Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
| Aggregate market value of the 58,202,180 shares of Common Stock held by non-affiliates of the registrant at the closing sales price as reported on The Nasdaq Global Select Market, Inc. on June 30, 2008 | $ | 1,197,218,843 | ||
| Number of shares of Common Stock outstanding as of the close of business on February 20, 2009: | 65,986,784 |
Documents incorporated by reference:
Portions of the definitive proxy statement relating to the 20062009 Annual Meeting of Stockholders ofRent-A-Center, Inc. are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
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PART I
| Item 1. | Business. |
Overview
Unless the context indicates otherwise, references to “we,” “us” and “our” refers to the consolidated business operations ofRent-A-Center, Inc., the parent, and all of its direct and indirect subsidiaries.
We are the largest operator in the United Statesrent-to-own rent-to-own industry with an approximate 33%38% market share based on store count. At December 31, 2005,2008, we operated 2,7603,037 company-owned stores nationwide and in Canada and Puerto Rico, including 2131 retail installment sales stores in Wisconsin operated by our subsidiary Get It Now, LLC under the namenames “Get It Now” and seven“Home Choice” and eight rent-to-own stores located in Canada operated by our subsidiaryRent-A-Centre, Ltd.,operating under the name “Rent-A-Centre.“Rent-A-Centre.” One of our other subsidiaries, Our subsidiary, ColorTyme, Inc., is a national franchisor ofrent-to-own rent-to-own stores. At December 31, 2005,2008, ColorTyme had 296222 franchised rent-to-own stores in 38 states, 288 of which operated under the ColorTyme name and eight of which operated under theRent-A-Center name.34 states. These franchise stores represent an additional 4%3% market share based on store count.
Our stores generally offer high quality, durable products such as major consumer electronics, appliances, computers and furniture and accessories under flexible rental purchase agreements that generally allow the customer to obtain ownership of the merchandise at the conclusion of an agreed upon rental period. TheseThe rental purchase agreements are designed to appeal totransaction is a wide variety of customers by allowing themflexible alternative for consumers to obtain the use and enjoyment of brand name merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a lackwithout incurring debt. Key features of access to credit. These agreements also cater to customers who only have a temporary need or who simply desire to rent rather thanthe rental purchase the merchandise. Get It Now offers our merchandise on an installment sales basis in Wisconsin. transaction include:
| • | convenient payment options — in-store or over the phone; | |
| • | no long-term obligations; | |
| • | right to terminate without penalty; | |
| • | no requirement of a credit history; | |
| • | set-up and delivery included at no additional charge; | |
| • | product maintenance; | |
| • | lifetime reinstatement; and | |
| • | flexible options to obtain ownership — 90 days same as cash, early purchase options, or payment through the term of the agreement. |
We offer well known brands such as Sony, Philips, LG, Hitachi, JVC, Toshiba and Mitsubishi home electronics, Whirlpool appliances, Dell, CompaqToshiba, Sony, Hewlett-Packard and Hewlett-PackardDell computers and Ashley, England Berkline and StandardKlaussner furniture. We also offer high levels of customer service, including repair, pickup and delivery, generally at no additional charge. Our customers benefit from the ability to return merchandise at any time without further obligation and make payments that build toward ownership. We estimate that approximately 70%75% of our business is from repeat customers.
We also offer financial services products, such as short term secured and unsecured loans, debit cards, check cashing, tax preparation and money transfer services, in some of our existing rent-to-own stores under the trade names “RAC Financial Services” and “Cash AdvantEdge.” As of December 31, 2008, we offered some or all of these financial services products in 351Rent-A-Center store locations in 18 states.
We were incorporated in Delaware in 1986. Our principal executive offices are located at 5700 Tennyson Parkway, Suite 100,5501 Headquarters Drive, Plano, Texas 75024. Our telephone number is(972) 801-1100 and our company website is www.rentacenter.com. We do not intend for information contained on our website to be part of thisForm 10-K. We make available free of charge on or through our website our annual report onForm 10-K, our quarterly reports onForm 10-Q, our current reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, we voluntarily will provide electronic or paper copies of our filings free of charge upon request.
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Industry Overview
According to the Association of Progressive Rental Organizations, therent-to-own rent-to-own industry in the United States of Americaand Canada consists of approximately 8,3008,500 stores and providesserves approximately 6.9 million products to over 2.73.0 million households. We estimate that the threetwo largestrent-to-own rent-to-own industry participants account for approximately 4,7004,800 of the total number of stores, and the majority of the remainder of the industry consists of operations with fewer than 2050 stores. Therent-to-own rent-to-own industry is highly fragmented and due primarily to the decreased availability of traditional financing sources, has experienced and we believe will continue to experience, increasingsignificant consolidation. We believe this consolidation trend in the industry presentswill continue, presenting opportunities for us to continue to acquire additional stores or customer accounts on favorable terms.
Therent-to-own rent-to-own industry serves a highly diverse customer base. According to the Association of Progressive Rental Organizations, approximately 73% ofrent-to-own rent-to-own customers have household incomes between $15,000 and $50,000 per year. ManyThe rent-to-own industry serves a wide variety of the customers served by the industry do not haveallowing them to obtain merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to significant amounts of credit. For these customers, therent-to-own industry provides an alternative for them to obtain
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The study noted that customers gave a wide variety of reasons for their satisfaction, including “the ability to obtain merchandise they otherwise could not,not; the low payments,payments; the lack of a credit check,check; the convenience and flexibility of the transaction,transaction; the quality of the merchandise,merchandise; the quality of the maintenance, delivery, and other services,services; the friendliness and flexibility of the store employees,employees; and the lack of any problems or hassles.”
From 1993 to 2006, we pursued an aggressive growth strategy in which we sought to acquire underperforming rent-to-own stores to which we could apply our operating model as well as open new stores. Since March 1993, our company-owned store base has grown from 27 to 3,037 at December 31, 2008, primarily through acquisitions, including the acquisition in November 2006 of Rent-Way, Inc. (“Rent-Way”), which operated 782 stores in 34 states. During this period, we acquired over 3,600 stores, including approximately 400 of our franchised stores. These acquisitions occurred in approximately 240 separate transactions, including ten transactions where we acquired in excess of 50 stores. In addition, we strategically opened or acquired stores near market areas served by existing stores (“cannibalized”) to enhance service levels, gain incremental sales and increase market penetration.
The following table summarizes the store growth activity over the last three fiscal years:
2008 | 2007 | 2006 | ||||||||||
| Stores at beginning of period | 3,081 | 3,406 | 2,760 | |||||||||
| New store openings | 26 | 27 | 40 | |||||||||
| Acquired stores remaining open | 5 | 14 | 646 | |||||||||
Closed stores(1) | ||||||||||||
| Merged with existing stores | 45 | 363 | 25 | |||||||||
| Sold or closed with no surviving store | 30 | 3 | 15 | |||||||||
| Stores at end of period | 3,037 | 3,081 | 3,406 | |||||||||
| Acquired stores closed and accounts merged with existing stores | 38 | 36 | 164 | |||||||||
| Total approximate purchase price of acquisitions | $15.7 million | $20.1 million | $657.4 million | |||||||||
| (1) | Substantially all of the merged, sold or closed stores in 2008 and 2007 relate to our store consolidation plans discussed below and in more detail in Note F, Restructuring, in the Notes to the Consolidated Financial Statements on page 59. |
Store Consolidation.We believe our aggressive store acquisition program and our planned cannibalization resulted in over penetration in some markets. We continually evaluate every market in which we operate by reviewing operating results, competitive positioning, and growth potential. As a result of such review in December 2007, we committed to a store consolidation plan pursuant to which we closed or merged 282 stores as of December 31, 2008.
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Future Store Growth. We continue to believe there are currentlyattractive opportunities to expand our presence in the rent-to-own industry both nationally and internationally. We plan to continue opening new stores in targeted markets and acquiring existing rent-to-own stores and store account portfolios. We will focus new market penetration in adjacent areas or regions that we believe are underserved by the rent-to-own industry. In addition, we intend to pursue our acquisition strategy of targeting under-performing and under-capitalized rent-to-own stores. We also intend to continue to critically evaluate the markets in which we operate and will close, sell or merge underperforming stores.
Competitive Strengths
We believe the following competitive strengths position us well for continued growth:
Geographic Footprint. At December 31, 2008, we operated 3,037 stores nationwide and in Canada and Puerto Rico. In addition, our subsidiary, ColorTyme, franchised 222 stores in 34 states. We believe the number and location of our stores combined with the strength of our brand provides us with a unique platform from which to market additional products and services to our customer demographic. The following table shows the geographic distribution of our stores:
| Number of Stores | ||||||||||||
| Company | With Financial | |||||||||||
Location | Owned | Services | Franchised | |||||||||
| Alabama | 60 | — | 5 | |||||||||
| Alaska | 6 | 5 | 4 | |||||||||
| Arizona | 58 | 6 | — | |||||||||
| Arkansas | 39 | — | 1 | |||||||||
| California | 139 | — | 5 | |||||||||
| Colorado | 44 | 13 | 1 | |||||||||
| Connecticut | 40 | — | 1 | |||||||||
| Delaware | 20 | — | — | |||||||||
| District of Columbia | 4 | — | — | |||||||||
| Florida | 188 | — | 20 | |||||||||
| Georgia | 88 | — | 12 | |||||||||
| Hawaii | 11 | 7 | 5 | |||||||||
| Idaho | 11 | 6 | 3 | |||||||||
| Illinois | 110 | † | — | 8 | ||||||||
| Indiana | 101 | — | 4 | |||||||||
| Iowa | 27 | 11 | — | |||||||||
| Kansas | 34 | 13 | 8 | |||||||||
| Kentucky | 67 | 20 | 3 | |||||||||
| Louisiana | 45 | — | 5 | |||||||||
| Maine | 28 | — | 9 | |||||||||
| Maryland | 65 | — | 11 | |||||||||
| Massachusetts | 69 | — | 1 | |||||||||
| Michigan | 104 | — | 9 | |||||||||
| Minnesota | 4 | * | — | — | ||||||||
| Mississippi | 35 | — | 1 | |||||||||
| Missouri | 65 | 16 | — | |||||||||
| Montana | 9 | 5 | — | |||||||||
| Nebraska | 14 | 1 | — | |||||||||
| Nevada | 23 | 4 | — | |||||||||
| New Hampshire | 20 | — | 1 | |||||||||
| New Jersey | 44 | — | — | |||||||||
| New Mexico | 26 | 10 | 9 | |||||||||
| New York | 178 | — | 3 | |||||||||
| North Carolina | 133 | — | 15 | |||||||||
| North Dakota | 3 | — | — | |||||||||
| Ohio | 183 | 51 | 4 | |||||||||
| Oklahoma | 44 | — | 6 | |||||||||
| Oregon | 27 | — | 4 | |||||||||
| Pennsylvania | 152 | — | 3 | |||||||||
| Puerto Rico | 43 | — | — | |||||||||
| Rhode Island | 16 | — | 2 | |||||||||
| South Carolina | 67 | — | 6 | |||||||||
| South Dakota | 4 | — | — | |||||||||
| Tennessee | 91 | 37 | 4 | |||||||||
| Texas | 292 | 113 | 35 | |||||||||
| Utah | 16 | 8 | — | |||||||||
| Vermont | 9 | — | — | |||||||||
| Virginia | 70 | — | 11 | |||||||||
| Washington | 44 | 25 | 3 | |||||||||
| West Virginia | 33 | — | — | |||||||||
| Wisconsin | 21 | * | — | — | ||||||||
| Wyoming | 5 | — | — | |||||||||
| Canada | 8 | — | — | |||||||||
| TOTAL | 3,037 | 351 | 222 | |||||||||
| * | Retail installment stores | |
| † | Includes six retail installment stores |
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Management Expertise. Our management team at both the corporate and operational levels is highly experienced and motivated. Our executive management team has extensive experience in the rent-to-own industry with over 100 combined years of service with us and has demonstrated the ability to grow our business through their operational leadership and strategic vision.
Financial Strength. Historically, our operations have generated strong cash flow, averaging $210.2 million in operating cash flow per year since 1998. As a result, we have been able to invest in acquisitions and new business opportunities while maintaining a strong balance sheet.
Collections. The breadth of our store locations also provides us with the operational infrastructure to support our collection efforts. The ability to timely and personally contact customers through our local field personnel is critical to our ability to collect payments or regain possession of rented merchandise. In addition, we believe we have developed lasting relationships with our customers, as well as obtained extensive knowledge of our targeted customer demographic, through our collection experience.
Integration Experience. We have gained significant experience in the acquisition and integration of other rent-to-own operators and believe the fragmented nature of the rent-to-own industry will result in ongoing consolidation opportunities. Acquired stores benefit from our improved product mix, sophisticated management information system, purchasing power and administrative network.
Strategy
We intend to capitalize on our competitive strengths and continue to build our position as a leading provider of products and services to cash and credit constrained consumers by focusing our strategic efforts on:on the following:
| • | enhancing the operations, revenue and profitability | |
| • | ||
| • | ||
| • |
Enhancing the Operations, Revenue and Profitability of Our Store Locations
We continually seek to improve store performance through strategies intended to produce gains in operating efficiency, revenue and profitability. For example, we continue to focus our operational personnel on prioritizing store profit growth, including the effective pricing of rental merchandiseincreasing store revenue and the management ofmanaging store level operating expenses.
We believe we will achieve further gains in revenues and operating margins in both existing and newly acquired stores by continuing to:
| • | use consumer focused advertising, including direct mail, television, radio and print media, | |
| • | focus on the customer experience, both in our store locations, as well as on our website; | |
| • | focus on improving the operations in our existing financial services store locations; | |
| • | respond to competitive pressures on a market by market basis with specifically tailored action plans; | |
| • | acquire customer accounts; | |
| • | expand the offering of product lines to appeal to more customers to increase the number of | |
| • | evaluate other growth strategies, including the entry into additional lines of business offering products and services designed to appeal to our customer demographic; | |
| • | employ strict store-level cost control; | |
| • | analyze and evaluate store operations against key performance indicators; and | |
| • | use a revenue and profit based incentive pay plan. |
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Seeking Additional Distribution Channels for Our Products and over 380 franchised stores in approximately 160 separate transactions, including nine transactions where we acquired in excess of 50 stores.Services
| 2005 | 2004 | 2003 | |||||||||||
| Stores at beginning of period | 2,875 | 2,648 | 2,407 | ||||||||||
| New store openings | 67 | 94 | 101 | ||||||||||
| Acquired stores remaining open | 44 | 191 | 160 | ||||||||||
Closed stores(1) | |||||||||||||
| Merged with existing stores | 170 | 48 | 20 | ||||||||||
| Sold or closed with no surviving store | 56 | 10 | — | ||||||||||
| Stores at end of period | 2,760 | 2,875 | 2,648 | ||||||||||
| Acquired stores closed and accounts merged with existing stores | 39 | 111 | 220 | ||||||||||
| Total approximate purchase price of acquisitions | $ | 38.3 million | $ | 195.2 million(2 | ) | $ | 126.1 million | ||||||
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Leveraging our Financial Strength
We believe we can leverage our financial strength by investing significantly in people, processes and technology to reduce our cost infrastructure. We are focused on lowering operating expenses through our investments in centralized inventory purchasing, centralized procurement, and enhanced information management systems. We believe the creation of a centralized inventory purchasing system will allow us to better manage our inventory at the store level while expanding availability of the most popular products. The development of an on-line procurement tool and careful review of our processes has allowed us to reduce many of our store-level expenses. We believe our financial strength allows us to pursue these and other initiatives while also making strategic use of our cash to enhance our balance sheet.
