SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneFOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
Commission File Number 0-25370
RENT-A-CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
(972) 801-1100
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
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 X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 9,November 8, 2002:
Class Outstanding
- ---------------------------------------- ------------------------------------------------------------------ -----------
Common stock, $.01 par value per share 35,134,79634,935,423
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of JuneSeptember 30, 2002 and
December 31, 2001 3
Consolidated Statements of Earnings for the sixnine months ended
4
JuneSeptember 30, 2002 and 2001 4
Consolidated Statements of Earnings for the three months ended
5
JuneSeptember 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the sixnine months ended
6
JuneSeptember 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
14
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) JUNESEPTEMBER 30, DECEMBER 31,
2002 2001
------------------------ ------------
UNAUDITED
ASSETS
Cash and cash equivalents ................................................................... $ 93,824110,261 $ 107,958
Accounts receivable - trade .................................... 1,889........................... 2,885 1,664
Prepaid expenses and other assets .............................. 31,335..................... 28,043 29,846
Rental merchandise, net
On rent ...................................................... 517,500............................................. 505,397 531,627
Held for rent ................................................ 131,705....................................... 119,197 122,074
Property assets, net ........................................... 104,253.................................. 105,786 106,883
Deferred income tax assets ................................................................. -- 8,772
Intangible assets, net ......................................... 724,091................................ 739,489 711,096
----------- -----------------------
$ 1,604,5971,611,058 $ 1,619,920
=========== =======================
LIABILITIES
Accounts payable - trade ..................................................................... $ 47,95950,898 $ 49,930
Accrued liabilities ............................................ 201,453................................... 197,774 170,196
Deferred income tax liabilities ................................ 6,387....................... 19,688 --
Senior debt .................................................... 300,000........................................... 260,000 428,000
Subordinated notes payable, net of discount .................... 274,543........... 273,312 274,506
----------- ------------
830,342-----------
801,672 922,632
COMMITMENTS AND CONTINGENCIES ................................................................... -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock,
net of placement costs, $.01 par value; 5,000,000
shares authorized; 200,7622 and 292,434 shares issued
and outstanding in 2002 and 2001, respectively ......................................... 200,702...... 2 291,910
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 125,000,000 shares
authorized; 31,957,90239,391,892 and 27,726,092 shares
issued in 2002 and 2001, respectively .................................. 320............... 394 277
Additional paid-in capital ..................................... 316,437............................ 527,697 191,438
Accumulated comprehensive loss ................................. (5,655)........................ (5,509) (6,319)
Retained earnings .............................................. 347,175..................................... 383,405 269,982
Treasury stock, 3,938,2654,179,669 and 2,224,179 shares at
cost in 2002 and 2001, respectively ................................ (84,724)................. (96,603) (50,000)
----------- ------------
573,553-----------
809,384 405,378
----------- -----------------------
$ 1,604,5971,611,058 $ 1,619,920
=========== =======================
See accompanying notes to consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA) SIXNINE MONTHS ENDED JUNESEPTEMBER 30,
--------------------------------------------------------
2002 2001
---------- ----------------------- -----------
UNAUDITED
Revenues
Store
Rentals and fees ....................................................... $ 899,8541,356,062 $ 802,1461,213,387
Merchandise sales ........................... 63,599 50,871.......................... 88,309 72,440
Other ....................................... 1,181 2,238...................................... 1,742 2,878
Franchise
Merchandise sales ........................... 25,739 24,259.......................... 37,305 36,346
Royalty income and fees ..................... 2,897 2,947
---------- ----------
993,270 882,461.................... 4,413 4,484
----------- -----------
1,487,831 1,329,535
Operating expenses
Direct store expenses
Depreciation of rental merchandise .......... 186,577 165,088......... 282,085 251,286
Cost of merchandise sold .................... 44,479 37,000................... 62,950 54,176
Salaries and other expenses ................. 527,097 486,584................ 795,649 748,576
Franchise cost of merchandise sold ............. 24,537 23,197
---------- ----------
782,690 711,869............ 35,598 34,821
----------- -----------
1,176,282 1,088,859
General and administrative expenses ............ 32,402 26,803........... 47,727 40,777
Amortization of intangibles .................... 1,642 14,664
---------- ----------................... 3,199 22,402
Non-recurring litigation settlements .......... -- 16,000
----------- -----------
Total operating expenses ................. 816,734 753,336................ 1,227,208 1,168,038
Operating profit ......................... 176,536 129,125
Non-recurring finance charge ..................... 2,909 --........................ 260,623 161,497
Interest expense ................................. 31,355 32,378................................ 49,565 47,215
Interest income .................................. (1,428) (588)
---------- ----------................................. (2,016) (870)
----------- -----------
Earnings before income taxes ............. 143,700 97,335............ 213,074 115,152
Income tax expense ............................... 58,194 44,792
---------- ----------.............................. 86,119 52,635
----------- -----------
NET EARNINGS ............................. 85,506 52,543............................ 126,955 62,517
Preferred dividends .............................. 8,890 9,378
---------- ----------............................. 10,211 12,087
----------- -----------
Net earnings allocable to common stockholders ....... $ 76,616116,744 $ 43,165
========== ==========50,430
=========== ===========
Basic earnings per common share ................................... $ 3.054.24 $ 1.71
========== ==========1.96
=========== ===========
Diluted earnings per common share ............................... $ 2.343.48 $ 1.43
========== ==========1.68
=========== ===========
See accompanying notes to consolidated financial statements.
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNESEPTEMBER 30,
-----------------------------------------------------------
2002 2001
---------- --------------------- ------------
UNAUDITED
Revenues
Store
Rentals and fees ............................................................. $ 456,149456,208 $ 409,023411,241
Merchandise sales ................................ 23,994 20,112........................... 24,710 21,569
Other ............................................ 567 908....................................... 561 640
Franchise
Merchandise sales ................................ 12,486 11,232........................... 11,566 12,087
Royalty income and fees .......................... 1,464 1,484
---------- ----------
494,660 442,759..................... 1,516 1,537
--------- ---------
494,561 447,074
Operating expenses
Direct store expenses
Depreciation of rental merchandise ............... 94,354 84,276.......... 95,508 86,198
Cost of merchandise sold ......................... 17,497 15,445.................... 18,471 17,176
Salaries and other expenses ...................... 264,478 244,365................. 268,552 261,992
Franchise cost of merchandise sold .................. 11,884 10,703
---------- ----------
388,213 354,789............. 11,061 11,624
--------- ---------
393,592 376,990
General and administrative expenses ................. 17,285 13,934............ 15,325 13,974
Amortization of intangibles ......................... 922 7,396
---------- ----------.................... 1,557 7,738
Non-recurring litigation settlement ............ -- 16,000
--------- ---------
Total operating expenses ...................... 406,420 376,119................. 410,474 414,702
Operating profit .............................. 88,240 66,640
Non-recurring finance charge .......................... 2,909 --......................... 84,087 32,372
Interest expense ...................................... 15,557 15,868................................. 15,301 14,837
Interest income ....................................... (705) (227)
---------- ----------.................................. (588) (282)
--------- ---------
Earnings before income taxes .................. 70,479 50,999............. 69,374 17,817
Income tax expense .................................... 28,536 23,454
---------- ----------............................... 27,925 7,843
--------- ---------
NET EARNINGS .................................. 41,943 27,545............................. 41,449 9,974
Preferred dividends ................................... 3,898 5,053
---------- ----------.............................. 1,321 2,709
--------- ---------
Net earnings allocable to common stockholders ............. $ 38,04540,128 $ 22,492
========== ==========7,265
========= =========
Basic earnings per common share ......................................... $ 1.481.24 $ 0.88
========== ==========0.27
========= =========
Diluted earnings per common share ..................................... $ 1.14 $ 0.74
========== ==========0.26
========= =========
See accompanying notes to consolidated financial statements.
5
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIXNINE MONTHS ENDED JUNESEPTEMBER 30,
-----------------------------------------------------------
(IN THOUSANDS OF DOLLARS) 2002 2001
---------- --------------------- -----------
UNAUDITED
Cash flows from operating activities
Net earnings ........................................................................................................ $ 85,506126,955 $ 52,54362,517
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation of rental merchandise ................................... 186,577 165,088..................... 282,085 251,286
Depreciation of property assets ...................................... 18,878 18,312........................ 28,525 28,106
Amortization of intangibles .......................................... 1,642 14,664............................ 3,199 22,402
Amortization of financing fees ....................................... 4,289 1,380......................... 5,451 2,070
Changes in operating assets and liabilities, net of
effects of Acquisitions
Rental merchandise ................................................... (174,455) (205,454)..................................... (238,606) (291,696)
Accounts receivable - trade .......................................... (225) 1,795............................ (1,221) 437
Prepaid expenses and other assets .................................... (900) (2,389)...................... (6,327) (3,946)
Deferred income taxes ................................................ 15,159 20,717.................................. 28,460 28,395
Accounts payable - trade ............................................. (1,971) (18,218)............................... 968 (2,669)
Accrued liabilities .................................................. 38,381 15,140
---------- ----------.................................... 36,194 19,903
--------- ---------
Net cash provided by operating activities ......................... 172,881 63,578........... 265,683 116,805
Cash flows from investing activities
Purchase of property assets ............................................ (16,791) (29,685).............................. (27,606) (42,282)
Proceeds from sale of property assets .................................. 581 356.................... 216 395
Acquisitions of businesses net of cash acquired ....................... (27,179) (34,534)
---------- ----------............................... (43,322) (44,943)
--------- ---------
Net cash used in investing activities ............................. (43,389) (63,863)............... (70,712) (86,830)
Cash flows from financing activities
Purchase of treasury stock ............................................. (34,724)............................... (46,603) --
Exercise of stock options .............................................. 19,098 21,562................................ 23,185 24,819
Proceeds from issuance of common stock .................................................... -- 45,677
Repurchase of subordinated notes ......................... (1,250) --
Repayments of debt ..................................................... (128,000) (76,051)
---------- ----------....................................... (168,000) (108,031)
--------- ---------
Net cash used in financing activities ......................... (143,626) (8,812)........... (192,668) (37,535)
NET DECREASEINCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................................... (14,134) (9,097).................................... 2,303 (7,560)
Cash and cash equivalents at beginning of period ...................................... 107,958 36,495
---------- ------------------- ---------
Cash and cash equivalents at end of period .................................................. $ 93,824110,261 $ 27,398
========== ==========28,935
========= =========
Supplemental cash flow information
Cash paid during the year for:
Interest ............................................................................................................ $ 26,34547,468 $ 31,33750,020
Income taxes .................................................................................................... $ 17,60929,225 $ 6,7988,239
Supplemental schedule of non-cash investing and financing
activities
Fair value of assets acquired ............................................................................ $ 27,17943,322 $ 34,53444,943
Cash paid .................................................................................................................... $ 27,17943,322 $ 34,534
---------- ----------44,943
--------- ---------
Liabilities assumed ................................................................................................ $ -- $ --
========== =================== =========
DuringFor the second quarter ofnine month period ending September 30, 2002 and 2001, we paid dividends
on our Series A preferred stock of approximately $2.7$10.2 million and $2.6$12.1
million, by
issuing 2,730 and 2,630 shares of Series A preferred stock, respectively.
See accompanying notes to consolidated financial statements.
6
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements of Rent-A-Center, Inc. included herein
have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the
Commission's rules and regulations, although we believe that the
disclosures are adequate to make the information presented not misleading.
We suggest that these financial statements be read in conjunction with the
financial statements and notes included in our Annual Report on Form 10-K
for the year ended December 31, 2001, and our Quarterly Report on Form 10-Q for
the three months ended March 31, 2002 and our Quarterly Report on Form 10-Q
for the six months ended June 30, 2002. In our opinion, the accompanying
unaudited interim financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary to present fairly our
results of operations and cash flows for the periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year.
2. Intangibles. In June 2001, the Financial Accounting Standards Board issued
SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
Intangible Assets. These statements established new accounting and
reporting standards for business combinations and associated goodwill and
intangible assets and require, among other things, the elimination of the
pooling of interests method of accounting and amortization of acquired
goodwill as well as periodic assessment for impairment of all goodwill and
intangible assets acquired in a business combination. SFAS No. 142 is
effective for our fiscal year beginning January 1, 2002. We conducted the
transitional test of the fair value of our goodwill outstanding as of
December 31, 2001 as required and determined there was no impairment as of
that date. Accordingly, the implementation of SFAS No. 142 had no effect on
our financial statements or operating results. Under SFAS No. 142, goodwill
is subject to an annual assessment for impairment using a prescribed
fair-value based test.
Intangibles consist of the following (in thousands):
JUNESEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
AVG. GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- -------- ------------ -------- ------------
Amortizable intangible assets
Franchise network...........network ........... 10 $ 3,000 $ 1,8001,875 $ 3,000 $ 1,650
Non-compete agreements......agreements ...... 5 1,500 1,3671,510 1,406 1,677 1,405
Customer contracts..........contracts .......... 1.5 6,684 3,18910,848 4,633 3,994 1,882
Intangible assets not subject
to amortization
Goodwill.................... $818,425Goodwill .................... $831,207 $ 99,162 $806,524 $ 99,162
-------- --------- -------- ------------------ --------
Total intangibles............... $829,609 $ 105,518intangibles ............... $846,565 $107,076 $815,195 $ 104,099$104,099
======== ========= ======== ================== ========
AGGREGATE AMORTIZATION EXPENSE
Three months ended JuneSeptember 30, 2002............... $ 9221,557
Three months ended JuneSeptember 30, 2001............... $ 7,396
Six7,738
Nine months ended JuneSeptember 30, 2002.................2002................ $ 1,642
Six3,199
Nine months ended JuneSeptember 30, 2001................. $14,6642001................ $22,402
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION REGARDING INTANGIBLE ASSETS AND AMORTIZATION.
