UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
----------------------FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31,
20032004Commission File Number 0-25370
RENT-A-CENTER, INC.
(Exact(Exact name of registrant as specified in its charter)DELAWARE 45-0491516 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
Delaware
(State or other jurisdiction of
incorporation or organization)45-0491516
(I.R.S. Employer
Identification No.)5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
(972) 801-1100(Address,
(Address, including zip code, and telephone
number, including area code, ofregistrant'sregistrant’s
principal executive offices)NONE
(Former
(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 by check mark whether the registrant is an accelerated
filedfiler (as defined in Rule 12b-2 of the Exchange Act).YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as ofMay 12, 2003: Class Outstanding - -------------------------------------- ---------------- Common stock, $.01 par value per share 35,111,258April 30, 2004:
Class Outstanding Common stock, $.01 par value per share 80,421,963 TABLE OF CONTENTS
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETSSTATEMENTS OF EARNINGS
MARCH 31, DECEMBER 31, (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) 2003 2002 ----------- ------------ UNAUDITEDASSETS Cash and cash equivalents................................... $ 103,151 $ 85,723 Accounts receivable - trade................................. 9,447 5,922 Prepaid expenses and other assets........................... 25,717 42,882 Rental merchandise, net On rent................................................... 556,415 510,184 Held for rent............................................. 136,909 121,540 Property assets, net........................................ 109,015 105,949 Intangible assets, net...................................... 788,964 743,852 ---------- ----------- $1,729,618 $1,616,052 ========== =========== LIABILITIES Accounts payable - trade.................................... $ 79,392 $ 43,461 Accrued liabilities......................................... 165,234 122,717 Deferred income tax liability............................... 75,712 86,142 Senior debt................................................. 249,500 249,500 Subordinated notes payable, net of discount................. 271,849 271,830 ---------- ----------- 841,687 773,650 COMMITMENTS AND CONTINGENCIES................................... -- -- PREFERRED STOCK Redeemable convertible voting preferred stock, net of placement costs, $.01 par value; 5,000,000 shares authorized; 2 shares issued and outstanding in 2003 and 2002, respectively.......................................... 2 2 STOCKHOLDERS' EQUITY Common stock, $.01 par value; 125,000,000 shares authorized; 39,747,712 and 39,538,042 shares issued in 2003 and 2002, respectively.............................................. 397 395 Additional paid-in capital.................................. 539,339 532,675 Accumulated comprehensive loss.............................. (2,351) (3,726) Retained earnings........................................... 479,547 428,621 Treasury stock, 4,875,269 and 4,599,269 shares at cost in 2003 and 2002, respectively............................... (129,003) (115,565) ---------- ----------- 887,929 842,400 ---------- ----------- $1,729,618 $1,616,052 ========== ===========
(In thousands, except per share data) Three months ended March 31, 2004 2003 Unaudited Revenues Store Rentals and fees $ 504,290 $ 493,419 Merchandise sales 59,423 52,664 Installment sales 6,698 6,045 Other 1,080 715 Franchise Merchandise sales 12,464 12,072 Royalty income and fees 1,425 1,491
585,380 566,406 Operating expenses Direct store expenses Depreciation of rental merchandise 108,315 106,660 Cost of merchandise sold 39,611 36,548 Cost of installment sales 3,145 3,231 Salaries and other expenses 309,084 292,496 Franchise cost of merchandise sold 11,892 11,551
472,047 450,486 General and administrative expenses 18,186 16,756 Amortization of intangibles 2,488 2,873
Total operating expenses 492,721 470,115 Operating profit 92,659 96,291 Interest expense 10,359 13,523 Interest income (1,503 ) (771 )
Earnings before income taxes 83,803 83,539 Income tax expense 31,594 32,580
NET EARNINGS 52,209 50,959 Preferred dividends — —
Net earnings allocable to common stockholders $ 52,209 $ 50,959
Basic earnings per common share $ 0.65 $ 0.58
Diluted earnings per common share $ 0.63 $ 0.57
See accompanying notes to consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGSBALANCE SHEETS
THREE MONTHS ENDED MARCH 31, ---------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 --------- --------- UNAUDITEDRevenues Store Rentals and fees ...................................... $ 493,419 $ 443,705 Installment sales ..................................... 6,045 -- Merchandise sales ..................................... 52,664 39,605 Other ................................................. 715 614 Franchise Merchandise sales ..................................... 12,072 13,253 Royalty income and fees ............................... 1,491 1,433 --------- --------- 566,406 498,610 Operating expenses Direct store expenses Depreciation of rental merchandise .................... 106,660 92,223 Cost of installment sales ............................. 3,231 -- Cost of merchandise sold .............................. 36,548 26,982 Salaries and other expenses ........................... 292,496 262,619 Franchise cost of merchandise sold ....................... 11,551 12,653 --------- --------- 450,486 394,477 General and administrative expenses ...................... 16,756 15,117 Amortization of intangibles .............................. 2,873 720 --------- --------- Total operating expenses ........................... 470,115 410,314 Operating profit ................................... 96,291 88,296 Interest expense ........................................... 13,523 15,798 Interest income ............................................ (771) (723) --------- --------- Earnings before income taxes ....................... 83,539 73,221 Income tax expense ......................................... 32,580 29,658 --------- --------- NET EARNINGS ....................................... 50,959 43,563 Preferred dividends ........................................ -- 4,992 --------- --------- Net earnings allocable to common stockholders .............. $ 50,959 $ 38,571 ========= ========= Basic earnings per common share ............................ $ 1.46 $ 1.57 ========= ========= Diluted earnings per common share .......................... $ 1.42 $ 1.20 ========= =========
(In thousands, except share data) March 31, December 31, 2004 2003 Unaudited ASSETSCash and cash equivalents $ 273,391 $ 143,941 Accounts receivable, net 15,506 14,949 Prepaid expenses and other assets 42,444 70,702 Rental merchandise, net On rent 557,484 542,909 Held for rent 140,418 139,458 Property assets, net 120,831 121,909 Goodwill, net 796,779 788,059 Intangible assets, net 7,821 9,375
$ 1,954,674 $ 1,831,302
LIABILITIESAccounts payable – trade $ 96,124 $ 72,708 Accrued liabilities 208,798 132,844 Deferred income taxes 108,383 132,918 Senior debt 397,000 398,000 Subordinated notes payable, net of discount 300,000 300,000 Redeemable convertible voting preferred stock 2 2
1,110,307 1,036,472 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Common stock, $.01 par value; 125,000,000 shares authorized; 101,571,531 and 101,148,417 shares issued in 2004 and 2003, respectively 1,016 1,012 Additional paid-in capital 578,318 572,628 Retained earnings 662,139 609,930 Treasury stock, 21,292,591 and 21,020,041 shares at cost in 2004 and 2003, respectively (397,106 ) (388,740 )
844,367 794,830
$ 1,954,674 $ 1,831,302
See accompanying notes to consolidated financial statements.
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ---------------------------- (IN THOUSANDS OF DOLLARS) 2003 2002 --------- --------- UNAUDITEDCash flows from operating activities Net earnings .................................................... $ 50,959 $ 43,563 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise ............................ 106,660 92,223 Depreciation of property assets ............................... 10,120 9,466 Amortization of intangibles ................................... 2,873 720 Amortization of financing fees ................................ 262 690 Deferred income taxes ......................................... (10,430) 12,076 Changes in operating assets and liabilities, net of effects of acquisitions Rental merchandise ............................................ (117,896) (93,826) Accounts receivable - trade ................................... (3,525) (1,144) Prepaid expenses and other assets ............................. 15,422 (3,435) Accounts payable - trade ...................................... 35,931 15,468 Accrued liabilities ........................................... 34,414 20,530 --------- --------- Net cash provided by operating activities .................. 124,790 96,331 Cash flows from investing activities Purchase of property assets ..................................... (9,245) (8,100) Proceeds from sale of property assets............................ 223 374 Acquisitions of businesses, net of cash acquired ................ (91,065) (3,549) --------- --------- Net cash used in investing activities ...................... (100,087) (11,275) Cash flows from financing activities Purchase of treasury stock ...................................... (13,438) (34,724) Exercise of stock options ....................................... 6,163 8,974 --------- --------- Net cash used in financing activities ...................... (7,275) (25,750) NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 17,428 59,306 Cash and cash equivalents at beginning of period ................... 85,723 107,958 --------- --------- Cash and cash equivalents at end of period ......................... $ 103,151 $ 167,264 ========= ========= Supplemental cash flow information Cash paid during the year for: Interest ...................................................... $ 20,839 $ 18,585 Income taxes .................................................. $ 2,569 $ 2,018
Three months ended March 31, (In thousands) 2004 2003 Unaudited Cash flows from operating activities Net earnings $ 52,209 $ 50,959 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise 108,315 106,660 Depreciation of property assets 11,249 10,120 Amortization of intangibles 2,488 2,873 Amortization of financing fees 212 262 Deferred income taxes (24,535 ) (10,430 ) Changes in operating assets and liabilities, net of effects of acquisitions Rental merchandise (119,650 ) (117,896 ) Accounts receivable, net (557 ) (3,525 ) Prepaid expenses and other assets 28,294 15,422 Accounts payable – trade 23,416 35,931 Accrued liabilities 75,954 34,414
Net cash provided by operating activities 157,395 124,790 Cash flows from investing activities Purchase of property assets (13,418 ) (9,245 ) Proceeds from sale of property assets 3,246 223 Acquisitions of businesses, net of cash acquired (14,101 ) (91,065 )
Net cash used in investing activities (24,273 ) (100,087 ) Cash flows from financing activities Purchase of treasury stock (8,366 ) (13,438 ) Exercise of stock options 5,694 6,163 Repayments of debt (1,000 ) —
Net cash used in financing activities (3,672 ) (7,275 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 129,450 17,428 Cash and cash equivalents at beginning of period 143,941 85,723 ��
Cash and cash equivalents at end of period $ 273,391 $ 103,151
Supplemental cash flow informationCash paid during the period for: Interest $ 3,727 $ 20,839 Income taxes $ 592 $ 2,569 Supplemental schedule of non-cash investing and financing activities Fair value of assets acquired $ 14,101 $ 91,065 Cash paid $ 14,101 $ 91,065 During the first
quarterthree months of 2004 and 2003, the Company paid dividends on itsSeries Apreferred stock of approximately$20.00$19 in cash.During the first quarter of 2002, the Company paid dividends on its Series A preferred stock of approximately $2.8 million by issuing 2,764 shares of Series A preferred stock.See accompanying notes to consolidated financial statements.
5
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, 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. Principles of Consolidation and Nature of Operations. Unless the context indicates otherwise, references to "Rent-A-Center" refer only to Rent-A-Center, Inc., the parent, and references to "we," "us" and "our"
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/A for the year ended December 31, 2003. 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. Stock Split.On July 28, 2003, we announced that our Board of Directors had approved a 5 for 2 stock split on our common stock to be paid in the form of a stock dividend. Each common stockholder of record on August 15, 2003 received 1.5 additional shares of common stock for each share of common stock held on that date. No fractional shares were issued in connection with the stock dividend. Each stockholder who would otherwise have received a fractional share received an additional share of common stock. The distribution date for the stock dividend was August 29, 2003. The effect of the stock split has been recognized retroactively in the stockholder’s equity accounts and in all share data in the consolidated statements of earnings, notes to the consolidated financial statements and management’s discussion and analysis, unless otherwise noted. 3. Principles of Consolidation and Nature of Operations.These financial statements include the accounts of Rent-A-Center and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to “Rent-A-Center” refer only to Rent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and all of its direct and indirect subsidiaries. At March 31, 2004, we operated 2,671 company-owned stores nationwide and in Canada and Puerto Rico, including 22 stores in Wisconsin operated by a subsidiary, Get It Now, LLC, under the name “Get It Now”, and five stores in Canada operated by a subsidiary, Rent-A-Centre Canada, Ltd., under the name “Rent-A-Centre.” Rent-A-Center’s primary operating segment consists of leasing household durable goods to customers on a rent-to-own basis. Get It Now offers merchandise on an installment sales basis in Wisconsin. ColorTyme, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a nationwide franchisor of rent-to-own stores. At March 31, 2004, ColorTyme had 323 franchised stores operating in 40 states. ColorTyme’s primary source of revenues is the sale of rental merchandise to its franchisees, who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own program. The balance of ColorTyme’s revenues is generated primarily from royalties based on franchisees’ monthly gross revenues. 4. Reconciliation of Rental Merchandise.
Three Months Ended Three Months Ended March 31, 2004 March 31, 2003 (in thousands) Beginning merchandise value $ 682,367 $ 631,724 Inventory additions through acquisitions 4,200 50,364 Purchases 177,261 172,500 Depreciation of rental merchandise (108,315 ) (106,660 ) Cost of goods sold (42,756 ) (39,779 ) Skips and stolens (12,613 ) (10,469 ) Other inventory deletions(1)(2,242 ) (4,356 )
Ending merchandise value $ 697,902 $ 693,324
(1) Other inventory deletions include loss/damage waiver claims and unrepairable and missing merchandise, as well as acquisition write-offs. 6
RENT-A-CENTER, INC. AND SUBSIDIARIES
5. Intangibles. Amortization of intangibles consists primarily of the amortization of customer relationships and non-compete agreements. Intangibles consist of the following (in thousands):
March 31, 2004 December 31, 2003 Avg. Gross Gross Life Carrying Accumulated Carrying Accumulated (years) Amount Amortization Amount Amortization Amortizable intangible assets Franchise network 10 $ 3,000 $ 2,325 $ 3,000 $ 2,250 Non-compete agreements 4 5,014 1,984 5,275 1,788 Customer relationships 1.5 21,893 17,777 20,699 15,561
Total 29,907 22,086 28,974 19,599 Intangible assets not subject to amortization Goodwill 895,941 99,162 887,221 99,162
Total intangibles $ 925,848 $ 121,248 $ 916,195 $ 118,761
The estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows:
Estimated Amortization Expense (In thousands) 2004 $ 4,398 2005 2,116 2006 1,216 2007 91 2008 —
Total $ 7,821
Changes in the net carrying amount of goodwill are as follows:
At March 31, 2004 At December 31, 2003 (in thousands) Balance as of January 1, $ 788,059 $ 736,395 Additions from acquisitions 8,594 48,445 Post purchase price allocation adjustments 126 3,219
Balance as of the end of the period $ 796,779 $ 788,059
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
6. Stock Based Compensation. Rent-A-Center’s Amended and Restated Long-Term Incentive Plan (the “Plan”) for the benefit of certain employees, consultants and directors provides the Board of Directors broad discretion in creating equity incentives. Under the Plan, 14,562,865 shares of Rent-A-Center’s common stock were reserved for issuance under stock options, stock appreciation rights or restricted stock grants. Options granted to our employees under the Plan generally become exercisable over a period of one to four years from the date of grant and may be exercised up to a maximum of 10 years from the date of grant. Options granted to directors are immediately exercisable. There have been no grants of stock appreciation rights and all options have been granted with fixed prices. At March 31, 2004, there were 10,308,850 shares available for issuance under the Plan, of which 5,811,540 shares were allocated to options currently outstanding. However, pursuant to the terms of the Plan, when an optionee leaves our employ, unvested options granted to that employee terminate and become available for re-issuance under the Plan. Vested options not exercised within 90 days from the date the optionee leaves the Company’s employ terminate and become available for re-issuance under the Plan. Rent-A-Center accounts for the Plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if Rent-A-Center had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123,Accounting for Stock-Based Compensation,to stock-based employee compensation.
Three months ended March 31, 2004 2003 (In thousands, except per share data) Net earnings allocable to common stockholders As reported $ 52,209 $ 50,959 Deduct: Total stock-based employee compensation under fair value based method for all awards, net of related tax expense 3,176 3,704
Pro forma $ 49,033 $ 47,255
Basic earnings per common share As reported $ 0.65 $ 0.58 Pro forma $ 0.61 $ 0.54 Diluted earnings per common share As reported $ 0.63 $ 0.57 Pro forma $ 0.59 $ 0.53
The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 55.2%, risk-free interest rates of 2.9% and 3.7% and expected lives of four years and seven years in 2004 and 2003, respectively, and no dividend yield. 8
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. 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 March 31, 2004 Net earnings Shares Per share Basic earnings per common share $ 52,209 80,285 $ 0.65 Effect of dilutive stock options 2,602
Diluted earnings per common share $ 52,209 82,887 $ 0.63
Three months ended March 31, 2003 Net earnings Shares Per share Basic earnings per common share $ 50,959 87,240 $ 0.58 Effect of dilutive stock options — 2,600
Diluted earnings per common share $ 50,959 89,840 $ 0.57
For the three months ended March 31, 2004 and 2003, 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 64,750 and 2,330,000, respectively. 8. Subsidiary Guarantors. 11% Senior Subordinated Notes.In December 2001, Rent-A-Center East issued $100.0 million of 11% senior subordinated notes (the “11% Notes”), maturing on August 15, 2008, under an indenture dated as of December 19, 2001 among Rent-A-Center East, its subsidiary guarantors and The Bank of New York, as trustee. On May 2, 2002, Rent-A-Center East closed an exchange offer for, among other things, approximately $175.0 million of senior subordinated notes issued by it under a previous indenture, such that, on that date, all senior subordinated notes were governed by the terms of the 2001 indenture. The 2001 indenture contained covenants that limited Rent-A-Center East’s ability to, among other things, incur additional debt, grants liens to third parties, and pay dividends or repurchase stock. On May 6, 2003, Rent-A-Center East repurchased approximately $183.0 million of its then outstanding 11% Notes. On August 15, 2003, Rent-A-Center East redeemed the remaining outstanding 11% Notes. 7 ½% Senior Subordinated Notes. On May 6, 2003, Rent-A-Center issued $300.0 million in senior subordinated notes due 2010, bearing interest at 7½% (the “7½% Notes”), pursuant to an indenture dated May 6, 2003, among Rent-A-Center, Inc., its subsidiary guarantors (the “Subsidiary Guarantors”) and The Bank of New York, as trustee. The proceeds of this offering were used to fund the repurchase and redemption of the then outstanding 11% Notes. The 2003 indenture contains covenants that limit Rent-A-Center’s ability to: incur additional debt;sell assets or its subsidiaries;grant liens to third parties;pay dividends or repurchase stock; andengage in a merger or sell substantially all of itsdirect and indirect subsidiaries. These financial statements include the accounts of Rent-A-Center and its direct and indirect wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. At March 31, 2003, we operated 2,542 company-owned stores nationwide and in Puerto Rico, including 23 stores in Wisconsin operated by a subsidiary, Get It Now, LLC,assets.