Strengthening Customer Relationships through Community Involvement
We seek to further strengthen relationships with our customers through community involvement both at the local store level and as a company through corporate donations and initiatives. We encourage the management of each of our stores to involve themselves with their respective local communities. In addition, we participate in various programs, including the following:
| Since 2002, co-workers at our headquarters facility in Plano, Texas have worked to fight hunger through the North Texas Food Bank. On a national basis, we have committed $500,000 over four years in the fight to end hunger. | ||
| • | Each spring, we raise funds for Big Brothers Big Sisters of America. With a donation of $1 or more, customers, co-workers and the community sign their name on a paper spring egg to hang in our stores. Since 2003, we have donated more than $1.4 million. | |
| • | In 2004, we established the Make A Difference Scholarship which provides $50,000 annually to customers, their children and our co-workers’ children who are pursuing an undergraduate degree at the college or university of their choice. | |
| • | Since 2005, we have teamed up with Boys & Girls Clubs to furnish special “RAC” Rooms to the centers that need them most. Each year, we create 20 new RAC Rooms around the country. Clubs choose the merchandise they need, including furniture, televisions, electronics and computers. | |
| • | We pledged $800,000 over four years in grants to Junior Achievement offices in communities across the U.S. as part of our commitment to promoting financial literacy in our communities. Our | |
| • | Random Acts of Caring brings unexpected gifts to people and organizations that serve others. Examples include furnishing rooms in three fire stations in New York and donating $5,000 to the FDNY Foundation, and providing Summit Academy, a school for children with special learning needs in Warren, Ohio, with six computers and two HDTV’s. |
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| Number of Stores | Number of Stores | |||||||||||||||||||||||||
| Company | With Financial | Company | With Financial | |||||||||||||||||||||||
| Location | Owned | Services | Franchised | Location | Owned | Services | Franchised | |||||||||||||||||||
| Alabama | 60 | — | 5 | Nebraska | 9 | — | — | |||||||||||||||||||
| Alaska | 6 | — | 1 | Nevada | 22 | 3 | 4 | |||||||||||||||||||
| Arizona | 56 | — | 7 | New Hampshire | 14 | — | 2 | |||||||||||||||||||
| Arkansas | 35 | — | 1 | New Jersey | 43 | — | 4 | |||||||||||||||||||
| California | 150 | — | 5 | New Mexico | 17 | — | 10 | |||||||||||||||||||
| Colorado | 39 | — | 1 | New York | 128 | — | 13 | |||||||||||||||||||
| Connecticut | 37 | — | 3 | North Carolina | 111 | — | 11 | |||||||||||||||||||
| Delaware | 18 | — | — | North Dakota | 2 | — | — | |||||||||||||||||||
| District of Columbia | 4 | — | — | Ohio | 175 | — | 6 | |||||||||||||||||||
| Florida | 173 | — | 19 | Oklahoma | 42 | — | 14 | |||||||||||||||||||
| Georgia | 106 | — | 14 | Oregon | 31 | 5 | 3 | |||||||||||||||||||
| Hawaii | 12 | — | 4 | Pennsylvania | 126 | — | 3 | |||||||||||||||||||
| Idaho | 11 | 7 | 2 | Puerto Rico | 30 | — | — | |||||||||||||||||||
| Illinois | 110 | — | 8 | Rhode Island | 17 | — | 1 | |||||||||||||||||||
| Indiana | 102 | — | 7 | South Carolina | 43 | — | 7 | |||||||||||||||||||
| Iowa | 24 | — | — | South Dakota | 5 | — | — | |||||||||||||||||||
| Kansas | 31 | — | 17 | Tennessee | 94 | — | 1 | |||||||||||||||||||
| Kentucky | 44 | — | 1 | Texas | 261 | — | 59 | |||||||||||||||||||
| Louisiana | 29 | — | 6 | Utah | 15 | 4 | — | |||||||||||||||||||
| Maine | 25 | — | 9 | Vermont | 7 | — | — | |||||||||||||||||||
| Maryland | 63 | — | 9 | Virginia | 54 | — | 10 | |||||||||||||||||||
| Massachusetts | 60 | — | 2 | Washington | 46 | 16 | 2 | |||||||||||||||||||
| Michigan | 107 | — | 17 | West Virginia | 22 | — | — | |||||||||||||||||||
| Minnesota | 4 | — | — | Wisconsin | 21 | * | — | — | ||||||||||||||||||
| Mississippi | 28 | — | 2 | Wyoming | 5 | — | — | |||||||||||||||||||
| Missouri | 70 | — | 6 | Alberta, Canada | 7 | † | — | — | ||||||||||||||||||
| Montana | 9 | 5 | — | TOTAL | 2,760 | 40 | 296 | |||||||||||||||||||
Store Design
Our stores average approximately 4,6004,700 square feet and are located primarily in strip centers. Because we utilize “just in time” inventory strategies, and receivereceiving merchandise shipments in relatively small quantities directly from vendors, we are able to dedicate approximately 75% of the store space to showroom floor, and also eliminate warehousing costs.
Product Selection
Our stores generally offer merchandise from four basic product categories: major consumer electronics, appliances, computers and furniture and accessories. Although we seek to ensure our stores maintain sufficient inventory in our stores to offer customers a wide variety of models, styles and brands, we generally limit inventory to prescribed levels to ensuremaintain strict inventory controls. We seek to provide a wide variety of high quality
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merchandise to our customers, and we emphasize high-end products from name-brand manufacturers. For the year ended December 31, 2005, furniture and accessories2008, consumer electronic products accounted for approximately 38%35% of our store rental revenue, consumer electronic productsfurniture and accessories for 34%,33% and appliances for 16% and computers for 12%.16% each. Customers may request either new merchandise or previously rented merchandise. Previously rented merchandise is generally offered at the same weekly or monthly rental rate as is offered for new merchandise, but with an opportunity to obtain ownership of the merchandise after fewer rental payments.
Major consumer electronic products offered by our stores include high definition televisions, home theatre systems, video game consoles and stereos from top name-brand manufacturers such as Sony, Nintendo, Philips, LG, Hitachi, JVC, Toshiba and Mitsubishi. We offer major appliances manufactured by Whirlpool, including refrigerators, washing machines, dryers, microwave ovens, freezers and ranges. We offer personaldesktop and laptop computers from Dell, CompaqToshiba, Sony, Hewlett Packard and Hewlett Packard.Dell. We offer a variety of furniture products, including dining room, living room and bedroom furniture featuring a number of styles, materials and colors. We offer furniture made by Ashley, England Berkline and StandardKlaussner and other top name-brand manufacturers. Accessories include pictures, lamps and tables and are typically rented as part of a package of items, such as a complete room of furniture. Showroom displays enable customers to visualize how the product will look in their homes and provide a showcase for accessories.
Rental Purchase Agreements
Our customers generally enter into weekly, semi-monthly or monthly rental purchase agreements, which renew automatically upon receipt of each payment. We retain title to the merchandise during the term of the rental purchase agreement. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of 7seven to 3630 months, depending upon the product type, or exercises a specified early purchase option. Although weWe do not conduct a formal credit investigation of each customer,customer. We do require a potential customer mustto provide store management with sufficient personal information to allow us to verify their residence and sources of income. References listed by the customer are also contacted to verify the information contained in the customer’s rental purchase order form. Rental payments are generally made in the store inor by telephone. We accept cash byand credit card or debit card.cards. Approximately 86% of our customers payagreements are on a weekly basis.term. Depending on state regulatory requirements, we may charge for the reinstatement of terminated accounts or collect a delinquent account fee, and collect loss/damage waiver fees from customers desiring product protection in case of theft or certain natural disasters. These fees are standard in the industry and may be subject to government-specified limits. Please read the section entitled “— Government Regulation.”
Product Turnover
On average, a minimum rental term of 18 months is generally required to obtain ownership of new merchandise. We believe that only approximatelyApproximately 25% of our initial rental purchase agreements are taken to the full term of the agreement. The average total life for each product is approximately 1920 months, which includes the initial rental period, all re-rental periods and idle time in our system. Turnover varies significantly based on the type of merchandise rented, with certain consumer electronics products, such as camcorders and DVD players and recorders, generally rented for shorter periods, while appliances and furniture are generally rented for longer periods. To cover the relatively high operating expenses generated by greater product turnover, rental purchase agreements require higher aggregate payments than are generally charged under other types of purchase plans, such as installment purchase or credit plans.
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Customer Service
We generally offer same day or24-hour delivery and installation of our merchandise at no additional cost to the customer. We provide any required service or repair without additional charge, except for damage in excess of normal wear and tear. Repair services are provided through our national network of 2324 service centers, the cost of which may be reimbursed by the vendor if the item is still under factory warranty. If the product cannot be repaired at the customer’s residence, we provide a temporary replacement while the product is being repaired. TheGenerally, the customer is fully liable for damage, loss or destruction of the merchandise, unless the
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customer purchases an optional loss/damage waiver covering the particular loss. Most of the products we offer are covered by a manufacturer’s warranty for varying periods which, subject to the terms of the warranty, is transferred to the customer in the event that the customer obtains ownership.
Collections
Store managers use our management information system to track collections on a daily basis. For fiscal years 2005, 2004,2008, 2007, and 2003,2006, the average week ending past due percentages were 6.76%6.38%, 6.57%6.43% and 6.55%6.58%, respectively. Our goal was to have no more than 5.99%, 5.99% and 6.50% of our rental agreements past due one day or more each Saturday evening in 2005, 2004 and 2003, respectively.the three years. For the 20062009 fiscal year, our goal remains the same as in 2005 at 5.99%. If a customer fails to make a rental payment when due, store personnel will attempt to contact the customer to obtain payment and reinstate the agreement, or will terminate the account and arrange to regain possession of the merchandise. We attempt to recover the rental items as soon as possible following termination or default of a rental purchase agreement, generally by the seventh day. Collection efforts are enhanced by the numerous personal and job-related references required of customers, the personal nature of the relationships between store employees and customers and the fact that, following a period in which a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may re-rent a piece of merchandise of similar type and age on the terms the customer enjoyed prior to that period.
Pursuant to the rental purchase agreements, customers who become delinquent in their rental payments and fail to return the rented merchandise are or may over time become liable for accrued rent through the date the merchandise is finally returned or the amount of the early purchase option and,or, if the merchandise is not returned before expiration of the original term of weeks or months to ownership under the rental purchase agreement, then the total balance of payments necessary to acquire ownership of the merchandise. Generally,If the customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the ninetieth day following the time the account became past due. Charge offs in our rental stores due to customer stolen merchandise, expressed as a percentage of rental store revenues, were approximately 2.5% in 2005,2008, 2.8% in 2007 and 2.4% in 2004 and 2.3% in 2003.2006.
Management
We organize our network of stores geographically with multiple levels of management. At the individual store level, each store manager is responsible for customer and account relations, delivery and collection of merchandise, inventory management, staffing, training store personnel and certain marketing efforts. ThreeTwo times each week, store management is required to count the store’s inventory on hand and compare the count to theour accounting records, with the marketdistrict manager performing a similar audit at least quarterly. In addition, our individual store managers track their daily store performance for revenue collected as compared to the projected performance of their store. Each store manager reports to a marketdistrict manager within close proximity who typically oversees six to eight stores. Typically, a marketdistrict manager focuses on developing the personnel in his or her marketdistrict and ensuring all stores meet our quality, cleanliness and service standards. In addition, a marketdistrict manager routinely audits numerous areas of the stores’ operations. A significant portion of a marketdistrict manager’s and store manager’s compensation is dependent upon store revenues and profits, which are monitored by our management reporting system and our tight control over inventory afforded by our direct shipment practice.profits.
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At December 31, 2005,2008, we had 390 market483 district managers who, in turn, reported to 6276 regional directors. Regional directors monitor the results of their entire region, with an emphasis on developing and supervising the marketdistrict managers in their region. Similar to the marketdistrict managers, regional directors are responsible for ascertaining whether stores are following the operational guidelines. The regional directors report to nine senior10 division vice presidents
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located throughout the country. The regional directors and seniordivision vice presidents receive a significant amount of their compensation based on the revenue and profitability of the stores under their management.
Our executive management team at the home office oversees field operations, with an overall strategic focus. The executive management team directs and coordinates advertising, purchasing, financial planning and controls, employee training, personnel matters, acquisitions and new store initiatives. The centralization and coordination of such operational matters allows our store managers to focus on individual store performance. A significant amountportion of our executive management compensation is determined in part onby the profits generated by us.
Management Information Systems
Through a licensing agreement with High Touch, Inc., we utilize an integrated management information and control system. Each store is equipped with a computer system utilizing point of sale software developed by High Touch. This system tracks individual components of revenue, each item in idle and rented inventory, total items on rent, delinquent accounts, items in service and other account information. We electronically gather each day’s activity report, which provides our executive management with access to all operating and financial information concerning any of our stores, markets or regions and generates management reports on a daily, weekly,month-to-date month-to-date andyear-to-date year-to-date basis for each store and for every rental purchase transaction. The system enables us to track all of our merchandise and rental purchase agreements, which often include more than one unit of merchandise. In addition, our bank reconciliation system performs a daily sweep of available funds from our stores’ depository accounts into our central operating account based on a formula from bank balances that is reconciled back to the balances reported by the stores. Our system also includes extensive management software, report-generating capabilities and a virtual private network. The virtual private network allows us to communicate with the stores more effectively and efficiently. The reports for all stores are reviewed on a daily basis by management and unusual items are typically addressed the following business day. Utilizing the management information system, our executive management, seniordivision vice presidents, regional directors, marketdistrict managers and store managers closely monitor the productivity of stores under their supervision according to our prescribed guidelines.
The integration of our management information system, developed by High Touch, with our accounting system, developed by Lawson Software, Inc., facilitates the production of our internal financial statements. These financial statements are distributed monthly to all stores, markets, regions and our executive management team for their review.
Purchasing and Distribution
Our executive management determines the general product mix in our stores based on analyses of customer rental patterns and the introduction of new products on a test basis. Individual store managers are responsible for determining the particular product selection for their store from the list of products approved by executive management. Store and marketdistrict managers make specific purchasing decisions for the stores, subject to review by executive management, on our online ordering system. Additionally, we have predetermined levels of inventory allowed in each store which restrict levels of merchandise that may be purchased. All merchandise is shipped by vendors directly to each store, where it is held for rental. We do not utilize any distribution centers. These practices allow us to retain tight control over our inventory and, along with our selection of products for which consistent historical demand has been shown, reduce the number of obsolete items in our stores. The stores also have online access to determine whether other stores in their market may have merchandise available. We are currently investing in new inventory management systems and processes to enhance further our inventory management.
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We purchase the majority of our merchandise from manufacturers, who ship directly to each store. Our largest suppliers include AshleyWhirlpool and Whirlpool,Ashley, who accounted for approximately 16.6%14.8% and 14.9%12.6%, respectively, of merchandise purchased in 2005.2008. No other supplier accounted for more than 10% of merchandise purchased during this period. We do not generally enter into written contracts with our suppliers that obligate us to meet certain minimum purchasing levels. Although we expect to continue relationships with our existing suppliers, we believe that there are numerous sources of products available, and we do not believe that the success of our operations is dependent on any one or more of our present suppliers.
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Marketing
We promote the products and services in our stores through direct mail advertising, radio, television and secondaryradio commercials, print media advertisements.advertisements, direct response and store signage, all of which are designed to increase our name recognition among our customers and potential customers. Our advertisements emphasize such features as product and name-brand selection, prompt delivery, price match, service at no extra cost, lifetime reinstatement and the absence of initial deposits, credit investigations or long-term obligations. In 2005,2007, we also continuedbegan the “RAC Worry-Free Guaranteetm” initiative to pursue strategic alliancesfurther highlight and other sponsorship opportunities, whichpromote these aspects of the rent-to-own transaction. In 2008, we introduced “Credit Free Life,” an integrated campaign utilizing TV, radio, newspaper ande-mail initiatives, as well as an information microsite, to explain how a rent-to-own transaction can help consumers meet their needs without incurring debt. We believe that as theRent-A-Center name gains familiarity and national recognition through our advertising efforts, we will enhancecontinue to educate our name recognition. customers and potential customers about the rent-to-own alternative to merchandise purchases as well as solidify our reputation as a leading provider of high quality branded merchandise and services.