Estimated amortization expense for each of the years ending December 31, is as
follows:
ESTIMATED AMORTIZATION
EXPENSE
------------------------------------------
(IN THOUSANDS)
2002........2002.................. $ 3,572
2003........ 2,149
2004........ 300
2005........ 300
2006........4,726
2003.................. 5,159
2004.................. 307
2005.................. 302
2006.................. 149
----------
TOTAL....... $ 6,470
==========-------
TOTAL................. $10,643
=======
Changes in the carrying amount of goodwill for the sixnine months ended JuneSeptember
30, 2002 are as follows (in thousands):
Balance as of January 1, 2002 $ 707,362$707,362
Acquisitions through JuneSeptember 30, 2002 11,901
---------24,683
--------
Balance as of JuneSeptember 30, 2002 $ 719,263
=========$732,045
========
Goodwill and intangible assets recognized prior to July 1, 2001 were amortized
through December 31, 2001. At JuneSeptember 30, 2002, quarterly and annualyear to date
goodwill amortization of approximately $7.3$7.5 million and $29.0$23.0 million willwere not be
recognized in accordance with SFAS No. 142.
Below is a schedule showing the pro forma effect of SFAS No. 142 for the sixnine
and three months ended JuneSeptember 30, 2002 in comparison to the sixnine and three
months ended JuneSeptember 30, 2001.
(IN THOUSANDS, EXCEPT PER SHARE DATA) SIXNINE MONTHS ENDED JUNESEPTEMBER 30,
-----------------------------------------------------------
2002 2001
------------------- ----------
UNAUDITED
Net earnings ................................................................................. $126,955 $ 85,506 $ 52,54362,517
Goodwill amortization, net of tax ....................................... -- 12,359
---------- ----------18,725
-------- --------
Adjusted net earnings ............................................................... $126,955 $ 85,506 $ 64,902
========== ==========81,242
======== ========
Diluted weighted average shares outstanding .............. 36,518 36,785
========== ==========..... 36,489 37,117
======== ========
Diluted earnings per common share before
goodwill amortization ...................................................................... $ 2.343.48 $ 1.76
========== ==========2.19
======== ========
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNESEPTEMBER 30,
------------------------------------------------------------
2002 2001
---------- ---------------------
UNAUDITED
Net earnings ................................................................................... $ 41,94341,449 $ 27,5459,974
Goodwill amortization, net of tax .......................................... -- 6,197
---------- ----------6,380
-------- --------
Adjusted net earnings........................................earnings ........................... $ 41,94341,449 $ 33,742
========== ==========16,354
======== ========
Diluted weighted average shares outstanding.................. 36,715 37,195
========== ==========outstanding ..... 36,431 37,779
======== ========
Diluted earnings per common share before
goodwill amortization .................................................................. $ 1.14 $ 0.91
========== ==========0.43
======== ========
8
RENT-A-CENTER, INC. AND SUBSIDIARIES
3. EARNINGS PER SHARE
Basic and diluted earnings per common share is computed based on the
following information:
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNESEPTEMBER 30, 2002
----------------------------------------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ -------------- ---------
Basic earnings per common share ....................... $ 38,045 25,708 $ 1.48..... $40,128 32,355 $1.24
Effect of dilutive stock options .......................... -- 1,6411,344
Assumed conversion of convertible
preferred stock ...................................... 3,898 9,366
------------ --------.................... 1,321 2,732
------- ------
Diluted earnings per common share ..................... $ 41,943 36,715 $ 1.14
============ ======== =========... $41,449 36,431 $1.14
======= ====== =====
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNESEPTEMBER 30, 2001
----------------------------------------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ -------------- ---------
Basic earnings per common share........................share ..... $ 22,492 25,672 $ 0.887,265 26,666 $0.27
Effect of dilutive stock options.......................options .... -- 1,248742
Assumed conversion of convertible
preferred stock....................................... 5,053 10,275
------------ --------stock .................... 2,709 10,371
------- ------
Diluted earnings per common share......................share ... $ 27,545 37,195 $ 0.74
============ ======== =========9,974 37,779 $0.26
======= ====== =====
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2002
----------------------------------------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ -------------- ---------
Basic earnings per common share........................ $ 76,616 25,111 $ 3.05share ..... $116,744 27,526 $4.24
Effect of dilutive stock options.......................options .... -- 1,4431,423
Assumed conversion of convertible
preferred stock....................................... 8,890 9,964
------------stock .................... 10,211 7,540
-------- ------
Diluted earnings per common share...................... $ 85,506 36,518 $ 2.34
============share ... $126,955 36,489 $3.48
======== =============== =====
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2001
----------------------------------------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ -------------- ---------
Basic earnings per common share........................ $ 43,165 25,303 $ 1.71share ..... $50,430 25,766 $1.96
Effect of dilutive stock options.......................options .... -- 1,2531,074
Assumed conversion of convertible
preferred stock....................................... 9,378 10,229
------------ --------stock .................... 12,087 10,277
------- ------
Diluted earnings per common share...................... $ 52,543 36,785 $ 1.43
============ ======== =========share ... $62,517 37,117 $1.68
======= ====== =====
For the three months ended JuneSeptember 30, 2002 and 2001, the number of stock
options that were outstanding but not included in the computation of
diluted earnings per common share because their exercise price was greater
than the average market price of our common stock, and therefore
anti-dilutive, was 5,000300,000 and 273,000,441,500, respectively. For the sixnine months
ended JuneSeptember 30, 2002 and 2001, the number of stock options that were
outstanding but not included in the computation of diluted earnings per
common share because their exercise price was greater than the average
market price of our common stock, and therefore anti-dilutive, was 276,500315,000
and 273,000,685,500, respectively.
Dividends on our Series A preferred stock are payable quarterly at an
annual rate of 3.75%. We account for shares of preferred stock distributed
as dividends in-kind at the greater of the stated value or the value of the
common stock obtainable upon conversion on the payment date.
9
RENT-A-CENTER, INC. AND SUBSIDIARIES
4. SUBSIDIARY GUARANTORS
At September 30, 2002, Rent-A-Center has $275.0had $273.8 million of subordinated
notes outstanding, maturing on August 15, 2008, including $100.0 million
which were issued in December 2001 at 99.5% of par. The notes require
semi-annual interest-only payments at 11%, and are guaranteed by
Rent-A-Center's twothree principal subsidiaries. The notes are redeemable at
Rent-A-Center's option, at any time on or after August 15, 2003, at a set
redemption price that varies depending upon the proximity of the redemption
date to final maturity. Upon a change of control, the holders of the
subordinated notes have the right to require Rent-A-Center to redeem the
notes.
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on incurring
additional indebtedness, selling assets of Rent-A-Center's subsidiaries,
granting liens to third parties, making restricted payments and engaging in
a merger or selling substantially all of Rent-A-Center's assets.
Rent-A-Center's direct and wholly-owned subsidiaries, consisting of
ColorTyme, Inc. and, Advantage Companies, Inc. and Get It Now, LLC
(collectively, the "Guarantors"), have fully, jointly and severally, and
unconditionally guaranteed the obligations of Rent-A-Center with respect to
the subordinated notes. The only direct or indirect subsidiaries of
Rent-A-Center that are not Guarantors are inconsequential subsidiaries.
There are no restrictions on the ability of any of the Guarantors to
transfer funds to Rent-A-Center in the form of loans, advances or
dividends, except as provided by applicable law.
Set forth below is certain condensed consolidating financial information as
of JuneSeptember 30, 2002 and December 31, 2001, and for the sixnine months ended
JuneSeptember 30, 2002 and 2001. The financial information includes the
Guarantors from the dates they were acquired or formed by Rent-A-Center and
is presented using the push-down basis of accounting.
CONDENSED CONSOLIDATING BALANCE SHEETS
PARENT SUBSIDIARY CONSOLIDATING
COMPANY GUARANTORS ADJUSTMENTS TOTALS
----------- --------------------- ---------- ------------- ---------------------
(IN THOUSANDS)
AT JUNESEPTEMBER 30, 2002 (UNAUDITED)
Rental merchandise, net .............................................. $ 649,205624,594 $ -- $ -- $ 649,205624,594
Intangible assets, net ........................... 380,416 343,675..................... 395,889 343,600 -- 724,091739,489
Other assets ..................................... 552,053 20,990............................... 563,132 25,585 (341,742) 231,301
----------- ----------- ------------- -----------246,975
---------- ---------- ---------- ----------
Total assets ................................................ $1,583,615 $ 1,581,674 $ 364,665369,185 $ (341,742) $ 1,604,597
=========== =========== ============= ===========$1,611,058
========== ========== ========== ==========
Senior debt ...................................................................... $ 300,000260,000 $ -- $ -- $ 300,000260,000
Other liabilities ................................ 524,515 5,827.......................... 534,098 7,574 -- 530,342541,672
Preferred stock .................................. 200,702............................ 2 -- -- 200,7022
Stockholders' equity ............................. 556,457 358,838....................... 789,515 361,611 (341,742) 573,553
----------- ----------- ------------- -----------809,384
---------- ---------- ---------- ----------
Total liabilities and equity ................ $1,583,615 $ 1,581,674 $ 364,665369,185 $ (341,742) $ 1,604,597
=========== =========== ============= ===========$1,611,058
========== ========== ========== ==========
AT DECEMBER 31, 2001
Rental merchandise, net .............................................. $ 653,701 $ -- $ -- $ 653,701
Intangible assets, net ................................................ 367,271 343,825 -- 711,096
Other assets .................................................................... 578,077 18,788 (341,742) 255,123
----------- ----------- ------------- --------------------- ---------- ---------- ----------
Total assets ........................... $ 1,599,049..................... $1,599,049 $ 362,613 $ (341,742) $ 1,619,920
=========== =========== ============= ===========$1,619,920
========== ========== ========== ==========
Senior debt ...................................................................... $ 428,000 $ -- $ -- $ 428,000
Other liabilities .......................................................... 489,174 5,458 -- 494,632
Preferred stock .............................................................. 291,910 -- -- 291,910
Stockholders' equity .................................................... 389,965 357,155 (341,742) 405,378
----------- ----------- ------------- --------------------- ---------- ---------- ----------
Total liabilities and equity ........... $ 1,599,049..... $1,599,049 $ 362,613 $ (341,742) $ 1,619,920
=========== =========== ============= ===========$1,619,920
========== ========== ========== ==========
10
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
----------- ----------- --------------------- ---------- ----------
(IN THOUSANDS)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2002 (UNAUDITED)
Total revenues ..................................... $1,446,113 $ 964,634 $ 28,636 $ 993,27041,718 $1,487,831
Direct store expenses .............................. 758,1531,140,684 -- 758,1531,140,684
Other expenses .................................... 125,074 24,537 149,611
----------- ----------- -----------181,088 39,104 220,192
---------- ---------- ----------
Net earnings ....................................... $ 81,407124,341 $ 4,0992,614 $ 85,506
=========== =========== ===========
SIX126,955
========== ========== ==========
NINE MONTHS ENDED JUNESEPTEMBER 30, 2001 (UNAUDITED)
Total revenues ..................................... $1,288,705 $ 855,255 $ 27,206 $ 882,46140,830 $1,329,535
Direct store expenses .............................. 688,6721,054,038 -- 688,6721,054,038
Other expenses ..................................... 111,721 29,525 141,246
----------- ----------- -----------168,667 44,313 212,980
---------- ---------- ----------
Net earnings (loss) ................................ $ 54,86266,000 $ (2,319)(3,483) $ 52,543
=========== =========== ===========62,517
========== ========== ==========
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
----------- ----------- --------------------- ---------- ----------
(IN THOUSANDS)
THREE MONTHS ENDED JUNESEPTEMBER 30, 2002 (UNAUDITED)
Total revenues ..................................... $ 480,710481,479 $ 13,95013,082 $ 494,660494,561
Direct store expenses .............................. 376,329382,531 -- 376,329382,531
Other expenses .................................... 64,504 11,884 76,388
----------- ----------- -----------58,431 12,150 70,581
---------- ---------- ----------
Net earnings ....................................... $ 39,87740,517 $ 2,066932 $ 41,943
=========== =========== ===========41,449
========== ========== ==========
THREE MONTHS ENDED JUNESEPTEMBER 30, 2001 (UNAUDITED)
Total revenues ..................................... $ 430,043433,450 $ 12,71613,624 $ 442,759447,074
Direct store expenses .............................. 344,086365,366 -- 344,086365,366
Other expenses ..................................... 57,261 13,867 71,128
----------- ----------- -----------56,946 14,788 71,734
---------- ---------- ----------
Net earnings (loss) ................................ $ 28,69611,138 $ (1,151)(1,164) $ 27,545
=========== =========== ===========9,974
========== ========== ==========
11
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
----------- ----------- -------------------- ---------- ---------
(IN THOUSANDS)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2002 (UNAUDITED)
Net cash provided by operating activities ........................... $ 171,519262,273 $ 1,3623,410 $ 172,881
----------- ----------- -----------265,683
--------- --------- ---------
Cash flows from investing activities
Purchase of property assets ........................ (17,502)........................... (28,317) 711 (16,791)(27,606)
Acquisitions of businesses, net of cash acquired ... (27,179)...... (43,322) -- (27,179)(43,322)
Other .............................................. 581................................................. 216 -- 581
----------- ----------- -----------216
--------- --------- ---------
Net cash usedprovided by / (used) in investing activities ................ (44,100)... (71,423) 711 (43,389)(70,712)
Cash flows from financing activities
Purchase of treasury stock ......................... (34,724)............................ (46,603) -- (34,724)(46,603)
Exercise of stock options .......................... 19,098............................. 23,185 -- 19,09823,185
Repurchase of subordinated notes ...................... (1,250) -- (1,250)
Repayments of debt ................................. (128,000).................................... (168,000) -- (128,000)(168,000)
Intercompany advances .............................. 2,073 (2,073)................................. 4,121 (4,121) --
----------- ----------- -------------------- --------- ---------
Net cash used in financing activities ................ (141,553) (2,073) (143,626)
----------- ----------- -----------................... (188,547) (4,121) (192,668)
--------- --------- ---------
Net decreaseincrease in cash and cash equivalents ............ (14,134)............... 2,303 -- (14,134)
----------- ----------- -----------2,303
--------- --------- ---------
Cash and cash equivalents at beginning of period ............. 107,958 -- 107,958
----------- ----------- -------------------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 93,824110,261 $ -- $ 93,824
=========== =========== ===========
SIX110,261
========= ========= =========
NINE MONTHS ENDED JUNESEPTEMBER 30, 2001 (UNAUDITED)
Net cash provided by operating activities ........................... $ 61,655111,905 $ 1,9234,900 $ 63,578
----------- ----------- -----------116,805
--------- --------- ---------
Cash flows from investing activities
Purchase of property assets ........................ (29,652) (33) (29,685)........................... (42,237) (45) (42,282)
Acquisitions of businesses, net of cash acquired ... (34,534)...... (44,943) -- (34,534)(44,943)
Other .............................................. 356................................................. 395 -- 356
----------- ----------- -----------395
--------- --------- ---------
Net cash used in investing activities ................ (63,830) (33) (63,863)................... (86,785) (45) (86,830)
Cash flows from financing activities
Exercise of stock options .......................... 21,562............................. 24,819 -- 21,56224,819
Repayments of debt ................................. (76,051).................................... (108,031) -- (76,051)(108,031)
Proceeds from the issuance of common stock ..................... 45,677 -- 45,677
Intercompany advances .............................. 1,890 (1,890)................................. 4,855 (4,855) --
----------- ----------- -------------------- --------- ---------
Net cash used in financing activities ................ (6,922) (1,890) (8,812)
----------- ----------- -----------................... (32,680) (4,855) (37,535)
--------- --------- ---------
Net decrease in cash and cash equivalents ............ (9,097)............... (7,560) -- (9,097)
----------- ----------- -----------(7,560)
--------- --------- ---------
Cash and cash equivalents at beginning of period ............. 36,495 -- 36,495
----------- ----------- -------------------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 27,39828,935 $ -- $ 27,398
=========== =========== ===========28,935
========= ========= =========
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
5. COMPREHENSIVE INCOME
Comprehensive income includes net earnings and items of other comprehensive
income or loss. The following table provides information regarding
comprehensive income, net of tax:
SIXNINE MONTHS ENDED JUNE 30, THREE MONTHS ENDED
JUNESEPTEMBER 30, -------------------------- ---------------------------SEPTEMBER 30,
------------------------ ------------------------
(IN THOUSANDS) (IN THOUSANDS)
2002 2001 2002 2001
---------- ---------- ---------- ------------------- --------- --------- ---------
Net earnings ............................................................................................ $ 85,506126,955 $ 52,54362,517 $ 41,94341,449 $ 27,5459,974
Other comprehensive (loss) income:
Unrealized gain on derivatives held
as cash flow hedges:
Cumulative effect of adoption of SFAS 133 ................ -- 1,378 -- --
Change in unrealized (loss) gain during period ............................................. 5,216 (4,193) 1,206 (658)... 7,757 (9,449) 2,541 (5,256)
Reclassification adjustment for (loss) gain
included in net earnings ...................... (4,552) 286 (2,322) 1,017
---------- ---------- ---------- ----------........................ (6,947) 2,051 (2,395) 1,765
--------- --------- --------- ---------
Other comprehensive (loss) income ........... 664 (2,529) (1,116) 359
---------- ---------- ---------- ----------............. 810 (6,020) 146 (3,491)
--------- --------- --------- ---------
Comprehensive income ............................................................................ $ 86,170127,765 $ 50,01456,497 $ 40,82741,595 $ 27,904
========== ========== ========== ==========6,483
========= ========= ========= =========
6. COMMON AND PREFERRED STOCK TRANSACTIONS
Purchase of Treasury Stock. In connection with the retirement of our former
Chief Executive Officer and Chairman of the Board, Mr. J. Ernest Talley, we
entered into an agreement to repurchase $25.0 million worth of shares of
our common stock held by Mr. Talley at a purchase price equal to the
average closing price of our common stock over the 10 trading days
beginning October 9, 2001, subject to a maximum of $27.00 per share and a
minimum of $20.00 per share. Under this formula, the purchase price for the
repurchase was calculated at $20.258 per share. Accordingly, on October 23,
2001, we repurchased 493,632 shares of our common stock from Mr. Talley at
$20.258 per share for a total purchase price of $10.0 million and on
November 30, 2001, repurchased an additional 740,448 shares of our common
stock from Mr. Talley at $20.258 per share, for a total purchase price of
an additional $15.0 million. On January 25, 2002, we exercised the option
to repurchase all of the remaining 1,714,086 shares of its common stock
held by Mr. Talley at $20.258 per share, for $34.7 million. We repurchased
those remaining shares on January 30, 2002.
