information
required to be shown; and there are no statutes or legal or
governmental proceedings required to be described in the Registration
Statement or the Prospectus that are not described as required and no
contracts or documents of a character that are required to be described
in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described and filed
as required.
(f) Each of the Company and its wholly-owned subsidiary,
Rainbow Advertising, Inc., an Ohio corporation (the "Subsidiary") has
been duly incorporated, is
3
<PAGE> 4
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and conduct its
business as described in the Prospectus. The Company has full power and
authority (corporate and other) to enter into this Agreement and to
perform its obligations hereunder. Each of the Company and the
Subsidiary is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, except where the failure
to so qualify would not have a material adverse effect on the financial
condition, results of operations or business of the Company and the
Subsidiary, taken as a whole.
(g) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued and
outstanding shares of Common Stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable and
conform to the description of the Common Stock contained in the
Prospectus. None of the issued shares of capital stock of the Company
or the Subsidiary has been issued or is owned or held in violation of
any preemptive rights of shareholders, and no person or entity
(including any holder of outstanding shares of capital stock of the
Company or the Subsidiary) has any preemptive or other rights to
subscribe for any of the Shares.
(h) All of the issued shares of capital stock of the
Subsidiary have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company free and
clear of all liens, security interests, pledges, charges, encumbrances,
defects, shareholders' agreements, voting trusts, equities or claims of
any nature whatsoever. Other than the subsidiaries listed on Exhibit 21
to the Registration Statement, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture
or other association.
(i) The Underwriters will receive good and marketable title to
the Shares to be issued and delivered by the Company hereunder, free
and clear of all liens, encumbrances, claims, security interests,
restrictions, shareholders' agreements and voting trusts whatsoever.
Except as disclosed in the Prospectus, there are no outstanding (i)
securities or obligations of the Company or the Subsidiary convertible
into or exchangeable for any capital stock of the Company or the
Subsidiary, (ii) warrants, rights or options to subscribe for or
purchase from the Company or the Subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or
(iii) obligations of the Company or the Subsidiary to issue any shares
of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(j) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor the
Subsidiary has sustained any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus.
4
<PAGE> 5
(k) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) neither the
Company nor the Subsidiary has incurred any liabilities or obligations,
direct or contingent, or entered into any transactions, not in the
ordinary course of business, that are material to the Company and the
Subsidiary, (ii) the Company has not purchased any of its outstanding
capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, (iii) there has not been
any change in the capital stock, long-term debt or short-term debt of
the Company or the Subsidiary, other than in the ordinary course of
business, and (iv) there has not been any material adverse change, or
any development involving a prospective material adverse change, in or
affecting the financial condition, results of operations or business of
the Company and the Subsidiary, in each case other than as disclosed in
or contemplated by the Prospectus.
(l) The Shares have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be validly
issued and fully paid and nonassessable and will conform to the
description of the Common Stock contained in the Prospectus; and the
certificates evidencing the Shares will comply with all applicable
requirements of Ohio law and none of the Shares will be issued or sold
in violation of any preemptive rights of shareholders.
(m) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(n) All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times duly registered under the
Act or exempt from the registration requirements of the Act by reason
of Sections 3(b), 4(2) or 4(6) thereof and were duly registered or the
subject of an available exemption from the registration requirements of
the applicable state securities or blue sky laws.
(o) Neither the Company nor the Subsidiary is, or with the
giving of notice or passage of time or both would be, in violation of
its Amended and Restated Articles of Incorporation or Amended and
Restated Code of Regulations or in default under any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which the Company or the Subsidiary is a party or to
which any of their respective properties or assets are subject that
would have a material adverse effect on the Company's and the
Subsidiary's business, financial condition or results of operations,
taken as a whole (a "Material Adverse Effect").
(p) The issue and sale of the Shares and the performance of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage,
5
<PAGE> 6
deed of trust, loan agreement, lease or other agreement or instrument
to which the Company or the Subsidiary is a party or to which any of
their respective properties or assets is subject and which would have a
Material Adverse Effect, nor will such action conflict with or violate
any provision of the Amended and Restated Articles of Incorporation or
Amended and Restated Code of Regulations of the Company or the
Subsidiary or any statute, rule or regulation or any order, judgment or
decree of any court or governmental agency or body having jurisdiction
over the Company or the Subsidiary or any of their respective
properties or assets.
(q) The Company and the Subsidiary have good and marketable
title in fee simple to all real property, if any, and good title to all
personal property owned by them, in each case free and clear of all
liens, security interests, pledges, charges, encumbrances, mortgages
and defects, except such as are disclosed in the Prospectus or such as
do not materially and adversely affect the value of such property and
do not interfere with the use made or proposed to be made of such
property by the Company and the Subsidiary; and any real property and
buildings held under lease by the Company or the Subsidiary are held
under valid, subsisting and enforceable leases, with such exceptions as
are disclosed in the Prospectus or are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or the Subsidiary.
(r) No consent, approval, authorization, order or declaration
of or from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act (which,
if the Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this Agreement) and
such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of the Shares by the
Underwriters.
(s) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened (or any basis therefor) in which
the Company or the Subsidiary is a party or of which any of their
respective properties or assets are the subject which, if determined
adversely to the Company or the Subsidiary, would individually or in
the aggregate have a material adverse effect on the financial
condition, results of operations or business of the Company and the
Subsidiary. Neither the Company nor the Subsidiary is in violation of,
or in default with respect to, any statute, rule, regulation, order,
judgment or decree, except as described in the Prospectus or such as do
not and will not individually or in the aggregate have a material
adverse effect on the financial condition, results of operations or
business of the Company and the Subsidiary, and neither the Company nor
the Subsidiary is required to take any action in order to avoid any
such violation or default. The Company and the Subsidiary hold all
licenses, consents and approvals, and have satisfied all eligibility
and other similar requirements imposed by federal and state regulatory
bodies, administrative agencies or other governmental bodies, agencies
or officials, in each case as material to the conduct of the respective
businesses in which they are engaged.
6
<PAGE> 7
(t) KPMG Peat Marwick, LLP, who have certified certain
financial statements of the Company and the Subsidiary, are and were
during the periods covered by their reports included in the
Registration Statement and the Prospectus, independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(u) The consolidated financial statements and schedules
(including the related notes) of the Company and the Subsidiary
included in the Registration Statement, the Prospectus or any
Preliminary Prospectus were prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial condition and results
of operations of the Company and the Subsidiary, on a consolidated
basis, at the dates and for the periods presented. The financial and
operating data set forth under the captions "Prospectus Summary,"
"Summary Financial and Operating Data," "Use of Proceeds,"
"Capitalization," "Selected Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business," "Management," and "Principal and Selling Shareholders" and
the financial statements contained in the Prospectus fairly present, on
the basis stated in the Prospectus, the information included therein.
(v) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles.
(w) Neither the Company nor any of its officers, directors or
affiliates has (i) taken, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Shares or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased or paid anyone any compensation for soliciting
purchases of, the Shares or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company.
(x) The Company has obtained for the benefit of the Company
and the Underwriters from each of its directors, officers and
shareholders a written agreement (a "Lock Up Agreement") that for a
period of 180 days from the date of the Prospectus such director,
officer or shareholder will not, without your prior written consent,
offer, pledge, sell, contract to sell, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into, or exercisable or
exchangeable for, shares of Common Stock except pursuant to the terms
of the Lock-Up Agreement entered into by such director, officer or
shareholder and the Underwriters.