Events of default under the name "Get It Now." Rent-A-Center's primary operating segment consists of leasing household durable goods to customers on a rent-to-own basis. Get It Now offers merchandise on an installment sales basis in Wisconsin. ColorTyme, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a nationwide franchisor of rent-to-own stores. At March 31, 2003, ColorTyme had 317 franchised stores operating in 40 states. These rent-to-own stores offer high quality durable products such as home electronics, appliances, computers, and furniture and accessories. ColorTyme's primary source of revenues is the sale of rental merchandise to its franchisees, who, in turn, offer the merchandise to the general public for rent or purchase under a rent-to-own program. The balance of ColorTyme's revenues is generated primarily from royalties based on franchisees' monthly gross revenues. 3. Reconciliation of Rental Merchandise.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31,2003MARCH 31, 2002 ------------------ ------------------Beginning merchandise value.......................... $ 631,724 $ 653,701 Inventory additions through acquisitions............. 50,364 1,240 Purchases............................................ 172,500 137,893 Depreciationindenture include customary events, such as a cross-acceleration provision in the event that Rent-A-Center defaults in the payment ofrental merchandise................... (106,660) (92,223) Cost of goods sold................................... (39,779) (26,982) Skips and stolens.................................... (10,469) (12,107) Other inventory deletions(1)......................... (4,356) (4,978) ------------- ------------ Ending merchandise value............................. $ 693,324 $ 656,544 ============= ============other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million.- --------------- (1) Other inventory deletions include loss/damage waiver claims and unrepairable and missing merchandise, as well as acquisition write-offs. 69
RENT-A-CENTER, INC. AND SUBSIDIARIES
4. Intangibles. Amortization of intangibles consists primarily
8. Subsidiary Guarantors– (continued)
The 7½% Notes may be redeemed on or after May 1, 2006, at our option, in whole or in part, at a premium declining from 103.75%. The 7½% Notes also require that upon the occurrence of a change of control (as defined in the amortization of customer relationships and non-compete agreements. Effective January 1, 2002, under SFAS 142 all goodwill and intangible assets with indefinite lives are no longer subject to amortization. We conducted our transition test in 2002, which showed no impairment of our goodwill. Intangibles consist of the following (in thousands):
MARCH 31,2003DECEMBER 31, 2002 --------------------------- -------------------------- AVG. GROSS GROSS LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED (YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------- ---------- ------------ --------- ------------Amortizable intangible assets Franchise network 10 $ 3,000 $ 2,025 $ 3,000 $ 1,950 Non-compete agreements...... 5 6,010 1,670 1,510 1,444 Customer relationships...... 1.5 20,694 8,938 12,706 6,365 Intangible assetsindenture), the holders of the notes have the right to require Rent-A-Center 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. This would trigger an event of default under our senior credit facility.Rent-A-Center and the Subsidiary Guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 7½% Notes. The only direct or indirect subsidiaries of Rent-A-Center that are not subjectguarantors are minor subsidiaries. There are no restrictions on the ability of any of the Subsidiary Guarantors toamortization Goodwill.................... 871,055 99,162 835,557 99,162 ---------- --------- --------- --------- Total intangibles $ 900,759 $ 111,795 $ 852,773 $ 108,921 ========== ========= ========= =========The remaining estimated amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows:
ESTIMATED AMORTIZATION EXPENSE --------------------- (IN THOUSANDS)2003........ $ 9,201 2004........ 5,074 2005........ 1,427 2006........ 1,275 2007........ 94 ------------- Total....... $ 17,071 =============Changes in the carrying amount of goodwill for the three months ended March 31, 2003 are as follows (in thousands):
Balancetransfer funds to Rent-A-Center in the form of loans, advances or dividends, except asof January 1, 2003 $ 736,395 Additions during first quarter 35,498 ---------- Balanceprovided by applicable law.Set forth below is certain condensed consolidating financial information as of March 31, 2004 and December 31, 2003 $ 771,893 ==========and for the three months ended March 31, 2004 and 2003. The financial information includes the Subsidiary Guarantors from the dates they were acquired or formed by Rent-A-Center and Rent-A-Center East and is presented using the push-down basis of accounting.5. Stock Based Compensation. Rent-A-Center's Amended and Restated Long-Term Incentive Plan (the "Plan") for the benefitCondensed Consolidating Statements of
certain key employees, consultants and directors provides the Board of Directors broad discretion in creating equity incentives. Under the plan, 7,900,000 shares of Rent-A-Center's common stock are reserved for issuance under stock options, stock appreciation rights or restricted stock grants. Options granted to our employees under the Plan generally become exercisable over a period of one to five years from the date of grant and may be exercised up to a maximum ofOperations – (in thousands)
Parent Subsidiary Company Guarantors Total Three Months Ended March 31, 2004 (unaudited) Total revenues $ — $ 585,380 $ 585,380 Direct store expenses — 460,155 460,155 Other expenses — 73,016 73,016
Net earnings $ — $ 52,209 $ 52,209
Parent Rent-A- Subsidiary Company Center East Guarantors Total Three Months Ended March 31, 2003 (unaudited) Total revenues $ — $ 400,263 $ 166,143 $ 566,406 Direct store expenses — 297,466 141,469 438,935 Other expenses — 50,274 26,238 76,512
Net earnings (loss) $ — $ 52,523 $ (1,564 ) $ 50,959
10
years from date of grant. Options granted to directors are exercisable immediately. There have been no grants of stock appreciation rights and all options have been granted with fixed prices. At March 31, 2003, there were 1,345,314 shares available for issuance under the Plan. However, pursuant to the terms of the Plan, when an optionee leaves our employ, unvested options granted to that employee terminate and become available for re-issuance under the Plan. Vested options not exercised within 90 days from the date the optionee leaves the Company's employ terminate and become available for re-issuance under the Plan. 7RENT-A-CENTER, INC. AND SUBSIDIARIES
Rent-A-Center accounts for the Plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if Rent-A-Center had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31, ------------------------------------- 2003 2002 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA)Net earnings allocable to common stockholders As reported....................................................... $ 50,959 $ 38,571 Deduct: Total stock-based employee compensation under fair value based method for all awards, net of related tax expense......... 3,704 2,823 -------- --------- Pro forma......................................................... $ 47,255 $ 35,748 ======== ========= Basic earnings per common share As reported....................................................... $ 1.46 $ 1.57 Pro forma......................................................... $ 1.35 $ 1.46 Diluted earnings per common share As reported....................................................... $ 1.42 $ 1.20 Pro forma......................................................... $ 1.32 $ 1.128. Subsidiary Guarantors– (continued) The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 55.2% and 56.7% and risk-free interest rates of 3.7% and 5.1% in 2003 and 2002, respectively, no dividend yield and expected lives of seven years. 6. Earnings Per Share. Basic and diluted earnings per common share is computed based on the following information:
THREE MONTHS ENDED MARCH 31, 2003 ---------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET EARNINGS SHARES PER SHARE ------------ -------- ---------Basic earnings per common share.................... $ 50,959 34,896 $ 1.46 Effect of dilutive stock options................... -- 1,040 Assumed conversion of convertible Preferred stock................................... -- -- ---------- ------ Diluted earnings per common share.................. $ 50,959 35,936 $ 1.42 ========== ======= ========
THREE MONTHS ENDED MARCH 31, 2002 ---------------------------------------------- NET EARNINGS SHARES PER SHARE ------------ ------ ---------Basic earnings per common share.................... $ 38,571 24,515 $ 1.57 Effect of dilutive stock options................... -- 1,239 Assumed conversion of convertible Preferred stock................................... 4,992 10,567 ---------- ------ Diluted earnings per common share.................. $ 43,563 36,321 $ 1.20 ========== ====== ========For the three months ended March 31, 2003 and 2002, 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 932,000 and 577,000, respectively. Dividends on our Series A preferred stock are payable quarterly at an annual rate of 3.75%. We accounted for shares of preferred stock distributed as dividends in-kind in 2002 at the greater of the stated value or the value of the common stock obtainable upon conversion on the payment date. In 2003, we began paying dividends on our Series A preferred stock in cash and paid approximately $20.00 in the first quarter of 2003. 8Condensed Consolidating Balance Sheets – (in thousands)
Parent Subsidiary Consolidating Company Guarantors Adjustments Totals March 31, 2004 (unaudited) Rental merchandise, net $ — $ 697,902 $ — $ 697,902 Intangible assets, net — 804,600 — 804,600 Other assets 878,977 307,465 (734,270 ) 452,172
Total assets $ 878,977 $ 1,809,967 $ (734,270 ) $ 1,954,674
Senior debt $ 397,000 $ — $ — $ 397,000 Other liabilities 300,002 805,833 (392,528 ) 713,307 Stockholders’ equity 181,975 1,004,134 (341,742 ) 844,367
Total liabilities and equity $ 878,977 $ 1,809,967 $ (734,270 ) $ 1,954,674
Parent Subsidiary Consolidating Company Guarantors Adjustments Totals December 31, 2003 Rental merchandise, net $ — $ 682,367 $ — $ 682,367 Intangible assets, net — 797,434 — 797,434 Other assets 882,876 231,893 (763,268 ) 351,501
Total assets $ 882,876 $ 1,711,694 $ (763,268 ) $ 1,831,302
Senior debt $ 398,000 $ — $ — $ 398,000 Other liabilities 300,002 759,996 (421,526 ) 638,472 Stockholders’ equity 184,874 951,698 (341,742 ) 794,830
Total liabilities and equity $ 882,876 $ 1,711,694 $ (763,268 ) $ 1,831,302
11
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. Subsidiary Guarantors. At March 31, 2003, Rent-A-Center East, one
8. Subsidiary Guarantors– (continued) Condensed Consolidating Statements of
our subsidiaries, had $271.8 million, net of discount, of 11% senior 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 and certain of Rent-A-Center East's direct and indirect wholly-owned subsidiaries, consisting of ColorTyme, Rent-A-Center West, Inc., Get It Now, Rent-A-Center Texas, L.L.C. and Rent-A-Center Texas, L.P. (collectively, the "Subsidiary Guarantors" and, together with Rent-A-Center, the "Guarantors"). The notes are redeemable at Rent-A-Center East'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 East 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 the Subsidiary Guarantors, granting liens to third parties, making restricted payments and engaging in a merger or selling substantially all of Rent-A-Center East's assets. Rent-A-Center and the Subsidiary Guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center East with respect to these notes. The only direct or indirect subsidiaries of Rent-A-Center that are not Guarantors are minor subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to Rent-A-Center East in the form of loans, advances or dividends, except as provided by applicable law. On May 6, 2003, Rent-A-Center East repurchased approximately $182.5 million of its outstanding 11% senior subordinated notes pursuant to the early tender provision of its tender offer announced in April 2003. Rent-A-Center East currently intends to optionally redeem the remaining 11% senior subordinated notes outstanding on August 15, 2003 pursuant to the terms of the underlying indenture. See "Recent Developments" discussed later in this report. Set forth below is certain condensed consolidating financial information as of March 31, 2003 and December 31, 2002, and for the three months ended March 31, 2003 and 2002. The financial information includes the Subsidiary Guarantors from the dates they were acquired or formed by Rent-A-Center and Rent-A-Center East and is presented using the push-down basis of accounting. CONDENSED CONSOLIDATING BALANCE SHEETS
PARENT RENT-A-CENTER SUBSIDIARY CONSOLIDATING COMPANY EAST GUARANTORS ADJUSTMENTS TOTALS --------- ------------- ---------- ------------- ---------- (IN THOUSANDS)MARCH 31, 2003 (UNAUDITED) Rental merchandise, net................. $ -- $ 503,387 $ 189,937 $ -- $ 693,324 Intangible assets, net.................. -- 355,221 433,743 -- 788,964 Other assets............................ 423,825 127,871 37,376 (341,742) 247,330 --------- ----------- ---------- ------------- ---------- Total assets.................. $ 423,825 $ 986,479 $ 661,056 $ (341,742) $1,729,618 ========= =========== ========== ============= ========== Senior debt............................. $ -- $ 249,500 $ -- $ -- $ 249,500 Other liabilities....................... -- 386,920 205,267 -- 592,187 Preferred stock......................... 2 -- -- -- 2 Stockholders' equity.................... 423,823 350,059 455,789 (341,742) 887,929 --------- ----------- ---------- ------------- ---------- Total liabilities and equity.. $ 423,825 $ 986,479 $ 661,056 $ (341,742) $1,729,618 ========= =========== ========== ============= ========== DECEMBER 31, 2002 Rental merchandise, net................. $ -- $ 630,256 $ 1,468 $ -- $ 631,724 Intangible assets, net.................. -- 400,327 343,525 -- 743,852 Other assets............................ 417,507 121,758 42,953 (341,742) 240,476 --------- ----------- ---------- ------------- ---------- Total assets.................. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $1,616,052 ========= =========== ========== ============= ========== Senior debt............................. $ -- $ 249,500 $ -- $ -- $ 249,500 Other liabilities....................... -- 495,511 28,639 -- 524,150 Preferred stock......................... 2 -- -- -- 2 Stockholders' equity.................... 417,505 407,330 359,307 (341,742) 842,400 --------- ----------- ---------- ------------- ---------- Total liabilities and equity.. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $1,616,052 ========= =========== ========== ============= ==========9Cash Flows – (in thousands)
Parent Subsidiary Company Guarantors Total Three months ended March 31, 2004 (unaudited) Net cash provided by operating activities $ — $ 157,395 $ 157,395
Cash flows from investing activities Purchase of property assets — (13,418 ) (13,418 ) Acquisitions of businesses, net of cash acquired — (14,101 ) (14,101 ) Proceeds from sale of property assets — 3,246 3,246
Net cash used in investing activities — (24,273 ) (24,273 ) Cash flows from financing activities Purchase of treasury stock (8,366 ) — (8,366 ) Exercise of stock options 5,694 — 5,694 Repayments of debt (1,000 ) — (1,000 ) Intercompany advances 139,585 (139,585 ) —
Net cash provided by (used in) financing activities 135,913 (139,585 ) (3,672 )
Net increase (decrease) in cash and cash equivalents 135,913 (6,463 ) 129,450 Cash and cash equivalents at beginning of period 61,006 82,935 143,941
Cash and cash equivalents at end of period $ 196,919 $ 76,472 $ 273,391
Parent Rent-A- Subsidiary Company Center East Guarantors Total Three months ended March 31, 2003 (unaudited) Net cash provided by operating activities $ — $ 89,864 $ 34,926 $ 124,790
Cash flows from investing activities Purchase of property assets — (6,730 ) (2,515 ) (9,245 ) Acquisitions of businesses, net of cash acquired — (60,504 ) (30,561 ) (91,065 ) Other — 163 60 223
Net cash used in investing activities — (67,071 ) (33,016 ) (100,087 ) Cash flows from financing activities Purchase of treasury stock (13,438 ) — — (13,438 ) Exercise of stock options 6,163 — — 6,163 Intercompany advances 7,275 (5,365 ) (1,910 ) —
Net cash used in financing activities — (5,365 ) (1,910 ) (7,275 )
Net increase in cash and cash equivalents — 17,428 — 17,428 Cash and cash equivalents at beginning of period — 85,723 — 85,723
Cash and cash equivalents at end of period $ — $ 103,151 $ — $ 103,151
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. Subsidiary Guarantors - (continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
PARENT RENT-A-CENTER SUBSIDIARY COMPANY EAST GUARANTORS TOTAL --------- ------------- ----------- --------- (IN THOUSANDS)THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED) Total revenues...................................... $ -- $ 400,263 $ 166,143 $ 566,406 Direct store expenses............................... -- 297,466 141,469 438,935 Other expenses...................................... -- 50,274 26,238 76,512 --------- ----------- ---------- --------- Net9. Comprehensive Income. Comprehensive income includes net earnings (loss)................................. $ -- $ 52,523 $ (1,564) $ 50,959 ========= =========== ========== ========= THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED) Total revenues...................................... $ 483,924 $ -- $ 14,686 $ 498,610 Direct store expenses............................... 381,824 -- -- 381,824 Other expenses...................................... 60,570 -- 12,653 73,223 --------- ----------- ---------- --------- Net earnings........................................ $ 41,530 $ -- $ 2,033 $ 43,563 ========= =========== ========== =========CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
PARENT RENT-A-CENTER SUBSIDIARY COMPANY EAST GUARANTORS TOTAL --------- ------------- ---------- ---------THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED) Net cash provided by operating activities............ $ -- $ 89,864 $ 34,926 $ 124,790 --------- ----------- --------- --------- Cash flows from investing activities Purchaseand items ofproperty assets........................ -- (6,730) (2,515) (9,245) Acquisitions of businesses,other comprehensive income or loss. The following table provides information regarding comprehensive income, net of tax:
Three months ended March 31, (in thousands) 2004 2003 Net earnings $ 52,209 $ 50,959 Other comprehensive (loss) income: Unrealized gain on derivatives held as cash flow hedges: Change in unrealized gain during period — 3,986 Reclassification adjustment for loss included in net earnings — (2,611 )
Other comprehensive income — 1,375
Comprehensive income $ 52,209 $ 52,334
10. Common and Preferred Stock Transactions. In April 2000, we announced that our Board of Directors had authorized a program to repurchase, from time to time, in the open market and in privately negotiated transactions up to an aggregate of $25.0 million of our common stock. In October 2002, our Board of Directors increased the amount of repurchases authorized under our common stock repurchase program from $25.0 million to $50.0 million. In March 2003, our Board of Directors again increased such amount from $50.0 million to $100.0 million. On August 1, 2003, we agreed to purchase an aggregate of 440,000 shares of our common stock (on a pre-split basis) at $73 per share (on a pre-split basis), 200,000 of which were repurchased from Mark E. Speese, our Chairman of the Board and Chief Executive Officer, 200,000 of which were repurchased from Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (“Apollo”), and 40,000 of which were repurchased from Mitchell E. Fadel, our President and Chief Operating Officer. On October 24, 2003 we announced our Board of Directors had rescinded our old common stock repurchase program and authorized a new $100 million common stock repurchase program. Through that date, we repurchased a total of 1.6 million shares (on a pre-split basis) of our common stock for an aggregate of $91.5 million under the old common stock repurchase program. Under our new common stock repurchase program, we have the ability to repurchase up to $100 million in aggregate purchase price of our common stock, from time to time, in open market and privately negotiated transactions. As of March 31, 2004, we had purchased a total of 1,101,900 shares of our common stock for an aggregate of $35.2 million under our new common stock repurchase program. Please see “Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities” later in this report. 11. Acquisitions. On February 8, 2003, we completed the acquisition of substantially all of the assets of 295 rent-to-own stores from Rent-Way, Inc. for an aggregate purchase price of $100.4 million in cash. Of the aggregate purchase price, we held back $10.0 million to pay for various indemnified liabilities and expenses, if any, of which $5.0 million was remitted in the second quarter of 2003 and the remaining amount, up to $5.0 million, will be remitted in August 2004. We funded the acquisition entirely from cash acquired... -- (60,504) (30,561) (91,065) Other.............................................. -- 163 60 223 --------- ----------- --------- --------- Net cash usedon hand. Of the 295 stores, 176 were subsequently merged with our existing store locations. We entered into this transaction seeing it as an opportunistic acquisition that would allow us to expand our store base ininvesting activities................ -- (67,071) (33,016) (100,087) Cash flows from financing activities Purchaseconjunction with our strategic growth plans. The acquisition price was determined by evaluating the average monthly rental income oftreasury stock......................... (13,438) -- -- (13,438) Exercisethe acquired stores and applying a multiple to the total. We utilized a third party to review the valuation ofstock options.......................... 6,163 -- -- 6,163 Intercompany advances.............................. 7,275 (5,365) (1,910) -- --------- ----------- ---------- --------- Net cash usedcertain intangible assets, which resulted infinancing activities................ -- (5,365) (1,910) (7,275) --------- ----------- ---------- --------- Neta $4.0 million decrease in the value assigned to customer relationships and a $4.0 million increase incash and cash equivalents............ -- 17,428 -- 17,428 --------- ----------- ---------- --------- Cash and cash equivalents at beginningthe value placed on the non-compete agreement as compared to our original estimates as disclosed in our 2002 annual report on Form 10-K. The table below summarizes the allocation ofperiod..... -- 85,723 -- 85,723 --------- ----------- ---------- --------- Cash and cash equivalents at endthe purchase price based on the fair values ofperiod........... $ -- $ 103,151 $ -- $ 103,151 ========= =========== ========== ========= THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED) Net cash provided by operating activities............ $ 96,052 $ -- $ 279 $ 96,331 --------- ----------- ---------- --------- Cash flows from investing activities Purchase of property assets........................ (8,811) -- 711 (8,100) Acquisitions of businesses, net of cash acquired... (3,549) -- -- (3,549) Other.............................................. 374 -- -- 374 --------- ----------- ---------- --------- Net cash provided by (used in) investing activities.. (11,986) -- 711 (11,275) Cash flows from financing activities Purchase of treasury stock......................... (34,724) -- -- (34,724) Exercise of stock options.......................... 8,974 -- -- 8,974 Intercompany advances.............................. 990 -- (990) -- --------- ----------- ---------- --------- Net cash used in financing activities................ (24,760) -- (990) (25,750) --------- ----------- ---------- --------- Net increase in cash and cash equivalents............ 59,306 -- -- 59,306 --------- ----------- ---------- --------- Cash and cash equivalents at beginning of period..... 107,958 -- -- 107,958 --------- ----------- ---------- --------- Cash and cash equivalents at end of period........... $ 167,264 $ -- $ -- $ 167,264 ========= =========== ========== =========the assets acquired:1013
