SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<Table>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11c or Section 240.14a-12
</Table>
RAINBOW RENTALS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
RAINBOW RENTALS LOGO
April 14, 2004
Dear Rainbow Rentals, Inc. Shareholder:
The board of directors of Rainbow Rentals, Inc. has unanimously agreed to
merge the Company with Eagle Acquisition Sub, Inc., an indirect, wholly owned
subsidiary of Rent-A-Center, Inc. After undertaking a strategic review with the
objective of enhancing shareholder value, the board unanimously determined that
the terms of the merger are fair to and in the best interests of the
shareholders of Rainbow Rentals, Inc.
A special meeting of shareholders to vote on the merger and related matters
has been scheduled for May 12, 2004 at 10:00 a.m., Cleveland time, to be held at
the Holiday Inn, 7410 South Avenue, Boardman, Ohio 44512. The merger cannot be
completed unless shareholders holding or representing a majority of the
outstanding shares vote to adopt the merger agreement.
THE ACCOMPANYING NOTICE OF MEETING AND PROXY STATEMENT, WHICH ARE FIRST
BEING MAILED ON OR ABOUT APRIL 14, 2004, EXPLAIN THE MERGER AND PROVIDE SPECIFIC
INFORMATION CONCERNING THE SPECIAL MEETING. PLEASE READ THESE MATERIALS
CAREFULLY.
Your vote is very important, regardless of the number of shares you own. To
be certain that your shares are voted at the special meeting, please mark, sign,
date and return promptly the enclosed proxy card, whether or not you plan to
attend the special meeting in person. If you attend the meeting and decide to
vote in person, you may withdraw your proxy at the meeting. If you do not vote,
it will have the same effect as voting against the merger.
Rainbow Rentals, Inc.'s board of directors strongly supports the merger and
is recommending that you vote in favor of adopting the merger agreement.
Sincerely,
/s/ Wayland J. Russell
Wayland J. Russell
Chairman and CEO
RAINBOW RENTALS LOGO
RAINBOW RENTALS, INC.
NOTICE OF SPECIAL SHAREHOLDERS MEETING
TO BE HELD ON MAY 12, 2004
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Rainbow
Rentals, Inc., an Ohio corporation ("Rainbow" or the "Company"), will be held on
May 12, 2004, at 10:00 a.m., local time at the Holiday Inn, 7410 South Avenue,
Boardman, Ohio, for the following purposes, as further described in the
accompanying proxy statement:
(1) Adoption of Merger Agreement. To consider and vote on a proposal
to adopt the Agreement and Plan of Merger, dated as of February 4, 2004
(the "Merger Agreement"), by and among the Company, Rent-A-Center, Inc., a
Delaware corporation ("Acquiror"), and Eagle Acquisition Sub, Inc., an Ohio
corporation and an indirect, wholly owned subsidiary of Acquiror ("Merger
Sub"), and the transactions contemplated thereby, including, without
limitation, the merger of Merger Sub with and into the Company (the
"Merger").
(2) Other Matters. To act upon other business as may properly come
before the meeting or any adjournment thereof, including the right to
adjourn or postpone the special meeting in order to solicit additional
votes from Company shareholders.
Only shareholders of record of common stock of the Company at the close of
business on April 12, 2004 (the "Record Date") are entitled to notice of, and to
vote at, the special meeting or any adjournments or postponements thereof. A
list of shareholders of record as of the Record Date will be available for
inspection at the Company's offices at 3711 Starr Centre Drive, Canfield, Ohio,
at least ten days prior to the special meeting.
As a result of the Merger, each Rainbow share (except shares held by
shareholders who properly perfect their dissenters' rights with respect to their
shares under Ohio law and treasury shares owned by the Company) will be
converted into the right to receive $16.00 in cash. The accompanying proxy
statement contains detailed information about the Merger Agreement, the Merger,
and the actions to be taken in connection with the Merger. The terms of the
Merger are more fully described in the Merger Agreement, which is attached as
Annex A to the accompanying proxy statement.
Shareholders who properly perfect dissenters' rights as set forth in
Section 1701.84 and Section 1701.85 of the Ohio Revised Code will be entitled,
if the Merger is completed, to receive payment of the fair cash value of their
shares as determined by an Ohio court. See the section entitled "Dissenters'
Rights" in the accompanying proxy statement and the full text of Section 1701.84
and Section 1701.85 of the Ohio Revised Code, which is attached as Annex C to
the accompanying proxy statement, for a description of the procedures that
shareholders must follow in order to exercise their dissenters' rights.
The Board of Directors of the Company, after careful consideration, has
unanimously determined that the Merger Agreement and the transactions
contemplated by the Merger Agreement, including the Merger, are fair to and in
the best interests of Rainbow shareholders. THE BOARD OF DIRECTORS OF THE
COMPANY HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDED THAT
RAINBOW SHAREHOLDERS VOTE "FOR" ADOPTING THE MERGER AGREEMENT AND GRANTING
DISCRETIONARY AUTHORITY TO THE PROXIES WITH RESPECT TO OTHER MATTERS AS MAY
PROPERLY BE BROUGHT BEFORE THE SPECIAL MEETING.
By Order of the Board of Directors.
/s/ Michael A. Pecchia
Michael A. Pecchia
Secretary
Canfield, Ohio
April 14, 2004
IMPORTANT
Your vote is important. ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL
MEETING OF SHAREHOLDERS IN PERSON. HOWEVER, TO ASSURE THAT YOUR VOTE IS COUNTED
AT THE SPECIAL MEETING, PLEASE MARK, DATE AND SIGN YOUR PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE. Any shareholder attending the special meeting
may vote in person even if the shareholder returned a proxy. No postage is
required if mailed in the United States.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE PROPOSED
MERGER IS COMPLETED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR CERTIFICATES.
If a properly executed proxy card is submitted and no instructions are
given, the shares represented by that proxy will be voted "FOR" adopting the
Merger Agreement and will provide discretionary authority to the proxies to vote
on such other matters as may be properly brought before the special meeting,
including in favor of a proposal to adjourn or postpone the meeting to solicit
additional votes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER, PASSED UPON THE MERITS OR
FAIRNESS OF THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE
DISCLOSURE IN THE ACCOMPANYING PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement incorporates by reference important business and
financial information about the Company from documents filed with the Securities
and Exchange Commission that are available without charge from the Securities
and Exchange Commission's website at www.sec.gov. See "ADDITIONAL INFORMATION"
on page 31. Shareholders may request copies of these documents, without charge,
by writing to Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio
44406, Attention: Investor Relations Department, or by calling Rainbow Rentals,
Inc. at (330) 533-5363, ext. 121.
This proxy statement is first being mailed to shareholders on or about
April 14, 2004.
RAINBOW RENTALS, INC.
3711 STARR CENTRE DRIVE
CANFIELD, OHIO 44406
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
---------------------
SUMMARY TERM SHEET
This Summary Term Sheet highlights important selected information contained
in this proxy statement relating to the proposed merger (the "Merger") of Eagle
Acquisition Sub, Inc., an Ohio corporation ("Merger Sub"), with and into Rainbow
Rentals, Inc. ("Rainbow" or the "Company"). Merger Sub is an indirect, wholly
owned subsidiary of Rent-A-Center, Inc., a Delaware corporation ("Acquiror").
This Summary Term Sheet does not contain all of the information that may be
important to Rainbow shareholders. To more fully understand the proposed Merger
and for a more complete description of the legal terms of the Merger, you should
read carefully this entire proxy statement and all of its appendices before
voting. We have included page references parenthetically to direct you to more
complete descriptions of the topics presented in this Summary Term Sheet.
THE PARTIES
- Rainbow Rentals, Inc.
3711 Starr Centre Drive
Canfield, OH 44406
Telephone: (330) 533-5363
Rainbow offers brand name, full-featured appliances, electronics, computers
and furniture at 124 rental-purchase stores in 15 states - Connecticut, Georgia,
Indiana, Kentucky, Maryland, Massachusetts, Michigan, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, and Virginia.
Rainbow also accepts product orders by phone and at its website, located at
www.rainbowrentals.com. Established in 1986, Rainbow is headquartered in
Canfield, Ohio, and employs nearly 900 associates.
ADDITIONAL INFORMATION CONCERNING THE COMPANY IS INCLUDED IN THE REPORTS
THE COMPANY PERIODICALLY FILES WITH THE SEC. SEE "ADDITIONAL INFORMATION'
BEGINNING ON PAGE 31.
BASED ON THE CLOSING PRICE OF RAINBOW SHARES ON THE NASDAQ NATIONAL MARKET
ON APRIL 9, 2004 ($ ) AND THE NUMBER OF RAINBOW SHARES OUTSTANDING ON THAT
DATE [5,946,203], THE COMPANY'S MARKET CAPITALIZATION WAS APPROXIMATELY $94
MILLION. THE OUTSTANDING SHARES DO NOT INCLUDE 579,532 SHARES ISSUABLE UPON
EXERCISE OF OUTSTANDING STOCK OPTIONS GRANTED UNDER THE COMPANY'S OPTIONS PLAN.
- Rent-A-Center, Inc.
5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
Telephone: 972-801-1100
Rent-A-Center, Inc., headquartered in Plano, Texas, is the nation's largest
rent-to-own operator, and currently operates approximately 2,648 company-owned
stores nationwide and in Puerto Rico. ColorTyme, Inc., a wholly owned subsidiary
of Acquiror, is a national franchiser of approximately 329 rent-to-own stores,
317 of which operate under the name ColorTyme name and the remaining 12 of which
operate under the Rent-A-Center name. The stores generally offer high-quality,
durable goods such as home electronics, appliances, computers,
i
and furniture and accessories to consumers under flexible rental purchase
arrangements that generally allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed-upon rental period.
- Eagle Acquisition Sub, Inc.
5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
Telephone: 972-861-1100
Eagle Acquisition Sub, Inc. is an indirect, wholly owned subsidiary of
Acquiror, formed in February 2004 for the sole purpose of completing the Merger.
Except for entering into the Merger Agreement and the transactions it
contemplates, Merger Sub has not carried on any business since its
incorporation.
EFFECTS OF THE MERGER
As a result of the Merger:
- Each Rainbow share (other than treasury shares owned by Rainbow and
shares held by any shareholder who properly perfects dissenters' rights
under Ohio law) will be converted into the right to receive $16.00 in
cash.
- Unexercised options to purchase Rainbow shares will be converted into a
right to receive cash in the amount of $16.00 less the applicable
exercise price for each Rainbow share issuable upon or pertaining to the
exercise of these options.
- Merger Sub will merge with and into the Company, and the Company will
continue as the surviving corporation and become an indirect, wholly
owned subsidiary of Acquiror.
- The Company will terminate the registration of Rainbow shares under the
Securities Exchange Act of 1934 and the listing of Rainbow shares on the
Nasdaq National Market, and there will be no public market for Rainbow
shares.
The specific terms and conditions of the Merger Agreement govern the rights
and obligations of the parties. A copy of the Merger Agreement is attached as
ANNEX A to this proxy statement.
THE SPECIAL MEETING (PAGES 1 TO 3)
The special meeting of Rainbow shareholders (the "Special Meeting") will be
held at 10:00 a.m., local time, on May 12, 2004 at:
HOLIDAY INN
7410 SOUTH AVENUE
BOARDMAN, OHIO 44512
Matters to be Considered at the Special Meeting (Page 1)
At the Special Meeting, you will consider whether to adopt the Agreement
and Plan of Merger, dated as of February 4, 2004, by and among Rainbow, Acquiror
and Merger Sub (the "Merger Agreement"), which is attached to this proxy
statement as ANNEX A. If our shareholders adopt the Merger Agreement at the
Special Meeting and the conditions to closing set forth in the Merger Agreement
are satisfied or waived, Merger Sub will be merged into the Company, with the
Company becoming an indirect, wholly owned subsidiary of Acquiror. Pursuant to
the Merger Agreement, each Company share (other than treasury shares and shares
held by dissenting shareholders) would be converted into the right to receive
$16.00 in cash.
If any other matters are properly brought before the Special Meeting,
including adjourning the meeting in order to solicit more votes, you may also
authorize the persons named on the enclosed proxy card to vote according to
their discretion.
ii
Record Date, Shares Entitled to Vote and Votes Required (Page 1)
You have one vote for each Rainbow share you owned at the close of business
on April 12, 2004, the record date for the Special Meeting (the "Record Date").
On that date, [5,946,203] Rainbow shares were outstanding and entitled to vote,
of which a total of 2,800,295 shares were held by the Company's directors and
executive officers. Three executive officers-shareholders, who beneficially own
approximately 47% of the outstanding shares, have executed a voting agreement
requiring them to vote in favor of adopting the Merger Agreement.
Vote Required to Adopt the Merger Agreement (Page 1)
For the Merger to be approved, the holders of a majority of the outstanding
Rainbow shares must affirmatively vote to adopt the Merger Agreement.
If you are a shareholder "of record," meaning your shares are registered in
your name, you may choose one of the following ways to cast your vote:
- by completing the accompany proxy card and returning it in the enclosed
envelope; or
- by appearing and voting in person at the Special Meeting.
If your shares are held in "street name," which means that your shares are
held in the name of a bank, broker or other financial institution instead of in
your own name, you must either direct the financial institution as to how to
vote your shares or obtain a proxy from the financial institution to vote at the
special meeting.
Quorum at the Special Meeting (Page 1)
A quorum must be present in order to transact business at the Special
Meeting, so a majority of the outstanding Rainbow shares must be present in
person or represented by proxy. If you submit a properly executed proxy card,
your shares will be counted for purposes of calculating whether a quorum is
present, even if you abstain from voting.
Effect of Abstentions and Broker Non-Votes (Page 2)
Both abstentions and "broker non-votes" will be counted in determining
whether a quorum is present at the Special Meeting. Since adoption of the Merger
Agreement requires the affirmative vote of the holders of a majority of the
outstanding Rainbow shares, abstentions and "broker non-votes" are effectively
counted as votes against the Merger Agreement.
Changing a Vote after Sending in Proxy Card (Page 2)
You may change your vote at any time before your proxy is voted. If you are
a shareholder "of record," you may revoke a proxy by:
- sending another signed proxy card with a later date to the address
indicated on the proxy card;
- sending a letter revoking the proxy to the Company's corporate secretary
prior to the date of the Special Meeting; or
- attending the Special Meeting, notifying the inspector of elections that
your proxy is revoked, and voting in person.
A "beneficial holder" whose shares are registered in another name (for
example, in "street name") must follow the procedures required by the holder of
record. If you are a beneficial holder, contact the holder of record of your
shares directly for more information on these procedures.
IT IS VERY IMPORTANT THAT ALL RAINBOW SHAREHOLDERS VOTE THEIR SHARES, SO
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY CARD TODAY!
BOARD OF DIRECTORS' RECOMMENDATION (PAGES 7 TO 9)
THE RAINBOW BOARD BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR
TO AND IN THE BEST INTERESTS OF RAINBOW SHAREHOLDERS. THE RAINBOW BOARD
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
iii
RECOMMENDS THAT RAINBOW SHAREHOLDERS VOTE FOR ADOPTING THE MERGER AGREEMENT, AND
THEREBY APPROVE THE MERGER.
MAJOR SHAREHOLDERS' VOTING AGREEMENT
Wayland J. Russell, Michael J. Viveiros and Michael A. Pecchia, three of
the Company's executive officers (the "Major Shareholders"), beneficially own
approximately 47% of Rainbow's outstanding shares. Messrs. Russell and Viveiros
are also directors of the Company and, as directors, they voted to approve the
Merger Agreement. The Major Shareholders have entered into a voting agreement
with Acquiror (the "Voting Agreement") under which they have agreed to vote
their shares in favor of adopting the Merger Agreement. The Voting Agreement is
attached to this proxy statement as EXHIBIT A to the Merger Agreement. They also
have agreed to vote against any action that would cause a breach of the Merger
Agreement. The voting agreement terminates upon (i) the effective time of the
Merger, (ii) termination of the Merger Agreement in accordance with its terms,
or (iii) mutual consent of the parties.
OPINION OF FINANCIAL ADVISERS (PAGES 9 TO 14)
The Rainbow Board considered the opinion of NatCity Investments, Inc.
("NatCity Investments") that was dated February 3, 2004, which was that the
consideration to be received by Rainbow shareholders pursuant to the Merger
Agreement was fair from a financial point of view. The opinion of NatCity
Investments is attached as ANNEX B to this proxy statement and is based on and
subject to the assumptions, qualifications and limitations described in the
opinion. You are urged to, and should, read the NatCity Investments opinion in
its entirety. The opinion is not a recommendation regarding how any Rainbow
shareholder should vote at the Special Meeting or as to any other action any
Rainbow shareholder should take regarding the Merger.
INTERESTS OF RAINBOW DIRECTORS AND OFFICERS IN THE TRANSACTION (PAGE 16)
In considering the recommendation of the Rainbow Board with respect to the
Merger, Rainbow shareholders should be aware that certain directors and
executive officers of the Company may have interests in the Merger that are
different from, or are in addition to, the interests of Rainbow shareholders
generally, including those listed below:
- Approximately 630 employees of the Company, including the executive
officers, are parties to stay bonus and severance agreements that are
designed to retain the employees and provide for continuity of operations
through the effective date of the Merger and, in certain circumstances,
for 90 days thereafter. These employees will receive stay bonuses or
severance payments and post-employment insurance and other benefits
totaling approximately $3.5 million, including $721,000 for the executive
officers.
- Options to purchase Rainbow shares outstanding but unvested at the time
the Merger becomes effective will become vested. As of April 9, 2004, the
current directors and executive officers of the Company held options to
purchase Rainbow shares that will accelerate and vest as a result of the
Merger, with a value of $424,556 (based on $16.00 per share less the
applicable exercise price) without regard to withholding for taxes.
- An amendment to the lease relating to the Company's headquarters has been
executed providing for a payment by Acquiror of $100,000 to the lessor
and Acquiror's agreement to abandon to lessor all furniture, fixtures and
equipment not related to the rent-to-own business, in exchange for an
early termination of the lease. In lieu of expiring in January 2006, the
lease will now expire ninety days after the date the Merger becomes
effective (the "Effective Time"). Messrs. Russell and Viveiros and a
former director and officer of the Company are the owners of the limited
liability company that is the lessor.
TAX CONSEQUENCES (PAGE 17)
Your receipt of cash in exchange for your shares will be a taxable
transaction for U.S. federal income tax purposes under the Internal Revenue Code
and may be a taxable transaction for foreign, state and local income tax
purposes as well. Shareholders will recognize gain or loss measured by the
difference between the amount of
iv
cash they receive and their tax basis in Rainbow shares exchanged therefor. You
should consult your own tax advisors regarding the tax consequences of the
Merger particular to you.
THE MERGER AGREEMENT (PAGES 21 TO 29 AND ANNEX A)
Conditions to the Closing of the Merger (Pages 27 to 28)
Before we can complete the Merger, a number of conditions must be satisfied
or waived. These conditions include, but are not limited to:
- the adoption of the Merger Agreement by Rainbow shareholders;
- the expiration or termination of the waiting or similar period (including
any extension thereof) applicable to the consummation of the Merger, or
if applicable, the necessary approvals, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). This
condition was satisfied on March 11, 2004;
- since February 4, 2004, the absence of a "Material Adverse Change" or
"Material Adverse Effect," each as defined in the Merger Agreement. A
"Material Adverse Effect" includes any change, effect, event, occurrence
or state of facts that is, has had or is reasonably likely to have a
material and adverse effect on the business, condition (financial or
other), results of operations, or properties of the Company, other than
any change, effect, event, or occurrence (i) relating to the economy or
capital or securities markets of the United States or any other region in
general, or (ii) relating to its business, financial condition or results
of operations that has been disclosed in writing to the other party prior
to the date of the Merger Agreement. The term "Material Adverse Change"
includes any Material Adverse Effect, and specifically includes certain
litigation and labor matters.
- the failure of the Company to achieve certain performance objectives in
the calendar month immediately preceding the Effective Time.
- the accuracy in all material respects, as of the Effective Time, of the
representations and warranties made by each party and each party's
compliance with its covenants in the Merger Agreement;
- the absence of any effective judgment, order, decree, statute, law,
ordinance, rule or regulation entered, enacted, promulgated, enforced, or
issued by any court or other governmental entity of competent
jurisdiction or other legal restraint or prohibition (collectively,
"Restraints") affecting or seeking to prohibit the transactions
contemplated by the Merger Agreement;
- the ten-day statutory notice period for dissenters' demands with respect
to the Merger shall have expired and the holders of not more than 15% of
the Rainbow shares shall have perfected their dissenters' rights; and
- the execution by the Major Shareholders of non-competition agreements
precluding them from participating in the rent-to-own business for three
years.
We expect to consummate the Merger as promptly as practicable after all of
the conditions to the Merger have been satisfied or waived.
Termination of the Merger Agreement (Pages 28 to 29)
The Merger Agreement may be terminated at any time prior to the closing of
the Merger, whether before or after Rainbow shareholders have adopted it, in any
of the following cases:
(1) by mutual written consent of Acquiror and the Company;
(2) by Acquiror, if (i) the Company has materially breached any representation,
warranty or covenant contained in the Merger Agreement and the breach has
not or cannot be timely cured, or (ii) the Major Shareholders fail to
perform their obligations under the Voting Agreement;
(3) by the Company, if Acquiror has materially breached any representation,
warranty or covenant contained in the Merger Agreement and the breach has
not or cannot be timely cured;
v
(4) by either the Company or Acquiror if (i) the Merger is not consummated by
June 30, 2004 (August 2, 2004, if all conditions, other than approvals under
the HSR Act, capable of being fulfilled, have been met by June 30, 2004),
(ii) Rainbow shareholders do not adopt the Merger Agreement at the Special
Meeting or any postponement or adjournment of the Special Meeting, or (iii)
any Restraint is in effect and is final and non-appealable;
(5) by the Company upon entering into a binding agreement with any party with
respect to a Company Takeover Proposal, as defined in the Merger Agreement
(see "The Merger Agreement -- Non-Solicitation" on page 25 of this proxy
statement), provided that the Company complies with the applicable
provisions of the Merger Agreement, including notice to Acquiror and the
payment to Acquiror of a termination fee of $3,750,000 plus reimbursement of
up to $500,000 of all reasonable out-of-pocket fees and expenses incurred by
Acquiror in connection with the Merger;
(6) by Acquiror, if the Rainbow Board (i) withdraws its approval of the Merger
Agreement or its recommendation to shareholders to vote in favor of the
Merger Agreement, or (ii) enters into an agreement with respect to a Company
Takeover Proposal with a third party;
(7) by Acquiror, if there has been a Material Adverse Change; and
(8) by Acquiror, in the event certain government entities require the
divestiture of sixteen (16) or more stores of the Company, Acquiror and its
subsidiaries as a requirement to obtain approval under the HSR Act.
Termination Fees and Expenses if Merger is not Completed (Pages 28 to 29)
Acquiror will be entitled to receive a termination fee in an amount equal
to $3,750,000 plus reimbursement of up to $500,000 of reasonable out-of-pocket
fees and expenses incurred by Acquiror if the Merger Agreement is terminated for
any of the reasons stated in item 2(ii), (4)(ii), (5) or (6) above. Acquiror
will be entitled only to its reasonable out-of-pocket fees and expenses up to
$500,000 if it terminates the Merger Agreement for the reason stated in item
(2)(i) above.
No Solicitation (Page 25)
Non-solicitation provisions in the Merger Agreement prohibit the Company
from soliciting a competing proposal to the Merger, but the Company may respond
under certain circumstances set forth in the Merger Agreement if it receives an
unsolicited proposal for a transaction from a third party.
DISSENTERS' RIGHTS (PAGES 18 TO 19)
If the Merger is consummated, Rainbow shareholders will have certain rights
under the Ohio Revised Code to dissent and demand dissenters' rights and to
receive payment of the fair cash value of their Rainbow shares. Dissenting
Rainbow shareholders may not vote in favor of adopting the Merger Agreement as
part of perfecting dissenters' rights under Ohio law. Rainbow shareholders who
perfect dissenters' rights by complying with the procedures set forth in
Sections 1701.84 and 1701.85 of the Ohio Revised Code will have the fair cash
value of their Rainbow shares determined by an Ohio court and will be entitled
to receive a payment equal to the fair cash value of those shares from the
corporation surviving the Merger. In addition, any dissenting Rainbow
shareholders would be entitled to receive payment of a fair rate of interest, at
a rate determined by the trial court, on the amount determined to be the fair
cash value of their Rainbow shares. In determining the fair cash value of
Rainbow shares, the court is required to take into account all relevant factors,
excluding any appreciation or depreciation in market value resulting from the
Merger. Accordingly, the court's determination could be based upon
considerations other than, or in addition to, the market value of Rainbow
shares, including, among other things, asset values and earning capacity.
Rainbow shares held by any person who wants to dissent but fails to perfect or
who effectively withdraws or loses the right to dissent under Section 1701.85 of
the Ohio Revised Code will be converted into, as of the Effective Time, the
right to receive the consideration offered to Rainbow shareholders according to
the terms of the Merger Agreement. Copies of Sections 1701.84 and 1701.85 of the
Ohio Revised Code are attached as ANNEX C to this proxy statement.
vi
TABLE OF CONTENTS
<Table>
SUMMARY TERM SHEET.......................................... i
The Parties............................................... i
Effects of the Merger..................................... ii
The Special Meeting....................................... ii
Board of Directors' Recommendation........................ iii
Major Shareholders' Voting Agreement...................... iv
Opinion of Financial Advisers............................. iv
Interests of Rainbow Directors and Officers in the
Transaction............................................. iv
Tax Consequences.......................................... iv
The Merger Agreement...................................... v
Dissenters' Rights........................................ vi
THE SPECIAL MEETING......................................... 1
Where and When the Special Meeting Will be Held........... 1
What Will be Voted Upon................................... 1
Required Votes............................................ 1
Voting Shares by Proxy.................................... 1
Dissenting Holders........................................ 2
Exchanging Share Certificates............................. 2
Proxy Solicitation; Solicitation Costs.................... 2
SPECIAL FACTORS............................................. 3
Background of the Merger.................................. 3
Recommendation of the Board............................... 7
Reasons for the Rainbow Board's Favorable
Recommendation.......................................... 7
Opinion of NatCity Investments............................ 9
Interests of Certain Persons in the Merger................ 15
Governmental and Regulatory Matters....................... 16
Material Federal Income Tax Consequences of the Merger.... 17
Dissenters' Rights of Rainbow Shareholders................ 17
Certain Relationships with Acquiror or the Company........ 18
Fees and Expenses......................................... 19
Delisting and Deregistration of Shares.................... 19
SELECTED HISTORICAL FINANCIAL DATA.......................... 19
THE MERGER AGREEMENT........................................ 21
The Merger................................................ 21
Effective Time............................................ 21
Merger Consideration...................................... 21
Payment Procedures........................................ 21
Stock Options............................................. 21
No Further Ownership Rights in the Company................ 22
Directors and Officers.................................... 22
Representations and Warranties............................ 22
Conduct of the Company's Business Prior to the Merger..... 23
Preparation of Proxy Statement............................ 24
Non-Solicitation.......................................... 25
Confidentiality; Public Announcement...................... 26
Access to Information..................................... 26
Agreement to Use Reasonable Commercial Efforts............ 26
Notification of Certain Matters........................... 26
Indemnification and Insurance............................. 26
Closing Deliveries........................................ 27
Closing Conditions........................................ 27
Termination; Termination Fee.............................. 28
SOURCE AND AMOUNT OF FUNDS.................................. 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 30
PRICE RANGE OF SHARES; DIVIDENDS............................ 31
SUBMISSION OF SHAREHOLDER PROPOSALS......................... 31
ADDITIONAL INFORMATION...................................... 31
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 32
OTHER MATTERS............................................... 33
ANNEX A Merger Agreement
ANNEX B Opinion of NatCity Investments, Inc.
ANNEX C Sections 1701.84 and 1701.85 of the Ohio Revised
Code -- Rights of Dissenting Shareholders
ANNEX D Annual Report on Form 10-K for the Year Ended
December 31, 2003
</Table>
vii
RAINBOW RENTALS LOGO
THE SPECIAL MEETING
This proxy statement is being furnished in connection with the solicitation
of proxies from the holders of Rainbow shares by the Rainbow Board. The Rainbow
Board is soliciting your proxy with respect to the Merger Agreement and the
transactions contemplated thereby, and any other matters to be voted upon at the
Special Meeting, including the right to postpone or adjourn the meeting to
solicit additional votes. We mailed this proxy statement to holders of Rainbow
shares beginning on April 14, 2004. You should read this proxy statement
carefully before voting your shares.
WHERE AND WHEN THE SPECIAL MEETING WILL BE HELD
The Special Meeting will be held at the Holiday Inn, 7410 South Avenue,
Boardman, Ohio, on May 12, 2004, starting at 10:00 a.m. local time.
WHAT WILL BE VOTED UPON
At the Special Meeting, you will be asked to consider and vote upon the
following items:
- to adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger; and
- other business as may properly come before the Special Meeting, including
the right to adjourn or postpone the meeting to solicit additional votes.
REQUIRED VOTE
The Rainbow Board has fixed the close of business on April 12, 2004 as the
Record Date for the determination of shareholders who are entitled to notice of,
and to vote at, the Special Meeting of shareholders or any adjournment thereof.
On the Record Date, there were issued and outstanding [5,946,203] Rainbow
shares.
The presence at the Special Meeting, in person or by proxy, of a majority
of Rainbow shares outstanding on the Record Date will constitute a quorum for
the conduct of business. Each Rainbow share entitles the holder thereof to cast
one vote on the matters to be voted upon at the Special Meeting.
For the Merger to occur, the Merger Agreement must receive the affirmative
vote of the holders of a majority of Rainbow shares outstanding on the Record
Date.
The Major Shareholders beneficially own approximately 47% of Rainbow's
outstanding shares. Messrs. Russell and Viveiros are also members of the Rainbow
Board and they have approved the Merger Agreement. The Major Shareholders have
entered into the Voting Agreement with Acquiror pursuant to which they agreed to
vote their shares in favor of adopting the Merger Agreement. They also agreed to
vote their shares against any action that would cause a breach of the Merger
Agreement. The Voting Agreement terminates upon (i) the Effective Time, (ii)
upon termination of the Merger Agreement in accordance with its terms, or (iii)
upon the mutual consent of the parties.
VOTING SHARES BY PROXY
When you return your proxy card you are giving your "proxy" to the
individuals we have designated on the proxy card to vote your shares as you
direct at the Special Meeting. If any matter not specifically listed in the
1
notice of Special Meeting is presented at the Special Meeting, they will vote
your shares in accordance with their best judgment. On the date this proxy
statement was mailed to Rainbow shareholders, we knew of no matters that needed
to be acted upon at the Special Meeting other than adoption of the Merger
Agreement. When a Rainbow shareholder has specified a choice on its proxy with
respect to the Merger Agreement or other proposals or matters, that direction
will be followed. If no direction is given, all Rainbow shares represented by
the proxy will be voted for adopting the Merger Agreement or at the discretion
of the proxy holder in respect of other proposals or matters.
A proxy may be revoked at any time before it is exercised. For a
shareholder "of record" (meaning one whose shares are registered in his or her
own name) to revoke a proxy, the shareholder may either:
- send in another signed proxy card with a later date; or
- send a letter revoking the shareholder's proxy, prior to the date of the
Special Meeting, to our corporate secretary at the Company's address:
Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio 44406; or
- attend the Special Meeting, notify us that the shareholder is revoking
its proxy, and vote in person.
A "beneficial holder" whose shares are registered in another name (for
example in "street name") must follow the procedures required by the holder of
record, which is usually a brokerage firm or bank, to revoke a proxy. A
beneficial holder should contact the holder of record directly for more
information on these procedures.
If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be able to vote them on the Merger
Agreement, which will have the effect of voting against the Merger. You should
therefore instruct your broker how to vote your shares, following the directions
provided by your broker.
Rainbow shareholders who attend the Special Meeting and wish to vote in
person will be given a ballot at the meeting. If your shares are held in street
name or are otherwise not registered in your name, and you want to vote at the
Special Meeting, you must obtain a proxy from the financial institution or other
registered owner to vote at the Special Meeting.
DISSENTING HOLDERS
Ohio law entitles Rainbow shareholders who do not vote in favor of adopting
the Merger Agreement to demand a judicial appraisal of the fair value of their
shares. If you do not vote in favor of adopting the Merger Agreement and if you
follow the procedures set forth in ANNEX C, you may become a dissenting holder.
Failure to follow these procedures precisely will result in a loss of
dissenters' rights. A dissenting shareholder must deliver its written demand to
the Company no later than May 22, 2004 in order to comply with the statutory
requirements.
EXCHANGING SHARE CERTIFICATES
HOLDERS OF RAINBOW SHARES SHOULD NOT SEND IN THEIR SHARE CERTIFICATES WITH
THE PROXY CARDS. IF THE MERGER IS COMPLETED, YOU WILL RECEIVE WRITTEN
INSTRUCTIONS FOR EXCHANGING YOUR SHARE CERTIFICATES FOR CASH.
PROXY SOLICITATION; SOLICITATION COSTS
In addition to this mailing, directors and employees of the Company may
solicit proxies personally, electronically or by telephone. No such directors or
employees will receive additional compensation for this solicitation.
The Company has requested banks, brokerage houses and other custodians,
nominees and fiduciaries to forward the Company's proxy solicitation materials
to the beneficial owners of Rainbow shares they hold of record. The Company will
reimburse these record holders for customary clerical and mailing expenses
incurred in forwarding these materials to their customers.
2
The Company has retained Georgeson & Co. for proxy solicitation services in
connection with the Special Meeting. Georgeson & Co. will receive a fee of
approximately $1,000 for its services and reimbursement of out-of-pocket
expenses in connection therewith. Georgeson & Co. will solicit proxies from
brokers, banks, bank nominees and other institutional holders.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
During the third and fourth quarters of 2003, the Company conducted a
thorough strategic planning process that examined all aspects of the Company's
operations. The result of the strategic planning process was an aggressive
strategic growth plan (the "Plan") which proposed both organic growth and an
aggressive acquisition strategy. Prior to implementing the Plan, the Rainbow
Board elected to assess external strategic alternatives.
On December 3, 2003, a potential strategic partner who had recently
indicated an interest in purchasing certain stores sent unsolicited
correspondence to the Company informally inquiring if the Rainbow Board might be
interested in pursuing discussions regarding the sale of the Company for $10 a
share. On December 16, 2003, the Company responded that there was no Company
interest in pursuing discussions at that time.
At a regularly scheduled meeting on December 4, 2003, the Rainbow Board
reviewed the results of the strategic planning process and assessed the
potential risks and rewards of implementing the Plan. The discussion included an
analysis of timing and the Company's ability to fully and successfully implement
the Plan, including a discussion of the risks associated with pursuing the Plan.
The Rainbow Board considered alternatives to implementation of the Plan,
including a potential sale of the Company. Following review, the Rainbow Board
committed to the process of exploring a sale, but did not necessarily commit to
selling the Company.
In this regard, the Company's legal counsel discussed the obligations of
the Rainbow Board in the context of a potential change in control, including the
Rainbow Board's obligation to the Company, its shareholders, and other
constituencies. Because the Rainbow Board has only 5 members, it was determined
that all directors should be involved in the process of evaluating a potential
sale of the Company. The Rainbow Board discussed whether it was the right time
to consider a sale of the Company, and, if so, what the appropriate process was
to consider such a sale. The Rainbow Board discussed the universe of potential
buyers and alternative sales exploration processes ranging from a full auction
process to a more selective process and negotiation only with financially
capable and motivated buyers. The Rainbow Board concluded that the Company's
objectives were speed, confidentiality, and certainty, and could only be met if
a potential buyer was financially capable and motivated and executed a
definitive merger agreement that: (i) had no financial or other contingencies,
other than routine closing conditions, and (ii) contained a "fiduciary-out"
provision with an acceptable break-up fee. Such an approach would provide a
"market check," allowing any other person to make an offer during the several
months that would customarily occur between the public announcement of a
definitive agreement and the shareholder vote.
The Rainbow Board considered its objectives of speed, confidentiality, and
certainty, and the adverse effects of an extended transaction process upon such
objectives. Due to the continuing adverse effect that a lengthy transaction
process would have upon the Company's relationships with its employees,
customers, and suppliers, the Rainbow Board discussed the desirability of
executing a definitive agreement by early February 2004.
The Rainbow Board determined that in order to appropriately consider the
alternatives, the Company needed to retain an outside adviser with relevant
experience. On December 8, 2003, the Rainbow Board and its legal counsel
interviewed potential financial advisors. The Rainbow Board decided to engage
NatCity Investments for the purposes of conducting a solicitation of potential
financial and strategic purchasers (both foreign and domestic) and, if
necessary, providing a fairness opinion with respect to any proposed
transaction.
As part of a presentation to the Rainbow Board on December 8, 2003, NatCity
Investments made a preliminary valuation assessment of the Company, discussed
potential transaction strategies and preliminary buyer candidates, including the
use of an auction process whereby only potential buyers targeted by NatCity
Investments and the Company would be solicited. This auction process was
discussed as a method to maximize
3
shareholder value. NatCity Investments identified potential buyers, including
foreign and domestic: (i) strategic buyers involved in the rent-to-own industry
or similar or complementary industries; and (ii) financial buyers.
At a special meeting held on December 18, 2003, the Rainbow Board reviewed
and approved the terms of the Company's engagement of NatCity Investments. The
Rainbow Board discussed alternative sales exploration processes and concluded
that a full auction process was both unnecessary and potentially detrimental to
the Company, due in part to the creation of uncertainty for the Company's
employees, customers, and suppliers. The Company adopted the auction process
discussed by NatCity Investments for the purpose of identifying and soliciting
potential financial and strategic partners.
At the meeting on December 18, 2003, the Rainbow Board also discussed the
desirability of entering into change in control agreements, stay bonus
agreements, and severance agreements designed to retain the Company's employees
and maintain continuity of operations through the closing of any potential
business combination and for a period thereafter (collectively, the "Severance
Agreements"). The Rainbow Board preliminarily approved $3.1 million in aggregate
payments under such Severance Agreements.
Prior to year-end 2003, NatCity Investments developed and contacted a list
of potential buyers. Those potential buyers who expressed further interest in a
potential acquisition were required to execute confidentiality agreements prior
to receiving additional information beyond preliminary solicitation materials,
which included estimated projections of the Company's future financial
performance. None of these discussions resulted in a written offer.
On January 6, 2004, Acquiror and one other strategic buyer were contacted
and sent confidentiality agreements. Acquiror signed its confidentiality
agreement on January 8, 2004, and the other strategic buyer signed its
confidentiality agreement on January 15, 2004. The Company had delayed
contacting these entities since it believed that both entities could move
quickly and the Company wanted to ensure that other potential bidders had
sufficient time to evaluate the Company and its business.
On January 13, 16, 17, and 22, 2004, members of the Company's senior
management and/or members of the NatCity Investments team met with one of the
potential strategic partners contacted in December to discuss a possible
combination in which the Company would be the purchaser and not the seller. No
formal proposal resulted from these meetings.
On January 19, 2004, Acquiror submitted a letter to NatCity Investments as
an indication of its interest for the purchase of the Company. The letter
indicated a range of enterprise value of approximately $80 to $88 million that
Acquiror was potentially prepared to pay for Company. The letter indicated,
among other things, that Acquiror: (i) had sufficient cash on hand and available
under its senior credit facilities to make the acquisition; (ii) did not
anticipate a financing contingency as a condition to closing; (iii) had a proven
track record in closing acquisitions similar to the proposed transaction; and
(iv) would be able to implement a transaction within an accelerated time frame.
The letter indicated that any transaction would be subject to the approval of
Acquiror's board of directors, an appropriate legal and financial due diligence
review of the Company, and the negotiation of a definitive agreement.
Also on January 19, 2004, the other strategic buyer submitted a letter
indicating that, because of the time period involved and the information
provided by the Company, it would be unable to submit a formal indication of
interest letter. However, the other strategic buyer indicated its interest in
pursuing an acquisition of the Company, and re-indicated its previous informal
inquiry regarding the Rainbow Board's interest in pursuing discussions regarding
sale of the Company for $10 a share. The potential buyer also indicated it would
be interested in pursuing a purchase of certain Company stores, if the Company
wished to pursue that alternative.
At a telephonic meeting of the Rainbow Board held on January 21, 2004,
NatCity Investments gave a status update of the remaining potential buyers.
NatCity Investments informed the Rainbow Board that: (i) given the timetable set
by the Rainbow Board; (ii) the level of interest exhibited by potential buyers;
and (iii) the probability of a potential transaction with such buyers, only
Acquiror and the other strategic buyer remained actively involved in the
process. NatCity Investments reported that on January 19, Acquiror had submitted
an expression of interest, and had indicated its ability and willingness to
execute an agreement on terms agreeable to the Company within the Company's
timeframe. NatCity Investments also reported that the other strategic buyer
4
had orally modified its January 19 proposal to suggest that, under some limited
circumstances with extensive additional information and confirmation, that there
was a possibility of an offer with a minimum lower range of $10 a share, and a
maximum upper range of $15 a share. The second strategic buyer's offer to
purchase certain stores was rejected by the Rainbow Board at that time, pending
evaluation of all strategic alternatives.
NatCity Investments also reported on activities relating to potential
business combinations, other than a sale of the entire Company, with certain
other potential strategic partners. The Board instructed NatCity Investments to
pursue all potential buyers, as well as all potential business combinations.
On January 23, 2004, an identical Merger Agreement was distributed to
Acquiror and the other strategic buyer that: (i) did not include a price; (ii)
had no financial or other contingencies, other than routine closing conditions;
and (iii) contained a "fiduciary-out" provision with a break-up fee in an
undetermined amount. The Merger Agreement provided for an acquisition of all of
the Company's equity and equity equivalents. On January 23 and 26, 2004,
identical due diligence materials were sent to Acquiror and the other strategic
buyer.
During the week of January 26, 2004 the other strategic buyer contacted the
Company and indicated an unwillingness to submit comments on the Merger
Agreement or submit a bid until it had received more detailed due diligence
information, including store-specific financial and leasing information. Based
on discussions, the Company believed the other strategic buyer had intentions of
closing and consolidating a substantial number of Company stores in connection
with any potential transaction. Based on its analysis: (i) of the uncertainty of
the level of interest expressed by the other strategic buyer; (ii) that such
uncertainty was in conflict with the Company's objectives of speed,
confidentiality, and certainty in a potential transaction; and (iii) that such
requested information could be used for competitive purposes adverse to the
Company, the Board elected to not provide the information requested by the other
strategic buyer at such time.
On the evening of January 28, 2004, a meeting was held in Cleveland, Ohio
among Wayland Russell, Michael Pecchia, NatCity Investments, Mark Speese,
Chairman and Chief Executive Officer of Acquiror, Mitch Fadel, President and
Chief Operating Officer of Acquiror, and Robert Davis, Chief Financial Officer
of Acquiror. Acquiror indicated its current intentions that: (i) most of the
Company stores would remain open; and (ii) it would be able to accommodate the
Company's timeframe, satisfying the Company's objectives of speed,
confidentiality, and certainty. Acquiror reiterated that it had sufficient cash
on hand for the transaction and had no need for a financing contingency.
Over the course of the evening, the parties held preliminary negotiations
regarding a purchase price. After negotiations, the parties tentatively agreed
to an enterprise value of approximately $106.4 million, as a starting point for
further negotiations, subject to: (i) agreement on all other business and
economic terms; (ii) an appropriate legal and financial due diligence review of
the Company; (iii) the negotiation of a definitive agreement; and (iv) approval
by their respective boards. The parties also discussed the aggregate amount of
payments under the Severance Agreements and the most desirable allocation among
Company employees.
On January 29, 2004, at a telephonic meeting of the Rainbow Board, NatCity
Investments reported on the status of all negotiations with remaining interested
buyers, including the negotiations with Acquiror on January 28 regarding
enterprise value. Depending upon a number of adjustments and other variables,
and depending upon the outcome of discussions regarding such adjustments and
variables, NatCity Investments reported that an enterprise value of $106.4
million represented a per share price of between $16 and $16.57, assuming the
number of shares acquired would be determined based upon the fully-diluted,
treasury stock method, and depending upon certain other calculated assumptions.
NatCity Investments also summarized the status of communications with the other
strategic buyer.
On January 29, 2004, Acquiror requested a break-up fee of 5% of the total
purchase price, and on January 30, 2004, the Company proposed to Acquiror a
per-share price of $16.57, and a break-up fee of $2.5 million, plus a maximum of
$500,000 in expenses.
Between January 31 and February 2, 2004, Messrs. Russell, Speese, and the
Company's and Acquiror's respective legal and financial advisors engaged in
extensive and protracted negotiations of the principal business terms and the
other terms and conditions contained in the Merger Agreement, including: (i) the
method of determination of the per-share price; (ii) the circumstances which
would trigger, and the amount of, the break-up
5
fee; (iii) the representations and warranties of the parties; (iv) the treatment
of the Company's outstanding stock options; (v) the various conditions of either
party to close the transaction; (vi) Severance Agreements for a maximum of
approximately $3.5 million with designated Company employees, excluding Mr.
Russell; and (vii) certain events triggering the right to terminate the Merger
Agreement, including the threshold number of stores that would trigger a right
of Acquiror to terminate in the event governmental entities require a
divestiture of stores.
