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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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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<S> <C> <C>
OHIO 7359 34-1512520
(PRIMARY STANDARD
(STATE OR OTHER JURISDICTION OF INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE
INCORPORATION OR ORGANIZATION) NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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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<S> <C>
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value................ 2,587,500 $12.00 $31,050,000 $9,160
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(1) Includes 337,500 shares of common stock which the Underwriters have the
option to purchase from the Selling Shareholders to cover over-allotments,
if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
------------------------
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 MARCH 27, 1998
PROSPECTUS
2,250,000 SHARES
[LOGO]
RAINBOW RENTALS, INC.
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)
<S> <C> <C> <C>
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Per Share...................................... $ $ $
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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
$500,000.
(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 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
makes no representations or assurances as to the accuracy of such published
data.
THE COMPANY
The Company operates 64 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 53 additional stores through March 1, 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,
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<PAGE> 5
Mid-Atlantic and New England markets. Because most of its public competitors
have grown primarily 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. 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 and new market acquisitions
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
</TABLE>
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(1) Excludes 400,000 shares of Common Stock reserved for issuance under the
Company's Stock Option Plan, including 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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<PAGE> 6
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. 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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<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental revenue........................ $ 30,463 $ 34,440 $ 39,721 $ 43,815 $ 52,153
Fees.................................. 830 957 1,151 1,284 1,588
Merchandise sales..................... 1,357 1,626 1,687 1,461 1,587
--------- --------- --------- --------- ---------
Total revenues...................... 32,650 37,023 42,559 46,560 55,328
Operating expenses:
Merchandise costs:
Depreciation and other merchandise
costs............................... 11,365 13,156 15,428 16,351 19,145
Amortization of acquired
rental-purchase agreements.......... -- -- 807 652 --
--------- --------- --------- --------- ---------
Total merchandise costs............. 11,365 13,156 16,235 17,003 19,145
Store operating expenses:
Salaries and related expenses......... 7,010 7,020 9,136 9,655 11,532
Occupancy expenses.................... 2,068 2,567 3,092 3,416 4,068
Advertising expenses.................. 2,461 3,020 2,576 2,837 3,283
Other store expenses.................. 3,353 3,980 4,746 5,437 6,554
--------- --------- --------- --------- ---------
Total store operating expenses...... 14,892 16,587 19,550 21,345 25,437
--------- --------- --------- --------- ---------
Total merchandise costs and store
operating expenses................ 26,257 29,743 35,785 38,348 44,582
General and administrative expenses..... 2,170 2,662 3,216 3,934 3,946
--------- --------- --------- --------- ---------
Total operating expenses............ 28,427 32,405 39,001 42,282 48,528
--------- --------- --------- --------- ---------
Operating income.................... 4,223 4,618 3,558 4,278 6,800
Interest expense........................ 526 726 898 834 1,822
Other expense, net...................... 283 52 183 453 329
--------- --------- --------- --------- ---------
Income before income taxes............ 3,414 3,840 2,477 2,991 4,649
Income taxes............................ 1,445 1,642 1,253 972 1,968
--------- --------- --------- --------- ---------
Net income............................ $ 1,969 $ 2,198 $ 1,224 $ 2,019 $ 2,681
========= ========= ========= ========= =========
Basic net income per common share....... $ .31 $ .34 $ .19 $ .32 $ .59
========= ========= ========= ========= =========
Weighted average common shares
outstanding........................... 6,392,610 6,392,610 6,392,610 6,392,610 4,509,406
OPERATING DATA:
Stores open at end of period.......... 42 46 51 55 62
Comparable store revenue growth (1)... 15.0% 6.7% 8.0% 2.2% 9.9%
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AS OF DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental-purchase merchandise, net..... $ 23,411 $ 23,411
Total assets......................... 31,240 31,240
Total debt........................... 23,844 1,327
Total liabilities.................... 28,187 5,670
Shareholders' equity................. 3,053 25,570
</TABLE>
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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.
6
<PAGE> 8
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."
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
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<PAGE> 10
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 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 $7.02 per share. See "Dilution."
9
<PAGE> 11
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
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.
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 $22.5 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 $11.1 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 reduce borrowings under the
Company's existing revolving credit facility with Bank of America Illinois (the
"Credit Facility"), which had an outstanding balance of $12.5 million as of
December 31, 1997, 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 December 31, 1997, 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 DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Credit Facility........................................... $12,464 $ 1,076
Capitalized lease obligations............................. 251 251
Redemption Debt (including accrued interest of $641)...... 11,129(1) --
------- -------
Total long-term debt................................... 23,844 1,327
------- -------
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 December 31, 1997
and 5,925,735 issued and outstanding, as adjusted...... 60 13,388
------- -------
Treasury stock, 2,716,875 shares of Common Stock at
December 31, 1997 and 466,875, as adjusted, at cost.... (11,095)(1) (1,906)
------- -------
Retained earnings......................................... 14,088 14,088
------- -------
Total shareholders' equity............................. 3,053 25,570
------- -------
Total capitalization................................. $26,897 $26,897
======= =======
</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 December 31, 1997, the net tangible book value of the Company was
approximately $1.1 million, or $0.29 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 December 31, 1997
would be $23.6 million or $3.98 per share. This represents an immediate increase
in net tangible book value per share of $3.69 to current shareholders and an
immediate dilution of $7.02 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..... $0.29
Increase in pro forma net tangible book value attributable
to the Offering........................................ 3.69
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.98
------
Dilution per share to new investors......................... $ 7.02
======
</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 consolidated financial statements as of December 31,
1996 and 1997, and for each of the years in the three-year period ended December
31, 1997, and the report thereon, are included elsewhere in this Prospectus. 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>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental revenue........................... $ 30,463 $ 34,440 $ 39,721 $ 43,815 $ 52,153
Fees..................................... 830 957 1,151 1,284 1,588
Merchandise sales........................ 1,357 1,626 1,687 1,461 1,587
---------- --------- --------- --------- ---------
Total revenues......................... 32,650 37,023 42,559 46,560 55,328
Operating expenses:
Merchandise costs:
Depreciation and other merchandise
costs.................................. 11,365 13,156 15,428 16,351 19,145
Amortization of acquired rental-purchase
agreements............................. -- -- 807 652 --
---------- --------- --------- --------- ---------
Total merchandise costs................ 11,365 13,156 16,235 17,003 19,145
Store operating expenses:
Salaries and related expenses............ 7,010 7,020 9,136 9,655 11,532
Occupancy expenses....................... 2,068 2,567 3,092 3,416 4,068
Advertising expenses..................... 2,461 3,020 2,576 2,837 3,283
Other store expenses..................... 3,353 3,980 4,746 5,437 6,554
---------- --------- --------- --------- ---------
Total store operating expenses......... 14,892 16,587 19,550 21,345 25,437
---------- --------- --------- --------- ---------
Total merchandise costs and store
operating expenses................... 26,257 29,743 35,785 38,348 44,582
General and administrative expenses........ 2,170 2,662 3,216 3,934 3,946
---------- --------- --------- --------- ---------
Total operating expenses............... 28,427 32,405 39,001 42,282 48,528
---------- --------- --------- --------- ---------
Operating income....................... 4,223 4,618 3,558 4,278 6,800
Interest expense........................... 526 726 898 834 1,822
Other expense, net......................... 283 52 183 453 329
---------- --------- --------- --------- ---------
Income before income taxes............... 3,414 3,840 2,477 2,991 4,649
Income taxes............................... 1,445 1,642 1,253 972 1,968
---------- --------- --------- --------- ---------
Net income............................... $ 1,969 $ 2,198 $ 1,224 $ 2,019 $ 2,681
========== ========= ========= ========= =========
Basic net income per common share........ $ .31 $ .34 $ .19 $ .32 $ .59
========== ========= ========= ========= =========
Weighted average common shares
outstanding............................ 6,392,610 6,392,610 6,392,610 6,392,610 4,509,406
OPERATING DATA:
Stores open at end of period............. 42 46 51 55 62
Comparable store revenue growth(1)....... 15.0% 6.7% 8.0% 2.2% 9.9%
BALANCE SHEET DATA:
Rental-purchase merchandise, net......... $ 10,362 $ 10,567 $ 15,676 $ 19,740 $ 23,411
Total assets............................. 14,573 15,490 20,932 25,401 31,240
Total debt............................... 6,578 6,843 8,651 9,850 23,844(2)
Total liabilities........................ 10,155 8,873 11,484 13,934 28,187(2)
Shareholders' equity..................... 4,418 6,617(3) 9,448 11,467 3,053(2)
</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 redemption of shares from a prior
shareholder-officer. See Note 4 of the Company's Consolidated Financial
Statements.
(3) Does not include 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.
14
<PAGE> 16
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 64 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 March 1, 1998, the Company opened two 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.
15
<PAGE> 17
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.
16
<PAGE> 18
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>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental revenue............................................ 93.3% 94.1% 94.3%
Fees...................................................... 2.7 2.8 2.9
Merchandise sales......................................... 4.0 3.1 2.8
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Operating expenses:
Merchandise costs:
Depreciation and other merchandise costs.................. 36.3 35.1 34.6
Amortization of acquired rental-purchase agreements....... 1.9 1.4 0.0
----- ----- -----
Total merchandise costs........................... 38.2 36.5 34.6
Store operating expenses:
Salaries and related expenses............................. 21.5 20.7 20.8
Occupancy expenses........................................ 7.3 7.3 7.4
Advertising expenses...................................... 6.0 6.1 6.0
Other store expenses...................................... 11.1 11.7 11.8
----- ----- -----
Total store operating expenses.................... 45.9 45.8 46.0
----- ----- -----
Total merchandise costs and store operating
expenses........................................ 84.1 82.3 80.6
General and administrative expenses......................... 7.5 8.4 7.1
----- ----- -----
Total operating expenses.......................... 91.6 90.7 87.7
----- ----- -----
Operating income.................................. 8.4 9.3 12.3
Interest expense............................................ 2.1 1.8 3.3
Other expense, net.......................................... 0.4 1.0 0.6
----- ----- -----
Income before income taxes................................ 5.9 6.5 8.4
Income taxes................................................ 2.9 2.1 3.6
----- ----- -----
Net income................................................ 3.0% 4.4% 4.8%
===== ===== =====
</TABLE>
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.
17
<PAGE> 19
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.
Other Expense, 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.
18
<PAGE> 20
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 45.7% of the increase, new store openings accounted for
$1.3 million, or 32.5% of the increase and comparable store revenue increased
$0.9 million, or 21.8% of the increase. Comparable store revenue increased 2.2%
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
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 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.
19
<PAGE> 21
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, 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 December
31, 1997, the outstanding balance of the Credit Facility was approximately $12.5
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 December 31, 1997), 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.
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. The
Company generally requires $500,000 to open and operate a 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
20
<PAGE> 22
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.
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, 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.
21
<PAGE> 23
BUSINESS
GENERAL
The Company operates 64 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 1996 APRO estimates, the ten largest
industry participants accounted 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 approximately four out of five
agreements terminate with the product being returned. Returned merchandise is
held for re-rental or sale. In large metropolitan areas, most customers live
within three miles of their rental-purchase store. Rental payments are generally
made in person, in cash or by check, money order or credit card. According to
APRO, the AMRR in 1996 for chains with more than 20 stores was approximately
$51.
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<PAGE> 24
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 development programs enhance the Company's operations by ensuring
conformity to established operating standards, reducing associate turnover,
enhancing associate productivity and improving associate morale.
23
<PAGE> 25
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 53 additional stores through March 1, 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.
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
24
<PAGE> 26
have the opportunity to consummate more acquisitions due, in part, to
potential store overlap among consolidating competitors.
STORES
As of March 1, 1998, the Company operated 64 stores in eight states, as set
forth in the following table.
<TABLE>
<CAPTION>
LOCATION NUMBER OF STORES
-------- ----------------
<S> <C>
Pennsylvania................................................ 18
Ohio........................................................ 15
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,
--------------------------------------------------------------------------------- MARCH 1,
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 2
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 0
-- -- -- -- -- -- -- -- -- -- -- -- --
Stores open at end of
period.................. 6 15 20 24 28 36 38 42 46 51 55 62 64
== == == == == == == == == == == == ==
</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
statements and increasing the number of agreements. Generally, within two years
after a store is opened, the
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<PAGE> 27
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 December 31, 1997, the
Company's rental-purchase stores averaged approximately 4,300 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 $34.99.
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.
26
<PAGE> 28
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 $49.99.
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.
27
<PAGE> 29
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 over 50% of their compensation 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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<PAGE> 30
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 60,000 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
29
<PAGE> 31
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.
30
<PAGE> 32
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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<PAGE> 33
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 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. When the Company purchased
the DTO stores, the average number of agreements at the seven DTO stores was
601. At December 31, 1997, the average number of agreements at the seven former
DTO stores was 1,001.
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 December 31, 1997, the Company had approximately 560 associates,
including 365 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 64 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.
GOVERNMENT REGULATION
State Regulation
There are currently 45 states that have legislation regulating
rental-purchase transactions, of which 42 require operators to provide certain
disclosure to customers regarding the terms of rental-purchase transac-
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<PAGE> 34
tions, and two states (including one of the 42 states imposing disclosure
requirements) which regulate rental-purchase transactions as credit sales
subject to interest rate limitations and other consumer lending restrictions.
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."
North Carolina, Wisconsin and Minnesota regulate rental-purchase
transactions as credit sales subject to consumer lending restrictions. North
Carolina and Minnesota subject rental-purchase transactions to implied interest
rate or finance charge limitations. 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.
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 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
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<PAGE> 35
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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<PAGE> 36
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
..........................................
Director Designee(1)
..........................................
Director Designee(1)
</TABLE>
- ---------------
(1) and 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.
has consented to become a director of the Company upon
completion of the Offering.
has consented to become a director of the Company upon
completion of the Offering.
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<PAGE> 37
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 and the two
director designees, and , are members of the Audit and
Compensation Committee.
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 April , 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 shares of Common Stock under the Option Plan upon their
appointment to the Board, immediately following the Offering.
DIRECTORS' FEES
Following completion of the Offering, the Company intends to pay each
outside director a fee of $ 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 $ per meeting for each meeting attended in excess of four per
year. No additional compensation is to
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<PAGE> 38
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, at a current annual rent of $109,264. 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 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.
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<PAGE> 39
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 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.
38
<PAGE> 40
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
39
<PAGE> 41
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.
40
<PAGE> 42
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 Incorporated 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 Incorporated..................................
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.
41
<PAGE> 43
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. 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.
42
<PAGE> 44
RAINBOW RENTALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets
December 31, 1996 and 1997................................ F-3
Consolidated Statements of Income
Years ended December 31, 1995, 1996, and 1997............. F-4
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1996, and 1997............. F-5
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996, and 1997............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 45
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, Ohio
March 13, 1998, except as to Note 12,
which is as of March 23, 1998
F-2
<PAGE> 46
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 472 $ 77
Short-term investments.................................... 27 --
Rental-purchase merchandise, net (note 2)................. 19,740 23,411
Prepaid expenses and other current assets................. 494 771
Income tax receivable (note 6)............................ -- 399
Deferred income taxes (note 6)............................ 14 --
------- -------
Total current assets................................... 20,747 24,658
Property and equipment, net (note 3)........................ 3,620 3,441
Deferred income taxes (note 6).............................. 819 1,041
Other assets, net (notes 10 and 11)......................... 215 2,100
------- -------
Total assets (note 4).................................. $25,401 $31,240
======= =======
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
Accounts payable.......................................... 1,917 1,000
Accrued income taxes (note 6)............................. 232 129
Accrued compensation and related costs.................... 942 1,091
Other liabilities and accrued expenses.................... 993 1,563
Deferred income taxes (note 6)............................ -- 1,201
Notes payable (note 5).................................... 132 --
Note payable to shareholder (note 5)...................... 159 --
------- -------
Total current liabilities.............................. 4,708 5,064
Long-term debt, excluding current installments (note 4)..... 9,226 12,464
Notes payable (note 4)...................................... -- 10,488
Obligations under capital leases, excluding current
installments (note 7)..................................... -- 171
------- -------
Total liabilities...................................... 13,934 28,187
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
Retained earnings......................................... 11,407 14,088
Treasury stock, -0- and 2,716,875 common shares at
December 31, 1996 and 1997, respectively, at cost...... -- (11,095)
------- -------
Total shareholders' equity............................. 11,467 3,053
Commitments (note 7)........................................
------- -------
Total liabilities and shareholders' equity............. $25,401 $31,240
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue
Rental revenue............................................ $39,721 $43,815 $52,153
Fees...................................................... 1,151 1,284 1,588
Merchandise sales......................................... 1,687 1,461 1,587
------- ------- -------
Total revenues.................................... 42,559 46,560 55,328
Operating expenses
Merchandise costs
Depreciation and other merchandise costs............... 15,428 16,351 19,145
Amortization of acquired rental-purchase agreements.... 807 652 --
------- ------- -------
Total merchandise costs........................... 16,235 17,003 19,145
Store operating expenses
Salaries and related expenses.......................... 9,136 9,655 11,532
Occupancy expenses..................................... 3,092 3,416 4,068
Advertising expenses................................... 2,576 2,837 3,283
Other store expenses................................... 4,746 5,437 6,554
------- ------- -------
Total store operating expenses.................... 19,550 21,345 25,437
------- ------- -------
Total merchandise costs and store operating
expenses........................................ 35,785 38,348 44,582
General and administrative expenses (notes 5 and 11)...... 3,216 3,934 3,946
------- ------- -------
Total operating expenses.......................... 39,001 42,282 48,528
------- ------- -------
Operating income.................................. 3,558 4,278 6,800
Interest expense............................................ 898 834 1,822
Other expense, net.......................................... 183 453 329
------- ------- -------
Income before income taxes........................ 2,477 2,991 4,649
Income taxes (note 6)....................................... 1,253 972 1,968
------- ------- -------
Net income........................................ $ 1,224 $ 2,019 $ 2,681
======= ======= =======
Basic net income per common share (note 12)................. $ .19 $ .32 $ .59
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
(DOLLARS IN THOUSANDS)
<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
==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 49
RAINBOW RENTALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 1,224 $ 2,019 $ 2,681
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
Depreciation of merchandise inventory................... 13,490 14,475 16,994
Deferred income taxes................................... (276) (335) 993
(Gain) loss on disposal of property and equipment....... -- 120 (18)
Purchases of merchandise inventory...................... (17,134) (20,546) (22,499)
Merchandise inventory disposed, net..................... 1,746 2,092 1,834
(Increase) decrease in
Short-term investments............................... -- (2) 27
Prepaid expenses and other current assets............ (228) 179 (277)
Income tax receivable................................ (314) 314 (399)
Increase (decrease) in
Accounts payable..................................... 729 571 (917)
Accrued income taxes................................. (78) 232 (103)
Accrued compensation and related costs............... 7 298 149
Other liabilities and accrued expenses............... 371 150 570
-------- -------- --------
Net cash provided by operating activities.......... 1,699 1,591 724
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment, net................... (1,359) (2,371) (1,106)
Proceeds on the sale of property and equipment............ -- 3 250
Acquisition of assets (note 8)............................ (2,007) -- --
Other, net................................................ (51) (30) 9
-------- -------- --------
Net cash used in investing activities.............. (3,417) (2,398) (847)
-------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt borrowings................... 46,645 53,644 63,827
Current installments and repayments of long-term debt..... (44,843) (52,379) (60,922)
Increase (decrease) in notes payable...................... 7 (66) (291)
Loan origination fees paid................................ (107) (63) (147)
Payment in connection with Redemption Agreement (note
11)..................................................... -- -- (2,700)
Principal payments under capital lease obligations........ -- -- (39)
-------- -------- --------
Net cash provided by (used in) financing activities..... 1,702 1,136 (272)
-------- -------- --------
Net increase (decrease) in cash............................. (16) (329) (395)
Cash at beginning of year................................... 159 143 472
-------- -------- --------
Cash at end of year......................................... $ 143 $ 472 $ 77
======== ======== ========
Supplemental cash flow information:
Net cash paid during the year for
Interest................................................ $ 896 $ 795 $ 1,066
Income taxes............................................ 2,007 884 1,477
Supplemental disclosures of noncash financing activities:
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
(note 7) has been excluded from purchases of property
and equipment.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 50
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
(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> 51
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 in 1995, 1996, and 1997,
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> 52
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,
------------------
1996 1997
------- -------
<S> <C> <C>
Rental-purchase merchandise, at original cost............ $33,133 $39,926
Less: accumulated depreciation........................... (13,393) (16,515)
------- -------
$19,740 $23,411
======= =======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Vehicles................................................. $ 2,768 $ 2,142
Leasehold improvements................................... 2,685 3,286
Computer equipment....................................... 665 688
Office equipment......................................... 995 1,133
Vehicles held under capital lease........................ -- 290
------- -------
7,113 7,539
Less accumulated depreciation and amortization........... 3,493 4,098
------- -------
Property and equipment, net......................... $ 3,620 $ 3,441
======= =======
</TABLE>
(4) LONG-TERM DEBT AND NOTES PAYABLE
Following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Bank borrowings under secured revolving loan............. $ 7,726 $12,464
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
Less current installments................................ 333 --
------- -------
Long-term debt, excluding current installments........... $ 9,226 $12,464
======= =======
</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 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
F-9
<PAGE> 53
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 54
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>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Income before income taxes....................... $2,477 $2,991 $4,649
Federal statutory tax rate....................... 34% 34% 34%
------ ------ ------
842 1,017 1,581
State and local income taxes, net of federal
income tax benefit............................. 191 37 262
Meals and entertainment and officers' insurance
premiums....................................... 43 20 33
Other, net....................................... 177 (102) 92
------ ------ ------
$1,253 $ 972 $1,968
====== ====== ======
</TABLE>
F-11
<PAGE> 55
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> 56
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,
------------------
1996 1997
------- -------
<S> <C> <C>
Noncompete and consulting agreements..................... $ -- $ 2,093
Loan origination fees.................................... 157 304
------- -------
157 2,397
Less accumulated amortization............................ 74 418
------- -------
83 1,979
Other.................................................... 132 121
------- -------
$ 215 $ 2,100
======= =======
</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. This Board action was taken in contemplation of a planned initial
public offering of the Company's securities (Offering). The conversion of
nonvoting shares has been reflected retroactively, by removing reference to
common nonvoting shares from shareholder's equity and calculating
F-13
<PAGE> 57
RAINBOW RENTALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 58
======================================================
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....................... 15
Business.............................. 22
Management............................ 35
Certain Transactions.................. 37
Principal and Selling Shareholders.... 37
Shares Eligible for Future Sale....... 38
Description of Capital Stock.......... 39
Underwriting.......................... 41
Legal Matters......................... 42
Experts............................... 42
Available Information................. 42
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]
RAINBOW RENTALS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
THE ROBINSON-HUMPHREY
COMPANY
DAIN RAUSCHER INCORPORATED
SUNTRUST EQUITABLE SECURITIES
, 1998
======================================================
<PAGE> 59
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.......................................................
Nasdaq National Market Entry Fee............................ 3,605
Transfer Agent and Registrar Fees...........................
Printing Costs..............................................
Accounting Fees and Expenses................................
Legal Fees and Expenses (not including Blue Sky)............
Blue Sky Fees and Expenses..................................
Miscellaneous...............................................
----------
Total............................................. [$500,000]
</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 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> 60
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. (to
be included in Exhibit 5.1).*
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included on Page II-4).
27.1 Financial Data Schedule
99.1 Director designees consent to inclusion of their name in
Prospectus*
</TABLE>
- ---------------
* To be filed by amendment
(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> 61
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> 62
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO,
ON MARCH 27, 1998.
RAINBOW RENTALS, INC.
By: /s/ WAYLAND J. RUSSELL
------------------------------------
Wayland J. Russell, Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Rainbow Rentals, Inc. (the "Company"), an Ohio corporation, for
himself and not for one another, does hereby constitute and appoint Wayland J.
Russell, Michael A. Pecchia, Marc H. Morgenstern, Michael A. Ellis and Deborah
A. Weisman, and each of them, a true and lawful attorney in his name, place and
stead, in any and all capacities, to sign his name to any and all amendments,
including post-effective amendments, to this Registration Statement and to sign
a Registration Statement pursuant to Section 462(b) of the Securities Act of
1933 and to cause the same (together with all Exhibits thereto) to be filed with
the Securities and Exchange Commission, granting unto said attorneys and each of
them full power and authority to do and perform any act and thing necessary and
proper to be done in the premises, as fully to all intents and purposes as the
undersigned could do if personally present, and each of the undersigned for
himself hereby ratifies and confirms all that said attorneys or any one of them
shall lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
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>
/s/ WAYLAND J. RUSSELL Chairman of the Board of Directors March 27, 1998
- ------------------------------------------------ and
Wayland J. Russell Chief Executive Officer
(Principal Executive Officer)
/s/ LAWRENCE S. HENDRICKS Chief Operating Officer and Director March 27, 1998
- ------------------------------------------------
Lawrence S. Hendricks
/s/ MICHAEL J. VIVEIROS President and Director March 27, 1998
- ------------------------------------------------
Michael J. Viveiros
/s/ MICHAEL A. PECCHIA Chief Financial Officer March 27, 1998
- ------------------------------------------------ (Principal Financial and Accounting
Michael A. Pecchia Officer)
</TABLE>
II-4
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
RAINBOW RENTALS, INC.
ARTICLE I
---------
The name of the Corporation is Rainbow Rentals, Inc.
ARTICLE II
----------
The principal office of the Corporation is located in Mahoning County,
the State of Ohio.
ARTICLE III
-----------
The purposes of the Corporation are and shall be as follows:
To carry on any lawful business whatsoever in connection with
the business of the Corporation or which is calculated,
directly or indirectly, to promote the interests of the
Corporation or to enhance the value of its properties; and to
have and exercise all rights, powers and privileges which are
now or may hereafter be conferred upon corporations by the
laws of Ohio.
ARTICLE IV
----------
The authorized number of shares of capital stock of the Corporation
shall consist of Twelve Million (12,000,000) shares, of which Ten Million
(10,000,000) shall be Common Shares, without par value and Two Million
(2,000,000) shall be Serial Preferred Shares, without par value. The Serial
Preferred Shares shall be divided into two classes: Voting Serial Preferred
Shares, consisting of One Million (1,000,000) shares ("Voting Preferred Shares")
and Non-voting Serial Preferred Shares, consisting of One Million (1,000,000)
shares ("Non-voting Preferred Shares").
<PAGE> 2
Subdivision A - Provisions Applicable to Voting Preferred Shares
- ----------------------------------------------------------------
1. General
-------
1.1. The Voting Preferred Shares may be issued, from time to time,
in one or more series. Subject to the provisions of paragraph
1.2 of this Subdivision, the Board of Directors, in a
resolution or resolutions (a copy of which shall be filed and
recorded as required by law) providing for the issue of a
series of Voting Preferred Shares, is expressly authorized to
fix:
a. The distinctive serial designations and the division
of such shares into series and the number of shares
of a particular series, which may be increased or
decreased, but not below the number of shares thereof
then outstanding, by a certificate made, signed,
filed and recorded as required by law;
b. The annual dividend rate for the particular series,
the date or dates from which dividends on all shares
of such series shall be paid, and whether or not
dividends on shares of the particular series shall be
cumulative;
c. The redemption rights and price or prices, if any,
for the particular series;
d. The right, if any, of the holders of a particular
series to convert such stock into other classes of
shares, and the terms and conditions of such
conversions;
e. The obligation, if any, of the Corporation to
purchase and retire and redeem shares of a particular
series as a sinking fund or redemption or purchase
account, the terms thereof and the redemption price
or price per share for such series redeemed pursuant
to the sinking fund or redemption or purchase
account; and
f. The amounts payable on shares of the series and the
priority among series in the event of the voluntary
or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation.
2
<PAGE> 3
The Board of Directors is authorized to adopt from time to
time amendments to these Amended and Restated Articles of
Incorporation fixing, with respect to each such series, the
matters specified in clauses (a) through (f) of this paragraph
1.1 of this Subdivision or any other matter permitted by law.
1.2. All shares of any one series of Voting Preferred Shares shall
be alike in every particular and all series shall rank equally
and be identical in all respects except insofar as they may
vary with respect to the matters which the Board of Directors
is hereby expressly authorized to determine in the resolution
or resolutions providing for the issue of any series of the
Voting Preferred Shares.
2. Rights on Liquidation
---------------------
In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, before any distribution or payment
shall have been made to the holders of the Common Shares, the holders
of the Serial Preferred Shares of each series, whether Voting or
Non-voting Preferred Shares, shall be entitled to be paid, or to have
set apart in trust for payment, an amount from the net assets of the
Corporation equal, in the aggregate, to that stated and expressed in
the resolutions adopted by the Board of Directors which provides for
the issue of each series. Such portion of the net assets of the
Corporation shall be distributed among the Serial Preferred Shares in
the order of priority established in such Board of Directors'
resolutions. Unless otherwise provided by the terms of a series of
Serial Preferred Shares, the remaining net assets of the Corporation
shall be distributed solely among the holders of the Common Shares
according to their respective shares.
3. Voting
------
3.1 The holders of Voting Preferred Shares shall be entitled to
one vote for each Voting Preferred Share upon all matters
presented to the shareholders, and, except as otherwise
provided by these Amended and Restated Articles of
Incorporation or required by law, the holders of Voting
Preferred Shares and the holders of Common Shares shall vote
together as one class on all matters. Unless otherwise
provided by the terms of a series of Voting Preferred Shares,
no adjustment of the voting rights of holders of Voting
Preferred Shares shall be made in the event of an increase or
decrease in the number of Common Shares authorized or issued
or in the event of a share split or combination of the Common
Shares or in the event of a share dividend on any class of
shares payable solely in Common Shares.
3
<PAGE> 4
3.2 The following matters shall require the vote or consent of the
holders of a majority of the then outstanding Voting Preferred
Shares voting separately as a class:
a. Any amendment, alteration or repeal of any of the
provisions of the Articles of Incorporation or of the
Code of Regulations of the Corporation that affects
adversely the voting powers, rights or preferences of
the holders of Voting Preferred Shares; PROVIDED,
HOWEVER, that for the purpose of this clause (a)
only, neither the amendment of the Articles of
Incorporation of the Corporation to authorize, or to
increase the authorized number of shares of, Voting
Preferred Shares or of any shares of any class
ranking on a parity with or junior to the Voting
Preferred Shares, nor the increase by the
shareholders or directors pursuant to the Code of
Regulations of the number or classes of directors of
the Corporation shall be deemed to affect adversely
the voting powers, rights or preferences of the
holders of Voting Preferred Shares; and PROVIDED
FURTHER, that if such amendment, alteration or repeal
affects adversely the rights or preferences of one or
more, but not all, of the then outstanding series of
Voting Preferred Shares, only the vote or consent of
the holders of at least a majority of the number of
the then outstanding shares of the series so affected
shall be required.
b. The purchase or redemption (whether for sinking fund
purposes or otherwise) of less than all of a series
of outstanding Voting Preferred Shares, except in
accordance with a purchase offer made to all holders
of record of such series of Voting Preferred Shares
if, at the time of such purchase offer, all dividends
on such series of Voting Preferred Shares then
outstanding for all previous quarterly dividend
periods shall have been declared and paid or funds
therefor set apart and all accrued sinking fund
obligations applicable to all such shares shall have
been complied with.
4. Ranking
-------
Whenever reference is made herein to shares "ranking prior to
the Voting Preferred Shares," such reference shall mean and include all
shares of the Corporation in respect of which the rights of the holders
thereof either as to the payment of dividends or as to distributions in
the event of a voluntary or involuntary liquidation,
4
<PAGE> 5
dissolution or winding up of the Corporation are given preference over
the rights of the holders of a specified series of Voting Preferred
Shares. Whenever reference is made to shares "on a parity with the
Voting Preferred Shares," such reference shall mean and include all
shares of the Corporation in respect of which the rights of the holders
thereof either as to the payment of dividends or as to distributions in
the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Corporation rank equally (except as to the amounts
fixed therefor) with the rights of the holders of a specified series of
Voting Preferred Shares. Whenever reference is made to shares "ranking
junior to the Voting Preferred Shares," such reference shall mean and
include all shares of the Corporation in respect of which the rights of
the holders thereof both as to the payment of dividends and as to
distribution in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation are junior and subordinate
to the rights of the holders of a specified series of Voting Preferred
Shares.
Subdivision B - Provisions Applicable to Non-voting Preferred Shares.
- ---------------------------------------------------------------------
1. General
-------
1.1. The Non-voting Preferred Shares may be issued, from time to
time, in one or more series. Subject to the provisions of
paragraph 1.2 of this Subdivision, the Board of Directors, in
a resolution or resolutions (a copy of which shall be filed
and recorded as required by law) providing for the issue of a
series of Non-voting Preferred Shares, is expressly authorized
to fix:
a. The distinctive serial designations and the division
of such shares into series and the number of shares
of a particular series, which may be increased or
decreased, but not below the number of shares thereof
then outstanding, by a certificate made, signed,
filed and recorded as required by law;
b. The annual dividend rate for the particular series,
the date or dates from which dividends on all shares
of such series shall be paid, and whether or not
dividends on shares of the particular series shall be
cumulative;
c. The redemption rights and price or prices, if any,
for the particular series;
5
<PAGE> 6
d. The right, if any, of the holders of a particular
series to convert such stock into other classes of
shares, and the terms and conditions of such
conversions;
e. The obligation, if any, of the Corporation to
purchase and retire and redeem shares of a particular
series as a sinking fund or redemption or purchase
account, the terms thereof and the redemption price
or prices per share for such series redeemed pursuant
to the sinking fund or redemption or purchase
account; and
f. The amounts payable on shares of the series and the
priority among series in the event of the voluntary
or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation.
The Board of Directors is authorized to adopt from time to
time amendments to these Amended Articles of Incorporation
fixing, with respect to each such series, the matters
specified in clauses (a) through (f) of this paragraph 1.1 of
this Subdivision or any other matter permitted by law.
1.2. All shares of any one series of Non-voting Preferred Shares
shall be alike in every particular and all series shall rank
equally and be identical in all respects except insofar as
they may vary with respect to the matters which the Board of
Directors is hereby expressly authorized to determine in the
resolution or resolutions providing for the issue of any
series of the Non-voting Preferred Shares.
2. Rights on Liquidation
---------------------
In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, before any distribution or payment
shall have been made to the holders of the Common Shares, the holders
of the Serial Preferred Shares of each series, whether Voting or
Non-voting Preferred Shares, shall be entitled to be paid, or to have
set apart in trust for payment, an amount from the net assets of the
Corporation equal, in the aggregate, to that stated and expressed in
the resolutions adopted by the Board of Directors which provides for
the issue of each series. Such portion of the net assets of the
Corporation shall be distributed among the Serial Preferred Shares in
the order of priority established in such Board of Directors'
resolutions. Unless otherwise provided by the terms of a series of
Serial Preferred Shares, the remaining net assets
6
<PAGE> 7
of the Corporation shall be distributed solely among the holders of the
Common Shares according to their respective shares.
3. Non-voting
----------
3.1 The holders of Non-voting Preferred Shares shall NOT be
entitled to vote on any matter, except as expressly required
pursuant to paragraph 3.2 of this Subdivision B or applicable
law.
3.2 The following matters shall require the vote or consent of the
holders of a majority of the then outstanding Non-voting
Preferred Shares voting separately as ONE class:
a. Any amendment, alteration or repeal of any of the
provisions of the Articles of Incorporation or of the
Code of Regulations of the Corporation that affects
adversely the voting powers, rights or preferences of
the holders of Non-voting Preferred Shares; PROVIDED,
HOWEVER, that for the purpose of this clause (a)
only, neither the amendment of the Articles of
Incorporation of the Corporation to authorize, or to
increase the authorized number of shares of, Non-
voting Preferred Shares or of any shares of any class
ranking on a parity with or junior to the Non-voting
Preferred Shares, nor the increase by the
shareholders or directors pursuant to the Code of
Regulations of the number or classes of directors of
the Corporation shall be deemed to affect adversely
the voting powers, rights or preferences of the
holders of Non-voting Preferred Shares; and PROVIDED
FURTHER, that if such amendment, alteration or repeal
affects adversely the rights of preferences of one or
more, but not all, of the then outstanding series of
Non-voting Preferred Shares, only the vote or consent
of the holders of at least a majority of the number
of the then outstanding shares of the series so
affected shall be required.
b. The purchase or redemption (whether for sinking fund
purposes or otherwise) of less than all of a series
of outstanding Non-voting Preferred Shares, except in
accordance with a purchase offer made to all holders
of record of such series of Non-voting Preferred
Shares if, at the time of such purchase offer, all
dividends on such series of Non-voting Preferred
Shares then outstanding for all previous quarterly
dividend periods shall have been declared and paid or
funds therefor set
7
<PAGE> 8
apart and all accrued sinking fund obligations
applicable to all such shares shall have been
complied with.
4. Ranking
-------
Whenever reference is made herein to shares "ranking prior to
the Non-voting Preferred Shares," such reference shall mean and include
all shares of the Corporation in respect of which the rights of the
holders thereof either as to the payment of dividends or as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation are given preference over
the rights of the holders of a specified series of Non-voting Preferred
Shares. Whenever reference is made to shares "on a parity with the
Non-voting Preferred Shares," such reference shall mean and include all
shares of the Corporation in respect of which the rights of the holders
thereof either as to the payment of dividends or as to distributions in
the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Corporation rank equally (except as to the amounts
fixed therefor) with the rights of the holders of a specified series of
Non-voting Preferred Shares. Whenever reference is made to shares
"ranking junior to the Non-voting Preferred Shares," such reference
shall mean and include all shares of the Corporation in respect of
which the rights of the holders thereof both as to the payment of
dividends and as to distribution in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
are junior and subordinate to the rights of the holders of a specified
series of Non-voting Preferred Shares.
Subdivision C - Provisions Applicable to Common Shares
- ------------------------------------------------------
The Common Shares shall be subject to the express terms of the Serial
Preferred Shares and of any class or series thereof and shall have the following
rights:
1. Dividends
---------
Whenever the full dividends upon any outstanding Serial
Preferred Shares for all past dividend periods and for the then current
dividend periods shall have been paid, or declared and a sum sufficient
for the respective payments thereof set apart, the holders of the
Common Shares shall be entitled to receive such dividends and
distributions, payable in cash or otherwise, as may be declared thereon
by the Board of Directors from time to time out of assets or funds of
the Corporation legally available therefor.
8
<PAGE> 9
2. Rights on Liquidation
---------------------
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after the payment or
setting apart for payment to the holders of any outstanding Serial
Preferred Shares of the full preferential amounts (including accrued,
but unpaid dividends) to which such holders are entitled as herein
provided or referred to, all of the remaining assets of the Corporation
shall, except as otherwise provided by the terms of the Serial
Preferred Shares, belong to and be distributable in equal amounts per
share to the holders of the Common Shares. For purposes of this
paragraph 2, a consolidation or merger of the Corporation with any
other corporation, or the sale, transfer or lease of all or
substantially all of its assets shall not constitute or be deemed a
liquidation, dissolution or winding up of the Corporation.
3. Voting
------
Each Common Share shall entitle the holder thereof to one
vote.
ARTICLE V
---------
The preemptive right to purchase additional shares or any other
securities of the Corporation is hereby expressly denied to all shareholders of
all classes.
ARTICLE VI
----------
The right of shareholders to vote cumulatively in the election of
directors of the Corporation is expressly denied to all shareholders of all
classes.
ARTICLE VII
-----------
A director or officer of the Corporation shall not be disqualified by
such director's or officer's office from dealing or contracting with the
Corporation as a vendor, purchaser, employee, agent or otherwise.
No transaction, contract or other act of the Corporation shall be
voided or voidable or in any way be affected or invalidated by reason of the
fact that any director or officer, or any corporation, partnership, trust or
other enterprise in which such director or officer is a shareholder, director,
officer, trustee, or partner or is in any way interested in such transaction,
contract or other act, provided that the interest of such director, officer,
9
<PAGE> 10
corporation, partnership, trust or other enterprise is disclosed or known to the
Board of Directors or such members thereof as shall take action upon any such
transaction, contract or other act; nor shall any such director or officer be
accountable or responsible to the Corporation for or in respect of any such
transaction, contract or other act of the Corporation or for any gains or
profits realized by reason of the fact that such director or officer, or any
firm of which such director or officer is a member, or any corporation or other
enterprise of which such director or officer is a shareholder, director,
officer, trustee, or partner, is interested in such transaction, contract or
other act; and any such director may be counted in determining the existence of
a quorum at any meeting of the Board of Directors of the Corporation which shall
authorize or take action in respect of any such transaction, contract or other
act, and, subject to the provisions of Section 1701.60 of the Ohio Revised Code,
may vote thereat to authorize, ratify or approve any such transaction, contract
or other act with like force and effect as if such director or officer or any
firm of which such director or officer is a member or any corporation or
business enterprise of which such director or officer is a shareholder,
director, officer, trustee, or partner were not interested in such transaction,
contract or other act.
ARTICLE VIII
------------
Subject to the express terms of any series of outstanding Serial
Preferred Shares, the Corporation may purchase, from time to time and to the
extent permitted by the laws of the State of Ohio, shares of any class of stock
issued by it. Such purchases may be made either in the open market or at private
or public sale, and in such manner and amounts, from such holder or holders of
outstanding shares of the Corporation and at such prices as the Board of
Directors of the Corporation shall determine, and the Board of Directors is
hereby empowered to authorize such purchases from time to time without any vote
of the holders of any class of shares now or hereafter authorized and
outstanding at the time of any such purchase.
ARTICLE IX
----------
Notwithstanding any provision of the laws of the State of Ohio now or
hereafter in force requiring for any purpose the vote of the holders of shares
entitling them to exercise two-thirds (2/3) or any other proportion (but less
than all) of the voting power of the Corporation or any class or classes of
shares thereof, such action (unless otherwise expressly prohibited by statute or
unless otherwise expressly required by these Amended and Restated Articles of
Incorporation) may be taken by vote of the holders of shares entitling them to
exercise a majority of the voting power of the Corporation or of such class or
classes.
10
<PAGE> 11
ARTICLE X
---------
Effective upon the filing of these Amended and Restated Articles of
Incorporation, each then outstanding non-voting Common Share, without par value,
of the Corporation shall be converted automatically into one Common Share.
ARTICLE XI
----------
These Amended and Restated Articles of Incorporation supersede the
existing Articles of Incorporation of the Corporation and any and all subsequent
amendments thereto, to the date hereof.
11
<PAGE> 1
Exhibit 3.2
RAINBOW RENTALS, INC.
AMENDED AND RESTATED CODE OF REGULATIONS
Adopted: ________, 1998
ARTICLE I
---------
SHAREHOLDERS
------------
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of
the Company for the election of directors, the consideration of reports to be
laid before the meeting, and the transaction of such other business as may
properly be brought before the meeting shall be held in the place described in
the Articles of Incorporation (the "Articles") as the place where the principal
office of the Company is or is to be located, or at such other place either
within or without the State of Ohio as may be designated by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer, or the
President and specified in the notice of the meeting, at 10:00 a.m., on the
second Tuesday in May of each year, or at such other time and on such other date
as the Board of Directors may determine.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders of
the Company may be held on any business day when called by the Chairman of the
Board, the Chief Executive Officer, the President, the Board of Directors acting
at a meeting, a majority of the directors acting without a meeting, or the
persons who hold fifty percent or more of all the shares outstanding and
entitled to vote at the meeting. Upon request in writing delivered either in
person or by registered mail to the President or the Secretary by any person
entitled to call a meeting of the shareholders, that officer shall forthwith
cause to be given to the shareholders entitled thereto notice of a meeting to be
held on a date not less than fourteen (14) or more than sixty (60) days after
receipt of the request, as that officer may fix. If the notice is not given
within fifteen (15) days after the delivery or mailing of the request, the
person calling the meeting may fix the time of the meeting and give notice
thereof in the manner provided by law or as provided in these Regulations or
cause the notice to be given by any designated representative. Each special
meeting shall be held at the principal office of the Company unless the meeting
is called by the Chairman of the Board, the Chief Executive Officer, the
President, or the directors, in which case the meeting may be held at any place
either within or without the State of Ohio as designated by the party calling
the meeting and specified in the notice of the meeting.
<PAGE> 2
SECTION 3. NOTICE OF MEETINGS. Not less than fourteen (14) or more than
sixty (60) days before the date fixed for a meeting of the shareholders, written
notice stating the time, place, and purposes of the meeting shall be given by or
at the direction of the Secretary or an Assistant Secretary. The notice shall be
given by personal delivery or by mail to each shareholder entitled to notice of
the meeting who is of record as of the day next preceding the date on which
notice is given or, if a record date therefor is duly fixed, of record as of
that date. If mailed, the notice shall be addressed to the shareholders at their
respective addresses as they appear on the records of the Company. Notice of the
time, place, and purposes of any meeting of the shareholders may be waived in
writing, either before or after the holding of the meeting, by any shareholder,
which writing shall be filed with or entered upon the records of the Company.
Attendance of any shareholder at any meeting without protesting, prior to or at
the commencement of the meeting, the lack of proper notice shall be deemed to be
a waiver by such shareholder of notice of the meeting.
SECTION 4. QUORUM; ADJOURNMENT. Except as may be otherwise provided by
law or by the Articles, at any meeting of the shareholders the holders of shares
entitled to exercise a majority of the voting power of the Company present in
person or by proxy shall constitute a quorum for the meeting, except that no
action required by law, the Articles, or these Regulations to be authorized or
taken by a designated proportion of the shares of any particular class or of
each class of the Company may be authorized or taken by a lesser proportion and
except that the holders of a majority of the voting shares represented at the
meeting, whether or not a quorum is present, may adjourn the meeting from time
to time. If any meeting is adjourned, notice of adjournment need not be given if
the time and place to which the meeting is adjourned are fixed and announced at
the meeting.
SECTION 5. ACTION WITHOUT A MEETING. Except as provided in Article X
with respect to the amendment of these Regulations or the adoption of new
Regulations by written consent, any other action that may be authorized or taken
at a meeting of the shareholders may be authorized or taken without a meeting
with the affirmative vote or approval of, and in a writing or writings signed by
or on behalf of, all of the shareholders who would be entitled to notice of a
meeting of the shareholders held for the purpose specified in the written
action, which writing or writings shall be filed with or entered upon the
records of the Company.
SECTION 6. INSPECTORS OF ELECTION. Inspectors of Election may be
appointed to act at any meeting of shareholders in accordance with the
provisions of the Ohio General Corporation Law.
SECTION 7. LIST OF SHAREHOLDERS. At any meeting of shareholders, an
alphabetically arranged list, or classified lists, of the shareholders of record
as of the applicable record date who are entitled to vote, showing their
respective addresses and the number and classes of shares held by each, shall be
produced on the request of any shareholder.
SECTION 8. PROXIES. Persons entitled to vote shares or to act with
respect to shares may vote or act in person or by proxy. The person appointed as
proxy need not be a shareholder. Unless the writing appointing a proxy otherwise
provides, the presence at a meeting of the person who appointed a proxy shall
not automatically operate to revoke the appointment. Notice to the
- 2 -
<PAGE> 3
Company, in writing or in open meeting, of the revocation of the appointment of
a proxy shall not affect any vote or act previously taken or authorized.
SECTION 9. APPROVAL AND RATIFICATION OF ACTS OF OFFICERS AND DIRECTORS.
Except as otherwise provided by the Articles or by law, any contract, action, or
transaction, prospective or past, of the Company or of the Board of Directors or
of any director or officer may be approved or ratified by the affirmative vote
in person or by proxy of the holders of record of a majority of the shares held
by persons not interested in the contract, action, or transaction and entitled
to vote in the election of directors (without regard to voting powers that may
thereafter exist upon a default, failure, or other contingency), which approval
or ratification shall be as valid and binding as though affirmatively voted for
or consented to by every shareholder of the Company.
ARTICLE II
----------
BOARD OF DIRECTORS
------------------
SECTION 1. NUMBER AND ELECTION. The Board of Directors shall consist of
such number of directors (not less, however, than three) as: (a) the
shareholders, at any annual or special meeting called for the purpose of
electing directors at which a quorum is present, by the affirmative vote of the
holders of a majority of the shares that are represented at the meeting and
entitled to vote on the proposal, may determine, or (b) the directors, at any
meeting of the Board of Directors by the vote of a majority of the directors
then in office, may determine, except that, after the number of directors has
been fixed by the shareholders, the directors may not increase or decrease the
number of directors by more than two. Until otherwise changed by the
shareholders or by the directors, the number of directors shall be five (5).
Whenever the shareholders or the directors shall have so determined the number
of directors, that number shall be deemed the authorized number of directors
until the number is again changed in the manner provided herein. At a meeting of
shareholders at which directors are to be elected, only persons nominated as
candidates shall be eligible for election as directors and the candidates
receiving the greatest number of votes shall be elected.
SECTION 2. NOMINATIONS FOR DIRECTORS. A shareholder entitled to vote
for the election of directors who intends to nominate a person for election as a
director must deliver written notice to the Secretary of the Company no later
than: (a) with respect to an election to be held at an annual meeting of
shareholders, 90 days in advance of the anniversary of the date on which the
notice of the annual meeting for the prior year was given to shareholders, and
(b) with respect to an election to be held at a special meeting of shareholders,
the close of business on the seventh (7th) day following the date on which
notice of such special meeting is first given to shareholders. The notice from
the shareholder must contain the following:
(a) the name and address of the shareholder and each director
nominee;
(b) a representation that the shareholder is entitled to vote and
intends to appear in person or by proxy at the meeting;
- 3 -
<PAGE> 4
(c) a description of any and all arrangements or understandings
between the shareholder and each nominee;
(d) such other information regarding the nominee that would have
been required to be included by the Securities and Exchange
Commission in a proxy statement had the nominee been named in
a proxy statement;
(e) a brief description of the nominee's qualifications to be a
director; and
(f) the written consent of the nominee to serve as a director if
so elected.
SECTION 3. TERM OF OFFICE; RESIGNATIONS. Each director shall hold
office until the next annual meeting of the shareholders and until the
director's successor is elected, or until the director's earlier death, removal
from office, or resignation. Any director may resign at any time by providing a
written notice to that effect delivered to the Secretary, such resignation to
take effect immediately or at such future date, but not later than the next
annual meeting of shareholders, as the director may specify in the director's
notice of resignation.
SECTION 4. VACANCIES. In the event of the occurrence of any vacancy in
the Board of Directors, however caused, the remaining directors, though less
than a majority of the whole authorized number of directors, may, by the vote of
a majority of their number, fill the vacancy for the unexpired term.
SECTION 5. REGULAR MEETINGS. Upon notice duly given, regular meetings
of the Board of Directors may be held at such times and places within or without
the State of Ohio (or through use of telephone or other communications equipment
if all persons participating can hear each other) as may be provided for in
bylaws or resolutions adopted by the Board of Directors. Unless otherwise
indicated in the notice of a regular meeting, any business may be transacted at
a regular meeting.
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held at any time within or without the State of Ohio (or through use of
telephone or other communications equipment if all persons participating can
hear each other) upon call by the Chairman of the Board, the President, or any
two directors.