Advertising expense as a percentage of store revenue for the years ended December 31, 2005, 20042008, 2007 and 20032006 was approximately 2.9%, 2.8% and 3.1%2.8%, respectively. As we obtain new stores in our existing market areas, the advertising expenses of each store in the market can generally be reduced by listing all stores in the same market-wide advertisement.
Competition
Therent-to-own rent-to-own industry is highly competitive. According to industry sources and our estimates, the threetwo largest industry participants account for approximately 4,7004,800 of the 8,300 rent-to-own8,500 rent-to-own stores in the United States.States and Canada. We are the largest operator in therent-to-own rent-to-own industry with 2,7603,037 stores and 296222 franchised locations as of December 31, 2005.2008. Our stores compete with other national and regionalrent-to-own rent-to-own businesses, as well as with rental stores that do not offer their customers a purchase option. With respect to customers desiring to purchase merchandise for cash or on credit, we also compete with retail stores. Competition is based primarily on store location, product selection and availability, customer service and rental rates and terms.
Seasonality
Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to federal income tax refunds. Generally, our customers will more frequently exercise their early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. We expect this trend to continue in future periods. Furthermore, we tend to experience slower growth in the number of rental purchase agreements on rent in the third quarter of each fiscal year when compared to other quarters throughout the year. As a result, we would expect revenues for the third quarter of each fiscal year to remain relatively flat with the prior quarter. We expect this trend to continue in future periods unless we add significantly to our store base during the third quarter of future fiscal years as a result of new store openings or opportunistic acquisitions.
As of December 31, 2008, we operated 31 stores utilizing a retail model which generates installment credit sales through a retail sale transaction. Twenty-three of these stores operate under the name “Get It Now” and eight stores under the name “Home Choice.” Our retail stores are located in Illinois, Minnesota and Wisconsin.
ColorTyme Operations
ColorTyme is our nationwide franchisor ofrent-to-own rent-to-own stores. At December 31, 2005,2008, ColorTyme franchised 296 rent-to-own222 stores in 3834 states. Theserent-to-own rent-to-own stores primarily offer high quality durable products such as home electronics, appliances, computers and furniture and accessories. During 2005, 402008, 15 new franchise locations were added, three were closed and 5417 were sold, all of which 16 were sold to anotherRent-A-Center subsidiary.subsidiary, and three stores closed.
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All but 8 of the ColorTyme franchised stores use ColorTyme’s trade names, service marks, trademarks logos, emblems and indicia of origin. These 8 stores are franchises acquired in the Thorn Americas acquisition in 1998 and continue to use theRent-A-Center name.logos. All stores operate under distinctive operating procedures and standards. ColorTyme’s primary source of revenue is the sale of rental merchandise to its
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franchisees who, in turn, offer the merchandise to the general public for rent or purchase under arent-to-own rent-to-own program. As franchisor, ColorTyme receives royalties of 2.0% to 5.0% of the franchisees’ monthly gross revenue and, generally, an initial fee of between $7,500up to $20,000 per new location for existing franchisees and up to $35,000$25,000 per location for new franchisees.
The ColorTyme franchise agreement generally requires the franchised stores to utilize specific computer hardware and software for the purpose of recording rentals, sales and other record keeping and central functions. ColorTyme retains the right to retrieve data and information from the franchised stores’ computer systems. The franchise agreements also limit the ability of the franchisees to compete with other franchisees.franchisees and provides us a right of first refusal to purchase the franchise location of a ColorTyme franchisee that wishes to exit the business.
The franchise agreement also requires the franchised stores to exclusively offer for rent or sale only those brands, types and models of products that ColorTyme has approved. The franchised stores are required to maintain an adequate mix of inventory that consists of approved products for rent as dictated by ColorTyme policy manuals. ColorTyme negotiates purchase arrangements with various suppliers it has approved. ColorTyme’s largest suppliers are Ashley and Whirlpool, which accounted for approximately 19%18.5% and 13%11.0% of merchandise purchased by ColorTyme in 2005,2008, respectively.
ColorTyme franchisees may also offer financial services, such as short term secured and unsecured loans, in addition to traditional rent-to-own products. In addition, some of ColorTyme’s franchised stores offer custom rims and tires for sale or rental under the trade names “RimTyme” or “ColorTyme Custom Wheels.” As of December 31, 2008, 42 ColorTyme stores operated by 17 separate franchisees offered financial services. Twelve ColorTyme stores operated by four separate franchisees offered tires and rims exclusively.
ColorTyme is a party to an agreement with Wells Fargo Foothill, Inc. (“Wells Fargo”), who provides $50.0$35.0 million in aggregate financing to qualifying franchisees of ColorTyme generally of up to five times their average monthly revenues. Under the Wells Fargo agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Wells Fargo can assign the loans and the collateral securing such loans to ColorTyme, with ColorTyme paying the outstanding debt to Wells Fargo and then succeeding to the rights of Wells Fargo under the debt agreements, including the right to foreclose on the collateral. The Wells Fargo agreement expires in October 2006. Although we believe we will be able to renew our existing agreement or find other financing arrangements, we cannot assure you that we will not need to fund the foregoing guarantee upon the expiration of the existing agreement.on September 30, 2010. An additional $20.0 million of financing is provided by Texas Capital Bank, National Association (“Texas Capital Bank”) under an agreement similar to the Wells Fargo financing.Rent-A-Center East, Inc., a wholly owned subsidiary ofRent-A-Center, Inc., guarantees the obligations of ColorTyme under each of these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of $70.0$55.0 million, of which $30.3$24.5 million was outstanding as of December 31, 2005. Mark E. Speese,Rent-A-Center’s Chairman of the Board and Chief Executive Officer, is a passive investor in Texas Capital Bank, owning less than 1% of its outstanding equity.2008.
ColorTyme has established a national advertising fund for the franchised stores, whereby ColorTyme has the right to collect up to 3% of the monthly gross revenue from each franchisee as contributions to the fund. Currently, ColorTyme has set the monthly franchisee contribution at $250 per store per month. ColorTyme directs the advertising programs of the fund, generally consisting of advertising in print, television and radio. ColorTyme also has the right to require franchisees to expend 3% of their monthly gross revenue on local advertising.
ColorTyme licenses the use of its trademarks and servicemarks to theits franchisees under the franchise agreement. ColorTyme owns the registeredvarious trademarks and servicemarks, including ColorTyme®, ColorTyme-What’s Right for YouRimTyme®, and FlexTymeYour Hometown ColorTyme®, alongthat are used in connection with certain designits operations and service marks.have been registered with the United States Patent and Trademark office. The duration of these marks is unlimited, subject to periodic renewal and continued use.
Some of ColorTyme’s franchisees may be in locations where they directly compete with our company-owned stores, which could negatively impact the business, financial condition and operating results of our company-owned stores.
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Financial Services Operations
We offer financial services products, such as short term secured and unsecured loans, bill paying, debit cards, check cashing, tax preparation and money transfer services under the trade name “The Cash AdvantEdge.”names “RAC Financial Services” and “Cash AdvantEdge” within certain of our existingRent-A-Center store locations. As of December 31, 2005,2008, we offered some or all of these financial services products in 40351Rent-A-Center store locations in Idaho, Montana, Nevada, Oregon, Utah and Washington.18 states. We expectintend to offer suchfocus our resources on improving the operations in these existing financial services products in 140store locations and do not plan to 200add significantly to the number ofRent-A-Center store locations by the end of 2006. offering financial services at this time.
Stores offering financial services products in addition to traditionalrent-to-own rent-to-own products generally require one to two additional employees. TheManagement of our financial services business is managed byintegrated with our executive management team at the home office.rent-to-own operations, with five financial services regional directors and 44 financial services district managers reporting to our division vice presidents.
Our financial services business operates in a highly competitive industry. Similar financial services products are offered by large regional or national entities, smaller independent outlets and pawnshops. Competitive factors include location, service, maximum loan amount, repayment options and fees.
Trademarks
We own various registered trademarks and servicemarks, includingRent-A-Center®, Renters Choice®, and Get It Now®. We have submitted a trademark application for “The Cash AdvantEdge”that are used in connection with our financial servicesoperations and have been registered with the United States Patent and Trademark Office. The duration of our trademarks is unlimited, subject to periodic renewal and continued use. In addition, we have obtained trademark registrations in Canada. We believe we hold the necessary rights for protection of the trademarks and servicemarks essential to our business. The products held for rent in our stores also bear trademarks and service marksservicemarks held by their respective manufacturers.
Employees
As of March 3, 2006,February 18, 2009, we had approximately 15,48017,900 employees, of whom 404575 are assigned to our headquarters and the remainder of whom are directly involved in the management and operation of our stores and service centers. The employees of the ColorTyme franchisees are not employed by us. While we have experienced limited union activity in the past, none of our employees are covered by a collective bargaining agreement.
We believe relationships with our employees are generally good. In connection with the settlement in December 2002 of a class action matter alleging discriminatory, gender-based employment practices, we entered into a four-year consent decree, which can be extended by the court for an additional one year upon a showing of good cause. Under the terms of the consent decree, we augmented our human resources department and our internal employee complaint procedures, enhanced our gender anti-discrimination training for all employees, and hired a consultant mutually acceptable to the parties to advise us on employment matters. We provide certain reports to the EEOC regarding our compliance with the consent decree, as well as our efforts to recruit, hire and promote qualified women. We continue to take steps to improve opportunities for women. We believe that we are in compliance in all material respects with our obligations under the consent decree.
Government Regulation
Rental Purchase Transactions
State Regulation
Currently, 47 states, the District of Columbia and Puerto Rico have legislation regulating rental purchase transactions. We believe this existing legislation is generally favorable to us, as it defines and clarifies the various disclosures, procedures and transaction structures related to therent-to-own rent-to-own business with which we must comply. With some variations in individual states, most related state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides
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time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some state rental purchase laws prescribe grace periods for non-payment, prohibit or limit certain types of collection or other practices, and limit certain fees that may be charged. Nine states limit the total rental payments that can be charged. These limitations, however, generally do not become applicable unless the total rental payments required under an agreement exceed 2.0 times to 2.4 times of the disclosed cash price or the retail value of the rental product.
Courts in each of Minnesota, which has a rental purchase statute, and Wisconsin and New Jersey, and Wisconsin, which do not have rental purchase statutes, have had courtrendered decisions which treatclassify rental purchase transactions as credit sales subject to consumer lending restrictions. In response, we have developed and utilized a separate rental agreementAccordingly, in Minnesota which does not provideand Wisconsin, we offer our customers with an option to purchase rented merchandise. In New Jersey, we have provided increased disclosures and longer grace periods in our rental purchase agreements. In Wisconsin, our Get It Now customers are provided an opportunity to purchase our merchandise through an installment sale transaction.transaction in our Get It Now and Home Choice stores. In New Jersey, we have modified our typical rental purchase agreements to provide disclosures, grace
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periods, and pricing that we believe conform with the retail installment sales act. We operate four25 Get It Now and Home Choice stores in Minnesota and 43Wisconsin, and 44Rent-A-Center stores in New Jersey. Get It Now, our subsidiary, operates 21 stores in Wisconsin.
North Carolina has no rental purchase legislation. However, the retail installment sales statute in North Carolina recognizesexpressly provides that rental purchaselease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under suchthe statute. We operate 111133 stores in North Carolina.
Legislation has been introduced in New York from time to time that would significantly amend that state’s existing rental purchase statute. Recently introduced bills would impose significant pricing restrictions in New York and, if enacted as proposed, would have a material and adverse impact on our operations in New York. While predecessors of these bills have not received widespread support from members of either body of New York’s legislature, we are unable to assure you that such adverse legislation will not be enacted in the future. We operate 178 stores in New York.
Federal Legislation
To date, no comprehensive federal legislation has been enacted regulating or otherwise impacting the rental purchase transaction. We do, however, comply with the Federal Trade Commission recommendations for disclosure in rental purchase transactions.
From time to time, we have supported legislation introduced in Congress that would regulate the rental purchase transaction. Currently, there are two bills pending in Congress that would regulate the rental purchase transaction, both of which are similar in substance to the generally favorable state laws in effect. While both beneficial and adverse legislation may be introduced in Congress in the future, any adverse federal legislation, if enacted, could have a material and adverse effect on us.
There can be no assurance thatas to whether new or revised rental purchase laws will not be enacted or whether, if enacted, that the laws would not have a material and adverse effect on us.
Financial Services
Our financial services business is subject to regulation and supervision primarily at the state and federal levels. We intend to offer our financial services products only in those jurisdictions with favorable regulatory environments.
In those jurisdictions where we make consumer loans directly to consumers (currently all states in which we offer financial services other than Texas), we are a licensed lender where required and are subject to various state regulations regarding the Districtterms of Columbia provide safe harbor regulations forour short term consumer lending,loans and two additional states, Wisconsinour policies, procedures and New Mexico, permit short termoperations relating to those loans. Typically, state regulations limit the amount that we may lend to any consumer lendingand, in some cases, the number of loans or transactions that we may make to any consumer at one time or in the course of a year. These state regulations also typically restrict the amount of finance or service charges or fees that we may assess in connection with any loan or transaction and may limit a customer’s ability to renew or “rollover” a loan.
We operate our financial services business in Texas under the Texas Credit Services Organization law which requires that we register as a Credit Services Organization (“CSO”) with the Texas Secretary of State, pay a registration fee and post surety bonds for each location. The CSO may, for a fee, help a consumer obtain an extension of credit from an independent third-party lender. We must also comply with various disclosure requirements, which include providing the consumer with a disclosure statement and contract that detail the services to be performed by the CSO and the total cost of those services along with various other items. Additionally, the CSO must give a consumer the right to cancel the credit services agreement without penalty within 3 days after the agreement is signed.
We are subject to regulation in several jurisdictions in which we operate that require the registration or licensing of check cashing companies or regulate the fees that check cashing companies may impose. In some of these jurisdictions, we may be required to file fee schedules with the state or conspicuously post the fees charged for cashing checks by each branch. In some cases, we are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements. We are licensed lenders. Safe harbor regulations typically set maximum fees, size and lengthin each of the loans. Fourteen states prohibit or limit short term consumer lending through small loan rate capsjurisdictions in which a license is currently required for us to operate as a check cashing company and have filed our schedule of fees with
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each of the states or state usuryother jurisdictions in which such a filing is required. To the extent those states have adopted ceilings including New York, New Jersey, Pennsylvania, Georgia, and Texas. on check cashing fees, the fees we currently charge are at or below the maximum ceiling.
In addition, our financial services business is subject to federal statutes and regulations such as the USA Patriot Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Anti-Money Laundering Act, and similar state laws.
In October 2006, U.S. federal legislation was enacted which limited our ability to offer financial services to active duty military personnel beginning in October 2007. There was no significant effect on our operations due to the restriction on lending to military personnel.
In 2008, legislation was enacted in Ohio which revised the statutes governing the short term consumer loan product we offered there at that time. The rate caps under the revised statute made it economically unfeasible to continue offering our loan products pursuant to that statute. As a result of this adverse legislation, we began offering alternative loan products and services in Ohio under other applicable provisions of Ohio law. We cannot assure you that we will be successful in offering these alternative products and services to consumers in Ohio, or whether such alternative products and services will prove to be economically feasible. We operate 51 stores in Ohio.
Legislative activity with respect to the financial services industry at the state and federal level continues to be significant. Both favorable and adverse legislation has been introduced in a number of states as well as in Congress. There can be no assurance thatas to whether new or revised financial services laws will not be enacted or whether, if enacted, that the laws would not have a material and adverse effect on us.
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| Item 1A. | Risk Factors. |
You should carefully consider the risks described below before making an investment decision. We believe these are all the material risks currently facing our business. Our business, financial condition or results of operations could be materially adversely affected by these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. You should also refer to the other information included or incorporated by reference in this report, including our financial statements and related notes.