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. 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:
Fair Values (in thousands) Inventory $ 50,100 Property assets 4,300 Customer relationships 7,900 Non-compete agreement 4,300 Goodwill 33,800
Total assets acquired $ 100,400
THREE MONTHS ENDED MARCHCustomer relationships are amortized utilizing the straight-line method over an 18 month period. The non-compete agreement is amortized using the straight-line method over a four year period and, in accordance with SFAS 142, the goodwill associated with the acquisition will not be amortized, but will be deductible for tax purposes. On February 4, 2004, we announced that we entered into a definitive agreement to acquire Rainbow Rentals, Inc., a rent-to-own operator, for $16.00 in cash per share of Rainbow common stock. The acquisition consists of 124 rent-to-own stores in 15 states. The agreement also provides that each holder of options of Rainbow will receive an amount equal to the difference between $16.00 and the exercise price of the option. We intend to fund the acquisition primarily with cash on hand. The acquisition, which is expected to be completed in the second quarter of 2004, is conditioned upon customary closing conditions for a transaction of this nature, including the receipt of requisite regulatory approval and approval of Rainbow’s shareholders. On March 5, 2004, we completed the purchase of five Canadian rent-to-own stores for $3.2 million Canadian dollars ($2.4 million U.S dollars). The five stores are located in the cities of Edmonton and Calgary in the province of Alberta. This acquisition marked the commencement of our business operations in Canada. Furthermore, during the first quarter of 2004, we acquired 18 additional stores, accounts from 19 additional locations, opened 22 new stores, and closed 22 stores. Of the closed stores, 16 were merged with existing store locations, and six stores were sold. The additional stores and acquired accounts were the result of 14 separate transactions for an aggregate price of approximately $11.7 million in cash. 13. Guarantees. In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Guarantees of Indebtedness of Others.” FIN 45 requires a liability be recorded on the guarantor’s balance sheet upon issuance of a guarantee and requires disclosures about the guarantees that an entity has issued. The adoption of FIN 45 did not have a material impact on our results of operations, financial condition or cash flows. ColorTyme Guarantee.ColorTyme is a party to an agreement with Wells Fargo Foothill, Inc., who provides $50.0 million in aggregate financing to qualifying franchisees of ColorTyme generally of up to five times their average monthly revenues. Under the Wells Fargo agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Wells Fargo can assign the loans and the collateral securing such loans to ColorTyme, with ColorTyme then succeeding to the rights of Wells Fargo under the debt agreements, including the right to foreclose on the collateral. An additional $15.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Wells Fargo financing. Rent-A-Center East guarantees the obligations of ColorTyme under each of these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of $65.0 million, of which $30.1 million was outstanding as of March 31, ---------------------------- (IN THOUSANDS) 2003 2002 --------- ----------Net earnings.............................................................. $ 50,959 $ 43,563 Other comprehensive income: Unrealized gain2004.We also provide assurance to our insurance providers that if they are not able to draw funds from us for claims paid, they have the ability to draw against our letters of credit. One of our letters of credit is renewed automatically every year unless we notify the institution not to renew. The other letter of credit expires in August 2004. At March 31, 2004, we had $109.7 million in outstanding letters of credit. Of the $109.7 million, $80.0 million is supported by our additional term loan facility. Under this additional term loan facility, in the event that a letter of credit is drawn upon, we have the right to either repay the additional term loan facility lenders the amount withdrawn or request a loan in that amount. Interest on derivatives held as cash flow hedges: Change in unrealized gain during period.......................... 3,986 4,010 Reclassification adjustment for loss included in net earnings.... (2,611) (2,230) --------- ---------- Other comprehensive income................................... 1,375 1,780 --------- ---------- Comprehensive income...................................................... $ 52,334 $ 45,343 ========= ==========any requested additional term loan facility accrues at the adjusted prime rate plus 1.25% or, at our option, at the Eurodollar Rate plus 2.25%, with the entire amount of the additional term loan facility due on May 28, 2009. The remaining $29.7 million reduces the amount available under our $120.0 million revolving facility.9. Common and Preferred Stock Transactions. Purchase of Treasury Stock. 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 stock beneficially 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 beneficially held by 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 beneficially held by 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 beneficially 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 $25.0 million of our common stock. In October 2002, our Board of Directors increased the amount of repurchases authorized under our common stock repurchase program from $25.0 million to $50.0 million. In March 2003, our Board of Directors again increased such amount from $50.0 million to $100.0 million. Through March 31, 2003, we have repurchased approximately 937,000 shares of our common stock under this program for approximately $44.3 million, 276,000 shares of which were purchased in the quarter ended March 31, 2003 for approximately $13.5 million. We have suspended our common stock repurchase program pending the consummation of our recently announced equity tender offer. See "Note 11" discussed later in this report. However, we may begin repurchasing shares of our common stock at any time after the tenth business day following the termination of the equity tender offer. 1114
RENT-A-CENTER, INC. AND SUBSIDIARIES
10. Significant Acquisitions. On February 8, 2003, we completed the acquisition of substantially all of the assets of 295 rent-to-own stores from Rent-Way, Inc. for an aggregate purchase price of $100.4 million in cash. Of the aggregate purchase price, we held back $10.0 million to pay for various indemnified liabilities and expenses, if any. We funded the acquisition entirely from cash on hand. Of the 295 stores, 176 were subsequently merged with our existing store locations. We entered into this transaction seeing it as an opportunistic acquisition that would allow us to expand our store base in conjunction with our strategic growth plans. The acquisition price was determined by evaluating the average monthly rental income of the acquired stores and applying a multiple to the total. We utilized a third party to review the valuation of certain intangible assets, which resulted in a $4.0 million decrease in the values assigned to customer relationships and a $4.0 million increase in the value placed on the non-compete agreement as compared to our original estimates as disclosed in our 2002 annual report on Form 10-K. The table below summarizes the allocation of the purchase price based on the fair values of the assets acquired:
FAIR VALUES (IN THOUSANDS) -------------Inventory............................. $ 50,100 Property assets....................... 4,300 Customer relationships................ 7,900 Non-compete agreement................. 4,500 Goodwill.............................. 33,600 --------- Total assets acquired................. $ 100,400 =========14. Recapitalization. In April 2003, we announced and commenced a program to recapitalize a portion of our financial structure in a series of transactions. The recapitalization consisted of the tender offer for all of Rent-A-Center East’s $272.25 million 11% Notes, the redemption of the 11% Notes, the issuance of $300.0 million 7½% Notes, the refinancing of our senior debt and the repurchase of shares of our common stock. On May 6, 2003, we repurchased approximately $183.0 million principal amount of 11% Notes pursuant to a debt tender offer announced on April 23, 2003. On August 15, 2003, we redeemed all of the remaining outstanding 11% Notes in accordance with the terms of the indenture governing the 11% Notes, at the applicable redemption price of 105.5% of the principal amount, plus accrued and unpaid interest to that date. The total aggregate redemption price for the 11% Notes was approximately $93.75 million, including $4.65 million in accrued interest and $4.65 million in redemption premium. Proceeds from the offering of $300 million in 7½% Notes were used to pay for the redemption. On April 25, 2003, we announced that we had entered into an agreement with Apollo which provided for the repurchase of a number of shares of Rent-A-Center’s common stock sufficient to reduce Apollo’s aggregate record ownership to 19.00% after consummation of Rent-A-Center’s planned tender offer at the price per share paid in the tender offer. On April 28, 2003, we commenced a tender offer to purchase up to 2.2 million shares of Rent-A-Center’s common stock (on a pre-split basis) pursuant to a modified “Dutch Auction.” On June 25, 2003, we closed the tender offer and purchased 1,769,960 shares of Rent-A-Center’s common stock (on a pre-split basis) at $73 per share (on a pre-split basis) for approximately $129.2 million. On July 11, 2003, we closed the Apollo transaction and purchased 774,547 shares of Rent-A-Center’s common stock (on a pre-split basis) at $73 per share (on a pre-split basis) for approximately $56.5 million. As contemplated by the Apollo agreement, Apollo also exchanged their shares of Series A preferred stock for shares of Series C preferred stock. As a result, no shares of Series A preferred stock remain outstanding. The terms of the Series A preferred stock and Series C preferred stock are substantially similar, except the Series C preferred stock does not have the right to directly elect any members of Rent-A-Center’s Board of Directors. On May 6, 2003, Rent-A-Center issued $300.0 million in 7½% Notes, the proceeds of which were used, in part, to fund the repurchase and redemption of the 11% Notes. On May 28, 2003 we refinanced our then existing senior debt by entering into a new $600.0 million senior credit facility, consisting of a $400.0 million term loan, a $120.0 million revolving credit facility and an $80.0 million additional term loan. 15. Subsequent Events. On April 28, 2004, we announced that we had entered into a definitive agreement to acquire Rent Rite, Inc., a Tennessee corporation, which currently operates approximately 90 stores in 11 states. The agreement provides for the merger of Rent Rite with and into a newly-formed subsidiary of ours. Pursuant to the agreement, we have agreed to acquire Rent Rite for 12.75 times Rent Rite’s average three month recurring revenue, or approximately $58.4 million based on Rent Rite’s recurring revenue for the three month period ended March 31, 2004. Under the terms of the agreement, we have agreed to assume the debt and other liabilities of Rent Rite. Approximately one half the purchase price will be paid in our common stock, with the remaining portion consisting of cash, the assumption of Rent Rite’s stock options and retirement of Rent Rite’s outstanding debt. We intend to fund the acquisition primarily with cash on hand for the portion of the purchase price to be paid in cash. The acquisition, which is expected to be completed in early May 2004, is conditioned upon customary closing conditions for a transaction of the nature, including the receipt of approval of Rent Rite’s shareholders. Customer relationships will be amortized over an 18 month period. The non-compete agreement is for four years and, in accordance with SFAS 142, the goodwill associated with the acquisition will not be amortized. 11. Subsequent Events. Stock Repurchase Program. On April 28, 2003, we announced the commencement of a tender offer to purchase up to 2.2 million shares of our common stock at prices between $60 and $66 per share pursuant to a modified "Dutch Auction." The tender offer will expire at 5:00 p.m., New York City time, on June 5, 2003, unless extended. We also announced, on April 25, 2003, that we have entered into an agreement with Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (Apollo) which provides for the repurchase of a number of shares of our common stock sufficient to reduce Apollo's aggregate beneficial ownership from approximately 20.03% to 19.00% on an issued and outstanding basis. Apollo will not be obligated to sell any shares under this agreement unless it would be entitled to sell at least 666,667 shares in reaching the 19.00% ownership level. Approximately 950,000 shares must be validly tendered by stockholders participating in the tender offer in order to result in Apollo selling at least 666,667 shares. The per share purchase price payable pursuant to this agreement will be equal to the per share purchase price of our common stock set in the tender offer. We will repurchase the shares from Apollo on the eleventh business day following the successful completion of the tender offer. The tender offer is not conditioned on the tender of any minimum number of shares. Senior Subordinated Notes. On April 23, 2003, we announced Rent-A-Center East's tender offer for all of its $272.25 million 11% Senior Subordinated Notes due 2008. This tender offer is scheduled to expire at 12:00 midnight, New York City time, on Tuesday, May 20, 2003. On May 6, 2003, Rent-A-Center East repurchased approximately $182.5 million principal amount of 11% senior subordinated notes pursuant to the early tender provisions of the tender offer. Rent-A-Center East currently intends to optionally redeem on August15
2003, in accordance with the terms of the underlying indenture, all of the 11% senior subordinated notes then outstanding at the applicable redemption price. This statement of intent shall not constitute a notice of redemption under the underlying indenture. Such notice, if made, will only be made in accordance with the applicable provisions of the underlying indenture. Furthermore, under the terms of our existing senior credit facility, we are required to redeem our 11% senior subordinated notes no later than August 15, 2003. On May 6, 2003, we issued an additional $300.0 million in senior subordinated notes due 2010, bearing interest at 7 1/2%, the proceeds of which were to be used to fund the repurchase and redemption of the 11% senior subordinated notes. Senior Debt Refinancing. We recently announced that we anticipate refinancing our existing senior debt by entering into a new $600.0 million senior credit facility, consisting of a $400.0 million term loan, a $120.0 million revolving credit facility and the right to obtain an additional term loan of up to $80.0 million. We anticipate that the terms of the new senior credit facility will, among other things, permit us to repurchase up to approximately an additional $200.0 million of our common stock. 12RENT-A-CENTER, INC. AND SUBSIDIARIES
12. Guarantees. In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's AccountingItem 2. Management’s Discussion and
Disclosure Requirement for Guarantees, Including Indirect GuaranteesAnalysis ofIndebtednessFinancial Condition and Results ofOthers." FIN 45 requires a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued. We have applied the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002, and have adopted the quarterly disclosure provisions of FIN 45 for the quarter ended March 31, 2003. The adoption of FIN 45 did not have a material impact to our results of operations, financial condition or cash flows. We provide assurance to our insurance providers that if they are not be able to draw funds from us for claims paid, they have the ability to draw against our letters of credit. One of our letters of credit is renewed automatically every year unless we notify the institution not to renew. The other letter of credit expires in August 2003, but is automatically renewed each year for a one year period unless the institution notifies us prior to the applicable expiration date that they elect not to renew the letter of credit for such additional one year period. At March 31, 2003, we had $85.7 million to support our outstanding letters of credit. Of the $85.7 million, $80.0 million is supported by our Tranche D LC Facility. Under this Tranche D LC Facility, in the event that a letter of credit is drawn upon, we have the right to either repay the Tranche D LC lenders the amount withdrawn or request a loan in that amount. Interest on any requested Tranche D LC loan accrues at an adjusted prime rate plus 1.75% or, at our option, at the Eurodollar Rate plus 2.80%, with the entire amount of the Tranche D LC Facility due on December 31, 2007. The remaining $5.7 million reduces the amount available under our $120.0 million revolving facility. ColorTyme is a party to an agreement with Textron Financial Corporation, who provides $40.0 million in financing to qualifying franchisees of ColorTyme of up to five times their average monthly revenues. Under this on going 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. An additional $10.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Textron financing. Rent-A-Center guarantees the obligations of ColorTyme under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of $50.0 million, of which $31.8 million was outstanding as of March 31, 2003. Mark E. Speese, Rent-A-Center's Chairman of the Board and Chief Executive Officer, is a passive investor in Texas Capital Bank, owning less than 1% of its outstanding equity. 13RENT-A-CENTER, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTSOperationsForward-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"“may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or"believe."“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:- -uncertainties regarding the ability to open new stores;- -our ability to acquire additional rent-to-own stores on favorable terms;- -our ability to enhance the performance of these acquiredstores, including the stores acquired in the Rent-Way acquisition; - -stores;our ability to control store level costs;- -our ability to realize benefits from our margin enhancement initiatives;- -the results of our litigation;- -the passage of legislation adversely affecting the rent-to-own industry;- -interest rates;- - changes in the credit markets; - - our ability to enter into a new senior credit agreement containing terms acceptable to us; - -our ability to collect on our rental purchase agreements;- - our ability to effectively hedge interest rates on our outstanding debt; - -changes in our effective tax rate;- - factors that may restrict our ability to redeem our outstanding 11% senior subordinated notes on August 15, 2003, including our financial situation at that time; - -changes in our stock price and the number of shares of common stock that we may or may not repurchase; and- -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-K10-K/A for our fiscal year ended December 31,2002.2003. 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 BUSINESSOur Business
We are the largest rent-to-own operator in the United States with an approximate
31%32% market share based on store count. At March 31,2003,2004, we operated2,5422,671 company-owned stores nationwide and in Puerto Rico, including2322 stores located in Wisconsin and operated by our subsidiary Get It Now, LLC under the name"Get“Get ItNow."Now” and five stores located in Canada and operated by our subsidiary Rent-A-Centre Canada, Ltd., under the name “Rent-A-Centre.” Another of our subsidiaries, ColorTyme, is a national franchisor of rent-to-own stores. At March 31,2003,2004, ColorTyme had317323 franchised stores in 40 states,305311 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 generally 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.14RENT-A-CENTER, INC. AND SUBSIDIARIESWe 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,
theacquired 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 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.16
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.