In April 2000, we announced that our board of directors had authorized a
program to repurchase in the open market up to an aggregate of $25$25.0
million of our common stock. During the quarter ended JuneIn October 2002, we announced that our board
of directors increased our ability to effect repurchases of our outstanding
common stock under our common stock repurchase program from $25.0 million
to $50.0 million. Through September 30, 2002, we did not
repurchase any of our shares pursuant to this Board authorization. Since
June 30, 2002, we have repurchased approximately
241,404 shares of our common stock under this program for approximately
$11.9 million, all of which was effected during the quarter ended September
30, 2002. As of November 5, 2002, we have repurchased approximately 389,400
additional shares of our common stock under this program since September
30, 2002, for approximately $17.7 million.
Secondary Equity Offering. In connection with the issuance of our Series A
preferred stock in August 1998, we entered into a registration rights
agreement with Apollo Investment Fund IV, L.P. and Apollo Overseas Partners
IV, L.P. (Apollo) which, among other things, granted them two rights to request that
their shares be registered, and a registration rights agreement with an
affiliate of Bear, Stearns & Co., Inc. (Bear Stearns), which granted them the right to
participate in any company-initiated registration of shares, subject to
certain exceptions. In May 2002, Apollo exercised one of their two rights
to request that their shares be registered and Bear Stearns elected to
participate in such registration. In connection therewith, Apollo and an
affiliate of Bear Stearns converted 97,197 shares of our Series A preferred
stock held by them into 3,500,000 shares of our common stock, which they
sold in the May 2002 public offering. We did not receive any of the
proceeds from this offering.
Conversion of Series A Preferred Stock. On August 5, 2002, the first date
on which the Series A preferred stock could be optionally redeemed by us,
the holders of our Series A preferred stock converted all but two shares of
our Series A preferred stock held by them into approximately 7,281,548 shares of our
common stock. As a result of the conversion, the dividend on our Series A
preferred stock has been substantially eliminated for future periods. In
connection with Apollo's conversion of all but two of the shares of Series
A preferred stock held by them on August 5, 2002, we granted Apollo an
additional right to effect a demand registration under the existing
registration rights agreement we entered into with them in 1998.
13
RENT-A-CENTER, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that these expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to these differences include,
but are not limited to:
o uncertainties regarding the ability to open new stores;
o our ability to acquire additional rent-to-own stores on favorable terms;
o our ability to enhance the performance of these acquired stores;
o our ability to control store level costs and implement our margin
enhancement initiatives;
o our ability to realize benefits from our margin enhancement initiatives;
o the results of our litigation;
o the passage of legislation adversely affecting the rent-to-own industry;
o interest rates;
o our ability to collect on our rental purchase agreements;
o our ability to effectively hedge interest rates on our outstanding debt;
o changes in our effective tax rate; and
o 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 Risk Factors in our Annual
Report on Form 10-K for our fiscal year ended December 31, 2001. 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.
OUR BUSINESS
We are the largest rent-to-own operator in the United States with an approximate
28% market share based on store count. At JuneSeptember 30, 2002, we operated 2,3352,362
company-owned stores nationwide and in 50 states, the District of Columbia and Puerto Rico. Our subsidiary, ColorTyme,
is a national franchisor of rent-to-own stores. At JuneSeptember 30, 2002, ColorTyme
had 329 franchised stores in 41 states, 317 of which operated under the
ColorTyme name and 12 stores of which operated under the Rent-A-Center name. Our
stores generally offer high quality durable products such as home electronics,
appliances, computers, and furniture and accessories under flexible rental
purchase agreements that typically allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed-upon rental period. These rental
purchase agreements are designed to appeal to a wide variety of customers by
allowing them to obtain merchandise that they might otherwise be unable to
obtain due to insufficient cash resources or a lack of access to credit. These
agreements also cater to customers who only have a temporary need, or who simply
desire to rent rather than purchase the merchandise.
We have pursued an aggressive growth strategy since 1989. We have sought to
acquire underperforming stores to which we could apply our operating model as
well as open new stores. As a result, the acquired stores have generally
experienced more significant revenue growth during the initial periods following
their acquisition than in subsequent periods. Because of significant growth
since our formation, particularly due to the Thorn Americas acquisition, our
historical results of operations and period-to-period comparisons of such
results and other financial data, including the rate of earnings growth, may not
be meaningful or indicative of future results.
14
RENT-A-CENTER, INC. AND SUBSIDIARIES
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an emphasis on new store development. Typically, a newly
opened store is profitable on a monthly basis in the ninth to twelfth month
after its initial opening. Historically, a typical store has achieved cumulative
break-even profitability in 18 to 24 months after its initial opening. Total
financing requirements of a typical new store approximate $450,000, with roughly
70% of that amount relating to the purchase of rental merchandise inventory. A
newly opened store historically has achieved results consistent with other
stores that have been operating within the system for greater than two years by
the end of its third year of operation. As a result, our quarterly earnings are
impacted by how many new stores we opened during a particular quarter and the
quarters preceding it. There can be no assurance that we will open any new
stores in the future, or as to the number, location or profitability thereof.
In addition, to provide any additional funds necessary for the continued pursuit
of our operating and growth strategies, we may incur from time to time
additional short 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 of
factors, some of which will relate to our financial condition and performance,
and some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance additional financing will
be available, or if available, will be on terms acceptable to us.
If a change in control occurs, we may be required to offer to repurchase all of
our outstanding subordinated notes at 101% of their principal amount, plus
accrued interest to the date of repurchase. Our senior credit facility limits
our ability to repurchase our subordinated notes, including in the event of a
change in control. In addition, a change in control would result in an event of
default under our senior credit facilities, which could then be accelerated by
our lenders, and would require us to offer to redeem our Series A preferred
stock. In the event a change in control occurs, we cannot be sure that we would
have enough funds to immediately pay our accelerated senior credit facility
obligations, all of our subordinated notes and for the redemption of our Series
A preferred stock, or that we would be able to obtain financing to do so on
favorable terms, if at all.
CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ESTIMATES, UNCERTAINTIES OR
ASSESSMENTS IN OUR FINANCIAL STATEMENTS
The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In applying our accounting principles, we must
often make individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are generally
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as they
are known. 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.
Actual results related to the estimates and assumptions made by us in preparing
our consolidated financial statements will emerge over periods of time, such as
estimates and assumptions underlying the determination of our self-insurance
liabilities. These estimates and assumptions are monitored by us and
periodically adjusted as circumstances warrant. For instance, our liability for
self-insurance related to our workers compensation, general liability, medical
and autoautomobile liability may be adjusted based on higher or lower actual loss
experience. Although there is greater risk with respect to the accuracy of these
estimates and assumptions because of the period over which actual results may
emerge, such risk is mitigated by our ability to make changes to these estimates
and assumptions over the same period.
In preparing our financial statements at any point in time, we are also
periodically faced with uncertainties, the outcomes of which are not within our
control and will not be known for prolonged periods of time. As discussed in the
section entitled "Legal Proceedings" and the notes to our consolidated financial
statements, we are involved in actions relating to claims that our rental
purchase agreements constitute installment sales contracts, violate state usury
laws or violate other state laws enacted to protect consumers, claims asserting
gender discrimination in our employment practices, as well as claims we violated
the federal securities laws. We, together with our counsel, make estimates, if
determinable, of our probable liabilities and record such amounts in our
consolidated financial statements. These estimates represent our best estimate,
or may be the minimum range of probable loss when no single best estimate is
determinable. Disclosure is made, when determinable, of the additional possible
amount of loss on these claims, or if such estimate cannot be made, that fact is
disclosed. We, together with our counsel, monitor developments related to these
legal matters and, when appropriate, adjustments are made to liabilities to
reflect current facts and circumstances.
15
RENT-A-CENTER, INC. AND SUBSIDIARIES
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 provide a meaningful and fair perspective
of our company. However, we do not suggest that other general risk factors, such
as those discussed in our Annual Report on Form 10-K 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.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are summarized below and in Note A to our
consolidated financial statements included in our Annual Report on Form 10-K.
Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over the term
of the agreement. Rental purchase agreements generally include a discounted
early purchase option. Upon exercise of this option, and upon sale of used
merchandise, revenue is recognized as these payments are received.
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. We depreciate our rental merchandise using
the income forecasting method. The income forecasting method of depreciation we
use does not consider salvage value and does not allow the depreciation of
rental merchandise during periods when it is not generating rental revenue. The
objective of this method of depreciation is to provide for consistent
depreciation expense while the merchandise is on rent. On July 1, 2002, we began
accelerating the depreciation on computers that are 21 months old or older and
which have become idle using the straight-line method for a period of at least
six months. The purpose for this change is to better reflect the depreciable
life of a computer in our stores. Though this method will accelerate the
depreciation expense on the effected computers, we do not expect it to have a
material effect on our financial position, results of operations or cash flows
in future periods.
Cost of Merchandise Sold. Cost of merchandise sold represents the book value net
of accumulated depreciation of rental merchandise at time of sale.
Salaries and Other Expenses. Salaries and other expenses include all salaries
and wages paid to store level employees, together with market 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, 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, as
well as regional directors' salaries, travel and office expenses.
Amortization of Intangibles. Amortization of intangibles consists primarily of
the amortization of the excess of purchase price over the fair market value of
acquired assets and liabilities. Effective January 1, 2002, under SFAS 142 all
goodwill and intangible assets with indefinite lives are no longer subject to
amortization. SFAS 142 requires that an impairment test be conducted annually
and in the event of an impairment indicator.
Preferred Dividends. Dividends on Series A preferred stock are payable at an
annual rate of 3.75%. Shares of Series A preferred stock distributed as
dividends in-kind are accounted for at the greater of the stated value or the
value of the common stock obtainable upon conversion on the payment date. As
discussed below, on August 5, 2002, the holders of our Series A preferred stock
converted substantially all of the shares of Series A preferred stock held by
them. Accordingly, dividends on our Series A preferred stock have been
substantially eliminated for future periods.