We may not be able to successfully implementincrease revenue in our growth strategy,rent-to-own stores, which could cause our future earnings to grow more slowly or even decrease.
Our continued growth also depends on our ability to increase sales in our existingrent-to-own rent-to-own stores. Our same store sales increased by 3.0% for 20032.3%, 2.1% and decreased by 3.6%1.9% in 2008, 2007 and 2.3% in 2004 and 2005,2006, respectively. As a result of new store openings in existing markets and because mature stores will represent an increasing proportion of our store base over time, our same store revenues in future periods may be lower than historical levels. If we are unable to increase revenue in our rent-to-own stores, our earnings may grow more slowly or even decrease.
If we fail to grow through expansion intoeffectively manage the growth, integration and profitability of our financial services business. business, we may not realize the economic benefit of our financial investment in such operations.
We face risks associated with integrating this newour financial services business into our existing operations.operations, including further development of information technology and financial reporting systems. In addition, a newly opened financial services location generally does not attain positive cash flow during its first year of operations. Also, the financial services industry is highly competitive and regulated by federal, state and local laws.
Our growth strategyexpansion into the financial services business could place a significant demand on our management and our financial and operational resources. If we are unable to effectively implement our growth strategy, our earningsfinancial services business, we may grow more slowly or even decrease.
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Rent-to-own transactions are regulated by law in most states. Any adverse change in these laws or the passage of adverse newrent-to-own stores, laws could expose us to litigation or require us to alter our financial results may be adversely affected.business practices.
As is the integration of our management philosophies and personnel, standardization of training programs, realization of operating efficiencies and effective coordination of sales and marketing and financial reporting efforts. In addition, acquisitions in generalcase with most businesses, we are subject to various governmental regulations, including specifically in our case, regulations regarding rent-to-own transactions. Currently, 47 states, the District of Columbia and Puerto Rico have passed laws regulating rental purchase transactions and one additional state has a numberretail installment sales statute that excludes rent-to-own transactions from its coverage if certain criteria are met. These laws generally require certain contractual and advertising disclosures. They also provide varying levels of special risks, includingsubstantive consumer protection, such as requiring a grace period for late fees and contract reinstatement rights in the event the rental purchase agreement is terminated. The rental purchase laws of nine states limit the total amount of rentals that may be charged over the life of a rental purchase agreement. Several states also effectively regulate rental purchase transactions under other consumer protection statutes. We are currently subject to litigation alleging that we have violated some of these statutory provisions.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, adverse short-term effects onfederal legislation may be enacted in the future. From time to time, legislation has been introduced in Congress seeking to regulate our reported operating results, diversion of management’s attention and unanticipated problemsbusiness. In addition, various legislatures in the states where we currently do business may adopt new legislation or legal liabilities. Further, a newly openedrent-to-own store generally does not attain positive cash flow during its first year of operations.amend existing legislation that could require us to alter our business practices.
Our financial services business is subject to federal statutes and regulations such as the USA Patriot Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Anti-Money Laundering Act, and similar state laws. In addition, we are subject to various state regulations regarding the terms of our short term consumer loans and our policies, procedures and operations relating to those loans, including the fees we may charge, as well as fees we may charge in connection with our other financial services products. The failure to comply with such regulations may result in the imposition of material fines, penalties, or injunctions. Congressand/or the various legislatures in the states where we currently operate or intend to offer financial services products may adopt new legislation or amend existing legislation with respect to our financial services business that could require us to alter our business practices in a manner that we may deem to be unacceptable, which could slow our growth opportunities.
We may be subject to legal proceedings pending against us seekingfrom time to time which seek material damages. The costs we incur in defending ourselves or associated with settling any of these proceedings, as well as a material final judgment or decree against us, could materially adversely affect our financial condition by requiring the payment of the settlement amount, a judgment or the posting of a bond.
In our rental agreements constitute installment sales contracts, violate state usury laws or violate other state laws enacted to protect consumers. We are also defending ahistory, we have defended class action lawsuit alleging we violated the securities laws and lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. We cannot assure you that we violated state wage and hour laws. Becausewill not be the subject of similar lawsuits in the uncertainties associated with litigation, we cannot estimate for you our ultimate liability for these matters, if any.future. Significant settlement amounts or final judgments could materially and adversely
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affect our liquidity. The failure to pay any material judgment would be a default under our senior credit facilities and the indenture governing our outstanding subordinated notes.
Our debt agreements impose restrictions on us which may limit or prohibit us from engaging in certain transactions. If a default were to occur, our lenders could accelerate the amounts of debt outstanding, and holders of our secured indebtedness could force us to sell our assets to satisfy all or a part of what is owed.
Covenants under our senior credit facilities and the indenture governing our outstanding subordinated notes restrict our ability to pay dividends, engage in various operational matters, as well as require us to maintain specified financial ratios and satisfy specified financial tests.ratios. Our ability to meet these financial ratios and tests may be affected by events beyond our control. These
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restrictions could limit our ability to obtain future financing, make needed capital expenditures or other investments, repurchase our outstanding debt or equity, withstand a future downturn in our business or in the economy, dispose of operations, engage in mergers, acquire additional stores or otherwise conduct necessary corporate activities. Various transactions that we may view as important opportunities, such as specified acquisitions, are also subject to the consent of lenders under the senior credit facilities, which may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.
If a default were to occur, the lenders under our senior credit facilities could accelerate the amounts outstanding under the credit facilities, and our other lenders could declare immediately due and payable all amounts borrowed under other instruments that contain certain provisions for cross-acceleration or cross-default. In addition, the lenders under these agreements could terminate their commitments to lend to us. If the lenders under these agreements accelerate the repayment of borrowings, we may not have sufficient liquid assets at that time to repay the amounts then outstanding under our indebtedness or be able to find additional alternative financing. Even if we could obtain additional alternative financing, the terms of the financing may not be favorable or acceptable to us.
The existing indebtedness under our senior credit facilities is secured by substantially all of our assets. Should a default or acceleration of this indebtedness occur, the holders of this indebtedness could sell the assets to satisfy all or a part of what is owed. Our senior credit facilities also contain certain provisions prohibiting the modification oflimiting our ability to modify or refinance our outstanding subordinated notes, as well as limiting the ability to refinance such notes.
A change of control could accelerate our obligation to pay our outstanding indebtedness, and we may not have sufficient liquid assets at that time to repay these amounts.
Under our senior credit facilities, an event of default would result if a third party became the beneficial owner of 35.0% or more of our voting stock or upon certain changes in the constitution of ourRent-A-Center’s Board of Directors. As of December 31, 2005, we were required to make principal payments2008, $721.7 million was outstanding under our senior credit facilities of $3.5 million in 2006, $3.5 million in 2007, $3.5 million in 2008, $168.0 million in 2009 and $166.3 million after 2009. These payments reduce our cash flow.debt.
Under the indenture governing our outstanding subordinated notes, in the event that a change in control occurs, we may be required to offer to purchase all of our outstanding subordinated notes at 101% of their original aggregate principal amount, plus accrued interest to the date of repurchase. A change in control also would result in an event of default under our senior credit facilities, which would allow our lenders to accelerate indebtedness owed to them.
If the lenders under our debt instruments accelerate these obligations, we may not have sufficient liquid assets to repay amounts outstanding under these agreements.
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Rent-A-Center’s organizational documents contain provisions that classify our boardits Board of directors,Directors, authorize our boardits Board of directorsDirectors to issue blank check preferred stock and establish advance notice requirements on ourits stockholders for director nominations and actions to be taken at annual meetings of the stockholders. In addition, as a Delaware corporation, we areRent-A-Center is subject to Section 203 of the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indenture governing our subordinated notes each contain various change of control provisions which, in the event of a change of control, would cause a default under those provisions. These provisions and arrangements could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving us that could include a premium over the market price of ourRent-A-Center’s common stock that some or a majority of ourRent-A-Center’s stockholders might consider to be in their best interests.
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Rent-A-Center is a holding company, with no revenue generating operations and no assets other than ourits ownership interests in ourits direct and indirect subsidiaries. Accordingly, we areRent-A-Center is dependent on the cash flow generated by ourits direct and indirect operating subsidiaries and must rely on dividends or other intercompany
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transfers from ourits operating subsidiaries to generate the funds necessary to meet ourits obligations, including the obligations under ourthe senior credit facilities and ourthe outstanding subordinated notes. The ability of ourRent-A-Center’s subsidiaries to pay dividends or make other payments to usit is subject to applicable state laws. Should one or more of ourRent-A-Center’s subsidiaries be unable to pay dividends or make distributions, ourits ability to meet ourits ongoing obligations could be materially and adversely impacted.
Our stock price is volatile, and you may not be able to recover your investment if our stock price declines.
The price of our common stock has been volatile and can be expected to be significantly affected by factors such as:
| • | quarterly variations in our results of operations, which may be impacted by, among other things, changes in same store sales, when and how many | |
| • | quarterly variations in our competitors’ results of operations; | |
| • | changes in earnings estimates or buy/sell recommendations by financial analysts; and | |
| • | the stock price performance of comparable | |
In addition, the stock market as a whole has experienced extreme price and volume fluctuations that have affected the market price of many specialty retailers in ways that may have been unrelated to these companies’ operating performance.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
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| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
We lease space for substantially all of our stores and service center locations, as well as our corporate and regional offices, under operating leases expiring at various times through 2013.2016. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according toagreed-upon formulas. Store sizes range from approximately 1,900 to 18,50024,000 square feet, and average approximately 4,6004,700 square feet. Approximately 75% of each store’s space is generally used for showroom space and 25% for offices and storage space. Our headquarters, including Get It Now
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We own the land and ColorTyme, are each locatedbuilding at 5700 Tennyson Parkway,5501 Headquarters Drive, Plano, Texas, and consists of approximately 115,307 square feet.
We believe that suitable store space generally is available for lease and we would be able to relocate any of our stores without significant difficulty should we be unable to renew a particular lease. We also expect additional space is readily available at competitive rates to open new stores. Under various federal and state laws, lessees may be liable for environmental problems at leased sites even if they did not create, contribute to, or know of the problem. We are not aware of and have not been notified of any material violations of federal, state or local environmental protection or health and safety laws, but cannot guarantee that we will not incur material costs or liabilities under these laws in the future.
| Item 3. | Legal Proceedings. |
Legal Proceedings
From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. We account for our litigation contingencies pursuant to the provisions of Statement of Financial Accounting Standards No. 5,Accounting for Contingencies(“SFAS No. 5”) and FASB Interpretation No. 14,Reasonable Estimation of the Amount of a Loss — An Interpretation of FASB Statement No. 5(“FIN 14”), which require that we accrue for losses that are both probable and reasonably estimable. We expense legal fees and expenses incurred in connection with the defense of all of our litigation at the time such amounts are invoiced or otherwise made known to us.
As of December 31, 2008, we had accrued $11.3 million relating to probable losses for our outstanding litigation as follows (in millions):
Shafer/Johnson Matter | $ | 1.8 | ||
California Attorney General Settlement | 9.4 | |||
Other Litigation | 0.1 | |||
| Total Accrual | $ | 11.3 | ||
We continue to monitor our litigation exposure, and will review the adequacy of our legal reserves on a quarterly basis in accordance with applicable accounting rules. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in Our Financial Statements” regarding our process for evaluating our litigation reserves. Except as described below, we are not currently a party to any material litigation. The ultimate outcome of our litigation is uncertain and, the amount of any loss we may incur, if any, cannot in our judgment be reasonably estimated. Accordingly, other than as set forth above, we have not established any other reserves for our outstanding litigation.
California Attorney General Inquiry. In January 2009, we paid $9.4 million in accordance with respectthe settlement with the California Attorney General.
Eric Shafer, et al. v.Rent-A-Center, Inc. We recorded a pre-tax expense of $11.0 million in the fourth quarter of 2007 related to the settlement of thePucci/ChessEric Shafer et al. v.Rent-A-Center, Inc. matter (which was fundedandVictor E. Johnson et al. v.Rent-A-Center, Inc., coordinated matters pending in February 2006),state court in Los Angeles, California. Due to fewer class members eligible to participate in the prospective settlement of theRose/ Madrigalmatter discussed belowthan originally estimated, as well as anticipated legalnegotiated reductions in settlement payments to certain plaintiffs, the maximum claim amount remaining to be paid was reduced by approximately $2.4 million during the fourth quarter of 2008. We also paid settlement costs and plaintiffs’ attorneys’ fees in the amount of approximately $4.4 million, and expenses for our other litigation matters, no provision has been madesettlement payments in our consolidated financial statements for any such loss.the aggregate amount of approximately $2.4 million during the fourth quarter of 2008. We expect to fund the maximum remaining settlement payments of approximately $1.8 million during 2009.
In our history, we have defended class action in November 1997 in New York state court. This matter was assumed by us in connection with the Thorn Americas acquisition. The plaintiff acknowledges thatrent-to-own transactions in New York are subjectlawsuits alleging various regulatory violations and have paid material amounts to the provisions of New York’s Rental Purchase Statute but contends the Rental Purchase Statute does not provide us immunity from suit for other statutory violations. The plaintiff alleges we have a duty to disclose effective interest under New York consumer protection laws, and seeks damages and injunctive relief for failure to do so. This suit also alleges violations relating to excessive and unconscionable pricing, late fees, harassment, undisclosed charges, and the ease of use and accuracy of payment records. In the prayer for relief, the plaintiff requests class certification, injunctive relief requiring us to cease certain marketing practices and price our rental purchase contracts in
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We believe these claims are without merit and will continue to vigorously defend ourselves in this case. However, we cannot assure you that we will not be found to have no liability in this matter.
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| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
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21
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock has been listed on the Nasdaq StockGlobal Select Market® and its predecessors under the symbol “RCII” since January 25, 1995, the date we commenced our initial public offering. The following table sets forth, for the periods indicated, the high and low sales price per share of the common stock as reported.
| 2005 | High | Low | ||||||
| Fourth Quarter | $ | 20.360 | $ | 14.900 | ||||
| Third Quarter | 24.360 | 17.910 | ||||||
| Second Quarter | 27.750 | 22.360 | ||||||
| First Quarter | 27.890 | 24.080 | ||||||
| 2004 | High | Low | ||||||
| Fourth Quarter | $ | 26.890 | $ | 22.000 | ||||
| Third Quarter | 31.600 | 24.700 | ||||||
| Second Quarter | 33.930 | 27.630 | ||||||
| First Quarter | 33.342 | 27.030 | ||||||
2008 | High | Low | ||||||
| Fourth Quarter | $ | 22.68 | $ | 9.97 | ||||
| Third Quarter | 26.00 | 18.60 | ||||||
| Second Quarter | 23.20 | 17.07 | ||||||
| First Quarter | 20.22 | 11.67 | ||||||
2007 | High | Low | ||||||
| Fourth Quarter | $ | 18.59 | $ | 13.17 | ||||
| Third Quarter | 27.06 | 16.85 | ||||||
| Second Quarter | 29.01 | 25.90 | ||||||
| First Quarter | 31.09 | 26.32 | ||||||
As of March 8, 2006,February 20, 2009, there were approximately 9451 record holders of our common stock.
We have not paid any cash dividends on our common stock since the time of our initial public offering. Any change in our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition, future prospects and any other factors our Board of Directors may deem relevant.
Cash dividend payments are subject to the restrictions in our senior credit facilities and the indenture governing our subordinated notes. These restrictions would not currently prohibit the payment of cash dividends. Please see the section entitled “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Credit Facilities” on page 3835 of this report for further discussion of such restrictions.
