SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File Number 0-25370
RENT-A-CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
(972) 801-1100
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 3, 2002:
Class Outstanding
- -------------------------------------- -------------------
Common stock, $.01 par value per share 24,390,692
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 3
Consolidated Statements of Earnings for the three months ended 4
March 31, 2002 and 2001
Consolidated Statements of Cash Flows for the three months ended 5
March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
UNAUDITED
ASSETS
Cash and cash equivalents ................................... $ 167,264 $ 107,958
Accounts receivable - trade ................................. 2,808 1,664
Prepaid expenses and other assets ........................... 32,499 29,846
Rental merchandise, net
On rent ................................................... 544,471 531,627
Held for rent ............................................. 112,073 122,074
Property assets, net ........................................ 105,157 106,883
Deferred income tax asset ................................... -- 8,772
Intangible assets, net ...................................... 712,764 711,096
----------- -----------
$ 1,677,036 $ 1,619,920
=========== ===========
LIABILITIES
Accounts payable - trade .................................... $ 65,398 $ 49,930
Accrued liabilities ......................................... 186,403 170,196
Deferred income tax liability ............................... 3,304 --
Senior debt ................................................. 428,000 428,000
Subordinated notes payable, net of discount ................. 274,525 274,506
----------- -----------
957,630 922,632
COMMITMENTS AND CONTINGENCIES ................................... -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock, net of
placement costs, $.01 par value; 5,000,000 shares authorized;
295,198 and 292,434 shares issued and outstanding in 2002
and 2001, respectively ...................................... 294,674 291,910
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 125,000,000 shares
authorized; 28,084,227 and 27,726,092 shares issued in
2002 and 2001, respectively ............................... 281 277
Additional paid-in capital .................................. 203,490 191,438
Accumulated comprehensive loss .............................. (4,539) (6,319)
Retained earnings ........................................... 310,224 269,982
Treasury stock, 3,938,265 and 2,224,179 shares at cost in
2002 and 2001, respectively ............................. (84,724) (50,000)
----------- -----------
424,732 405,378
----------- -----------
$ 1,677,036 $ 1,619,920
=========== ===========
See accompanying notes to consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ ------------
UNAUDITED
Revenues
Store
Rentals and fees .............................. $ 443,705 $ 393,123
Merchandise sales ............................. 39,605 30,759
Other ......................................... 614 1,330
Franchise
Merchandise sales ............................. 13,253 13,027
Royalty income and fees ....................... 1,433 1,463
------------ ------------
498,610 439,702
Operating expenses
Direct store expenses
Depreciation of rental merchandise ............ 92,223 80,812
Cost of merchandise sold ...................... 26,982 21,555
Salaries and other expenses ................... 262,619 242,219
Franchise cost of merchandise sold ............... 12,653 12,494
------------ ------------
394,477 357,080
General and administrative expenses .............. 15,117 12,869
Amortization of intangibles ...................... 720 7,268
------------ ------------
Total operating expenses ................... 410,314 377,217
Operating profit ........................... 88,296 62,485
Interest expense ................................... 15,798 16,510
Interest income .................................... (723) (361)
------------ ------------
Earnings before income taxes ............... 73,221 46,336
Income tax expense ................................. 29,658 21,338
------------ ------------
NET EARNINGS ............................... 43,563 24,998
Preferred dividends ................................ 4,992 4,325
------------ ------------
Net earnings allocable to common stockholders ...... $ 38,571 $ 20,673
============ ============
Basic earnings per common share .................... $ 1.57 $ 0.83
============ ============
Diluted earnings per common share .................. $ 1.20 $ 0.69
============ ============
See accompanying notes to consolidated financial statements.
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS OF DOLLARS) 2002 2001
------------ ------------
UNAUDITED
Cash flows from operating activities
Net earnings ................................................... $ 43,563 $ 24,998
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of rental merchandise ........................... 92,223 80,812
Depreciation of property assets .............................. 9,466 8,805
Amortization of intangibles .................................. 720 7,268
Amortization of financing fees ............................... 690 690
Changes in operating assets and liabilities, net of effects of
Acquisitions
Rental merchandise ........................................... (93,826) (118,461)
Accounts receivable - trade .................................. (1,144) (400)
Prepaid expenses and other assets ............................ (3,435) (6,250)
Deferred income taxes ........................................ 12,076 10,709
Accounts payable - trade ..................................... 15,468 11,636
Accrued liabilities .......................................... 20,530 12,239
------------ ------------
Net cash provided by operating activities ................. 96,331 32,046
Cash flows from investing activities
Purchase of property assets .................................... (8,100) (11,846)
Proceeds from sale of property assets .......................... 374 524
Acquisitions of businesses, net of cash acquired ............... (3,549) (2,835)
------------ ------------
Net cash used in investing activities ..................... (11,275) (14,157)
Cash flows from financing activities
Purchase of treasury stock ..................................... (34,724) --
Exercise of stock options ...................................... 8,974 11,073
Repayments of debt ............................................. -- (37,916)
------------ ------------
Net cash used in financing activities ..................... (25,750) (26,843)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................. 59,306 (8,954)
Cash and cash equivalents at beginning of period .................. 107,958 36,495
------------ ------------
Cash and cash equivalents at end of period ........................ $ 167,264 $ 27,541
============ ============
Supplemental cash flow information
Cash paid during the year for:
Interest ..................................................... $ 18,585 $ 19,676
Income taxes ................................................. 2,018 750
Supplemental schedule of non-cash investing and financing
activities
Fair value of assets acquired ..................................... $ 3,549 $ 2,835
Cash paid ......................................................... 3,549 2,835
</Table>
During the first quarter of 2002 and 2001, the Company paid dividends on its
Series A preferred stock of approximately $2.8 million and $2.7 million by
issuing 2,764 and 2,656 shares of Series A preferred stock, respectively.
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, 2001. In our opinion, the accompanying
unaudited interim financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary to present fairly our
results of operations and cash flows for the periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year.
2. Intangibles. The Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Intangible Assets.
These statements establish new accounting and reporting standard for
business combinations and associated goodwill and intangible assets. They
require, among other things, elimination of the pooling of interests method
of accounting, no amortization of acquired goodwill and periodic assessment
for impairment of all goodwill and intangible assets acquired in a business
combination. SFAS No. 142 was effective for our fiscal year beginning
January 1, 2002. During the first quarter ended March 31, 2002, we
conducted our transitional test of the fair value of goodwill as of
December 31, 2001 and determined there was no impairment as of that date.
Therefore, the implementation of SFAS No. 142 had no effect on our
financial statements or operating results. Under the new standard, goodwill
is subject to an annual assessment for impairment using a prescribed
fair-value based test.
Intangibles consist of the following (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
--------------------------- ---------------------------
AVG. GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------------ ------------ ------------
Amortizable intangible assets
Franchise network ......... 10 $ 3,000 $ 1,725 $ 3,000 $ 1,650
Non-compete agreements .... 5 1,500 1,302 1,677 1,405
Customer contracts ........ 1.5 4,250 2,407 3,994 1,882
Intangible assets not subject
to amortization
Goodwill .................. 808,610 99,162 806,524 99,162
------------ ------------ ------------ ------------
Total intangibles ............. $ 817,360 $ 104,596 $ 815,195 $ 104,099
============ ============ ============ ============
AGGREGATE AMORTIZATION EXPENSE
Three months ended March 31, 2002................... $ 720
Three months ended March 31, 2001................... $ 7,268
Supplemental information regarding intangible assets and amortization.
Estimated amortization expense for each of the years ending December 31, is
as follows:
ESTIMATED
AMORTIZATION EXPENSE
--------------------------
(IN THOUSANDS)
2002........................ $ 2,553
2003........................ 734
2004........................ 300
2005........................ 300
2006........................ 149
------------
TOTAL....................... $ 4,036
6
RENT-A-CENTER, INC. AND SUBSIDIARIES
2. Intangibles (Continued)
Changes in the carrying amount of goodwill for the three months ended March
31, 2002 are as follows (in thousands):
<Table>
Balance as of January 1, 2002 $707,362
Acquisitions during first quarter 2,086
--------
Balance as of March 31, 2002 $709,448
========
</Table>
Goodwill and intangible assets recognized prior to July 1, 2001 were
amortized through December 31, 2001. Since January 1, 2002, quarterly and
annual goodwill amortization of approximately $7.1 million and $28.4
million has not been recognized.
Below is a schedule showing the pro forma effect of SFAS 142 for the three
months ended March 31, 2001 in comparison to the three months ended March
31, 2002.
<Table>
<Caption>
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
----------- ----------
UNAUDITED
Net earnings ........................................ $ 43,563 $ 24,998
Goodwill amortization, net of tax ................... -- 6,160
--------- ---------
Adjusted net earnings ............................... $ 43,563 $ 31,158
========= =========
Diluted weighted average shares outstanding ......... 36,321 36,375
========= =========
Diluted earnings per common share before goodwill
amortization ........................................ $ 1.20 $ .86
========= =========
</Table>
3. EARNINGS PER SHARE
Basic and diluted earnings per common share is computed based on the
following information:
<Table>
<Caption>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 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
======= ======= =======
</Table>
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2001
---------------------------------------
NET EARNINGS SHARES PER SHARE
------------ ------- ---------
Basic earnings per common share ........ $20,673 24,959 $ .83
Effect of dilutive stock options ....... -- 1,235
Assumed conversion of convertible
Preferred stock ....................... 4,325 10,181
------- -------
Diluted earnings per common share ...... $24,998 36,375 $ .69
======= ======= =======
</Table>
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
3. EARNINGS PER SHARE - (continued)
For the three months ended March 31, 2002 and 2001, the number of stock
options that were outstanding but not included in the computation of
diluted earnings per common share because their exercise price was greater
than the average market price of our common stock, and therefore
anti-dilutive, was 577,000 and 0, respectively.