RECENT DEVELOPMENTS Store Growth. We are actively seekingRecent Developments
Rent Rite Acquisition.On April 28, 2004, we announced that we had entered into a definitive agreement to
increase our store baseacquire Rent Rite, Inc., a Tennessee corporation, which currently operates approximately 90 stores in 11 states. The agreement provides for the merger of Rent Rite with andannual revenues and profits through opportunistic acquisitions and new store openings. On February 8, 2003,into a newly-formed subsidiary of ours. Pursuant to the agreement, weacquired substantially allhave agreed to acquire Rent Rite for 12.75 times Rent Rite’s average three month recurring revenue, or approximately $58.4 million based on Rent Rite’s recurring revenue for the three month period ended March 31, 2004. Under the terms of theassetsagreement, we have agreed to assume the debt and other liabilities of295 stores located throughoutRent Rite. Approximately one half theUnited States from Rent-Way, Inc.purchase price will be paid in our common stock, with the remaining portion consisting of cash, the assumption of Rent Rite’s stock options andcertainretirement ofits subsidiariesRent Rite’s outstanding debt. We intend to fund the acquisition primarily with cash on hand forapproximately $100.4 millionthe portion of the purchase price to be paid in cash.OfThe acquisition, which is expected to be completed in early May 2004, is conditioned upon customary closing conditions for a transaction of the295 stores, 176 were merged with existing locations. Furthermore, duringnature, including thefirst quarterreceipt of2003,approval of Rent Rite’s shareholders.As of April 30, 2004, we have acquired one additional store and accounts from
twothree additional locations, opened20four new stores andclosed five stores. All of the closedmerged two storeswere merged withinto existingstore locations. The additional store and acquired accounts were the result of three separate transactions for an aggregate price of approximately $700,000 in cash. As of May 9, 2003, we have acquired three additional stores, accounts from four additionallocationsand opened nine new storesduring the second quarter of2003.2004. It is our intention to increase the number of stores we operate by an average of approximately 5 to 10% per year over the next several years.Stock Repurchase Program. On March 19, 2003, our Board of Directors increased the amount of repurchases of our outstanding common stock authorized under our common stock repurchase program from $50.0 million to $100.0 million. During the first quarter of 2003, we repurchased approximately $13.5 million of our common stock under the common stock repurchase program. We have suspended our common stock repurchase program pending the consummation of our recently announced equity tender offer discussed below. However, we may begin repurchasing shares of our common stock at any time after the tenth business day following the termination of the equity tender offer. On April 28, 2003, we announced the commencement of a tender offer to purchase up to 2.2 million shares of our common stock at prices between $60 and $66 per share pursuant to a modified "Dutch Auction." The tender offer will expire at 5:00 p.m., New York City time, on June 5, 2003, unless extended. We also announced on April 25, 2003, that we have entered into an agreement with Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. which provides for the repurchase of a number of shares of our common stock sufficient to reduce Apollo's aggregate beneficial ownership from approximately 20.03% to 19.00% on an issued and outstanding basis. Apollo will not be obligated to sell any shares under this agreement unless it would be entitled to sell at least 666,667 sharesCritical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in
reaching the 19.00% ownership level. Approximately 950,000 shares must be validly tendered by stockholders participating in the tender offer in order to result in Apollo selling at least 666,667 shares. The per share purchase price payable pursuant to this agreement will be equal to the per share purchase price of our common stock set in the tender offer. We will repurchase the shares from Apollo on the eleventh business day following the successful completion of the tender offer. The tender offer is not conditioned on the tender of any minimum number of shares. 15RENT-A-CENTER, INC. AND SUBSIDIARIES Senior Subordinated Notes. On April 23, 2003, we announced Rent-A-Center East's tender offer for all of its $272.25 million 11% Senior Subordinated Notes due 2008. This tender offer is scheduled to expire at 12:00 midnight, New York City time, on Tuesday, May 20, 2003. On May 6, 2003, Rent-A-Center East repurchased approximately $182.5 million principal amount of 11% senior subordinated notes pursuant to the early tender provisions of the tender offer. Rent-A-Center East currently intends to optionally redeem on August 15, 2003, in accordance with the terms of the underlying indenture, all of the 11% senior subordinated notes then outstanding at the applicable redemption price. This statement of intent shall not constitute a notice of redemption under the underlying indenture. Such notice, if made, will only be made in accordance with the applicable provisions of the underlying indenture. Furthermore, under the terms of our existing senior credit facility, we are required to redeem our 11% senior subordinated notes no later than August 15, 2003. On May 6, 2003, we issued an additional $300.0 million in senior subordinated notes due 2010, bearing interest at 7 1/2%, the proceeds of which were to be used to fund the repurchase and redemption of the 11% senior subordinated notes. Senior Debt Refinancing. We recently announced that we anticipate refinancing our existing senior debt by entering into a new $600.0 million senior credit facility, consisting of a $400.0 million term loan, a $120.0 million revolving credit facility and the right to obtain an additional term loan of up to $80.0 million. We anticipate that the terms of the new senior credit facility will, among other things, permit us to repurchase up to approximately an additional $200.0 million of our common stock. CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ESTIMATES, UNCERTAINTIES OR ASSESSMENTS IN OUR FINANCIAL STATEMENTSOur Financial StatementsThe preparation of our financial statements in conformity with accounting principles generally accepted 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 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 closely monitored by us and periodically adjusted as circumstances warrant. For instance, our liability for our self-insured retentions related to our workers compensation, general liability, medical and auto 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 Part II, Item 1
"Legal Proceedings"“Legal Proceedings” and the notes to our consolidated financial statements included in our Annual Report on Form10-K,10-K/A, we are involved in actions relating to claims that our rental purchase agreements constitute installment sales contracts, violate state17
RENT-A-CENTER, INC. AND SUBSIDIARIES
usury laws or violate other state laws enacted to protect consumers, claims asserting violations of wage and hour laws in our employment practices, as well as claims we violated the federal securities laws. We, together with our counsel, make estimates
if determinable,of our probable liabilities, if determinable or reasonably estimatable, 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. 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.We periodically review the carrying value of our goodwill and other intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation. 16RENT-A-CENTER, INC. AND SUBSIDIARIESBased 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-K10-K/A 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 POLICIESOther 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 a10-K/A.Revenue. Merchandise is rented to customers pursuant to rental-purchase agreements which provide for weekly or monthly
basis. Thisrental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenueisand fees are recognized over thetermrental term. No revenue is accrued because the customer can cancel the rental contract at any time and we cannot enforce collection for non-payment of rents. Get It Now’s revenue from the sale of merchandise through an installment credit sale is recognized at the time of theagreement. Rental purchase agreements generally includesale, as is the cost of the merchandise sold, net of adiscounted early purchase option. Upon exercise of this option, and upon sale of used merchandise, revenue is recognized as these payments are received.provision for uncollectable accounts.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.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 acceleratingWe accelerate 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 purposefor this changeis to better reflect the depreciable life of a computer in our stores and to encourage the sale of older computers.Though this method will accelerate the depreciation expense on the affected 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.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 regionaldirectors'directors’ salaries, travel and office expenses.Amortization of
Intangibles.Intangibles. Amortization of intangibles consists primarily of the amortization of customer relationships and non-compete agreements resulting from acquisitions.Effective January 1, 2002, under SFAS 142 all goodwill and intangible assets with indefinite lives are no longer subjectResults of Operations
Three Months Ended March 31, 2004 compared to
amortization. 17RENT-A-CENTER, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS THREE MONTHS ENDED MARCHThree Months Ended March 31, 2003COMPARED TO THREE MONTHS ENDED MARCH 31, 2002Store
Revenue.Revenue. Total store revenue increased by$68.9$18.7 million, or14.2%3.4%, to $571.5 million for the three months ended March 31, 2004 as compared to $552.8 million for the three months ended March 31,2003 from $483.9 million for the three months ended March 31, 2002.2003. The increase in total store revenue is primarily attributable togrowth in same store revenues,an increase in cash sales and early purchase options,as well asnew stores, and incremental revenues related tothe acquisitionacquisitions, offset by a decrease in same store sales of295 Rent-Way stores on February 8, 2003.1.3%.Same store revenues represent those revenues earned in stores that were operated by us for each of the entire three month periods ending March 31, 2004 and 2003,
and 2002.excluding store locations that received accounts through an acquisition or merger of an existing store location. Same store revenuesincreaseddecreased by$25.6$6.1 million, or6.2%1.3%, to$439.1$455.2 million for the three months ended March 31,2003 from $413.52004 as compared to $461.3 million in2002.2003. Theincreasedecrease in same store revenues was primarily attributable to a decrease in the average number of customers on a per store basis during the first quarter of 2004 versus the first quarter of 2003 offset by an increase in thenumber of customers served (approximately 404average revenue perday per storecustomer. Merchandise sales for2003 vs. approximately 403 per day per store for 2002 in sameall storesopen)increased $6.7 million, or 12.8%,as well as total revenue earned per customer including all rentals, fees and cash sales (approximately $562 per customerto $59.4 million for thequarter endingthree months ended March 31,2003 versus approximately $532 per customer for the quarter ending March 31, 2002). Merchandise sales increased $13.1 million, or 33%,2004 as compared to $52.7 millionfor 2003 from $39.6 millionin2002.2003. The increase in merchandise sales was primarily attributable to an increase in the number of items sold in the first quarter of200318
RENT-A-CENTER, INC. AND SUBSIDIARIES
2004 (approximately
317,975)348,000) from the number of items sold in20022003 (approximately258,063)318,000). This increase in the number of items sold in20032004 versus the same period in20022003 was primarily the result of an increase in theamountnumber ofcustomers exercising early purchase options.stores operating during the first quarter of 2004 as compared to 2003.Franchise
Revenue.Revenue. Total franchise revenuedecreasedincreased by$1.1 million,$326,000, or7.7%2.4%, to$13.6$13.9 million for the three months ended March 31,2003 from $14.72004 as compared to $13.6 million in2002.2003. Thisdecreaseincrease was primarily attributable toa decreasean increase in merchandise sales to franchise locations as a result ofa decrease in the number ofmore franchised locations operating in the first quarter of20032004 as compared to the first quarter of2002.2003.Depreciation of Rental
Merchandise.Merchandise. Depreciation of rental merchandise increased by$14.4$1.6 million, or15.7%1.6%, to$106.7$108.3 million for the three months ended March 31,2003 from $92.22004 as compared to $106.7 million in2002.2003. Depreciation of rental merchandise expressed as apercentpercentage of store rentals and fees revenueincreaseddecreased to21.6%21.5% in20032004 from20.8%21.6% for the same period in2002. These increases were2003. The slight decrease was primarily attributable toan increasea more normalized depreciation rate inrentalthe first quarter of 2004 as compared to 2003, which included the effect of the Rent-Way acquisition andfee revenue, pricing and term changes put into place in late 2001 and higher depreciation associated withtherecently acquired Rent-Way inventory.terms of their product.Cost of Merchandise
Sold.Sold. Cost of merchandise sold increased by$9.6$3.1 million, or35.5%8.4%, to$36.5$39.6 million for the three months ended March 31,2003 from $27.02004 as compared to $36.5 million in2002.2003. This increase was primarily a result of an increase in the number of items sold during the firstthree monthsquarter of20032004 as compared to the firstthree monthsquarter 2003. The gross margin percent of2002, as well asmerchandise sales increased to 33.3% in 2004 from 30.6% in 2003. This percentage increase was primarily attributable to theadditional salessale ofinventory gained through the acquisition of 295merchandise acquired from Rent-Waystores.in February 2003, which caused a lower gross margin to occur in 2003 versus 2004.Salaries and Other
Expenses.Expenses. Salaries and other expenses expressed as a percentage of total store revenuedecreasedincreased to 54.1% for the three months ended March 31, 2004 from 52.9% for the three months ended March 31,2003 from 54.3% for the three months ended March 31, 2002.2003. Thisdecreaseincrease was primarily attributable to the decrease in same store sales coupled with an increase instore revenuesthe average salary and other expenses in the first quarter of20032004 compared to the first quarter of 2003. In the first quarter of 2004, there were 31 more new stores and 77 more acquired stores open as compared to2002 coupled with2003, which are not yet performing at thecontinued improvements seen in the realizationlevel ofour margin enhancement initiatives and reductions in store level costs.a mature store.Franchise Cost of Merchandise
Sold.Sold. Franchise cost of merchandise solddecreasedincreased by$1.1,$341,000 or8.7%3.0%, to$11.6$11.9 million for the three months ended March 31,2003 from $12.72004 as compared to $11.6 million in2002.2003. Thisdecreaseincrease was primarily attributable to an increase in merchandise sales to franchise locations as adecrease in the numberresult of more franchised locations operating in the first quarter of20032004 as compared to the first quarter of2002.2003.General and Administrative
Expenses.Expenses. General and administrative expenses expressed as apercentpercentage of total revenueremained relatively constant atincreased to 3.1% for the three months ending March 31, 2004 as compared to 3.0% for the three months ending March 31,2003 and 2002, respectively.2003.Amortization of
Intangibles.Intangibles. Amortization of intangiblesincreaseddecreased by$2.2$385,000, or 13.4%, to $2.5 millionor 299.0%,for the three months ended March 31, 2004 as compared to $2.9 million for the three months ended March 31,2003 from $720,000 for the three months ended March 31, 2002.2003. Thisincreasedecrease was primarily attributable to theRent-Way acquisition and the number of acquisitions made during the later part of 2002 versus 2001. The result of those prior year acquisitions is a highercompleted amortization ofintangibles in the first quarter of 2003 versus 2002.some intangibles.Operating
Profit.Profit. Operating profitincreaseddecreased by$8.0$3.6 million, or9.1%3.8%, to$96.3$92.7 million for the three months ended March 31,2003 from $88.32004 as compared to $96.3 million in2002.2003. Operating profit as a percentage of total revenue decreased to17.0%15.8% for the three months ended March 31,2003,2004, from17.7%17.0% in2002. This decrease was2003. These decreases were primarily attributable to theincreasesincrease indepreciation of rental merchandisesalaries andamortization of intangiblesother expenses and the decrease in same store sales during the first quarter of 2004 versus 2003versus 2002,aswelldiscussed above. In the first quarter of 2004, there were 31 more new stores and 77 more acquired stores open as compared to 2003, which are not yet performing at theeffectlevel ofthe Rent-Way acquisition. 18RENT-A-CENTER, INC. AND SUBSIDIARIESa mature store.Net