Under our common stock repurchase program, we are authorized to repurchase up to $400.0$500.0 million in aggregate purchase price of our common stock. As of December 31, 2005,2008, we had repurchased $356.1a total of 19,412,750 shares ofRent-A-Center common stock for an aggregate of $457.8 million inunder our common stock repurchase program. For the year ended December 31, 2008, we repurchased 951,800 shares of our common stock for an aggregate purchase price of our common stock under our stock repurchase program.$13.4 million. In the fourth quarter of 2005,2008, we madeeffected the following repurchases of our common stock:
| Maximum Dollar | ||||||||||||||||
| Value of Shares | ||||||||||||||||
| Total Number of | that May Yet Be | |||||||||||||||
| Shares Purchased as | Purchased Under | |||||||||||||||
| Total Number | Average Price | Part of Publicly | the Plans or | |||||||||||||
| of Shares | Paid per Share | Announced Plans or | Programs | |||||||||||||
| Period | Purchased | (including fees) | Programs | (including fees) | ||||||||||||
| October 1 through October 31 | 0 | $ | 0.0000 | 0 | $ | 78,358,403 | ||||||||||
| November 1 through November 30 | 1,816,100 | $ | 18.9807 | 1,816,100 | $ | 43,887,581 | ||||||||||
| December 1 through December 31 | 0 | $ | 0.0000 | 0 | $ | 43,887,581 | ||||||||||
| Total | 1,816,100 | $ | 18.9807 | 1,816,100 | $ | 43,887,581 | ||||||||||
| Maximum Dollar | ||||||||||||||||
| Total Number of | Value that May Yet | |||||||||||||||
| Shares Purchased | Be Purchased | |||||||||||||||
| Total Number | Average Price | as Part of Publicly | Under the Plans | |||||||||||||
| of Shares | Paid per Share | Announced Plans | or Programs | |||||||||||||
Period | Purchased | (Including Fees) | or Programs | (Including Fees) | ||||||||||||
| October 1 through October 31 | 150,000 | $ | 14.0456 | 150,000 | $ | 50,422,839 | ||||||||||
| November 1 through November 30 | 651,800 | $ | 12.5574 | 651,800 | $ | 42,237,933 | ||||||||||
| December 1 through December 31 | ||||||||||||||||
| Total | 801,800 | $ | 12.8358 | 801,800 | $ | 42,237,933 | ||||||||||
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Stock Performance Graph
The following chart represents a comparison of the five year total return of our common stock to the NASDAQ Market Index and a peer group index selected by us. The peer group index consists of Aaron Rents, Inc., Family Dollar Stores, Inc., 99¢ Only Stores, Dollar Tree Stores, Inc., Dollar Financial Corp., Advance America, Cash Advance Centers, Inc., EZCORP, Inc., and Cash America International, Inc. The graph assumes $100 was invested on December 31, 2003 and dividends, if any, were reinvested for all years ending December 31.
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| Item 6. | Selected Financial |
The selected financial data presented below for the five years ended December 31, 20052008 have been derived from our consolidated financial statements as audited by Grant Thornton LLP, independent registered public accounting firm. All prices and amounts have been adjusted to reflect the 5-for-2 split of our common stock effected in August 2003. The historical financial data are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto, the section entitled “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and other financial information included in this report.
| Year Ended December 31, | ||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||
Consolidated Statements of Earnings | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||
| Store | ||||||||||||||||||||||
| Rentals and fees | $ | 2,084,757 | $ | 2,071,866 | $ | 1,998,952 | $ | 1,828,534 | $ | 1,650,851 | ||||||||||||
| Merchandise sales | 177,292 | 166,594 | 152,984 | 115,478 | 94,733 | |||||||||||||||||
| Installment sales | 26,139 | 24,304 | 22,203 | 6,137 | — | |||||||||||||||||
| Other | 7,903 | 3,568 | 3,083 | 2,589 | 3,476 | |||||||||||||||||
| Franchise | ||||||||||||||||||||||
| Merchandise sales | 37,794 | 41,398 | 45,057 | 51,514 | 53,584 | |||||||||||||||||
| Royalty income and fees | 5,222 | 5,525 | 5,871 | 5,792 | 5,884 | |||||||||||||||||
| Total revenue | 2,339,107 | 2,313,255 | 2,228,150 | 2,010,044 | 1,808,528 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||||
| Direct store expenses | ||||||||||||||||||||||
| Cost of rentals and fees | 452,583 | 450,035 | 432,696 | 383,400 | 343,197 | |||||||||||||||||
| Cost of merchandise sold | 129,624 | 119,098 | 112,283 | 84,628 | 72,539 | |||||||||||||||||
| Cost of installment sales | 10,889 | 10,512 | 10,639 | 3,776 | — | |||||||||||||||||
| Salaries and other expenses | 1,358,760 | (1) | 1,277,926 | 1,180,115 | 1,070,265 | 1,019,402 | ||||||||||||||||
| Franchise cost of merchandise sold | 36,319 | 39,472 | 43,248 | 49,185 | 51,251 | |||||||||||||||||
| 1,988,175 | 1,897,043 | 1,778,981 | 1,591,254 | 1,486,389 | ||||||||||||||||||
| General and administrative expenses | 82,290 | 75,481 | 66,635 | 63,296 | 55,359 | |||||||||||||||||
| Amortization of intangibles | 11,705 | (2) | 10,780 | 12,512 | 5,045 | 30,194 | ||||||||||||||||
| Class action litigation settlement (reversion) | (8,000 | )(3) | 47,000 | (6) | — | — | 52,000 | (8) | ||||||||||||||
| Restructuring charge | 15,166 | (4) | — | — | — | — | ||||||||||||||||
| Total operating expenses | 2,089,336 | 2,030,304 | 1,858,128 | 1,659,595 | 1,623,942 | |||||||||||||||||
| Operating profit | 249,771 | 282,951 | 370,022 | 350,449 | 184,586 | |||||||||||||||||
| Income from sale of charged off accounts | — | (7,924 | )(7) | — | — | — | ||||||||||||||||
| Finance charges from refinancing | — | 4,173 | 35,260 | — | — | |||||||||||||||||
| Interest expense, net | 40,703 | 35,323 | 43,932 | 62,006 | 59,780 | |||||||||||||||||
| Earnings before income taxes | 209,068 | 251,379 | 290,830 | 288,443 | 124,806 | |||||||||||||||||
| Income tax expense | 73,330 | (5) | 95,524 | 109,334 | 116,270 | 58,589 | ||||||||||||||||
| �� | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Consolidated Statements of Earnings | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Store | ||||||||||||||||||||
| Rentals and fees | $ | 2,505,268 | $ | 2,594,061 | $ | 2,174,239 | (7) | $ | 2,084,757 | $ | 2,071,866 | |||||||||
| Merchandise sales | 256,731 | 208,989 | 175,954 | 177,292 | 166,594 | |||||||||||||||
| Installment sales | 41,193 | 34,576 | 26,877 | 26,139 | 24,304 | |||||||||||||||
| Other | 42,759 | 25,482 | 15,607 | 7,903 | 3,568 | |||||||||||||||
| Franchise | ||||||||||||||||||||
| Merchandise sales | 33,283 | 34,229 | 36,377 | 37,794 | 41,398 | |||||||||||||||
| Royalty income and fees | 4,938 | 8,784 | (4) | 4,854 | 5,222 | 5,525 | ||||||||||||||
| Total revenue | 2,884,172 | 2,906,121 | 2,433,908 | 2,339,107 | 2,313,255 | |||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Direct store expenses | ||||||||||||||||||||
| Cost of rentals and fees | 572,900 | 574,013 | 476,462 | (7) | 452,583 | 450,035 | ||||||||||||||
| Cost of merchandise sold | 194,595 | 156,503 | 131,428 | 129,624 | 119,098 | |||||||||||||||
| Cost of installment sales | 16,620 | 13,270 | 11,346 | 10,889 | 10,512 | |||||||||||||||
| Salaries and other expenses | 1,651,805 | 1,684,965 | 1,385,437 | (8) | 1,358,760 | (11) | 1,277,926 | |||||||||||||
| Franchise cost of merchandise sold | 31,705 | 32,733 | 34,862 | 36,319 | 39,472 | |||||||||||||||
| 2,467,625 | 2,461,484 | 2,039,535 | 1,988,175 | 1,897,043 | ||||||||||||||||
| General and administrative expenses | 125,632 | 123,703 | 93,556 | 82,290 | 75,481 | |||||||||||||||
| Amortization and write-down of intangibles | 16,637 | 15,734 | 5,573 | 11,705 | (12) | 10,780 | ||||||||||||||
| Litigation expense (credit) | (4,607 | )(1) | 62,250 | (5) | 73,300 | (9) | (8,000 | )(13) | 47,000 | (16) | ||||||||||
| Restructuring charge | 4,497 | (2) | 38,713 | (6) | — | 15,166 | (14) | — | ||||||||||||
| Total operating expenses | 2,609,784 | 2,701,884 | 2,211,964 | 2,089,336 | 2,030,304 | |||||||||||||||
| Operating profit | 274,388 | 204,237 | 221,944 | 249,771 | 282,951 | |||||||||||||||
| Income from sale of charged off accounts | — | — | — | — | (7,924 | )(17) | ||||||||||||||
| Finance charges from refinancing | — | — | 4,803 | (10) | — | 4,173 | ||||||||||||||
| Gain on extinguishment of debt | (4,335 | )(3) | — | — | — | — | ||||||||||||||
| Interest expense, net | 57,381 | 87,951 | 53,003 | 40,703 | 35,323 | |||||||||||||||
| Earnings before income taxes | 221,342 | 116,286 | 164,138 | 209,068 | 251,379 | |||||||||||||||
| Income tax expense | 81,718 | 40,018 | 61,046 | 73,330 | (15) | 95,524 | ||||||||||||||
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| Item 6. Selected Financial Data — Continued | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| NET EARNINGS | $ | 139,624 | $ | 76,268 | $ | 103,092 | $ | 135,738 | $ | 155,855 | ||||||||||
| Basic earnings per common share | $ | 2.10 | $ | 1.11 | $ | 1.48 | $ | 1.86 | $ | 1.99 | ||||||||||
| Diluted earnings per common share | $ | 2.08 | $ | 1.10 | $ | 1.46 | $ | 1.83 | $ | 1.94 | ||||||||||
Consolidated Balance Sheet Data | ||||||||||||||||||||
| Rental merchandise, net | $ | 819,054 | $ | 937,970 | $ | 1,056,233 | (18) | $ | 750,680 | $ | 759,111 | |||||||||
| Intangible assets, net | 1,266,953 | 1,269,094 | 1,281,597 | 929,326 | 922,404 | |||||||||||||||
| Total assets | 2,496,702 | 2,626,943 | 2,740,956 | (18) | 1,948,664 | 1,967,788 | ||||||||||||||
| Total debt | 947,087 | 1,259,335 | 1,293,278 | 724,050 | 708,250 | |||||||||||||||
Total liabilities(19) | 1,417,500 | 1,679,852 | 1,797,997 | (18) | 1,125,232 | 1,173,517 | ||||||||||||||
| Stockholders’ equity | 1,079,202 | 947,091 | 942,959 | (18) | 823,432 | 794,271 | ||||||||||||||
Operating Data (Unaudited) | ||||||||||||||||||||
| Stores open at end of period | 3,037 | 3,081 | 3,406 | 2,760 | 2,875 | |||||||||||||||
Comparable store revenue growth (decrease)(20) | 2.3 | % | 2.1 | % | 1.9 | % | (2.3 | )% | (3.6 | )% | ||||||||||
| Weighted average number of stores | 3,056 | 3,376 | 2,848 | 2,844 | 2,788 | |||||||||||||||
| Franchise stores open at end of period | 222 | 227 | 282 | 296 | 313 | |||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
| NET EARNINGS | 135,738 | 155,855 | 181,496 | 172,173 | 66,217 | ||||||||||||||||
| Preferred dividends | — | — | — | 10,212 | 15,408 | ||||||||||||||||
| Net earnings allocable to common stockholders | $ | 135,738 | $ | 155,855 | $ | 181,496 | $ | 161,961 | $ | 50,809 | |||||||||||
| Basic earnings per common share | $ | 1.86 | $ | 1.99 | $ | 2.16 | $ | 2.20 | $ | 0.79 | |||||||||||
| Diluted earnings per common share | $ | 1.83 | $ | 1.94 | $ | 2.08 | $ | 1.89 | $ | 0.71 | |||||||||||
Consolidated Balance Sheet Data | |||||||||||||||||||||
| Rental merchandise, net | $ | 750,680 | $ | 759,111 | $ | 680,700 | $ | 631,724 | $ | 653,701 | |||||||||||
| Intangible assets, net | 929,326 | 922,404 | 797,434 | 743,852 | 711,096 | ||||||||||||||||
| Total assets | 1,948,664 | 1,967,788 | 1,831,302 | 1,626,652 | 1,630,315 | ||||||||||||||||
| Total debt | 724,050 | 708,250 | 698,000 | 521,330 | 702,506 | ||||||||||||||||
Total liabilities(9) | 1,125,232 | 1,173,517 | 1,036,472 | 784,252 | 1,224,937 | ||||||||||||||||
| Stockholders’ equity | 823,432 | 794,271 | 794,830 | 842,400 | 405,378 | ||||||||||||||||
Operating Data | |||||||||||||||||||||
| Stores open at end of period | 2,760 | 2,875 | 2,648 | 2,407 | 2,281 | ||||||||||||||||
Comparable store revenue growth (decrease)(10) | (2.3 | )% | (3.6 | )% | 3.0 | % | 6.0 | % | 8.0 | % | |||||||||||
| Weighted average number of stores | 2,844 | 2,788 | 2,560 | 2,325 | 2,235 | ||||||||||||||||
| Franchise stores open at end of period | 296 | 313 | 329 | 318 | 342 | ||||||||||||||||
| Includes the effects of a $4.6 million in pre-tax litigation credits recorded in the fourth quarter of 2008 related to thePerezmatter and theShafer/Johnsonmatter | ||
| Includes the effects of a $4.5 million pre-tax restructuring expense as part of the store consolidation plan and other restructuring items announced December 3, 2007. | ||
| (3) | Includes the effects of a $4.3 million pre-tax gain on the extinguishment of debt recorded in the fourth quarter of 2008. | |
| (4) | Includes the effects of a $3.9 million pre-tax benefit recorded in the third quarter of 2007 as a result of the receipt of accelerated royalty payments from franchisees in consideration of the termination of their franchise agreements. | |
| (5) | Includes the effects of a $51.3 million pre-tax litigation expense recorded in the first quarter of 2007 related to thePerezmatter and the effects of an $11.0 million pre-tax litigation expense recorded in the fourth quarter of 2007 related to theShafer/Johnsonmatter. | |
| (6) | Includes the effects of a $38.7 million pre-tax restructuring expense recorded in the fourth quarter of 2007 related to the store consolidation plan and other restructuring items announced December 3, 2007. | |
| (7) | Includes the effects of adopting SAB 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(“SAB 108”), of approximately $3.1 million decrease in pre-tax revenue and $738,000 decrease in pre-tax depreciation expense related to adjustments for deferred revenue. | |
| (8) | Includes the effects of adopting SFAS 123R,Share-Based Payment(“SFAS 123R”), of approximately $7.8 million of pre-tax expense related to stock options and restricted stock units granted. | |
| (9) | Includes the effects of a $4.95 million pre-tax expense in the third quarter of 2006 associated with the settlement of theBurdusis/French/Corsolitigation, the effects of a $10.35 million pre-tax expense in the third quarter of 2006 associated with the settlement with the California Attorney General and the effects of a $58.0 million pre-tax expense in the fourth quarter of 2006 associated with the litigation reserve with respect to thePerezcase. | |
| (10) | Includes the effects of a $2.2 million pre-tax expense in the third quarter of 2006 and the effects of a $2.6 million pre-tax expense in the fourth quarter of 2006 for the refinancing of our senior credit facilities. | |
| (11) | Includes the effects of $5.2 million in charges recorded in the third and fourth quarters of 2005 as a result of Hurricanes Katrina, Rita and Wilma. These charges were primarily related to the disposal of inventory and fixed assets. | |
| Includes the effects of $3.7 million in goodwill impairment charges recorded in the third quarter of 2005 as result of Hurricane Katrina. | ||
| Includes the effect of a pre-tax legal reversion of $8.0 million recorded in the first quarter of 2005 associated with the settlement of a class action lawsuit in the state of California. |
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| Includes the effects of a $15.2 million pre-tax restructuring expense as part of the store consolidation plan announced September 6, 2005. | ||
| Includes the effects of a $2.0 million tax audit reserve credit associated with the examination and favorable resolution of our 1998 and 1999 federal tax returns and a $3.3 million state tax reserve credit due to a change in estimate related to potential loss exposures. | ||
| Includes the effects of a pre-tax legal settlement charge of $47.0 million recorded in the third quarter of 2004 associated with the settlement of a class action lawsuit in the state of California. | ||
| Includes the effects of $7.9 million in pre-tax income associated with the 2004 sale of previously charged off accounts. | ||
| Includes the effects of adopting SAB 108 of a | ||
| In accordance with the adoption of SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(“SFAS 150”), total liabilities also includes redeemable convertible voting preferred |
| stock for the years ended December 31, 2002 through December 31, 2005. | ||
| Comparable store revenue growth for each period presented includes revenues only of stores open throughout the full period and the comparable prior period. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
We are the largestrent-to-own operator in the United States rent-to-own industry with an approximate 33%38% market share based on store count. At December 31, 2005,2008, we operated 2,7603,037 company-owned stores nationwide and in Canada and Puerto Rico, including 2131 retail installment sales stores in Wisconsin operated by our subsidiary Get It Now, LLC under the namenames “Get It Now” and seven“Home Choice” and eight rent-to-own stores located in Canada operated by our subsidiary Rent-A-Centre, Ltd., under the name “Rent-A-Centre.“Rent-A-Centre.” Another of our subsidiaries, Our subsidiary, ColorTyme, is a national franchisor ofrent-to-own rent-to-own stores. At December 31, 2005,2008, ColorTyme had 296222 franchised rent-to-own stores in 38 states, 288 of which operated under the ColorTyme name and eight34 states. These franchise stores of which operated under theRent-A-Center name.represent an additional 3% market share based on store count.