During such negotiations, the Company re-proposed a per-share price of
$16.57, and Acquiror offered a per share price of $15.85. Following additional
negotiations, the Company and Acquiror agreed upon a per-share price of $16, a
break-up fee of $3.75 million plus a maximum of $500,000 for expenses incurred,
and certain other principal terms of the Merger Agreement.
Additionally, the parties agreed that: (i) Messrs. Russell, Viveiros, and
Pecchia would enter into the Voting Agreement, pursuant to which they would vote
in favor of the transaction if it were recommended by the Rainbow Board; and
(ii) the Voting Agreement would terminate if the Company elected to terminate
the Merger Agreement. The parties also agreed that Messrs. Russell, Viveiros,
and Pecchia would sign 3-year non-competition agreements limited to the
rent-to-own industry.
As a separate matter, Acquiror indicated its intent to close the Company's
headquarters. To accommodate Acquiror's needs, Acquiror negotiated an amendment
to the lease relating to the Company's headquarters providing for early
termination of the lease. Under the amendment, the lease will now expire ninety
days after the Effective Time. Messrs. Russell and Viveiros and a former
director and officer of the Company are the owners of the limited liability
company that is the lessor.
On February 2 and 3, 2004, the Company and Acquiror continued to negotiate
the final terms of the Merger Agreement. On February 2, 2004, a representative
of Acquiror visited the Company's headquarters, reviewed various due diligence
materials, and met with members of the Company's senior management, who
responded to various due diligence questions.
In a letter received by NatCity Investments on February 2, 2004, the other
strategic buyer again requested specific store-level information. It indicated
it would consider submitting a purchase price offer of $12 per share if it was
provided with such information to evaluate whether such a transaction made
economic sense to it.
On the afternoon of February 2, 2004, at a telephonic meeting of the
Rainbow Board, the terms of the Merger Agreement and all other items negotiated
since the previous Rainbow Board meeting were reviewed, including, among other
things, the $16 per-share price and the break-up fee of $3.75 million, plus a
maximum of $500,000 for expenses. The Rainbow Board was informed that the
break-up fee represented approximately 3.5% of the Company's enterprise value.
NatCity Investments indicated its ability to render a fairness opinion based
upon the $16 per share price.
On the afternoon of February 3, 2004, at a telephonic meeting of the
Rainbow Board, the Rainbow Board reviewed the Merger Agreement, which was in
substantially final form. Legal counsel reviewed in more detail the terms of the
proposed Merger Agreement. NatCity Investments delivered an oral opinion,
subsequently confirmed in writing, to the effect that, as of the date of its
opinion, and based upon and subject to the assumptions, limitations and
qualifications contained in its opinion, the consideration to be received by the
Company's shareholders pursuant to the Merger was fair, from a financial point
of view, to the holders of Company shares.
The Rainbow Board reviewed a presentation by NatCity Investments that
contained: (i) an analysis of the historical trading of the Company's stock;
(ii) alternative discounted cash flow analyses based upon varying levels of
implementation of the Company's Plan; (iii) an analysis of the operating and
financial performance of other comparable public companies; (iv) a review of
recent transactions in the rent-to-own industry; and (v) an analysis of premiums
paid in completed acquisitions. NatCity Investments confirmed that the
statistical average break-up fee for transactions similar in size to the
proposed Merger was approximately 3.5% of enterprise value.
The Rainbow Board conducted an extended analysis comparing the certainty of
a cash transaction today against the risks and uncertainty involved in
implementing the Plan (fully or partially). The Rainbow Board considered the
factors involved, including the lack of liquidity and small public float of the
Company's shares,
6
and the increasing legal, accounting, insurance and other costs of remaining a
publicly-traded company. The Rainbow Board determined that that the proposed
transaction with Acquiror was the best strategic alternative to maximize
shareholder value given all factors and unanimously: (i) approved the terms of
the Merger Agreement; (ii) determined that all transactions contemplated by the
Merger Agreement were fair to, and in the best interests of, the Company and its
shareholders, (iii) recommended that all shareholders approve the Merger
Agreement and the transactions contemplated thereby at the Special Meeting; (iv)
approved the Severance Agreements; (v) approved the acceleration of the vesting
of all unvested stock options effective immediately prior to the Merger; and
(vi) authorized Mr. Russell to negotiate and finalize remaining issues remaining
open that evening.
Throughout the evening of February 3, the Company and Acquiror negotiated
and finalized the terms of the Merger Agreement. On the morning of February 4,
2003, the Merger Agreement was signed and a press release was issued prior to
the opening of the stock markets.
RECOMMENDATION OF THE BOARD
On February 3, 2004, the Rainbow Board unanimously approved the terms of
the Merger Agreement and determined that the Merger is fair to, and in the best
interests of, Rainbow and its shareholders and recommended that all shareholders
adopt the Merger Agreement and the transactions contemplated thereby at the
Special Meeting.
REASONS FOR THE RAINBOW BOARD'S FAVORABLE RECOMMENDATION
Material Factors
In reaching its decision to approve, and in making its recommendation that
Rainbow shareholders adopt, the Merger Agreement and the transactions
contemplated thereby, including the Merger, the Rainbow Board considered a
number of factors, both positive and negative, including the following material
factors:
- the Rainbow Board's familiarity with, and presentations by NatCity
Investments regarding, the business, operations, properties and assets,
financial condition, competitive position, business strategy, and
prospects of the Company (as well as the risks involved in achieving
those prospects), the current environment for the rent-to-own industry,
including the consolidation trend, and general economic and market
conditions;
- the fact that the offer price of $16.00 per Rainbow share represented an
approximate 93% premium over the $8.31 per share closing price of Rainbow
shares on the last trading day prior to the February 3, 2004 Rainbow
Board meeting;
- the advice that the Rainbow Board received from legal counsel and NatCity
Investments in negotiating and evaluating the terms of the Merger
Agreement;
- the financial presentation made by NatCity Investments at the February 3,
2004 meeting of the Rainbow Board;
- the opinion of NatCity Investments dated February 3, 2004 and attached to
this proxy statement as ANNEX B, that, as of that date, the consideration
to be received by Rainbow shareholders pursuant to the Merger Agreement
was fair from a financial point of view to the holders of Rainbow shares;
- the current and historical (since the June 1998 initial public offering)
market prices of Rainbow shares which have not exceeded the offer price
of $16.00 per share;
- the Rainbow Board's judgment that the current stock price does not
reflect the Company's value, in part, due to the lack of liquidity and
small public float of Rainbow shares;
- the fact that the consideration offered to Rainbow shareholders is all
cash, which provides certainty of value to Rainbow shareholders;
- the increasing legal, accounting, insurance and other costs of remaining
a publicly-traded company;
7
- the Rainbow Board's judgment, in view of the Company's prospects as well
as discussions with certain possible acquirors, that it is unlikely that
one or more strategic or financial acquirers would be willing to pay, at
the present time, a price for the Company or its assets that would be
higher than the consideration offered to Rainbow shareholders pursuant to
the Merger Agreement;
- the provisions of the Merger Agreement that allow the Company, under
certain circumstances, to furnish information to and conduct negotiations
with a third party and terminate the Merger Agreement in connection with
a superior proposal for a business combination or acquisition of the
Company upon payment of a termination fee of $3.75 million, which
represents approximately 3.5% of the Company's enterprise value, plus
expenses of up to $500,000; and
- the alternatives available to the Company, including the range of
potential values of the Company, and the Rainbow Board's perception that
the risk associated with consummating the sale to Acquiror was lower than
the risks associated with achieving a competitive value through the
implementation of the Company's growth strategy and remaining an
independent corporation, which implementation would be subject to
significant uncertainties and risks beyond the Company's control,
including negative general business and economic conditions and a
consolidating rent-to-own industry.
Process
The Rainbow Board's favorable recommendation followed an extensive process
of seeking business combination proposals conducted by the Company and NatCity
Investments, pursuant to which interested parties signed confidentiality
agreements, met with Company management, reviewed confidential information about
the Company and its business, and reviewed public disclosures by and about the
business, financial condition and current business strategy of Rainbow.
In considering Acquiror's proposal, the Rainbow Board took into account
discussions with other interested parties regarding the value and form of
consideration, expected tax treatment, termination fees payable in the event
that a more favorable transaction was presented to the Company following the
execution of the Merger Agreement, and transaction risks related to timing and
the certainty that a transaction would be consummated considering regulatory
risks and closing conditions. Based on these considerations, the Rainbow Board
believed that acceptance of the Acquiror's proposal was in the best interest of
Rainbow shareholders.
The Board also considered the structure of the Merger and the terms and
conditions of the Merger Agreement, including:
- the ability of the Company, prior to the consummation of the Merger, to
consider and negotiate unsolicited third party business combination
proposals, subject to certain conditions;
- the right of the Rainbow Board, prior to the consummation of the Merger,
to terminate the Merger Agreement and accept a superior proposal, subject
to the satisfaction of certain conditions and the payment of a
termination fee to Acquiror; and
- the ability to consummate the Merger within a reasonable period of time.
Negative Factors
The Rainbow Board also identified and considered the following potentially
negative factors in its deliberations:
- The possible disruption to the Company's businesses that may result from
the announcement of the transaction and the resulting distraction of
management's and other personnel's attention from the day-to-day
operations of the Company's businesses;
- The restrictions contained in the Merger Agreement on the operation of
the Company's businesses during the period between the signing of the
Merger Agreement and the completion of the Merger;
- The $3.75 million termination fee plus up to $500,000 of expenses to be
paid to Acquiror if the Merger Agreement is terminated under certain
circumstances specified in the Merger Agreement. See "The Merger
Agreement -- Termination of the Merger Agreement; Termination Fee" on
pages 28 to 29;
8
- The possibility that the Merger might not be completed, which could cause
the Company's share price to decline to its pre-merger announcement
level;
- The possibility that the Merger might not be completed, and the impact of
the cost of the failed transaction on the Company's operating results;
- The Company's ability to attract and retain key personnel could be
impaired due to the uncertainty involved with the proposed transaction
and employees' concerns regarding job security;
- The possibility of significant costs, delays and non-consummation of the
Merger Agreement resulting from seeking regulatory approvals necessary
for the consummation of the Merger Agreement; and
- Gains, if any, arising from receipt of the cash paid in the Merger would
be taxable to Rainbow shareholders for United States federal income tax
purposes.
The foregoing discussion of the factors considered by the Rainbow Board is
not intended to be exhaustive. In view of the variety of factors considered in
connection with their evaluation of the Merger Agreement and the transactions
contemplated by the Merger Agreement, including the Merger, the Rainbow Board
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. The Rainbow Board considered all the factors as a whole in
reaching its determination. Individual members of the Rainbow Board may have
given different weights to different factors.
THE RAINBOW BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT IS
FAIR TO AND IN THE BEST INTERESTS OF RAINBOW SHAREHOLDERS AND BELIEVES THAT THE
MERGER AGREEMENT REPRESENTS AN OPPORTUNITY TO ENHANCE VALUE FOR RAINBOW
SHAREHOLDERS. ACCORDINGLY, THE RAINBOW BOARD UNANIMOUSLY RECOMMENDS THAT RAINBOW
SHAREHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
In considering the recommendation of the Rainbow Board with respect to the
Merger Agreement, Rainbow shareholders should be aware that certain directors
and officers of the Company have arrangements that cause them to have interests
in the transaction that are different from, or are in addition to, the interests
of Rainbow shareholders generally. See "Interests of Certain Persons in the
Merger" beginning on page 15.
OPINION OF NATCITY INVESTMENTS
Pursuant to an engagement letter, dated December 16, 2003, the Company
retained NatCity Investments to act as its exclusive financial advisor.
The Rainbow Board also asked NatCity Investments to render an opinion to
the Rainbow Board as to the fairness, from a financial point of view, of the
consideration to be paid to the holders of Rainbow shares pursuant to the Merger
Agreement. On February 3, 2004, NatCity Investments delivered an oral opinion,
subsequently confirmed in writing, to the effect that, as of the date of its
opinion, and based upon and subject to the assumptions, limitations and
qualifications contained in its opinion, the consideration to be received by
Rainbow shareholders pursuant to the Merger was fair, from a financial point of
view, to the holders of Rainbow shares.
THE FULL TEXT OF THE WRITTEN OPINION OF NATCITY INVESTMENTS IS ATTACHED TO
THIS PROXY STATEMENT AS ANNEX B AND INCORPORATED HEREIN BY REFERENCE. WE URGE
YOU TO READ THAT OPINION CAREFULLY AND IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED, AND LIMITS OF THE REVIEW
UNDERTAKEN IN ARRIVING AT THAT OPINION.
NatCity Investments was retained to serve as an advisor to the Rainbow
Board and not as an advisor to or agent of any shareholder of the Company.
NatCity Investments' opinion was prepared for the Rainbow Board and is directed
only to the fairness, from a financial point of view, of the consideration to be
paid to Rainbow shareholders pursuant to the Merger and does not address the
merits of the decision by the Company to engage in the Merger or other business
strategies considered by the Company, nor does it address the Company's decision
to proceed with the Merger or the form of the transaction as a merger. NatCity
Investments' opinion does not constitute a recommendation to any of the
Company's shareholders as to how such shareholder should vote at the Special
Meeting.
9
NatCity Investments did not determine the amount of the consideration to be
paid to Rainbow shareholders pursuant to the Merger. The amount of consideration
was determined in negotiations between the Company and Acquiror, in which
NatCity Investments advised the Rainbow Board. No restrictions or limitations
were imposed by the Rainbow Board on NatCity Investments with respect to the
investigations made or the procedures followed by NatCity Investments in
rendering its opinion.
In rendering its opinion, NatCity Investments reviewed, among other things:
- A draft of the Merger Agreement, dated February 2, 2004, which NatCity
Investments understood to be in substantially final form;
- A draft of the form of Voting Agreement, dated February 2, 2004, for
certain Rainbow shareholders, which NatCity Investments understood to be
in substantially final form;
- The Company's Annual Reports on Form 10-K for each of the years ended
December 31, 1999, 2000, 2001, and 2002, its Quarterly Reports on Form
10-Q for the quarters ended March 31, June 30 and September 30, 2003, and
other publicly available information about the Company;
- Certain unaudited internal information, primarily financial in nature and
including estimated financial results for the year ended December 31,
2003 and projections as of February 2, 2004 for the years ending December
31, 2004 through 2008, prepared and furnished to NatCity Investments by
the Company's management;
- Publicly available information concerning the trading of, and the trading
market for, Rainbow shares;
- Publicly available information with respect to certain other companies
that NatCity Investments believed to be comparable to the Company and the
trading markets for those other companies' securities; and
- Publicly available information concerning the nature and terms of other
transactions that NatCity Investments considered relevant to its analysis
of the Merger.
NatCity Investments also discussed past and current operations and the
financial condition and prospects of the Company, as well as other matters
NatCity Investments believed to be relevant to its analysis of the Merger, with
certain officers and employees of the Company. In addition, NatCity Investments
conducted such other financial studies, analyses and investigations, and
considered such other information, as NatCity Investments deemed necessary or
appropriate, including NatCity Investments' assessment of general, economic,
market and other conditions.
You should note that in rendering its opinion, NatCity Investments relied
upon the accuracy and completeness of all of the financial and other information
provided or otherwise made available to it or that was publicly available.
NatCity Investments was not engaged to, and did not independently attempt to,
verify any of that information. NatCity Investments also relied upon the
management of the Company as to the reasonableness and achievability of the
financial and operating projections, and the assumptions and bases for those
projections provided to it, and assumed that those projections reflect the best
currently available estimates and judgments of the Company's management. NatCity
Investments was not engaged to assess the reasonableness or achievability of
those projections or the assumptions and bases underlying them and expresses no
view on those matters. NatCity Investments neither conducted a physical
inspection or appraisal of any of the assets, properties or facilities of the
Company, nor was it furnished with any evaluation or appraisal.
NatCity Investments also assumed that the representations and warranties of
each party contained in the Merger Agreement are true and correct, the
conditions to the Merger as set forth in the Merger Agreement would be satisfied
and that the Merger would be completed on a timely basis in the manner
contemplated by the Merger Agreement and in compliance with all applicable laws.
Further, NatCity Investments assumed that all governmental or other consents
necessary for the consummation of the Merger would be obtained without any
adverse effect on any of the parties thereto or to the contemplated benefits of
the Merger.
NatCity Investments' opinion is based on economic and market conditions and
other circumstances existing on, and information made available as of, the date
of its opinion. NatCity Investments' opinion does not address any matters after
the date of its opinion. NatCity Investments has disclaimed any undertaking or
obligation to
10
advise any person of any change in any fact or matter affecting the opinion
which may come or be brought to its attention after the date of the opinion. In
the event that in NatCity's judgment there is a material change in any fact,
assumption upon which its opinion is based or other matter affecting the opinion
after the date of the opinion, NatCity Investments has reserved the right to
withdraw, revise or modify the opinion.
The following is a brief summary of the financial and comparative analyses
performed by NatCity Investments to arrive at its opinion. This summary is not
intended to be an exhaustive description of the analyses performed by NatCity
Investments but includes all material factors considered by NatCity Investments
in rendering its opinion.
Although other valuation techniques may exist, NatCity Investments believes
that each analysis performed by NatCity Investments as described below is a
common methodology utilized in determining valuations and that the analyses,
when taken as a whole, provide the most appropriate analyses for NatCity
Investments to arrive at its opinion.
HISTORICAL STOCK TRADING ANALYSIS
NatCity Investments reviewed the historical performance of Rainbow shares
based on a historical analysis of closing prices and trading volumes for the one
month, three month, six month, twelve month, two year and five year periods
ended February 2, 2004. NatCity Investments noted that the average closing price
for Rainbow shares over these periods ranged from $6.16 to $7.96, with the
lowest average closing price being the twelve month average and the highest
average closing price being the one month average.
The following chart summarizes these prices and volume of trading of
Rainbow shares.
<Table>
<Caption>
AVERAGE DAILY CLOSE
AVERAGE DAILY -------------
PERIOD CLOSE VOLUME HIGH LOW
- ------ ------- ------- ----- -----
Latest 1 Month....................................... $7.96 1,399 $8.30 $7.25
Last 3 Months........................................ 7.74 2,815 8.31 7.00
Last 6 Months........................................ 6.95 3,025 8.31 5.56
Last 12 Months....................................... 6.16 3,874 8.31 4.82
Last 2 Years......................................... 6.21 5,553 10.24 4.05
Last 5 Years......................................... 7.67 6,870 14.00 4.05
</Table>
NatCity Investments also reviewed the distribution of the closing prices of
the Rainbow shares for the prior one year period and five year period compared
to the $16.00 per share to be paid to Rainbow shareholders pursuant to the
Merger Agreement.
<Table>
<Caption>
PERCENT OF PERCENT OF
TRADING VOLUME AT OR TRADING DAYS AT OR
PRIOR PERIOD BELOW $16.00 BELOW $16.00
- ------------ -------------------- ------------------
One Year.......................................... 100% 100%
Five Years........................................ 100% 100%
</Table>
DISCOUNTED CASH FLOW ANALYSIS
NatCity Investments analyzed various financial projections prepared by the
management of the Company for the five year period 2004 through 2008 and
performed two discounted cash flow analyses, as if the Company were to continue
on a stand-alone basis, based on these projections. A discounted cash flow
analysis is a methodology used to derive an implied equity value for a corporate
entity by discounting to the present its future, unlevered, after-tax free cash
flows and an estimated terminal value of the entity. NatCity Investments
calculated an implied equity value per share reference range for the Company by
discounting to the present the unlevered, after-tax free cash flows that the
Company is projected to generate over the five-year period 2004 through 2008 and
the terminal value of the Company based on a range of perpetuity growth rates
applied to projected 2008 free cash flow. NatCity Investments then compared the
implied equity value reference range to the proposed offer price in the Merger.
11
NatCity Investments believed that two discounted cash flow analyses were
appropriate due to several new initiatives that are expected to affect the
profitability of the Company in the future. The historical case financial
projections prepared by the management of the Company assume that the Company
will continue to operate in a manner consistent with its historical results.
Management of Rainbow completed the strategic Plan in 2003 which calls for
growing the Company's current business from 125 stores to 407 stores by 2008,
through acquisition and organic growth, and adding ancillary services such as
payday loan and check cashing services which the Company feels are complementary
to its current rent-to-own product offering. The Plan case financial projections
prepared by the management of the Company assume that the Company will implement
the Plan. Since there can be no assurance that the Plan would be implemented, in
full or in part, NatCity Investments believed it was appropriate to determine a
value for the Company in a scenario whereby management continues to operate
prospectively as it has historically as well as in a scenario that contemplates
the implementation of the Plan. For purposes of these analyses, NatCity
Investments used discount rates of 11.6% to 13.6% for the historical case
projections and 15.7% to 17.7% for the Plan case projections, based on the
projected weighted average cost of capital, including funded debt, of the
Company and perpetuity growth rates of 1.0% to 5.0%, which were applied to the
projected 2008 free cash flow.
NatCity Investments believed that a higher discount rate for the discounted
cash flow analysis using the Plan case financial projections prepared by the
management of the Company was appropriate due to several factors. These factors
included, among others, the ability to find and consummate the contemplated
acquisitions at reasonable valuations, the ability to successfully integrate
acquisitions, the ability to consolidate unprofitable store locations, the
increased cost of debt or equity capital that may be necessary to implement the
Plan, and the Company's unproven ability to implement its strategy of increased
fees to customers and to introduce certain services, including check cashing and
payday loan services. Furthermore, according to management, the Company faces
significant competition in the markets it serves.
These analyses indicated an implied equity value per share reference range
for the Company of approximately $2.19 to $3.37 and $11.76 to $14.82 in the
historical case analysis and Plan case analysis, respectively. NatCity
Investments noted that the proposed offer price of $16.00 per share was above
the implied equity value reference range for the Company in both the historical
and Plan cases.
<Table>
<Caption>
IMPLIED PRICE PROPOSED
DISCOUNTED CASH FLOW ANALYSIS PER SHARE OFFER PRICE
- ----------------------------- --------------- -----------
Historical Case $2.19 - $3.37 $16.00
Plan Case $11.76 - $14.82 $16.00
</Table>
COMPARABLE PUBLIC COMPANY ANALYSIS
NatCity Investments reviewed and compared selected financial data of the
Company to financial data of four publicly traded companies that NatCity
Investments considered reasonably similar to the Company because these companies
operate in the consumer rent-to-own industry. The selected companies may differ
from the Company based on, among other things, the size of the companies and the
geographic coverage of the companies' operations. The selected comparable
companies included:
<Table>
- - Aaron Rents, Inc. - Rent-A-Center, Inc.
- - Bestway, Inc. - Rent-Way, Inc.
</Table>
NatCity Investments reviewed, among other things, enterprise values as a
multiple of actual latest twelve month revenue, earnings before interest, taxes,
depreciation and amortization, commonly referred to as EBITDA, and earnings
before interest and taxes, commonly referred to as EBIT. NatCity Investments
calculated enterprise values as the market value of equity securities plus total
funded indebtedness less cash and cash equivalents. NatCity Investments also
reviewed equity values as a multiple of projected 2003 earnings per share
("EPS"). EPS projections for the selected companies were based on publicly
available median consensus research analyst estimates. Projected financial data
for the Company were based on projections provided by the Company's management.
Latest twelve month revenue, EBITDA and EBIT data for the Company were based on
year-end 2003 estimated financial statements provided by the Company's
management. NatCity Investments then compared the implied multiples derived for
the selected companies with the multiples implied in the Merger
12
based on the estimated transaction value of the Merger. For purposes of
determining the estimated transaction value of the Merger, NatCity Investments
assumed consideration of $16.00 per Company share to be paid pursuant to the
Merger and an estimated $3.0 million net in total funded debt at the Closing and
$5.0 million in change in control and transaction liabilities. The following
table sets forth the implied multiples for the selected companies, as compared
to the implied multiples based on the estimated transaction value of the Merger:
<Table>
<Caption>
MEDIAN IMPLIED
COMPARABLE PUBLIC COMPANIES COMPARABLE MULTIPLE TRANSACTION MULTIPLE
- --------------------------- ------------------- --------------------
Multiple of Revenue.............................. 1.05x 1.05x
Multiple of EBITDA............................... 9.2x 22.6x
Multiple of EBIT................................. 11.9x 46.3x
</Table>
The following table sets forth the implied multiples for the selected
companies, as compared to the implied multiples based on the estimated equity
value of the Merger:
<Table>
<Caption>
MEDIAN
COMPARABLE IMPLIED
COMPARABLE PUBLIC COMPANIES MULTIPLE TRANSACTION MULTIPLE
- --------------------------- ------------------- --------------------
Multiple of 2003 Projected EPS................... 17.5x 107.1x
</Table>
NatCity Investments noted that the implied multiples of the Company, based
on the transaction and equity values of the Merger, were generally above the
median multiples of the comparable public companies, with the exception of the
Multiple of Revenue which is equal to the median multiple of the comparable
public companies.
No company utilized in the comparable public company analysis is identical
or directly comparable to the Company. NatCity Investments made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of either the Company or the Acquiror. Mathematical analysis (such as
determining the mean or median) is not itself a meaningful method of using
publicly traded comparable company data.
SELECTED PRECEDENT TRANSACTION ANALYSIS
Using publicly available information, NatCity Investments reviewed certain
transactions in the consumer rent-to-own industry completed since January 1,
1998. These transactions were chosen because they were business combination
transactions that, for purposes of the analysis, NatCity Investments considered
reasonably similar to the Merger in that these transactions involved companies
in the consumer rent-to-own industry and occurred in a recent period. However,
no single selected precedent transaction is exactly the same as the Merger. The
selected precedent transactions may significantly differ from the Merger based
on, among other things, the size of the transaction, the form of consideration
paid in the transaction, the structure of the transaction, and the date the
transaction was consummated. The selected precedent transactions include:
<Table>
<Caption>
TARGET ACQUIROR
- ------ --------
Rent-Way (295 Stores) Rent-A-Center
RentaVision Rent-Way
ACI Investments (7 Stores) Aaron Rents
Home Choice Holdings Rent-Way
THORN America Rent-A-Center
Central Rents Rent-A-Center
Champion Rentals Rent-Way
Ace Rentals Rent-Way
Rental King Rent-Way
</Table>
For each of these transactions, NatCity Investments calculated the ratio of
the enterprise value of the transaction to the target company's actual
then-latest twelve month revenue, EBITDA and EBIT. NatCity Investments then
compared the implied multiples derived from the selected precedent transactions
with the multiples implied in the Merger for the Company based on the estimated
transaction value of the Merger. All
13
multiples for the selected precedent transactions were based on publicly
available information at the time of the announcement of the particular selected
precedent transaction. Latest twelve month revenue, EBITDA and EBIT data for the
Company were based on year ended December 31, 2003 estimated financial
statements provided by the Company's management. The following table sets forth
the implied multiples for the selected precedent transactions, as compared to
the implied multiples based on the estimated transaction value of the Merger:
<Table>
<Caption>
MEDIAN IMPLIED
SELECTED PRECEDENT TRANSACTIONS TRANSACTION MULTIPLE TRANSACTION MULTIPLE
- ------------------------------- -------------------- --------------------
Multiple of Revenue............................... 0.99x 1.05x
Multiple of EBITDA................................ 13.6x 22.6x
Multiple of EBIT.................................. 20.6x 46.3x
</Table>
NatCity Investments noted that the implied multiples of the Company, based
on the transaction value of the Merger, were above the median transaction
multiples of the selected precedent transactions.
PREMIUMS PAID ANALYSIS
Using publicly available information, NatCity Investments reviewed 573
publicly-disclosed control acquisitions that were announced since January 1,
1999, and had enterprise values above $50 million and below $200 million. These
transactions were chosen based on the comparable size of the transactions and
the recent period in which the transactions were completed. The selected
transactions may significantly differ from the Merger based on, among other
things, the size of the transaction, the form of consideration paid in the
transaction, the structure of the transaction, the date the transaction was
announced, and the industry in which the transaction occurred. For each of the
target companies involved in the transactions, NatCity Investments examined the
closing stock price one trading day, five trading days and thirty trading days
prior to announcement of the transaction. In addition, NatCity Investments
calculated the premium of the $16.00 per share that the Company shareholders
would receive to the closing prices for Company shares for the periods one
trading day, five trading days and thirty trading days prior to an assumed
announcement date after the close of business on February 2, 2004, when the
Company's closing price per share was $8.31. The following table sets forth the
implied premiums for the selected control acquisitions, as compared to the
implied premiums based on the price per share offered pursuant to the Merger
Agreement:
<Table>
<Caption>
CASH CONSIDERATION IMPLIED
PREMIUMS PAID TRANSACTIONS MEDIAN MERGER PREMIUM
- ------------- ------------------- --------------
One trading day..................................... 32.8% 92.5%
Five trading days................................... 38.5% 97.0%
Thirty trading days................................. 51.1% 120.4%
</Table>
NatCity Investments noted that the implied premiums for the Merger are
greater than the premiums paid in the selected control acquisitions.
NATCITY FEES AND OTHER MATTERS
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore, the
opinion is not readily susceptible to summary description. NatCity Investments
did not form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, NatCity Investments
considered the results of the analyses in light of each other and in the
aggregate and ultimately reached its opinion based upon the results of all
analyses taken as a whole. NatCity Investments did not place particular reliance
or weight on any individual analysis or other factor, but instead concluded that
its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate analyses summarized above, NatCity Investments
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and other factors considered by it, without considering
all analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinion. In performing its analyses, NatCity
Investments made numerous assumptions with
14
respect to industry performance, business and economic conditions and other
matters. The analyses performed by NatCity Investments do not purport to be
appraisals and are not necessarily indicative of actual value or future results,
which may be significantly more or less favorable than those suggested by the
analyses.
NatCity Investments, as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Rainbow Board selected NatCity Investments based on its experience
in transactions similar to the Merger and its reputation in the brokerage and
investment communities.
Pursuant to the terms of an engagement letter dated December 16, 2003, the
Company paid to NatCity Investments $200,000 for the fairness opinion described
herein, which was payable upon rendering of the fairness opinion. In addition,
the Rainbow Board agreed to have the Company pay to NatCity Investments a fee of
approximately $600,000 for providing financial advisory services to the Rainbow
Board that is customary in transactions of this nature, which is contingent upon
consummation of the Merger. The Rainbow Board also agreed to have the Company to
reimburse NatCity Investments for certain of its reasonable out-of-pocket
expenses, and to indemnify NatCity Investments and related persons against
liabilities in connection with its engagement, including liabilities under
federal securities laws. Except as to this transaction, NatCity Investment has
performed no work for either Rainbow or the Acquiror in the last two years.
In the ordinary course of business, NatCity Investments may actively trade
the securities of the Company for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
those securities. NatCity Investments' affiliates have also provided financing
services from time to time to the Company and to the Acquiror and their
respective affiliates for which services NatCity Investments' affiliates have
received, and expect to receive, compensation. In 2002 and 2003, NatCity
Investment's affiliates received approximately $3.64 million and $2.85 million,
respectively, in interest and rental payments and fees from Rainbow and
approximately $126,500 and $306,000, respectively, in interest payments and fees
from the Acquiror. The interests of NatCity Investments' affiliates may differ
from those of the Company and the Acquiror in respect to timing, pricing and
other terms and conditions of the proposed Merger and otherwise. No opinion
rendered or advice given by NatCity Investments is deemed to be a representation
that any of NatCity Investments' affiliates would approve or vote for the
proposed Merger or any related transaction if any such approval or vote were
required.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Rainbow Board, you should be
aware that certain members of the Rainbow Board and management have interests
that are different from, or in addition to, your interests as a holder of
Rainbow shares generally. Each of the members of the Rainbow Board was aware of
these interests and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated by the Merger Agreement,
including the Merger.
We refer you to the information under the headings "Security Ownership of
Certain Beneficial Owners and Management" for information regarding our current
officers and directors and their share ownership in the Company. The Company's
officers and directors who own Rainbow shares at the Effective Time of the
Merger will be entitled, as will all Rainbow shareholders, to receive $16.00 per
share as consideration for their Rainbow shares.
In addition, the rights of holders of all unexercised options to purchase
Rainbow shares will be converted into a right to receive cash for each Rainbow
share upon the exercise of these options, in the amount of $16.00 less the
applicable exercise price of these options. All unvested options outstanding at
the Effective Time of the Merger will vest and become immediately exercisable as
a result of the transactions contemplated by the Merger Agreement. The following
table shows the dollar value of the payments before taxes to be received by the
15
directors and executive officers of the Company with respect to their options
that would otherwise be unvested as of March 31, 2004, and which become vested
as a result of the Merger:
<Table>
<Caption>
NAME TOTAL PAYMENT
- ---- -------------
Wayland J. Russell.......................................... $ 0.00
Michael J. Viveiros......................................... 0.00
S. Robert Harris............................................ 391,226.00
Michael A. Pecchia.......................................... 0.00
Brian L. Burton............................................. 0.00
Robert A. Glick............................................. 33,330.00
Ivan J. Winfield............................................ 0.00
-----------
TOTAL............................................. $424,556.00
===========
</Table>
Options that would otherwise be vested as of March 31, 2004 are included in the
table "Security Ownership of Certain Beneficial Owners and Management" on page
30 hereof.
Approximately 630 employees of the Company, including the four executive
officers, are parties to the Severance Agreements that are designed to retain
the employees and provide for continuity of operations through the Effective
Time and, in certain instances, for 90 days thereafter. The total amount of stay
bonuses and severance payments, together with the value of post-employment
insurance and other benefits, payable to all employees is approximately
$3,500,000. The aggregate value of the payments and benefits payable to Messrs.
Russell, Viveiros, Harris and Pecchia are $46,259, $327,739, $128,697, and
$218,510, respectively.
In connection with the execution of the Merger Agreement, Messrs, Russell,
Viveiros and Pecchia have agreed to enter into three year noncompetition
agreements with Acquiror that generally preclude them from engaging in the
rent-to-own, rental, lease purchase or leasing business. In exchange for their
Agreements, Messrs. Russell, Viveiros and Pecchia will receive an aggregate of
$50,000, $25,000, and $25,000 respectively.
An amendment to the triple-net lease relating to the Company's headquarters
has been executed providing for (i) a payment by Acquiror of $100,000 to the
lessor, a limited liability company owned by Messrs. Russell and Viveiros and a
former director and officer of the Company, and (ii) Acquiror's agreement to
abandon to lessor all furniture, fixtures and equipment not related to the
rent-to-own business, in exchange for an early termination of the lease. In lieu
of expiring on January 31, 2006, the lease will now expire ninety days after the
Effective Time of the Merger. The book value of the furniture, fixtures and
equipment to be abandoned is estimated at $400,000.
GOVERNMENTAL AND REGULATORY MATTERS
Under the HSR Act and rules promulgated by the Federal Trade Commission
(the "FTC"), certain acquisitions may not be consummated unless certain
information has been furnished to the Antitrust Division of the United States
Department of Justice and the FTC and the applicable waiting period requirements
have been satisfied. The Merger is subject to these requirements.
Pursuant to the requirements of the HSR Act, Acquiror and the Company each
filed the required Notification and Report Forms with the Antitrust Division and
the FTC on February 13, 2004. The statutory waiting period applicable to the
Merger pursuant to the HSR Act expired on March 11, 2004.
The Antitrust Division and the FTC frequently scrutinize the legality of
transactions under the antitrust laws. At any time before or after the
consummation of any such transactions, the Antitrust Division or the FTC could,
notwithstanding termination of the waiting period, take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the Merger or divestiture of assets of the Company
or Acquiror. Private parties and State Attorneys General may also bring legal
actions under the antitrust laws.
Under the Merger Agreement, Acquiror and the Company have each agreed to
use commercially reasonable efforts to avoid the entry of, or to have vacated or
terminated, any decree, or order of judgment that would
16
restrain, prevent or delay the Merger. If government entities require store
divestitures as a condition to securing approval under the HSR Act, Acquiror and
the Company have agreed to negotiate and consummate such divestitures, provided,
however, that Acquiror has the right to terminate the Merger Agreement in the
event that the government entities require the divestiture of sixteen (16) or
more stores of the Company, Acquiror and its subsidiaries.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. Federal income tax
consequences of the Merger. This discussion is based upon the provisions of the
Internal Revenue Code of 1986, as amended (referred to as the "Code" in this
proxy statement), the regulations promulgated under the Code, Internal Revenue
Service rulings, and judicial and administrative rulings in effect as of the
date of this proxy statement, all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects of federal
income taxation that may be relevant to a holder of Rainbow shares in light of
the shareholder's particular circumstances or to those holders of Rainbow shares
subject to special rules, such as shareholders who are not citizens or residents
of the United States, shareholders who are financial institutions or
broker-dealers, tax-exempt organizations, insurance companies, dealers in
securities, foreign corporations, or shareholders who hold their shares as part
of a straddle or conversion transaction. This summary also does not address the
U.S. federal income tax consequences to holders of options to purchase Rainbow
shares, each of whom is receiving a cash payment equal to $16.00 less the
exercise price for each option held. This discussion assumes that holders of
Rainbow shares hold their respective shares as capital assets within the meaning
of Section 1221 of the Code. No ruling from the Internal Revenue Service will be
applied for with respect to the federal income tax consequences discussed herein
and accordingly there can be no assurance that the Internal Revenue Service will
agree with the positions described in this proxy statement.
Cash payments received by Rainbow shareholders upon redemption of their
Rainbow shares will be treated as received in exchange for their shares, and
gain or loss will be recognized for federal income tax purposes on receipt of
the cash payment, measured by the difference between the amount of cash received
and the basis of Rainbow shares redeemed. The gain or loss will be long term
capital gain or loss if Rainbow shares are considered to have been held for more
than one year at the time of the Merger.
If a Rainbow shareholder perfects dissenter's rights with respect to its
Rainbow shares, this holder should generally recognize capital gain or loss on
the Effective Time of the Merger in an amount equal to the difference between
the "amount realized" and the adjusted tax basis of its Rainbow shares. For this
purpose, although there is no authority directly on point, the amount realized
generally should equal the trading price of Rainbow shares on the Effective Time
of the Merger. This holder should also recognize capital gain or loss at the
time the appraised fair cash value is received, to the extent the payment
exceeds or is less than the amount realized on the Effective Time of the Merger.
In addition, a portion of the payment may be characterized as interest income.
Certain non-corporate holders of Rainbow shares may be subject to backup
withholding at a rate of 31% on cash payments received pursuant to the Merger.
Backup withholding will not apply, however, to a holder of Rainbow shares who
furnishes a taxpayer identification number and certifies that he or she is not
subject to backup withholding on the substitute Form W-9 included in the
transmittal letter, who provides a certificate of foreign status on Form W-8, or
who is otherwise exempt from backup withholding. A holder of Rainbow shares who
fails to provide the correct tax identification number on Form W-9 may be
subject to a $50.00 penalty imposed by the Internal Revenue Service.
THE ABOVE DISCUSSION OF POTENTIAL TAX CONSEQUENCES MAY NOT APPLY TO CERTAIN
CATEGORIES OF SHAREHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE INTERNAL
REVENUE CODE. THE COMPANY SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING ANY
FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES OF THE MERGER.
DISSENTERS' RIGHTS OF RAINBOW SHAREHOLDERS
If the Merger is completed, holders of Rainbow shares outstanding on the
Record Date will have certain rights under the Ohio Revised Code to dissent and
demand dissenters' rights and to receive payment in cash of
17
the fair cash value of their Rainbow shares. Rainbow shareholders who vote in
favor of the Merger will not be entitled to relief as dissenting shareholders.
Holders of shares not voted or voted against adopting the Merger Agreement will
retain their dissenters' rights. To perfect rights as a dissenting shareholder,
a Rainbow shareholder must deliver to the Company a written demand for payment
of the fair cash value of the shares for which relief is sought. This demand for
payment must be delivered by May 22, 2004. If the Company then sends a
dissenting shareholder a request for the certificates representing Rainbow
shares for which relief is sought, the dissenting shareholder must return the
certificates requested to the Company so that they may be endorsed with a legend
stating that a demand for the fair cash value of the holder's Rainbow shares has
been made. Failure to deliver the certificates within 15 days from the date
Company's sends its request for them may, at the Company's option, result in a
loss of all dissenters' rights under Ohio law. Unless the Company and the
dissenting shareholder come to an agreement as to the fair cash value per
Rainbow share for which the dissenting shareholder seeks relief within three
months after the service of the demand for payment by the dissenting
shareholder, either the dissenting shareholder or the Company may file a
complaint in court. Other dissenting shareholders may join as plaintiffs or
defendants in the resulting proceeding at that time.
If the shareholder complies with the statutory procedures for exercising or
perfecting dissenters' rights in accordance with Sections 1701.84 and 1701.85 of
the Ohio Revised Code, then a judicial determination will be made as to the fair
cash value required to be paid to the objecting shareholder for the holder's
Rainbow shares. Any judicial determination of the fair cash value will be based
on the amount that a willing seller, under no compulsion to sell, would be
willing to accept, and a willing buyer, under no compulsion to purchase, would
be willing to pay. In determining the fair cash value of Rainbow shares, a court
is required to take into account all relevant factors, excluding any
appreciation or depreciation in market value resulting from the proposal of the
Merger. Accordingly, a determination could be based upon considerations other
than, or in addition to, the market value of Rainbow shares, including, among
other things, asset values and earning capacity. The value so determined may be
more or less than the price per Rainbow share to be paid in the Merger but in no
event can the value so determined exceed the amount specified in the demand of a
particular shareholder.
From the time written demand for payment of the fair cash value is given
until either the termination of the rights and obligations arising from the
demand or the purchase of the shares related thereto, all rights accruing to the
dissenting shareholder, including voting and dividend or distribution rights,
will be suspended. If any dividend or distribution is paid in money on Rainbow
shares during the suspension or if any dividend, distribution or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for the shares, an amount equal to the dividend, distribution or interest that
would have been payable on the shares, but for the suspension, shall be paid to
the holder of record of the shares as a credit against the fair cash value of
the shares. If the right to receive the fair cash value is terminated other than
by the purchase of the shares, all rights will be restored to the objecting
shareholder and any distribution that would have been made to the holder of
record of the shares, but for the suspension, will be made at the time of
termination.
The foregoing summary of the rights of dissenting shareholders under Ohio
law does not purport to be a complete statement of the procedures to be followed
by shareholders desiring to exercise any available dissenters' rights and is
qualified in its entirety by reference to the full text of Section 1701.84 and
Section 1701.85 of the Ohio Revised Code attached as ANNEX C and incorporated
herein by this reference. The preservation and exercise of dissenters' rights
are conditioned on strict adherence to the applicable provisions of the Ohio
Revised Code.
CERTAIN RELATIONSHIPS WITH ACQUIROR OR THE COMPANY
Except as set forth in this proxy statement, neither Acquiror nor the
Company, nor to their respective knowledge, any of their respective directors,
executive officers or other affiliates has any contract, arrangement,
understanding or relationship with any other person with respect to any
securities of the Company, including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any securities, joint ventures, loan or option arrangements, puts or calls,
guaranties of loans, guaranties against loss or the giving or withholding of
proxies.
18
In October 2002, the Company sold Acquiror its customers' accounts,
inventory on rent and general intangibles associated with a Company store in
Newark, Delaware. As part of the sale, the Company agreed not to open a
rent-to-own store within a 15-mile radius of the Newark store for a three-year
period.
As of the date of this proxy statement, neither Acquiror nor any of its
subsidiaries own any Rainbow shares. To Acquiror's knowledge, no officers or
directors of Acquiror own shares or have interests in the Company.
FEES AND EXPENSES
Except in the event the Merger Agreement is terminated under the
circumstances described in "The Merger Agreement--Termination; Termination Fee"
beginning on page 28, all costs and expenses incurred in connection with the
Merger Agreement and the transactions it contemplates will be paid by the party
incurring these costs or expenses, whether or not the Merger is consummated,
with the exception of payment of the HSR filing fee which will be borne equally
by Acquiror and the Company.
DELISTING AND DEREGISTRATION OF SHARES
Rainbow shares currently are listed on the Nasdaq National Market under the
symbol "RBOW." Upon the consummation of the Merger, Rainbow shares will cease to
trade on the Nasdaq National Market and be deregistered under the Securities
Exchange Act of 1934, as amended.
19
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for each of the five years in the period ended December 31, 2003.
Certain prior year amounts have been reclassified to conform to the presentation
used in 2003. The data for the five years ended December 31, 2003, should be
read in conjunction with the Company's consolidated financial statements
reported on Form 10-K for the year ended December 31, 2003.