SECTION 7. NOTICE OF MEETING AND WAIVER OF NOTICE. Written notice of
the time and place of each regular or special meeting shall be given to each
director either by personal delivery (which, for purposes of these Regulations,
includes notice by electronic transmission of a written notice) or by mail,
telegram, or cablegram at least forty-eight (48) hours before the meeting. The
notice need not specify the purposes of the meeting. The attendance of any
director at any meeting (and participation in a meeting employing telephone or
other communications equipment) without, prior to or at the commencement of the
meeting, protesting the lack of proper notice shall be deemed to be a waiver by
the director of notice of the meeting. Further, notice of a meeting may be
waived in
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<PAGE> 5
writing, either before or after the holding of the meeting, by any director,
which writing shall be filed with or entered upon the records of the Company.
Unless otherwise indicated in the notice of a meeting, any business may be
transacted at such meeting.
SECTION 8. QUORUM; ADJOURNMENT. A quorum of the Board of Directors at
any meeting shall consist of a majority of the directors then in office, except
that a majority of the directors present at a meeting duly held, whether or not
a quorum is present, may adjourn the meeting from time to time. If any meeting
is adjourned, notice of adjournment need not be given if the time and place to
which the meeting is adjourned are fixed and announced at the meeting. At each
meeting of the Board of Directors at which a quorum is present, unless otherwise
provided by law, the Articles, or these Regulations, all matters requiring the
approval of the Board of Directors shall be determined by a majority vote of
those present.
SECTION 9. ACTION WITHOUT A MEETING. Any action that may be authorized
or taken at a meeting of the Board of Directors may be authorized or taken
without a meeting with the affirmative vote or approval of, and in a writing or
writings signed by, all of the directors, which writing or writings shall be
filed with or entered upon the records of the Company.
SECTION 10. COMMITTEES. The Board of Directors may at any time appoint
from its members an Audit, Compensation, or other committee or committees,
consisting of such number of members, not less than three (or such lesser number
as may hereafter be permitted by Ohio law), as the Board of Directors may deem
advisable, together with such alternates as the Board of Directors may deem
advisable, to take the place of any absent member or members at any meeting of
the committee. Each member and each alternate may be appointed or removed, at
any time, by the Board of Directors. Any committee shall act only in the
intervals between meetings of the Board of Directors and shall have such
authority of the Board of Directors (other than the authority to fill vacancies
in the Board of Directors or in any committee of the Board of Directors) as may,
from time to time, be delegated by the Board of Directors. Subject to these
exceptions, any person dealing with the Company shall be entitled to rely upon
any act or authorization of an act by any committee to the same extent as an act
or authorization of the Board of Directors. Unless otherwise ordered by the
Board of Directors, any committee may prescribe its own rules of procedure and
may act at a meeting, by a majority of its members, or without a meeting by a
writing or writings signed by all of its members.
ARTICLE III
-----------
OFFICERS
--------
SECTION 1. ELECTION AND DESIGNATION OF OFFICERS. The Board of Directors
shall elect a President, a Secretary, and a Treasurer and, in its discretion,
may elect a Chairman of the Board, one or more Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
as the Board of Directors may deem necessary. Any Person occupying the position
of Chairman of the Board, if any, shall be a director, but no one of the other
officers need be a director. Any two or more offices may be held by the same
person, but no officer shall execute,
- 5 -
<PAGE> 6
acknowledge, or verify any instrument in more than one capacity if the
instrument is required to be executed, acknowledged, or verified by two or more
officers.
SECTION 2. TERM OF OFFICE; VACANCIES. Each officer of the Company shall
hold office until the officer's successor is elected or until the officer's
earlier resignation, removal from office, or death. The Board of Directors may
remove any officer at any time with or without cause by a majority vote of the
directors then in office. Any vacancy in any office may be filled by the Board
of Directors.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and all meetings of the
shareholders. The Chairman may have such additional authority and shall perform
such other duties as may be determined by the Board of Directors. The Company
may elect Co-Chairmen and, for purposes of these Regulations, the term Chairman
shall mean any one of the Co-Chairmen.
SECTION 4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Company, if any, shall have supervising authority over and may exercise general
executive power concerning the direction and control of the business and
officers of the Company, with the authority to delegate, from time to time, to
other officers of the Company such executive powers and duties as the Chief
Executive Officer deems advisable. The Chief Executive Officer may execute all
authorized leases, bonds, contracts and other obligations in the name of the
Company and shall have such additional powers as the Board of Directors may
prescribe. In the absence of a Chairman, the Chief Executive Officer shall
preside at meetings of the Board of Directors and shareholders. In the absence
of a Chief Executive Officer, the power of the Chief Executive Officer shall be
held by the President.
SECTION 5. PRESIDENT. Subject to directions of the Board of Directors
and to the delegation by the Board of Directors to the Chairman of the Board or
Chief Executive Officer of specific or general duties, the President shall have
primary responsibility for store operations, site selection, advertising and
merchandising. The President may execute all authorized leases, bonds,
contracts, and other obligations in the name of the Company and shall have such
other authority and shall perform such other duties as may be determined by the
Board of Directors.
SECTION 6. VICE PRESIDENTS. The Vice Presidents, if any, shall,
respectively, have such authority and perform such duties as may be determined
by the Board of Directors.
SECTION 7. SECRETARY. The Secretary shall keep the minutes of meetings
of the shareholders and of the Board of Directors. The Secretary shall keep such
additional corporate records as may be required by the Board of Directors, shall
give notices of meetings of the shareholders and of meetings of the Board of
Directors required by law or by these Regulations or otherwise, and shall have
such authority and shall perform such other duties as may be determined by the
Board of Directors.
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<PAGE> 7
SECTION 8. TREASURER (CHIEF FINANCIAL OFFICER). Unless the authority is
granted by the Board of Directors to another financial officer, the Treasurer
shall receive and have control over all money, notes, bonds, securities of other
corporations, and similar property belonging to the Company, and shall do with
this property as may be ordered by the Board of Directors. The Treasurer shall
keep accurate financial accounts and hold them open for the inspection and
examination of the directors and shall have such authority and shall perform
such other duties as may be determined by the Board of Directors.
SECTION 9. OTHER OFFICERS. The Assistant Secretaries and Assistant
Treasurers, if any, and any other officers whom the Board of Directors may elect
shall, respectively, have such authority and perform such duties as may be
determined by the Board of Directors.
SECTION 10. DELEGATION OF AUTHORITY AND DUTIES. The Board of Directors
is authorized to delegate the authority and duties of any officer to any other
officer and generally to control the action of the officers and to require the
performance of duties in addition to those mentioned herein.
ARTICLE IV
----------
COMPENSATION OF AND TRANSACTIONS WITH
-------------------------------------
DIRECTORS. OFFICERS, AND EMPLOYEES
----------------------------------
SECTION 1. DIRECTORS AND MEMBERS OF COMMITTEES. Members of the Board of
Directors and members of any committee of the Board of Directors shall, as such,
receive such compensation, which may be either a fixed sum for attendance at
each meeting of the Board of Directors or Board committee or a stated amount
payable at intervals, or shall otherwise be compensated as may be determined by,
or pursuant to authority conferred by, the Board of Directors, which
compensation may be in different amounts for various members of the Board of
Directors or of any committee. No member of the Board of Directors and no member
of any committee of the Board of Directors shall be disqualified from being
counted in the determination of the presence of a quorum or from acting at any
meeting of the Board of Directors or of a committee of the Board of Directors by
reason of the fact that matters affecting the director's own compensation as a
director, member of a committee of the Board of Directors, officer, or employee
are to be determined.
SECTION 2. OFFICERS AND EMPLOYEES. The compensation of officers and
employees of the Company, or the method of fixing their compensation, shall be
determined by, or pursuant to authority conferred by, the Board of Directors.
Compensation may include pension, disability, and death benefits, and may be by
way of fixed salary, on the basis of earnings of the Company, any combination
thereof, or otherwise, as may be so determined or authorized.
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<PAGE> 8
ARTICLE V
---------
INDEMNIFICATION
---------------
SECTION 1. THIRD PARTY ACTIONS. The Company shall indemnify any person
(the "Indemnified Party") who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (other than an action,
suit, or proceeding by or in the right of the Company), by reason of the fact
that the Indemnified Party is or was a director, officer, employee, or agent of
the Company, or is or was serving at the request of the Company as a director,
trustee, officer, employee, member, manager, or agent of another corporation
(profit or non-profit), partnership, joint venture, trust, limited liability
company, or other enterprise, against expenses (including professional fees,
e.g., attorneys' fees and accountants' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by the Indemnified Party in
connection with the action, suit, or proceeding if the Indemnified Party acted
in good faith and in a manner the Indemnified Party reasonably believed to be in
or not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the
Indemnified Party's conduct was unlawful. The termination of any action, suit,
or proceeding by judgment, order, settlement, or conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the Indemnified Party did not act in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Company
or that, with respect to any criminal action or proceeding, such person had
reasonable cause to believe that their conduct was unlawful.
SECTION 2. DERIVATIVE ACTIONS. Other than in connection with an action
or suit in which the liability of a director under Section 1701.95 of the Ohio
Revised Code is the only liability asserted, the Company shall indemnify any
person (the "Indemnified Party") who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the Company to procure a judgment in its favor by reason of the
fact that the Indemnified Party is or was a director, officer, employee, member,
manager, or agent of the Company, or is or was serving at the request of the
Company as a director, trustee, officer, employee, member, manager, or agent of
another corporation (profit or non-profit), partnership, joint venture, trust,
limited liability company, or other enterprise, against expenses (including
professional fees, e.g., attorneys' fees and accountants' fees) actually and
reasonably incurred by the Indemnified Party in connection with the defense or
settlement of the action or suit if the Indemnified Party acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the Company, except that:
(a) no indemnification of a director shall be made if it is
proved by clear and convincing evidence in a court of competent
jurisdiction that the director's action or failure to act involved an
act or omission undertaken with deliberate intent to cause injury to
the Company or undertaken with reckless disregard for the best
interests of the Company; and
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<PAGE> 9
(b) no indemnification of an officer, employee, or agent,
regardless of such person's status as a director, shall be made in
respect of any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the performance
of their duty to the Company;
unless and only to the extent that a court of common pleas or the court in which
the action or suit was brought determines that, notwithstanding the adjudication
of liability, in view of all the circumstances of the case, the Indemnified
Party is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
SECTION 3. RIGHTS AFTER SUCCESSFUL DEFENSE. To the extent an
Indemnified Party has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in Section 1 or Section 2 of this
Article V, or in defense of any claim, issue, or matter therein, the Indemnified
Party shall be indemnified against expenses (including professional fees, e.g.,
attorneys' and accountants' fees) actually and reasonably incurred in connection
with the action, suit, or proceeding.
SECTION 4. OTHER DETERMINATIONS OF RIGHTS. Other than in a situation
governed by Section 3 of this Article V, any indemnification under Section 1 or
Section 2 of this Article V (unless ordered by a court) shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in Section 1 or Section 2. The determination shall be made: (a) by a
majority vote of those directors who, in number, constitute a quorum of the
directors and who also were not and are not parties to or threatened with any
such action, suit, or proceeding, (b) if such a quorum is not obtainable or a
majority of disinterested directors requests, in a written opinion by
Independent Counsel, (c) by the affirmative vote of a majority of the shares
held by persons who were not and are not parties to or threatened with any such
action, suit, or proceeding and entitled to vote in the election of directors,
without regard to voting power that may thereafter exist upon a default,
failure, or other contingency or (d) by the court of common pleas or the court
in which the action, suit, or proceeding was brought. For purposes of this
Section 4, "Independent Counsel" shall mean any attorney or firm other than an
attorney or a firm having associated with it an attorney who has been retained
by or who has performed services for the Company or the proposed Indemnified
Party within the past five (5) years.
SECTION 5. ADVANCES OF EXPENSES. Unless the action or suit is one in
which liability under Section 1701.95 of the Ohio Revised Code is the only
liability asserted:
(a) expenses (including professional fees, e.g., attorneys'
fees and accountants' fees) incurred by a director in defending any
action, suit, or proceeding referred to in Section 1 or Section 2 of
this Article V shall be paid by the Company, as they are incurred, in
advance of final disposition of the action, suit, or proceeding upon
receipt of an undertaking by or on behalf of the director in which the
director agrees in writing both: (i) to
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<PAGE> 10
repay the amount if it is proved by clear and convincing evidence in a
court of competent jurisdiction that the director's action or failure
to act involved an act or omission undertaken with deliberate intent to
cause injury to the Company or undertaken with reckless disregard for
the best interests of the Company and (ii) to cooperate with the
Company concerning the action, suit, or proceeding, and
(b) expenses (including professional fees, e.g., attorneys'
and accountants' fees) incurred by an officer, employee, or agent in
defending any action, suit, or proceeding referred to in Section 1 or
Section 2 of this Article V may be paid by the Company, as they are
incurred, in advance of final disposition of the action, suit, or
proceeding, as authorized by the Board of Directors in the specific
case, upon receipt of a written undertaking by or on behalf of the
officer, employee, or agent to repay the amount if it is ultimately
determined as provided in this Article V that such party is not
entitled to be indemnified by the Company.
SECTION 6. PURCHASE OF INSURANCE. The Company may purchase and maintain
insurance or furnish similar protection, including trust funds, letters of
credit, and self insurance, on behalf of or for any person who is or was a
director, officer, employee, or agent of the Company, or is or was serving at
the request of the Company as a director, trustee, officer, employee, member,
manager, or agent of another corporation (profit or non-profit), partnership,
joint venture, trust, limited liability company, or other enterprise, against
any liability asserted against such person and incurred by such party in any
capacity, or arising out of such status, whether or not the Company would have
the power to indemnify the individual against liability under the provisions of
this Article V or of the Ohio General Corporation Law. Insurance may be
purchased from or maintained with a person in which the Company or any of its
directors, officers, employees or shareholders has a financial interest.
SECTION 7. MERGERS. Unless otherwise provided in the applicable
agreement of merger, if a constituent corporation other than the Company would
have been required to indemnify directors, officers, employees, member, manager,
or agents in specified situations, any person who served as a director, officer,
employee, member, manager, or agent of the constituent corporation, or served at
the request of the constituent corporation as a director, trustee, officer,
employee, member, manager, or agent of another corporation, partnership, joint
venture, trust, limited liability company, or other enterprise, shall be
entitled to indemnification by this Company (as the surviving corporation) to
the same extent the individual would have been entitled to indemnification by
the constituent corporation had the constituent corporation's separate existence
continued.
SECTION 8. HEIRS; NON-EXCLUSIVITY. The indemnification provided by this
Article V shall continue as to a person who has ceased to be a director,
officer, employee, or agent of the Company and shall inure to the benefit of the
heirs, executors, and administrators of such a person and shall not be deemed
exclusive of, and shall be in addition to, any other rights granted to a person
seeking indemnification as a matter of law or under the Articles, these
Regulations, any agreement, a vote of shareholders or disinterested directors,
any insurance benefitting by the Company, any action by
- 10 -
<PAGE> 11
the directors to take into account amendments to the Ohio General Corporation
Law that expand the authority of the Company to indemnify a director, officer,
employee, or agent of the Company, or otherwise, both as to actions in their
official capacity and as to actions in another capacity while holding an office.
ARTICLE VI
----------
RECORD DATES
------------
For any lawful purpose, including the determination of the shareholders
who are entitled to receive notice of or to vote at a meeting of the
shareholders, the Board of Directors may fix a record date in accordance with
the provisions of the Ohio General Corporation Law. The record date for the
purpose of determining shareholders who are entitled to receive notice of or to
vote at a meeting of the shareholders shall continue to be the record date for
all adjournments of the meeting unless the Board of Directors or the persons who
shall have fixed the original record date shall, subject to the limitations set
forth in the Ohio General Corporation Law, fix another date and shall cause
notice thereof and of the date to which the meeting shall have been adjourned to
be given to shareholders of record as of the newly fixed date in accordance with
the same requirements as those applying to a meeting newly called. The Board of
Directors may close the share transfer books against transfers of shares during
the whole or any part of the period provided for in this Article, including the
date of the meeting of the shareholders and the period ending with the date, if
any, to which adjourned. If no record date is fixed therefor, the record date
for determining the shareholders who are entitled to receive notice of and to
vote at a meeting of the shareholders shall be the date next preceding the day
on which notice is given.
ARTICLE VII
-----------
CERTIFICATES FOR SHARES
-----------------------
SECTION 1. FORM OF CERTIFICATES AND SIGNATURES. Each holder of shares
shall be entitled to one or more certificates, signed by: (a) the Chairman of
the Board, the President, or a Vice President and (b) the Secretary, an
Assistant Secretary, the Treasurer, or an Assistant Treasurer of the Company.
Each certificate shall set forth the number and class of shares held by the
holder of shares in the Company, but no certificate for shares shall be executed
or delivered until the shares are fully paid. When a certificate is
countersigned by an incorporated transfer agent or registrar, the signature of
any officer of the Company may be facsimile, engraved, stamped, or printed.
Although an officer of the Company whose manual or facsimile signature is
affixed to a certificate ceases to hold that office before the certificate is
delivered, the certificate nevertheless shall be effective in all respects when
delivered. Notwithstanding the foregoing, the directors may provide by
resolution that some or all of any classes and series of shares may be
uncertificated shares issued in accordance with the provisions of Section
1701.24 of the Ohio General Corporation Law.
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<PAGE> 12
SECTION 2. TRANSFER OF SHARES. Subject to the restriction on transfers
of shares hereinafter set forth, or in the Articles, shares of the Company shall
be transferable, upon the books of the Company by the holders thereof, in
person, or by a duly authorized attorney, upon surrender and cancellation of
certificates for a like number of shares of the same class or series, with duly
executed assignment and power of transfer endorsed thereon or attached thereto,
and with such proof of the authenticity of the signatures to such assignment and
power of transfer as the Company or its agents may reasonably require.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Company may
issue a new certificate for shares in place of any certificate theretofore
issued by it and alleged to have been lost, stolen, or destroyed. The Board of
Directors, however, in its discretion, may require the owner, or the owner's
legal representatives, to give the Company a bond containing such terms as the
Board of Directors may require to protect the Company or any person injured by
the execution and delivery of a new certificate.
SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may
appoint, or revoke the appointment of, transfer agents and registrars and may
require all certificates for shares to bear the signatures of the transfer
agents and registrars, or any of them.
ARTICLE VIII
------------
AUTHORITY TO TRANSFER AND VOTE SECURITIES
-----------------------------------------
The Chairman of the Board, Chief Executive Officer, the President, any
Vice President, the Secretary, the Treasurer of the Company, and each such
officer are authorized to sign the name of the Company and to perform all acts
necessary to effect on behalf of the Company a sale, transfer, assignment, or
other disposition of any shares, bonds, other evidences of indebtedness or
obligations, subscription rights, warrants, or other securities of another
corporation and to issue the necessary powers of attorney. Each officer is
authorized, on behalf of the Company, to vote the securities, to appoint proxies
with respect thereto, to execute consents, waivers, and releases with respect
thereto, or to cause any such action to be taken.
ARTICLE IX
----------
CORPORATE SEAL
--------------
The Ohio General Corporation Law provides that the absence of a
corporate seal from any instrument executed on behalf of the Company does not
affect the validity of the instrument. If, in spite of such provision, a seal is
imprinted on or attached, applied, or affixed to an instrument by embossment,
engraving, stamping, printing, typing, adhesion, or other means, the impression
of the seal on the instrument shall be circular in form and shall contain the
words "corporate seal."
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<PAGE> 13
ARTICLE X
---------
AMENDMENTS
----------
These Regulations may be amended, or new Regulations may be adopted, by
the shareholders at a meeting held for that purpose, by the affirmative vote of
the holders of shares entitling them to exercise a majority of the voting power
on that proposal or without a meeting by the written consent of the holders of
shares entitling them to exercise a majority of the voting power on that
proposal. If the Regulations are amended, or new Regulations are adopted,
without a meeting of the shareholders, the Secretary of the Company shall mail a
copy of the amendment or the new Regulations to each shareholder who would have
been entitled to vote thereon but did not participate in the adoption thereof.
ARTICLE XI
----------
SUPERSEDES PRIOR REGULATIONS
----------------------------
These Regulations supersede the existing Regulations of the Company and
any and all subsequent amendments thereto, to the date hereof.
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<PAGE> 1
EXHIBIT 4.2
================================================================================
LOAN AND SECURITY AGREEMENT
DATED AS OF OCTOBER 5, 1992
BETWEEN
CONTINENTAL BANK N.A.
and
RAINBOW HOME RENTALS, INC.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
-----------------
Page
1. DEFINITIONS AND OTHER TERMS ........................................ 1
1.1 Definitions ................................................ 1
1.2 Other Definitional Provisions ..............................11
1.3 Interpretation of Agreement ................................11
1.4 Compliance with Financial Restrictions .....................11
2. LOANS; LETTERS OF CREDIT; OTHER MATTERS ............................11
2.1 Loans ......................................................11
2.2 Letters of Credit ..........................................12
2.3 Loan Account; Demand Deposit Account .......................14
2.4 Interest and Fees ..........................................14
2.5 Requests for Loans; Borrowing Base
Certificates; Other Information ............................15
2.6 Statements . . . ......................................16
2.7 Overdraft Loans . ..........................................16
2.8 Over Advances ..............................................16
2.9 All Loans One Obligation ...................................17
2.10 Making of Payments; Application of
Collections; Charging of Accounts ..........................17
2.11 Lender's Election Not to Enforce ...........................18
2.12 Reaffirmation ..............................................19
2.13 Setoff .....................................................19
2.14 Closing Fee ................................................19
3. COLLATERAL .........................................................19
3.1 Grant of Security Interest .................................19
3.2 Accounts Receivable ........................................21
3.3 Inventory ..................................................24
3.4 Equipment ..................................................25
3.5 Supplemental Documentation .................................26
4. REPRESENTATIONS AND WARRANTIES .....................................26
4.1 Organization ...............................................26
4.2 Authorization ..............................................27
4.3 No Conflicts ...............................................27
4.4 Validity and Binding Effect ................................27
4.5 No Default .................................................27
4.6 Financial Statements .......................................27
4.7 Insurance ..................................................28
4.8 Litigation; Contingent Liabilities .........................28
4 .9 Liens ......................................................28
4.10 Subsidiaries ...............................................29
4.11 Partnerships; Joint Ventures . . ...........................29
4.12 Business and Collateral Locations . . .....................29
4.13 Real Property ..............................................30
4.14 Eligibility of Collateral . . . ...........................30
4.15 Control of Collateral; Lease of Property ...................30
4.16 Patents, Trademarks, etc ...................................30
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<PAGE> 3
4.17 Solvency ..................................................30
4.18 Contracts; Labor Matters ..................................30
4.19 Pension and Welfare Plans .................................31
4.20 Regulation U ..............................................31
4.21 Compliance ................................................32
4.22 Taxes .....................................................32
4.23 Investment Company Act Representation . . ...............32
4.24 Public Utility Holding Company Act
Representation ............................................32
4.25 Environmental and Safety and Health Matters ............32
4.26 Related Agreements . . ...............................33
5. BORROWER COVENANTS ................................................33
5.1 Financial Statements and Other Reports ....................33
5.2 Notices ...................................................35
5.3 Existence .................................................38
5.4 Nature of Business ........................................38
5.5 Books, Records and Access .................................38
5.6 Insurance .................................................39
5.7 Insurance Survey ..........................................40
5.8 Repair ....................................................40
5.9 Taxes .....................................................40
5.10 Compliance ................................................40
5.11 Pension Plans .............................................41
5.12 Merger, Purchase and Sale .................................41
5.13 Restricted Payments .......................................41
5.14 Borrower's and Subsidiaries' Stock ........................41
5.15 Indebtedness ..............................................42
5.16 Liens .....................................................42
5.17 Guaranties ................................................42
5.18 Investments ...............................................42
5.19 Subsidiaries ..............................................43
5.20 Operating Leases ..........................................43
5.21 Change in Accounts Receivable .............................43
5.22 Future Environmental Assessments ..........................43
5.23 Related Agreements ........................................44
5.24 Unconditional Purchase Options ............................44
5.25 Use of Proceeds ...........................................44
5.26 Transactions with Related Parties .........................44
6. DEFAULT ...........................................................44
6.1 Event of Default ..........................................44
6.2 Effect of Event of Default; Remedies ......................47
7. ADDITIONAL PROVISIONS REGARDING COLLATERAL AND LENDER'S
RIGHTS ............................................................48
7.1 Notice of Disposition of Collateral .......................48
7.2 Application of Proceeds of Collateral .....................48
7.3 Care of Collateral ........................................48
7.4 Performance of Borrower's Obligations .....................49
7.5 Lender's Rights ...........................................49
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<PAGE> 4
8. CONDITIONS PRECEDENT; DELIVERY OF DOCUMENTS AND OTHER
MATTERS ..........................................................50
8.1 Conditions Precedent to Initial Revolving
Loans ....................................................50
8.2 Continuing Conditions Precedent to all Loans;
Certification ............................................54
9. INDEMNITY ........................................................55
9.1 Environmental and Safety and Health
Indemnity ................................................55
9.2 General Indemnity ........................................55
9.3 Capital Adequacy .........................................56
10. ADDITIONAL PROVISIONS ............................................56
11. GENERAL ..........................................................57
11.1 Borrower Waiver ..........................................57
11.2 Power of Attorney ........................................57
11.3 Expenses; Attorney's Fees ................................58
11.4 Lender Fees and Charges ..................................58
11.5 Lawful Interest ..........................................59
11.6 No Waiver by Lender; Amendments ..........................59
11.7 Termination of Credit ....................................59
11.8 Notices ..................................................60
11.9 Assignments and Participations; Information ..............60
11.10 Severability .............................................60
11.11 Successors ...............................................60
11.12 Construction .............................................60
11.13 Consent to Jurisdiction ..................................61
11.14 Subsidiary Reference .....................................61
11.15 Waiver of Jury Trial .....................................61
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LOAN AND SECURITY AGREEMENT
THIS AGREEMENT ("Agreement") is made as of this 5th day of October, 1992
by and between CONTINENTAL BANK N.A., a national banking association having its
principal office at 231 South LaSalle Street, Chicago, Illinois 60697
("Lender"), and RAINBOW HOME RENTALS, INC., an Ohio corporation having its
principal office at 3711 Starr Center Drive, Canfield, Ohio 44406 ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower may, from time to time, request loans or other
financial accommodations from Lender, and the parties wish to provide for the
terms and conditions upon which such loans or other financial accommodations
shall be made;
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit (including any loan or advance or grant of credit by renewal or
extension) hereafter made to Borrower by Lender, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. DEFINITIONS AND OTHER TERMS.
1.1 Definitions. In addition to terms defined elsewhere in this
Agreement or any Supplement, Schedule or Exhibit hereto, when used herein, the
following terms shall have the following meanings (such meanings shall be
equally applicable to the singular and plural forms of the terms used, as the
context requires):
"Account Debtor" means any Person who is or who may become obligated to
Borrower under, with respect to, or on account of an Account Receivable,
Contract Right, General Intangible or other Collateral.
"Account Receivable" means any account of Borrower and any other right
of Borrower to payment for goods sold or leased or for services rendered,
whether or not evidenced by an instrument or chattel paper and whether or not
yet earned by performance (including without limitation any right of Borrower to
payment under any Rental Agreement).
"Agreement" means this Loan and Security Agreement, as it may be
amended, modified or supplemented from time to time.
"Application" means an application by Borrower, in a form and containing
terms and provisions acceptable to Lender, for the issuance by Lender of a
Letter of Credit.
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"Attorneys' Fees" means the reasonable value of the services (and costs,
charges and expenses related thereto) of the attorneys (and all paralegals,
secretaries, accountants and other staff employed by such attorneys) employed by
Lender (including but not limited to attorneys and paralegals who are employees
of Lender) from time to time (a) in connection with the negotiation,
preparation, execution, delivery, administration and enforcement of this
Agreement, any Related Agreement, any Supplemental Documentation and all other
documents or instruments provided for herein or in any thereof or delivered or
to be delivered hereunder or under any thereof or in connection herewith or with
any thereof, (b) to prepare documentation related to the Loans made and other
Liabilities incurred hereunder, (c) to prepare any amendment to or waiver under
this Agreement or any Related Agreement and any documents or instruments related
thereto, (d) to represent Lender in any litigation, contest, dispute, suit or
proceeding or to commence, defend or intervene in any litigation, contest,
dispute, suit or proceeding or to file a petition, complaint, answer, motion or
other pleading, or to take any other action in or with respect to, any
litigation, contest, dispute, suit or proceeding (whether instituted by Lender,
Borrower or any other Person and whether in bankruptcy or otherwise) in any way
or respect relating to the Collateral, any Third Party Collateral, this
Agreement or any Related Agreement, or Borrower's or any other obligor's or any
Subsidiary's affairs, (e) to protect, collect, lease, sell, take possession of,
or liquidate any of the Collateral or any Third Party Collateral, (f) to attempt
to enforce any security interest in any of the Collateral or any Third Party
Collateral or to give any advice with respect to such enforcement and (g) to
enforce any of Lender's rights to collect any of the Liabilities.
"Banking Day" means any day other than a Saturday, Sunday or legal
holiday on which banks are authorized or required to be closed for the conduct
of commercial banking business in Chicago, Illinois.
"Blocked Deposit Account" has the meaning ascribed to such term in
SECTION 3.2(d).
"Borrower" -- see Preamble.
"Borrowing Base" has the meaning ascribed to such term in Supplement A.
"Borrowing Base Certificate" has the meaning ascribed to such term in
SECTION 2.5(c).
"Capitalized Lease" means any lease which is or should be capitalized on
the balance sheet of the lessee in accordance with GAAP.
"Cash Receipts Availability" has the meaning ascribed to such term in
SUPPLEMENT A.
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"Closing Date" means the date the initial Revolving Loans are made
and/or the initial Letters of Credit are issued under this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, together with the regulations thereunder,
in each case as in effect from time to time. References to sections of the Code
shall be construed to also refer to any successor sections.
"Collateral" has the meaning ascribed to such term in SECTION 3.1.
"Contract Right" means any right of Borrower to payment under a
contract, which right is not yet earned by performance and not evidenced by an
instrument or chattel paper.
"Credit" means the facility established under this Agreement pursuant to
which Lender will make Revolving Loans to Borrower and issue Letters of Credit
for the account of Borrower.
"Default Rate" means, with respect to a Loan, the rate of interest which
is applicable to such Loan after any amount thereof is not paid when due,
whether by acceleration or otherwise, as determined pursuant to SUPPLEMENT A.
"Demand Deposit Account" has the meaning ascribed to such term in
SECTION 2.3.
"Eligible Inventory" means Inventory which meets the following
requirements:
(a) it is owned by Borrower, and is not subject to any prior
assignment, claim or Lien, other than (i) a Lien in favor of Lender and
(ii) Liens consented to by Lender in writing;
(b) it is in rentable condition (as determined in accordance
with Borrower's customary practices);
(c) except as Lender may otherwise consent, it is in the
possession and control of Borrower, or an Account Debtor pursuant to the
terms of a Rental Agreement;
(d) if it is in the possession or control of a bailee,
warehouseman, processor or other Person other than Borrower or an
Account Debtor pursuant to the terms of a Rental Agreement, Lender is in
possession of such agreements, instruments and documents as Lender may
require (each in form and content acceptable to Lender and duly
executed, as appropriate, by the bailee, warehouseman, processor or such
other Person in possession or control of such Inventory, as applicable)
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including but not limited to warehouse receipts in Lender's name
covering such Inventory;
(e) it is not Inventory which is dedicated to, identifiable
with, or is otherwise specifically to be used in the manufacture of,
goods which are to be sold or leased to the United States of America or
any department, agency or instrumentality thereof and in respect of
which Inventory such Borrower shall have received any progress or other
advance payment which is or may be against any Account Receivable
generated upon the sale or lease of any such goods;
(f) it is not Inventory produced in violation of the Fair Labor
Standards Act and subject to the "hot goods" provisions contained in
Title 29 U.S.C. Section 215 or any successor statute or section;
(g) it is not (i) packaging or shipping materials, (ii) goods
used in connection with maintenance or repair of Borrower's business,
properties or assets or (iii) general supplies;
(h) it is not Inventory which in any way fails to meet or
violates any warranty, representation or covenant contained in this
Agreement or any Related Agreement relating directly or indirectly to
Borrower's Inventory;
(i) Lender has determined in its sole and absolute discretion
that it is not unacceptable due to age, type, category, quality and/or
quantity; and
(j) it satisfies the Eligible Inventory Requirements, if any,
set forth in SUPPLEMENT A.
Inventory of Borrower which is at any time Eligible Inventory but which
subsequently fails to meet any of the foregoing requirements shall forthwith
cease to be Eligible Inventory.
"Environmental Laws" means the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act, any
so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, and
any other federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree or other requirement regulating, relating to, or
imposing liability or standards of conduct (including but not limited to permit
requirements, and emission or effluent restrictions) concerning any Hazardous
Materials or any hazardous, toxic or dangerous waste, substance or constituent,
or any pollutant or contaminant or other substance, whether solid, liquid or
gas, as now or at any time hereafter in effect.
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"Environmental Lien" means a Lien in favor of any governmental entity
for (a) any liability under any Environmental Law or (b) damages arising from or
costs incurred by such governmental entity in response to a spillage, disposal
or release into the environment of any Hazardous Material or other hazardous,
toxic or dangerous waste, substance or constituent, or other substance.
"Equipment" means all equipment of Borrower of every description,
including without limitation fixtures, furniture, vehicles and trade fixtures,
together with any and all accessions, parts and equipment attached thereto or
used in connection therewith, and any substitutions therefor and replacements
thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"ERISA Affiliate" means any corporation, partnership, or other trade or
business (whether or not incorporated) that is, along with Borrower, a member of
a controlled group of corporations or a controlled group of trades or
businesses, as described in sections 414(b) and 414(c), respectively, of the
Code or section 4001 of ERISA, or a member of the same affiliated service group
within the meaning of section 414(m) of the Code.
"Event of Default" has the meaning ascribed to such term in SECTION 6.1.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any successor thereto.
"Fiscal Quarter" means any quarter of a Fiscal Year.
"Fiscal Year" means any period of twelve (12) consecutive calendar
months ending on the 31st day of December. References to a Fiscal Year with a
number corresponding to any calendar year (e.g. "Fiscal Year 1992") refer to the
Fiscal Year ending on the 31st day of December, 1992 occurring during such
calendar year.
"Fixtures" means all fixtures of Borrower of every description and all
substitutions and replacements of any thereof.
"GAAP" means generally accepted accounting principles as applied in the
preparation of the audited financial statement of Borrower referred to in
SECTION 4.6.
"General Intangibles" means all of Borrower's general intangibles,
intangible personal property, including things in action, causes of action and
all other personal property of Borrower of every kind and nature (other than
accounts, inventory, equipment, chattel paper, documents, instruments and
money),
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including without limitation corporate, partnership or other business records,
inventions, designs, patents, patent applications, trademarks, trademark
applications, trade names, trade styles, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, tax refund claims, claims
against carriers and shippers, guarantee claims, security interests, security
deposits or other security held by or granted to Borrower to secure any payment
from an Account Debtor, and any rights to indemnification.
"Hazardous Materials" means any toxic substance, hazardous substance,
hazardous material, hazardous chemical or hazardous waste defined or qualifying
as such in (or for the purposes of) any Environmental Law, or any pollutant or
contaminant, and shall include, but not be limited to, petroleum, including
crude oil or any fraction thereof which is liquid at standard conditions of
temperature or pressure (60 degrees Fahrenheit and 14.7 pounds per square inch
absolute), any radioactive material, including but not limited to any source,
special nuclear or by-product material as defined at 42 U.S.C. section 2011 ET
SEQ., as amended or hereafter amended, polychiorinated biphenyls and asbestos in
any form or condition.
"Indebtedness" of any Person means, without duplication, (a) any
obligation of such Person for borrowed money, including without limitation (i)
any obligation of such Person evidenced by bonds, debentures, notes or other
similar debt instruments and (ii) any obligation for borrowed money which is
non-recourse to the credit of such Person but which is secured by a Lien on any
asset of such Person, (b) any obligation of such Person on account of deposits
or advances, (c) any obligation of such Person for the deferred purchase price
of any property or services, except Trade Accounts Payable, (d) any obligation
of such Person as lessee under a Capitalized Lease and (e) any Indebtedness of
another Person secured by a Lien on any asset of such first Person, whether or
not such Indebtedness is assumed by such first Person. For all purposes of this
Agreement, the Indebtedness of any Person shall include the Indebtedness of any
partnership or joint venture in which such Person is a general partner or joint
venturer.
"Inventory" means any and all of Borrower's goods, (including without
limitation goods in transit) wheresoever located which are or may at any time be
leased by Borrower to a lessee, held for sale or lease, furnished under any
contract of service, or held as raw materials, work in process, or supplies or
materials used or consumed in Borrower's business, or which are held for use in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of such goods, and all goods the sale or other disposition of which
has given rise to an Account Receivable, Contract Right or General Intangible
which are returned to and/or repossessed and/or stopped in transit by or at any
time hereafter are in the possession or under the control of, Borrower or Lender
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<PAGE> 11
or any agent or bailee of either of them, and all documents of title or other
documents representing the same.
"Inventory Availability" has the meaning ascribed to such term in
SUPPLEMENT A.
"Investment" of any Person means any investment, made in cash or by
delivery of any kind of property or asset, in any other Person, whether by
acquisition of shares of stock or similar interest, Indebtedness or other
obligation or security, or by loan, advance or capital contribution, or
otherwise.
"L/C Draft" means a draft drawn on Lender pursuant to a Letter of
Credit.
"Lender" -- See Preamble.
"Letter of Credit" means a letter of credit issued by Lender, in its
discretion, on the Application of Borrower.
"Letter of Credit Obligations" means at any time an amount equal to the
sum of (a) the aggregate outstanding face amount of all Letters of Credit plus
(b) the aggregate outstanding face amount of all accepted but unpaid L/C Drafts.
"Liabilities" means all of the liabilities, obligations and indebtedness
of Borrower to Lender of any kind or nature, however created, arising or
evidenced, whether direct or indirect, absolute or contingent, now or hereafter
existing or due or to become due, and including but not limited to (a)
Borrower's obligations under any Note, (b) Borrower's obligations under this
Agreement, (c) Borrower's obligations with respect to any Letter of Credit or
any Application therefor, (d) interest, charges, expenses, Attorneys' Fees and
other sums chargeable to Borrower by Lender under this Agreement or any Related
Agreement and (e) the obligations of Borrower under any Related Agreement,
including obligations of performance. "Liabilities" shall also include any and
all amendments, extensions, renewals, refundings or refinancings of any of the
foregoing.
"Lien" means any mortgage, pledge, hypothecation, judgment lien or
similar legal process, title retention lien, or other lien, encumbrance or
security interest, including without limitation the interest of a vendor under
any conditional sale or other title retention agreement and the interest of a
lessor under any Capitalized Lease.
"Loan" means (a) any Revolving Loan made pursuant to SECTION 2.1.1 and
(b) any other loan or advance made to Borrower by Lender under or pursuant to
this Agreement (including without limitation any Overdraft Loan).
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"Loan Account" has the meaning ascribed to such term in SECTION 2.3.
"Margin Stock" has the meaning ascribed to such term in Regulation U of
the Federal Reserve Board or any regulation substituted therefor, as in effect
from time to time.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is maintained for employees of Borrower, any other
Obligor or any ERISA Affiliate.
"Note" means any promissory note of Borrower evidencing any loan or
advance (including but not limited to any Revolving Loans) made by Lender to
Borrower pursuant to this Agreement, as the same may be amended, modified or
supplemented from time to time.
"Obligor" means Borrower and each other Person who is or shall become
primarily or secondarily liable on any of the Liabilities, or who grants to
Lender a Lien on any property of such Person as security for any of the
Liabilities.
"Occupational Safety and Health Law" means the Occupational Safety and
Health Act of 1970 and any other federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to or
imposing liability or standards of conduct concerning employee health and/or
safety.
"Over Advance" has the meaning ascribed to such term in SECTION 2.8.
"Overdraft Loan" has the meaning ascribed to such term in SECTION 2.7.
"Participant" means any Person, now or at any time or times hereafter,
participating with Lender in the Loans made to Borrower pursuant to this
Agreement or any Related Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means a "pension plan," as such term is defined in
Section 3(2) of ERISA, which is subject to the provisions of Title IV of ERISA
(other than a Multiemployer Plan) and to which Borrower, any other Obligor or
any ERISA Affiliate may have any liability, including any liability by reason of
being deemed to be a contributing sponsor under Section 4069 of ERISA.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, entity, or government (whether national, federal, state, county,
city, municipal or
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otherwise, including without limitation any instrumentality, division, agency,
body or department thereof).
"Reference Rate" means, at any time, the rate of interest then most
recently announced by Lender at Chicago, Illinois as its reference rate. Each
change in the interest rate on any Loan shall take effect on the effective date
of the change in the Reference Rate.
"Related Agreement" means any agreement, instrument or document
(including without limitation notes, guarantees, mortgages, deeds of trust,
chattel mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, leases, financing statements,
subordination agreements, trust account agreements and all other written matter)
heretofore, now, or hereafter delivered to Lender with respect to or in
connection with or pursuant to this Agreement or any of the Liabilities, and
executed by or on behalf of Borrower or any other Obligor.
"Related Party" means any Person (other than a Subsidiary) (a) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, Borrower, (b) which beneficially
owns or holds ten percent (10%) or more of the equity interest of Borrower or
(c) ten percent (10%) or more of the equity interest of which is beneficially
owned or held by Borrower or a subsidiary. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Rental Agreements" means the chattel paper evidencing the obligations
of Borrower's Account Debtors with respect to the lease of Borrower's Inventory.
"Reportable Event" has the meaning given to such term in ERISA.
"Revolving Credit Amount" has the meaning ascribed to such term in
SUPPLEMENT A.
"Revolving Loan" has the meaning ascribed to such term in SECTION 2.1.1.
"Revolving Loan Availability" means the lesser of (a) the Revolving
Credit Amount minus the Letter of Credit Obligations and (b) the Borrowing Base
minus the Letter of Credit Obligations.
"Subordinated Debt" means that portion of any liabilities, obligations
or Indebtedness of Borrower which contains terms satisfactory to Lender and is
subordinated, in a manner
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satisfactory to Lender, as to right and time of payment of principal and
interest thereon, to all of the Liabilities.
"Subsidiary" means any Person of which or in which Borrower and its
other Subsidiaries own directly or indirectly fifty percent (50%) or more of (a)
the combined voting power of all classes of stock having general voting power
under ordinary circumstances to elect a majority of the board of directors of
such Person, if it is a corporation, (b) the capital interest or profits
interest of such Person, if it is a partnership, joint venture or similar entity
or (c) the beneficial interest of such Person, if it is a trust, association or
other unincorporated organization.
"Supplemental Documentation" has the meaning ascribed to such term in
SECTION 3.5.
"Tangible Net Worth" means at any time, the total assets (exclusive of
intangible assets) of Borrower and its consolidated Subsidiaries calculated in
accordance with GAAP, less the total liabilities (exclusive of Subordinated Debt
and deferred rent expense) of Borrower and its consolidated Subsidiaries
calculated in accordance with GAAP. Intangible assets shall include, without
limitation, unamortized debt discount and expense, unamortized deferred charges
and goodwill.
"Taxes" with respect to any Person means taxes, assessments or other
governmental charges or levies imposed upon such Person, its income or any of
its properties, franchises or assets.
"Termination Date" means October 5, 1995 or such later date to which it
may be extended pursuant to SECTION 11.7.
"Third Party Collateral" means any property of any Person other than
Borrower which secures payment or performance of any Liabilities.
"Trade Accounts Payable" of any Person means trade accounts payable of
such Person with a maturity of not greater than ninety (90) days incurred in the
ordinary course of such Person's business.
"Trademark Security Agreement" means the Collateral Trademark Security
Agreement between Borrower and Lender in the form of EXHIBIT C, with appropriate
insertions, as it may be amended, modified or supplemented from time to time.
"UCC" means the Uniform Commercial Code as in effect in the State of
Illinois, and any successor statute, together with any regulations thereunder,
in each case as in effect from time to time. References to sections of the UCC
shall be construed to also refer to any successor sections.
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"Unmatured Event of Default" means any event or condition which, with
the lapse of time or giving of notice to Borrower or both, would constitute an
Event of Default.
1.2 OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined or the
context otherwise requires, all financial and accounting terms used herein or in
any certificate or other document made or delivered pursuant hereto shall be
defined in accordance with GAAP. Unless otherwise defined therein, all terms
defined in this Agreement shall have the defined meanings when used in any
Related Agreement or Supplemental Documentation. Terms used in this Agreement
which are defined in any Supplement or Exhibit hereto shall, unless the context
otherwise indicates, have the meanings given them in such Supplement or Exhibit.
Other terms used in this Agreement shall, unless the context indicates
otherwise, have the meanings provided for by the UCC to the extent the same are
used or defined therein.
1.3 INTERPRETATION OF AGREEMENT. A SECTION, an EXHIBIT or a SCHEDULE is,
unless otherwise stated, a reference to a section hereof, an exhibit hereto or a
schedule hereto, as the case may be. Section captions used in this Agreement are
for convenience only and shall not affect the construction of this Agreement.
The words "hereof," "herein," "hereto" and "hereunder" and words of similar
import when used in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Reference to "this Agreement" shall
include the provisions of SUPPLEMENT A.
1.4 COMPLIANCE WITH FINANCIAL RESTRICTIONS. Compliance with each of the
financial ratios and restrictions contained in SECTION 5 or Supplement A shall,
except as otherwise provided herein, be determined in accordance with GAAP
consistently followed.
2. LOANS; LETTERS OF CREDIT; OTHER MATTERS.
2.1 LOANS.
2.1.1 REVOLVING LOANS.
(a) Subject to the terms and conditions of this Agreement and the
Related Agreements, and in reliance upon the warranties of Borrower set forth
herein and in the Related Agreements, Lender agrees to make such loans or
advances (individually each a "Revolving Loan" and collectively the "Revolving
Loans") from time to time before the Termination Date to Borrower as Borrower
may from time to time request, up to but not in excess of the Revolving Loan
Availability. Revolving Loans made by Lender may be repaid and, subject to the
terms and conditions hereof, reborrowed to but not including the Termination
Date unless the Credit extended under this Agreement is otherwise terminated as
provided in this Agreement.
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(b) In the event the aggregate outstanding principal balance of the
Revolving Loans exceeds the Revolving Loan Availability, Borrower shall, unless
Lender shall otherwise consent, without notice or demand of any kind,
immediately make such repayments of the Revolving Loans or take such other
actions as shall be necessary to eliminate such excess.
(c) All Revolving Loans hereunder shall be paid by Borrower on the
Termination Date, unless payable sooner pursuant to the provisions of this
Agreement, but may, at Borrower's election, be repaid in whole or in part at any
time prior to such date without premium or penalty.
2.1.2 PREPAYMENT OF ALL LIABILITIES; REDUCTION OF REVOLVING CREDIT
AMOUNT. Borrower may prepay all of the Liabilities in full at any time by
prepaying the outstanding principal balance of the Revolving Loans, together
with (a) all accrued and unpaid interest on the Liabilities, (b) all other
outstanding Liabilities and (c) cash in the amount of, or adequate (in Lender's
determination) cash collateral for, the Letter of Credit Obligations. Borrower
may not permanently reduce the Revolving Credit Amount except in connection with
the prepayment in full of all of the Liabilities.
2.1.3 MAXIMUM OUTSTANDING LOANS. Notwithstanding any other provision of
this Agreement, the aggregate outstanding principal balance of the Loans plus
Letter of Credit Obligations shall not exceed the Revolving Credit Amount;
PROVIDED, HOWEVER, that the foregoing shall not limit the right of Lender to
advance Revolving Loans to Borrower pursuant to the provisions of SECTION
2.2(b), 2.2(c), 2.2(d), 2.4.5,2.10(c), 3.2(c), 5.5, 5.6, 5.22, 7.4, 11.3, 11.4
or any other provision of this Agreement or any Related Agreement that permits
Lender to advance Revolving Loans to Borrower.
2.2 Letters of Credit.
(a) In addition to Revolving Loans made pursuant to SECTION 2.1, Lender
will, upon receipt of duly executed Applications and such other documents,
instruments and/or agreements as Lender may require, issue Letters of Credit on
such terms as are satisfactory to Lender, PROVIDED, HOWEVER that no Letter of
Credit will be issued if, before or after taking such Letter of Credit into
account, the Letter of Credit Obligations exceeds the lesser of (i) Revolving
Credit Amount minus the outstanding principal balance of the Revolving Loans and
(ii) the Borrowing Base minus the outstanding principal balance of the Revolving
Loans.
(b) Borrower agrees to pay Lender, on demand, Lender's standard
administrative operating fees and charges in effect from time to time for
issuing and administering any Letters of Credit. With respect to standby Letter
of Credit, Borrower further agrees
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to pay Lender a commission equal to two and three-quarters percent (2.75%) per
annum (calculated on the basis of a year consisting of three hundred sixty (360)
days and paid for actual days elapsed) of the daily average of the undrawn
amount of each such standby Letter of Credit and on each L/C Draft accepted by
Lender in connection therewith. Such standby Letter of Credit commissions shall
be paid at such frequency as Lender shall determine. With respect to commercial
and documentary Letters of Credit, Borrower further agrees to pay Lender a
commission equal to two and three quarters percent (2.75%) of the maximum
undrawn amount of each such Letter of Credit. Such commercial and documentary
Letter of Credit commissions shall be paid at the time of the acceptance of the
initial L/C Draft drawn under each such Letter of Credit. Lender may provide for
the payment of any fees, charges or commissions due hereunder by advancing the
amount thereof to Borrower as a Revolving Loan. At all times that any Default
Rate is being charged under this Agreement, the Letter of Credit commission
shall be equal to the otherwise applicable commission plus two percent (2.00%).
(c) Borrower agrees to reimburse Lender, on demand, for each payment
made by Lender under or pursuant to any Letter of Credit or L/C Draft. Borrower
further agrees to pay to Lender, on demand, interest at the rate applicable to
Revolving Loans on any amount paid by Lender under or pursuant to any Letter of
Credit or L/C Draft from the date of payment until the date of reimbursement to
Lender. Lender may provide for the payment of any reimbursement obligations and
any interest accrued thereon by advancing the amount thereof to Borrower as a
Revolving Loan.
(d) Notwithstanding anything to the contrary herein or in any
Application, upon the occurrence of an Event of Default, an amount equal to the
aggregate amount of the outstanding Letter of Credit Obligations shall, at
Lender's option and without demand upon or further notice to Borrower, be deemed
(as between Lender and Borrower) to have been paid or disbursed by Lender under
the Letters of Credit and L/C Drafts accepted by Lender (notwithstanding that
such amounts may not in fact have been so paid or disbursed), and a Revolving
Loan to Borrower in the amount of such Letter of Credit Obligations to have been
made and accepted, which Revolving Loan shall be immediately due and payable. In
lieu of the foregoing, at the election of Lender at any time after an Event of
Default, Borrower shall, upon Lender's demand, deliver to Lender cash collateral
equal to the aggregate Letter of Credit Obligations. Any such cash collateral
and/or any amounts received by Lender in payment of the Revolving Loan made
pursuant to this PARAGRAPH (d) shall be held by Lender in a separate account
appropriately designated as a cash collateral account in relation to this
Agreement and the Letters of Credit and shall be retained by Lender as
collateral security in respect of, first, Borrower's Liabilities under or in
connection with the Letters of Credit and L/C Drafts and then, all other
Liabilities. Such amounts shall not be used by Lender to pay any amounts drawn
or paid under or
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pursuant to any Letter of Credit or L/C Draft, but may be applied to reimburse
Lender for drawings or payments under or pursuant to Letters of Credit or L/C
Drafts which Lender has paid, or if no such reimbursement is required, to
payment of such other Liabilities as Lender shall determine. Any amounts
remaining in any cash collateral account established pursuant to this PARAGRAPH
(d) following payment in full of all Liabilities shall be returned to Borrower.
