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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25370
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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)
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
TITLE OF CLASS
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE 16,930,013 SHARES OF COMMON
STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT AT THE CLOSING SALES PRICE ON MARCH 22,
2000...................................................... $262,415,202
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NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON
MARCH 22, 2000:........................................... 24,315,421
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 2000 Annual
Meeting of Stockholders of Rent-A-Center, Inc., are incorporated by reference
into Part III of this report.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 24
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 25
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 25
Item 13. Certain Relationships and Related Transactions.............. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 25
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PART I
ITEM 1. BUSINESS
GENERAL
We are the largest operator in the United States rent-to-own industry with
an approximate 26% market share based on store count. At December 31, 1999 we
operated 2,075 company-owned stores in 49 states, the District of Columbia and
Puerto Rico. Our subsidiary, ColorTyme, Inc., is a national franchisor of rental
centers. At December 31, 1999, ColorTyme operated 365 stores in 42 states, 338
of which operate under the ColorTyme name, while the remaining 27 stores operate
under the Rent-A-Center name. This represents a further 5% market share based on
store count. Our stores offer high quality durable products such as home
electronics, appliances, computers, and furniture 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.
Our principal executive offices are located at 5700 Tennyson Parkway, Third
Floor, Plano, Texas 75024.
Acquisition History
We have pursued an aggressive growth strategy since we were acquired in
1989 by J. Ernest Talley, our Chairman of the Board and Chief Executive Officer.
We have sought to acquire under-performing stores to which we could apply our
operating model. The acquired stores benefit from our administrative network,
improved product mix, sophisticated management information systems and the
greater purchasing power of a larger organization. Since May 1993, our
company-owned store base has grown from 27 to 2,075 primarily through
acquisitions. During this period we have acquired over 2,000 company-owned
stores and over 300 franchised stores in more than 60 separate transactions,
including six transactions where we acquired in excess of 70 stores. Our two
most significant acquisitions occurred in 1998. In May 1998, we acquired
substantially all of the assets of Central Rents, Inc., which operated 176
stores, for approximately $100 million in cash. In August 1998, we acquired
Thorn Americas, Inc. for approximately $900 million in cash, including the
repayment of certain debt of Thorn Americas. Prior to this acquisition, Thorn
Americas was our largest competitor, operating 1,409 company-owned stores and 65
franchised stores in 49 states and the District of Columbia. As a result, we
have gained significant experience in the acquisition and integration of other
rent-to-own operators and believe that the fragmented nature of the industry
will result in ongoing growth opportunities.
1999 DEVELOPMENTS
By the end of March 1999, we successfully completed our comprehensive
program for the integration of the stores acquired from Central Rents and Thorn
Americas. The rapid completion of this integration process enabled us to begin
to realize all of the synergies identified at the time of the acquisitions,
allowing us to concentrate our efforts on improving the performance of the
acquired stores earlier than we had originally anticipated.
During the remainder of 1999 we focused our efforts on enhancing the
operational performance and strengthening the depth of management in the stores
acquired from Central Rents and Thorn Americas. We sought to improve store
performance through strategies intended to produce gains in operating efficiency
and profitability. For instance, in conjunction with the closure of Thorn
Americas' distribution centers and the change to our vendor drop shipment
system, we managed to significantly reduce the number of stock-keeping units
held, either through normal rental channels or through outright sales. These
stock-keeping units were replaced with our current product offerings, and with
the support of our marketing and advertising programs, we were able to increase
revenues and operating margins. In addition, our strategy of rationalizing the
product mix resulted in increased average monthly revenue per unit for the
acquired stores. This rationalization, as well
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as management's focus on improving other processes that are essential to our
operating model, improved revenues and profitability in the acquired stores. We
have strengthened the depth of management by continuing to aggressively recruit
and train high quality personnel.
Despite the increased investment in new merchandise necessary to achieve
the desired product mix in the acquired stores, we still generated positive cash
flow from operations of $78.9 million in 1999. This amount is calculated before
the $76.7 million of litigation settlements, the $20.8 million final purchase
price adjustment for Thorn Americas, and the $10.7 million of other acquisition
related liabilities that we paid in 1999. Under the terms of our senior credit
facility, we were obligated to repay $2.0 million of principal in 1999. However,
our stronger than anticipated financial performance and cash flow position has
enabled us to meet this obligation and to additionally pre-pay approximately
$35.7 million of our term loans during 1999. We also pre-paid approximately
$89.3 million of our term loans in 1998 when we had no obligation to make a
principal repayment. In line with our intentions of making further principal
repayments on our senior debt whenever our cash flow position is sufficiently
strong, through the date of this report we have pre-paid a further $43.2 million
during 2000. In conjunction with these payments, we amended our senior credit
facility to allow us to make our year 2000 principal repayments early. As a
result, we only have an obligation to repay a further $3.0 million of principal
in 2000.
RECENT DEVELOPMENTS
In February 2000, we announced that Mr. John Madden will serve as our
national advertising spokesman for our new, fully integrated advertising
campaign that will be launched in April 2000. Mr. Madden will be appear in
advertising media to be used in the campaign, including television and radio
commercials, print, direct response and in-store signage. We believe that Mr.
Madden has a unique balance of multi-cultural appeal, a strong awareness amongst
both men and women, and possesses a personality that people of all ages enjoy.
We believe that he will help us capture new customers and help us establish a
more powerful identity for Rent-A-Center.
INDUSTRY OVERVIEW
According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,000 stores, and provides 7.5 million products to 3.3
million households. We estimate that the six largest rent-to-own industry
participants account for 4,200 of the total number of stores, and that the
majority of the industry consists of operations with fewer than 20 stores. The
rent-to-own industry is highly fragmented and, due primarily to the decreased
availability of traditional financing sources, has experienced, and is expected
to continue to experience increasing consolidation. We believe that this
consolidation of operations in the industry presents opportunities for us to
continue to acquire additional stores on favorable terms.
STRATEGY
We are currently focusing our strategic efforts on (A) enhancing the
operations and depth of management in the stores acquired from Central Rents and
Thorn Americas, and (B) the pursuit of strategic expansion once the acquired
stores are operating to our satisfaction.
Enhancing Store Operations and Depth of Management
We are seeking to improve store performance through strategies intended to
produce gains in operating efficiency and profitability. We believe that we will
achieve gains in revenues and operating margins in our stores by:
- using focused advertising to increase store traffic;
- expanding the offering of upscale, higher margin products, such as Sony,
Magnavox and JVC electronics and Ashley furniture, to increase the number
of product rentals;
- employing strict store-level cost control;
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- closely monitoring each store's performance through the use of our
management information system to ensure each store's adherence to
established operating guidelines; and
- using a profit based incentive pay plan.
We intend to continue strengthening the depth of management by aggressively
recruiting and training high quality personnel.
Pursuing Strategic Expansion
As of December 31, 1999, we operated 2,075 stores in 49 states, Puerto Rico
and the District of Columbia. In addition, our subsidiary, ColorTyme, Inc.,
franchised 365 stores in 42 states. This information is illustrated by the
following table:
NUMBER OF STORES
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COMPANY
LOCATION OWNED FRANCHISED
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Alabama.................. 46 2
Alaska................... 1 --
Arizona.................. 52 9
Arkansas................. 21 2
California............... 118 12
Colorado................. 25 4
Connecticut.............. 17 6
Delaware................. 15 1
District of Columbia..... 4 --
Florida.................. 133 9
Georgia.................. 92 8
Hawaii................... 11 1
Idaho.................... 1 2
Illinois................. 111 4
Indiana.................. 72 17
Iowa..................... 18 --
Kansas................... 28 17
Kentucky................. 39 7
Louisiana................ 35 7
Maine.................... -- 17
Maryland................. 46 6
Massachusetts............ 40 12
Michigan................. 93 17
Minnesota................ 6 --
Mississippi.............. 12 10
Missouri................. 49 8
Montana.................. 1 3
NUMBER OF STORES
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COMPANY
LOCATION OWNED FRANCHISED
- -------- ------- ----------
Nebraska................. 4 --
Nevada................... 16 5
New Hampshire............ 15 2
New Jersey............... 40 8
New Mexico............... 10 10
New York................. 99 21
North Carolina........... 87 14
North Dakota............. 1 --
Ohio..................... 123 11
Oklahoma................. 35 13
Oregon................... 6 5
Pennsylvania............. 74 6
Puerto Rico.............. 17 --
Rhode Island............. 7 4
South Carolina........... 27 1
South Dakota............. 2 --
Tennessee................ 78 10
Texas.................... 219 58
Utah..................... 16 2
Vermont.................. 6 --
Virginia................. 39 3
Washington............... 27 7
West Virginia............ 13 2
Wisconsin................ 27 2
Wyoming.................. 1 --
TOTAL.................... 2,075 365
We have gained significant experience in the acquisition and integration of
other rent-to-own operators and believe that the fragmented nature of the
rent-to-own industry will result in ongoing growth opportunities.
We typically target under-performing and under-capitalized chains of rent-to-own
stores. The acquired stores benefit from our administrative network, improved
product mix, sophisticated management information system and purchasing power.
In addition, we have access to an expanding number of franchise locations, which
we have the right of first refusal to purchase. We believe that the rent-to-own
market is significantly under-penetrated and we plan to open new stores in
current and new markets. We will focus new market penetration in adjacent areas
or regions that are under-served by the rent-to-own industry. In evaluating a
new market, we review demographic statistics, cost of advertising and the number
and nature of competitors.
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During 1999 we concentrated our efforts on improving the operational
performance of the 1,585 stores we acquired from Central Rents and Thorn
Americas. As a result, we did not open any new store locations during 1999, nor
did we acquire any stores. In 2000 we have resumed our strategy of increasing
our store base and annual revenues and profits through the opening of new
stores, as well as through opportunistic acquisitions. We intend to increase the
number of stores in which we operate by an average of approximately 10-15% per
year over the next several years.
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an increasing emphasis on new store development.
RENT-A-CENTER STORE OPERATIONS
Product Selection
Our stores offer merchandise from four basic product categories; home
electronics, appliances, computers, and furniture and accessories. Our policy is
to ensure that our stores maintain sufficient inventory to offer customers a
wide variety of models, styles and brands. We seek to provide a wide variety of
high quality merchandise to our customers, and we emphasize high-end products
from brand-name manufacturers. During 1999, home electronic products accounted
for approximately 38% of our store rentals and fees revenue, appliances for 15%,
computers for 7%, and furniture and accessories for 32%. Customers may request
either new merchandise or previously rented merchandise. Previously rented
merchandise is offered at the same weekly or monthly rental rate as is offered
for new merchandise, but with an opportunity to obtain ownership of the
merchandise after fewer rental payments. Many of the stores acquired from
Central Rents and Thorn Americas carried merchandise from other product
categories and different manufacturers than those selected by us. As part of the
integration process, we have standardized the inventory in each of these stores.
Home electronic products offered by our stores include televisions, DVD's,
home entertainment centers, video cassette recorders and stereos from top brand
manufacturers such as Magnavox, Sony, JVC and Toshiba. We rent major appliances
manufactured by Whirlpool, including refrigerators, washing machines, dryers,
microwave ovens, freezers and ranges. We offer computer hardware and software by
Dell and Compaq. We rent a variety of furniture products, including dining room,
living room and bedroom furniture featuring a number of styles, materials and
colors. We offer furniture made by Ashley, England-Corsair, Benchcraft and other
top brand manufacturers, while accessories include pictures, plants, lamps and
tables and are typically rented as part of a package of items, such as a
complete room of furniture. Showroom displays enable customers to visualize how
the product will look in their homes and provide a showcase for accessories.
Rental Purchase Agreements
Our customers generally enter into weekly or monthly rental purchase
agreements, which renew automatically upon receipt of each payment. We retain
title to the merchandise during the term of the rental purchase agreement.
Ownership of the merchandise generally transfers to the customer if the customer
has continuously renewed the rental purchase agreement for a period of 18 to 36
months (depending upon the product type), or exercises a specified early
purchase option. Although we do not conduct a formal credit investigation of
each customer, a potential customer must provide store management with
sufficient personal information to allow us to verify their residence and
sources of income. References listed by the customer are contacted to verify the
information contained in the customer's rental purchase order form. Rental
payments are generally made in cash, by money order or debit card. Depending on
state regulatory requirements, we charge for the reinstatement of terminated
accounts or collect a delinquent account fee, and collect loss/ damage waiver
fees from customers desiring such product protection in case of theft or certain
natural disasters. Such fees are standard in the industry and may be subject to
government-specified limits. Please read the section entitled Government
Regulation below.
Product Turnover
In the majority of our stores, a minimum rental term of 18 months is
generally required to obtain ownership of new merchandise. We believe that only
approximately 25% of our initial rental purchase
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agreements are taken to the full term of the agreement. Turnover varies
significantly based on the type of merchandise rented, with certain consumer
electronics products, such as camcorders and VCRs, generally rented for shorter
periods, while appliances and furniture are generally rented for longer periods.
In order to cover the relatively high operating expenses generated by greater
product turnover, rental purchase agreements require higher aggregate payments
than are generally charged under other types of purchase plans, such as
installment purchase or credit plans.
Customer Service
We offer same day or 24-hour delivery and installation of our merchandise
at no additional cost to the customer. We provide any required service or repair
without charge, except for damage in excess of normal wear and tear. Repair
services are provided either through our national network of 21 service centers
or by the vendor if the product is still under factory warranty. If the product
cannot be repaired at the customer's residence, we provide a temporary
replacement while the product is being repaired. The customer is fully liable
for damage, loss or destruction of the merchandise, unless the customer
purchases an optional loss/damage waiver. Most of the products we offer are
covered by a manufacturer's warranty for varying periods, which, subject to the
terms of the warranty, is transferred to the customer in the event that the
customer obtains ownership.
Collections
Store managers use our computerized management information system to track
cash collections on a daily basis. If a customer fails to make a rental payment
when due, store management will attempt to contact the customer to obtain
payment and reinstate the contract, or will terminate the account and arrange to
regain possession of the merchandise. We attempt to recover the rental items by
the seventh to tenth day following termination or default of a rental purchase
agreement. Charge-offs due to lost or stolen merchandise, expressed as a
percentage of store revenues, were approximately 2.3% in 1999, as compared to
approximately 2.5% in 1998. In an effort to improve collections at the stores
acquired during 1998, we implemented our collection procedures in these stores,
including our management incentive plans, which provide incentives to reduce the
percentage of delinquent accounts.