No pro forma data giving effect to the Merger is provided because the
Company does not believe pro forma information is material to shareholders in
evaluating the Merger Agreement and the transactions contemplated by the Merger
Agreement, including the Merger, since (1) the consideration offered to Rainbow
shareholders is all cash and (2) if the Merger is completed, the Company's
public shareholders will no longer have any equity interest in the Company. The
Company's consolidated financial statements for the year ended December 31,
2003, which have been audited by KPMG LLP, independent public auditors, are
incorporated by reference in this proxy statement from the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Income Data:
Revenues
Rental revenue..................................... $ 96,826 $ 93,239 $ 88,770 $ 86,099 $ 75,932
Fees............................................... 2,679 2,728 2,697 2,849 2,639
Merchandise sales.................................. 3,168 3,300 3,088 2,947 2,287
---------- ---------- ---------- ---------- ----------
Total revenues................................. 102,673 99,267 94,555 91,895 80,858
Operating expenses
Merchandise costs.................................. 33,346 33,995 33,310 30,775 26,758
Store expenses
Salaries and related............................. 26,849 24,393 22,713 21,774 18,374
Occupancy........................................ 10,022 9,480 8,607 7,464 6,027
Advertising...................................... 6,884 6,167 5,928 4,430 3,662
Other expenses................................... 14,397 13,494 13,258 12,388 10,719
---------- ---------- ---------- ---------- ----------
Total store expenses........................... 58,152 53,534 50,506 46,056 38,782
---------- ---------- ---------- ---------- ----------
Total merchandise costs and store expenses..... 91,498 87,529 83,816 76,831 65,540
General and administrative expenses................ 8,765 7,706 7,160 6,340 5,176
Amortization of goodwill and noncompete
agreements....................................... 160 175 689 608 456
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 100,423 95,410 91,665 83,779 71,172
---------- ---------- ---------- ---------- ----------
Operating income............................... 2,250 3,857 2,890 8,116 9,686
Interest expense..................................... 570 632 689 933 697
Other expense, net................................... 227 228 227 284 361
---------- ---------- ---------- ---------- ----------
Income from continuing operations, before
income taxes................................. 1,453 2,997 1,974 6,899 8,628
Income taxes......................................... 574 1,184 800 2,794 3,580
---------- ---------- ---------- ---------- ----------
Income from continuing operations.............. 879 1,813 1,174 4,105 5,048
Discontinued operations
Loss from operations of discontinued store
including loss on disposal, net of tax........... -- (172) -- -- --
Net income..................................... $ 879 $ 1,641 $ 1,174 $ 4,105 $ 5,048
========== ========== ========== ========== ==========
Basic and diluted earnings per common share
from continuing operations................... $ 0.15 $ 0.31 $ 0.20 $ 0.69 $ 0.85
========== ========== ========== ========== ==========
Basic and diluted earnings per common share.... $ 0.15 $ 0.28 $ 0.20 $ 0.69 $ 0.85
========== ========== ========== ========== ==========
Weighted average common shares outstanding:
Basic............................................ 5,929,435 5,928,006 5,925,735 5,925,735 5,925,735
Diluted.......................................... 5,940,598 5,940,606 5,940,999 5,930,157 5,930,887
Pro forma net income data:
Net income as reported............................. $ 879 $ 1,641 $ 1,174 $ 4,105 $ 5,048
Pro forma adjustment for goodwill amortization,
net.............................................. -- -- 312 287 212
---------- ---------- ---------- ---------- ----------
Pro forma net income................................. $ 879 $ 1,641 $ 1,486 $ 4,392 $ 5,260
========== ========== ========== ========== ==========
Pro forma basic and diluted income per common
share.............................................. $ 0.15 $ 0.28 $ 0.25 $ 0.74 $ 0.89
========== ========== ========== ========== ==========
Operating Data:
Stores open at end of period......................... 125 122 113 110 92
Comparable store revenue growth (1).................. (1.0)% 1.4% (4.3)% 1.7% 4.4%
</Table>
- ---------------
(1) Comparable store revenue growth is the percentage increase (decrease) 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.
20
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement, a
copy of which is attached to this proxy statement as ANNEX A and incorporated
herein by reference. You are urged to read the entire Merger Agreement as it is
the legal document that governs the Merger.
THE MERGER
The Merger Agreement provides that subject to the conditions summarized
below, Merger Sub will merge with and into the Company. Following the completion
of the Merger, Merger Sub will cease to exist as a separate entity, and the
Company will continue as an indirect, wholly-owned subsidiary of Acquiror.
EFFECTIVE TIME
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Ohio in accordance with the Ohio
Revised Code, or at another time as is agreed upon by the Company, Acquiror and
Merger Sub and specified in the Certificate of Merger. The time at which the
Merger becomes effective is referred to as the "Effective Time" in this proxy
statement.
MERGER CONSIDERATION
At the Effective Time, each Rainbow share outstanding immediately before
the Effective Time will be cancelled and automatically converted into the right
to receive $16.00 in cash, without any other payment thereon, with the following
exceptions:
- treasury shares owned by the Company will be cancelled without any
payment thereon; and
- shareholders who have perfected their dissenters' rights will be entitled
to receive payment in cash of the fair value of their shares in
accordance with Ohio law.
Additionally, as of the Effective Time, holders of Company stock options will
have such rights converted as described below under the caption "Stock Options."
PAYMENT PROCEDURES
Before the Effective Time, Acquiror or Merger Sub will deposit the
consideration to be paid in the Merger with Mellon Investor Services, LLC (the
"Exchange Agent"). As soon as reasonably practicable after the Effective Time,
the Exchange Agent will send to each holder of Rainbow shares and each option
holder a letter of transmittal and instructions to effect the surrender of the
share certificates or other documentation that represent Rainbow shares or
options entitled to receive payment under the Merger Agreement in exchange for
payment of the consideration offered in respect of these shares or options. YOU
SHOULD NOT FORWARD SHARE CERTIFICATES OR OTHER DOCUMENTATION WITH THE ENCLOSED
PROXY CARD. YOU SHOULD SURRENDER CERTIFICATES REPRESENTING RAINBOW SHARES ONLY
AFTER RECEIVING INSTRUCTIONS FROM THE EXCHANGE AGENT OR ACQUIROR.
Each Rainbow shareholder will be entitled to receive the consideration
offered Rainbow shareholders, after giving effect to any required tax
withholdings, only upon surrender to the Exchange Agent of the relevant share
certificates, together with a properly completed letter of transmittal. Acquiror
will not pay interest on the consideration offered to Rainbow shareholders. The
Exchange Agent will not make payments to any person who is not the registered
holder of the certificates surrendered unless the certificate is properly
endorsed or otherwise in proper form for transfer. Further, the person
requesting this payment will be required to pay any transfer or other taxes
required as a result of this payment to a person other than the registered
holder of the certificate surrendered, or establish to the satisfaction of the
Exchange Agent that the tax has been paid or is not payable.
STOCK OPTIONS
The Merger Agreement provides that, at the Effective Time, each outstanding
option (whether or not then exercisable or vested) shall be extinguished and
converted into the right to receive cash in the amount of $16.00 less the
applicable exercise price. Each holder will receive a cash payment for such
amount, less applicable
21
withholding taxes. The Merger Agreement restricts the Company from granting any
new options to purchase Rainbow shares.
NO FURTHER OWNERSHIP RIGHTS IN THE COMPANY
At the Effective Time, a holder of Rainbow shares (other than a holder who
has perfected its dissenter's rights) will no longer have any rights as a
shareholder, except for the right to surrender his, her or its certificates
representing the Rainbow shares in exchange for the right to receive $16.00 cash
per share. Dissenters shall have the right to receive the fair cash value of
their Rainbow shares as such value is determined under Ohio law. After the
Effective Time, no transfer of shares shall be made on the share transfer books
of the Company except as contemplated by the Merger Agreement. Any certificates
representing Rainbow shares presented after the Effective Time for transfer will
be cancelled and exchanged for the right to receive the consideration offered to
Rainbow shareholders.
DIRECTORS AND OFFICERS
The Merger Agreement provides that the directors and officers of Merger Sub
immediately before the Effective Time will be the directors and officers of the
Surviving Corporation after the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties made
by the Company to Acquiror and Merger Sub, subject to identified exceptions,
including, but not limited to, representations and warranties relating to:
- due incorporation, valid existence, good standing and requisite power of
the Company;
- the lack of subsidiaries of the Company;
- capitalization of the Company;
- the authorization, execution, and delivery of the Merger Agreement by the
Company and the enforceability of the Merger Agreement against the
Company;
- absence of any conflict between execution and delivery of the Merger
Agreement and consummation of the transactions contemplated by the Merger
Agreement, including the Merger, on the one hand, and the Company's
organizational documents and any contracts and documents applicable to
the Company, or its assets, on the other hand, except for conflicts that
would not have a Material Adverse Effect;
- required consents and approvals by third parties other than Rainbow
shareholders and including any governmental entities with certain
exceptions for filings that are required by securities and antitrust laws
or would not have a Material Adverse Effect;
- the lack of any undisclosed liabilities of the Company, except for
liabilities (i) incurred in the ordinary course of business, (ii)
permitted under the Merger Agreement, or (iii) that, in the aggregate, do
not exceed $250,000;
- the accuracy of the information supplied by the Company in this proxy
statement and other documents required to be filed with the Securities
and Exchange Commission in connection with the Merger;
- compliance with laws (including states' rent-to-own laws) and the absence
of material litigation;
- labor, employment and matters related to the Employee Retirement Income
Security Act of 1974, as amended and other compliance and compensation
matters (including employee benefit plans);
- filing of tax returns and payment of taxes;
- intellectual property;
- problems with customers and suppliers, if any;
22
- brokers' and advisors' fees with respect to the Merger;
- the opinion of a financial advisor;
- the approval of the Merger Agreement and the transactions contemplated by
the Merger Agreement, including the Merger, by the Rainbow Board;
- the inapplicability of takeover statutes or regulations to the Merger;
- certain business practices;
- the Company's leased properties;
- the Company's properties and accounts;
- material licenses and permits;
- inventories, including December 31, 2003 inventory levels;
- the enforceability of, and compliance with, material contracts;
- insurance; and
- January 2004 revenues.
The Merger Agreement contains various representations and warranties made
by Acquiror and Merger Sub to the Company, including, but not limited to,
representations and warranties relating to:
- due incorporation, valid existence, good standing and requisite power of
Acquiror and Merger Sub;
- authorization, execution, delivery and enforceability of the Merger
Agreement;
- absence of any conflict between the Merger Agreement and Acquiror's or
Merger Sub's organizational documents, applicable laws or judgments, and
any other contracts and documents;
- Acquiror's financial capability to consummate the Merger; and
- the accuracy of the information supplied by Acquiror and Merger Sub in
this proxy statement and any other documents required to be filed with
the Securities and Exchange Commission in connection with the Merger.
The representations and warranties in the Merger Agreement will not survive
beyond the Effective Time.
CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE MERGER
From February 4, 2004 to the Effective Time, the Company is required to
comply with certain restrictions on its conduct and operations. These
restrictions are described below and apply to the period of time prior to the
closing of the Merger. In general, the Company will use its reasonable efforts
to conduct business in the ordinary course of business consistent with past
practices and in compliance with all Legal Requirements (as defined in the
Merger Agreement).
Except as otherwise permitted under the Merger Agreement or to the extent
that Acquiror consents in writing, which consent cannot be unreasonably
withheld, the Company agreed to use all reasonable efforts to:
- Preserve intact its business organization and relationships;
- Keep its current officers and key employees;
- Not make any provision for dividends, stock splits, recapitalizations,
issuances, purchases, redemptions, or create any lien on or regarding any
of its securities, except in accordance with the Merger Agreement;
- Not amend its articles of incorporation, code of regulations, or other
organizational documents or merge or consolidate with a third party;
23
- Not acquire, sell, lease or otherwise encumber any of its assets (other
than inventory in the ordinary course of business consistent with past
practice), any business or any person;
- Not take any action that would cause the representations and warranties
set forth in the Merger Agreement to no longer be true and correct;
- Not make any change in accounting methods or cash managements;
- Not (i) increase the compensation of any officers, directors or key
employees (except in the case of non-officer employees in the ordinary
course of business), (ii) adopt a new, grant an award under or amend any
existing benefit plan, (iii) enter into or modify any employment or
severance agreement with any officer, director or employee of the
Company, (iv) enter into a collective bargaining agreement, or (v) make
any loan or enter into a material transaction with any director,
executive officer, or key employee of the Company;
- Not materially modify, amend, or terminate any of the Company's material
contracts, including leases, provided that the Company can renew leases
for up to ten stores for up to six months each;
- Not incur or assume any indebtedness other than with respect to working
capital in amounts consistent with past practices or enter into any
material commitment or transaction other than the purchase of inventory
in the ordinary course of business;
- Not make a material tax election or settle or compromise any material
income tax liability;
- Not waive the benefits of, or materially modify, any confidentiality or
standstill agreement or make any payments that have not been reserved
against in the Company's most recent consolidated financial statements
(or the notes thereto) or which amounts to less than $50,000 individually
or $250,000 in the aggregate;
- Not make any payment or incur any liability (excluding amounts less than
$50,000 in the aggregate) for the purpose of obtaining a consent from a
third party to the transactions contemplated by the Merger Agreement;
- Keep in full force and effect the Company's current insurance coverage;
- Not introduce in the stores any new product lines, other than products
currently available in Acquiror's stores, or engage in any business other
than the rent-to-own business;
- Not modify, amend or terminate any of the existing vehicle leases, or
enter into any new vehicle lease other than a lease to replace any
existing store delivery vehicle;
- Not form any subsidiary or enter into a joint venture or partnership with
a third party; and
- Inform Acquiror of any event that could reasonably be expected to result
in a breach of any representation or warranty in the Merger Agreement.
In addition, the Company and Acquiror have agreed not to, nor shall they
permit any of their Affiliates to, take any action that would reasonably be
expected to result in the failure of any of the conditions to the Merger set
forth in the Merger Agreement.
PREPARATION OF PROXY STATEMENT
The Company and Acquiror have agreed that the information provided by each
of them for use in this proxy statement related to the Merger will be true and
correct in all material respects and will not omit any material fact required to
be stated therein or necessary in order to make this information not misleading
on the date this proxy statement is first mailed to Rainbow shareholders and on
the date of the Special Meeting. Each of the Company, Acquiror, and Merger Sub
has also agreed to correct any information provided by it for use in this proxy
statement that has become false or misleading.
24
NON-SOLICITATION
The Merger Agreement provides that the Company will not, and will not
authorize or permit any of its officers, directors or employees, investment
bankers, attorneys, accountants or other advisors or representatives, to
directly or indirectly:
- solicit, initiate or encourage the submission of, any Company Takeover
Proposal (as defined below), including by furnishing information; or
- participate in any discussions or negotiations regarding a Company
Takeover Proposal, except in certain circumstances specified in the
Merger Agreement.
For purposes of the Merger Agreement and this proxy statement, a "Company
Takeover Proposal" means any inquiry, proposal or offer from any person relating
to a:
- direct or indirect acquisition or purchase of a business that constitutes
25% or more of the net revenues, net income, or the assets of the
Company;
- direct or indirect acquisition or purchase of 25% or more of any class of
equity securities of the Company;
- tender offer or exchange offer that if consummated would result in any
person beneficially owning 25% or more of any class of equity securities
of the Company; or
- merger, consolidation, business combination, recapitalization,
liquidation, dissolution, or similar transaction involving the Company
whose business constitutes 50% or more of the net revenues, net income,
or assets of the Company other than the transactions contemplated by this
Agreement.
If the Rainbow Board, after consulting with its legal, financial and other
advisors, determines that its fiduciary duties so require, the Company may,
before the Special Meeting and in response to a Company Takeover Proposal that
was not solicited and did not result from a breach of the non-solicitation
provision of the Merger Agreement:
- furnish information with respect to the Company to the person making the
Company Takeover Proposal and its representatives pursuant to a
confidentiality agreement; and
- participate in discussions or negotiations with the person making a
Company Takeover Proposal and its representatives regarding such
Proposal.
Furthermore, the Merger Agreement provides that the Rainbow Board may not,
unless the Merger Agreement is terminated in accordance with its terms:
- withdraw, modify, or propose to adversely withdraw or modify, in any
manner adverse to Acquiror, its approval or recommendation of the Merger
Agreement and the transactions contemplated by the Merger Agreement,
including the Merger;
- enter into any agreement, commitment, understanding, or other arrangement
with respect to any Company Takeover Proposal; or
- approve or recommend, or publicly propose to approve or recommend, any
competing transaction.
In addition, in the event of an unsolicited bona fide Company Takeover
Proposal as described above, the Merger Agreement provides that the Company must
promptly notify Acquiror of any request for information or Company Takeover
Proposal and of the material terms of the request or Company Takeover Proposal.
The Company also agreed to keep Acquiror reasonably informed of the status and
details of any request for information or Company Takeover Proposal. Prior to
accepting a Company Takeover Proposal and terminating the Merger Agreement, the
Company must give Acquiror (i) at least four days' notice of the Company
Takeover Proposal and (ii) at least two days' notice of each amendment thereto.
25
CONFIDENTIALITY; PUBLIC ANNOUNCEMENT
Each of the Company and Acquiror will (i) hold in confidence, unless
compelled to disclose by judicial or administrative process or both other legal
requirements, certain non-public information regarding the other party,
including, but not limited to, the Company's confidential financial projections
("Confidential Information") furnished in connection with the transactions
contemplated by the Merger Agreement until the information becomes publicly
available (other than through the wrongful act of the person) and (ii) not
release or disclose such information to any other person, except in connection
with the Merger Agreement to its auditors, attorneys, financial advisors, other
consultants and advisors. Acquiror and the Company will consult with each other
before issuing, and provide each other the opportunity to review, comment upon,
and concur with, any press release or other public statements with respect to
the transactions contemplated by the Merger Agreement, including the Merger, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as required by applicable law, court process, or by
obligations pursuant to any listing agreement with any national securities
exchange.
ACCESS TO INFORMATION
The Company has agreed to give Acquiror and its authorized representatives
reasonable access to the offices and other facilities, and to all books and
records, of the Company. This access is subject to the terms of a
confidentiality provisions contained in the Merger Agreement and may only occur
during normal business hours.
AGREEMENT TO USE REASONABLE COMMERCIAL EFFORTS
Subject to the terms and conditions of the Merger Agreement (including the
limitations provided in the Merger Agreement regarding the fiduciary duties of
the Rainbow Board), the Company, Acquiror, and Merger Sub have agreed to use
their respective reasonable commercial efforts to take, or cause to be taken,
all actions, and to do, or cause to be done as promptly as practicable, all
things necessary, proper and advisable under applicable laws and regulations to
consummate and make effective as promptly as practicable the transactions
contemplated by the Merger Agreement and to cause the conditions to the closing
to be satisfied. Acquiror and the Company have further agreed that in the event
government entities require store divestitures as a condition to securing
approval under the HSR Act, it will negotiate and consummate such divestitures;
provided, however, Acquiror has the right to terminate the Merger Agreement in
the event such government entities require the divestiture of sixteen (16) or
more stores of the Company, Acquiror or its subsidiaries.
NOTIFICATION OF CERTAIN MATTERS
The Company, on the one hand, and Acquiror and Merger Sub, on the other
hand, have agreed to promptly notify in writing the other party of the
occurrence or non-occurrence of any fact or event that would be likely to cause
(i) any representation or warranty contained in the Merger Agreement to be
untrue or inaccurate in any respect or (ii) a Material Adverse Effect. It should
be noted, however, that notification will not affect the representations or
warranties of, or the remedies available to, any party to the Merger Agreement.
INDEMNIFICATION AND INSURANCE
Acquiror will, and will cause the Surviving Corporation to, indemnify and
hold harmless the current or former employees, directors, or officers of the
Company for all acts or omissions by them in their official capacities or taken
at the request of the Company that occur before the Effective Time. This
indemnity may be limited by Ohio law. Any indemnification arrangements or
agreements of the Company will survive the Merger and continue in full force and
effect without amendment or modification except as required by law.
Furthermore, for a period of six years following the Effective Time the
Surviving Corporation will maintain in effect the Company's current directors'
and officers' liability insurance policy or enter into a policy providing at
least comparable coverage. This coverage must apply to persons who are currently
covered by such Company's policy. However, the Surviving Corporation is not
required to expend in any one year an amount in excess of 150% of the current
premium for this insurance. If the coverage can only be obtained at an annual
premium that exceeds this amount, the Surviving Corporation will be obligated to
obtain as much insurance as can be obtained
26
for an annual premium not exceeding this amount. This obligation will pass to
any successor of the Surviving Corporation. In lieu of providing the annual
insurance policy for the six-year period, Acquiror can purchase a "tail" policy
providing such coverage and being effective for the full six-year period
provided that the premium shall not be required to be more than six times 150%
of the current premium for such coverage.
CLOSING DELIVERIES
At the closing of the Merger, the Company has agreed to deliver the
following documents:
- a certificate executed on behalf of the Company by its Chief Executive
Officer and Chief Financial Officer to the effect that (i) the
representations and warranties of the Company contained in the Merger
Agreement are true and correct in all material respects when made and as
of the time of the closing date, as if again made by the Company at that
time (except for representations and warranties expressly made as of an
earlier date, in which case as of that earlier date), (ii) the Company
has performed and complied in all material respects with all of its
covenants under the Merger Agreement to be performed by it on or prior to
the closing date; (iii) there has not been a Material Adverse Change
since February 4, 2004; (iv) the Company's monthly recurring revenue for
the calendar month immediately preceding the closing date was not less
than $7,600,000; and (v) the net book value of the Company's inventory on
the last day of the month preceding the closing date is not less than
$36,000,000;
- executed Noncompetition Agreements from Messrs. Russell, Viveiros and
Pecchia;
- resignations of the current directors and officers of the Company
effective at the Effective Time; and
- an opinion of counsel for the Company on customary matters.
CLOSING CONDITIONS
The closing of the Merger is conditioned upon the satisfaction or waiver by
Acquiror and the Company, on or before the date of the closing of the Merger, of
the following requirements:
- shareholders of the Company shall have adopted the Merger Agreement;
- all consents, approvals and actions of, filings with and notices to any
governmental entity that is required to consummate the Merger and the
other transactions contemplated by the Merger Agreement shall have been
obtained;
- no Restraint affecting the consummation of the Merger or seeking to
prohibit the transactions contemplated under the Merger Agreement shall
be in effect; provided, however, that each of the parties shall have used
its commercially reasonable efforts to prevent the entry of any such
Restraint and to appeal as promptly as possible any Restraints that may
be entered; and
- all waiting periods (including any extension thereof), filings, or
approvals applicable under the HSR Act, shall have expired, been
terminated, been made or been obtained.
The obligations of Acquiror to consummate the Merger under the Merger
Agreement are subject to the satisfaction, at or before the closing of the
Merger, of the following conditions, any one or more of which may be waived by
Acquiror:
(1) The representations and warranties made by the Company in the Merger
Agreement must be true and correct in all material respects when the
Merger closes as if again made by the Company on the closing date
(except for representations and warranties that refer to a specific
date, in which case the representations and warranties must be
accurate and correct in all material respects as of that date);
(2) The Company must have performed, in all material respects, all of its
obligations required to be performed on or before the Effective Time;
(3) There shall not have been any Material Adverse Change since February
4, 2004;
27
(4) The Company's Monthly Recurring Revenue (defined to include all
revenue from Rental Purchase Agreements and reinstatement and home
pick-up fees) for the calendar month preceding the Effective Time is
not less than $7.6 million;
(5) The net book value of Company inventory on the last day of the
calendar month preceding the Effective Time is not less than $36
million;
(6) The ten-day statutory notice period for dissenters' demands with
respect to the Merger shall have expired and not more than 15% of the
holders of Rainbow shares outstanding at the close of business on the
Record Date have perfected their dissenters' rights;
(7) The Voting Agreement shall remain in full force and effect and the
Major Shareholders shall have performed their obligations thereunder;
(8) The total number of Rainbow shares outstanding and subject to issuance
upon exercise of stock options shall not exceed 6,525,735;
(9) The Company shall have obtained all required consents and approvals;
and
(10) Delivery of the closing documents by the Company as described under
"-- Closing Deliveries."
The obligations of the Company to consummate the Merger under the Merger
Agreement are subject to the satisfaction, at or before the closing of the
Merger, of the following conditions, any one or more of which may be waived by
the Company:
(1) The representations and warranties made by Acquiror in the Merger
Agreement must be true and correct in all material respects when the
Merger closes, as if again made on the closing date (except for
representations and warranties that refer to a specific date, in which
case the representations and warranties must be accurate and correct in
all material respects as of that date); and
(2) Acquiror must have otherwise performed in all material respects, all of
their obligations under the Merger Agreement to be performed or
complied with on or before the closing date, including the deposit with
the Escrow Agent of an amount of funds equal to the aggregate sum due
to Rainbow shareholders for their shares and due the option holders for
their options.
TERMINATION; TERMINATION FEE
The Merger Agreement may be terminated at any time before the closing of
the Merger, whether before or after Rainbow shareholders have adopted it:
(1) By the mutual written consent of Acquiror and the Company;
(2) by Acquiror, if (i) the Company has materially breached any
representation, warranty or covenant contained in the Merger Agreement
and the breach has not or cannot be timely cured, or (ii) the Major
Shareholders fail to perform their obligations under the Voting
Agreement;
(3) by the Company, if Acquiror has materially breached any representation,
warranty or covenant contained in the Merger Agreement and the breach
has not or cannot be timely cured;
(4) by either the Company or Acquiror if (i) the Merger is not consummated
by June 30, 2004 (August 2, 2004, if all conditions, other than
approvals under the HSR Act, capable of being fulfilled, have been met
by June 30, 2004), (ii) Rainbow shareholders do not adopt the Merger
Agreement at the Special Meeting or any postponement or adjournment of
the Special Meeting, or (iii) any Restraint is in effect and is final
and non-appealable;
(5) by the Company upon entering into a binding agreement with any party
with respect to a Company Takeover Proposal, provided that the Company
complies with the applicable provisions of the Merger Agreement,
including notice to Acquiror and the payment to Acquiror of a
termination fee of $3,750,000 plus reimbursement of up to $500,000 of
all reasonable out-of-pocket fees and expenses incurred by Acquiror in
connection with the Merger;
28
(6) by Acquiror, if the Rainbow Board (i) withdraws its approval of the
Merger Agreement or its recommendation to shareholders to vote in favor
of the Merger Agreement, or (ii) enters into an agreement with respect
to a Company Takeover Proposal with a third party;
(7) by Acquiror, if there has been a Material Adverse Change; and
(8) by Acquiror, in the event certain government entities require the
divestiture of sixteen (16) or more stores of the Company, Acquiror and
its subsidiaries as a requirement to obtain approval under the HSR Act.
Acquiror will be entitled to receive a termination fee in an amount equal
to $3,750,000 plus reimbursement of up to $500,000 of reasonable out-of-pocket
fees and expenses incurred by Acquiror if the Merger Agreement is terminated for
any of the reasons stated in items (2)(ii), 4(ii), (5) or (6) above. Acquiror
will be entitled only to its reasonable out-of-pocket fees and expenses up to
$500,000 if it terminates the Merger Agreement for the reason stated in item
(2)(i) above.
SOURCE AND AMOUNT OF FUNDS
Based on the number of outstanding shares on the Record Date, as well as
anticipated payments to holders of options to purchase Rainbow shares, the
anticipated severance and stay bonus payments, and the estimated level of
Rainbow revolving credit facility to be retired at the Effective Time, Acquiror
will require approximately $106 million in cash to pay Rainbow shareholders,
option holders, certain employees and institutional lenders. Acquiror intends to
fund this payment primarily with cash on hand, as well as availability under its
senior credit facility.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 12, 2004, or
as of the date specified, with respect to the beneficial ownership of the
Rainbow shares. Unless otherwise indicated below, the persons named below have
the sole voting and investment power with respect to the number of Rainbow
shares set forth opposite their names. All information with respect to
beneficial ownership has been furnished by the respective Director, Officer or
5% or greater shareholder, as the case may be.
<Table>
<Caption>
ACTUAL OWNED VESTED OPTION OWNERSHIP
NAME OF BENEFICIAL OWNER(1) SHARES SHARES TOTAL SHARES PERCENTAGE
- --------------------------- ------------ ------------- ------------ ----------
Wayland J. Russell........................... 2,536,675(2) -- 2,536,675 42.7%
Michael J. Viveiros.......................... 255,620(3) -- 255,620 4.3%
S. Robert Harris............................. -- 3,334 3,334 *
Michael A. Pecchia........................... -- 60,000 60,000 1.0%
Ivan J. Winfield............................. 2,000 10,000 12,000 *
Brian L. Burton.............................. 5,000 10,000 15,000 *
Robert A. Glick.............................. 1,000 6,667 7,667 *
Wasatch Advisors, Inc.
150 Social Hall Avenue
Salt Lake City, UT 84111................... 951,301(4) -- 951,301 16.0%
Lawrence S. Hendricks
550 Boardman-Poland Road
Boardman, Ohio 44512....................... 548,240 -- 548,240 9.2%
Aaron Rents, Inc.
309 E. Paces Ferry Road
Atlanta, GA 30305-2377..................... 474,500(5) -- 474,500 8.0%
All Directors and Executive Officers of the
Company (7 Persons)........................ 2,800,295 90,001 2,890,296 47.9%
</Table>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of all persons listed above is c/o
Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio 44406.
(2) Includes 176,245 shares held by a charitable foundation.
(3) Includes 100,000 shares held by a charitable remainder trust.
(4) As of December 31, 2003, based on a Schedule 13G filed with the SEC on
February 18, 2004. Wassatch Advisors has advised Rainbow that Mr. J.B.
Taylor is the portfolio manager with both dispositive and voting power over
the Rainbow shares.
(5) Based on a Schedule 13D, as amended, filed with the SEC on January 22, 2003.
30
PRICE RANGE OF SHARES; DIVIDENDS
As of April 12, 2004, there were approximately 90 shareholders of record
and approximately 300 beneficial owners of Rainbow shares. The following table
sets forth the closing high and low prices for Rainbow shares for the periods
indicated and is derived from data prepared by the Nasdaq National Market.
<Table>
<Caption>
YEAR ENDING YEAR ENDING
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter......................................... $8.25 $6.25 $6.04 $4.05
Second Quarter........................................ 10.24 6.56 6.13 4.93
Third Quarter......................................... 7.24 4.35 6.85 5.40
Fourth Quarter........................................ 7.47 4.26 8.31 6.05
</Table>
On February 3, 2004, the last full trading day prior to the announcement of
the Merger, the last sale price per Rainbow share reported by Nasdaq National
Market was $8.16. Rainbow shareholders should obtain current market quotations
for Rainbow shares before making any decision regarding the Merger or the other
matters described in this proxy statement.
The Company has never paid dividends on its shares.
SUBMISSION OF SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the proxy statement for the 2004
annual meeting were to have been received by the Company on or prior to December
11, 2003. However, as a result of the execution of the Merger Agreement and the
scheduled Special Meeting, the Company has delayed indefinitely, the annual
meeting. To be eligible for inclusion in the proxy statement and form of proxy
for Rainbow's next annual meeting, if any, a shareholder proposal must be
received no later than 10 days following the public announcement of the meeting
date. Proposals should be submitted by certified mail, return receipt requested,
addressed to Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio
44406. Attention: Corporate Secretary.
ADDITIONAL INFORMATION
The SEC allows the Company to incorporate by reference information into
this proxy statement, which means that the Company can disclose important
information to shareholders by referring shareholders to another document filed
separately with the SEC. This proxy statement incorporates by reference the
documents listed below that the Company has previously filed with the SEC. These
documents contain important information about the Company and its respective
business, financial condition and results of operations.
Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2003
is enclosed with this proxy statement as ANNEX D. Any statement contained in a
document incorporated by reference in this proxy statement shall be deemed to be
modified or superseded for all purposes to the extent that a statement contained
in this proxy statement modifies or replaces the statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of this proxy statement.
We undertake to provide by first class mail, without charge and within one
business day of receipt of any written or oral request, to any person to whom a
copy of this proxy statement has been delivered, a copy of the document referred
to above which has been incorporated by reference in this proxy statement, other
than exhibits to the documents, unless the exhibits are specifically
incorporated by reference therein. Requests for copies should be directed to
Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio 44406, Attention:
Investor Relations Department. The Company will mail requested documents to
shareholders by first class mail, or another equally prompt means, within one
business day after receiving a request.
31
We are subject to the informational filing requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, are required to
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission related to our business, financial condition
and other maters. Information as of particular dates concerning our directors
and officers, their remuneration, stock options granted to them, the principal
holders of our securities and any material interest of such persons in
transactions with us is required to be disclosed in proxy statements distributed
to our shareholders and filed with the Securities and Exchange Commission. Such
reports, proxy statements and other information should be available for
inspection at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Please all the Commission at 1-800-SEC-0330 for further information on
the public reference rooms. Copies of such materials may also be obtained by
mail, upon payment of the Securities and Exchange Commission's customary fees,
by writing to its principal office at 450 Fifth Street, NW, Washington, DC
20549. These materials filed by us with the Securities and Exchange Commission
are also available at the website of the Securities and Exchange Commission at
www.sec.gov.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT IN DETERMINING HOW TO VOTE. THE COMPANY HAS NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION CONTAINED IN, ATTACHED TO, OR INCORPORATED BY REFERENCE INTO, THIS
DOCUMENT. THIS DOCUMENT IS DATED APRIL 14, 2004. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS DOCUMENT IS ACCURATE AS OF ANY DATE OTHER THAN
THAT DATE, AND THE MAILING OF THIS DOCUMENT SHALL NOT CREATE ANY IMPLICATION TO
THE CONTRARY.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made certain forward-looking statements in this proxy statement
(and in the document that is incorporated by reference) that are subject to
risks and uncertainties. Forward-looking statements are not guarantees of
performance. You are cautioned not to place undue reliance on our
forward-looking statements. Forward-looking statements include the information
concerning possible or assumed results of operations. Also, when we use words
such as "believe," "expect," "anticipate," "plan" or "intend" or similar
expressions, we are making forward-looking statements. You should note that many
factors could affect our future financial results and could cause these results
to differ materially from those expressed in our forward-looking statements.
These factors include the following: (i) the failure of Rainbow shareholders to
adopt the Merger Agreement and other reasons that could cause the Merger
Agreement to terminate in accordance with its terms (including denial of
required regulatory approval); (ii) competition from other rent-to-own
companies; and (iii) seasonality or an economic downturn that could limit
consumer spending.
Further, the Company operates in an industry sector where securities values
may be volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided in
this proxy statement and in other reports, please refer to the discussions
detailed in the Management's Discussion and Analysis of Financial Conditions and
Results of Operations included in the Company's annual report on Form 10-K for
the period ended December 31, 2003.
32
OTHER MATTERS
AS OF THE DATE OF THIS PROXY STATEMENT, THE RAINBOW BOARD IS NOT AWARE OF
ANY MATTERS TO BE PRESENTED AT THE SPECIAL MEETING OTHER THAN ADOPTION OF THE
MERGER AGREEMENT. IF OTHER MATTERS SHOULD PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF AND BE VOTED UPON, THE
ENCLOSED PROXIES WILL BE DEEMED TO CONFER DISCRETIONARY AUTHORITY ON THE
INDIVIDUALS NAMED AS PROXIES THEREIN TO VOTE THE SHARES REPRESENTED BY THE
PROXIES AS TO ANY MATTERS.
By Order of the Board of Directors,
RAINBOW RENTALS, INC.
Michael A. Pecchia, Secretary
April 14, 2004
THE RAINBOW BOARD HOPES THAT SHAREHOLDERS WILL ATTEND THE SPECIAL MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A PROMPT RESPONSE WILL
FACILITATE ARRANGEMENTS FOR THE SPECIAL MEETING. YOUR PARTICIPATION IS
APPRECIATED.
33
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 4, 2004
BY AND BETWEEN
RENT-A-CENTER, INC.,
EAGLE ACQUISITION SUB, INC.
AND
RAINBOW RENTALS, INC.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
ARTICLE 1 THE MERGER..................................................... A-2
1.1 The Merger.................................................. A-2
1.2 Closing..................................................... A-2
1.3 Effective Time.............................................. A-2
1.4 Effects of the Merger....................................... A-2
1.5 Articles of Incorporation and Code of Regulations........... A-2
1.6 Directors and Officers of the Surviving Corporation......... A-2
ARTICLE 2 CANCELLATION AND CONVERSION OF SHARES; CONSIDERATION........... A-2
2.1 Effect on Capital Stock..................................... A-2
2.2 Company Stock Plans......................................... A-3
2.3 Exchange of Certificates;................................... A-3
2.4 Dissenters' Rights.......................................... A-5
2.5 Certain Adjustments......................................... A-5
2.6 Further Assurances.......................................... A-5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES................................. A-6
3.1 Representations and Warranties of the Company............... A-6
3.2 Representations and Warranties of Acquiror and Merger Sub... A-16
ARTICLE 4 PRE-CLOSING COVENANTS.......................................... A-17
4.1 Conduct of Business......................................... A-17
4.2 Other Actions............................................... A-19
4.3 Advice of Changes........................................... A-19
4.4 [Intentionally left blank].................................. A-19
4.5 No Solicitation By The Company.............................. A-20
ARTICLE 5 ADDITIONAL AGREEMENTS.......................................... A-20
5.1 Preparation of the Proxy Statement; Shareholders Meeting.... A-20
5.2 Access To Information; Confidentiality...................... A-21
5.3 Commercially Reasonable Efforts; Cooperation................ A-22
5.4 Director, Officer and Employee Indemnification.............. A-22
5.5 Public Announcements........................................ A-24
5.6 Employees................................................... A-24
5.7 Delisting................................................... A-24
5.8 Noncompete Agreements....................................... A-24
5.9 Amendment to Headquarters Lease............................. A-25
5.10 Litigation.................................................. A-25
ARTICLE 6 CONDITIONS PRECEDENT........................................... A-25
6.1 Conditions to Each Party's Obligation to Effect the A-25
Merger......................................................
6.2 Conditions to Obligations of Acquiror....................... A-25
6.3 Conditions to Obligations of the Company.................... A-26
6.4 Frustration of Closing Conditions........................... A-26
6.5 Postponement of Closing..................................... A-26
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER.............................. A-27
7.1 Termination................................................. A-27
7.2 Effect of Termination....................................... A-28
7.3 Fees and Expenses........................................... A-28
</Table>
ii
<Table>
<Caption>
PAGE
----
ARTICLE 8 GENERAL PROVISIONS............................................. A-28
8.1 Survival of Representations and Warranties.................. A-28
8.2 Notices..................................................... A-28
8.3 Counterparts................................................ A-29
8.4 Entire Agreement; No Third-Party Beneficiaries.............. A-29
8.5 Governing Law............................................... A-29
8.6 Assignment.................................................. A-29
8.7 Consent to Jurisdiction..................................... A-29
8.8 Headings.................................................... A-29
8.9 Severability................................................ A-29
8.10 Amendment................................................... A-30
8.11 No Consequential Damages.................................... A-30
8.12 Failure or Indulgence Not Waiver; Remedies Cumulative....... A-30
8.13 Extension; Waiver........................................... A-30
8.14 Specific Performance........................................ A-30
EXHIBITS.................................................................
EXHIBIT A Voting Agreement..............................................
EXHIBIT C Kahn Kleinman, L.P.A. Legal Opinion...........................
</Table>
iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February 4,
2004, among RAINBOW RENTALS, INC., an Ohio corporation (the "Company"),
RENT-A-CENTER, INC., a Delaware corporation ("Acquiror"), and EAGLE ACQUISITION
SUB, INC., an Ohio corporation, and an indirect wholly owned subsidiary of
Acquiror ("Merger Sub").
RECITALS
A. The respective Boards of Directors of the Company, Acquiror and Merger
Sub have approved the merger of Merger Sub with and into the Company (the
"Merger"), upon the terms and subject to the conditions set forth in this
Agreement, whereby each issued and outstanding common share, without par value,
of the Company ("Company Common Stock"), other than (i) Dissenting Shares, (ii)
any Company Common Stock held in the treasury of the Company, or (iii) owned by
Acquiror or an Affiliate of Acquiror will be converted into the right to receive
the Merger Consideration;
B. The respective Boards of Directors of the Company, Acquiror and Merger
Sub have each determined that the Merger and the other transactions contemplated
hereby are consistent with, and in furtherance of, their respective business
strategies and goals;
C. The Company, Acquiror and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
D. The Board of Directors of the Company has resolved to recommend the
Merger to the holders of the Company Common Stock, has determined that the
consideration to be paid for each share of Company Common Stock in the Merger is
fair to the holders of such Company Common Stock, and has resolved to recommend
that the holders of such Company Common Stock accept the Merger Consideration
and approve this Agreement and each of the transactions contemplated hereby upon
the terms and subject to the conditions set forth herein; and
E. Concurrently with the execution and delivery of this Agreement, as a
condition and inducement to Acquiror's and Merger Sub's willingness to enter
into this Agreement, certain shareholders of the Company (the "Major
Shareholders") have entered into a Voting Agreement, dated as of the date of
this Agreement, in the form attached hereto as Exhibit A (the "Voting
Agreement") pursuant to which each such Major Shareholder has, among other
things, agreed to vote the Company Common Stock held by such Major Shareholder,
the number of which shares is set forth on the signature page of the Voting
Agreement, for the Merger.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows. Capitalized terms used herein shall have
the meanings referred to or set forth in Appendix A hereto.
A-1
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Ohio Statutes, Merger Sub shall be
merged with and into the Company at the Effective Time and the separate
corporate existence of Merger Sub shall thereupon cease. Following the Effective
Time, the Company shall be the surviving corporation (the "Surviving
Corporation").
1.2 Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. on a date to be specified by the parties, which shall be no later
than the second Business Day after satisfaction or waiver (subject to applicable
law) of the conditions (excluding conditions that, by their terms, cannot be
satisfied until the Closing) set forth in ARTICLE 6, unless another time or date
is agreed to by the parties hereto (the "Closing Date"). The Closing will be
held at the offices of Kahn Kleinman, a legal professional association, 2600
Erieview Tower, 1301 East Ninth Street, Cleveland, Ohio 44114, or such other
location as the parties hereto shall agree to in writing.
1.3 Effective Time. Subject to the provisions of this Agreement, as soon
as practicable after the satisfaction or, if permissible, the waiver of the
conditions set forth in ARTICLE 6, the parties shall file a Certificate of
Merger (the "Certificate of Merger") in such form as is required by and executed
in accordance with the relevant provisions of the Ohio Statutes. The Merger
shall become effective at such time as the Certificate of Merger is duly filed
with the Secretary of State of the State of Ohio, or at such later date or time
as the Company and Acquiror shall agree and specify in the Certificate of Merger
(the date and time the Merger becomes effective being the "Effective Time").
1.4 Effects of the Merger. The Merger shall have the effects set forth in
the Ohio Statutes. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of the Company and Merger Sub shall be vested in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.5 Articles of Incorporation and Code of Regulations. Subject to SECTION
5.4, the articles of incorporation and code of regulations of Merger Sub shall
be the articles of incorporation and code of regulations, respectively, of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law; provided, however, that the name of the Surviving Corporation
shall be "Rainbow Rentals, Inc."
1.6 Directors and Officers of the Surviving Corporation. The directors of
Merger Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation each to hold office in accordance with the articles of
incorporation and code of regulations of the Surviving Corporation, and the
officers of the Merger Sub immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, in each case, until the earlier of their
death, resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
ARTICLE 2
CANCELLATION AND CONVERSION OF SHARES; CONSIDERATION
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of capital
stock of the Company or Merger Sub:
(a) Cancellation of Treasury Stock and Acquiror-Owned Stock. Each
share of Company Common Stock that is (i) owned by Acquiror or an Affiliate
of Acquiror or (ii) held in the treasury of the Company shall automatically
be canceled and retired and shall cease to exist, and no consideration
shall be delivered in exchange therefor.
(b) Conversion of Company Common Stock. Subject to SECTION 2.4
(Dissenters' Rights), each issued and outstanding share of Company Common
Stock shall be converted into the right to receive $16.00 in cash (the
"Merger Consideration").
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(c) Capital Stock of Merger Sub. Each share of common stock, no par
value, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into one share of common stock of the
Surviving Corporation.
(d) Cancellation and Retirement of Company Common Stock. All shares of
Company Common Stock (other than shares to be canceled in accordance with
SECTION 2.1(a) and Dissenting Shares) shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of Company Common
Stock shall cease to have any rights with respect thereto, except the right
to receive the Merger Consideration, without interest, upon surrender of
such certificate in accordance with SECTION 2.3.
2.2 Company Stock Plans. As of the Effective Time, each outstanding
Company Stock Option, vested or unvested, exercisable or non-exercisable, shall
be extinguished and converted into the right to receive a cash amount equal to
the product of (x) the excess, if any, of the Merger Consideration, minus the
exercise price, if any, of each such Company Stock Option (with respect to each
Company Stock Option, the "Option Shares Merger Consideration"), multiplied by
(y) the aggregate number of shares of the Company Common Stock issuable upon the
exercise in full of such Company Stock Option at the Effective Time. No cash
payment will be due in respect of such Company Stock Option or its termination
if the exercise price of such Company Stock Option is equal to or exceeds the
Merger Consideration. The Company shall take all actions necessary to ensure
that the Company's Stock Plans shall terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company
shall be terminated as of the Effective Time. In addition, the Company shall
take all action necessary to ensure that following the Effective Time no
participant in the Company Stock Plans or other plans, programs or arrangements
(each, an "Eligible Option Holder") shall have any right thereunder to acquire
or participate in changes in value of equity securities of the Company, the
Surviving Corporation, Merger Sub or any of their respective subsidiaries and to
terminate all such plans effective as of the Effective Time.