2.3 LOAN ACCOUNT; DEMAND DEPOSIT ACCOUNT. Lender shall establish or
cause to be established on its books in Borrower's name one or more accounts
(each a "Loan Account") to evidence Loans made to Borrower. Lender will credit
or cause to be credited to a commercial account ("Demand Deposit Account")
maintained by Borrower at Lender's 231 South LaSalle Street, Chicago, Illinois
office the amount of any sums advanced as Loans hereunder. Any amounts advanced
as Loans hereunder which are credited to Borrower's Demand Deposit Account,
together with any other amounts advanced to Borrower as a Loan pursuant to this
Agreement, will be debited to the applicable Loan Account and result in an
increase in the principal balance outstanding in such Loan Account in the amount
thereof.
2.4 INTEREST AND FEES.
2.4.1 INTEREST. The unpaid principal amount of each Revolving Loan
hereunder shall bear interest until maturity at the rate applicable to Revolving
Loans indicated in SUPPLEMENT A hereto. If any Revolving Loan or portion thereof
is not paid when due, whether by acceleration or otherwise, the entire unpaid
principal amount of the Revolving Loans shall bear interest thereafter until
such amount is paid in full at the Default Rate applicable to Revolving Loans
indicated in SUPPLEMENT A hereto. Until maturity, interest on the Revolving
Loans shall be paid by Borrower on the date(s) indicated in SUPPLEMENT A, and at
such maturity. After maturity, whether by acceleration or otherwise, accrued
interest shall be payable on demand.
2.4.2 NONUSE FEE. Borrower agrees to pay to Lender a fee equal to
one-half of one percent (0.50%) per annum on the daily average amount by which
the Revolving Credit Amount exceeds the outstanding principal balance of the
Revolving Loans plus the Letter of Credit Obligations. The fee provided for in
this SECTION 2.4.2 shall be payable monthly in arrears on the first day of each
month, and on the date the Credit terminates for the period then ended.
2.4.3 COLLATERAL MONITORING FEE. Borrower agrees to pay to Lender a fee
equal to $750 per month during the period between the Closing Date and the
second anniversary of the date hereof. The fee provided for in this SECTION
2.4.3 shall be payable monthly in arrears on the first day of each month, and on
the date the
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Credit terminates (if such termination occurs prior to the second anniversary of
the date hereof).
2.4.4 METHOD OF CALCULATING INTEREST AND FEES. Interest on the unpaid
principal amount of each Loan shall accrue from and including the date such Loan
is made to, but not including, the date such Loan is paid. Interest and any fee
shall be calculated on the basis of a year consisting of three hundred sixty
(360) days and paid for actual days elapsed.
2.4.5 PAYMENT OF INTEREST AND FEES. Lender may provide for the payment
of any unpaid accrued interest and any fees by charging the Demand Deposit
Account or any other bank account maintained by Borrower with Lender.
2.5 REQUESTS FOR LOANS; BORROWING BASE CERTIFICATES; OTHER INFORMATION.
(a) Loans shall be requested in writing or by telephone, except for
Overdraft Loans and Revolving Loans made pursuant to the provisions of SECTION
2.2(b), 2.2(c), 2.2(d), 2.4.5, 2.10(c), 3.2(c), 5.5, 5.6, 5.22, 7.4, 11.3, 11.4
or any other provision of this Agreement or any Related Agreement that permits
Lender to advance Revolving Loans to Borrower.
(b) In the event that Borrower shall at any time, or from time to time,
(i) make a request for a Revolving Loan hereunder or (ii) be deemed to have
requested an Overdraft Loan, Borrower agrees to forthwith provide Lender with
such information, at such frequency and in such format, as is reasonably
required by Lender, such information to be current as of the time of such
request.
(c) Borrower further agrees to provide to Lender a current Borrowing
Base Certificate at the end of each month and at such other times as Lender may
request. Such Borrowing Base Certificate shall be in substantially the same form
as that attached hereto as EXHIBIT A, executed and certified as accurate by such
officers or employees of Borrower as Borrower designates in writing to Lender
pursuant to duly adopted resolutions of Borrower's Board of Directors
authorizing such action.
(d) Borrower shall provide Lender with documentation satisfactory to
Lender indicating the names of those employees of Borrower authorized by
Borrower to sign Borrowing Base Certificates and/or to make telephonic requests
for Loans, and/or to authorize disbursement of the proceeds of Loans by wire
transfer or otherwise, and Lender shall be entitled to rely upon such
documentation until notified in writing by Borrower of any change(s) in the
names of the employees so authorized. Lender shall be entitled to act on the
instructions of anyone identifying himself as one of the persons authorized to
request Loans or disbursements of Loan proceeds by telephone and Borrower shall
be bound thereby in the
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same manner as if the person were actually so authorized. Borrower agrees to
indemnify and hold Lender harmless from any and all claims, damages,
liabilities, losses, costs and expenses (including Attorneys' Fees) which may
arise or be created by the acceptance of instructions for making or paying Loans
by wire transfer or telephone.
2.6 STATEMENTS. All Loans and payments hereunder shall be recorded on
Lender's books, which shall be rebuttably presumptive evidence of the amount
of such Loans outstanding at any time hereunder. Lender will account monthly as
to all Loans and payments hereunder and, absent demonstrable error, each monthly
accounting will be fully binding on Borrower unless, within fifteen (15) days of
Borrower's receipt thereof, Borrower shall provide Lender with a specific
listing of exceptions. Notwithstanding any term or condition of this Agreement
to the contrary, however, the failure of Lender to record the date and amount of
any Loan hereunder shall not limit or otherwise affect the obligation of
Borrower to repay any such Loan.
2.7 OVERDRAFT LOANS. Lender, in its sole and absolute discretion, and
subject to the terms hereof, may make a Revolving Loan to Borrower in an amount
equal to the amount of any overdraft which may from time to time exist with
respect to the Demand Deposit Account or any other bank account which Borrower
may now or hereafter have with Lender. The existence of any such overdraft shall
be deemed to be a request by Borrower for such Loan. Borrower acknowledges that
Lender is under no duty or obligation to make any Loan to Borrower to cover any
overdraft. Borrower further agrees that an overdraft shall constitute a separate
Loan under this Agreement (an "Overdraft Loan"), which shall bear, from the date
on which the overdraft occurred until paid, interest in an amount equal to the
greater of one hundred thirty percent (130%) of the highest rate of interest
then charged for Revolving Loans (other than Overdraft Loans) made hereunder,
and $50 per day. If Lender, in its sole and absolute discretion, decides not to
make a Loan to cover part or all of any overdraft, Lender may return any
check(s) which created such overdraft.
2.8 OVER ADVANCES. Lender, in its sole and absolute discretion, may make
Revolving Loans to Borrower in amounts which cause the outstanding principal
balance of the Revolving Loans to exceed the Revolving Loan Availability or
otherwise permit the outstanding principal balance of the Revolving Loans to at
any time exceed the Revolving Loan Availability, and no such event or occurrence
shall cause or constitute a waiver by Lender of its right to refuse to make any
further Revolving Loans or issue any Letters of Credit at any time that an Over
Advance exists or would result therefrom. During any period in which the
aggregate outstanding Revolving Loans exceeds the Revolving Loan Availability
(such excess Liabilities are herein referred to as "Over Advances"), the amount
of Over Advances shall bear interest at a rate equal to one hundred thirty
percent (130%) of the highest rate
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of interest then charged for Revolving Loans made hereunder; provided, that if
the Over Advances exist as a result of the failure of Lender to apply amounts
received from proceeds of Collateral as provided in SECTION 2.10(b), such Over
Advances shall bear interest at the rate applicable to Revolving Loans indicated
in SUPPLEMENT A hereto.
2.9 ALL LOANS ONE OBLIGATION. The Revolving Loans and all other Loans
under this Agreement shall constitute one Loan, and all Indebtedness and other
Liabilities of Borrower to Lender under this Agreement and any of the Related
Agreements shall constitute one general obligation secured by Lender's Lien on
all of the Collateral and Third Party Collateral and by all other Liens
heretofore, now, or at any time or times hereafter granted by Borrower or any
other Obligor to Lender. Borrower agrees that all of the rights of Lender set
forth in this Agreement shall apply to any modification of or supplement to this
Agreement, any Supplements or Exhibits hereto, and the Related Agreements,
unless otherwise agreed in writing.
2.10 MAKING OF PAYMENTS; APPLICATION OF COLLECTIONS; CHARGING OF
ACCOUNTS.
(a) All payments hereunder (including payment of Letter of Credit
Obligations and payments with respect to any Note) shall be made without set-off
or counterclaim and shall be made to Lender in immediately available funds
(except as Lender may otherwise consent) prior to 12:30 p.m., Chicago time, on
the date due at its office at 231 South LaSalle Street, Chicago, Illinois 60697,
or at such other place as may be designated by Lender to Borrower in writing.
Any payments received after such time shall be deemed received on the next
Banking Day. Whenever any payment to be made hereunder or under any Note shall
be stated to be due on a date other than a Banking Day, such payment may be made
on the next succeeding Banking Day, and such extension of time shall be included
in the calculation of interest and any fees.
(b) Borrower authorizes Lender, and Lender will, subject to the
provisions of this PARAGRAPH (b), apply the whole or any part of any amounts
received by Lender from the collection of items of payment and proceeds of any
Collateral or Third Party Collateral (including without limitation payments
under Rental Agreements), against the principal and/or interest of any Loans
made hereunder and/or any other Liabilities, whether or not then due, in such
order of application as Lender may determine, unless such payments or proceeds
are, in Lender's sole and absolute discretion, released to Borrower; PROVIDED,
HOWEVER, that prior to the occurrence of an Event of Default, any such amounts
received by Lender shall be applied as follows: FIRST, to payment of amounts
then due with respect to fees (including Attorneys' Fees), charges and expenses
for which Borrower is liable pursuant to this Agreement and the Related
Agreements; SECOND, to payment of amounts then due with respect to interest on
the Loans; THIRD, to payment of amounts then
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due with respect to principal of the Loans; and FOURTH, to repayment of the
other Liabilities; PROVIDED, FURTHER, that no checks, drafts or other
instruments received by Lender shall constitute final payment to Lender unless
and until such item of payment has actually been collected. All items or amounts
which are delivered to Lender by or on behalf of Borrower or any Obligor or any
Account Debtor on account of partial or full payment or otherwise as proceeds of
any of the Collateral or Third Party Collateral may from time to time in
Lender's sole and absolute discretion be released to Borrower or may be applied
by Lender towards payment of the Liabilities, whether or not then due as
provided in the preceding sentence. Notwithstanding anything to the contrary
herein, (i) all cash, checks, instruments and other items of payment, solely for
purposes of determining the occurrence of an Event of Default, shall be deemed
received upon actual receipt by Lender in its account at 231 South LaSalle
Street, Chicago, Illinois, unless the same is subsequently dishonored for any
reason whatsoever, (ii) for purposes of determining whether, under SECTIONS 2.1
and 2.2, there is availability for Loans or Letters of Credit, all cash, checks,
instruments and other items of payment shall be applied against the Liabilities
on the first Banking Day after receipt thereof by Lender in its account at 231
South Lasalle Street, Chicago, Illinois and (iii) solely for purposes of
interest calculation hereunder, all cash, checks, instruments and other items of
payment shall be deemed to have been applied against the Liabilities after
receipt by Lender of available funds with respect thereto in its account at 231
South LaSalle Street, Chicago, Illinois.
(c) Borrower hereby authorizes Lender, and Lender may, in its sole and
absolute discretion, upon notice to Borrower charge to Borrower at any time when
due all or any portion of any of the Liabilities (and interest, if any, thereon)
including but not limited to any Attorneys' Fees and other costs and expenses of
Lender for which Borrower is liable pursuant to the terms of this Agreement or
any Related Agreement, by charging Borrower's Demand Deposit Account or any
other bank account of Borrower with Lender; PROVIDED, HOWEVER that Lender shall
not be required to provide notice to Borrower if Lender charges interest and the
fees set forth in SECTION 2.4 to Borrower, and the provisions of this SECTION
2.10(c) shall not affect Borrower's obligation to pay when due all amounts
payable by Borrower under this Agreement, any Note or any Related Agreement,
whether or not there are sufficient funds therefor in the Demand Deposit Account
or any such other bank account of Borrower.
2.11 LENDER'S ELECTION NOT TO ENFORCE. Notwithstanding any term or
condition of this Agreement to the contrary, Lender, in its sole and absolute
discretion, at any time and from time to time, may suspend or refrain from
enforcing any or all of the restrictions imposed in this SECTION 2, but no such
suspension or failure to enforce shall impair any right or power of Lender under
this Agreement, including without limitation any right of Lender to
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refrain from making a Loan or issuing a Letter of Credit if all conditions
precedent to Lender's obligation to making such Loan or issuing such Letter of
Credit have not been satisfied.
2.12 REAFFIRMATION. Each Loan or Letter of Credit requested by Borrower
pursuant to this Agreement shall constitute an automatic certification by
Borrower to Lender that (a) all of the representations and warranties of
Borrower in this Agreement and each of the Related Agreements are true and
correct on the date of such request to the same extent as if made on such date,
except for such changes as are specifically permitted hereunder (or under such
Related Agreement) and (b) immediately before and after making the requested
Loan or issuing the requested Letter of Credit, no Event of Default, or
Unmatured Event of Default, then exists or would result therefrom.
2.13 SETOFF. In addition to and not in limitation of all other rights
and remedies (including other rights of offset or banker's lien) that Lender or
any other holder of any Note may have under applicable law, Lender or such other
holder shall, upon the occurrence of any Event of Default described in SECTION
6.1, or any Unmatured Event of Default described in SECTION 6.1(e), have the
right to appropriate and apply to the payment of the Liabilities (whether or not
then due), in such order of application as Lender or such other holder may
elect, any and all balances, credits, deposits (general or special, time or
demand, provisional or final), accounts or moneys of Borrower then or thereafter
with Lender or such other holder. Lender shall promptly advise Borrower of any
such setoff and application but failure to do so shall not affect the validity
of such setoff and application.
2.14 CLOSING FEE. Borrower agrees to pay to Lender a closing fee of
$110,000 contemporaneously with the making of the initial Loan. With Lender's
consent, the amount of any closing fee due on the Closing Date may be advanced
to Borrower as a Revolving Loan.
3. COLLATERAL.
3.1 GRANT OF SECURITY INTEREST. As security for the payment of all Loans
now or hereafter made by Lender to Borrower hereunder or under any Note, and as
security for the payment or other satisfaction of all other Liabilities
(including without limitation all reimbursement obligations under any Letters of
Credit), Borrower hereby grants to Lender a security interest in and to the
following property of Borrower, whether now owned or existing, or hereafter
acquired or coming into existence, wherever now or hereafter located (all such
property is hereinafter referred to collectively as the "Collateral"):
(a) Accounts Receivable;
(b) Equipment and Fixtures;
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(c) Inventory (whether or not Eligible Inventory);
(d) General Intangibles;
(e) Contract Rights, documents and documents of title;
(f) All Rental Agreements, chattel paper and instruments
evidencing, arising out of or relating to any obligation to Borrower for
goods sold or leased or services rendered, or otherwise arising out of
or relating to any property described in CLAUSES (a) through (e) above;
(g) Any and all balances, credits, deposits (general or special,
time or demand, provisional or final), accounts or monies of or in the
name or Borrower now or hereafter with Lender and any and all property
of every kind or description of or in the name of Borrower now or
hereafter, for any reason or purpose whatsoever, in the possession or
control of, or in transit to, or standing to Borrower's credit on the
books of, Lender, any agent or bailee for Lender, or any Participant;
(h) All interest of Borrower in any goods the sale or lease of
which shall have given or shall give rise to, and in all guaranties and
other property securing the payment of or performance under, any
Accounts Receivable, Contract Rights, General Intangibles or any Rental
Agreements, chattel paper or instruments referred to in CLAUSE (f)
above;
(i) All interests of Borrower as lessor, sublessor, lessee or
sublessee of any real or personal property;
(j) Any and all other property of Borrower, of any kind or
description (including but not limited to Real Property of Borrower),
subject to a separate mortgage, pledge or security interest in favor of
Lender or in which Lender now or hereafter has or acquires a security
interest securing any Liabilities, whether pursuant to a written
agreement or instrument other than this Agreement or otherwise;
(k) All replacements, substitutions, additions or accessions to
or for any of the foregoing;
(1) To the extent related to the property described in CLAUSES
(a) through (k) above, all books, correspondence, credit files,
records, invoices and other papers and documents, including without
limitation, to the extent so related, all tapes, cards, computer runs,
computer programs and other papers and documents in the
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possession or control of Borrower or any computer bureau from time to
time acting for Borrower, and, to the extent so related, all rights in,
to and under all policies of insurance, including claims of rights to
payments thereunder and proceeds therefrom, including any credit
insurance; and
(m) All products and proceeds (including but not limited to any
Accounts Receivable or other proceeds arising from the sale or other
disposition of any Collateral, any returns of any Equipment or Inventory
sold by Borrower, and the proceeds of any insurance covering any of the
Collateral) of any of the foregoing.
3.2 ACCOUNTS RECEIVABLE.
(a) If requested by Lender at any time after the occurrence of an Event
of Default, Borrower shall advise Lender promptly of any Inventory returned by
or repossessed from any Account Debtor, or otherwise recovered, shall receive
such Inventory in trust and, unless instructed to deliver such Inventory to
Lender, shall resell or lease it for Lender. If requested by Lender at any time
after the occurrence of an Event of Default, Borrower shall notify Lender
immediately of all disputes and claims by any Account Debtor and settle or
adjust them at no expense to Lender. If Lender directs, no discount or credit
allowance shall be granted thereafter by Borrower to any Account Debtor. All
Account Debtor payments and all net amounts received by Lender in settlement,
adjustment or liquidation of any Account Receivable may be applied by Lender to
Borrower's Liabilities or credited to Borrower's Demand Deposit Account (subject
to collection) with Lender, as Lender may deem appropriate, as more fully
described in SECTION 2.10. If requested by Lender, Borrower will make proper
entries in its books and records, disclosing the assignment of Accounts
Receivable to Lender.
(b) Borrower warrants and covenants that: (i) all of the Accounts
Receivable are and will continue to be bona fide existing obligations created by
the sale or lease of goods, the rendering of services, or the furnishing of
other good and sufficient consideration to Account Debtors in the regular course
of business; and (ii) all Rental Agreements, shipping or delivery receipts and
other documents furnished or to be furnished to Lender in connection therewith
are and will be genuine.
(c) Lender is authorized and empowered (which authorization and power,
being coupled with an interest, is irrevocable until the last to occur of
termination of this Agreement and payment and performance in full of all of the
Liabilities under this Agreement) at any time in its sole and absolute
discretion:
(i) To request, in Lender's name, Borrower's name or the name of
a third party, confirmation from any
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Account Debtor or party obligated under or with respect to any
Collateral of the amount shown by the Accounts Receivable or other
Collateral to be payable, or any other matter stated therein;
(ii) After the occurrence of an Event of Default, to endorse in
Borrower's name and to collect any chattel paper, checks, notes, drafts,
instruments or other items of payment tendered to or received by Lender
in payment of any Account Receivable or other obligation owing to
Borrower;
(iii) After the occurrence of an Event of Default, to notify,
either in Lender's name or Borrower's name, and/or to require Borrower
to notify, any Account Debtor or other Person obligated under or in
respect of any Collateral, of the fact of Lender's Lien thereon and of
the collateral assignment thereof to Lender;
(iv) After the occurrence of an Event of Default, to direct,
either in Lender's name or Borrower's name, and/or to require Borrower
to direct, any Account Debtor or other Person obligated under or in
respect of any Collateral to make payment directly to Lender of any
amounts due or to become due thereunder or with respect thereto; and
(v) After the occurrence of an Event of Default, to demand,
collect, surrender, release or exchange all or any part of any
Collateral or any amounts due thereunder or with respect thereto, or
compromise or extend or renew for any period (whether or not longer than
the initial period) any and all sums which are now or may hereafter
become due or owing upon or with respect to any of the Collateral, or
enforce, by suit or otherwise, payment or performance of any of the
Collateral either in Lender's own name or in the name of Borrower.
Under no circumstances shall Lender be under any duty to act in regard to any of
the foregoing matters. The costs relating to any of the foregoing matters,
including Attorneys' Fees and out-of-pocket expenses, and the cost of any
Blocked Deposit Account or other bank account or accounts which may be required
hereunder, shall be borne solely by Borrower whether the same are incurred by
Lender or Borrower, and Lender may advance same to Borrower as a Revolving Loan.
(d) Unless otherwise consented to by Lender, Borrower will, forthwith
upon receipt by Borrower of all checks, drafts, cash and other remittances in
payment or as proceeds of, or on account of, any of the Accounts Receivable or
other Collateral, deposit the same in a special bank account (a "Blocked Deposit
Account") with such banks or financial institution as Lender shall
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consent, over which Lender alone has power of withdrawal, and will, to the
extent required by Lender, designate with each such deposit the particular
Account Receivable or other item of Collateral upon which the remittance was
made. Borrower acknowledges that the maintenance of the Blocked Deposit Accounts
is solely for the convenience of Lender in facilitating its own operations and
Borrower does not and shall not have any right, title or interest in the Blocked
Deposit Accounts or in the amounts at any time appearing to the credit thereof.
Said proceeds shall be deposited in precisely the form received except for
Borrower's endorsement where necessary to permit collection of items, which
endorsement Borrower agrees to make. Pending such deposit, Borrower agrees not
to commingle any such checks, drafts, cash and other remittances with any of its
funds or property, but will hold them separate and apart therefrom and upon an
express trust for Lender until deposit thereof is made in the Blocked Deposit
Accounts. Upon the full and final liquidation of all Liabilities, Lender will
pay over to Borrower any excess amounts received by Lender as payment or
proceeds of Collateral.
(e) Borrower appoints Lender, or any Person whom Lender may from time to
time designate, as Borrower's attorney and agent-in-fact with power: (i) after
the occurrence of an Event of Default, to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
Lender; (ii) after the occurrence of an Event of Default, to receive, open and
dispose of all mail addressed to Borrower; (iii) to send requests for
verification of Accounts Receivable or other Collateral to Account Debtors; (iv)
after the occurrence of an Event of Default, to open an escrow account or
Blocked Deposit Account under Lender's sole control for the collection of
Accounts Receivable or other Collateral, if not required contemporaneously with
the execution hereof and (v) to do all other things which Lender is permitted to
do under this Agreement or any Related Agreement or which are necessary to carry
out this Agreement and the Related Agreements. Neither Lender nor any of its
directors, officers, employees or agents will be liable for any acts of
commission or omission nor for any error in judgment or mistake of fact or law,
unless the same shall have resulted from gross negligence or willful misconduct.
The foregoing appointment and power, being coupled with an interest, is
irrevocable until all Liabilities under this Agreement are paid and performed in
full and this Agreement is terminated. Borrower expressly waives presentment,
demand, notice of dishonor and protest of all instruments and any other notice
to which it might otherwise be entitled.
(f) If any Account Receivable, Contract Right or General Intangible
arises out of a contract with the United States or any department, agency, or
instrumentality thereof, Borrower will, unless Lender shall otherwise agree,
immediately notify Lender in writing and execute any instruments and take any
steps required by Lender in order that all monies due and to become due under
such
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contract shall be assigned to Lender and notice thereof given to the government
under the Federal Assignment of Claims Act of 1940, as amended or other
applicable laws or regulations.
(g) If any Account Receivable or Contract Right is evidenced by chattel
paper or promissory notes, trade acceptances, or other instruments for the
payment of money, Borrower will, at the request of Lender, deliver the originals
of same to Lender, appropriately endorsed to Lender's order and, regardless of
the form of such endorsement, Borrower hereby expressly waives presentment,
demand, notice of dishonor, protest and notice of protest and all other notices
with respect thereto.
3.3 INVENTORY.
(a) Borrower warrants and covenants that: (i) all of the Inventory is,
and at all times shall be, owned by Borrower free of all claims and Liens
(except as set forth in SECTION 5.16); and (ii) Borrower will not make any
further assignment of any thereof or create or permit to exist any further Lien
thereon, unless approved in writing by Lender, nor permit any of Lender's rights
therein to be affected by any attachment, levy, garnishment or other judicial
process.
(b) Unless Lender shall otherwise agree, if Borrower sells Inventory for
cash, all full and partial payments therefor shall be immediately delivered by
Borrower to a Blocked Deposit Account in their original form for deposit. All
such cash shall be held by Borrower in trust for Lender and shall be remitted to
a Blocked Deposit Account not later than the end of the day received, or at such
other time as Lender may designate.
(c) Lender shall not be liable or responsible in any way for the
safekeeping of any Inventory delivered to it, to any bailee appointed by or for
it, to any warehouseman, or under any other circumstances. Lender shall not be
responsible for collection of any proceeds or for losses in collected proceeds
held by Borrower in trust for Lender. Any and all risk of loss for any or all of
the foregoing shall be upon Borrower, except for such loss as shall result from
Lender's gross negligence or willful misconduct.
(d) If requested by Lender, Borrower shall, upon acquiring an interest
in any Inventory, deliver to Lender schedules of such Inventory, together with
supplier's invoices, warranties, production, cost and other records as Lender
may request. If requested by Lender, Borrower shall deliver to Lender schedules
of the sale or lease of any Inventory immediately upon its sale or lease. Any
material change in the value or condition of any Inventory, and any errors
discovered in schedules delivered to Lender, shall be reported to Lender
immediately. Borrower confirms that the warranties and representations in this
Agreement shall apply to each schedule. Borrower represents and warrants that,
as to each schedule of Inventory delivered to Lender:
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(i) The descriptions, origins, sizes, qualities, quantities,
weights, and markings of all goods stated thereon, or on any attachment
thereto, are true and correct in all material respects;
(ii) None of the goods are defective, of second quality, used,
or goods returned after shipment, except where described as such; and
(iii) All Inventory not included on such schedule has been
previously scheduled.
(e) If requested by Lender at any time after the occurrence of an Event
of Default, Borrower will notify Lender immediately if Borrower obtains
possession (by return, repossession or otherwise) of any Inventory which has
been sold or leased, and will inform Lender of the identity of the returned or
repossessed Inventory, the applicable Account Debtor and the amount of the
applicable Account Receivable.
3.4 EQUIPMENT.
(a) Borrower warrants and covenants that: (i) all of the Equipment is,
and at all times shall be, owned by Borrower free of all claims and Liens
(except as set forth in SECTION 5.16); (ii) Borrower will not make any further
assignment of any thereof or create or permit to exist any further Lien thereon,
unless approved in writing by Lender, nor permit any of Lender's rights therein
to be affected by any attachment, levy, garnishment or other judicial process;
and (iii) none of the Equipment used by Borrower in its business is or will be
subject to a lease under which Borrower is the lessee (except as set forth on
SCHEDULE 4.15 hereto), or leases consented to in writing by Lender.
(b) Borrower shall at all times keep the Equipment in good operating
condition and repair, ordinary wear and tear excepted, and Borrower shall not,
without the prior written consent of Lender, sell, lease, or otherwise dispose
of any Equipment, or any part thereof or interest therein; PROVIDED, HOWEVER,
that without Lender's consent (but with notice to Lender) Borrower may (i) trade
in obsolete or unuseful Equipment in the ordinary course in connection with the
purchase of new Equipment, or (ii) dispose of obsolete or unuseful Equipment in
the ordinary course provided the Equipment disposed of in any Fiscal Year has an
aggregate market value of $150,000 or less.
(c) In the event any Equipment is sold, transferred or otherwise
disposed of, unless Lender shall agree otherwise, Borrower shall deliver all of
the proceeds of any such sale, transfer or disposition to Lender, which proceeds
shall be deposited in a Blocked Deposit Account or otherwise applied to the
repayment of the Liabilities.
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(d) Borrower will, upon request of Lender, submit to Lender a current
listing of all of Borrower's Equipment, which listing shall indicate the type,
model, serial number and location of such Equipment.
3.5 SUPPLEMENTAL DOCUMENTATION. At Lender's request, Borrower shall
execute and/or deliver to Lender, at any time or times hereafter, such
agreements, documents, financing statements, warehouse receipts, bills of
lading, notices of assignment of Accounts Receivable, Schedules of Accounts
Receivable assigned, and other written matter necessary or reasonably requested
by Lender to perfect and maintain perfected Lender's security interest in the
Collateral (all the above hereinafter referred to as "Supplemental
Documentation"), in form and substance acceptable to Lender, and pay all taxes,
fees and other costs and expenses associated with any recording or filing of the
Supplemental Documentation. Borrower hereby irrevocably makes, constitutes and
appoints Lender (and all Persons designated by Lender for that purpose) as
Borrower's true and lawful attorney (and agent-in-fact) (which appointment and
power, being coupled with an interest, is irrevocable until the last to occur
of termination of this Agreement and payment and performance in full of all of
the Liabilities under this Agreement) to sign the name of Borrower on any of the
Supplemental Documentation if Borrower refuses to so sign such Supplemental
Documentation and to deliver any of the Supplemental Documentation to such
Persons as Lender in its sole and absolute discretion, may elect. Borrower
agrees to mark each Rental Agreement with a legend indicating that Lender has a
security interest in such Rental Agreement. Borrower agrees that a carbon,
photographic, photostatic, or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement.
4. REPRESENTATIONS AND WARRANTIES.
To induce Lender to make Loans to, and issue Letters of Credit for the
account of, Borrower under this Agreement, Borrower makes the following
representations and warranties, all of which shall be true and correct as of the
date the initial Revolving Loan is made and shall survive the execution of this
Agreement and the making of the initial Revolving Loan:
4.1 ORGANIZATION. Borrower and all of its corporate Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their respective incorporation. All of Borrower's
other Subsidiaries, if any, are entities duly organized, validly existing and in
good standing under the laws of the jurisdictions of their respective
organization. Borrower and all of its Subsidiaries are in good standing and are
duly qualified to do business in each jurisdiction where, because of the nature
of their respective activities or properties, such qualification is required. On
the date hereof, Borrower and each Subsidiary conducts business in its own name
exclusively. SCHEDULE 4.1 sets forth a complete and accurate list,
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as of the date of this Agreement, of (a) the state or other jurisdiction of
formation of Borrower, (b) each state in which Borrower is qualified to do
business and (c) all of Borrower's trade names, trade styles or doing business
forms.
4.2 AUTHORIZATION. Borrower is duly authorized to execute and deliver
this Agreement, any Note(s), and any Related Agreements or Supplemental
Documentation contemplated by this Agreement, and is and will continue to be
duly authorized to borrow monies hereunder and to perform its obligations under
this Agreement, any Notes and any such Related Agreements and Supplemental
Documentation. The execution, delivery and performance by Borrower of this
Agreement, any Note(s), and any Related Agreements or Supplemental Documentation
contemplated by this Agreement, and the borrowings hereunder, do not and will
not require any consent or approval of any governmental agency or authority.
4.3 NO CONFLICTS. The execution, delivery and performance by Borrower
of this Agreement, any Note(s), and any Related Agreements or Supplemental
Documentation contemplated by this Agreement do not and will not conflict with
(a) any provision of law, (b) the charter or by-laws of Borrower, (c) any
agreement binding upon Borrower or (d) any court or administrative order or
decree applicable to Borrower, and do not and will not require, or result in,
the creation or imposition of any Lien on any asset of Borrower or any of its
Subsidiaries except as provided herein.
4.4 VALIDITY AND BINDING EFFECT. This Agreement, any Note(s), and any
Related Agreements or Supplemental Documentation contemplated by this Agreement,
when duly executed and delivered will be legal, valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms.
4.5 NO DEFAULT. Neither Borrower nor any of its Subsidiaries is in
default under any agreement or instrument to which Borrower or any Subsidiary is
a party or by which any of their respective properties or assets is bound or
affected, which default might materially and adversely affect (a) Lender's Lien
on or rights with respect to any Collateral or Third Party Collateral or (b) the
financial condition or operations of Borrower, any Subsidiary or Borrower and
its Subsidiaries taken as a whole. No Event of Default or Unmatured Event of
Default has occurred and is continuing.
4.6 FINANCIAL STATEMENTS. Borrower's audited financial statement as at
December 31, 1991 and Borrower's unaudited financial statement as at August 31,
1992, copies of which have been furnished to Lender, have been prepared in
conformity with generally accepted accounting principles applied on a basis
consistent with that of the preceding fiscal year and period and present fairly
the financial condition of Borrower and its Subsidiaries as at such dates and
the results of their operations for the periods then ended, subject (in the case
of the interim
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financial statement) to year-end audit adjustments. Since December 31, 1991,
there has been no material adverse change in the financial condition of
Borrower.
4.7 INSURANCE. Schedule 4.7 hereto is a complete and accurate summary of
the property and casualty insurance program carried by Borrower and its
Subsidiaries on the date hereof. SCHEDULE 4.7 includes the insurer's(s')
name(s), policy number(s), expiration date(s), amount(s) of coverage, type(s) of
coverage, the annual premium(s), Best's policyholder's and financial size
ratings of the insurer(s), exclusions, deductibles and self-insured retention
and describes in detail any retrospective rating plan, fronting arrangement or
any other self-insurance or risk assumption agreed to by Borrower or any
Subsidiary or imposed upon Borrower or any Subsidiary by any such insurer. This
summary also includes any self-insurance program that is in effect.
4.8 Litigation; Contingent Liabilities.
(a) Except for those referred to in SCHEDULE 4.8, no claims, litigation,
arbitration proceedings or governmental proceedings are pending or threatened
against or are affecting Borrower or any Subsidiary, the results of which might
materially and adversely affect (i) the financial condition or operations of
Borrower, any Subsidiary or Borrower and its Subsidiaries taken as a whole or
(ii) Lender's interest in or Lien on any material Collateral or Third Party
Collateral.
(b) Other than any liability incident to the claims, litigation or
proceedings disclosed in SCHEDULE 4.8 or SCHEDULE 4.19, or provided for or
disclosed in the financial statements referred to in SECTION 4.6, neither
Borrower nor any of its Subsidiaries has any contingent liabilities which are
material to Borrower, any Subsidiary or Borrower and its Subsidiaries taken as a
whole.
4.9 LIENS. None of the Collateral or other property, revenues or assets
of Borrower or any Subsidiary is subject to any Lien (including but not limited
to Liens pursuant to Capitalized Leases under which Borrower or any Subsidiary
is a lessee) except: (a) Liens in favor of Lender; (b) Liens for current Taxes
not delinquent or Taxes being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as
may be required by GAAP are being maintained; (c) carriers', warehousemen's,
mechanics', materialmen's and other like statutory Liens arising in the ordinary
course of business securing obligations which are not overdue or which are being
contested in good faith and by appropriate proceedings and as to which such
reserves or other appropriate provisions as may be required by GAAP are being
maintained; (d) Liens disclosed in the financial statements referred to in
SECTION 4.6; (e) Liens listed on SCHEDULE 4.9; and (f) Liens consented to in
writing by Lender.
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4.10 SUBSIDIARIES. Borrower has no Subsidiaries except as listed on
SCHEDULE 4.10. SCHEDULE 4.10 sets forth, for each Subsidiary, a complete and
accurate statement of (a) Borrower's and each Subsidiary's percentage ownership
of each of their respective Subsidiaries, (b) the state or other jurisdiction of
formation or incorporation of each Subsidiary, (c) each state in which each
Subsidiary is qualified to do business on the date of this Agreement and (d) all
of each Subsidiary's trade names, trade styles or doing business forms on the
date of this Agreement.
4.11 PARTNERSHIPS; JOINT VENTURES. Neither Borrower nor any of its
Subsidiaries is a partner or joint venturer in any partnership or joint venture
other than the partnerships and joint ventures listed on SCHEDULE 4.11. SCHEDULE
4.11 sets forth, for each such partnership or joint venture, a complete and
accurate statement of (a) Borrower's and each Subsidiary's percentage ownership
of each such partnership or joint venture, (b) the state or other jurisdiction
of formation or incorporation, as appropriate, of each such partnership or
joint venture, (c) each state in which each such partnership or joint venture is
qualified to do business on the date of this Agreement and (d) all of each such
partnership's or joint venture's trade names, trade styles or doing business
forms on the date of this Agreement.
4.12 BUSINESS AND COLLATERAL LOCATIONS.
(a) On the date hereof the office where Borrower keeps Borrower's books
and records concerning Borrower's Accounts Receivable and other Collateral, and
Borrower's chief place of business and chief executive office, is located at the
address of Borrower set forth on the signature pages of this Agreement. SCHEDULE
4.12 contains a complete and accurate list, as of the date of this Agreement, of
(i) all of Borrower's places of business other than that referred to in the
first sentence of this PARAGRAPH (a) and (ii) all locations and places of
business of each Subsidiary.
(b) SCHEDULE 4.12 contains a complete and accurate list, as of the date
of this Agreement, of (i) the locations of all of Borrower's Inventory (other
than Inventory in the possession of Account Debtors pursuant to the terms of
Rental Agreements), Equipment and Fixtures, (ii) if applicable, the locations of
all Third Party Collateral (except any part thereof which prior to the execution
of this Agreement Borrower shall have advised Lender in writing consists of
Collateral or Third Party Collateral, as applicable, normally used in more than
one state) and (iii) if any Inventory, Equipment or other Collateral, or any
Third Party Collateral is not in the possession or control of Borrower, an
Account Debtor pursuant to the terms of a Rental Agreement or the owner of such
Third Party Collateral, the name and mailing address of each bailee, processor,
warehouseman or other Person in possession or control thereof.
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4.13 REAL PROPERTY. SCHEDULE 4.13 contains a complete
and accurate list, as of the date of this Agreement, of (a) the
address and legal descriptions of any real property owned by
Borrower or on which any Fixtures are located and (b) in the case
of Fixtures located on property not owned by Borrower, the name(s)
and mailing addresses of the record owners of such property.
4.14 ELIGIBILITY OF COLLATERAL. Each item of Inventory which Borrower
shall, expressly or by implication (by inclusion on a Borrowing Base Certificate
or otherwise), request Lender to classify as Eligible Inventory will, as of the
time when such request is made, conform in all respects to the requirements of
such classification set forth in the definition of "Eligible Inventory" set
forth herein.
4.15 CONTROL OF COLLATERAL; LEASE OF PROPERTY. Borrower is not now
conducting, or permitting or suffering to be conducted, any activities pursuant
to or in conjunction with which any of the Collateral is now, or will be (while
any Liabilities exist or this Agreement is in effect), in the possession or
control of, any Subsidiary, Obligor (other than Borrower) or Related Party.
Except for Capitalized Leases included on SCHEDULE 5.15, SCHEDULE 4.15 contains
a complete and accurate list of (a) all leases under which Borrower or a
Subsidiary is the lessee covering any machinery, equipment or real property used
by Borrower or any Subsidiary and (b) the name and mailing address of each
lessor or owner of such machinery, equipment or real property.
4.16 PATENTS, TRADEMARKS, ETC. To the best of its knowledge, Borrower
and each of its Subsidiaries possesses adequate assets, licenses, patents,
patent applications, copyrights, trademarks, trademark applications, trade
styles, and tradenames to continue to conduct its respective business as
heretofore conducted by it, and all such licenses, patents, patent applications,
copyrights, trademarks, trademark applications, trade styles, and tradenames
existing on the date hereof and, in the case of patents, trademarks and
copyrights, the date of issuance thereof, are listed on SCHEDULE 4.16.
4.17 SOLVENCY. Each of Borrower and each of its Subsidiaries now has
capital sufficient to carry on its respective business and transactions and all
business and transactions in which it is about to engage, and is now solvent and
able to pay its respective debts as they mature, and each of Borrower and each
of its Subsidiaries now owns property having a value, both at fair valuation and
at present fair salable value, greater than the amount required to pay
Borrower's or such Subsidiary's debts.
4.18 CONTRACTS; LABOR MATTERS. Except as disclosed on Schedule 4.18: (a)
neither Borrower nor any Subsidiary is a party to any contract or agreement, or
is subject to any charge, corporate restriction, judgment, decree or order,
which materially and adversely affects its business, property, assets,
operations or
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condition, financial or otherwise; (b) no labor contract to which Borrower or
any Subsidiary is a party or is otherwise subject is scheduled to expire prior
to the initial Termination Date; (C) neither Borrower nor any Subsidiary has,
within the two-year period preceding the date of this Agreement, taken any
action which would have constituted or resulted in a "plant closing" or "mass
layoff" within the meaning of the Federal Worker Adjustment and Retraining
Notification Act of 1988 or any similar applicable federal, state or local law,
and Borrower has no reasonable expectation that any such action is or will be
required at any time prior to the initial Termination Date and (d) on the date
of this Agreement (i) neither Borrower nor any Subsidiary is a party to any
labor dispute and (ii) there are no strikes or walkouts relating to any labor
contracts to which Borrower or any Subsidiary is a party or is otherwise
subject.
4.19 PENSION AND WELFARE PLANS. Each Pension Plan complies, and has been
administered in compliance, in all material respects, with all applicable
statutes and governmental rules and regulations; no Reportable Event has
occurred and is continuing with respect to any Pension Plan; neither Borrower
nor any ERISA Affiliate has withdrawn from any Multiemployer Plan in a "complete
withdrawal" or a "partial withdrawal" as defined in Sections 4203 or 4205 of
ERISA, respectively; no steps have been instituted to terminate any Pension
Plan; no contribution failure has occurred with respect to any Pension Plan
sufficient to give rise to a Lien under Section 302(f) of ERISA; no condition
exists or event or transaction has occurred in connection with any Pension Plan
or Multiemployer Plan which could result in the incurrence by Borrower, any
other Obligor or any ERISA Affiliate of any material liability, fine or penalty;
and neither Borrower nor any other Obligor nor any ERISA Affiliate is a
"contributing sponsor" as defined in Section 4001(a) (13) of ERISA of a
"single-employer plan" as defined in Section 4001(a) (15) of ERISA which has two
or more contributing sponsors at least two of whom are not under common control.
Except as listed in SCHEDULE 4.19, neither Borrower nor any ERISA Affiliate, to
the extent there is joint and several liability with Borrower to pay such
benefits, has any liability to pay any welfare benefits under any employee
welfare benefit plan within the meaning of Section 3(1) of ERISA to former
employees thereof or to current employees with respect to claims incurred after
the termination of their employment other than as required by Section 4980B of
the Code or Part 6 of Subtitle B of Title 1 of ERISA.
4.20 REGULATION U. Borrower is not engaged in the business of purchasing
or selling Margin Stock or extending credit to others for the purpose of
purchasing or carrying Margin Stock, and no part of the proceeds of any
borrowing hereunder will be used to purchase or carry any Margin Stock or for
any other purpose which would violate any of the margin regulations of the
Federal Reserve Board.
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4.21 COMPLIANCE. Except as described on SCHEDULE 4.21 or SCHEDULE 4.25,
Borrower and its Subsidiaries are in material compliance with all statutes and
governmental rules and regulations applicable to them.
4.22 TAXES. Each of Borrower and its Subsidiaries has filed all tax
returns which are required to have been filed and has paid, or made adequate
provisions for the payment of, all of its Taxes which are due and payable,
except such Taxes, if any, as are being contested in good faith and by
appropriate proceedings and as to which such reserves or other appropriate
provisions as may be required by GAAP have been maintained. The federal income
tax liability of Borrower and its Subsidiaries has been audited by the Internal
Revenue Service and has been finally determined and satisfied (or the time for
audit has expired) for all tax years up to and including the tax year ended
December 31, 1988. Borrower is not aware of any proposed assessment against
Borrower or any of its Subsidiaries for additional Taxes (or any basis for any
such assessment) which might be material to Borrower and its Subsidiaries taken
as a whole.
4.23 INVESTMENT COMPANY ACT REPRESENTATION. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
4.24 PUBLIC UTILITY HOLDING COMPANY ACT REPRESENTATION. Borrower is not
a "holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
4.25 ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS. Except as disclosed on
SCHEDULE 4.25, Borrower and each of its Subsidiaries and/or each property,
operations and facility that Borrower or any Subsidiary may own, operate or
control (a) complies in all respects with (i) all applicable Environmental Laws
and (ii) all applicable Occupational Safety and Health Laws; (b) is not subject
to any judicial or administrative proceeding alleging the violation of any
Environmental Law or Occupational Safety and Health Law; (c) has not received
any notice (i) that it may be in violation of any Environmental Law or
Occupational Safety and Health Law, (ii) threatening the commencement of any
proceeding relating to allegedly unlawful, unsafe or unhealthy conditions or
(iii) alleging that it is or may be responsible for any response, cleanup, or
corrective action, including but not limited to any remedial
investigation/feasibility studies, under any Environmental Law or Occupational
Safety and Health Law; (d) is not the subject of federal or state investigation
evaluating whether any investigation, remedial action or other response is
needed to respond to (i) a spillage, disposal or release or threatened release
into the environment of any Hazardous Material or other hazardous, toxic or
dangerous waste, substance or constituent, or other substance or
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(ii) any allegedly unsafe or unhealthful condition; (e) has not filed any notice
under or relating to any Environmental Law or Occupational Safety and Health Law
indicating or reporting (i) any past or present spillage, disposal or release
into the environment of, or treatment, storage or disposal of, any Hazardous
Material or other hazardous, toxic or dangerous waste, substance or constituent,
or other substance or (ii) any potentially unsafe or unhealthful condition, and
there exists no basis for such notice irrespective of whether such notice was
actually filed; and (f) has no contingent liability in connection with (i) any
actual or potential spillage, disposal or release into the environment of, or
otherwise with respect to, any Hazardous Material or other hazardous, toxic or
dangerous waste, substance or constituent, or other substance, whether on any
premises owned or occupied by Borrower or any Subsidiary or on any other
premises or (ii) any unsafe or unhealthful condition. Except as disclosed on
SCHEDULE 4.25, there are no Hazardous Materials on, in or under any property or
facilities owned, operated or controlled by Borrower or any Subsidiary,
including but not limited to such Hazardous Materials that may be contained in
underground storage tanks, but excepting such Hazardous Materials used in
accordance with all applicable laws and in the same manner as an ordinary
consumer (e.g., gasoline in tanks of motor vehicles, small amounts of cosmetic
cleaners, etc.).
4.26 RELATED AGREEMENTS. All representations and warranties of Borrower
contained in any Related Agreements are true and correct as if made on the date
hereof and Borrower hereby adopts and affirms all such representations and
warranties which Borrower agrees shall be incorporated by reference herein and
made a part hereof.
4.27 CAPITALIZED LEASE OBLIGATIONS. As of the date hereof, Borrower's
Indebtedness under Capitalized Leases is as set forth on SCHEDULE 4.27.
5. BORROWER COVENANTS.
From the date of this Agreement and thereafter until the Credit is
terminated and all Liabilities of Borrower hereunder are paid in full, Borrower
agrees that unless Lender shall otherwise consent in writing, it will:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Furnish to Lender in form
satisfactory to Lender:
5.1.1 FINANCIAL REPORTS:
(a) ANNUAL AUDIT REPORT. Within ninety (90) days after each Fiscal Year
of Borrower, a copy of the annual audit report of Borrower and its Subsidiaries
prepared on a consolidating and consolidated basis and in conformity with GAAP
and certified by an independent certified public accountant who shall be
satisfactory
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to Lender, together with a certificate from such accountant (i) acknowledging to
Lender such accountant's understanding that Lender and any Participant is
relying on such annual audit report, (ii) containing a computation of, and
showing compliance with, each of the financial ratios and restrictions contained
in this SECTION 5 or in SUPPLEMENT A, and (iii) to the effect that, in making
the examination necessary for the signing of such annual audit report, such
accountant has not become aware of any Event of Default or Unmatured Event of
Default that has occurred and is continuing, or, if such accountant has become
aware of any such event, describing it and the steps, if any, being taken to
cure it;
(b) QUARTERLY FINANCIAL STATEMENT. Within fifteen (15) days after each
Fiscal Quarter of each Fiscal Year of Borrower, a copy of the unaudited
financial statement of Borrower and its Subsidiaries prepared in the same manner
as the audit report referred to in preceding CLAUSE (a), signed by Borrower's
chief financial officer and consisting of at least a balance sheet as at the
close of such Fiscal Quarter and statements of earnings and cash flows for such
Fiscal Quarter and for the period from the beginning of such Fiscal Year to the
close of such Fiscal Quarter;
(c) MONTHLY FINANCIAL STATEMENT. Within fifteen (15) days after the end
of each month of each fiscal year of Borrower, a copy of the unaudited financial
statement of Borrower and its Subsidiaries prepared in the same manner as the
audit report referred to in preceding CLAUSE (a), signed by Borrower's chief
financial officer and consisting of at least a balance sheet as at the close of
such month and statements of earnings and cash flows for such month and for the
period from the beginning of such Fiscal Year to the close of such month; and
(d) OFFICER'S CERTIFICATE. Together with the financial statements
furnished by Borrower under the preceding CLAUSES (a), (b) and (c), a
certificate of Borrower's chief financial officer, dated the date of such annual
audit report or such quarterly or monthly financial statement, as the case may
be, containing a statement that no Event of Default or Unmatured Event of
Default has occurred and is continuing, or, if there is any such event,
describing it and the steps, if any, being taken to cure it, and containing a
computation of, and showing compliance with, each of the financial ratios and
restrictions contained in this Section 5 or in SUPPLEMENT A.
5.1.2 AGINGS. Within ten (10) days after the end of each month, an aging
of all amounts owing under Rental Agreements and an aging of all accounts
payable as of the end of such month, in form and content acceptable to Lender.
5.1.3 INVENTORY CERTIFICATION. Within ten (10) days after the end of
each month, an Inventory certification report as of the end of the month for all
Inventory locations, in form and content acceptable to Lender.
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5.1.4 CASH RECEIPTS REPORT. Within ten (10) days after the end of each
month, a report as at the end of the month, in form and content acceptable to
Lender, specifying the cash received during such month from rental and
non-rental payments under Rental Agreements.
5.1.5 OTHER REPORTS AND INFORMATION:
(a) SEC AND OTHER REPORTS. Copies of each filing and report made by
Borrower or any Subsidiary with or to any securities exchange or the Securities
and Exchange Commission and of each communication from Borrower or any
Subsidiary to shareholders generally, promptly upon the filing or making
thereof;
(b) REPORT OF CHANGE RELATING TO BORROWER, SUBSIDIARIES OR PARTNERSHIPS.
Promptly from time to time, a written report of any change in the information
set forth in SCHEDULE 4.1, SCHEDULE 4.10 or SCHEDULE 4.11 concerning Borrower,
any Subsidiary, or any partnership or joint venture;
(c) PATENTS, ETC. Promptly from time to time, a written report of any
change to the list of patents, trademarks, copyrights and other information set
forth in SCHEDULE 4.16; and
(d) OTHER REPORTS. Any information required to be provided pursuant to
other provisions of this Agreement, and such other reports or information from
time to time reasonably requested by Lender.