Management
Our network of stores is organized geographically with multiple levels of
management. At the individual store level, each store manager is responsible for
customer and credit relations, delivery and collection of merchandise, inventory
management, staffing and certain marketing efforts. Each store manager reports
to a market manager who typically oversees eight stores. Market managers are
primarily responsible for monitoring individual store performance and inventory
levels within their respective markets. We have 268 market managers who, in
turn, report to 45 regional directors, who monitor the operations of their
respective regions and, through the market managers, individual store
performance. The regional directors report to our senior executives. A
significant portion of a market or store manager's compensation is dependent
upon store revenues and profits.
Our executive management directs and coordinates purchasing, financial
planning and controls, employee training, personnel matters and new store site
selection. Our management team also evaluates the performance of each store,
including the use of on-site reviews. Our business strategy emphasizes strict
cost containment and operational controls.
MANAGEMENT INFORMATION SYSTEMS
We utilize an integrated computerized management information and control
system to track each unit of merchandise in our stores and each rental purchase
agreement. Our system also includes extensive management software and
report-generating capabilities. The reports for all stores are reviewed on a
daily basis by executive management and any unusual items are addressed the
following business day. Each store is equipped with a computer system that
tracks individual components of revenue, each item in idle and rented
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inventory, total items on rent, delinquent accounts and other account
information. We electronically gather each day's activity report through the
computer located at our headquarters. This system provides our executive
management with access to operating and financial information about any of our
stores, markets or regions and generates management reports on a daily, weekly,
month-to-date and year-to-date basis for each store and for every rental
purchase transaction. Utilizing the management information system, our executive
management, regional directors, market managers and store managers closely
monitor the productivity of stores under their supervision as compared to our
prescribed guidelines. The integration of the management information system with
our accounting system facilitates the production of the financial statements.
PURCHASING AND DISTRIBUTION
The general product mix in our stores is determined by our executive
management, based on analyses of customer rental patterns and the introduction
of new products on a test basis. Individual store managers are responsible for
determining the particular product selection for their store from the list of
products approved by executive management. Specific purchasing decisions for the
stores are made by store and market managers, subject to review by executive
management. All merchandise is shipped by vendors directly to each store, where
it is held for rental. We do not maintain any warehouse space.
We purchase the majority of our merchandise directly from manufacturers.
Our largest suppliers include Ashley, Whirlpool and Magnavox, who accounted for
approximately 15.5%, 14.7% and 12.1%, respectively, of merchandise purchased for
the stores in 1999. No other supplier accounted for more than 10% of merchandise
purchased during this period. We do not generally enter into written contracts
with our suppliers. Although we expect to continue relationships with our
existing suppliers, we believe that there are numerous sources of products
available, and we do not believe that the success of our operations is dependent
on any one or more of our present suppliers.
MARKETING
We promote the products and services in our stores primarily through direct
mail advertising and, to a lesser extent, radio, television and secondary print
media advertisements. Our advertisements emphasize such features as product and
brand-name selection, prompt delivery and the absence of initial deposits,
credit investigations or long-term obligations. Advertising expense as a
percentage of store revenue for the year ended December 31, 1999 and 1998, was
approximately 4.0% and 4.9%, respectively. As we obtain new stores in our
existing market areas, the advertising expenses of each store in the market can
be reduced by listing all stores in the same market-wide advertisement.
In February 2000, we announced that Mr. John Madden will serve as our
national advertising spokesman for our new, fully integrated advertising
campaign that will be launched in April 2000. Mr. Madden will be appear in all
of our advertising media used in the campaign, including television and radio
commercials, print, direct response and in-store signage. We believe that Mr.
Madden has a unique balance of multi-cultural appeal, a strong awareness amongst
both men and women, and possesses a personality that people of all ages enjoy.
We believe that he will help us capture new customers and help us establish a
more powerful identity for Rent-A-Center.
TRADEMARKS
We own various registered trademarks, including Get the Good Stuff (the
slogan to be used in our new advertising campaign featuring Mr. Madden),
Rent-A-Center and Renters Choice. The products held for rent also bear
trademarks and service marks held by their manufacturers.
COMPETITION
The rent-to-own industry is highly competitive. According to industry
sources and our estimates, the six largest industry participants account for
approximately 4,200 of the 8,000 rent-to-own stores in the United States. We are
the largest operator in the rent-to-own industry with 2,075 stores and 365
franchised rental centers as at December 31, 1999. Our stores compete with other
national and regional rent-to-own businesses,
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as well as with rental stores that do not offer their customers a purchase
option. With respect to customers desiring to purchase merchandise for cash or
on credit, we also compete with department stores and discount stores.
Competition is based primarily on store location, product selection and
availability, customer service and rental rates and terms.
COLORTYME OPERATIONS
ColorTyme is a nationwide franchisor of rental centers. As of December 31,
1999, ColorTyme operated 365 franchised rental centers in 42 states. These
rental centers offer high quality durable products such as home electronics,
appliances, computers, and furniture and accessories. During 1999, 49 new
locations were added, seven were closed and four were sold. During 1999, the
number of franchisees operating stores under the ColorTyme name increased by 22.
All but 27 of the ColorTyme franchised stores use ColorTyme's tradenames,
service marks, trademarks, logos, emblems and indicia of origin. The remaining
stores use the Rent-A-Center name. All stores operate under distinctive
operating procedures and standards. ColorTyme's primary source of revenue is the
sale of rental merchandise to its franchisees who, in turn, offer the
merchandise to the general public for rent or purchase under a rent-to-own
program. As franchisor, ColorTyme receives royalties of 2.2% to 4.0% of the
franchisees' rental income and, generally, an initial fee of between $7,500 per
location for existing franchisees and up to $25,000 per location for new
franchisees.
ColorTyme has an arrangement with STI Credit Corporation, who provides
inventory financing to qualifying new franchisees.
The ColorTyme franchise agreement generally requires the franchised stores
to utilize certain computer hardware and software for the purpose of recording
rentals, sales and other record keeping and central functions. ColorTyme retains
the right to upload and download data, troubleshoot, and retrieve data and
information from the franchised stores' computer systems.
The franchise agreement also requires the franchised stores to exclusively
offer for rent or sale only those brands, types, and models of products that
ColorTyme has approved. The franchised stores are required to maintain an
adequate mix of inventory that consists of approved products for rent as
dictated by ColorTyme policy manuals, and must maintain on display such products
as specified by ColorTyme. ColorTyme negotiates purchase arrangements with
various suppliers it has approved. ColorTyme's largest suppliers are Whirlpool
and Magnavox, who accounted for approximately 18.2% and 8.7%, respectively, of
merchandise purchased by ColorTyme in 1999.
ColorTyme has established a national advertising fund for the franchised
stores, whereby ColorTyme has the right to collect up to 3% of the monthly gross
rental payments and sales from each franchisee as contributions to the fund.
Currently, ColorTyme has set the monthly franchisee contribution at $250 per
store per month. ColorTyme directs the advertising programs of the fund,
generally consisting of advertising in print, television and radio. Furthermore,
the franchisees are required to expend 3% of their monthly gross rental and
sales revenues on local advertising.
ColorTyme licenses the use of its trademarks to the franchisees under the
franchise agreement. ColorTyme owns the registered trademarks ColorTyme,
ColorTyme-What's Right for You, and FlexTyme, along with certain design and
service marks.
GOVERNMENT REGULATION
State Regulation
There are currently 46 states that have legislation regulating rental
purchase transactions. With some variations in individual states, most state
legislation requires the lessor to make prescribed disclosures to customers
about the rental purchase agreement and transaction, and provides time periods
during which customers may reinstate agreements. Some state rental purchase laws
prescribe grace periods for non-payment, prohibit or limit certain types of
collection or other practices, and limit certain fees that may be
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charged. Nine states limit the total rental payments that can be charged. Such
limitations, however, do not become applicable in general unless the total
rental payments required under agreements exceed 2 times to 2.4 times of the
disclosed cash price or the retail value.
Minnesota (which does have a rental purchase statute), and Wisconsin and
New Jersey (which do not have rental purchase statutes), have had court
decisions which treat rental purchase transactions as credit sales subject to
consumer lending restrictions. In response, we have developed and utilize
rent-to-rent agreements, with certain variations, in both Minnesota and
Wisconsin. In New Jersey, we have provided increased disclosures and longer
grace periods.
Montana, North Carolina, Puerto Rico and the District of Columbia have no
rental purchase legislation. However, the retail installment sales statute in
North Carolina recognizes that rental purchase transactions which provide for
more than a nominal purchase price at the end of the agreed rental period are
not credit sales under such statute. We operate 22 stores in these states that
have no rental purchase legislation, excluding North Carolina.
There can be no assurance that new or revised rental purchase laws will not
be enacted or, if enacted that such laws would not have a material and adverse
effect on us.
Federal Legislation
No comprehensive federal legislation has been enacted regulating or
otherwise impacting the rental-purchase transaction. From time to time,
legislation has been introduced in Congress that would regulate the
rental-purchase transaction, including legislation that would subject the rental
purchase transaction to interest rate, finance charge and fee limitations, as
well as the Federal Truth in Lending Act. Any such federal legislation, if
enacted, could have a material and adverse effect on us.
EMPLOYEES
As of March 22, 2000, we had approximately 11,000 employees, of whom 220
are assigned to our headquarters and the remainder of whom are directly involved
in the management and operation of our stores. As of the same date, ColorTyme
had approximately 25 employees, all of whom were employed full-time. None of our
employees, including ColorTyme employees, are covered by a collective bargaining
agreement. We believe relationships with our employees and ColorTyme's
relationships with its employees are generally good.
RISK FACTORS
An investment in our common stock involves various risks. You should
carefully consider the information below in addition to any other information
contained in this report in evaluating whether or not you should invest in our
common stock.
We incurred significant debt when we acquired Thorn Americas. If we
experience a downturn in our business, we may not be able to meet our
obligations under these debt agreements, which would materially and adversely
affect your investment.
We incurred a significant amount of debt in the acquisition of Thorn
Americas. As of March 21, 2000, we owed approximately $804.0 million under our
various debt facilities and our subordinated notes. Under our various debt
agreements, we will be required to make minimum principal payments totaling
approximately $3.0 million in 2000, $12.9 million in 2001 and 2002, and $14.5
million in 2003 and 2004, plus applicable interest. You should be aware that
this significant amount of debt could have important consequences to you as a
stockholder, including the following:
- We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes;
- A significant portion of our cash flow from operations must be dedicated
to the repayment of the indebtedness, thereby reducing the amount of cash
we have available for other purposes;
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- We may be disadvantaged as compared to our competitors as a result of the
significant amount of debt we owe; and
- Our ability to adjust to changing market conditions and to withstand
competition may be hampered by the amount of debt we owe. It may also
make us more vulnerable in a downturned market.
You should be aware that our ability to repay or refinance our current debt
depends on our continued successful financial and operating performance.
Our debt agreements impose restrictions on us, which may significantly
limit or prohibit us from engaging in certain transactions.
Our senior credit facilities and the indenture relating to our subordinated
notes impose significant operating and financial restrictions on us and our
subsidiaries.
The loan documents we signed to borrow money to acquire Thorn Americas
impose significant restrictive covenants on us and require us to maintain
specified financial ratios and satisfy certain financial tests. Our ability to
meet these financial ratios and tests may be affected by events beyond our
control and, as a result, we cannot guarantee to you that we will be able to
meet such tests. In addition, the restrictions contained in our senior credit
facilities could limit our ability to obtain future financing, make needed
capital expenditures, withstand a future downturn in our business or in the
economy, or otherwise conduct necessary corporate activities. Our failure to
comply with the restrictions in our senior credit facilities or the indenture
could lead to a default under the terms of those documents. In the event of such
a default, the applicable lender could declare all amounts borrowed and all
amounts due under other instruments that contain certain provisions for
cross-acceleration or cross-default due and payable. In addition, the lenders
under such agreements could terminate their commitments to lend to us. If that
occurs, we cannot assure you that we would be able to make payments on our notes
or that we would be able to find additional alternative financing. Even if we
could obtain additional alternative financing, we cannot assure you that it
would be on terms that are favorable or acceptable to us.
You should also be aware that the existing indebtedness under the senior
credit facilities is secured by substantially all of our and our subsidiaries'
assets. Should a default or acceleration of such indebtedness occur, the holders
of such indebtedness could sell the assets to satisfy all or a part of what is
owed. The senior credit facilities also contain provisions prohibiting the
modification of our notes and limiting our ability to refinance the notes.
Our senior credit facilities prohibit us from paying dividends on our
common stock. We do not anticipate paying cash dividends on shares of our common
stock in the foreseeable future.
We may not have the ability to raise the funds necessary to finance the
change of control offer, which may be required by the indenture.
If a change of control occurs, we may be required to make an offer to
purchase all of our outstanding subordinated notes. We would be required to
purchase the notes at 101% of their principal amount, plus accrued interest to
the date of repurchase. If a change of control occurs, we cannot be sure that we
would have enough funds to pay for all of the notes. If we were required to
purchase the notes, we would need to secure third-party financing if we do not
have available funds to meet our purchase obligations. However, we cannot be
sure that we would be able to secure such financing on favorable terms, if at
all.
Also, our financing arrangements restrict our ability to repurchase the
notes, including pursuant to a change of control. Furthermore, a change of
control will result in an event of default under the senior credit facilities
and may lead to an acceleration of any other senior indebtedness we may have at
that time. In such event, the subordination provisions of the notes would
require us to pay our senior credit facilities and any other senior indebtedness
in full before repurchasing any notes. In addition, a change of control could
require us to repurchase our existing notes and we could be required to offer to
redeem our convertible preferred stock. The inability to repay senior
indebtedness, if accelerated, and to purchase all of the tendered notes, would
constitute an event of default under the indenture.
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There are legal proceedings pending against us seeking material damages.
The costs we incur in defending ourselves or associated with settling any of
these proceedings, a ruling against us in any of these proceedings, or one or
more judgments against us could have a material and adverse effect on our
financial condition and our business operations.
The material lawsuits against us generally involve claims that rent-to-own
contracts are in fact disguised installment sales contracts, violate state usury
laws, or violate other state laws enacted to protect consumers.
Because of the uncertainties associated with remaining material litigation,
we cannot estimate for you our ultimate liability for these matters, if any. You
should be aware that an adverse ruling on any of these cases could have a
material and adverse effect on our business operations and our financial
condition.
A final judgment against us could also materially and adversely affect our
financial condition by requiring the payment of the judgment or the posting of a
bond. The failure to pay any such judgment would be a default under our senior
credit facilities and our indenture.