(y) Neither the Company, the Subsidiary, nor any director,
officer, agent, employee or other person associated with or acting on
behalf of the Company or the Subsidiary has, directly or indirectly:
used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political
activity; made any
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<PAGE> 8
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(z) The operations of the Company and the Subsidiary with
respect to any real property currently leased or owned or by any means
controlled by the Company or the Subsidiary (the "Real Property") are
in compliance in all material respects with all federal, state, and
local laws, ordinances, rules, and regulations relating to occupational
health and safety and the environment (collectively, "Laws"), and the
Company and the Subsidiary have all licenses, permits and
authorizations necessary to operate under all Laws and are in
compliance with all terms and conditions of such licenses, permits and
authorizations; neither the Company nor the Subsidiary has authorized,
conducted or has knowledge of the generation, transportation, storage,
use, treatment, disposal or release of any hazardous substance,
hazardous waste, hazardous material, hazardous constituent, toxic
substance, pollutant, contaminant, petroleum product, natural gas,
liquefied gas or synthetic gas defined or regulated under any
environmental law on, in or under any Real Property; and there is no
pending or threatened claim, litigation or any administrative agency
proceeding, nor has the Company or the Subsidiary received any written
or oral notice from any governmental entity or third party, that: (i)
alleges a violation of any Laws by the Company or the Subsidiary; (ii)
alleges the Company or the Subsidiary is a liable party under the
Comprehensive Environmental Response, Compensation, and Liability Act,
42 U.S.C.ss.9601 ET SEQ. or any state superfund law; (iii) alleges
possible contamination of the environment by the Company or the
Subsidiary; or (iv) alleges possible contamination of the Real
Property.
(aa) The Company and the Subsidiary own or have the right to
use all patents, patent applications, trademarks, trademark
applications, tradenames, service marks, copyrights, franchises, trade
secrets, proprietary or other confidential information and intangible
properties and assets (collectively, "Intangibles") necessary to their
respective businesses as presently conducted or as the Prospectus
indicates the Company or the Subsidiary proposes to conduct; to the
best knowledge of the Company, neither the Company nor the Subsidiary
has infringed or is infringing, and neither the Company nor the
Subsidiary has received notice of infringement with respect to,
asserted Intangibles of others; and, to the best knowledge of the
Company, there is no infringement by others of Intangibles of the
Company or the Subsidiary.
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<PAGE> 9
(bb) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; and neither the Company nor the Subsidiary has any
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a comparable cost, except as disclosed in the
Prospectus.
(cc) Each of the Company and the Subsidiary makes and keeps
accurate books and records reflecting its assets and maintains internal
accounting controls which provide reasonable assurance that (i)
transactions are executed in accordance with management's
authorization, (ii) transactions are recorded as necessary to permit
preparation of the Company's consolidated financial statements in
accordance with generally accepted accounting principles and to
maintain accountability for the assets of the Company, (iii) access to
the assets of the Company and the Subsidiary is permitted only in
accordance with management's authorization, and (iv) the recorded
accountability for assets of the Company and the Subsidiary is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. The Company's software systems
include design, performance and functionality so that the Company does
not reasonably expect to experience invalid or incorrect results or
abnormal software operation related to calendar year 2000. The
Company's software systems include calendar year 2000 date conversion
and compatibility capabilities, including, but not limited to, date
data century recognition, same century and multiple century formula and
date value calculations, and user interface date data values that
reflect the century.
(dd) The Subsidiary is not currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distributions on its capital stock, from repaying to the Company
any loans or advances to the Subsidiary or from transferring any of its
property or assets to the Company or any other subsidiary of the
Company, except as disclosed in the Prospectus.
(ee) The Company and the Subsidiary have filed all foreign,
federal, state and local tax returns that are required to be filed by
them and have paid all taxes shown as due on such returns as well as
all other taxes, assessments and governmental charges that are due and
payable; and no deficiency with respect to any such return has been
assessed or proposed.
(ff) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940.
(gg) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or commission as a
result of any of the transactions contemplated by this Agreement.
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<PAGE> 10
(hh) The Company has taken such action as necessary to have
the Shares authorized for trading, and all of the Shares have been
approved for listing, on the National Association of Securities Dealers
Automated Quotation National Market System (the "Nasdaq National
Market").
(ii) No statement, representation, or warranty made by the
Company in this Agreement or made in any certificate or document
required by this Agreement to be delivered to you was, or will be when
made, inaccurate, untrue or incorrect in any material respect.
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
herein set forth, the Company agrees to issue and sell an aggregate of 2,250,000
Firm Shares, and each of the Underwriters agrees, severally and not jointly, to
purchase at a purchase price of $_______ per share, the number of Firm Shares
set forth opposite the name of such Underwriter in SCHEDULE I hereto. In the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Selling Shareholders agree to
issue and sell to each of the Underwriters the aggregate number of Optional
Shares set forth opposite such Selling Shareholder's name in SCHEDULE II hereto,
and each of the Underwriters agrees, severally and not jointly, to purchase from
the Selling Shareholders, at the purchase price per share set forth in the
immediately preceding sentence, that portion of the number of Optional Shares as
to which such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction, the numerator of which is the maximum number of Optional
Shares that such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in SCHEDULE I hereto and the denominator of which is
the maximum number of the Optional Shares that all of the Underwriters are
entitled to purchase hereunder.
The Selling Shareholders hereby grant to the Underwriters the right to
purchase at their election in whole or in part from time to time up to 337,500
Optional Shares at the purchase price per share set forth in the paragraph
above, for the sole purpose of covering over-allotments in the sale of Firm
Shares. Any such election to purchase Optional Shares may be exercised by
written or telegraphic notice from you to the Company and the Selling
Shareholders, given from time to time within a period of 30 calendar days after
the date of this Agreement and setting forth the aggregate number of Optional
Shares to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time of
Delivery (as hereinafter defined) or, unless you and the Selling Shareholders
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice. In the event you elect to purchase all or a
portion of the Optional Shares, the Company and the Selling Shareholders agree
to furnish or cause to be furnished to you the certificates, letters and
opinions, and to satisfy all conditions, set forth in Section 8 hereof at each
Subsequent Time of Delivery (as hereinafter defined). In the event you elect to
purchase less than all of the 337,500 Optional Shares, the number of Optional
Shares to be purchased from and sold by each Selling Shareholder shall be, as
nearly as practicable, in the respective proportions to which the total shares
to be sold by each Selling Shareholder bears to the total number of shares to be
sold by all Selling Shareholders.
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<PAGE> 11
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates for the Shares to be
purchased by each Underwriter hereunder, in such denominations and registered in
such names as The Robinson-Humphrey Company, LLC may request upon at least 48
hours' prior notice to the Company, shall be delivered by or on behalf of the
Company to you for the account of such Underwriter, against payment by such
Underwriter on its behalf of the purchase price therefor by wire transfer of
immediately available funds to an account designated by the Company. The closing
of the sale and purchase of the Shares shall be held at the offices of Nelson
Mullins Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400,
Atlanta, Georgia 30309, except that physical delivery of such certificates shall
be made at the office of The Depository Trust Company, 55 Water Street, New
York, New York 10041. The time and date of such delivery and payment shall be,
with respect to the Firm Shares, at 10:00 a.m., Atlanta time, on the third full
business day after the execution of this Agreement or at such other time and
date as you and the Company may agree upon in writing, and, with respect to the
Optional Shares, at 10:00 a.m., Atlanta time, on the date specified by you in
the written notice given by you of the Underwriters' election to purchase all or
part of such Optional Shares, or at such other time and date as you and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called a "Subsequent Time of Delivery," and each such time and date for delivery
is herein called a "Time of Delivery." The Company will make such certificates
available for checking and packaging at least 24 hours prior to each Time of
Delivery at the office of The Depository Trust Company, 55 Water Street, New
York, New York 10041 or at such other location in New York, New York specified
by you in writing at least 48 hours prior to such Time of Delivery.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters:
(a) If the Registration Statement has been declared effective
prior to the execution and delivery of this Agreement, the Company will
file either (A) the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by you, subparagraph (4)) of Rule 424(b) or (B) a Term Sheet with the
Commission pursuant to and in accordance with Rule 434 not later than
the earlier of (i) the second business day following the execution and
delivery of this Agreement or (ii) the fifth business day after the
date on which the Registration Statement is declared effective. The
Company will advise you promptly of any such filing pursuant to Rule
424(b) or Rule 434.