2.3 Exchange of Certificates; (a) Exchange Agent. The Parties agree that
Mellon Investor Services, LLC, or such other bank or trust company which the
Parties may designate, shall act as agent (the "Exchange Agent") of Acquiror for
purposes of, among other things, mailing and receiving transmittal letters and
distributing to the Company shareholders or holders of Company Stock Options the
proceeds payable to such holders under SECTION 2.1(b) (Conversion of Company
Common Stock) or SECTION 2.2 (Company Stock Plans) above. Immediately prior to
the Effective Time, Acquiror or Merger Sub shall deposit, or shall cause to be
deposited, with or for the account of the Exchange Agent, for the benefit of the
holders of Certificates (as defined herein) and the Eligible Option Holders cash
in an aggregate amount (the "Exchange Fund") equal to the sum of (x) the product
of (A) the Merger Consideration multiplied by (B) the number of shares of
Company Common Stock issued and outstanding at the Effective Time plus (y) the
aggregate Option Shares Merger Consideration for all Eligible Option Holders as
of the Effective Time (the "Aggregate Merger Consideration").
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Acquiror shall direct the Exchange Agent to mail or deliver to
each holder of record of a stock certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock (the "Certificates") whose shares were converted into the right to receive
the Merger Consideration pursuant to SECTION 2.1(b), or (ii) each Eligible
Option Holder entitled to receive his or her Option Shares Merger Consideration
pursuant to SECTION 2.2, as applicable, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as the Company
and Acquiror may reasonably specify) and (ii) instructions for use in
surrendering the Certificates or evidence of Company Stock Options in exchange
for the Merger Consideration or Option Shares Merger Consideration, as
applicable. Upon surrender of a Certificate for cancellation or evidence of
Company Stock Options to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by Acquiror, the Surviving Corporation or the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor a
check or wire transfer of immediately available funds representing the amount of
cash such holder has the right to receive pursuant to the provisions of this
ARTICLE 2, and the Certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of Company Common Stock
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which is not registered in the transfer records of the Company, a new
Certificate representing the proper number of shares of Company Common Stock may
be issued to a Person other than the Person in whose name the Certificate so
surrendered is registered if such Certificate is properly endorsed or otherwise
in proper form for transfer and the Person requesting such issuance pays any
transfer or other taxes required by reason of the payment of the Merger
Consideration to a Person other than the registered holder of such Certificate
or establishes to the satisfaction of Acquiror that such tax has been paid or is
not applicable. Until surrendered as contemplated by this SECTION 2.3, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration, that the
holder thereof has the right to receive in respect of such Certificate pursuant
to the provisions of this ARTICLE 2. No interest shall be paid or will accrue on
any cash payable to holders of Certificates pursuant to the provisions of this
ARTICLE 2.
(c) No Further Ownership Rights in Company Common Stock. The Merger
Consideration or Option Shares Merger Consideration, as applicable, shall be
deemed to have been paid in full satisfaction of all rights pertaining to the
shares of Company Common Stock, theretofore represented by such Certificates or
evidence of Company Stock Options, as applicable, subject, however, to
Acquiror's obligation to pay the Aggregate Merger Consideration, and there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates or evidence of Company Stock Options, as applicable, are
presented to the Surviving Corporation or the Exchange Agent for any reason,
they shall be canceled and exchanged as provided in this ARTICLE 2, except as
otherwise provided in SECTION 2.3(d) or by law.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed (including interest thereon) to the holders of the
Certificates or Eligible Option Holders for six months after the Effective Time
shall to the extent permitted by law, become the property of the Surviving
Corporation. Any holders of the Certificates or Eligible Option Holders, as
applicable, who have not theretofore surrendered their respective Certificates
or evidence of Company Stock Options and otherwise complied with this ARTICLE 2
shall thereafter look only to the Surviving Corporation, and only as a general
creditor, for payment of their claim for Merger Consideration or Option Shares
Merger Consideration, as applicable, and without interest. If any Certificates
or evidence of Company Stock Options shall not have been surrendered prior to
five years after the Effective Time (or immediately prior to such earlier date
on which any payment in respect thereof would otherwise escheat to or become the
property of any Governmental Entity), the payment in respect of such shall, to
the extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
(e) No Liability. None of the Parties shall be liable to any Person in
respect of any Merger Consideration from the Exchange Fund, delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(f) Investment of Exchange Fund. The Exchange Agent shall invest the
Exchange Fund, as directed by the Surviving Corporation, in (i) direct
obligations of the United States of America, (ii) obligations for which the full
faith and credit of the United States of America is pledged to provide for the
payment of principal and interest, (iii) commercial paper rated the highest
quality by either Moody's Investors Services, Inc. or Standard & Poor's
Corporation, or (iv) certificates of deposit, bank repurchase agreements or
bankers acceptances, of commercial banks with capital exceeding $1 billion, and
any net earnings with respect thereto shall be paid to the Surviving Corporation
as and when requested by the Surviving Corporation; provided, that any such
investment or any such payment of earnings shall not delay the receipt by
holders of Certificates or evidence of Company Stock Options of the Merger
Consideration or Option Shares Merger Consideration, as the case may be, or
otherwise impair such holders' respective rights hereunder.
(g) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon (i) the delivery of a Letter of Transmittal stating as such,
(ii) the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed, (iii) evidence that such Person is
the beneficial owner of the Certificate claimed to be lost, stolen or destroyed,
and, (iv) if required by the Surviving Corporation, the posting by such Person
of a bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any
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claim that may be made against it with respect to such Certificate, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Certificate the
Merger Consideration.
(h) Withholding Rights. The Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of Company Common Stock or Eligible Option Holder such amounts as the
Exchange Agent, Surviving Corporation, or Acquiror is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law, including, without limitation,
withholdings required in connection with payments with respect to Company Stock
Options held by employees of the Company. To the extent that amounts are so
withheld by the Exchange Agent, Surviving Corporation, or Acquiror, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder in respect of which such deduction and withholding was
made.
2.4 Dissenters' Rights.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Common Stock outstanding immediately prior to the
Effective Time and held by persons who shall have properly demanded payment
of the fair cash value of such shares of Company Common Stock in accordance
with Section 1701.85 of the Ohio Statutes (collectively, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration as provided in SECTION 2.1(b). Such persons shall be
entitled only to such rights as are granted under Section 1701.85 of the
Ohio Statutes, except that all Dissenting Shares held by persons who fail
to perfect or who effectively withdraw or lose their rights as dissenting
shareholders in respect of such shares under 1701.85 of the Ohio Statutes
shall thereupon be deemed to have been converted into, as of the Effective
Time, the right to receive the applicable portion of the Merger
Consideration, without interest thereon, upon surrender of the Certificate
therefor in the manner provided in SECTION 2.3.
(b) The Company or the Surviving Corporation shall give Acquiror (i)
prompt written notice of any demands by dissenting shareholders received by
the Company or the Surviving Corporation, withdrawals of such demands and
any other instruments served on the Company or the Surviving Corporation
and any material correspondence received by the Surviving Corporation or
the Company in connection with such demands and (ii) after the Effective
Date, the right to direct in all negotiations and proceedings with respect
to such demands and prior to the Effective Date to participate in such
negotiations and proceedings. Neither the Company nor the Surviving
Corporation shall, except with the prior written consent of Acquiror, make
any payment with respect to any demands for appraisal or offer to settle or
settle any such demands. Any funds paid to dissenting shareholders shall be
paid out of the Exchange Fund to the extent such payment is equal to or
less than the Merger Consideration and, if greater, the excess shall be
paid out of the assets of the Surviving Corporation.
2.5 Certain Adjustments. If after the date hereof and on or prior to the
Effective Time, the outstanding shares of Company Common Stock shall be changed
into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, or any similar event shall occur, the Merger
Consideration shall be adjusted accordingly to provide to the holders of Company
Common Stock the same economic effect as contemplated by this Agreement prior to
such reclassification, recapitalization, split-up, combination, exchange or
dividend or similar event.
2.6 Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized, (i) to execute and
deliver, in the name and on behalf of the Company or Merger Sub, any deeds,
bills of sale, assignments or assurances and (ii) to take and do, in the name
and on behalf of the Company or Merger Sub, any other actions and things to
vest, perfect or confirm of record in the Surviving Corporation any and all
right, title and interest in, to and under any of the rights, properties or
assets acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company has set
forth information in the Company Disclosure Schedule delivered by the Company to
Acquiror simultaneously with the execution of this Agreement (the "Company
Disclosure Schedule") in a section that corresponds to the section of this
Agreement to which it relates. Such information shall be deemed disclosed with
respect to any other section of this ARTICLE 3 to which the matter relates, so
long as the applicability of such matter would be clearly evident on the face of
such disclosure. The Company hereby represents and warrants to Acquiror and
Merger Sub as follows:
(a) Organization, Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Ohio and has the requisite corporate power and
authority to carry on its business as now being conducted. The Company is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership, leasing
or operation of its properties makes such qualification or licensing
necessary, except for those jurisdictions where the failure to be so
qualified or licensed or to be in good standing individually or in the
aggregate would not have a Material Adverse Effect. SECTION 3.1(a) of the
Company Disclosure Schedules sets forth each jurisdiction in which the
Company is qualified to do business. The Company has made available to
Acquiror prior to the execution of this Agreement complete and correct
copies of its charter documents, each as amended to date.
(b) Subsidiaries. The Company has no Subsidiaries and owns no capital
stock or other voting or non-voting equity interest or debt security of or
in any other entity.
(c) Capital Structure. The authorized capital stock of the Company
consists of (i) 10,000,000 shares of Company Common Stock and (ii)
2,000,000 shares of preferred stock ("Company Preferred Stock"). At the
date hereof (the "Stock Reference Date"): (i) 5,932,653 shares of Company
Common Stock are issued and outstanding; (ii) 463,291 shares of Company
Common Stock are held by the Company in its treasury; and (iii) 593,082
shares of Company Common Stock are subject to outstanding employee,
consultants and directors stock options to purchase Company Common Stock
(collectively, the "Company Stock Options") granted pursuant to the
Company's incentive plans (collectively, the "Company Stock Plans"), all
such stock options are set forth on SECTION 3.1(c) of the Company
Disclosure Schedule. No shares of the Company Preferred Stock have been
issued or are outstanding. Other than the Company Stock Options, no
securities of the Company convertible into or exchangeable or exercisable
for shares of capital stock or voting securities are outstanding as of the
Stock Reference Date, and no warrants, calls, options or other rights to
acquire shares of capital stock or voting securities were outstanding as of
the Stock Reference Date. All outstanding shares of Common Stock of the
Company are, and all shares which may be issued will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and were not
issued, and will not be issued, in violation of any preemptive or similar
rights of any Persons, and were issued in accordance with the registration
and qualification requirements of the Securities Act and all Legal
Requirements applicable to the offer and sale of securities or pursuant to
valid exemptions therefrom. Except for the Company Stock Options and the
issued and outstanding shares and treasury shares described above, there
are not issued, reserved for issuance or outstanding (A) any shares of
capital stock or other voting securities of the Company, (B) any securities
of the Company convertible into or exchangeable or exercisable for shares
of capital stock or voting securities of the Company or (C) any warrants,
calls, options or other rights to acquire from the Company any capital
stock or voting securities of the Company. There are no outstanding
obligations of the Company to repurchase, redeem or otherwise acquire any
such securities. The Company is not a party to any voting agreement with
respect to the voting of any such securities. There are no outstanding
obligations of the Company to register under the Securities Act any shares
of its capital stock or to include in any registration of its capital stock
shares held by others.
(d) Authority; No Conflict. The Company has all requisite power and
authority to enter into this Agreement, and each instrument required hereby
to be executed, and delivered by it at the Closing, to perform its
obligations hereunder and thereunder, and, subject to the Company
Shareholder Approval, to consummate the transactions contemplated thereby
and hereby. The execution and delivery by the Company
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of this Agreement and each instrument required hereby to be executed and
delivered by it at the Closing, and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject to the Company
Shareholder Approval. This Agreement has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
Acquiror and Merger Sub, constitutes a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting the rights of creditors and to general principles
of equity. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will not, conflict with,
or result in any violation of, or default (with or without notice or
passage of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a benefit under,
or result in the creation of any Lien upon any of the properties or assets
of the Company under (i) the articles of incorporation or code of
regulations of the Company, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise, license or similar authorization applicable to the
Company or its properties or assets or (iii) subject to the governmental
filings and other matters referred to in SECTION 3.1(e), any Legal
Requirement or regulation applicable to the Company or its properties or
assets, other than, in the case of clauses (ii) and (iii), any such
conflicts, violations, defaults, rights, losses or Liens that individually
or in the aggregate would not (x) have, or be reasonably likely to have, a
Material Adverse Effect or (y) reasonably be expected to materially impair
or delay the ability of the Company to perform its obligations under this
Agreement.
(e) Consents. Except as set forth in SECTION 3.1(e) of the Company
Disclosure Schedule, the Company Shareholder Approval, and the
authorizations of Governmental Entities as specifically set forth below, no
Consent or approval of any third Person is required in connection with the
execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated hereby. No consent,
approval, order or authorization of, action by or in respect of, or
registration, declaration or filing with, any federal, state, local or
foreign government, any court, administrative, regulatory or other
governmental agency, commission or authority or any non-governmental U.S.
or foreign self-regulatory agency, commission or authority or any arbitral
tribunal (each, a "Governmental Entity") or other Legal Requirement is
required by the Company in connection with the execution and delivery of
this Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for: (1) the filing with the SEC
of (A) a proxy statement relating to the Company Shareholders Meeting (the
"Proxy Statement"), and (B) such reports under Sections 13(a), 13(d),
13(e), 15(d) or 16(a) of the Exchange Act, as may be required in connection
with this Agreement and the transactions contemplated hereby; (2) the
filing of the Certificate of Merger with the Secretary of State of the
State of Ohio; (3) the filing of a pre-merger notification and report form
by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended ("HSR Act"); and (4) such filings, consents, approvals,
orders or authorizations the failure of which to be made or obtained
individually or in the aggregate would not have or reasonably be expected
to have, a Material Adverse Effect.
(f) Reports; Undisclosed Liabilities; Books and Records/Internal
Controls. The Company has timely filed all required reports, schedules,
forms, statements and other documents (including exhibits and all other
information incorporated therein) with the SEC since January 1, 1999 (the
"Company SEC Documents") and has filed all material reports, schedules,
forms, statements, and other documents with all other Government Entities
since January 1, 1999. As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such Company
SEC Documents, and none of the Company SEC Documents when filed, declared
effective or mailed (as the case may be) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company (including the related schedules and notes
thereto) included in the Company SEC Documents (or incorporated therein by
reference) comply, as of their respective dates of filing with the SEC, in
all material respects with applicable
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accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the consolidated statement of
operations, cash flows and shareholders' equity for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). The Company has no liabilities or obligations of any nature
(whether known or unknown, whether asserted or unasserted, whether absolute
or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated and whether due or to become due) except (A) as reflected in
the September 30, 2003 financial statements or in the notes thereto; (B)
for liabilities incurred in connection with this Agreement or the
transactions contemplated hereby which are on SCHEDULE 3.1(f)(i) of the
Company Disclosure Schedule; (C) liabilities or obligations incurred in the
ordinary course of business from September 30, 2003 to the date hereof; (D)
liabilities or obligations incurred as permitted pursuant to SECTION 4.1
hereof; or (E) which, in the aggregate, do not exceed $250,000.
There are no significant deficiencies or material weaknesses in the
Company's internal controls. The Company maintains accurate books and
records reflecting its assets and liabilities and maintains proper and
adequate internal accounting controls which provide assurance that (i) all
transactions are executed with management's authorization (ii) transactions
are recorded as necessary to permit preparation of the financial statements
of the Company and to maintain accountability for the Company's assets;
(iii) access to the Company's assets is permitted only in accordance with
management's authorization; (iv) the reporting of the Company's assets is
compared with existing assets at regular intervals; and (v) accounts and
inventory are recorded accurately, and proper and adequate procedures are
implemented to effect the collection thereof on a current and timely basis.
The Company maintains disclosure controls and procedures required by Rule
13a-15 or 15d-15 under the Exchange Act; such controls and procedures are
effective to ensure that all material information concerning the Company is
made known on a timely basis to the individuals responsible for the
preparation and execution of the Company's filings with the SEC and other
public disclosure documents, including, without limitation, any
certifications required to be filed by the Chief Executive Officer and the
Chief Financial Officer of the Company. SECTION 3.1(f)(ii) of the Company
Disclosure Schedule lists, and the Company has delivered to Acquiror copies
of, all written descriptions of, and all policies, manuals and other
documents promulgating, such disclosure controls and procedures.
(g) Company Proxy Materials. All of the information supplied by the
Company for inclusion in the Definitive Proxy Statement referred to in
SECTION 5.1(a), will not, on the date the Definitive Proxy Statement is
first mailed to the Company's shareholders, and the Definitive Proxy
Statement, as then amended or supplemented, will not, on the date of the
Company Shareholders Meeting referred to in SECTION 5.1(b) hereof, contain
any statement which is false or misleading with respect to any material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Notwithstanding
the foregoing, the Company makes no representation or warranty regarding
information furnished by Acquiror or Merger Sub for inclusion in the
Definitive Proxy Statement (or any amendment or supplement thereto). The
Definitive Proxy Statement will comply, with respect to information
supplied or to be supplied in writing by or on behalf of the Company for
inclusion in the Definitive Proxy Statement, in all material respects with
the requirements of the Exchange Act and the applicable rules and
regulations of the SEC thereunder.
(h) Absence of Certain Changes or Events. Since September 30, 2003,
except for liabilities incurred in connection with this Agreement or the
transactions contemplated hereby, or as disclosed in SECTION 3.1(h) of the
Company Disclosure Schedules, the Company has conducted its business only
in the ordinary course, and there has not been (1) any declaration, setting
aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to any of the Company's capital stock, (2)
any split, combination or reclassification of any of the Company's capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of the
Company's capital stock, except for issuances of Company Common Stock upon
the exercise of
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Company Stock Options outstanding on September 30, 2003, (3) (A) any
granting by the Company after September 30, 2003 to any current or former
director, executive officer or other key employee of the Company of any
increase in compensation, bonus or other benefits, except for normal
increases in the ordinary course of business or as was required under any
employment agreements in effect as of September 30, 2003, (B) any granting
by the Company after September 30, 2003 to any such current or former
director, executive officer or key employee of any increase in severance or
termination pay, or (C) any entry by the Company after September 30, 2003
into, or any amendment of, any employment, deferred compensation,
consulting, severance, termination or indemnification agreement with any
such current or former director, executive officer or key employee, (4)
except as required by a change in generally accepted accounting principles,
any change in accounting methods, principles or practices by the Company
materially affecting its assets, liabilities or business, (5) any tax
election that individually or in the aggregate would reasonably be expected
to have a Material Adverse Effect or any settlement or compromise of any
material income tax liability, (6) any change in the business, assets,
financial condition or results of operations of the Company or any other
event which in any such case has had or could reasonably be expected to
have a Material Adverse Effect, (7) any damage, destruction or loss
affecting the assets of the Company, whether covered by insurance or not,
having a Material Adverse Effect, (8) the entry into any agreement,
commitment or transaction by the Company which is material to the Company,
(9) any change in the terms and conditions of the Company Stock Plans, (10)
any cancellation or compromise by the Company of any material debt or
claim, except for adjustments made in the ordinary course of business
which, either individually or in the aggregate, would not have a Material
Adverse Effect, (11) any waiver or release by the Company of any right of
any material value to the Company, (12) any revaluation by the Company of
any asset (including, without limitation, any writing down of the value of
inventory), other than in the ordinary course of business, (13) any
transaction that if taken after the date hereof would constitute a
violation of SECTION 4.1 hereof, or (14) any agreement or commitment,
whether in writing or otherwise, to take any action described in this
SECTION 3.1(h).
(i) Compliance With Applicable Laws; Litigation.
(i) The Company holds all permits, licenses, variances, exemptions,
orders, registrations and approvals of all Governmental Entities which
are required for the operation of the business of the Company
(collectively, the "Company Permits"), except where the failure to have
any such Company Permits individually or in the aggregate would not have
a Material Adverse Effect. The Company is in compliance with the terms
of the Company Permits and all applicable Legal Requirements, except
where the failure so to comply individually or in the aggregate would
not have a Material Adverse Effect. The Company is, or will timely be in
all material respects, in compliance with all current and proposed
listing and corporate governance requirements of the Nasdaq Stock
Market, and is in compliance in all material respects, and will continue
to remain in compliance through the Closing, with all rules,
regulations, and requirements of the Sarbanes-Oxley Act of 2002 and the
SEC.
(ii) The Company has furnished Acquiror copies of (a) all attorney
responses to the request of the independent auditors for the Company
with respect to loss contingencies as of December 31, 2002 and to loss
contingencies as of December 31, 2003 in connection with the Company's
financial statements, and (b) a written list of legal and regulatory
proceedings filed against the Company which are pending (including
matters which are on appeal or have not been fully funded, and
administrative matters that may be closed but with respect to which the
applicable statute of limitations has not run) as of the date of this
Agreement. There are no actions, suits, investigations, complaints or
proceedings (including any proceedings in arbitration) pending
(including matters which are on appeal or have not been fully funded,
and administrative matters that may be closed but with respect to which
the applicable statute of limitations has not run) or, to the Knowledge
of the Company, threatened against the Company or any of its officers,
directors, employees, agents, at law or in equity, in any court or
before any Governmental Entity, including, without limitation,
whistleblower claims, except actions, suits, investigations, complaints
or proceedings that are set forth on SECTION 3.1(i)(ii) of the Company
Disclosure Schedule. Except as set forth in SECTION 3.1(i)(ii) of the
Company Disclosure Schedule, there are no actions, suits,
investigations, complaints or proceedings (including any proceedings in
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arbitration) pending or, to the Knowledge of the Company, threatened
against the Company, at law or in equity, in any court or before any
Governmental Entity, by persons alleging violation of the provisions of
the Rental Purchase Agreements, rent-to-own statutes or any other
consumer protection law. None of the Company, its officers or employees,
or to the Company's Knowledge, contractors, subcontractors or agents
have knowingly, with the intent to retaliate, taken any action harmful
to any person, including interference with the lawful employment or
livelihood of such person, because such individual provided to a law
enforcement officer or supervisor any truthful information relating to
the commission or possible commission of any federal or state offense.
Except as set forth in SECTION 3.1(i)(ii) of the Company Disclosure
Schedule, there are no actions, suits, investigations, complaints or
proceedings (including any proceedings in arbitration) pending or, to
the Knowledge of the Company, threatened against the Company or any of
its officers, directors, employees, agents, at law or in equity, in any
court or before any Governmental Entity, by persons alleging violations
of federal or state laws respecting employment, including but not
limited to, gender, race, disability, national origin or age
discrimination, violations of the Occupational Safety and Health Act of
1970, as amended, Family and Medical Leave Act of 1993, as amended,
terms and conditions of employment or the federal or state Legal
Requirements regarding wages and hours.
(j) Inventory. All Company inventory was ordered new, purchased new,
or acquired in the ordinary course of business or pursuant to acquisitions
and consistent with the regular inventory practices of the Company. All
such inventory is of a quality usable and merchantable in the operation of
the business and is in good repair and condition, ordinary wear and tear
excepted, except for obsolete items which have been written off in the
Company financial statements included in the Company SEC Documents or on
the accounting records of the Company as of the Closing Date, as the case
may be.
(k) Rental Purchase Agreements. The Company has provided to Acquiror
true and correct copies of all forms of Rental Purchase Agreements utilized
by the Company during the previous five (5) years (the "Rental Purchase
Agreements"). Except as set forth on SCHEDULE 3.1(k) of the Company
Disclosure Schedule, the form of each Rental Purchase Agreement utilized by
the Company currently and during the previous five (5) years of the Company
is and was, as the case may be, in compliance with all federal and state
laws. The Rental Purchase Agreements were entered into in the ordinary
course of business in a manner consistent with the regular business
practices of the Company at the time at which such agreements were
utilized. With respect to each Rental Purchase Agreement to which the
Company is currently a party:
(i) such Rental Purchase Agreement is in full force and effect and
constitutes a valid, legal and binding obligation of the Company and to
the Company's Knowledge, the other contracting parties, enforceable
against each of them in accordance with its terms;
(ii) the Company has complied in all respects with the terms of
such Rental Purchase Agreement;
(iii) the Company is not in breach, violation or default under such
Rental Purchase Agreement;
(iv) no event has occurred which constitutes, or with the lapse of
time or the giving of notice, or both would constitute a breach,
violation or default under the Rental Purchase Agreement by the Company;
(v) the enforceability of such Rental Purchase Agreement and the
enjoyment of the rights and benefits thereunder will not be affected in
any respect by the execution and delivery of this Agreement, the
performance by the parties of their obligations hereunder or the
consummation of the transactions contemplated hereby;
except for those matters above which would not, individually or in the
aggregate, have a Material Adverse Effect.
(l) Labor Matters. The Company has not been, and is not now, a party
to any collective bargaining agreement or other labor contract. There has
not been, nor is there presently pending (including matters which are on
appeal or have not been fully funded, and administrative matters that may
be closed but with respect to which the applicable statute of limitations
has not run) or existing, and, to the Company's
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Knowledge, there is not threatened, any strike, slowdown, picketing, work
stoppage or employee grievance process involving the Company. To the
Knowledge of the Company, no event has occurred or circumstance exists that
could provide the basis for any work stoppage or other labor dispute and
there is not pending or, to the Knowledge of the Company, threatened
against or affecting the Company any proceeding relating to the alleged
violation of any legal requirement pertaining to labor relations or
employment matters, including any charge or complaint filed with the
National Labor Relations Board or any comparable Governmental Entity, and
there is no organizational activity or other labor dispute against or
affecting the Company. No application or petition for an election of or for
certification of a collective bargaining agent is pending and no grievance
or arbitration proceeding exists that might have an adverse effect upon the
Company. There is no lockout of any employees by the Company, and no such
action is contemplated by the Company. To the Knowledge of the Company,
except as set forth on SECTION 3.1(L) of the Company Disclosure Schedule,
there has been no charge of discrimination filed against or threatened
against the Company with the Equal Employment Opportunity Commission or
similar Governmental Entity.
(m) ERISA Matters.
(i) SECTION 3.1(m) of the Company Disclosure Schedule lists all
employee benefit plans of the Company (the "Benefit Plans"). With
respect to each such plan, the Company has delivered or made available
to Acquiror correct and complete copies of (1) all plan texts and
agreements and related trust agreements, (2) all summary plan
descriptions and material employee communications, (3) the most recent
annual report (including all schedules thereto), (4) the most recent
annual audited financial statement, (5) if the plan is intended to
qualify under Code Section 401(a) or 403(a), the most recent
determination letter, if any, received from the Internal Revenue Service
(the "IRS"), and (6) all material communications with any Governmental
Entity (including, without limitation, the Pension Benefit Guaranty
Company and the IRS).
(ii) There are no Benefit Plans that (i) are subject to any of Code
Section 412, ERISA Section 302 or Title IV of ERISA, or (ii) are welfare
plans within the meaning of and subject to ERISA Section 3(1) that
provide benefits to current or former Employees beyond the end of the
month in which the Employee retires or is otherwise terminated (other
than coverage mandated by COBRA or applicable state law), or are
self-insured "multiple employer welfare arrangements," as such term is
defined in Section 3(40) of ERISA. Except as set forth on SECTION 3.1(m)
of the Company Disclosure Schedule, there are no Benefit Plans that are
intended to qualify under Code Section 401(a) or 403(a).
(iii) Each Benefit Plan conforms in all material respects to, and
its administration is in all material respects in compliance with, all
applicable laws and regulations
(iv) Except as set forth on SECTION 3.1(m) of the Company
Disclosure Schedule, the consummation of the Merger, this Agreement and
the transactions contemplated thereby and hereby will not (1) entitle
any current or former Employee to severance pay, unemployment
compensation or any similar payment or (2) accelerate the time of
payment or vesting, or increase the amount of any compensation due to,
any current or former employee, excluding stock options which all
accelerate and vest in connection with consummation of the Merger
(v) No Benefit Plan is a "multiemployer plan" within the meaning of
the Code or Section 3(37) of ERISA or a plan subject to Title IV of
ERISA or Section 412 of the Code.
(vi) In the six years preceding the date hereof with respect to
each Benefit Plan including, for this purpose, any Benefit Plan
maintained, sponsored or contributed to by any ERISA Affiliate (1) no
such plan that is or was subject to Title IV of ERISA has been
terminated; (2) no reportable event with the meaning of Section 4043 or
ERISA has occurred; (3) no filing of a notice of intent to terminate
such a plan has been made; and (4) the Pension Benefit Guaranty Company
has not initiated any proceeding to terminate any such plan.
(vii) The Company is not a party to any agreement that has
resulted, or would result, in the payment of any compensation to any
current or former employee that would constitute a "parachute payment"
as defined in Section 280G of the Code.
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(viii) The Company has no existing arrangement with any of its
employees providing for an excise tax gross up in respect of any excise
taxes imposed by Section 4999 of the Code.
(ix) Section 162(m) of the Code does not limit the deduction for
employee remuneration for the Company.
(n) Taxes.
(i) The Company has timely filed all tax returns and reports
required to be filed by it and all such returns and reports are complete
and correct in all material respects, or requests for extensions to file
such returns or reports have been timely filed, granted and have not
expired, except to the extent that such failures to file, to be complete
or correct or to have extensions granted that remain in effect
individually or in the aggregate would not have a Material Adverse
Effect. The Company has paid all Taxes shown as due on such returns, and
the most recent financial statements contained in the Company SEC
Documents reflect an adequate reserve for all Taxes payable by the
Company for all taxable periods and portions thereof accrued through the
date of such financial statements.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against the Company that are not adequately reserved for,
except for deficiencies that individually or in the aggregate would not
have a Material Adverse Effect.
(iii) No claim has ever been made or, to the Company's Knowledge,
is threatened to be made by any Governmental Entity in a jurisdiction
where the Company does not file Tax returns that it is or may be subject
to taxation by that jurisdiction.
(iv) SECTION 3.1(n) of the Company Disclosure Schedule contains a
complete and accurate list of all Tax returns of the Company that have
been audited or are currently under audit and accurately describe any
deficiencies or other amounts that were paid or are currently being
contested. To the Knowledge of the Company, no undisclosed deficiencies
are expected to be asserted with respect to any such audit. All
deficiencies proposed as a result of such audits have been paid,
reserved against, settled or are being contested in good faith by
appropriate proceedings as described in SECTION 3.1(n) of the Company
Disclosure Schedule. The Company has delivered, or made available to
Acquiror, copies of any examination reports, statements or deficiencies
or similar items with respect to such audits. Except as provided in
SECTION 3.1(n) of the Company Disclosure Schedule, the Company has no
Knowledge that any Governmental Entity is likely to assess any
additional taxes for any period for which Tax returns have been filed.
There is no dispute or claim concerning any taxes of the Company either
(i) claimed or raised by any Governmental Entity in writing or (ii) as
to which the Company has Knowledge. Except as described in SECTION
3.1(n) of the Company Disclosure Schedule, the Company has not given or
been requested to give waivers or extensions (or is or would be subject
to a waiver or extension given by any other Person) of any statute of
limitations relating to the payment of Taxes of the Company or for which
the Company may be liable.
(v) All Taxes that the Company is or was required by Legal
Requirements to withhold, deduct or collect have been duly withheld,
deducted and collected and, to the extent required, have been paid to
the proper Governmental Entity or other Person.
(vi) There is no tax sharing agreement, tax allocation agreement,
tax indemnity obligation or similar written or unwritten agreement,
arrangement, understanding or practice with respect to Taxes (including
any advance pricing agreement, closing agreement or other agreement
relating to Taxes) that will require any payment by the Company.
(vii) The Company (A) has not been a member of an affiliated group
within the meaning of the Code Section 1504(a) (or any similar group
defined under a similar provision of state, local or foreign law) and
(B) has no liability for Taxes of any Person (other than the Company)
under Treas. Reg. Sect. 1.1502-6 (or any similar provision of state,
local or foreign law), as a transferee or successor by contract or
otherwise.
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The Company has disclosed on its federal income Tax returns all positions
taken therein that could give rise to a substantial understatement of
federal income Tax within the meaning of Code Section 6662.
(o) Environmental Matters.
(i) Except for matters which would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect, (A)
no written notice, notification, demand, request for information,
citation, summons, complaint or order has been received by, and no
action, claim, suit, proceeding or review or, to the Knowledge of the
Company, investigation is pending or, to the Knowledge of the Company,
threatened by any Person against, the Company with respect to any
matters relating to or arising out of any Environmental Law; and (B) the
Company is in compliance with all Environmental Laws.
(ii) For purposes of this Agreement, the term "Environmental Laws"
means federal, state, and local statutes, laws, judicial decisions,
regulations, ordinances, rules, judgments, orders, codes, injunctions,
permits and governmental agreements relating to human health and the
environment, including, but not limited to, Hazardous Materials; and the
term "Hazardous Material" means all substances or materials regulated as
hazardous, toxic, explosive, dangerous, flammable or radioactive under
any Environmental Law including, but not limited to, (A) petroleum,
asbestos or polychlorinated biphenyls and (B) in the United States, all
substances defined as Hazardous Substances, Oils, Pollutants or
Contaminants in the National Oil and Hazardous Substances Pollution
Contingency Plan, 40 C.F.R. Section 300.5.
(p) Opinion of Financial Advisor. The Company has received the
opinion of its Financial Advisor, to the effect that, as of the date of its
opinion, the Merger Consideration is fair from a financial point of view to
the holders of shares of Company Common Stock (the "Fairness Opinion").
(q) Takeover Statutes. The Company's Board of Directors, at a meeting
duly called and held, has approved, for purposes of Chapter 1704 of the
Ohio Statutes, the Merger and the acquisition by Acquiror of the shares of
common stock of the Company pursuant to the Merger. As of the date of this
Agreement, except for Chapter 1704 of the Ohio Statutes and Section
1701.831 of the Ohio Statutes, no "fair price," "business combination,"
"moratorium," "control share acquisition" or other anti-takeover statute or
similar statute or regulation enacted by any state apply to the Merger or
the other transactions contemplated by this Agreement.
(r) Finders' or Advisors' Fees. Except for its Financial Advisor,
there is no investment banker, broker, finder or other intermediary which
has been retained by or is authorized to act on behalf of the Company who
might be entitled to any fee or commission in connection with the
transactions contemplated by this Agreement.
(s) Intellectual Property; Software.
(i) Except in each case where the failure would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse
Effect and except as disclosed in SECTION 3.1(s) of the Company
Disclosure Schedule, (i) the Company owns all right, title and interest
in or has valid and enforceable rights to use, by license or other
agreements, all of the Intellectual Property that is currently used in
the conduct of the Company's business, free of all liens, pledges,
charges, options, rights of first refusal, security interests or other
encumbrances of any kind, (ii) no action, claim, arbitration,
proceeding, audit, hearing, investigation, litigation or suit (whether
civil, criminal, administrative, investigative or informal) has
commenced, been brought or heard by or before any Governmental Entity or
arbitrator or is pending or is threatened in writing by any third Person
with respect to any Intellectual Property owned by the Company in
connection with the business as currently conducted, including any claim
or suit that alleges that any such Intellectual Property infringes,
impairs, dilutes or otherwise violates the rights of others, and the
Company is not subject to any outstanding injunction, judgment, order,
decree, ruling, charge, settlement, or other dispute involving any third
Person's Intellectual Property, (iii) the Company has not threatened or
initiated any claim or action against any third party
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with respect to any Intellectual Property, and (iv) the Company has no
Knowledge of any material conflict with or infringements of any
Intellectual Property of any third Person.
(ii) For purposes of this Agreement, "Intellectual Property" means
all (i) inventions, discoveries, processes, designs, techniques,
developments, technology, and related improvements, whether or not
patentable; (ii) United States patents and applications therefor and all
divisionals, reissues, renewals, registrations, confirmations,
re-examinations, certificates of inventorship, extensions, continuations
and continuations-in-part thereof; (iii) United States, state and
foreign trademarks, trade dress, service marks, service names, trade
names, brand names, logo or business symbols, whether registered or
unregistered, and pending applications to register the foregoing,
including all extensions and renewals thereof and all goodwill
associated therewith; (iv) United States and foreign copyrights in
writings, designs, software, mask works or other works, whether
registered or unregistered, and pending applications to register the
same, (v) technical, scientific, and other know-how, trade secrets,
methods, processes, practices, formulas and techniques, computer
software programs and software systems, including all databases,
compilations, tool sets, compilers, higher level or "proprietary"
languages, related documentation and materials, whether in interpretive
code, source code, object code or human readable form; (vi) rights of
publicity and privacy, "name and likeness" rights and other similar
rights, (vii) books and records kept in the ordinary course of business
describing or used in connection with any of the foregoing; and (viii)
claims or causes of action arising out of or related to past, present or
future infringement or misappropriation of any of the foregoing. Without
limiting the foregoing, the Intellectual Property shall include the
trademark registrations, trademark applications, and right to register
the domain names as set forth in SECTION 3.1(s) of the Company
Disclosure Schedules.
(t) Major Suppliers.
(i) SECTION 3.1(t) of the Company Disclosure Schedule lists each of
the Company's vendors or suppliers, the dollar value of purchases from
each of which constituted greater than 10% of the Company's revenue for
the year ended December 31, 2003 (each, a "Major Supplier"), and the
dollar amount of business done with each Major Supplier in such period.
The Company has furnished Acquiror and Merger Sub with complete and
accurate copies of all current written agreements or written summaries
of unwritten agreements with such Major Suppliers. Except as set forth
in SECTION 3.1(t) of the Company Disclosure Schedules, (i) the Company
is not engaged in a material dispute with any Major Supplier, (ii) there
has been no material change in the business relationship of the Company
and any Major Supplier since December 31, 2003, and (iii) no Major
Supplier has indicated in writing or otherwise any material modification
or change in the business relationship with the Company.
(ii) Since January 1, 2002: (a) no supplier of the Company has
canceled or otherwise terminated its relationship with the Company,
except for such cancellations and terminations that, individually or in
the aggregate, have not had, or are not reasonably expected to have, a
Material Adverse Effect; (b) to the Knowledge of the Company, no
supplier of the Company has provided written notice to the Company of
its intent either to terminate its relationship with the Company or to
cancel any Material Contract with the Company , except for such
terminations and cancellations that would not, individually or in the
aggregate, have, or be reasonably likely to have, a Material Adverse
Effect; (c) to the Knowledge of the Company, none of the suppliers of
the Company is unable to continue to supply the products or services
supplied to the Company by such supplier, except for such inabilities
that, individually or in the aggregate, have not had, or be reasonably
likely to have, a Material Adverse Effect; and (d) the Company has no
direct or indirect ownership interest in any supplier of the Company.
(u) Material Contracts. SECTION 3.1(u) of the Company's Disclosure
Schedule contains a true and complete list of the Material Contracts of the
Company. There have been delivered to or made available to Acquiror true
and complete copies of all of the Material Contracts and any other
contracts or agreements set forth in any section of the Company's
Disclosure Schedule. Except as set forth in Section 3.1(u) of the Company's
Disclosure Schedule, all Material Contracts to which the Company is a party
are, to the
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Company's Knowledge, in full force and effect, the Company has performed
its obligations thereunder to date and, shall continue to do so through the
Closing Date and, to the Knowledge of the Company, each other party thereto
has performed its obligations thereunder to date.
(v) Certain Business Practices. To the Knowledge of the Company,
within the past five years, none of the Company, or any directors,
officers, agents or employees of the Company has (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
related to political activity, (ii) made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
(w) Voting Requirements. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock at the Company
Shareholders Meeting to adopt this Agreement (the "Company Shareholder
Approval") is the only vote of the holders of any class or series of the
Company's capital stock necessary to adopt and approve this Agreement and
the Merger and the transactions contemplated hereby.
(x) Board Recommendation. As of the date hereof, the Board of
Directors of the Company has (i) full knowledge of the terms of the Voting
Agreement and (ii) recommended that the shareholders of the Company vote
for adoption of this Agreement and the consummation of the transactions
contemplated hereby.
(y) Monthly Revenue-One Month. The Company's Monthly Recurring
Revenue for the month of January 2004, was not less than $8,400,000.
(z) Net Book Value of Inventory. The net book value of the Company's
inventory, calculated in accordance with the Company's historical
practices, on an unaudited basis, as at December 31, 2003, was not less
than $40,500,000.
(aa) Property. A true and complete copy of all real estate leases
have been delivered to the Acquiror. With respect to the Headquarters Lease
and each real estate lease of the Company's stores (the "Store Leases" and,
together with the Headquarters Lease, the "Leases"), (i) each Lease has
been validly executed and delivered by the Company and is a binding
agreement therein and, to the Company's Knowledge, has been validly
executed and delivered by the other party or parties thereto and is binding
thereon; (ii) the Company is not, and, to the Company's Knowledge, no other
party to the Lease is, in material breach or material default, and, no
event has occurred on the part of the Company or, to the Knowledge of the
Company, the part of any other party which, with notice or lapse of time,
would constitute such a breach or default or permit termination,
modification or acceleration under the Lease; (iii) except as set forth on
SECTION 3.1(aa) of the Company Disclosure Schedule, the Lease will continue
to be binding in accordance with its terms following the Closing Date; (iv)
the Company has not repudiated and, to the Company's Knowledge, no other
party to the Lease has repudiated any provision thereof; (v) except as set
forth on SECTION 3.1(aa) of the Company Disclosure Schedule, there are no
material disputes, oral agreements or delayed payment programs in effect as
to the Lease; and (vi) all facilities leased under each Lease are fit for
the operation of the store and have been reasonably maintained. All
heating, cooling, lighting, plumbing and electrical systems under each
Lease are in good repair and working order.
(bb) Vehicles. All vehicles and items of equipment utilized by the
Company, taken as a whole, are (i) mechanically sound and in a condition to
perform in the manner needed for the operation of the Company, ordinary
wear and tear excepted and (ii) in compliance with all applicable statutes,
ordinances and regulations, including without limitation, those related to
safety.
(cc) Insurance. The Company currently maintains fire and casualty and
general liability, workers compensation and automobile policies with
reputable insurance carriers. To the Company's Knowledge, such insurance
policies provide full and adequate coverage for all normal risks incident
to the Company.
(dd) Certifications. The Chief Executive Officer and the Chief
Financial Officer of the Company have signed, and the Company has furnished
to the SEC, all certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. Such certifications contain no qualifications
or exceptions to the matters
A-15
certified therein and have not been modified or withdrawn, and neither the
Company nor any of its officers has received notice from any Governmental
Entity questioning or challenging the accuracy, completeness, form or
manner of filing or submission of such certifications.
(ee) Loans to Insiders. The Company has not, since July 30, 2002,
extended or maintained credit, arranged for the extension of credit, or
renewed an extension of credit, in the form of a personal loan to or for
any director or executive officer (or equivalent thereof) of the Company.
SECTION 3.1(EE) of the Company Disclosure Schedule identifies any loan or
extension of credit maintained by the Company to which the second sentence
of Section 13(k)(1) of the Exchange Act applies.
(ff) Affiliate Transactions. SECTION 3.1(ff) of the Company
Disclosure Schedule contains a complete and correct list of all agreements,
contracts, transfers of assets or liabilities or other commitments or
transactions, whether or not entered into in the ordinary course of
business, to or by which the Company, on the one hand, and any director or
executive officer or any of their respective Affiliates (other than the
Company), on the other hand, are or have been a party or are otherwise
bound or affected, and that (i) are currently pending or in effect or (ii)
involve continuing liabilities and obligations (absolute, contingent or
otherwise).
(gg) Disclosure. To the Company's Knowledge, this Agreement and the
Company Disclosure Schedule, taken as a whole, do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated herein or therein or necessary to make the statements contained
herein or therein, in light of the circumstances under which they were
made, not misleading.
(hh) No Additional Representations or Warranties. Neither the Company
nor any other Person makes any other express or implied representation on
behalf of the Company other than as expressly set forth in this ARTICLE 3.
3.2 Representations and Warranties of Acquiror and Merger Sub. Acquiror
and Merger Sub each hereby represents and warrants to the Company as follows:
(a) No Prior Activities of Merger Sub. Merger Sub has not conducted
any business prior to the date hereof and has no, and prior to the
Effective Time will have no, assets, liabilities or obligations of any
nature other than those incident to its formation and required pursuant to
this Agreement and the Merger and the other transactions contemplated by
this Agreement.
(b) Organization, Standing and Corporate Power. Each of Acquiror and
Merger Sub is a corporation or other legal entity duly organized, validly
existing and in good standing under the laws of the jurisdiction in which
it is organized and has the requisite corporate or other power, as the case
may be, and authority to carry on its business as now being conducted.
(c) Authority; No Conflict. Each of Acquiror and Merger Sub has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement by Acquiror and Merger Sub and the
consummation by Acquiror and Merger Sub of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the
part of Acquiror and Merger Sub. This Agreement has been duly executed and
delivered by Acquiror and Merger Sub and, assuming the due authorization,
execution and delivery by the Company, constitutes a legal, valid and
binding obligation of Acquiror and Merger Sub, enforceable against Acquiror
and Merger Sub in accordance with its terms subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws of general applicability relating to or affecting the rights of
creditors and general principles of equity. Except as set forth on SECTION
3.2 of the Acquiror's Disclosure Schedule, the execution and delivery of
this Agreement does not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any
obligation or loss of a benefit under, (i) the certificate of
incorporation, articles of organization or other charter documents of
Acquiror or the articles of incorporation or code of regulations of Merger
Sub, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise,
license or similar
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authorization applicable to Acquiror or Merger Sub or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any Legal Requirement
applicable to Acquiror or Merger Sub or their respective properties or
assets, other than, in the case of clauses (ii) and (iii), any such
conflicts, violations, defaults, rights, losses or Liens that individually
or in the aggregate would not reasonably be expected to materially impair
or delay the ability of Acquiror or Merger Sub to perform their obligations
under this Agreement. Except as set forth on SECTION 3.2 of Acquiror's
Disclosure Schedule, no consent, approval, order or authorization of,
action by, or in respect of, or registration, declaration or filing with,
any Governmental Entity is required by Acquiror or Merger Sub in connection
with the execution and delivery of this Agreement by Acquiror or Merger Sub
or the consummation by Acquiror or Merger Sub of the transactions
contemplated hereby, except: (1) the filing of the Certificate of Merger
with the Secretary of State of the State of Ohio; (2) the filing of a
pre-merger notification and report form by Acquiror under the HSR Act; and,
(3) such consents, approvals, orders or authorizations the failure of which
to be made or obtained individually or in the aggregate would not
reasonably be expected to materially impair or delay the ability of
Acquiror or Merger Sub to perform its respective obligations under this
Agreement.