A final judgment in any of our material litigation cases could also
materially adversely affect our ability to transact our rent-to-own business as
presently conducted. While we believe we have meritorious defenses to all of the
material actions presently pending against us, we cannot assure you that such a
judgment will not be entered against us. In addition, if such a judgment were
entered against us and upheld on appeal, it could be the basis for additional
litigation against us by new plaintiffs based on the same or similar claims.
Rent-to-own transactions are regulated by law in most states. Any change in
these laws or the passage of new laws, could materially and adversely affect our
business operations or increase our exposure to litigation.
In the event that legislation having a negative impact on our business is
adopted, you should be aware that it could have a material and adverse impact on
our business operations. As is the case with most businesses, we are subject to
certain governmental regulations, specifically in our case, regulations
regarding rent-to-own transactions. There are currently 46 states that have
passed laws regulating rental purchase transactions and another state that has a
retail installment sales statute that excludes rent-to-own transactions from its
coverage if certain criteria are met. These laws generally require certain
contractual and advertising disclosures. They also provide varying levels of
substantive consumer protection, such as requiring a grace period for late fees
and contract reinstatement rights in the event the rental purchase agreement is
terminated. The rental purchase laws of nine states limit the total amount of
rentals that may be charged over the life of a rental purchase agreement.
Certain states also effectively regulate rental purchase transactions under
other consumer protection statutes. You should also be aware that we are
currently subject to outstanding judgments and other litigation alleging that
we, or our subsidiaries, have violated some of these statutory provisions.
Although there is no comprehensive federal legislation regulating
rental-purchase transactions, we cannot assure you that such legislation will
not be enacted in the future. From time to time, legislation has been introduced
in Congress seeking to regulate our business. In addition, we cannot assure you
that the various legislatures in the states where we currently do business will
not adopt new legislation or amend existing legislation that negatively affects
us.
If we fail to effectively manage our growth, our business could be
materially and adversely affected.
We have expanded our operations rapidly in recent years and plan to
continue this expansion. This rapid growth places a significant demand on our
management and our financial and operational resources. Our growth strategy is
subject to various risks, including;
- our inability to successfully integrate or operate acquired businesses;
- our inability to retain customers of acquired businesses or to obtain new
customers; and
- our inability to avoid delays in realizing expected benefits from our
increased size.
The integration of businesses we may acquire in the future may also require
us to invest more capital than we expected or require more time and effort by
management than we expected. If we fail to effectively manage
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the size and growth of our business, our operations and financial results could
be affected, both materially and adversely.
Our business depends on a limited number of key personnel, with whom we do
not have employment agreements. The loss of any one of these could materially
and adversely affect our business.
Our continued success is highly dependent upon the personal efforts and
abilities of our senior management, including J. Ernest Talley, our Chairman of
the Board and Chief Executive Officer, Mark E. Speese, our Vice-Chairman of the
Board, L. Dowell Arnette, our President, and Dana F. Goble, our Executive
Vice-President and Chief Operating Officer. We do not have employment contracts
with any of these officers and the loss of any one of them could impact us in a
negative way.
44.5% of our voting stock is owned by a small group of our directors and
their affiliates. This group would be able to effectively control us since the
election of directors and major transactions only require the vote of a majority
of our stockholders.
You should be aware that a total of approximately 44.5% of our voting stock
on a fully diluted basis, assuming the conversion of our Series A preferred
stock and all outstanding options, are controlled by Messrs. Talley and Speese
and by certain affiliates of Apollo Management IV, L.P. As a result, in the
event they act together, they have the ability to exercise practical control
over the outcome of actions requiring the approval of our stockholders,
including potential acquisitions, elections of our Board of Directors and sales
or changes in control of Rent-A-Center.
Our organizational documents contain provisions that may prevent or deter
another group from paying a premium over the market price to our stockholders to
acquire our stock.
Our organizational documents contain provisions that classify our Board of
Directors, authorize our Board of Directors to issue blank check preferred
stock, and establish advance notice requirements on our stockholders for
director nominations and actions to be taken at annual meetings of the
stockholders. In addition, as a Delaware corporation, we are subject to Section
203 of the Delaware General Corporation Law. These provisions and arrangements
could delay, deter or prevent a merger, consolidation, tender offer or other
business combination or change of control involving us that could include a
premium over the market price of our common stock that some or a majority of our
stockholders might consider to be in their best interests.
ITEM 2. PROPERTIES
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. Most of
these leases contain renewal options for additional periods ranging from three
to five years at rental rates adjusted according to agreed-upon formulas. Both
our headquarters and ColorTyme's headquarters are located at 5700 Tennyson
Parkway, Plano, Texas, and consist of approximately 77,158 and 5,116 square feet
devoted to our operations and ColorTyme's operations, respectively. Store sizes
range from approximately 1,400 to 19,400 square feet, and average approximately
4,000 square feet. Approximately 80% of each store's space is generally used for
showroom space and 20% for offices and storage space. We believe that suitable
store space generally is available for lease and that we would be able to
relocate any of our stores without significant difficulty should we be unable to
renew a particular lease. We also expect that additional space will be readily
available at competitive rates in the event that we desire to open new stores.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we, along with our subsidiaries, are party to various
legal proceedings arising in the ordinary course of business. The majority of
the material proceedings involve claims that may be generally
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characterized into one of two categories, recharacterization claims and
statutory compliance claims. Recharacterization claims generally involve claims:
- in states that do not have rent-to-own legislation;
- that rent-to-own transactions are disguised installment sales in
violation of applicable state installment statutes; and
- that allege greater damages.
Statutory compliance claims generally involve claims:
- in states that have rent-to-own legislation;
- that the operator failed to comply with applicable state rental purchase
statutes, such as notices and late fees; and
- that allege lesser damages.
Except as described below, we are not currently a party to any material
litigation.
Abels v. Rent-A-Center, Inc. In April 1999, the plaintiff filed suit in
state court in Michigan alleging violations of the Michigan Consumer Protection
Act pertaining to our basis for setting the cash purchase price on goods rented
by plaintiff pursuant to two rental purchase agreements with us. Plaintiff's
complaint sought individual declaratory, injunctive and monetary damages relief,
as well as monetary damages on behalf of a putative class of our past, current
and future customers in Michigan. We filed an answer in the matter denying
plaintiff's claims and vigorously defended this action. After preliminary
discovery, we settled this matter for $15,000. Documents are now being prepared
documenting this settlement.
Murray v. Rent-A-Center, Inc. In May 1999, the plaintiffs filed a putative
nationwide class action in federal court in Missouri, alleging that we have
discriminated against African Americans in our hiring, compensation, promotion
and termination policies. Plaintiffs alleged no specific amount of damages in
their complaint. We have filed an answer in the matter denying plaintiffs'
allegations and intend to vigorously defend this action. No discovery in this
litigation has occurred to date. Members of the regional class defined in our
completed settlement of the Allen v. Thorn Americas, Inc. litigation would not
be included in the Murray case. We believe plaintiffs' claims in this suit are
without merit. However, given the early stage of this proceeding, there can be
no assurance that we will be found to have no liability.
Otero v. Rent-A-Center, Inc. In September 1999, the plaintiff filed this
putative class action in Los Angeles Superior Court in California alleging our
classification of and pay to our executive assistant managers and our
inside/outside managers is contrary to California wage and hour laws. In March
2000, we settled this matter in principle for approximately $3.1 million.
The following litigation matters were assumed with Thorn Americas pursuant
to the Thorn Americas acquisition. In connection with accounting for the Thorn
Americas acquisition, we made appropriate purchase accounting adjustments for
contingent liabilities associated with outstanding litigation.
Robinson v. Thorn Americas, Inc. The plaintiffs filed this class action on
April 19, 1994 in state court in New Jersey. The class consisted of all
residents of New Jersey who were or had been parties to Thorn Americas'
rent-to-own contracts since April 19, 1988. During this period, Thorn Americas
operated approximately 23 stores in New Jersey. The plaintiffs' claims were for
alleged violations of the New Jersey Retail Installment Sales Act and the New
Jersey Consumer Fraud Act, usury, unlawful contractual penalty and conversion.
On January 5, 1998, the court entered a judgment against Thorn Americas and
ordered Thorn Americas to pay the plaintiffs the amount equal to (A) all
reinstatement fees collected by Thorn Americas since April 29, 1988, and (B) 40%
of all rental revenue collected by Thorn Americas from the plaintiffs from April
29, 1988, trebled. Later, the court added an incentive award to the class
representative, the inclusion of attorneys' fees, and granted plaintiff's
counsel 25% of the amount to be distributed to the class. The judgment was
secured by a supersedeas bond posted by Thorn Americas in the amount of $163.0
million, which amount was derived from an accounting by the plaintiffs of the
projected amount of the judgment liability through
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April 1999. In December 1998, we settled this matter in principle, along with
Gallagher and Boykin, two similar matters pending in New Jersey involving
similar claims, for approximately $60.0 million less certain amounts to be
refunded to us based on unlocated class members, subject to preliminary and
final approval of the court. Final approval of the court occurred on October 13,
1999. We funded the settlement in November 1999 and received refunds in February
2000 totaling approximately $11.0 million (including refunds in Gallagher and
Boykin). We expect additional refunds as a result of unlocated class members
pursuant to the settlement agreement. However, we are unable to reasonably
estimate such amounts at this time.
Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in
November 1997 in New York state court. Thorn Americas removed the case to the
U.S. District Court for the Southern District of New York. Plaintiffs filed a
motion to remand, which was granted. 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. In their prayers for relief, the plaintiffs have requested the
following:
- class certification;
- 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;
- unspecified compensatory and punitive damages;
- rescission of the class members contracts;
- an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period;
- treble damages, attorney's fees, filing fees and costs of suit;
- pre- and post-judgment interest; and
- any further relief granted by the court.
This suit also alleges violations relating to late fees, harassment,
undisclosed charges, and the ease of use and accuracy of its payment records.
The plaintiffs did not specify a specific amount on their damages request.
The proposed class includes all New York residents who were party to Thorn
Americas' rent-to-own contracts from November 26, 1991 through November 26,
1997. We are vigorously defending this action and on September 24, 1998, filed
motions to deny class certification and dismiss the complaint. Plaintiff
responded and filed a motion for summary judgment asking the court to declare
that the transaction includes an undisclosed interest component. The court
denied our motion to dismiss and plaintiffs' motion for summary judgement on
August 24, 1999. Both sides are appealing the court's ruling to the Appellate
Division. The appeal is scheduled for oral argument in April 2000. There can be
no assurance that our position will prevail, or that we will be found not to
have any liability.
In connection with the Thorn Americas acquisition, Thorn plc agreed to
indemnify and hold us harmless from the following lawsuit:
Fogie v. Thorn Americas, Inc. The plaintiffs filed this class action on
December 4, 1991 in Minnesota. The class consisted of residents of Minnesota who
entered rental purchase contracts with Thorn Americas from August 1, 1990
through November 30, 1996. The plaintiffs alleged that Thorn Americas'
rent-to-own contracts violated Minnesota's Consumer Credit Sales Act and the
Minnesota General Usury Statute. On April 15, 1998, the court entered a final
judgment against Thorn Americas and ordered it to pay approximately $30.0
million plus interest after that date to the plaintiffs. Under certain
provisions of the judgment, Thorn Americas may receive certain credits against
the judgment. On May 15, 1998, Thorn Americas filed a notice of appeal from the
damages finding only. Oral argument in the appeal occurred on May 10, 1999. The
Eighth Circuit Court of Appeals affirmed the damages finding on August 8, 1999.
Thorn plc deposited the judgment
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amount in an escrow account supervised by plaintiff's counsel and the court on
October 15, 1999. The administration of the judgment and payment of class
members' claims is now underway.
The following litigation matters were settled in connection with the
settlement of the Robinson matter:
Gallagher v. Crown Leasing Corporation. On January 3, 1996, we were served
with a class action complaint adding us as a defendant in this action originally
filed in April 1994 against Crown and certain of its affiliates in state court
in New Jersey. The class consisted of all New Jersey residents who entered into
rent-to-own contracts with Crown between April 25, 1988 and April 20, 1995.
During this period, Crown operated approximately five stores in New Jersey. The
lawsuit alleged, among other things, that under certain rent-to-own contracts
entered into between the plaintiff class and Crown, some of which were
purportedly acquired by us pursuant to the acquisition of Crown and certain of
its affiliates, the defendants failed to make the necessary disclosures and
charged the plaintiffs fees and expenses that violated the New Jersey Consumer
Fraud Act and the New Jersey Retail Installment Sales Act. The plaintiffs sought
damages including, among other things, a refund of all excessive fees and/or
interest charged or collected by the defendants in violation of such acts, state
usury laws and other related statutes and treble damages, as applicable.
Pursuant to the Asset Purchase Agreement entered into between Crown, its
controlling shareholder and us in connection with the Crown acquisition, we did
not contractually assume any liabilities pertaining to Crown's rent-to-own
contracts for the period prior to the acquisition of Crown. The plaintiffs
obtained class certification and a summary judgment against Crown on the
liability issues. Subsequent to these decisions by the New Jersey state court,
Crown filed for protection from its creditors under Chapter 11 of the federal
bankruptcy laws. The bankruptcy court allowed the lawsuit to proceed in New
Jersey, where the state court granted summary judgment on the plaintiff's
damages formula against Crown. The plaintiffs calculated actual damages for
purposes of their summary judgment motion at approximately $7.6 million. The
court ruled that the plaintiffs were entitled to three times actual damages.
However, the state court's ruling required certain minor adjustments pursuant to
an accounting. Together with the Boykin matter, we settled this matter for
approximately $11.5 million. The final settlement documents were signed on April
23, 1999 and final approval of the court occurred on October 13, 1999.
Michelle Newhouse v. Rent-A-Center, Inc./Handy Boykin v. Rent-A-Center,
Inc. On November 26, 1997 a class action complaint was filed against us by
Michelle Newhouse in New Jersey state court alleging, among other things, that
under certain rent-to-own contracts entered into between the plaintiffs and us,
we failed to make the necessary disclosures and charged the plaintiffs fees and
expenses that violated the New Jersey Consumer Fraud Act and the New Jersey
Installment Sales Act. The claims arising from this action were similar to the
claims made in Robinson v. Thorn Americas, Inc. and Gallagher v. Crown Leasing
Corporation. The proposed class consisted of all residents of New Jersey who
were or had been parties to contracts to rent-to-own merchandise from us within
the past six years. During this period, we operated approximately 17 stores in
New Jersey.