5.2 NOTICES. Notify Lender in writing of any of the following
immediately upon learning of the occurrence thereof (or, in the case of CLAUSES
(e) and (f) of this SECTION 5.2, at least thirty (30) days prior to the
occurrence thereof to the extent applicable to Borrower, any Subsidiary or any
other Obligor), describing the same and, if applicable, the steps being taken by
the Person(s) affected with respect thereto:
(a) DEFAULT. The occurrence of (i) an Event of Default or
Unmatured Event of Default and (ii) to the extent not included in CLAUSE
(i) of this SECTION 5.2(a), the default by Borrower, any other Obligor,
any Subsidiary or any Related Party under any material note,
indenture, loan agreement, mortgage, lease, deed or other material
similar agreement to which Borrower, any other Obligor, any Subsidiary
or any Related Party, as appropriate, is a party or by which it is
bound (including without limitation any document evidencing any Sub-
ordinated Debt);
(b) LITIGATION. The institution of any litigation, arbitration
proceeding or governmental proceeding affecting Borrower, any other
Obligor, any Subsidiary, any Related Party, any Collateral or any Third
Party
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Collateral, whether or not considered to be covered by insurance;
(c) JUDGMENT. The entry of any judgment or decree against
Borrower, any other Obligor, any Subsidiary or any Related Party, if the
amount of such judgment exceeds $50,000;
(d) PENSION PLANS AND WELFARE PLANS. The occurrence of a
Reportable Event with respect to any Pension Plan; the filing of a
notice of intent to terminate a Pension Plan by Borrower, any ERISA
Affiliate, or any other Obligor; the institution of proceedings to
terminate a Pension Plan by the PBGC or any other Person; the
withdrawal in a "complete withdrawal" or a "partial withdrawal" as
defined in Sections 4203 and 4205, respectively, of ERISA by Borrower,
any ERISA Affiliate or any other Obligor from any Multiemployer Plan;
the failure of Borrower, any other Obligor or any ERISA Affiliate to
make a required contribution to any Pension Plan, including but not
limited to any failure to pay an amount sufficient to give rise to a
Lien under Section 302(f) of ERISA; the taking of any action with
respect to a Pension Plan which could result in the requirement that
Borrower, any other Obligor or any ERISA Affiliate furnish a bond or
other security to the PBGC or such Pension Plan; the occurrence of any
other event with respect to any Pension Plan which could result in the
incurrence by Borrower, any other Obligor or any ERISA Affiliate of any
material liability, fine or penalty; or the establishment of a new plan
subject to ERISA or an amendment to any existing plan which will result
in a material increase in contributions or benefits under such plan or
the incurrence of any material increase in the liability of Borrower,
any other Obligor (or an ERISA Affiliate to the extent there is joint
and several liability with Borrower or any other Obligor) or any
Subsidiary, with respect to any "employee welfare benefit plan" as
defined in Section 3(1) of ERISA which covers former employees thereof
or current employees and their beneficiaries with respect to claims
incurred after the termination of their employment;
(e) BUSINESS AND COLLATERAL INFORMATION. Any change or proposed
change in any of the information set forth on SCHEDULE 4.12, SCHEDULE
4.13 or SCHEDULE 4.15, including but not limited to (i) any change in
the location of any Inventory, or Equipment or any Third Party
Collateral, (ii) the identity any new bailee, processor, warehouseman or
other Person (other than an Account Debtor pursuant to the terms of a
Rental Agreement) in possession or control of any Inventory or Equipment
or other Collateral or Third Party Collateral,
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(iii) any change in the name or address of the lessor or owner of any
real property or equipment leased to Borrower, any subsidiary or any
other Obligor, (iv) any proposed change in the location of Borrower's or
any subsidiary's chief executive office or chief place of business, (v)
any proposed opening, closing or other change in the list of offices and
other places of business of Borrower and each Subsidiary and (vi) any
opening, closing or other change in the offices and other places of
business of each other Obligor and each Related Party;
(f) CHANGE OF NAME OR STATUS. Any change in the name or address
of any other Obligor or any Related Party;
(g) INSURANCE INFORMATION. Any material change in the
information set forth in SCHEDULE 4.7;
(h) ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS. The occurrence
of any event, or the acquisition of any information which, if it had
occurred or was true on or before the Closing Date, would have been
required to have been disclosed and included on SCHEDULE 4.25, including
but not limited to existence of any Environmental Lien and receipt of
any notice from any federal, state or local government or agency with
respect to any actual or alleged violation of any Environmental Law or
any Occupational Safety and Health Law;
(i) MATERIAL ADVERSE CHANGE. The occurrence of a material
adverse change in the business, operations or financial condition of
Borrower, any other Obligor, any Subsidiary or any Related Party;
(j) DEFAULT BY OTHERS. Any material default by any Account
Debtor or other Person obligated to Borrower, any other Obligor, or any
Subsidiary, under any contract, chattel paper, note or other evidence of
amounts payable or due or to become due to Borrower, such Obligor or
Subsidiary if the amount payable under such contract, chattel paper,
note or other evidence of amounts payable or due or to become due is
material;
(k) MOVEABLE COLLATERAL. If any of the Collateral or Third Party
Collateral shall consist of goods of a type normally used in more than
one state, whether or not actually so used, any use of any such goods in
any state other than a state in which Borrower shall have previously
advised Lender such goods will be used. Borrower agrees that such goods
will not, unless Lender shall otherwise consent in writing, be used
outside the continental United States or in Louisiana;
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(l) CHANGE IN MANAGEMENT OR LINE(S) OF BUSINESS. Any substantial
change in the senior management of Borrower or any Subsidiary, or any
change in Borrower's or any Subsidiary's line(s) of business; and
(m) OTHER NOTICES. Any notices required to be provided pursuant
to any Related Agreement or the other provisions of this Agreement, and
notice of the occurrence of such other events as Lender may reasonably
from time to time specify.
5.3 EXISTENCE. Maintain and preserve, and cause each Subsidiary to
maintain and preserve, its respective existence as a corporation or other form
of business organization, as the case may be, and all rights, privileges,
licenses, patents, patent rights, copyrights, trademarks, trade names, trade
styles, franchises and other authority to the extent material and necessary for
the conduct of its respective business in the ordinary course as conducted from
time to time.
5.4 NATURE OF BUSINESS. Engage, and cause each Subsidiary to engage, in
substantially the same fields of business as it is engaged in on the date
hereof.
5.5 BOOKS, RECORDS AND ACCESS. Maintain, and cause each Subsidiary to
maintain, complete and accurate books and records (including but not limited to
records relating to Accounts Receivable, Inventory, Equipment and other
Collateral), in which full and correct entries in conformity with GAAP shall be
made of all dealings and transactions in relation to its respective business and
activities. Cause its books and records as at the end of any calendar month to
be posted and closed not more than ten (10) days after the last business day of
such month. Permit, and cause each Subsidiary to permit, access by Lender and
its agents or employees to the books and records of Borrower and such Subsidiary
at Borrower's or such Subsidiary's place or places of business at intervals to
be determined by Lender and without hindrance or delay, and permit and cause
each Subsidiary to permit Lender or its agents and employees to inspect
Borrower's Inventory and Equipment and such Subsidiary's inventory and
equipment, to perform appraisals of Borrower's Equipment and each Subsidiary's
equipment, and to inspect, audit, check and make copies and/or extracts from the
books, records, computer data and records, computer programs, journals, orders,
receipts, correspondence and other data relating to Inventory, Accounts
Receivable, Contract Rights, General Intangibles, Equipment and any other
Collateral or Third Party Collateral, or relating to any other transactions
between the parties hereto. Borrower shall pay Lender an audit fee of $750 per
auditor per day in connection with each audit performed by Lender or its agents
and reimburse Lender for all out-of-pocket expenses incurred by Lender or its
agents in connection with any and all such inspections and/or audits, and Lender
may advance same to Borrower as a Revolving Loan. Notwithstanding the foregoing,
as
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long as no Event of Default or Unmatured Event of Default has occurred or is
continuing Borrower shall not be required to reimburse Lender for appraisals of
Borrower's Equipment or the equipment of its Subsidiaries more frequently than
once each Fiscal Year.
5.6 INSURANCE. Maintain, and cause each Subsidiary to maintain,
insurance to such extent and against such hazards and liabilities as is commonly
maintained by companies similarly situated or as Lender may reasonably request
from time to time. Keep the Collateral properly housed and insured for its full
insurable value against loss or damage by fire, theft, explosion, sprinklers,
collision (in the case of motor vehicles) and such other risks as are
customarily insured against by persons engaged in business similar to that of
Borrower, with such companies, in such amounts and under policies in such form
as shall be satisfactory to Lender. Certificates of such policies of insurance
have been delivered to Lender prior to the date hereof together with evidence of
payment of all premiums therefor. Borrower shall cause each issuer of an
insurance policy to provide Lender, prior to the Closing Date, with an
endorsement or an independent instrument (a) substantially in the form of
EXHIBIT B or such other form and containing such other terms as shall be
acceptable to Lender and (b) showing loss payable to Lender and, if required by
Lender, naming Lender as an additional insured. Borrower hereby directs all
insurers under such policies of insurance to pay all proceeds payable thereunder
directly to Lender. Borrower appoints Lender and any Person whom Lender may from
time to time designate (and all officers, employees or agents designated by
Lender or such Person) as Borrower's true and lawful attorney and agent-in-fact
with power (i) to make, settle and adjust claims in excess of $50,000 under such
policies of insurance, and endorse the name of Borrower on any check, draft,
instrument or other item of payment for the proceeds of such policies of
insurance, and (ii) after the occurrence of an Event of Default, to make all
determinations and decisions with respect to such policies of insurance. The
foregoing appointment and power, being coupled with an interest, is irrevocable
until all Liabilities under this Agreement are paid and performed in full and
this Agreement is terminated. In the event Borrower at any time or times
hereafter shall fail to obtain or maintain any of the policies of insurance
required herein or to pay any premium in whole or in part relating thereto, then
Lender, without waiving or releasing any obligation of or default by Borrower
hereunder, may at any time or times thereafter (but shall be under no obligation
to do so) obtain and maintain such policies of insurance and pay such premiums
and take any other action with respect thereto which Lender deems advisable. All
sums so disbursed by Lender, including reasonable Attorneys' Fees, court costs,
expenses and other charges relating thereto, shall be payable on demand by
Borrower to Lender, and Lender may, in its sole and absolute discretion, advance
such sums to Borrower as a Revolving Loan.
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5.7 INSURANCE SURVEY. Provide to Lender at least annually within ninety
(90) days of the end of Borrower's Fiscal Year, a certificate signed by its
chief financial officer that attests to and summarizes the property and casualty
insurance program carried by Borrower and its Subsidiaries. This summary shall
include the insurer's(s') name(s), policy number(s), expiration date(s),
amount(s) of coverage, type(s) of coverage, the annual premium(s), Best's
policyholder's and financial size ratings of the insurer(s), exclusions,
deductibles and self-insured retention and shall describe in detail any
retrospective rating plan, fronting arrangement or any other self-insurance or
risk assumption agreed to by Borrower or any Subsidiary or imposed upon Borrower
or any Subsidiary by any such insurer, as well as any self-insurance program
that is in effect. Borrower shall notify Lender in writing (a) at least twenty
(20) days prior to any cancellation or material change of any such insurance by
Borrower or any Subsidiary and (b) within five (5) business days after receipt
of any notice (whether formal or informal) of any cancellation or change in
any of its insurance by any of its insurers or any material change in the cost
thereof or which reduces the policyholder's or financial size ratings of the
insurance carriers of Borrower or any of its Subsidiaries, as established by
BEST'S INSURANCE REPORTS. Annually, Lender shall have the right to request
Borrower to have a risk management survey completed by a recognized independent
risk management consultant acceptable to it and Lender which will identify,
quantify and assess any catastrophic uninsured, underinsured or self-insured
exposures faced by Borrower and its Subsidiaries. The cost of such survey shall
be borne solely by Borrower. A copy of the results of each such a survey shall
be promptly delivered by Borrower to Lender.
5.8 REPAIR. Maintain, preserve and keep, and cause each Subsidiary to
maintain, preserve and keep, its properties in operating condition and repair,
ordinary wear and tear excepted, and from time to time make, and cause each
Subsidiary to make, all necessary and proper repairs, renewals, replacements,
additions, betterments and improvements thereto so that at all times the
efficiency thereof shall be fully preserved and maintained.
5.9 TAXES. Pay, and cause each Subsidiary to pay, when due, all of its
Taxes (including without limitation ninety percent (90%) of its estimated
Taxes), unless and only to the extent that Borrower or such Subsidiary is
contesting such Taxes in good faith and by appropriate proceedings and Borrower
or such Subsidiary has set aside on its books such reserves or other appropriate
provisions therefor as may be required by GAAP; not file a consolidated tax
return together with any other Person, unless consented to in writing by Lender;
and not change its Fiscal Year or tax year without Lender's prior written
consent.
5.10 COMPLIANCE. Comply, and cause each Subsidiary to comply, with all
statutes and governmental rules and regulations
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applicable to it (including without limitation all consumer credit statutes,
rules and regulations).
5.11 PENSION PLANS. Not permit, and not permit any Subsidiary to permit,
any condition to exist in connection with any Pension Plan which might
constitute grounds for the PBGC to institute proceedings to have such Pension
Plan terminated or a trustee appointed to administer such Pension Plan; not
fail, and not permit any Subsidiary to fail, to make a required contribution to
any Pension Plan if such failure is sufficient to give rise to a Lien under
Section 302(f) of ERISA; and not engage in, or permit to exist or occur, or
permit any of its Subsidiaries to engage in, or permit to exist or occur, any
other condition, event or transaction with respect to any Pension Plan which
could result in the incurrence by Borrower or any of its Subsidiaries of any
material liability, fine or penalty.
5.12 MERGER, PURCHASE AND SALE. Not, and not permit any Subsidiary to:
(a) be a party to any merger, liquidation or consolidation; (b) except for sales
or leases of Inventory in the normal course of its business, and except for
sales of Equipment permitted under SECTION 3.4(b), sell, transfer, convey, lease
or otherwise dispose of any of its assets; (c) sell or assign, with or without
recourse, any Accounts Receivable, Contract Rights, notes receivable or chattel
paper, except as provided in this Agreement; (d) purchase or otherwise acquire
all or a part of the assets or business of any Person outside the ordinary
course of business; or (e) open any new stores; provided that Borrower may
acquire stores and the assets and business of any Person or open new stores so
long as (i) after giving effect to such acquisition or opening, no Event of
Default exists, (ii) after giving effect to such acquisition or opening,
Borrower has availability for at least an additional $300,000 of Revolving Loans
(assuming all Trade Payables are current), (iii) the acquisition or opening
involves a business and/or assets related to Borrower's current line of
business, and (iv) the number of stores opened or acquired in any Fiscal Year of
Borrower does not exceed the number of stores projected to be opened during such
Fiscal Year as set forth on SCHEDULE 5.20.
5.13 RESTRICTED PAYMENTS. Not purchase or redeem any shares of its
stock, declare or pay any dividends thereon (other than stock dividends), make
any distribution to stockholders as such or set aside any funds for any such
purpose, and not prepay, purchase or redeem, and not permit any Subsidiary to
purchase, any subordinated Indebtedness of Borrower (including without
limitation any of the Subordinated Debt).
5.14 BORROWER'S AND SUBSIDIARIES' STOCK. Not permit any Subsidiary to
purchase or otherwise acquire any shares of the stock of Borrower, and not take
any action, or permit any Subsidiary to take any action, which will result in a
decrease in Borrower's or any Subsidiary's ownership interest in any Subsidiary.
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5.15 INDEBTEDNESS. Not, and not permit any Subsidiary to, incur or
permit to exist any Indebtedness (including but not limited to Indebtedness as
lessee under Capitalized Leases), except: (a) Indebtedness under the terms of
this Agreement; (b) other Indebtedness of Borrower having maturities and terms,
and which is subordinated to payment of the Liabilities in a manner, approved in
writing by Lender; (c) other Indebtedness outstanding on the date hereof and
listed on SCHEDULE 5.15; (d) Indebtedness hereafter incurred in connection with
Liens permitted under SECTION 5.16(d) and (e) other Indebtedness approved in
writing by Lender.
5.16 LIENS. Not, and not permit any Subsidiary to, create or permit to
exist any Lien with respect to any property, revenue or assets now owned or
hereafter acquired, except: (a) Liens for current Taxes not delinquent or Taxes
being contested in good faith and by appropriate proceedings and as to which
such reserves or other appropriate provisions as may be required by GAAP are
being maintained; (b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's, and other like statutory Liens arising in the ordinary course of
business securing obligations which are not overdue or which are being contested
in good faith and by appropriate proceedings and as to which such reserves or
other appropriate provisions as may be required by GAAP are being maintained;
(c) pledges or deposits in connection with workers' compensation, unemployment
insurance and other social security legislation; (d) Liens in connection with
the acquisition of Equipment after the date hereof by way of purchase money
mortgage, conditional sale or other title retention agreement, Capitalized Lease
or other deferred payment contract, and attaching only to the Equipment being
acquired, if (i) the Indebtedness secured thereby does not exceed seventy-five
percent (75%) of the fair market value of such Equipment at the time of the
acquisition thereof, (ii) the Indebtedness secured by any single piece of
Equipment does not exceed $35,000 and (iii) the aggregate outstanding amount of
such Indebtedness of Borrower and its Subsidiaries does not exceed $1,500,000;
(e) Liens in favor of Lender; (f) Liens referred to in SECTION 4.9 and (g) Liens
consented to in writing by Lender.
5.17 GUARANTIES. Not, and not permit any Subsidiary to, become or be a
guarantor or surety of, or otherwise become or be responsible in any manner
(whether by agreement to purchase any obligations, stock, assets, goods or
services, or to supply or advance any funds, assets, goods or services, or
otherwise) with respect to, any undertaking of any other Person, except for the
endorsement, in the ordinary course of collection, of instruments payable to it
or its order.
5.18 INVESTMENTS. Not, and not permit any Subsidiary to, make or permit
to exist any Investment in any Person, except for: (a) advances to employees of
Borrower or any of its Subsidiaries for travel or other ordinary business
expenses provided that the aggregate amount outstanding at any one time shall
not exceed $10,000 for any single employee and $50,000 in the aggregate for
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all employees; (b) advances to subcontractors and suppliers in maximum aggregate
amounts reasonably acceptable to Lender but in any event not exceeding an
aggregate outstanding amount of $50,000; (c) extensions of credit in the nature
of Accounts Receivable or notes receivable arising from the sale or lease of
goods and in the ordinary course of business; (d) shares of stock, obligations
or other securities received in settlement of claims arising in the ordinary
course of business; (e) Investments (other than Investments in the nature of
loans or advances) outstanding on the date hereof in Subsidiaries by Borrower
and other Subsidiaries; (f) Investments in the nature of loans and advances
constituting Indebtedness of Subsidiaries to Borrower and to other Subsidiaries
outstanding on the date hereof and listed on SCHEDULE 5.18; (g) other
Investments outstanding on the date hereof and listed on SCHEDULE 5.18 and (h)
other Investments consented to by Lender in writing.
5.19 SUBSIDIARIES. Not, and not permit any Subsidiary to, acquire any
stock or similar interest in any Person, and not create, establish or acquire
any Subsidiaries other than those existing on the date of this Agreement.
5.20 OPERATING LEASES. Not enter into or permit to exist, or permit any
Subsidiary to enter into or permit to exist, any arrangements for the leasing by
Borrower or such Subsidiary, as lessee under a lease which is not a Capitalized
Lease, of any real or personal property (or any interest therein) other than
under leases in existence on the date hereof and listed on SCHEDULE 4.15 or
other leases to which Lender has consented in writing; provided, that nothing
contained in this SECTION 5.20 shall prohibit Borrower from renegotiating any
leases and Borrower may enter into leases for the stores projected to be opened
during the term of this Agreement as described on SCHEDULE 5.20.
5.21 CHANGE IN ACCOUNTS RECEIVABLE. After the occurrence of an Event of
Default or Unmatured Event of Default, not permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account Receivable, including any of the terms
relating thereto.
5.22 FUTURE ENVIRONMENTAL ASSESSMENTS. Lender may cause an environmental
assessment of Borrower to be conducted because of non-compliance by Borrower
with Environmental Laws, and Borrower shall pay upon demand all costs and
expenses (including Attorney's Fees) connected with such assessment. Borrower
shall provide such information and certifications which Lender may reasonably
request from time to time pertaining to such environmental assessment. Lender,
may, in its discretion, provide for the payment of any amount due from Borrower
under this SECTION 5.22 by making Borrower a Revolving Loan. Nothing in this
SECTION 5.22, and no actions taken by Lender pursuant thereto, shall give, or be
construed as controlling or giving, to Lender the right or obligation to direct
or control the conduct or action or inaction of Borrower or any
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Subsidiary with respect to any environmental matters, including but not limited
to those pertaining to compliance with any Environmental Laws.
5.23 RELATED AGREEMENTS. Not enter into, or permit any Subsidiary to
enter into, any agreement containing any provision which would be violated or
breached by the performance by Borrower or such Subsidiary of its obligations
hereunder or under any Related Agreement or any instrument or document delivered
or to be delivered by Borrower or such Subsidiary in connection herewith.
5.24 UNCONDITIONAL PURCHASE OPTIONS. Not enter into or be a party to, or
permit any Subsidiary to enter into or be a party to any contract for the
purchase of materials, supplies or other property or services, if such contract
requires that payment be made by it regardless of whether or not delivery is
ever made of such materials, supplies or other property or services.
5.25 USE OF PROCEEDS. Not use or permit any proceeds of the Loans to be
used, either directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of "purchasing or carrying" any Margin Stock, and
furnish to Lender upon request, a statement in conformity with the requirements
of Federal Reserve Form U-1 referred to in Regulation U of the Board of
Governors of the Federal Reserve System.
5.26 TRANSACTIONS WITH RELATED PARTIES. Not, and not permit any
Subsidiary to, (a) pay any management, consulting or similar fees to any Related
Party, whether for services rendered to Borrower or any Subsidiary, or otherwise
or (b) enter into or be a party to any other transaction or arrangement,
including without limitation the purchase, sale, lease or exchange of property
or the rendering of any service, with any Related Party, except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
Borrower or such Subsidiary than would obtain in a comparable arm's-length
transaction with a Person not a Related Party.
6. DEFAULT.
6.1 EVENT OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
(a) NON-PAYMENT. Default in the payment, when due or declared due, of
any of the Liabilities.
(b) NON-PAYMENT OF OTHER INDEBTEDNESS. Default in the payment when due,
whether by acceleration or otherwise (subject to any applicable grace period),
of aggregate Indebtedness in excess of $50,000 of, or guaranteed by, Borrower
(other than any Indebtedness under this Agreement and any Notes).
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(c) ACCELERATION OF OTHER INDEBTEDNESS. Any event or condition shall
occur which results in the acceleration of the maturity of aggregate
Indebtedness in excess of $50,000 of, or guaranteed by, Borrower (other than the
Indebtedness under this Agreement and any Notes) or enables the holder or
holders of such other Indebtedness or any trustee or agent for such holders (any
required notice of default having been given and any applicable grace period
having expired) to accelerate the maturity of such other Indebtedness.
(d) OTHER OBLIGATIONS. Default in the payment when due, whether by
acceleration or otherwise, or in the performance or observance (subject to any
applicable grace period or waiver of such default) of (i) any obligation or
agreement of Borrower to or with Lender (other than any obligation or agreement
of Borrower hereunder and under any Notes) or (ii) any material obligation or
agreement of Borrower to or with any other Person (other than (x) any such
material obligation or agreement constituting or related to Indebtedness and (y)
Trade Accounts Payable except to the extent that the existence of any such
default is being contested by Borrower in good faith and by appropriate
proceedings and Borrower shall have set aside on its books such reserves or
other appropriate provisions therefor as may be required by GAAP.
(e) INSOLVENCY. Borrower or any other Obligor becomes insolvent, or
generally fails to pay, or admits in writing its inability to pay, its debts as
they mature, or applies for, consents to, or acquiesces in the appointment of a
trustee, receiver or other custodian for Borrower or such other Obligor, or for
a substantial part of the property of Borrower or such other Obligor, or makes a
general assignment for the benefit of creditors; or, in the absence of such
application, consent or acquiescence, a trustee, receiver or other custodian is
appointed for Borrower or any other Obligor, or for a substantial part of the
property of Borrower or any other Obligor and is not discharged or dismissed
within thirty (30) days; or any bankruptcy, reorganization, debt arrangement or
other proceeding under any bankruptcy or insolvency law, or any dissolution or
liquidation proceeding, is instituted by or against Borrower or any other
Obligor; or any warrant of attachment or similar legal process is issued against
any substantial part of the property of Borrower or any other Obligor.
(f) ERISA LIABILITIES. Any of the following events shall have occurred,
if such event would have a material adverse effect on Borrower: (i) the
existence of a Reportable Event, (ii) the withdrawal of Borrower or any ERISA
Affiliate from a Pension Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a) (2) of ERISA, (iii) the occurrence of an
obligation to provide affected parties with a written notice of intent to
terminate a Pension Plan in a distress termination under Section 4041 of ERISA,
(iv) the institution by PBGC of proceedings to terminate any Pension Plan, (v)
any event or condition which
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would require the appointment of a trustee to administer a Pension
Plan, (vi) the withdrawal of Borrower or any ERISA Affiliate from
a Multiemployer Plan, and (vii) any event that would give rise to
a Lien under Section 302(f) of ERISA.
(g) NON-COMPLIANCE WITH THIS AGREEMENT. Default in the performance of
any of Borrower's agreements set forth in SECTION 2, 3.2, 3.3, 3.4, 5.3, 5.5,
5.6, 5.9, 5.12 through 5.26 or SUPPLEMENT A (and not constituting an Event of
Default under any of the other subsections of this SECTION 6.1), and continuance
of such default after notice thereof to Borrower from Lender; or default in the
performance of any of Borrower's agreements set forth in SECTION 5.1.1, 5.1.2,
5.1.3, 5.1.4, 5.1.5 or 5.2 (and not constituting an Event of Default under any
of the other subsections of this SECTION 6.1), and continuance of such default
for three (3) days after notice thereof to Borrower from Lender; or default in
the performance of any of Borrower's other agreements herein set forth (and not
constituting an Event of Default under any of the other subsections of this
SECTION 6.1), and continuance of such default for thirty (30) days after notice
thereof to Borrower from Lender.
(h) NON-COMPLIANCE WITH RELATED AGREEMENTS. Default in the performance
by Borrower or any other Obligor of any of its agreements set forth in any
Related Agreement (and not constituting an Event of Default under any of the
other subsections of this SECTION 6.1), and continuance of such default after
notice from Lender and the expiration of the grace period (if any) set forth
therein.
(i) REPRESENTATIONS AND WARRANTIES. Any representation or warranty made
by Borrower or any other Obligor herein or in any Related Agreement is untrue or
misleading in any material respect when made or deemed made; or any schedule,
statement, report, notice, certificate or other writing furnished by Borrower or
any other Obligor to Lender is untrue or misleading in any material respect on
the date as of which the facts set forth therein are stated or certified; or any
certification made or deemed made by Borrower or any other Obligor to Lender is
untrue or misleading in any material respect on or as of the date made or deemed
made.
(j) LITIGATION. There shall be entered against Borrower, one or more
judgments or decrees in excess of $50,000 in the aggregate at any one time
outstanding, excluding those judgments or decrees (i) that shall have been
outstanding less than thirty (30) calendar days from the entry thereof or (ii)
for and to the extent which Borrower is insured and with respect to which the
insurer has assumed responsibility in writing or for and to the extent which
Borrower is otherwise indemnified if the terms of such indemnification are
satisfactory to Lender.
(k) DEATH OF OBLIGOR. If any natural person who is an Obligor, partner
in a partnership Obligor, or owner of a material interest in a corporate
Obligor, shall die or be declared legally
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incompetent and Borrower does not replace such Obligor with another
Person acceptable to Lender in its reasonable discretion within 90
days of such death or declaration of legal incompetence.
(1) VALIDITY. If the validity or enforceability of this Agreement or any
other Related Agreement shall be challenged by Borrower, any other Obligor or
any other Person, or shall fail to remain in full force and effect.
(m) CONDUCT OF BUSINESS. If Borrower is enjoined, restrained or in any
way prevented by court order, which has not been dissolved or stayed within five
(5) business days, from conducting all or any material part of its business
affairs.
(n) OWNERSHIP. If Wayland Russell and Jason Alford fail to own ninety
percent (90%) of the voting stock of Borrower.
(o) MATERIAL ADVERSE CHANGE. Lender shall have determined in good faith
that (i) a material adverse change has occurred in the business, operations or
financial condition of Borrower, (ii) Lender's interest in any material
Collateral or Third Party Collateral has been adversely affected or impaired, or
the value thereof to Lender has been diminished to a material extent or (iii)
the prospect of payment or performance of any obligation or agreement of
Borrower or any other Obligor hereunder or under any Related Agreement is
materially impaired, and the condition giving rise to such determination does
not constitute an Event of Default under any of the other subsections of this
Section 6.1 and continues to exist after notice of such determination by Lender
to Borrower.
6.2 EFFECT OF EVENT OF DEFAULT; REMEDIES.
(a) In the event that one or more Events of Default described in SECTION
6.1(e) shall occur, then Lender's commitment and the Credit extended under this
Agreement shall terminate and all Liabilities hereunder and under any Notes
shall be immediately due and payable without demand, notice or declaration of
any kind whatsoever.
(b) In the event an Event of Default other than one described in SECTION
6.1(e) shall occur, then Lender's commitment shall terminate and Lender may
declare all Liabilities hereunder and under any Notes immediately due and
payable without demand or notice of any kind whatsoever, whereupon the Credit
extended under this Agreement shall terminate and all Liabilities hereunder and
under any Notes shall be immediately due and payable. Lender shall promptly
advise Borrower of any such declaration, but failure to do so shall not impair
the effect of such declaration.
(c) In the event of the occurrence of any Event of Default Lender may
exercise any one or more or all of the following remedies, all of which are
cumulative and non-exclusive:
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(i) Any remedy contained in this Agreement or in any of the
Related Agreements or any Supplemental Documentation;
(ii) Any rights and remedies available to Lender under the UCC,
and any other applicable law;
(iii) To the extent permitted by applicable law, Lender may,
without notice, demand or legal process of any kind, take possession of
any or all of the Collateral (in addition to Collateral which it may
already have in its possession), wherever it may be found, and for that
purpose may pursue the same wherever it may be found, and may enter into
any premises where any of the Collateral may be or is supposed to be,
and search for, take possession of, remove, keep and store any of the
Collateral until the same shall be sold or otherwise disposed of, and
Lender shall have the right to store the same in any of Borrower's
premises without cost to Lender;
(iv) At Lender's request, Borrower will, at Borrower's
expense, assemble the Collateral and make it available to Lender at a
place or places to be designated by Lender which is reasonably
convenient to Lender and Borrower; and
(v) Lender at its option, and pursuant to notification given
to Borrower as provided for below, may sell any Collateral actually or
constructively in its possession at public or private sale and apply
the proceeds thereof as provided below.
7. ADDITIONAL PROVISIONS REGARDING COLLATERAL AND LENDER'S RIGHTS.
7.1 NOTICE OF DISPOSITION OF COLLATERAL. Any notification of intended
disposition of any of the Collateral required by law shall be deemed reasonably
and properly given if given at least five (5) calendar days before such
disposition.
7.2 APPLICATION OF PROCEEDS OF COLLATERAL. Any proceeds of any
disposition by Lender of any of the Collateral may be applied by Lender to the
payment of expenses in connection with the taking possession of, storing,
preparing for sale, and disposition of Collateral, including Attorneys' Fees and
legal expenses, and any balance of such proceeds may be applied by Lender toward
the payment of such of the Liabilities, and in such order of application, as
Lender may from time to time elect.
7.3 CARE OF COLLATERAL. Lender shall be deemed to have exercised
reasonable care in the custody and preservation of any Collateral in its
possession if it takes such action for that purpose as Borrower requests in
writing, but failure of Lender to
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comply with such request shall not, of itself, be deemed a failure to exercise
reasonable care, and no failure of Lender to preserve or protect any rights with
respect to such Collateral against prior parties, or to do any act with respect
to the preservation of such Collateral not so requested by Borrower, shall be
deemed a failure to exercise reasonable care in the custody or preservation of
such Collateral.
7.4 PERFORMANCE OF BORROWER'S OBLIGATIONS. Lender shall have the right
upon notice, but shall not be obligated, to discharge any claims against or
Liens, and any Taxes at any time levied or placed upon any or all Collateral,
including without limitation those arising under statute or in favor of
landlords, taxing authorities, government, public and/or private warehousemen,
common and/or private carriers, processors, finishers, draymen, coopers, dryers,
mechanics, artisans, laborers, attorneys, courts, or others. Lender may also pay
for maintenance and preservation of Collateral. Lender may, but is not obligated
to, perform or fulfill any of Borrower's responsibilities under this Agreement
which Borrower has failed to perform or fulfill. Lender may advance to Borrower
as a Revolving Loan any payment made or expense incurred by Lender under this
SECTION 7.4.
7.5 LENDER'S RIGHTS. None of the following shall affect the obligations
of Borrower to Lender under this Agreement or Lender's right with respect to the
remaining Collateral or any Third Party Collateral (any or all of which actions
may be taken by Lender at any time, whether before or after an Event of Default,
at its sole and absolute discretion and without notice to Borrower):
(a) acceptance or retention by Lender of other property or
interests in property as security for the Liabilities, or acceptance or
retention of any Obligor(s), in addition to Borrower, with respect to
any of the Liabilities;
(b) release of its Lien on, or surrender or release of, or the
substitution or exchange of or for, all or any part of the Collateral or
any Third Party Collateral or any other property securing any of the
Liabilities (including but not limited to any property of any Obligor
other than Borrower), or any extension or renewal for one or more
periods (whether or not longer than the original period), or release,
compromise, alteration or exchange, of any obligations of any guarantor
or other Obligor with respect to any Collateral or any such property;
(c) extension or renewal for one or more periods (whether or not
longer than the original period), or release, compromise, alteration or
exchange of any of the Liabilities, or release or compromise of any
obligation of any Obligor with respect to any of the liabilities; or
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(d) failure by Lender to resort to other security or pursue any
Person liable for any of the Liabilities before resorting to the
Collateral.
8. CONDITIONS PRECEDENT; DELIVERY OF DOCUMENTS AND OTHER MATTERS.
8.1 CONDITIONS PRECEDENT TO INITIAL REVOLVING LOANS AND LETTERS OF
CREDIT. The obligation of Lender to make the initial Revolving Loans and issue
the initial Letters of Credit is subject to satisfaction of the following
conditions precedent (in addition to those provided in SECTION 8.2):
8.1.1 AUDIT. Lender shall have completed its due diligence audit of the
business, operations and assets of Borrower and each other Obligor, the results
of which shall provide Lender with results and information which, in Lender's
sole determination, are satisfactory to permit Lender to enter into the secured
financing transaction described in this Agreement and the Related Agreements.
Lender's due diligence examination may include but need not be limited to (a) a
final field examination of Borrower's and each other Obligor's books and
records, (b) a physical audit and inspection of Borrower's and each other
Obligor's real and personal property, (c) an analysis of all of Borrower's and
each other Obligor's contingent liabilities, including but not limited to those
pertaining to environmental and health and safety matters, union contracts,
employee benefit plans and pending or threatened litigation, (d) a review of
such fair market value and/or liquidation value appraisals of the assets of
Borrower and each other Obligor as Lender shall determine to be necessary, in
each case prepared by independent appraisers and using such assumptions and
methods of analysis as Lender shall determine to be acceptable, (e) a review of
Borrower's and each other Obligor's current financial condition and the pro
forma financial condition of Borrower and each other Obligor, and (f) a review
of Borrower's and each other Obligor's business plan and projections, including
without limitation projected cash flow statements and statements of earnings.
8.1.2 SECURITY INTEREST. The security interest in the Collateral granted
under this Agreement and the Related Agreements, and in any Third Party
Collateral, and all other Liens granted to Lender to secure the Liabilities,
shall be a senior, perfected Lien except as otherwise agreed by Lender, and all
financing statements and other documents relating to Collateral and Third Party
Collateral shall have been filed or recorded, as appropriate.
8.1.3 SOLVENCY. Lender shall be satisfied that Borrower shall have
sufficient assets (excluding goodwill and other intangible assets not capable of
valuation) having a value, both at present fair salable value and at fair
valuation, greater than the amount of Borrower's liabilities (including trade
debt and Indebtedness to Lender). Lender shall be satisfied that all of the
assets supporting Lender's Loans and Letters of Credit under this
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Agreement shall be sufficient in value to provide Borrower with sufficient cash
flow and working capital to enable it to profitably operate its business and to
meet its obligations as they become due.
8.1.4 LOAN AVAILABILITY. Immediately after making the initial Revolving
Loans and issuing the initial Letters of Credit and the payment of all amounts
required to be paid on the Closing Date, Borrower shall, under the terms and
conditions of the Agreement, have availability for at least an additional
$250,000 of Revolving Loans.
8.1.5 BLOCKED ACCOUNT; LOCK BOX. Borrower shall have entered into
blocked account and/or lock box agreements with Lender for the collection and
remittance to Lender of cash proceeds of Collateral.
8.1.6 EFFECT OF LAW. No law or regulation affecting Lender's entering
into the secured financing transaction contemplated by this Agreement shall
impose upon Lender any material obligation, fee, liability, loss, penalty, cost,
expense or damage.
8.1.7 EXHIBITS; SCHEDULES. All Exhibits and Schedules to this Agreement
shall have been completed and submitted to Lender, shall be in form and
substance satisfactory to Lender and shall contain no facts or information which
Lender, in its sole judgment, determines to be unacceptable.
8.1.8 LICENSES. PERMITS AND CONSENTS. All licenses, permits, consents,
judicial and regulatory approvals and corporate action necessary to consummate
the transactions contemplated by this Agreement shall have been obtained on
terms acceptable to Lender.
8.1.9 FEES. If not funded with the proceeds of the initial Revolving
Loans, Lender shall have received the closing fee referred to in SECTION 2.14
and any other fees due and payable by Borrower or any other Person on the
funding of the initial Loans.
8.1.10 TITLE TO ASSETS. Borrower shall have good, indefeasible and
merchantable title to the Collateral, free and clear of all Liens, except as
otherwise permitted in SECTION 5.16 hereof, all financing statements or other
documents relating to any such Collateral shall have been filed or recorded, as
appropriate, and the priority of Lender's Liens on the Collateral shall be
supported by such agreements as Lender shall request.
8.1.11 MATERIAL ADVERSE CHANGE; LITIGATION. No material adverse change,
as determined by Lender, in the condition or operations (financial or otherwise)
of Borrower or any other Obligor, shall have occurred from December 31, 1991
through the time of the making of the initial Revolving Loans and the issuance
of the initial Letters of Credit and no material adverse change as
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determined by Lender, shall have occurred in the facts and information disclosed
to Lender or otherwise relied upon by Lender in making its decision to enter
into this Agreement and Lender shall not have become newly aware of any material
adverse facts or information, as determined by Lender, with respect to Borrower
or any other Obligor or the business, operations or prospects of Borrower or any
other Obligor. In addition, there shall not have been instituted or threatened
any litigation or proceedings in any court or administrative forum affecting or
threatened to affect Borrower or any other Obligor, which may materially
adversely affect Borrower or any other Obligor, in each case as determined by
Lender.
8.1.12 DOCUMENTS. Lender shall have received all of the following, each
duly executed where appropriate and dated as of the date of the initial
Revolving Loan (or such other date as shall be satisfactory to Lender), in form,
and containing terms and provisions, acceptable to Lender:
(a) BORROWER RESOLUTIONS. A copy, duly certified by the
secretary or an assistant secretary of Borrower of (i) resolutions of
the Board of Directors of Borrower authorizing (A) the borrowings by
Borrower hereunder, (B) the execution, delivery and performance by
Borrower of this Agreement and each Related Agreement to which Borrower
is a party or by which it is bound, and (C) certain officers or
employees of Borrower to request borrowings by telephone and to execute
Borrowing Base Certificates, and the consent of the shareholders of
Borrower thereto, (ii) all documents evidencing any other necessary
corporate action with respect to this Agreement and the Related
Agreements, (iii) all approvals or consents, if any, with respect to
this Agreement and the Related Agreements, (iv) a list of the names of
all officers and directors of Borrower, together with the true
signatures of such officers and directors, and specifying those
authorized to sign this Agreement and the Related Agreements, (v) the
by-laws of Borrower, (vi) the Articles of Incorporation of Borrower and
(vii) a list of all shareholders of Borrower and the number of shares of
Borrower's stock owned by each;
(b) BORROWER'S CLOSING CERTIFICATE. The certificate of the
President or Chairman of the Board of Borrower certifying to the
fulfillment of all conditions precedent to closing and funding the
secured financing transaction contemplated by this Agreement and to the
truth and accuracy, as of such date, of the representations and
warranties of Borrower contained in this Agreement and each Related
Agreement to which Borrower is a party or by which it is bound and the
absence or any defaults under any such agreements;
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(c) ACCOUNTANT'S LETTER. With respect to the financial
statements referred to in SECTION 4.6, a "reliance letter" from the
accountants who prepared such statements in form and content acceptable
to Lender;
(d) BORROWER'S ARTICLES OF INCORPORATION. A copy, duly certified
by the Secretary of State of Ohio, of Borrower's Articles of
Incorporation;
(e) BORROWER'S REGISTRATION; GOOD STANDING. A copy, duly
certified by the applicable Secretary of State of (i) a certificate of
good standing issued by the Secretary of the State of Ohio and each
other state where Borrower is qualified to do business or where, because
of the nature of its business or properties, qualification to do
business is required, (ii) a certificate of qualification, registration
to do business or other documents required to be filed by Borrower to
qualify to do business in each state referred to in CLAUSE (i), and
(iii) in any state in which Borrower is doing business under an assumed
name, a certificate or other document issued by the Secretary of State
of each such state evidencing Borrower's authority to use such name;
(f) LEGAL OPINION. Legal opinion from counsel for Borrower;
(g) INSURANCE. Evidence satisfactory to Lender of the existence
of insurance on the Collateral, Third Party Collateral and business of
Borrower in amounts and with insurers acceptable to Lender, together
with evidence establishing that Lender is named as a loss payee with
respect to property and casualty insurance, collateral assignee with
respect to business interruption insurance and additional insured with
respect to liability insurance;
(h) AUTHORIZATION TO PAY PROCEEDS. Written authorization and
instructions from Borrower, in form satisfactory to Lender, for
disbursement of the proceeds of the initial Revolving Loans and issuance
and delivery of the initial Letters of Credit;
(i) TRADEMARK SECURITY AGREEMENT. The Trademark Security
Agreement;
(j) GUARANTIES. Guaranties, duly executed by each of Wayland
Russell and Jason Alford, and their wives; and
(k) OTHER DOCUMENTS. Such other documents as Lender shall
determine to be necessary or desirable.
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8.1.13 DEFAULT. No Event of Default or Unmatured Event of Default shall
have occurred and be continuing or would be caused thereby.
8.2 CONTINUING CONDITIONS PRECEDENT TO ALL LOANS; CERTIFICATION. The
obligation of Lender to make the initial Revolving Loans and each subsequent
Loan and issue the initial Letters of Credit and each subsequent Letter of
Credit, is subject to satisfaction of the following conditions precedent in
addition to those provided in SECTION 8.1:
(a) NO CHANGE IN CONDITION. No change in the condition or
operations, financial or otherwise, of Borrower, any Subsidiary or any
other Obligor, shall have occurred which change, in the reasonable
credit judgment of Lender, may have a material adverse effect on
Borrower, any Subsidiary or any other Obligor, or on any Collateral or
Third Party Collateral;
(b) DEFAULT. Before and after giving effect to such Loan and/or
Letter of Credit, no Event of Default or Unmatured Event of Default
shall have occurred and be continuing;
(c) INSURANCE. There shall have been no material change, or
notice of prospective material change (whether such notice is formal or
informal), in the nature, extent, scope or cost of the insurance
policies of Borrower or any Subsidiary listed on SCHEDULE 4.7 which
change would have a material adverse effect on the financial condition
of Borrower, any Subsidiary or Borrower and its Subsidiaries taken as a
whole, or would significantly adversely affect Borrower's ability to
perform its obligations under this Agreement, any Note(s), or any
Related Agreement to which it is a party or by which it is bound;
(d) REPRESENTATIONS AND WARRANTIES. Before and after giving
effect to such Loan and/or Letter of Credit, the representations and
warranties in SECTION 4 shall be true and correct as though made on the
date of such Loan and/or Letter of Credit, except for such changes as
are specifically permitted hereunder;
(e) NO MATERIAL TRANSACTION. None of Borrower, and Subsidiary,
any other Obligor or any Related Party shall have entered into any
material (as determined by Lender) commitment or transaction, including
without limitation transactions for borrowings and capital expenditures,
which are not in the ordinary course of their respective businesses; and
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(f) ACCOUNTING METHODS. Borrower shall not have made any
material (as determined by Lender) change in its accounting methods or
principles except as required by GAAP.
Each request for a Loan or a Letter of Credit hereunder made or deemed to have
been made by Borrower shall be deemed to be a certificate of Borrower as to the
matters set out in the foregoing provisions of this SECTION 8.2.
9. INDEMNITY.
9.1 ENVIRONMENTAL AND SAFETY AND HEALTH INDEMNITY. Borrower hereby
indemnifies Lender and agrees to hold Lender harmless from and against any and
all losses, liabilities, damages, injuries, costs, expenses and claims of any
and every kind whatsoever (including without limitation court costs and
Attorneys' Fees) which at any time or from time to time may be paid, incurred or
suffered by, or asserted against, Lender for, with respect to, or as a direct or
indirect result of the violation by Borrower or any of its Subsidiaries of any
Environmental Law or Occupational Safety and Health Law, or with respect to, or
as a direct or indirect result of (a) the presence on or under, or the escape,
seepage, leakage, spillage, disposal, discharge, emission or release from,
properties utilized by Borrower and/or any Subsidiary in the conduct of its
business into or upon any land, the atmosphere, or any watercourse, body of
water or wetland, of any Hazardous Material or other hazardous, toxic or
dangerous waste, substance or constituent, or other substance (including without
limitation any losses, liabilities, damages, injuries, costs, expenses or claims
asserted or arising under any Environmental Law) or (b) the existence of any
unsafe or unhealthful condition on or at any premises utilized by Borrower
and/or any Subsidiary in the conduct of its business. The provisions of and
undertakings and indemnification set out in this SECTION 9.1 shall survive
satisfaction and payment of the Liabilities and termination of this Agreement.
9.2 GENERAL INDEMNITY. In addition to the payment of expenses pursuant
to SECTION 11.3, whether or not the transactions contemplated hereby shall be
consummated, Borrower agrees to indemnify, pay and hold Lender and any holder of
any Notes, and the officers, directors, employees, agents, and affiliates of
Lender and such holders (collectively, the "Indemnitees") harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever (including without limitation the reasonable fees and
disbursements of counsel for any of such Indemnitees in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not any of such Indemnitees shall be designated a party thereto) that
may be imposed on, incurred by, or asserted against any Indemnitee, in any
manner relating to or
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arising out of this Agreement, any Related Agreement or any other agreements
executed and delivered by Borrower or any other Obligor in connection herewith,
the statements contained in any commitment letter delivered by Lender, Lender's
agreement to make the Loans or to issue Letters of Credit hereunder, the use or
intended use of any Letters of Credit, or the use or intended use of the
proceeds of any of the Loans hereunder (the "indemnified liabilities"); PROVIDED
that Borrower shall have no obligation to an Indemnitee hereunder with respect
to indemnified liabilities arising from the gross negligence or willful
misconduct of such Indemnitee. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in the preceding sentence may be unenforceable
because it violates any law or public policy, Borrower shall contribute the
maximum portion that it is permitted to pay under applicable law to the payment
and satisfaction of all indemnified liabilities incurred by the Indemnitees or
any of them. The provisions of the undertakings and indemnification set out in
this SECTION 9.2 shall survive satisfaction and payment of the Liabilities and
termination of this Agreement.
9.3 CAPITAL ADEQUACY. If Lender shall reasonably determine that the
application or adoption of any law, rule, regulation, directive, interpretation,
treaty or guideline regarding capital adequacy, or any change therein or in the
interpretation or administration thereof, whether or not having the force or law
(including without limitation application of changes to Regulation H and
Regulation Y of the Federal Reserve Board issued by the Federal Reserve Board on
January 19, 1989 and regulations of the Comptroller of the Currency, Department
of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller of the
Currency on January 27, 1989) increases the amount of capital required or
expected to be maintained by Lender or any Person controlling Lender in excess
of any such increases affecting Lender as of the date hereof, and such increase
is based upon the existence of Lender's obligations hereunder and other
commitments of this type, then from time to time, within sixty (60) days after
demand from Lender, Borrower shall pay to Lender such amount or amounts as will
compensate Lender or such controlling Person, as the case may be, for such
increased capital requirement. The determination of any amount to be paid by
Borrower under this SECTION 9.3 shall take into consideration the policies of
Lender or any Person controlling Lender with respect to capital adequacy and
shall be based upon any reasonable averaging, attribution and allocation
methods. A certificate of Lender setting forth the amount or amounts as shall be
necessary to compensate Lender as specified in this SECTION 9.3 shall be
delivered to Borrower and shall be conclusive in the absence of manifest error.
10. ADDITIONAL PROVISIONS.
Additional provisions are set forth in SUPPLEMENT A.
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11. GENERAL.
11.1 BORROWER WAIVER. Except as otherwise provided for in this
Agreement, Borrower waives (a) presentment, demand and protest and notice of
presentment, protest, default, non-payment, maturity, release, compromise,
settlement, one or more extensions or renewals of any or all commercial paper,
accounts, contract rights, documents, instruments, chattel paper and guaranties
at any time held by Lender on which Borrower may in any way be liable and hereby
ratifies and confirms whatever Lender may do in this regard; (b) all rights to
notice and a hearing prior to Lender's taking possession or control of, or
Lender's relevy, attachment or levy on or of, the Collateral or any bond or
security which might be required by any court prior to allowing Lender to
exercise any of Lender's remedies and (c) the benefit of all valuation,
appraisement and exemption laws. Borrower acknowledges that it has been
advised by counsel of its choice with respect to this Agreement and the
transactions evidenced by this Agreement.
11.2 POWER OF ATTORNEY. Borrower appoints Lender, or any
Person whom Lender may from time to time designate, as Borrower's
attorney and agent-in-fact with power (which appointment and power,
being coupled with an interest, is irrevocable until all Liabilities under
this Agreement are paid and performed in full and this
Agreement is terminated), without notice to Borrower, to:
(a) At such time or times hereafter as Lender or said agent, in
its sole and absolute discretion, may determine in Borrower's or
Lender's name (i) after the occurrence of an Event of Default, endorse
Borrower's name on any checks, notes, drafts or any other items of
payment relating to and/or proceeds of the Collateral which come into
the possession of Lender or under Lender's control and apply such
payment or proceeds to the Liabilities; (ii) after the occurrence of an
Event of Default, endorse Borrower's name on any chattel paper,
document, instrument, invoice, freight bill, bill of lading or similar
document or agreement in Lender's possession relating to Accounts
Receivable, Inventory or any other Collateral; (iii) use the information
recorded on or contained in any data processing equipment and computer
hardware and software to which Borrower has access relating to Accounts
Receivable, Inventory and/or other Collateral; (iv) use Borrower's
stationery and sign the name of Borrower to verification of Accounts
Receivable and notices thereof to Account Debtors and (v) if not done by
Borrower, do all acts and things determined by Lender to be necessary,
to fulfill Borrower's obligations under this Agreement; and
(b) At such time or times after the occurrence of an Event of
Default, as Lender or said agent, in its sole and absolute discretion,
may determine, in Borrower's or
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Lender's name: (i) demand payment of the Accounts Receivable; (ii)
enforce payment of the Accounts Receivable, by legal proceedings or
otherwise; (iii) exercise all of Borrower's rights and remedies with
respect to the collection of the Accounts Receivable and other
Collateral; (iv) settle, adjust, compromise, extend or renew the
Accounts Receivable; (v) settle, adjust or compromise any legal
proceedings brought to collect the Accounts Receivable; (vi) if
permitted by applicable law, sell or assign the Accounts Receivable
and/or other Collateral upon such terms for such amounts and at such
time or times as Lender may deem advisable; (vii) discharge and release
the Accounts Receivable and/or other Collateral; (viii) prepare, file
and sign Borrower's name on any proof of claim in bankruptcy or similar
document against any Account Debtor; (ix) prepare, file and sign
Borrower's name on any notice of lien, assignment or satisfaction of
lien or similar document in connection with the Accounts Receivable
and/or other Collateral and (x) do all acts and things necessary, in
Lender's sole and absolute discretion, to obtain repayment of the
Liabilities and to fulfill Borrower's other obligations under this
Agreement.