16
RENT-A-CENTER, INC. AND SUBSIDIARIES
RECENT DEVELOPMENTS
Store Growth. In the second half of 2000, we resumed our strategy of increasing
our store base and annual revenues and profits through opportunistic
acquisitions and new store openings. During the secondthird quarter of 2002, we
acquired a total of 3823 stores and accounts from 4025 locations for approximately
$23.6$16.2 million in 1611 separate transactions, opened 1617 new stores, and closed three13
stores. All threethe closed stores were merged with existing stores. For the sixnine
months ended JuneSeptember 30, 2002, we acquired a total of 4164 stores and accounts
from 5984 locations for approximately $27.2$43.3 million in 3243 separate transactions,
opened 2239 new stores and closed nine22 stores. Of the closed stores, six19 were merged
with existing stores and three were sold. As of August 12,November 8, 2002, we have
acquired 2213 additional stores, accounts from 2110 locations, opened nine12 new stores,
sold one location and merged two storesone store with an existing locationslocation during the
thirdfourth quarter of 2002.
Senior Credit Facilities. On May 3, 2002, we amended and restated our senior
credit facility to provide for a new Tranche D LC Facility in an aggregate
amount at closing equal to $80.0 million to support our outstanding letters of
credit. Under this new LC Facility, in the event that a letter of credit is
drawn upon, we have the right to either repay the LC lenders the amount
withdrawn or request a loan in that amount. Interest on any requested LC loan
accrues at an adjusted prime rate plus 1.75% or, at our option, at the
Eurodollar base rate plus 2.80%, with the entire amount of the LC Facility due
on December 31, 2007. As a result of this amendment, our letters of credit are
issued under the new LC Facility, which increased the amount available to us
under our revolving credit facility, thereby enabling us to achieve more
flexibility and liquidity within our capital structure.
As of August 5, 2002, our outstanding letters of credit currently amount to
$85.7 million, of which $80.0 million is supported by our Tranche D LC Facility
and the remaining $5.7 million is supported by our $120.0 million revolving
credit facility.
Secondary Equity Offering. In connection with the issuance of our Series A
preferred stock in August 1998, we entered into a registration rights agreement
with Apollo which, among other things, granted them two rights to request that
their shares be registered, and a registration rights agreement with an
affiliate of Bear Stearns, which granted them the right to participate in any
company-initiated registration of shares, subject to certain exceptions. In May
2002, Apollo exercised one of their two rights to request that their shares be
registered and Bear Stearns elected to participate in such registration. In
connection therewith, Apollo and an affiliate of Bear Stearns converted 97,197
shares of our Series A preferred stock held by them into 3,500,000 shares of our
common stock, which they sold in the May 2002 public offering that was the
subject of Apollo's request. We did not receive any of the proceeds from this
offering.
Appointment of Mary Elizabeth Burton to the Board of Directors. On May 31, 2002,
we announced that Mary Elizabeth Burton was appointed to our Board of Directors.
Ms. Burton also serves as a member of our Audit Committee.
Conversion of Series A Preferred Stock. On August 5, 2002, the first date on
which the Series A preferred stock could be optionally redeemed by us, the
holders of our Series A preferred stock converted all but two shares of our
Series A preferred stock held by them into approximately 7,281,548 shares of our common stock.
As a result of the conversion, the dividend on our Series A preferred stock has
been substantially eliminated for future periods. In connection with Apollo's
conversion of all but two of the shares of Series A preferred stock held by them
on August 5, 2002, we granted Apollo an additional right to effect a demand
registration under the existing registration rights agreement we entered into
with them in 1998.
Repurchase of Subordinated Notes. In September 2002, we repurchased $1.25
million of our subordinated notes for approximately $1.35 million, which
included a loss of approximately $82,800. Since September 30, 2002, we have
repurchased an additional $1.5 million of our subordinated notes for
approximately $1.62 million, which included a loss of approximately $96,250.
Get It Now, LLC. On September 30, 2002, we transferred all of our Wisconsin
store operations to a newly formed wholly owned subsidiary, Get It Now, LLC. On
October 1, 2002, due to consumer laws in the state of Wisconsin, Get It Now
began operations in the state of Wisconsin under a new retail operation which
will generate installment credit sales through a retail transaction.
Stock Repurchase Program. On October 8, 2002, the Board of Directors increased
our authority to effect repurchases of our outstanding common stock under our
common stock repurchase program from $25.0 million to $50.0 million. During the
third quarter of 2002, we repurchased approximately $11.9 million of our common
stock under the common stock repurchase program. As of November 5, 2002, we
have repurchased an additional $17.7 million of our common stock under this
program.
RESULTS OF OPERATIONS
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2002 COMPARED TO SIXNINE MONTHS ENDED JUNESEPTEMBER 30,
2001
Store Revenue. Total store revenue increased by $109.3$157.4 million, or 12.8%12.2%, to
$964.6$1,446.1 million for the sixnine months ended JuneSeptember 30, 2002 from $855.3$1,288.7
million for the sixnine months ended JuneSeptember 30, 2001. The increase in total
store revenue is primarily attributable to growth in same store revenues and
incremental revenues in new and acquired stores, as well as an increase in the amount of merchandise
sales over the same period in 2001.stores.
Same store revenues represent those revenues earned in stores that were operated
by us for each of the entire sixnine month periods ending JuneSeptember 30, 2002 and
2001. Same store revenues increased by $53.5$75.1 million, or 6.9%6.6%, to $829.4$1,207.7
million for the sixnine months ended JuneSeptember 30, 2002 from $775.9$1,132.6 million in
2001. The increase in same store revenues was primarily attributable to an
increase in the number of customers served (approximately 397400 active customers
per day per store for 2002 vs. approximately 391 active customers per store for 2001 in same stores open), the number of agreements on rent
(approximately 610 per store for 2002 vs. approximately 604day per
store for 2001 in same stores open), as well as revenue earned per agreement on rentcustomer
(approximately $98$1,597 per customer for the nine month per agreement forperiod ending September
30, 2002 vs. approximately $96$1,531 per agreementcustomer for 2001). Merchandise sales
increased $12.7$15.9 million, or 25.0%21.9%, to $63.6$88.3 million for 2002 from $50.9$72.4 million
in 2001. The increase in merchandise sales was primarily attributable to an
increase in the number of items sold in the first sixnine months of 2002
(approximately 463,000)652,000) from the number of items sold 17
RENT-A-CENTER, INC. AND SUBSIDIARIES
in 2001 (approximately
373,000)561,000). This increase in the number of items sold in 2002 versus the same
period in 2001 was primarily the result of an increase in the amount of
customers exercising early purchase options.
Franchise Revenue. Total franchise revenue increased by $1.4 million,$888,000, or 5.3%2.2%, to
$28.6$41.7 million for the sixnine months ended JuneSeptember 30, 2002 from $27.2$40.8 million in
2001. This increase was primarily attributable to an increase in merchandise
sales to franchise locations, partially offset by a decrease in the number of
franchised locations in the first sixnine months of 2002 as compared to the first
sixnine months of 2001, which caused a slight decrease in royalty income.
17
RENT-A-CENTER, INC. AND SUBSIDIARIES
Depreciation of Rental Merchandise. Depreciation of rental merchandise increased
by $21.5$30.8 million, or 13.0%12.3%, to $186.6$282.1 million for the sixnine months ended
JuneSeptember 30, 2002 from $165.1$251.3 million in 2001. This increase was primarily
attributable to an increase in rental and fee revenue. Depreciation of rental
merchandise expressed as a percent of store rentals and fees revenue increased
to 20.7%20.8% in 2002 from 20.6%20.7% for the same period in 2001. This slight increase is
primarily a result of in-store promotions made during the third quarter of 2001,
which included a reduction in the rates and terms on certain rental agreements.
These in-store promotions caused depreciation to be a greater percentage of
store rentals and fees revenue on those promotional items rented.
Cost of Merchandise Sold. Cost of merchandise sold increased by $7.5$8.8 million, or
20.2%16.2%, to $44.5$63.0 million for the sixnine months ended JuneSeptember 30, 2002 from $37.0$54.2
million in 2001. This increase was primarily a result of an increase in the
number of items sold during the first sixnine months of 2002 as compared to the
first sixnine months of 2001.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 54.6%55.0% for the sixnine months ended
JuneSeptember 30, 2002 from 56.9%58.1% for the sixnine months ended JuneSeptember 30, 2001. This
decrease was primarily attributable to an increase in store revenues in the
first sixnine months of 2002 as compared to 2001 coupled with the realization of
our margin enhancement initiatives and reductions in store level costs.costs in 2002.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold increased
by $1.3 million,$777,000, or 5.8%2.2%, to $24.5$35.6 million for the sixnine months ended JuneSeptember 30,
2002 from $23.2$34.8 million in 2001. This increase was primarily attributable to an
increase in merchandise sales to franchise locations, partially offset by a
decrease in the number of franchised locations in the first sixnine months of 2002
as compared to the first sixnine months of 2001.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue increased slightly to 3.3%3.2% for the sixnine
months ending JuneSeptember 30, 2002 as compared to 3.0%3.1% for the sixnine months ending
JuneSeptember 30, 2001. This increase is primarily attributable to additional
litigation settlement costs of $2.0 million in connection with the settlement of
our class action gender discrimination litigation incurred during the second
quarter of 2002.
Amortization of Intangibles. Amortization of intangibles decreased by $13.1$19.2
million, or 88.8%85.7%, to $1.6$3.2 million for the sixnine months ended JuneSeptember 30, 2002
from $14.7$22.4 million for the sixnine months ended JuneSeptember 30, 2001. This decrease
was directly attributable to the implementation of SFAS 142, which requires that
goodwill no longer be amortized.
Operating Profit. Operating profit increased by $47.4$99.1 million, or 36.7%61.4%, to
$176.5$260.6 million for the sixnine months ended JuneSeptember 30, 2002 from $129.1$161.5 million
in 2001, including the $16 million litigation settlement charge taken in the
third quarter of 2001. Operating profit as a percentage of total revenue
increased to 17.8%17.5% for the sixnine months ended JuneSeptember 30, 2002, from 14.6%12.1% in
2001. This increase was primarily attributable to an increase in store revenues
in the first sixnine months of 2002 as compared to 2001 coupled with the
realization of our margin enhancement initiatives, reduction of store level
costs and the reduction of intangible amortization expense as discussed above.
After adjusting reported results for the first sixnine months of 2001 to exclude
the effects of goodwill amortization, operating profit increased by $24.5$78.0
million, or 16.1%42.7% on a comparable basis.
Net Earnings. Net earnings increased by $33.0$64.4 million, or 62.7%103.1%, to $85.5$126.9
million for the sixnine months ended JuneSeptember 30, 2002 from $52.5$62.5 million in 2001.
This increase is primarily attributable to growth in operating profit as
discussed above. After adjusting reported results for the first sixnine months of
2001 to exclude the effects of goodwill amortization, net earnings increased by
$20.6$45.7 million, or 31.8%56.3% on a comparable basis.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. We account for shares of preferred stock
distributed as dividends in-kind at the greater of the stated value or the value
of the common stock obtainable upon conversion on the payment date. Preferred
dividends decreased by $488,000,$1.9 million, or 5.2%15.5%, to $8.9$10.2 million for the sixnine
months ended JuneSeptember 30, 2002 as compared to $9.4$12.1 million in 2001. This
decrease is a direct result of the conversion of 97,197 shares of preferred
stock into 3,500,000 millionshares of our common sharesstock in May 2002 resultingand the conversion
in less shares
outstanding inAugust 2002 as compared to 2001. On August 5, 2002, the holders of our
Series A preferred stock converted all but two shares of our outstanding Series A preferred stock
into approximately 7,281,548 shares of our common stock. Accordingly, the
dividend on our Series Astock, resulting in less
preferred stock has been substantially eliminated for
future periods.
18
RENT-A-CENTER, INC. AND SUBSIDIARIESshares outstanding in 2002 as compared to 2001.
THREE MONTHS ENDED JUNESEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED JUNESEPTEMBER
30, 2001
Store Revenue. Total store revenue increased by $50.7$48.0 million, or 11.8%11.1%, to
$480.7$481.5 million for the three months ended JuneSeptember 30, 2002 from $430.0$433.4 million
for the three months ended JuneSeptember 30, 2001. The increase in total store
revenue is primarily attributable to growth in same store revenues and
incremental revenues in new and acquired stores, as well as an increase in the amount of merchandise
sales over the same period in 2001.stores.
18
RENT-A-CENTER, INC. AND SUBSIDIARIES
Same store revenues represent those revenues earned in stores that were operated
by us for each of the entire three month periods ending JuneSeptember 30, 2002 and
2001. Same store revenues increased by $25.9$27.0 million, or 6.6%6.9%, to $420.2$421.0 million
for the three months ended JuneSeptember 30, 2002 from $394.3$394.0 million in 2001. The
increase in same store revenues was primarily attributable to an increase in the
number of customers served (approximately 397394 active customers per day per store
for 2002 vs. approximately 390389 active customers per store for 2001 in same stores open), the number of agreements on rent
(approximately 609 per store for 2002 vs. approximately 602day per store for 2001 in
same stores open), as well as revenue earned per agreement on rentcustomer (approximately $99$528
per month per agreementcustomer for the three months ended September 30, 2002 vs. approximately
$96$500 per agreementcustomer for 2001). Merchandise sales increased $3.9$3.1 million, or 19.3%14.6%,
to $24.0$24.7 million for 2002 from $20.1$21.6 million in 2001. The increase in
merchandise sales was primarily attributable to an increase in the number of
items sold in the secondthird quarter of 2002 (approximately 205,000)206,000) from the number
of items sold in 2001 (approximately 163,000)188,000). This increase in the number of
items sold in 2002 versus the same period in 2001 was primarily the result of an
increase in the amount of customers exercising early purchase options.
Franchise Revenue. Total franchise revenue increaseddecreased by $1.2 million,$542,000, or 9.7%4.0%, to
$13.9$13.1 million for the three months ended JuneSeptember 30, 2002 from $12.7$13.6 million
in 2001. This increasedecrease was primarily attributable to an increase in merchandise
sales to franchise locations, partially offset by a decrease in the number of
franchised locations in the secondthird quarter of 2002 as compared to the secondthird
quarter of 2001, which caused a slight decrease in royalty income.income and merchandise
sales.