We removed the case to federal court on January 21, 1998, and were then
advised by the plaintiffs' attorney that Michelle Newhouse no longer wished to
serve as class representative. A motion to voluntarily dismiss the Newhouse case
filed by the plaintiffs' attorney was granted shortly thereafter. However, on
May 1, 1998, a new class action complaint against us made by Handy Boykin was
filed by the plaintiffs' attorney in the Newhouse matter in New Jersey state
court alleging the same causes of action with the same proposed class as that of
the Newhouse matter. This new filing essentially constituted a replacement of
the named plaintiff in the Newhouse matter with a new named plaintiff, Handy
Boykin. We anticipated this replacement. We removed the Boykin case to federal
court. Together with the Gallagher matter, we settled this matter for
approximately $11.5 million. The final settlement documents were signed on April
23, 1999 and final approval of the court occurred on October 13, 1999.
As noted above, the settlements in Robinson, Gallagher and Boykin received
final approval from the court on October 13, 1999 and we funded the settlements
in November 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been listed on the Nasdaq Stock Market(R) under the
symbol "RCII" since January 25, 1995, the date we commenced our initial public
offering. The following table sets forth, for the periods indicated, the high
and low sales price per share of the common stock as reported.
HIGH LOW
1999 ------- -------
First Quarter............................................... $33.375 $24.000
Second Quarter.............................................. 34.250 20.000
Third Quarter............................................... 25.500 16.750
Fourth Quarter.............................................. 21.750 15.250
HIGH LOW
1998 ------- -------
First Quarter............................................... $27.000 $18.000
Second Quarter.............................................. 32.000 24.313
Third Quarter............................................... 28.625 21.563
Fourth Quarter.............................................. 32.500 22.125
As of March 22, 2000, there were approximately 72 record holders of our
common stock.
Since our initial public offering in 1995, we have not paid any cash
dividends and expect that we will retain all available earnings generated by our
operations for the development and growth of our business. Under the terms of
the certificate of designations governing our Series A preferred stock,
dividends are payable in cash or additional shares of Series A preferred stock
until late 2003, after which time dividends are payable in cash. However, our
senior credit facility and the indenture governing our subordinated notes
prohibit us from paying any cash dividends. Any change in our dividend policy
will be made at the discretion of the Board of Directors and will depend on a
number of factors, including future earnings, capital requirements, contractual
restrictions, financial condition, future prospects, and such other factors as
the Board of Directors may deem relevant. You should read Item 7., Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources later in this report.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended
December 31, 1999 have been derived from our consolidated financial statements
as audited by Grant Thornton LLP, independent certified public accountants. The
historical financial data are qualified in their entirety by, and should be read
in conjunction with, the financial statements and the notes thereto included
elsewhere herein.
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YEAR ENDED DECEMBER 31,(1)
-------------------------------------------------------------
1999 1998(2) 1997 1996(3) 1995
(In thousands, except per share data) ---- ------- ---- ------- ----
CONSOLIDATED STATEMENTS OF EARNINGS DATA
Revenues
Store
Rentals and fees $ 1,270,885 $ 711,443 $ 275,344 $ 198,486 $ 126,264
Merchandise sales 88,516 41,456 14,125 10,604 6,383
Other 2,177 7,282 679 687 642
Franchise(4)
Merchandise sales 49,696 44,365 37,385 25,229 --
Royalty income and fees 5,893 5,170 4,008 2,959 --
----------- ----------- --------- --------- ---------
1,417,167 809,716 331,541 237,965 133,289
Operating expenses
Direct store expenses
Depreciation of rental merchandise 265,486 164,651 57,223 42,978 29,640
Cost of merchandise sold 74,027 32,056 11,365 8,357 4,954
Salaries and other expenses 770,572 423,750 162,458 116,577 70,012
Franchise cost of merchandise sold 47,914 42,886 35,841 24,010 --
----------- ----------- --------- --------- ---------
1,157,999 663,343 266,887 191,922 104,606
General and administrative expenses 42,029 28,715 13,304 10,111 5,766
Amortization of intangibles 27,116 15,345 5,412 4,891 3,109
Class action litigation settlements -- 11,500 -- -- --
----------- ----------- --------- --------- ---------
Total operating expenses 1,227,144 718,903 285,603 206,924 113,481
----------- ----------- --------- --------- ---------
Operating profit 190,023 90,813 45,938 31,041 19,808
Interest expense 75,673 39,144 2,194 606 2,202
Non-recurring financing costs -- 5,018 -- -- --
Interest income (904) (2,004) (304) (667) (890)
----------- ----------- --------- --------- ---------
Earnings before income taxes 115,254 48,655 44,048 31,102 18,496
Income tax expense 55,899 23,897 18,170 13,076 7,784
----------- ----------- --------- --------- ---------
NET EARNINGS 59,355 24,758 25,878 18,026 10,712
Preferred dividends 10,039 3,954 -- -- --
----------- ----------- --------- --------- ---------
Net earnings allocable to common stockholders $ 49,316 $ 20,804 $ 25,878 $ 18,026 $ 10,712
=========== =========== ========= ========= =========
Basic earnings per common share $ 2.04 $ 0.84 $ 1.04 $ 0.73 $ 0.52
=========== =========== ========= ========= =========
Diluted earnings per common share $ 1.74 $ 0.83 $ 1.03 $ 0.72 $ 0.52
=========== =========== ========= ========= =========
OPERATING DATA
Stores open at end of period 2,075 2,126 504 423 325
Comparable store revenue growth(5) 7.7% 8.1% 8.1% 3.8% 18.1%
CONSOLIDATED BALANCE SHEET DATA
Rental merchandise, net $ 531,223 $ 408,806 $ 112,759 $ 95,110 $ 64,240
Intangible assets, net 707,324 727,976 61,183 47,192 29,549
Total assets 1,485,000 1,502,989 208,868 174,467 147,294
Total debt 847,160 805,700 26,280 18,993 40,850
Total liabilities 1,007,408 1,088,600 56,115 48,964 50,810
Redeemable convertible voting preferred stock 270,902 259,476 -- -- --
Stockholders' equity 206,690 154,913 152,753 125,503 96,484
- ------------------------------------------------
(1) We have pursued an aggressive growth strategy since we were acquired in
1989 by our Chairman of the Board and Chief Executive Officer, J. Ernest
Talley. Because of the significant growth since our formation, our
historical results of operations, our period-to-period comparisons of
such results and certain financial data may not be comparable, meaningful
or indicative of future results.
(2) In May and August 1998, we completed the acquisitions of Central Rents
and Thorn Americas, respectively, both of which affect the comparability
between the historical financial and operating data for the periods
presented.
(3) In May 1996, we completed the acquisition of ColorTyme, which affects the
comparability between the historical financial and operating data for the
periods presented.
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(4) Prior to the acquisition of ColorTyme in May 1996, we conducted no
franchise operations. Therefore, franchise operations financial
information is not presented for the year ended December 31, 1995.
(5) Comparable store revenue for each period presented includes revenues only
of stores open throughout the full period and the comparable prior
period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, estimate, anticipate or believe. We believe that the
expectations reflected in such forward-looking statements are accurate. However,
we cannot assure you that such expectations will occur. Our actual future
performance could differ materially from such statements. Factors that could
cause or contribute to such differences include, but are not limited to:
- our ability to acquire additional rent-to-own stores on favorable terms;
- our ability to enhance the performance of these acquired stores;
- uncertainties regarding the ability to open new stores;
- the passage of legislation adversely affecting the rent-to-own industry;
- interest rates;
- our ability to collect on our rental purchase agreements at the current
rate; and
- the other risks detailed from time to time in our SEC reports.
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. Important factors that could
cause our actual results to differ materially from our expectations are
discussed under Risk Factors and elsewhere in this report. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
statements in those sections.
The following discussion and analysis should be read in conjunction with
the information set forth under the caption Selected Financial Data, and our
consolidated financial statements and the accompanying notes thereto included
elsewhere in this report.
GENERAL
We have pursued an aggressive growth strategy since we were acquired in
1989 by J. Ernest Talley, our Chairman of the Board and Chief Executive Officer.
We have sought to acquire underperforming stores to which we could apply our
operating model. 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, our historical results of operations and period-to-period comparisons
of such results and certain financial data may not be meaningful or indicative
of future results.
We expect to continue to grow through both the acquisition of existing
stores and the opening of new stores. If we open new stores or acquire
under-performing or unprofitable stores, start-up costs associated with new
stores and excess salaries, other overhead costs and operating results
associated with acquired stores could negatively impact our earnings until these
stores are fully integrated into our operations and become profitable.
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COMPONENTS OF INCOME
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. Amounts received upon sales of merchandise pursuant to
such options, and upon the sale of used merchandise, are recognized as revenue
when the merchandise is sold.
Franchise Revenue. Revenue from the sale of rental equipment is recognized
upon shipment of the equipment 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. Except for tax purposes, we depreciate
our rental merchandise using the income forecasting method. The income
forecasting method of depreciation does not consider salvage value and does not
allow the depreciation of rental merchandise during periods when it is not
generating rental revenue. For periods prior to 1996, we used the income
forecasting method to calculate depreciation of our rental merchandise for tax
purposes. However, in 1996, we began using the MACRS method of depreciation
using a five-year class life for our rental purchase merchandise. In August
1997, the Internal Revenue Service issued a revenue ruling requiring rental
purchase companies to use MACRS, with a three-year class life for all purchases
after August 5, 1997. We began application of the ruling for all purchases
effective August 5, 1997, and thereafter.
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, occupancy, fixed asset depreciation and other operating expenses.
General and Administrative Expenses. General and administrative expenses
include all corporate overhead expenses related to our headquarters such as
salaries, taxes and benefits, occupancy, administrative and other operating
expenses, as well as Regional Directors' salaries, travel and office expenses.
Amortization of Intangibles. Amortization of intangibles consists
primarily of the amortization of the excess of purchase price over the fair
market value of acquired assets and liabilities.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, historical
Consolidated Statements of Earnings data as a percentage of total store and
franchise revenues.
Year ended December 31, Year ended December 31,
--------------------------- ---------------------------
(Company-owned stores only) (Franchise operations)
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
REVENUES
Rentals and fees................... 93.3% 93.6% 94.9% --% --% --%
Merchandise sales.................. 6.5 5.5 4.9 89.4 89.6 90.3
Other/Royalty income and fees...... 0.2 0.9 0.2 10.6 10.4 9.7
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
OPERATING EXPENSES
Direct store expenses
Depreciation of rental
merchandise................... 19.5% 21.7% 19.7% --% --% --%
Cost of merchandise sold......... 5.4 4.2 3.9 86.2 86.6 86.6
Salaries and other expenses...... 56.6 55.7 56.0 -- -- --
----- ----- ----- ----- ----- -----
81.5 81.6 79.6 86.2% 86.6 86.6
General and administrative
expenses......................... 2.9 3.5 3.8 5.1 4.9 5.3
Amortization of intangibles........ 2.0 2.0 1.7 0.6 0.7 1.0
Class action litigation
settlements...................... -- 1.5 -- -- -- --
----- ----- ----- ----- ----- -----
Total operating expenses........... 86.4 88.6 85.1 91.9 92.2 92.9
----- ----- ----- ----- ----- -----
Operating profit................... 13.6 11.4 14.9 8.1 7.8 7.1
Interest expense/(income).......... 5.5 5.0 0.8 (0.8) (0.7) (0.6)
Non-recurring financing costs...... -- 0.7 -- -- -- --
----- ----- ----- ----- ----- -----
Earnings before income taxes....... 8.1% 5.7% 14.1% 8.9% 8.5% 7.7%
===== ===== ===== ===== ===== =====
Comparison of the Years ended December 31, 1999 and 1998
Total revenue increased by $607.5 million, or 75.0%, to $1,417.2 million
for 1999 from $809.7 million for 1998. The increase in total revenue was
primarily attributable to the inclusion of revenue from the Central Rents and
Thorn Americas stores acquired during the year ended December 31, 1998 for the
entire year ended December 31, 1999. Same store revenues increased by $25.3
million, or 7.7%, to $354.3 million for 1999 from $329.0 million in 1998. Same
store revenues represent those revenues earned in stores that were operated by
us for the entire years ending December 31, 1999 and 1998. This improvement was
primarily attributable to an increase in both the number of items on rent and in
revenue earned per item on rent.
Depreciation of rental merchandise increased by $100.8 million, or 61.2%,
to $265.5 million for 1999 from $164.7 million for 1998. Depreciation of rental
merchandise expressed as a percent of store rentals and fees revenue decreased
from 23.1% in 1998 to 20.9% in 1999. This decrease is primarily attributable to
Central Rents and Thorn Americas experiencing depreciation rates of 22.9% and
29.8%, respectively, upon their acquisition in 1998. These rates have decreased
following the implementation of our pricing strategies and inventory management
practices.
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Salaries and other expenses expressed as a percentage of total store
revenue increased to 56.6% for 1999 from 55.7% for 1998. This increase is
principally attributable to incentive programs given to store-based employees in
1999 whereby they could achieve their year 2000 pay plans early if they achieved
targeted gains in the number of items on rent and targeted reductions in the
percentage of delinquent accounts. Although the costs associated with these
programs were incurred ahead of the associated benefit, the satisfaction of
these operational targets will benefit us during 2000 when we collect rentals
and fees on a larger number of items on rent, with fewer accounts in
delinquency. Occupancy costs also increased as a percentage of total store
revenue due to the relocation of certain stores acquired in 1998 to locations
that are larger in square footage. Generally, revenue from these stores
increased gradually while the additional occupancy costs were incurred
immediately. General and administrative expenses expressed as a percent of total
revenue decreased from 3.5% in 1998 (3.2% before the $2.5 million non-recurring
expense detailed below), to 3.0% in 1999. This decrease was the result of
increased revenues from the stores acquired from Central Rents and Thorn
Americas, allowing us to leverage our fixed and semi-fixed costs over the larger
revenue base.
Operating profit increased by $99.2 million, or 109.2%, to $190.0 million
for 1999 from $90.8 million for 1998. In the third quarter of 1998, we incurred
a pre-tax non-recurring expense of $2.5 million to effect a name change of the
Renters Choice stores to Rent-A-Center. In the fourth quarter of 1998, we
incurred a pre-tax non-recurring class action litigation settlement of $11.5
million. Stated before the effects of these expenses, operating profit increased
by $85.2 million, or 81.3%. Operating profit as a percentage of total revenue
increased to 13.4% in 1999 from 12.9% in 1998, calculated before the effects of
the non-recurring expenses. This increase is attributable to our efforts in
improving the efficiency and profitability of the stores acquired from Central
Rents and Thorn Americas.