Earnings.Earnings. Net earnings increased by$7.4$1.2 million, or17.0%2.5%, to$51.0$52.2 million for the three months ended March 31,2003 from $43.62004 as compared to $51.0 million in2002.2003. This increase is primarily attributable to growth in total revenues,reduceda decrease in interestexpenses resulting fromexpense, and areduction in outstanding debtlower effective tax rate during the first quarter of 2004 as compared to 2003.19
RENT-A-CENTER, INC. AND SUBSIDIARIES
Liquidity and
the improvements seen in salaries and other expenses under our cost control programs. Preferred Dividends. Dividends on our Series A preferred stock are payable quarterly at an annual rate of 3.75%. Preferred dividends decreased by $5.0 million, or nearly 100%, for the three months ended March 31, 2003, primarily due to the conversion of all but two shares of outstanding Series A preferred stock in August 2002. LIQUIDITY AND CAPITAL RESOURCESCapital ResourcesCash provided by operating activities increased by
$28.5$32.6 million to$124.8$157.4 million for the three months ending March 31,2003 from $96.32004 as compared to $124.8 million in2002.2003. This increase resulted primarily fromana greater increase innet earnings, accounts payable andaccrued liabilities during the firstthree monthsquarter of20032004 as compared to2002, offset by increased purchases2003, consisting primarily ofinventory.income taxes accrued for but not yet paid.Cash used in investing activities
increaseddecreased by$88.8$75.8 million to$100.1$24.3 million during the three month period ending March 31,2003 from $11.32004 as compared to $100.1 million in2002.2003. Thisincreasedecrease is primarily attributable to the acquisition of 295 stores fromRent-Way.Rent-Way in February 2003.Cash used in financing activities decreased by
$18.5$3.6 million to$7.3$3.7 million during the three month period ending March 31,2003 from $25.82004 as compared to $7.3 million in2002.2003. This decrease is a result ofthe difference between our purchase of $34.7 million in treasuryfewer stockin the first quarter of 2002 as compared to $13.4 millionrepurchases effected during the first quarter of 2004 as compared to 2003, offset byfewer proceeds from options exercisedthe $1.0 million repayment on our term loans in2003 as compared to 2002.2004.Liquidity Requirements.Our primary liquidity requirements are for debt service, rental merchandise purchases, capital expenditures
litigationand our store expansion program. Our primary sources of liquidity have been cash provided by operations, borrowings and sales of debt and 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 the cash flow generated from operations, together with amounts available under our
existingsenior credit facilities, will be sufficient to fund our debt service requirements, rental merchandise purchases, capital expenditureslitigationand our store expansion programsduring 2003.into 2005. Ourexistingrevolving credit facilities provide us with revolving loans in an aggregate principal amount not exceeding $130.0 million, of which$124.3$90.3 million was available atMay 9, 2003.April 30, 2004. AtMay 9, 2003,April 30, 2004, we had$162.6approximately $184.6 million incash.cash, of which approximately $130.0 million we expect to be utilized to fund the Rainbow and Rent Rite acquisitions anticipated in May 2004. To the extent we have available cash that is not necessary for store openings or acquisitions, we intend to repurchase additional shares of our common stock as well as make payments to service our existing debt. 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.Our
existingsenior creditfacilityfacilities and theindenturesindenture governing oursenior subordinated7½% notes contain certain change in control provisions. A change in control would result in an event of default under ourexistingsenior credit facilities, and, pursuant to the underlyingindentures,indenture would also require us to offer to repurchase all of oursenior subordinated7½% notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Provisions of ourexistingsenior creditfacility would prohibitfacilities restrict the repurchase of all of oursenior subordinated7½% notes. 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 and all of thesenior subordinated7½% notes, or that we would be able to obtain financing to do so on favorable terms, if at all.Deferred Taxes.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. For assets placed in service between May 6, 2003 and December 31, 2004, the Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the percent of the basis of qualifying property deductible in the year the property is placed in service from 30% to 50%. 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
increasehave increased by approximately$60.0$103.4 million through 2004 before the deferred tax liabilities begin to reverse over a three year period beginning in 2005.Rental Merchandise
Purchases.Purchases. We purchased$172.5$177.3 million and$137.9$172.5 million of rental merchandise during the three month periods ending March 31, 2004 and 2003,and 2002,respectively.19RENT-A-CENTER, INC. AND SUBSIDIARIESCapital
Expenditures.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$9.2$13.4 million and$8.1$9.2 million on capital expenditures during the three month periods ending March 31,20032004 and2002,2003, respectively, and expect to spend approximately$31.0$40.0 million for the remainder of2003.2004.20
RENT-A-CENTER, INC. AND SUBSIDIARIES
Acquisitions and New Store Openings.For the first three months of
2003,2004, we spent approximately$101.1$14.1 million on acquiring stores andaccounts of which $100.4 million was for the Rent-Way acquisition.accounts. For the entire year ending December 31,2003,2004, we intend to add approximately5% to 10%5-10% to our store base by opening approximately8080-120 new store locations as well ascontinuingpursuing opportunistic acquisitions.On February 4, 2004, we announced that we entered into a definitive agreement to
pursue opportunistic acquisitions.acquire Rainbow Rentals, Inc., a rent-to-own operator, for $16.00 in cash per share of Rainbow common stock. The acquisition consists of 124 rent-to-own stores in 15 states. The agreement also provides that each holder of options of Rainbow will receive an amount equal to the difference between $16.00 and the exercise price of the option. We intend to fund the acquisition primarily with cash on hand. The acquisition, which is expected to be completed in mid to late May 2004, is conditioned upon customary closing conditions for a transaction of this nature, including the receipt of requisite regulatory approval and approval of Rainbow’s shareholders.On March 5, 2004, we completed the purchase of five Canadian rent-to-own stores for approximately $3.2 million Canadian dollars ($2.4 million U.S dollars). The five stores are located in the cities of Edmonton and Calgary in the province of Alberta. This acquisition marked the commencement of our business operations in Canada.
Furthermore, during the first quarter of 2004, we acquired 18 additional stores, accounts from 19 additional locations, opened 22 new stores, and closed 22 stores. Of the closed stores, 16 were merged with existing store locations, and six stores were sold. The additional stores and acquired accounts were the result of 14 separate transactions for an aggregate price of approximately $11.7 million in cash. As of April 30, 2004, we have acquired one additional store and accounts from three additional locations, opened four new stores and merged two stores into existing locations during the second quarter of 2004. It is our intention to increase the number of stores we operate by an average of approximately 5 to 10% per year over the next several years.
On April 28, 2004, we announced that we had entered into a definitive agreement to acquire Rent Rite, Inc., a Tennessee corporation, which currently operates approximately 90 stores in 11 states. The agreement provides for the merger of Rent Rite with and into a newly-formed subsidiary of ours. Pursuant to the agreement, we have agreed to acquire Rent Rite for 12.75 times Rent Rite’s average three month recurring revenue, or approximately $58.4 million based on Rent Rite’s recurring revenue for the three month period ended March 31, 2004. Under the terms of the agreement, we have agreed to assume the debt and other liabilities of Rent Rite. Approximately one half the purchase price will be paid in our common stock, with the remaining portion consisting of cash, the assumption of Rent Rite’s stock options and retirement of Rent Rite’s outstanding debt. We intend to fund the acquisition primarily with cash on hand for the portion of the purchase price to be paid in cash. The acquisition, which is expected to be completed in early May 2004, is conditioned upon customary closing conditions for a transaction of the nature, including the receipt of approval of Rent Rite’s shareholders.
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 under-performing 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.
WeAdditionally, we cannot assureyouthat the stores we do acquire or open will be profitable at the same levels that our current stores are, or at all.Borrowings.Borrowings. The table below shows the scheduled maturity dates of our
existingsenior debt outstanding at March 31,2003.
PERIOD (YEAR) ENDING DECEMBER 31, (IN THOUSANDS) - -------------------- --------------2003....... $ 1,063 2004....... 13,040 2005....... 49,093 2006....... 114,111 2007....... 72,193 Thereafter.......... -- --------- $ 249,500 =========Since March 31,2004.
YEAR ENDING DECEMBER 31, (IN THOUSANDS) 2004 $ 3,000 2005 4,000 2006 4,000 2007 4,000 2008 192,000 Thereafter 190,000
$ 397,000
Senior Credit Facilities.On May 28, 2003, we
have prepaid an additional $24.5 million of our existing senior debt during the second quarter. Senior Credit Facilities. Our existingentered into a new senior creditfacilities arefacility provided by a syndicate of banks and other financial institutions led byJPMorgan Chase Bank,Lehman Commercial Paper, Inc., as administrative agent. At March 31,2003,2004, we had a total of$249.5$397.0 million outstanding under ourexistingsenior creditfacilityfacilities related to our term loans and$114.3$90.3 million of availability under the revolving credit line portion of ourexistingsenior creditfacility. Under ourfacilities.The senior credit facility also includes an $80.0 million
Tranche D LC Facility, inadditional term loan facility. This facility is currently held to support our outstanding letters of credit. In the event that a letter of credit is drawn upon, we have the right to either repay theTranche D LC Facilityadditional term loan facility lenders the amount withdrawn or request a loan in that amount. Interest on any requestedTranche D LC Facility21
RENT-A-CENTER, INC. AND SUBSIDIARIES
additional term loan facility loan accrues at an adjusted prime rate plus
1.75%1.25% or, at our option, at the Eurodollar base rate plus2.80%2.25%, with the entire amount of theTranche D LC Facilityadditional term loan facility due onDecember 31, 2007.May 28, 2009.Borrowings under our
existingsenior credit facilities bear interest at varying rates equal to1.50% to 3.00%2.25% over the Eurodollar rate, which was1.30%1.09% at March 31,2003.2004. We also have a prime rate option under the facilities, but have not exercised it to date.For the quarter ended March 31, 2003, the average effective rate on outstanding borrowings under our existing senior credit facilities was 4.80%, before considering the interest rate swap agreements as described below, and 9.04%, after giving effect to the interest rate swap agreements in effect during the first quarter of 2003. During 1998, weWe have not entered into any interest rate protection agreements withtwo banks, one of which expired in 2001. Underrespect to theterms of the current interest rate agreements, the Eurodollar rate used to calculate the interest rate charged onterm loans under our$250.0 million outstandingseniorterm debt has been fixed at an average rate of 5.60%. Of the $250.0 million under protection, $140.0 million expires in August 2003 and the remaining $110.0 million expires in September 2003.credit facilities.Our
existingsenior credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including intellectualproperty and realproperty. Ourexistingsenior credit facilities are also secured by a pledge of the capital stock of our U.S. subsidiaries, and a portion of the capital stock of our international subsidiaries.20RENT-A-CENTER, INC. AND SUBSIDIARIES Our existingThe senior credit facilities contain covenants, including without limitation, covenants that generally limit our ability to:
-incur additional debt (including subordinated debt) in excess of$25$35 million at any one time outstanding;-repurchase our capital stock andsenior subordinated7½% notes;-incur liens or other encumbrances;-merge, consolidate or sell substantially all our property or business;-sell assets, other than inventory in the ordinary course of business;-make investments or acquisitions unless we meet financial tests and other requirements;-make capital expenditures; or-enter into a new line of business.Our
existingsenior credit facilities require us to comply with several financial covenants, including a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum fixed charge coverage ratio. At March 31,2003,2004, the maximum consolidated leverage ratio was3.00:2.75:1, the minimum consolidated interest coverage ratio was3.50:4.0:1, and the minimum fixed charge coverage ratio was1.30:1.50:1. On that date, our actual ratios were1.22:1.53:1,6.78:6.73:1 and2.70:2.51:1, respectively. In addition, we are generally required to use 25% of the net proceeds fromanyequityofferingofferings to repay our term loans.Events of default under our
existingsenior 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 ifwe undergothere is a change of control. This is defined to include the case where a third party becomes the beneficial owner of33.33%35% or more of our voting stock or certain changes in our Board of Directorsoccur. We recently announced that we anticipate refinancing our existing senior credit facilities by entering into a new $600.0 million senior credit facility, consisting of a $400.0 million term loan, a $120.0 million revolving credit facility and the right to obtain an additional term loan of up to $80.0 million. We anticipate the terms of the new senior credit facility will, among other things, permit us to repurchase up to approximately an additional $200.0 million of our common stock. 11%occurs.7½% Senior Subordinated Notes.
As of March 31, 2003, Rent-A-Center East had outstanding $272.25 million in 11% senior subordinated notes pursuant to an indenture dated as of December 19, 2001 among Rent-A-Center East, its subsidiary guarantors and The Bank of New York, as trustee. The 2001 indenture contains covenants that limit Rent-A-Center East's ability to: - incur additional debt; - sell assets or our subsidiaries; - grant liens to third parties; - pay dividends or repurchase stock; and - engage in a merger or sell substantially all of our assets. 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 $25.0 million. The notes may be redeemed on or 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 Rent-A-Center East did not comply with this repurchase obligation, this would trigger an event of default under our senior credit facilities. 21On May 6, 2003, we issued RENT-A-CENTER, INC. AND SUBSIDIARIES On April 23, 2003, we announced Rent-A-Center East's tender offer for all of its $272.25 million 11% senior subordinated notes. This tender offer is scheduled to expire at 12:00 midnight, New York City time, on Tuesday, May 20, 2003. On May 6, 2003, Rent-A-Center East repurchased approximately $182.5 million principal amount of 11% senior subordinated notes pursuant to the early tender provisions of the tender offer. Rent-A-Center East currently intends to optionally redeem on August 15, 2003, in accordance with the terms of the 2001 indenture, all of the 11% senior subordinated notes then outstanding at the applicable redemption price. This statement of intent shall not constitute a notice of redemption under the underlying indenture. Such notice, if made, will only be made in accordance with the applicable provisions of the underlying indenture. 7 1/2% Senior Subordinated Notes.an additional$300.0 million in senior subordinated notes due 2010, bearing interest at7 1/2%7½%, pursuant to an indenture dated May 6, 2003, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York, as trustee. The proceeds of this offeringare to bewere used to fund the repurchase and redemption of the 11% senior subordinated notes.The 2003 indenture contains covenants that limit
Rent-A-Center'sRent-A-Center’s ability to:- -incur additional debt;- -sell assets or our subsidiaries;- -grant liens to third parties;- -pay dividends or repurchase stock; and- -engage in a merger or sell substantially all ofourits assets.Events of default under the 2003 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 $50.0 million.