Dividends on our Series A preferred stock are payable quarterly at an
annual rate of 3.75%. We account for shares of preferred stock distributed
as dividends in-kind at the greater of the stated value or the value of the
common stock obtainable upon conversion on the payment date.
4. SUBSIDIARY GUARANTORS
Rent-A-Center has $275.0 million of subordinated notes outstanding,
maturing on August 15, 2008, including $100.0 million which were issued in
December 2001 at 99.5% of par. The notes require semi-annual interest-only
payments at 11%, and are guaranteed by Rent-A-Center's two principal
subsidiaries. The notes are redeemable at Rent-A-Center's option, at any
time on or after August 15, 2003, at a set redemption price that varies
depending upon the proximity of the redemption date to final maturity. Upon
a change of control, the holders of the subordinated notes have the right
to require Rent-A-Center to redeem the notes.
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on incurring
additional indebtedness, selling assets of Rent-A-Center's subsidiaries,
granting liens to third parties, making restricted payments and engaging in
a merger or selling substantially all of Rent-A-Center's assets.
Rent-A-Center's direct and wholly-owned subsidiaries, consisting of
ColorTyme, Inc. and Advantage Companies, Inc. (collectively, the
"Guarantors"), have fully, jointly and severally, and unconditionally
guaranteed the obligations of Rent-A-Center with respect to these notes.
The only direct or indirect subsidiaries of Rent-A-Center that are not
Guarantors are inconsequential subsidiaries. There are no restrictions on
the ability of any of the Guarantors to transfer funds to Rent-A-Center in
the form of loans, advances or dividends, except as provided by applicable
law.
Set forth below is certain condensed consolidating financial information as
of March 31, 2002 and December 31, 2001, and for the three months ended
March 31, 2002 and 2001. The financial information includes the Guarantors
from the dates they were acquired or formed by Rent-A-Center and is
presented using the push-down basis of accounting.
8
RENT-A-CENTER, INC. AND SUBSIDIARIES
4. SUBSIDIARY GUARANTORS - (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
PARENT SUBSIDIARY CONSOLIDATING
COMPANY GUARANTORS ADJUSTMENTS TOTALS
---------- ---------- ------------- ----------
(IN THOUSANDS)
AT MARCH 31, 2002 (UNAUDITED)
Rental merchandise, net .............. $ 656,544 $ -- $ -- $ 656,544
Intangible assets, net ............... 369,014 343,750 -- 712,764
Other assets ......................... 628,547 20,923 (341,742) 307,728
---------- ---------- ---------- ----------
Total assets ............... $1,654,105 $ 364,673 $ (341,742) $1,677,036
========== ========== ========== ==========
Senior debt .......................... $ 428,000 $ -- $ -- $ 428,000
Other liabilities .................... 522,977 6,653 -- 529,630
Preferred stock ...................... 294,674 -- -- 294,674
Stockholders' equity ................. 408,454 358,020 (341,742) 424,732
---------- ---------- ---------- ----------
Total liabilities and equity $1,654,105 $ 364,673 $ (341,742) $1,677,036
========== ========== ========== ==========
AT DECEMBER 31, 2001
Rental merchandise, net .............. $ 653,701 $ -- $ -- $ 653,701
Intangible assets, net ............... 367,271 343,825 -- 711,096
Other assets ......................... 578,077 18,788 (341,742) 255,123
---------- ---------- ---------- ----------
Total assets ............... $1,599,049 $ 362,613 $ (341,742) $1,619,920
========== ========== ========== ==========
Senior debt .......................... $ 428,000 $ -- $ -- $ 428,000
Other liabilities .................... 489,174 5,458 -- 494,632
Preferred stock ...................... 291,910 -- -- 291,910
Stockholders' equity ................. 389,965 357,155 (341,742) 405,378
---------- ---------- ---------- ----------
Total liabilities and equity $1,599,049 $ 362,613 $ (341,742) $1,619,920
========== ========== ========== ==========
</Table>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
-------- ---------- --------
(IN THOUSANDS)
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
======== ======== ========
THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
Total revenues ................................... $425,212 $ 14,490 $439,702
Direct store expenses ............................ 344,586 -- 344,586
Other expenses ................................... 54,459 15,659 70,118
-------- -------- --------
Net earnings (loss) .............................. $ 26,167 $ (1,169) $ 24,998
======== ======== ========
</Table>
9
RENT-A-CENTER, INC. AND SUBSIDIARIES
4. SUBSIDIARY GUARANTORS - (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
--------- ---------- ---------
(IN THOUSANDS)
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 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
========= ========= =========
THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
Net cash provided by operating activities ............... $ 31,226 $ 820 $ 32,046
--------- --------- ---------
Cash flows from investing activities
Purchase of property assets ........................... (11,836) (10) (11,846)
Acquisitions of businesses, net of cash acquired ...... (2,835) -- (2,835)
Other ................................................. 524 -- 524
--------- --------- ---------
Net cash used in investing activities ................... (14,147) (10) (14,157)
Cash flows from financing activities
Exercise of stock options ............................. 11,073 -- 11,073
Repayments of debt .................................... (37,916) -- (37,916)
Intercompany advances ................................. 810 (810) --
--------- --------- ---------
Net cash used in financing activities ................... (26,033) (810) (26,843)
--------- --------- ---------
Net increase in cash and cash equivalents ............... (8,954) -- (8,954)
Cash and cash equivalents at beginning of period ........ 36,495 -- 36,495
--------- --------- ---------
Cash and cash equivalents at end of period .............. $ 27,541 $ -- $ 27,541
========= ========= =========
</Table>
5. COMPREHENSIVE INCOME
Comprehensive income includes net earnings and items of other
comprehensive income or loss. The following table provides information
regarding comprehensive income, net of tax:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS)
2002 2001
-------- --------
Net earnings .................................................. $ 43,563 $ 24,998
Other comprehensive income (loss):
Unrealized gain on derivatives held
As cash flow hedges:
Cumulative effect of adoption of SFAS 133 ............ -- 1,378
Change in unrealized gain (loss) during period ....... 4,010 (3,535)
Reclassification adjustment for loss
included in net earnings ........................... (2,230) (731)
-------- --------
Other comprehensive income (loss) ................ 1,780 (2,888)
-------- --------
Comprehensive income .......................................... $ 45,343 $ 22,110
======== ========
</Table>
10
RENT-A-CENTER, INC. AND SUBSIDIARIES
6. PURCHASE OF TREASURY STOCK
In connection with the retirement of our former Chief Executive Office and
Chairman of the Board Mr. J. Ernest Talley, we entered into an agreement
to repurchase $25.0 million worth of shares of our common stock held by
Mr. Talley at a purchase price equal to the average closing price of our
common stock over the 10 trading days beginning October 9, 2001, subject
to a maximum of $27.00 per share and a minimum of $20.00 per share. Under
this formula, the purchase price for the repurchase was calculated at
$20.258 per share. Accordingly, on October 23, 2001 we repurchased 493,632
shares of our common stock from Mr. Talley at $20.258 per share for a
total purchase price of $10.0 million and on November 30, 2001,
repurchased an additional 740,448 shares of our common stock from Mr.
Talley at $20.258 per share, for a total purchase price of an additional
$15.0 million. On January 25, 2002, we exercised the option to repurchase
all of the remaining 1,714,086 shares of its common stock held by Mr.
Talley at $20.258 per share, for $34.7 million. We repurchased those
remaining shares on January 30, 2002. As a result, our treasury stock
amount as of March 31, 2002 was $84.7 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts, included in
this report are forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "intend," "could", "estimate," "should",
"anticipate" or "believe." We believe that the expectations reflected in
such forward-looking statements are accurate. However, we cannot assure
you that these expectations will occur. Our actual future performance
could differ materially from such statements. Factors that could cause or
contribute to these differences include, but are not limited to:
o uncertainties regarding the ability to open new stores;
o our ability to acquire additional rent-to-own stores on favorable
terms;
o our ability to enhance the performance of these acquired stores;
o our ability to control store level costs and implement our margin
enhancement initiatives;
o our ability to realize benefits from our margin enhancement
initiatives;
o the results of our litigation;
o the passage of legislation adversely affecting the rent-to-own
industry;
o interest rates;
o our ability to collect on our rental purchase agreements;
o our ability to effectively hedge interest rates on our outstanding
debt;
o changes in our effective tax rate; and
o the other risks detailed from time to time in our SEC reports.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under Risk Factors in our
Annual Report on Form 10-K for our fiscal year ended December 31, 2001.
You should not unduly rely on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we
are not obligated to publicly release any revisions to these
forward-looking statements to reflect events or circumstances occurring
after the date of this report or to reflect the occurrence of
unanticipated events.
OUR BUSINESS
We are the largest rent-to-own operator in the United States with an
approximate 29% market share based on store count. At March 31, 2002, we
operated 2,284 company-owned stores in 50 states, the District of Columbia
and Puerto Rico. Our subsidiary, ColorTyme, is a national franchisor of
rent-to-own stores. At March 31, 2002, ColorTyme had 338 franchised stores
in 42 states, 326 of which operated under the ColorTyme name and 12 stores
of which operated under the Rent-A-Center name. Our stores offer high
quality durable products such as home electronics, appliances, computers,
and furniture
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
and accessories under flexible rental purchase agreements that allow the
customer to obtain ownership of the merchandise at the conclusion of an
agreed-upon rental period. These rental purchase agreements are designed
to appeal to a wide variety of customers by allowing them to obtain
merchandise that they might otherwise be unable to obtain due to
insufficient cash resources or a lack of access to credit. These
agreements also cater to customers who only have a temporary need, or who
simply desire to rent rather than purchase the merchandise.