Net earnings increased by $34.6 million, or 139.7%, to $59.4 million in
1999 from $24.8 million in 1998. In addition to the $2.5 million and $11.5
million pre-tax non-recurring expenses discussed above, we also incurred pre-tax
non-recurring financing costs of $5.0 million associated with interim financing
utilized in the acquisition of Thorn Americas until permanent financing was
obtained. The after-tax effect of these items was $10.3 million. Calculated
before the effects of these non-recurring expenses, net earnings increased by
$24.3 million, or 69.3%.
Comparison of the Years ended December 31, 1998 and 1997
During 1998 we acquired 1,637 stores, 15 of which were subsequently
consolidated with existing locations and one of which was sold. These
acquisitions were accounted for as purchases, and accordingly, the operating
results of the acquired operations have been included in the results of
operations since the respective dates of acquisition. Primarily as a result of
the effects of these acquisitions on our results of operations, comparisons of
operating results for 1998 and 1997 may not be meaningful or indicative of
future results.
Total revenue increased by $478.2 million, or 144.2% to $809.7 million for
1998 from $331.5 million for 1997. The increase in total revenue was primarily
attributable to the inclusion of 1,622 stores purchased in 1998, net of store
consolidations. Total revenue exclusive of these 1,622 new stores increased by
$44.8 million, or 15.4% to $334.9 million for 1998 from $290.1 million in 1997.
Depreciation of rental merchandise increased by $107.4 million, or 187.7%
to $164.7 million for 1998 from $57.2 million for 1997. Depreciation of rental
merchandise expressed as a percent of total store rentals and fees revenue
increased to 23.1% for 1998 from 20.8% for 1997. This increase was primarily
attributable to lower rental rates on rental merchandise acquired in the 1998
acquisitions.
Salaries and other expenses expressed as a percentage of total store
rentals and fees revenue increased to 59.6% for 1998 from 59.0 % for 1997. This
increase is attributable to the increase in salaries for employees and other
expenses of the acquired stores immediately following the acquisitions.
Occupancy costs also increased as a percentage of total store revenue due to the
relocation of certain stores acquired in 1997 and 1998 to locations that are
larger in square footage. Generally, revenue from these stores increased
gradually while the additional payroll and occupancy costs were incurred
immediately.
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General and administrative expenses expressed as a percentage of total
revenue decreased from 4.0% in 1997 to 3.5% in 1998. Expressed as a percentage
of total store rentals and fees revenue only, general and administrative
expenses, exclusive of expenses relative to ColorTyme, decreased to 3.5% in 1998
from 3.8% in 1997. This decrease is primarily attributable to the leveraging of
fixed and semi-fixed costs over a larger revenue base. Franchise general and
administrative expenses as a percentage of franchise revenue totaled 4.9% in
1998, down from 5.3% in 1997. This decrease was primarily attributable to our
continuous streamlining efforts associated with our franchise operations.
Operating profit increased by $44.9 million, or 97.7%, to $90.8 million for
1998 from $45.9 million for 1997. This improvement was primarily due to an
increase in both the number of items on rent and in revenue earned per item on
rent in the stores acquired before 1998. The revenue increase exceeded increases
in direct store expenses and the $11.5 million pre-tax non-recurring legal
settlement expensed as a result of us settling certain class action litigation
in New Jersey.
Net earnings decreased by $1.1 million, or 4.3%, to $24.8 million in 1998
from $25.9 million in 1997. The decrease was primarily the result of us
incurring non-recurring financing costs of $5.0 million associated with the
interim financing utilized in the Thorn Americas acquisition, $2.5 million in
losses on disposed Renters Choice signage as a result of the name change to
Rent-A-Center, and $11.5 million relating to certain class action legal
settlements, as well as increased interest expense relating to the financing
required to complete the acquisitions completed in 1998. All of the above costs
are stated gross of the effects of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity requirements are for debt service under our senior
credit facilities, the subordinated notes, other indebtedness outstanding,
working capital and capital expenditures. At December 31, 1999, we had in place
an $800.0 million senior credit facility. The amounts outstanding under our
senior credit facility, subordinated notes, and other indebtedness as of this
date were approximately $671.5 million, $175.0 million, and $0.7 million,
respectively.
We purchased $513.9 million of rental merchandise during the year ended
December 31, 1999.
For the year ended December 31, 1999, cash provided by operating activities
decreased by $35.7 million, from $6.4 million in 1998 to $(29.3) million in
1999. This decrease was primarily the result of investment in new rental
merchandise required by our product mix rationalization strategy for the
acquired Central Rents and Thorn Americas stores and for the settlement of
litigation, partially offset by increased profitability in these acquired
stores. Cash used in investing activities decreased by $941.1 million from
$968.8 million in 1998 to $27.6 million in 1999, primarily due to the purchase
of Central Rents and Thorn Americas occurring in 1998. Cash provided by
financing activities was $44.8 million in 1999, compared to $991.4 million in
1998, which represented the source of funds for the purchase of Central Rents
and Thorn Americas.
Borrowings under the senior credit facility bear interest at varying rates
equal to 0.25% to 1.75% over the designated prime rate, which was 8.50% per
annum at December 31, 1999, or 1.25% to 2.75% over LIBOR, which was 6.50% at
December 31, 1999, at our option. At December 31, 1999, the average rate on
outstanding borrowings was 8.78%. During 1998, we entered into certain interest
rate protection agreements with two banks. Under the terms of the interest rate
agreements, the LIBOR rate used to calculate the interest rate charged on $500.0
million of the outstanding senior term debt has been fixed at an average rate of
5.59%. These interest rate agreements have terms of three and five years.
Borrowings were collateralized by a lien on substantially all of our assets. A
commitment fee equal to 0.25% to 0.50% of the unused portion of the term loan
facility is payable quarterly. The senior credit facility includes certain net
worth and fixed charge coverage requirements, as well as covenants which
restrict additional indebtedness and the disposition of assets not in the
ordinary course of business.
Principal and interest payments under the senior credit facilities, the
subordinated notes, and other indebtedness represent significant liquidity
requirements for us. As of March 21, 2000, we owed approximately $804.0 million
under our various debt facilities and our subordinated notes. Under our various
debt agreements, we will be required to make minimum principal payments totaling
approximately $3.0 million in
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2000, $12.9 million in 2001 and 2002, and $14.5 million in 2003 and 2004, plus
applicable interest. Loans under the senior credit facilities not covered by
interest rate swap agreements bear interest at floating rates based upon the
interest rate option selected by us. As discussed earlier, as of March 21, 2000
we have pre-paid a further $43.2 million of our senior debt during 2000.
Capital expenditures are made generally to maintain existing operations and
for new capital assets in new and acquired stores. We spent $36.2 million on
capital expenditures in the year ended December 31, 1999, and expect to spend a
total of approximately $40.0 million on capital expenditures in the year ended
December 31, 2000.
Management is currently focusing its efforts on enhancing the operations
and the depth of management in the acquired stores. During 2000, we have resumed
our strategy of increasing our store base and annual revenues and profits
through the opening of new stores, as well as through opportunistic
acquisitions. It is our intention to increase the number of stores in which we
operate by an average of approximately 10-15% per year over the next several
years.
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an increasing emphasis on new store development. Typically, a
newly opened store is profitable on a monthly basis in the sixth to seventh
month after its initial opening. Historically, a typical store has achieved
break-even profitability in 12 to 15 months after its initial opening. Total
financing requirements of a typical new store approximates $0.4 million, with
roughly 80% to 85% 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. There can be no assurance
that we will open any new stores in the future, or as to the number, location or
profitability thereof.
We believe that the cashflow generated from operations, together with
amounts available under our senior credit facilities, will be sufficient to fund
our debt service requirements, working capital needs, capital expenditures,
litigation costs, and our store expansion intentions during 2000. At December
31, 1999, we had 94.1 million available under our various debt agreements. The
revolving credit facility provides us with revolving loans in an aggregate
principal amount not exceeding $120.0 million. In addition, the $122.3 million
letter of credit/multidraw facility (that was being used to support litigation
assumed in connection with the Thorn Americas acquisition via a letter of
credit) has been converted to a $85.0 million multi-draw facility following the
termination of the letter of credit. During 1999, we funded the settlements of
the Robinson, Boykin, Gallagher and Burney lawsuits. Please see the section
entitled Legal Proceedings discussed earlier. As a result, and based upon our
extensive review and analysis of our current outstanding litigation and the
potential exposure thereon, we believe that litigation expenses related to
outstanding litigation will not be significant in 2000.
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 will be 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.
INFLATION
During the years ended December 31, 1999, 1998 and 1997, the cost of rental
merchandise, lease expense and salaries and wages has increased modestly. The
increases have not had a significant effect on our results of operations because
we have been able to charge commensurately higher rental rates for our
merchandise.
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UPDATE ON YEAR 2000 COMPUTER ISSUES
During 1999 we undertook initiatives to ensure that our systems were Year
2000 compliant as well as contacting major customers and vendors to assess their
status. As of the date of this filing, we have not experienced any disruption of
our operations due to Year 2000 issues. The cost of Year 2000 modifications have
not been significant and no additional Year 2000 costs are anticipated.
QUARTERLY RESULTS
The following table contains certain unaudited historical financial
information for the quarters indicated.
1ST QUARTER 2ND QUARTER 3RD QUARTER(3) 4TH QUARTER(4)
(In Thousands of Dollars, except per share data) ----------- ----------- -------------- --------------
Year ended December 31, 1999(1)
Revenues.......................... $344,697 $351,421 $350,420 $370,629
Operating profit.................. 41,702 45,788 48,960 53,573
Net earnings...................... 12,027 13,891 15,597 17,840
Basic earnings per common share... 0.40 0.47 0.54 0.63
Diluted earnings per common share... $ 0.35 $ 0.41 $ 0.46 $ 0.52
Year ended December 31, 1998(2)
Revenues.......................... $ 90,233 $103,313 $265,886 $350,284
Operating profit.................. 13,721 15,547 30,467 31,078
Net earnings...................... 7,856 8,529 4,643 3,730
Basic earnings per common share... 0.32 0.34 0.13 0.05
Diluted earnings per common share... $ 0.31 $ 0.34 $ 0.13 $ 0.05
- ------------------------------
(1) During 1999, we did not acquire nor sell any stores. However, we did
consolidate 51 stores into existing locations.
(2) During 1998, six stores were purchased during the first quarter; 177 stores
were purchased during the second quarter; 1,450 stores were purchased during
the third quarter; and four stores were purchased during the fourth quarter.
Of the 1,637 stores acquired, 15 were subsequently consolidated with
existing store locations. In addition, one store was opened during the first
quarter, and one store was sold during the third quarter.
(3) During the third quarter of 1998, we incurred pre-tax non-recurring
financing costs of $5.0 million associated with the interim financing
utilized in the acquisition of Thorn Americas, and $2.5 million associated
with effecting a name change of the Renters Choice stores to Rent-A-Center.
(4) During the fourth quarter of 1998, we charged $11.5 million (pre-tax) to
earnings classified as class action legal settlements, in conjunction with
the settlement of class action litigation in New Jersey.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards
requiring that derivative instruments, including certain derivative instruments
imbedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. We will adopt SFAS 133 no later than the
first quarter of fiscal year 2001. SFAS 133 is not expected to have a material
impact on our consolidated financial statements.
In November 1999, the SEC issued SAB No. 100, Restructuring and Impairment
Charges which provides guidance regarding the accounting for and disclosure of
certain expenses commonly reported in connection with exit activities and
business combinations. In December 1999, the SEC issued SAB No. 101, Revenue
Recognition in Financial Statements which provides the SEC's views in applying
generally accepted
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accounting principles to selected revenue recognition issues. These SAB's are
not expected to have any effect on our consolidated financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
As of December 31, 1999 we had $175.0 million in subordinated notes
outstanding at a fixed interest rate of 11.0%. At this date, we also had $595.0
million in term loans outstanding, $17.2 million outstanding under revolving
credit facilities, and $60.0 million outstanding under a multi-draw facility
indexed to the LIBOR rate. The subordinated notes mature on August 15, 2008 and
have a fixed interest rate of 11.0%. 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 December 31, 1999 was $179.8 million,
which is $4.8 million in excess of their carrying value of $175.0 million.
Unlike the subordinated notes, the $595.0 million in term loans, the $17.2
million outstanding under revolving credit facilities, and the $60.0 million
outstanding under a multi-draw facility 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. These contracts have an average life of four
years. Given the current capital structure, including our interest rate swap
agreements, we have $172.2 million, or 20.3% of our total debt, in variable rate
debt. A hypothetical 1.0% change in the LIBOR rate would affect pre-tax earnings
by approximately $1.7 million. The swap agreements had an aggregate fair value
of $14.5 million and $(7.5) million at December 31, 1999 and 1998, respectively.
A hypothetical 1.0% change in the LIBOR rate would affect the fair value of the
swaps by approximately $15.6 million.
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest rates. Our primary market risk exposure is fluctuations
in interest rates. Monitoring and managing this risk is a continual process
carried out by the Board of Directors and senior management. We manage our
market risk based on an ongoing assessment of trends in interest rates and
economic developments, giving consideration to possible effects on both total
return and reported earnings.
INTEREST RATE RISK
We hold long-term debt with variable interest rates indexed to prime or
LIBOR that exposes us to the risk of increased interest costs if interest rates
rise. To reduce the risk related to unfavorable interest rate movements, we have
entered into certain interest rate swap contracts on $500.0 million of debt to
pay a fixed rate of 5.59%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements required to be included in Item 8 are
set forth in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(*)
ITEM 11. EXECUTIVE COMPENSATION(*)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(*)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(*)
- ------------------------------
* The information required by Items 10, 11, 12 and 13 is or will be set forth in
the definitive proxy statement relating to the 2000 Annual Meeting of
Stockholders of Rent-A-Center, Inc., which is to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. This definitive proxy statement relates to a
meeting of stockholders involving the election of directors and the portions
therefrom required to be set forth in this Form 10-K by Items 10, 11, 12 and
13 are incorporated herein by reference pursuant to General Instruction G(3)
to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
Report Of Independent Certified Public Accountants..... F-2
Consolidated Financial Statements
Balance Sheets............................. F-3
Statements Of Earnings..................... F-4
Statement Of Stockholders' Equity.......... F-5
Statements Of Cash Flows................... F-6
Notes to Consolidated Financial
Statements.................................. F-8
Schedules Supporting Financial Statements
Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are either not required under the related
instructions or inapplicable.