(d) Proxy Materials. All of the information to be furnished by
Acquiror or Merger Sub for inclusion in the Definitive Proxy Statement (or
any amendment or supplement thereto) will not, on the date the Definitive
Agreement is first mailed to the Company's shareholders, and the Definitive
Proxy Statement, as then amended or supplemented, on the date of the
Company Shareholders Meeting referred to in SECTION 5.1(b) or on the
Closing Date, contain any statement which is false or misleading with
respect to any material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, Acquiror and Merger Sub make no
representation or warranty regarding information furnished by the Company
for inclusion in the Definitive Proxy Statement (or any amendment or
supplement thereto). The information supplied or to be supplied in writing
by or on behalf of Acquiror or Merger Sub for inclusion in the Definitive
Proxy Statement will comply as to form and substance in all material
respects with the requirements of the Exchange Act and the applicable rules
and regulations of the SEC thereunder.
(e) Brokers. No broker, investment banker, financial advisor or other
Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated
by this Agreement based upon arrangements made by or on behalf of Acquiror
or Merger Sub.
(f) Financial Capability. Based on existing cash reserves or
availability under existing credit facilities Acquiror and Merger Sub have
the funds necessary to finance the transaction contemplated hereby, pay
related fees and expenses, and provide for the ongoing working capital
needs of the Surviving Corporation.
ARTICLE 4
PRE-CLOSING COVENANTS
4.1 Conduct of Business. Except as (i) set forth in SECTION 4.1 of the
Company Disclosure Schedules, (ii) as otherwise expressly contemplated by this
Agreement or (iii) consented to, in writing, by Acquiror, such consent not to be
unreasonably withheld or delayed, during the period from the date of this
Agreement to the Effective Time, the Company shall carry on its business in the
ordinary course consistent with past practice and in compliance in all material
respects with all applicable Legal Requirements and, to the extent consistent
therewith, use all reasonable efforts to preserve intact its current business
organizations (other than internal organizational realignments), use all
reasonable efforts to keep available the services of its current officers and
other key employees and preserve their relationships with those Persons having
business dealings with the Company to the end that its goodwill and ongoing
business shall not be impaired at the Effective Time. Without limiting the
generality of the foregoing (but subject to the above exceptions), during the
period from the date of this Agreement to the Effective Time or earlier
termination of this Agreement, the Company shall not:
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(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, (ii) split, combine
or reclassify any of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, except for issuances of the Company Common
Stock upon the exercise of the Company Stock Options under the Company
Stock Plans outstanding as of the Stock Reference Date, and only in
accordance with their present terms or (iii) except pursuant to agreements
entered into with respect to the Company Stock Plans that are in effect as
of the close of business on the Stock Reference Date, purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber or subject to
any Lien any shares of its capital stock, any other voting securities or
any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities,
other than the issuance of Company Common Stock upon the exercise of the
Company Stock Options outstanding on the date hereof and in accordance with
their present terms;
(c) amend its articles of incorporation or code of regulations or
merge or consolidate with any Person;
(d) acquire or agree to acquire, or dispose of or agree to dispose of,
any assets (other than inventory in the ordinary course of business
consistent with past practice), any business or any Person;
(e) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien abandon or otherwise dispose of any of its properties or assets
other than inventory in the ordinary course of business consistent with
past practice;
(f) take any action that would cause the representations and
warranties set forth in this Agreement to no longer be true and correct;
(g) make any change in accounting methods or cash management;
(h) (i) grant any increase in the compensation payable or to become
payable by the Company to any of its officers, directors or employees,
except in the case of employees (who are not officers or directors)
increases in the ordinary course of business; or (ii) (A) adopt any new,
(B) grant any award under, or (C) except as required by applicable Legal
Requirements, amend or otherwise increase, or accelerate the payment or
vesting of the amounts payable or to become payable under, any existing
Benefit Plan; or (iii) enter into or modify or amend any employment or
severance agreement with or, except as required by applicable Legal
Requirements, grant any severance or termination rights to any officer,
director or employee of the Company; (iv) enter into any collective
bargaining agreement or (v) make any loan to, or enter into any material
transaction of any other nature with, any director, executive officer or
employee of the Company;
(i) enter into, modify, amend or terminate in any material respect,
any Material Contract or waive, release or assign any material rights or
claims thereunder; provided, however, that for purposes of this clause (i),
Material Contracts includes contracts and agreements for the purchase of
services or non-inventory goods that (A) require payments by the Company in
excess of $50,000, or (B) are not terminable by the Company on notice of
thirty (30) days or less without penalty, and further provided that Store
Leases for a maximum of ten (10) stores may be extended for a maximum of
six (6) months each and store Leases may also be amended in other respects,
so long as such amendments do not increase the term or the rental amount
and are entered into in the ordinary course of business.
(j) (i) incur or assume any Indebtedness other than Indebtedness with
respect to working capital in amounts consistent with past practice; (ii)
materially modify any Indebtedness or other liability; (iii) assume,
guaranty, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
Person, other than immaterial amounts in the ordinary course of business,
and other than the endorsement of negotiable instruments for collection in
the ordinary course of business; (iv) make any loans, advances or capital
contributions to, or investments in, any other person (other than
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customary advances to employees in accordance with past practice); or (v)
enter into any material commitment or transaction other than the purchase
of inventory in the ordinary course of business;
(k) make any material Tax election (unless required by law) or settle
or compromise any material income Tax liability;
(l) (i) waive the benefits of, or agree to modify in any material
manner, any confidentiality, standstill or similar agreement to which the
Company is a party, or (ii) pay, discharge or satisfy any proceeding, other
than (A) a payment, discharge or satisfaction for which liabilities are
reflected on or are reserved against in the Company's most recent
consolidated financial statements (or the notes thereto) included in the
Company SEC Documents, but not to exceed the reserve therefor, in each case
in complete satisfaction, or (B) a payment, discharge or satisfaction in a
non-material amount shall be less than $50,000 individually and $250,000 in
the aggregate), and, in either case, with a complete release, of such
matter with respect to all parties to such matter, of actions, suits,
proceedings or claims; provided, however, that this prohibition shall not
preclude the Company from amending any confidentiality or other agreement
that is deemed necessary by the Board of Directors of the Company in the
exercise of its fiduciary duties under SECTION 4.5 hereof.
(m) make any payment or incur any liability or obligation (excluding
amounts of less than $50,000 in the aggregate) for the purpose of obtaining
any consent from any third party to the transactions contemplated hereby;
(n) fail to keep in full force and effect insurance comparable in
amount and scope to coverage maintained by it (or on behalf of it),
including altering a self-insurance arrangement to an insured arrangement,
and visa versa, on the date hereof;
(o) fail to inform Acquiror of the occurrence of any event which to
the Knowledge of the Company could reasonably be expected to result in a
breach of any representation of warranty contained in SECTION 3.1, such
that the condition set forth in Section 6.2(a) would not be satisfied;
(p) form any directly or indirectly wholly-owned subsidiary entities
or other Affiliate;
(q) enter into any partnerships, joint ventures or similar agreements
related to the profit or expense sharing with a third Person;
(r) introduce any new product line, other than product lines currently
available in Acquiror's stores, or engage in any lines of business other
than the rent-to-own business;
(s) modify, amend, or terminate the Company's existing vehicle leases
or enter into any new vehicle leases; provided that this shall not preclude
the entry of any new vehicle lease for a store delivery vehicle which
replaces an existing vehicle lease, nor the extension, on a month-to-month
basis, of any store vehicle or other vehicle lease; or
(t) authorize, or commit or agree to take, any of the foregoing
actions.
4.2 Other Actions. Except as required by law, the Company and Acquiror
shall not, and neither shall permit any of their respective Affiliates to,
voluntarily take any action that would reasonably be expected to result in any
of the conditions to the Merger set forth in ARTICLE 6 (Conditions Precedent)
not being satisfied.
4.3 Advice of Changes. The Company and Acquiror shall promptly advise the
other party orally and in writing to the extent it has Knowledge of any change
or event having, or which, insofar as can reasonably be foreseen, would
reasonably be expected to have a Material Adverse Effect on such party or on the
truth of their respective representations and warranties or the ability of the
conditions set forth in ARTICLE 6 to be satisfied; provided, however, that no
such notification shall affect the representations, warranties, covenants or
agreements of the parties (or remedies with respect thereto) or the conditions
to the obligations of the parties under this Agreement.
4.4 [Intentionally left blank].
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4.5 No Solicitation By The Company. (a) The Company shall not, nor shall
it authorize or permit any of its directors, officers or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it to, directly or indirectly, through another
Person, (i) solicit, initiate or encourage (including by way of furnishing any
information or assistance), or take any other action to facilitate or cause any
inquiries or the making of any proposal from any Person which constitutes any
Company Takeover Proposal or (ii) participate in any discussions or negotiations
regarding any Company Takeover Proposal; provided, however, that if, at any
time, the Board of Directors of the Company determines in good faith, after
consultation with such legal, financial and other advisors as it deems
appropriate, that it is necessary to do so in order to act in a manner
consistent with its fiduciary duties under the Ohio Statutes, including, without
limitation, Section 1701.59, the Company may, prior to the date of the Company
Shareholders Meeting and only in response to a Company Takeover Proposal that
was not solicited by it or that did not otherwise result from a breach of the
foregoing restrictions under this SECTION 4.5(A), (x) furnish non-public
information with respect to the Company to any Person making a Company Takeover
Proposal pursuant to a confidentiality agreement and (y) participate in
discussions or negotiations regarding such Company Takeover Proposal.
(b) In addition to the obligations of the Company set forth in paragraph
(a) of this SECTION 4.5, the Company shall immediately advise Acquiror orally
and in writing of any request for information or of any Company Takeover
Proposal and the material terms and conditions of such request or Company
Takeover Proposal, including the name of any Person making a Company Takeover
Proposal. The Company will keep Acquiror reasonably informed of the status and
details (including amendments and proposed amendments) of any such request or
Company Takeover Proposal. The Company may not accept a Company Takeover
Proposal from any Person, nor may it terminate this Agreement, unless it has
provided Acquiror (i) at least four calendar days notice of the exact terms of
the Company Takeover Proposal, including a copy of the proposed agreement, and
(ii) at least two calendar days notice of any and each amendment to such Company
Takeover proposal and proposed agreement.
(c) Except as set forth in this SECTION 4.5 or 7.1(E) hereof, neither the
Company's Board of Directors nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in any manner adverse to Acquiror, the
approval or recommendation by the Company's Board of Directors or any committee
thereof of this Agreement and the transactions contemplated hereby, (ii) approve
or recommend, or propose to approve or recommend, any competing transaction, or
(iii) enter into any agreement, commitment, understanding or other arrangement
with respect to any Company Takeover Proposal.
(d) Nothing contained in this SECTION 4.5 shall prohibit the Company from
taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders if, in the good faith judgment of the Board of Directors
of the Company, after consultation with outside counsel, failure so to disclose
would be inconsistent with its obligations under applicable Legal Requirements.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Preparation of the Proxy Statement; Shareholders Meeting.
(a) Proxy Statement. In connection with the Company Shareholders Meeting
contemplated by SECTION 5.1(b) below, within thirty (30) days following the date
hereof, the Company will prepare, pursuant to, and in accordance with,
Regulation 14A of the Exchange Act and file (after consultations with Acquiror)
a preliminary proxy statement relating to the transactions contemplated by this
Agreement (the "Preliminary Proxy Statement") and will use its commercially
reasonable efforts to respond to the comments of the SEC, if any, thereon, and
to cause a final proxy statement (such proxy statement the "Definitive Proxy
Statement") to be mailed to the Company's shareholders, in each case as soon as
reasonably practicable after providing Acquiror with reasonable opportunity to
comment thereon. Each party to this Agreement will notify the other parties
promptly of the receipt of the comments of the SEC, if any, and of any request
by the SEC for amendments or supplements to the Preliminary Proxy Statement or
the Definitive Proxy Statement or for additional information, and will supply
the
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others with copies of all correspondence between such party or its
representatives, on the one hand, and the SEC or members of its staff, on the
other hand, with respect to the Preliminary Proxy Statement, the Definitive
Proxy Statement or the Merger. If at any time prior to the Company Shareholders
Meeting, (i) any event should occur relating to the Company which should be set
forth in an amendment of, or a supplement to, the Definitive Proxy Statement, or
(ii) any event should occur relating to Acquiror or Merger Sub or any of their
respective Affiliates, in either case that should be set forth in an amendment
of, or a supplement to, the Definitive Proxy Statement, then the Company or
Acquiror (as applicable), will, upon learning of such event, promptly inform the
other of such event and the Company shall prepare, file and, if required, mail
such amendment or supplement to the Company's shareholders; provided that, prior
to such filing or mailing the Company shall consult with Acquiror with respect
to such amendment or supplement and shall afford Acquiror reasonable opportunity
to comment thereon. Acquiror will furnish to the Company the information
relating to Acquiror and Merger Sub, their respective Affiliates, which is
required to be set forth in the Preliminary Proxy Statement or the Definitive
Proxy Statement under the Exchange Act and the rules and regulations of the SEC
thereunder.
(b) The Company will take all action necessary in accordance with
applicable law and its governing documents to duly call, give notice of, and,
after SEC clearance of the Definitive Proxy Statement, convene a meeting of its
shareholders to consider and vote upon the adoption of this Agreement (the
"Company Shareholders Meeting"). The Board of Directors of the Company shall
recommend such adoption and approval, and subject to fiduciary obligations under
applicable law, shall not withdraw or modify such recommendation other than in
compliance with SECTION 4.5(a) and SECTION 7.1(e), and shall, subject to SECTION
5.3 hereof, take all lawful action necessary to obtain such shareholder
approval.
5.2 Access To Information; Confidentiality.
(a) The parties hereby acknowledge the Confidentiality Agreement dated
January 8, 2004 between Acquiror and the Company (the "Confidentiality
Agreement") expires on execution of this Agreement. Each of the Company and
Acquiror will, and will cause their respective officers, directors, employees,
agents and representatives to (i) hold in confidence, unless compelled to
disclose by judicial or administrative process or by other Legal Requirements,
all "Confidential Information" (as such term was defined in the Confidentiality
Agreement) concerning the other party furnished in connection with the
transactions contemplated by this Agreement until such time as such information
becomes publicly available (otherwise than through the wrongful act of such
person) and (ii) not release or disclose such information to any other person,
except in connection with this Agreement to its auditors, attorneys, financial
advisors, other consultants and advisors. In the event of termination of this
Agreement for any reason, the parties hereto will promptly return or destroy all
documents containing non-public information so obtained from any other party
hereto and any copies made of such documents and any summaries, analyses or
compilations made therefrom.
(b) The Company shall, and shall cause its Affiliates, together with its
agents and representatives, to, afford to Acquiror and to the officers,
employees, accountants, counsel, financial advisors and other representatives of
Acquiror, reasonable access during normal business hours during the period prior
to the Effective Time to make such inspections as Acquiror may reasonably
require of all of its properties, books, contracts, commitments, personnel and
records and, during such period, the Company shall, and shall cause its
Affiliates, together with its agents and representatives, to, furnish promptly
to Acquiror (i) a copy of each report, schedule, registration statement and
other document filed by it during such period pursuant to the requirements of
federal or state securities laws and (ii) all other information concerning the
Company's business, properties and personnel as Acquiror may reasonably request.
Acquiror will hold, and will cause its officers, employees, accountants,
counsel, financial advisors and other representatives and Affiliates, and agents
and representatives, to hold, any non-public information in accordance with the
terms of SECTION 5.2(a).
(c) Between the date hereof and the Effective Time, the Company shall
furnish to the Acquiror and Merger Sub (i) within five (5) Business Days after
the delivery thereof to management, such monthly financial statements and data
(financial, operational, compliance or otherwise) as are regularly prepared for
distribution to Company management and (ii) at the earliest time they are
available, such quarterly and annual financial statements as are prepared for
the Company's SEC filings, which (in the case of this clause (ii)), shall be in
accordance with the books and records of the Company.
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5.3 Commercially Reasonable Efforts; Cooperation.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement, including (i) obtaining of all necessary actions or non-actions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all steps as may be
necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity, (ii) obtaining of all necessary
consents, approvals or waivers from third parties, (iii) defending any lawsuits
or other legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby, including
seeking to have any stay or temporary restraining order entered by any court or
other Governmental Entity vacated or reversed, and (iv) executing and delivering
of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. Nothing
set forth in this SECTION 5.3(a) will limit or affect actions permitted to be
taken pursuant to SECTION 4.2.
(b) Each of Acquiror and the Company shall (i) make the filings required of
such party under the HSR Act with respect to the Merger and the other
transactions contemplated by this Agreement within ten Business Days after the
date of this Agreement; (ii) comply at the earliest practicable date with any
request under the HSR Act for additional information, documents or other
materials received by such party from the Federal Trade Commission or the
Department of Justice or any other Governmental Entity in respect of such
filings or the Merger and the other transactions contemplated by this Agreement,
(iii) cooperate with the other party in connection with making any filing under
the HSR Act and in connection with any filings, conferences or other submissions
related to resolving any investigation or other inquiry by any such Governmental
Entity under the HSR Act with respect to the Merger and the other transactions
contemplated by this Agreement; and (iv) keep the other party apprised of the
status of any inquiries made by a Governmental Entity. Any and all fees required
in connection with the filing of the notices required under the HSR Act shall be
borne in equal portions by the Company and Acquiror.
(c) Acquiror and the Company shall (i) each use commercially reasonable
efforts to avoid the entry of, or to have vacated or terminate, any decree,
order, or judgment that would restrain, prevent or delay the Closing, on or
before June 30, 2004, including without limitation defending through litigation
on the merits and claim asserted in any court by any party; and (ii) each take
any and all steps necessary to avoid or eliminate each and every impediment
under any antitrust, competition or trade regulation law that may be asserted by
any Governmental Entity with respect to the Merger so as to enable the Closing
to occur as soon as reasonably possible (and in any event no later than June 30,
2004, including without limitation proposing, negotiating, committing to and
effecting, by consent decree, hold separate order, or otherwise, the sale,
divestiture or disposition of such assets or businesses of Acquiror or the
Company (or any of their respective subsidiaries) or otherwise take or commit to
take any actions that limits its freedom of action with respect to, or its
ability to retain, any of the businesses or assets of the Company, Acquiror or
their respective subsidiaries, as may be required in order to avoid the entry
of, or to effect the dissolution of, any injunction, temporary restraining
order, or other order in any suit or proceeding, which would otherwise have the
effect of delaying the Closing; provided, however, that nothing herein shall
require Acquiror to agree to the sale transfer, divestiture or other disposition
of 16 or more stores of the Company, the Acquiror or any of its subsidiaries.
5.4 Director, Officer and Employee Indemnification.
(a) Acquiror shall, and shall cause the Surviving Corporation to, and the
Surviving Corporation shall, indemnify and hold harmless, to the fullest extent
permitted under applicable law, the individuals who on or prior to the Effective
Time were officers, directors or employees of the Company (collectively, the
"Indemnitees") with respect to all acts or omissions by them in their capacities
as such or taken at the request of the Company at any time prior to the
Effective Time. With respect to all acts or omissions by them in their
capacities as such or taken at the request of the Company at any time prior to
the Effective Time, Acquiror agrees that, and Acquiror agrees to cause the
Surviving Corporation to agree that, all rights of the Indemnitees to
indemnification and
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exculpation from liabilities for acts or omissions occurring at or prior to the
Effective Time as provided in the articles of incorporation or code of
regulations (or comparable organizational and governing documents) of the
Company as now in effect and any indemnification agreements or arrangements of
the Company shall survive the Merger and shall continue in full force and effect
in accordance with their terms. Such rights shall not be amended, or otherwise
modified in any manner that would adversely affect the rights of the
Indemnitees, unless such modification is required by law. In addition, the
Surviving Corporation shall pay any expenses of any Indemnitee under this
SECTION 5.4 as incurred to the fullest extent permitted under applicable law,
provided that the Person to whom expenses are advanced provides an undertaking
to repay such advances to the extent required by applicable law.
(b) From and after the Effective Time, but solely as it may relate to
events occurring before the Effective Time, Acquiror shall cause the articles of
incorporation and code of regulations of the Surviving Corporation to contain
provisions no less favorable with respect to limitation of certain liabilities
of directors, officers and employees and indemnification than are set forth as
of the date of this Agreement in the articles of incorporation and code of
regulations of the Company.
(c) In the event any action is asserted or made, any determination required
to be made with respect to whether an Indemnitee's conduct complies with the
standards set forth under the Ohio Statutes, the applicable organizational
documents of the Company or any indemnification agreements or arrangements of
the Company, as the case may be, shall be made by independent legal counsel
selected by such Indemnitee and reasonably acceptable to the Acquiror; provided,
however, that nothing in this SECTION 5.4 shall impair any rights of any current
or former director or officer of the Company, including pursuant to the
respective articles of incorporation or bylaws of Surviving Corporation or the
Company, or their respective subsidiaries, under Ohio law or otherwise.
(d) Each of Acquiror, the Surviving Corporation and the Indemnitee shall
cooperate, and cause their respective Affiliates to cooperate, in the defense of
any action and shall provide access to properties and individuals as reasonably
requested and furnish or cause to be furnished records, information and
testimony, and attend such conferences, discovery proceedings, hearings, trials
or appeals, as may be reasonably requested in connection therewith.
(e) For the six-year period commencing immediately after the Effective
Time, Surviving Corporation shall either (i) maintain in effect the Company's
current directors' and officers' liability insurance policies providing coverage
as respects acts or omissions occurring prior to the Effective Time with respect
to those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms and at limits no less favorable to
the Company's directors and officers currently covered by policies in effect on
the date hereof or (ii) a directors' and officers' insurance policy, which may
include Acquiror's own directors' and officers' insurance policy, that (w)
benefits those persons who are currently covered by the Company's directors' and
officers' liability insurance policy, (x) is from a financially sound and
nationally reputable carrier, (y) is at least as favorable to the Persons
currently covered by the Company's directors' and officers' liability insurance
in effect as of the date hereof and (z) will at a minimum have the same terms
and limits as the Company's directors' and officers' liability insurance
policies in effect as of the date hereof; provided, however, that, if the
Company's current directors' and officers' liability insurance expires, is
terminated or is canceled during such six-year period, Acquiror shall, or shall
cause the Surviving Corporation to, obtain directors' and officers' liability
insurance covering such acts or omissions with respect to each such Person on
terms and at limits no less favorable to the Company's directors and officers
currently covered by policies in effect immediately prior to the date of such
expiration, termination or cancellation. The Company and Acquiror shall
cooperate to make any arrangements necessary to obtain or continue such
directors' and officers' liability insurance for such six-year period, including
the prepayment any fees or premiums to the applicable insurance providers of
such amounts as necessary to provide the coverage contemplated by this SECTION
5.4; provided, however, that Surviving Corporation will not be required to
expend in any year an amount in excess of 150% of the annual aggregate premiums
currently paid by the Company for such insurance; and provided, further, that if
the annual premiums of such insurance coverage exceed such amount, the Surviving
Corporation will be obligated to obtain a policy with the best coverage
available, in the reasonable judgment of its Board of Directors, for a cost not
exceeding such amount. In lieu of providing the foregoing annual insurance
policies for the six (6) year period, the
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Surviving Corporation or Acquiror may obtain a so-called "tail" policy providing
such coverage and being effective for the full six (6) year period referred to
above; provided, however, the Surviving Corporation or Acquiror shall not be
required to pay an aggregate premium therefor in excess of an amount equal to
six (6) times 150% of the annual aggregate premiums currently paid by the
Company for such insurance; and if the Surviving Corporation or Acquiror is
unable to obtain the "tail" insurance policy for such amount, it shall obtain as
much comparable insurance as possible for an aggregate premium equal to such
maximum amount.
(f) The provisions of this SECTION 5.4 are intended to be for the benefit
of, and shall be enforceable by, each Indemnitee, such Indemnitee's heirs and
representatives and (ii) are in addition to, and not in substitution for, any
other rights to indemnification or contribution that any such Person may have by
contract or otherwise.
(g) In the event that the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and is not the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any Person, then, and in each such case, proper provision shall be made so
that the successors and assigns of the Surviving Corporation shall assume all of
the obligations thereof set forth in this SECTION 5.4.
(h) The obligations of Acquiror and the Surviving Corporation under this
SECTION 5.4 shall not be terminated or modified in such a manner as to adversely
affect any Indemnitee to whom this SECTION 5.4 applies without the consent of
the affected Indemnitee (it being expressly agreed that the Indemnitees to whom
this SECTION 5.4 applies shall be third party beneficiaries of this SECTION
5.4), such consent not to be unreasonably withheld.
(i) Notwithstanding the foregoing, no director, officer, employee or other
Person entitled to indemnity hereunder shall be indemnified for any loss, damage
or liability resulting to the extent indemnity is unavailable under Section
1701.13 of the Ohio Statutes.
5.5 Public Announcements. Acquiror and the Company will consult with each
other before issuing, and provide each other the opportunity to review, comment
upon and concur with, any press release or other public statements with respect
to the transactions contemplated by this Agreement, including the Merger, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as either party may determine is required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange. The parties agree that the
initial press release to be issued with respect to the transactions contemplated
by this Agreement shall be in the form heretofore agreed to by the parties.
5.6 Employees.
(a) As of the Effective Time the Surviving Corporation shall offer
employment at will to all employees of the Company that are actively employed by
the Company immediately prior to the Effective Time; provided, however, that
nothing in this SECTION 5.6(a) shall apply to those individuals listed in
SECTION 5.6(a) of the Company Disclosure Schedule. Except as otherwise set forth
in SECTION 5.6(a) of the Company Disclosure Schedule, the Surviving Corporation
agrees to honor the terms of all existing employment contracts previously
entered into by the Company. Notwithstanding any other provision of this SECTION
5.6, nothing herein shall require the continuation of any employment or any
terms of employment after the Effective Time.
(b) Except as set forth in SECTION 5.6(b) of the Acquiror Disclosure
Schedule, for purposes of eligibility to participate, employees of the Company
as of the Effective Time shall receive credit under any employee benefit plan,
program or arrangement established or maintained by Acquiror or the Surviving
Corporation and made available to such employees for service accrued prior to
the Effective Time with the Company.
5.7 Delisting. Each of the parties hereto shall cooperate with each other
in taking, or causing to be taken, all actions necessary to delist all of the
Company Common Stock from the Nasdaq National Market and to terminate
registration under the Exchange Act; provided, that such delisting and
termination shall not be effective until after the Effective Time.
5.8 Noncompete Agreements. Wayland J. Russell, Michael Viveiros, and
Michael A. Pecchia (the "Executive Officers") shall enter into Noncompetition
Agreements, effective as of the Effective Date, in the form attached to SCHEDULE
5.8 of the Acquiror Disclosure Schedule (the "Noncompetition Agreements").
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5.9 Amendment to Headquarters Lease. Within fifteen (15) days of the date
hereof, the Company shall enter into an amendment to the Headquarters Lease, in
a form reasonably acceptable to Acquiror, providing that such lease will
terminate ninety (90) days after the Effective Time with no further obligations
imposed on the Surviving Corporation upon Acquiror's payment on the Effective
Date of a termination fee (which includes three (3) months rental) of One
Hundred Thousand Dollars ($100,000). Such amendment shall provide that the
Company agrees to abandon to lessor all furniture, fixtures and equipment on the
property, except for such assets relating to and necessary for the operation of
the business of the Company.
5.10 Litigation. The Company will use its reasonable efforts to promptly
settle, prior to Closing, the litigation set forth on SCHEDULE 5.10 of the
Company Disclosure Schedule.
ARTICLE 6
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. The Company Shareholder Approval shall have
been obtained.
(b) Governmental and Regulatory Approvals. All consents, approvals
and actions of, filings with and notices to any Governmental Entity
required of the Company, Acquiror, or Merger Sub to consummate the Merger
and the other transactions contemplated hereby (other than consents,
approvals, and actions of, filings with and notices to any Government
Entity required under the HSR Act and which are specified in SECTION
6.1(d)) shall have been obtained.
(c) No Injunctions or Restraints. No judgment, order, decree,
statute, law, ordinance, rule or regulation, entered, enacted, promulgated,
enforced or issued by any court or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition affecting the Closing
or seeking to prohibit the transactions contemplated under this Agreement
(collectively, "Restraints") shall be in effect; provided, however, that
each of the parties shall have used its commercially reasonable efforts to
prevent the entry of any such Restraints and to appeal as promptly as
possible any such Restraints that may be entered.
(d) HSR Act. Any applicable waiting period (and any extensions
thereto), filings or approvals under the HSR Act applicable to the
transaction contemplated by this Agreement shall have expired, been
terminated, been made, or been obtained.
6.2 Conditions to Obligations of Acquiror. The obligation of Acquiror to
effect the Merger is further subject to satisfaction or waiver of the following
conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company set forth herein shall be true and correct, in
all materials respects, both when made and at and as of the Closing Date,
as if made at and as of such time (except to the extent expressly made as
of an earlier date, in which case as of such date); provided, however, that
any representation or warranty contained in SECTION 3.1 which contains an
express materiality exception shall be accurate in all respects as written
in ARTICLE 3.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change. At any time after the date of this
Agreement there shall not have occurred any Material Adverse Change.
(d) Monthly Revenue-One Month. The Company's Monthly Recurring
Revenue for the first full month immediately preceding the Closing Date,
calculated in a manner consistent with the accounting principles utilized
by the Company (the "Closing Month Revenue"), shall be no less than
$7,600,000 ("Closing Month Revenue Minimum"); provided, however, that in
the event that the first full month
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immediately preceding the Closing Date is February 2004, the Closing Month
Revenue Minimum shall be $7,300,000.
(e) Net Book Value of Inventory. The net book value of the Company's
inventory, on the last day of the month preceding the Closing Date,
prepared in a manner consistent with the accounting principles utilized by
the Company (the "Closing Inventory"), shall be no less than $36,000,000
(net of 30-days past due).
(f) Noncompetition Agreements. The Executive Officers shall have
entered into the Noncompetition Agreements with Acquiror.
(g) Opinion of Counsel. The Acquiror shall have received an opinion
dated the Closing Date, from Kahn Kleinman, counsel to the Company, in
substantially the form and substance as set forth on Exhibit "C" hereto.
(h) Dissenting Shares. The ten (10) day notice period for dissenter's
demands with respect to the Merger provided by Section 1701.85 of the Ohio
Statutes shall have expired, and the number of Dissenting Shares shall not
exceed fifteen percent (15%) of the number of outstanding shares of Company
Common Stock as of the Effective Time.
(i) Voting Agreement. The Voting Agreement shall remain in full force
and effect and the Major Shareholders shall have complied in all respects
with the Voting Agreement and shall have performed all of their respective
obligations thereunder.
(j) Outstanding Shares. The total number of shares of Company Common
Stock outstanding and subject to issuance upon exercise of all Company
Stock Options shall not exceed 6,525,735.
(k) Consents. The Company shall have received all of the consents and
approvals set forth in SECTION 3.1(i) of the Company Disclosure Schedule,
except as otherwise provided on SECTION 6.3(k) of the Company Disclosure
Schedule.
(l) Officers' Certificate. Acquiror shall have received the
certificate of the Chief Executive Officer and Chief Financial Officer of
the compliance by the Company with the conditions of SECTIONS 6.2(a),
(b),(c), (d) and (e).
6.3 Conditions to Obligations of the Company. The obligation of the
Company to effect the Merger is further subject to satisfaction or waiver of the
following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Acquiror set forth herein shall be true and correct, in all
material respects, both when made and at and as of the Closing Date, as if
made at and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such date), provided, however, that any
representation or warranty contained in SECTION 3.2 which contains an
express materiality exception shall be accurate in all respects as written
in ARTICLE 3.
(b) Performance of Obligations of Acquiror. Acquiror shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
6.4 Frustration of Closing Conditions. Neither Acquiror nor the Company
may rely on the failure of any condition set forth in SECTION 6.1 (Conditions to
Each Party's Obligation to Effect the Merger), SECTION 6.2 (Conditions to
Obligations of the Acquiror),or SECTION 6.3 (Conditions to Obligations of the
Company), as the case may be, to be satisfied if such failure was caused by such
party's failure to use commercially reasonable efforts to consummate the Merger
and the other transactions contemplated by this Agreement, as required by and
subject to SECTION 5.3 (Commercially Reasonable Efforts; Cooperation).
6.5 Postponement of Closing. In the event all of the conditions set forth
in SECTION 6.1 and SECTIONS 6.2(c), (h), (i), (j) and (k) shall have been
satisfied during the first four (4) days of a calendar month, the parties agree
that the Company can postpone the Closing Date until the next Business Day.
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ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after the Company Shareholder Approval:
(a) By mutual written consent of Acquiror and the Company;
(b) By either Acquiror or the Company:
(i) if the Merger shall not have been consummated by June 30, 2004;
provided, however, that the right to terminate this Agreement pursuant
to this SECTION 7.1(b)(i) shall not be available to any party whose
failure to perform any of its obligations under this Agreement is the
basis for the failure of the Merger to be consummated by such time; and
further provided, that if the condition set forth in SECTION 6.1(d) has
not been satisfied on June 30, 2004, and on such date, the conditions
set forth in SECTIONS 6.1(a) and (c) and SECTIONS 6.2(c), (h), (i), (j)
and (k) shall have been satisfied, then the date shall be August 2,
2004.
(ii) if the Company Shareholder Approval shall not have been
obtained at a Company Shareholders Meeting duly convened therefor or at
any adjournment or postponement thereof; or
(iii) if any Restraint having any of the effects set forth in
SECTION 6.1(c) shall be in effect and shall have become final and
nonappealable; provided, however, that the party seeking to terminate
this Agreement pursuant to this SECTION 7.1(b)(iii) shall have used
commercially reasonable efforts to prevent the entry of and to remove
such Restraint;
(c) By Acquiror, if the Company shall have breached or failed to
perform in any of its representations, warranties, covenants or other
agreements contained in this Agreement, such that the conditions set forth
in SECTION 6.2(a) or SECTION 6.2(b) would not be satisfied; provided,
however, that the Acquiror may not terminate under this section if such
breach or failure (A) is cured by the Company within thirty (30) days after
written notice thereof or (B) is capable of being cured by the Company and
the Company continues to exercise reasonable efforts to cure such breach.
(d) By the Company, if Acquiror shall have breached or failed to
perform in any of its representations, warranties, covenants or other
agreements contained in this Agreement, such that the conditions set forth
in SECTION 6.3(a) or SECTION 6.3(b) would not be satisfied; provided,
however, that the Company may not terminate under this section if such
breach or failure is (A) cured by the Acquiror within thirty (30) days
after written notice thereof or (B) is capable of being cured by Acquiror
and the Acquiror continues to exercise reasonable efforts to cure such
breach;
(e) By the Company upon the Company's execution of a binding agreement
with a third party with respect to a Company Takeover Proposal;
(f) By Acquiror, if the Company or the Board of Directors of the
Company shall have (i) withdrawn or modified, in a manner adverse to
Acquiror or Merger Sub,(x) the approval by the Board of Directors of the
Company of this Agreement or the transactions contemplated hereby or (y)
the recommendation of the Company's board of directors that the
shareholders approve this Agreement and the Merger (an "Adverse
Recommendation") (it being understood and agreed that any communication by
the Company or its board of directors to the shareholders that indicates
that the board of directors had determined not to withdraw or modify such
recommendation, in whole or in part, because such action would or might
give rise to a right on the part of Acquiror to terminate this Agreement
and/or obligate the Company to comply with the provisions of SECTION 7.3(a)
of this Agreement shall nevertheless be deemed to be an Adverse
Recommendation), or (ii) approved or entered into a definitive agreement
with respect to a Company Takeover Proposal with a third party;
(g) By Acquiror in the event there is a Material Adverse Change;
(h) By Acquiror in the event that Governmental Entities require the
divestiture of 16 or more stores of the Company, Acquiror and its
subsidiaries; or
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(i) By Acquiror in the event the condition in SECTION 6.2(i) is not
satisfied.
7.2 Effect of Termination. In the event of termination of this Agreement
by either the Company or Acquiror as provided in SECTION 7.1, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of Acquiror or the Company, other than the provisions of
SECTION 5.2(a), this SECTION 7.2, SECTION 7.3 and ARTICLE 8, which provisions
survive such termination; provided, however, that nothing herein shall relieve
any party from any liability for any willful and material breach by such party
of any of its representations, warranties, covenants or agreements set forth in
this Agreement.
7.3 Fees and Expenses.
(a) Expenses. If this Agreement is terminated (i) in connection with
any of the circumstances described in SECTION 7.3(b), or (ii) in connection
with any of the circumstances described in SECTION 7.1(c), the Company
shall reimburse Acquiror and Merger Sub for all reasonable out-of-pocket
expenses and fees payable by Acquiror or Merger Sub in connection with the
proposed Merger; provided, however, that the Company shall not be obligated
to reimburse Acquiror and Merger Sub for expenses in excess of Five Hundred
Thousand Dollars ($500,000) in the aggregate. Any such required
reimbursement shall take place on the later of the termination of this
Agreement or submission of evidence of such incurred expenses to the
Company.
(b) Termination Fee. If this Agreement is terminated pursuant to
SECTION 7.1(e) or SECTION 7.1(f), or if this Agreement is terminated
pursuant to SECTION 7.1(b)(ii) or SECTION 7.1(i), then the Company shall
pay Buyer a fee of Three Million Seven Hundred Fifty Thousand Dollars
($3,750,000) in cash, which amount shall be payable in same day funds (the
"Termination Fee") simultaneously with such termination of this Agreement.
(c) Other Expenses. Except as provided otherwise in paragraph (a)
above or SECTION 5.3(b), all costs and expenses incurred in connection with
this Agreement, and the transactions contemplated hereby shall be paid by
the party incurring such expenses, whether or not the Merger is
consummated.
ARTICLE 8
GENERAL PROVISIONS
8.1 Survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This SECTION 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to the Company, to: Rainbow Rentals, Inc.
3711 Starr Centre Drive
Canfield, Ohio 44406
Facsimile No.: (330) 533-8658
Attention: Wayland J. Russell
with a copy to: Kahn Kleinman, A Legal
Professional Association
2600 Erieview Tower
1301 East Ninth Street
Cleveland, Ohio 44114-1824
Facsimile No.: (216) 623-4912
Attention: Marc H. Morgenstern, Esq.
And:Michael A. Ellis, Esq.
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(b) if to Acquiror or Merger Sub, to:
Rent-A-Center, Inc.
5700 Tennyson Parkway,
Third Floor
Plano, Texas 75024
Facsimile No.: 972-943-0116
Attention: Mark E. Speese
with a copy to: Winstead Sechrest & Minick P.C.
1201 Elm Street, Suite 5400
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attention: Thomas W. Hughes, Esq.
Notice given by the telecopier will be deemed delivered on the day the sender
receives telecopier confirmation that such notice was reached at the telecopier
number of the addressee. Notices delivered personally shall be deemed delivered
as of the actual receipt and overnight couriered notices shall be deemed
delivered one day after sending.
8.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
8.4 Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein), (a) constitutes
the entire agreement, and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter of
this Agreement and (b) except for the provisions of SECTION 5.4 and SECTION 5.6,
are not intended to confer upon any Person other than the parties any rights or
remedies.
8.5 Governing Law. This Agreement and the agreements, instruments, and
documents contemplated hereby unless otherwise noted, shall be governed by, and
construed in accordance with, the laws of the State of Delaware , without regard
to principles of conflict of laws thereof.
8.6 Assignment. Neither this Agreement nor any of the rights, interests
or obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties hereto without the prior
written consent of the other parties; provided, however, that Acquiror and
Merger Sub may assign their respective rights and obligations hereunder to any
direct or indirect wholly-owned subsidiary of Acquiror. Any assignment in
violation of the preceding sentence shall be void. Subject to the preceding two
sentences, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
8.7 Consent to Jurisdiction. Each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any federal court located in the
State of Delaware or any Delaware state court, in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this Agreement,
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction
by motion or other request for leave from any such court, and (c) agrees that it
will not bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal court sitting
in the State of Delaware or a Delaware state court.
8.8 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. References to Sections and Articles refer to sections and
articles of this Agreement unless otherwise stated.
8.9 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that
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any term or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner so that the transactions contemplated hereby are fulfilled to
the extent possible.
8.10 Amendment. This Agreement may be amended by the parties upon action
taken by or on behalf of their respective boards of directors at any time before
or after the Company Shareholder Approval; provided, however, that after any
such Company Shareholder Approval, there shall not be made any amendment
affecting the Merger Consideration or that by law requires further approval by
the shareholders of the Company without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
8.11 No Consequential Damages. Notwithstanding anything to the contrary
elsewhere in this Agreement, no party (or its Affiliates) shall, in any event,
be liable to any other party (or its Affiliates) for any consequential damages,
including, but not limited to, loss of revenue or income, cost of capital, or
loss of business reputation or opportunity relating to the breach or alleged
breach of this Agreement.
8.12 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
will impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor will any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not alternative to or exclusive to, and not
exclusive of, any rights or remedies otherwise available.
8.13 Extension; Waiver. At any time prior to the Effective Time, a party
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties, (b) waive any inaccuracies in the representations and
warranties of another party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of SECTION
8.11, waive compliance by any party with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
8.14 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
required to be performed by the Company were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
Acquiror shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction without the
necessity of posting a bond, this being in addition to any other remedy to which
Acquiror is entitled at law or in equity.
[THIS SPACE LEFT BLANK INTENTIONALLY.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Merger to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
RAINBOW RENTALS, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
------------------------------------
RENT-A-CENTER, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
------------------------------------
EAGLE ACQUISITION SUB, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
------------------------------------
A-31
APPENDIX A
INTERPRETATION
When a reference is made in this Agreement to an Article, Section or
Exhibit, such reference shall be to an Article or Section of, or an Exhibit to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. All terms defined in this Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined therein. The definitions contained in
this Agreement are applicable to the singular as well as the plural forms of
such terms and to the masculine as well as to the feminine and neuter genders of
such term. Any agreement, instrument or statute defined or referred to herein or
in any agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a Person are also to its permitted successors and assigns.
DEFINITIONS
For purposes of this Agreement:
"Acquiror" has the meaning set forth in the Recitals.
"Affiliate" of any Person means another Person that directly or indirectly,
through one or more intermediaries, Controls, is Controlled by, or is under
common Control with, such first Person.
"Aggregate Merger Consideration" has the meaning set forth in Section
2.4(a).
"Agreement" has the meaning set forth in the Recitals.
"Benefit Plans" has the meaning set forth in Section 3.1(m)(i).
"Business Day" shall mean any day other than a day on which banks in the
States of Ohio, Texas, or New York are authorized or obligated to be closed.
"Certificates" has the meaning set forth in Section 2.3(b).
"Certificate of Merger" has the meaning set forth in Section 1.3.
"Closing" has the meaning set forth in Section 1.2.
"Closing Date" has the meaning set forth in Section 1.2.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the Recitals.
"Company Common Stock" has the meaning set forth in the Recitals.
"Company Disclosure Schedule" means the schedule referenced in Section 3.1.
"Company Permits" has the meaning set forth in Section 3.1(i).
"Company Preferred Stock" has the meaning set forth in Section 3.1(c).
"Company SEC Documents" has the meaning set forth in Section 3.1(f).
"Company Stock Options" has the meaning set forth in Section 3.1(c).
"Company Stock Plans" has the meaning set forth in Section 3.1(c).
"Company Shareholder Approval" has the meaning set forth in Section 3.1(u).
"Company Shareholders Meeting" has the meaning set forth in Section 5.1(b).
"Company Takeover Proposal" means any inquiry, proposal or offer from any
person relating to any (a) direct or indirect acquisition or purchase of a
business that constitutes 25% or more of the net revenues, net income or the
assets of the Company, taken as a whole, (b) direct or indirect acquisition or
purchase of 25% or more of any class of equity securities of the Company whose
business constitutes 25% or more of the net revenues, net income or assets of
the Company, taken as a whole, (c) tender offer or exchange offer that if
consummated would result in any person beneficially owning 25% or more of any
class of equity securities of the Company whose business constitutes 25% or more
of the net revenues, net income or assets of the Company, taken as a whole, or
(d) merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company whose business
constitutes 50% or more of the net revenues, net income or assets of the
Company, taken as a whole, other than the transactions contemplated by this
Agreement.
"Consent" shall mean any approval consent, ratification, permission, waiver
or authorization (including any License or Governmental authorization).