It is also an event of default under the 2003 indenture if we fail to purchase or redeem all of the 11% senior subordinated notes by August 30, 2003.The
7 1/2% notes7½% Notes may be redeemed on or after May 1, 2006, at our option, in whole or in part, at a premium declining from 103.75%. The7 1/2% subordinated notes7½% Notes also require that upon the occurrence of a change of control (as defined in the 2003 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 aggregate22
RENT-A-CENTER, INC. AND SUBSIDIARIES
principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. If we do not comply with this repurchase obligation, this would trigger an event of default under our
existingsenior credit facilities.Store
Leases.Leases. We lease space for all of our stores as well as our corporate and regional offices under operating leases expiring at various times through2010.2011.ColorTyme Guarantee.ColorTyme is a party to an agreement with
Textron Financial Corporation,Wells Fargo Foothill, Inc., whogenerallyprovides$40.0$50.0 million in aggregate financing to qualifying franchisees of ColorTyme generally of up to five times their average monthly revenues. Underthisthe Wells Fargo agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events,Textron mayWells Fargo can assign the loans and the collateral securing such loans to ColorTyme, with ColorTyme then succeeding to the rights ofTextronWells Fargo under the debt agreements, including therightsright to foreclose on the collateral. An additional$10.0$15.0 million of financing is provided by Texas Capital Bank, National Association under anarrangementagreement similar to theTextronWells Fargo financing.We guaranteeRent-A-Center East guarantees the obligations of ColorTyme under each of these agreements, not considering the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of$50.0$65.0 million, of which$31.8$30.1 million was outstanding as of March 31,2003.2004. Mark E. Speese,ourRent-A-Center’s Chairman of the Board and Chief Executive Officer, is a passive investor in Texas Capital Bank, owning less than 1% of its outstanding equity.22RENT-A-CENTER, INC. AND SUBSIDIARIESLitigation.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 March 31,
2003,2004, we have paid approximately$124.5$125.0 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.On November 12, 2002, we signed a settlement agreement settling the Wisconsin Attorney General matter, which was approved by the court on the same day. Under the terms of the settlement, we created a restitution fund in the amount of $7.0 million for our eligible Wisconsin customers who had completed or active transactions with us as of September 30, 2002. In addition, we paid $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 the restitution fund is allocated for customers with completed transactions as of September 30, 2002, and the balance is allocated for restitution on active transactions as of September 30, 2002, which will be allowed to terminate according to their terms when customers either acquire or return the merchandise. Restitution will be offered on the active transactions when all such active transactions have terminated, which we anticipate will occur by the fall of 2004. Any unclaimed restitution funds at the conclusion of the restitution period will be returned 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 the active transactions, together with the amount of funds we anticipate will remain unclaimed by customers with completed transactions, will be sufficient to pay the required amount of restitution on all eligible active transactions.Additional settlements or judgments against us on our existing litigation could affect our liquidity. Please refer to Note
J orL of our consolidated financial statements included in our Annual Report on Form10-K.10-K/A.Sales of Equity Securities.During 1998, we issued 260,000 shares of our
Series Apreferred stock at $1,000 per share, resulting in aggregate proceeds of $260.0 million. Dividends on ourSeries Apreferred stock accrue on a quarterly basis at the rate of 3.75%, or $37.50 per annum. Prior to the conversion of all but two shares of ourSeries Apreferred stock in August 2002, we paid these dividends in additional shares ofSeries Apreferred stock because of restrictive provisions in our senior credit facilities. We have the ability to pay the dividends in cash and may do so under ourexistingsenior credit facilities so long as we are not in default.On May 31, 2001, we completed an offeringIn connection with the repurchase of
3,680,000774,547 shares of our common stockat 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. In connection with the issuance of our Series A preferred stock(on a pre-split basis) from Apollo inAugust 1998, we entered into a registration rights agreement withJuly 2003, Apollowhich, among other things, granted them two rights to request thatexchanged theirshares 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 an affiliate of 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. On August 5, 2002, the first date on which we had the right to optionally redeem theshares of Series A preferred stockthe holders of our Series A preferred stock converted all but twofor shares ofourSeriesAC preferredstock held by them into 7,281,548 shares of our commonstock. 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 theno shares of Series A preferred stockheld by them on August 5, 2002, we granted Apollo an additionalremain outstanding. The terms of the Series A preferred stock and Series C preferred stock are substantially similar, except the Series C preferred stock does not have the right toeffect a demand registration under the existing registration rights agreement we entered into with them in 1998, such that Apollo now has two demand rights. 23RENT-A-CENTER, INC. AND SUBSIDIARIES Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding asdirectly elect any members ofMarch 31, 2003:
PAYMENTS DUE BY YEAR END Contractual Cash Obligations(1) TOTAL 2003 2004 2005 2006 2007 2008 AND THEREAFTER ------------------------------- ----- ---- ---- ---- ---- ---- ------------------- (IN THOUSANDS)Existing Senior Credit Facilities (including current portion)....... $ 249,500 $ 1,063 $ 13,040 $ 49,093 $114,111 $ 72,193 $ -- 11% Senior Subordinated Notes (2)........................ 436,961 14,974 29,948 29,948 29,948 29,948 302,195 Operating Leases..................... 395,076 127,258 110,057 83,764 47,877 21,158 4,962 - ------------------------------------- ---------- -------- --------- --------- -------- -------- -------- Total $1,081,537 $143,295 $ 153,045 $ 162,805 $191,936 $123,299 $307,157- ------------------------ (1) Excludes transactions which have occurred since March 31, 2003, including the repurchaseour Board ofapproximately $182.5 million of 11% Notes pursuant to the tender offer, 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 indentures governing Rent-A-Center East's subordinated notes. (2) Includes interest payments of $14.97 million on each of February 15 and August 15 of each year.Directors.Repurchases of Outstanding Securities.
In connection with the retirement of J. Ernest Talley, our former Chairman of the Board and Chief Executive Officer,On April 25, 2003, we announced that we entered into an agreementtowith Apollo which provided for the repurchase$25.0 million worthof a number of shares of our common stockbeneficially held by Mr. Talley at a purchase price equalsufficient tothe average closing pricereduce Apollo’s aggregate record ownership to 19.00% after consummation of ourcommon stock overplanned tender offer at the10 trading days beginning October 9, 2001, subject to a maximum of $27.00price per shareandpaid in the tender offer. On April 28, 2003, we commenced aminimum of $20.00 per share. Under this formula, thetender offer to purchaseprice for the repurchase was calculated at $20.258 per share. Accordingly, on October 23, 2001 we repurchased 493,632up to 2.2 million shares of our common stockbeneficially held by Mr. Talley at $20.258 per share for(on atotal purchase price of $10.0 million,pre-split basis) pursuant to a modified “Dutch Auction.” On June 25, 2003, we closed the tender offer andon November 30, 2001, we repurchased an additional 740,448purchased 1,769,960 shares of our common stockbeneficially held by Mr. Talley(on a pre-split basis) at$20.258$73 per share (on a pre-split basis) fora total purchase price of an additional $15.0approximately $129.2 million. OnJanuary 25, 2002,July 11, 2003, weexercisedclosed theoption to repurchase all of the remaining 1,714,086Apollo transaction and purchased 774,547 shares of our common stockbeneficially held(on a pre-split basis) at $73 per share (on a pre-split basis) for approximately $56.5 million. As contemplated byMr. Talley at $20.258 per share. We repurchased those remainingthe Apollo agreement, Apollo also exchanged their shareson January 30, 2002.of Series A preferred stock for shares of Series C preferred stock.In April 2000, we announced that our
boardBoard ofdirectorsDirectors had authorized a program to repurchase, from time to time, in the open market and in privately negotiated transactions up to an aggregate of $25.0 million of our common stock. In October 2002, our Board of Directors increased the amount of repurchases authorized under our common stock repurchase program from $25.0 million to $50.0 million. In March 2003, our Board of Directors again increased such amount from $50.0 million to $100.0 million.Through March 31,On August 1, 2003, wehave repurchased approximately 937,000agreed to purchase an aggregate of 440,000 shares of our common stockunder this program for approximately $44.3 million, 276,000 shares(on a pre-split basis) at $73 per share (on a pre-split basis), 200,000 of which werepurchased in the quarter ended March 31, 2003 for approximately $13.5 million. We have suspendedrepurchased from Mark E. Speese, ourcommon stock repurchase program pending the consummation of our recently announced equity tender offer. See "Recent Developments" discussed previously in this report. However, we may begin repurchasing shares of our common stock at any time after the tenth business day following the terminationChairman of theequity tender offer. On April 28, 2003, we announced the commencementBoard and Chief Executive Officer, 200,000 ofa tender offer to purchase up to 2.2 million shares of our common stock at prices between $60 and $66 per share pursuant to a modified "Dutch Auction." The tender offer will expire at 5:00pm, New York City time, on June 5, 2003, unless extended. We also announced that we have entered into an agreement withwhich were repurchased from Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P., and 40,000 of whichprovides for thewere repurchased from Mitchell E. Fadel, our President and Chief Operating Officer. On October 24, 2003 we announced our Board of Directors had rescinded our old common stock repurchase program and authorized a new $100 million common stock repurchase program. Through that date, we repurchased a total of 1.6 million shares (on anumber of sharespre-split basis) of our common stocksufficientfor an aggregate of $91.5 million under23
RENT-A-CENTER, INC. AND SUBSIDIARIES
the old common stock repurchase program. Under our new common stock repurchase program, we have the ability to
reduce Apollo'srepurchase up to $100 million in aggregatebeneficial ownership from approximately 20.03% to 19.00% on an issued and outstanding basis. Apollo will not be obligated to sell any shares under this agreement unless it would be entitled to sell at least 666,667 shares in reaching the 19.00% ownership level. Approximately 950,000 shares must be validly tendered by stockholders participating in the tender offer in order to result in Apollo selling at least 666,667 shares. The per share purchase price payable pursuant to this agreement will be equal to the per sharepurchase price of our common stock,setfrom time to time, inthe tender offer. We willopen market and privately negotiated transactions. As of March 31, 2004, we had purchased a total of 1,101,900 shares of our common stock for an aggregate of $35.2 million under our new common stock repurchasethe shares from Apollo on the eleventh business day following the successful completionprogram. Please see “Changes in Securities, Use ofthe tender offer. The tender offer is not conditioned on the tenderProceeds and Issuer Purchase ofany minimum number of shares.Equity Securities” later in this report.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.
24RENT-A-CENTER, INC. AND SUBSIDIARIES Seasonality.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
tocompared to other quarters throughout the year. As a result, we would expect revenues for the third quarter of each fiscal year to remain relatively flatwithor slightly below 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.ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE SENSITIVITYQuantitative and Qualitative Disclosure About Market RiskInterest Rate Sensitivity
As of March 31,
2003,2004, we had$272.25$300.0 million in subordinated notes outstanding at a fixed interest rate of11.0%7½% and$249.5$397.0 million in term loans outstanding at interest rates indexed to theLIBOREurodollar 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 7½% subordinated notes at March 31,20032004 was$292.7$318.5 million which is$20.9$18.5 million above their carrying value. Unlike the subordinated notes, the$249.5$397.0 million in term loans have variable interest rates indexed to currentLIBOREurodollar rates.Because the variable rate structure exposes us to the riskAs ofincreased interest cost if interest rates rise, in 1998March 31, 2004, we have not entered into$500.0 million inany interest rate swap agreementsthat 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, of which $140.0 million will expire on August 5, 2003 and the remaining $110.0 million will expire on September 5, 2003. The swap agreements had an aggregate negative fair value of $4.2 million and $7.3 million at March 31, 2003 and 2002, respectively. A hypothetical 1.0% change in the LIBOR rate would have affected the fair value of the swaps by approximately $300,000. MARKET RISKwith respect to term loans under our senior credit facilities.Market Risk
Market risk is the potential change in an
instrument'sinstrument’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 bytheour 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 RISKInterest Rate Risk
We hold long-term debt with variable interest rates indexed to prime or
LIBORthe Eurodollar rate 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%. ITEMItem 4.
CONTROLS AND PROCEDURESControls and ProceduresAn 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 beforeas of thefilingend of the period covered by 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 thatcould significantlyhave materially affected, or are reasonably likely to materially affect, our internalcontrols subsequent to their evaluation. 25controls. 24
RENT-A-CENTER, INC. AND SUBSIDIARIES
PART II
- OTHER INFORMATION ITEM– Other InformationItem 1.
LEGAL PROCEEDINGSLegal ProceedingsFrom 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.Inc. The plaintiff 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 plaintiff acknowledges that rent-to-own transactions in New York are subject to the provisions of NewYork'sYork’s Rental Purchase Statute but contends the Rental Purchase Statute does not provide Thorn Americas immunity from suit for other statutory violations. The plaintiff alleges Thorn Americas has a duty to disclose effective interest under New York consumer protection laws, andseekseeks damages and injunctive relief for ThornAmericas'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 the prayer for relief, the plaintiff requested class certification, injunctive relief requiring Thorn Americas to cease certain marketing practices and price their rental purchase contracts in certain ways, unspecified compensatory and punitive damages, rescission of the class members contracts, an order placing in trust all moneys received by Thorn Americas in connection with the rental of merchandise during the class period, treble damages,attorney'sattorney’s fees, filing fees and costs of suit, pre- and post-judgment interest, and any further relief granted by the court. The plaintiff has not alleged a specific monetary amount with respect to the request for damages.The proposed class includes all New York residents who were party to our rent-to-own contracts from November 26, 1994. In November 2000, following interlocutory appeal by both parties from the denial of cross-motions for summary judgment, we obtained a favorable ruling from the Appellate Division of the State of New York, dismissing the
plaintiff'splaintiff’s claims based on the alleged failure to disclose an effective interest rate. Theplaintiff'splaintiff’s other claims were not dismissed. The plaintiff moved to certify a state-wide class in December 2000. Theplaintiff'splaintiff’s class certification motion was heard by the court on November 7, 2001 and, on September 12, 2002, the court issued an opinion denying in part and granting in part theplaintiff'splaintiff’s requested certification. The opinion grants certification as to all of theplaintiff'splaintiff’s claims except theplaintiff'splaintiff’s pricing claims pursuant to the Rental Purchase Statute, as to which certification was denied. The parties have differing views as to the effect of thecourt'scourt’s opinion, and accordingly, the court granted the parties permission to submit competing orders as to the effect of the opinion on theplaintiff'splaintiff’s specific claims. Both proposed orders were submitted to the court on March 27,2003. A hearing has been scheduled before the court for2003, and on May 30, 2003,to determinetheform ofcourt held a hearing regarding such orders. No orderto be entered.has yet been entered by the court. Regardless of the determination of the final certification order by the court, we intend to pursue an interlocutory appeal of thecourt'scourt’s certification order.We believe these claims are without merit and will continue to vigorously defend ourselves in this case. However, we cannot assure you that we will be found to have no liability 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 believed was a separate transaction, was a disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the Attorney General alleged that we failed to disclose credit terms, misrepresented the terms of the transaction and engaged in unconscionable practices. The Attorney General sought 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. On October 1, 2002, in anticipation of the settlement of this matter, we changed our business practices in Wisconsin to a retail sale model. Accordingly, our 23 Wisconsin stores now offer credit sale transactions and operate under our subsidiary Get It Now, which is subject to regulation under the Wisconsin Consumer Act. On November 12, 2002, we signed a settlement agreement for this suit with the Attorney General, which was approved by the court on the same day. Under the terms of the settlement, we created a restitution fund in the amount of $7.0 million for our eligible Wisconsin customers who had completed or active transactions with us as of September 30, 2002. In addition, we paid $1.4 million to the State of Wisconsin for fines, penalties, costs and fees. A portion of the restitution fund is allocated for customers with completed transactions as of September 30, 2002, and the balance is allocated for restitution on active transactions as of September 30, 2002, which will be allowed to terminate according to their terms when customers either acquire or return the merchandise. Restitution will be offered on the active transactions when all such active transactions 26RENT-A-CENTER, INC. AND SUBSIDIARIES have terminated, which we anticipate will occur by the fall of 2004. Any unclaimed restitution funds at the conclusion of the restitution period will be returned 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 the active transactions, together with the amount of funds we anticipate will remain unclaimed by customers with completed transactions, will be sufficient to pay the required amount of restitution on all eligible active transactions. 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.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
allegesalleged that the defendants violated Sections 10(b) and/or Section 20(a) of the Securities Exchange Actof 1934and 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 complaintpurportspurported to be brought on behalf of all purchasers of our common stock from April 25, 2001 through October 8, 2001 andseekssought damages in unspecified amounts. Similar complaints were consolidated by the court with the Walker matter in October 2002.On November 25, 2002, the lead plaintiffs in theWalkermatter filed an amended consolidated complaint which added certain of our outside directors as defendants to the Exchange Act claims. The amended complaint also added additional claims that we, and certain of our current and former officers and directors, violated various provisions of the Securities Act
of 1933as a result of alleged misrepresentations and omissions in connection with an offering in May 2001 and also added the managing underwriters in that offering as defendants.On February 7, 2003, we, along with certain officer and director defendants, filed a motion to dismiss the matter as well as a motion to transfer venue. In addition, our outside directors named in the matter separately filed a motion to dismiss the Securities Act claims on statute of limitations grounds. On February 19, 2003, the underwriter defendants also filed a motion to dismiss the matter. The plaintiffs filed response briefs to these motions,
and our responsetothese response briefs is duewhich we replied on May 21, 2003.TheA hearing was held by the courthas scheduled a hearing foron June 26, 2003 to hear each of these motions.25
RENT-A-CENTER, INC. AND SUBSIDIARIES
On September 30, 2003, the court granted our motion to dismiss without prejudice, dismissed without prejudice the outside directors’ and underwriters’ separate motions to dismiss and denied our motion to transfer venue. In its order on the motions to dismiss, the court granted the lead plaintiffs leave to replead the case within certain parameters. However, on October 9, 2003, the lead plaintiffs filed a motion for reconsideration with the court with respect to the Securities Act claims. In that motion, they indicated they intend to replead their claims. We filed our response to this motion on October 24, 2003. No decision on the lead plaintiffs’ motion has been entered by the court.