Our stores generally offer high quality durable products such as major consumer electronics, appliances, computers, and furniture and accessories under flexible rental purchase agreements that generally allow the customer to obtain ownership of the merchandise at the conclusion of anagreed-upon rental period. TheseThe rental purchase agreements are designed to appeal totransaction is a wide variety of customers by allowing themflexible alternative for consumers to obtain use and enjoyment of brand name merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a lackwithout incurring debt. Key features of access to credit. These agreements also cater to customers who only have a temporary need, or who simply desire to rent rather thanthe rental purchase the merchandise. transaction include:
| • | convenient payment options — in-store or over the phone; | |
| • | no long-term obligations; | |
| • | right to terminate without penalty; | |
| • | no requirement of a credit history; | |
| • | set-up and delivery included at no additional charge; | |
| • | product maintenance; | |
| • | lifetime reinstatement; and | |
| • | flexible options to obtain ownership — 90 days same as cash, early purchase options, or payment through the term of the agreement. |
Rental payments are made generally on a weekly basis and, together with applicable fees, constitute our primary revenue source.
Our expenses primarily relate to merchandise costs and the operations of our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, advertising expenses, lost, damaged, or stolen merchandise, fixed asset depreciation, and corporate and other expenses.
From 1993 to 2006, we began offering financial services products, such as short term secured and unsecured loans, bill paying, debit cards, check cashing and money transfer services in our existingrent-to-own stores under the trade name “The Cash AdvantEdge.” As of December 31, 2005, we offered some or all of these financial services products in 40Rent-A-Center store locations in Idaho, Montana, Nevada, Oregon, Utah and Washington. We expect to offer such financial services products in 140 to 200Rent-A-Center store locations by the end of 2006.
In addition, we strategically open or acquire stores near market areas served by existing stores (“cannibalize”) to enhance service levels, gain incremental sales and increase market penetration. This planned cannibalization may negatively impact our same store revenue and cause us to grow at a slower rate. There can be no assurance that we will open any newrent-to-own rent-to-own stores in the future, or as to the number, location or profitability thereof.
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We also offer financial services products, such as short term secured and unsecured loans, debit cards, check cashing, tax preparation and money transfer services, in some of our existing rent-to-own stores under the trade names “RAC Financial Services” and “Cash AdvantEdge.” As of December 31, 2008, we offered some or all of these financial services products in 351Rent-A-Center store locations in 18 states. We intend to focus our resources on improving the operations in these existing financial services store locations and do not plan to add significantly to the number ofRent-A-Center store locations offering financial services at this time. There can be no assurance that we will be successful in our efforts to improve and expand our financial services operations or that such operations, should they be added, will prove to be profitable.
The following discussion focuses on our results of operations, and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
Forward-Looking Statements
The statements, other than statements of historical facts, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We believe the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that suchthese expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to suchthese differences include, but are not limited to:
| • | uncertainties regarding | |
| • | our ability to acquire additional | |
| • | our ability to | |
| • | our ability to | |
| successfully add financial services locations within our | ||
| • | our ability to identify and successfully enter | |
| • | our ability to enhance the | |
| • | our ability to retain the | |
| • | ||
| • | our ability to enter into new and collect on our rental purchase agreements; | |
| • | our ability to enter into new and collect on our short term loans; | |
| • | the passage of legislation adversely affecting the rent-to-own or financial services industries; | |
| • | our failure to comply with statutes or regulations governing the rent-to-own or financial services industries; | |
| • | interest rates; | |
| • | increases in the unemployment rate; | |
| • | economic pressures, such as high fuel and utility costs, affecting the disposable income available to our targeted | |
| • | changes in our stock price and | |
| • | changes in estimates relating to self-insurance liabilities and income tax and litigation reserves; | |
| • | changes in our effective tax rate; | |
| • | our ability to maintain an effective system of internal controls; |
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| • | changes in the number of share-based compensation grants, methods used to value future share-based payments and changes in estimated forfeiture rates with respect to share-based compensation; | |
| • | ||
| • | the other risks detailed from time to time in our SEC reports. |
Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section entitled “Risk Factors” and elsewhere in this report. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
Critical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in Our Financial Statements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported
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amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical.
Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers’ compensation, general liability and auto liability insurance policies. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions.
We continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through a greater focus on the risk management function, a transitional duty program for injured workers, ongoing safety and accident prevention training, and various programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, which are prepared using methods and assumptions in accordance with standard actuarial practice,company specific development factors, general industry loss development factors, and third party claim administrator loss estimates which are based on known facts surrounding individual claims. During 2005, each quarterThese assumptions incorporate expected increases in health care costs. Periodically, we reevaluatedreevaluate our estimate of liability within our self-insured retentions, including our assumptions related to our loss forecasts and estimates, using actuarial loss forecasts updated during the quarter and currently valued third party claim administrator loss estimates. Weretentions. At that time, we evaluate the adequacy of our accruals by comparing amounts accrued on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third party claim administrator loss estimates, and make adjustments to our accruals as needed based upon such review.needed.
As of December 31, 2005,2008, the net amount accrued for losses within our self-insured retentions with respect to workers’ compensation, general liability and auto liability insurance was $97.0$117.9 million, as compared to $87.2$109.5 million at December 31, 2004. The increase in2007. If any of the netfactors that contribute to the overall cost of insurance claims were to change, the actual amount accruedincurred for our self-insurance liability would be directly affected. While we believe our loss prevention programs will reduce our total cost for self-insurance claims, our actual cost could be greater than the 2005 period is a result of an estimate for new claims expected for the current policy period, which incorporates our store growth, increased number of employees, increases in health care costs, and the net effect of prior period claims which have closed or for which additional development or changes in estimates have occurred.amounts currently accrued.
Litigation Reserves. We are the subject of litigation in the ordinary course of our business. OurHistorically, our litigation involves, among other things, actions relating to claims that our rental purchase agreements constitute installment sales contracts, violate state usury laws or violate other state laws to protect consumers, claims asserting violations of wage and hour laws in our employment practices, as well as claims we violated the federal securities laws.has involved lawsuits alleging various regulatory violations. In preparing our financial statements at a given point in time, we account for theseloss contingencies pursuant to the provisions of SFAS No. 5 and FIN 14, which requiresrequire that we accrue for losses that are both probable and reasonably estimable.
Each quarter, we make estimates of our probable liabilities,losses, if reasonably estimable, and record such amounts in our consolidated financial statements. These amounts represent our best estimate, or may be the minimum range of probable loss when no single best estimate is determinable. We, together with our counsel, monitor developments
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related to these legal matters and, when appropriate, adjustments are made to reflect current facts and circumstances. As of December 31, 2005, we had accrued $4.5 million relating to our outstanding litigation, of which $1.9 million was related to the settlement of thePucci/ Chessmatter (which was funded in February 2006), approximately $1.3 million related to the prospective settlement of theRose/ Madrigalmatters, and an additional $1.3 million for anticipatedWe expense legal fees and expenses with respect to our other outstanding litigation, as compared to $49.0 million for the year ended December 31, 2004, of which we had accrued $47.0 millionincurred in connection with the settlementdefense of all of our litigation at theGriego/ Carrillomatter, and an additional $2.0 million time such amounts are invoiced or otherwise made known to us.
Our accruals relating to probable losses for probableour outstanding litigation costsfollow:
| Year Ended December 31, | ||||||||
| 2008 | 2007 | |||||||
| (In millions) | ||||||||
Shafer/Johnson Matter | $ | 1.8 | $ | 11.0 | ||||
California Attorney General Settlement | 9.4 | 9.6 | ||||||
Other Litigation | 0.1 | 1.1 | ||||||
Legal Fees and Expenses | — | 0.2 | ||||||
| Total Accrual | $ | 11.3 | $ | 21.9 | ||||
As with respect to our other outstanding litigation.
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| • | the procedural status of the matter; | |
| • | our views and the views of our counsel as to the probability of a loss in the matter; | |
| • | the relative strength of the parties’ arguments with respect to liability and damages in the matter; | |
| • | settlement discussions, if any, between the parties; | |
| • | how we intend to defend ourselves in the matter; and | |
| • | our experience. |
Significant factors that may cause us to increase or decrease our accrual with respect to a matter include:
| • | judgments or finding of liability against us in the matter by a trial court; | |
| • | the granting of, or declining to grant, a motion for class certification in the matter; | |
| • | definitive decisions by appellate courts in the requisite jurisdiction interpreting or otherwise providing guidance as to applicable law; | |
| • | favorable or unfavorable decisions as the matter progresses; | |
| • | settlements agreed to in principle by the parties in the matter, subject to court approval; and | |
| • | final settlement of the matter. |
Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax Reserves. Welaws are complex and subject to federal, state, localdiffering interpretations between the taxpayer and foreign income taxes.the taxing authorities. Significant judgment is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties under FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). As required by FIN 48, which we adopted January 1, 2007, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. We estimatereview our tax positions quarterly and adjust the balance as new information becomes available.
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Prior to 2007, we estimated our liabilities for income tax exposure by evaluating our income tax reserves each quarterexposure based on the information available to us, and establishing reserves in accordance with the criteria for accrual under SFAS No. 5. In estimating this liability, we evaluateevaluated a number of factors in ascertaining whether we may have to pay additional taxes and interest when all examinations by taxing authorities are concluded. The actual amount accrued as a liability iswas based on an evaluation of the underlying facts and circumstances, a thorough researchanalysis of the technical merits of our arguments,tax positions taken, and an assessment of the chances of us prevailing in our arguments. We consult with external tax advisers in researching our conclusions. At December 31, 2005, we had accrued $4.9 million relating to our contingent liabilities for income taxes, as compared to $7.7 million at December 31, 2004. The decrease in the amount accrued for the 2005 period primarily relates to the reversal of a $3.3 million state tax reserve in connection with a change in estimate as well as a $2.0 million tax audit reserve associated with the favorable resolution of our 1998 and 1999 federal tax returns offset slightly by our normal tax accruals.positions taken.
If we make changes to our accruals in any of these areaswith respect to our self-insurance liabilities, or litigation or income tax reserves in accordance with the policies described above, these changes would impact our earnings. Increases to our accruals would reduce earnings and, similarly, reductions to our accruals would increase our earnings. A pre-tax change of $1.1 million in our estimates would result in a corresponding $0.01 change in our earnings per common share.
Stock-Based Compensation Expense. We account for stock-based compensation expense under Statement of Financial Accounting Standards No. 123,Share-Based Payment(“SFAS 123R”), and recognize share-based payment awards to our employees and directors at the estimated fair value on the grant date. Determining the fair value of any share-based awards requires information about several variables including, but not limited to, expected stock volatility over the terms of the awards, expected dividend yields and the predicted employee exercise behavior. We base expected life on historical exercise and post-vesting employment-termination experience, and expected volatility on historical realized volatility trends. In addition, all stock-based compensation expense is recorded net of an estimated forfeiture rate. The forfeiture rate is based upon historical activity and is analyzed at least quarterly as actual forfeitures occur. Stock options granted during the twelve months ended December 31, 2008 were valued using the binomial method pricing model with the following assumptions for employee options: expected volatility of 33.85% to 53.58%, a risk-free interest rate of 1.62% to 3.17%, no dividend yield, and an expected life of 4.20 years. For non-employee director options, the stock options granted during the twelve months ended December 31, 2008 were valued using the binomial method pricing model with the following assumptions: expected volatility of 41.26%, a risk-free interest rate of 3.54%, no dividend yield, and an expected life of 6.90 years. During the twelve months ended December 31, 2008, we recognized $3.3 million in pre-tax compensation expense related to stock options and restricted stock units granted.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this report. However, we do not suggest that other general risk factors, such as those discussed elsewhere in this report as well as changes in our growth objectives or performance of new or acquired stores, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Significant Accounting Policies
Our significant accounting policies are summarized below and in Note A to our consolidated financial statements included elsewhere herein.in this report.
Revenue. Merchandise is rented to customers pursuant to rental-purchaserental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term as payments are received and merchandise sales revenue is recognized when the customer exercises theirthe purchase option and pays the cash price due. Cash received prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue is accrued for uncollected amounts due based on historical collection experience. However, the total amount of the rental purchase agreement is not accrued because the customer can terminate the rental agreement at any time and we cannot enforce collection for non-payment of future rents. Because Get It Now makes
Revenue from the sale of merchandise in our retail sales on an installment credit basis, Get It Now’s revenuestores is recognized atwhen the time of such retail sale, asinstallment note is signed, the costcustomer has taken possession of the merchandise sold, net of a provision for uncollectible accounts. and collectability is reasonably assured.
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The revenue from our financial services is recorded differently depending on the type of transaction. Fees collected on loans are recognized ratably over the term of the loan. For money orders, wire transfers, check cashing and other customer service type transactions, fee revenue is recognized at the time of the transactions.service is performed.
Franchise Revenue. Revenue from the sale of rental merchandise is recognized upon shipment of the merchandise to the franchisee. Franchise fee revenue is recognized upon completion of substantially all services and satisfaction of all material conditions required under the terms of the franchise agreement.
Depreciation of Rental Merchandise. Depreciation of rental merchandise is included in the cost of rentals and fees on our statement of earnings. We depreciate our rental merchandise using the income forecasting method. Under the income forecasting method, merchandise held for rent is not depreciated and
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merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity-based method similar to the units of production method. On computers that are 24 months old or older and which have become idle, depreciation is recognized using the straight-line method for a period of at least six months, generally not to exceed an aggregate depreciation period of 3630 months. The purpose is to better reflect the depreciable life of a computer in our stores and to encourage the sale of older computers.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value net of accumulated depreciation of rental merchandise at time of sale. Cost of merchandise sold also includes the cost of services offered by us, such as prepaid telephone and electric services.
Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store level employees, together with marketdistrict managers’ salaries, travel and occupancy, including any related benefits and taxes, as well as all store level general and administrative expenses and selling, advertising, insurance, occupancy, delivery, fixed asset depreciation and other operating expenses.
General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, taxes and benefits, occupancy, administrative and other operating expenses.
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Results of Operations
The following table sets forth, for the periods indicated, historical Consolidated Statements of Earnings data as a percentage of total store and franchise revenues.
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||
| (Company-owned stores only) | (Franchise operations only) | ||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||
| Rentals and fees | 90.8 | % | 91.4 | % | 91.8 | % | — | % | — | % | — | % | |||||||||||||
| Merchandise Sales | 8.9 | 8.4 | 8.0 | 87.9 | 88.2 | 88.5 | |||||||||||||||||||
| Other/ Royalty income and fees | 0.3 | 0.2 | 0.2 | 12.1 | 11.8 | 11.5 | |||||||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
Operating Expenses | |||||||||||||||||||||||||
| Direct store expenses | |||||||||||||||||||||||||
| Cost of rentals and fees | 19.7 | % | 19.9 | % | 19.9 | % | — | % | — | % | — | % | |||||||||||||
| Cost of merchandise sold | 6.1 | 5.7 | 5.6 | 84.4 | 84.1 | 84.9 | |||||||||||||||||||
| Salaries and other expenses | 59.2 | 56.4 | 54.2 | — | — | — | |||||||||||||||||||
| 85.0 | 82.0 | 79.7 | 84.4 | 84.1 | 84.9 | ||||||||||||||||||||
| General and administrative expenses | 3.5 | 3.2 | 3.1 | 6.6 | 6.3 | 4.1 | |||||||||||||||||||
| Amortization of intangibles | 0.5 | 0.5 | 0.1 | 0.7 | 0.6 | 0.6 | |||||||||||||||||||
| Class action litigation (reversion) | (0.3 | ) | — | — | — | — | — | ||||||||||||||||||
| Restructuring charge | 0.7 | 2.1 | — | — | — | — | |||||||||||||||||||
| Total operating expenses | 89.4 | 87.8 | 82.9 | 91.7 | 91.0 | 89.6 | |||||||||||||||||||
| Operating profit | 10.6 | 12.2 | 17.1 | 8.3 | 9.0 | 10.4 | |||||||||||||||||||
| Interest, net and other income | 1.8 | 1.4 | 3.7 | (1.0 | ) | (0.9 | ) | (1.1 | ) | ||||||||||||||||
| Earnings before income taxes | 8.8 | % | 10.8 | % | 13.4 | % | 9.3 | % | 9.9 | % | 11.5 | % | |||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
| (Company-owned stores only) | (Franchise operations only) | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
| Rentals and fees | 88.0 | % | 90.6 | % | 90.9 | % | — | % | — | % | — | % | ||||||||||||
| Merchandise sales | 10.5 | 8.5 | 8.5 | 87.1 | 79.6 | 88.2 | ||||||||||||||||||
| Other/Royalty income and fees | 1.5 | 0.9 | 0.6 | 12.9 | 20.4 | 11.8 | ||||||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
Operating Expenses | ||||||||||||||||||||||||
| Direct store expenses | ||||||||||||||||||||||||
| Cost of rentals and fees | 20.1 | % | 20.0 | % | 19.9 | % | — | % | — | % | — | % | ||||||||||||
| Cost of merchandise sold | 7.5 | 5.9 | 6.0 | 83.0 | 76.1 | 84.6 | ||||||||||||||||||
| Salaries and other expenses | 58.0 | 58.9 | 57.9 | — | — | — | ||||||||||||||||||
| 85.6 | 84.8 | 83.8 | 83.0 | 76.1 | 84.6 | |||||||||||||||||||
| General and administrative expenses | 4.3 | 4.3 | 3.9 | 10.3 | 7.8 | 9.1 | ||||||||||||||||||
| Amortization and write-down of intangibles | 0.6 | 0.5 | 0.2 | — | — | 0.4 | ||||||||||||||||||
| Litigation expense (credit) | (0.2 | ) | 2.2 | 3.1 | — | — | — | |||||||||||||||||
| Restructuring charge | 0.2 | 1.4 | — | — | — | — | ||||||||||||||||||
| Total operating expenses | 90.5 | 93.2 | 91.0 | 93.3 | 83.9 | 94.1 | ||||||||||||||||||
| Operating profit | 9.5 | 6.8 | 9.0 | 6.7 | 16.1 | 5.9 | ||||||||||||||||||
| Interest, net and other income | 1.9 | 3.1 | 2.4 | (1.6 | ) | (1.6 | ) | (1.4 | ) | |||||||||||||||
| Earnings before income taxes | 7.6 | % | 3.7 | % | 6.6 | % | 8.3 | % | 17.7 | % | 7.3 | % | ||||||||||||
2008 Overview
Highlights of our operating results for the year ended December 31, 2005 increased slightly, while net earnings decreased from2008 include:
| • | Generated $384.7 million in operating cash flow. | |
| • | Reduced outstanding indebebtedness, including our subordinated notes and senior term loans, by $312.2 million. | |
| • | Repurchased 951,800 shares of our common stock for an aggregate of $13.4 million. | |
| • | Increased same store revenues by 2.3%. |
Comparison of the prior year primarily due to a decrease in same store sales, the impact of expenses related to our store
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| Estimated | |||||||||||||
| Expense Recognized | Remaining Charges | ||||||||||||
| Closing Plan Estimate | During 2005 | for 2006 | |||||||||||
| (In thousands) | |||||||||||||
| Lease obligations | $ | 8,661 - $13,047 | $ | 9,261 | $ | 0 - $3,786 | |||||||
| Fixed asset disposals | 2,630 - 4,211 | 3,333 | 0 - 878 | ||||||||||
| Net proceeds from stores sold | — | (2,250 | ) | — | |||||||||
Other costs(1) | 830 - 7,875 | 4,822 | 0 - 3,053 | ||||||||||
| Total | $ | 12,121 - $25,133 | $ | 15,166 | $ | 0 - $7,717 | |||||||
| Cash | |||||||||||||||||
| (Payments) | |||||||||||||||||
| September 30, 2005 | Charges to | Receipts or Asset | December 31, 2005 | ||||||||||||||
| Balance | Expense | Write-Offs | Balance | ||||||||||||||
| (In thousands) | |||||||||||||||||
| Lease obligations | $ | 5,341 | $ | 2,759 | $ | (2,736 | ) | $ | 5,364 | ||||||||
| Fixed asset disposals | — | 1,544 | (1,544 | ) | — | ||||||||||||
| Net proceeds from stores sold | — | (2,250 | ) | 2,250 | — | ||||||||||||
Other costs(1) | 658 | 86 | (653 | ) | 91 | ||||||||||||
| Total | $ | 5,999 | $ | 2,139 | $ | (2,683 | ) | $ | 5,455 | ||||||||
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Store Revenue. Total store revenue increaseddecreased by $29.8$17.1 million, or 1.3%0.6%, to $2,296.1$2,846.0 million for 2005in 2008 from $2,266.3$2,863.1 million for 2004.in 2007. The increasedecrease in total store revenue was primarily attributable to approximately $69.1 million315 fewer stores in incremental revenue from new stores and acquisitions, net of stores sold, during 2005 as comparedthe 2008 period, principally due to 2004,the 2007 store consolidation plan, offset by a decreasean increase in same store sales of 2.3%.
Same store revenues represent those revenues earned in 2,0432,201 stores that were operated by us for each of the entire years endingtwelve month periods ended December 31, 20052008 and 2004.2007. Same store revenues decreasedincreased by $39.3$43.5 million, or 2.3%, to $1,972.4 million in 20052008 as compared to 2004.$1,928.9 million in 2007. This decreaseincrease in same store revenues
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was primarily attributable to a decreasean increase in the average number of customersprice per unit on a per store basis during 2005rent and an increase in merchandise sales and financial services revenue in 2008 as compared to 2004.2007.
Franchise Revenue. Total franchise revenue decreased by $3.9$4.8 million, or 8.3%11.1%, to $38.2 million in 2008 as compared to $43.0 million for 2005 from $46.9 million in 2004.2007. This decrease was primarily attributable to a decreasethe receipt of accelerated royalty payments from five affiliated ColorTyme franchisees in merchandise sales to franchise locations as a result of 15 fewer franchised locations operating, on a weighted average basis, during 2005 as compared to 2004. The number of franchised locations operating in 2005 declined primarily as a resultconsideration of the purchasetermination of 54 franchised locations by otherRent-A-Center subsidiaries.their franchise agreements in 2007.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise and the costs associated with our membership programs which began in 2004.programs. Cost of rentals and fees for the year ended December 31, 2005, increased2008 decreased by $2.6$1.1 million, or 0.6%0.2%, to $452.6$572.9 million for the year ended December 31, 2005 as compared to $450.0$574.0 million in 2004. This increase is a result2007. Cost of an increase in store rental revenue in 2005 compared to 2004. Depreciation of rental merchandiserentals and fees expressed as a percentage of store rentals and fees revenue increased slightly to 22.9% in 2008 compared to 22.1% in 2007. This percentage increase was constant at 21.7% for 2005 and 2004.due to an increase in promotional activity in 2008 as compared to 2007.
Cost of Merchandise Sold. Cost of merchandise sold increased by $10.5$38.1 million, or 8.8%24.3%, to $129.6$194.6 million for 20052008 from $119.1$156.5 million in 2004. This increase was a result of an increase in the number of items sold in 2005 as compared to 2004.for 2007. The gross profitmargin percent of merchandise sales decreased slightly to 26.9% for 200524.2% in 2008 from 28.5%25.1% in 2004.2007. This percentage decrease was primarily attributable to an increased volume of sales of prepaid services at a decrease in the average purchase pricelower margin than our historical margins on merchandise sales, as well as increased promotional activity during 2005 as compared to 2004.the 2008 period.
Salaries and Other Expenses. Salaries and other expenses increaseddecreased by $80.8$33.2 million, or 6.3%2.0%, to $1,358.7$1,651.8 million for the year ended December 31, 2005in 2008 as compared to $1,277.9$1,685.0 million in 2004.2007. The increasedecrease was primarily the result of an increasea decrease in salaries and wages and occupancy costs, higher fuel expenses relating to product deliveries and utility costs, as well asassociated with the impact of inventory and fixed assets written-offdecrease in our store base due to Hurricanes Katrina, Ritaour 2007 store consolidation plan and Wilma.other restructuring items. Charge offs in our rental stores due to customer stolen merchandise, expressed as a percentage of rental store revenues, were approximately 2.5% in 2008 as compared to 2.8% in 2007. Salaries and other expenses expressed as a percentage of total store revenue increaseddecreased slightly to 59.2% for the year ended December 31, 200558.0% in 2008 from 56.4%58.9% in 2004. This percentage increase was primarily attributable to the decrease in same store sales during 2005 as compared to 2004.2007.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased by $3.2$1.0 million, or 8.0%3.1%, to $36.3$31.7 million for 2005 from $39.5 in 2004.2008 as compared to $32.7 million in 2007. This decrease was primarily attributable to a decrease in merchandise salesthe number of products sold to franchise locations as a result of 15 fewer franchised locations operating, on a weighted average basis, during 2005franchisees in 2008 as compared to 2004. The number of franchised locations operating in 2005 declined primarily as a result of the purchase of 54 franchised locations by otherRent-A-Center subsidiaries.2007.
General and Administrative Expenses. General and administrative expenses increased by $6.8$1.9 million, or 9.0%1.6%, to $82.3$125.6 million for the year ended December 31, 2005,in 2008 as compared to $75.5$123.7 million in 2004.2007. General and administrative expenses expressed as a percent of total revenue increased slightly to 3.5%4.4% in 20052008 from 3.3%4.3% in 2004. These increases are primarily attributable to additional personnel and related expansion at our
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Amortization and Write-Down of Intangibles. Amortization of intangibles increased by $925,000,approximately $900,000 or 8.6%5.7%, to $11.7$16.6 million for 20052008 from $10.8$15.7 million in 2004.for 2007. This increase was primarily attributable to the impairment charges recorded in connection with our store closing plan andgoodwill write-down for stores that closed due to Hurricane Katrinasold, offset by completed customer relationship amortization associated with previous acquisitions, suchintangible assets that were fully amortized during 2008 as the Rent Way, Rainbow and Rent-Rite acquisitions.compared to 2007.
Operating Profit. Operating profit decreasedincreased by $33.2$70.2 million, or 11.7%34.3%, to $249.8$274.4 million for the year ended December 31, 20052008 as compared to $283.0$204.2 million in 2004.2007. Operating profit as a percentage of total revenue decreasedincreased to 10.7%9.5% for the year ended December 31, 20052008 from 12.2% in 2004. These decreases were7.0% for 2007. This increase was primarily attributable to the litigation charge of $62.3 million recorded in the 2007 period.
Interest Expense. Interest expense decreased by $28.6 million, or 30.0%, to $66.2 million for 2008 as compared to $94.8 million in 2007. This decrease was attributable to a decrease in same store salesborrowings under our senior credit facilities in 2008 as compared to 2007, a reduction in amounts outstanding under our senior term loans and subordinated notes, and a decrease in our weighted average interest rate to 6.21% in 2008 as compared to 7.68% in 2007 due to a decrease in the increaseEurodollar rate in salaries and other expenses during 2005 versus 20042008 as discussed above.compared to 2007.
Income Tax Expense. Income tax expense decreasedincreased by $22.2$41.7 million, or 23.2%104.2%, to $73.3$81.7 million for the year ended December 31, 2005in 2008 as compared to $95.5$40.0 million in 2004.2007. This decreaseincrease is primarily attributable to a decreasean increase in earnings before taxes for 20052008 as compared to 2004, in addition to a decrease2007 and an increase in our overall effective tax rate to 35.07%36.9% for 20052008 as compared to 38.00%34.4% for 2004.2007. The 2008 increase in our overall effective tax rate decrease was the result of the reversal of a $3.3 million state tax reserve in connection with a change in estimate related to potential loss exposures and a $2.0 million tax audit reserve associated with the examination and favorable resolution of our 1998 and 1999 federal tax returns.
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Net Earnings. Net earnings increased by $63.3 million, or 83.1%, to $139.6 million for 2008 as compared to $76.3 million in 2007. This increase was primarily attributable to an increase in salariesoperating profit, a gain on debt extinguishment and other expenses during 2005 versus 2004 as discussed above,a decrease in interest expense, offset by a pre-tax litigation reversionan increase in income tax expense in 2008 as compared to 2007.
Comparison of $8.0 millionthe Years ended December 31, 2007 and the tax credits discussed above.2006
Store Revenue. Total store revenue increased by $89.1$470.4 million, or 4.1%19.7%, to $2,266.3$2,863.1 million for 2004in 2007 from $2,177.2$2,392.7 million for 2003.in 2006. The increase in total store revenue was primarily attributable to approximately $155.8 million in incremental revenue from new stores and acquisitions, net of stores sold, during 2004 as compared to 2003, offset by a decreaseprimarily the Rent-Way acquisition, and an increase in same store sales of 3.6%2.1%.
Same store revenues represent those revenues earned in 1,9371,935 stores that were operated by us for each of the entire years endingtwelve month periods ended December 31, 20042007 and 2003.2006. Same store revenues decreasedincreased by $60.9$35.3 million, or 3.6%2.1%, to $1,729.6 million in 20042007 as compared to 2003.$1,694.3 million in 2006. This decreaseincrease in same store revenues was primarily attributable to a decreasemore units on rent in the average number of customers on a per store basis during 20042007 as compared to 2003.2006.