(b) The Company will not file with the Commission the
prospectus or the amendment referred to in the second sentence of
Section 1 (a) of this Agreement, any amendment or supplement to the
Prospectus, any Term Sheet, any amendment to the Registration Statement
or any Rule 462(b) Registration Statement unless you have received a
reasonable period of time to review any such proposed amendment or
supplement and consented to the filing thereof or unless in the written
opinion of counsel for the Company (which opinion is provided to you
prior to any such filing) such amendment or supplement
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<PAGE> 12
is required by law, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective as
promptly as possible. Upon the request of the Representatives or
counsel for the Underwriters, the Company will promptly prepare and
file with the Commission, in accordance with the rules and regulations
of the Commission, any amendments to the Registration Statement or
amendments or supplements to the Prospectus or any Term Sheet that may
be necessary or advisable in connection with the distribution of the
Shares by the several Underwriters and will use its best efforts to
cause any such amendment to the Registration Statement to be declared
effective as promptly as possible. If required, the Company will file
any amendment or supplement to the Prospectus or any Term Sheet with
the Commission in the manner and within the time period required by
Rule 424(b) and Rule 434, as applicable, under the Act. The Company
will advise the Representatives, promptly after receiving notice
thereof, of the time when the Original Registration Statement or any
amendment thereto or any Rule 462(b) Registration Statement has been
filed or declared effective or the Prospectus or any amendment or
supplement thereto has been filed and will provide evidence to the
Representatives of each such filing or effectiveness.
(c) The Company will advise you promptly after receiving
notice or obtaining knowledge of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement or any part thereof
or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Shares for offer or
sale in any jurisdiction or of the initiation or threatening of any
proceeding for any such purpose, or (iii) any request made by the
Commission or any securities authority of any other jurisdiction for
amending the Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to
prevent the issuance of any such stop order and, if any such stop order
is issued, to obtain the withdrawal thereof as promptly as possible.
(d) If the delivery of a prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine
months after the date of the Prospectus and if at such time any events
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or if for any reason it is necessary during such
same period to amend or supplement the Prospectus to comply with the
Act or the rules and regulations thereunder, the Company will promptly
notify you and upon your request (but at the Company's expense) prepare
and file with the Commission an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such
compliance and will furnish without charge to each Underwriter and to
any dealer in securities as many copies of such amended or supplemented
Prospectus as you may from time to time reasonably request. If the
delivery of a prospectus relating to the Shares is required under the
Act at any time nine months or more after the date of the Prospectus,
upon your request but at the expense of such Underwriter, the Company
will prepare and deliver to such Underwriter as many copies as you may
request of an amended or
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<PAGE> 13
supplemented Prospectus complying with Section 10(a)(3) of the Act.
Neither your consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 8.
(e) The Company promptly from time to time will take such
action as you may reasonably request to qualify the Shares for offering
and sale under the securities or blue sky laws of such jurisdictions as
you may request and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required
to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction in which the Company is not
currently so subject.
(f) The Company will promptly provide you, without charge, (i)
four manually executed copies of the Registration Statement and any
Rule 462(b) Registration Statement as originally filed with the
Commission and of each amendment thereto, (ii) for each other
Underwriter a conformed copy of the Registration Statement and any Rule
462(b) Registration Statement as originally filed and of each amendment
thereto, without exhibits, and (iii) so long as a prospectus relating
to the Shares is required to be delivered under the Act, as many copies
of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as you may reasonably request.
(g) As soon as practicable, but in any event not later than
the last day of the thirteenth month after the effective date of the
Registration Statement and any Rule 462(b) Registration Statement, the
Company will make generally available to its security holders an
earnings statement (which need not be audited) of the Company and the
Subsidiary, if any, covering a period of at least 12 months beginning
after the effective date of the Registration Statement and any Rule
462(b) Registration Statement complying with Section 11(a) of the Act
and the rules and regulations thereunder.
(h) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, the Company will not, without your prior written consent,
offer, pledge, issue, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of (or announce any offer, pledge, sale,
grant of an option to purchase or other disposition), directly or
indirectly, any shares of Common Stock or securities convertible into,
exercisable or exchangeable for, shares of Common Stock, except as
provided in Section 2 and except for the grant of options pursuant to
the Company's 1998 Stock Option Plan.
(i) During a period of three years from the later of the
effective date of the Original Registration Statement or any Rule
462(b) Registration Statement, the Company will furnish to you and,
upon request, to each of the other Underwriters, without charge, (i)
copies of all reports or other communications (financial or other)
furnished to shareholders, (ii) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange, and (iii) such
additional information concerning the business and financial condition
of the Company and the Subsidiary, if any, as you may reasonably
request.
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<PAGE> 14
(j) Neither the Company nor any of its officers, directors or
affiliates will (i) take, directly or indirectly, prior to the
termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone
any compensation for soliciting purchases of, the Shares or (iii) pay
or agree to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(k) The Company will, from time to time after the effective
date of the Registration Statement, file with the Commission such
reports as are required by the Act, the Exchange Act and the rules and
regulations thereunder, and shall also file with the state securities
commissions in states where the Shares have been sold by the
Underwriters, such reports as are required to be filed by the
securities acts and regulations of those states.
(l) The Company will apply the net proceeds from the offering
in the manner set forth under "Use of Proceeds" in the Prospectus and
will report the use of such proceeds in accordance with rule 463 under
the Act.
(m) The Company will cause the Shares to be listed on the
Nasdaq National Market at each Time of Delivery and for at least one
year from the date hereof.
(n) If at any time during the period beginning on the later of
the date the Registration Statement or any Rule 462(b) Registration
Statement becomes effective and ending on the later of (i) the date 30
days after such effective date and (ii) the date that is the earlier of
(A) the date on which the Company first files with the Commission a
Quarterly Report on Form 10-Q after such effective date and (B) the
date on which the Company first issues a quarterly financial report to
shareholders after such effective date, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which
in your reasonable opinion the market price of the Common Stock has
been or is likely to be materially affected (regardless of whether such
rumor, publication or event necessitates an amendment of or supplement
to the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith prepare,
consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(o) If the Company elects to rely upon Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with rule 462(b) and pay the applicable fees
in accordance with Rule 111 promulgated under the Act by the earlier of
(i) 10:00 p.m., Washington, D.C. time, on the date of this Agreement
and (ii) the time confirmations are sent or given, as specified by Rule
462(b)(2).
6. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of
the Selling Shareholders, severally and not jointly, represents and warrants to,
and agrees with, each of the Underwriters that:
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<PAGE> 15
(a) Such Selling Shareholder will have good and valid title to
the Shares set forth in SCHEDULE II to be sold by such Selling
Shareholder, free and clear of any liens, encumbrances, equities and
claims (other than as imposed by the Act or this Agreement), and full
right, power and authority to effect the sale and delivery of such
Shares; and upon the delivery of and payment for the Shares to be sold
by such Selling Shareholder pursuant to this Agreement, good and valid
title thereto, free and clear of any liens, encumbrances, equities and
claims, will be transferred to the Underwriters.
(b) Such Selling Shareholder has duly executed and delivered
the Custody Agreement and Power of Attorney (the "Custody Agreement")
in the form previously delivered to the Representatives, appointing
Wayland J. Russell and Michael A. Pecchia, and each of them, as such
Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact") and
National City Bank, Cleveland, Ohio, as custodian (the "Custodian").
The Attorney-in-Fact is authorized to execute, deliver and perform this
Agreement on behalf of such Selling Shareholder, to deliver the Shares
to be sold by such Selling Shareholder hereunder, to accept payment
therefor and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement. Certificates, in suitable form for
transfer by delivery or accompanied by duly executed instruments of
transfer or assignment in blank, representing the Shares to be sold by
such Selling Shareholder hereunder have been deposited with the
Custodian pursuant to the Custody Agreement for the purpose of delivery
pursuant to this Agreement. Such Selling Shareholder agrees that the
Common Stock represented by the certificates on deposit with the
Custodian are subject to the interests of the Company, the Underwriters
and the other Selling Shareholders hereunder, that the arrangements
made for such custody and the appointment of the Attorney-in-Fact are
to that extent irrevocable, and that the obligations of such Selling
Shareholder hereunder shall not be terminated except as provided in
this Agreement and the Custody Agreement. If such Selling Shareholder
should die, become disabled or be declared incompetent, dissolve or
become insolvent, or if any other event should occur before the
delivery of the Shares of such Selling Shareholder hereunder, the
certificates for such Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such death, disability, incompetency,
dissolution, insolvency or other event had not occurred, regardless of
whether or not the Custodian or the Attorney-in-Fact shall have
received notice thereof.
(c) Such Selling Shareholder, acting individually or through
its duly authorized Attorney-in-Fact, has duly executed and delivered
this Agreement and the Custody Agreement; this Agreement constitutes a
legal valid and binding obligation of such Selling Shareholder; all
authorizations and consents necessary for the execution and delivery of
this Agreement and the Custody Agreement on behalf of such Selling
Shareholder and for the sale and delivery of the Shares to be sold by
such Selling Shareholder hereunder have been given, except as may be
required by the Act or state securities laws or the NASD; and such
Selling Shareholder has the legal capacity and full right, power and
authority to execute this Agreement and the Custody Agreement.
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<PAGE> 16
(d) The performance of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby
and thereby by each of the Selling Shareholders will not result in a
material breach or violation of, or material conflict with, any of the
terms or provisions of, or constitute a material default by such
Selling Shareholder under, any indenture, mortgage, deed of trust
(constructive or other), loan agreement, lease, franchise, license or
other agreement or instrument to which such Selling Shareholder or any
of its properties is bound, any statute, or any judgment, decree,
order, rule or regulation or any court or governmental agency or body
applicable to such Selling Shareholder or any of its properties.
(e) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock. Such Selling Shareholder
has not distributed and will not distribute any prospectus or other
offering material in connection with the offer and sale of the Shares
other than any preliminary prospectus prepared and filed by the Company
with the Commission or the Prospectus or other material permitted by
the Act.
(f) To the knowledge of such Selling Shareholder, the
representations and warranties of the Company contained in Section 1 of
this Agreement are true and correct in all material respects; such
Selling Shareholder has reviewed and is familiar with the Registration
Statement as originally filed with the Commission and the Preliminary
Prospectus contained therein. To the knowledge of such Selling
Shareholder, the Preliminary Prospectus does not include an untrue
statement of a material fact, or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; other than as
disclosed to the Underwriters, such Selling Shareholder is not prompted
to sell the Shares to be sold by such Selling Shareholder by any
material, non-public information concerning the Company that is not set
forth in the Preliminary Prospectus or the Prospectus.
(g) To the extent that any statements or omissions made in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Shareholder expressly for use therein, such Registration
Statement, preliminary prospectus and Prospectus and any amendments or
supplements thereto did not and will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(h) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement by such Selling Shareholder, and the
consummation by it of the transactions herein contemplated (other than
as required by the Act, state securities laws and the NASD).
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<PAGE> 17
(i) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or to counsel
for the Representatives shall be deemed a representation and warranty
by such Selling Shareholder to each Underwriter as to the matters
covered thereby.
(j) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated such Selling Shareholder agrees to deliver to you prior to
or at the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
7. EXPENSES. The Company will pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including without limitation all costs and
expenses incident to (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and,
if applicable, filing of the Registration Statement and any Rule 462(b)
Registration Statement (including all amendments thereto), any Preliminary
Prospectus, the Prospectus and any amendments and supplements thereto, this
Agreement and any blue sky memoranda; (ii) the delivery of copies of the
foregoing documents to the Underwriters; (iii) the filing fees of the Commission
and the National Association of Securities Dealers, Inc. relating to the Shares;
(iv) the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and registrar's
fees; (v) the qualification of the Shares for offering and sale under state
securities and blue sky laws, including filing fees and fees and disbursements
of counsel for the Underwriters relating thereto; (vi) any listing of the Shares
on the Nasdaq National Market and (vii) any expenses for travel, lodging and
meals incurred by the Company and any of its officers, directors and employees
in connection with any meetings with prospective investors in the Shares. It is
understood, however, that, except as provided in this Section, Section 9 and
Section 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses relating to the offer
and sale of the Shares.
8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of such Time of Delivery, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its covenants and agreements hereunder, and to the following
additional conditions precedent:
(a) If the Original Registration Statement as amended to date
has not become effective prior to the execution of this Agreement, such
Original Registration Statement and , if the Company has elected to
rely upon Rule 462(b), the Rule 462(b) Registration Statement shall
have been declared effective not later than the earlier of (i) 11:00
a.m., Atlanta time, on the date of this Agreement or (ii) the time
confirmations are sent or given as
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<PAGE> 18
specified by Rule 462(b)(2), or, with respect to the Original
Registration Statement, such later date and/or time as you shall have
consented to in writing. The Prospectus and any amendment or supplement
thereto or a Term Sheet shall have been filed with the Commission
pursuant to Rule 424(b) or Rule 434, as applicable, within the
applicable time period prescribed for such filing and in accordance
with Section 5(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement, respectively, or any part thereof shall have
been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the knowledge of the Company and the
Representatives, contemplated by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction.
(b) Nelson Mullins Riley & Scarborough, L.L.P., counsel for
the Underwriters, shall have furnished to you such opinion or opinions,
dated such Time of Delivery, with respect to the incorporation of the
Company, the validity of the Shares being delivered at such Time of
Delivery, the Registration Statement, the Prospectus, and other related
matters as you may reasonably request, and the Company shall have
furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters. In rendering such
opinion, such counsel may rely as to all matters of law upon the
opinion of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., referred to
in paragraph (c) below.
(c) You shall have received an opinion, dated such Time of
Delivery, of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., counsel for
the Company, in form and substance satisfactory to you and your
counsel, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Ohio, with corporate power and authority
to own or lease its properties and conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement. The Company is
duly qualified to transact business as a foreign corporation
and is in good standing in the States of Connecticut,
Massachusetts, Michigan, New York, Pennsylvania, Rhode Island
and Tennessee.