We have pursued an aggressive growth strategy since 1989. We have sought
to acquire underperforming stores to which we could apply our operating
model as well as open new stores. As a result, the acquired stores have
generally experienced more significant revenue growth during the initial
periods following their acquisition than in subsequent periods. Because of
significant growth since our formation, particularly due to the Thorn
Americas acquisition, our historical results of operations and
period-to-period comparisons of such results and other financial data,
including the rate of earnings growth, may not be meaningful or indicative
of future results.
We plan to accomplish our future growth through selective and
opportunistic acquisitions, with an emphasis on new store development.
Typically, a newly opened store is profitable on a monthly basis in the
ninth to twelfth month after its initial opening. Historically, a typical
store has achieved cumulative break-even profitability in 18 to 24 months
after its initial opening. Total financing requirements of a typical new
store approximate $450,000, with roughly 70% of that amount relating to
the purchase of rental merchandise inventory. A newly opened store
historically has achieved results consistent with other stores that have
been operating within the system for greater than two years by the end of
its third year of operation. As a result, our quarterly earnings are
impacted by how many new stores we opened during a particular quarter and
the quarters preceding it. There can be no assurance that we will open any
new stores in the future, or as to the number, location or profitability
thereof.
In addition, to provide any additional funds necessary for the continued
pursuit of our operating and growth strategies, we may incur from time to
time additional short or long-term bank indebtedness and may issue, in
public or private transactions, equity and debt securities. The
availability and attractiveness of any outside sources of financing will
depend on a number of factors, some of which will relate to our financial
condition and performance, and some of which are beyond our control, such
as prevailing interest rates and general economic conditions. There can be
no assurance additional financing will be available, or if available, will
be on terms acceptable to us.
If a change in control occurs, we may be required to offer to repurchase
all of our outstanding subordinated notes at 101% of their principal
amount, plus accrued interest to the date of repurchase. Our senior credit
facility restricts our ability to repurchase our subordinated notes,
including in the event of a change in control. In addition, a change in
control would result in an event of default under our senior credit
facilities, which could then be accelerated by our lenders, and would
require us to offer to redeem our Series A preferred stock. In the event a
change in control occurs, we cannot be sure that we would have enough
funds to immediately pay our accelerated senior credit facility
obligations, pay all of our subordinated notes and redeem all of our
Series A preferred stock, or that we would be able to obtain financing to
do so on favorable terms, if at all.
CRITICAL ACCOUNTING POLICIES INVOLVING ESTIMATES, UNCERTAINTIES OR
ASSESSMENTS IN OUR FINANCIAL STATEMENTS
The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. In applying our accounting
principles, we must often make individual estimates and assumptions
regarding expected outcomes or uncertainties. As you might expect, the
actual results or outcomes are generally different than the estimated or
assumed amounts. These differences are usually minor and are included in
our consolidated financial statements as soon as they are known. Our
estimates, judgments and assumptions are continually evaluated based on
available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ
from those estimates.
Actual results related to the estimates and assumptions made by us in
preparing our consolidated financial statements will emerge over periods
of time, such as estimates and assumptions underlying the determination of
our self-insurance liabilities. These estimates and assumptions are
monitored by us and periodically adjusted as circumstances warrant. For
instance, our liability for self-insurance related to our workers
compensation, general liability, medical and 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.
13
RENT-A-CENTER, INC. AND SUBSIDIARIES
In preparing our financial statements at any point in time, we are also
periodically faced with uncertainties, the outcomes of which are not
within our control and will not be known for prolonged periods of time. As
discussed in the section entitled "Legal Proceedings" and the notes to our
consolidated financial statements, we are involved in actions relating to
claims that our rental purchase agreements constitute installment sales
contracts, violate state usury laws or violate other state laws enacted to
protect consumers, claims asserting gender discrimination in our
employment practices, as well as claims we violated the federal securities
laws. We, together with our counsel, make estimates, if determinable, of
our probable liabilities and record such amounts in our consolidated
financial statements. These estimates represent our best estimate, or may
be the minimum range of probable loss when no single best estimate is
determinable. Disclosure is made, when determinable, of the additional
possible amount of loss on these claims, or if such estimate cannot be
made, that fact is disclosed. We, together with our counsel, monitor
developments related to these legal matters and, when appropriate,
adjustments are made to liabilities to reflect current facts and
circumstances.
Based on an assessment of our accounting policies and the underlying
judgments and uncertainties affecting the application of those policies,
we believe our consolidated financial statements provide a meaningful and
fair perspective of our company. However, we do not suggest that other
general risk factors, such as those discussed in our Annual Report on Form
10-K as well as changes in our growth objectives or performance of new or
acquired stores, could not adversely impact our consolidated financial
position, results of operations and cash flows in future periods.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are summarized below and in Note A to
our consolidated financial statements included in our Annual Report on
Form 10-K.
Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over
the term of the agreement. Rental purchase agreements generally include a
discounted early purchase option. Upon exercise of this option, and upon
sale of used merchandise, revenue is recognized as these payments are
received.
Franchise Revenue. Revenue from the sale of rental merchandise is
recognized upon shipment of the merchandise to the franchisee. Franchise
fee revenue is recognized upon completion of substantially all services
and satisfaction of all material conditions required under the terms of
the franchise agreement.
Depreciation of Rental Merchandise. We depreciate our rental merchandise
using the income forecasting method. The income forecasting method of
depreciation we use does not consider salvage value and does not allow the
depreciation of rental merchandise during periods when it is not
generating rental revenue. The objective of this method of depreciation is
to provide for consistent depreciation expense while the merchandise is on
rent.
Cost of Merchandise Sold. Cost of merchandise sold represents the book
value net of accumulated depreciation of rental merchandise at time of
sale.
Salaries and Other Expenses. Salaries and other expenses include all
salaries and wages paid to store level employees, together with market
managers' salaries, travel and occupancy, including any related benefits
and taxes, as well as all store level general and administrative expenses
and selling, advertising, insurance, occupancy, fixed asset depreciation
and other operating expenses.
General and Administrative Expenses. General and administrative expenses
include all corporate overhead expenses related to our headquarters such
as salaries, taxes and benefits, occupancy, administrative and other
operating expenses, as well as regional directors' salaries, travel and
office expenses.
14
RENT-A-CENTER, INC. AND SUBSIDIARIES
Amortization of Intangibles. Amortization of intangibles consists
primarily of the amortization of the excess of purchase price over the
fair market value of acquired assets and liabilities. In July 2001, the
Financial Accounting Standards Board issued SFAS 142, Goodwill and
Intangible Assets, which revised the accounting for purchased goodwill and
intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives acquired after June 30, 2001 were not amortized.
Effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives are no longer subject to
amortization. SFAS 142 requires an impairment test be conducted annually
and a transitional impairment test be conducted by June 30, 2002. We
completed our transitional impairment test as of March 31, 2002 and no
impairment existed at that date.
Preferred Dividends. Dividends on Series A preferred stock are payable at
an annual rate of 3.75%. Shares of Series A preferred stock distributed as
dividends in-kind are accounted for at the greater of the stated value or
the value of the common stock obtainable upon conversion on the payment
date.
RECENT DEVELOPMENTS
Store Growth. In the second half of 2000, we resumed our strategy of
increasing our store base and annual revenues and profits through
opportunistic acquisitions and new store openings. During the first
quarter of 2002, we acquired a total of three stores and accounts from 19
locations for approximately $3.5 million in 16 separate transactions,
opened six new stores and closed six stores. Of the closed stores, three
were merged with existing stores and three were sold. As of May 3, 2002,
we have acquired seven additional stores and opened six new stores during
the second quarter of 2002. 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.
Talley Repurchase. In connection with Mr. Talley's retirement, we entered
into an agreement to repurchase $25.0 million worth of shares of our
common stock held by Mr. Talley at a purchase price equal to the average
closing price of our common stock over the 10 trading days beginning
October 9, 2001, subject to a maximum of $27.00 per share and a minimum of
$20.00 per share. Under this formula, the purchase price for the
repurchase was calculated at $20.258 per share. Accordingly, on October
23, 2001 we repurchased 493,632 shares of our common stock from Mr. Talley
at $20.258 per share for a total purchase price of $10.0 million and on
November 30, 2001, repurchased an additional 740,448 shares of our common
stock from Mr. Talley at $20.258 per share, for a total purchase price of
an additional $15.0 million. On January 25, 2002, we exercised the option
to repurchase all of the remaining 1,714,086 shares of our common stock
held by Mr. Talley at $20.258 per share, for $34.7 million. We repurchased
those remaining shares on January 30, 2002.
Gender Discrimination Actions. On November 1, 2001, we announced that we
reached an agreement in principle for the settlement of the Margaret
Bunch, et al. v. Rent-A-Center, Inc. matter pending in federal court in
Kansas City, Missouri, which is subject to court approval. Under the terms
of the proposed settlement, while not admitting liability, we would pay an
aggregate of $12.25 million to the agreed upon class, plus plaintiff's
attorneys' fees as determined by the court and costs to administer the
settlement process. Accordingly, to account for the aforementioned costs,
as well as our own attorneys' fees, we recorded a non-recurring charge of
$16.0 million in the third quarter of 2001.
In early March 2002, we reached an agreement in principle with the
plaintiffs attorneys in the Wilfong matter pending in St. Louis, Missouri
and the EEOC to resolve the Wilfong suit and an EEOC action in Tennessee.