Franchise Revenue. Total franchise revenue decreasedincreased by $4.0$1.8 million, or 7.9%4.3%, to $46.9 million for 2004 from $50.9$43.0 million in 2003.2007 as compared to $41.2 million in 2006. This decreaseincrease was primarily attributable to the receipt of accelerated royalty payments in the amount of approximately $3.9 million from five affiliated ColorTyme franchisees in consideration of the termination of their franchise agreements, offset by a decrease in merchandise salesthe number of products sold to franchise locations as a result of 16 fewer franchised locations operating by the end of 2004franchisees in 2007 as compared to 2003. The number of franchised locations operating in 2004 declined primarily as a result of2006 due to fewer new franchise stores together with the purchase of 27 franchised locations by otherRent-A-Center subsidiaries.in 2007.
Cost of Rentals and Fees. Cost of rentals and fees consists of depreciation of rental merchandise and the costs associated with our membership programs which began in 2004. Depreciation of rental merchandise, which accounts for 99.2% of the costprograms. Cost of rentals and fees for the year ended December 31, 2004,2007 increased by $13.9$97.6 million, or 3.2%20.5%, to $446.6$574.0 million for the year ended December 31, 2004 as compared to $432.7$476.5 million in 2003.2006. This increase is a result of an increase in store rental revenue in 2004for 2007 as compared to 2003. Depreciation2006. Cost of rental merchandiserentals and fees expressed as a percentage of store rentals and fees revenue was constant at 21.6% for 2004 and 2003.increased slightly to 22.1% in 2007 compared to 21.9% in 2006.
Cost of Merchandise Sold. Cost of merchandise sold increased by $6.8$25.1 million, or 6.1%19.1%, to $119.1$156.5 million for 20042007 from $112.3$131.4 million in 2003.for 2006. This increase was aprimarily the result of approximately $13.1 million of cost of sales for prepaid telephone service offered in our stores, as well as an increase in the number of items sold
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Salaries and Other Expenses. Salaries and other expenses increased by $97.8$299.5 million, or 8.3%21.6%, to $1,277.9$1,685.0 million for the year ended December 31, 2004in 2007 as compared to $1,180.1$1,385.4 million in 2003.2006. The increase was primarily the result of an increase in salariesexpenses associated with the increase in our store base due to the acquisition of Rent-Way and wages andincludes increases in labor expense of $157.8 million, occupancy costs of $31.1 million, utility costs of $10.7 million, expenses relating to product deliveries of $25.2 million, communication expenses of $13.9 million and charge offs due to an increased numbercustomer stolen merchandise of $20.3 million. Charge offs in our rental stores due to customer stolen merchandise, expressed as a percentage of rental store revenues, were approximately 2.8% in the 2004 period. For the year ending December 31, 2004, there were 228 more stores, on a weighted average basis, operating during the year2007 as compared to 2003.2.4% in 2006. Salaries and other expenses expressed as a percentage of total store revenue increased slightly to 56.4% for the year ended December 31, 200458.9% in 2007 from 54.2%57.9% in 2003. This increase was primarily attributable to the decrease in same store sales coupled with an increase in salaries and other expenses of $104.5 million during 2004 compared to 2003 resulting from an increase in our store base, which was offset by a decrease of approximately $6.7 million in salaries and other expense incurred by our mature stores.2006.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased by $3.7$2.1 million, or 8.7%6.1%, to $39.5$32.7 million for 2004 from $43.2 in 2003.2007 as compared to $34.9 million in 2006. This decrease was primarily attributable to a decrease in merchandise salesthe number of products sold to franchise locations as a result of 16 fewer franchised locations operating by the end of 2004franchisees in 2007 as compared to 2003. The number of franchised locations operating in 2004 declined primarily as a result of2006 due to fewer new franchise stores together with the purchase of 27 franchised locations by otherRent-A-Center subsidiaries.in 2007.
General and Administrative Expenses. General and administrative expenses increased by $8.9$30.1 million, or 13.3%32.2%, to $75.5$123.7 million for the year ended December 31, 2004,in 2007 as compared to $66.6$93.6 million in 2003.2006. General and administrative expenses expressed as a percent of total revenue increased to 3.3%4.3% in 20042007 from 3.0%3.8% in 2003.2006. These increases are primarily attributable to the operation of the Rainbow Rentalsadditional personnel and Rent Rite headquarters during the integration and transition period pursuant to those acquisitions,related expansion at our corporate office to support current and future store growth, as well as the impactincluding our plans to expand into complementary lines of the decreasebusiness in our same stores sales for 2004.rent-to-own stores.
Amortization and Write-Down of Intangibles. Amortization of intangibles decreasedincreased by $1.7$10.2 million or 13.8%182.3%, to $10.8$15.7 million for 20042007 from $12.5$5.6 million in 2003.for 2006. This decreaseincrease was primarily attributable to the completed
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amortization of certain intangibles particularlyfrom the $7.9 million in customer relationships associated with the 2003 acquisition of 295 stores from Rent-Way. The decrease dueRent-Way, which were included in amortization expense for the entire twelve months ended December 31, 2007, compared to the completion of amortization of certain intangibles was offset by the addition of customer relationship and non-compete amortization related to the Rainbow Rentals and Rent Rite acquisitionsapproximately 45 days in May 2004.2006.
Operating Profit. Operating profit decreased by $87.0$17.7 million, or 23.5%8.0%, to $283.0$204.2 million for the year ended December 31, 20042007 as compared to $370.0$221.9 million in 2003. Excluding the pre-tax litigation charges of $47.0 million recorded in 2004, operating profit decreased $40.0 million, or 10.8%, to $330.0 million for the year ended December 31, 2004 as compared to $370.0 million in 2003.2006. Operating profit as a percentage of total revenue decreased to 14.3%7.0% for the year ended December 31, 2004 before the pre-tax litigation charge of $47.0 million,2007 from 16.6%9.1% for the year ended December 31, 2003. These decreases, excluding the pre-tax litigation charge, were2006. This decrease was primarily attributable to the decreasea $38.7 million charge related to our store consolidation plan and other restructuring items, offset by a net increase in same store sales during 2004 versus 2003revenues and incremental revenue from new stores and acquisitions, primarily the increase in salaries and other expensesRent-Way acquisition, as discussed above. For the year ended December 31, 2004, there were 228 more stores, on a weighted average basis, operating during the year
Interest Expense. Interest expense increased by $36.2 million, or 61.9%, to $94.8 million for 2007 as compared to 2003, many of which are not yet performing at the level of a mature store.
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Income Tax Expense. Income tax expense decreased by $13.8$21.0 million, or 12.6%34.4%, to $95.5$40.0 million for the year ended December 31, 2004in 2007 as compared to $109.3$61.0 million in 2003.2006. This decrease is primarily attributable to a decrease in earnings before taxes for 20042007 as compared to 2003, offset by2006 and a slight increasedecrease in our overall effective tax rate to 38.0%34.4% for 20042007 as compared to 37.6%37.1% for 2003.
Net Earnings. Net earnings decreased by lower interest expense during 2004$26.8 million, or 26.0%, to $76.3 million for 2007 as compared to 2003.$103.1 million in 2006. This decrease was primarily attributable to a decrease in operating profit and an increase in interest expense, offset by a decrease in income tax expense, as discussed above.
Quarterly Results
The following table contains certain unaudited historical financial information for the quarters indicated. All prices and amounts have been adjusted to reflect the 5-for-2 split of our common stock effected in August 2003.
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||
Year ended December 31, 2005 | |||||||||||||||||
| Revenues | $ | 601,809 | $ | 580,578 | $ | 573,507 | $ | 583,213 | |||||||||
| Operating profit | 85,992 | 72,988 | 30,980 | (2) | 59,811 | ||||||||||||
| Net earnings | 47,669 | (1) | 41,742 | 11,277 | 35,050 | (3) | |||||||||||
| Basic earnings per common share | $ | 0.64 | $ | 0.56 | $ | 0.15 | $ | 0.50 | |||||||||
| Diluted earnings per common share | $ | 0.63 | $ | 0.55 | $ | 0.15 | $ | 0.50 | |||||||||
Year ended December 31, 2004 | |||||||||||||||||
| Revenues | $ | 585,380 | $ | 572,985 | $ | 569,607 | $ | 585,283 | |||||||||
| Operating profit | 92,659 | 90,223 | 24,344 | (4) | 75,725 | ||||||||||||
| Net earnings | 52,209 | 51,194 | 5,573 | 46,879 | |||||||||||||
| Basic earnings per common share | $ | 0.65 | $ | 0.64 | $ | 0.07 | $ | 0.63 | |||||||||
| Diluted earnings per common share | $ | 0.63 | $ | 0.62 | $ | 0.07 | $ | 0.61 | |||||||||
Year ended December 31, 2003 | |||||||||||||||||
| Revenues | $ | 566,406 | $ | 553,260 | $ | 549,825 | $ | 558,659 | |||||||||
| Operating profit | 96,291 | 97,238 | 87,502 | 88,991 | |||||||||||||
| Net earnings | 50,959 | 35,300 | 43,738 | 51,499 | |||||||||||||
| Basic earnings per common share | $ | 0.58 | $ | 0.40 | $ | 0.54 | $ | 0.64 | |||||||||
| Diluted earnings per common share | $ | 0.57 | $ | 0.39 | $ | 0.52 | $ | 0.62 | |||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2008 | ||||||||||||||||
| Revenues | $ | 756,636 | $ | 719,031 | $ | 708,755 | $ | 699,750 | ||||||||
| Operating profit | 77,540 | 74,434 | 58,549 | 63,865 | ||||||||||||
| Net earnings | 36,358 | 37,741 | 29,379 | 36,146 | ||||||||||||
| Basic earnings per common share | $ | 0.55 | $ | 0.57 | $ | 0.44 | $ | 0.54 | ||||||||
| Diluted earnings per common share | $ | 0.54 | $ | 0.56 | $ | 0.44 | $ | 0.54 | ||||||||
Year ended December 31, 2007 | ||||||||||||||||
| Revenues | $ | 755,299 | $ | 724,158 | $ | 709,701 | $ | 716,963 | ||||||||
| Operating profit | 46,155 | 87,024 | 60,575 | 10,483 | ||||||||||||
| Net earnings(loss) | 15,103 | 41,251 | 25,275 | (5,361 | ) | |||||||||||
| Basic earnings(loss) per common share | $ | 0.21 | $ | 0.59 | $ | 0.37 | $ | (0.08 | ) | |||||||
| Diluted earnings(loss) per common share | $ | 0.21 | $ | 0.58 | $ | 0.37 | $ | (0.08 | ) | |||||||
Year ended December 31, 2006 | ||||||||||||||||
| Revenues | $ | 606,975 | $ | 583,623 | $ | 587,184 | $ | 656,126 | ||||||||
| Operating profit | 75,484 | 75,193 | 51,871 | 19,396 | ||||||||||||
| Net earnings(loss) | 40,328 | 39,843 | 25,241 | (2,320 | ) | |||||||||||
| Basic earnings(loss) per common share | $ | 0.58 | $ | 0.57 | $ | 0.36 | $ | (0.03 | ) | |||||||
| Diluted earnings(loss) per common share | $ | 0.57 | $ | 0.56 | $ | 0.36 | $ | (0.03 | ) | |||||||
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| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||
| (As a percentage of revenues) | |||||||||||||||||
Year ended December 31, 2005 | |||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| Operating profit | 14.3 | 12.6 | 5.4 | (2) | 10.3 | ||||||||||||
| Net earnings | 7.9 | (1) | 7.2 | 2.0 | 6.0 | (3) | |||||||||||
Year ended December 31, 2004 | |||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| Operating profit | 15.8 | 15.7 | 4.3 | (4) | 12.9 | ||||||||||||
| Net earnings | 8.9 | 8.9 | 1.0 | 8.0 | |||||||||||||
Year ended December 31, 2003 | |||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| Operating profit | 17.0 | 17.6 | 15.9 | 15.9 | |||||||||||||
| Net earnings | 9.0 | 6.4 | 8.0 | 9.2 | |||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| (As a percentage of revenues) | ||||||||||||||||
Year ended December 31, 2008 | ||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Operating profit | 10.2 | 10.4 | 8.3 | 9.1 | ||||||||||||
| Net earnings | 4.8 | 5.2 | 4.1 | 5.2 | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Operating profit | 6.1 | 12.0 | 8.5 | 1.5 | ||||||||||||
| Net earnings(loss) | 2.0 | 5.7 | 3.6 | (0.7 | ) | |||||||||||
Year ended December 31, 2006 | ||||||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Operating profit | 12.4 | 12.9 | 8.8 | 3.0 | ||||||||||||
| Net earnings(loss) | 6.6 | 6.8 | 4.3 | (0.4 | ) | |||||||||||
Liquidity and Capital Resources
Overview. For the year ended December 31, 2005,2008, we generated approximately $187.9$384.7 million in operating cash flow. In addition to funding operating expenses, we used approximately $60.2$61.9 million in cash for capital expenditures, approximately $38.3$15.7 million in acquisitions of existingrent-to-ownrent-to-own stores, $13.4 million for common stock repurchases and approximately $118.4$307.9 million for a reduction in stock repurchases.debt of $312.2 million. We ended the year with approximately $57.6$87.4 million in cash and cash equivalents.
Analysis of Cash Flow.Cash provided by operating activities decreasedincreased by $143.1$144.3 million to $187.9$384.7 million for 2008 from $240.4 million in 2005 from $331.0 million in 2004.2007. This decreaseincrease is attributable to a decreasean increase in net earnings changesand an increase in deferred income taxes resulting from the reversalas a result of the effect that the Job Creation and Workers AssistanceEconomic Stimulus Act of 2002 had on our cash flow2008 as discussed underDeferred Taxes below, and changes in accrued liabilities. The change in our accrued liabilities is primarily due to the litigation settlement accrual of $47.0 million recorded in the third quarter of 2004 and then paid in 2005.working capital.
Cash used in investing activities decreased by $136.5$46.1 million to $96.0$71.5 million for 2008 from $117.6 million in 2005 from $232.5 million in 2004.2007. This decrease is primarily attributable to the acquisitioncompletion of Rent Riteconstruction of our new corporate headquarters building in 2007 and Rainbow Rentalsa reduction in May 2004 as well as a decreaseacquisitions of businesses in property assets purchased during 20052008 as compared to 2004.2007.
Cash used in financing activities decreasedincreased by $90.6$205.4 million to $93.1$323.2 million for 2008 from $117.8 million used in 2005 from $183.7 million2007. This increase in 2004. This decrease2008 as compared to 2007 is primarily related to decreasepayments made to reduce our outstanding debt and subordinated notes, offset by the purchase in stock repurchases in 2005 as compared to 2004.2008 of fewer shares of common stock.
Liquidity Requirements. Our primary liquidity requirements are for debt service, rental merchandise purchases, capital expenditures, litigation expenses, including settlements or judgments, and implementation of our growth strategies, including store expansion and investment in our financial services business. Our primary sources of liquidity have been cash provided by operations borrowings and sales of debt and equity securities.borrowings. In the future, to provide any additional funds necessary for the continued pursuit of our operating and growth strategies, we may incur from time to time additional shortshort-term or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number
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of factors, some of which relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. The global financial markets have recently experienced adverse conditions and continued volatility in the capital markets may affect our ability to access additional sources of financing. There can be no assurance that additional financing will be available, or if available, that it will be on terms we find acceptable.
We believe that the cash flow generated from operations, together with amounts available under our senior credit facilities, will be sufficient to fund our debt serviceliquidity requirements rental merchandise purchases, capital expenditures, and our store expansion programsas discussed above (including mandatory principal payments) during 2006.the next twelve months. Our revolving credit facilities, including our $10.0$20.0 million line of credit at Intrust Bank, provide us with revolving loans in an aggregate principal amount not exceeding $260.0$420.0 million, of which $110.5$287.8 million was available at March 8, 2006.February 20, 2009. At March 8, 2006,February 20, 2009, we had $91.0$140.5 million in cash. To the extent we have available cash that is not necessary to fund the items listed above, we intend to make additional payments to service our existing debt, and may repurchase additional shares of our common stock or repurchase
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