(ii) The Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Ohio, with the corporate power and
authority to own or lease its properties and conduct its
businesses as described in the Prospectus.
(iii) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
the caption "Capitalization" and conforms as to legal matters
in all material respects to the description thereof contained
in the Prospectus. The issued and outstanding shares of
capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. The
issued and outstanding shares of capital stock of the Company
and Subsidiary and are each free of preemptive rights.
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<PAGE> 19
(iv) The issued and outstanding shares of capital
stock of Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable. One hundred
percent (100%) of the outstanding capital stock of the
Subsidiary is owned by the Company free and clear of any lien,
encumbrance, security interest, pledge, charge, shareholders'
agreement, voting trust or claim of any nature whatsoever.
Based solely on the Certificate, to our knowledge, the Company
does not own, directly or indirectly, any capital stock or
other equity interest of any other corporation, partnership,
joint venture or other association.
(v) The certificates evidencing the Shares to be
delivered pursuant to the Underwriting Agreement comply with
all applicable requirements of the State of Ohio and when
countersigned by the Company's transfer agent and delivered to
the Representative or upon the Representative's order against
payment of the agreed consideration therefor in accordance
with the provisions of the Underwriting Agreement, the Shares
represented thereby will be duly authorized and validly
issued, fully paid and nonassessable and will conform to the
description of the common stock contained in the Prospectus.
The Shares have been duly and validly authorized and qualified
for inclusion on the Nasdaq National Market, subject to
official notice of issuance.
(vi) The Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Act, and
no stop order suspending the effectiveness of the Registration
Statement and any Rule 462(b) Registration Statement, or any
part thereof, has been issued and to the best of our
knowledge, no proceedings for that purpose have been
instituted or are pending or contemplated under the Act; the
Registration Statement (and the information deemed to be part
of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b), if applicable), any Rule 462(b)
Registration Statement and the Prospectus and each amendment
or supplement thereto (except for the financial statements and
other statistical and financial data included therein as to
which we express no opinion), as of their respective effective
or issue dates and each Time of Delivery, comply as to form in
all material respects with the applicable requirements of the
Act and the rules and regulations thereunder; and we have no
reason to believe that either the Registration Statement
(including the information deemed to be part of the
Registration Statement at the time of effectiveness and as of
each Time of Delivery pursuant to Rule 430A(b), if applicable)
or the Prospectus, or the Registration Statement or the
Prospectus as amended or supplemented (except for the
financial statements and other statistical data included
therein as to which we express no opinion), as of their
respective effective or issue dates and each Time of Delivery,
contained any untrue statement of a material fact or omitted
or omits to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the Prospectus, or any amendment or
supplement thereto, as of the date thereof and each Time of
Delivery contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the
statements therein not misleading in the light of the
circumstances under which they were made; and
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<PAGE> 20
any required filing of the Prospectus pursuant to Rule 424(b)
has been made in the manner and within the time period
required by Rule 424(b).
(vii) The statements under the captions
"Capitalization," "Management", "Certain Transactions",
"Shares Eligible for Future Sale" and "Description of Capital
Stock" in the Prospectus, insofar as such statements
constitute a summary of transactions or documents referred to
therein of statutes or other matters of law, are, to the best
of our knowledge, accurate summaries of such transactions or
documents or matters of law, and fairly and accurately
present, in all material respects, the information required to
be disclosed with respect to such transactions, documents and
matters by the Act and the rules and regulations thereunder.
(viii) The Underwriting Agreement and the performance
of the Company's obligations thereunder have been duly
authorized by all necessary corporate action, and have been
duly executed and delivered by and on behalf of the Company;
and no approval, authorization or consent or order or
declaration of or from or registration, qualification or
filing with any court or governmental agency or body is
required to be obtained by the Company in connection with the
issue and sale of the Shares by the Company pursuant to the
Underwriting Agreement or the consummation by the Company of
any other transactions contemplated thereby (other than under
the Act and the rules and regulations promulgated thereunder,
applicable state or province securities laws and the rules of
the NASD).
(ix) Neither the Company nor Subsidiary is in
violation of its respective Articles or Regulations or, to the
best of our knowledge, is in breach of, or in default under
(nor has any event occurred that, with notice, lapse of time
or both would constitute a breach of, or default under) any
indenture, lease, loan agreement, mortgage, deed of trust, or
other agreement or instrument to which the Company or
Subsidiary is a party or to which any of their respective
properties or assets is subject and that has been filed as an
exhibit to the Registration Statement or which is a lease of
real property, where such violation or breach or default would
have a Material Adverse Effect.
(x) The performance of the Underwriting Agreement,
the issuance and sale of the Shares being issued at such Time
of Delivery, and the consummation by the Company of the
transactions provided for in the Underwriting Agreement will
not (x) contravene any of the provisions of, result in a
breach or violation of, or result in a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or
Subsidiary is a party or by which the property of either of
them is bound and that has been filed as an exhibit to the
Registration Statement or which is a lease of real property,
where the contravention or default could have a Material
Adverse Effect, (y) conflict with or violate any of the
provisions of the Company's Articles of Incorporation or
Subsidiary's Articles of Incorporation or the Company's Code
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<PAGE> 21
of Regulations or the Subsidiary's Code of Regulations or (z)
to our knowledge, violate any statute, rule or regulation or
any order, judgment or decree of any court or governmental
agency or body having jurisdiction over the Company or
Subsidiary or any of their respective properties or assets.
(xi) To the best of our knowledge, there are no
contracts, agreements or understandings between the Company
and any person granting such person the right to require the
Company to file a registration statement under the 1933 Act
with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act.
(xii) To our knowledge, all offers and sales of the
Company's capital stock prior to the date hereof were at all
relevant times exempt from the registration requirements of
the Act. There exist no recission rights under either federal
or state securities laws with respect to the Company's
outstanding capital stock.
(xiii) The Company is not, and will not be as a
result of the transactions contemplated by the Underwriting
Agreement, an "investment company" or a company "controlled
by" an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xiv) Except as disclosed in the Prospectus, there
are no outstanding (A) securities or obligations of the
Company or the Subsidiary convertible into or exchangeable for
any capital stock of the Company or Subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the
Company or Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C)
obligations of the Company or Subsidiary to issue any shares
of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or
options.
(xv) All real property and buildings held under lease
by the Company or Subsidiary are held by the Company or the
Subsidiary under valid, subsisting and enforceable leases with
such exceptions as are disclosed in the Prospectus or are not
material and do not interfere with the use made and proposed
to be made of such property and buildings by the Company or
the Subsidiary.
(xvi) To our knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened (or any basis therefor) in
which the Company or the Subsidiary is a party or of which any
of their respective properties or assets is the subject that,
if determined adversely to the Company or Subsidiary, would
have a Material Adverse Effect and, to our knowledge, neither
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<PAGE> 22
the Company nor Subsidiary is in violation of, or in default
with respect to, any statute, rule, regulation, order,
judgment or decree, except as described in the Prospectus, nor
is the Company or the Subsidiary required to take any action
in order to avoid any such violation or default.
In rendering any such opinion, such counsel may rely (i) as to matters
of fact, to the extent such counsel deem proper, upon certificates of
responsible officers of the Company and public officials, (ii) as to the number
of shares of Common Stock at any time or times outstanding, upon the certificate
of National City Bank, the transfer agent of the Common Stock, and (iii) as to
legal matters in jurisdictions other than those in which they are domiciled, on
the opinion of local counsel satisfactory to such counsel. If such counsel
relies on certificates of officers of the Company or on opinions of local
counsel, their opinion shall state that they are so doing and copies of such
certificates or opinions are to be attached to the opinion unless such opinions
or certificates (or, in the case of certificates, the information therein) have
been furnished to the Representatives in written form.