Under the terms of the proposed settlement, while not admitting any
liability, we would pay an aggregate of $47.0 million to female employees
and certain female applicants who were employed by or applied for
employment with us for a period commencing no later than April 19, 1998
through the future date of the notice to the applicable class, plus up to
$375,000 in settlement administrative costs. The class members in Wilfong
include all of the Bunch class members. The $47.0 million payment includes
the $12.25 million payment discussed in connection with the Bunch
settlement and attorney fees for class counsel in Wilfong. Members of the
class who do not wish to participate in the settlement would be given the
opportunity to opt out of the settlement.
The proposed settlement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an
additional one year upon a showing of good cause. Also, under the proposed
settlement, we agreed to augment our human resources department and our
internal employee complaint procedures; enhance our gender
anti-discrimination training for all employees; hire a consultant mutually
acceptable to the parties for two years to advise us on employment
matters; provide certain reports to the EEOC during the period of the
consent decree; seek qualified female representation on our board of
directors; publicize our desire to recruit, hire and promote qualified
women; offer to fill job vacancies within our regional markets with
qualified class members who reside in those markets and express an
interest in employment by us to the extent of 10% of our job vacancies in
such markets over a fifteen month period; and to take certain other steps
to improve opportunities for women. We initiated many of the above
programs prior to entering into the proposed settlement. Under the
proposed agreement, we have the right to terminate the settlement under
certain circumstances, including in the event that more than 60 class
members elect to opt out of the settlement.
15
RENT-A-CENTER, INC. AND SUBSIDIARIES
The proposed settlement contemplates that the Bunch case will be dismissed
with prejudice once such settlement becomes final. At the parties'
request, the court in the Bunch case stayed the proceedings in that case,
including postponing the fairness hearing previously scheduled for March
6, 2002. Similarly, the court in the Tennessee action has stayed the
proceedings in that case and the EEOC has agreed to having the Tennessee
EEOC action dismissed once the Wilfong settlement is finalized.
The terms of the proposed settlement are subject to the parties entering
into a definitive settlement agreement and court approval. While we
believe the proposed settlement is fair, we cannot assure you that the
settlement will be approved by the court in its present form.
To account for the aforementioned costs, as well as our own attorney's
fees, we recorded an additional non-recurring charge of $36.0 million in
the fourth quarter of 2001 in connection with the Wilfong matter for a
total non-recurring charge of $52.0 million.
Senior Credit Facilities. On May 3, 2002, we amended and restated our
senior credit facility to provide for a new Tranche D LC Facility in an
aggregate amount at closing equal to $80.0 million to support our
outstanding letters of credit, which currently amount to approximately
$63.5 million. Under this new LC Facility, in the event that a letter of
credit is drawn upon, we have the right to either repay the LC lenders the
amount withdrawn or request a loan in that amount. Interest on any
requested LC loan accrues at an adjusted prime rate plus 1.75% or, at our
option, at the Eurodollar base rate plus 2.75%, with the entire amount of
the LC Facility due on December 31, 2007. As a result of this amendment,
our letters of credit will be issued under the new LC Facility which will
increase the amount available to us under our revolving credit facility,
thereby enabling us to achieve more flexibility and liquidity within our
capital structure.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2001
Store Revenue. Total store revenue increased by $58.7 million, or 13.8%,
to $483.9 million for the three months ended March 31, 2002 from $425.2
million for the three months ended March 31, 2001. The increase in total
store revenue is primarily attributable to growth in same store revenues
and incremental revenues in new and acquired stores, as well as an
increase in the amount of merchandise sales over the same period in 2001.
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,
2002 and 2001. Same store revenues increased by $30.1 million, or 7.7%, to
$423.1 million for the three months ended March 31, 2002 from $393.0
million in 2001. The increase in same store revenues was primarily
attributable to an increase in the number of customers served
(approximately 404 per store for 2002 vs. approximately 395 per store for
2001 in same stores open), the number of agreements on rent (approximately
624 per store for 2002 vs. approximately 610 per store for 2001 in same
stores open), as well as revenue earned per agreement on rent
(approximately $96 per month per agreement for 2002 vs. approximately $94
per agreement for 2001). Merchandise sales increased $8.8 million, or
28.8%, to $39.6 million for 2002 from $30.8 million in 2001. The increase
in merchandise sales was primarily attributable to an increase in the
number of items sold in the first quarter of 2002 (approximately 258,000)
from the number of items sold in 2001 (approximately 210,000). This
increase in the number of items sold in 2002 versus the same period in
2001 was primarily the result of an increase in the amount of customers
exercising their early purchase options as a result of in-store promotions
made during the third quarter of 2001, which included a reduction in the
rates and terms on certain rental agreements.
Franchise Revenue. Total franchise revenue increased by $196,000, or 1.4%,
to $14.7 million for the three months ended March 31, 2002 from $14.5
million in 2001. This increase was primarily attributable to an increase
in merchandise sales to franchise locations, partially offset by a
decrease in the number of franchised locations in the first quarter of
2002 as compared to the first quarter of 2001.
Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $11.4 million, or 14.1%, to $92.2 million for the three
months ended March 31, 2002 from $80.8 million in 2001. This increase was
primarily attributable to an increase in rental and fee revenue.
Depreciation of rental merchandise expressed as a percent of store rentals
and fees revenue increased to 20.8% in 2002 from 20.6% for the same period
in 2001. This slight increase is primarily a result of in-store promotions
made during the third quarter of 2001, which included a reduction in the
rates and terms on certain rental agreements. These in-store promotions
caused depreciation to be a greater percentage of store rentals and fees
revenue on those promotional items rented.
16
RENT-A-CENTER, INC. AND SUBSIDIARIES
Cost of Merchandise Sold. Cost of merchandise sold increased by $5.4
million, or 25.2%, to $27.0 million for the three months ended March 31,
2002 from $21.6 million in 2001. This increase was primarily a result of
an increase in the number of items sold during the first three months of
2002 as compared to the first three months of 2001.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 54.3% for the three months
ended March 31, 2002 from 57.0% for the three months ended March 31, 2001.
This decrease was primarily attributable to an increase in store revenues
in the first quarter of 2002 as compared to 2001 coupled with the
realization of our margin enhancement initiatives and reductions in store
level costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
increased by $159,000, or 1.3%, to $12.7 million for the three months
ended March 31, 2002 from $12.5 million in 2001. This increase was
primarily attributable to an increase in merchandise sales to franchise
locations, partially offset by a decrease in the number of franchised
locations in the first quarter of 2002 as compared to the first quarter of
2001.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue remained relatively constant at
3.0% and 2.9% for the three months ending March 31, 2002 and 2001,
respectively.
Amortization of Intangibles. Amortization of intangibles decreased by $6.5
million, or 90.1%, to $720,000 for the three months ended March 31, 2002
from $7.3 million for the three months ended March 31, 2001. This decrease
was directly attributable to the implementation of SFAS 142, which
requires that goodwill no longer be amortized.
Operating Profit. Operating profit increased by $25.8 million, or 41.3%,
to $88.3 million for the three months ended March 31, 2002 from $62.5
million in 2001. Operating profit as a percentage of total revenue
increased to 17.7% for the three months ended March 31, 2002, from 14.2%
in 2001. This increase was primarily attributable to an increase in store
revenues in the first quarter of 2002 as compared to 2001 coupled with the
realization of our margin enhancement initiatives, reduction of store
level costs and the reduction of intangible amortization expense as
discussed above. After adjusting reported results for the first quarter of
2001 to exclude the effects of goodwill amortization, operating profit
increased by $18.7 million, or 26.9% on a comparable basis.
Net Earnings. Net earnings increased by $18.6 million, or 74.3%, to $43.6
million for the three months ended March 31, 2002 from $25.0 million in
2001. This increase is primarily attributable to growth in total revenues,
reduced interest expenses resulting from a reduction in outstanding debt
and a reduction in the expenses associated with the amortization of
intangibles. After adjusting reported results for the first quarter of
2001 to exclude the effects of goodwill amortization, net earnings
increased by $12.4 million, or 39.8% on a comparable basis.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. We account for shares of preferred
stock distributed as dividends in-kind at the greater of the stated value
or the value of the common stock obtainable upon conversion on the payment
date. Preferred dividends increased by $667,500, or 15.4%, to $5.0 million
for the three months ended March 31, 2002 as compared to $4.3 million in
2001. This increase is a result of more shares of Series A Preferred stock
outstanding for the three months ended March 31, 2002 as compared to the
three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $64.3 million to $96.3
million for the three months ending March 31, 2002 from $32.0 million in
2001. This increase resulted primarily from an increase in net earnings
and depreciation of rental merchandise, as well as a decrease in the
amount of rental merchandise purchased during the first three months of
2002 compared to 2001.
Cash used in investing activities decreased by $2.9 million to $11.3
million during the three month period ending March 31, 2002 from $14.2
million in 2001. This decrease is primarily attributable to the
acquisition and opening of fewer new stores during the first three months
of 2002 as compared to 2001 as well as a decrease in capital expenditures.
Cash used in financing activities decreased by $1.1 million to $25.8
million during the three month period ending March 31, 2002 from $26.8
million in 2001. This decrease is a result of the difference between our
purchase of $34.7 million in treasury stock in the first quarter of 2002
as compared to debt repayments of $37.9 million during the first quarter
of 2001, offset by fewer proceeds from options exercised in 2002 as
compared to 2001. During the second quarter of 2002, we have prepaid $37.1
million of our senior debt.