CURRENT REPORTS ON FORM 8-K
None.
EXHIBITS
See attached Exhibit Index incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned duly authorized.
RENT-A-CENTER, INC.
By: /s/ J. Ernest Talley
----------------------------------
J. Ernest Talley
Chairman of the Board and
Chief Executive Officer
Date: March 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
/s/ J. Ernest Talley Chairman of the Board and March 21, 2000
- ----------------------------------------------------- Chief Executive Officer
J. Ernest Talley (Principal Executive
Officer)
/s/ Mark E. Speese Vice Chairman of the Board March 21, 2000
- -----------------------------------------------------
Mark E. Speese
/s/ L. Dowell Arnette President and Director March 21, 2000
- -----------------------------------------------------
L. Dowell Arnette
/s/ Robert D. Davis Senior Vice President -- March 21, 2000
- ----------------------------------------------------- Finance, Treasurer and
Robert D. Davis Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ J.V. Lentell Director March 21, 2000
- -----------------------------------------------------
J.V. Lentell
/s/ Joseph V. Mariner, Jr. Director March 21, 2000
- -----------------------------------------------------
Joseph V. Mariner, Jr.
/s/ Peter P. Copses Director March 21, 2000
- -----------------------------------------------------
Peter P. Copses
/s/ Laurence M. Berg Director March 21, 2000
- -----------------------------------------------------
Laurence M. Berg
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INDEX TO FINANCIAL STATEMENTS
Page
----
RENT-A-CENTER, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Earnings F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
30
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Rent-A-Center, Inc.
We have audited the accompanying consolidated balance sheets of Rent-A-Center,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rent-A-Center,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
GRANT THORNTON LLP
Dallas, Texas
February 9, 2000
F-2
31
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
(In Thousands of Dollars) ---------- ----------
ASSETS
Cash and cash equivalents $ 21,679 $ 33,797
Rental merchandise, net
On rent 425,469 311,650
Held for rent 105,754 97,156
Accounts receivable -- trade 3,883 3,296
Prepaid expenses and other assets 27,867 65,689
Property assets, net 82,657 85,018
Deferred income taxes 110,367 178,407
Intangible assets, net 707,324 727,976
---------- ----------
$1,485,000 $1,502,989
========== ==========
LIABILITIES
Senior debt $ 672,160 $ 630,700
Subordinated notes payable 175,000 175,000
Accounts payable -- trade 53,452 43,868
Accrued liabilities 106,796 239,032
---------- ----------
1,007,408 1,088,600
COMMITMENTS AND CONTINGENCIES -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock, net of
placement costs, $.01 par value; 5,000,000 shares
authorized; 271,426 and 260,000 shares issued and
outstanding in 1999 and 1998, respectively 270,902 259,476
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized; 25,297,458 and 25,073,583 shares issued in
1999 and 1998, respectively 253 251
Additional paid-in capital 105,627 101,781
Retained earnings 125,810 77,881
---------- ----------
231,690 179,913
Treasury stock, 990,099 shares at cost in 1999 and 1998 (25,000) (25,000)
---------- ----------
206,690 154,913
---------- ----------
$1,485,000 $1,502,989
========== ==========
The accompanying notes are an integral part of these statements.
F-3
32
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
1999 1998 1997
(In Thousands of Dollars, except per share data) ---------- -------- --------
Revenues
Store
Rentals and fees $1,270,885 $711,443 $275,344
Merchandise sales 88,516 41,456 14,125
Other 2,177 7,282 679
Franchise
Merchandise sales 49,696 44,365 37,385
Royalty income and fees 5,893 5,170 4,008
---------- -------- --------
1,417,167 809,716 331,541
Operating expenses
Direct store expenses
Depreciation of rental merchandise 265,486 164,651 57,223
Cost of merchandise sold 74,027 32,056 11,365
Salaries and other expenses 770,572 423,750 162,458
Franchise cost of merchandise sold 47,914 42,886 35,841
---------- -------- --------
1,157,999 663,343 266,887
General and administrative expenses 42,029 28,715 13,304
Amortization of intangibles 27,116 15,345 5,412
Class action litigation settlements -- 11,500 --
---------- -------- --------
Total operating expenses 1,227,144 718,903 285,603
---------- -------- --------
Operating profit 190,023 90,813 45,938
Interest expense 75,673 39,144 2,194
Non-recurring financing costs -- 5,018 --
Interest income (904) (2,004) (304)
---------- -------- --------
Earnings before income taxes 115,254 48,655 44,048
Income tax expense 55,899 23,897 18,170
---------- -------- --------
NET EARNINGS 59,355 24,758 25,878
Preferred dividends 10,039 3,954 --
---------- -------- --------
Net earnings allocable to common stockholders $ 49,316 $ 20,804 $ 25,878
========== ======== ========
Basic earnings per common share $ 2.04 $ 0.84 $ 1.04
========== ======== ========
Diluted earnings per common share $ 1.74 $ 0.83 $ 1.03
========== ======== ========
The accompanying notes are an integral part of these statements.
F-4
33
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
--------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
(In Thousands) ------ ------ ---------- -------- -------- -----
Balance at January 1, 1997 24,791 $248 $ 98,010 $ 27,245 $ -- $125,503
Net earnings -- -- -- 25,878 -- 25,878
Exercise of stock options 114 1 950 -- -- 951
Tax benefits related to exercise of stock
options -- -- 421 -- -- 421
------ ---- -------- -------- -------- --------
Balance at December 31, 1997 24,905 249 99,381 53,123 -- 152,753
Net earnings -- -- -- 24,758 -- 24,758
Purchase of treasury stock -- 990 shares -- -- -- -- (25,000) (25,000)
Exercise of stock options 169 2 1,872 -- -- 1,874
Tax benefits related to exercise of stock
options -- -- 528 -- -- 528
------ ---- -------- -------- -------- --------
Balance at December 31, 1998 25,074 251 101,781 77,881 (25,000) 154,913
Net earnings -- -- -- 59,355 -- 59,355
Preferred dividends -- -- -- (11,426) -- (11,426)
Exercise of stock options 223 2 3,318 -- -- 3,320
Tax benefits related to exercise of stock
options -- -- 528 -- -- 528
------ ---- -------- -------- -------- --------
Balance at December 31, 1999 25,297 $253 $105,627 $125,810 $(25,000) $206,690
====== ==== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
34
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
(In Thousands of Dollars) --------- ---------- -------
Cash flows from operating activities
Net earnings $ 59,355 $ 24,758 $25,878
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities
Depreciation of rental merchandise 265,486 164,651 57,223
Depreciation of property assets 31,313 17,482 5,601
Amortization of intangibles 27,116 15,345 5,412
Non-recurring charges -- loss on assets related to name
change -- 2,451 --
Amortization of financing fees 2,608 1,326 --
Changes in operating assets and liabilities, net of
effects of acquisitions
Rental merchandise (387,903) (171,263) (64,346)
Accounts receivable -- trade (587) (155) 182
Prepaid expenses and other assets 6,522 5,240 1,252
Deferred income taxes 64,231 20,565 (341)
Accounts payable -- trade 9,584 (27,508) (5,112)
Accrued liabilities (106,975) (46,492) 3,033
--------- ---------- -------
Net cash provided by (used in) operating activities (29,250) 6,400 28,782
Cash flows from investing activities
Purchase of property assets (36,211) (21,860) (10,446)
Proceeds from sale of property assets 8,563 740 376
Acquisitions of businesses, net of cash acquired -- (947,655) (30,491)
--------- ---------- -------
Net cash used in investing activities (27,648) (968,775) (40,561)
--------- ---------- -------
Cash flows from financing activities
Purchase of treasury stock -- (25,000) --
Financing fees paid -- (24,017) --
Proceeds from issuance of preferred stock, net of
issuance costs -- 259,476 --
Exercise of stock options 3,320 1,874 951
Proceeds from debt 320,815 1,258,464 80,656
Repayments of debt (279,355) (479,369) (71,004)
--------- ---------- -------
Net cash provided by financing activities 44,780 991,428 10,603
--------- ---------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,118) 29,053 (1,176)
Cash and cash equivalents at beginning of year 33,797 4,744 5,920
--------- ---------- -------
Cash and cash equivalents at end of year $ 21,679 $ 33,797 $ 4,744
========= ========== =======
The accompanying notes are an integral part of these statements.
F-6
35
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
(In Thousands of Dollars) ------- ------- -------
Supplemental cash flow information
Cash paid during the year for:
Interest $76,653 $26,091 $ 1,962
Income taxes $ 4,631 $10,212 $13,893
Supplemental schedule of non-cash investing and financing activities
1999 1998 1997
------- ----------- --------
Fair value of assets acquired, including cash of $56,027 in
1998 $ -- $ 1,340,480 $ 30,491
Cash paid -- (1,003,682) (30,491)
------- ----------- --------
Liabilities assumed $ -- $ 336,798 $ --
======= =========== ========
During 1999, the Company paid preferred dividends of approximately $11.4 million
by issuing 11,426 shares of preferred stock.
The accompanying notes are an integral part of these statements.
F-7
36
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation and Nature of Operations
The accompanying financial statements include the accounts of Rent-A-Center,
Inc. (Rent-A-Center), and its wholly-owned subsidiaries (collectively, the
Company). All significant intercompany accounts and transactions have been
eliminated. Rent-A-Center's sole operating segment consists of leasing household
durable goods to customers on a rent-to-own basis. At December 31, 1999, the
Company operated 2,075 stores which were located throughout the United States,
the District of Columbia and the Commonwealth of Puerto Rico.
ColorTyme, Inc. (ColorTyme), the only subsidiary with substantive operations, is
a nationwide franchisor of 365 franchised rental centers operating in 42 states.
These rental centers offer high quality durable products such as home
electronics, appliances, computers, and furniture and accessories. ColorTyme's
primary source of revenues is the sale of rental merchandise to its franchisees,
who, in turn, offer the merchandise to the general public for rent or purchase
under a rent-to-own program. The balance of ColorTyme's revenues are generated
primarily from royalties based on franchisees' monthly gross revenues.
Rental Merchandise
Rental merchandise is carried at cost, net of accumulated depreciation.
Depreciation is provided using the income forecasting method, which is intended
to match as closely as practicable the recognition of depreciation expense with
the consumption of the rental merchandise, and assumes no salvage value. The
consumption of rental merchandise occurs during periods of rental and directly
coincides with the receipt of rental revenue over the rental-purchase agreement
period, generally 18 to 24 months. Under the income forecasting method,
merchandise held for rent is not depreciated, and merchandise on rent is
depreciated in the proportion of rents received to total rents provided in the
rental contract, which is an activity based method similar to the units of
production method.
Rental merchandise which is damaged and inoperable, or not returned by the
customer after becoming delinquent on payments, is written-off when such
impairment is incurred.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include all highly liquid
investments with an original maturity of three months or less.
Rental Revenue and Fees
Merchandise is rented to customers pursuant to rental-purchase agreements which
provide for weekly or monthly rental terms with non-refundable rental payments.
Generally, the customer has the right to acquire title either through a purchase
option or through payment of all required rentals. Rental revenue and fees are
recognized over the rental term. No revenue is accrued because the customer can
cancel the rental contract at any time and the Company cannot enforce collection
for non-payment of rents.
ColorTyme's revenue from the sale of rental merchandise is recognized upon
shipment of the merchandise to the franchisee.
F-8
37
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS (continued)
Property Assets and Related Depreciation
Furniture, equipment and vehicles are stated at cost less accumulated
depreciation. Depreciation is provided over the estimated useful lives of the
respective assets (generally five years) by the straight-line method. Leasehold
improvements are amortized over the term of the applicable leases by the
straight-line method.
Intangible Assets and Amortization
Intangible assets are stated at cost less accumulated amortization calculated by
the straight-line method.
Accounting for Impairment of Long-Lived Assets
The Company evaluates all long-lived assets, including all intangible assets and
rental merchandise, for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. Impairment is
recognized when the carrying amounts of such assets cannot be recovered by the
undiscounted net cash flows they will generate.
Income Taxes
The Company provides deferred taxes for temporary differences between the tax
and financial reporting bases of assets and liabilities at the rate expected to
be in effect when taxes become payable.
Earnings Per Common Share
Basic earnings per common share are based upon the weighted average number of
common shares outstanding during each period presented. Diluted earnings per
common share are based upon the weighted average number of common shares
outstanding during the period, plus, if dilutive, the assumed exercise of stock
options and the assumed conversion of convertible securities at the beginning of
the year, or for the period outstanding during the year for current year
issuances.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expense was $55.8 million, $37.2 million, and $13.7
million in 1999, 1998 and 1997, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues during the reporting period. Actual results could differ from those
estimates.
F-9
38
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS (continued)
Derivative Financial Instruments
The Company uses interest rate swap agreements to manage interest rate risk on
its variable rate debt. Amounts due to or from counterparties are recorded in
interest income or expense as incurred.
Reclassifications
Certain reclassifications have been made to prior year financial information in
order to conform to the 1999 presentation.
NOTE B -- ACQUISITIONS
On August 5, 1998, the Company acquired all of the outstanding common stock of
Thorn Americas, Inc. (Thorn), which operated 1,409 stores, for approximately
$900 million in cash. The acquisition, together with the increased working
capital requirements of the combined entity, was financed via $720 million in
variable-rate senior debt maturing in 6 to 8.5 years, $175 million of 11% senior
subordinated debt maturing in 10 years, and $260 million of redeemable
convertible voting preferred stock. The purchase price exceeded the fair value
of net assets acquired, as adjusted below, by approximately $596 million, which
has been recorded as goodwill and is being amortized over 30 years.
During 1999, goodwill relating to the Thorn acquisition was increased by
approximately $5.4 million as a result of downward adjustments to the fair value
of the net assets acquired, the largest of which was a $3.8 million decrease in
deferred tax assets (Note J).
In conjunction with the Thorn acquisition, the Company terminated substantially
all of the existing Thorn home office employees (approximately 550), and
discontinued using Thorn's distribution facilities. As a result, at acquisition
the Company recorded liabilities for employee termination costs, primarily
related to severance agreements, of approximately $21.4 million and costs
associated with the discontinued use of leased distribution and store facilities
of approximately $18.4 million. As of December 31, 1999, all of the termination
costs and $12.9 million of the costs associated with the discontinued use of the
leased distribution and store facilities had been paid.