(d) The Underwriters shall have received an opinion, dated the
Option Closing Date and satisfactory in form and substance to your
counsel, from Kahn, Kleinman, Yanowitz and Arson, Co., L.P.A., counsel
to the Selling Shareholders, to the effect that:
(i) The Underwriting Agreement and the Custody
Agreement have been duly executed and delivered by or on
behalf of each of the Selling Shareholders, and constitute
valid and binding obligations of such Selling Shareholders in
accordance with their terms, except as enforceability may be
limited by applicable equity principles or by bankruptcy,
insolvency, moratorium, reorganization or similar laws from
time to time in effect affecting the enforcement of creditors'
rights and except that the enforceability of the rights to
indemnity and contribution contained in the Underwriting
Agreement may be limited by federal or state laws and public
policy underlying such laws.
(ii) Assuming that the Underwriters will take
delivery of the Shares for value in good faith and without
notice of any adverse claim and that the Underwriters are not
parties themselves to any fraud or illegality affecting the
Shares, and by delivery of a certificate or certificates
therefor, each Selling Shareholder will pass good and
marketable title to such Shares to the several Underwriters,
free and clear, to our knowledge, of any pledge, lien,
security interest, charge, claim, equity or encumbrance of any
kind.
(iii) No consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation by any Selling Shareholder of the transactions
contemplated by the Underwriting Agreement in connection with
the Shares to be sold by each Selling Shareholder thereunder,
except which may have been obtained and in full force and
effect, such as have been obtained under the Act and such as
may be required under the state securities or blue sky laws of
any jurisdiction in connection with the purchase and
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<PAGE> 23
distribution of the Shares by the Underwriters as to which
such counsel need express no opinion.
(iv) The sale of the Shares being sold by any Selling
Shareholder and the compliance by any Selling Shareholder with
the provisions of the Underwriting Agreement and the Custody
Agreement and the consummation of the transactions
contemplated thereby will not conflict with, result in a
breach or violation of, or constitute a default under any
terms of any indenture, mortgage, deed of trust, loan
agreement or other instrument known to us to which any Selling
Shareholder is a party or bound or to which any of the
property or assets of such Selling Shareholder is subject, or
any statute, order, rule or regulation of any court or
governmental body having jurisdiction over any Selling
Shareholder known to us to be applicable to any Selling
Shareholder or to which the property or assets of such Selling
Shareholder is subject.
In rendering such opinion, such counsel may rely as to matters of fact,
to the extent proper, on certificates of the Selling Shareholders and the
representations and warranties contained in the Custody Agreement executed by
such Selling Shareholder. Such counsel also may rely as to matters of fact, to
the extent deemed proper, on certificates of responsible officers of the Company
and public officials.
(e) You shall have received from KPMG Peat Marwick, LLP
letters dated, respectively, the date hereof (or, if the Registration
Statement has been declared effective prior to the execution and
delivery of this Agreement, dated such effective date and the date of
this Agreement) and each Time of Delivery, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto. In the
event that the letters referred to in the immediately preceding
sentence set forth any changes, decreases or increases in the items
specified in paragraph __ of Annex 1, it shall be a further condition
to the obligations of the Underwriters that (i) such letters shall be
accompanied by a written explanation by the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (ii) such changes, decreases or increases do not, in
your sole judgment, make it impracticable or inadvisable to proceed
with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as
amended as of the date of such letter.
(f) Since the date of the latest audited financial statements
included in the Prospectus, neither the Company nor the Subsidiary
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity,
whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as disclosed in
or contemplated by the Prospectus, or (ii) any change, or any
development involving a prospective change (including without
limitation a change in management or control of the Company), in or
affecting the financial position, results of operations, net worth or
business prospects of the Company and the Subsidiary, otherwise than as
disclosed in or contemplated by the Prospectus, the effect of which, in
either such case, is in your judgment so material and adverse as to
make it impracticable or inadvisable to proceed with the purchase, sale
and
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<PAGE> 24
delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date
hereof.
(g) Subsequent to the date hereof there shall not have
occurred any of the following: (i) any suspension or limitation in
trading in securities generally on the New York Stock Exchange, or any
setting of minimum prices for trading on such exchange, or in the
Common Stock by the Commission or the Nasdaq National Market; (ii) a
moratorium on commercial banking activities in New York declared by
either federal or state authorities; or (iii) any outbreak or
escalation of hostilities involving the United States, declaration by
the United States of a national emergency or war or any other national
or international calamity or emergency if the effect of any such event
specified in this clause (iii) in your judgment makes it impracticable
or inadvisable to proceed with the purchase, sale and delivery of the
Shares being delivered at such Time of Delivery as contemplated by the
Registration Statement, as amended as of the date hereof.
(h) The Company shall have furnished to you at such Time of
Delivery certificates of officers of the Company, satisfactory to you
as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the
Company of all of its obligations hereunder to be performed at or prior
to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to
be furnished certificates as to the matters set forth in subsections
(a) and (f) of this Section 8, and as to such other matters as you may
reasonably request.
(i) The Shares shall be listed on the Nasdaq National Market.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon, in
whole or in part: (i) any untrue statement or alleged untrue statement
made by the Company in Section 1 of this Agreement or by the Selling
Shareholders in Section 6 of this Agreement; (ii) any failure of the
Company or the Selling Shareholders to perform their obligations
hereunder or under applicable law; (iii) any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or
(iv) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company shall not be
liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue
24
<PAGE> 25
statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement or any Rule 462(b) Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through you expressly for use therein. The Company will
not, without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding (or related cause of
action or portion thereof) in respect of which indemnification may be
sought hereunder (whether or not such Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of such Underwriter from
all liability arising out of such claim, action, suit or proceeding (or
related cause of action or portion thereof).
(b) The Selling Shareholders agree to indemnify and hold
harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon, in whole or in part: (i) any untrue statement or
alleged untrue statement made by the Company in Section 1 of this
Agreement or by the Selling Shareholders in Section 6 of this
Agreement; (ii) any failure of the Company or the Selling Shareholders
to perform their obligations hereunder or under applicable law; (iii)
any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or (iv) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Selling Shareholders will
reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating,
defending against or appearing as a third-party witness in connection
with any such loss, claim, damage, liability or action; PROVIDED,
HOWEVER, that the Selling Shareholders shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through
you expressly for use therein. The Selling Shareholders will not,
without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding (or related cause of
action or portion thereof) in respect of which indemnification may be
sought hereunder (whether or not such Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of such Underwriter from
all liability arising out of such claim, action, suit or proceeding (or
related cause of action or portion thereof).
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<PAGE> 26
(c) Each Underwriter, severally but not jointly, agrees to
indemnify and hold harmless the Company and its directors and officers
who sign the Registration Statement against any losses, claims, damages
or liabilities to which the Company may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any
failure of the Underwriters to perform their obligations hereunder or
under applicable law, or (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or any amendment thereto, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto or arise out of or are based upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse
the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such loss,
claim, damage, liability or action. The Underwriters will not, without
the prior written consent of the Company, settle or compromise or
consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding (or related cause of action or
portion thereof) in respect of which indemnification may be sought
hereunder (whether or not the Company is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent
includes an unconditional release of the Company from all liability
arising out of such claim, action, suit or proceeding (or related cause
of action or portion thereof).