"Consultants" shall have the meaning set forth in Section 5.8.
"Consulting Agreements" shall have the meaning set forth in Section 5.8.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management policies of a Person, whether
through the ownership of voting securities, by contract, or otherwise.
"Definitive Proxy Statement" has the meaning set forth in Section 5.1(a).
"Dissenting Shares" has the meaning set forth in Section 2.5.
"Effective Time" has the meaning set forth in Section 1.3.
"Eligible Option Holders" has the meaning set forth in Section 2.2.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any trade or business, whether or not incorporated,
that together with the Company would be deemed to be a "single employer" within
the meaning of Section 4001(b) of ERISA.
"Exchange Act" means the Securities Exchange Act of 1934.
"Exchange Agent" has the meaning set forth in Section 2.3(a).
"Exchange Fund" has the meaning set forth in Section 2.3(a).
"Fairness Opinion" shall mean the opinion referenced in Section 3.1(o).
"Financial Advisor" means NatCity Investments, Inc.
"Governmental Entity" has the meaning set forth in Section 3.1(e).
"HSR Act" has the meaning set forth in Section 3.1(e).
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person, (i) the
principal of and premium, if any, in respect of any indebtedness of such Person
for money borrowed, (ii) the principal, premium, if any, and interest of such
Person with respect to obligations evidenced by bonds, debentures, notes or,
except for accrued liabilities arising in the ordinary course of business, other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses (other than trade payables which
are not overdue or in default), (iii) all obligations of such Person in respect
of letters of credit or other similar instruments (including reimbursement
obligations with respect thereto) but only to the extent of drawings thereunder,
(iv) every obligation of such Person issued or assumed as the deferred purchase
price of property or services (excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business which are not overdue or
in default), (v) every capital lease obligation (determined in accordance with
GAAP) of such Person, (vi) all Indebtedness of other Persons secured
ii
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided, however, that the amount of such Indebtedness
shall be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons,
(vii) every obligation to pay rent or other payment amounts of such Person with
respect to any sale-leaseback transaction to which such Person is a party,
payable through the stated maturity of such sale-leaseback transaction, (viii)
factoring arrangements of such Person, whether or not such arrangements appear
on the balance sheet of such Person; and (ix) every obligation of the type
referred to in clauses (i) through (viii) of another Person the payment of
which, in any case, such Person has guaranteed or is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise.
"Indemnitees" have the meaning set forth in Section 5.4(a).
"Intellectual Property" has the meaning set forth in Section 3.1(r).
"Knowledge" means the actual knowledge, after due inquiry, of the Company's
Chief Executive Officer, the President, the Chief Operating Officer, and the
Chief Financial Officer, and the actual knowledge of the Marketing Director,
Vice-President, Controller and Director of Human Resources as it relates to
their specific assigned areas.
"Legal Requirement" means any federal, state, local, municipal, or other
order, constitution, law, rule, ordinance, permit, judgment, principle of common
law, regulation, statute or treaty.
"Lien" means any pledge, claim, lien, tax, charge, encumbrance or security
interest of any kind or nature whatsoever.
"Material Adverse Change" means any Material Adverse Effect and,
specifically including:
(a) The commencement of any actions, suits, investigations, complaints
or proceedings, at law or in equity, in any court or before any
Governmental Entity, by a person or persons seeking class action status and
alleging violation of the provisions of the Rental Purchase Agreements,
rent-to-own statutes or any other consumer protection law; provided that
such action involves five (5) or more stores; and
(b) The commencement of any actions, suits, investigations,
complaints, or proceedings, at law or in equity, in any court or before any
Governmental Entity, by a person or persons seeking class action status and
alleging violations of federal or state laws respecting employment,
including, but not limited to, gender, race, disability, national origin or
age discrimination, violations of the Occupational Safety and Health Act of
1970, as amended, Family and Medical Leave Act of 1993, as amended, terms
and conditions of employment or the federal or state Legal Requirements
regarding wages and hours; provided, however, that the commencement of any
such actions, suits, investigations, complaints or proceedings shall not
constitute a Material Advance Change in the event the Company can
demonstrate to the reasonable satisfaction of the Acquiror that the
potential size of the purported class does not exceed twenty-five (25)
persons.
"Material Adverse Effect" means any change, effect, event, occurrence or
state of facts that is, has had or will have a material and adverse effect to
the business, condition (financial or other), results of operations, or
properties of the Company taken as a whole, other than any change, effect, event
or occurrence (i) relating to the economy or securities markets of the United
States or any other region in general, or (ii) relating to its business,
financial condition or results of operations that has been disclosed in writing
to the other party prior to the date of this Agreement.
"Material Contract" shall mean (i) any contract within the meaning set
forth in Item 601(b)(10) of Regulation S-K of the SEC; (ii) any noncompetition
agreement or other agreement that limits or will limit the Company for engaging
in any line of business, (iii) any agreement, contract or commitment not in the
ordinary course of business involving the excess of $50,000; (iv) the scheduled
severance payments and Stay Bonuses and Change of Control Agreements; (v) any
franchise agreement, (vi) any contract or agreement relating to the acquisition
or disposition of assets having a value in excess of $100,000 other than the
purchase or sale of inventory in the ordinary course of business; (vii) any
material licenses, registrations or memberships required by a Government Entity,
(viii) any shareholder, voting trust or similar contract or agreement relating
to the voting of shares of Company Common Stock, (iv) joint venture agreements,
partnership agreements and other similar
iii
contracts involving a sharing of profits and expenses, (x) any material
agreement or commitment relating to the borrowing of money in excess of $100,000
or guaranty, including security agreement therewith, (xi) the Leases, (xii)
contracts and agreements for the purchase of inventories, goods or other
materials, by or for the furnishing of services to the Company that (A) requires
payments in excess of $150,000 or (B) are not terminable by the Company on
notice of ninety (90) days or less without penalty, and (xiii) all employment
agreements.
"Material Supplier" has the meaning set forth in Section 3.1(t).
"Merger" has the meaning set forth in the Recitals.
"Merger Consideration" has the meaning set forth in Section 2.1(b).
"Merger Sub" has the meaning set forth in the Recitals.
"Monthly Recurring Revenues" means all of the revenues in any month from
all Rental Purchase Agreements (including, without limitation, rental income
(including final month(s) rental or sale price), reinstatement fees and in-home
pick-up fees), but not including retail sales during the month, as shown on the
unaudited Company-generated monthly reports, prepared on a consistent basis in
accordance with past practices. Monthly Recurring Revenues does not include
revenue from merchandise sales or from the exercise of early purchase options
under Rental Purchase Agreements.
"Ohio Statutes" means the Ohio General Corporation Law.
"Option Shares Merger Consideration" has the meaning set forth in Section
2.2.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.
"Preliminary Proxy Statement" has the meaning set forth in Section 5.1(a).
"Proxy Statement" has the meaning set forth in Section 3.1(e).
"Purchase Price Reduction" has the meaning set forth in Section 2.3(a)
hereof.
"Rental Purchase Agreement" has the meaning set forth in Section 3.1(k).
"Restraints" has the meaning set forth in Section 6.1(c).
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Stock Reference Date" has the meaning set forth in Section 3.1(c).
"Subsidiary" of any Person means another Person of which sufficient voting
securities, other voting ownership, or voting partnership interests (or, if
there are no such voting interests, 50% or more of the equity interests) of such
Person to elect at least a majority of its Board of Directors or other governing
body are owned, directly or indirectly, by such first Person.
"Surviving Corporation" has the meaning set forth in Section 1.1.
"Taxes" means all (x) federal, state, local or foreign net and gross
income, alternative or add-on minimum, environmental, gross receipts, ad
valorem, value added, goods and services, capital stock, profits, license,
single business, employment, severance, stamp, unemployment, customs, property,
sales, excise, use, occupation, service, transfer, payroll, social security,
franchise, withholding and other taxes or similar governmental duties, charges,
fees, levies or other assessments including any interest, penalties or additions
with respect thereto, (y) liability for the payment of any amounts of the type
described in clause (x) as a result of being a member of an affiliated,
consolidated, combined or unitary group, and (z) liability for the payment of
any amounts as a result of being party to any tax sharing agreement or as a
result of any express or implied obligation to indemnify any other person with
respect to the payment of any amounts of the type described in clause (x) or
(y).
"Termination Fee" has the meaning set forth in Section 7.3(b).
"Voting Agreement" has the meaning set forth in the Recitals.
iv
EXHIBIT A
VOTING AGREEMENT
THIS VOTING AGREEMENT, dated as of February 4, 2004 (this "Agreement"), is
made by and among RENT-A-CENTER, INC., a Delaware corporation ("RAC"), WAYLAND
J. RUSSELL ("Russell"), the RUSSELL FAMILY FOUNDATION (the "Russell
Foundation"), MICHAEL J. VIVEIROS, individually, and as Trustee of the Michael
and Robbi Viveiros Charitable Remainder Unitrust U/T/A/ December 30, 2003
("Viveiros") and MICHAEL A. PECCHIA ("Pecchia" and, together with Russell, the
Russell Foundation, and Viveiros, each a "Shareholder" and collectively, the
"Shareholders" as defined herein). Capitalized terms used and not otherwise
defined herein shall have the respective meanings assigned to them in the Merger
Agreement.
WITNESSETH:
WHEREAS, as of the date hereof, each of the Shareholders is the beneficial
owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") of the number of common shares without par value
(the "Company Common Shares") of Rainbow Rentals, Inc., an Ohio corporation (the
"Company"), in each case as set forth opposite such Shareholder's name on the
signature page hereof (such shares, together with any Company Common Shares
acquired by any Shareholder prior to the termination of this Agreement, are
collectively referred to herein as the "Shares");
WHEREAS, concurrently with the execution of this Agreement, RAC, EAGLE,
ACQUISITION SUB, INC., an Ohio corporation (the "Merger Sub"), and the Company
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), pursuant to which, upon the terms and subject to the
conditions thereof, Merger Sub will be merged with and into the Company (the
"Merger"); and
WHEREAS, as a condition to the willingness of the Company, RAC, and Merger
Sub to enter into the Merger Agreement, RAC has requested each of the
Shareholders to agree, and in order to induce RAC to enter into the Merger
Agreement, such Shareholders are willing to agree, to vote in favor of adopting
the Merger Agreement and approving the Merger and the other transactions
contemplated by the Merger Agreement, upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereby agree, severally and not jointly, as follows:
Section 1. Voting of Shares.
(a) Until the Termination Date (as hereinafter defined), each Shareholder
hereby agrees that, at the Company Shareholder Meeting or any other meeting of
the shareholders of the Company, however called, each Shareholder will (i)
appear at such meeting or otherwise cause its Shares to be counted as present
thereat for purposes of establishing a quorum, and (ii) vote or direct the vote
of all of such Shareholder's Shares (A) in favor of the adoption of the Merger
Agreement and the approval of the Merger and the other transactions contemplated
by the Merger Agreement, and any matter that could reasonably be expected to
facilitate the Merger, and (B) against (1) any Company Takeover Proposal, (2)
against any action or agreement that would reasonably be expected to result in a
breach of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which would reasonably be
expected to result in any of the conditions to the Merger Agreement not being
fulfilled, including, without limitation, a "control share acquisition" (as
contemplated by Ohio Rev. Code Ann. Sections 1701.01 and 1701.831) by any Person
other than pursuant to the Merger and the Merger Agreement, (3) any change in
the present capitalization of the Company, (4) any amendment to the Company's
articles of incorporation or code of regulations, or (5) any other action which
in the case of each of the matters referred to in this clause (B) could
reasonably be expected to impede, interfere with, delay, postpone or materially
adversely affect the transactions contemplated by the Merger Agreement or the
likelihood of such transactions being consummated in a timely manner; and (C) in
favor of any other matter necessary for consummation or in furtherance of the
transactions contemplated by the Merger Agreement which is considered at any
such meeting of the Company's shareholders or in such written consent in lieu
thereof. In connection therewith, Shareholder shall execute any documents which
are necessary or
appropriate in order to effectuate the foregoing. In addition, each Shareholder
agrees that it will, upon request by the RAC, furnish written confirmation, in
form and substance reasonably acceptable to RAC, of such Shareholder's vote in
favor of the Merger, Merger Agreement and any other transaction contemplated by
the Merger Agreement or that could be expected to facilitate the Merger.
(b) In the event that any Shareholder fails to satisfy its obligations
under clauses (a)(i) or (a)(ii) above, each Shareholder hereby grants RAC a
power of attorney up to and through the Termination Date to execute and deliver
a proxy for and on behalf of such Shareholder.
(c) Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict any Shareholder, or any affiliate thereof, from acting in his capacity
as director or officer of the Company, to the extent applicable, it being
understood that this Agreement shall apply to any such Shareholder solely in his
capacity as a shareholder of the Company.
Section 2. Transfer of Shares. Each Shareholder represents and warrants
that it has no present intention of taking action to, prior to the Termination
Date, and shall not, directly or indirectly, (a) sell, assign, transfer
(including by operation of law), tender, pledge, or otherwise dispose of or
encumber any of the Shares, (b) deposit any of the Shares into a voting trust or
enter into a voting agreement or arrangement with respect to the Shares or grant
any proxy or power of attorney with respect thereto which is inconsistent with
this Agreement, or (c) enter into any contract, option or other arrangement or
undertaking with respect to the direct or indirect sale, transfer (including by
operation of law) or other disposition of any Shares. Notwithstanding anything
to the contrary in clauses (a) and (c) above, any Shareholder may gift or
similarly transfer any or all of its Shares to Shareholder's spouse or issue,
including adopted children, or to a trust or other entity for the exclusive
benefit of Shareholder or Shareholder's spouse or issue or to a charity;
provided, however, that in any such case, prior to and as a condition to the
effectiveness of such transfer, each person as to which any of such Shares or
any interest in any of such Shares is or may be transferred shall have executed
and delivered to each of the Company and RAC a counterpart to this Agreement
pursuant to which such person shall be bound by all of the terms and provisions
of this Agreement.
Section 3. Purchase of Shares. Each Shareholder agrees that it shall not
directly or indirectly acquire additional Shares. Notwithstanding the foregoing,
each Shareholder may exercise options to purchase Company Common Shares pursuant
to the Company's 1998 Stock Option Plan; provided, however, that upon the
exercise by such Shareholder of such option, such Company Common Shares that
Shareholder acquires thereto will be treated as Shares for the purposes of this
Agreement.
Section 4. Agreement of RAC. RAC hereby covenants and agrees with the
Shareholders that it shall take all reasonably necessary actions to ensure that
promptly following the Effective Time, each Shareholder or its designee shall
receive the Merger Consideration in immediately available funds with respect to
the number of Shares for which such Shareholder is entitled to receive Merger
Consideration pursuant to the terms of the Merger Agreement, provided that such
Shareholder or its designee shall have complied with the provisions of Section
2.3(b) of the Merger Agreement.
Section 5. Representations, Warranties and Covenants of Shareholder. Each
Shareholder hereby represents, warrants and covenants to RAC with respect to
itself and its ownership of its Shares as follows:
(a) Shareholder has all legal capacity to execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
(b) Shareholder is the beneficial owner of its Shares and, except as
permitted by Section 2 of this Agreement, will continue to be the
beneficial owner of its Shares until the Termination Date and during such
period the Shares will be free and clear of any liens, claims, options,
charges, or other encumbrances.
(c) This Agreement has been duly executed and delivered by such
Shareholder.
(d) This Agreement constitutes the valid and binding agreement of such
Shareholder, enforceable against Shareholder in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting
creditors' rights
2
generally, by general equity principles, (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(e) The execution and delivery of this Agreement by Shareholder does
not, and the performance of this Agreement by Shareholder will not, (i)
conflict with or violate any law applicable to Shareholder or by which
Shareholder or any of Shareholder's properties is bound or affected; or
(ii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any assets of
Shareholder, including, without limitation, Shareholder's Shares, pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which
Shareholder is a party or by which Shareholder or any of Shareholder's
assets is bound or affected.
(f) Until the Termination Date, Shareholder shall not (and will use
Shareholder's reasonable best efforts to cause the Company, its officers,
directors, or employees, or any investment banker, financial adviser
attorney, accountant, or other representative of Shareholder or the Company
or any of the same not to) directly or indirectly through any Person (i)
solicit, initiate, or encourage (including by way of furnishing any
information or assistance), or take any other action to facilitate or cause
any inquiries or the making of any proposal from any Person which
constitutes, any Company Takeover Proposal, (ii) participate in any
discussions or negotiations in furtherance of such inquiries or to obtain a
Company Takeover Proposal, or the making of any proposal that constitutes
any Company Takeover Proposal, or (iii) knowingly facilitate any effort or
attempt to make or implement a Company Takeover Proposal. In the event that
Shareholder receives from any third party any offer or indication of
interest (whether made in writing or otherwise) regarding any of the
transactions referred to in the foregoing sentence, or any request for
information about the Company with respect to any of the foregoing,
Shareholder shall immediately advise RAC orally and in writing of any
request for information or of any Company Takeover Proposal and the
material terms and conditions of such request or Company Takeover Proposal,
including the name of any Person making a Company Takeover Proposal.
Shareholder will keep RAC reasonably informed of the status and details
(including amendments and proposed amendments) of any such request or
Company Takeover Proposal. Notwithstanding any provision of this Section
3(f) to the contrary, if Shareholder is a member of the Company's Board of
Directors, Shareholder may take actions in such capacity to the extent
permitted by the Merger Agreement.
(g) Shareholder hereby waives any rights of appraisal or rights to
dissent from the Merger.
(h) Shareholder agrees to execute and deliver any additional documents
necessary, in the reasonable opinion of RAC, to carry out the purpose and
intent of this Agreement.
(i) Shareholder understands and acknowledges that RAC is entering into
the Merger Agreement in reliance upon the execution and delivery of this
Agreement by Shareholder.
Section 6. Representations and Warranties of RAC. RAC hereby represents
and warrants to the Shareholders as follows:
(a) RAC is a corporation duly organized and validly existing under the
laws of the jurisdiction of its incorporation. RAC has all necessary
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby by RAC have been duly authorized by all necessary action on the part
of RAC.
(b) (i) No filing with any governmental authority and no
authorization, consent or approval of any other Person is necessary for the
execution of this Agreement by RAC and the consummation by RAC of the
transactions contemplated hereby and (ii) none of the execution and
delivery of this Agreement by RAC, the consummation by RAC of the
transactions contemplated hereby shall (A) conflict with or result in any
breach of the organizational documents of RAC, (B) result in, or give rise
to, a violation or breach of or a default under any of the terms of any
material contract, understanding, agreement or other instrument or
obligation to which RAC is a party or by which RAC or any of its assets may
be bound, or (C) violate any
3
applicable order, writ, injunction, decree, judgment, statute, rule or
regulation, except for any of the foregoing as could not reasonably be
expected to impair RAC's ability to perform its obligations under this
Agreement.
(c) RAC understands and acknowledges that the Shareholders are
entering into this Agreement in reliance upon the execution and delivery of
the Merger Agreement by RAC.
Section 7. Additional Documents. Each Shareholder and RAC hereby covenant
and agree to execute and deliver any additional documents reasonably necessary
or desirable to carry out the purpose and intent of this Agreement.
Section 8. Consent and Waiver. Each Shareholder hereby gives any consent
or waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which such Shareholder is a party or pursuant to
any rights such Shareholder may have.
Section 9. Termination. This Agreement shall terminate upon the earliest
to occur of (i) the Effective Time, (ii) the date of termination of the Merger
Agreement, or (iii) the mutual consent of the parties hereto, provided that no
such termination shall relieve any party of liability for a breach hereof prior
to the Termination Date.
Section 10. Expenses. Each party hereto shall be responsible for its own
fees and expenses (including, without limitation, the fees and expenses of
financial consultants, investment bankers, accountants and counsel) in
connection with the entering into of this Agreement.
Section 11. Separate Agreement. The agreement between each Shareholder
and RAC contained in this Agreement is intended to be severable from the
agreement between RAC and any other Shareholder. Each Shareholder acknowledges
that RAC can proceed against any one Shareholder without the need to involve or
join in any complaint against the other Shareholders.
Section 12. Miscellaneous.
(a) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof. This Agreement is not intended to confer
upon any other person any rights or remedies hereunder. This Agreement may not
be amended, modified or rescinded except by an instrument in writing signed by
each of the parties hereto.
(b) Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by operation of law (including by merger or
consolidation) or otherwise without the prior written consent of the other
parties hereto; provided, however, that RAC may assign its rights and
obligations hereunder to any director or indirect wholly-owned subsidiary of
RAC. Any assignment in violation of the preceding sentence shall be void.
Subject to the preceding two sentences, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by the parties hereto and their
respective successors and assigns.
(c) The failure of any party hereto to exercise any right, power or remedy
provided under this Agreement or otherwise available in respect hereof at law or
in equity, or to insist upon compliance by any other party hereto with its
obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof shall not constitute a waiver by such party of its right
to exercise any such or other right, power, or remedy or to demand such
compliance. Each of the parties hereto agrees that it will use its reasonable
best efforts to do all things necessary to effectuate this Agreement.
(d) All notices, requests, claims, demands and other communications to be
given under this Agreement shall be in writing and shall be deemed given (i)
three (3) business days following sending by registered or certified mail,
postage prepaid, (ii) when sent if sent by facsimile; provided, however, that
the fax is promptly confirmed by telephone confirmation thereof, (iii) when
delivered, if delivered personally to the intended recipient, and
4
(iv) one business day following sending by overnight delivery via a national
courier service, and in each case, addressed to a party at the following address
for such party:
if to the Shareholders, to: c/o Wayland J. Russell
Rainbow Rentals, Inc.
3711 Starr Centre Drive
Canfield, Ohio 44406
with a copy to: Kahn Kleinman,
A Legal Professional Association
2600 Erieview Tower
1301 East Ninth Street
Cleveland, Ohio 44114-1824
Facsimile No.: (216) 623-4912
Attention: Marc H. Morgenstern, Esq.
And: Michael A. Ellis, Esq.
if to RAC or Merger Sub, to: Rent-A-Center, Inc.
5700 Tennyson Parkway,
Third Floor
Plano, Texas 75024
Facsimile: 972-943-0116
Attention: Mark E. Speese
with a copy to: Winstead Sechrest & Minick P.C.
1201 Elm Street, Suite 5400
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attention: Thomas W. Hughes, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
(e) This Agreement shall be governed by, and construed in accordance with
the laws of the State of Ohio, without giving effect to the choice of law
provisions thereof. Each of the parties hereto (a) consents to submit itself to
the personal jurisdiction of any federal court located in the State of Ohio or
any Ohio state court, in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement, (b) agrees that it will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, and (c) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a federal court sitting in the State of
Ohio or a Ohio state court.
(f) The descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
(g) The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof. If any provision of this
Agreement, or the application thereof to any person or any circumstance, is
invalid or unenforceable, (a) if necessary, a suitable and equitable provision
shall be substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (b) the remainder of this Agreement and the application of such provision to
other persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application thereof, in any
other jurisdiction.
(h) The parties agree that RAC will be irreparably damaged and that there
will be no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholders set forth herein. It is accordingly agreed that, in
addition to any other remedies that may be available to RAC upon any such
violation, RAC shall have the
5
right to enforce such covenants and agreements by specific performance,
injunctive relief, or by any other means available to RAC at law or in equity.
(i) This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
(j) The words "hereof," "herein" and "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section and
paragraph references are to the sections and paragraphs of this Agreement unless
otherwise specified. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Any agreement, instrument or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such, instrument or statute as from time to time, amended, qualified or
supplemented, including (in the case of agreements and instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
(k) The parties have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
6
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above.
"RAC"
RENT-A-CENTER, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
------------------------------------
<Table>
<Caption>
ACTUAL SHARES OWNED OPTION SHARES "SHAREHOLDERS"
- ------------------- ------------- --------------
2,360,430 -0- ------------------------------------------------------
WAYLAND J. RUSSELL, individually
176,245 -0- THE RUSSELL FAMILY FOUNDATION
By:
------------------------------------------------------
Wayland J. Russell
Title:
------------------------------------------------------
255,620 -0- ------------------------------------------------------
MICHAEL J. VIVEIROS, individually and
as Trustee of the Michael and Robbi Viveiros
Charitable Remainder Unitrust U/T/A December 30, 2003
-0- 60,000 ------------------------------------------------------
MICHAEL A. PECCHIA
</Table>
7
ANNEX B
[NATCITY INVESTMENTS, INC.(R) LOGO]
February 3, 2004
PERSONAL & CONFIDENTIAL
Board of Directors
Rainbow Rentals, Inc.
3711 Starr Centre Drive
Canfield, OH 44406
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the issued and outstanding common shares, without par
value (the "Company Common Stock"), of Rainbow Rentals, Inc., an Ohio
corporation (the "Company"), of the consideration to be received by such holders
pursuant to the Agreement and Plan of Merger (the "Merger Agreement") to be
entered into by the Company, Rent-A-Center, Inc., a Delaware corporation
("Acquirer"), and RAC Acquisition Sub Inc., an Ohio corporation, and an indirect
wholly owned subsidiary of Acquirer ("Merger Sub").
You have advised us that the Merger Agreement contemplates that at the
closing of the transaction contemplated thereby, among other things, Merger Sub
will be merged with and into the Company (the "Merger") and each common share of
the Company issued and outstanding as of the date the merger becomes effective
(other than dissenting shares, any Company Common Stock held in the treasury of
the Company, or owned by Acquirer or an affiliate of Acquirer) will be converted
into the right to receive the amount of $16.00 per share in cash (the "Merger
Consideration").
In connection with rendering this opinion, we have, among other things:
(i) reviewed a draft of the Merger Agreement, dated February 2, 2004,
which we understand to be in substantially final form;
(ii) reviewed a draft of the form of Voting Agreement dated February 2,
2004 for certain shareholders of the Company, which we understand to
be in substantially final form;
(iii) reviewed certain publicly available information concerning the
Company, including the Company's Annual Reports on Form 10-K for
each of the years ended December 31, 1999, 2000, 2001, and 2002, the
Company's Quarterly Reports on Form 10-Q for each of the periods
ended March 31, 2003, June 30, 2003, and September 30, 2003;
(iv) analyzed certain unaudited internal information, primarily financial
in nature and including financial results for the fiscal year ended
December 31, 2003 and projections as of February 2, 2004 for the
fiscal years ending December 31, 2004 through 2008, prepared and
furnished to us by the Company's management for purposes of our
analysis;
(v) reviewed certain publicly available information concerning the
trading of, and the trading market for, the Company Common Stock;
(vi) reviewed certain publicly available information with respect to
certain other companies that we believe to be comparable to the
Company and the trading markets for certain of such other companies'
securities;
(vii) compared the proposed financial terms of the Merger with certain
publicly available information concerning the nature and terms of
certain other transactions that we considered to be relevant;
Board of Directors
February 4, 2004
Page 2
(viii) discussed past and current operations and financial condition and
the prospects of the Company, as well as other matters we believe
relevant to our inquiry, with certain officers and employees of the
Company; and
(ix) conducted such other financial studies, analyses and investigations,
and considered such other information, as we deemed necessary or
appropriate, including our assessment of general financial, economic,
market and other conditions.
In our review and analysis and in arriving at our opinion, we have relied
upon, without any responsibility for independent verification or liability
therefor, the accuracy and completeness of all of the financial and other
information that was publicly available or supplied or otherwise made available
to us by the Company. We have not been engaged to, and have not independently
attempted to, verify any of such information. We have also relied upon the
management of the Company as to the reasonableness and achievability of the
financial and operating projections (and the assumptions and bases therefor)
provided to us and, with your consent, we have assumed that such projections
reflect management's best currently available estimates and judgments. We have
not been engaged to assess the reasonableness or achievability of such
projections or the assumptions on which they were based and express no view as
to such projections or assumptions. In addition, we have not evaluated or
appraised any of the assets, properties or facilities of the Company nor have we
been furnished with any such evaluation or appraisal. We have also not been
requested to assume, and have not assumed, any obligation to conduct any
inspection of the properties or facilities of the Company.
At your direction, we have not been asked to, nor do we, offer any opinion
as to the material terms of the Merger Agreement or the form of the transaction
as a merger. We have also assumed, with your consent, that the final executed
form of the Merger Agreement does not differ in any material respect from the
draft agreement dated February 2, 2004 furnished to and reviewed by us and that
the conditions to the Merger as set forth in the Merger Agreement would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Merger Agreement. Without limiting the generality of
the foregoing, for purposes of rendering our opinion, we have assumed, in all
respects material to our analysis, with your consent, (a) that the proposed
Merger will be consummated as described in the Agreement and in compliance with
all applicable laws, (b) that all the representations and warranties of each
party contained in the Agreement are true and correct, (c) that each party to
the Agreement will perform all of the covenants and agreements required to be
performed by it thereunder without any consents or waivers of the other parties
thereto, and (d) that all conditions to the consummation of the proposed Merger
will be satisfied without waiver thereof. We note that we are not legal, tax or
regulatory experts. We have assumed, with your consent, that all governmental,
regulatory or other consents and approvals (contractual or otherwise) necessary
for, or in connection with, the consummation of the proposed Merger will be
obtained without any adverse effect on the Company, the Merger Sub and Acquirer
or on the contemplated benefits of the proposed Merger, in any respect material
to our analysis.
It should be noted that this opinion is necessarily based on the economic,
monetary, market and other conditions as in effect on, and the information made
available to us, as of the date hereof and does not address any matters
subsequent to such date. It should be noted that although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm our opinion after the date hereof. We disclaim any
undertaking or obligation to advise any person of any change in any fact or
matter affecting the opinion which may come or be brought to our attention after
the date hereof. Without limiting the foregoing, in the event that in our
judgment there is any material change in any fact, assumption upon which our
opinion is based or matter affecting the opinion after the date hereof, we
reserve the right to withdraw, revise or modify our opinion.
Our opinion is limited to the fairness, as of the date hereof, from a
financial point of view, of the Merger Consideration. This opinion does not
address the underlying or relative merits of the proposed Merger or any related
transaction and any other transactions or business strategies discussed by the
Board of Directors of the Company or that might be available as alternatives to
the proposed Merger or the decision of the Company to
Board of Directors
February 4, 2004
Page 3
proceed with the proposed Merger or any related transaction. Our opinion is not,
and should not be construed as, a valuation of the Company or its respective
assets or any of the Company Common Stock.
We have acted as the Company's exclusive financial advisor in connection
with the Merger and will receive a fee for our services. We will also receive a
fee for our services in rendering this opinion and an additional fee if the
proposed Merger is consummated. The Company has agreed to indemnify us under
certain circumstances.
We provide a full range of financial, advisory and securities services and,
as part of our investment banking activities, are regularly engaged in the
valuation of businesses and their respective securities in connection with
mergers and acquisitions, underwritings, private placements and valuations for
corporate and other purposes. In the ordinary course of our business, we may
actively trade the Company Common Stock and other securities of the Company, as
well as Acquirer's common stock, for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our affiliates have also provided financing services from time to time to
the Company and to the Acquirer and their respective affiliates for which
services we have received, and expect to receive, compensation. One of our
affiliates is currently a lender to the Company. One of our affiliates is also a
lender to the Acquirer. The interests of our affiliates may differ from those of
the Company, the Merger Sub or the Acquirer in respect of the timing, pricing
and other terms and conditions of the proposed Merger and otherwise. No opinion
rendered or advice given by us is deemed to be a representation that any of our
affiliates would approve or vote for the proposed Merger or any related
transaction if any such approval or vote were required.
This opinion has been prepared for the information of the Board of
Directors of the Company for its confidential use in connection with its
consideration of the proposed Merger and may not, in whole or in part, be
reproduced, disseminated, quoted, summarized, described or referred to at any
time, communicated or provided to any person or otherwise made public or used
for any other purpose without our prior written consent; provided, however, that
this opinion may be reproduced in full in the proxy or information statement
related to the proposed Merger filed with the Securities and Exchange
Commission. Our opinion is directed to the Board of Directors and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote at the shareholders' meeting held in connection with the
Merger or any related transaction or any other matter.
Based upon and subject to the foregoing and such other matters as we
consider relevant, including our assessment of current economic, market,
financial and other conditions, it is our opinion that, as of the date hereof,
the Merger Consideration is fair, from a financial point of view, to the holders
of the Company Common Stock.
Very Truly Yours,
NATCITY INVESTMENTS, INC.
By:
------------------------------------
J.W. Sean Dorsey
Senior Managing Director and
Co-Head of Investment Banking
ANNEX C
SECTIONS 1701.84 AND 1701.85 OF THE OHIO REVISED CODE
RIGHTS OF DISSENTING SHAREHOLDERS
1701.84 DISSENTING SHAREHOLDERS ENTITLED TO RELIEF
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant
to section 1701.78, 1701.781, 1701.79, 1701.791, or 1701.801 of the Revised
Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 or 1701.781 of the
Revised Code are entitled to vote on the adoption of an agreement of
merger, but only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one
or more domestic or foreign corporations are being merged pursuant to
section 1701.801 of the Revised Code.
1701.85 QUALIFICATIONS OF AND PROCEDURES FOR DISSENTING SHAREHOLDERS
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section 1701.80
or 1701.801 of the Revised Code, the dissenting shareholder shall deliver to the
corporation a written demand for payment with the same information as that
provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that
1
the corporation may forthwith endorse on them a legend to the effect that demand
for the fair cash value of such shares has been made. The corporation promptly
shall return such endorsed certificates to the dissenting shareholder. A
dissenting shareholder's failure to deliver such certificates terminates his
rights as a dissenting shareholder, at the option of the corporation, exercised
by written notice sent to the dissenting shareholder within twenty days after
the lapse of the fifteen-day period, unless a court for good cause shown
otherwise directs. If shares represented by a certificate on which such a legend
has been endorsed are transferred, each new certificate issued for them shall
bear a similar legend, together with the name of the original dissenting holder
of such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment in its
shareholder records. If uncertificated shares for which payment has been
demanded are to be transferred, any new certificate issued for the shares shall
bear the legend required for certificated securities as provided in this
paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505 of the Revised
Code. If, during the pendency of any proceeding instituted under this section, a
suit or proceeding is or has been instituted to enjoin or otherwise to prevent
the carrying out of the action as to which the shareholder has dissented, the
proceeding instituted under this section shall be stayed until the final
determination of the other suit or proceeding. Unless any provision in division
(D) of this section is applicable, the fair cash value of the shares that is
agreed upon by the parties or fixed under this section shall be paid within
thirty days after the date of final determination of such value under this
division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
2
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a willing seller
who is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
3
ANNEX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________.
Commission File No. 0-24333
RAINBOW RENTALS, INC.
---------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1512520
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3711 Starr Centre Drive, Canfield, OH 44406
-------------------------------------------
(Address of principal executive offices)
330-533-5363
------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities and Exchange Act of 1934) [ ] Yes No [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $12.3 million at June 30, 2003. The number of
common shares outstanding at March 1, 2004 was 5,931,819.
RAINBOW RENTALS, INC.
INDEX
PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20
Item 9A. Controls and Procedures 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 26
Item 14. Principal Accountant Fees and Services 26
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures 44
2
PART I
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-K, other than those concerning
historical information, or, in future filings by Rainbow Rentals, Inc. with the
Securities and Exchange Commission (SEC), in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and are made pursuant to the "safe harbor" provisions of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements use such words as "may", "will", "should", "expects",
"plans", "anticipates", "estimates", "believes", "thinks", "continues",
"indicates", "outlook", "looks", "goals", "initiatives", "projects", or
variations thereof. Forward-looking statements are based on management's current
beliefs and assumptions regarding future events and operating performance and
speak only as of the date made. These statements are likely to address the
Company's growth strategy, future financial performance (including sales and
earnings), strategic initiatives, marketing and expansion plans and the impact
of operating initiatives. Forward-looking statements are subject to a number of
risks, uncertainties and other factors, many of which are outside the control of
the Company that could cause the Company's actual results to differ materially
from those expressed or implied in such statements. These risks and
uncertainties include the following: risks associated with the proposed merger
("Merger") with a subsidiary of Rent-A-Center, Inc., general economic
conditions; failure, in the event the Merger does not occur, to adequately
execute plans and unforeseen circumstances beyond the Company's control in
connection with development, implementation and execution of new business
processes, procedures and programs; greater than expected expenses associated
with the Company's activities; and the effects of new accounting standards. You
are strongly urged to review such filings for a more detailed discussion of such
risks and uncertainties. The Company's SEC filings are available, at no charge,
at www.sec.gov and through the Company's web site at www.rainbowrentals.com. The
foregoing list of important factors is not exclusive. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
ITEM 1. BUSINESS
GENERAL
Founded in 1986 with six stores, the Company, as of December 31, 2003,
operated 125 rental-purchase stores under the Rainbow Rentals trade name in
Connecticut, Georgia, Indiana, Kentucky, Maryland, Massachusetts, Michigan, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee and Virginia. The Company has opened 105 of these 125 locations, with
the balance of the locations having been acquired. The Company offers quality,
name brand, durable merchandise, including home electronics, furniture,
appliances and computers. Generally, rental-purchase merchandise is rented to
individuals under flexible agreements that allow customers to own the
merchandise after making a specified number of rental payments (ranging from 12
to 30 months). Customers have the option to return the merchandise at any time
without further obligation and also have the option to purchase the merchandise
at any time during the rental term.
During 2003, Rainbow opened 6 new stores (all in new markets) and
consolidated three stores into existing locations. In 2004 through the date of
this report, Rainbow consolidated one store into an existing location.
On February 4, 2004 the Company entered into an Agreement and Plan of
Merger (Merger Agreement) with Rent-A-Center, Inc., (RAC) the industry's largest
rent-to-own operator. Under the terms of the Merger Agreement, which is expected
to close during the second quarter of 2004, RAC will acquire 100% of the
outstanding stock of the Company for a purchase price of $16.00 per share.
Pursuant to such Merger Agreement, the Company will not open any stores until
the time the Merger is consummated or the agreement is terminated.
INDUSTRY OVERVIEW
The rental-purchase industry provides an alternative to traditional
retail installment sales, appealing to individuals with a need for acquiring the
use of household products who cannot afford a cash purchase, may be unable to
qualify for credit, and are unwilling or unable to wait until they can save for
a purchase. Others may value the flexibility and services offered by the rental
transaction, which allows for the return of merchandise at any time without
obligation for further payments. In addition, the industry serves customers
having short-term needs or seeking to try products, such as computers, before
committing to purchase them. Rental-purchase transactions include delivery and
pick-up service as well as a repair warranty.
3
Rental-purchase transactions are made on a week-to-week or month-to-month basis
and provide customers with the opportunity for ownership if the merchandise is
rented for a continuous term, generally 12 to 30 months. Customers may cancel
agreements at any time without further obligation by returning the merchandise
or requesting its pick-up by the store. Returned merchandise is held for
re-rental or sale. Rental renewal payments are generally made in person, in
cash, by check or money order, or by mail.
According to its 2003 Rental-Purchase Industry Survey, the Association
of Progressive Rental Organizations (APRO), the industry's trade association,
estimates there are approximately 8,300 rent-to-own stores in the United States.
According to APRO, industry-wide revenues were approximately $6.0 billion in
2002, the latest year for which statistics are available. APRO also estimates
there were approximately 2.9 million households served during 2002. Management
believes the industry's four largest public companies currently operate
approximately 4,650 stores, or 56% of the total rental-purchase stores in
operation.
The rental-purchase industry serves a highly diverse customer base.
According to APRO, approximately 92% of rental purchase customers have annual
household incomes between $15,000 and $49,999. Estimates also show that the
majority of rental-purchase customers are between the ages of 25 and 44 and over
93% of rental-purchase customers are high school graduates. The U.S. Census
Bureau reported that in 2000 there were approximately 44 million households with
annual income between $15,000 and $49,999. Management believes the
rental-purchase industry remains under-penetrated, providing growth
opportunities via new store openings or acquisitions for companies that are well
capitalized and have access to both debt and equity capital.
RISK FACTORS
Risk Associated with delay in completion of the Merger, or Termination
of Merger Agreement. During the transition period until the Merger is completed
or terminated, the Company's ability to attract and retain key personnel could
be impaired due to the uncertainty involved with the transaction and associates'
concern about job security. However, to mitigate this risk, the Company has
implemented severance agreements and stay bonus agreements for key personnel who
stay with the Company that will be vested and paid when the Merger is
completed. Moreover, the Merger Agreement contains customary restrictions on
the Company's ability to operate the business pending completion of the Merger,
which includes delaying implementation of the Company's strategic plan. If the
merger is not consummated, such delay, as well as the legal, accounting,
investment banking and other fees incurred in connection with the transaction
could have an adverse impact on the Company's operating results.
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 the 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 operational internal audit personnel to adequately
detect any problems with a store, or the failure of store managers to follow
operating guidelines, could have a material adverse affect 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. In addition, 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.
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 relatively fewer underserved areas available for
penetration by the Company.
Government Regulation. The Company believes there are 47 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. 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 affect on the Company's business, financial condition and results of
operations.
4
No federal legislation has been enacted regulating or otherwise
governing rental-purchase transactions. Currently, the industry has sponsored
two bills that have been introduced in Congress. Both bills would amend the
Consumer Credit Protection Act to include favorable treatment of rental-purchase
contracts. The Senate version (S.884), which has 21 co-sponsors, has been
referred to the Committee on Banking, Housing and Urban Affairs. The House
version (H.R. 996) also has 82 co-sponsors and has been referred to the
Committee on Financial Services. There is no assurance that either bill will be
enacted.
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 affect 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. Generally, new stores operate at a loss for up to 12 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.
Volatility of Share Price; Potential Fluctuations in Quarterly Results.
The Company believes that various factors such as general economic conditions
and changes or volatility in the financial markets, changing market conditions
in the rental-purchase industry and quarterly or annual variations in the
financial results of other public companies that are part of the rental-purchase
industry, all of which may be unrelated to the Company's performance, could
cause the market price of the Common Stock to fluctuate substantially.
Additionally, quarterly revenues and operating income are difficult to forecast.
The Company's expense levels are based, in part, on its expectations as to
future revenues and timing of new store openings. If revenue levels are below
expectations, the Company may be unable or unwilling to reduce expenses
proportionately and operating results would likely be adversely affected. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter the Company's operating results will differ
from the expectations of public market analysts and investors. In such event,
the market price of the Common Stock would likely be materially adversely
affected.
Litigation. Due to the consumer-oriented nature of the rental-purchase
industry and the application of certain laws and regulations, industry
participants may be named as defendants in litigation alleging violations of
state laws and regulations and consumer tort law, including fraud. Many of these
actions involve alleged violations of consumer protection laws. 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 affect on the Company's business, financial
condition or results of operations.
OPERATING STRATEGY
The following narrative of the Company's Operating Strategy is based
upon the assumption that the Company will continue as a stand-alone entity and
the Merger will not occur. If the Merger does occur, it is possible RAC will
modify or change the Company's operating strategy.
During the fourth quarter of 2003, the Company completed a strategic
planning process that identified several key initiatives to support the
Company's core operating strategy of operating high volume, high profit store
locations. These initiatives are aimed at improving the Company's competitive
position by i) increasing customer retention; ii) increasing new customers per
store; and iii) increasing revenue and profit per customer. The strategic
process also identified the need for the Company to accelerate its growth plan
in order to achieve economies of scale in areas such as advertising and
purchasing as well as leveraging its corporate infrastructure. Prior to the
implementation of any of these initiatives, on February 4, 2004, the Company
entered into the Merger Agreement with RAC mentioned in the "General" section
above. If the Merger
5
Agreement is terminated, the Company will implement its strategic plan and will
disclose the details of such plan in a subsequent filing with the Securities and
Exchange Commission.
The Company's operating strategy is to operate high volume store
locations with core stores (stores opened three or more years) averaging a
minimum of $1.0 million in annual revenue in conjunction with generating store
level operating income ranging from 20% to 22%. Annual revenues from continuing
operations per store, including core and non-core stores, were approximately
$821,000 during 2003, which management believes is one of the highest in the
industry. The Company anticipates executing its strategy by maintaining a high
Average Monthly Rental Rate (AMRR) on its rental-purchase agreements, a high
number of customers per store and a high level of customer referrals and repeat
business, all accompanied by a low level of delinquencies. The Company seeks to
achieve these objectives by applying its "More, Better, Different" philosophy to
its customers and associates by utilizing the following operating techniques.
Customer Service. Management believes the rental-purchase
industry is a neighborhood business built on the relationship
between the customer and store personnel. Beginning with the
store manager and ending with the account manager, the
Company's customer service policy is to treat all customers at
all times with "Respect and Dignity". Bilingual associates are
employed in many stores to serve the needs of Spanish-speaking
customers and regional managers handle all customer service
calls directly to ensure prompt follow-up and dispute
resolution. In addition, the Company focuses on customer
convenience by locating stores on main arteries near national
discount retailers or grocery stores and by setting renewal
payment dates based on the customer's wage or other income
schedule. By not imposing many of the fees that are standard
in the industry, such as club, waiver, processing and delivery
fees, the Company enables its customers to afford higher
quality merchandise with additional features and benefits.
Quality Merchandise. The Company's merchandising strategy is
to offer its customers a wide range of new and pre-rented,
quality, name brand, and durable merchandise. Management
recognizes that its customers desire many of the higher end
products found in the large national electronic, appliance and
furniture stores. Accordingly, the Company provides its
customers with items such as large screen televisions, leather
furniture and computers with nationally recognized brand names
and other popular features. This strategy has enabled the
Company to maintain a high AMRR. In addition, by providing
name brand and durable products that maintain their quality
throughout the rental period, the Company has maintained a
high level of repeat and referral business.