We believe the
plaintiff'splaintiff’s claims in this matter 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
assertsasserted 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'sGriffin’s suitseekssought class-wide remedies, including injunctive relief, unspecified statutory, actual and treble damages, as well asattorney'sattorney’s fees and costs.In July 2002, we filed preliminary objections to the complaint in Griffin.On December 13, 2002, the trial court
granted our preliminary objections anddismissed theplaintiffs' claims.plaintiffs’ claims in this matter. The plaintiffs subsequently appealed. On December 2, 2003, the appellate court issued an opinion finding that the trial court properly ruled that our rental purchase agreements are governed by the Pennsylvania Rental-Purchase Agreement Act and not the Pennsylvania Goods and Services Installment Sales Act. In doing so, the appellate court reversed the trial court’s dismissal of the plaintiffs’ amended complaint and remanded the case back to the trial court to allow the plantiffs an opportunity to file an amended complaint under the Pennsylvania Rental-Purchase Agreement Act. In April 2004, we settled this matter in principle with the plaintiffs for a nominal amount.Benjamin Griego, et al. v. Rent-A-Center, Inc., et al.This matter is a state-wide class action originally filed in San Diego, California on January
6,21, 2002 by Benjamin Griego. A similar matter, entitledArthur Carrillo, et al. v. Rent-A-Center, Inc., et al, filed on April 12, 2002 in Los Angeles, California, was coordinated withGriegoin the Superior Court for the County of San Diego on September 10, 2002.On February 28, 2003, the plaintiffs filed a
noticeconsolidated amended complaint alleging various claims, including that our cash sales prices exceed the pricing permitted under the California Rental Purchase Act, that the guaranteed merchandise replacement benefit in the third-party membership program offered by us to our customers in California violates the prohibitions in the Rental Purchase Act relating to the sale ofappeal.loss damage waiver and property insurance, that the membership program prematurely offers service contracts to our customers, and that the fee for the membership program is excessive. In addition, the plaintiffs allege that portions of our form of rental purchase agreement in California do not strictly comply with the type-size requirements under the Rental Purchase Act. Theplaintiffs' appeal briefplaintiffs further allege that our rental purchase documentation improperly references certain merchandise as “previously rented” rather than “used,” does not contain all of the required disclosures and terms of the transaction, and includes language that the plaintiffs interpret as affording us rights not permitted under the applicable California statutes.In accordance with a previously issued opinion from the California Legislative Counsel, we believe that the pricing formula utilized by us in California complies with the Rental Purchase Act. In addition, we believe that under California case law, courts have found that arrangements similar to the guaranteed merchandise replacement benefit offered to our customers do not constitute insurance.
Upon notification of the alleged violations, we promptly modified our rental purchase documentation in California, including increasing the type-size in the relevant portion of our rental purchase agreements from 9-point type to 10-point type and modifying the language in our rental purchase documentation to, among other things, refer to “previously rented” merchandise as “used.” In addition, we dispute plaintiffs’ interpretation of the language in our rental purchase agreement and note that the rights the plaintiffs contend were granted to us were never asserted by us. In connection with the revisions described above, we also modified our rental purchase documentation to clarify our disclosures and the disputed language. As part of that process, we promptly communicated to our California customers that their statutory rights remained intact. Accordingly, we believe that no harm to our customers could have occurred as a result of these claims.
The plaintiffs have not alleged specific damages in the amended complaint, but contend that no proof of actual harm or damage on the part of the individual consumer is necessary to establish recovery for these claims, which we vigorously dispute. Under the Rental Purchase Act, a consumer damaged by a violation of the Rental Purchase Act is entitled to recover actual damages, statutory damages equal to twenty-five percent of an amount equal to the total amount of payments to obtain ownership if all payments were made under the rental purchase agreement (but not less than $100 nor more than $1,000),
26
RENT-A-CENTER, INC. AND SUBSIDIARIES
reasonable attorney’s fees and court costs, exemplary damages for intentional or willful violations, and equitable relief. The Rental Purchase Act also provides that with respect to certain violations, a rental purchase agreement is voidable by the consumer. Furthermore, the statute provides that if a lessor willfully discloses a cash price that exceeds the price permitted under the statute, the contract is void and the consumer is entitled to keep the merchandise and recover a full refund of all payments. A consumer who suffers any damage from a violation of the Consumer Legal Remedies Act is entitled to recover actual damages, injunctive relief, restitution, punitive damages, certain civil penalties and attorneys’ fees and costs.
On October 17, 2003, the plaintiffs filed their motion for class certification. On October 24, 2003, we filed a motion to dismiss certain of the plaintiffs’ claims and on October 31, 2003, filed our opposition to the plaintiffs’ motion for class certification. The hearing on our motion to dismiss and plaintiffs’ motion for class certification was
filedheld onMay 9,November 14, 2003. On December 4, 2003, the court denied our motion to dismiss and granted the plaintiffs’ motion for class certification. The class definition includes our customers in California from February 1, 1999 through January 31, 2002, and encompasses customers who entered into approximately 400,000 rental purchase agreements. Such customers also purchased approximately 167,000 memberships. With respect to such rental purchase agreements, we believe that twenty-five percent of the total amount of payments to obtain ownership (the maximum percentage applicable to statutory damages) was approximately $600 per agreement on average. On February 20, 2004, the court ruled that it would enter an order certifying the class described above and, with respect to the cash price claims, a sub-class of our customers during the same time period who rented electronic appliances and entertainment equipment. We believe this sub-class encompasses customers who entered into approximately 245,000 of theplaintiffs'400,000 rental purchase agreements, with an average revenue of approximately $500 per agreement. On March 16, 2004, the court entered the certification order.On February 13, 2004, we filed motions seeking rulings by the court on a series of legal questions applicable to plaintiffs’ claims. The plaintiffs subsequently filed a cross-motion with respect to one of the legal questions. On April 2, 2004, the court ruled with respect to these motions. These rulings include that there is no requirement that class members prove actual damages resulting from violations of the Rental Purchase Act, and that the pricing formula referenced in the Rental Purchase Act is merely evidence of permissible “cash prices” under the Rental Purchase Act as opposed to a statutory determination of permissible “cash prices.” The court also ruled, without prejudice, that our service contracts made available under our membership program are offered and sold in violation of the Rental Purchase Act but agreed to allow us to present evidence to the contrary later in the proceeding. The court also concurred with our position that the contract terms for the membership program need not be contained in the rental purchase agreement.
A mediation with the plaintiffs’ counsel was held on April 23, 2004, and discovery in the case is continuing. At the hearing on April 2, the court, at the request of the parties, indicated a willingness to postpone the currently scheduled June 18, 2004 trial date to a later date.
In light of the recent decisions by the court, we are reviewing various options, including the prospect of seeking a writ of review from the California Court of Appeal on certain of the trial court’s recent rulings, reviewing the extent to which the trial court rulings, such as that regarding permissible “cash prices,” indicate a predominance of individualized claims justifying decertification of the class and exploring opportunities for a reasonable settlement of the case. In addition, we anticipate seeking a ruling from the trial court that any allowable statutory damages are limited to rental purchase agreements entered into within the one-year period prior to the plaintiffs’ January 31, 2002 filing date, rather than the three-year period contended by plaintiffs due to California law provisions so limiting the imposition of mandatory civil penalties.
We continue to believe the claims in
this matterthe plaintiffs’ complaint arewithout meritunfounded, that we have meritorious defenses to the allegations made andintendthat a class should not have been certified by the court. We will continue to vigorously defendourselves. However,ourselves in this case, while seeking reasonable opportunities to resolve this matter. Nevertheless, we cannot assure you that we will be found to have no liability in this matter.Carey Duron, et. al. v. Rent-A-Center, Inc.This matter is a putative class action filed on August 29, 2003 in the District Court of Jefferson County, Texas by Carey Duron, who alleges we violated certain provisions of the Texas Business and Commerce Code relating to late fees charged by us under our rental purchase agreements in Texas. In the complaint, Duron alleges that her contract provided for a percentage late fee greater than that permitted by Texas law, that she was charged and paid a late fee in excess of the amount permitted by Texas law and that we had a policy and practice of assessing and collecting late fees in excess of that allowed by Texas law. Duron has not alleged specific damages in the complaint, but seeks to recover actual damages, statutory damages, interest, reasonable attorney’s fees and costs of court.
When this matter was filed, we promptly investigated Duron’s allegations, including the formula we use to calculate late fees in Texas. While we do not believe the formula utilized by us during this time period violated Texas law, in late 2003, we sent written notice to approximately 29,500 of our Texas customers for whom we had records and who were potentially adversely impacted by our calculation. We also refunded approximately $37,000 in the aggregate to the customers we could
27
RENT-A-CENTER, INC. AND SUBSIDIARIES
locate. In taking these measures, we believe we complied with the curative measures provided for under the Texas statute. We also reprogrammed our computer system in Texas to modify the formula by which late fees are calculated.
On November 26, 2003, we filed a motion for summary judgment in this matter. On December 4, 2003, Duron filed her motion for class certification. On March 11, 2004, we were notified that the court denied our summary judgment motion and granted Duron’s motion for class certification. The certified class includes our customers in Texas from August 29, 1999 through March 5, 2004 who were charged and paid a late fee in excess of the amount permitted by Texas law.
Under the Texas statute, a consumer damaged by a violation is entitled to recover actual damages, statutory damages equal to twenty-five percent of an amount equal to the total amount of payments required to obtain ownership of the merchandise involved (but not less than $250 nor more than $1,000), reasonable attorney’s fees and court costs. With respect to the approximately 29,500 Texas customers for whom we have records (representing approximately two years of the recently certified class), we believe that twenty-five percent of the total amount of payments to obtain ownership (the maximum percentage applicable to statutory damages) under those rental purchase agreements was approximately $600 per agreement on average.
We believe the claims in Duron’s complaint are unfounded and that we have meritorious defenses to the allegations made. We further believe that a class should not have been certified by the court, and have appealed the court’s certification order, which we are entitled to do as a matter of right under applicable Texas law. This matter has been stayed pending the decision on appeal. Although we intend to vigorously defend ourselves in this case, we cannot assure you that we will be found to have no liability in this matter.
State Wage and Hour Class
Actions.Actions. We are subject to various actions filed against us in the states of Oregon, California and Washington alleging we violated the wage and hour laws of such states. As of March 31, 2004, we operated 24 stores in Oregon, 161 stores in California and 41 stores in Washington.Rob Pucci, et. al. v. Rent-A-Center, Inc.On August 20, 2001,
athis putative class action was filed against us in state court in Multnomah County, Oregonentitled Rob Pucci, et. al. v. Rent-A-Center, Inc.allegingviolationswe violated various provisions of Oregon state law regarding overtime, lunch and work breaks,and failurethat we failed totimelypay all wages due to our Oregon employees,as well asand various contract claims that we promised but failed to pay overtime. Pucci seeks to represent a class of all present and former executive assistants, inside/outside managers and account managers employed by us within the six year period prior to the filing of the complaint as to the contract claims, and three years as to the statutory claims, and seeks class certification, payments for all unpaid wages under Oregon law, statutory and civil penalties, costs and disbursements, pre- and post-judgment interest in the amount of 9% per annum and attorneys fees.As of March 31, 2003, we operated 19 stores in Oregon.On July 25, 2002, the plaintiffs filed a motion for class certification and on July 31, 2002, we filed our motion for summary judgment. On January 15, 2003, the court orally granted our motion for summary judgment in part, ruling that the plaintiffs were prevented from recovering overtime payments at the rate of"time“time and a half,"” but stated that the plaintiffs may recover"straight-time"“straight-time” to the27RENT-A-CENTER, INC. AND SUBSIDIARIESextent plaintiffs could prove purported class members worked in excess of forty hours in a work week but were not paid for such time worked. The court denied our motion for summary judgment on the remainingclaims and granted plaintiff's motion for class certification with respect to the remainingclaims. We strongly disagree with thecourt'scourt’s rulings against our positions andhaverequested that the court grant us interlocutory appeal on those matters.Our requestThe plaintiffs filed a motion for summary judgment seeking to resolve certain factual issues related to the purported class, which was denied on July 1, 2003. On October 10, 2003, the court issued an opinion letter stating that it would certify a class and not permit an interlocutory appeal,is currently pending beforeand issued its written order to that effect on December 9, 2003. We subsequently filed a petition for a writ of mandamus with theCourt.Oregon Supreme Court, which was denied on January 24, 2004. We intend to continue to challenge the appropriateness of the court’s class certification. Although we believe the court’s certification ruling is inappropriate and that the claims remaining in this case are without merit, we cannot assure you we will be found to have no liability in this matter.We are subject to a similar suit pending in Clark County, Washington entitled Kevin Rose, et al. v. Rent-A-Center, Inc., et al. and two similar suits pending in Los Angeles, California entitledJeremy Burdusis, et al. v. Rent-A-Center, Inc., et al.
and/Israel French, et al. v. Rent-A-Center, Inc., each of whichThese matters pending in Los Angeles, California were filed on October 23, 2001, and October 30, 2001, respectively, and allege similar violations of the wage and hour laws of California as thoserespective states. As of March 31, 2003, we operated 41 storesinWashington and 151 stores in California.Pucci. The same law firm seeking to represent the purported class inPucciis seeking to represent the purported class intwo ofBurdusis. TheBurdusisandFrench proceedings are pending before thethree similar suits.same judge in California. On March 24, 2003, theBurdusiscourt denied theplaintiffs'plaintiffs’ motion for class certification in that case, which we view as a favorable development in that proceeding. On April 25, 2003, the plaintiffs inBurdusisfiled a notice of appeal of that ruling, and on May 8, 2003, theBurdusiscourt, at our request, stayed further proceedings inBurdusisandFrenchpending the resolution on appeal of thecourt'scourt’s denial of class certification inBurdusis.Burdusis. On October 30, 2003, the plaintiffs’ counsel inBurdusisandFrenchfiled a new non-class lawsuit in Orange County, California entitledKris Corso, et al. v. Rent-A-Center, Inc. The plaintiffs’ counsel later amended this complaint to add additional plaintiffs, totaling approximately 339 individuals. The claims made are substantially the same as those inBurdusis. On January 16, 2004, we28
RENT-A-CENTER, INC. AND SUBSIDIARIES
filed a demurrer to the complaint, arguing, among other things, that the plaintiffs inCorsowere misjoined. On February 19, 2004, the court granted our demurrer on the misjoinder argument, with leave for the plaintiffs to replead. On March 8, 2004, the plaintiffs filed an amended complaint inCorso, increasing the number of plaintiffs to approximately 540. The claims in the amended complaint are substantially the same as those inBurdusis. We filed a demurrer with respect to the amended complaint on April 12, 2004.
Kevin Rose, et al. v. Rent-A-Center, Inc. et al.This matter pending in Clark County, Washington was filed on June 26, 2001, and
French proceedings arealleges similar violations of the wage and hour laws of Washington as those inPucci. The same law firm seeking to represent the purported class inPucciis seeking to represent the purported class in this matter. On May 14, 2003, theRosecourt denied the plaintiffs’ motion for class certification in that case, which we view as a favorable development in that proceeding. On June 3, 2003, the plaintiffs inRosefiled a notice of appeal. On September 8, 2003, the Commissioner appointed by the Court of Appeals denied review of theRosecourt decision. On October 10, 2003, theRoseplaintiffs filed a motion seeking to modify the Commissioner’s ruling, to which we responded on October 30, 2003. The Court of Appeals denied the plaintiffs’ motion on November 26, 2003. Following the denial by the Court of Appeals, the plaintiffs’ counsel filed 14 county-wide putative class actions in Washington with substantially the same claims as inRose. The purported classes in these county-wide class actions range from approximately 20 individuals to approximately 100 individuals. In December 2003, we filed motions to dismiss the class allegations in each of the county-wide actions, arguing that the plaintiffs were collaterally estopped by virtue of the previous ruling inRosedenying state-wide class certification. Three of these motions were subsequently granted and one is still pending before thesame judgecourt. Accordingly, ten of the county-wide claims are proceeding as putative class actions, three are proceeding on an individual plaintiff basis and one has not been decided by the court. The plaintiffs have not filed motions to certify a class inCalifornia.any of the putative county-wide class actions. In the event they do so, we intend to vigorously oppose class certification.Although the wage and hour laws and class certification procedures of Oregon,
WashingtonCalifornia andCaliforniaWashington contain certain differences that could cause differences in the outcome of the pending litigation in these states, we believe the claims of the purported classes involved in each are without merit. We cannot assure you, however, that we will be found to have no liability in these matters.ITEM29
RENT-A-CENTER, INC. AND SUBSIDIARIES
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In October 2003, we eliminated our then current stock repurchase program and adopted a new stock repurchase program which allows us to repurchase up to $100.0 million in aggregate purchase price of our common stock. As of March 31, 2004, we had repurchased $35.2 million in aggregate purchase price of our common stock under our new stock repurchase program. In the first quarter of 2004, we effected the following repurchases of our common stock:
Total Number of Shares Purchased as Maximum Dollar Part of Publicly Value that May Yet Total Number of Average Price Announced Plans or Be Purchased Under Period Shares Purchased Paid per Share Programs the Plans or Programs January 1 through January 31 0 $ 0.0000 0 $ 73,163,267 February 1 through February 29 266,300 $ 31.4663 266,300 $ 64,783,791 March 1 through March 31 0 $ 0.0000 0 $ 64,783,791
Total 266,300 $ 31.4663 266,300 $ 64,783,791 Item 6.
EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K.CURRENT REPORTS ON FORMCurrent Reports on Form 8-K
None.
EXHIBITSExhibits
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.