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) and (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection, notify
the indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to
the indemnifying party); PROVIDED, HOWEVER, that if the defendants in
any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that
there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
indemnified party and such indemnified party shall have the right to
select separate counsel to defend such action on behalf of such
indemnified party. After such notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend
such action, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses,
other than reasonable costs of investigation, subsequently
26
<PAGE> 27
incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate
counsel in accordance with the proviso to the next preceding sentence
or (ii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party.
Nothing in this Section 9(d) shall preclude an indemnified party from
participating at its own expense in the defense of any such action so
assumed by the indemnifying party.
(e) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if
the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities
(or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred
to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
27
<PAGE> 28
misrepresentation. The Underwriters' obligations in this subsection (d)
to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company under this Section 9 shall
be in addition to any liability which the Company may otherwise have
and shall extend, upon the same terms and conditions, to each person,
if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 9 shall be in
addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to
each officer and director of the Company and to each person, if any,
who controls the Company within the meaning of the Act.
10. DEFAULT OF UNDERWRITERS.
(a) If any Underwriter defaults in its obligation to purchase
Shares at a Time of Delivery, you may in your discretion arrange for
you or another party or other parties to purchase such Shares on the
terms contained herein. If within thirty-six (36) hours after such
default by any Underwriter you do not arrange for the purchase of such
Shares, the Company shall be entitled to a further period of thirty-six
(36) hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the
Company notifies you that it has so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone a Time of
Delivery for a period of not more than seven days in order to effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements,
and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus that in your opinion may
thereby be made necessary. The cost of preparing, printing and filing
any such amendments shall be paid for by the Underwriters. The term
"Underwriter" as used in this Agreement shall include any person
substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of Shares to be purchased at such
Time of Delivery, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and,
in addition, to require each non-defaulting Underwriter to purchase its
pro rata share (based on the number of Shares which such Underwriter
agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been
made, but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
11. DEFAULT BY A SELLING SHAREHOLDER. If any of the Selling
Shareholders shall fail to sell and deliver the number of Optional Shares that
such Selling Shareholder is obligated to sell, the Underwriters may, at their
option, by notice to the Company, either (a) require the Company
28
<PAGE> 29
to sell and deliver such number of shares of Common Stock as to which the
Selling Shareholders have defaulted, (b) elect to purchase the Firm Shares and
the Optional Shares that the Company and the non-defaulting Selling Shareholders
have agreed to sell pursuant to this Agreement, or (c) terminate this Agreement
if the Company shall have refused to sell and deliver to the Underwriters the
Common Stock referred to in clause (a) of this Section 11.
In the event of a default under this Section 11 that does not result in
the termination of this Agreement, either the Underwriters or the Company shall
have the right to postpone the Closing Date or Option Closing Date for a period
not exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
No action taken pursuant to this Section 11 shall relieve the Company or the
Selling Shareholder so defaulting from liability, if any, in respect of such
default.
12. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm
Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time
of Delivery or any Subsequent Time of Delivery, respectively, in the
event that (i) any condition to the obligations of the Underwriters set
forth in Section 8 hereof has not been satisfied, or (ii) the Company
shall have failed, refused or been unable to deliver the Shares or to
perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior to such Time of Delivery,
in either case other than by reason of a default by any of the
Underwriters. If this Agreement is terminated pursuant to this Section
12(a), the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable counsel
fees and disbursements) that shall have been incurred by them in
connection with the proposed purchase and sale of the Shares. The
Company shall not in any event be liable to any of the Underwriters for
the loss of anticipated profits from the transactions covered by this
Agreement.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in Section 10(a), the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of Shares to be purchased at such Time of Delivery, or
if the Company shall not exercise the right described in Section 10(b)
to require non-defaulting Underwriters to purchase Shares of a
defaulting Underwriter or Underwriters, then this Agreement (or, with
respect to a Subsequent Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional
Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to
be borne by the Company and the Underwriters as provided in Section 7
hereof and the indemnity and contribution agreements in Section 9
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
13. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain
29
<PAGE> 30
in full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person referred to in Section 9(f) or the Company, or any officer or
director or controlling person of the Company referred to in Section 9(f), and
shall survive delivery of and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 7 and 9 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
14. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to you in care of The Robinson-Humphrey Company, LLC, 3333
Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Corporate Finance
Department (with a copy which shall not constitute notice to Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309, Attention: Glenn W. Sturm, Esq.); and if sent to the Company,
shall be mailed, delivered or telegraphed and confirmed in writing to the
Company at 3711 Starr Centre Drive, Canfield, Ohio 44406, Attention: Wayland J.
Russell, Chief Executive Officer (with a copy which shall not constitute notice
to Kahn, Kleinman, Yanowitz and Arnson Co, ,L.P.A., 1301 East Ninth Street,
Suite 2600, Cleveland, Ohio 44114, Attention: Marc H. Morgenstern, Esq.).
15. REPRESENTATIVES. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by The Robinson-Humphrey Company,
LLC will be binding upon all the Underwriters.
16. BINDING EFFECT. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters and the Company and to the extent
provided in Sections 9 and 12 hereof, the officers and directors and controlling
persons referred to therein and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia without giving effect to any
provisions regarding conflicts of laws.
18. COUNTERPARTS. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
19. WAIVER OF JURY TRIAL. The Company, each Selling Shareholder and you
each hereby irrevocably waive any right they may have to a trial by jury in
respect of any claim based upon or arising out of this Agreement or the
transactions contemplated hereby.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by The Robinson-Humphrey Company, LLC, on behalf of each
of the Underwriters, this letter will constitute a binding agreement among the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Master
30
<PAGE> 31
Agreement among Underwriters, a copy of which shall be submitted to the Company
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
RAINBOW RENTALS, INC.
By:
-----------------------------------
Name: Wayland J. Russell
Title: Chief Executive Officer
[Signatures continue on following page]
31
<PAGE> 32
SELLING SHAREHOLDERS
By:
-----------------------------------
Wayland J. Russell
-----------------------------------
Lawrence S. Hendricks
-----------------------------------
Michael J. Viveiros
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, LLC.