Depreciation of Rental Merchandise. Depreciation of rental merchandise increased
by $10.1$9.3 million, or 12.0%10.8%, to $94.4$95.5 million for the three months ended JuneSeptember
30, 2002 from $84.3$86.2 million in 2001. This increase was primarily attributable to
an increase in rental and fee revenue. Depreciation of rental merchandise
expressed as a percent of store rentals and fees revenue increaseddecreased to 20.7%20.9% in
2002 from 20.6%21.0% for the same period in 2001. This slight increasedecrease is primarily a
result of in-store promotions made during the third quarter of 2001, which
included a reduction in the rates and terms on certain rental agreements. These
in-store promotions caused depreciation to be a greater percentage of store
rentals and fees revenue on those promotional items rented.
Cost of Merchandise Sold. Cost of merchandise sold increased by $2.1$1.3 million, or
13.3%7.5%, to $17.5$18.5 million for the three months ended JuneSeptember 30, 2002 from $15.4$17.2
million in 2001. This increase was primarily a result of an increase in the
number of items sold during the secondthird quarter of 2002 as compared to the secondthird
quarter of 2001.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 55.0%55.8% for the three months ended
JuneSeptember 30, 2002 from 56.8%60.4% for the three months ended JuneSeptember 30, 2001.
This decrease was primarily attributable to an increase in store revenues in the
secondthird quarter of 2002 as compared to 2001 coupled with the realization of our
margin enhancement initiatives and reductions in store level costs.costs in 2002.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold increaseddecreased
by $1.2,$563,000, or 11.0%4.8%, to $11.9$11.1 million for the three months ended JuneSeptember 30,
2002 from $10.7$11.6 million in 2001. This increasedecrease was primarily attributable to an
increase in merchandise sales to franchise locations, partially offset by a
decrease in the number of franchised locations in the secondthird quarter of 2002 as
compared to the secondthird quarter of 2001.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue increased to 3.5%remained constant at 3.1% for the three
months ending JuneSeptember 30, 2002 as compared to 3.2% for the three months ending June 30,and 2001. This increase is primarily attributable to additional litigation
settlement costs of $2.0 million in connection with the settlement of our class
action gender discrimination litigation.
Amortization of Intangibles. Amortization of intangibles decreased by $6.5$6.2
million, or 87.5%79.9%, to $922,000 for the three months ended June 30, 2002 from
$7.4$1.5 million for the three months ended JuneSeptember 30, 2002
from $7.7 million for the three months ended September 30, 2001. This decrease
was directly attributable to the implementation of SFAS 142, which requires that
goodwill no longer be amortized.
Operating Profit. Operating profit increased by $21.6$51.7 million, or 32.4%159.8%, to
$88.2$84.1 million for the three months ended JuneSeptember 30, 2002 from $66.6$32.4 million
in 2001. Operating profit as a percentage of total revenue increased to 17.8%17.0%
for the three 19
RENT-A-CENTER, INC. AND SUBSIDIARIES
months ended JuneSeptember 30, 2002, from 15.1%7.2% in 2001. This increase
was primarily attributable to an increase in store revenues in 2002 as compared
to 2001 coupled with the realization of our margin enhancement initiatives,
reduction of store level costs and the reduction of intangible amortization
expense as discussed above. After adjusting reported results for the secondthird
quarter of 2001 to exclude the effects of goodwill amortization, operating
profit increased by $10.1$44.5 million, or 13.0%112.2% on a comparable basis.
Net Earnings. Net earnings increased by $14.4$31.5 million, or 52.3%315.6%, to $41.9$41.4
million for the three months ended JuneSeptember 30, 2002 from $27.5$9.9 million in 2001.
This increase is primarily attributable to growth in operating profit as
discussed above. After adjusting reported results for the firstthird quarter of 2001
to exclude the effects of goodwill amortization, net earnings increased by $8.2$25.1
million, or 24.3%153.5% on a comparable basis.
19
RENT-A-CENTER, INC. AND SUBSIDIARIES
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. We account for shares of preferred stock
distributed as dividends in-kind at the greater of the stated value or the value
of the common stock obtainable upon conversion on the payment date. Preferred
dividends decreased by $1.2$1.4 million or 22.9%51.2%, to $3.9$1.3 million for the three
months ended JuneSeptember 30, 2002 as compared to $5.1$2.7 million in 2001. This
decrease is a direct result of the conversion of 97,197 shares of preferred
stock into 3,500,000 millionshares of our common sharesstock in May 2002 resultingand the conversion
in less shares
outstanding inAugust 2002 as compared to 2001. On August 5, 2002, the holders of our
Series A preferred stock converted all but two shares of our outstanding Series A preferred stock
into approximately 7,281,548 shares of our common stock. Accordingly, the
dividend on our Series Astock, resulting in less
preferred stock has been substantially eliminated for
future periods.shares outstanding in 2002 as compared to 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $109.3$148.9 million to $172.9$265.7
million for the sixnine months ending JuneSeptember 30, 2002 from $63.6$116.8 million in
2001. This increase resulted primarily from an increase in net earnings and
depreciation of rental merchandise, as well as a decrease in the amount of
rental merchandise purchased during the first sixnine months of 2002 compared to
2001.
Cash used in investing activities decreased by $20.5$16.1 million to $43.4$70.7 million
during the sixnine month period ending JuneSeptember 30, 2002 from $63.9$86.8 million in
2001. This decrease is primarily attributable to a decrease in capital
expenditures as well as a decrease in the acquisition and opening of fewer
new stores
during the first sixnine months of 2002 as compared to 2001 as well as a
decrease in capital expenditures.2001.
Cash used in financing activities increased by $134.8$155.1 million to $143.6$192.7 million
during the sixnine month period ending JuneSeptember 30, 2002 from $8.8$37.5 million in
2001. This increase is a result of our purchase of $34.7$46.6 million in treasury
stock, in the first quarterrepurchase of 2002$1.25 million of our subordinated notes, and an
increase of debt repayments of $128.0$60.0 million during the first sixnine months of
2002 offset byas compared to 2001. In addition, there were no proceeds from the issuance
of common stock in 2002 as compared to proceeds of approximately $45.7 million
in 2001.
Liquidity Requirements. Our primary liquidity requirements are for debt service,
rental merchandise purchases, capital expenditures, litigation and our store
expansion program. Our primary sources of liquidity have been cash provided by
operations, borrowings and sales of equity securities. In the future, we may
incur additional debt, or may issue debt or equity securities to finance our
operating and growth strategies. The availability and attractiveness of any
outside sources of financing will depend on a number 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 economic conditions.
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 cash flow generated from operations, together with amounts
available under our senior credit facilities, will be sufficient to fund our
debt service requirements, rental merchandise purchases, capital expenditures,
litigation and our store expansion intentions during 2002.through 2003. At August 9,November 8,
2002, we had $102.4$95.2 million in cash. While our operating cash flow has been
strong and we expect this strength to continue, our liquidity could be
negatively impacted if we do not remain as profitable as we expect.
On March 9, 2002, President Bush signed into law the Job Creation and Worker
Assistance Act of 2002, which provides for accelerated tax depreciation
deductions for qualifying assets placed in service between September 11, 2001
and September 10, 2004. Under these provisions, 30 percent of the basis of
qualifying property is deductible in the year the property is placed in service,
with the remaining 70 percent of the basis depreciated under the normal tax
depreciation rules. Accordingly, our cash flow will benefit from having a lower
current cash tax obligation, which in turn will provide additional cash flows
from operations until the deferred tax liabilities begin to reverse. We estimate
that our operating cash flow will increase by approximately $60.0 million
through 2004 before the deferred tax liabilities begin to reverse over a three
year period beginning in 2005.
20
RENT-A-CENTER, INC. AND SUBSIDIARIES
Rental Merchandise Purchases. We purchased $252.3$354.4 million and $270.5$395.0 million of
rental merchandise during the sixnine month periods ending JuneSeptember 30, 2002 and
2001, respectively.
Capital Expenditures. We make capital expenditures in order to maintain our
existing operations as well as for new capital assets in new and acquired
stores. We spent $16.8$27.6 million and $29.7$42.3 million on capital expenditures during
the sixnine month periods ending JuneSeptember 30, 2002 and 2001, respectively, and
expect to spend approximately $20.0$11.0 million for the remainder of 2002.
Acquisitions and New Store Openings. For the first sixnine months of 2002, we spent
approximately $27.2$43.3 million on acquiring stores and accounts. For the entire
year ending December 31, 2002, we intend to add approximately 5% to 10% to our
store base by opening between 60 and 8070 new store locations as well as
continuing to pursue opportunistic acquisitions.
20
RENT-A-CENTER, INC. AND SUBSIDIARIES
The profitability of our stores tends to grow at a slower rate approximately
five years from the time we open or acquire them. As a result, in order for us
to show improvements in our profitability, it is important for us to continue to
open stores in new locations or acquire underperforming stores on favorable
terms. There can be no assurance that we will be able to acquire or open new
stores at the rates we expect, or at all. We cannot assure you that the stores
we do acquire or open will be profitable at the same levels that our current
stores are, or at all.
Borrowings. The table below shows the scheduled maturity dates of our senior
debt outstanding at JuneSeptember 30, 2002.
PERIOD (YEAR) ENDING
DECEMBER 31, (IN THOUSANDS)
------------------------------------------- --------------
2002.....2002.......................... $ 1,273
2003..... 1,273
2004..... 15,612
2005..... 58,777
2006..... 136,615
Thereafter........ 86,450
----------
$ 300,0000
2003.......................... 1,108
2004.......................... 13,589
2005.......................... 51,159
2006.......................... 118,913
Thereafter.......................... 75,231
--------
$260,000
========
For the six months ended JuneAs of September 30, 2002, we paid $168.0 million of our senior debt during 2002.
Since September 30, 2002, we have prepaid $128.0 million of our
senior debt. Since June 30, 2002, we have prepaid approximately $11.0an additional $10.5 million of our
senior debt during the thirdfourth quarter of 2002.
Under our senior credit facilities, we are required to use 25% of the net
proceeds from any equity offering to repay our term loans. We intend to continue
to make prepayments of debt under our senior credit facilities, repurchase some
of our senior subordinated notes or repurchase our common stock to the extent we
have available cash that is not necessary for store openings or acquisitions.
However, we cannot assure you that we will have excess cash for these purposes.
Our senior credit facilities currently limit our ability to repurchase in excess
of $54.0$51.3 million of our senior subordinated notes. In addition, our senior
credit facilities currently limit our ability to repurchase our common stock in
excess of 25% of our consolidated net income for the period from January 1, 2002
through our latest quarterly financial reports and require us to make a matching
pre-payment on our term loans with any such repurchase.
Senior Credit Facilities. The senior credit facilities are provided by a
syndicate of banks and other financial institutions led by JP Morgan Chase Bank,
as administrative agent. On May 3, 2002, we amended and restated our senior
credit facility to provide for a new Tranche D LC Facility in an aggregate
amount at closing equal to $80.0 million to support our outstanding letters of
credit. Under this new LC Facility, in the event that a letter of credit is
drawn upon, we have the right to either repay the LC lenders the amount
withdrawn or request a loan in that amount. Interest on any requested LC loan
accrues at an adjusted prime rate plus 1.75% or, at our option, at the
Eurodollar base rate plus 2.80%, with the entire amount of the LC Facility due
on December 31, 2007. As a result of this amendment, our letters of credit are
issued under the new LC Facility, which increases the amount available to us
under our revolving credit facility, thereby enabling us to achieve more
flexibility and liquidity within our capital structure. At JuneSeptember 30, 2002,
we had a total of $300.0$260.0 million outstanding under our senior credit facilities,
all of which was under our term loans. At JuneSeptember 30, 2002, we had $120.0$114.3
million of availability under thisour revolving credit facility.
As of August 5,November 8, 2002, our outstanding letters of credit currently amountamounted to $85.7
million, $80.0 million of which is supported by our Tranche D LC Facility and
the remaining $5.7 million which is supported by our $120.0 million revolving
credit facility.
Borrowings under the senior credit facilities bear interest at varying rates
equal to 1.50% to 3.0% over LIBOR, which was 1.84%1.81% at JuneSeptember 30, 2002. We
also have a prime rate option under the facilities, but have not exercised it to
date. At JuneSeptember 30, 2002,
21
RENT-A-CENTER, INC. AND SUBSIDIARIES the average rate on outstanding senior debt
borrowings was 9.72%8.9%. Including the non-recurring finance fees of $2.9 million$881,651
incurred in connection with our prepayment of debt, the average rate on
outstanding senior debt borrowings was 11.54%10.1%.
During 1998, we entered into interest rate protection agreements with two banks,
one of which expired in 2001. Under the terms of the current interest rate
protection agreements, the LIBOR rate used to calculate the interest rate
charged on $250.0 million of the outstanding senior term debt has been fixed at
an average rate of 5.60%. The protection on the $250.0 million expires in 2003.
The senior credit facilities are secured by a security interest in substantially
all of our tangible and intangible assets, including intellectual property and
real property. The senior credit facilities are also secured by a pledge of the
capital stock of our subsidiaries.
21
RENT-A-CENTER, INC. AND SUBSIDIARIES
The senior credit facilities contain covenants that limit our ability to:
o incur additional debt (including subordinated debt) in excess of $25
million;
o repurchase our capital stock and senior subordinated notes;
o incur liens or other encumbrances;
o merge, consolidate or sell substantially all our property or business;
o sell assets, other than inventory;
o make investments or acquisitions unless we meet financial tests and other
requirements;
o make capital expenditures; or
o enter into a new line of business.
The senior credit facilities require us to comply with several financial
covenants, including a maximum leverage ratio, a minimum interest coverage ratio
and a minimum fixed charge coverage ratio. At JuneSeptember 30, 2002, the maximum
leverage ratio was 3.75:1, the minimum interest coverage ratio was 3.00:1, and
the minimum fixed charge coverage ratio was 1.30:1. On that date, our actual
ratios were 1.64:1.40:1, 5.62:6.09:1 and 2.34:2.51:1.