At acquisition, the Company recorded an accrual of approximately $125 million
for estimated probable losses on Thorn litigation, including $34.5 million
related to Fogie v. Thorn Americas, Inc. and Willis v. Thorn Americas, Inc. The
Company was indemnified by the seller for losses relating to the Fogie and
Willis cases, and had recorded a corresponding receivable. As of December 31,
1999 approximately $110 million has been paid in settlement of certain of the
acquired litigation. Details regarding acquired litigation and related
settlements are described in Note K.
In May 1998, the Company acquired substantially all of the assets of Central
Rents, Inc. (Central Rents), which consisted of 176 stores, for approximately
$100 million in cash. The purchase price exceeded the fair value of assets
acquired by approximately $72 million, which has been recorded as goodwill and
is being amortized over 30 years.
The Company also acquired the assets of 52 stores in 14 separate transactions
during 1998 for approximately $26.4 million. All acquisitions have been
accounted for as purchases, and the operating results of the acquired businesses
have been included in the financial statements of the Company since their date
of acquisition.
The following pro forma information combines the results of operations as if the
acquisitions of Thorn and Central Rents had been consummated as of the beginning
of 1998, after including the impact of adjustments for amortization of
intangibles, and the impact of interest expense and preferred dividends as a
result of
F-10
39
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE B -- ACQUISITIONS (continued)
acquisition financing. The results of operations of the other acquired stores
were not material in relation to the Company's consolidated results of
operations.
Year ended
December 31,
1998
(In Thousands of Dollars, except per share data) ------------
Revenues $1,377,864
Net earnings allocable to common stockholders 5,258
Basic earnings per common share 0.21
Diluted earnings per common share 0.21
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of operating results that would have occurred
had these acquisitions been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
NOTE C -- RENTAL MERCHANDISE
December 31,
-------------------
1999 1998
(In Thousands of Dollars) -------- --------
On rent
Cost $633,360 $414,089
Less accumulated depreciation 207,891 102,439
-------- --------
$425,469 $311,650
======== ========
Held for rent
Cost $122,984 $105,539
Less accumulated depreciation 17,230 8,383
-------- --------
$105,754 $ 97,156
======== ========
NOTE D -- PROPERTY ASSETS
December 31,
-----------------
1999 1998
(In Thousands of Dollars) ------- -------
Furniture and equipment $57,879 $35,025
Transportation equipment 29,498 31,287
Building and leasehold improvements 43,009 38,629
Construction in progress 786 768
------- -------
131,172 105,709
Less accumulated depreciation 48,515 20,691
------- -------
$82,657 $85,018
======= =======
F-11
40
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E -- INTANGIBLE ASSETS
December 31,
Amortization -------------------
Period 1999 1998
(In Thousands of Dollars) ------------- -------- --------
Noncompete agreements 2 - 5 years $ 5,152 $ 5,152
Franchise network 10 years 3,000 3,000
Goodwill 20 - 30 years 748,251 741,786
Other Various 142 1,178
-------- --------
756,545 751,116
Less accumulated amortization 49,221 23,140
-------- --------
$707,324 $727,976
======== ========
NOTE F -- SENIOR DEBT
In conjunction with the acquisition of Thorn, the Company entered into a Senior
Credit Facility (the Facility) with a syndicate of banks. The Company also has
other debt facilities. Senior debt consists of the following:
December 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
Facility Maximum Amount Amount Maximum Amount Amount
Maturity Facility Outstanding Available Facility Outstanding Available
(In Thousand of Dollars) -------- -------- ----------- --------- -------- ----------- ---------
Senior Credit Facility:
Term Loan "A" 2004 $99,443 $ 99,443 $ -- $105,100 $105,100 $ --
Term Loan "B" 2006 222,918 222,918 -- 236,500 236,500 --
Term Loan "C" 2007 272,639 272,639 -- 289,100 289,100 --
Revolver (1) 2004 120,000 16,500 64,800 120,000 -- 67,600
Letter of Credit/
Multi-Draw (2) 2004 85,000 59,950 25,050 122,300 -- --
-------- -------- ------- -------- -------- -------
800,000 671,450 89,850 873,000 630,700 67,600
Other Indebtedness:
Revolver 2000 5,000 710 4,290 2,000 -- 2,000
-------- -------- ------- -------- -------- -------
Total Debt Facilities $805,000 $672,160 $94,140 $875,000 $630,700 $69,600
======== ======== ======= ======== ======== =======
(1) As at December 31, 1999 and 1998 the amounts available under the Company's
revolver facility is reduced by approximately $38.7 million and $52.4
million, respectively, for outstanding letter of credit. These letters of
credit are used to support the Company's litigation and insurance
obligations.
(2) The $122.3 million letter of credit/multi-draw facility in 1998 was being
used to support litigation assumed in the Thorn acquisition via a letter of
credit. Following the termination of the letter of credit in 1999, the
facility was converted to an $85.0 million multi-draw facility.
Borrowings under the Facility bear interest at varying rates equal to 0.25% to
1.75% over the designated prime rate (8.50% per annum at December 31, 1999) or
1.25% to 2.75% over LIBOR (6.50% at December 31, 1999) at the Company's option,
and are subject to quarterly adjustments based on certain leverage ratios. At
December 31, 1999 and 1998, the average rate on outstanding borrowings was 8.78%
and 8.03%, respectively. A commitment fee equal to 0.25% to 0.50% of the unused
portion of the Facility is payable quarterly.
The Facility is collateralized by substantially all of the Company's tangible
and intangible assets, and is unconditionally guaranteed by each of the
Company's subsidiaries. In addition, the Facility contains several financial
covenants as defined therein, including a maximum leverage ratio, a minimum
interest coverage
F-12
41
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F -- SENIOR DEBT (continued)
ratio, and a minimum fixed charge coverage ratio, as well as restrictions on
capital expenditures, additional indebtedness, and the disposition of assets not
in the ordinary course of business.
During 1998, the Company entered into three interest rate swap agreements to
limit the effect of increases in interest rates. These agreements expire in 2001
and 2003, and have an aggregate notional principal amount of $500 million. The
effect of these agreements is to limit the Company's interest rate exposure by
fixing the LIBOR rate at 5.59%. The agreements had no cost to the Company, and
at December 31, 1999 and 1998 they had aggregate fair values of $14.5 million
and $(7.5) million, respectively.
The following are scheduled maturities of senior debt at December 31, 1999:
Year ending
December 31,
- ------------ (In Thousands of Dollars)
2000 $ 16,059
2001 33,219
2002 36,533
2003 39,848
2004 95,693
Thereafter 450,808
--------
$672,160
========
NOTE G -- SUBORDINATED NOTES PAYABLE
During 1998, the Company issued $175.0 million of subordinated notes, maturing
on August 15, 2008. The notes require semi-annual interest-only payments at 11%,
and are guaranteed by the Company's two principal subsidiaries. The notes are
redeemable at the Company'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. In addition, prior to August 15, 2001, the
Company may redeem up to 33.33% of the original aggregate principal with the
cash proceeds of one or more equity offerings, at a redemption price of 111%.
Upon a change of control, the holders of the subordinated notes have the right
to require the Company to redeem the notes.
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on additional indebtedness
and restricted payments.
The $5.0 million non-recurring financing costs expensed during 1998, relate to
fees paid for bridge financing necessary to complete the Thorn acquisition,
which was subsequently replaced with the subordinated notes.
The Company'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 the
Company with respect to these notes. The only direct or indirect subsidiaries of
the Company that are not Guarantors are inconsequential subsidiaries. There are
no restrictions on the ability of any of the Guarantors to transfer funds to the
Company in the form of loans, advances or dividends, except as provided by
applicable law.
Set forth below is certain summarized combined financial information (within the
meaning of Rule 1-02(bb) of Regulation S-X) for the Guarantors, as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999. The summarized combined financial information includes ColorTyme, Inc.
and Advantage Companies, Inc. from the dates they were acquired or formed by the
Company (May 1996 and November 1998, respectively) and is presented using the
push-down basis of
F-13
42
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G -- SUBORDINATED NOTES PAYABLE (continued)
accounting. Separate financial statements and other disclosures concerning the
Guarantors have not been included because management believes that they are not
material to investors.
December 31,
Balance Sheet Data ------------------
1999 1998
-------- -------
(In Thousands of Dollars)
Accounts receivable, net $ 3,840 $ 3,296
Intangible assets, net 369,838 3,136
Deferred taxes 2,777 4,276
Total assets 380,099 11,676
Total liabilities 4,518 3,921
Year ended December 31,
Statements of Earnings Data ---------------------------
1999 1998 1997
------- ------- -------
(In Thousands of Dollars)
Total revenues $55,587 $48,285 $42,036
Franchise cost of merchandise sold 47,914 41,974 36,301
Net earnings (loss) (9,732) 2,109 2,018
NOTE H -- ACCRUED LIABILITIES
December 31,
-------------------
1999 1998
(In Thousands of Dollars) -------- --------
Taxes other than income $ 19,228 $ 13,869
Income taxes payable 276 --
Accrued litigation costs 19,163 122,326
Accrued insurance costs 22,473 27,049
Accrued compensation and other 45,656 75,788
-------- --------
$106,796 $239,032
======== ========
NOTE I -- REDEEMABLE CONVERTIBLE VOTING PREFERRED STOCK
During 1998, the Company issued 260,000 shares of redeemable convertible voting
preferred stock at $1,000 per share, resulting in aggregate proceeds of $260.0
million. Placement costs of approximately $0.5 million were charged against
these proceeds to arrive at the original carrying value.
The preferred stock is convertible, at any time, into shares of the Company's
common stock at a conversion price equal to $27.935 per share, and has a
liquidation preference of $1,000 per share, plus all accrued and unpaid
dividends. No distributions may be made to holders of common stock until the
holders of the preferred stock have received the liquidation preference.
Dividends accrue on a quarterly basis, at the rate of $37.50 per annum, per
share. Under the terms of the subordinated notes, preferred dividends must be
paid in additional preferred stock until 2003, after which the Company can pay
the dividends in cash or additional preferred
F-14
43
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I -- REDEEMABLE CONVERTIBLE VOTING PREFERRED STOCK (continued)
stock. During 1999, the Company paid approximately $11.4 million in preferred
dividends by issuing 11,426 shares of preferred stock.
The preferred stock is not redeemable until 2002, after which time the Company
may, at its option, redeem the shares at 105% of the liquidation preference plus
accrued and unpaid dividends. Holders of the preferred stock have the right to
require the Company to redeem the preferred stock upon a change of control, if
the Company ceases to be listed on a United States national securities exchange
or the NASDAQ National Market System, or upon the eleventh anniversary of the
issuance of the preferred stock, at a price equal to the liquidation preference
value.
Holders of the preferred stock are entitled to two seats on the Company's Board
of Directors, and are entitled to vote on all matters presented to the holders
of the Company's common stock. The number of votes per preferred share is equal
to the number of votes associated with the underlying voting common stock into
which the preferred stock is convertible.
NOTE J -- INCOME TAXES
The components of the income tax provision are as follows:
Year ended December 31,
----------------------------
1999 1998 1997
(In Thousands of Dollars) -------- ------- -------
Current expense (benefit)
Federal $(10,770) $ -- $15,028
State 815 1,756 1,911
Foreign 1,623 1,576 1,572
-------- ------- -------
Total current (8,332) 3,332 18,511
-------- ------- -------
Deferred expense
Federal 57,342 18,377 (351)
State 6,889 2,188 10
-------- ------- -------
Total deferred 64,231 20,565 (341)
-------- ------- -------
Total $ 55,899 $23,897 $18,170
======== ======= =======
The income tax provision reconciled to the tax computed at the statutory Federal
rate is:
Year ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Tax at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.5% 5.1% 4.6%
Effect of foreign operations, net of foreign tax credits 0.3% 0.3% 0.4%
Goodwill amortization 6.4% 7.3% 1.1%
Other, net 1.3% 1.4% 0.2%
---- ---- ----
Total 48.5% 49.1% 41.3%
==== ==== ====
F-15
44
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J -- INCOME TAXES (continued)
Deferred tax assets and liabilities consist of the following:
December 31,
-------------------
1999 1998
(In Thousands of Dollars) -------- --------
Deferred tax assets
Net operating loss carryforwards $ 91,232 $ 28,067
Rental merchandise -- 1,601
Accrued expenses 27,005 83,387
Intangible assets 25,285 39,984
Property assets 17,530 14,692
Other tax credit carryforwards 2,835 12,843
Other 311 --
-------- --------
164,198 180,574
Deferred tax liability
Rental merchandise (53,831) --
Other -- (2,167)
-------- --------
Net deferred tax asset $110,367 $178,407
======== ========
The Company has Federal net operating loss carryforwards of approximately $230.4
million at December 31, 1999. Approximately $10.8 million of the Federal net
operating loss carryforwards were acquired in connection with purchased
companies, expire between 2005 and 2010, and are limited to approximately $3.5
million per year. The Company also has various state net operating loss
carryforwards. The Company generated $79.4 million and $152.8 million of Federal
net operating loss carryforwards in 1999 and 1998, respectively, as a result of
events relating to the acquisition of Thorn such as the payment of change of
control bonuses and severance to former employees, the sale of Thorn's
non-rent-to-own businesses and its corporate headquarters, the abandonment of
certain internally developed software, and litigation settlement payments. These
carryforwards expire in 2018 and 2019.
During 1999, the Company completed its analysis of the tax bases of assets and
liabilities acquired in the Thorn acquisition, resulting in a decrease in its
deferred tax asset of $3.8 million and a corresponding increase in goodwill.
F-16
45
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and certain delivery
vehicles. Rental expense was $96.8 million, $51.4 million and $22.0 million for
1999, 1998 and 1997, respectively. Future minimum rental payments under
operating leases with remaining noncancelable lease terms in excess of one year
at December 31, 1999 are as follows:
Year ending
December 31,
- ------------ (In Thousands of Dollars)
2000 $ 79,306
2001 79,459
2002 79,601
2003 79,862
2004 80,275
Thereafter 8,923
--------
$407,426
========
From time to time, the Company, along with its subsidiaries, is party to various
legal proceedings arising in the ordinary course of business. The majority of
the material proceedings involve claims that may be generally categorized as
recharacterization claims and statutory compliance claims. Recharacterization
claims generally involve claims (i) in states that do not have rent-to-own
legislation, (ii) that rent-to-own transactions are disguised installment sales
in violation of applicable state installment statutes, and (iii) that allege
greater damages. Statutory compliance claims generally involve claims (i) in
states that have rent-to-own legislation, (ii) that the operator failed to
comply with applicable state rental purchase statutes (e.g., notices and late
fees), and (iii) that allege lesser damages. The Company is currently a party to
the following material litigation:
Murray v. Rent-A-Center, Inc. In May 1999, the plaintiffs filed this class
action lawsuit in Missouri, alleging that the Company discriminated against
African Americans in its hiring, compensation, promotion and termination
policies. Plaintiffs alleged no specific amount of damages in their complaint.