17
RENT-A-CENTER, INC. AND SUBSIDIARIES
Liquidity Requirements. Our primary liquidity requirements are for debt
service, rental merchandise purchases, capital expenditures, litigation
and our store expansion program. Our primary sources of liquidity have
been cash provided by operations, borrowings and sales of equity
securities. In the future, we may incur additional debt, or may issue debt
or equity securities to finance our operating and growth strategies. The
availability and attractiveness of any outside sources of financing will
depend on a number of factors, some of which relate to our financial
condition and performance, and some of which are beyond our control, such
as prevailing interest rates and general economic conditions. There can be
no assurance that additional financing will be available, or if available,
that it will be on terms we find acceptable.
We believe that cash flow generated from operations, together with amounts
available under our senior credit facilities, will be sufficient to fund
our debt service requirements, rental merchandise purchases, capital
expenditures, litigation and our store expansion intentions during 2002.
At April 30, 2002, we had $154.5 million in cash. While our operating cash
flow has been strong and we expect this strength to continue, our
liquidity could be negatively impacted if we do not remain as profitable
as we expect.
Rental Merchandise Purchases. We purchased $137.9 million and $151.8
million of rental merchandise during the three month periods ending March
31, 2002 and 2001, respectively.
Capital Expenditures. We make capital expenditures in order to maintain
our existing operations as well as for new capital assets in new and
acquired stores. We spent $8.1 million and $11.8 million on capital
expenditures during the three month periods ending March 31, 2002 and
2001, respectively, and expect to spend approximately $36.9 million for
the remainder of 2002.
Acquisitions and New Store Openings. For the first three months of 2002,
we spent approximately $3.5 million on acquisitions. For the entire year
ending December 31, 2002, we intend to add approximately 5% to 10% to our
store base by opening between 60 and 80 new store locations as well as
continuing to pursue opportunistic acquisitions.
The profitability of our stores tends to grow at a slower rate
approximately five years from the time we open or acquire them. As a
result, in order for us to show improvements in our profitability, it is
important for us to continue to open stores in new locations or acquire
underperforming stores on favorable terms. There can be no assurance that
we will be able to acquire or open new stores at the rates we expect, or
at all. We cannot assure you that the stores we do acquire or open will be
profitable at the same levels that our current stores are, or at all.
Borrowings. The table below shows the scheduled maturity dates of our
senior debt outstanding at March 31, 2002.
<Table>
<Caption>
PERIOD (YEAR) ENDING
DECEMBER 31, (IN THOUSANDS)
-------------------- --------------
2002.............. $ 1,849
2003.............. 1,849
2004.............. 26,379
2005.............. 100,000
2006.............. 177,078
Thereafter.............. 120,845
-----------
$ 428,000
===========
</Table>
Since March 31, 2002, we have prepaid approximately $37.1 million of our
senior debt during the second quarter, $19.0 million of which has been
paid since April 30, 2002.
Under our senior credit facilities, we are required to use 25% of the net
proceeds from any equity offering to repay our term loans. We intend to
continue to make prepayments of debt under our senior credit facilities or
repurchase some of our senior subordinated notes to the extent we have
available cash that is not necessary for store openings or acquisitions.
Our senior credit facilities currently limit our ability to repurchase our
senior subordinated notes in excess of $54.0 million. We cannot, however,
assure you that we will have excess cash available for these purposes.
Senior Credit Facilities. The senior credit facilities are provided by a
syndicate of banks and other financial institutions led by JP Morgan Chase
Bank, as administrative agent. At March 31, 2002, we had a total of $428.0
million outstanding under these facilities, all of which was under our
term loans. At March 31, 2002, we had $56.4 million of availability under
this revolving credit facility.
18
RENT-A-CENTER, INC. AND SUBSIDIARIES
Borrowings under the senior credit facilities bear interest at varying
rates equal to 1.50% to 3.0% over LIBOR, which was 1.91% at March 31,
2002. We also have a prime rate option under the facilities, but have not
exercised it to date. At March 31, 2002, the average rate on outstanding
senior debt borrowings was 8.69%.
On May 3, 2002, we amended and restated our senior credit facility to
provide for a new Tranche D LC Facility in an aggregate amount at closing
equal to $80.0 million to support our outstanding letters of credit, which
currently amount to approximately $63.5 million. Under this new LC
Facility, in the event that a letter of credit is drawn upon, we have the
right to either repay the LC lenders the amount withdrawn or request a
loan in that amount. Interest on any requested LC loan accrues at an
adjusted prime rate plus 1.75% or, at our option, at the Eurodollar base
rate plus 2.75%, with the entire amount of the LC Facility due on December
31, 2007. As a result of this amendment, our letters of credit will be
issued under the new LC Facility which will increase the amount available
to us under our revolving credit facility, thereby enabling us to achieve
more flexibility and liquidity within our capital structure. At May 3,
2002, our revolving credit facilities provide us with revolving loans in
an aggregate principal amount of $130.0 million, all of which was
available.
During 1998, we entered into interest rate protection agreements with two
banks, one of which expired in 2001. Under the terms of the current
interest rate protection agreements, the LIBOR rate used to calculate the
interest rate charged on $250.0 million of the outstanding senior term
debt has been fixed at an average rate of 5.60%. The protection on the
$250.0 million expires in 2003.
The senior credit facilities are secured by a security interest in
substantially all of our tangible and intangible assets, including
intellectual property and real property. The senior credit facilities are
also secured by a pledge of the capital stock of our subsidiaries.
The senior credit facilities contain covenants that limit our ability to:
o incur additional debt (including subordinated debt) in excess of $25
million;
o repurchase our capital stock and senior subordinated notes;
o incur liens or other encumbrances;
o merge, consolidate or sell substantially all our property or business;
o sell assets, other than inventory;
o make investments or acquisitions unless we meet financial tests and
other requirements;
o make capital expenditures; or
o enter into a new line of business.
The senior credit facilities require us to comply with several financial
covenants, including a maximum leverage ratio, a minimum interest coverage
ratio and a minimum fixed charge coverage ratio. At March 31, 2002, the
maximum leverage ratio was 3.75:1, the minimum interest coverage ratio was
3.00:1, and the minimum fixed charge coverage ratio was 1.30:1. On that
date, our actual ratios were 2.12:1, 5.53:1 and 2.25:1, respectively.
Events of default under the senior credit facilities include customary
events, such as a cross-acceleration provision in the event that we
default on other debt. In addition, an event of default under the senior
credit facilities would occur if we undergo a change of control. This is
defined to include the case where Apollo ceases to own at least 4,474,673
shares of our common stock on an as converted basis, or a third party
becomes the beneficial owner of 33.33% or more of our voting stock at a
time when certain permitted investors own less than the third party or
Apollo entities own less than 35% of the voting stock owned by the
permitted investors. We do not have the ability to prevent Apollo from
selling its stock, and therefore would be subject to an event of default
if Apollo did so and its sales were not agreed to by the lenders under the
senior credit facilities. This could result in the acceleration of the
maturity of our debt under the senior credit facilities, as well as under
the subordinated notes through their cross-acceleration provision.
Senior Subordinated Notes. In August 1998, we issued $175.0 million of
senior subordinated notes, maturing on August 15, 2008, under an indenture
dated as of August 18, 1998 among us, our subsidiary guarantors and the
trustee, which is now The Bank of New York, as successor to IBJ Schroder
Bank & Trust Company. In December 2001, we issued an additional $100.0
million of 11% senior subordinated notes, maturing on August 15, 2008,
under a separate indenture dated as of
19
RENT-A-CENTER, INC. AND SUBSIDIARIES
December 19, 2001 among us, our subsidiary guarantors and The Bank of New
York, as trustee. On May 2, 2002, we closed an exchange offer for, among
other things, all of the notes issued by us under the 1998 indenture, such
that all of our senior subordinated notes are now governed by the terms of
the 2001 indenture.
The 2001 indenture contains covenants that limit our ability to:
o incur additional debt;
o sell assets or our subsidiaries;
o grant liens to third parties;
o pay dividends or repurchase stock; and
o engage in a merger or sell substantially all of our assets.
Events of default under the 2001 indenture include customary events, such
as a cross-acceleration provision in the event that we default in the
payment of other debt due at maturity or upon acceleration for default in
an amount exceeding $25 million.
We may redeem the notes after August 15, 2003, at our option, in whole or
in part, at a premium declining from 105.5%.
The subordinated notes also require that upon the occurrence of a change
of control (as defined in the 2001 indenture), the holders of the notes
have the right to require us to repurchase the notes at a price equal to
101% of the original aggregate principal amount, together with accrued and
unpaid interest, if any, to the date of repurchase. If we did not comply
with this repurchase obligation, this would trigger an event of default
under our senior credit facilities.
Store Leases. We lease space for all of our stores as well as our
corporate and regional offices under operating leases expiring at various
times through 2010.
ColorTyme Guarantee. ColorTyme is a party to an agreement with Textron
Financial Corporation, who provides financing to qualifying franchisees of
ColorTyme. Under this agreement, in the event of default by the franchisee
under agreements governing this financing and upon the occurrence of
certain 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. We guarantee the obligations of ColorTyme under this
agreement up to a maximum amount of $50.0 million, of which $37.7 million
was outstanding as of March 31, 2002.
Litigation. In 1998, we recorded an accrual of approximately $125.0
million for estimated probable losses on litigation assumed in connection
with the Thorn Americas acquisition. As of March 31, 2002, we have paid
approximately $123.7 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 1, 2001, we announced that we reached an agreement in
principle for the settlement of the Margaret Bunch, et al. v.
Rent-A-Center, Inc. matter pending in federal court in Kansas City,
Missouri, which is subject to court approval. Under the terms of the
proposed settlement, while not admitting liability, we would pay an
aggregate of $12.25 million to the agreed upon class, plus plaintiff's
attorneys' fees as determined by the court and costs to administer the
settlement process. Accordingly, to account for the aforementioned costs,
as well as our own attorneys' fees, we recorded a non-recurring charge of
$16.0 million in the third quarter of 2001.