Store Environment. The Company believes it is essential that
its stores provide an appealing and attractive shopping
environment while conveying a sense of quality, safety and
convenience. Company stores are generally located on main
arteries, near residential or commercial areas and in strip
shopping centers near national discount retailers or grocery
stores. The Company generally maintains a uniform store size
(4,750 square feet, on average), color scheme, store layout
and display signs. Stores are intended to provide an appealing
retail environment and are modeled to resemble a quality
furniture and electronics showroom.
Experienced Associates. The Company's operations and
profitability are largely dependent on the services of its
store-level personnel, senior management and executive
officers (collectively, the "associates"). The Company's
regional managers and store managers have extensive experience
in the industry and have worked with the Company for an
average of approximately 12 and five years, respectively
(excluding managers from newly opened and acquired stores).
The Company's executive officers have over 80 combined years
in the rental-purchase industry and the CEO and President
co-founded the Company in 1986. The Company attempts to
attract and retain its quality associates through compensation
and benefits that meet or exceed industry averages and through
various ongoing proprietary training programs. Management
believes its associate development programs enhance the
Company's operations by ensuring conformity to established
operating standards, reducing associate turnover, enhancing
associate productivity and improving associate morale.
Management. The Company's management approach provides store
managers with a certain degree of autonomy and accountability.
Within guidelines set by the Company, store managers are
responsible for developing customer relationships, managing
customer service, maintaining appropriate levels, quality and
mix of merchandise inventory and meeting operational
benchmarks. The Company supports its structure with strong
regional supervision, management information systems,
operational audit procedures, operating guidelines and
experienced associates.
As the Company continues to grow, a key element to ensure
the quality of its store operations is the Regional Management
team. Currently, the Company employs 12 regional managers and
one regional vice president, who are generally promoted from
within the Company. Regional managers generally live within
their geographic area to
6
reduce travel time and expense. Senior management is able to
stay in touch with store operations through regular
communication with the regional managers by either telephone
conferences or quarterly meetings. Management intends on
maintaining an average region size of approximately 10 stores.
GROWTH STRATEGY
During the fourth quarter of 2003, the Company completed a strategic
planning process that identified the need for the Company to pursue an
aggressive strategic growth plan, which proposed both organic growth and an
aggressive acquisition strategy. Prior to the implementation of any of the
initiatives of the strategic plan, the Company entered into a Definitive
Agreement and Plan of Merger with Rent-A-Center, Inc. on February 4, 2004,
mentioned in the "General" section above. If the merger does not occur, the
Company will implement its strategic plan and will disclose the details of such
plan in a subsequent filing with the Securities and Exchange Commission.
STORES
As of December 31, 2003, Rainbow operated 125 stores in fifteen states,
as set forth in the following table:
Location Number of Stores
-------- ----------------
Ohio 27
Pennsylvania 22
Massachusetts 11
Michigan 11
South Carolina 8
Tennessee 8
Connecticut 7
North Carolina 7
Virginia 7
New York 5
Kentucky 4
Rhode Island 3
Indiana 2
Maryland 2
Georgia 1
Rainbow's primary method of growth is through the opening of new store
locations. New stores have a maturation period of approximately three years and
are generally dilutive to earnings for the first 12 months as the Company builds
a customer base and develops a recurring revenue stream. If the Merger with RAC
does not occur, Rainbow plans to open approximately five additional stores
during 2004.
In investigating a new market, the Company reviews demographic
statistics, cost of advertising and the number and nature of competitors. In
addition, the Company investigates the regulatory environment of the state in
which the new market exists. It is the Company's policy to operate in those
states where there is an absence of unfavorable legislation regarding
rental-purchase transactions.
MERCHANDISE
Rainbow's merchandising strategy is to carry a wide variety of quality,
name brand, durable merchandise in four major categories, including home
electronics, furniture, appliances and computers. Choices of merchandise reflect
the Company's belief that customers want to rent the same quality of merchandise
that is available from more traditional retailers, and that customers are
willing to pay for value and quality. In addition, by focusing on its
manufacturers' mid-point and better range products, the Company avoids frequent
service problems associated with inferior products. The Company purchases
merchandise directly from the manufacturers and through distributors generally
through volume price discounts.
As of December 31, 2003, rental-purchase agreements for home
electronics accounted for approximately 33%; furniture accounted for 35%;
appliances accounted for 19%; and computers accounted for 13% of the Company's
total units on rent.
RETENTION, TRAINING AND EMPOWERMENT OF ASSOCIATES
Management believes a key to its success in retaining quality
associates is its policy of promoting many of its store
7
managers from within. However, to ensure the strength of its store level
management team, the Company also hires experienced managers from other
rent-to-own chains. These experienced managers are introduced to Rainbow's
culture of customer service and store operating system through its "Fast Track"
training program.
The Company places great importance on training, both in terms of
initial training for potential managers and continued education of its current
management team. The Company has developed a formal training program that each
associate must successfully complete before becoming eligible for promotion to
store manager. This training program for potential managers consists of a three
to six month curriculum involving formal classroom training as well as on-site
store training. After an associate becomes a store manager, the training
continues. Manager meetings are conducted twice per year and all store managers,
regional managers, department heads and executive management of the Company are
required to attend. At such sessions, prior performance is critiqued, operating
procedures are reviewed and revised, new merchandise is showcased and managers
receive eight to ten hours of classroom training in the areas of financial
management, product information, inventory management, customer service, credit
management, personnel management and other areas of store operations. In
addition, the Company holds training sessions for store personnel below the
level of manager in areas such as customer service, collection techniques, sales
training and safety. The Company also produces training videos to assist in the
on-going training of store associates.
The Company believes open communication with regional and store level
management is essential to understanding existing markets, increasing associate
morale and retaining associates. In order to facilitate open lines of
communication, the Company has a committee comprised of top performing managers
to serve as a sounding board for new concepts and innovative operational and
sales techniques.
MARKETING
The Company uses advertising mediums such as printed circulars, radio,
television, and direct mail to introduce and reinforce the benefits of its
rental-purchase program to potential and existing customers and to make such
customers aware of new products and promotions.
The Company advertises in both English and Spanish to reach the diverse
segments of its customer base. Advertising focuses on things such as superior
customer service, quality name brand products, the ease of a hassle-free
ordering process, and promotional offers. Some of the supporting elements to
these concepts include a toll-free phone number that automatically connects the
caller with the store nearest them, a website for online ordering and
information about products and locations, and a toll-free number to a customer
service representative who forwards messages directly to one of the Company's
regional managers who answers questions and resolves problems.
Direct mail is employed to target specific households that match up
with the established demographics of our customer base. These programs are
tailored to both active customers at various points in their rental life cycle,
and to inactive customers to encourage them to again enjoy the products and
services the Company has to offer. In addition, the Company holds "customer
appreciation" events at its store locations during various times of the year to
foster better customer relations.
APPROVAL PROCESS
The Company does not conduct a formal credit review. The Company's
order approval process is designed to verify a customer's stability in his or
her community and serves as a successful method of loss prevention. Since
merchandise is rented rather than purchased, the Company focuses on a customer's
credibility, not the customer's credit history. The approval process is designed
to take less than one hour. Merchandise is generally delivered on the same day
that the order is received.
THE RENTAL-PURCHASE AGREEMENT
Merchandise is provided to customers under written rental-purchase
agreements that set forth the terms and conditions of the transaction in a
straightforward and understandable manner. The Company has developed its own
agreements, which have been reviewed by legal counsel and meet the legal
requirements of the state in which they are used. The Company's flexible rental
program allows a customer to choose weekly, bi-weekly, semi-monthly, or monthly
rental periods with rent paid in advance. At the end of each rental period, the
customer can renew the agreement by making a renewal payment, terminate the
agreement, or purchase the merchandise for a price based upon a predetermined
formula. If the customer elects to terminate the agreement, the merchandise is
returned to the store and made available for rent to another customer. The
Company retains title to the merchandise during the term of the rental-purchase
agreement. If the customer renews the agreement for a specified number of rental
periods, ownership is transferred to the customer upon receipt of the last
renewal payment.
8
CUSTOMER SERVICE AND MANAGEMENT
In addition to the enjoyment of quality products, customers are
afforded many services provided by well-trained customer management personnel
who treat customers with "Respect and Dignity". The Company does not impose many
of the fees standard in the industry, such as waiver fees, club fees, processing
or delivery fees, and provides additional services under the rental-purchase
agreement at no additional cost. Such services include delivery and
installation, product training, maintenance to ensure the product continues to
perform, "loaner" merchandise if a product is being serviced, and pick-up
service to return the merchandise, if requested. Rental income represented 94.3%
of the Company's total revenue in 2003 with an additional 3.1% in merchandise
sales. In addition, customers are able to upgrade products, reinstate a
previously terminated agreement and are given free service for a reasonable
period, generally 90 days, beyond the rental term.
Management's philosophy is "customers will pay you because they want
to, not because they have to" and every renewal date offers the opportunity to
sell the customer on the benefits of maintaining a good account with the
Company. Management believes a thorough understanding by the customer of all the
terms of the rental agreement is the first step of successful customer
management. A large majority of all renewal payments are made timely without the
involvement of store personnel and renewal payments are generally made at the
store by cash, check or money order or by mail. Customer management personnel
are given extensive training to assist the customer in maintaining a good
account with the Company. Customer management begins upon delivery of the
merchandise in the customer's home.
MANAGEMENT INFORMATION SYSTEMS
The Company has operated its current internal network for a number of
years, which is a Windows NT 4.0 based environment supporting approximately 40
local users and 140 remote users. The Company utilizes a proprietary Windows
based point-of-sale system to support its store operations. The system provides
store managers with all of the relevant store-level financial and operational
data as well as individual profiles on each store's customers. This same data is
also readily available to senior management for performance and trend analysis.
COMPETITION
The rental-purchase industry is highly competitive. The Company
competes with other national, regional and local rental-purchase businesses, as
well as rental stores that do not offer their customers a purchase option. With
respect to customers desiring to purchase merchandise for cash or on credit, the
Company competes with department stores, consumer electronic stores and discount
stores. The Company's three largest competitors, Rent-A-Center, Inc., Rent-Way,
Inc., and Aaron Rents, Inc., have greater financial and operating resources and
name recognition than Rainbow.
PERSONNEL
As of March 2004, the Company had approximately 872 associates of which
653 of them were full-time. Approximately 45 associates are located at the
Company's corporate headquarters in Canfield, Ohio. None of the Company's
associates are represented by a labor union. Management believes its relations
with its associates are good.
GOVERNMENT REGULATION
The Company believes there are 47 states that have legislation
regulating rental-purchase transactions. The Company's policy is to operate in
states where there is an absence of unfavorable legislation regarding
rental-purchase transactions. There can be no assurance against the enactment of
new or revised rental-purchase laws that would have a material adverse affect on
the Company. No federal legislation has been enacted regulating or otherwise
governing rental-purchase transactions. See Government Regulation under Risk
Factors.
The Company instructs its managers in procedures required by applicable
law through training seminars and policy manuals and believes that it has
operated in compliance with the requirements of applicable law in all material
respects.
SERVICE MARKS
The Company owns the federally registered service mark "Rainbow
Rentals." The Company believes that the Rainbow Rentals mark has acquired
significant market recognition and goodwill in the communities in which its
stores are located.
9
ITEM 2. PROPERTIES
The Company leases all of its stores under operating leases that
expire at various times through 2010. Store leases generally provide for fixed
monthly rental payments, plus payment for real estate taxes, insurance and
common area maintenance. Most of these leases contain renewal options for
additional periods ranging from three to five years at rates generally
adjusted for increases in the cost of living. There is no assurance the
Company can renew the leases that do not contain renewal options,or if it can
renew them, that the terms will be favorable to the Company. Store sizes range
from approximately 3,200 to 9,830 square feet, and average approximately 4,750
square feet. Management believes suitable store space is generally available
for lease and the Company would be able to relocate any of its stores without
significant difficulty should it be unable or unwilling to renew a particular
lease. Management also believes additional store space is available to meet the
requirements of its new store opening program.
The Company leases its corporate office located at 3711 Starr Centre
Drive, Canfield, Ohio from a corporation owned by two of its executive officers
and a former officer (see "Related Party Transactions"). The corporate office
consists of approximately 10,000 square feet and is leased through January 31,
2006, however, in the event the Merger is consummated, the lease will terminate
90 days after the effective date of the Merger. In 2003, the rental amount was
$130,000. The Company believes the rental is at market rate and the other
provisions of the lease are on terms no less favorable to the Company than could
be obtained from unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. The Company believes the amount of any
ultimate liability with respect to these actions will not have a material
adverse affect on the Company's liquidity, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Rainbow Rentals, Inc. trades on The Nasdaq Stock
Market under the symbol "RBOW". As of March 1, 2004, there were 5,931,819 shares
outstanding held by approximately 90 shareholders of record. The Company
believes there are approximately 300 persons or entities holding stock in
nominee or street name through various brokerage firms or other institutional
holders.
The following table shows the quarterly high and low trade prices of
the common shares for the years ended 2003 and 2002.
2003 2002
----------------- -----------------
High Low High Low
------- ------- -------- -------
Quarter ended March 31 $ 6.04 $ 4.05 $ 8.25 $ 6.25
Quarter ended June 30 6.13 4.93 10.24 6.56
Quarter ended September 30 6.85 5.40 7.24 4.35
Quarter ended December 31 8.31 6.05 7.47 4.26
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."
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2003,
regarding shares outstanding and available for issuance under the Company's
existing stock option plan:
(a) (b) (c)
------------------------------------------------------------------------------------------------
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, warrants price of outstanding options, remaining available for future
Plan category and rights warrants and rights issuance
- -----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 583,034 $ 7.95 10,882
Equity compensation plans
not approved by security holders - - -
------- ----------------- ------
Total 583,034 $ 7.95 10,882
======= ================= ======
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Income Data" and "Balance Sheet Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 2003, are derived
from the financial statements of the Company. The data presented below should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations, and the Financial Statements and the
related notes thereto included elsewhere in this annual report.
Year Ended December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Statement of Income Data:
Revenues
Rental revenue $ 96,826 $ 93,239 $ 88,770 $ 86,099 $ 75,932
Fees 2,679 2,728 2,697 2,849 2,639
Merchandise sales 3,168 3,300 3,088 2,947 2,287
---------- ---------- ---------- ---------- ----------
Total revenues 102,673 99,267 94,555 91,895 80,858
Operating expenses
Merchandise costs 33,346 33,995 33,310 30,775 26,758
Store expenses
Salaries and related 26,849 24,393 22,713 21,774 18,374
Occupancy 10,022 9,480 8,607 7,464 6,027
Advertising 6,884 6,167 5,928 4,430 3,662
Other expenses 14,397 13,494 13,258 12,388 10,719
---------- ---------- ---------- ---------- ----------
Total store expenses 58,152 53,534 50,506 46,056 38,782
---------- ---------- ---------- ---------- ----------
Total merchandise costs and
store expenses 91,498 87,529 83,816 76,831 65,540
General and administrative expenses 8,765 7,706 7,160 6,340 5,176
Amortization of goodwill and noncompete
agreements 160 175 689 608 456
---------- ---------- ---------- ---------- ----------
Total operating expenses 100,423 95,410 91,665 83,779 71,172
---------- ---------- ---------- ---------- ----------
Operating income 2,250 3,857 2,890 8,116 9,686
Interest expense 570 632 689 933 697
Other expense, net 227 228 227 284 361
---------- ---------- ---------- ---------- ----------
Income from continuing
operations, before income
taxes 1,453 2,997 1,974 6,899 8,628
Income taxes 574 1,184 800 2,794 3,580
---------- ---------- ---------- ---------- ----------
Income from continuing
operations 879 1,813 1,174 4,105 5,048
Discontinued operations
Loss from operations of discontinued
store including loss on disposal,
net of tax - (172) - - -
---------- ---------- ---------- ---------- ----------
Net income $ 879 $ 1,641 $ 1,174 $ 4,105 $ 5,048
========== ========== ========== ========== ==========
Basic and diluted earnings
per common share from
continuing operations $ 0.15 $ 0.31 $ 0.20 $ 0.69 $ 0.85
========== ========== ========== ========== ==========
Basic and diluted earnings
per common share $ 0.15 $ 0.28 $ 0.20 $ 0.69 $ 0.85
========== ========== ========== ========== ==========
Weighted average common shares
outstanding:
Basic 5,929,435 5,928,006 5,925,735 5,925,735 5,925,735
Diluted 5,940,598 5,940,606 5,940,999 5,930,157 5,930,887
Pro forma net income data:
Net income as reported $ 879 $ 1,641 $ 1,174 $ 4,105 $ 5,048
Pro forma adjustment for goodwill
amortization, net - - 312 287 212
---------- ---------- ---------- ---------- ----------
Pro forma net income $ 879 $ 1,641 $ 1,486 $ 4,392 $ 5,260
========== ========== ========== ========== ==========
Pro forma basic and diluted income per
common share $ 0.15 $ 0.28 $ 0.25 $ 0.74 $ 0.89
========== ========== ========== ========== ==========
Operating Data:
Stores open at end of period 125 122 113 110 92
Comparable store revenue growth (1) (1.0%) 1.4% (4.3%) 1.7% 4.4%
(1) Comparable store revenue growth is the percentage increase (decrease) 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.
12
SELECTED FINANCIAL DATA, CONTINUED
Year Ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- ---------
(Dollars in thousands)
Balance Sheet Data:
Rental-purchase merchandise, net $ 40,545 $ 39,342 $ 39,330 $ 36,545 $ 33,042
Total assets 63,651 60,913 60,121 58,429 50,324
Total long-term debt 6,154 7,550 9,440 12,340 10,522
Total liabilities 23,930 22,088 22,956 22,438 18,438
Shareholders' equity 39,721 38,825 37,165 35,991 31,886
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding of
the Company's financial position as of December 31, 2003 and 2002 and results of
operations for the years ended December 31, 2003, 2002 and 2001. This discussion
should be read in conjunction with the Company's financial statements and notes
thereto included herein.
GENERAL
At December 31, 2003, the Company operated 125 rental-purchase stores
in 15 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 30 months). Customers have the option to return the
merchandise at any time without further obligation, and also have the option to
purchase the merchandise at any time during the rental term.
RECENT DEVELOPMENTS
On February 4, 2004 the Company entered into an Agreement and Plan of
Merger (Merger Agreement) with Rent-A-Center, Inc., (RAC) the industry's largest
rent-to-own operator. Under the terms of the Merger Agreement, which is expected
to close during the second quarter of 2004, RAC will acquire 100% of the
outstanding stock of the Company for a purchase price of $16.00 per share.
CRITICAL ACCOUNTING POLICIES
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" discusses our financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
On an on-going basis, the Company evaluates its estimates and
judgments. The Company bases its estimates and judgments on historical
experience and on various other factors that management believes to be
reasonable under the circumstances. The results of these estimates and judgments
form the basis for making conclusions about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Our
significant estimates and assumptions are reviewed by management on a quarterly
basis and required adjustments are recorded, if necessary
A critical accounting policy is one that is both important to the
portrayal of the Company's financial condition and results of operations and
requires management to make estimates about the effects of matters that are
inherently uncertain. Management believes the following critical accounting
policies affect its more significant judgments and estimates in the preparation
of its financial statements:
- Rental-purchase merchandise, including depreciation and
impairment;
- Revenue recognition;
- Accounting for income taxes;
- Valuation of long-lived and intangible assets; and
- Valuation of goodwill
13
Rental-purchase merchandise, including depreciation and impairment.
Rental-purchase merchandise is stated at historical cost, net of accumulated
depreciation. The Company depreciates inventory on rent using the units of
activity method. Under the units of activity method, merchandise on rent is
depreciated in the proportion of rents earned to total expected rents to be
provided over the rental contract term. The Company believes the units of
activity method more accurately matches the recognition of depreciation expense
with the estimated timing of revenue earned over the rental-purchase agreement
period. The units of activity method is recognized in the rental-purchase
industry and does not consider salvage value. In addition, the Company
depreciates certain older rental-purchase merchandise held for rent over its
remaining useful life.
The Company monitors the value of rental-purchase merchandise for
possible impairment. An impairment loss is recognized when the carrying amounts
cannot be recovered by the estimated undiscounted cash flows they will receive.
Revenue recognition. Merchandise is rented to customers pursuant to
rental-purchase agreements, which generally provide for weekly or monthly rental
terms. Rental revenue is recognized over the lease term. Deferred revenue is
recognized for cash received for which revenue is not yet earned. 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 an early purchase option. Amounts received from
such early purchase options, as well as sales of new and used merchandise
available for rent in the stores, are included in merchandise sales.
Accounting for income taxes. As part of the process of preparing the
Company's financial statements, management is required to estimate income taxes
in each of the jurisdictions in which it operates. This process involves
estimating the Company's actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items. These
differences result in deferred tax assets and liabilities, which are included
within the Company's balance sheet. The Company must then assess the likelihood
that deferred tax assets will be recovered from future taxable income, and if
the Company assesses that recovery is not likely, a valuation allowance must be
established.
Management judgment is required in determining the Company's provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance that may be deemed necessary.
Valuation of long-lived and intangible assets. The Company assesses the
impairment of identifiable intangible assets and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important that could trigger an
impairment review include the following:
- significant underperformance relative to expected historical
or projected future operating results;
- significant changes in the manner of the Company's use of
the acquired assets or its strategy for the overall
business; and
- significant negative industry or economic trends
When the Company determines that the carrying value of intangibles and
long-lived assets may not be recovered based upon the existence of one or more
of the above factors, impairment is measured based on a projected undiscounted
cash flow method.
Valuation of goodwill. Goodwill is the cost in excess of the fair value
of net assets of acquired businesses. These assets are stated at cost and are no
longer amortized, but evaluated at least annually for impairment in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142.
The Company is required to test all existing goodwill for impairment
annually on a "reporting unit" basis. A fair value approach is used to test
goodwill for impairment. An impairment charge is recognized for the amount, if
any, by which the carrying amount of goodwill exceeds its implied fair value.
The fair value of a reporting unit and the related implied fair value of the
respective goodwill are established using comparative market multiples, namely a
combination of the Company's market capitalization and average monthly revenues.
Should the Company's stock price and/or average monthly revenues fall such that
the carrying amount of goodwill would not be recoverable, an impairment loss
would be recognized. During the fourth quarter of 2003, we performed an
impairment assessment of our goodwill, and determined that no impairment
existed.
14
COMPONENTS OF INCOME AND EXPENSES
Revenues. The Company collects rental renewal payments in advance,
under weekly, biweekly, semi-monthly and monthly rental-purchase agreements.
Rental revenue is recognized over the lease term. Fees include amounts for
reinstatement of expired agreements and amounts for in-home collection. Fees are
recognized when earned. Rental-purchase agreements generally include an early
purchase option. Merchandise sales include amounts received upon sales of
merchandise pursuant to such early purchase options and upon the sale of new or
used rental merchandise. These amounts are recognized as revenue when the
merchandise is sold.
Merchandise Costs. Merchandise costs include depreciation of
rental-purchase merchandise under the units of activity depreciation method.
Rental-purchase merchandise is depreciated as revenue is earned. Merchandise
costs also include the remaining book value of merchandise sold or otherwise
disposed, the cost of replacement parts and accessories and other miscellaneous
merchandise costs. The Company monitors the value of rental-purchase merchandise
for possible impairment and, if necessary, reduces the carrying value of the
related asset to fair value.
Salaries and Related. Salaries and related expenses include all
salaries and wages paid to store level associates, related benefits, taxes and
workers' compensation claims and premiums.
Occupancy. Occupancy includes rent, repairs, maintenance and security
of the physical store locations, utility costs and depreciation of store
leasehold improvements. The Company has no leases that include percentage rent
provisions.
Advertising. Costs incurred for producing and communicating advertising
are charged to expense the first time advertising takes place.
Other Expenses. Other expenses include delivery expenses, insurance,
costs associated with maintaining rental-purchase merchandise, telephone
expenses, store computer and office expenses and personal property taxes, among
other items.
General and Administrative Expenses. General and administrative
expenses include all personnel, occupancy and other operating expenses
associated with the Company's corporate-level support departments and regional
store supervision. In addition, all costs associated with training, legal and
professional fees, charitable contributions and state taxes not based on income,
are included.
Amortization Expense. Amortization expense includes the amortization of
non-compete agreements and other identifiable intangible assets with definitive
lives. Effective January 1, 2002, with the adoption of SFAS No. 142, goodwill is
no longer amortized.
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.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of total revenues.
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues
Rental revenue 94.3% 93.9% 93.9%
Fees 2.6 2.8 2.8
Merchandise sales 3.1 3.3 3.3
----- ----- -----
Total revenues 100.0 100.0 100.0
Operating expenses
Merchandise costs 32.5 34.2 35.2
Store expenses
Salaries and related 26.1 24.6 24.0
Occupancy 9.8 9.5 9.1
Advertising 6.7 6.2 6.3
Other expenses 14.0 13.6 14.0
----- ----- -----
Total store expenses 56.6 53.9 53.4
----- ----- -----
Total merchandise costs and store expenses 89.1 88.1 88.6
General and administrative expenses 8.5 7.8 7.6
Amortization of goodwill and noncompete agreements 0.2 0.2 0.7
----- ----- -----
Total operating expenses 97.8 96.1 96.9
----- ----- -----
Operating income 2.2 3.9 3.1
Interest expense 0.6 0.6 0.7
Other expense, net 0.2 0.2 0.2
----- ----- -----
Income from continuing operations, before income
taxes 1.4 3.1 2.2
Income taxes 0.5 1.2 0.9
----- ----- -----
Income from continuing operations 0.9 1.9 1.3
Loss on discontinued operations, net of tax - (0.2) -
----- ----- -----
Net income 0.9 1.7 1.3
Pro forma adjustment for goodwill amortization, net of tax - - 0.3
----- ----- -----
Pro forma net income 0.9 1.7 1.6
===== ===== =====
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
Total revenues increased $3.4 million, or 3.4%, to $102.7 million for
the year ended December 31, 2003 compared to $99.3 million for the year ended
December 31, 2002. Revenue from comparable stores, or stores in operation for
each of the entire years ended December 31, 2003 and 2002, decreased $1.0
million, or 1.0%. This decrease was primarily attributable to a 4.9% decline in
average units on rent due largely to management's decision to discontinue
rentals of accessory items in 2003, which are less profitable than regular
rental purchase merchandise items. Average accessory units on rent at comparable
stores fell 27.8% during 2003, and, to a lesser extent, average regular units on
rent fell 1.4%. Collection performance at comparable stores declined 44 basis
points. Partially offsetting the declines in comparable units on rent and
collection performance was a 1.25% increase in average price per unit charged to
customers on regular rental purchase merchandise. Revenues from stores opened
during 2002 increased $3.8 million as these stores continued to build their
customer base. Revenues from the six stores opened during 2003 totaled $656,000.
Merchandise costs decreased $649,000, or 1.9%, to $33.3 million for the
year ended December 31, 2003 compared to $34.0 million for the year ended
December 31, 2002. Comparable store merchandise costs declined $2.3 million, or
6.8%, which was partially offset by an increase in merchandise costs for stores
opened in 2002 and 2003. As a percentage of revenue, merchandise costs declined
to 32.5% from 34.2% for the years ended December 31, 2003 and 2002,
respectively. The decrease in merchandise costs as a percentage of revenues is
attributable to better pricing on the purchase of rental merchandise and, to a
lesser extent, an increase in average rental rates.
Store expenses increased $4.6 million, or 8.6%, to $58.1 million for
the year ended December 31, 2003 compared to $53.5 million for the year ended
December 31, 2002. Store expenses associated with stores opened after January 1,
2002 (non-comparable stores) accounted for $3.1 million, or nearly 68% of the
increase. Store expenses were also affected by an
16
increase in comparable store salaries and related expenses totaling $1.0
million, which was attributable to increased wages (primarily staffing), higher
workers' compensation costs, and, to a lesser extent, an increase in group
insurance costs due to higher self-insurance claims, primarily in the fourth
quarter of 2003. Advertising and other store expenses at comparable stores
increased $350,000 and $352,000, respectively. Advertising increased primarily
in the fourth quarter of 2003 in an attempt to increase customer traffic. The
increase in other store expenses was due to higher inventory repairs, in
addition to increases in insurance premiums and vehicle claims. Comparable store
occupancy expense declined $226,000 predominantly due to a lease buy-out and
asset write-offs recorded during 2002 associated with the consolidation of a
store. Store expenses totaled 56.6% and 53.9% of total revenue for the years
ended December 31, 2003 and 2002, respectively. Comparable store expenses as a
percentage of comparable store revenue totaled 54.9% and 52.6% for the years
ended December 31, 2003 and 2002, respectively.
General and administrative expenses increased $1.1 million, or 13.7%,
to $8.8 million for the year ended December 31, 2003 compared to $7.7 million
for the year ended December 31, 2002. The increase in general and administrative
expenses was partially attributable to $329,000 in severance costs associated
with the departure of the Company's Chief Operating Officer in May 2003. Also
contributing to the increase were higher payroll-related costs totaling
$409,000, which included reorganizing and training the Company's regional and
store managers, higher corporate payroll due primarily to additional personnel,
and severance costs related to closing the Company's construction department
during the fourth quarter of 2003. Other increases included $100,000 in
consulting fees, primarily due to strategic planning initiated during the fourth
quarter of 2003, and $66,000 in higher director and officer insurance premiums.
General and administrative expenses totaled 8.5% and 7.8% of total revenues for
the years ended December 31, 2003 and 2002, respectively.
Interest expense decreased $62,000 comparing the years ended December
31, 2003 and 2002, due to lower average outstanding debt.
Income tax expense decreased $610,000 to $574,000 for the year ended
December 31, 2003 from $1.2 million for the year ended December 31, 2002, and
was attributable to a decline in income from operations. The Company's effective
tax rate was 39.5% for both the years.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001
Total revenues from continuing operations increased $4.7 million, or 5.0%,
to $99.3 million for the year ended December 31, 2002 compared to $94.6 million
for the year ended December 31, 2001. Revenue from comparable stores, or stores
in operation on January 1, 2001, increased $1.3 million, or 1.4%, and was
primarily attributable to an increase in average rental rates and, to a lesser
extent, an increase in collection performance. The increase in average rental
rates was mainly the effect of raising rental rates on pre-rented merchandise
during the second quarter of 2002 towards historical levels as the quality of
such merchandise improved over the previous year. Changes in product mix and
increased average rental rates on new merchandise also contributed to the
increase in comparable store revenue. Partially offsetting the increase in
comparable store revenue was a modest decline in average units on rent comparing
2002 to 2001, which was due to a decline in average customers per comparable
store. Revenue from the 17 stores opened after January 1, 2001 accounted for
$3.6 million of the increase in total revenue from continuing operations as
these stores continue to build a customer base and develop a recurring revenue
stream. Revenues in 2001 included the activity of an underperforming store sold
in 2001.
Merchandise costs from continuing operations increased $685,000, or 2.1%,
to $34.0 million for the year ended December 31, 2002 compared to $33.3 million
for the year ended December 31, 2001. Merchandise costs totaled 34.2% and 35.2%
of revenue for the years ended December 31, 2002 and 2001, respectively. The
decrease in merchandise costs from continuing operations as a percentage of
revenues from continuing operations was primarily the result of higher rental
margins. During mid-2001, the Company lowered rental rates in order to move
older, pre-rented merchandise. The Company began raising rental rates during the
second quarter of 2002 towards historical levels as the quality of older,
pre-rented merchandise improved.
Store expenses from continuing operations increased $3.0 million, or 6.0%,
to $53.5 million for the year ended December 31, 2002 compared to $50.5 million
for the year ended December 31, 2001. This increase was mainly attributable to
the 17 stores opened after January 1, 2001, as total store expenses for
comparable stores remained flat. To a lesser extent, costs associated with the
consolidation of two stores contributed to the increase in store expenses from
continuing operations. A modest increase in salaries and related expenses at
comparable stores, in addition to normal scheduled rent increases, were offset
by cost savings as operational efficiencies and spending controls were
implemented during 2002. As a result of the above-mentioned cost savings, total
comparable store expenses as a percentage of comparable store revenue improved
from 52.4% for the year ended December 31, 2001 to 51.8% for the year ended
December 31, 2002. Store expenses from
17
continuing operations totaled 53.9% and 53.4% of total revenues from continuing
operations for the years ended December 31, 2002 and 2001, respectively.
Amortization expense from continuing operations decreased $514,000 to
$175,000 for the year ended December 31, 2002 compared to $689,000 for the year
ended December 31, 2001. With the adoption of SFAS No. 142 on January 1, 2002,
goodwill is no longer amortized, but evaluated at least annually for impairment.
For the year ended December 31, 2001, amortization of goodwill totaled $525,000.
General and administrative expenses from continuing operations
increased $546,000, or 7.6%, to $7.7 million for the year ended December 31,
2002 from $7.2 million for the year ended December 31, 2001. The increase in
general and administrative expenses from continuing operations was mostly
attributable to higher costs associated with the Company's manager trainee
program due to both new store openings and preparing potential managers for
future store openings and replacements. In addition, higher regional manager
compensation and increased legal costs contributed to the increase. General and
administrative expenses increased to 7.8% from 7.6% of revenues, respectively,
comparing the years ended December 31, 2002 to December 31, 2001 due to slower
revenue growth than anticipated.
Interest expense decreased $57,000 comparing the years ended December
31, 2002 to 2001, and was due to lower average outstanding debt and lower
interest rates during 2002.
Income tax expense from continuing operations increased $384,000 from
$800,000 for the year ended December 31, 2001 to $1.2 million for the year ended
December 31, 2002. This increase was attributable to an increase in income from
continuing operations, but was partially offset by a decline in the Company's
effective tax rate to 39.5% for 2002 from 40.5% for 2001 due to a higher
proportion of state taxable income in states with lower income tax rates.
During the fourth quarter of 2002, the Company sold an under-performing
store, which was accounted for as a discontinued operation. Loss from
discontinued operations totaled $172,000, net of an income tax benefit and
included a $90,000 loss, net of tax, from operations of the store and an $82,000
loss, net of tax, on the disposal of the store. There were no restatements
necessary for years prior to 2002 since the Company opened this store in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital consist of purchasing
additional and/or replacement rental-purchase merchandise, expenditures related
to new store openings, acquisitions and working capital requirements for new and
existing stores. The primary sources of liquidity and capital are from
operations and borrowings. The Merger Agreement with RAC contains customary
provisions limiting the Company's capital expenditures including the opening of
new stores.
For the years ended December 31, 2003 and 2002, cash provided by
operating activities totaled $3.6 million and $4.2 million, respectively. The
decrease in cash provided by operating activities was affected by a decline in
income from operations and increased purchases of rental purchase merchandise,
which was partially offset by changes in accounts payable (due mainly to the
timing of inventory purchases). Cash used in investing activities decreased to
$2.2 million for the year ended December 31, 2003 from $2.8 million for the year
ended December 31, 2002, and was primarily due to acquisitions of customer
accounts in 2002 and a decline in purchases of property and equipment purchases
in 2003. Cash used in financing activities decreased to $1.8 million for the
year ended December 31, 2003 from $2.2 million for the year ended December 31,
2002 and was mainly attributable to loan fees paid in 2002.
During 2002, Congress passed the Job Creation and Workers Assistance
Act of 2002, which provided an additional first-year "bonus" depreciation
deduction of 30% on property acquired after September 10, 2001, but before
September 11, 2004, if there was no written binding contract for the
acquisition of the property in effect before September 11, 2001. Additionally,
Congress passed the Jobs and Growth Tax Reconciliation Act of 2003, which
increased the additional first-year "bonus" depreciation from 30% to 50% for
most capital assets acquired new after May 5, 2003 and before 2005. These acts
have a significant impact on the Company as all rental purchase merchandise and
a portion of the fixed assets qualify for these accelerated deductions. The
above has resulted in the Company receiving an amount of $730,000 in the
current year from the federal government, net of estimated income tax payments.
The Company expects that these bonus depreciation amounts will result in
significant tax savings through 2005, which is when the benefits expire.
In January 2002, the Company refinanced its debt with a $25.0 million
revolving loan agreement (the "Credit Facility") that matures in January 2005. A
borrowing base ($13.0 million at December 31, 2003) measured against rental
purchase merchandise limits borrowings under the Credit Facility to 32% of
rental purchase inventory, less outstanding letters of credit, which totaled
$2.9 million at December 31, 2003. Excess availability was approximately $4.4
million at December 31, 2003. The agreement requires the Company to meet certain
quarterly financial covenants and ratios including maximum leverage, minimum
interest coverage, minimum net worth, fixed charge coverage and rental
merchandise usage ratios. In addition, the Company must meet requirements
regarding monthly, quarterly and annual financial reporting. The agreement also
contains non-financial covenants that limits actions of the Company with respect
to additional indebtedness, certain loans and investments, payment of dividends,
acquisitions, mergers and consolidations, dispositions of assets or
subsidiaries, issuance of capital stock, capital expenditures and leases.
18
The following table summarizes the Company's approximate obligations
and commitments to make future payments under contractual obligations as of
December 31, 2003:
Less than More than
1 year 1 - 3 years 3 - 5 years 5 years Total
- ---------------------------------------------------------------------------------------------------------------------
Operating lease obligations $ 8,805 $ 11,557 $ 4,468 $ 609 $ 25,439
Long-term debt - 5,725 - - 5,725
Debt from variable interest entity - 429 - - 429
--------- --------- --------- -------- ---------
$ 8,805 $ 17,711 $ 4,468 $ 609 $ 31,593
========= ========= ========= ======== =========
If the Merger Agreement is terminated and the Company would continue as
a stand-alone entity, management believes it would be able to open six new
stores in 2004, as well as continue to have the opportunity to increase the
number of its stores and rental-purchase agreements through selective
acquisitions. Potential acquisitions may vary in size and the Company may
consider larger acquisitions that could be material to the Company. To provide
any additional funds necessary for the continued pursuit of its growth
strategies, should the Merger not occur, the Company may use cash flow from
operations, borrow additional amounts under its Credit Facility, or use its own
equity securities, the availability of which will depend upon market and other
conditions. There can be no assurance that such additional financing will be
available to the Company or its current lender.
Capital spending amounted to approximately $2.3 million for the year
ended December 31, 2003 and, subject to changes resulting from the Merger, is
expected not to change materially for 2004. If the Merger Agreement is
terminated, spending will be focused on leasehold improvements for new and
existing stores in addition to completion of a point-of-sale software upgrade.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which amends and clarifies accounting for derivative
instruments and hedging activities under SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 provides guidance relating to
decisions made (a) as part of the Derivatives Implementation Group process, (b)
in connection with other FASB projects dealing with financial instruments and
(c) regarding implementation issues raised in the application of the definition
of a derivative and the characteristics of a derivative that contains financing
components. SFAS No. 149 is effective for contracts entered into or modified and
for hedging relationships designated after June 30, 2003. The application of
this Statement does not have an effect on the Company's financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments and Characteristics of both Liabilities and Equity, which
requires freestanding financial instruments such as mandatorily redeemable
shares, forward purchase contracts, written put options to be reported as
liabilities by their issuers as well as related new disclosure requirements. The
provisions of SFAS No. 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The application of
this Statement does not have an effect on the Company's financial position or
results of operations.
In November 2002, the Emerging Issues Task Force (EITF) issued a final
consensus on EITF Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables, which addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. EITF Issue No. 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
application of this statement does not have and effect on the Company's
financial position or results of operations.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which clarifies
existing SEC guidance regarding revenues for contracts that contain multiple
deliverables to make it consistent with EITF Issue No. 00-21. The adoption of
SAB No. 104 did not have an effect of the Company's financial position or
results of operations.
19
SEASONALITY
Management believes that the Company's operating results are subject to
seasonality. The third quarter generally shows a small reduction of customer
spending habits because of circumstances such as summer vacations and back to
school needs. On the other hand, the fourth quarter generally shows increased
rental activity because of traditional holiday shopping patterns. Many of the
Company's expenses do not fluctuate with seasonal revenue changes; therefore,
such revenue changes may cause fluctuations in the Company's quarterly results.
INFLATION
During the years ended December 31, 2003, 2002 and 2001, lease expense
and salaries and wages have increased modestly, which have not had a significant
effect on the Company's results of operations.
MARKET RISK
The Company manages interest rate risk with the use of variable rate
borrowings under its committed and uncommitted Credit Facility. Variable rate
borrowings under the Credit Facility totaled $5.7 million at December 31, 2003.
A one percent increase or decrease in interest rates would have resulted in an
increase or decrease in interest expense of approximately $62,000.
The Company does not purchase or hold any derivative financial
instruments.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Market Risk Section under the Management's Discussion and
Analysis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 15 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company evaluated the design and operation of its disclosure
controls and procedures to determine whether they are effective in ensuring that
the disclosure of required information is made timely in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including the Company's principal executive officer and principal
financial officer prior to the filing of this Annual Report on Form 10-K. The
principal executive officer and principal financial officer have concluded,
based on their review, that the Company's disclosure controls and procedures, as
defined at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure
that information required to be disclosed by the Company in reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. No significant changes were made to the Company's internal controls
or other factors during the fourth quarter of 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME OF PRINCIPAL OCCUPATION PAST FIVE YEARS, DIRECTOR
DIRECTOR/OFFICER AGE OTHER DIRECTORSHIPS SINCE
------------------------ --- ------------------- -----
Wayland J. Russell 52 Chairman of the Board and Chief Executive Officer of the Company since 1986
February 1997, having previously served as the Company's President
since its inception in 1986.
Michael J. Viveiros 48 President of the Company since February 1997, having previously served 1986
as Vice President since the Company's inception in 1986.
Brian L. Burton 63 Business Consultant and Executive Vice President and Chief Financial 1998
Officer of KST Coatings Manufacturing, Inc. since 2002, a manufacturer
of roofing products. Prior thereto, Mr. Burton was President of
Vertical Merchandising Systems, a distributor of impulse merchandising
systems to supermarkets, for over five years.
Ivan J. Winfield 69 Associate Professor at Baldwin-Wallace College, Cleveland, Ohio, and 1998
business consultant since 1995. Prior thereto, Mr. Winfield was
Managing Partner of Coopers & Lybrand, Cleveland, Ohio from 1978 to
1994. He is a director of Boykin Lodging Co. and HMI Industries, Inc.
Robert A. Glick 57 Chairman and Chief Executive Officer of Dots, LLC., a retailer of 2001
women's apparel. He is a director of the National Retail Federation and
Chairman of the Advisory Board of the Shannon Rodgers and Jerry
Silverman School of Fashion Design and Merchandising at Kent State
University.
S. Robert Harris 56 Chief Operating Officer of the Company since May 2003, having N/A
previously served as Regional Supervisor since joining the Company in
January 2003. Prior thereto, Mr. Harris served as Chairman and Chief
Executive Officer of Texas Shamrock Homes, a retailer of manufactured
housing in Texas.
Michael A. Pecchia 43 Chief Financial Officer of the Company since February 1997, having N/A
previously served as Treasurer since June 1991.
21
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information with respect to the
compensation earned during the years ended December 31, 2003, 2002 and 2001,
respectively, by the Chief Executive Officer and all other named Executive
Officers of the Company whose annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
-------------------------------------- ------------------------------
Other Annual Option All Other
Name and Principal Position Year Salary Bonus Compensation(1) Awards(#) Compensation(2)
---- ------ ----- --------------- --------- ---------------
Wayland J. Russell 2003 $322,008 $58,879 $33,894 0 $ 6,348
Chief Executive Officer 2002 322,563 58,724 41,978 0 6,727
2001 322,008 50,000 21,258 0 9,805
S. Robert Harris 2003 153,545 0 10,561 40,000 1,990
Chief Operating Officer
Michael J. Viveiros 2003 219,000 44,637 16,317 0 2,168
President 2002 223,277 43,850 23,619 0 2,595
2001 243,000 44,000 17,197 0 3,827
Michael A. Pecchia 2003 140,000 18,750 19,320 0 243
Secretary and 2002 125,000 18,750 18,577 0 243
Chief Financial Officer 2001 125,000 18,750 19,602 0 1,237
Lawrence S. Hendricks (3) 2003 81,000 18,750 13,110 0 1,805
Chief Operating Officer 2002 243,243 37,500 21,903 0 2,340
2001 243,000 41,600 13,994 0 3,557
(1) Includes the value of perquisites reported as taxable wages, including
for 2003 amounts for the Company's annual business meeting, personal use of
automobiles, country clubs, professional services and other miscellaneous items.
For Messrs. Russell, Harris, Viveiros, Pecchia and Hendricks the value of the
foregoing perquisites were as follows: annual business meeting -- $7,100,
$3,470, $5,742, $4,204 and $6,492, respectively; automobile -- $9,769, $3,103,
$6,605, $8,272 and $321, respectively; country club -- $7,707, $3,418, $0,
$6,640 and $3,322, respectively; professional services -- $9,318, $0, $2,169, $0
and $2,975, respectively; and other miscellaneous items -- $0, $570, $1,801,
$204 and $0, respectively. Also included for Mr. Hendricks is severance related
compensation -- $11,536.