Events of default under the senior credit facilities include customary events,
such as a cross-acceleration provision in the event that we default on other
debt. In addition, an event of default under the senior credit facilities would
occur if we undergo a change of control. This is defined to include the case
where Apollo ceases to own at least 4,474,673 shares of our common stock on an
as converted basis, or a third party becomes the beneficial owner of 33.33% or
more of our voting stock at a time when certain permitted investors own less
than the third party or Apollo entities own less than 35% of the voting stock
owned by the permitted investors. We do not have the ability to prevent Apollo
from selling its stock, and therefore would be subject to an event of default if
Apollo did so and its sales were not agreed to by the lenders under the senior
credit facilities. This could result in the acceleration of the maturity of our
debt under the senior credit facilities, as well as under the subordinated notes
through their cross-acceleration provision.
Senior Subordinated Notes. In August 1998, we issued $175.0 million of senior
subordinated notes, maturing on August 15, 2008, under an indenture dated as of
August 18, 1998 among us, our subsidiary guarantors and the trustee, which is
now The Bank of New York, as successor to IBJ Schroder Bank & Trust Company. In
December 2001, we issued an additional $100.0 million of 11% senior subordinated
notes, maturing on August 15, 2008, under a separate indenture dated as of
December 19, 2001 among us, our subsidiary guarantors and The Bank of New York,
as trustee. On May 2, 2002, we closed an exchange offer for, among other things,
all of the notes issued by us under the 1998 indenture, such that all of our
senior subordinated notes are now governed by the terms of the 2001 indenture.
The 2001 indenture contains covenants that limit our ability to:
o incur additional debt;
o sell assets or our subsidiaries;
o grant liens to third parties;
o pay dividends or repurchase stock; and
o engage in a merger or sell substantially all of our assets.
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
Events of default under the 2001 indenture include customary events, such as a
cross-acceleration provision in the event that we default in the payment of
other debt due at maturity or upon acceleration for default in an amount
exceeding $25 million.
We may redeem the notes after August 15, 2003, at our option, in whole or in
part, at a premium declining from 105.5%. The subordinated notes also require
that upon the occurrence of a change of control (as defined in the 2001
indenture), the holders of the notes have the right to require us to repurchase
the notes at a price equal to 101% of the original aggregate principal amount,
together with accrued and unpaid interest, if any, to the date of repurchase. If
we did not comply with this repurchase obligation, this would trigger an event
of default under our senior credit facilities.
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
Store Leases. We lease space for all of our stores as well as our corporate and
regional offices under operating leases expiring at various times through 2010.
ColorTyme Guarantee. ColorTyme is a party to an agreement with Textron Financial
Corporation, who generally provides financing to qualifying franchisees of
ColorTyme of up to five times their average monthly revenues. Under this
agreement, upon an event of default by the franchisee under agreements governing
this financing and upon the occurrence of certain other events, Textron may
assign the loans and the collateral securing such loans to ColorTyme, with
ColorTyme then succeeding to the rights of Textron under the debt agreements,
including the rights to foreclose on the collateral. Approximately $10.0 million
of the Textron financing was recently refinanced by Texas Capital Bank, National
Association upon terms and conditions similar to the Textron financing. We
guarantee the obligations of ColorTyme under these agreements up to a maximum
amount of $50.0 million, of which $34.3$32.9 million was outstanding as of JuneSeptember
30, 2002. Mark E. Speese, our Chairman of the Board and Chief Executive Officer,
is a passive investor in Texas Capital Bank, owning less than 1% of its
outstanding equity.
Litigation. In 1998, we recorded an accrual of approximately $125.0 million for
estimated probable losses on litigation assumed in connection with the Thorn
Americas acquisition. As of JuneSeptember 30, 2002, we have paid approximately
$124.1$124.5 million of this accrual in settlement of most of these matters and legal
fees. These settlements were funded primarily from amounts available under our
senior credit facilities, including the revolving credit facility and the
multidraw facility, as well as from cash flow from operations.
In November 2001, we announced that we had reached an agreement in principle for
the settlement of the Bunch matter. Under the terms of the Bunch settlement,
while not admitting any liability, we agreed to pay an aggregate of $12.25
million to the agreed upon class, plus plaintiffs' attorneys fees as determined
by the court and costs to administer the settlement subject to an aggregate cap
of $3.15 million. Accordingly, to account for the aforementioned costs, we
recorded a non-recurring charge of $16.0 million in the third quarter of 2001.
In early March 2002, we reached an agreement in principle with the plaintiffs
attorneys in Wilfong and the EEOC to resolve the Wilfong suit and the Tennessee
EEOC action. At the parties' request, the court in the Bunch case stayed the
proceedings in that case, including postponing the fairness hearing previously
scheduled for March 6, 2002. Similarly, the court in the Tennessee EEOC action
stayed the proceeding in that case. The definitive settlement agreement
documents were filed with the Wilfong court in June 2002, and the court granted
preliminary approval of the settlement on JulyJune 19, 2002. The court held a
fairness hearing, approved the settlement and entered its order and judgment of
final approval on October 4, 2002. Assuming there are no appeals, the order and
judgment will become effective on December 4, 2002.
Under the terms of the Wilfong settlement, while not admitting any liability, we
agreed to pay an aggregate of $47.0 million to approximately 6,000 female
employees and a yet to be determined number ofapproximately 2,300 female applicants who were employed by or
applied for employment with us during the period commencing on April 19, 1998
and ending on June 19, 2002, plus up to $375,000 in settlement administrative
costs. The $47.0 million payment includes the $12.25 million payment discussed
in connection with the Bunch settlement. Attorney fees of approximately $10.5
million for class counsel in Wilfong will be paid out of the $47.0 million
settlement fund. Pursuant to the settlement procedures approved by the court,
approximately fifty class members opted out of the settlement.
In June 2002, we separately agreed to contribute an additional $2.0 million to a
dispute resolution fund in an amount to be determinedwhich approximately 100 class members in Bunch will
participate. This dispute resolution fund has been approved by the court.Bunch court
and counsel to the plaintiffs in Bunch support the dispute resolution fund and
the Wilfong settlement.
The settlement agreement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an additional
one year upon a showing of good cause. Also, under the settlement agreement, we
agreed to augment our human resources department and our internal employee
complaint procedures; enhance our gender anti-discrimination training for all
employees; hire a consultant mutually acceptable to the parties for two years to
advise us on employment matters; provide certain reports to the EEOC during the
period of the consent decree; seek qualified female representation on our board
of directors; publicize our desire to recruit, hire and promote qualified women;
offer to fill job vacancies within our regional markets with qualified class
members who reside in those markets and express an interest in employment by us
to the extent of 10% of our job vacancies in such markets over a fifteen month
period; and to take certain other steps to improve opportunities for women. We
initiated many of the above programs prior to entering into the settlement
agreement.
UnderIn connection with the settlement, agreement,the parties have agreed that the Bunch case
and the Tennessee EEOC action will be dismissed with prejudice once the Wilfong
settlement becomes final, which we have the right to terminate the settlement
under certain circumstances, includingexpect will occur in the event that more than 60 class
members elect to opt out of the settlement.early December 2002.
23
RENT-A-CENTER, INC. AND SUBSIDIARIES
The Wilfong settlement contemplates that the Bunch case will be dismissed with
prejudice once such settlement becomes final. At the parties' request, the court
in the Bunch case stayed the proceedings in that case, including postponing the
fairness hearing previously scheduled for March 6, 2002. Similarly, the court in
the Tennessee EEOC action has stayed the proceeding in that case and the EEOC
has agreed to having the case dismissed once the Wilfong settlement is
finalized.
In June 2002, we separately agreed to contribute an additional $2.0 million to a
dispute resolution fund in which approximately 100 class members in Bunch will
participate. This dispute resolution fund has been approved by the Bunch court
and counsel to the plaintiffs in Bunch support the dispute resolution fund and
the Wilfong settlement preliminarily approved by the Wilfong court.
To account for the aforementioned costs, as well as our own attorney's fees, we
recorded an additional non-recurring charge of $36.0 million in the fourth
quarter of 2001 in connection with the Wilfong matter and a non-recurrring
charge of $2.0 million in the second quarter of 2002 for a total non-recurring
charge of $54.0 million.
In November 2002, we reached a settlement of the suit with the Wisconsin
Attorney General, subject to court approval. Under the terms of the settlement,
we agreed to create a restitution fund in the amount of approximately $7.0
million for our applicable Wisconsin customers who had completed or active
transactions with us as of September 30, 2002. In addition, we agreed to pay
$1.4 million to the State of Wisconsin for fines, penalties, costs and fees. The
settlement of this matter was fully reserved for in our financial statements. A
portion of this restitution fund is allocated for restitution on active rental
transactions, which will be allowed to terminate according to their terms when
customers either acquire or return the merchandise. Restitution will be offered
to these customers when all such active transactions have terminated, which we
anticipate will occur in approximately two years. Any unclaimed restitution
funds at the conclusion of the restitution period will revert back to us. To the
extent the amount in the restitution fund is insufficient to pay the required
amount of restitution, we are obligated to provide additional funds to do so.
However, we believe the amount in the restitution fund allocated for these
customers, together with the amount of funds we anticipate will revert to us at
the conclusion of the restitution period, will be sufficient to pay the required
amount of restitution. Any customer accepting a restitution check will be
required to release us and our subsidiary ColorTyme from all claims related to
their transaction or transactions with us. We, together with ColorTyme, also
agreed to enter into an injunction requiring each of us to comply with the
Wisconsin Consumer Act in any transaction in Wisconsin in which the customer can
become the owner of merchandise other than through a single lump sum payment.
A court hearing to approve the settlement is scheduled for November 12, 2002. We
expect to fund this settlement within ten days following the court's approval.
We expect to fund the Wilfong settlement and the Wisconsin Attorney General
matter with cash on hand. Additional settlements or judgments against us on our
existing litigation could affect our liquidity. Please refer to Note J of our
consolidated financial statements included in our Annual Report on Form 10-K.
Sales of Equity Securities. On May 31, 2001, we completed an offering of
3,680,000 shares of our common stock at an offering price of $42.50 per share.
In that offering, 1,150,000 shares were offered by us and 2,530,000 shares were
offered by some of our stockholders. Net proceeds to us were approximately $45.6
million.
During 1998, we issued 260,000 shares of our Series A preferred stock at $1,000
per share, resulting in aggregate proceeds of $260.0 million. Dividends on our
Series A preferred stock accrue on a quarterly basis at the rate of $37.50 per
annum. To date, we have paid these dividends in additional shares of Series A
preferred stock because of restrictive provisions in our senior credit
facilities. Beginning in August 2003, we will be required to pay the dividends
in cash and may do so under our senior credit facilities so long as we are not
in default.
On August 5, 2002, the first date in which we had the right to optionally redeem
the shares of Series A preferred stock, the holders of our Series A preferred
stock converted all but two shares of our Series A preferred stock held by them
into approximately 7,281,548 shares of our common stock. As a result, the dividend on our
Series A preferred stock has been substantially eliminated for future periods.
In connection with Apollo's conversion of all but two of the shares of Series A
preferred stock held by them on August 5, 2002, we granted Apollo an additional
right to effect a demand registration under the existing registration rights
agreement we entered into with them in 1998.
Contractual Cash Commitments. The table below summarizes debt, lease and other
minimum cash obligations outstanding as of JuneSeptember 30, 2002:
PAYMENTS DUE BY YEAR END:
Contractual Cash Obligations(1) TOTAL 2002 2003 2004 2005 AND THEREAFTER
------------------------------- -------- -------- -------- -------- -------------------
(IN THOUSANDS)
Senior Credit Facilities
(including current portion) ........ $300,000....... $260,000 $ 1,2730 $ 1,2731,108 $ 15,612 $281,84213,589 $245,303
11% Senior Subordinated Notes (2) ........... 471,625 15,125 30,250 30,250 396,000
Series A Preferred Stock (3) ................ 52,556 -- 1,210 8,012 43,334... 454,425 0 30,112 30,112 394,201
Operating Leases ............................ 377,167 89,431 104,207 86,647 96,882.................... 361,252 42,593 111,072 94,023 113,564
- ----------
(1) Excludes obligations under the ColorTyme guarantee, the change in control
and acceleration provisions under the senior credit facilities, and the
optional redemption, change in control and acceleration provisions under
the indenture governing our subordinated notes.
(2) Includes interest payments of $15.13$15.06 million on each of February 15 and
August 15 of each year.
(3) Represents cash dividends required to be paid on the Series A preferred
stock from August 5, 2003 through August 5, 2009 but excludes the
obligations related to change in control and redemption, and assumes that
the internal rate of return threshold allowing us to cease paying dividends
of the Series A preferred stock is not met. On August 5, 2002, the first
date in which we had the right to optionally redeem the shares of Series A
preferred stock, the holders of our Series A preferred stock converted all
but two of the outstanding shares of Series A preferred stock into shares
of our common stock. Accordingly, cash dividends of approximately $52.6
million that would have otherwise been paid beginning August 5, 2003
through August 5, 2009 have been substantially eliminated.24
RENT-A-CENTER, INC. AND SUBSIDIARIES
Repurchases of Outstanding Securities. In connection with the retirement of J.
Ernest Talley, our former Chairman of the Board and Chief Executive Officer, we
entered into an agreement to repurchase $25.0 million worth of shares of our
common
24
RENT-A-CENTER, INC. AND SUBSIDIARIES stock held by Mr. Talley at a purchase price equal to the average closing
price of our common stock over the 10 trading days beginning October 9, 2001,
subject to a maximum of $27.00 per share and a minimum of $20.00 per share.
Under this formula, the purchase price for the repurchase was calculated at
$20.258 per share. Accordingly, on October 23, 2001 we repurchased 493,632
shares of our common stock from Mr. Talley at $20.258 per share for a total
purchase price of $10.0 million, and on November 30, 2001, we repurchased an
additional 740,448 shares of our common stock from Mr. Talley at $20.258 per
share, for a total purchase price of an additional $15.0 million. On January 25,
2002, we exercised the option to repurchase all of the remaining 1,714,086
shares of common stock held by Mr. Talley at $20.258 per share. We repurchased
those remaining shares on January 30, 2002.
In April 2000, we announced that our board of directors had authorized a program
to repurchase in the open market up to an aggregate of $25$25.0 million of our
common stock. During the quarter ended June 30,In October 2002, we did not repurchase anyour board of directors increased our authority to
effect repurchases of our shares pursuantoutstanding common stock under our common stock
repurchase program from $25.0 million to this Board authorization. Since June$50.0 million. Through September 30,
2002, we have repurchased approximately 241,404 shares of our common stock under
this program for approximately $11.9 million, all of which was effected in the
quarter ended September 30, 2002. As of November 5, 2002, we have repurchased an
additional 389,400 shares of our common stock under this program since September
30, 2002, for approximately $17.7 million.