The Company believes that the plaintiffs' claims are without merit and intends
to vigorously defend this action. However, given the early stage of this
proceeding, there can be no assurance that the Company will prevail without
liability.
Otero v. Rent-A-Center, Inc. In September 1999, the plaintiff filed this class
action lawsuit in California alleging that the classification of and pay to the
Company's executive assistant managers and inside/outside managers is contrary
to California wage and hour laws. Plaintiff's complaint seeks class
certification, unspecified compensatory and penalty damages, injunctive relief,
attorney's fees, filing fees and costs of suit, pre- and post-judgment interest,
and any further relief granted by the court. The Company intends to vigorously
defend itself in this matter. However, given the early stage of this proceeding,
there can be no assurance that the Company will prevail without liability.
Colon v. Thorn Americas, Inc. In November 1997, the plaintiffs filed this
statutory compliance class action lawsuit in New York alleging various statutory
violations of New York consumer protection laws. The plaintiffs are seeking
damages, punitive damages, interest, attorney's fees and certain injunctive
relief. Although the Company intends to vigorously defend itself in this action,
the ultimate outcome cannot presently be determined, and there can be no
assurance that the Company will prevail without liability.
An adverse ruling in one or more of the aforementioned cases could have a
material and adverse effect on the Company's consolidated financial statements.
F-17
46
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- COMMITMENTS AND CONTINGENCIES (continued)
During 1999, the Company funded the $11.5 million settlement of its two existing
class action lawsuits in New Jersey, together with the $48.5 million settlement
of Robinson v. Thorn Americas, Inc. The settlement of the Company's existing
litigation resulted in a charge to earnings in 1998, classified as class action
legal settlements. In addition, the Company settled and funded Anslono v. Thorn
Americas, Inc. during the year. Both the Robinson and Anslono cases were
acquired in the Thorn acquisition, and the Company made appropriate purchase
accounting adjustments for liabilities associated with this litigation.
In addition, Fogie v. Thorn Americas, Inc., was acquired in the Thorn
acquisition; however, the Company received full indemnification from the seller
for any incurred losses. In December 1991, the plaintiffs filed this class
action in Minnesota alleging that Thorn's rent-to-own contracts violated
Minnesota's Consumer Credit Sales Act and the Minnesota General Usury Statute.
In April 1998, the court entered a final judgment against Thorn for
approximately $30.0 million. Following an unsuccessful appeal in August 1999,
Thorn plc deposited the judgment amount in an escrow account supervised by
plaintiff's counsel and the court in October 1999. The administration of the
judgment and payment of class members' claims is now underway.
The Company is also involved in various other legal proceedings, claims and
litigation arising in the ordinary course of business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE L -- STOCK BASED COMPENSATION
In November 1994, the Company established a long-term incentive plan(the Plan)
for the benefit of certain key employees and directors. Under the plan, up to
4,500,000 shares of the Company's common shares may be reserved for issuance
under stock options, stock appreciation rights or restricted stock grants.
Options granted to employees under the plan become exercisable over a period of
one to five years from the date of grant and may be exercised up to a maximum of
10 years from date of grant. Options granted to directors are exercisable
immediately. There have been no grants of stock appreciation rights and all
options have been granted with fixed prices. At December 31, 1999, there were
334,600 shares reserved for issuance under the Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for employee
stock options and continues to apply APB 25 for stock options granted under the
Plan. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Compensation
costs for all other stock-based compensation is accounted for under SFAS 123. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant date for options under the Plan consistent with
F-18
47
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- STOCK BASED COMPENSATION (continued)
the methodology prescribed by SFAS 123, the Company's 1999, 1998 and 1997 net
earnings and earnings per common share would be reduced to the pro forma amounts
indicated as follows:
Year ended December 31,
---------------------------
1999 1998 1997
(In Thousands of Dollars, except per share data) ------- ------- -------
Net earnings allocable to common stockholders
As reported $49,316 $20,804 $25,878
Pro forma $41,011 $17,580 $23,967
Basic earnings per common share
As reported $ 2.04 $ 0.84 $ 1.04
Pro forma $ 1.69 $ 0.71 $ 0.96
Diluted earnings per common share
As reported $ 1.74 $ 0.83 $ 1.03
Pro forma $ 1.50 $ 0.70 $ 0.95
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 50 percent; risk-free interest rates of
6.50%, 5.55% and 6.47% in 1999, 1998, and 1987, respectively; no dividend yield;
and expected lives of seven years.
1999 1998 1997
--------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- -------- --------- -------- --------- --------
Outstanding at beginning of
year 3,493,763 $23.96 1,324,250 $16.39 1,142,050 $15.74
Granted 2,042,250 24.42 2,680,000 26.65 859,000 16.54
Exercised (173,875) 12.05 (168,862) 8.95 (113,925) 8.39
Forfeited (1,772,100) 24.81 (341,625) 18.28 (562,875) 17.13
---------- --------- ---------
Outstanding at end of year 3,590,038 $23.57 3,493,763 $23.96 1,324,250 $16.39
========== ========= =========
Options exercisable at end of
year 819,739 $20.78 377,263 $16.43 282,375 $14.53
F-19
48
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- STOCK BASED COMPENSATION (continued)
The weighted average fair value per share of options granted during 1999, 1998
and 1997, was $14.38, $15.22, and $9.93, respectively, all of which were granted
at market value. Information about stock options outstanding at December 31,
1999 is summarized as follows:
Options outstanding
---------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ----------------- -----------------
$3.34 to $6.67 137,063 5.36 years $ 6.58
$6.68 to $18.50 687,350 8.63 years $16.89
$18.51 to $28.50 2,439,625 8.73 years $25.66
$28.51 to $30.50 326,000 9.23 years $30.50
---------
3,590,038
=========
Options exercisable
-------------------------------
Number Weighted average
Range of exercise prices exercisable exercise price
------------------------ ----------- -----------------
$3.34 to $6.67 137,063 $ 6.58
$6.68 to $18.50 134,163 $15.40
$18.51 to $28.50 521,513 $26.25
$28.51 to $30.50 27,000 $30.50
-------
819,739
=======
NOTE M -- 401(k) PLAN
The Company sponsors a defined contribution pension plan under Section 401(k) of
the Internal Revenue Code for all employees who have completed twelve months of
service. Employees may elect to contribute up to 15% of their eligible
compensation on a pre-tax basis, subject to limitations. The Company may make
discretionary matching contributions to the plan. During 1999, 1998 and 1997,
the Company made matching contributions of $2,283,575, $1,393,386, and $60,487
respectively, which represents 25% of the employees' contributions to the plan
up to an amount not to exceed 4% of each employees' respective compensation.
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, senior
debt and subordinated notes payable. The carrying amount of cash and cash
equivalents approximates fair value at December 31, 1999 and 1998, because of
the short maturities of these instruments. The Company's senior debt is variable
rate debt that reprices frequently and entails no significant change in credit
risk, and as a result, fair value approximates carrying value. The fair value of
the subordinated notes payable is estimated based on discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. At December 31, 1999 the fair value of the
subordinated notes was $179.8 million, which is $4.8 million in excess of their
carrying value of $175.0 million. Information relating to the fair value of the
Company's interest rate swap agreements is set forth in Note F.
F-20
49
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- EARNINGS PER COMMON SHARE
Summarized basic and diluted earnings per common share were calculated as
follows:
(In Thousands of Dollars, except per share data) 1999
---------------------------------
Net Earnings Shares Per Share
------------ ------ ---------
Basic earnings per common share $49,316 24,229 $2.04
Effect of dilutive stock options -- 319
Effect of preferred dividend 10,039 9,583
------- ------
Diluted earnings per common share $59,355 34,131 $1.74
======= ======
1998
---------------------------------
Net Earnings Shares Per Share
------------ ------ ---------
Basic earnings per common share $20,804 24,698 $0.84
Effect of dilutive stock options -- 405
------- ------
Diluted earnings per common share $20,804 25,103 $0.83
======= ======
1997
---------------------------------
Net Earnings Shares Per Share
------------ ------ ---------
Basic earnings per common share $25,878 24,844 $1.04
Effect of dilutive stock options -- 350
------- ------
Diluted earnings per common share $25,878 25,194 $1.03
======= ======
The assumed conversion of the redeemable convertible preferred stock issued in
1998 would have an anti-dilutive effect on diluted earnings per common share for
1998 and accordingly has been excluded from the computation thereof.
For 1999, 1998 and 1997, 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 the common
stock and, therefore their effect would have anti-dilutive, was 1,707,947,
498,201, and 339,235 respectively.
NOTE P -- UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1999 and 1998 is as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(In Thousands of Dollars, except per share data) ----------- ----------- ----------- -----------
Year ended December 31, 1999
Revenues $344,697 $351,421 $350,420 $370,629
Operating profit 41,702 45,788 48,960 53,573
Net earnings 12,027 13,891 15,597 17,840
Basic earnings per common share 0.40 0.47 0.54 0.63
Diluted earnings per common share 0.35 0.41 0.46 0.52
F-21
50
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE P -- UNAUDITED QUARTERLY DATA (continued)
1st Quarter 2nd Quarter 3rd Quarter(1) 4th Quarter(2)
(In Thousands of Dollars, except per share data) ----------- ----------- -------------- --------------
Year ended December 31, 1998
Revenue $90,233 $103,313 $265,886 $350,284
Operating profit 13,721 15,547 30,467 31,078
Net earnings 7,856 8,529 4,643 3,730
Basic earnings per common share 0.32 0.34 0.13 0.05
Diluted earnings per common share 0.31 0.34 0.13 0.05
(1) During the third quarter of 1998, the Company incurred pre-tax non-recurring
financing costs of $5.0 million associated with the interim financing
utilized in the Thorn acquisition, and $2.5 million in losses on disposed
Renters Choice signage as a result of the name change to "Rent-A-Center".
(2) During the fourth quarter of 1998, the Company charged $11.5 million
(pre-tax) to earnings for certain non-recurring class action legal
settlements as described in Note K.
NOTE Q -- RELATED PARTY TRANSACTIONS
On August 18, 1998, the Company repurchased 990,099 shares of its common stock
for $25 million from J. Ernest Talley, its Chairman of the Board and Chief
Executive Officer. The repurchase of Mr. Talley's stock was approved by the
Company's Board of Directors on August 5, 1998. The price was determined by a
pricing committee, and was approved by the Board of Directors of the Company,
with Mr. Talley abstaining. The pricing committee met on August 17, 1998, after
the close of the markets, and Mr. Talley's shares were repurchased at the price
of $25.25 per share, the closing price of the Company's common stock on August
17, 1998.
F-22
51
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2.1(1) -- Asset Purchase Agreement, dated May 1, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.2(2) -- Letter Agreement, dated as of May 26, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.3(3) -- Stock Purchase Agreement, dated as of June 16, 1998,
among Renters Choice, Inc., Thorn International BV and Thorn
plc (Pursuant to the rules of the Commission, the schedules
and exhibits have been omitted. Upon the request of the
Commission, the Company will supplementally supply such
schedules and exhibits to the Commission.)
3.1(4) -- Amended and Restated Certificate of Incorporation of
Renters Choice
3.2(5) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice
3.3(6) -- Amended and Restated Bylaws of Rent-A-Center
4.1(7) -- Form of Certificate evidencing Common Stock
4.2(8) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series A Preferred Stock of
Renters Choice, Inc.
4.3(9) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series B Preferred Stock of
Renters Choice, Inc.
4.4(10) -- 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(11) -- Form of Certificate evidencing Series A Preferred Stock
4.6(12) -- Form of Exchange Note
4.7(13) -- 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.
10.1(14) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(15) -- Credit Agreement, dated August 5, 1998, among Renters
Choice, Inc., Comerica Bank, as Documentation Agent,
NationsBank N.A., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent, and certain other
lenders
10.3* -- First Amendment, dated as of February 25, 2000, to the
Credit Agreement, dated August 5, 1998, among Rent-A-Center,
Inc. (formerly known as Renters Choice, Inc.), Comerica
Bank, as Documentation Agent, Nations Bank N.A., as
Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent and certain other lenders
10.4(16) -- 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
10.5(17) -- $175,000,000 Senior Subordinated Credit Agreement, dated
as of August 5, 1998, among Renters Choice, Inc., certain
other lenders and the Chase Manhattan Bank
10.6(18) -- Stockholders Agreement, dated as of August 5, 1998, by
and among Apollo Investment Fund IV, L.P., Apollo Overseas
Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Renters
Choice, Inc., and certain other persons
10.7(19) -- Agreements to be Bound to Stockholders Agreement, each
dated September 9, 1999, 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(20) -- 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
52
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.9(21) -- 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 B Convertible Preferred Stock
10.10(22) -- Stock Purchase Agreement, dated August 5, 1998, among
Renters Choice, Inc., Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P.
10.11(23) -- Exchange and Registration Rights Agreement, dated August
18, 1998, by and among Renters Choice, Inc. and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC and Credit Suisse First Boston
Corporation
10.12(24) -- Employment Agreement, dated October 1, 1998, by and
between Rent-A-Center, Inc. and Bradley W. Denison
27.1* -- Financial Data Schedule
- ------------
* Filed herewith.
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated May 28, 1998
(2) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Current Report on Form 8-K dated May 28, 1998
(3) Incorporated herein by reference to Exhibit 2.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(4) 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
(5) 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
(6) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(7) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form
S-4 filed on January 19, 1999.
(8) 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
(9) 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
(10) Incorporated herein by reference to Exhibit 4.4 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(11) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(12) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(13) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(14) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Registration Statement on Form S-8 (File No. 333-53471)
(15) Incorporated herein by reference to Exhibit 10.18 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(16) 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
(17) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
53
(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 10.7 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
(20) 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
(21) Incorporated herein by reference to Exhibit 10.23 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(22) Incorporated herein by reference to Exhibit 2.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(23) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(24) Incorporated herein by reference to Exhibit 10.15 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1998
- ------------
- - Filed herewith.