In early March 2002, we reached an agreement in principle with the
plaintiffs attorneys in the Wilfong matter pending in St. Louis, Missouri
and the EEOC to resolve the Wilfong suit and an EEOC action in Tennessee.
Under the terms of the proposed settlement, while not admitting any
liability, we would pay an aggregate of $47.0 million to female employees
and certain female applicants who were employed by or applied for
employment with us for a period commencing no later than April 19, 1998
through the future date of the notice to the applicable class, plus up to
$375,000 in settlement administrative costs. The class members in Wilfong
include all of the Bunch class members. The $47.0 million payment includes
the $12.25 million payment discussed in connection with the Bunch
settlement and attorney fees for class counsel in Wilfong. Members of the
class who do not wish to participate in the settlement would be given the
opportunity to opt out of the settlement.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
The proposed settlement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an
additional one year upon a showing of good cause. Also, under the proposed
settlement, we agreed to augment our human resources department and our
internal employee complaint procedures; enhance our gender
anti-discrimination training for all employees; hire a consultant mutually
acceptable to the parties for two years to advise us on employment
matters; provide certain reports to the EEOC during the period of the
consent decree; seek qualified female representation on our board of
directors; publicize our desire to recruit, hire and promote qualified
women; offer to fill job vacancies within our regional markets with
qualified class members who reside in those markets and express an
interest in employment by us to the extent of 10% of our job vacancies in
such markets over a fifteen month period; and to take certain other steps
to improve opportunities for women. We initiated many of the above
programs prior to entering into the proposed settlement. Under the
proposed agreement, we have the right to terminate the settlement under
certain circumstances, including in the event that more than 60 class
members elect to opt out of the settlement.
The proposed settlement contemplates that the Bunch case will be dismissed
with prejudice once such settlement becomes final. At the parties'
request, the court in the Bunch case stayed the proceedings in that case,
including postponing the fairness hearing previously scheduled for March
6, 2002. Similarly, the court in the Tennessee EEOC action has stayed the
proceeding in that case and the EEOC has agreed to having the case
dismissed once the Wilfong settlement is finalized.
The terms of the proposed settlement are subject to the parties entering
into a definitive settlement agreement and court approval. While we
believe the proposed settlement is fair, we cannot assure you that the
settlement will be approved by the court in its present form.
To account for the aforementioned costs, as well as our own attorney's
fees, we recorded an additional non-recurring charge of $36.0 million in
the fourth quarter of 2001 in connection with the Wilfong matter for a
total non-recurring charge of $52.0 million.
Additional settlements or judgments against us on our existing litigation
could affect our liquidity. Please refer to Note J or our consolidated
financial statements included in our Annual Report on Form 10-K.
Sales of Equity Securities. On May 31, 2001, we completed an offering of
3,680,000 shares of our common stock at an offering price of $42.50 per
share. In that offering, 1,150,000 shares were offered by us and 2,530,000
shares were offered by some of our stockholders. Net proceeds to us were
approximately $45.6 million.
During 1998, we issued 260,000 shares of our Series A preferred stock at
$1,000 per share, resulting in aggregate proceeds of $260.0 million.
Dividends on our Series A preferred stock accrue on a quarterly basis, at
the rate of $37.50 per annum, per share, and are currently paid in
additional shares of Series A preferred stock because of restrictive
provisions in our senior credit facilities. Beginning in 2003, we will be
required to pay the dividends in cash and may do so under our senior
credit facilities so long as we are not in default.
The Series A preferred stock is not redeemable until August 2002, after
which time we may, at our option, redeem the shares at 105% of the $1,000
per share liquidation preference plus accrued and unpaid dividends.
Contractual Cash Commitments. The table below summarizes debt, lease and
other minimum cash obligations outstanding as of March 31, 2002:
<Table>
<Caption>
PAYMENTS DUE BY YEAR END:
Contractual Cash Obligations(1) TOTAL 2002 2003 2004 2005 AND THEREAFTER
------------------------------- -------- -------- -------- -------- -------------------
(IN THOUSANDS)
Senior Credit Facilities
(including current portion) ........ $428,000 $ 1,849 $ 1,849 $ 26,379 $397,923
11% Senior Subordinated Notes(2) ............ 471,625 15,125 30,250 30,250 396,000
Series A Preferred Stock(3) ................. 70,487 -- 1,795 11,757 56,934
Operating Leases ............................ 307,046 70,935 85,656 71,647 78,808
</Table>
- ----------
(1) Excludes obligations under the ColorTyme guarantee, as well as the
change in control and acceleration provisions under the senior
credit facilities, and the optional redemption, change in control
and acceleration provisions under the indenture governing our
subordinated notes.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
(2) Includes interest payments of $15.13 million on each of February 15
and August 15 of each year.
(3) Represents cash dividends required to be paid on the Series A
preferred stock from August 5, 2003 through August 5, 2009 but
excludes the obligations related to change in control and
redemption, and assumes that the internal rate of return threshold
allowing us to cease paying dividends of the Series A preferred
stock is not met.
Talley Repurchase. In connection with Mr. Talley's retirement, we entered
into an agreement to repurchase $25.0 million worth of shares of our
common stock held by Mr. Talley at a purchase price equal to the average
closing price of our common stock over the 10 trading days beginning
October 9, 2001, subject to a maximum of $27.00 per share and a minimum of
$20.00 per share. Under this formula, the purchase price for the
repurchase was calculated at $20.258 per share. Accordingly, on October
23, 2001 we repurchased 493,632 shares of our common stock from Mr. Talley
at $20.258 per share for a total purchase price of $10.0 million, and on
November 30, 2001, we repurchased an additional 740,448 shares of our
common stock from Mr. Talley at $20.258 per share, for a total purchase
price of an additional $15.0 million. On January 25, 2002, we exercised
the option to repurchase all of the remaining 1,714,086 shares of common
stock held by Mr. Talley at $20.258 per share. We repurchased those
remaining shares on January 30, 2002.
Our senior credit facilities contain covenants that generally limit our
ability to repurchase our capital stock. In addition, the indenture
governing our subordinated notes contain covenants limiting our ability to
repurchase our capital stock. Under these agreements, we had the ability
to effect the repurchases of our common stock from Mr. Talley. However, as
a result of those repurchases, our ability to make further repurchases of
our common stock, including pursuant to our common stock repurchase
program, is limited.
Common Stock Repurchase Program. 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 million of our common stock. To date, no
shares of common stock have been purchased by us under this share
repurchase program. We have suspended this share repurchase program
pending the consummation of an equity offering by some of our
stockholders. However, we may begin repurchasing shares of our common
stock at any time, subject to the limitations in our senior credit
facilities and the indenture governing our senior subordinated notes.
Economic Conditions. Although our performance has not suffered in previous
economic downturns, we cannot assure you that demand for our products,
particularly in higher price ranges, will not significantly decrease in
the event of a prolonged recession.
Seasonality. Our revenue mix is moderately seasonal, with the first
quarter of each fiscal year generally providing higher merchandise sales
than any other quarter during a fiscal year, primarily related to federal
income tax refunds. Generally, our customers will more frequently exercise
their early purchase option on their existing rental purchase agreements
or purchase pre-leased merchandise off the showroom floor during the first
quarter of each fiscal year. We expect this trend to continue in future
periods. Furthermore, we tend to experience slower growth in the number of
rental purchase agreements on rent in the third quarter of each fiscal
year when to compared to other quarters throughout the year. As a result,
we would expect revenues for the third quarter of each fiscal year to
remain relatively flat with the prior quarter. We expect this trend to
continue in future periods unless we add significantly to our store base
during the third quarter of future fiscal years as a result of new store
openings or opportunistic acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
As of March 31, 2002, we had $275.0 million in subordinated notes
outstanding at a fixed interest rate of 11.0% and $428.0 million in term
loans outstanding at interest rates indexed to the LIBOR rate. The
subordinated notes mature on August 15, 2008. The fair value of the
subordinated notes is estimated based on discounted cash flow analysis
using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The fair value of the subordinated
notes at March 31, 2002 was $291.5 million, which is $16.5 million above
their carrying value. Unlike the subordinated notes, the $428.0 million in
term loans have variable interest rates indexed to current LIBOR rates.
Because the variable rate structure exposes us to the risk of increased
interest cost if interest rates rise, in 1998 we entered into $500.0
million in interest rate swap agreements that lock in a LIBOR rate of
5.59%, thus hedging this risk. Of the $500.0 million in agreements, $250.0
million expired in September 2001 and the remaining $250.0 million will
expire in 2003. Given our current capital structure, including our
interest rate swap agreements, we have $178.0 million, or 25.3% of our
total debt, in variable rate debt. A hypothetical 1.0% change in the LIBOR
rate would affect pre-tax earnings by approximately $1.8 million. The swap
agreements had an aggregate fair value of $(7.3) million and $(5.3)
million at March 31, 2002 and 2001, respectively. A hypothetical 1.0%
change in the LIBOR rate would have affected the fair value of the swaps
by approximately $4.7 million.
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest rates. Our primary market risk exposure is
fluctuations in interest rates. Monitoring and managing this risk is a
continual process carried out by the Board of Directors and senior
management. We manage our market risk based on an ongoing assessment of
trends in interest rates and economic developments, giving consideration
to possible effects on both total return and reported earnings.
INTEREST RATE RISK
We hold long-term debt with variable interest rates indexed to prime or
LIBOR that exposes us to the risk of increased interest costs if interest
rates rise. To reduce the risk related to unfavorable interest rate
movements, we have entered into certain interest rate swap contracts on
$250.0 million of debt to pay a fixed rate of 5.60%.