In September 2002, we repurchased $1.25 million of our subordinated notes for
approximately $1.35 million, which included a loss of approximately $82,800.
Since September 30, 2002, we have repurchased an additional $1.5 million of our
subordinated notes for approximately $1.62 million, which included a loss of
approximately $96,250.
Our senior credit facilities currently limit our ability to repurchase our
common stock in excess of 25% of our consolidated net income for the period from
January 1, 2002 through our latest quarterly financial reports and require us to
make a matching pre-payment on our term loans with any such repurchase.
In
addition, theFurthermore, our senior credit facilities generally limit our ability to
repurchase our subordinated notes in excess of $54.0 million, of which
approximately $2.75 million has been utilized. The indenture governing our
subordinated notes containcontains covenants limiting our ability to repurchase our
capital stock. Accordingly, our ability to make further repurchases of our
common stock, including pursuant to our common stock repurchase program, and our
ability to repurchase our subordinated notes, is limited.
Economic Conditions. Although our performance has not suffered in previous
economic downturns, we cannot assure you that demand for our products,
particularly in higher price ranges, will not significantly decrease in the
event of a prolonged recession.
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.
25
RENT-A-CENTER, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
As of JuneSeptember 30, 2002, we had $275.0$273.8 million in subordinated notes
outstanding at a fixed interest rate of 11.0% and $300.0$260.0 million in term loans
outstanding at interest rates indexed to the LIBOR rate. The subordinated notes
mature on August 15, 2008. The fair value of the subordinated notes is estimated
based on discounted cash flow analysis using interest rates currently offered
for loans with similar terms to borrowers of similar credit quality. The fair
value of the subordinated notes at JuneSeptember 30, 2002 was $290.1$292.9 million, which
is $15.1$19.1 million above their carrying value. Unlike the subordinated notes, the
$300.0$260.0 million in term loans have variable interest rates indexed to current
LIBOR rates. Because the variable rate structure exposes us to the risk of
increased interest cost if interest rates rise, in 1998 we entered into $500.0
million in interest rate swap agreements that lock in a LIBOR rate of 5.59%,
thus hedging this risk. Of the $500.0 million in agreements, $250.0 million
expired in September 2001 and the remaining $250.0 million will expire in 2003.
Given our current capital structure at September 30, 2002, including our interest rate
swap agreements, we have $50.0$10.0 million, or 16.7%3.85% of our total debt, in variable
rate debt. A hypothetical 1.0% change in the LIBOR rate would affect pre-tax
earnings by approximately $50,000.$100,000. The swap agreements had an aggregate
negative fair value of $9.1$8.9 million and $4.7$11.5 million at JuneSeptember 30, 2002 and
2001, respectively. A hypothetical 1.0% change in the LIBOR rate would have
increased the negative fair value of the swaps by approximately $3.9$2.6 million.
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest rates. Our primary market risk exposure is fluctuations
in interest rates. Monitoring and managing this risk is a continual process
carried out by the Board of Directors and senior management. We manage our
market risk based on an ongoing assessment of trends in interest rates and
economic developments, giving consideration to possible effects on both total
return and reported earnings.
INTEREST RATE RISK
We hold long-term debt with variable interest rates indexed to prime or LIBOR
that exposes us to the risk of increased interest costs if interest rates rise.
To reduce the risk related to unfavorable interest rate movements, we have
entered into certain interest rate swap contracts on $250.0 million of debt to
pay a fixed rate of 5.60%.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days before the filing of this quarterly
report. Based on that evaluation, our management, including our Chief Executive
Officer and our Chief Financial Officer, concluded that our disclosure controls
and procedures were effective. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to their evaluation.
26
RENT-A-CENTER, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we, along with our subsidiaries, are party to various legal
proceedings arising in the ordinary course of business. Except as described
below, we are not currently a party to any material litigation.
Colon v. Thorn Americas, Inc. The plaintiffsPlaintiff filed this class action in November
1997 in New York state court. This matter was assumed by us in connection with
the Thorn Americas acquisition, and appropriate purchase accounting adjustments
were made for such contingent liabilities. The plaintiffs acknowledgePlaintiff acknowledges that
rent-to-own transactions in New York are subject to the provisions of New York's
Rental Purchase Statute but contendcontends the Rental Purchase Statute does not
provide Thorn Americas immunity from suit for other statutory violations.
Plaintiffs
allegePlaintiff alleges Thorn Americas has a duty to disclose effective interest under
New York consumer protection laws, and seek damages and injunctive relief for
Thorn Americas' 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 its payment records. In their
prayersthe prayer
for relief, the plaintiffs havePlaintiff requested the following:
o class certification;
o injunctive relief requiring Thorn Americas to (A) cease certain marketing
practices, and (B) price their rental purchase contracts in certain ways, and
(C) disclose effective interest;ways;
o unspecified compensatory and punitive damages;
o rescission of the class members contracts;
o an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period;
o treble damages, attorney's fees, filing fees and costs of suit;
o pre- and post-judgment interest; and
o any further relief granted by the court.
The plaintiffs havePlaintiff has not alleged a specific monetary amount with respect to theirthe
request for damages.
The proposed class originally included all New York residents who were party to
Thorn Americas' rent-to-own contracts from November 26, 1991 through November
26, 1997. In her class certification briefing, Plaintiff acknowledged her claims
under the General Business Law in New York are subject to a three year statute
of limitations, and is now requesting a class of all persons in New York who
paid for rental merchandise from us since November 26, 1994. In November 2000,
following interlocutory appeal by both parties from the denial of cross-motions
for summary judgement,judgment, we obtained a favorable ruling from the Appellate Division
of the State of New York, dismissing Plaintiff's claims based on the alleged
failure to disclose an effective interest rate. Plaintiff's other claims were
not dismissed. Plaintiff moved to certify a state-wide class in December 2000.
Plaintiff's class certification motion was heard by the court on November 7,
2001 at which timeand, on September 12, 2002, the court tookissued an opinion denying in part and
granting in part Plaintiff's requested certification. The opinion grants
certification as to all of Plaintiff's claims except Plaintiff's pricing claims
pursuant to the motion under advisement.Rental Purchase Statute. A court hearing is scheduled for
November 12, 2002 seeking clarification of the court's opinion concerning the
effect of its order on Plaintiff's specific claims.
We believe these claims are without merit and will continue to vigorously defendingdefend
ourselves in this action and opposing class certification. Although
there can be no assurance that our position will prevail, orcase, including appealing the court's certification order if
circumstances warrant. However, we cannot assure you that we will be found not to
have anyno liability we believe the decision by the Appellate
Division regarding interest rate disclosure to be a significant and favorable
development in this matter.
Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin Attorney
General filed suit against us and our subsidiary ColorTyme in the Circuit Court
of Milwaukee County, Wisconsin, alleging that our rent-to-rent transaction,
coupled with the opportunity afforded our rental customers to purchase the
rented merchandise under what we believe is a separate transaction, is a
disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the
Attorney General allegesalleged that we have failed to disclose credit terms, misrepresented
the terms of the transaction and engaged in unconscionable practices.
We currently operate 26 stores in Wisconsin.
27
RENT-A-CENTER, INC. AND SUBSIDIARIES
The Attorney General seekssought injunctive relief, restoration of any losses
suffered by any Wisconsin consumer harmed and civil forfeitures and penalties in
amounts ranging from $50 to $10,000 per violation. If the Attorney General's theory on
damages prevails, the Attorney General's claim for monetary penalties would
apply to at least 18,772 transactions through March 31, 2002. On October 31, 2001, the
Attorney General filed a motion for summary judgment on several counts in the
complaint, including the principal claim that our rent-to-rent transaction is
governed by the Wisconsin Consumer Act. Our response was filed on December 17,
2001. A pre-trial conference and hearing on the motion for summary judgment took
place on January 22, 2002, at which time the court ruled in favor of the
Attorney General's motion for summary judgment on the liability issues and set
the case for trial on damages for February 2003.
Since the filinginception of this suit, we have attempted to negotiate a mutually
satisfactory resolution of these claims with the Wisconsin Attorney General's
office, including the consideration of possible changes in our business
practices in Wisconsin. To date,On October 1, 2002, in anticipation of the settlement of
this matter, we have not been successful, butchanged our efforts
are ongoing. Ifbusiness practices in Wisconsin to a retail sale
model. Accordingly, our 23 Wisconsin stores now offer credit sale transactions
and operate under our newly-formed subsidiary Get It Now, which is subject to
regulation under the Wisconsin Consumer Act.
In November 2002, we are unable to negotiatereached a settlement of this suit with the Attorney
General, subject to court approval. Under the terms of the settlement, we intendagreed
to litigatecreate a restitution fund in the suit. We cannot assure you, however, thatamount of approximately $7.0 million for our
applicable Wisconsin customers who had completed or active transactions with us
as of September 30, 2002. In addition, we agreed to pay $1.4 million to the
outcomeState of Wisconsin for fines, penalties, costs and fees. A portion of this
matterrestitution fund is allocated for restitution on active rental transactions,
which will notbe allowed to terminate according to their terms when customers
either acquire or return the merchandise. Restitution will be offered to these
customers when all such active transactions have terminated, which we anticipate
will occur in approximately two years. Any unclaimed restitution funds at the
conclusion of the restitution period will revert back to us. To the extent the
amount in the restitution fund is insufficient to pay the required amount of
restitution, we are obligated to provide additional funds to do so. However, we
believe the amount in the restitution fund allocated for these customers,
together with the amount of funds we anticipate will revert to us at the
conclusion of the restitution period, will be sufficient to pay the required
amount of restitution. Any customer accepting a material adverse impact onrestitution check will be
required to release us and our financial
position, resultssubsidiary ColorTyme from all claims related to
their transaction or transactions with us. We, together with ColorTyme, also
agreed to enter into an injunction requiring each of operations or cash flows.us to comply with the
Wisconsin Consumer Act in any transaction in Wisconsin in which the customer can
become the owner of merchandise other than through a single lump sum payment.
A court hearing to approve the settlement is scheduled for November 12, 2002. We
expect to fund this settlement within ten days following the court's approval.
Gender Discrimination Actions. We are subject to three class action lawsuits
claiming gender discrimination. As described below, we have settled in principle all of the
claims covered by these three actions.
In September 1999, an action was filed against us in federal court in the
Western District of Tennessee by the U.S. Equal Employment Opportunity
Commission, alleging that we engaged in gender discrimination with respect to
four named females and other unnamed female employees and applicants within our
Tennessee and Arkansas region. The allegations underlying this EEOC action
involve charges of wrongful termination and denial of promotion, disparate
impact and failure to hire. The group of individuals on whose behalf EEOC seeks
relief is approximately seventy individuals.
In August 2000, a putative nationwide class action was filed against us in
federal court in East St. Louis, Illinois by Claudine Wilfong and eighteen other
plaintiffs, alleging that we engaged in class-wide gender discrimination
following our acquisition of Thorn Americas. The allegations underlying Wilfong
involve charges of wrongful termination, constructive discharge, disparate
treatment and disparate impact. In addition, the EEOC filed a motion to
intervene on behalf of the plaintiffs, which the court granted on May 14, 2001.
On December 27, 2001, the court granted the plaintiff's motion for class
certification.
In December 2000, similar suits filed by Margaret Bunch and Tracy Levings in
federal court in the Western District of Missouri were amended to allege class
action claims similar to those in Wilfong. In November 2001, we announced that
we had reached an agreement in principle for the settlement of the Bunch matter.
Under the terms of the Bunch settlement, while not admitting any liability, we
agreed to pay an aggregate of $12.25 million to the agreed upon class, plus
plaintiffs' attorneys fees as determined by the court and costs to administer
the settlement subject to an aggregate cap of $3.15 million. On November 29,
2001, the court in Bunch granted preliminary approval of the settlement and set
a fairness hearing on such settlement for March 6, 2002.
In early March 2002, we reached an agreement in principle with the plaintiffsplaintiffs'
attorneys in Wilfong and the EEOC to resolve the Wilfong suit and the Tennessee
EEOC action. At the parties' request, the court in the Bunch case stayed the
proceedings in that case, including postponing the fairness hearing previously
scheduled for March 6, 2002. Similarly, the court in the
28
RENT-A-CENTER, INC. AND SUBSIDIARIES
Tennessee EEOC action stayed the proceeding in that case. The definitive
settlement agreement documents were filed with the Wilfong court in June 2002,
and the court granted preliminary approval of the settlement on JulyJune 19, 2002.
The court held a fairness hearing, approved the settlement and entered its order
and judgment of final approval on October 4, 2002. Assuming there are no
appeals, the order and judgment will become effective on December 4, 2002.
Under the terms of the Wilfong settlement, while not admitting any liability, we
agreed to pay an aggregate of $47.0 million to approximately 6,000 female
employees and a yet to be determined number ofapproximately 2,300 female applicants who were employed by or
applied for employment with us during the period commencing on April 19, 1998
and ending on June 19, 2002, plus up to $375,000 in settlement administrative
costs. The $47.0 million payment includes the $12.25 million payment discussed
in connection with the Bunch settlement. Attorney fees of approximately $10.5
million for class counsel in Wilfong will be paid out of the $47.0 million
settlement fund. Pursuant to the settlement procedures approved by the court,
approximately fifty class members opted out of the settlement.
In June 2002, we separately agreed to contribute an additional $2.0 million to a
dispute resolution fund in an amount to be determinedwhich approximately 100 class members in Bunch will
participate. This dispute resolution fund has been approved by the court.Bunch court
and counsel to the plaintiffs in Bunch support the dispute resolution fund and
the Wilfong settlement.
The settlement agreement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an additional
one year upon a showing of good cause. Also, under the settlement agreement, we
agreed to augment our human resources department and our internal employee
complaint procedures; enhance our gender anti-discrimination training for all
employees; hire a consultant mutually acceptable to the parties for two years to
advise us on employment matters; provide certain reports to the EEOC during the
period of the consent decree; seek qualified female representation on our board
of directors; publicize our desire to recruit, hire and promote qualified women;
offer to fill job vacancies within our regional markets with qualified class
members who reside in those markets and express an interest in employment by us
to the extent of 10% of our job vacancies in such markets over a fifteen month
period; and to take certain other steps to improve opportunities for women. We
initiated many of the above programs prior to entering into the settlement
agreement.