11.3 EXPENSES; ATTORNEY'S FEES. Borrower agrees, whether or not any Loan
is made or Letter of Credit is issued hereunder, to pay upon demand all
Attorneys' Fees and all other reasonable expenses incurred by Lender in
connection with (a) the preparation, negotiation and execution of this
Agreement, any Related Agreement and any document required to be furnished in
connection herewith or therewith, (b) the preparation of any and all amendments
to this Agreement or any of the Related Agreements and all other instruments
or documents provided for therein or delivered or to be delivered thereunder or
in connection therewith, (c) the collection or enforcement of Borrower's or any
other Obligor's obligations hereunder or under any Related Agreement and (d) the
collection or enforcement of any of Lender's rights in or to any Collateral or
Third Party Collateral. Lender may advance all such amounts to Borrower as a
Revolving Loan. Borrower also agrees (y) to indemnify and hold Lender harmless
from any loss or expense which may arise or be created by the acceptance of
telephonic or other instructions for making Loans and (z) to pay, and save
Lender harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Agreement, or any
Related Agreement or Supplemental Documentation, or the issuance of any Note or
of any other instruments or documents provided for herein or to be delivered
hereunder or in connection herewith. Borrower's foregoing obligations shall
survive any termination of this Agreement.
11.4 LENDER FEES AND CHARGES. Borrower agrees to pay Lender on demand
the customary fees and charges of Lender for maintenance of accounts with Lender
or for providing other services
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<PAGE> 63
to Borrower. Lender may, in its sole and absolute discretion,
provide for such payment by advancing the amount thereof to
Borrower as a Revolving Loan.
11.5 LAWFUL INTEREST. In no contingency or event whatsoever shall the
interest rate charged pursuant to the terms of this Agreement exceed the highest
rate permissible under any law which a court of competent jurisdiction shall, in
a final determination, deem applicable hereto. In the event that such a court
determines that Lender has received interest hereunder in excess of the highest
applicable rate, Lender shall promptly refund such excess interest to Borrower.
11.6 NO WAIVER BY LENDER; AMENDMENTS. No failure or delay on the part of
Lender in the exercise of any power or right, and no course of dealing between
Borrower and Lender shall operate as a waiver of such power or right, nor shall
any single or partial exercise of any power or right preclude other or further
exercise thereof or the exercise of any other power or right. The remedies
provided for herein are cumulative and not exclusive of any remedies which may
be available to Lender at law or in equity. No notice to or demand on Borrower
not required hereunder shall in any event entitle Borrower to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the right of Lender to any other or further action in any
circumstances without notice or demand. No amendment, modification or waiver
of, or consent with respect to, any provision of this Agreement or any Related
Agreement shall in any event be effective unless the same shall be in writing
and signed and delivered by Lender. Any waiver of any provision of this
Agreement, and any consent to any departure by Borrower from the terms of any
provision of this Agreement, shall be effective only in the specific instance
and for the specific purpose for which given.
11.7 TERMINATION OF CREDIT. Unless otherwise terminated pursuant to the
terms of this Agreement, the Credit shall terminate on the Termination Date.
Borrower may terminate the Credit at any time upon notice to Lender and payment
in full of the outstanding principal balance of the Loans and all other
Liabilities under this Agreement and the Related Agreements, as provided in
SECTION 2.1.2. All of Lender's rights and remedies, the liens and security
interests of Lender in the Collateral and all of Borrower's duties and
obligations under this Agreement shall survive termination of the Credit
extended to Borrower hereunder until all of the Liabilities hereunder have been
finally paid and performed in full. The termination or cancellation of the
Credit shall not affect or impair the liabilities and obligations of Borrower or
any one or more of the Obligors to Lender or Lender's rights with respect to any
Loans and advances made and other Liabilities incurred prior to such termination
or with respect to the Collateral or any Third Party Collateral.
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<PAGE> 64
11.8 NOTICES. Except as otherwise expressly provided
herein, any notice hereunder to Borrower or Lender shall be in
writing (including telegraphic, telex, or facsimile communication)
and shall be given to Borrower or Lender at its address, telex
number or facsimile number set forth on the signature pages hereof
or at such other address, telex number or facsimile number as
Borrower or Lender may, by written notice, designate as its
address, telex number or facsimile number for purposes of notices
hereunder. All such notices shall be deemed to be given when
transmitted by telex and the appropriate answerback is received,
transmitted by facsimile, delivered to the telegraph office,
delivered by courier, personally delivered or, in the case of
notice by mail, three (3) Banking Days following deposit in the
United States mails, properly addressed as herein provided, with
proper postage prepaid; provided, however, that notice to Lender of
Borrower's intent to terminate the Credit shall not be effective
until actually received by Lender.
11.9 ASSIGNMENTS AND PARTICIPATIONS; INFORMATION. Borrower hereby
consents to Lender's grant of participations in or sale, assignment, transfer or
other disposition, at any time and from time to time hereafter, of this
Agreement or any Related Agreement, or of any portion of any thereof, including
without limitation Lender's rights, titles, interests, remedies, powers and/or
duties. Lender may furnish any information concerning Borrower in the possession
of Lender from time to time to assignees of the rights and/or obligations of
Lender hereunder and to participants in any Loan (including prospective
assignees and participants) and may furnish information in response to credit
inquiries consistent with general banking practice. Lender shall promptly notify
Borrower of Lender's grant of any participation in or sale, assignment, transfer
or other disposition of this Agreement or any Related Agreement, or of any
portion of any thereof. Borrower shall use its best efforts to assist Lender in
its efforts to sell assignments and participations.
11.10 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
11.11 SUCCESSORS. This Agreement shall be binding upon Borrower and
Lender and their respective successors and assigns, and shall inure to the
benefit of Borrower and Lender and the successors and assigns of Lender.
Borrower shall not assign its rights or duties hereunder without the consent of
Lender.
11.12 CONSTRUCTION. Borrower acknowledges that this Agreement shall not
be binding upon Lender or become effective until and unless accepted by Lender,
in writing. If so accepted by Lender, this Agreement and the Related Agreements
and Supplemental
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<PAGE> 65
Documents shall, unless otherwise expressly provided therein, be deemed to have
been negotiated and entered into in, and shall be governed and controlled by the
laws of, the State of Illinois as to interpretation, enforcement, validity,
construction, effect, choice of law, and in all other respects, including but
not limited to the legality of the interest rate and other charges, but
excluding perfection of security interests and liens which shall be governed and
controlled by the laws of the relevant jurisdiction.
11.13 CONSENT TO JURISDICTION. To induce Lender to accept this
Agreement, Borrower irrevocably agrees that, subject to Lender's sole and
absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE RELATED AGREEMENTS, OR
THE SUPPLEMENTAL DOCUMENTATION OR THE COLLATERAL SHALL BE LITIGATED IN COURTS
HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. BORROWER HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT
LOCATED WITHIN SAID CITY AND STATE AND WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON BORROWER, AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE
BY REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS STATED ON THE SIGNATURE
PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL
RECEIPT THEREOF.
11.14 SUBSIDIARY REFERENCE. Any reference herein to a Subsidiary or
Subsidiaries of Borrower, and any financial definition, ratio, restriction or
other provision of this Agreement which is stated to be applicable to "Borrower
and its Subsidiaries" or which is to be determined on a "consolidated" or
"consolidating" basis, shall apply only to the extent Borrower has any
Subsidiaries and, where applicable, to the extent any such Subsidiaries are
consolidated with Borrower for financial reporting purposes.
11.15 WAIVER OF JURY TRIAL. BORROWER AND LENDER EACH WAIVES ANY RIGHT TO
A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a)
UNDER THIS AGREEMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR (b) ARISING FROM ANY BANKING RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
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<PAGE> 66
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
CONTINENTAL BANK N.A.
By /s/ C. H. Levy
-------------------------------------
Title Vice President
-------------------------------
Address: 231 South LaSalle Street
Chicago, Illinois 60697
Attention: Business Credit Group
RAINBOW HOME RENTALS, INC.
By /s/ Jason Alford
-------------------------------------
Title Secretary
-------------------------------
Address 3711 Starr Center Drive
Canfield, Ohio 44460
Attention Jason Alford
-----------------------------
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<PAGE> 67
WAIVER AND AMENDMENT NO. 1 TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Waiver and Amendment No. 1 to Loan and Security
Agreement is made as of December 9, 1993, between Rainbow Home
Rentals, Inc. ("Borrower") and Continental Bank N.A. ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has informed Lender that in connection with the
execution of that certain Asset Purchase Agreement dated as of July 14, 1993
between Borrower and Rent-It-Rite, Inc., Borrower issued a promissory note in
the principal amount of $165,000 (the "Rent-It-Rite Note"). Borrower
acknowledges that the issuance of the Rent-It-Rite Note has resulted in a breach
of Section 5.15 of the Loan Agreement and an Event of Default (the "Rent-It-Rite
Indebtedness Default"), and has requested that Lender waive such default. In
addition, Borrower and Lender have agreed to amend the Loan Agreement in certain
respects.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. WAIVER. Lender hereby waives the Rent-It-Rite Indebtedness Default
existing as of the date hereof. The foregoing waiver is limited to the matters
and by the terms set forth herein and shall not be deemed to constitute a waiver
of any Event of Default existing as of the date hereof and not specified above
(including the Event of Default existing as a result of Borrower's failure to
deliver all of the blocked account agreements required pursuant to that certain
Letter Agreement dated October 5, 1992 between Borrower and Lender) or any Event
of Default arising after the date hereof, or otherwise prejudice the exercise of
any and all of the rights and remedies of Lender under the Loan Agreement or any
other agreement, instrument or document delivered or to be delivered in
connection therewith.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
3.1. AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of
Supplement A to the Loan Agreement is hereby amended and restated in its
entirety, as follows.
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such
amount, as adjusted from time to time, is herein called the "Revolving
Credit Amount") is $6,200,000; provided, that the Revolving
<PAGE> 68
Credit Amount shall reduce to $4,916,000 on April 1, 1994 and thereafter shall
further reduce by $83,333 on May 1, 1994 and on the first day of each month
thereafter until reduced to zero.
3.2 AMENDMENT TO SECTION 2.3 OF SUPPLEMENT A. Section 2.3 of
Supplement A to the Loan Agreement is hereby amended and restated in its
entirety, as follows:
2.3 INVENTORY SUBLIMIT. Inventory Sublimit shall mean the lesser
of (A) $1,500,000 (the "Inventory Amount") and (B) 30% (the "Inventory
Sublimit Rate") of Cash Receipts Availability; provided, that the
Inventory Amount shall reduce to $750,000 on April 1, 1994 and thereafter
shall further reduce by $187,500, commencing on April 30, 1994 and
continuing on the same day of each calendar quarter thereafter until the
Inventory Amount is zero, and the Inventory Sublimit Rate shall reduce to
25% on April 1, 1994 and thereafter shall further reduce by five
percentage points, commencing on April 30, 1994 and continuing on the
same day of each calendar quarter thereafter until the Inventory Sublimit
Rate is reduced to zero.
4. CONDITIONS PRECEDENT. The waiver and amendment to the Loan
Agreement set forth in this Waiver and Amendment shall become effective as of
the date of this Waiver and Amendment upon the satisfaction of the following
conditions precedent:
4.1. NO DEFAULT. No Event of Default, or event which, with the giving
of notice or the passage of time, or both, would become an Event of Default,
shall have occurred and be continuing (other than as specified herein).
4.2. AMENDED FEE. Borrower shall have paid Lender a fee in the amount
of $10,000, in addition to, and not in lieu of, all other fees described in the
Loan Agreement.
4.3 RESOLUTIONS AND OPINION OF COUNSEL. Borrower shall have delivered
corporate resolutions and an opinion of counsel, in form and substance
satisfactory to Lender, with respect to this Waiver and Amendment.
5. MISCELLANEOUS.
5.1. EXPENSES. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Waiver and Amendment and all other
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. In addition, Borrower agrees to pay, and
save Lender harmless from all liability for, any stamp or other taxes
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<PAGE> 69
which may be payable in connection with the execution or delivery of this
Waiver and Amendment, the borrowings under the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this SECTION 5.1 shall survive any termination of
this Waiver and Amendment or the Loan Agreement as amended hereby.
5.2. GOVERNING LAW. This Waiver and Amendment shall be a contract
made under and governed by the internal laws of the State of Illinois.
5.3. COUNTERPARTS. This Waiver and Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Waiver and Amendment.
5.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendment to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Waiver and Amendment.
5.5. SUCCESSORS. This Waiver and Amendment shall be binding upon
Borrower, Lender and their respective successors and assigns, and shall inure to
the benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be executed by their respective officers thereunto duly authorized
and delivered at Chicago, Illinois as of the date first above written.
RAINBOW HOME RENTALS, INC.
By /s/Michael A. Pecchia
---------------------------
Its Treasurer/Secretary
--------------------------
CONTINENTAL BANK, N.A.
By /s/Bridget Geravalio
---------------------------
Its Vice President
------------------------
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<PAGE> 70
ACKNOWLEDGEMENT
---------------
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Wayland J. Russell
----------------------------
Wayland Russell
/s/Donna Russell
----------------------------
Donna Russell
<PAGE> 71
ACKNOWLEDGEMENT
---------------
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Jason Alford
------------------------
JASON ALFORD
/s/Ruth Alford
------------------------
RUTH ALFORD
<PAGE> 72
WAIVER AND AMENDMENT NO. 2 TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Waiver and Amendment No. 2 to Loan and Security Agreement is
made as of March 31, 1994, between Rainbow Rentals, Inc. (formerly known as
"Rainbow Home Rentals, Inc.") ("Borrower") and Continental Bank N.A. ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has informed Lender that (i) Borrower has breached Section
5.9 of the Loan Agreement by failing to pay at least ninety percent (90%) of its
estimated Taxes for Fiscal Year 1993, (ii) Borrower has breached Section 5.16 of
the Loan Agreement by incurring Indebtedness in excess of seventy-five percent
(75%) of the fair market value of Equipment purchased in connection with the
incurrance of such Indebtedness, (iii) Borrower has breached Section 5.18 of the
Loan Agreement by making advances to Don Vokle in excess of $10,000, (iv)
Borrower has breached Section 5.20 of the Loan Agreement by entering into two
new leases in connection with the transactions contemplated by that certain
Asset Purchase Agreement dated as of July 14, 1993 (the "Rent-It-Rite Purchase
Agreement") between Borrower and Rent-It-Rite, Inc., and (v) Borrower has
breached the terms of that certain Letter Agreement dated as of October 5, 1992
(the "Letter Agreement"), by failing to deliver all of the blocked account
agreements required thereunder, Borrower acknowledges that the foregoing
breaches constitute Events of Default under the Loan Agreement and has requested
that Lender waive such Events of Default.
In addition, Borrower has requested that Lender permit Borrower to
deliver Borrower's annual audit report required under Section 5.1.1(a) of the
Loan Agreement for Fiscal Year 1993 on or before April 30, 1994.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. WAIVER. Lender hereby waives the Events of Default arising as a
result of (i) a breach by Borrower of Section 5.9 of the Loan Agreement for
failure of Borrower to pay at least ninety percent (90%) of its estimated Taxes
for Fiscal Year 1993, (ii) a breach by Borrower of Section 5.16 of the Loan
Agreement as a result of Borrower incurring Indebtedness in excess of
seventy-five percent (75%) of the fair market value of Equipment purchased in
connection with incurring such Indebtedness, (iii) a breach by Borrower of
Section 5.18 of the Loan Agreement as a result of Borrower advancing $10,000 to
Don Vokle, (iv) a breach by Borrower of Section 5.20 of the Loan Agreement as a
result of Borrower
<PAGE> 73
entering into two new leases in connection with the Rent-It-Rite Purchase
Agreement, and (v) a breach by Borrower of the Letter Agreement for failure to
deliver all of the blocked account agreements required thereunder. The foregoing
waiver is limited to the matters and by the terms set forth herein and shall not
be deemed to constitute a waiver of any Event of Default existing as of the date
hereof and not specified above or any Event of Default arising after the date
hereof (including without limitation as a result of a breach of Sections 5.9,
5.16, 5.18 or 5.20 of the Loan Agreement), or otherwise prejudice the exercise
of any and all of the rights and remedies of Lender under the Loan Agreement or
any other agreement, instrument or document delivered or to be delivered in
connection therewith.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
3.1 AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (a) of
Section 5.1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
5.1.1 ANNUAL AUDIT REPORT. Within one hundred twenty (120) days after
Fiscal Year 1993 and within ninety (90) days after each other Fiscal Year of
Borrower, a copy of the annual audit report of Borrower and its Subsidiaries
prepared on a consolidating and consolidated basis and in conformity with
GAAP and certified by an independent certified public accountant who shall
be satisfactory to Lender, together with a certificate from such accountant
(i) acknowledging to Lender such accountant's understanding that Lender and
any Participant is relying on such annual audit report, (ii) containing a
computation of, and showing compliance with, each of the financial ratios
and restrictions contained in this SECTION 5.1.1 or in SUPPLEMENT A, and
(iii) to the effect that, in making the examination necessary for the
signing of such annual audit report, such accountant has not become aware of
any Event of Default or Unmatured Event of Default that has occurred and is
continuing, or, if such accountant has become aware of any such event,
describing it and the steps, if any, being taken to cure it.
3.2. AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of Supplement
A to the Loan Agreement is hereby amended and restated in its entirety, as
follows:
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such
amount, as adjusted from time to time, is herein called the "Revolving
Credit Amount") is $6,200,000; provided, that the Revolving Credit Amount
shall reduce to $4,916,000 on May 1, 1994
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<PAGE> 74
and thereafter shall further reduce by $83,333 on June 1, 1994 and on the first
day of each month thereafter until reduced to zero.
3.3 AMENDMENT TO SECTION 2.3 OF SUPPLEMENT A. Section 2.3 of Supplement A
to the Loan Agreement is hereby amended and restated in its entirety, as
follows:
2.3 INVENTORY SUBLIMIT. Inventory Sublimit shall mean the lesser of (A)
$1,500,000 (the "Inventory Amount") and (B) 30% (the "Inventory Sublimit
Rate") of Cash Receipts Availability; provided, that the Inventory Amount
shall reduce to $750,000 on May 1, 1994 and thereafter shall further reduce
by $187,500, commencing on June 30, 1994 and continuing on the same day of
each calendar quarter thereafter until the Inventory Amount is zero, and
the Inventory Sublimit Rate shall reduce to 25% on May 1, 1994 and
thereafter shall further reduce by five percentage points, commencing on
June 30, 1994 and continuing on the same day of each calendar quarter
thereafter until the Inventory Sublimit Rate is reduced to zero.
4. CONDITIONS PRECEDENT. The waiver and amendment to the Loan
Agreement set forth in this Waiver and Amendment shall become effective as of
the date of this Waiver and Amendment upon the satisfaction of the following
conditions precedent:
4.1. NO DEFAULT. No Event of Default, or event which, with the giving
of notice or the passage of time, or both, would become an Event of Default,
shall have occurred and be continuing (other than as specified herein).
4.2 RESOLUTIONS. Borrower shall have delivered corporate resolutions,
in form and substance satisfactory to Lender, with respect to this Waiver and
Amendment.
5. MISCELLANEOUS.
5.1. EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Waiver and Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrower agrees to pay, and save Lender
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Waiver and Amendment, the
borrowings under the Loan Agreement, as amended hereby, and the execution and
delivery of any instruments or documents provided for herein or delivered or to
be delivered hereunder or in connection herewith. All obligations
-3-
<PAGE> 75
provided in this SECTION 5.1 shall survive any termination of this Waiver and
Amendment or the Loan Agreement as amended hereby.
5.2. GOVERNING LAW. This Waiver and Amendment shall be a contract
made under and governed by the internal laws of the State of Illinois.
5.3. COUNTERPARTS. This Waiver and Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Waiver and Amendment.
5.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendment to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Waiver and Amendment.
5.5. SUCCESSORS. This Waiver and Amendment shall be
binding upon Borrower, Lender and their respective successors and
assigns, and shall inure to the benefit of Borrower, Lender and the
successors and assigns of Borrower and Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be executed by their respective officers thereunto duly authorized
and delivered at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/ Michael A. Pecchia
-------------------------
Its Secretary/Treasurer
----------------------
CONTINENTAL BANK N.A.
By /s/ Bridget Garavalio
-------------------------
Its Vice President
----------------------
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<PAGE> 76
ACKNOWLEDGEMENT
---------------
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Wayland J. Russell
--------------------------
Wayland Russell
/s/Donna Russell
--------------------------
DONNA RUSSELL
<PAGE> 77
ACKNOWLEDGEMENT
---------------
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Jason Alford
-------------------------
JASON ALFORD
/s/Ruth Alford
-------------------------
RUTH ALFORD
<PAGE> 78
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment No. 3 to Loan and Security Agreement is
made as of June 1, 1994, between Rainbow Rentals, Inc. (formerly
known as Rainbow Home Rentals, Inc.) ("Borrower") and Continental
Bank N.A. ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has requested that the Loan Agreement be amended in
certain respects.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
2.1 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT. The definition of
"Termination Date" in Section 1.1 of the Loan Agreement is hereby amended in its
entirety, as follows:
"Termination Date" means April 30, 1996.
2.2 AMENDMENT TO SECTION 3.2 OF THE LOAN AGREEMENT. Clause (d) of
Section 3.2 of the Loan Agreement is hereby amended in its entirety as follows:
(d) Borrower will, forthwith upon the receipt by Borrower of all
checks, drafts, cash and other remittances in payment or as proceeds of, or
on account of, any of the Accounts Receivable or other Collateral, deposit
the same with such banks or financial institutions as Lender shall consent,
and the funds deposited at such banks and financial institutions shall be
transferred, by automated clearinghouse, to NDC, and then immediately
transferred by NDC, by automated clearinghouse, to Lender; provided, that
(i) all credit card remittances shall be deposited at Society National Bank
and, on a monthly basis, transferred, by wire transfer, to Lender, and (ii)
any miscellaneous receipt not in excess of Fifty Thousand Dollars ($50,000)
may be deposited in Borrower's checking account at Society National Bank.
Notwithstanding anything contained herein to the contrary, upon the
occurrence of an Unmatured Event of Default or an Event of Default, Lender
shall have the option to require that Borrower cause all checks, drafts,
cash and other remittances in payment or
<PAGE> 79
as proceeds of, or on account of, any of the Accounts Receivable or other
Collateral, received by Borrower to be deposited in a special bank account
(a "Blocked Deposit Account") with such banks or financial institutions as
Lender shall consent, over which Lender alone has the power of withdrawal
and will to the extent required by Lender, designate with each such deposit
the particular Accounts Receivable or other item of Collateral upon which
the remittance was made.
2.3 AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (a) of
Section 5.1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
(a) ANNUAL AUDIT REPORT. With respect to Fiscal Year 1993, within five
(5) days after Amendment No. 3 to Loan and Security Agreement becomes
effective, and with respect to any other Fiscal Year, within ninety (90)
days after each such other Fiscal Year of Borrower, a copy of the annual
audit report of Borrower and its Subsidiaries prepared on a consolidating
and consolidated basis and in conformity with GAAP and certified by an
independent certified public accountant who shall be satisfactory to
Lender, together with a certificate from such accountant (i) acknowledging
to Lender such accountant's understanding that Lender and any Participant
is relying on such annual audit report, (ii) containing a computation of,
and showing compliance with, each of the financial ratios and restrictions
contained in this SECTION 5.1.1 or in SUPPLEMENT A, and (iii) to the
effect that, in making the examination necessary for the signing of such
annual audit report, such accountant has not become aware of any Event of
Default or Unmatured Event of Default that has occurred and is continuing,
or, if such accountant has become aware of any such event, describing it
and the steps, if any, being taken to cure it.
2.4 AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (c) of
Section 5.1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
(c) MONTHLY FINANCIAL STATEMENT. Within fifteen (15) days after the end
of each month of each fiscal year of Borrower, a copy of the unaudited
financial statement of Borrower and its Subsidiaries prepared in the same
manner audit report referred to in preceding CLAUSE (a), signed by
Borrower's chief financial officer and consisting of at least a balance
sheet as at the close of such month, statements of earnings and cash flows
for such month and for the period from the beginning of such Fiscal Year to
the close of such month and the information described on SCHEDULE 5.1.1
hereto; and
-2-
<PAGE> 80
2.5 AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such
amount, as adjusted from time to time, is herein called the "Revolving
Credit Amount") is $7,500,000; provided, that so long as no Event of
Default then exists, the Revolving Credit Amount shall increase to
$8,000,000 on June 30, 1994 and to $8,250,000 on December 1, 1994.
2.6 AMENDMENT TO SECTION 2.2 OF SUPPLEMENT A. Clause (ii) of Section
2.2 of Supplement A to the Loan Agreement is hereby amended to replace the
percentage "20%" with the percentage "30%."
2.7 AMENDMENT TO SECTION 2.3 OF SUPPLEMENT A. Section 2.3 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.3 INVENTORY SUBLIMIT. Inventory Sublimit shall mean the lesser of
(A) $1,500,000 (the "Inventory Amount") and (B) 30% (the "Inventory
Sublimit Rate") of Cash Receipts Availability; provided, that the Inventory
Amount shall be $1,750,000 during the period October 1, through December 31
of each year.
2.8 AMENDMENT TO SECTION 3.1 OF SUPPLEMENT A. Clause (a) of Section
3.1 of Supplement A to the Loan Agreement is hereby amended in its entirety as
follows:
(a) INTEREST TO MATURITY. The unpaid principal balance of the
Revolving Loans (other than Overdraft Loans and Over Advances) shall bear
interest to maturity at a per annum rate equal to the Reference Rate in
effect from time to time plus 1.75%.
2.9 AMENDMENT TO SECTION 4.1 OF SUPPLEMENT A. Section 4.1 of
Supplement A to the Loan Agreement is amended in its entirety as follows:
4.1 TANGIBLE NET WORTH. Not permit Borrower's Tangible Net Worth at
any time during any period set forth below to be less than the amount set
forth opposite such period:
Period Amount
------ ------
From the date hereof thru $1,500,000
June 29, 1993
June 30, 1993 thru December 30, 1993 1,750,000
-3-
<PAGE> 81
December 31, 1993 thru December 30, 1994 4,000,000
December 31, 1994 and thereafter 5,000,000
2.10 AMENDMENT TO SECTION 4.2 OF SUPPLEMENT A. The last sentence of
Section 4.2 of Supplement A to the Loan Agreement is amended in its entirety as
follows:
For purposes of this SECTION 4.2, (i) net earnings shall not include
any gains on the sale or other disposition of Investments of fixed
assets and any extraordinary or nonrecurring items of income to the
extent that the aggregate of all such gains and extraordinary or
nonrecurring items of income exceeds the aggregate of losses on such
sale or other disposition and extraordinary or nonrecurring charges,
and (ii) interest expense shall include, without limitation, implicit
interest expense on Capitalized Leases, and shall exclude the
amortization of the closing fee paid to Lender upon the initial
funding of the Revolving Loans.
2.11 ADDITION OF SCHEDULE 5.1.1. Schedule 5.1.1 attached hereto is
added as a Schedule to the Loan Agreement.
3. BANK AGENCY AGREEMENT. Borrower agrees to deliver to Lender bank
agency agreements in the form of Exhibit A hereto duly executed by the banks
listed on Exhibit B hereto within 30 days of the date hereof and Borrower
further agrees that Borrower's failure to so deliver such executed bank agency
agreements shall constitute an Event of Default.
4. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set forth
in this Amendment shall become effective as of the date of this Amendment upon
the satisfaction of the following conditions precedent:
4.1. NO DEFAULT. No Event of Default, or event which, with the giving
of notice or the passage of time, or both, would become an Event of Default,
shall have occurred and be continuing (other than as specified herein).
4.2 RESOLUTIONS. Borrower shall have delivered corporate resolutions,
in form and substance satisfactory to Lender, with respect to this Amendment.
4.3 MODIFICATION FEE. Borrower shall have paid Lender a modification
fee of $30,000.
5. MISCELLANEOUS.
5.1. EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the
-4-
<PAGE> 82
preparation, negotiation, execution, delivery and administration of this
Amendment and all other instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith. In addition,
Borrower agrees to pay, and save Lender harmless from all liability for, any
stamp or other taxes which may be payable in connection with the execution or
delivery of this Amendment, the borrowings under the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this SECTION 5.1 shall survive any termination of
this Amendment or the Loan Agreement as amended hereby.
5.2. GOVERNING LAW. This Amendment shall be a contract
made under and governed by the internal laws of the State of
Illinois.
5.3. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
5.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendment to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
5.5. SUCCESSORS. This Amendment shall be binding upon Borrower, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrower, Lender and the successors and assigns of Borrower and Lender.
-5-
<PAGE> 83
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/Michael A. Pecchia
--------------------------
Its Treasurer
-----------------------
CONTINENTAL BANK N.A.
By /s/Bridget Garavalio
--------------------------
Its Vice President
------------------------
-6-
<PAGE> 84
ACKNOWLEDGEMENT
---------------
The undersigned hereby acknowledge that they have read the foregoing
Amendment and hereby ratify and reaffirm their guaranty of the obligations of
Borrower to Lender pursuant to that certain Guaranty executed by the
undersigned dated October 5, 1992.
/s/Jason Alford
---------------------------
JASON ALFORD
/s/Ruth Alford
---------------------------
RUTH ALFORD
<PAGE> 85
ACKNOWLEDGEMENT
The undersigned hereby acknowledge that they have read the foregoing
Amendment and hereby ratify and reaffirm their guaranty of the obligations of
Borrower to Lender pursuant to that certain Guaranty executed by the undersigned
dated October 5, 1992.
/s/Wayland J. Russell
--------------------------
WAYLAND RUSSELL
/s/ Donna Russell
---------------------------
DONNA RUSSELL
<PAGE> 86
CONSENT AND AMENDMENT NO. 4 TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Consent and Amendment No. 4 ("Amendment") to Loan and Security
Agreement is made as of March __, 1995, between Rainbow Rentals, Inc. (formerly
known as Rainbow Home Rentals, Inc.) ("Borrower") and Bank of America Illinois
(formerly known as Continental Bank Illinois, formerly known as Continental Bank
N.A. ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has informed Lender that Borrower desires to enter into that
certain Secured Party Asset Sale Agreement dated as of March 1, 1995 (the "Asset
Purchase Agreement) among Borrower, CWD Enterprises Two, Ltd., Jerrald Dunaway
(as the secured party for the properties and assets of CWD Enterprises Two,
Ltd.), Jerrald Dunaway, Wayne Chambers and Christopher Williams (individually
and as the partners of CWD Enterprises Two, Ltd.), and Wayne Chambers, Susan
Chambers, Christopher Williams and Cheryl Williams (as guarantors of certain
debt of CWD Enterprises Two, Ltd.). Borrower acknowledges that the execution
and delivery of the Asset Purchase Agreement requires the consent of Lender and
has requested that Lender provide such consent.
Borrower has also requested that the Loan Agreement be amended to (i)
increase the Revolving Credit Amount from $8,250,000 to $9,000,000, (ii) modify
the Inventory Sublimit, (iii) extend the Termination Date to February 28, 1998,
(iv) change the interest rate, (v) change the Tangible Net Worth and Interest
Coverage Ratio, and (vi) make certain other changes to the Loan Agreement.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. CONSENT. Lender hereby consents to the execution and delivery of
the Asset Purchase Agreement. This consent shall not constitute (a) a
modification or alteration of the terms, conditions or covenants of the Loan
Agreement or any document entered into in connection therewith, or (b) a waiver,
release or limitation upon the exercise by Lender of any of its rights, legal or
equitable, hereunder, except as to the matters to which Lender herein expressly
consents. Except as set forth above, Lender reserves any and all rights and
remedies which it has had, has or may have under the Loan Agreement.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
<PAGE> 87
3.1 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT. The definition of
"Termination Date" in Section 1.1 of the Loan Agreement is hereby amended in its
entirety, as follows:
"Termination Date" means February 28, 1998.
3.2 AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (c) of
Section 5.1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
(c) MONTHLY FINANCIAL STATEMENT. Within fifteen (15) days after the end
of each month of each fiscal year of Borrower, a copy of the unaudited
financial statement of Borrower and its Subsidiaries prepared (i) in the
same manner as the audit report referred to in preceding CLAUSE (a), and
(ii) on a store-by-store basis with respect to any stores acquired within
12 months prior to the end of such month, in each case signed by Borrower's
chief financial officer and consisting of at least a balance sheet as at
the close of such month, statements of earnings and cash flows for such
month and for the period from the beginning of such Fiscal Year to the
close of such month and the information described on SCHEDULE 5.1.1 hereto;
and
3.3 AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of Supplement
A to the Loan Agreement is hereby amended in its entirety as follows:
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such
amount, as adjusted from time to time, is herein called the "Revolving
Credit Amount") is $9,000,000.
3.4 AMENDMENT TO SECTION 2.3 OF SUPPLEMENT A. Section 2.3 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.3 INVENTORY SUBLIMIT. Inventory Sublimit shall mean the lesser of (A)
the Inventory Amount (as defined below) and (B) 30% (the "Inventory
Sublimit Rate") of Cash Receipts Availability; provided that the Inventory
Sublimit shall be $2,250,000 during the period from March 1, 1995 through
August 31, 1995 and the Inventory Sublimit shall be $2,000,000 during the
period from September 1, 1995 through February 28, 1996. The "Inventory
Amount" shall be $1,500,000 during the period from January 1 through
September 30 of each year and $1,750,000 during the period from October 1
through December 31 of each year.
-2-
<PAGE> 88
3.5 AMENDMENT TO SECTION 3.1 OF SUPPLEMENT A. Clause (a) of
Section 3.1 of Supplement A to the Loan Agreement is hereby amended in its
entirety as follows:
(a) INTEREST TO MATURITY. The unpaid principal balance of
the Revolving Loans (other than Overdraft Loans and Over Advances)
shall bear interest to maturity at a per annum rate equal to the
Reference Rate in effect from time to time plus 1.50%.
3.6 AMENDMENT TO SECTION 4.1 OF SUPPLEMENT A. Section 4.1 of
Supplement A to the Loan Agreement is amended in its entirety as follows:
4.1 TANGIBLE NET WORTH. Not permit Borrower's Tangible Net Worth at any
time during any period set forth below to be less than the amount set
forth opposite such period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
From the date hereof thru June 29, 1995 $6,000,000
June 30, 1995 thru December 30, 1995 6,250,000
December 31, 1995 thru June 29, 1996 6,500,000
June 30, 1996 thru December 30, 1996 7,000,000
December 31, 1996 thru June 29, 1997 7,500,000
June 30, 1997 and thereafter 8,000,000
</TABLE>
3.7 AMENDMENT TO SECTION 4.2 OF SUPPLEMENT A. Section 4.2 of
Supplement A to the Loan Agreement is amended in its entirety as follows:
4.2 INTEREST COVERAGE RATIO. Not permit the ratio of (a)
Borrower's consolidated net earnings before interest expense and provision
for Taxes and depreciation and amortization, for any period set forth
below, to (b) Borrower's consolidated interest expense for such period, to
be less than the following for the corresponding period:
Interest
Period Coverage
------ --------
<TABLE>
<CAPTION>
<S> <C>
Three month period commencing January 1,
1995 and ending March 31, 1995 5.0
Six month period commencing January 1,
1995 and ending June 30, 1995 5.0
Nine month period commencing January 1,
1995 and ending September 30, 1995 5.0
Twelve month period commencing January 1,
1995 and ending December 31, 1995 5.0
Three month period commencing January 1,
1996 and ending March 31, 1996 6.0
</TABLE>
-3-
<PAGE> 89
<TABLE>
<CAPTION>
<S> <C>
Six month period commencing January 1,
1996 and ending June 30, 1996 6.0
Nine month period commencing January 1,
1996 and ending September 30, 1996 6.0
Twelve month period commencing January 1,
1996 and ending December 31, 1996 6.0
Three month period commencing January 1,
1997 and ending March 31, 1997 7.0
Six month period commencing January 1,
1997 and ending June 30, 1997 7.0
Nine month period commencing January 1,
1997 and ending September 30, 1997 7.0
Twelve month period commencing January 1,
1997 and ending December 31, 1997 7.0
</TABLE>
For purposes of this SECTION 4.2, (i) net earnings shall not
include any gains on the sale or other disposition of Investments of
fixed assets and any extraordinary or nonrecurring items of income to
the extent that the aggregate of all such gains and extraordinary or
nonrecurring items of income exceeds the aggregate of losses on such
sale or other disposition and extraordinary or nonrecurring charges,
and (ii) interest expense shall include, without limitation, implicit
interest expense on Capitalized Leases, and shall exclude the
amortization of the closing fee, the modification fee, or any other
fee paid to Lender in connection with the Revolving Loans.
4. BANK AGENCY AGREEMENT. Borrower agrees to deliver to Lender bank
agency agreements in the form of Exhibit A hereto duly executed by the banks
listed on Exhibit B hereto within 30 days of the date hereof and Borrower
further agrees that Borrower's failure to so deliver such executed bank agency
agreements shall constitute an Event of Default.
5. GUARANTOR FINANCIAL STATEMENT. Borrower agrees to deliver to Lender
the most recent financial statements from each guarantor of the Liabilities
within 30 days of the date hereof and Borrower further agrees that Borrower's
failure to deliver such financial statements shall constitute an Event of
Default.
6. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set forth
in this Amendment shall become effective as of the date of this Amendment upon
the satisfaction of the following conditions precedent:
6.1 NO DEFAULT. No Event of Default, or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, shall
have occurred and be continuing.
6.2 RESOLUTIONS. Borrower shall have delivered corporate resolutions,
in form and substance satisfactory to Lender, with respect to this Amendment.
-4-
<PAGE> 90
6.3 MODIFICATION FEE. Borrower shall have paid Lender a modification
fee of $100,000.
6.4 EXECUTION. The delivery of an executed copy of this Agreement and
the acknowledgements hereto to Lender.
7. MISCELLANEOUS.
7.1 EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrower agrees to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment, the borrowings under the Loan
Agreement, as amended hereby, and the execution and delivery of any instruments
or documents provided for herein or delivered or to be delivered hereunder or
in connection herewith. All obligations provided in this SECTION 7.1 shall
survive any termination of this Amendment or the Loan Agreement as amended
hereby.
7.2 GOVERNING LAW. This Amendment shall be a contract made under and
governed by the internal laws of the State of Illinois.
7.3 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
7.4 REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendments to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
7.5 SUCCESSORS. This Amendment shall be binding upon Borrower, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrower, Lender and the successors and assigns of Borrower and Lender.
-5-
<PAGE> 91
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and delivered
at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/Michael A. Pecchia
----------------------------
Its Treasurer
-------------------------
BANK OF AMERICA ILLINOIS
By
----------------------------
Its
-------------------------
-6-
<PAGE> 92
WAIVER AND AMENDMENT NO. 5 TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS WAIVER AND AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT
is made as of March 24, 1995, between Rainbow Rentals, Inc.
(formerly known as Rainbow Home Rentals, Inc.) ("Borrower"), and
Bank Of America Illinois (formerly known as Continental Bank, N.A.)
("Lender").
R E C I T A L S
- - - - - - - -
A. Borrower and Lender have entered into that certain Loan and Security
Agreement dated as of October 5, 1992 (as amended from time to time, the "Loan
Agreement).
B. Borrower has informed Lender that Borrower has breached Sections
5.1.1(a) (iii), 5.l.l(c), 5.1.1(d) and 5.1.2 of the Loan Agreement by failing to
provide Lender with copies of an accountant's certificate regarding Events of
Default, monthly financial statements, officers certificates and agings as
required by said sections. Borrower acknowledges that the foregoing breaches
constitute Events of Default under the Loan Agreement and has requested that
Lender waive such Events of Default.
C. In addition, Borrower has requested that Lender permit Borrower to
deliver Borrower's annual financial report required under Section 5.1.1(a) of
the Loan Agreement for Fiscal Year 1994 within 120 days after the expiration of
said Fiscal Year.
D. Therefore, in consideration of the promises and mutual agreements
herein contained and of any loans or extensions of credit heretofore, now or
hereafter made to or for the benefit of the Borrower by the Lender, the parties
hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meaning ascribed to such terms in the Loan Agreement.
2. RECITALS. The recitals set forth above are incorporated herein by
reference, as if fully restated herein.
3. WAIVER. Subject to the terms of Section 7 hereof, for the Fiscal
Year ending December 31, 1994 only, Lender hereby waives the Events of Default
arising as a result of breaches by Borrower of Sections 5.1.1(a) (iii),
5.1.1(c), 5.1.1(d) and 5.1.2 of the Loan Agreement for failure of Borrower to
provide copies of an accountant's certificate regarding Events of Default,
monthly statements, officers certifications and agings as required by said
sections.
<PAGE> 93
4. TERMINATION OF WAIVER. The waiver granted in Section 3 of this
Waiver and Amendment shall be effective until the date on which Lender becomes
aware that the Borrower has failed to comply with any provision of this Waiver
and Amendment or with the terms and conditions of the Loan Agreement which were
not waived hereunder or that an Event of Default has occurred and is continuing.
5. EFFECT OF WAIVER. This Waiver shall be effective only to the extent
specifically set forth herein and shall not be construed as a waiver of any
breach or default other than those specifically waived herein nor as a waiver of
any breach or default of which the Lender has not been informed by the Borrower.
All other terms and conditions of the Loan Agreement remain in full force and
effect.
6. AMENDMENT TO SECTION 5.1.1(a) OF THE LOAN AGREEMENT. Subsection (a)
of Section 5.1.1 of the Loan Agreement is hereby deleted in its entirety and the
following shall be substituted in lieu thereof:
"5.1.1 ANNUAL AUDIT REPORT. Within one hundred twenty (120) days after
Fiscal Year 1994, and within ninety (90) days after each other Fiscal
Year of Borrower, a copy of the annual audit report of Borrower and
its Subsidiaries prepared on a consolidating and consolidated basis
and in conformity with GAAP and certified by an independent public
accountant who shall be satisfactory to Lender, together with a
certificate from such accountant (i) acknowledging to Lender such
accountant's understanding that Lender (and any Participant) is
relying on such annual audit report, (ii) containing a computation of,
and showing compliance with, each of the financial ratios and
restrictions contained in this SECTION 5 or in SUPPLEMENT A, and (iii)
to the effect that, in making the examination necessary for the
signing of such annual audit report, such accountant has not become
aware of any Event of Default or Unmatured Event of Default that has
occurred or is continuing, or, if such accountant has become aware of
any such event, describing it and the steps, if any, being taken to
cure it;"
7. CONDITIONS PRECEDENT. The waiver and amendment to Loan Agreement set
forth in this Waiver and Amendment shall become effective as of the date of this
Waiver and Amendment upon the satisfaction of the following conditions
precedent:
7.1 AMENDMENT. Borrower and Lender shall have executed and delivered
four (4) counterpart copies of this Waiver and Amendment.
7.2 NO DEFAULT. No event of Default, or Unmatured Event of Default,
shall have occurred and be continuing (other than as specified herein).
-2-
<PAGE> 94
8. MISCELLANEOUS.
8.1 GOVERNING LAW. This Waiver and Amendment shall be a contract under
and governed by the internal laws of the State of Illinois.
8.2 COUNTERPARTS. This Waiver and Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall
together constitute but one and the same Waiver and Amendment.
8.3 REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendment to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Waiver and Amendment.
8.4 SUCCESSORS. This Waiver and Amendment shall be binding upon
Borrower, Lender and their respective successors and assigns, and shall inure to
the benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be executed by their respective officers thereunto duly authorized
and delivered at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By: /s/ Michael A. Pecchia
-----------------------
Its: Treasurer
----------------------
BANK OF AMERICA ILLINOIS
By: /s/ Ron A. Benishay
-----------------------
Its: Vice President
----------------------
-3-
<PAGE> 95
AMENDMENT NO.6 TO
LOAN AND SECURITY AGREEMENT
This Amendment No.6 ("Amendment") to Loan and Security Agreement is
made as of April 22,1996, between Rainbow Rentals, Inc. (formerly known as
Rainbow Home Rentals, Inc.) ("Borrower") and Bank of America Illinois (formerly
known as Continental Bank Illinois, formerly known as Continental Bank N.A.)
("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has requested that the Loan Agreement be amended to (i)
increase the Revolving Credit Amount from $9,000,000 to $10,000,000 until May
31, 1996 and (ii) provide additional availability under the Borrowing Base of
$1,000,000 until May 31, 1996.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
2.1. AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such amount,
as adjusted from time to time, is herein called the "Revolving Credit Amount")
is $10,000,000; provided, that at all times after May 31, 1996 the Revolving
Credit Amount shall be $9,000,000.
2.2. AMENDMENT TO SECTION 2.2 OF SUPPLEMENT A. Section 2.2 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.2 BORROWING BASE. The term "Borrowing Base," as used herein, shall
mean:
(i) an amount (the "Cash Receipts Availability") of up to 100% of the
net amount of Borrower's actual cash collections of Accounts Receivable from
Account Debtors pursuant to the terms of Rental Agreements for the
immediately preceding two calendar months (exclusive of collections for
delivery, insurance, merchandise, sales and other non-rental payments and
after deduction of such reserves and allowances as Lender deems proper and
necessary); PLUS
<PAGE> 96
(ii) an amount (the "Inventory Availability") of up to the lesser of
(A) up to 30% of the net value (as determined by Lender and after deduction
of such reserves and allowances as Lender deems proper and necessary) of
Borrower's Eligible Inventory and (B) the "Inventory Sublimit" (as defined
in Section 2.3 below). Without limiting Lender's discretion to establish
reserves with respect to Inventory Availability, Lender shall establish a
reserve equal to one-third of the value of Borrower's Eligible Inventory;
plus
(iii) the "Additional Amount (as defined below). "Additional Amount"
means $1,000,000; provided, that at all times after May 31, 1996, the
Additional Amount means zero.
3. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set
forth in this Amendment shall become effective as of the date of this
Amendment upon the satisfaction of the following conditions precedent:
3.1. NO DEFAULT. No Event of Default, or event which, with the giving
of notice or the passage of time, or both, would become an Event of Default,
shall have occurred and be continuing.
3.2. RESOLUTIONS. Borrower shall have delivered corporate resolutions,
in form and substance satisfactory to Lender, with respect to this Amendment.
3.3. MODIFICATION FEE. Borrower shall have paid Lender a modification
fee of $10,000.
3.4. EXECUTION. The delivery of an executed copy of this Agreement and
the acknowledgments hereto to Lender.
4. MISCELLANEOUS.
4.1. EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrower agrees to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment, the borrowings under the Loan
Agreement, as amended hereby, and the execution and delivery of any instruments
or documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. All obligations provided in this SECTION 4.1 shall survive
any termination of this Amendment or the Loan Agreement as amended hereby.
4.2. GOVERNING LAW. This Amendment shall be a contract made under and
governed by the internal laws of the State of Illinois.
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<PAGE> 97
4.3. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
4.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendments to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
4.5. SUCCESSORS. This Amendment shall be binding upon Borrower, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrower, Lender and the successors and assigns of Borrower and Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and delivered at
Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/ Michael A. Pecchia
-----------------------------
Its Treasurer
-----------------------------
BANK OF AMERICA ILLINOIS
By /s/ Ron Benishay
-----------------------------
Its V.P.
----------------------------
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<PAGE> 98
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the
foregoing Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5,1992.
/s/Jason Alford
----------------------------
JASON ALFORD
/s/Ruth Alford
----------------------------
RUTH ALFORD
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<PAGE> 99
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the
foregoing Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5,1992.
/s/Wayland J. Russell
-----------------------------
WAYLAND RUSSELL
/s/Donna Russell
-----------------------------
DONNA RUSSELL
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<PAGE> 100
WAIVER AND AMENDMENT NO.7 TO
LOAN AND SECURITY AGREEMENT
This Waiver and Amendment No. 7 ("Waiver and Amendment") to Loan and
Security Agreement is made as of May 31, 1996, between Rainbow Rentals, Inc.
(formerly known as Rainbow Home Rentals, Inc.) ("Borrower") and Bank of America
Illinois (formerly known as Continental Bank Illinois, formerly known as
Continental Bank N.A.) ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5,1992 (as amended, the "Loan Agreement").
Borrower has informed Lender that Borrower has breached Section 5.1.1
(a)(ii) of the Loan Agreement by failing to cause its accountant, KPMG Peat
Marwick, to provide a certificate stating that it has not become aware of the
occurrence of any Event of Default or Unmatured Event of Default. Borrower
acknowledges that such breach constitutes an Event of Default under the Loan
Agreement and has requested that Lender waive such Event of Default.
In addition, Borrower has requested that the Loan Agreement be amended
to, among other things (i) provide a term loan facility and (ii) provide
Borrower with an interest rate option with respect to the Loans that is based on
a LIBOR rate.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. WAIVER. Lender hereby waives the Event of Default arising as a
result of a breach by Borrower of Section 5.1.1(a)(ii) of the Loan Agreement for
failure of Borrower to cause its accountant, KPMG Peat Marwick, to provide a
certificate stating that it has not become aware of the occurrence of any Event
of Default or Unmatured Event of Default. The foregoing waiver is limited to the
matters and by the terms set forth herein and shall not be deemed to constitute
a waiver of any other Event of Default existing as of the date hereof or any
Event of Default arising after the date hereof, or otherwise prejudice the
exercise of any and all of the rights and remedies of Lender under the Loan
Agreement or any other agreement, instrument or document delivered or to be
delivered in connection therewith.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended
as follows:
3.1. SECTION 1.1 of the Loan Agreement is hereby amended by inserting
a proviso at the end of the definition of the term "Banking Day," as follows:
; provided, that with respect to LIBOR Rate Loans, Banking Days shall
not include a day on which dealings in U.S. Dollars may not be carried
on by Lender in the London interbank LIBOR market.
<PAGE> 101
3.2. AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT. The definition of
"Credit" in Section 1.1 of the Loan Agreement is hereby amended in its entirety
as follows:
"Credit" means the facility established under this Agreement pursuant
to which Lender will make Revolving Loans and the Term Loan to Borrower and
issue Letters of Credit for the account of Borrower.
3.3. AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT. The definition of
"Loan" in Section 1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
"Loan" means (a) any Revolving Loan made pursuant to Section 2.1.1 (b)
the Term Loan made pursuant to SECTION 2.1.1 A and (c) any other loan or advance
made to Borrower by Lender under or pursuant to this Agreement (including
without limitation any Overdraft Loan).