23
RENT-A-CENTER, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we, along with our subsidiaries, are party to various
legal proceedings arising in the ordinary course of business. Except as
described below, we are not currently a party to any material litigation.
Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in
November 1997 in New York state court. This matter was assumed by us in
connection with the Thorn Americas acquisition, and appropriate purchase
accounting adjustments were made for such contingent liabilities. The
plaintiffs acknowledge that rent-to-own transactions in New York are
subject to the provisions of New York's Rental Purchase Statute but
contend the Rental Purchase Statute does not provide Thorn Americas
immunity from suit for other statutory violations. Plaintiffs allege Thorn
Americas has a duty to disclose effective interest under New York consumer
protection laws, and seek damages and injunctive relief for Thorn
Americas' failure to do so. This suit also alleges violations relating to
excessive and unconscionable pricing, late fees, harassment, undisclosed
charges, and the ease of use and accuracy of its payment records. In their
prayers for relief, the plaintiffs have requested the following:
o class certification;
o injunctive relief requiring Thorn Americas to (A) cease certain
marketing practices, (B) price their rental purchase contracts in
certain ways, and (C) disclose effective interest;
o unspecified compensatory and punitive damages;
o rescission of the class members contracts;
o an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period;
o treble damages, attorney's fees, filing fees and costs of suit;
o pre- and post-judgment interest; and
o any further relief granted by the court.
The plaintiffs have not alleged a specific monetary amount with respect to
their request for damages.
The proposed class originally included all New York residents who were
party to Thorn Americas' rent-to-own contracts from November 26, 1991
through November 26, 1997. In her class certification briefing, Plaintiff
acknowledged her claims under the General Business Law in New York are
subject to a three year statute of limitations, and is now requesting a
class of all persons in New York who paid for rental merchandise from us
since November 26, 1994. In November 2000, following interlocutory appeal
by both parties from the denial of cross-motions for summary judgement, we
obtained a favorable ruling from the Appellate Division of the State of
New York, dismissing Plaintiff's claims based on the alleged failure to
disclose an effective interest rate. Plaintiff's other claims were not
dismissed. Plaintiff moved to certify a state-wide class in December 2000.
Plaintiff's class certification motion was heard by the court on November
7, 2001, at which time the court took the motion under advisement. We are
vigorously defending this action and opposing class certification.
Although there can be no assurance that our position will prevail, or that
we will be found not to have any liability, we believe the decision by the
Appellate Division regarding interest rate disclosure to be a significant
and favorable development in this matter.
Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin
Attorney General filed suit against us and our subsidiary ColorTyme in the
Circuit Court of Milwaukee County, Wisconsin, alleging that our
rent-to-rent transaction, coupled with the opportunity afforded our rental
customers to purchase the rented merchandise under what we believe is a
separate transaction, is a disguised credit sale subject to the Wisconsin
Consumer Act. Accordingly, the Attorney General alleges that we have
failed to disclose credit terms, misrepresented the terms of the
transaction and engaged in unconscionable practices. We currently operate
26 stores in Wisconsin.
The Attorney General seeks injunctive relief, restoration of any losses
suffered by any Wisconsin consumer harmed and civil forfeitures and
penalties in amounts ranging from $50 to $10,000 per violation. If the
Attorney General's theory on damages prevails, the Attorney General's
claim for monetary penalties would apply to at least 17,900 transactions
through January 31, 2002. On October 31, 2001, the Attorney General filed
a motion for summary judgment on several counts in the complaint,
including the principal claim that our rent-to-rent transaction is
governed by the Wisconsin Consumer Act. Our response was filed on December
17, 2001. A pre-trial conference and hearing on the motion for summary
judgment took place on January 22, 2002, at which time the court ruled in
favor of the Attorney General's motion for summary judgment on the
liability issues and set the case for trial on damages for February 2003.
Since the filing of this suit, we have attempted to negotiate a mutually
satisfactory resolution of these claims with the Wisconsin Attorney
General's office, including the consideration of possible changes in our
business practices in Wisconsin. To date, we have not been successful, but
our efforts are ongoing. If we are unable to negotiate a settlement with
the Attorney General, we intend to litigate the suit. We cannot assure
you, however, that the outcome of this matter will not have a material
adverse impact on our financial position, results of operations or cash
flows.
Gender Discrimination Actions. We are subject to three class action
lawsuits claiming gender discrimination. As described below, we have
settled in principle all of the claims covered by these three actions.
In September 1999, an action was filed against us in federal court in the
Western District of Tennessee by the U.S. Equal Employment Opportunity
Commission, alleging that we engaged in gender discrimination with respect
to four named females and other unnamed female employees and applicants
within our Tennessee and Arkansas region. The allegations underlying this
EEOC action involve charges of wrongful termination and denial of
promotion, disparate impact and failure to hire. The group of individuals
on whose behalf EEOC seeks relief is approximately seventy individuals.
In August 2000, a putative nationwide class action was filed against us in
federal court in East St. Louis, Illinois by Claudine Wilfong and eighteen
other plaintiffs, alleging that we engaged in class-wide gender
discrimination following our acquisition of Thorn Americas. The
allegations underlying Wilfong involve charges of wrongful termination,
constructive discharge, disparate treatment and disparate impact. In
addition, the EEOC filed a motion to intervene on behalf of the
plaintiffs, which the court granted on May 14, 2001. On December 27, 2001,
the court granted the plaintiff's motion for class certification.
In December 2000, similar suits filed by Margaret Bunch and Tracy Levings
in federal court in the Western District of Missouri were amended to
allege class action claims similar to those in Wilfong. In November 2001,
we announced that we had reached an agreement in principle for the
settlement of the Bunch matter, which is subject to court approval. Under
the terms of the proposed settlement, we agreed to pay an aggregate of
$12.25 million to the agreed upon class, plus plaintiffs' attorneys fees
as determined by the court and costs to administer the settlement subject
to an aggregate cap of $3.15 million. On November 29, 2001, the court in
Bunch granted preliminary approval of the settlement and set a fairness
hearing on such settlement for March 6, 2002.
In early March 2002, we reached an agreement in principle with the
plaintiffs attorneys in Wilfong and the EEOC to resolve the Wilfong suit
and the Tennessee EEOC action. Under the terms of the proposed settlement,
while not admitting any liability, we would pay an aggregate of $47.0
million to approximately 5,300 female employees and a yet to be determined
number of female applicants who were employed by or applied for employment
with us for a period commencing no later than April 19, 1998 through the
future date of the notice to the applicable class, plus up to $375,000 in
settlement administrative costs. The $47.0 million payment includes the
$12.25 million payment discussed in connection with the Bunch settlement.
Attorney fees for class counsel in Wilfong would be paid out of the $47.0
million settlement fund in an amount to
24
RENT-A-CENTER, INC. AND SUBSIDIARIES
be determined by the court. Members of the class who do not wish to
participate in the settlement would be given the opportunity to opt out of
the settlement.
The proposed agreement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an
additional one year upon a showing of good cause. Also, under the proposed
settlement, we agreed to augment our human resources department and our
internal employee complaint procedures; enhance our gender
anti-discrimination training for all employees; hire a consultant mutually
acceptable to the parties for two years to advise us on employment
matters; provide certain reports to the EEOC during the period of the
consent decree; seek qualified female representation on our board of
directors; publicize our desire to recruit, hire and promote qualified
women; offer to fill job vacancies within our regional markets with
qualified class members who reside in those markets and express an
interest in employment by us to the extent of 10% of our job vacancies in
such markets over a fifteen month period; and to take certain other steps
to improve opportunities for women. We initiated many of the above
programs prior to entering into the proposed settlement.
Under the proposed agreement, we have the right to terminate the
settlement under certain circumstances, including in the event that more
than 60 class members elect to opt out of the settlement.
The proposed settlement contemplates that the Bunch case will be dismissed
with prejudice once such settlement becomes final. At the parties'
request, the court in the Bunch case stayed the proceedings in that case,
including postponing the fairness hearing previously scheduled for March
6, 2002. Similarly, the court in the Tennessee EEOC action has stayed the
proceeding in that case and the EEOC has agreed to having the case
dismissed once the Wilfong settlement is finalized.
The terms of the proposed settlement are subject to the parties entering
into a definitive settlement agreement and court approval. While we
believe the proposed settlement is fair, we cannot assure you that the
settlement will be approved by the court in its present form.
Terry Walker, et. al. v. Rent-A-Center, Inc., et. al.; Chaim Klein, et.
al. v. Rent-A-Center, Inc., et. al.; John Farrar, et. al. v.
Rent-A-Center, Inc., et. al. On January 4, 2002, a putative class action
was filed against us and certain of our current and former officers and
directors by Terry Walker in federal court in Texarkana, Texas. The
complaint alleges that the defendants violated Sections 10(b) and/or
Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by issuing false and misleading statements and
omitting material facts regarding our financial performance and prospects
for the third and fourth quarters of 2001. The complaint purports to be
brought on behalf of all purchasers of our common stock from April 25,
2001 through October 8, 2001 and seeks damages in unspecified amounts. We
anticipate that the similar complaints filed by Chaim Klein and John
Farrar will be consolidated by the court with the Walker matter. We
believe that these claims 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.
25
RENT-A-CENTER AND SUBSIDIAIRES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
CURRENT REPORTS ON FORM 8-K
None.
EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1(1) -- Amended and Restated Certificate of Incorporation
of Renters Choice, Inc.
3.2(2) -- Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of Renters
Choice, Inc.
3.3(3) -- Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of
Rent-A-Center, Inc.
3.4* -- Amended and Restated Bylaws of Rent-A-Center, Inc.