28
RENT-A-CENTER, INC. AND SUBSIDIARIES
UnderIn connection with the settlement, agreement, wethe parties have the right to terminate the settlement
under certain circumstances, including in the event that more than 60 class
members elect to opt out of the settlement.
The Wilfong settlement contemplatesagreed that the Bunch case
and the Tennessee EEOC action will be dismissed with prejudice once such settlement becomes final. At the parties' request, the court
in the Bunch case stayed the proceedings in that case, including postponing the
fairness hearing previously scheduled for March 6, 2002. Similarly, the court in
the Tennessee EEOC action has stayed the proceeding in that case and the EEOC
has agreed to having the case dismissed once the Wilfong
settlement is
finalized.
In June 2002,becomes final, which we separately agreedcurrently expect to contribute an additional $2.0 million to a
dispute resolution fundoccur in which approximately 100 class members in Bunch will
participate. This dispute resolution fund has been approved by the Bunch court
and counsel to the plaintiffs in Bunch support the dispute resolution fund and
the Wilfong settlement preliminarily approved by the Wilfong court.
Notices have been mailed to the Wilfong class members. Members of the class who
do not wish to participate in the settlement have been given the opportunity to
opt out of the settlement. A fairness hearing has been scheduled for October 4,early December
2002. While we believe the proposed settlement is fair, we cannot assure you
that the settlement will be approved by the court in its present form.
Terry Walker, et. al. v. Rent-A-Center, Inc., et. al. On January 4, 2002, a
putative class action was filed against us and certain of our current and former
officers and directors by Terry Walker in federal court in Texarkana, Texas. The
complaint alleges that the defendants violated Sections 10(b) and/or Section
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by issuing false and misleading statements and omitting material
facts regarding our financial performance and prospects for the third and fourth
quarters of 2001. The complaint purports to be brought on behalf of all
purchasers of our common stock from April 25, 2001 through October 8, 2001 and
seeks damages in unspecified amounts. We anticipate that similarSimilar complaints will
bewere consolidated by
the court with the Walker matter.matter in October 2002. Plaintiff's consolidated
amended complaint is due by November 25, 2002, and we anticipate our response to
such complaint will be due in early January 2003. We believe that theseplaintiff's claims
to date are without merit and intend to vigorously defend ourselves. However, we
cannot assure you that we will be found to have no liability in this matter.
Gregory Griffin, et. al. v. Rent-A-Center, Inc. On June 25, 2002, a suit
originally filed by Gregory Griffin in state court in Philadelphia, Pennsylvania
was amended to seek relief both individually and on behalf of a class of
customers in Pennsylvania, alleging that we violated the Pennsylvania Goods and
Services Installment Sales Act and the Pennsylvania Unfair Trade Practices and
Consumer Protection Law. The amended complaint asserts that our rental purchase
transactions are, in fact, retail installment sales transactions, and as such,
are not governed by the Pennsylvania Rental-Purchase Agreement Act, which was
enacted after the adoption of the Pennsylvania Goods and Services Installment
Sales Act and the Pennsylvania Unfair Trade Practices Act. Griffin's suit seeks
class-wide remedies, including injunctive relief, unspecified statutory, actual
and treble damages, as well as attorney's fees and costs. Discovery in the case
is in its early stages. Although we believe that these claims are without merit,
a recent trial court decision in a similar case to which we were not a party
held that rental purchase transactions in Pennsylvania are in fact retail
installment sales transactions not governed by the Pennsylvania Rental-Purchase
Agreement Act. We strongly disagree with this decision. We have filed
preliminary objections to the complaint in Griffin. Such objections are
currently pending before the trial court for decision. We intend to vigorously
defend ourselves in this case. However, we cannot assure you that we will be
found to have no liability in this matter and we
intend to vigorously defend ourselves in this case.matter.
29
RENT-A-CENTER, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Stockholders held on May 21, 2002, the nominees for our
Class II directors were elected. One Class II director was elected by all of our
stockholders and one Class II director was elected by the holders of our Series
A preferred stock.
The voting was as follows for the director elected by all of our stockholders:
NOMINEE FOR WITHHELD
Mark E. Speese 18,470,727 3,140,961
The voting was as follows for the director elected by the holders of our Series
A preferred stock:
NOMINEE FOR WITHHELD
Lawrence M. Berg 292,434 0
In addition to the directors elected at our Annual Meeting of Stockholders, the
following directors' terms of office as a director continued after the Annual
Meeting of Stockholders:
J.V. Lentell
Andrew S. Jhawar
Mitchell E. Fadel
Peter P. Copses
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
CURRENT REPORTS ON FORM 8-K
None.Current Report on Form 8-K, dated August 12, 2002, relating to the filing of
sworn statements by Rent-A-Center, Inc.'s principal executive officer and
principal financial officer pursuant to Section 21(a)(1) of the Securities
Exchange Act of 1934 as required by the Securities and Exchange Commission's
Order No. 4-460 dated June 27, 2002.
Current Report on Form 8-K, dated August 12, 2002, relating to the certification
by Mr. Speese and Mr. Davis pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002 which accompanied Rent-A-Center, Inc.'s Quarterly Statement on Form 10-Q
for the quarter ended June 30, 2002.
EXHIBITS
The exhibits required to be furnished pursuant to Item 6 are listed in the
Exhibit Index filed herewith, which Exhibit Index is incorporated herein by
reference.
30
RENT-A-CENTER, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned duly authorized officer.
RENT-A-CENTER, INC.
By: /s/ Robert D. Davis
-----------------------------------
Robert D. Davis
Senior Vice President-Finance and
Chief Financial Officer
Date: AugustNovember 12, 2002
31
RENT-A-CENTER, INC. AND SUBSIDIARIES
I, Mark E. Speese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-A-Center,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ MARK E. SPEESE
---------------------------------
Chairman of the Board
and Chief Executive Officer
32
RENT-A-CENTER, INC. AND SUBSIDIARIES
I, Robert D. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-A-Center,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
d. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
f. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
c. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ ROBERT D. DAVIS
----------------------------------------
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
33
RENT-A-CENTER, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ------------------ -------------------
3.1(1) -- Amended and Restated Certificate of Incorporation of Renters
Choice, Inc.
3.2(2) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice, Inc.
3.3(3) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Rent-A-Center, Inc.
3.4(4) -- Amended and Restated Bylaws of Rent-A-Center, Inc.
4.1(5) -- Form of Certificate evidencing Common Stock
4.2(6) -- Certificate of Designations, Preferences and Relative Rights
and Limitations of Series A Preferred Stock of Renters
Choice, Inc.
4.3(7) -- Certificate of Designations, Preferences and Relative Rights
and Limitations of Series B Preferred Stock of Renters
Choice, Inc.
4.4(8) -- Indenture, dated as of August 18, 1998, by and among Renters
Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc.,
as Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company,
as Trustee
4.5(9) -- Form of Certificate evidencing Series A Preferred Stock
4.6(10) -- Form of 1998 Exchange Note
4.7(11) -- First Supplemental Indenture, dated as of December 31, 1998, by
and among Renters Choice Inc., Rent-A-Center, Inc., ColorTyme,
Inc., Advantage Companies, Inc. and IBJ Schroder Bank & Trust
Company, as Trustee.
4.8(12)4.5(9) -- Indenture, dated as of December 19, 2001, by and among
Rent-A-Center, Inc., as Issuer, ColorTyme, Inc., and
Advantage Companies, Inc., as Subsidiary Guarantors, and The
Bank of New York, as Trustee
4.9(13)4.6(10) -- First Supplemental Indenture, dated as of May 1, 2002, by
and among Rent-A-Center, Inc., ColorTyme, Inc., Advantage
Companies, Inc. and The Bank of New York, as Trustee.
4.10(14)4.7* -- Second Supplemental Indenture, dated as of September 30,
2002, by and among Rent-A-Center, Inc., ColorTyme, Inc.,
Advantage Companies, Inc., Get It Now, LLC and The Bank of
New York, as Trustee.
4.8(11) -- Form of 2001 Exchange Note
10.1(15)10.1(12)+ -- Amended and Restated Rent-A-Center, Inc. Long-Term Incentive
Plan
10.2(16) -- Amended and Restated Credit Agreement, dated as of August 5, 1998
as amended and restated as of June 29, 2000, among Rent-A-Center,
Inc., Comerica Bank, as Documentation Agent, Bank of America NA,
as Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent.
10.3(17) -- First Amendment to the Credit Agreement, dated August 5, 1998, as
amended and restated as of June 29, 2000, among Rent-A-Center,
Inc., the Lenders party to the Credit Agreement, the Documentation
Agent, and Syndication Agent named therein and the Chase Manhattan
Bank, as Administrative Agent
10.4(18) -- Second Amendment, dated as of November 26, 2001, to the Credit
Agreement, dated as of August 5, 1998, as amended and restated as
of June 29, 2000, among Rent-A-Center, Inc., the lenders party to
the Credit Agreement, the Documentation Agent and Syndication
Agent named therein and JP Morgan Chase Bank (formerly known as
The Chase Manhattan Bank), as Administrative Agent
10.5(19)10.2(13) -- Amended and Restated Credit Agreement, dated as of August 5,
1998 as amended and restated as of May 3, 2002, among
Rent-A-Center, Inc., Comerica Bank, as Documentation Agent,
Bank of America NA, as Syndication Agent and JP Morgan Chase
Bank, as Administrative Agent.
10.6(20)10.3* -- First Amendment, dated as of October 11, 2002, to the Credit
Agreement, dated August 5, 1998, as amended and restated as
of May 3, 2002, among Rent-A-Center, Inc., the lenders party
to the Credit Agreement, the Documentation Agent and
Syndication named there in and JP Morgan Chase Bank, as
Administrative Agent.
10.4(14) -- Guarantee and Collateral Agreement, dated August 5, 1998,
made by Renters Choice, Inc., and certain of its
Subsidiaries in favor of the Chase Manhattan Bank, as
Administrative Agent
10.7(21)10.5(15) -- Amended and Restated Stockholders Agreement, dated as of
October 8, 2001, by and among Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley,
Mark E. Speese, Rent-A-Center, Inc., and certain other
persons
10.8*10.6(16) -- Amended and Restated Stockholders Agreement, dated as of
August 5, 2002, by and among Apollo Investment Fund IV,
L.P., Apollo Overseas Partners IV, L.P., Apollo
Overseas Partners IV, L.P.Mark E. Speese,
Rent-A-Center, Inc., Mark E. Speese, Rent-A-Center, Inc.,
and certain other persons
32
RENT-A-CENTER, INC. AND SUBSIDIARIES
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.9(22)and certain other persons
10.7(17) -- Registration Rights Agreement, dated August 5, 1998, by and
between Renters Choice, Inc., Apollo Investment Fund IV,
L.P., and Apollo Overseas Partners IV, L.P., related to the
Series A Convertible Preferred Stock
10.10*10.8(18) -- Second Amendment to Registration Rights Agreement, dated as
of August 5, 2002, by and among Rent-A-Center, Inc., Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners IV,
L.P.
10.11(23)10.9(19) -- Common Stock Purchase Agreement, dated as of October 8,
2001, by and among J. Ernest Talley, Mary Ann Talley, the
Talley 1999 Trust and Rent-A-Center, Inc.
10.12(24)10.10(20) -- Exchange and Registration Rights Agreement, dated December
19, 2001, by and among Rent-A-Center, Inc., ColorTyme, Inc.,
Advantage Companies, Inc., J.P. Morgan Securities, Inc.,
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
and Lehman Brothers, Inc.
10.13*10.11(21) -- Amended and Restated Franchisee Financing Agreement, dated
March 27, 2002, by and between Textron Financial
Corporation, ColorTyme, Inc. and Rent-A-Center, Inc.
10.14*10.12(22) -- Franchise Financing Agreement, dated April 30, 2002, but
effective as of June 28, 2002, but effective
as of June 28, 2002, by and between Texas Capital
Bank, National Association, ColorTyme, Inc. and
between Texas Capital Bank, National
Association, ColorTyme, Inc. and Rent-A-Center, Inc.
10.15*Rent-A-Center, Inc.
RENT-A-CENTER, INC. AND SUBSIDIARIES
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.13(23) -- First Amendment to Franchisee Financing Agreement, dated
July 23, 2002, by and between Textron Financial Corporation,
ColorTyme, Inc. and Rent-A-Center, Inc.
21.1(25)10.14* -- Second Amendment to Franchisee Financing Agreement, dated
September 30, 2002, by and between Textron Financial
Corporation, ColorTyme, Inc. and Rent-A-Center, Inc.
21.1* -- Subsidiaries of Rent-A-Center, Inc
- ----------
* Filed herewith.
+ Management contract or company plan or arrangement
(1) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(2) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
(3) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
(4) Incorporated herein by reference to Exhibit 3.4 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(5) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form
S-4 filed on January 19, 1999.
(6) Incorporated herein by reference to Exhibit 4.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(7) Incorporated herein by reference to Exhibit 4.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(8) Incorporated herein by reference to Exhibit 4.44.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(9) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(10) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(11) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(12) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(13)(10) Incorporated herein by reference to Exhibit 4.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
33
RENT-A-CENTER, INC. AND SUBSIDIARIES
(14)(11) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(15)(12) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Registration Statement of Form S-4 filed on January 22, 2002
(16) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(17) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(18) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(19)(13) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(20)(14) Incorporated herein by reference to Exhibit 10.19 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(21)(15) Incorporated herein by reference to Exhibit 10.2110.7 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
RENT-A-CENTER, INC. AND SUBSIDIARIES
(16) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(22)2002
(17) Incorporated herein by reference to Exhibit 10.22 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(23)(18) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(19) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
(24)(20) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(25)(21) Incorporated herein by reference to Exhibit 21.110.13 to the registrant's
Registration StatementQuarterly Report on Form S-4 filed10-Q for the quarter ended June 30, 2002
(22) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Quarterly Report on January 19, 1999
34Form 10-Q for the quarter ended June 30, 2002
(23) Incorporated herein by reference to Exhibit 10.15 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002