3.4. AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT. The definition of
"Termination Date" in Section 1.1 of the Loan Agreement is hereby amended in its
entirety as follows:
"Termination Date" means May 31, 1999.
3.5. SECTION 1.1 Of the Loan Agreement is hereby amended by inserting
the following defined terms in the appropriate places, alphabetically:
"Eurocurrency Reserve Requirement" means, with respect to
any LIBOR Rate Loan for any Interest Rate Period, a percentage equal
to the daily average during such Interest Rate Period of the
percentages in effect on each day of such Interest Rate Period, as
prescribed by the Federal Reserve Board, for determining the aggregate
maximum reserve requirements (including all basic, supplemental,
marginal and other reserves) applicable to "Eurocurrency liabilities"
pursuant to Regulation D or any other then applicable regulation of
the Federal Reserve Board which prescribes reserve requirements
applicable to "Eurocurrency liabilities," as presently defined in
Regulation D. Without limiting the effect of the foregoing, the
Eurocurrency Reserve Requirement shall reflect any other reserves
required to be maintained by Lender or any Related Party of Lender
against (i) any category of liabilities that includes deposits by
reference to which the LIBOR Rate is to be determined, or (ii) any
category of extensions of credit or other assets that includes LIBOR
Rate Loans. For purposes of this Agreement, any LIBOR Rate Loan
hereunder shall be deemed to be "Eurocurrency liabilities," as defined
in Regulation D, and, as such, shall be deemed to be subject to such
reserve requirements without the benefit of, or credit for, proration,
exceptions or offsets which may be available to Lender or any Related
Party of Lender from time to time under Regulation D.
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<PAGE> 102
"Interest Rate Period" means with respect to any LIBOR Revolving
Portion or LIBOR Term Portion, the period commencing on the date on which the
LIBOR Rate is deemed applicable to such LIBOR Revolving Portion or LIBOR Term
Portion, and ending on the numerically corresponding day one (1), two (2) or
three (3) months thereafter, as selected by Borrower pursuant to SECTION 3.1.3
of SUPPLEMENT A; provided, however, that:
(a) any Interest Rate Period which would otherwise end on a
day which is not a Banking Day shall end on the next succeeding
Banking Day unless such next succeeding Banking Day falls in another
calendar month, in which case such Interest Rate Period shall end on
the next preceding Banking Day;
(b) any Interest Rate Period which begins on the last
Banking Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Rate Period) shall end on the last Banking Day of the
calendar month at the end of such Interest Rate Period; and
(c) no Interest Rate Period shall extend beyond the
Termination Date.
"LIBOR Base Rate" means (i) with respect to each Interest Rate Period
for any LIBOR Rate Loan, the rate per annum at which U.S. Dollar deposits in
immediately available funds are offered to Lender two (2) Banking Days prior
to the beginning of such Interest Rate Period by major banks in the London
interbank eurodollar market at or about 11:00 a.m., London time, for delivery on
the first day of such Interest Rate Period, for the number of days comprised
therein and in an amount equal to the amount of the LIBOR Rate Loan to be
outstanding during such Interest Rate Period.
"LIBOR Option" means the option granted to Borrower pursuant to SECTION
3.1.3 of SUPPLEMENT A to have the interest on all or any portion of the
principal amount of the Revolving Loans or the Term Loan based on a LIBOR Rate.
"LIBOR Rate" means, with respect to each Interest Rate Period for a
LIBOR Rate Loan, a rate per annum (rounded upward, if necessary, to the nearest
one hundredth of one percent (1/100th of 1%)) determined pursuant to
the following formula:
LIBOR Rate = LIBOR Base Rate
-----------------------------------
I -Eurocurrency Reserve Requirement
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<PAGE> 103
"LIBOR Rate Loan" means any LIBOR Revolving Portion or LIBOR
Term Portion;
"LIBOR Request" means a written notice from Borrower to Lender
requesting that interest on all or a portion of the Revolving Loan or the Term
Loan be based on the then applicable LIBOR Rate, specifying (i) a dollar amount
of the LIBOR Revolving Portion or LIBOR Term Portion consistent with the
definitions of such terms; (ii) the date on which the applicable Interest Rate
Period shall begin; and (iii) the Interest Rate Period applicable thereto.
"LIBOR Revolving Portion" means, collectively, that portion of the
Revolving Loans specified in a LIBOR Request (including any portion of the
Revolving Loans which is being borrowed by Borrower concurrently with such LIBOR
Request) which is not less than $100,000 and is an integral multiple of $10,000,
which does not exceed the outstanding balance of the Revolving Loans not already
subject to a LIBOR Option and, which as of the date of the LIBOR Request
specifying such LIBOR Revolving Portion, has met the conditions for basing
interest at the LIBOR Rate in SECTION 3.1.3 of SUPPLEMENT A and the Interest
Rate Period of which has commenced and has not been terminated.
"LIBOR Term Portion" means, collectively, that portion of the Term
Loan specified in a LIBOR Request which is not less than $100,000 and is an
integral multiple of $10,000, which does not exceed the outstanding balance of
the Term Loan not already subject to the LIBOR Option, and which, as of the date
of the LIBOR Request specifying such LIBOR Term Portion, has met the conditions
for bearing interest at the LIBOR Rate in SECTION 3.1.3 of SUPPLEMENT A and the
Interest Rate Period of which has commenced and has not been terminated."
"Net Worth" means at any time, the total assets of Borrower and its
consolidated Subsidiaries calculated in accordance with GAAP, less the total
liabilities of Borrower and its consolidated Subsidiaries calculated in
accordance with GAAP.
"Reference Rate Loan" means any Reference Revolving Portion or
Reference Term Portion.
"Reference Revolving Portion" means that portion of the Revolving
Loans that is not subject to a LIBOR Option.
"Reference Term Portion" means that portion of the Term Loan that is
not subject to a LIBOR Option.
"Term Loan" means the Term Loan referred to in SECTION 2.1.1 A.
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<PAGE> 104
3.6. SECTION 2.1 of the Loan Agreement is hereby amended by inserting
a new SECTION 2.1.IA thereto as follows:
2.1.1A TERM LOAN.
(a) Subject to the terms and conditions of this Agreement and the
Related Agreements, and in reliance upon the warranties and representations
of Borrower set forth herein and in the Related Agreements, Lender agrees
to make a term loan (the "Term Loan") to Borrower on or before February 28,
1997; provided that (i) Borrower shall be permitted to make only two draws
hereunder in minimum increments of $500,000; and (ii) the aggregate amount
of such advances shall not exceed the sum of $3,000,000.
(b) Unless otherwise required to be sooner paid pursuant to SECTION
2.1.2 or any other provision of this Agreement, the principal balance of
each draw against the Term Loan shall be repaid in 72 equal monthly
installments equal to 1/72nd of the principal amount of such advance
commencing on the first day of the month after such advance by Lender to
Borrower hereunder and continuing on the same day of each month thereafter.
(c) Notwithstanding the foregoing, if not theretofore paid in full,
the outstanding principal balance of the Term Loan shall be due and payable
in full on the Termination Date.
(d) Subject to SECTION 2.1.2, Borrower may, upon at least three Banking
Days' notice to Lender, prepay the principal of the Term Loan in whole
or in part without any premium or penalty (other than as expressly provided
in SECTION 3.5 of SUPPLEMENT A with respect to LIBOR Rate Loans repaid
prior to the end of the applicable Interest Rate Period). Any partial
prepayment of principal shall be in a minimum amount of $100,000 and in an
integral multiple of $10,000 thereafter, and shall be applied to the unpaid
installments of the Term Loan in the inverse order of their maturities.
3.7. SECTION 2.1.1(c) of the Loan Agreement is hereby amended by
inserting a parenthetical at the end of such section, as follows:
"(other than as expressly provided in SECTION 3.5 of SUPPLEMENT A with
respect to LIBOR Rate Loans repaid prior to the end of the applicable
Interest Rate Period)."
3.8. SECTION 2.1.2 of the Loan Agreement is hereby amended by deleting
the first sentence thereof in its entirety and inserting the following in lieu
thereof:
"Borrower may prepay all of the Liabilities in full at any time without
premium or penalty (other than as expressly provided in SECTION 3.5 of
SUPPLEMENT A
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<PAGE> 105
with respect to LIBOR Rate Loans repaid prior to the end of the applicable
Interest Rate Period), by prepaying the outstanding principal balance of
the Revolving Loans and the Term Loan, together with (a) all accrued and
unpaid interest on the Liabilities, (b) all other outstanding Liabilities
and (c) cash in the amount of, or adequate (in Lender's determination) cash
collateral for, the Letter of Credit Obligations."
3.9. SECTION 2.1.3 of the Loan Agreement is hereby amended by deleting
the phrase "Revolving Credit Amount" in the fourth line thereof and inserting
the amount "$12,000,000" in lieu thereof.
3.10. SECTION 2.12 of the Loan Agreement is hereby amended by inserting
the phrase", each LIBOR Request" after the phrase "Each Loan" and before the
phrase "or Letter of Credit" in the first line thereof.
3.11. SECTION 2.4.1 of the Loan Agreement is hereby amended in its
entirety as follows:
2.4.1 INTEREST.
(a) REVOLVING LOANS. The unpaid principal amount of each
Revolving Loan hereunder shall bear interest until maturity at the
rate applicable to Revolving Loans indicated in SUPPLEMENT A hereto.
If any Revolving Loan or portion thereof is not paid when due, whether
by acceleration or otherwise, the entire unpaid principal amount of
the Revolving Loans shall bear interest thereafter until such amount
is paid in full at the Default Rate applicable to Revolving Loans
indicated in SUPPLEMENT A hereto. Until maturity, interest on the
Revolving Loans shall be paid by Borrower on the date(s) indicated in
SUPPLEMENT A and at such maturity. After maturity, whether by
acceleration or otherwise. accrued interest shall be payable on
demand.
(b) TERM LOAN. The unpaid principal amount of the Term Loan
shall bear interest until maturity at the rate applicable to the Term
Loan indicated in SUPPLEMENT A hereto. If any installment of the Term
Loan is not paid when due, whether by acceleration or otherwise, the
entire unpaid principal amount of the Term Loan shall bear interest
thereafter until such amount is paid in full at the Default Rate
applicable to the Term Loan indicated in SUPPLEMENT A hereto. Until
maturity, interest on the Term Loan shall be paid by Borrower on the
date(s) indicated in SUPPLEMENT A and at such maturity. After
maturity, whether by acceleration or otherwise, accrued interest shall
be payable on demand.
3.12. AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (a) to
Section 5.1.1 of the Loan Agreement is hereby amended in its entirety as
follows:
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<PAGE> 106
"(a) ANNUAL AUDIT REPORT. No later than May 31, 1996 for
Fiscal Year 1995, and within one hundred twenty (120) days after each
other Fiscal Year of Borrower, a copy of the annual audit report of
Borrower and its Subsidiaries prepared on a consolidating and
consolidated basis and in conformity with GAAP and certified by an
independent public accountant who shall be satisfactory to Lender,
together with a certificate from such accountant (i) acknowledging to
Lender such accountant's understanding that Lender (and any
Participant) is relying on such annual audit report, and (ii)
containing a computation of, and showing compliance with, each of the
financial ratios and restrictions contained in this SECTION 5 or in
SUPPLEMENT A."
3.13. AMENDMENT TO SECTION 5.1.1 OF THE LOAN AGREEMENT. Clause (c) of
Section 5.1.1 of the Loan Agreement is hereby amended to replace the number
"fifteen (15)" contained in the first and second lines thereof with the number
"twenty (20)".
3.14. AMENDMENT AND RESTATEMENT OF SUPPLEMENT A OF THE LOAN AGREEMENT.
Supplement A of the Loan Agreement is hereby amended in its entirety in the form
attached hereto as EXHIBIT A.
4. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set forth
in this Amendment shall become effective as of the date of this Amendment upon
the satisfaction of the following conditions precedent.
4.1. NO DEFAULT. No Event of Default, or event which, with the giving
of notice or the passage of time, or both, would become an Event of Default,
shall have occurred and be continuing.
4.2. RESOLUTIONS. Borrower shall have delivered corporate resolutions,
in form and substance satisfactory to Lender, with respect to this Waiver and
Amendment.
4.3. TERM NOTE. The delivery of an executed copy of the $3,000,000
Term Note.
4.4. EXECUTION. The delivery of an executed copy of this Waiver
and Amendment and the acknowledgments hereto to Lender.
4.5. CLOSING FEE. Borrower shall have paid Lender a closing fee of
$50,000.
5. MISCELLANEOUS.
5.1. EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Waiver and Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrower agrees to pay, and save
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<PAGE> 107
Lender harmless from all liability for, any stamp or other taxes which may be
payable in connection with the execution or delivery of this Waiver and
Amendment, the borrowings under the Loan Agreement, as amended hereby, and the
execution and delivery of any instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith. All
obligations provided in this SECTION 5.1 shall survive any termination of this
Waiver and Amendment or the Loan Agreement as amended hereby.
5.2. GOVERNING LAW. This Waiver and Amendment shall be a contract made
under and governed by the internal laws of the State of Illinois.
5.3. COUNTERPARTS. This Waiver and Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Waiver and Amendment.
5.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendments to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Waiver and Amendment.
5.5. SUCCESSORS. This Waiver and Amendment shall be binding upon
Borrower, Lender and their respective successors and assigns, and shall inure to
the benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
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<PAGE> 108
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By/s/Michael A. Pecchia
----------------------------
Its Treasurer
---------------------------
BANK OF AMERICA ILLINOIS
By/s/Ron Benishay
----------------------------
Its Vice President
---------------------------
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<PAGE> 109
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Jason Alford
------------------------------
JASON ALFORD
/s/Ruth Alford
-------------------------------
RUTH ALFORD
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<PAGE> 110
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the foregoing
Waiver and Amendment and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/Wayland J. Russell
-------------------------------
Wayland Russell
/s/Donna Russell
-------------------------------
DONNA RUSSELL
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<PAGE> 111
CONSENT AND AMENDMENT NO. 8 TO
LOAN AND SECURITY AGREEMENT
This Consent and Amendment No. 8 ("Amendment") to Loan and Security
Agreement is made as of April 21, 1997, between Rainbow Rentals, Inc. (formerly
known as Rainbow Home Rentals, Inc.) ("Borrower") and Bank of America Illinois
(formerly known as Continental Bank Illinois, formerly known as Continental Bank
N.A. ("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has requested that Lender consent to (A) the execution and
delivery by Borrower of the Redemption Agreement attached hereto as Exhibit A
(the "Redemption Agreement") pursuant to which Borrower will redeem all of the
capital stock of Borrower held by Jason A. Alford ("Jason"), Ruth L. Alford
("Ruth"), Saint Ruth Limited Partnership ("SLRP") and Alford Limited Partnership
("ALP") in exchange for a cash payment of $2,751,850 (the "Cash Redemption
Payment") and the issuance of a $1,660,748.50 Subordinated Non-Negotiable Note
to ALP, a $1,660,478.50 Subordinated Non-Negotiable Note to Jason, a
$2,283,007.46 Subordinated Non-Negotiable Note to Ruth, and a $2,790,340.54
Subordinated Non-Negotiable Note to SRLP (such notes to be in the form of
Exhibits A, B, and C, respectively, to the Redemption Agreement (the
"Subordinated Redemption Notes")), (B) the execution, and delivery of the
Employment Severance, Non-Competition and Non-Disclosure Agreement attached
hereto as Exhibit B (the "Severance Agreement") pursuant to which Borrower will
pay Jason $248,150 (the "Cash Severance Payment") and issue a $1,593,065
Subordinated Non-Negotiable Note to Jason (such note to be in the form of the
exhibit attached to the Severance Agreement (the "Subordinated Severance
Note")), and (C) the execution and delivery of the Consulting Agreement attached
hereto as Exhibit C (the "Consulting Agreement") pursuant to which Borrower will
issue a $500,125 Subordinated Non-Negotiable Note to Jason (such note to be in
the form of the exhibit attached to the Consulting Agreement (the "Subordinated
Consulting Note")).
Borrower has also requested that the Loan Agreement be amended in certain
respects.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. CONSENT. Subject to the terms and conditions of this Amendment,
Lender hereby consents to (A) the execution and delivery by Borrower of the
Redemption Agreement, the Severance Agreement and the Consulting Agreement, and
the redemption of the capital stock of Jason, Ruth, SRLP and ALP pursuant to the
Redemption Agreement, (B) the issuance by Borrower of the Subordinated
Redemption Notes, the Subordinated Severance Note and the Subordinated
Consulting Note, and (C) the payment by Borrower of the Cash Redemption Payment,
the Cash Severance Payment and the Cash Consulting Payment. This consent shall
not constitute (a) a modification or alteration of the terms, conditions or
<PAGE> 112
covenants of the Loan Agreement (other than to Sections 5.13 and 5.15 of the
Loan Agreement as expressly set forth above) or any document entered into in
connection therewith, or (b) a waiver, release or limitation upon the exercise
by Lender of any of its rights, legal or equitable, hereunder. Except as set
forth above, Lender reserves any and all rights and remedies which it has had,
has or may have under the Loan Agreement. Subject to the terms and conditions of
this Amendment, Lender will release Jason and Ruth from their obligations under
that certain Guaranty dated October 3, 1992 executed by them and any other
documents executed by them in connection with such Guaranty, if any (but not the
Subordination Agreement referred to below).
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby
amended as follows:
3.1. AMENDMENT TO SECTION 6.1(n) OF THE LOAN AGREEMENT. Section
6.1(n) of the Loan Agreement is hereby amended and restated as follows:
(n) OWNERSHIP. If Wayland Russell fails to own seventy percent (70%)
of the voting stock of Borrower.
3.2. AMENDMENT TO SECTION 2.1 OF SUPPLEMENT A. Section 2.1 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.1 REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such
amount, as adjusted from time to time, is herein called the "Revolving
Credit Amount") is $11,500,000; provided, that at all times after May 21,
1997 the Revolving Credit Amount shall be $9,000,000.
3.3. AMENDMENT TO SECTION 2.2 OF SUPPLEMENT A. Section 2.2 of
Supplement A to the Loan Agreement is hereby amended in its entirety as follows:
2.2 BORROWING BASE. The term "Borrowing Base," as used herein, shall
mean:
(i) an amount (the "Cash Receipts Availability") of up to 100%
of the net amount of Borrower's actual cash collections of Accounts
Receivable from Account Debtors pursuant to the terms of Rental Agreements
for the immediately preceding two calendar months (exclusive of
collections for delivery, insurance, merchandise, sales and other
non-rental payments and after deduction of such reserves and allowances as
Lender deems proper and necessary); plus
(ii) an amount (the "Inventory Availability") of up to the
lesser of (A) up to 30% of the net value (as determined by Lender and
after deduction of such reserves and allowances as Lender deems proper and
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<PAGE> 113
necessary) of Borrower's Eligible Inventory and (B) the "Inventory
Sublimit" (as defined in Section 2.3 below). Without limiting Lender's
discretion to establish reserves with respect to Inventory Availability,
Lender shall establish a reserve equal to one-third of the value of
Borrower's Eligible Inventory; plus
(iii) the "Additional Availability (as defined below). "Additional
Availability" means $2,000,000; provided, that at all times after May 21,
1997, the Additional Availability means zero.
4. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set
forth in this Amendment shall become effective as of the date of this Amendment
upon the satisfaction of the following conditions precedent:
4.1. NO DEFAULT. No Event of Default, or event which, with the
giving of notice or the passage of time, or both, would become an Event of
Default, shall have occurred and be continuing.
4.2. RESOLUTIONS. Borrower shall have delivered corporate
resolutions, in form and substance satisfactory to Lender, with respect to this
Amendment.
4.3. AMENDMENT FEE. Borrower shall have paid Lender an amendment fee
of $40,000.
4.4. EXECUTION. The delivery of an executed copy of this Agreement
and the acknowledgments hereto to Lender.
4.5. SUBORDINATION AGREEMENT. Each of Jason, Ruth, SRLP and ALP
shall have executed a subordination agreement in form and substance satisfactory
to Lender.
5. MISCELLANEOUS.
5.1. PERSONAL FINANCIAL STATEMENTS. Within 30 days following the
date hereof, Borrower will cause Wayland and Donna Russell to deliver to Lender
their personal financial statements.
5.2. EXPENSES. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrower agrees to pay, and save Lender
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Amendment, the borrowings
under the Loan Agreement, as amended hereby, and the execution and delivery of
any instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. All obligations provided in this SECTION
5.1 shall survive any termination of this Amendment or the Loan Agreement as
amended hereby.
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<PAGE> 114
5.3. GOVERNING LAW. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois.
5.4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
5.5. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendments to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
5.6. SUCCESSORS. This Amendment shall be binding upon Borrower,
Lender and their respective successors and assigns, and shall inure to the
benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/ Wayland J. Russell
----------------------------
Its President
---------------------------
BANK OF AMERICA ILLINOIS
By /s/ Paul S.
----------------------------
Its Senior Vice President
---------------------------
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<PAGE> 115
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the foregoing
Consent and Amendment No.8 (and understand that the guaranty of Jason and Ruth
Alford will be released) and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5,1992.
/s/ Wayland J. Russell
-----------------------------
WAYLAND RUSSELL
/s/ Donna R. Russell
-----------------------------
DONNA RUSSELL
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<PAGE> 116
AMENDMENT NO. 9 TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 9 ("Amendment") to Loan and Security Agreement is made
as of May 21, 1997, between Rainbow Rentals, Inc. (formerly known as Rainbow
Home Rentals, Inc.)("Borrower") and Bank of America Illinois (formerly known
as Continental Bank Illinois, formerly known as Continental Bank
N.A.)("Lender").
Reference is made to that certain Loan and Security Agreement between
Borrower and Lender dated October 5, 1992 (as amended, the "Loan Agreement").
Borrower has requested that the Loan Agreement be amended in certain
respects.
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed to such terms in the Loan Agreement.
2. PAYMENT OF TERM LOAN. The outstanding principal balance of the Term
Loan is $2,652,777.75. Upon the date this Amendment becomes effective pursuant
to Section 4 hereof, Borrower agrees to prepay the Term Loan in full.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended as
follows:
3.1 SECTION 1.1 of the Loan Agreement is hereby amended by amending and
restating the proviso at the end of the definition of the term "Banking Day,"
as follows:
;provided, that with respect to IBOR Rate Loans, Banking days shall not
include a day on which dealings in U.S. Dollars may not be carried on by
Lender in the interbank IBOR market.
3.2 SECTION 1.1 of the Loan Agreement is hereby amended by amending and
restating the definition of "Eurocurrency Reserve Requirement" as follows:
"Eurocurrency Reserve Requirement" means, with respect to any IBOR
Rate Loan for any Interest Rate Period, a percentage equal to the daily
average during such Interest Rate Period of the percentages in effect on
each day of such Interest Rate Period, as prescribed by the Federal Reserve
Board, for determining the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves) applicable
to "Eurocurrency liabilities" pursuant to Regulation D or any other then
applicable regulation of the Federal Reserve Board which prescribes
reserve requirements applicable to "Eurocurrency liabilities," as presently
defined in Regulation D. Without limiting the effect of the foregoing, the
Eurocurrency Reserve Requirement shall reflect any other reserves required
to be maintained by Lender or any Related Party of Lender against (i) any
category of liabilities that includes
<PAGE> 117
deposits by reference to which the IBOR Rate is to be determined, or (ii)
any category of extensions of credit or other assets that includes IBOR
Rate Loans. For purposes of this Agreement, any IBOR Rate Loan hereunder
shall be deemed to be "Eurocurrency liabilities," as defined in Regulation
D, and, as such, shall be deemed to be subject to such reserve
requirements without the benefit of, or credit for, proration, exceptions
or offsets which may be available to Lender or any Related Party of Lender
from time to time under Regulation D.
3.3. SECTION 1.1 of the Loan Agreement is hereby amended by amending
and restating the definition of "Interest Rate Period" as follows:
"Interest Rate Period" means with respect to any IBOR Revolving
Portion, the period commencing on the date on which the IBOR Rate is
deemed applicable to such IBOR Revolving Portion, and ending on the
numerically corresponding day one (1), two (2) or three (3) months
thereafter, as selected by Borrower pursuant to SECTION 3.1.3 of
SUPPLEMENT A, provided, however, that;
(a) any Interest Rate Period which would otherwise end on a
day which is not a Banking Day shall end on the next succeeding
Banking Day unless such next succeeding Banking Day falls in another
calendar month, in which case such Interest Rate Period shall end on
the next preceding Banking Day;
(b) any Interest Rate Period which begins on the last Banking
Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of
such Interest Rate Period) shall end on the last Banking Day of the
calendar month at the end of such Interest Rate Period; and
(c) no Interest Rate Period shall extend beyond thc
Termination Date.
3.4. SECTION 1.1 of the Loan Agreement is hereby amended by
amending and restating the definition of "Reference Revolving Portion" as
follows:
"Reference Revolving Portion" means that portion of the
Revolving Loans that is not subject to an IBOR Option.
3.5. SECTION 1.1 of the Loan Agreement is hereby amended by amending
and restating in its entirety the definition of "Termination Date" as follows:
"Termination Date" means May 21, 2000.
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<PAGE> 118
3.6. SECTION 1.1 of the Loan Agreement is hereby amended by Inserting
the following definitions in the appropriate places, alphabetically:
"IBOR Base Rate" means (i) with respect to each Interest Rate Period
for any IBOR Rate Loan, the rate per annum at which U.S. Dollar deposits
in immediately available funds are offered to the IBOR Office of Lender
two (2) Banking Days prior to the beginning of such Interest Rate Period
by major banks in the interbank eurodollar market at or about 10:00 a.m.,
Chicago time, for delivery on the first day of such Interest Rate Period,
for the number of days comprised therein and in an amount equal to the
amount of the IBOR Rate Loan to be outstanding during such Interest Rate
Period.
"IBOR Office" means the office or offices selected by Lender which
shall be making or maintaining IBOR Rate Loans hereunder or such other
office or offices selected by Lender through which Lender determines its
IBOR Base Rate. An IBOR Office may be, at the option of Lender, a United
States or Canadian or other foreign office.
"IBOR Option" means the option granted to Borrower pursuant to
SECTION 3.1.3 of SUPPLEMENT A to have the interest on all or any portion
of the principal amount of the Revolving Loans based on a IBOR Rate.
"IBOR Rate" means, with respect to each Interest Rate Period for a
IBOR Rate Loan, a rate per annum (rounded upward, if necessary, to the
nearest one hundredth of one percent (1/100th of 1%)) determined pursuant
to the following formula:
IBOR Rate = IBOR Base Rate
----------------------------------
1-Eurocurrency Reserve Requirement
"IBOR Rate Loan" means any IBOR Revolving Portion.
"IBOR Request" means a written notice from Borrower to Lender
requesting that interest on all or a portion of the Revolving Loan be
based on the then applicable IBOR Rate, specifying (i) a dollar amount of
the IBOR Revolving Portion consistent with the definitions of such terms;
(ii) the date on which the applicable Interest Rate Period shall begin;
and (iii) the Interest Rate Period applicable thereto.
"IBOR Revolving Portion" means, collectively, that portion of the
Revolving Loans specified in a IBOR Request (including any portion of the
Revolving Loans which is being borrowed by Borrower concurrently with such
IBOR Request) which is not less than $100,000 and is an integral multiple
of $10,000, which does not exceed the outstanding balance of the Revolving
Loans not already subject to a IBOR Option and, which as of the date of
the
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<PAGE> 119
IBOR Request specifying such IBOR Revolving Portion, has met the conditions
for basing interest at the IBOR Rate in Section 3.1.3 of Supplement A and
the Interest Rate Period of which has commenced and has not been
terminated.
3.7. SECTION 1.1 of the Loan Agreement is hereby amended to delete
the definitions of "LIBOR Base Rate," "LIBOR Option," "LIBOR Rate," "LIBOR Rate
Loan," "LIBOR Request," "LIBOR Revolving Portion" and "LIBOR Term Portion" in
their entirety.
3.8. SECTION 2.1.1(c) of the Loan Agreement is hereby amended by
amending and restating the parenthetical at the end of such section, as
follows:
"(other than as expressly provided in SECTION 3.5 of SUPPLEMENT A with
respect to IBOR Rate Loans repaid prior to the end of the applicable
Interest Rate Period)."
3.9. SECTION 2.1.2 of the Loan Agreement is hereby amended by
amending and restating the first sentence thereof in its entirety and inserting
the following in lieu thereof:
"Borrower may prepay all of the Liabilities in full at any time without
premium or penalty (other than as expressly provided in SECTION 3.5 of
SUPPLEMENT A with respect to IBOR Rate Loans repaid prior to the end of
the applicable Interest Rate Period), by prepaying the outstanding
principal balance of the Revolving Loans, together with (a) all accrued
and unpaid interest on the Liabilities, (b) all other outstanding
Liabilities and (c) cash in the amount of, or adequate (in Lender's
determination) cash collateral for, the Letter of Credit Obligations."
3.10. SECTION 2.1.3 of the Loan Agreement is hereby amended by
deleting the phrase "$12,000,O00" in the fourth line thereof and inserting the
phrase "Revolving Credit Amount" in lieu thereof.
3.11. SECTION 2.12 of the Loan Agreement is hereby amended by
deleting each reference to ", each LIBOR Request" and inserting the phrase
", each IBOR Request" after the phrase "Each Loan" and before the phrase "or
Letter of Credit" in the first line thereof.
3.12. SECTION 2.4.2 of the Loan Agreement is hereby amended to
replace the phrase "one-half of one percent (0.50%)" with the phrase
"three-eighths of one percent (0.375%)."
3.13. AMENDMENT AND RESTATEMENT OF SUPPLEMENT A OF THE LOAN AGREEMENT.
SUPPLEMENT A of the Loan Agreement is hereby amended in its entirety in the form
attached hereto as EXHIBIT A.
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<PAGE> 120
4. CONDITIONS PRECEDENT. The amendment to the Loan Agreement set
forth in this Amendment shall become effective as of the date of this Amendment
upon the satisfaction of the following conditions precedent:
4.1. NO DEFAULT. No Event of Default, or event which, with the
giving of notice or the passage of time, or both, would become an Event of
Default, shall have occurred and be continuing.
4.2. RESOLUTIONS. Borrower shall have delivered corporate
resolutions, in form and substance satisfactory to Lender, with respect to this
Waiver and Amendment.
4.3. EXECUTION. The delivery of an executed copy of this Waiver and
Amendment and the acknowledgments hereto to Lender.
4.4. CLOSING FEE. Borrower shall have paid Lender a closing fee of
$100,000.
5. MISCELLANEOUS.
5.1 EXPENSES. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Waiver and Amendment and all other
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. In addition, Borrower agrees to pay, and
save Lender harmless from all liability for, any stamp or other taxes which may
be payable in connection with the execution or delivery of this Waiver and
Amendment, the borrowings under the Loan Agreement, as amended hereby, and the
execution and delivery of any instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith. All
obligations provided in this Section 5.1 shall survive any termination of this
Waiver and Amendment or the Loan Agreement as amended hereby.
5.2 GOVERNING LAW. This Waiver and Amendment shall be a contract
made under and governed by the internal laws of the State of Illinois.
5.3 COUNTERPARTS. This Waiver and Amendment may be executed in any
number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Waiver and Amendment.
5.4. REFERENCE TO LOAN AGREEMENT. Except as herein amended, the Loan
Agreement shall remain in full force and effect and is hereby ratified in all
respects. On and after the effectiveness of the amendments to the Loan Agreement
accomplished hereby, each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference to
the Loan Agreement in any note and in any Related Agreements, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan
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<PAGE> 121
Agreement, shall mean and be a reference to the Loan Agreement, as amended by
this Waiver and Amendment.
5.5. SUCCESSORS. This Waiver and Amendment shall be binding upon
Borrower, Lender and their respective successors and assigns, and shall inure to
the benefit of Borrower, Lender and the successors and assigns of Borrower and
Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized and
delivered at Chicago, Illinois as of the date first above written.
RAINBOW RENTALS, INC.
By /s/ Wayland J. Russell
--------------------------------------
Its President-CEO
--------------------------------------
BANK OF AMERICA ILLINOIS
By______________________________________
Its_____________________________________
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<PAGE> 122
ACKNOWLEDGMENT
The undersigned hereby acknowledge that they have read the
foregoing Amendment No. 9 and hereby ratify and reaffirm their guaranty of the
obligations of Borrower to Lender pursuant to that certain Guaranty executed by
the undersigned dated October 5, 1992.
/s/ Wayland J. Russell
---------------------------------------
WAYLAND RUSSELL
/s/ Donna Russell
---------------------------------------
DONNA RUSSELL
-7-
<PAGE> 123
SECOND AMENDED AND RESTATED SUPPLEMENT A
TO LOAN AND SECURITY AGREEMENT
DATED AS OF OCTOBER 5, 1992
BETWEEN BANK OF AMERICA ILLINOIS
AND RAINBOW RENTALS, INC.
1. LOAN AGREEMENT REFERENCE. This Second Amended and Restated Supplement
A, as it may be amended or modified from time to time, is a part of the Loan
and Security Agreement dated as of October 5, 1992 between Lender and Borrower
(together with all amendments, modifications and supplements thereto, the "Loan
Agreement") and amends and restates in its entirety that certain Amended and
Restated Supplement A dated June 17, 1996. Terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Loan Agreement.
2. REVOLVING CREDIT AMOUNT; BORROWING BASE.
2.1. REVOLVING CREDIT AMOUNT. The maximum amount of Revolving Loans
which Lender, in its discretion, will make available to Borrower (such amount,
as adjusted from time to time, is herein called the "Revolving Credit Amount")
is $16,000,000.
2.2. BORROWING BASE. The term "Borrowing Base," as used herein, shall
mean an amount (the "Cash Receipts Availability") equal to (A) the product of up
to the "Cash Collection Percentage" (as defined below) multiplied by the net
amount of Borrower's actual cash collections of Accounts Receivable from Account
Debtors pursuant to the terms of Rental Agreements for the immediately
preceding two calendar months (exclusive of collections for delivery,
insurance, merchandise, sales and other non-rental payments and after
deduction of such reserves and allowances as Lender deems proper and
necessary), divided by (B) two. "Cash Collection Percentage" (as defined below)
means (i) 375% at all times during the period (inclusive) commencing on the
date hereof and ending November 20, 1998 and (ii) 350% at all times on and after
November 21, 1998.
2.3. LENDER'S RIGHTS. Borrower agrees that nothing contained in
Supplement A (i) shall be construed as Lender's agreement to resort or look to
a particular type or item of Collateral as security for any specific Loan or
portion of the Liabilities or advance or in any way limit Lender's right to
resort to any or all of the Collateral as security for any of the Liabilities,
(ii) shall be deemed to limit or reduce any Lien upon any portion of the
Collateral or other security for the Liabilities or (iii) shall supersede
Section 2.9 of the Loan Agreement.
3. INTEREST.
3.1.1. REVOLVING LOANS.
(a) INTEREST TO MATURITY. The unpaid principal balance of the Revolving
Loans (other than Overdraft Loans and Over Advances) shall bear interest to
maturity at a per annum rate equal to the Reference Rate in effect from time to
time plus 0.25%, provided that
<PAGE> 124
pursuant to the provisions of SECTION 3.1.3 below, from time to time Borrower
may elect to have all or any portion of the Revolving Loans bear interest at the
IBOR Rate plus 3.00%.
(b) DEFAULT RATE. If any amount of the Revolving Loans is not paid when
due, whether by acceleration or otherwise, the entire unpaid principal balance
of the Revolving Loans (other than Overdraft Loans and Over Advances) shall bear
interest until paid at a rate per annum equal to the greater of (i) the rate
otherwise from time to time if effect plus 2.00% and (ii) 2.00% above the rate
otherwise in effect at the time such amount becomes due.
3.1.2. INTENTIONALLY OMITTED.
3.1.3. IBOR OPTION.
Borrower shall have the right, from time to time, to designate IBOR
Revolving Portions by means of an IBOR Request. All IBOR Requests must be
received by Lender not later than 10:00 a.m., Chicago time, two (2) Banking Days
prior to the date the applicable Interest Rate Period is to begin (or is to be
continued). Notwithstanding the foregoing, (x) all undesignated portions of the
Revolving Loan shall constitute Reference Rate Loans, (y) Borrower shall not
have the right to designate IBOR Rate Loans at any time that an Event of Default
or an Unmatured Event of Default is in existence, notwithstanding a contrary
designation by Borrower, and (z) in no event may more than four (4) IBOR Rate
Loans having different Interest Rate Periods be outstanding at any one time.
Each designation by Borrower of a IBOR Rate Loan shall be irrevocable; provided,
however, that Borrower may specify in any such IBOR Request a maximum IBOR Rate
which it will accept for the related Interest Rate Period and the IBOR Option
elected in such IBOR Request shall not become effective if the applicable IBOR
Rate determined by Lender shall exceed such specified maximum.
3.2. OVERDRAFT LOANS; OVER ADVANCES. Overdraft Loans and Over Advances
shall bear interest at the rate(s) determined pursuant to Section 2.7 or Section
2.8 of the Loan Agreement, as applicable.
3.3. COMPUTATION. Interest shall be calculated on the basis of a year
consisting of 360 days and paid for actual days elapsed; provided, that the
computation of interest on IBOR Rate Loans shall include the date on which the
applicable Interest Rate Period began, but shall exclude the last day of the
applicable Interest Rate Period. IBOR Rate Loans not repaid on the last day of
the Interest Rate Period applicable thereto shall be continued or converted
into Reference Rate Loans and shall bear interest at the applicable rate for
Reference Rate Loans of such type from and including the last day of such
Interest Rate Period. Changes in any interest rate provided for herein which
are due to changes in the Reference Rate shall take effect on the date of the
change in the Reference Rate.
3.4. PAYMENT. Until maturity, interest on the Loans shall be payable on
the first day of each month, and at maturity. After maturity, whether by
acceleration or otherwise, accrued interest shall be payable on demand;
provided, that interest on IBOR Rate Loans shall
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<PAGE> 125
be payable in arrears on the last day of the Interest Rate Period applicable
thereto and at maturity.
3.5. FUNDING INDEMNIFICATION. If any payment of a IBOR Rate Loan
occurs on a date which is not the last day of the applicable Interest Rate
Period, whether because of acceleration, prepayment or otherwise, Borrower will
indemnify Lender for any loss or cost incurred by it resulting therefrom,
including without limitation any loss or cost in liquidating or employing
deposits acquired to fund or maintain such Loan. Lender shall deliver a written
statement as to the amount due, if any, under this SECTION 3.5. Such written
statement shall set forth in reasonable detail the calculations upon which
Lender determined such amount and shall be final, conclusive and binding on
Borrower in the absence of manifest error. Determination of amounts payable
under this SECTION 3.5 shall be calculated as though Lender funded its IBOR Rate
Loans through the purchase of a deposit of the type and maturity corresponding
to the IBOR Rate Loan and applicable Interest Rate Period bearing interest at
the IBOR Base Rate, whether or not Lender actually funded the Loan in that
manner. The amount specified in the written statement shall be payable on demand
after receipt by Borrower of the written statement. This SECTION 3.5 shall apply
to all payments of IBOR Rate Loans prior to the last day of the applicable
Interest Rate Period, including without limitation any such payment required to
be made in order to permit Borrower to pay any installment of principal due in
respect of the Revolving Loan under this Agreement.
3.6. AVAILABILITY OF INTEREST RATE OPTIONS. If Lender determines that
maintenance of any of its IBOR Rate Loans would violate any applicable law,
rule, regulation or directive, whether or not having the force of law, Lender
shall suspend the availability of such IBOR Rate Loans and require any IBOR
Rate Loans outstanding and so affected to be repaid; or if Lender determines
that (i) deposits of a type or maturity appropriate to match fund IBOR Rate
Loans are not available, (ii) the IBOR Rate does not accurately reflect the
cost of making such Loans, or (iii) Lender's ability to make or maintain IBOR
Rate Loans has been materially adversely affected by the occurrence of any
event after the date hereof, then Lender shall suspend the availability of the
IBOR Rate Loans, as applicable, after the date of any such determination.
4. ADDITIONAL COVENANTS. From the Closing Date and thereafter until all
of Borrower's Liabilities under the Loan Agreement are paid in full, Borrower
agrees that, unless Lender otherwise consents in writing, it will:
4.1. NET WORTH. Not permit Borrower's Net Worth at any time during any
period set forth below to be less than the amount set forth opposite such
period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
March 31, 1997 through June 29, 1997 $600,000
June 30, 1997 through September 29, 1997 $700,000
September 30, 1997 through December 30, 1997 $800,000
December 31, 1997 through March 30, 1998 $1,100,000
</TABLE>
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<PAGE> 126
Period Amount
------ ------
March 31, l998 through June 29, 1998 $1,450,000
June 30, 1998 through September 29, 1998 $1,800,000
September 30, 1998 through December 30, 1998 $2,150,000
December 31, 1998 through March 30, 1999 $2,500,000
March 31, 1999 through June 29, 1999 $2,900,000
June 30, 1999 through September 29, 1999 $3,300,000
September 30, 1999 through December 30, 1999 $3,700,000
December 31, 1999 through March 30, 2000 $4,000,000
March 31, 2000 and thereafter $4,500,000
4.2. CAPITAL EXPENDITURES. Not and not permit any of its Subsidiaries
to purchase or otherwise acquire (including without limitation, acquisition by
way of capitalized lease), or commit to purchase or acquire, any fixed asset, if
after giving effect to such purchase or other acquisition, the aggregate cost of
all such fixed assets purchased or otherwise acquired would exceed $1,500,000 in
any Fiscal Year.
4.3. MAXIMUM FUNDED DEBT TO EARNINGS RATIO. Not permit, for the twelve
month period ending on the last day of each month ending during any period
(inclusive) set forth below, the ratio of (a) Borrower's Indebtedness for
interest bearing borrowed money on the last day of each such month during such
period set forth below (excluding Indebtedness subordinated to Lender in a
manner satisfactory to Lender) to (b) Borrower's consolidated net earnings
before interest expense and provision for Taxes for such twelve month period, to
be greater than the ratio set forth below opposite such twelve month period;
Period Maximum Ratio
------- -------------
April 30, 1997 through December 30, 1997 3.75:1.00
December 31, 1997 through December 30, 1998 3.50:1.00
December 31, 1998 and the twelve month period ending 3.25:1:00
on the last day of each month thereafter
For purposes of this SECTION 4.3 and SECTION 4.4 (i) net earnings shall not
include any gains on the sale or other disposition of Investments of fixed
assets and any extraordinary or nonrecurring items of income to the extent that
the aggregate of all such gains and extraordinary or nonrecurring items of
income exceeds the aggregate of losses on such sale or other disposition and
extraordinary or nonrecurring charges, and (ii) interest expense shall include,
without limitation, implicit interest expense on Capitalized Leases, and shall
exclude the amortization of the closing fee, the modification fee, or any other
fee paid to Lender in connection with the Loans.
4.4. MINIMUM FIXED CHARGE COVERAGE RATIO. Not permit, for the twelve
month period ending on the last day of each month ending during any period
(inclusive) set forth below, the ratio of (a) Borrower's consolidated net
earnings before interest expense and
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<PAGE> 127
provision for Taxes plus the rental payments for Borrower's stores for such
twelve month period to (b) the sum of (i) Borrower's accrued cash interest
expense for such twelve month period, (ii) scheduled principal payments with
respect to Borrower's Indebtedness for borrowed money during such twelve month
period, and (iii) the rental payments for Borrower's stores, to be less than the
ratio set forth below opposite such twelve month period:
Period Minimum Ratio
------ -------------
April 30, 1997 through March 31, 1998 1.40:1.00
April 30, 1998 through June 30, 1998 1.25:1.00
July 31, 1998 and the twelve month period ending on the 1.50:1.00
last day of each month thereafter
Borrower's Initials /s/ WJR
-------
Lender's Initials
Date: , 1997
------------
-5-
<PAGE> 1
EXHIBIT 4.3
COLLATERAL TRADEMARK SECURITY AGREEMENT
THIS COLLATERAL TRADEMARK SECURITY AGREEMENT ("Security Agreement") made
as of the 5th day of October, 1992, by RAINBOW HOME RENTALS, INC., an Ohio
corporation ("Borrower") and CONTINENTAL BANK N.A., a national banking
association having its principal office at 231 South LaSalle Street, Chicago,
Illinois 60697 ("Lender"):
W I T N E S S E T H:
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement of even date herewith (said Loan and Security Agreement, as it may
hereafter be amended or otherwise modified from time to time, being called the
"Loan and Security Agreement"; capitalized terms not otherwise defined herein
shall have the meaning ascribed to such terms in the Loan and Security
Agreement); and
WHEREAS, it is a condition precedent to the making of the initial
Revolving Loan and the issuance of the initial Letter of Credit under the Loan
and Security Agreement by Lender that Borrower shall grant the security interest
and make the collateral assignment contemplated by this Security Agreement;
NOW, THEREFORE, in consideration of the premises and in order to induce
Lender to make Loans and issue Letters of Credit under the Loan and Security
Agreement, Borrower hereby agrees with Lender as follows:
1. GRANT OF SECURITY INTEREST. To secure the prompt and complete
payment, observance and performance of all of the Liabilities, Borrower hereby
grants, bargains, assigns, mortgages, pledges and creates a security interest in
and transfers and conveys to Lender as and by way of a first mortgage and
security interest having priority over all other security interests, with power
of sale as hereinafter provided, to the extent permitted by law, with respect to
all of the following property of Borrower, whether now owned or existing or
hereafter acquired or arising (collectively, the "Collateral"):
(a) trademarks, trademark registrations, interests under
trademark license agreements, tradenames and trademark applications,
service marks, service mark registrations, service mark applications and
brand names, including, without limitation, the trademarks, trade-
names, service marks and registrations and applications thereof listed
on EXHIBIT A attached hereto and made a part hereof and the trademark
license agreements (both as licensee and licensor) listed on EXHIBIT B
attached hereto and made a part hereof and (i) all renewals thereof,
(ii) all income, royalties, damages and payments
<PAGE> 2
now or hereafter due and/or payable with respect thereto, including,
without limitation, payments under all licenses entered into in
connection therewith and damages and payments for past or future
infringements thereof, but excluding attorneys' fees and court costs
payable to Borrower with respect thereto, (iii) the right to sue for
past, present and future infringements thereof, and (iv) all rights
corresponding thereto throughout the world (all of the foregoing
trademarks, tradenames, service marks, applications, registrations, and
interests under trademark license agreements, together with the items
described in CLAUSES (i) through (iv) in this SUBSECTION (a), are
sometimes hereinafter individually and/or collectively referred to as
the "Trademarks"); and
(b) the goodwill of Borrower's business associated with or
symbolized by the Trademarks.
2. RESTRICTIONS ON FUTURE AGREEMENTS. Borrower agrees that until all
Liabilities shall have been satisfied in full and the Loan and Security
Agreement shall have been terminated, Borrower will not, without Lender's prior
written consent, abandon any Trademark, the abandonment of which would have a
material adverse affect on Borrower, or enter into any agreement, including,
without limitation, any license agreement, which is inconsistent with Borrower's
obligations under this Security Agreement and Borrower further agrees that it
will not take any action, or permit any action to be taken by others subject to
its control, including licensees, or fail to take any action, which would affect
the validity or enforcement of the rights transferred to Lender under this
Security Agreement and any such agreement or action if it shall take place shall
be null and void and of no effect whatsoever.
3. NEW TRADEMARKS. Borrower represents and warrants that the Trademarks
listed on EXHIBIT A and the license agreements listed on EXHIBIT B constitute
all of the Trademarks and applications now owned by or licensed to or by
Borrower for which registrations have been issued or applied for in the United
States Patent and Trademark Office. If, before the Liabilities have been
satisfied in full and the Loan and Security Agreement terminated, Borrower shall
(i) obtain rights to any new trademarks, trademark registrations or applications
or tradenames used in the United States or any state, territory or possession
thereof or (ii) become entitled to the benefit of any trademark application,
trademark, trademark registration or tradename used in the United States or any
state, territory or possession thereof, the provisions of PARAGRAPH 1 above
shall automatically apply thereto and Borrower shall give to Lender prompt
written notice thereof. Borrower hereby authorizes Lender to modify this
Security Agreement by amending EXHIBIT A and EXHIBIT B to include any future
trademarks, trademark registrations, trademark applications, tradenames and
-2-
<PAGE> 3
license agreements which are Trademarks, as applicable, under PARAGRAPH 1 above
or under this PARAGRAPH 3.
4. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents, warrants, covenants and agrees that:
(a) It is and will continue to be the owner of all right, title
and interest in the Collateral so long as the Trademarks shall continue
in force, free from any lien or security interest in favor of any Person
except for the security interest granted to Lender and any other
security interests agreed to in writing by Lender.
(b) It has the full right and power to grant the security
interest in the Collateral made hereby.
(c) It has made no previous assignment, transfer or agreements
in conflict herewith or constituting a present or future assignment,
transfer, or encumbrance on any of the Collateral except for license
agreements to use such Collateral granted to licensees described on
EXHIBIT B hereto.
(d) There is no financing statement or other document or
instrument now signed or on file in any public office covering any part
of the Collateral, except those showing Lender as secured party, and so
long as any Liabilities remain outstanding under the Loan and Security
Agreement or the Loan and Security Agreement has not terminated, it will
not execute, and there will not be on file in any public office, any
such financing statement or other document or instruments, except
financing statements on file or to be filed in favor of Lender.
(e) All information furnished to Lender concerning the
Collateral and proceeds thereof, for the purpose of obtaining credit or
an extension of credit, is, or will be at the time the same is
furnished, accurate and correct in all material respects.
(f) Except as otherwise disclosed herein, to the best of
Borrower's knowledge and belief after due inquiry, no infringement or
unauthorized use presently is being made of any of the Trademarks which
would materially adversely affect the fair market value of the
Collateral or the benefits of this Security Agreement granted to Lender
including, without limitation, the priority or perfection of the
security interest granted herein or the remedies of Lender hereunder.
5. ROYALTIES; TERMS. Borrower hereby agrees that any rights granted
hereunder to use by Lender with respect to all
-3-
<PAGE> 4
Collateral as described above shall be worldwide and without any liability for
royalties or other related charges from Lender to Borrower. The term of the
assignments of security interest granted herein shall extend until the earlier
of (i) the expiration or termination of each of the Trademarks assigned
hereunder or (ii) all Liabilities have been paid in full and the Loan and
Security Agreement has been terminated.
6. LENDER'S RIGHT TO INSPECT. Lender shall have the right, at any time
and from time to time, to inspect Borrower's premises and to examine Borrower's
books, records and operations. Borrower agrees not to sell or assign its
interest in, or grant any license under, any of the Collateral without the prior
written consent of Lender.
7. RELEASE OF SECURITY INTEREST. This Security Agreement is made for
collateral purposes only. Upon payment in full of all Liabilities and
termination of the Loan and Security Agreement, Lender shall, at Borrower's sole
cost and expense, execute and deliver to Borrower all termination statements,
assignments and other instruments as may be necessary or proper to re-vest in
Borrower full title to the Collateral granted hereby, subject to any disposition
thereof which may have been made by Lender pursuant hereto or pursuant to the
Loan and Security Agreement.
8. DUTIES OF BORROWER. Borrower shall have the duty (i) to file and
prosecute diligently any trademark or service mark application that is part of
the Trademarks pending as of the date hereof or thereafter, (ii) to make
application on Trademarks, as appropriate, and (iii) to preserve and maintain
all rights in the Trademarks. Any expenses incurred in connection with this
PARAGRAPH 8 shall be borne by Borrower. Borrower shall not abandon any right to
file a trademark application or any pending trademark application without the
consent of Lender, if such abandonment could have a material adverse effect on
Borrower's business, operations or financial condition.