4.1(4) -- Form of Certificate evidencing Common Stock
4.2(5) -- Certificate of Designations, Preferences and
Relative Rights and Limitations of Series A
Preferred Stock of Renters Choice, Inc.
26
RENT-A-CENTER, INC. AND SUBSIDIARIES
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
4.3(6) -- Certificate of Designations, Preferences and
Relative Rights and Limitations of Series B
Preferred Stock of Renters Choice, Inc.
4.4(7) -- Indenture, dated as of August 18, 1998, by and
among Renters Choice, Inc., as Issuer, ColorTyme,
Inc. and Rent-A-Center, Inc., as Subsidiary
Guarantors, and IBJ Schroder Bank & Trust Company,
as Trustee
4.5(8) -- Form of Certificate evidencing Series A Preferred
Stock
4.6(9) -- Form of 1998 Exchange Note
4.7(10) -- First Supplemental Indenture, dated as of December
31, 1998, by and among Renters Choice Inc.,
Rent-A-Center, Inc., ColorTyme, Inc., Advantage
Companies, Inc. and IBJ Schroder Bank & Trust
Company, as Trustee.
4.8(11) -- Indenture, dated as of December 19, 2001, by and
among Rent-A-Center, Inc., as Issuer, ColorTyme,
Inc., and Advantage Companies, Inc., as Subsidiary
Guarantors, and The Bank of New York, as Trustee
4.9* -- First Supplemental Indenture, dated as of May 1,
2002, by and among Rent-A-Center, Inc., ColorTyme,
Inc., Advantage Companies, Inc. and The Bank of
New York, as Trustee.
4.10(12) -- Form of 2001 Exchange Note
10.1(13)+ -- Amended and Restated Rent-A-Center, Inc. Long-Term
Incentive Plan
10.2(14) -- Amended and Restated Credit Agreement, dated as of
August 5, 1998 as amended and restated as of June
29, 2000, among Rent-A-Center, Inc., Comerica
Bank, as Documentation Agent, Bank of America NA,
as Syndication Agent, and The Chase Manhattan
Bank, as Administrative Agent.
10.3(15) -- First Amendment to the Credit Agreement, dated
August 5, 1998, as amended and restated as of June
29, 2000, among Rent-A-Center, Inc., the Lenders
party to the Credit Agreement, the Documentation
Agent, and Syndication Agent named therein and the
Chase Manhattan Bank, as Administrative Agent
10.4(16) -- Second Amendment, dated as of November 26, 2001,
to the Credit Agreement, dated as of August 5,
1998, as amended and restated as of June 29, 2000,
among Rent-A-Center, Inc., the lenders party to
the Credit Agreement, the Documentation Agent and
Syndication Agent named therein and JP Morgan
Chase Bank (formerly known as The Chase Manhattan
Bank), as Administrative Agent
10.5* -- Amended and Restated Credit Agreement, dated as of
August 5, 1998, as amended and restated as of May
3, 2002, among Rent-A-Center, Inc., Comerica Bank,
as Documentation Agent, Bank of America, N.A., as
Syndication Agent and JPMorgan Chase Bank, as
Administrative Agent.
10.6(17) -- Guarantee and Collateral Agreement, dated August
5, 1998, made by Renters Choice, Inc., and certain
of its Subsidiaries in favor of the Chase
Manhattan Bank, as Administrative Agent
10.7(18) -- Amended and Restated Stockholders Agreement by and
among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark
E. Speese, Rent-A-Center, Inc., and certain other
persons
10.8(19) -- 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(20) -- 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.
10.10(21) -- 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.
21.1(22) -- Subsidiaries of Rent-A-Center, Inc.
* Filed herewith.
+ Management contract or company plan or arrangement
(1) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(2) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996
27
RENT-A-CENTER, INC. AND SUBSIDIARIES
(3) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
(4) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Form S-4 filed on January 19, 1999.
(5) Incorporated herein by reference to Exhibit 4.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(6) Incorporated herein by reference to Exhibit 4.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(7) Incorporated herein by reference to Exhibit 4.4 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(8) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(9) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(10) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(11) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(12) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(13) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Registration Statement of Form S-4 filed on January 22, 2002
(14) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(15) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(16) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(17) Incorporated herein by reference to Exhibit 10.19 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
(18) Incorporated herein by reference to Exhibit 10.21 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
(19) 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
(20) 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
(21) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(22) Incorporated herein by reference to Exhibit 21.1 to the registrant's
Registration Statement on Form S-4 filed on January 19, 1999
28
RENT-A-CENTER, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Report to be signed on its
behalf by the undersigned duly authorized officer.
RENT-A-CENTER, INC.
By: /s/ Robert D. Davis
---------------------------------
Robert D. Davis
Senior Vice President-Finance and
Chief Financial Officer
Date: May 7, 2002
29
RENT-A-CENTER, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1(1) -- Amended and Restated Certificate of Incorporation
of Renters Choice, Inc.
3.2(2) -- Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of Renters
Choice, Inc.
3.3(3) -- Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of
Rent-A-Center, Inc.
3.4* -- Amended and Restated Bylaws of Rent-A-Center, Inc.
4.1(4) -- Form of Certificate evidencing Common Stock
4.2(5) -- Certificate of Designations, Preferences and
Relative Rights and Limitations of Series A
Preferred Stock of Renters Choice, Inc.
4.3(6) -- Certificate of Designations, Preferences and
Relative Rights and Limitations of Series B
Preferred Stock of Renters Choice, Inc.
4.4(7) -- Indenture, dated as of August 18, 1998, by and
among Renters Choice, Inc., as Issuer, ColorTyme,
Inc. and Rent-A-Center, Inc., as Subsidiary
Guarantors, and IBJ Schroder Bank & Trust Company,
as Trustee
4.5(8) -- Form of Certificate evidencing Series A Preferred
Stock
4.6(9) -- Form of 1998 Exchange Note
4.7(10) -- First Supplemental Indenture, dated as of December
31, 1998, by and among Renters Choice Inc.,
Rent-A-Center, Inc., ColorTyme, Inc., Advantage
Companies, Inc. and IBJ Schroder Bank & Trust
Company, as Trustee.
4.8(11) -- Indenture, dated as of December 19, 2001, by and
among Rent-A-Center, Inc., as Issuer, ColorTyme,
Inc., and Advantage Companies, Inc., as Subsidiary
Guarantors, and The Bank of New York, as Trustee
4.9* -- First Supplemental Indenture, dated as of May 1,
2002, by and among Rent-A-Center, Inc., ColorTyme,
Inc., Advantage Companies, Inc. and The Bank of
New York, as Trustee.
4.10(12) -- Form of 2001 Exchange Note
10.1(13)+ -- Amended and Restated Rent-A-Center, Inc. Long-Term
Incentive Plan
10.2(14) -- Amended and Restated Credit Agreement, dated as of
August 5, 1998 as amended and restated as of June
29, 2000, among Rent-A-Center, Inc., Comerica
Bank, as Documentation Agent, Bank of America NA,
as Syndication Agent, and The Chase Manhattan
Bank, as Administrative Agent.
10.3(15) -- First Amendment to the Credit Agreement, dated
August 5, 1998, as amended and restated as of June
29, 2000, among Rent-A-Center, Inc., the Lenders
party to the Credit Agreement, the Documentation
Agent, and Syndication Agent named therein and the
Chase Manhattan Bank, as Administrative Agent
10.4(16) -- Second Amendment, dated as of November 26, 2001,
to the Credit Agreement, dated as of August 5,
1998, as amended and restated as of June 29, 2000,
among Rent-A-Center, Inc., the lenders party to
the Credit Agreement, the Documentation Agent and
Syndication Agent named therein and JP Morgan
Chase Bank (formerly known as The Chase Manhattan
Bank), as Administrative Agent
10.5* -- Amended and Restated Credit Agreement, dated as of
August 5, 1998, as amended and restated as of May
3, 2002, among Rent-A-Center, Inc., Comerica Bank,
as Documentation Agent, Bank of America, N.A., as
Syndication Agent and JPMorgan Chase Bank, as
Administrative Agent
10.6(17) -- Guarantee and Collateral Agreement, dated August
5, 1998, made by Renters Choice, Inc., and certain
of its Subsidiaries in favor of the Chase
Manhattan Bank, as Administrative Agent
10.7(18) -- Amended and Restated Stockholders Agreement by and
among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark
E. Speese, Rent-A-Center, Inc., and certain other
persons
10.8(19) -- 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(20) -- 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.
10.10(21) -- 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.
</Table>
30
RENT-A-CENTER, INC. AND SUBSIDIARIES
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
21.1(22) -- Subsidiaries of Rent-A-Center, Inc.
</Table>
* Filed herewith.
+ Management contract or company plan or arrangement
(1) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
(2) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996
(3) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
(4) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Form S-4 filed on January 19, 1999.
(5) Incorporated herein by reference to Exhibit 4.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(6) Incorporated herein by reference to Exhibit 4.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(7) Incorporated herein by reference to Exhibit 4.4 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(8) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(9) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(10) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(11) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(12) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(13) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Registration Statement of Form S-4 filed on January 22, 2002
(14) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
(15) Incorporated herein by reference to Exhibit 10.5 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(16) Incorporated herein by reference to Exhibit 10.4 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(17) Incorporated herein by reference to Exhibit 10.19 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
31
RENT-A-CENTER, INC. AND SUBSIDIARIES
(18) Incorporated herein by reference to Exhibit 10.21 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
(19) 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
(20) 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
(21) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(22) Incorporated herein by reference to Exhibit 21.1 to the registrant's
Registration Statement on Form S-4 filed on January 19, 1999
32