DAIN RAUSCHER WESSELS
SUNTRUST EQUITABLE SECURITIES CORPORATION
By: The Robinson-Humphrey Company, LLC
By:
--------------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
32
<PAGE> 33
SCHEDULE I
----------
<TABLE>
<CAPTION>
Total
Number of Firm
Shares to be
Underwriter Purchased
- ----------- ---------
<S> <C>
The Robinson-Humphrey Company, LLC
Dain Rauscher Wessels
SunTrust Equitable Securities Corporation
---------
Total....................................... 2,250,000
=========
</TABLE>
<PAGE> 34
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Optional
Shares to be
Sold if
Maximum
Option
Name of Selling Shareholder Exercised
- --------------------------- ---------
<S> <C>
Wayland J. Russell 182,500
Lawrence S. Hendricks 91,000
Michael J. Viveiros 64,000
--------
Total....................................... 337,500
========
</TABLE>
<PAGE> 35
ANNEX I
Pursuant to Section 8(e) of the Underwriting Agreement, KPMG Peat
Marwick LLP shall furnish letters to the Underwriters to the effect that:
(i) they are independent certified public accountants with respect to
the Company and the Subsidiary within the meaning of the Act and the applicable
rules and regulations thereunder;
(ii) in their opinion, the consolidated financial statements and any
supplementary financial information and schedules audited (and, if applicable,
prospective financial statements and/or pro forma financial information
examined) by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related rules and regulations thereunder;
(iii) the financial statements of the Company as of and for the quarter
ended March 31, 1998 were reviewed by them in accordance with the standards
established by the American Institute of Certified Public Accountants and based
upon their review they are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles, and such financial statements comply as to form
in all material respects with the applicable accounting requirements of the Act
and the applicable rules and regulations thereunder
(iv) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
the Subsidiary, inspection of the minute books of the Company and the Subsidiary
since the date of the latest audited financial statements included in the
Prospectus, inquiries of officials of the Company and the Subsidiary responsible
for financial accounting matters and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited consolidated condensed financial statements
of the Company and the Subsidiary included in the Registration
Statement and the Prospectus do not comply inform in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not in
conformity with generally accepted principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus;
(B) as of a specified date not more than 5 days prior to the
date of such letter, there were any changes in the capital stock or any
increase in inventories or the long-term debt or short-term debt of the
Company and the Subsidiary, or any decreases in net current assets or
net assets or other items specified by the Representatives, or any
increases in any other items specified by the Representatives, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
A-1
<PAGE> 36
increases or decreases which the Prospectus discloses have occurred or
may occur, or which are described in such letter; and
(C) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred to
in Clause (C) there were any decreases in revenues or operating income
or the total or per share amounts of net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each
case for increases or decreases which the Prospectus discloses have
occurred or may occur, or which are described in such letter; and
(v) In addition to the audit referred to in their report(s) included in
the Prospectus and the limited procedures, inspection of minute books, inquiries
and other procedures referred to in paragraph (iv) above, they have carried out
certain specified procedures, not constituting an audit in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives that are
included in the Registration Statement and the Prospectus, or which appear in
Part II of, or in exhibits or schedules to, the Registration Statement and have
compared certain of such amounts, percentages and financial information with the
accounting records of the Company and the Subsidiary and have found them to be
in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
A-2
<PAGE> 1
Exhibit 4.1
RAINBOW RENTALS, INC.
[LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO
COMMON SHARES,
WITHOUT PAR VALUE
CUSIP 750857 10 4
This Certifies that
is the owner of
Common Shares fully paid and non-assessable of RAINBOW RENTALS, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the duly authorized officers of the
Corporation.
- --------------------------------- ---------------------------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
NATIONAL CITY BANK
(TRANSFER AGENT AND REGISTRAR)
BY
AUTHORIZED SIGNATURE
<PAGE> 2
RAINBOW RENTALS, INC.
As required by Ohio law, the Corporation will mail to the record holder of
this certificate, without charge, within five (5) days after receipt of written
request therefor addressed to the Secretary of the Corporation at its principal
place of business, a copy of the express terms of the shares represented by this
certificate and of all other classes and series of shares which the Corporation
is authorized to issue.
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT Custodian
----------- ----------
TEN ENT -- as tenants by the entries (Cust) (Minor)
Under Uniform Gifts to Minors Act
JT TEN -- as joint tenants with right of Act
survivorship and not as tenants -----------------------------
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OF THE SHARES REPRESENTED
- ----------------------------------------------------
BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY TO TRANSFER THE
- ----------------------------------------------------
SAID SHARES ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH FULL POWER OF
SUBSTITUTION IN THE PREMISES.
DATED 19
--------------- ---
----------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 5.1
May 11, 1998
Rainbow Rentals, Inc.
3711 Starr Centre Drive
Canfield, Ohio 44406
In connection with the filing by Rainbow Rentals, Inc., an Ohio
corporation (the "Company"), with the Securities and Exchange Commission under
the provisions of the Securities Act of 1933, as amended, of a Registration
Statement on Form S-1 with respect to up to 2,587,500 Common Shares, without
par value, of the Company (the "Shares"), to be sold by the Company and certain
Selling Shareholders, we have examined the following: (i) the form of Amended
and Restated Articles of Incorporation to be filed with the Ohio Secretary of
State immediately prior to the completion of the offering contemplated by the
Registration Statement; (ii) the Amended and Restated Code of Regulations of
the Company, as currently in effect; (iii) the form of Registration Statement
on Form S-1 (including Exhibits thereto) filed with the Securities and Exchange
Commission; (iv) the form of Underwriting Agreement pursuant to which the
Shares are to be purchased by the Underwriters and resold in a public offering;
and (v) the records relating to the organization of the Company and such other
documents as we deem it necessary to examine as a basis for the opinions
hereinafter expressed.
Based on the foregoing, we are of the opinion that:
(i) The Company is incorporated and validly existing under the laws of
the State of Ohio.
<PAGE> 2
Rainbow Rentals, Inc.
May 11, 1998
Page 2
(ii) The Shares to be issued and sold by the Company, when issued and sold
in the manner contemplated by the Registration Statement, will be,
legally issued, fully paid and non-assessable.
We consent to the filing of this opinion with the Registration Statement
and to the use of our name therein under the caption "Legal Matters."
Very truly yours,
/s/ Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A.
-------------------------------------------------
KAHN, KLEINMAN, YANOWITZ & ARNSON CO., L.P.A.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Rainbow Rentals, Inc. and Subsidiaries:
We consent to the use of our reports dated March 13, 1998, except as to
Note 12, which is as of March 23, 1998, included herein and to the references to
our firm under the headings "Selected Financial Data" and "Experts" in the
registration statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Cleveland, Ohio
May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 0 472 77
<SECURITIES> 0 27 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 19,740 23,411
<CURRENT-ASSETS> 0 20,747 24,658
<PP&E> 0 7,113 7,539
<DEPRECIATION> 0 3,493 4,098
<TOTAL-ASSETS> 0 25,401 31,240
<CURRENT-LIABILITIES> 0 4,708 5,064
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 60 60
<OTHER-SE> 0 11,407 2,993
<TOTAL-LIABILITY-AND-EQUITY> 0 25,401 31,240
<SALES> 42,559 46,560 55,328
<TOTAL-REVENUES> 42,559 46,560 55,328
<CGS> 15,428 16,351 19,145
<TOTAL-COSTS> 39,001 42,282 48,528
<OTHER-EXPENSES> 183 453 329
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 898 834 1,822
<INCOME-PRETAX> 2,477 2,991 4,649
<INCOME-TAX> 1,253 972 1,968
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,224 2,019 2,681
<EPS-PRIMARY> .19 .32 .59
<EPS-DILUTED> .19 .32 .59
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
The undersigned consents to being named in Rainbow Rentals, Inc.'s
Registration Statement on Form S-1 (No. 333-48769) filed with the Securities
and Exchange Commission.
Dated: May 12, 1998 By: /s/ Brian L. Burton
-----------------------
BRIAN L. BURTON
<PAGE> 2
Exhibit 99.1
continued.
CONSENT OF DIRECTOR NOMINEE
The undersigned consents to being named in Rainbow Rentals, Inc.'s
Registration Statement on Form S-1 (No. 333-48769) filed with the Securities and
Exchange Commission.
Dated: May 14, 1998 By: /s/ Ivan J. Winfield
--------------------------------------------
IVAN J. WINFIELD
<PAGE> 1
EXHIBIT 99.2
CONSENT OF THE ASSOCIATION OF PROGRESSIVE RENTAL ORGANIZATIONS
The undersigned consents to being named in and the use of information from
its 1997 Rental-Purchase Industry Survey in Rainbow Rentals, Inc.'s
Registration Statement on Form S-1 (No. 333-48769) filed with the Securities
and Exchange Commission.
The Association of Progressive Rental Organizations
Dated: May 7, 1998 By: /s/ Bill Keese
-----------------------------------------------
Name: Bill Keese
Title: Executive Director