2830
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
RENT-A-CENTER, INC. By: /s/ Robert D. Davis Robert D. Davis Senior Vice President-Finance,
Chief Financial Officer and TreasurerDate: May
13, 2003 293, 2004 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: May 13, 2003 /s/ Mark E. Speese ---------------------------------------- Mark E. Speese Chairman of the Board and Chief Executive Officer 30INDEX TO EXHIBITS
Exhibit Number Exhibit Description 2.1(1) — Asset Purchase Agreement, dated as of December 17, 2002, by and among Rent-A-Center East, Inc. and Rent-Way, Inc., Rent-Way of Michigan, Inc. and Rent-Way of TTIG, L.P. (Pursuant to the rules of the SEC, the schedules and exhibits have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and exhibits to the SEC.) 2.2(2) — Letter Agreement, dated December 31, 2002 2.3(3) — Letter Agreement, dated January 7, 2003 2.4(4) — Letter Agreement, dated February 7, 2003 2.5(5) — Letter Agreement, dated February 10, 2003 (Pursuant to the rules of the SEC, the exhibit has been omitted. Upon the request of the SEC, Rent-A-Center will supplementally supply such exhibit to the SEC.) 2.6(6) — Letter Agreement, dated March 10, 2003 (Pursuant to the rules of the SEC, the exhibit has been omitted. Upon the request of the SEC, Rent-A-Center will supplementally supply such exhibit to the SEC.) 2.7(7) — Agreement and Plan of Merger, dated as of February 4, 2004, by and between Rent-A-Center, Inc., Eagle Acquisition Sub, Inc. and Rainbow Rentals, Inc. (Pursuant to the rules of the SEC, the schedules and exhibits have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and exhibits to the SEC.) 2.8* — Agreement and Plan of Merger, dated as of April 28, 2004, by and between Rent-A-Center, Inc., RAC RR, Inc. and Rent Rite, Inc. d/b/a Rent Rite Rental Purchase (Pursuant to the rules of the SEC, the schedules and exhibits have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and exhibits to the SEC.) 3.1(8) — Certificate of Incorporation of Rent-A-Center, Inc., as amended 3.2(9) — Amended and Restated Bylaws of Rent-A-Center, Inc. 4.1(10) — Form of Certificate evidencing Common Stock 4.2(11) — Certificate of Elimination of Series A Preferred Stock 4.3(12) — Certificate of Designations, Preferences and relative Rights and Limitations of Series C Preferred Stock of Rent-A-Center, Inc. 4.4(13) — Form of Certificate evidencing Series C Preferred Stock 4.5(14) — Indenture, dated as of May 6, 2003, by and among Rent-A-Center, Inc., as Issuer, Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P. and Rent-A-Center Texas, L.L.C., as Guarantors, and The Bank of New York, as Trustee 4.6(15) — First Supplemental Indenture, dated as of December 4, 2003, between Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee 4.7* — Second Supplemental Indenture, dated as of April 26, 2004, between Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee 4.8(16) — Form of 2003 Exchange Note 10.1(17)+ — Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan 10.2(18) — Amended and Restated Credit Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, among Rent-A-Center, Inc., Rent-A-Center East, Inc., Comerica Bank, as Documentation Agent, Bank of America NA, as Syndication Agent, and JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent 10.3(19) — First Amendment, dated as of April 22, 2003, to the Amended and Restated Credit Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, among Rent-A-Center, Inc., Rent-A-Center East, Inc., Comerica Bank, as Documentation Agent, Bank of America NA, as Syndication Agent, and JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent 10.4(20) — Credit Agreement, dated as of May 28, 2003, among Rent-A-Center, Inc., Morgan Stanley Senior Funding Inc., as Documentation Agent, JPMorgan Chase Bank and Bear, Stearns & Co. Inc., each as Syndication Agent, and Lehman Commercial Paper Inc., as Administrative Agent 10.5(21) — Guarantee and Collateral Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, made by Rent-A-Center, Inc., Rent-A-Center East, Inc. and certain of its 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: May 13, 2003 /s/ Robert D. Davis ---------------------------------------- Robert D. Davis Senior Vice President-Finance, Treasurer and Chief Financial Officer 31
Exhibit Number Exhibit Description Subsidiaries in favor of JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent 10.6(22) — Guarantee and Collateral Agreement, dated as of May 28, 2003, made by Rent-A-Center, Inc., Rent-A-Center East, Inc. and certain of its Subsidiaries in favor of Lehman Commercial Paper Inc., as Administrative Agent 10.7(23) — First Amendment, dated as of May 28, 2003, to the Credit Agreement and the Guarantee and Collateral Agreement, both dated as of May 28, 2003, among Rent-A-Center, Inc., Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Remco America, Inc., Get It Now LLC, Rent-A-Center Texas, L.P., Rent-A-Center Texas, L.L.C. and Lehman Commercial Paper, Inc., as administrative agent. 10.8(24) — Second 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., Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.9(25) — Third Amended and Restated Stockholders Agreement, dated as of December 31, 2002, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.10(26) — Fourth Amended and Restated Stockholders Agreement, dated as of July 11, 2003, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.11(27) — 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. 10.12(28) — 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. 10.13(29) — Third Amendment to Registration Rights Agreement, dated as of December 31, 2002, by and among Rent-A-Center, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.14(30) — Fourth Amendment to Registration Rights Agreement, dated as of July 11, 2003, by and between Rent-A-Center, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P. 10.15(31) — Registration Rights Agreement, dated as of May 6, 2003, by and among Rent-A-Center, Inc., as Issuer, Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P. and Rent-A-Center Texas, L.L.C., as Guarantors, and Lehman Commercial Paper Inc., J.P. Morgan Securities, Inc., Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS Warburg LLC and Wachovia Securities, Inc., as Initial Purchasers 10.16(32) — Amended and Restated Franchisee Financing Agreement, dated March 27, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.17(33) — Franchisee Financing Agreement, dated April 30, 2002, but effective as of June 28, 2002, by and between Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center, Inc. 10.18(34) — First Amendment to Franchisee Financing Agreement, dated July 23, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.19(35) — Second Amendment to Franchisee Financing Agreement, dated September 30, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.20(36) — Third Amendment to Franchisee Financing Agreement, dated March 24, 2003, but effective as of December 31, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.21(37) — Supplemental Letter Agreement to Franchisee Financing Amendment, dated May 26, 2003, by and between Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center, Inc. 10.22(38) — Amended and Restated Franchise Financing Agreement, dated October 1, 2003, by and among Wells Fargo Foothill, Inc., ColorTyme, Inc. and Rent-A-Center East, Inc. 10.23(39) — First Amendment to Amended and Restated Franchisee Financing Agreement, dated December 15, 2003, by and among Wells Fargo Foothill, Inc., ColorTyme, Inc. and Rent-A-Center East, Inc. 10.24* — Second Amendment to Amended and Restated Franchisee Financing Agreement, dated as of March 1, 2004, by and among Wells Fargo Foothill, Inc., ColorTyme, Inc. and Rent-A-Center East, Inc. 10.25(40) — Purchase Agreement, dated May 1, 2003, among Rent-A-Center, Inc., Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P., Rent-A- 33
RENT-A-CENTER, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT DESCRIPTION 2.1(1) -- Agreement and Plan of Merger, dated as of December 30, 2002, but effective as of December 31, 2002, by and among Rent-A-Center, Inc., Rent-A-Center Holdings, Inc. and RAC Merger Sub, Inc. 2.2(2) -- Asset Purchase Agreement, dated as of December 17, 2002, by and among Rent-A-Center East, Inc. and Rent-Way, Inc., Rent-Way of Michigan, Inc. and Rent-Way of TTIG, L.P. (Pursuant to the rules of the SEC, the schedules and exhibits have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and exhibits to the SEC.) 2.3(3) -- Letter Agreement, dated December 31, 2002 2.4(4) -- Letter Agreement, dated January 7, 2003 2.5(5) -- Letter Agreement, dated February 7, 2003 2.6(6) -- Letter Agreement, dated February 10, 2003 (Pursuant to the rules of the SEC, the exhibit has been omitted. Upon the request of the SEC, Rent-A-Center will supplementally supply such exhibit to the SEC.) 2.7(7) -- Letter Agreement, dated March 10, 2003 (Pursuant to the rules of the SEC, the exhibit has been omitted. Upon the request of the SEC, Rent-A-Center will supplementally supply such exhibit to the SEC.) 3.1(8) -- Certificate of Incorporation of Rent-A-Center, Inc., as amended 3.2(9) -- Amended and Restated Bylaws of Rent-A-Center, Inc. 4.1(10) -- Form of Certificate evidencing Common Stock 4.2(11) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Rent-A-Center, Inc. (formerly known as Rent-A-Center Holdings, Inc.) 4.3(12) -- Form of Certificate evidencing Series A Preferred Stock 4.4(13) -- 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 4.5(14) -- 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 4.6(15) -- 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 4.7(16) -- Amended and Restated Third Supplemental Indenture, dated as of December 31, 2002, by and among Rent-A-Center, Inc., Rent-A-Center Holdings, Inc., ColorTyme, Inc., Rent-A-Center West, Inc. (formerly known as Advantage Companies, Inc.), Get It Now, LLC, Rent-A-Center Texas, LP, Rent-A-Center Texas, LLC and The Bank of New York, as Trustee 4.8(17) -- Form of 2001 Exchange Note 4.9* -- Indenture, dated as of May 6, 2003, by and among Rent-A-Center, Inc., as Issuer, Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P. and Rent-A-Center Texas, L.L.C., as Guarantors, and The Bank of New York, as Trustee 10.1(18)+ -- Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan 10.2(19) -- Amended and Restated Credit Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, among Rent-A-Center, Inc., Rent-A-Center East, Inc., Comerica Bank, as Documentation Agent, Bank of America NA, as Syndication Agent, and JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent 10.3* -- First Amendment, dated as of April 22, 2003, to the Amended and Restated Credit Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, among Rent-A-Center, Inc., Rent-A-Center East, Inc., Comerica Bank, as Documentation Agent, Bank of America NA, as Syndication Agent, and JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as Administrative Agent 10.4(20) -- Guarantee and Collateral Agreement, dated as of August 5, 1998, as amended and restated as of December 31, 2002, made by Rent-A-Center, Inc., Rent-A-Center East, Inc. and certain of its Subsidiaries in favor of JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Exhibit Number Exhibit Description Center Texas, L.L.C., Lehman Brothers Inc., J.P. Morgan Securities, Inc., Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS Warburg LLC and Wachovia Securities, Inc. (Pursuant to the rules of the SEC, the schedules and annexes have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and annexes to the SEC.) 10.25(41) — Stock Purchase and Exchange Agreement, dated April 25, 2003, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P. and Rent-A-Center, Inc. 21.1* — Subsidiaries of Rent-A-Center, Inc. 31.1* — Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Mark E. Speese 31.2* — Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Robert D. Davis 32.1* — Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Mark E. Speese 32.2* — Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Robert D. Davis
* Filed herewith. + Management contract or compensatory plan or arrangement
(1) Incorporated herein by reference to Exhibit 2.2 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (2) Incorporated herein by reference to Exhibit 2.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (3) Incorporated herein by reference to Exhibit 2.4 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (4) Incorporated herein by reference to Exhibit 2.5 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (5) Incorporated herein by reference to Exhibit 2.6 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (6) Incorporated herein by reference to Exhibit 2.7 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (7) Incorporated herein by reference to Exhibit 2.7 to the registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (8) Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated as of December 31, 2002 (9) Incorporated herein by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K dated as of December 31, 2002 (10) Incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-4 filed on January 11, 1999 (11) Incorporated herein by reference to Exhibit 4.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (12) Incorporated herein by reference to Exhibit 4.4 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 34
RENT-A-CENTER, INC. AND SUBSIDIARIES
EXHIBIT NUMBER EXHIBIT DESCRIPTION Administrative Agent 10.5(21) -- 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 10.6(22) -- Second 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., Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.7(23) -- Third Amended and Restated Stockholders Agreement, dated as of December 31, 2002, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.8(24) -- 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 10.9(25) -- 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. 10.10(26) -- Third Amendment to Registration Rights Agreement, dated as of December 31, 2002, by and among Rent-A-Center, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.11(27) -- 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(28) -- 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(29) -- 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(30) -- Franchisee Financing Agreement, dated April 30, 2002, but effective as of June 28, 2002, by and between Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center, Inc. 10.15(31) -- First Amendment to Franchisee Financing Agreement, dated July 23, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.16(32) -- Second Amendment to Franchisee Financing Agreement, dated September 30, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.17(33) -- Third Amendment to Franchisee Financing Agreement, dated March 24, 2003, but effective as of December 31, 2002, by and between Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center, Inc. 10.18* -- Purchase Agreement, dated May 1, 2003, among Rent-A-Center, Inc., Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P., Rent-A-Center Texas, L.L.C., Lehman Brothers Inc., J.P. Morgan Securities, Inc., Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS Warburg LLC and Wachovia Securities, Inc. (Pursuant to the rules of the SEC, the schedules and annexes have been omitted. Upon the request of the SEC, Rent-A-Center, Inc. will supplementally supply such schedules and annexes to the SEC.) 10.19* -- Registration Rights Agreement, dated as of May 6, 2003, by and among Rent-A-Center, Inc., as Issuer, Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P. and Rent-A-Center Texas, L.L.C., as Guarantors, and Lehman Brothers Inc., J.P. Morgan Securities, Inc., Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS Warburg LLC and Wachovia Securities, Inc., as Initial Purchasers 10.20(34) -- Stock Purchase and Exchange Agreement, dated April 25, 2003, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P. and Rent-A-Center, Inc. 21.1(35) -- Subsidiaries of Rent-A-Center, Inc. 99.1* -- Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Mark E. Speese 99.2* -- Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Robert D. Davis - ------------- * Filed herewith. + Management contract or company plan or arrangement
(13) Incorporated herein by reference to Exhibit 4.5 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (14) Incorporated herein by reference to Exhibit 4.9 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (15) Incorporated herein by reference to Exhibit 4.6 to the registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (16) Incorporated herein by reference to Exhibit 4.11 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (17) Incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (18) Incorporated herein by reference to Exhibit 10.2 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (19) Incorporated herein by reference to Exhibit 10.3 to the registrant’s Quarterly Report on form 10-Q for the quarter ended March 31, 2003 (20) Incorporated herein by reference to Exhibit 10.4 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (21) Incorporated herein by reference to Exhibit 10.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (22) Incorporated herein by reference to Exhibit 10.6 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (23) Incorporated herein by reference to Exhibit 10.7 to the registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (24) Incorporated herein by reference to Exhibit 10.8 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (25) Incorporated herein by reference to Exhibit 10.6 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (26) Incorporated herein by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (27) 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 (28) 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 (29) Incorporated herein by reference to Exhibit 10.9 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (30) Incorporated herein by reference to Exhibit 10.10 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (31) Incorporated herein by reference to Exhibit 10.19 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (32) Incorporated herein by reference to Exhibit 10.13 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 35
RENT-A-CENTER, INC. AND SUBSIDIARIES
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated as of December 31, 2002 (2) Incorporated herein by reference to Exhibit 2.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (3) Incorporated herein by reference to Exhibit 2.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (4) Incorporated herein by reference to Exhibit 2.4 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (5) Incorporated herein by reference to Exhibit 2.5 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (6) Incorporated herein by reference to Exhibit 2.6 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (7) Incorporated herein by reference to Exhibit 2.7 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (8) Incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K dated as of December 31, 2002 (9) Incorporated herein by reference to Exhibit 3.2 to the registrant's Current Report on Form 8-K dated as of December 31, 2002 (10) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form S-4 filed on January 11, 1999 (11) Incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K dated as of December 31, 2002 (12) Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement Form S-4 filed on January 11, 1999 (13) Incorporated herein by reference to Exhibit 4.6 to the registrant's Registration Statement on Form S-4 filed on January 22, 2002 (14) 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 (15) Incorporated herein by reference to Exhibit 4.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (16) Incorporated herein by reference to Exhibit 4.7 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (17) Incorporated herein by reference to Exhibit 4.7 to the registrant's Registration Statement on Form S-4 filed on January 22, 2002 (18) Incorporated herein by reference to Exhibit 99.1 to the registrant's Post-Effective Amendment No.1 to Form S-8 dated as of December 31, 2002 (19) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (20) Incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002RENT-A-CENTER, INC. AND SUBSIDIARIES (21) Incorporated herein by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (22) Incorporated herein by reference to Exhibit 10.8 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (23) Incorporated herein by reference to Exhibit 10.6 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (24) 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 (25) 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 (26) Incorporated herein by reference to Exhibit 10.8 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (27) 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 (28) Incorporated herein by reference to Exhibit 10.9 to the registrant's Registration Statement on Form S-4 filed on January 22, 2002 (29) Incorporated herein by reference to Exhibit 10.13 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (30) Incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (31) 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 (32) Incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (33) Incorporated herein by reference to Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (34) Incorporated herein by reference to Exhibit 99(d)(1) to the registrant's Schedule TO filed on April 28, 2003 (35) Incorporated herein by reference to Exhibit 21.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002
(33) Incorporated herein by reference to Exhibit 10.14 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (34) 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 (35) Incorporated herein by reference to Exhibit 10.14 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (36) Incorporated herein by reference to Exhibit 10.22 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (37) Incorporated herein by reference to Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (38) Incorporated herein by reference to Exhibit 10.23 to the registrant’s Registration Statement on Form S-4 filed July 11, 2003 (39) Incorporated herein by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (40) Incorporated herein by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (41) Incorporated herein by reference to Exhibit 99(d)(1) to the registrant’s Schedule TO filed on April 28, 2003 36