If Borrower fails to comply with any of the foregoing duties, Lender may
do so in Borrower's name to the extent permitted by law, but at Borrower's
expense, and Borrower hereby agrees to reimburse Lender in full for all
expenses, including the reasonable fees and disbursements of counsel incurred by
Lender in protecting, defending and maintaining the Collateral.
In the event that Borrower shall fail to pay when due any fees required
to be paid by it hereunder, or shall fail to discharge any lien or security
interest prohibited hereby, or shall fail to comply with any other duty
hereunder, Lender may, but shall not be required to, pay, satisfy, discharge or
bond the same for the account of Borrower, and all moneys so paid out shall be
Liabilities of Borrower repayable on demand, together with interest
-4-
<PAGE> 5
at the rate of interest applicable to Revolving Loans under the Loan and
Security Agreement.
9. RIGHT TO SUE. Upon the occurrence and during the continuance of an
Event of Default, Lender shall have the right, but shall in no way be obligated,
to bring suit in its own name to enforce the Trademarks, and any licenses
thereunder, and, if Lender shall commence any such suit, Borrower shall, at the
request of Lender, do any and all lawful acts and execute any and all proper
documents required by Lender or such other party in aid of such enforcement and
Borrower shall promptly, upon demand, reimburse and indemnify Lender or such
other party for all costs and expenses incurred by Lender or such other party in
the exercise of its or their rights under this PARAGRAPH 9.
10. WAIVERS. No course of dealing among Borrower and Lender, nor any
failure to exercise, nor any delay in exercising, on the part of Lender, any
right, power or privilege hereunder or under the Loan and Security Agreement
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder or thereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
11. SEVERABILITY. The provisions of this Security Agreement are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof, in
such jurisdiction, and shall not in any manner affect such clause or provision
in any other jurisdiction, or any other clause or provision of this Security
Agreement in any jurisdiction.
12. MODIFICATION. This Security Agreement cannot be altered, amended or
modified in any way, except as specifically provided in PARAGRAPH 3 hereof or by
a writing signed by the parties hereto.
13. CUMULATIVE REMEDIES; POWER OF ATTORNEY; EFFECT ON LOAN AND SECURITY
AGREEMENT. All of the rights and remedies of Lender with respect to the
Collateral, whether established hereby or by the Loan and Security Agreement, or
by any other agreements or by law shall be cumulative and may be exercised
singularly or concurrently. Borrower hereby authorizes Lender to make,
constitute and appoint any officer or agent of Lender as Lender may select, in
its sole discretion, as Borrower's true and lawful attorney-in-fact, with power
at any time after the occurrence and during the continuance of an Event of
Default, (i) to endorse Borrower's name on all applications, documents, papers
and instruments necessary or desirable for Lender in the use of the Collateral,
or to grant or issue any exclusive or non-exclusive license under the Collateral
to anyone, or to assign, pledge, convey or otherwise transfer title in or
dispose of the Collateral
-5-
<PAGE> 6
to anyone free and clear of any encumbrance upon title thereof created after the
date of this Security Agreement, and (ii) to take any other actions with respect
to the Collateral as Lender reasonably deems in its best interests. Lender
hereby ratifies all that such attorney-in-fact shall lawfully do or cause to be
done by virtue hereof. This power of attorney, being coupled with an interest,
shall be irrevocable until all Liabilities shall have been paid in full and the
Loan and Security Agreement has been terminated. Borrower acknowledges and
agrees that this Security Agreement is not intended to limit or restrict in any
way the rights and remedies of Lender or its successors, transferees and assigns
under the Loan and Security Agreement but rather is intended to facilitate the
exercise of such rights and remedies. Lender and such other parties shall have,
in addition to all other rights and remedies given it or them by the terms of
this Security Agreement, all rights and remedies allowed by law and the rights
and remedies of a secured party under the Uniform Commercial Code as enacted in
any jurisdiction in which the Trademarks may be located. Recourse to security
will not be required at any time.
14. CARE OF COLLATERAL. Lender shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral if it takes
such action for that purpose as Borrower shall request in writing, but failure
of Lender to comply with any such request shall not of itself be deemed a
failure to exercise reasonable care, and no failure of Lender to preserve or
protect any rights with respect to the Collateral against prior parties, or to
do any act with respect to preservation of the Collateral not so requested by
Borrower shall be deemed a failure to exercise reasonable care in the custody or
preservation of the Collateral.
15. CERTAIN RIGHTS REGARDING COLLATERAL AND LIABILITIES. Lender may from
time to time, after the occurrence and during the continuance of an Event of
Default, take all or any of the following actions: (a) transfer all or any part
of the Collateral into the name of Lender or its nominee, with or without
disclosing that such Collateral is subject to the lien and security interest
hereunder, (b) notify the parties obligated on any of the Collateral to make
payment to Lender of any amounts due or to become due hereunder and (c) enforce
collection of any of the Collateral by suit or otherwise, and surrender, release
or exchange all or any part thereof, or compromise or extend or renew for any
period (whether or not longer than the original period) any obligations of any
nature of any party with respect thereto. Lender shall give Borrower prompt
notice of any such action taken by Lender. Lender may, furthermore, from time to
time, whether before or after any of the Liabilities shall become due and
payable, without notice to Borrower, take all or any of the following actions:
(a) take control of any proceeds of the Collateral, (b) retain or obtain a
security interest in any property, in addition to the Collateral, to secure any
of the Liabilities, (c) retain or obtain the primary or secondary liability of
any party or parties, in addition to Borrower with respect to any of the
Liabilities, (d) extend or
-6-
<PAGE> 7
renew for any period (whether or not longer than the original period) or
exchange any of the Liabilities or release or compromise any obligation of any
nature of any party with respect thereto, (e) surrender, release or exchange all
or any part of any property, in addition to the Collateral, securing any of the
Liabilities, or compromise or extend or renew for any period (whether or not
longer than the original period) any obligations of any nature of any party with
respect to any such property, and (f) resort to the Collateral for payment of
any of the Liabilities whether or not it shall have resorted to any other
property securing the Liabilities or shall have proceeded against any party
primarily or secondarily liable on any of the Liabilities.
16. BINDING EFFECT; BENEFITS. This Security Agreement shall be binding
upon Borrower and its respective successors and assigns, and shall inure to the
benefit of Lender and its respective successors, transferees and assigns.
17. GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE
EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR
REMEDIES HEREUNDER, IN RESPECT OF ANY OF THE TRADEMARKS, ARE GOVERNED BY THE
LAWS OF A JURISDICTION OTHER THAN THE STATE OF ILLINOIS. UNLESS OTHERWISE
DEFINED HEREIN OR IN THE LOAN AND SECURITY AGREEMENT, TERMS USED IN ARTICLE 9 OF
THE UNIFORM COMMERCIAL CODE AS ENACTED IN THE STATE OF ILLINOIS ARE USED HEREIN
AS THEREIN DEFINED.
18. NOTICE. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon either of the parties by the other, or whenever either
of the parties desires to give or serve upon the other any communication with
respect to this Security Agreement, each such notice, demand, request, consent,
approval, declaration or other communication shall be in writing and shall be
delivered in accordance with the Loan and Security Agreement.
19. CONSENT TO JURISDICTION. To induce Lender to accept this Agreement,
Borrower, irrevocably, agrees that, subject to Lender's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS AGREEMENT, OR THE COLLATERAL SHALL BE LITIGATED IN
COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. BORROWER
HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL
COURTS LOCATED WITHIN SAID CITY AND STATE AND CONSENTS THAT ALL SUCH SERVICE OF
PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS STATED ON
THE SIGNATURE PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED
UPON ACTUAL RECEIPT THEREOF. NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE LENDER TO BRING ANY
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<PAGE> 8
ACTION OR PROCEEDING AGAINST THE BORROWER IN THE COURTS OF ANY OTHER
JURISDICTION.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Security Agreement as of the date first above written.
ATTEST: RAINBOW HOME RENTALS, INC.
______________________________ By___________________________
Title___________________________ Title______________________
CONTINENTAL BANK N.A.
By___________________________
Title_______________________
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<PAGE> 9
STATE OF ILLINOIS )
) ss:
COUNTY OF COOK )
The foregoing Collateral Trademark Security Agreement was executed and
acknowledged before me this __________ day of __________, 1992, by
___________________ and ___________________, personally known to me to be the
________________________ and ______________________, respectively, of Rainbow
Home Rentals, Inc., an Ohio corporation, on behalf of such corporation.
--------------------------------------
Notary Public
My Commission Expires:
-------------------------------------
<PAGE> 10
STATE OF ILLINOIS )
) ss:
COUNTY OF COOK )
The foregoing Collateral Trademark Security Agreement was executed and
acknowledged before me this ________ day of __________, 1992, by
____________________, personally known to me to be the
________________________ of Continental Bank N.A.
(SEAL)
------------------------------------
Notary Public
My Commission Expires:
-------------------------------------
<PAGE> 1
EXHIBIT 10.1
RAINBOW RENTALS, INC.
1998 STOCK OPTION PLAN
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Purpose of the Plan...............................................................................................3
Definitions.......................................................................................................3
Administration of the Plan........................................................................................7
Shares Subject to the Plan........................................................................................8
Limit on Fair Market Value of Incentive Stock Options.............................................................8
Participants to Whom Options May Be Granted.......................................................................9
Stock Options.....................................................................................................9
Exercise Rights Under Option.....................................................................................12
Rights of Option Holders.........................................................................................12
Transferability of Options.......................................................................................13
Date of Grant....................................................................................................13
Adjustments Upon Changes in Capitalization.......................................................................13
Termination of Options Upon Change in Control....................................................................13
Option Agreement. ..............................................................................................14
Withholding for Taxes. .........................................................................................14
Amendment of the Plan............................................................................................14
Delivery of Shares on Exercise...................................................................................15
Fees and Costs...................................................................................................15
Other Provisions.................................................................................................15
Law to Govern....................................................................................................15
Effectiveness of the Plan........................................................................................15
</TABLE>
1
<PAGE> 3
RAINBOW RENTALS, INC.
1998 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. This Rainbow Rentals, Inc. 1998 Stock Option
Plan is intended to promote the interests of the Company and its shareholders.
The purposes of the Plan are to encourage directors, officers, employees and
consultants of the Company and other persons providing key services to the
Company to acquire or increase their proprietary interest in the Company by
further identifying their interests with those of other shareholders through
compensation based on the Company's Common Shares, to provide incentive
compensation opportunities that are competitive with those of similar companies,
to foster in participants a strong motivation to put forth maximum effort for
the continued success and growth of the Company, to aid in retaining individuals
who put forth such efforts, and to assist in attracting the best available
individuals to the Company in the future.
2. DEFINITIONS. When used herein, the following terms shall have the
meanings set forth below:
2.1 "Affiliate" means, with respect to any specified person or
entity, a person or entity that directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person or entity specified.
2.2 "Board" means the Board of Directors of the Company.
2.3 A "Change in Control" shall have occurred if at any time,
or from time to time, after the date of adoption of this Plan, any of the
following events occurs:
(a) a report is filed with the Securities and
Exchange Commission (the "SEC") on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Exchange Act, disclosing that any
"person" (as the term "person" is used in Section 13(d) or
Section 14(d)(2) of the Exchange Act) is or has become a
beneficial owner, directly or indirectly, in one transaction
or a series of transactions, of securities of the Company
representing 30% or more of the combined voting power of the
Company's then outstanding securities; PROVIDED, HOWEVER, that
the term "person" shall not include (i) any "affiliate" of the
Company (as the term "affiliate" is defined in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act) or
any individual who is considered to own stock of the Company
owned, directly or indirectly, by such an "affiliate" under
the rules of Section 267(c)(2) of the Code or (ii) any person
or persons who owned 30% or more of the combined voting power
of the Company's securities at the time of adoption of this
Plan;
2
<PAGE> 4
(b) the Company files a report or proxy statement
with the SEC pursuant to the Exchange Act disclosing in
response to Item 1 of Form 8-K thereunder that a Change in
Control of the Company has or may have occurred or will or may
occur in the future pursuant to any then-existing contract or
transaction;
(c) the Company is merged or consolidated with
another corporation and, as a result thereof, securities
representing less than 50% of the combined voting power of the
surviving or resulting corporation's securities (or of the
securities of a parent corporation in case of a merger in
which the surviving or resulting corporation becomes a
wholly-owned subsidiary of the parent corporation) are owned
in the aggregate by holders of the Company's securities
immediately prior to such merger or consolidation;
(d) during any period of 24 consecutive months,
individuals who were Directors of the Company at the beginning
of such period cease for any reason to constitute at least a
majority of the Company's Board; PROVIDED, HOWEVER, that a
person shall not be considered to be a new Director if that
person is nominated or elected as a Director by a vote of at
least two-thirds of the Directors of the Company who were
Directors at the beginning of such 24 month period;
(e) there is a sale, lease, exchange or other
transfer (in one transaction or a series of transactions) of
all or substantially all of the assets of the Company; or
(f) the shareholders of the Company shall approve any
plan or proposal for the liquidation or dissolution of the
Company.
Notwithstanding anything in this Section 2.3 to the contrary,
an event or occurrence (or a series of events or occurrences) which would
otherwise constitute a Change in Control under the foregoing shall not
constitute a Change in Control for purposes of this Plan if the Board, by
majority vote, determines that a Change in Control does not result therefrom;
but only if Continuing Directors constitute a majority of the directors voting
in favor of such determination. Further, an event or occurrence (or a series of
events or occurrences) which would not otherwise constitute a Change in Control
under the foregoing shall be deemed to constitute a Change in Control for
purposes of this Plan if the Board, by majority vote, determines that a Change
in Control does result therefrom; but only if Continuing Directors constitute a
majority of the directors voting in favor of such determination. A determination
by Directors under the provisions of this paragraph shall be made solely for
purposes of this Plan and shall not directly or indirectly affect any
determination or analysis of whether a Change in Control results for any other
purpose. Any
3
<PAGE> 5
determination made with respect to whether a Change in Control results for
purposes of any other plan or agreement of the Company shall have no effect for
purposes of this Plan.
2.4 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and reference to any specific provisions of the Code shall
refer to the corresponding provisions of the Code as it may hereafter be amended
or replaced.
2.5 "Committee" means the Compensation Committee of the Board
or any other committee appointed by the Board whose members meet the
requirements for eligibility to serve as set forth in Section 3 of this Plan and
which is invested by the Board with responsibility for the administration of
this Plan; PROVIDED, HOWEVER, that only those members of the Compensation
Committee of the Board who participate in decisions relative to Options under
this Plan shall be deemed to be part of the "Committee" for purposes of this
Plan.
2.6 "Company" means Rainbow Rentals, Inc., an Ohio
corporation, collectively with its Subsidiaries, where consistent with the
context.
2.7 "Continuing Director" shall mean a member of the Board who
either was a member of the Board on the date of the adoption of this Plan or who
subsequently became a director of the Company and whose initial appointment,
election or nomination for election by the Company's shareholders subsequent to
such date was approved by a vote of two-thirds of the Continuing Directors then
on the Board.
2.8 "Directors" means members of the Company's Board.
2.9 "ERISA" means the Employee Retirement Income Security Act
of 1974, as in effect at the time of reference, or any successor law which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of ERISA shall refer to the corresponding provisions of ERISA as it
may hereafter be amended or replaced.
2.10 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time and reference to any specific provisions of the
Exchange Act shall refer to the corresponding provisions of the Exchange Act as
it may hereafter be amended or replaced.
2.11 "Employee" or "Employees" means any key employee or
employees of the Company, including any individual employed by the Company who
is also a member of the Board.
2.12 "Fair Market Value" means, except as otherwise determined
by the Committee, with respect to the Shares, the closing sales price for the
Shares as reported on the national securities exchange on which the Shares are
traded, or, if applicable, as reported on the Nasdaq National Market, on the
date for which the determination of fair market value is
4
<PAGE> 6
made, or if there are no sales of Shares on that date, then on the next
preceding date on which there were any sales of Shares. If the Shares are not or
cease to be traded on a national securities exchange or on the Nasdaq National
Market, the "Fair Market Value" of Shares shall be determined in the manner
prescribed by the Committee.
2.13 "Incentive Stock Option" means an Option meeting the
requirements and containing the limitations and restrictions set forth in
Section 422 of the Code or any successor provision.
2.14 "Non-Employee Director" means a person who is a member of
the Board and who is not an Employee of the Company or an Affiliate of the
Company.
2.15 "Non-Qualified Stock Option" means an Option other than
an Incentive Stock Option.
2.16 "Option" means the right to purchase, at a price and for
a term fixed by the Committee in accordance with this Plan, and subject to such
other limitations and restrictions as this Plan and the Committee impose, the
number of Shares specified by the Committee.
2.17 "Option Agreement" means a written agreement in such form
as may from time to time be hereafter approved by the Committee, which Option
Agreement shall set forth the terms and conditions of an Option under this Plan,
and be duly executed by the Company and the Participant.
2.18 "Parent" means any corporation, other than the employer
corporation of a Participant, in an unbroken chain of corporations ending with
the employer corporation of a Participant if each of the corporations other than
such employer corporation owns stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in the chain.
2.19 "Participant" means directors (including Non-Employee
Directors), officers (including officers who are Directors), employees and
consultants of the Company or a Subsidiary and any person providing key services
to the Company or a Subsidiary.
2.20 "Plan" means the Company's 1998 Stock Option Plan.
2.21 "Regulation T" means Part 220, Chapter II, Title 12 of
the Code of Federal Regulations, issued by the Board of Governors of the Federal
Reserve System pursuant to the Exchange Act, as amended from time to time, or
any successor regulation which may hereafter be adopted in lieu thereof.
5
<PAGE> 7
2.22 "Rule 16b-3" means Rule 16b-3 of the General Rules and
Regulations of the Exchange Act, as effective August 15, 1996, as amended from
time to time thereafter and as it may hereafter be amended or replaced.
2.23 "Share" or "Shares" means Common Shares, without par
value, of the Company or, if by reason of the adjustment provisions contained
herein, any rights under an Option under this Plan pertaining to any other
security, such other security.
2.24 "Subsidiary" or "Subsidiaries" means any corporation
other than the employer corporation of the Participant in an unbroken chain of
corporations beginning with the employer corporation of the Participant if each
of the corporations other than the last corporation in the unbroken chain owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
2.25 "Successor" means the legal representative of the estate
of a deceased Participant or the person or persons who shall acquire the right
to exercise an Option by transfer, bequest or inheritance or by reason of the
death of the Participant.
2.26 "Term" means the period during which a particular Option
may be exercised.
3. ADMINISTRATION OF THE PLAN. The Board shall appoint the
Committee, which shall consist of not less than three (3) members of the Board,
a majority of whom meet both the definition of a "non-employee director" as
defined in Rule 16b-3, as well as the definition of an "outside director"
pursuant to Treasury Regulations promulgated under Section 162(m) of the Code.
Subject to the provisions of the Plan, the Committee shall have full authority,
in its sole and absolute discretion, to determine the Participants to whom
Options shall be granted, the time or times of receipt of Options, the number of
Shares to be covered by each of the Options, and the terms and provisions
(including vesting schedule, performance criteria and restrictions on exercise)
of the Option Agreements by which Options shall be evidenced; to amend or cancel
Options (subject to Section 17 of the Plan); to accelerate the vesting of
Options; to require the cancellation or surrender of any Options or any other
awards previously granted under any other plans of the Company as a condition to
the granting of an Option; to interpret the Plan; to determine the requirements
with respect to the transferability of Options; and to prescribe, amend, and
rescind rules and regulations relating to it, and generally to interpret and
determine any and all matters whatsoever relating to the administration of the
Plan and the granting of Options hereunder. The construction and interpretation
by the Committee of any provision of the Plan or any Option Agreement delivered
pursuant to the Plan and any determination by the Committee pursuant to any
provision of the Plan or any Option Agreement delivered pursuant to the Plan
shall be final and conclusive. The Board may, from time to time, appoint members
to the Committee in substitution for or in addition
6
<PAGE> 8
to members previously appointed and may fill vacancies, however caused, in the
Committee. Any action of the Committee may be taken by a written instrument
signed by all of the members, and any action so taken shall be fully as
effective as if it had been taken by a vote of a majority of the members at a
meeting duly called and held. The Committee shall make such rules and
regulations for the conduct of its business as it shall deem advisable and shall
appoint a secretary who shall keep minutes of its meetings and records of all
action taken in writing without a meeting. In addition, the Committee may
authorize any one or more of their number or any officer of the Company to
execute and deliver documents on behalf of the Committee and the Committee may
delegate to one or more employees, agents or officers of the Company, or to one
or more third party consultants, accountants, lawyers or other advisors, such
ministerial duties related to the operation of the Plan as it may deem
appropriate. No member of the Committee shall be liable in the absence of bad
faith, for any act or omission with respect to such member's service on the
Committee. The Committee shall from time to time adopt policies and procedures
applicable to Options that will govern the rights of Participants and Successors
in the event of death, disability, or retirement of Participants or upon the
occurrence of any other event determined by the Committee, in its sole and
absolute discretion, to be appropriate. The Committee shall have authority to
define disability and retirement and other similar terms, and the Committee's
policies and procedures may differ with respect to Options granted at different
times. Notwithstanding the foregoing, the Committee may delegate to the Chief
Executive Officer ("CEO") the authority to grant Options to non-executive
officers of the Company; provided that the CEO may not grant Options for more
than 5,000 shares to any individual in any 12-month period and the terms of the
Option (vesting, exercise price et al) may not be more favorable than the terms
of Options previously granted by the Committee.
4. SHARES SUBJECT TO THE PLAN. There will be reserved for use, upon the
exercise of Options to be granted from time to time under the Plan an aggregate
of Four Hundred Thousand (400,000) Shares, which Shares may be, in whole or in
part, as the Board shall from time to time determine, authorized but unissued
Shares, issued Shares which shall have been reacquired by the Company, or Shares
acquired on the open market specifically for distribution under the Plan. Any
Shares subject to issuance upon exercise of an Option, but which are not issued
because of a surrender, lapse, expiration, cancellation or termination of any
such Option prior to issuance of the Shares shall once again be available for
issuance in satisfaction of Options under the Plan. Notwithstanding any other
provision of the Plan, but subject to adjustment under Section 12, the maximum
number of Shares that may be issued under the Plan pursuant to Incentive Stock
Options shall be Shares.
5. LIMIT ON FAIR MARKET VALUE OF INCENTIVE STOCK OPTIONS. In any
calendar year, no Employee may be granted an Incentive Stock Option hereunder to
the extent that the aggregate Fair Market Value (such Fair Market Value being
determined as of the date of grant of the option in question), of the Shares
with respect to which Incentive Stock Options first become exercisable by the
Employee during any calendar year (under all such plans of the
7
<PAGE> 9
Employee's employer corporation, its Parent, if any, and its Subsidiaries, if
any) exceeds the sum of One Hundred Thousand Dollars ($100,000). For purposes of
the preceding sentence, Options shall be taken into account in the order in
which they were granted. Any Option granted under the Plan which is intended to
be an Incentive Stock Option, but which exceeds the limitation set forth in this
Section 5, shall be a Non-Qualified Stock Option.
6. PARTICIPANTS TO WHOM OPTIONS MAY BE GRANTED.
6.1 EMPLOYEES, CONSULTANTS AND OTHER PERSONS PROVIDING KEY SERVICES.
Options may be granted in each calendar year or portion thereof while the Plan
is in effect to such of the Participants as the Committee, in its sole and
absolute discretion, shall determine. In determining the Participants to whom
Options shall be granted and the number of Shares subject to purchase under such
Options, the Committee shall take into account the nature of services rendered
by the respective Participants, their present and potential contributions to the
success of the Company, and such other factors as the Committee shall deem
relevant in connection with accomplishing the purposes of the Plan. Incentive
Stock Options shall only be granted to Participants who are also Employees. The
maximum number of Shares with respect to which any Participant may receive an
Option under this Plan shall be Shares (taking into account for this purpose
any option previously granted to such Participant that has been canceled or
repriced).
6.2 NON-EMPLOYEE DIRECTORS. Non-Qualified Stock Options for [ ,000]
Shares shall automatically be granted to each Non-Employee Director of the
Company upon his or her initial election or appointment as a director of the
Company; PROVIDED, HOWEVER, that any Non-Employee Director who was a director
on the effective date of the Company's initial registration statement on Form
S-1 filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, shall automatically be granted Non-Qualified Stock Options
to purchase [ ,000] Shares effective as of such date and, unless they expire
earlier in accordance with the terms of this Plan, shall expire ten (10) years
after grant. The Options granted to Non-Employee Directors shall become
exercisable with respect to [twenty percent (20%)] of the total number of Shares
subject to the Option one (1) year after the effective date of grant with the
balance of the Option becoming exercisable in [twenty percent (20%)] increments
on each of the next [four] anniversaries of such date.
7. STOCK OPTIONS.
7.1 TYPES OF OPTIONS. Options granted under this Plan may be
(i) Incentive Stock Options, (ii) Non-Qualified Stock Options, or (iii) a
combination of the foregoing. The Option Agreement shall designate whether an
Option is an Incentive Stock Option or a Non-Qualified Stock Option and separate
Option Agreements shall be issued for each type of Option granted to a
particular Participant. Any Option which is designated as a Non-Qualified
8
<PAGE> 10
Stock Option shall not be treated by the Company or the Participant to whom the
Option is granted as an Incentive Stock Option for federal income tax purposes.
7.2 OPTION PRICE.
(a) INCENTIVE STOCK OPTION. The option price per
Share of any Incentive Stock Option granted under the Plan shall not be
less than the Fair Market Value of the Shares covered by the Incentive
Stock Option on the date the Incentive Stock Option is granted.
Notwithstanding anything herein to the contrary, in the event an
Incentive Stock Option is granted to an Employee who, at the time such
Incentive Stock Option is granted, owns as defined in Section 424 of
the Code, stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of:
(i) the Company; or
(ii) if applicable, a Subsidiary; or
(iii) if applicable, a Parent,
the option price per Share of such Incentive Stock Option shall not be
less than one hundred ten percent (110%) of the Fair Market Value of
the Shares covered by the Incentive Stock Option on the date the
Incentive Stock Option is granted.
(b) NON-QUALIFIED STOCK OPTIONS. Unless otherwise
determined by the Committee, in its sole and absolute discretion, the
option price per Share of any Non-Qualified Stock Option granted under
this Plan shall be equal to the Fair Market Value of the Shares covered
by the Non-Qualified Stock Option on the date the Non-Qualified Stock
Option is granted.
7.3 TERM OF OPTIONS. Options granted hereunder shall be
exercisable for a Term of not more than ten (10) years from the date of grant,
but shall be subject to earlier termination as hereinafter provided. Each Option
Agreement issued hereunder shall specify the Term of the Option, which Term
shall be determined by the Committee in accordance with its discretionary
authority hereunder. In the event the Committee fails to specify the term of an
Option, such option shall have a term of ten (10) years.
Notwithstanding anything herein to the contrary, in the event
an Incentive Stock Option is granted to an Employee who, at the time such
Incentive Stock Option is granted, owns, as defined in Section 424 of the Code,
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of:
9
<PAGE> 11
(i) the Company; or
(ii) if applicable, a Subsidiary; or
(iii) if applicable, a Parent,
then such Incentive Stock Option shall not be exercisable more than five (5)
years from the date of grant, but shall be subject to earlier termination as
hereinafter provided.
7.4 TERMINATION OF OPTIONS. Unless otherwise expressly
provided in an Option Agreement with the Participant to whom an Option is
granted, and then only in such instance, the following terms apply to Options
granted under the Plan:
(a) TERMINATION OF UNVESTED OPTIONS. If the
employment of, or services to, the Company of a Participant to
whom an Option shall have been granted under this Plan
terminates, then to the extent any Option is not yet
exercisable in accordance with its terms on the date notice is
given either to or from the Company of termination of
employment by or services to the Company, such Option shall
terminate.
(b) IMMEDIATE TERMINATION OF ENTIRE OPTION. If the
employment of, or rendering services to, the Company of a
Participant to whom an Option shall have been granted under
this Plan terminates: (i) for any reason prior to the first
date the Option becomes exercisable; (ii) as a result of such
person's willful misconduct, gross negligence, or any other
termination for cause; or (iii) as a result of the voluntary
termination of employment or service by the Participant, then
anything to the contrary herein notwithstanding, all such
Options or portions of Options then held by such Participant
shall terminate on the date notice is given either to or from
the Company of termination of employment by or service to the
Company; PROVIDED, HOWEVER, that in the event of a termination
under clause (iii) above, the Committee may, but shall not be
required to, allow the Participant to exercise the Option (to
the extent exercisable on the date of termination) at any time
within three months after the date of termination (but not
beyond the original term of the Option). All factual
determinations with respect to the termination of a
Participant's employment of, or rendering of services to, the
Company that may be relevant under this Section 7.4 shall be
made by the Committee in its sole discretion.
(c) DEATH OR DISABILITY OF PARTICIPANT. If a
Participant shall die while still employed by or rendering
services to the Company, then any Option exercisable as of the
date of death may be exercised by the Participant's Successor
at any time within one (1) year after the date of such
Participant's
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<PAGE> 12
death (but not beyond the original term of the Option). If the
termination is on account of the Participant's having become
"disabled", as defined in Section 22(e)(3) of the Code, the
Option (to the extent exercisable on the date of termination)
may be exercised at any time within one (1) year after such
termination date (but not beyond the original term of the
Option).
(d) TERMINATION OF EMPLOYMENT OR SERVICES. If the
employment of, or rendering of services by, a Participant to
whom an Option shall have been granted shall terminate, other
than as provided in Section 7.4 (a), (b) or (c) hereof, then
the Option (to the extent exercisable on the date of
termination) may be exercised at any time within three (3)
months after the date of such termination of employment or
rendering of services to the Company (but not beyond the
original term of the Option).
8. EXERCISE RIGHTS UNDER OPTION.
8.1 EXERCISE OF OPTIONS. Except as otherwise provided in
Section 7.4, an Option may be exercised only while the Employee to whom the
Option was granted is in the employ of the Company or of a Subsidiary. Subject
to this requirement, and unless otherwise specified by the Committee in the
relevant Option Agreement, each Option shall become exercisable with respect to
twenty percent (20%) of the total number of Shares subject to the Option one (1)
year after the effective date of the grant with the balance of the Option
becoming exercisable in twenty percent (20%) increments on each of the next four
anniversaries of such date.
8.2 NOTICE OF EXERCISE. A Participant entitled to exercise an
Option may do so by delivery of a written notice to that effect specifying the
number of Shares with respect to which the Option is being exercised and any
other information the Committee may prescribe. Except as provided in Section 8.3
below, the notice shall be accompanied by payment in full of the purchase price
of any Shares to be purchased, which payment may be made in cash or, with the
Committee's approval, in Shares valued at Fair Market Value at the time of
exercise or, with the Committee's approval, a combination thereof. No Shares
shall be issued upon exercise of an Option until full payment has been made
therefor. The notice of exercise of an Option shall be accompanied by the
Participant's copy of the Option Agreement evidencing the grant of the Option.
All notices or requests provided for herein shall be delivered to the Secretary
of the Company.
8.3 CASHLESS EXERCISE PROCEDURES. The Committee, in its sole
and absolute discretion, may, but shall not be obligated to, establish
procedures whereby a Participant, subject to the requirements of Rule 16b-3,
Regulation T, federal income tax laws, and other federal, state and local tax
and securities laws, can exercise an Option or a portion thereof without making
a direct payment of the option price to the Company. If the Committee so
11
<PAGE> 13
elects to establish a cashless exercise program, the Committee shall determine,
in its sole and absolute discretion, and from time to time, such administrative
procedures and policies as it deems appropriate and such procedures and policies
shall be binding on any Participant wishing to utilize the cashless exercise
program.
9. RIGHTS OF OPTION HOLDERS. The holder of an Option shall not have any
of the rights of a shareholder with respect to the Shares subject to purchase or
issuance under such Option, except to the extent that one or more certificates
for such Shares shall be delivered to the holder upon due exercise of the
Option.
10. TRANSFERABILITY OF OPTIONS. An Option shall not be transferable by
the Participant, other than by will or the laws of descent and distribution, and
such Option may be exercised, during the lifetime of the Participant, only by
such Participant, or in the event of the Participant's death or disability, by
the Participant's Successor or personal representative. Notwithstanding the
forgoing, at the discretion of the Committee, an Option shall be transferable
(i) pursuant to a qualified domestic relations order, as defined in the Code or
ERISA or the rules thereunder (except in the case of an Incentive Stock Option
if such transfer would be deemed to violate the restrictions on transferability
contained in Section 422(b)(5) of the Code under the then current interpretation
of such Code section) or (ii) to a Participant's spouse, lineal descendants,
spouses of lineal descendants or to a trust for their benefit ("Family
Transferees"), at such time as the SEC rules permit Family Transferees to sell
Shares under a Registration Statement on Form S-8.
11. DATE OF GRANT. The date of grant of an Option granted hereunder
shall be the date on which the Committee acts in granting the Option, unless
otherwise specifically indicated by the Committee as part of its action granting
the Option.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes
in all of the outstanding Shares by reason of stock dividends, stock splits,
reclassifications, recapitalizations, mergers, consolidations, combinations, or
exchanges of shares, separations, reorganizations or liquidations, or similar
events, or in the event of extraordinary cash or noncash dividends being
declared with respect to outstanding Shares or other similar transactions or
events, the number and class of Shares available under the Plan in the
aggregate, the number and class of Shares subject to Options theretofore
granted, applicable option prices and all other applicable provisions, subject
to the provisions of the Plan, shall be equitably adjusted by the Committee
(which adjustment may, but need not, include payment to the holder of an Option,
in cash or in Shares, in an amount equal to the difference between the then
current Fair Market Value of the Shares subject to such Option, as equitably
determined by the Committee, and the option price of such Option) to the extent
necessary and in such manner that the benefits of Participants under all then
outstanding Options shall be maintained substantially as before the occurrence
of such event. The foregoing adjustment and the manner of application of the
foregoing provisions shall be determined by the Committee
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<PAGE> 14
in its sole and absolute discretion. Any such adjustment may provide for the
elimination of any fractional Shares which might otherwise become subject to an
Option.
13. TERMINATION OF OPTIONS UPON CHANGE IN CONTROL. Notwithstanding
anything to the contrary herein, and except as otherwise specified in the
relevant Option Agreement, upon the occurrence of a Change in Control, each
Option granted under the Plan shall terminate ninety (90) days after the
occurrence of such Change in Control, but, in the event of any such termination,
the Option holder shall have the right, commencing at least five (5) days prior
to such Change in Control and subject to any other limitation on the exercise of
such Option in effect on the date of exercise, to immediately exercise any
Option in full, without regard to any vesting limitations, to the extent it
shall not have been theretofore exercised.
The foregoing adjustment and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole and
absolute discretion.
14. OPTION AGREEMENT. Nothing contained in the Plan nor any resolution
adopted or to be adopted by the Board or the shareholders of the Company shall
constitute the granting of any Option. An Option shall be granted hereunder at
such date or dates as the Committee may determine, subject to the Plan. Whenever
the Committee determines to grant an Option, the Chief Executive Officer or
President of the Company, or such other person as the Committee appoints, shall
forthwith deliver a written Option Agreement which shall have been duly executed
by or on behalf of the Company, in such form as the Committee approves, stating
the number of Shares subject to an Option, its Term, and the other provisions
(including restrictions) and conditions thereof. If the surrender of previously
issued Options granted under this Plan, or stock appreciation rights or
restricted stock awards previously granted under any other plans of the Company
is made a condition of the grant, the notice shall set forth the pertinent
details of such condition. Execution of an Option Agreement by the recipient
Participant in accordance with the provisions of the Plan shall be a condition
precedent to the exercise of any Option.
15. WITHHOLDING FOR TAXES. The Company shall have the right to require
a Participant entitled to receive Shares pursuant to the exercise of an Option
under the Plan to pay the Company the amount of any taxes which the Company is
or will be required to withhold with respect to such Shares before the
certificate for such Shares is delivered pursuant to the Option. Furthermore,
the Company may elect to deduct such taxes from any other amounts payable then
or any time thereafter in cash or Shares or other property to the Participant.
If the Participant disposes of Shares acquired pursuant to an Incentive Stock
Option in any transaction considered to be a disqualifying transaction under
Sections 421 and 422 of the Code, the Participant must give the Company written
notice of such transfer and the Company shall have the right to deduct any taxes
required by law to be withheld from any amounts otherwise payable to the
Participant.
13
<PAGE> 15
16. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from
time to time by the Board, but no amendment without the approval of the
shareholders of the Company shall be made if shareholder approval under Rule
16b-3 or Section 422 of the Code would be required. Notwithstanding the
discretionary authority granted to the Committee in Section 3 of the Plan, no
amendment of the Plan or any Option granted under the Plan shall impair any of
the rights of any holder, without such holder's consent, under any Option
theretofore granted under the Plan.
17. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for Shares
pursuant to the grant or exercise of an Option may be postponed by the Company
for such period as may be required for it with reasonable diligence to comply
with any applicable requirements of any federal, state or local law or
regulation or any administrative or quasi-administrative requirement (including
stock exchange requirements) applicable to the sale, issuance, distribution or
delivery of such Shares. The Committee may, in its sole and absolute discretion,
require a Participant to furnish the Company with appropriate representations
that he or she is acquiring the Shares as an investment and not with a view to
distribution thereof, if the Company, in its sole discretion determines that
such representation is required to insure that a resale or other disposition of
the Shares would not involve a violation of the Securities Act of 1933, as
amended, or of applicable blue sky laws. Any investment representation shall no
longer be applicable at any time such representation is no longer necessary for
such purposes.
18. FEES AND COSTS. The Company shall pay all original issue taxes on
the exercise of any Option granted under the Plan and all other fees and
expenses necessarily incurred by the Company in connection therewith.
19. OTHER PROVISIONS. As used in the Plan, and in Options and other
documents prepared in implementation of the Plan, references to the masculine
pronoun shall be deemed to refer to the feminine or neuter, and references in
the singular or the plural shall refer to the plural or the singular, as the
identity of the person or persons or entity or entities being referred to may
require. The captions used in the Plan and in such Options and other documents
prepared in implementation of the Plan are for convenience only and shall not
affect the meaning of any provision hereof or thereof.
20. LAW TO GOVERN. This Plan shall be governed by and construed in
accordance with the laws of the State of Ohio.
21. EFFECTIVENESS OF THE PLAN. The Plan was approved by the Company's
shareholders on , 1998, and became effective on that date. Unless
sooner terminated by the Board, the Plan shall terminate ten (10) years from its
effective date and no Options may be granted under the Plan after such
termination date. Any Options outstanding at the time of termination of the Plan
shall continue in full force and effect according to the terms and conditions of
the Option and this Plan.
14
<PAGE> 1
Exhibit 10.2
LEASE
BY AND BETWEEN
RAINBOW PROPERTIES, LTD.,
AN OHIO LIMITED LIABILITY COMPANY
"LANDLORD"
AND
RAINBOW RENTALS, INC.,
AN OHIO CORPORATION
"TENANT"
<PAGE> 2
LEASE
THIS LEASE made as of the 1st day of January, 1996 between RAINBOW
PROPERTIES, LTD., an Ohio limited liability company, having a principal office
at 3711 Starr Centre Drive, Canfield, Ohio 44406 (hereinafter called
"Landlord"), and RAINBOW RENTALS, INC., an Ohio corporation, having a principal
office at 3711 Starr Centre Drive, Canfield, Ohio 44406 (hereinafter called
"Tenant").
W I T N E S S E T H:
--------------------
ARTICLE I
---------
1.1 PREMISES. Landlord, in consideration of the rents to be paid and
the covenants and agreements to be performed and observed by Tenant, does hereby
lease unto Tenant, and Tenant does hereby lease and take from Landlord, a
one-story building (the "Building"), situated on that certain parcel of land
described on EXHIBIT "A", attached hereto, which is located at 3711 Starr Centre
Drive, Canfield, Ohio 44406 as delineated on the site plan attached hereto as
EXHIBIT "B" and made a part hereof. The Building currently contains
approximately nine thousand five hundred eight (9,508) square feet of floor
area, and will ultimately contain nine thousand nine hundred twenty-eight
(9,928) square feet of floor area after Tenant, at Tenant's sole cost and
expense, constructs a 15' x 28' addition to the front of the Building. The
Building, together with the land described on EXHIBIT "A" attached hereto and
all improvements located thereon shall be referred to herein as the "Real
Estate". The Building leased to Tenant, situated on the land described on
EXHIBIT "A" attached hereto, shall be referred to herein as the "Premises".
1.2 LANDLORD'S USE OF BUILDING. Landlord's use of the exterior walls of
the Building, the area beneath the Building, and/or the roof of the Building
shall not adversely affect Tenant's access to or use of the Premises.
ARTICLE II
----------
2.1 TERM OF LEASE. The term of this Lease shall begin on the first
(1st) day of January, 1996 (the "Commencement Date"), and shall continue until
the date which is ten (10) years after the Commencement Date; provided, however
that if the Commencement
<PAGE> 3
Date is not the first day of the month, then the term of this Lease shall
continue until the last day of the month in which the date which is ten (10)
years after the Commencement Date occurs.
ARTICLE III
-----------
RIGHT TO EXTEND
---------------
Tenant shall have the right, at its election, to extend the original
term of this Lease for three (3) option periods of two (2) years each
(respectively, the "First Renewal Term", the "Second Renewal Term", and the
"Third Renewal Term"), exercisable upon the following terms and conditions:
(a) Tenant shall give Landlord written notice of such election
to extend each renewal term hereof not later than six (6) months prior
to the expiration of the initial term, or any renewal term, as the case
may be;
(b) At the time of exercise of such election, Tenant shall not
have been declared in default under this Lease beyond any applicable
grace periods; and
(c) Each option period shall be upon the same terms and
conditions as during the original term hereof, except that:
(i) Tenant shall have no further election to extend
the term of the Lease; and
(ii) Tenant shall pay to Landlord Minimum Rent during
each calendar month of the First Renewal Term the Minimum Rent
payable during the last calendar month of the tenth (10th)
year of the original term increased by the percentage increase
in the Consumer Price Index for All Urban Consumers, all items
index (1982-1984 base) U.S. city average (the "CPI-U"),
popularly known as the Cost of Living Index (presently
published monthly by the Bureau of Labor Statistics of the
U.S. Department of Labor) for the period between the calendar
month in which the commencement date of the ninth (9th) year
of the original term occurs and the calendar month in which
the last day of the original term occurs. The Minimum Rent
during the First Renewal Term shall be increased by the
resulting percentage derived from a ratio having as its
denominator the CPI-U for the calendar month in which the
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<PAGE> 4
commencement date of the ninth (9th) year of the original term
occurs, and having as its numerator the difference between the
CPI-U for the calendar month in which the commencement date of
the ninth (9th) year of the original term occurs and the CPI-U
for the calendar month in which the last day of the original
term occurs. In the event Tenant exercises its right to extend
the term of this Lease for the Second Renewal Term, the
Minimum Rent for the Second Renewal Term payable during each
calendar month of the Second Renewal Term shall be equal to
the Minimum Rent payable during the last calendar month of the
First Renewal Term increased by the percentage increase in the
CPI-U for the period between the calendar month in which the
commencement date of the First Renewal Term occurs and the
calendar month in which the last day of the First Renewal Term
occurs. The Minimum Rent during the Second Renewal Term shall
be increased by the resulting percentage derived from a ratio
having as its denominator the CPI-U for the calendar month in
which the commencement date of the First Renewal Term occurs,
and having as its numerator the difference between the CPI-U
for the calendar month in which the commencement date of the
First Renewal Term occurs and the CPI-U for the calendar month
in which the last day of the First Renewal Term occurs. In the
event Tenant exercises its right to extend the term of this
Lease for the Third Renewal Term, the Minimum Rent for the
Third Renewal Term payable during each calendar month of the
Third Renewal Term shall be equal to the Minimum Rent payable
during the last calendar month of the Second Renewal Term
increased by the percentage increase in the CPI-U for the
period between the calendar month in which the commencement
date of the Second Renewal Term occurs and the calendar month
in which the last day of the Second Renewal Term occurs. The
Minimum Rent during the Third Renewal Term shall be increased
by the resulting percentage derived from a ratio having as its
denominator the CPI-U for the calendar month in which the
commencement date of the Second Renewal Term occurs, and
having as its numerator the difference between the CPI-U for
the calendar month in which the commencement date of the
Second Renewal Term occurs and the CPI-U for the calendar
month in which the last day of the Second Renewal Term occurs.
In no event shall the Minimum Rent payable during each lease
year of the First Renewal Term, or the Second Renewal Term, or
the Third Renewal Term, as the case may be, be less than the
Minimum Rent payable during the last full lease year of the
original term or the First Renewal Term, or the Second Renewal
Term, as the case may be. If the base year selected by the
U.S. Department of Labor shall be changed, then the resultant
Index shall be readjusted so as to reflect the base initially
established under this Lease. If
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<PAGE> 5
the said Index shall no longer be published or cannot be
adjusted, then another index generally recognized as
authoritative shall be substituted by agreement between the
parties.
If Tenant elects to exercise such option(s), the term of this Lease shall be
automatically extended for the period of such option period(s) without necessity
for the execution of any instrument to effect the same, and in such event the
phrases "the term of this Lease" and "the term hereof" as used in this Lease
shall include such option period(s).
ARTICLE IV
----------
4.1 MINIMUM RENT. Tenant agrees to pay Landlord, at such place as
Landlord shall from time to time direct by written notice to Tenant, "Minimum
Rent" for the term of this Lease at the monthly rate of:
<TABLE>
<CAPTION>
=====================================================================================================================
Months After
The Rental Rent Per
Commencement Date Annual Rent Monthly Rent Square Foot
----------------- ----------- ------------ -----------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-24 $84,388.00 $7,032.33 $8.50
25-48 $94,316.00 $7,859.67 $9.50
49-72 $104,244.00 $8,687.00 $10.50
73-96 $109,208.00 $9,100.67 $11.00
97-120 $114,172.00 $9,514.33 $11.50
=====================================================================================================================
</TABLE>
Minimum Rent shall be payable during each year in advance on the first day of
each and every calendar month during the term of this Lease, commencing on the
Commencement Date. Minimum Rent shall be prorated for the fractional portion of
any month.
ARTICLE V
---------
5.1 PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes
levied against personal property and trade fixtures placed by Tenant in the
Premises.
5.2 REAL ESTATE TAXES.
(a) (i) Subject to the terms and conditions of this Section
5.2, from and after the Tax Commencement Date (defined below), Tenant
shall pay, as additional
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<PAGE> 6
rent any Taxes (defined below) assessed against the Real Estate during
the term hereof.
(ii) For purposes of this Section 5.2, the "Tax
Commencement Date" shall mean February 1, 1996.
(b) Commencing on the Tax Commencement Date and continuing on
each July 1, and January 1 thereafter, Landlord shall deliver to Tenant
a written statement setting forth (i) the Taxes assessed against the
Real Estate during the preceding tax period, and (ii) the Taxes
reasonably estimated by Landlord for the current tax period. From and
after the Tax Commencement Date and during the remaining term of this
Lease, Tenant shall pay, in monthly installments together with the
Minimum Rent, an amount equal to one-twelfth (l/12th) of the Taxes, as
reasonably estimated by Landlord for such tax period, as set forth in
such written statement. Within thirty (30) days after the receipt of
the applicable tax bills for the year in which Tenant shall be required
to pay the Taxes and each tax period thereafter during the term of this
Lease, Landlord shall deliver such tax bills to Tenant, together with
evidence of payment thereof. If Tenant's estimate of Taxes paid by
Tenant during the preceding tax period exceeds the Taxes required to be
paid for the Real Estate as set forth in such tax bills, such excess
amount shall be credited against the next monthly installments due from
Tenant to Landlord hereunder. If the Taxes for the Real Estate for such
year exceed the total amount paid by Tenant during such previous year,
then Tenant shall pay to Landlord the actual amount due within thirty
(30) days after receipt of such written statement. For the tax period
in which this Lease terminates or expires, the Taxes shall be subject
to a pro rata adjustment for such tax year based on the number of days
of said tax year during which the term of this Lease is in effect, but
calculated to reflect that such taxes are paid six (6) months in
arrears. Upon the expiration and/or termination of this Lease, any
amounts paid by Tenant towards the Taxes which exceed the actual Taxes
required to be paid by Tenant for such tax period hereunder, shall be
refunded by Landlord to Tenant, or applied by Landlord against any
damages incurred by Landlord under ARTICLE XVII below as a result of
any default by Tenant hereunder.
(c) For purposes of this Lease, the term "Taxes" shall include
ad valorem taxes and special assessments imposed upon the Real Estate
during the term hereof, less any abatements (except as hereinafter set
forth), refunds, or rebates made thereof or any discounts available
with respect thereto. Notwithstanding the foregoing, "Taxes" shall not
include:
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<PAGE> 7
(i) Any special assessment for Improvements
heretofore installed or in the process of installation in
connection with the initial development of the Real Estate;
provided, however, that "Taxes" shall include any special
assessments imposed upon the Real Estate for improvements made
on-site or off-site by the city in connection with the
inclusion of the Real Estate as part of a special improvement
district, including for example special assessments for the
installation of sewers, sidewalks, and/or for road widening
purposes;
(ii) Any interest or penalties payable by Landlord as
a result of Landlord's failure to pay any such Taxes prior to
delinquency;
(iii) Any tax payable by Landlord on rentals, unless
(A) such taxes are imposed on owners of real property only and
(B) such taxes are in lieu, in part or in whole, of the Taxes
required to be paid by Tenant hereunder, in which event Tenant
shall pay such Taxes only to the extent the same are
applicable to the rent payable by Tenant hereunder; or
(iv) Any estate, inheritance, succession, capital
levy, corporate franchise, gross receipt, transfer or income
tax of Landlord.
To the extent Tenant is required to pay for any special assessment for
improvements, Tenant's obligation shall be determined by treating the
assessment as payable in as many installments as is lawful, and
charging Tenant with such annual amount thereof during the tax year
corresponding to an annual payment of the assessment. Any annual
assessment deemed payable after the term of this Lease shall not be
Tenant's obligation.
(d) Landlord hereby covenants to apply all sums paid by Tenant
to Landlord pursuant to this Section 5.2 to the payment when due of all
Taxes and other taxes and assessments assessed against the Real Estate,
and Landlord shall promptly deliver to Tenant a photostatic copy of
every available tax bill, showing full payment thereof.
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<PAGE> 8
ARTICLE VI
----------
6.1 TENANT'S CONSTRUCTION.
(a) Tenant shall construct such improvements to the Premises
("Tenant's Work") as set forth in Tenant's outline specifications
attached hereto and made a part hereof as EXHIBIT "C" (the "Plans").
Tenant shall complete such construction in a first-class and in a good
and workmanlike manner, in accordance with the Plans, and in compliance
with all applicable laws, ordinances, and regulations, including
building codes, and the Americans with Disabilities Act. Tenant, at
Tenant's expense, shall procure all building and other permits and
approvals necessary for performing all such construction, and for such
purposes Landlord shall cooperate with Tenant in obtaining such permits
and approvals. All contractors, subcontractors, and materialmen
employed by Tenant in performing Tenant's Work shall be subject to the
prior written approval of Landlord, which approval shall not be
unreasonably withheld or delayed. Upon receipt of Tenant's written
notice requesting approval of any such contractors, subcontractors or
materialmen, Landlord shall deliver written notice to Tenant within ten
(10) days after receipt of such written request setting forth
Landlord's approval or disapproval thereof. If Tenant does not receive
any such written notice within such ten (10) day period, then Landlord
shall be conclusively deemed to have approved such written request.