(2) Included in this column are amounts paid by the Company for life
insurance coverage for the benefit of the Executive Officers. Life insurance
premiums paid on behalf of Messrs. Russell, Harris, Viveiros, Pecchia and
Hendricks were $6,348, $1,990, $2,168, $243, and $1,805, respectively.
(3) In May 2003 Mr. Hendricks retired as the Company's Chief Operating
Officer, in which he received a severance agreement that paid him $149,536
through December 31, 2003.
STOCK OPTIONS
The table below provides information concerning individual grants of
stock options made during 2003 to each of the Company's executive officers named
in the Summary Compensation Table. The Company has never granted any stock
22
appreciation rights. Unless otherwise indicated, the exercised prices represent
the fair market value of the common stock on the grant date.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of the Company's common stock. The 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's estimate
or projection of the future price of its common stock. The potential realizable
value is calculated based on the ten-year term of the option at its time of
grant. It is calculated based on the assumption that the Company's common stock
appreciates at the indicated annual rate compounded annually for the entire term
of the option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. Actual gains, if any, on stock option
exercises depend on the future performance of the Company's common stock. The
amounts reflected in the table may not necessarily be achieved.
The Company granted these options under its 1998 Stock Option Plan.
Each option has a maximum of ten years, subject to earlier termination if the
optionee's services are terminated. The percentage of total options granted to
the Company's employees in the last fiscal year is based on options to purchase
the aggregate of 129,500 shares of common stock granted during 2003. The
following table sets forth information concerning the individual grants to each
of the Company's named executive officers in 2003.
OPTION GRANTS IN 2003
Number of Individual Grants Potential Realizable Value
Securities Percent of Total of Assumed Annual Rates
Underlying Options Granted of Stock Price Appreciation
Options to Employees in Exercise for Option Term
Granted Fiscal 2003 Price Expiration ----------------------------
Name (1) (#) (2) (%) Per Share Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------
S. Robert Harris 10,000 7.7 $5.24 4/1/2013 $ 32,954 $ 83,512
S. Robert Harris 30,000 23.2 $5.35 5/14/2013 $100,938 $255,795
(1) No other executive officers in the Summary Compensation Table were granted
stock options in 2003.
(2) Unless otherwise noted, 33 1/3 of these shares vest after one year of
service from the date of the grant, and the remaining options vest in two
equal annual installments thereafter. Each option expires on the earlier of
ten years from the date of grant or within a specified period following
termination of the optionee's employment with the Company.
Shown below is information with respect to the unexercised options to
purchase the Company's Common Shares under the Company's Stock Option Plan held
by the Executive Officers listed in the Summary Compensation Table at December
31, 2003. None of the Executive Officers listed in the Summary Compensation
Table exercised any stock options during 2003.
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at 12/31/03 (#) at 12/31/03 ($) (1)
on Exercise Realized -------------------------------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
Wayland J. Russell 0 0 0 0 0 0
Michael J. Viveiros 0 0 0 0 0 0
S. Robert Harris 0 0 0 40,000 0 $91,100
Michael A. Pecchia 0 0 60,000 0 0 0
Lawrence S. Hendricks 0 0 0 0 0 0
(1) Calculated in the basis of the fair market value of the underlying
securities at December 31, 2003, minus the exercise price.
23
On May 5, 2003, the Company entered into a severance agreement and
mutual release with Lawrence S. Hendricks, the Company's former Chief Operating
Officer. Under the agreement, the Company agreed to pay an aggregate of
$280,500, an amount representing one year's salary and bonus, over a twelve
monthly period. In addition, the Company agreed to continue certain fringe
benefits, including insurance and country club dues, for a one-year period and
payment of Mr. Hendricks car lease for a two-year period. The severance payment
was to continue for a second year, in the event, Mr. Hendricks (i) failed to
gain full time employment either with a new employer or through commencement of
a substantial business venture; provided that there was no "change-in-control"
of the Company. Mr. Hendricks has commenced a new business venture that will
result in the Company having no obligation to make the second year severance
payment. Moreover, the Company's obligation to continue severance payments
terminates on the effective date of the purchase of the Company by
Rent-A-Center.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as March 1, 2004 or as
of the date specified, with respect to the beneficial ownership of the Common
Shares. Unless otherwise indicated below, the persons named below have the sole
voting and investment power with respect to the number of Common Shares set
forth opposite their names. All information with respect to beneficial ownership
has been furnished by the respective Director, Officer or 5% or greater
shareholder, as the case may be.
Names and, where necessary, Number of Shares Ownership
addresses of Beneficial Owners (1) Beneficially Owned Percentage
- ------------------------------ ------------------ ----------
Wayland J. Russell 2,536,675 42.7%
Michael J. Viveiros 255,620 4.3%
S. Robert Harris 3,334 (2)
Michael A. Pecchia 60,000 (3) 1.0%
Ivan J. Winfield 12,000 (4) *
Brian L. Burton 15,000 (4) *
Robert A. Glick 7,667 (5) *
Wasatch Advisors, Inc. 951,301 (6) 16.0%
150 Social Hall Ave.
Salt Lake City, UT 84111
Lawrence S. Hendricks
550 Boardman-Poland Road 548,240 9.2%
Boardman, Ohio 44512
Aaron Rents, Inc. 474,500 (7) 8.0%
309 E. Paces Ferry Road
Atlanta, GA 30305-2377
All Directors and Executive Officers
of the Company (7 Persons) 2,890,296 (8) 47.9%
- ------------------------------
*Less than one percent
(1) Unless otherwise indicated, the address of all persons listed above is
c/o Rainbow Rentals, Inc., 3711 Starr Centre Drive, Canfield, Ohio
44406.
(2) Includes 3,334 shares subject to options that are currently
exercisable.
(3) Includes 60,000 shares subject to options that are currently
exercisable.
(4) Includes 10,000 shares subject to options that are currently
exercisable.
(5) Includes 6,667 shares subject to options that are currently
exercisable.
(6) As of December 31, 2003, based on a Schedule 13G filed with the SEC on
February 18, 2004.
(7) Based on a Schedule 13D, as amended, filed with the SEC on January 22,
2003.
(8) Includes 90,001 shares subject to options that are currently
exercisable.
25
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires the Company's
Directors, Executive Officers and persons who own 10% or more of the Company's
Common Shares to file reports of ownership and changes of ownership with the
Securities and Exchange Commission and the Company. Based upon a review of these
filings and written representations from such individuals, the Company
understands that all such filers have adhered to all applicable filing
requirements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Company's headquarters facility is leased from an entity owned by
Messrs. Russell, Hendricks and Viveiros under a ten-year triple-net lease, with
three two-year options. In 2003, the rental amount was $130,000. The Company
believes that the rental is at market rates and that the other provisions of the
lease are on terms no less favorable to the Company than could be obtained from
unrelated parties.
An amendment to the lease relating to the Company's headquarters has
been executed providing for (i) a payment by the acquiror (Rent-A-Center, or
"RAC") of $100,000 to the lessor and (ii) RAC's agreement to abandon to lessor
all furniture, fixtures and equipment not related to the rent-to-own business,
in exchange for an early termination of the lease. In lieu of expiring on
January 31, 2006, the lease will now expire ninety days after the Effective Date
of the Merger.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During 2003, the Company retained its independent public accountants,
KPMG LLP, to provide services in the following categories and amounts:
2003 2002
---------- ----------
Audit Fees $ 165,000 $ 133,000
Tax Fees 5,000 2,000
---------- ----------
Total $ 170,000 $ 135,000
========== ==========
Audit Fees. This category relates to services rendered in connection
with the audits of the Company's annual financial statements for the years ended
December 31, 2003 and 2002, for the reviews of the financial statements included
in the Company's quarterly reports on Form 10-Q during 2003 and 2002 and for
services that are normally provided by independent public accountants in
connection with statutory and regulatory filings or engagements for the relevant
years.
Tax Fees. This category includes the aggregate fees billed in each of
the last two years for professional services rendered by the independent public
accountants for tax compliance. Such tax compliance services consisted of
assistance with federal income tax returns.
The Audit Committee has considered the compatibility of the non-audit
services performed by and fees paid to KPMG LLP in 2003 and determined that such
services and fees were compatible with the independence of the public
accountants. During 2003, KPMG LLP did not utilize any personnel in connection
with the audit other than its full-time, permanent employees.
All services provided by the Company's independent public accountants,
both audit and non-audit, must be pre-approved by the Audit Committee. The
Chairman of the Audit Committee has the authority to approve any additional
audit services and permissible non-audit services, provided the Chairman informs
the Audit Committee of such approval at its next regularly scheduled meeting.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 2003 and 2002 29
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001 30
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 32
Notes to Consolidated Financial Statements 33
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted because
they are not applicable or because required information is
included in the Company's consolidated financial statements
and notes thereto.
(a) (3) Exhibits:
See the Index to Exhibits included on page 45.
(b) Reports on Form 8-K:
Report on Form 8-K dated October 29, 2003 to report the
results of operations for the three and nine months ended
September 30, 2003.
Report on Form 8-K dated February 4, 2004 to announce a
definitive merger agreement between the Company and
Rent-A-Center, Inc.
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rainbow Rentals, Inc.:
We have audited the accompanying consolidated balance sheets of Rainbow
Rentals, Inc. as of December 31, 2003 and 2002, 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, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rainbow
Rentals, Inc. as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
- -----------------
KPMG LLP
Cleveland, Ohio
February 26, 2004
28
RAINBOW RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------
2003 2002
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 669 $ 1,080
Rental-purchase merchandise, net 40,545 39,342
Income tax receivable - 939
Prepaid expenses and other current assets 2,264 1,926
-------- --------
Total current assets 43,478 43,287
Property and equipment, net 6,374 5,558
Deferred income taxes 4,230 1,989
Goodwill 9,236 9,236
Other assets, net 333 843
-------- --------
Total assets $ 63,651 $ 60,913
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Deferred revenue $ 1,075 $ 1,215
Accounts payable 1,550 2,175
Accrued compensation and related costs 2,971 2,402
Other liabilities and accrued expenses 3,209 2,403
Deferred income taxes 8,888 6,343
-------- --------
Total current liabilities 17,693 14,538
Long-term debt 6,154 7,550
Minority interest 83 -
-------- --------
Total liabilities 23,930 22,088
Commitments and contingencies
Shareholders' equity
Serial preferred stock, no par value; 2,000,000 shares authorized,
none issued - -
Common stock, no par value; 10,000,000 shares authorized,
6,392,610 issued, 5,931,819 outstanding at December 31,
2003 and 5,929,319 outstanding at December 31, 2002 11,039 11,039
Additional paid-in capital 11 4
Retained earnings 30,553 29,674
Treasury stock, at cost, 460,791 shares at December 31, 2003
and 463,291 shares at December 31, 2002 (1,882) (1,892)
-------- --------
Total shareholders' equity 39,721 38,825
-------- --------
Total liabilities and shareholders' equity $ 63,651 $ 60,913
======== ========
See accompanying notes to consolidated financial statements.
29
RAINBOW RENTALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues
Rental revenue $ 96,826 $ 93,239 $ 88,770
Fees 2,679 2,728 2,697
Merchandise sales 3,168 3,300 3,088
----------- ----------- -----------
Total revenues 102,673 99,267 94,555
Operating expenses
Merchandise costs 33,346 33,995 33,310
Store expenses
Salaries and related 26,849 24,393 22,713
Occupancy 10,022 9,480 8,607
Advertising 6,884 6,167 5,928
Other expenses 14,397 13,494 13,258
----------- ----------- -----------
Total store expenses 58,152 53,534 50,506
----------- ----------- -----------
Total merchandise costs and store expenses 91,498 87,529 83,816
General and administrative expenses 8,765 7,706 7,160
Amortization of intangibles 160 175 689
----------- ----------- -----------
Total operating expenses 100,423 95,410 91,665
----------- ----------- -----------
Operating income 2,250 3,857 2,890
Interest expense 570 632 689
Other expense, net 227 228 227
----------- ----------- -----------
Income from continuing operations,
before income taxes 1,453 2,997 1,974
Income tax expense 574 1,184 800
----------- ----------- -----------
Income from continuing operations 879 1,813 1,174
Discontinued operations
Loss from operations of discontinued store,
including loss on disposal, net of tax - (172) -
----------- ----------- -----------
Net income $ 879 $ 1,641 $ 1,174
=========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings per share from continuing operations $ 0.15 $ 0.31 $ 0.20
Basic loss per share from discontinued operations - (0.03) -
----------- ----------- -----------
Basic earnings per share $ 0.15 $ 0.28 $ 0.20
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Diluted earnings per share from continuing operations $ 0.15 $ 0.31 $ 0.20
Diluted loss per share from discontinued operations - (0.03) -
----------- ----------- -----------
Diluted earnings per share $ 0.15 $ 0.28 $ 0.20
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,929,435 5,928,006 5,925,735
=========== =========== ===========
Diluted 5,940,598 5,940,606 5,940,999
=========== =========== ===========
PRO FORMA NET INCOME DATA:
Net income as reported $ 879 $ 1,641 $ 1,174
Pro forma adjustment for goodwill amortization, net of tax - - 312
----------- ----------- -----------
Pro forma net income $ 879 $ 1,641 $ 1,486
=========== =========== ===========
PRO FORMA EARNINGS PER COMMON SHARE:
Basic $ 0.15 $ 0.28 $ 0.25
=========== =========== ===========
Diluted $ 0.15 $ 0.28 $ 0.25
=========== =========== ===========
See accompanying notes to consolidated financial statements.
30
RAINBOW RENTALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
----------------------------------------------------------------------------------------------
COMMON STOCK TOTAL
------------ ADDITIONAL RETAINED TREASURY SHAREHOLDERS'
SHARES COST PAID-IN CAPITAL EARNINGS STOCK EQUITY
------ ---- --------------- -------- ----- ------
Balance at December 31, 2000 5,925,735 $ 11,039 $ - $ 26,859 $ (1,907) $ 35,991
Net income - - - 1,174 - 1,174
---------- --------------- -------------- -------------- ----------- ----------
Balance at December 31, 2001 5,925,735 11,039 - 28,033 (1,907) 37,165
Exercise of stock options 3,584 - 4 - 15 19
Net income - - - 1,641 - 1,641
---------- --------------- -------------- -------------- ----------- ----------
Balance at December 31, 2002 5,929,319 11,039 4 29,674 (1,892) 38,825
Exercise of stock options 2,500 - 7 - 10 17
Net income - - - 879 - 879
---------- --------------- -------------- -------------- ----------- ----------
Balance at December 31, 2003 5,931,819 $ 11,039 $ 11 $ 30,553 $ (1,882) $ 39,721
========== =============== ============== ============== =========== ==========
See accompanying notes to consolidated financial statements.
31
RAINBOW RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Income from continuing operations $ 879 $ 1,813 $ 1,174
Reconciliation of income from continuing operations to net
cash provided by operating activities of continuing operations
Depreciation of property and equipment and
amortization of intangibles 2,444 2,480 2,990
Depreciation and write-down of rental-purchase merchandise 26,550 27,635 26,950
Purchases of rental-purchase merchandise (34,847) (34,030) (36,169)
Rental-purchase merchandise disposed, net 7,094 6,511 6,414
Deferred income taxes 304 1,924 212
Write-off of goodwill from sale of store - - 260
(Gain) loss on disposal of assets (3) 128 (100)
(Increase) decrease in
Income tax receivable 939 (826) 778
Prepaid expenses and other assets (330) 296 (450)
Increase (decrease) in
Accounts payable (625) (1,742) 1,514
Accrued income taxes - (306) 306
Accrued compensation and related costs 569 320 557
Deferred revenue and other liabilities and accrued expenses 666 210 840
-------- -------- --------
Net cash provided by operating activities of continuing operations 3,640 4,413 5,276
Net cash used in operating activities of discontinued operations - (197) -
-------- -------- --------
Net cash provided by operating activities 3,640 4,216 5,276
-------- -------- --------
Cash flows from investing activities
Purchase of property and equipment, net (2,290) (2,494) (2,017)
Proceeds from the sale of assets 39 98 349
Cash from consolidation of Rainbow Properties, Ltd. 8 - -
Acquisitions - (315) (245)
-------- -------- --------
Net cash used in investing activities of continuing operations (2,243) (2,711) (1,913)
Net cash used in investing activities of discontinued operations - (58) -
-------- -------- --------
Net cash used in investing activities (2,243) (2,769) (1,913)
-------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt 30,475 35,164 27,070
Current installments and repayments of long-term debt (32,300) (37,054) (29,970)
Proceeds from stock option exercises 17 19 -
Loan fees paid - (335) (50)
-------- -------- --------
Net cash used in financing activities (1,808) (2,206) (2,950)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (411) (759) 413
Cash and cash equivalents at beginning of period 1,080 1,839 1,426
-------- -------- --------
Cash and cash equivalents at end of period $ 669 $ 1,080 $ 1,839
======== ======== ========
Supplemental cash flow information
Net cash paid (received) during the period for
Interest $ 469 $ 488 $ 694
Income taxes (730) 560 (348)
See accompanying notes to consolidated financial statements.
32
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Rainbow Rentals, Inc. ("Rainbow"
or "Company"), which are summarized below, are consistent with accounting
principles generally accepted in the United States of America and reflect
practices appropriate to the industry in which the Company operates.
The Company is engaged in the rental and sale of home electronics,
furniture, appliances, and computers to the general public. At December 31,
2003, Rainbow operated 125 stores in 15 states: Connecticut, Georgia, Indiana,
Kentucky, Maryland, Massachusetts, Michigan, New York, North Carolina, Ohio,
Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The
Company's corporate office is located in Canfield, Ohio.
PRINCIPLES OF CONSOLIDATION: The Company's financial statements include
the accounts of Rainbow Rentals, Inc. and Rainbow Properties, Ltd., a variable
interest entity.
VARIABLE INTEREST ENTITIES: During the fourth quarter of the year
ended December 31, 2003, the Company adopted FASB Interpretation No. 46 and
No. 46 Revised (FIN 46), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIE's) that do not have sufficient
equity investment at risk to permit the entity to finance its activities
without subordinated financial support or which the equity investors lack an
essential characteristic of a controlling financial interest. The Company has
one VIE, Rainbow Properties, Ltd., which is a special purpose entity.
Rainbow Properties, Ltd. ("LLC") is majority-owned by two of the
Company's officers and directors and primarily consists of land, building and
the related debt. The building is leased to the Company as an operating lease
and houses the Company's corporate headquarters. All the assets and liabilities
of the LLC are used for the purpose of operating the building. The two officers
of the Company that own the majority of the LLC have personally guaranteed the
debt. The LLC meets the criteria of a variable interest entity as the related
party relationship creates the presumption that the Company has provided an
implicit guarantee of the officers' investments and of the officers' personal
guarantees. The implicit guarantee is the Company's variable interest, and the
Company is considered the primary beneficiary of the LLC as the activities of
the LLC are most closely associated with the Company.
As the Company is considered the primary beneficiary of the LLC, the
assets and liabilities of the LLC are included in the Company's consolidated
balance sheet. The difference between the assets and liabilities of the LLC is
considered a minority interest of the Company of $83. As of December 31, 2003,
the balance sheet of the LLC consisted of cash, property and equipment and debt
of $8, $504 and $429, respectively.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and
money market funds with original maturities of three months or less at the date
of purchase.
RENTAL-PURCHASE MERCHANDISE: Rental-purchase merchandise consists of
merchandise rented to customers or in the stores available for rent or sale.
Merchandise is rented to customers pursuant to rental-purchase agreements, which
generally provide for weekly or monthly rental terms with rental renewal
payments collected in advance. The customers may terminate the rental-purchase
agreements at any time, at which time the merchandise is returned to the
Company.
Rental-purchase merchandise is stated at historical cost, net of
accumulated depreciation. The Company depreciates inventory on rent using the
units of activity method. Under the units of activity method, merchandise on
rent is depreciated in the proportion of rents earned to total expected rents to
be provided over the rental contract term. The Company believes the units of
activity method more accurately matches the recognition of depreciation expense
with the estimated timing of revenue earned over the rental-purchase agreement
period. The units of activity method is recognized in the rental-purchase
industry and does not consider salvage value. In addition, the Company
depreciates certain older rental-purchase merchandise held for rent over its
remaining useful life.
The Company monitors the value of rental-purchase merchandise for
possible impairment. An impairment loss is recognized when the carrying amounts
cannot be recovered by the estimated undiscounted cash flows they will receive.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost,
net of accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to five years for personal property and thirty-nine years
for real estate. Leasehold improvements are amortized over the shorter of the
term of the applicable leases or useful life of the assets.
GOODWILL: Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 establishes accounting and reporting standards for acquired
goodwill and other intangible assets in that goodwill and other intangible
assets that have indefinite useful lives will not be amortized but rather will
be tested at least annually for impairment, or more frequently if events or
changes in circumstances indicate that the carrying value may not be
recoverable. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives. For the year ended December 31, 2001,
earnings per diluted share of $0.20 included goodwill amortization of $312, net
of tax. Amortization expense related to goodwill was $525 for the year ended
December 31, 2001.
Under SFAS No. 142, the Company was required to test all existing
goodwill for impairment as of January 1, 2002, on a "reporting unit" basis. A
fair value approach is used to test goodwill for impairment. An impairment
charge is recognized for the amount, if any, by which the carrying amount of
goodwill exceeds its implied fair value. The fair value of a reporting unit and
the related implied fair value of the respective goodwill were established using
comparative market multiples.
33
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In January 2002, the Company completed the transitional goodwill
impairment test in accordance with SFAS No. 142, which resulted in no impairment
charge. The Company performed the annual impairment test as of November 30, 2003
and 2002, resulting in no impairment.
OTHER ASSETS: Other assets consist primarily of noncompete agreements
and loan fees. These costs are amortized over their respective agreement lives.
LONG-LIVED ASSETS: In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company evaluates all
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. Impairment is
recognized when the carrying amounts of such assets cannot be recovered by the
undiscounted net cash flows they are expected to generate.
RENTAL REVENUE: Merchandise is rented to customers pursuant to
rental-purchase agreements, which generally provide for weekly or monthly rental
terms. Rental revenue is recognized over the lease term. Deferred revenue is
recognized for cash received for which revenue is not yet earned. 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 an early purchase option. Amounts received from
such early purchase options, as well as sales of new and used merchandise
available for rent in the stores, are included in merchandise sales.
STOCK-BASED COMPENSATION: The Company has elected to apply Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related interpretations in accounting for its stock-based compensation.
In addition, the disclosures required under SFAS No. 123, Accounting for
Stock-Based Compensation are contained below and in Note 12 to the financial
statements.
Pro forma information for net income and basic and diluted earnings per
common share is required by SFAS No. 123 and has been determined as if the
Company had accounted for its stock options under the fair value method of that
statement. The weighted average fair value of stock options granted during 2003,
2002 and 2001 was $3.08, $4.66 and $3.15 per share, respectively. The fair value
for these stock options was estimated at the date of grant using the
Black-Scholes option-pricing model using the following assumptions for 2003,
2002 and 2001:
2003 2002 2001
-------- -------- ------
Risk-free interest rate 4.16% 4.42% 4.25%
Expected life of options 7.1 years 7.8 years 7 years
Expected stock price volatility 44% 60% 55%
Dividend yield 0% 0% 0%
The Company did not recognize any compensation expense related to the
issuance of stock options during the years ended December 31, 2003, 2002 and
2001. Had compensation cost for stock options been measured using SFAS No. 123,
the pro forma amounts for the years ended December 31, 2003, 2002 and 2001 are
indicated below.
2003 2002 2001
- ------------------------------------------------------------------------------------------
Net income
As reported $ 879 $ 1,641 $ 1,174
Pro forma 726 1,444 923
Basic and diluted earnings per common share
As reported 0.15 0.28 0.20
Pro forma 0.12 0.24 0.16
ADVERTISING COSTS: Costs incurred for producing and communicating
advertising are charged to expense the first time advertising takes place.
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.
EARNINGS PER COMMON SHARE: Basic earnings per common share are based on
the weighted average number of common shares outstanding during each year.
Diluted earnings per common share are based on the weighted average number of
common shares outstanding during each year, plus the assumed exercise of stock
options.
34
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided.
RECLASSIFICATIONS: Certain reclassifications have been made to prior
years financial data in order to conform to the 2003 presentation.
(2) ACQUISITIONS
During the years ended December 31, 2002 and 2001, the Company made
acquisitions of stores, rental purchase merchandise and rental purchase
agreements. All acquisitions made were accounted for using the purchase method
of accounting. Accordingly, all identifiable tangible and intangible assets were
recorded at their estimated fair market value at the date of acquisition. The
excess of the acquisition cost over the estimated fair value of the net assets
acquired was recorded as goodwill and is being assessed for impairment annually.
Assets acquired, other than goodwill, consisted primarily of rental-purchase
merchandise, property and equipment, non-compete agreements and other intangible
assets such as customer lists.
Acquisition activity for the years ended December 31, 2003, 2002 and
2001 is as follows:
2003 2002 2001
- --------------------------------------------------------------------------
Goodwill $ -- $ 138 $ 93
Rental-purchase merchandise -- 127 127
Other -- 50 25
------ ------ ------
Purchase price $ -- $ 315 $ 245
====== ====== ======
(3) RENTAL-PURCHASE MERCHANDISE
Following is a summary of rental-purchase merchandise at December 31,
2003 and 2002:
2003 2002
- ------------------------------------------------------------------------------
On rent
Original cost $ 59,666 $ 58,091
Less accumulated depreciation 27,568 27,131
--------- ---------
32,098 30,960
Held for rent
Original cost 11,944 12,150
Less accumulated depreciation 3,497 3,768
--------- ---------
8,447 8,382
--------- ---------
Total rental purchase merchandise, net $ 40,545 $ 39,342
========= =========
35
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 2003
and 2002:
2003 2002
- --------------------------------------------------------------------------------
Land $ 169 $ -
Buildings 425 -
Vehicles 284 286
Leasehold improvements 10,088 8,656
Computer equipment 1,805 1,574
Office equipment 3,551 3,193
------- ----------
16,322 13,709
Less accumulated depreciation 9,948 8,151
------- ----------
$ 6,374 $ 5,558
======= ==========
(5) LONG-TERM DEBT
The Company entered into a revolving financing agreement (the "Credit
Facility") in January 2002 that matures in January 2005. The agreement allows
the Company to borrow up to $25.0 million; however, borrowings are limited to
32% of the Company's rental purchase merchandise, less outstanding letters of
credit, which totaled $2.9 million at December 31, 2003. Excess availability at
December 31, 2003 was approximately $4.4 million. The Company's tangible assets,
primarily rental purchase merchandise, serve as the security for the debt. The
Company can elect interest to be charged on a portion of the outstanding debt
balance at the London Interbank Offering Rate (LIBOR) plus a range of 250 - 325
basis points and the remaining debt balance, if any, would be at the prime rate
plus a range of 50 - 125 basis points. In addition, the Company must pay a
commitment fee equal to a range of 37.5 to 50 basis points per annum on the
unused portion of the loan commitment. The interest rate ranges above are all
dependent on the Company's most recent quarterly leverage ratio. Borrowings
under the Credit Facility mature three years after the date of the loan. At
December 31, 2003, the outstanding loan balance totaled $5.7 million with a
weighted average interest rate of 5.78%. Long-term debt also included $429 in
mortgage debt from the consolidation of Rainbow Properties, Ltd., a variable
interest entity, with an interest rate of 8.0%. The above outstanding loans
mature in 2005.
The Credit Facility requires the Company to meet certain quarterly
financial covenants and ratios including maximum leverage, minimum interest
coverage, minimum net worth, fixed charge coverage and rental merchandise usage
ratios. The Credit Facility contains non-financial covenants that limit actions
of the Company with respect to additional indebtedness, certain loans and
investments, payment of dividends, acquisitions, mergers and consolidations,
dispositions of assets or subsidiaries, issuance of capital stock, capital
expenditures and leases. At December 31, 2003, the Company was in compliance
with the covenants and financial reporting requirements.
(6) RELATED PARTY TRANSACTIONS
The building that serves as Rainbow's corporate office is leased from
Rainbow Properties, Ltd. ("LLC"), the variable interest entity owned by Messrs.
Russell, Hendricks and Viveiros, two of who are executive officers of the
Company. The Company entered into a 10-year building lease agreement, expiring
January 2006, at a rental rate that approximates market rates. However, on
February 19, 2004, the LLC and the Company entered into a lease termination
agreement contingent upon the completion of the Merger Agreement with
Rent-A-Center, dated February 4, 2004. If the Merger Agreement with
Rent-A-Center is completed, the Company's lease obligation will cease 90 days
after the Merger completion date.
Rent paid to the partnership in 2003, 2002 and 2001 was $130, $126 and
$121, respectively. The future minimum lease payments under this lease are
included in the total lease obligations disclosed in Note 9.
36
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) INCOME TAXES
The provision for income taxes for the years ended December 31, 2003,
2002 and 2001 consists of the following components:
2003 2002 2001
- ----------------------------------------------------------------------
Current
Federal $ - $ (816) $ 467
State and local 270 76 121
------ ------- -------
270 (740) 588
Deferred
Federal 497 1,798 205
State and local (193) 126 7
------ ------- -------
304 1,924 212
------ ------- -------
Income tax expense $ 574 $ 1,184 $ 800
====== ======= =======
A reconciliation between income tax expense reported and income tax
expense computed by applying the federal statutory rate is as follows:
2003 2002 2001
- ------------------------------------------------------------------------------------
Income from continuing operations, $ 1,453 $ 2,997 $ 1,974
before income taxes
Federal statutory tax rate 34% 34% 34%
------- ------- ------
494 1,019 671
State and local income taxes, net of
Federal income tax benefit 51 133 84
Meals and entertainment and officers'
life insurance premiums 28 22 19
Other 1 10 26
------- ------- ------
$ 574 $ 1,184 $ 800
======= ======= ======
37
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of principal temporary differences and the resulting
deferred tax assets and liabilities at December 31, 2003 and 2002 are as
follows:
2003 2002
-------- --------
Deferred tax assets
Property and equipment $ 1,109 $ 1,369
Intangibles 516 428
Employee benefit programs 341 256
Charitable contributions 329 258
Minimum tax credits 280 280
Net operating loss carryforward 1,995 -
Other 8 22
-------- --------
Total deferred tax assets 4,578 2,613
Deferred tax liabilities
Rental purchase merchandise (8,567) (6,621)
Intangibles (642) (346)
Other (27) -
-------- --------
Total deferred tax liabilities (9,236) (6,967)
-------- --------
Net deferred tax liability $ (4,658) $ (4,354)
======== ========
For the years ended December 31, 2003 and 2002, deferred tax assets of
$348 and $278, respectively, were classified as current and were netted with the
deferred tax liability.
At December 31, 2003, the Company had a net operating loss carryforward
(NOL) of approximately $5.9 million and an alternative minimum tax credit
carryforward of $280. The NOL will expire in 2023 if the Company is unable to
use the amounts to offset taxable income in the future. The alternative minimum
tax credit carryforward does not have an expiration date. No valuation allowance
was considered for the years ended December 31, 2003 and 2002 as management
expects to generate future taxable income to utilize these amounts.
(8) DISCONTINUED OPERATIONS
The Company adopted SFAS No. 144, which superceded the accounting and
reporting provisions of APB Opinion 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sales and broadens the presentation of an entity (rather than segment of a
business). A component of an entity comprises of operations and cash flows that
can be clearly distinguished from the rest of the entity. SFAS No. 144 also
requires that discontinued operations be measured at the lower of the carrying
amount or fair value, less cost to sell. The adoption of SFAS No. 144 resulted
in the Company having a discontinued operation as a result of the sale of its
Newark, Delaware store. There are no restatements necessary for 2003 and 2001
since the Company opened and sold this store in 2002.
38
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating results of discontinued operations were as follows for the
year ended December 31, 2002:
DECEMBER 31,
2002
------------
Total revenues $ 41
Operating expenses
Merchandise costs 10
Store expenses
Salaries and related 56
Occupancy 41
Advertising 48
Other expenses 35
------
Total store expenses 180
------
Total merchandise costs and store expenses 190
------
Operating loss before income taxes (149)
Income tax benefit (59)
------
Net loss from discontinued store (90)
Loss on disposal of discontinued store, net of tax (82)
------
Net loss from discontinued operations $ (172)
======
Basic and diluted loss per share from
discontinued operations $(0.03)
======
(9) LEASES
The Company operates its retail stores and offices under noncancelable
operating leases with terms extending to 2010 with additional option periods
renewable at the request of the Company. The Company also leases its delivery
and general use vehicles under operating lease arrangements. Rental expense
charged to operations totaled $9,078, $8,987 and $8,133 for the years ended
December 31, 2003, 2002 and 2001, respectively. Future minimum lease payments
under noncancelable operating leases (with initial or remaining lease terms in
excess of one year) as of December 31, 2003 are as follows:
Year ending December 31,
- ----------------------------
2004 $ 8,805
2005 6,881
2006 4,676
2007 2,807
2008 1,661
Thereafter 609
--------
Total minimum lease payments $ 25,439
========
39
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) RETIREMENT PLAN
The Company maintains a qualified defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code. The plan, which covers
substantially all employees, provides for the Company to make discretionary
contributions based on salaries of eligible employees plus additional
contributions based upon voluntary employee salary deferrals. Payments upon
retirement or termination of employment are based on vested amounts credited to
individual accounts. During 2003, 2002 and 2001, the Company contributed $32,
$23 and $32, respectively.
(11) OTHER ASSETS
Following is a summary of other assets, net of accumulated
amortization:
2003 2002
------ ------
Non-compete agreements, net $ 188 $ 576
Loan fees, net 111 223
Deposits and other 34 44
------ ------
Other assets, net $ 333 $ 843
====== ======
Amortization expense related to other assets totaled $500, $530 and
$448 respectively, for the years ended December 31, 2003, 2002 and 2001.
Estimated amortization expense of non-compete agreements and loan fees are $262,
$32, $4 and $1 for the years ended December 31, 2004, 2005, 2006 and 2007,
respectively.
(12) STOCK OPTION PLAN
Rainbow sponsors a stock option and incentive plan for the benefit of
the employees and directors of the Company. A total of 600,000 shares of common
stock have been reserved under the plan, which provides for the grant of
options, which may qualify as either incentive stock options or nonqualified
stock options. Because all stock options were granted with an exercise price
equal to the market price on the date of grant, no compensation expense has been
recognized, consistent with the provisions of APB 25. Stock options granted
become exercisable over a three or four-year vesting period and expire ten years
from the date of grant.
Following is activity under the plan during the years ended December
31, 2003, 2002 and 2001:
2003 2002 2001
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------- ------------------- -------------------
Outstanding, beginning of year 522,366 $ 8.30 425,800 $ 8.58 359,800 $ 9.79
Granted 129,500 5.88 114,500 6.92 121,000 5.24
Exercised (2,500) 6.97 (3,584) 5.05 - -
Forfeited (66,332) 6.72 (14,350) 6.39 (55,000) 9.21
------- ------- -------
Outstanding, end of year 583,034 $ 7.95 522,366 $ 8.30 425,800 $ 8.58
======= ======== ======= ======== ======= ========
Exercisable at end of year 360,495 320,788 256,602
======= ======= =======
Available for grant at end of year 10,882 74,050 174,200
======= ======= =======
40
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER OF WEIGHTED
REMAINING AVERAGE OPTIONS AVERAGE
NUMBER CONTRACTUAL EXERCISE CURRENTLY EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------------------------------- ---------------------
$5.03 - $ 5.25 86,500 7.5 $ 5.17 41,668 $ 5.15
$5.35 - $ 6.00 90,000 9.3 5.78 6,667 6.00
$6.30 - $ 7.11 94,459 8.7 6.83 20,168 6.98
$7.42 - $ 7.88 37,375 7.6 7.68 19,792 7.78
$8.88 - $ 9.25 30,000 6.1 9.00 30,000 9.00
$9.75 - $10.00 234,700 4.4 10.00 234,700 10.00
$11.63 10,000 6.5 11.63 7,500 11.63
------- -------
583,034 6.6 $ 7.95 360,495 $ 9.02
======= === ======= ======= ========
(13) EARNINGS PER SHARE
Basic earnings per common share are computed using net income available
to common shareholders divided by the weighted average number of common shares
outstanding. For computation of diluted earnings per share, the weighted average
number of common shares outstanding is increased to give effect to stock options
considered to be common stock equivalents.
The following table shows the amounts used in computing earnings per
share for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
---------- ---------- ----------
Numerator:
Net income available to common shareholders $ 879 $ 1,641 $ 1,174
Denominator:
Basic weighted average shares 5,929,435 5,928,006 5,925,735
Effect of dilutive stock options 11,163 12,600 15,264
---------- ---------- ----------
Diluted weighted average shares 5,940,598 5,940,606 5,940,999
========== ========== ==========
Basic earnings per share $ 0.15 $ 0.28 $ 0.20
========== ========== ==========
Diluted earnings per share $ 0.15 $ 0.28 $ 0.20
========== ========== ==========
41
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Stock options of 401,538, 368,225 and 334,050 shares in 2003, 2002 and
2001, respectively, were not included in computed diluted earnings per share
because their effects were anti-dilutive.
(14) COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits in the ordinary course of
its normal operations. Outstanding matters of which the Company has knowledge
are covered by insurance, or in the opinion of management, would not have a
material adverse affect on the financial position, results of operations or cash
flows of the Company.
(15) SUBSEQUENT EVENT
On February 4, 2004, Rent-A-Center, Inc. and the Company entered into a
definitive agreement pursuant to which Rent-A-Center will acquire the Company
for $16.00 in cash per share of Rainbow Rentals, Inc. common stock. The
agreement also provides that each holder of non-qualified stock options of
Rainbow Rentals, Inc. will receive an amount equal to the difference between
$16.00 per share and the exercise price of the option. The acquisition, which is
expected to be completed in the second quarter of 2004, is conditioned upon
customary closing conditions for a transaction of this nature, including the
receipt of requisite regulatory approval, approval of the Company's
shareholders and approval by the Company's primary lender. Management believes
that the Company's primary lender will approve the acquisition.
(16) GUARANTEES AND PRODUCT WARRANTIES
The Company has applied the provisions of FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, to its agreements that contain
guarantees or indemnification clauses. These disclosure requirements expand
those required by FASB Statement No. 5, Accounting for Contingencies, by
requiring a guarantor to disclose certain types of guarantees, even if the
likelihood of requiring the guarantor's performance is remote.
The Company provides standby letters of credit through its financial
institution to certain vendors and insurance providers. If the Company is not
able to make payment, the vendors and insurance providers may draw on our
financial institution. At December 31, 2003, the maximum future payment
obligations relative to these guarantees totaled $2.9 million, and no associated
liability was recorded.
The Company provides free service on merchandise to its customers,
generally for 90 days beyond a product's rental term, which the Company records
an estimated liability for potential service calls. Estimated service calls are
based on historical factors, such as number of service calls, replacement parts
and labor costs. The Company has not experienced significant service calls for
products beyond its rental term.
42
RAINBOW RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table represents certain unaudited financial information
for the periods indicated:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Year ended December 31, 2003
Revenue $ 25,745 $ 25,775 $ 25,437 $ 25,716
Merchandise costs and store expenses 22,812 22,612 22,701 23,373
Other operating expenses 2,070 2,443 2,183 2,229
-------- -------- -------- --------
Operating income 863 720 553 114
Interest and other expenses 200 211 194 192
-------- -------- -------- --------
Operating income (loss) 663 509 359 (78)
Income tax expense (benefit) 262 201 142 (31)
-------- -------- -------- --------
Net income (loss) $ 401 $ 308 $ 217 $ (47)
======== ======== ======== ========
Basic and diluted earnings (loss) per share $ 0.07 $ 0.05 $ 0.04 $ (0.01)
======== ======== ======== ========
Year ended December 31, 2002
Revenue $ 24,965 $ 24,835 $ 24,344 $ 25,123
Merchandise costs and store expenses 22,075 21,571 21,578 22,305
Other operating expenses 1,757 2,160 2,007 1,957
-------- -------- -------- --------
Operating income (loss) 1,133 1,104 759 861
Interest and other expenses 242 224 191 203
-------- -------- -------- --------
Income from continuing operations,
before income taxes 891 880 568 658
Income taxes 360 355 209 260
-------- -------- -------- --------
Income from continuing operations 531 525 359 398
Loss on discontinued operations, net of tax (2) (49) (25) (96)
-------- -------- -------- --------
Net income $ 529 $ 476 $ 334 $ 302
======== ======== ======== ========
Basic and diluted earnings per share $ 0.09 $ 0.08 $ 0.06 $ 0.05
======== ======== ======== ========
Basic and diluted loss per share
from discontinued operations $ - $ (0.01) $ - $ (0.02)
======== ======== ======== ========
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAINBOW RENTALS, INC.
By: /s/ WAYLAND J. RUSSELL
--------------------------------
Wayland J. Russell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 5, 2004.
SIGNATURES TITLE
/s/ WAYLAND J. RUSSELL Chairman, Chief Executive Officer and Director
- --------------------------
Wayland J. Russell
/s/ S. ROBERT HARRIS Chief Operating Officer
- --------------------------
S. Robert Harris
/s/ MICHAEL J. VIVEIROS President and Director
- --------------------------
Michael J. Viveiros
/s/ MICHAEL A. PECCHIA Chief Financial Officer
- -------------------------- (Serves as principal accounting
Michael A. Pecchia and financial officer)
/s/ BRIAN L. BURTON Director
- --------------------------
Brian L. Burton
/s/ ROBERT A. GLICK Director
- --------------------------
Robert A. Glick
/s/ IVAN J. WINFIELD Director
- --------------------------
Ivan J. Winfield
44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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2.1* Agreement and Plan of Merger, dated February 4, 2004, by and among Registrant,
Rent-A-Center, Inc., and Eagle Acquisition Sub, Inc.
3.1 (1) Amended and Restated Articles of Incorporation
3.2 (1) Amended and Restated Code of Regulations
4.1 (2) Security Agreement dated as of January 11, 2002 between the Company and National City
Bank, as agent
4.2 (2) Credit Agreement dated as of January 11, 2002 by and among the Company and The
Guarantors Party Thereto and National City Bank, as agent and The Other Banks Party
Thereto
10.1 (1) 1998 Stock Option Plan
10.2 (1) Lease by and between the Company and Rainbow Properties, Ltd. dated January 1, 1996
for the Company's principal executive offices
10.3* Lease termination agreement by and between Rainbow Properties, Ltd. and the Company
dated February 19, 2004.
10.4 (3) Severance Agreement and Mutual Release, dated May 1, 2003, between Registrant and
Lawrence S. Hendricks
10.5 (3) Letter of Employment, dated May 6, 2003, between Registrant and S. Robert Harris
10.6* Letter, dated February 4, 2004, to Wayland J. Russell
10.7* Letter, dated February 4, 2004, to Michael J. Viveiros
10.8* Letter, dated February 4, 2004, to Michael A. Pecchia
10.9* Change-in-Control Agreement, dated February 4, 2004, between Registrant and S. Robert
Harris
14* Code of Ethics for Executive Officers and All Senior Financial Officers
23* Consent of Independent Public Accountants
31.1* CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32* CEO and CFO certification pursuant to Section 906 of the Sarbanes-Oxley act of 2002
(1) Incorporated by reference to an exhibit included in the Company's
Registration Statement on Form S-1 (file no. 333-48769).
(2) Incorporated by reference to an exhibit included in the Company's 2001
Annual Report on Form 10-K.
(3) Incorporated by reference to an exhibit included in the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.
* Filed Herewith
45
[FORM OF RAINBOW RENTALS, INC. PROXY CARD]
RAINBOW RENTALS, INC.
3711 Starr Centre Drive
Canfield, Ohio 44406
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF RAINBOW RENTALS,
INC.
The undersigned hereby appoints WAYLAND J. RUSSELL, MICHAEL J. VIVEIROS,
and MICHAEL A. PECCHIA, and each of them, proxies with full power of
substitution, and hereby authorizes them to represent the undersigned and to
vote all of the shares of Rainbow Rentals, Inc., an Ohio corporation (the
"Company") held of record by the undersigned on April 12, 2004 at the Special
Meeting of Shareholders of the Company to be held on May 12, 2004, and any
adjournment(s) thereof (the "Special Meeting") as follows and in accordance with
their judgment upon any other matter properly presented:
The Board of Directors of the Company recommends a vote "FOR" Proposal 1.
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated as
of February 4, 2004 (the "Merger Agreement"), by and among the Company,
Rent-A-Center, Inc., a Delaware corporation ("Acquiror"), and Eagle
Acquisition Sub, Inc., an Ohio corporation and an indirect, wholly owned
subsidiary of Acquiror ("Merger Sub"), and the transactions contemplated
thereby, including, without limitation, the merger of Merger Sub with and
into the Company, pursuant to which each Rainbow share is converted into
the right to receive $16.00 in cash.
FOR AGAINST ABSTAIN
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2. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting or any adjournment of the
meeting, including the approval of any proposal to postpone or adjourn the
special meeting to a later date to solicit additional proxies in favor of
Proposal 1 in the event that there are not sufficient votes for approval
of Proposal 1 at the special meeting.
FOR WITHHOLD AUTHORITY
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THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED, OR, IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR"
PROPOSALS 1 AND 2.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
Dated: , 2004
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Signature of Shareholder
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Signature of Shareholder
IMPORTANT: Please sign as your name appears hereon. If shares are held jointly,
all holders must sign. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. If a corporation, please sign
in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.