(b) Notwithstanding anything to the contrary contained herein,
if Tenant, despite its good faith efforts to do so, is unable to obtain
all necessary governmental approvals and permits to perform Tenant's
Work on or before the date which is ninety (90) after date of execution
of this Lease by Tenant, Tenant shall have the right to terminate this
Lease on written notice to Landlord, and upon such termination neither
Tenant or Landlord shall have any further obligations hereunder.
(c) Tenant shall obtain from the City of Canfield and furnish
Landlord with a copy of a certificate of occupancy for the Premises.
Landlord agrees to cooperate fully with Tenant in obtaining such
certificate of occupancy.
6.2 TENANT'S SIGNS. Landlord shall cooperate fully with Tenant in
obtaining all required governmental approvals and permits (including any
variances) from the local jurisdiction for the design and installation of
Tenant's building sign (as set forth in the Plans and EXHIBIT "D" attached
hereto).
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<PAGE> 9
6.3 INSURANCE. Before any such work is commenced, Tenant shall furnish
to Landlord evidence that all contractors performing such work have all required
workmen's compensation insurance and that Tenant has in effect the public
liability insurance required under Section 14.3 below.
ARTICLE VII
-----------
7.1 LANDLORD'S REPAIRS. Except for Tenant's obligations under Section
7.2 below, throughout the term hereof, Landlord shall maintain in good condition
and make all other repairs and replacements to the following, all of which costs
for same shall be considered Common Area Costs:
(a) To all exterior walls, the roof, floor slab, foundation,
any canopies and the structural portions of the Building;
(b) To all utility and building systems serving the Building,
including without limitation, all sewer lines;
(c) To the exterior of the Building;
(d) Required because of defective or faulty installations or
constriction by Landlord or because of the settling of the Building or
as a result of the act, default, omission or negligence of Landlord,
its employees, agents, licensees or contractors;
(e) Required to maintain the parking areas and every portion
thereof in a good and clean condition, including but not limited to
maintenance and replacement of landscaped areas, stripe painting, and
the removal of standing water, snow, and rubbish therefrom; and
(f) Required for reasons unrelated to Tenant's use of the
Premises in order to comply with any law, order, ordinance, rule,
regulation or requirement applicable to the Premises, and the
operation, maintenance and repair thereof, including without limitation
all applicable building codes, zoning ordinances, and environmental
laws; provided, however, that to the extent performance of all or any
portion of Tenant's Work requires compliance with any such law, order,
ordinance, rule, regulation, or requirement, then Tenant, as part of
Tenant's Work, shall comply with such law, order, ordinance, rule,
regulation, or requirement.
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<PAGE> 10
Landlord shall promptly commence and diligently complete all such
repairs upon notice thereof from Tenant. Notwithstanding the foregoing,
for a period of one (1) year after the Completion Date, Tenant, at its
expense, shall make all repairs to the Building to the extent such
repairs (i) relate to improvements included in Tenant's Work and (ii)
such repairs are required as a result of any defects in Tenant's Work.
7.2 TENANT'S MAINTENANCE. Throughout the term hereof, but except as set
forth in Section 7.1 above, Tenant shall maintain the interior of the Premises
in good repair and condition including any replacement of bulbs and fixtures,
normal and routine maintenance and, if necessary, replacement of the utility and
building systems serving the building, including without limitation, all sewer
lines and the HVAC system, and Tenant shall provide periodic janitorial services
for the Premises, and provide all trash removal in accordance with Section
10.2(d) below. In addition, notwithstanding the foregoing, Tenant, at its
expense, shall make all repairs to the Building to the extent such repairs (i)
relate to improvements included in Tenant's Work and (ii) such repairs are
required as a result of any defects in Tenant's Work. During the term of this
Lease, Tenant shall also maintain in full force and effect a service contract
for the periodic inspection of the Premises for rodents, insects, and other
pests, and the extermination thereof. Upon the expiration or termination of this
Lease, Tenant shall surrender the Premises to Landlord in broom clean condition,
reasonable wear and tear, damage and destruction pursuant to which this Lease is
terminated under Article XV below, condemnation, repairs required by Landlord,
and acts or omissions of Landlord, its agents, employees or independent
contractors excepted.
7.3 DISTURBANCE OF OCCUPANCY. If by reason of the work done by Landlord
pursuant to Section 7.1 above, Tenant is deprived of the use of the Premises,
the Minimum Rent, and other charges payable by Tenant under this Lease shall be
abated or adjusted, as the case may be, in proportion to that time during which,
and to the extent, Tenant is deprived of a portion of the Premises. If such work
would affect the layout or appearance of the Premises, all such work shall be
done in accordance with plans and specifications approved by Tenant, which
approval shall not be unreasonably withheld.
7.4 TENANT'S ALTERATIONS. Tenant shall have the right, at its sole
expense, from time to time, subsequent to completion of Tenant's Work to
redecorate the Premises and to make such alterations, additions, improvements
and changes in such parts thereof as Tenant shall deem expedient or necessary
for its purposes; provided, however, that Tenant shall not make changes to the
exterior or structural portions of the Building, or to any building systems
contained therein (including plumbing, electrical, and mechanical systems),
without Landlord's prior approval, which approval shall not be withheld or
delayed unreasonably. Upon the expiration of this Lease, Tenant may, at its
option, remove all such redecorations,
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<PAGE> 11
alterations, additions, improvements and changes. If Landlord's approval is
required for any such redecorations, alterations, additions, improvements or
changes, Landlord shall elect, at the time such approval is rendered, whether
any such items must be removed upon the expiration of this Lease. All such
alterations, additions, or improvements shall be done in accordance with all
applicable laws, rules, regulations, and orders, including applicable building
codes. Landlord shall execute and deliver upon request of Tenant such instrument
or instruments embodying the approval of Landlord which may be required by any
public or quasi public authority for the purpose of obtaining any licenses or
permits for the making of such alterations, additions, improvements, changes
and/or installations in, to or upon said Premises and Tenant agrees to pay for
such licenses or permits. Tenant will indemnify and hold Landlord harmless from
and against all claims by reason of such alterations, additions, or improvements
which may be made by Tenant on the Premises, and Tenant shall promptly repair
any damage to the Premises or the Building caused by any such alterations,
additions, improvements, or change;.
7.5 MECHANICS' LIENS. Tenant shall not suffer any mechanics' lien to be
filed against the Real Estate by reason of work, labor, services or materials
performed or furnished to Tenant in connection with Tenant's Work and/or any
subsequent alterations, additions, or improvements to the Premises by Tenant
hereunder. If any such mechanics' lien shall at any time be filed against the
Real Estate, Tenant shall have the right to contest any and all such liens;
provided, however, that Tenant shall cause the same to be discharged of record
by payment, bond, order of a court of competent jurisdiction or otherwise within
thirty (30) days written notice by Landlord. If Tenant shall fall to cause such
lien to be discharged within such thirty (30) day period, then, in addition to
any other right or remedy, Landlord may, but shall not be obligated to,
discharge the same by paying the amount claimed to be due or by bonding or other
proceeding deemed appropriate by Landlord, and the amount so paid by Landlord
and/or all reasonable costs and expenses, including reasonable attorneys' fees,
incurred by Landlord in procuring the discharge of such lien, shall be deemed to
be additional rent for the Premises and shall be due and payable by Tenant to
Landlord on the first day of the next following month. Tenant shall file the
notice of commencement required under the Ohio Revised Code prior to the
commencement of Tenant's Work.
ARTICLE VIII
------------
8.1 COMMON AREA COSTS. The term "Common Area Costs" shall mean all
actual direct costs and expenses reasonably paid or incurred by Landlord during
each calendar year during the term hereof in repairing, maintaining, and
operating the Common Areas
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<PAGE> 12
and the cost of all repairs required to be made by the Landlord as set forth in
Section 7.1 above, including, but not by way of limitation, cleaning, striping
and repair and replacement of the parking areas; snow and ice removal from the
Common Areas; maintenance and replacement of landscaped areas; maintenance and
replacement of bulbs and light standards; premiums for insurance required under
Section 14.2 below; wages and salaries of personnel employed for such operation,
maintenance, repair and replacement (to the extent such charges directly apply
to the operation, maintenance, repair and replacement of the Common Areas and/or
the Building); charges for utilities consumed in connection with such work; and
depreciation (on a straight line basis) of all equipment or machinery used in
such maintenance, repairs and replacement which reduces such Common Area Costs.
Notwithstanding the foregoing, "Common Area Costs" shall exclude:
(i) Depreciation (except as set forth above);
(ii) Interest, late charges, and penalties on any
charges payable by Landlord which are included within Common
Area Costs;
(iii) Attorneys' fees and costs;
(iv) The cost of any tenant improvements or other
improvements, or other services or other Common Area Costs
which are performed by or incurred by Landlord for the benefit
of some, but not all tenants of the Real Estate;
(v) Common Area Costs which are reimbursed by
insurance proceeds and/or condemnation awards;
(vi) Any and all expenses incurred in negotiating,
amending, extending, administering, or terminating leases with
any other tenants, including without limitation brokerage
commissions, architectural fees, or legal fees;
(vii) Any amounts payable under mortgages or ground
leases encumbering all or any part of the Real Estate;
(viii) Any administrative fee and/or management fee
to Landlord or any other party.
8.2 PAYMENT OF COMMON AREA COSTS. Common Area Costs shall be paid in
monthly installments on or before the first day of each calendar month, in
advance, in an
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<PAGE> 13
amount equal to one-twelfth (1/12th) of the Common Area Costs based upon the
actual Common Area Costs incurred by Landlord during the previous calendar year
and any reasonably anticipated increases in such costs. If any portion of the
term hereof shall include only a partial calendar year, then for such purposes
Common Area Costs shall be adjusted so that the Common Area Costs to be paid by
Tenant relates only to those Common Area Costs incurred by Landlord during the
term hereof. Within ninety (90) days after each calendar year during the term
hereof, Landlord shall deliver to Tenant a written statement setting forth all
Common Area Costs incurred by Landlord during such previous calendar year and
the anticipated Common Area Costs for the present calendar year. If the total
amount paid by Tenant during such previous calendar year for such items shall be
less than the actual amount due from Tenant for such calendar year, Tenant shall
pay Landlord the actual amount due within thirty (30) days after receipt of such
statement. If the total amount paid by Tenant for such items during such
previous calendar year shall exceed the actual amount of any such items, such
excess shall be credited against the next installments due from Tenant to
Landlord hereunder.
ARTICLE IX
----------
9.1 UTILITIES. Landlord, at its sole expense, shall cause all utilities
to be metered directly to the Premises, including gas, electricity, and water,
and Landlord shall pay all tap in fees, user fees, connection fees, and other
charges required to be paid to any governmental agency supplying such utility in
order to secure the availability of such utility services for the Premises.
Tenant shall pay all deposits required by the applicable utility company as a
condition to providing such utility service for consumption. Tenant shall pay
all charges for water, gas, heat, electricity, sewer and any other utility used
upon or furnished to the Premises. The obligation of Tenant to pay for such
utilities shall commence as of the Commencement Date, and Tenant shall also pay
any utility costs incurred in connection with Tenant's Work commencing on the
Commencement Date.
9.2 INTERRUPTION OF SERVICE. If any utility services to the Premises
are interrupted for ten (10) consecutive days as a result of Landlord's acts or
omissions, Tenant may abate Minimum Rent and all other charges hereunder until
such services are restored.
ARTICLE X
---------
10.1 USE OF PREMISES. Tenant shall use and occupy the Premises for any
legal purpose.
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<PAGE> 14
10.2 TENANT'S COVENANTS. Tenant covenants and agrees as follows:
(a) Tenant shall procure any licenses and permits required for
Tenant's use of the Premises and upon the expiration or termination of
this Lease, to remove its goods and effects and those of all persons
claiming under it and to yield up peaceably to Landlord the Premises in
good order repair and condition in all respects, except for damage by
fire and casualty, structural defects, required repairs by Landlord,
and reasonable wear and tear.
(b) Tenant shall permit Landlord and its agents on reasonable
notice and at reasonable times to perform Landlord's repair and
maintenance obligations hereunder, or to examine the Premises and to
show the Premises to prospective purchasers, mortgagees, and/or tenants
(but only during the last twelve (12) months of the term with respect
to prospective tenants), provided that Landlord shall not thereby
unreasonably interfere with the conduct of Tenant's business. Tenant
shall permit Landlord upon prior notice to enter the Premises to make
such repairs, improvements, alterations or additions thereto as may be
required by Landlord under this Lease, subject to Section 7.3 above.
(c) Tenant shall use and occupy the Premises in a careful,
safe and proper manner and shall keep the Premises in a clean, safe and
healthy condition in accordance with all federal, state, and local
laws, rules, regulations, and orders, including without limitation
environmental laws. Tenant shall not permit the Premises to be used for
any unlawful purpose, commit any waste thereof, or commit any nuisance.
Notwithstanding the foregoing, Tenant shall have the right to contest
the legality of any law, order, rule, regulation or requirement
applicable to Tenant's use of the Premises so long as Tenant
indemnifies Landlord against any loss, cost, expense, damage or
liability arising out of such contest. Upon the final determination of
any such contest, Tenant shall comply with any such law, order,
ordinance, rule, regulation or requirement to the extent held to be
valid or legal. Notwithstanding anything to the contrary as set forth
herein, to the extent compliance with any such law, order, ordinance,
rule, regulation or requirement requires any structural alteration of
the Premises or any other change in any portion of the Premises for
reasons unrelated to Tenant's actual use or Tenant's Work, Landlord, at
its sole expense, shall promptly comply with any such law, order,
ordinance, rule, regulation or requirement.
(d) All of Tenant's garbage and refuse shall be kept in the
kind of containers specified by Landlord and shall be placed outside
the Premises and prepared for collection in the manner and at the times
and places specified by Landlord. Tenant
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<PAGE> 15
shall not allow garbage or refuse to be placed or stored anywhere
within the Premises except within those outdoor receptacles specified
by Landlord. Tenant at its sole cost and expenses, shall provide trash
removal service for picking up such refuse and garbage.
10.3 OPERATION OF BUSINESS. Notwithstanding anything to the contrary
set forth in this Lease, Tenant shall have the right to vacate the Premises at
anytime during the term of this Lease. Upon any such vacation in excess of
ninety (90) days (excluding such discontinuance due to damage or destruction of
the Premises, redecoration, remodeling and/or refurbishing of the Premises, or
other causes beyond Tenant's control), Landlord shall have the right to
terminate this Lease upon written notice thereof to Tenant. Such right of
termination shall be Landlord's sole remedy as a result of such vacation;
provided, however, that Landlord shall retain all other remedies set forth
herein in the event of any default (including but not limited to the failure to
pay rent hereunder) by Tenant hereunder during such vacation. At such time as
Tenant vacates the Premises as set forth herein, Landlord shall have the right
to enter the Premises for purposes of exhibiting the same to potential tenants
in accordance with Section 10.2(b) above, and such entry shall not be deemed a
disturbance of Tenant's occupancy.
ARTICLE XI
----------
11.1 ASSIGNMENT AND SUBLETTING.
(a) The sale, issuance, or transfer of stock in Tenant shall
not be deemed to be an assignment of this Lease.
(b) Tenant may assign this Lease or sublet the Premises
without Landlord's consent to any wholly-owned subsidiary or its parent
corporation, or to any person or corporation owning a controlling
interest in Tenant, or to any company into which Tenant may be merged
or consolidated.
(c) Except as set forth in this ARTICLE XI, Tenant may not
assign this Lease or sublet all or any portion of the Premises to any
third party without Landlord's prior written consent, which consent
shall not be unreasonably withheld or delayed.
(d) Tenant shall have the right to make a collateral
assignment of Tenant's leasehold interest in the Premises under this
Lease without Landlord's consent in connection with any financing
obtained by Tenant, provided that any leasehold
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<PAGE> 16
mortgage which encumbers Tenant's leasehold interest hereunder shall
provide that the mortgagee, upon exercising its remedies under such
mortgage to obtain possession of the Premises, (i) shall cure any
defaults of Tenant which are curable by such mortgagee, (ii) shall
assign all obligations and liabilities of Tenant under this Lease from
and after the date such mortgagee obtains possession of the Premises,
and (iii) shall be subject to all the terms and conditions of this
Lease from and after the date of such possession.
11.2 LIABILITY. If, at any time during the term of this Lease, Tenant
sublets all or any part of the Premises or assigns this Lease as provided
herein, Tenant shall nevertheless remain fully liable under all the terms and
conditions of this Lease.
ARTICLE XII
-----------
FIXTURES
--------
All counters, shelving and other equipment and all other trade and
light fixtures installed by or at the expense of Tenant, in or on the Premises
shall remain the property of Tenant and Tenant shall remove the same or any part
thereof within thirty (30) days after the end of the term hereof, and provided
that Tenant, at its sole cost and expense, shall make any repairs occasioned by
such removal.
ARTICLE XIII
------------
EXTERIOR SIGNS
--------------
(a) Tenant shall have the right, at its sole expense and in
conformity with applicable laws and ordinances, to erect and
thereafter, to maintain and/or replace, if it shall so elect, a sign on
the exterior walls of the Building all in accordance with Tenant's
Signage Standards, as set forth on EXHIBIT "D". The size and design of
all such signs shall be as set forth for in EXHIBIT "D" attached hereto
and made a part hereof. Landlord shall not utilize the exterior of or
space above the Building or any other portion of the Building for signs
or advertising purposes.
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<PAGE> 17
(b) Upon any permitted assignment of this Lease or subletting
of the Premises, as set forth in ARTICLE XI above, the assignee and/or
subtenant shall have the right, at its sole expense and in conformity
with applicable laws and ordinances, to erect and thereafter to
maintain and/or replace a sign on the exterior walls of the Building,
in accordance with such assignee's and/or subtenant's standard sign
specifications, provided that any such sign shall comply with the then
applicable local laws and ordinances and shall otherwise conform with
EXHIBIT "D" attached hereto.
Upon the expiration of this Lease, Tenant shall remove all such signs, provided
that Tenant shall repair any damage to the Building caused by such removal.
ARTICLE XIV
-----------
14.1 INDEMNITY. Subject to Section 14.4 below:
(a) Tenant shall indemnify and hold Landlord harmless from any
claims, damages, liabilities and expenses (including attorneys' fees
and costs) for damage or injury to any person or any property occurring
on the Real Estate, or any part thereof, including but not limited to,
any claim arising out of the completion of Tenant's Work, unless caused
by the acts or omissions of Landlord, its agents, employees, or
independent contractors, Landlord's failure to perform its repair
obligations hereunder, or any latent defects in the Building.
(b) Landlord shall indemnify and hold Tenant harmless from any
and all claims, damages, liabilities and expenses (including attorneys'
fees and costs) for damage or injury to Tenant or any other person or
any property occurring on the Real Estate, or any part thereof, unless
caused by the acts or omissions of Tenant, its agents, employees, or
independent contractors, Tenant's failure to perform its maintenance
obligations under Section 7.2 above. or the completion of Tenant's
Work.
14.2 LANDLORD'S INSURANCE. During the term of this Lease, Landlord
shall maintain the following insurance polices:
(a) Comprehensive public liability insurance, including
insurance against the assumed or contractual liability of Landlord
hereunder, with respect to the Premises, to afford protection to the
limit for each occurrence of not less than One
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<PAGE> 18
Million Dollars ($1,000,000.00) combined single limit for bodily
injury, death and property damage; and
(b) All-risk property casualty insurance, written at
replacement cost value and with replacement cost endorsement, covering
the Building and all other buildings and improvements in the Real
Estate (not including any property required to be insured by Tenant
under Section 14.3(b)).
14.3 TENANT'S INSURANCE. During the term of this Lease, Tenant shall
maintain the following insurance policies:
(a) Comprehensive public liability insurance, including
insurance against the assumed or contractual liability of Tenant
hereunder, to afford protection to the limit for each occurrence of not
less than One Million Dollars ($1,000,000.00) combined single limit for
bodily injury, death and property damage; and
(b) All-risk property insurance, written at replacement cost
value and with replacement cost endorsement, including coverage against
vandalism and malicious mischief, covering all of Tenant's personal
property in the Premises (including, without limitation, inventory,
trade fixtures, wall and floor coverings, furniture and other personal
property), and all leasehold improvements installed in the Premises by
Tenant.
The policy carried by Tenant under Section 14.3(a) above shall name Landlord as
an additional insured, and both such policies shall also contain a provision by
which the insurer agrees that such policy shall not be cancelled except after
thirty (30) days written notice to Landlord. Such insurance may be carried under
blanket insurance policies. Each such policy, or a certificate thereof, shall be
deposited with Landlord by Tenant not later than the Commencement Date. Prior to
the expiration or termination of any such policy, Tenant shall deliver to
Landlord a new or renewal policy (or a certificate thereof).
14.4 WAIVER. Landlord and Tenant hereby release each other from any and
all liability or responsibility (to the other or anyone claiming through or
under them by way of subrogation or otherwise) for any loss or damage to
property caused by fire or any other casualties, even if such fire or other
casualty shall have been caused by the fault or negligence of the other party,
or anyone for whom such party may be responsible, to the extent such loss or
damage is required to be insured against hereunder or is actually insured
against, including deductible portions, and each party hereby waives any right
of subrogation for all or any insurance maintained by either party. Each party
shall cause each insurance
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<PAGE> 19
policy carried by it hereunder to be written in such manner to provide that; the
insurer waives all right of recovery by way of subrogation against the other
party hereunder in connection with any loss or damage covered by such policy.
14.5 TENANT'S CONTRIBUTION. Tenant shall pay the premiums for the
insurance required to be carried by Landlord under Section 14.2 above in
accordance with Section 8.2 above; provided, however, that such insurance costs
shall not include any premiums for any special endorsements required by
Landlord's lender.
ARTICLE XV
----------
15.1 ABATEMENT OR ADJUSTMENT OF RENT. If the Premises shall be damaged
or destroyed by fire ar other casualty after the execution of this Lease and
before the termination hereof, then Minimum Rent and any other charges payable
hereunder, shall be abated as set forth herein. If the whole of the Premises
shall be damaged or destroyed, or if a substantial portion thereof shall be
damaged or destroyed to the extent that Tenant, in its reasonable judgment,
determines that it cannot conduct business in the Premises, then Minimum Rent
and any other charges payable hereunder shall be abated entirely until Tenant is
obligated to recommence paying rent in accordance with Section 15.3 below. If
less than such substantial part of the Premises shall be damaged or destroyed,
then Minimum Rent and any other charges payable hereunder shall be abated in
proportion to that portion of the Premises of which Tenant shall be deprived on
account of such damage or destruction and the repair, restoration, rebuilding or
replacement or any combination thereof, of the improvements so damaged or
destroyed, and Tenant shall again be obligated to recommence paying rent in
accordance with Section 15.3 below.
15.2 REPAIRS AND RESTORATION OF BUILDING.
(a) Upon any damage or destruction of the Premises, Landlord
shall promptly proceed to repair, restore, replace or rebuild the
Premises, including those tenant improvements made by Tenant to the
Premises under ARTICLE VI above, (but not including any items required
to be insured by Tenant under Section 14.3(b)) to substantially the
condition in which the same were immediately prior to such damage or
destruction and Landlord thereafter shall diligently prosecute said
work to completion without delay or interruption, subject to Section
20.6 below. Notwithstanding the foregoing, if Landlord does not either
(i) obtain a building permit for any repairs, rebuilding or restoration
required hereunder within three (3) months
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<PAGE> 20
of the date of such damage or destruction, or (ii) complete such
repairs, rebuilding or restoration in accordance with Section 15.3
below within nine (9) months of such damage or destruction, then, in
either event, Tenant may at any time thereafter terminate this Lease
upon ninety (90) days' written notice thereof to Landlord; provided,
however, that such notice of cancellation shall not be effective if
Landlord, within such ninety (90) day period, shall obtain such permit
or complete and comply as aforesaid, as the case may be.
(b) Notwithstanding anything to the contrary set forth in
Section 15.2(a) above, if such damage or destruction shall occur during
the last two (2) years of the term of this Lease, and shall amount to
fifty percent (50%) or more of the replacement cost of the Building
(exclusive of the land and foundations), this Lease may be terminated
at the election of either Landlord or Tenant upon thirty (30) days
after the occurrence of such damage or destruction; provided, however,
that if Landlord shall elect to terminate this Lease, such cancellation
shall be of no force and effect if Tenant shall give Landlord written
notice within thirty (30) days after receipt of such notice of
termination that Tenant has elected to renew this Lease for all of the
option periods pursuant to ARTICLE III above. Upon any such renewal,
this Lease shall remain in full force and effect, and the Building
shall be restored in accordance with the terms and conditions of this
ARTICLE XV.
(c) If this Lease is terminated under this Section 15.2, any
Minimum Rent or other charges paid in advance by Tenant shall be
refunded to Tenant, and the parties shall be released hereunder, each
to the other, from all liability and obligations hereunder thereafter
arising.
(d) Upon any damage or destruction to the Building and any
repairs and/or restoration thereto under this ARTICLE XV, Tenant, at
Tenant's expense, shall promptly repair and/or replace all damaged or
destroyed fixtures, equipment, furniture, and other personal property,
and all leasehold improvements installed by Tenant.
15.3 DELIVERY OF PREMISES. If this Lease has not been cancelled
hereunder as a result of any damage or destruction of the Premises, Tenant shall
not be required to accept delivery or possession of the Premises and recommence
paying Minimum Rent and other charges (or such abated portion thereof) until all
of the following shall have occurred:
(a) The damaged or destroyed portion of the Premises shall
have been completed as nearly as practicable to the condition existing
immediately prior to such
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<PAGE> 21
destruction or damage and in compliance with all laws, ordinances,
regulations and requirements of governmental authorities having
jurisdiction thereof and the National Board of Fire Underwriters and/or
Insurance Service Organization ("ISO");
(b) If required, a temporary certificate of occupancy or an
equivalent use permit, and all other requisite permits, if any,
including an inspection certificate of approval by the National Board
of Fire Underwriters and/or ISO (if required) shall have been issued by
the appropriate legal authorities issuing same, and Landlord shall have
delivered to Tenant such certificate(s) or photostatic copies thereof;
and
(c) If the Premises have been totally damaged or destroyed,
Landlord shall have delivered written notice to Tenant of the date of
completion of the Premises as required herein, and Tenant shall have a
period of ten (10) days from and after such date of completion to
install all trade fixtures, furniture, equipment, and other personal
property damaged or destroyed in connection with such damage or
destruction of the Premises.
ARTICLE XVI
-----------
16.1 TOTAL TAKING. If the whole of the Premises shall be taken under
power of eminent domain by any public or private authority, or conveyed by
Landlord to said authority in lieu of such taking, then this Lease shall
terminate as of the date of such taking.
16.2 PARTIAL TAKING
(a) Tenant may, at its election, terminate this Lease upon the
occurrence of any condemnation, or conveyance in lieu of condemnation,
which affects:
(i) Twenty percent (20%) or more of the floor area of
the Premises;
(ii) Twenty percent (20%) or more of the parking
areas of the Real Estate shown on EXHIBIT "B" attached hereto;
or
(iii) Any portion of the Premises whose condemnation
would materially affect ingress to and egress from the
Premises, unless Landlord provides satisfactory substitute
points of ingress and egress to and from the Premises.
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<PAGE> 22
Tenant shall give Landlord notice of Tenant's election within thirty (30) days
after Tenant; shall receive notice of such pending condemnation. If Tenant fails
to give Landlord such written notice within such thirty (30) day period, Tenant
shall be conclusively deemed to have elected not to terminate this Lease.
Notwithstanding any termination of this Lease by Tenant hereunder, Tenant, at
its election, may continue to occupy the Premises, subject to the terms and
provisions of this Lease, for all or such part, as Tenant may determine, of the
period between the date of such taking and the date when possession of the
Premises shall be taken by the appropriate authority.
(b) Notwithstanding anything to the contrary set forth herein,
if any portion of the Premises is condemned or conveyed in lieu of such
condemnation during the last two (2) years of the term hereof, then
either Tenant or Landlord may terminate this Lease upon thirty (30)
days written notice to the other party; provided, however, that any
such notice of termination by Landlord shall be ineffective, and this
Lease shall remain in full force and effect, if Tenant, within thirty
(30) days after receipt of such notice from Landlord, shall give notice
to Landlord of its intention to extend the term of this Lease for all
of the options periods in accordance with ARTICLE III above. If Tenant
gives Landlord such notice of such renewal, Landlord shall repair
and/or restore the Premises in accordance with the terms and conditions
of this ARTICLE XVI, to the extent practicable. Notwithstanding any
termination of this Lease pursuant to the terms and conditions of this
Section 16.2(b), Tenant, at its election, may continue to occupy the
Premises, subject to the terms and conditions of this Lease, for the
period between the date of such taking and the date when possession of
the property to be condemned shall be taken by the appropriate
authority.
16.3 RESTORATION. If this Lease is not terminated under Section 16.2
above, Landlord, at Landlord's sole cost and expense, shall promptly restore the
remaining portions of the Building, including any and all improvements made
theretofore, together with the remaining portions of the parking areas, to an
architectural whole in substantially the same condition that the same were in
prior to such taking, to the extent practicable. If Landlord does not either (i)
obtain a building permit for any repairs or restoration required hereunder
within three (3) months of the date of taking, or (ii) complete such repairs or
restoration in accordance with this Section 16.3(a) within nine (9) months of
such taking, then, in either event, Tenant may at any time thereafter terminate
this Lease upon thirty (30) days written notice thereof to Landlord; provided,
however, that such notice of cancellation shall not be effective if Landlord,
within such thirty (30) day period, shall obtain such permit or complete and
comply as aforesaid, as the case may be. Minimum Rent and any other charges
payable by Tenant hereunder shall be suspended or abated until the completion of
such restoration according to the nature and extent of the injury to the
Premises. Upon any condemnation of
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<PAGE> 23
a portion of the Premises, the Minimum Rent and any other charges payable by
Tenant hereunder shall be proportionately reduced based upon the! floor area of
the Premises remaining after said taking.
16.4 THE AWARD. All compensation awarded for any taking, whether for
the whole or a portion of the Premises, shall be the sole property of Landlord
whether such compensation shall be awarded for diminution in the value of, or
loss of the leasehold or for diminution in the value of, or loss of the fee, or
otherwise, and Tenant hereby assigns to Landlord all of Tenant's right and title
to and interest in any and all such compensation; provided, however, Landlord
shall not be entitled to, and Tenant shall have the sole right to retain any
portion of any award made by the appropriating authority for the cost of removal
of leasehold improvements, fixtures, and improvements installed in the Premises
at the expense of Tenant and for relocation expenses, and to any separate award
made by the appropriating authority directly to Tenant.
16.5 RELEASE. In the event of any termination of this Lease as the
result of the provisions of this ARTICLE XVI, Minimum Rent and any other
charges, if any, paid in advance by Tenant shall be refunded to Tenant, and the
parties, effective as of such termination, shall be released from all liability
and obligations thereafter arising under this Lease.
ARTICLE XVII
------------
17.1 EVENTS OF DEFAULT, REMEDIES. If Tenant shall at any time be in
default in the payment of rental or any other charges hereunder or in the
performance of any of the covenants of this Lease, and Tenant shall fall to
remedy such default within (a) ten (10) days after receipt of written notice
thereof from Landlord if such default is as to payment of Minimum Rent or other
charges (provided that such written notice shall not be required more than once
in any twelve (12) month period, and thereafter Tenant shall be deemed to be in
default hereunder, if any payment of Minimum Pent or other charges is not paid
within ten (10) days of when due) or (b) within thirty (30) days after receipt
of written notice thereof if such default is non-monetary (but Tenant shall not
be deemed in default if it commences to remedy such default within said thirty
(30) day period and proceeds therewith with due diligence), or if Tenant shall
be adjudged a bankrupt or shall make an assignment for the benefit of creditors,
or if a receiver of any property of Tenant in or upon the Premises be appointed
in any action, suit or proceeding by or against Tenant and not removed within
sixty (60) days after appointment, or if the interest of Tenant in the Premises
shall be sold under execution or other legal process, Landlord may by notice to
Tenant, terminate this Lease, or
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<PAGE> 24
without terminating this Lease, re-enter the Premises by summary proceedings,
proceedings in forcible entry and detainer, eviction, or otherwise, and may
dispossess Tenant.
17.2 RELETTING; TERMINATION. If Landlord elects to terminate Tenant's
right to possession only without terminating this Lease as above provided,
Landlord may remove from the Premises any and all property found therein and
such repossession shall not release Tenant from Tenant's obligation to pay the
rental herein. After any such repossession by Landlord without termination of
the Lease, Landlord may relet the Premises or any part thereof to any person,
firm or corporation and for such time and upon such terms as Landlord in
Landlord's sole discretion may determine; provided, however, that Landlord shall
use reasonable efforts to relet the Premises and to mitigate all damages
incurred by Landlord as a result of any default by Tenant. Landlord may make
repairs, alterations and additions in and to the Premises and redecorate the
same to the extent deemed by Landlord necessary or desirable and Tenant, upon
demand in writing, shall pay the reasonable cost thereof (excluding tenant
improvements for the replacement tenant) together with Landlord's reasonable
expenses of reletting, including any commissions and attorneys' fees relative
thereto. If the rents collected by Landlord upon any such reletting are not
sufficient to pay monthly the full amount of the monthly rent and other charges
reserved herein, together with the reasonable costs of such repairs, alterations
(excluding tenant improvements for any replacement tenant), additions,
redecorating, and expenses, Tenant shall pay to Landlord the amount of each
monthly deficiency upon demand in writing.
17.3 LANDLORD'S RIGHT TO REMOVE CHATTELS. Any and all property which
may be removed from the Premises by Landlord in accordance with the terms of
this Lease may be handled, removed, stored or otherwise disposed of by Landlord
at the risk and expense of Tenant, and Landlord in no event shall be responsible
for the preservation or safekeeping thereof. Tenant shall pay to Landlord upon
demand in writing, any and all reasonable expenses incurred in connection with
such removal and all storage charges against such property so long as the same
shall be in Landlord's possession or under Landlord's control. If any property
shall remain in the Premises or in the possession of Landlord and shall not be
retaken by Tenant within a period of ten (10) days from and after the time when
the Premise are either abandoned by Tenant or repossessed by Landlord under the
terms of this Lease, said property shall conclusively be deemed to have been
forever abandoned by Tenant.
17.4 OTHER REMEDIES. The rights and remedies of Landlord set forth in
this ARTICLE XVII and in Section 18.1 below shall be in addition to any other
rights and remedies available to Landlord at law or in equity, provided that
such additional rights or remedies shall be subject to the explicit rights and
remedies set forth in this ARTICLE XVII,
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<PAGE> 25
and in no event shall Minimum Rent, any additional rent, or any other charges
payable by Tenant hereunder be accelerated, unless there shall be unpaid, at any
time after an event of default by Tenant hereunder, Minimum Rent and other
charges for two (2) consecutive months or Tenant shall have been in default in
the payment of Minimum Rent or other charges hereunder, three (3) times in any
twelve (12) month period. In such event, the Minimum Rent and other charges
payable by Tenant hereunder may be accelerated as hereinafter set forth,
provided Landlord delivers written notice to Tenant of such acceleration on or
before the date payment of any deficient amounts is made by Tenant to Landlord.
If Minimum Rent and other charges are permitted to be accelerated as set forth
herein, then the amount due and owing from Tenant to Landlord as a result of
such acceleration shall be equal to the difference between (a) the total Minimum
Rent and other charges remaining due and payable to Landlord from and after the
date of such acceleration through the expiration date of the term of the Lease,
discounted to its then present value at a rate which is one percent (1%) per
annum above the prime rate of National City Bank at the time of such calculation
(the "Discount Rate"), and (b) the fair market rental value of the Premises (net
of the costs reimbursable to Landlord under Section 17.2 hereof) for the
remaining portion of the term of this Lease, discounted to its then present
value at the Discount Rate.
ARTICLE XVIII
-------------
18.1 LANDLORD'S SELF-HELP. If Tenant shall default in the performance
or observance of any agreement or condition in this Lease contained on its part
to be performed or observed and shall not cure such default within any
applicable cure period set forth herein, Landlord may, at its option, without
waiving any claim for damages for breach of agreement, at any time thereafter
cure such default for the account of Tenant, and any amount paid or any
contractual liability incurred by Landlord in so doing shall be deemed paid or
incurred for the account of Tenant and Tenant agrees to reimburse Landlord
therefor together with interest on any such reimbursement at the same rate as
set forth in Section 17.4, and save Landlord harmless therefrom; provided that
Landlord may cure any such default as aforesaid prior to the expiration of said
waiting period, without notice to Tenant, if any emergency situation exists, or
after notice to Tenant, if the curing of such default prior to the expiration of
said waiting period is reasonably necessary to protect the Premises or
Landlord's interest therein, or to prevent injury or damage to persons or
property. If Tenant falls to reimburse Landlord upon demand for any amount paid
for the account of Tenant hereunder plus interest, said amount shall be added to
and become due as a part of the next payment of rent due hereunder.
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<PAGE> 26
18.2 TENANT'S SELF-HELP. If Landlord shall breach, or fall to perform
or observe, any agreement or condition in this Lease contained on Landlord's
part to be performed or observed, and if Landlord shall not cure such breach or
failure within thirty (30) days after notice from Tenant specifying such breach
or failure (or, if such breach or failure shall reasonably take more than thirty
(30) days to cure, and Landlord shall not have commenced the same within the
thirty (30) days and diligently prosecuted the same to completion), Tenant may,
at Tenant's option, without waiving any claim for damages for breach of
agreement, at any time thereafter cure such breach or failure for the account of
Landlord and any amount paid or any contractual liability incurred by Tenant in
so doing shall be deemed paid or incurred for the account of Landlord and
Landlord agrees to reimburse Tenant therefor together with interest on any such
reimbursement at the same rate as set forth in Section 20.12 and save Tenant
harmless therefrom; provided that Tenant may cure any such breach or failure as
aforesaid prior to the expiration of said waiting period if reasonably necessary
to protect the Premises or Tenant's interest therein, to prevent injury or
damage to persons or property, or in the event of any other emergency. Any
amounts not reimbursed by Landlord within thirty (30) days of Tenant's written
demand therefor may be applied by Tenant as a credit against Tenant's next
payment(s) of Minimum Rent or other charges, plus interest, provided that such
credit shall not exceed fifty percent (50%) of Tenant's next payment(s) of
Minimum Rent and other charges.
ARTICLE XIX
-----------
19.1 SUBORDINATION. Tenant hereby subordinates this Lease to the lien
of any deed of trust, mortgage or mortgages now or hereafter placed upon
Landlord's interest in the Real Estate; provided, however, that Landlord shall
procure from any such mortgagee an agreement, in writing, in form and substance
reasonably acceptable to Tenant, providing in substance that so long as Tenant
substantially performs the obligations imposed upon Tenant hereunder within the
applicable grace or cure period, its tenancy will not be disturbed, nor its
rights under this Lease affected by, any default under such mortgage nor shall
Tenant be named as a defendant in any foreclosure proceeding (unless required by
law), and (b) in the event of any foreclosure under any such mortgage or deed of
trust, or a granting of a deed in lieu thereof, any such mortgagee or purchaser
of Landlord's interests through foreclosure sale or deed in lieu thereof shall
assume the obligations of Landlord under this Lease from and after the date on
which such mortgagee or purchaser acquires Landlord's interests.
19.2 QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that
upon Tenant paying the Minimum Rent, the additional rent and all other charges,
and observing and performing all of the terms, covenants and conditions on
Tenant's part to be observed and
- 25 -
<PAGE> 27
performed hereunder, Tenant may peaceably and quietly have, hold, occupy and
enjoy the Premises without hindrance or molestation from Landlord or any persons
lawfully claiming through Landlord.
19.3 LANDLORD'S ASSURANCES. To induce Tenant to execute this Lease, and
in consideration thereof, Landlord warrants, represents, covenants and agrees as
follows:
(a) If at any time during the term of this Lease (or any
renewal thereof) applicable law shall not permit the use of the
Premises for the purposes permitted herein, then Tenant, without
waiving any other rights Tenant may have on account thereof, may
terminate this Lease by giving Landlord notice thereof.
(b) As of the date hereof, the Premises now have and through
the term of this Lease shall have access to all adjacent streets;
(c) Landlord has no knowledge or notice of any pending
condemnation or eminent domain proceedings with respect to the
Premises, nor has Landlord any knowledge or notice that the Premises or
any portion thereof is in violation of any applicable statute, law,
rule, regulation, or order of any governmental authority, including any
zoning ordinances or building codes.
(d) The execution and performance of this Lease by Landlord
will not violate or cause a default under any agreement, instrument, or
other transaction to which Landlord is a party or by which Landlord
and/or the Premises are bound.
ARTICLE XX
----------
20.1 HOLDING OVER. In the event that Tenant or anyone claiming under
Tenant shall continue occupancy of the Premises after the expiration of the
original term of this Lease without any agreement in writing between Landlord
and Tenant with respect thereto, such occupancy shall not be deemed to extend or
renew the term of this Lease, but such occupancy shall continue as a tenancy
from month to month upon the covenants, provisions and conditions herein
contained and at one hundred twenty-five percent (125%) of the Minimum Rent in
effect upon the expiration of the term, prorated and payable for the period of
such occupancy.
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<PAGE> 28
20.2 WAIVERS. Failure of either party to complain of any act or
omission on the part of the other party, no matter how long the same may
continue, shall not be deemed to be a waiver by said party of any of its rights
hereunder. No waiver by either party at any time, express or implied, of any
breach of any provision of this Lease shall be deemed a waiver of a breach of
any other provision of this Lease or a consent to any subsequent breach of the
same or any other provision. If any action by either party shall require the
consent or approval of the other party, the other party's consent to or approval
of such action on any one occasion shall not be deemed a consent to or approval
of said action on any subsequent occasion or a consent to or approval of any
other action on the same or any subsequent occasion.
20.3 NOTICES. All notices and other communications authorized or
required hereunder shall be in writing and shall be given by mailing the same by
certified mall or registered mall, return receipt requested, postage prepaid,
and any such notice or other communication shall be deemed to have been given
when received by the party to whom such notice or other communication shall be
addressed, or on the date noted that the addressee has refused delivery or on
the date that the notice is returned to sender due to the inability of the
postal authorities to deliver. If intended for Landlord, the same shall be
mailed to Landlord at P. O. Box 9006, Boardman, Ohio 44513, or such other
address as Landlord may hereafter designate by notice to Tenant, and if intended
for Tenant, the same shall be mailed to Tenant at P. O. Box 9006, Boardman, Ohio
44513, with a copy to Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A., 1301 East
9th Street, The Tower at Erieview, Suite 2600, Cleveland, Ohio 44114, Attention:
Gerald I. Arnson, Esq., or to such other address or addresses as Tenant may
hereafter designate by notice to Landlord.
20.4 ATTORNEYS' FEES. If either party hereto be made or becomes a party
to any litigation commenced by or against the other party involving the
enforcement of any of the rights and remedies of such party, or arising on
account of the default of the other party in the performance of such party's
obligations hereunder, then the prevailing party in any such litigation, or the
party becoming involved in such litigation because of a claim against such other
party, as the case may be, shall receive from the other party all costs and
reasonable attorneys' fees incurred by such party in such litigation.
20.5 FORCE MAJEURE. In the event that Landlord or Tenant shall be
delayed or hindered in or prevented from the performance of any act (other than
Tenant's obligation to make payments of Minimum Rent and other charges required
hereunder), by reason of strikes, lockouts, unavailability of materials, failure
of power, restrictive governmental laws or regulations, riots, insurrections,
the act, failure to act, or default of the other party, war or other reason
beyond its control, then performance of such act shall be excused for the period
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<PAGE> 29
for the delay and the period of the performance of such act shall be extended
for a period equivalent to the period of such delay. Notwithstanding the
foregoing, lack of funds shall not be deemed to be a cause beyond control of
either party and nothing contained herein shall be deemed to delay the
obligation of either party hereunder to pay any sum required to be paid to the
other party.
20.6 ESTOPPEL CERTIFICATES. At any time and from time to time, Landlord
and Tenant each agree, upon request in writing from the other, to execute,
acknowledge and deliver to the other, or to any person designated by the other,
a statement in writing certifying that this Lease is unmodified and is in full
force and effect, or if there have been modifications, that the same is in full
force and effect as modified (stating the modifications), that the other party
is not in default in the performance of its covenants hereunder, or if there
have been such defaults, specifying the same and the dates to which the rent and
other charges have been paid, and such other matters as the requesting party may
reasonably request.
20.7 RECORDATION. Simultaneously herewith, Landlord and Tenant have
entered into a Memorandum Of Lease for recording in the form attached hereto and
made a part hereof as EXHIBIT "E". Landlord and Tenant shall each pay one-half
(1/2) of the recording fees to record such memorandum.
20.8 INVALIDITY OF PARTICULAR PROVISION. If any term or provision of
this Lease or the application hereto to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which lt is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
20.9 CAPTIONS AND DEFINITIONS. The captions of the Sections of this
Lease are for convenience only and are not a part of this Lease and do not in
any way limit or amplify the terms and provisions of this Lease. The word
"Landlord" and the pronouns referring thereto, shall mean, where the context so
admits or requires, the persons, firm or corporation named herein as landlord or
the mortgagee in possession for the time being of the land and building
comprising the Real Estate and if there is more than one landlord, the covenants
of Landlord shall be the joint and several obligations of each of them, and if
Landlord is a partnership, the covenants of Landlord shall be the joint and
several of each of the partners and the obligation of the partnership. Any
pronoun shall be read in the singular or plural number and in such gender as the
context may require. Except as in this Lease otherwise provided, the terms and
provisions of this Lease shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
- 28 -
<PAGE> 30
20.10 BROKERAGE. Landlord and Tenant represent and warrant, each to the
other, that each has not dealt with any real estate agent or broker in
connection with this transaction and agree to indemnify and save each other
harmless from and against all loss, cost and expense incurred by reason of the
breach of such representation and warranty.
20.11 NET LEASE. This Lease shall be deemed and construed to be a "net
lease", and Tenant shall pay to Landlord, absolutely net throughout the term of
this Lease, the Minimum Rent and other payments hereunder, free of any charges,
assessments, impositions or deductions of any kind and without abatement,
deduction or setoff, and under no circumstances or conditions, whether now
existing or hereafter arising, or whether beyond the present contemplation of
the parties, shall Landlord be expected or required to make any payment of any
kind whatsoever or be under any other obligation or liability hereunder except
as herein otherwise expressly set forth.
20.12 DEFAULT INTEREST. All payments of Minimum Rent or other charges
characterized herein as additional rent which are not paid within ten (10) days
after written notice from Landlord thereof shall, at the option of the Landlord,
bear interest from such date to the date of payment at the Default Rate, which
interest shall be paid by Tenant to Landlord as additional rent. As used in this
Lease, the Default Rate shall mean an annual rate of interest equal to fifteen
percent (15%), or, if less, the maximum rate permitted by law. Notwithstanding
the foregoing, for the second and all subsequent failures by Tenant within a
single calendar year to pay Minimum Rent or additional rent within ten (10) days
after the due date hereof, no written notice shall be required to be delivered
to Tenant by Landlord hereunder, and interest at the Default Rate as set forth
above shall accrue and become due and payable together with such late payment
from and after the date which is ten (10) days after the due date thereof until
paid by Tenant.
20.13 TERMINATION OF PRIOR LEASE. Tenant is the tenant named in a
certain lease with West End-Antac Investments as Landlord, dated July 26, 1987,
and amended on January 2, 1990, December, 1991, December 24, 1992, and February
28, 1994 (the "Prior Lease"), and is presently occupying a portion of the
Building on the Real Estate (the "Prior Premises") pursuant to said Prior Lease.
Landlord herein, as the present owner of the Prior Premises demised by said
Prior Lease, and Tenant herein, as the tenant under said Prior Lease, hereby
agree that, upon the commencement of Tenant's obligation to pay rent under this
Lease, said Prior Lease shall be terminated. All Minimum Rent and other charges
shall be prorated as of the date Tenant's obligation to pay rent under this
Lease commences, and Landlord and Tenant shall promptly pay to each other any
amounts due as a result of said proration, except that additional rental
payments based upon Landlord's "estimates" shall be further adjusted between the
parties when the "actual" amounts are determined. All rights and liabilities
thereafter arising under said Prior Lease shall cease, and said Prior Lease
shall be of no
- 29 -
<PAGE> 31
further force and effect. Landlord and Tenant agree to execute any and all
documents and instruments requested by the other party to further evidence the
termination of the said Prior Lease.
20.14 COUNTERPARTS. This Lease may be executed in counterparts, each of
which shall be an original, but all of which when taken together shall
constitute one and the same instrument.
20.15 ENTIRE AgREEMENT. This instrument contains the entire and only
agreement between the parties, and no oral statement or representations or prior
written matter not contained in this instrument shall have any force and effect.
This Lease shall not be modified in any way except by a writing executed by both
parties.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written by their respective officer and Managing Member
thereunto duly authorized.
WITNESSES: RAINBOW RENTALS, LTD.
(an Ohio limited liability company)
_________________________________
_________________________________ By: __________________________________
WAYLAND J. RUSSELL,
Managing Member
"Landlord"
RAINBOW RENTALS, INC.
(an Ohio corporation)
_________________________________
By: __________________________________
MICHAEL A. PECCHIA,
_________________________________ Secretary/Treasurer
"Tenant"
- 30 -
<PAGE> 32
STATE OF OHIO )
) SS:
COUNTY OF MAHONING )
BEFORE ME, a Notary Public in and for said County and State, did
personally appear RAINBOW PROPERTIES, LTD., an Ohio limited liability company,
by WAYLAND J. RUSSELL, its Managing Member, who acknowledged to me that he did
sign the foregoing instrument both individually and as such Managing Member of
said limited liability company.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
Canfield, Ohio, this ___ day of January, 1996.
_________________________________
NOTARY PUBLIC
STATE OF OHIO )
) SS:
COUNTY OF MAHONING )
BEFORE ME, a Notary Public in and for said County and State, did
personally appear RAINBOW RENTALS, INC., an Ohio corporation, by MICHAEL A.
PECCHIA, its Secretary/Treasurer, who acknowledged to me that he did sign the
foregoing instrument as such officer and the same is his free act and deed, both
individually and as such officer of said Corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
Canfield, Ohio this ___ day of January, 1996.
_________________________________
NOTARY PUBLIC
This Instrument Prepared By:
Gerald I. Arnson, Esq.
Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A.
1301 East Ninth Street
The Tower at Erieview, Suite 2600
Cleveland, Ohio 44114
(216) 696-3311
- 31 -
<PAGE> 33
EXHIBIT "A"
Legal Description of the Real Estate
<PAGE> 34
EXHIBIT "B"
Site Plan of the Real Estate
<PAGE> 35
EXHIBIT "C"
Plans
<PAGE> 36
EXHIBIT "D"
Tenant's Building Sign
<PAGE> 37
EXHIBIT "E"
Memorandum of Lease
<PAGE> 1
Exhibit 21
<TABLE>
<CAPTION>
Percentage of
Name of Subsidiary State of Incorporation Common Stock Owned
------------------ ---------------------- ------------------
<S> <C> <C>
Rainbow Advertising, Inc. Ohio 100%
</TABLE>
<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
March 27, 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>
