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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File Number 0-25370
RENT-A-CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 45-0491516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 Tennyson Parkway, Third Floor
Plano, Texas 75024
(972) 801-1100
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 12, 2003:
Class Outstanding
- -------------------------------------- ----------------
Common stock, $.01 par value per share 35,111,258
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Earnings for the three months ended 4
March 31, 2003 and 2002
Consolidated Statements of Cash Flows for the three months ended 5
March 31, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) 2003 2002
----------- ------------
UNAUDITED
ASSETS
Cash and cash equivalents................................... $ 103,151 $ 85,723
Accounts receivable - trade................................. 9,447 5,922
Prepaid expenses and other assets........................... 25,717 42,882
Rental merchandise, net
On rent................................................... 556,415 510,184
Held for rent............................................. 136,909 121,540
Property assets, net........................................ 109,015 105,949
Intangible assets, net...................................... 788,964 743,852
---------- -----------
$1,729,618 $1,616,052
========== ===========
LIABILITIES
Accounts payable - trade.................................... $ 79,392 $ 43,461
Accrued liabilities......................................... 165,234 122,717
Deferred income tax liability............................... 75,712 86,142
Senior debt................................................. 249,500 249,500
Subordinated notes payable, net of discount................. 271,849 271,830
---------- -----------
841,687 773,650
COMMITMENTS AND CONTINGENCIES................................... -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock, net of
placement costs, $.01 par value; 5,000,000 shares
authorized; 2 shares issued and outstanding in 2003 and
2002, respectively.......................................... 2 2
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 125,000,000 shares authorized;
39,747,712 and 39,538,042 shares issued in 2003 and 2002,
respectively.............................................. 397 395
Additional paid-in capital.................................. 539,339 532,675
Accumulated comprehensive loss.............................. (2,351) (3,726)
Retained earnings........................................... 479,547 428,621
Treasury stock, 4,875,269 and 4,599,269 shares at cost in
2003 and 2002, respectively............................... (129,003) (115,565)
---------- -----------
887,929 842,400
---------- -----------
$1,729,618 $1,616,052
========== ===========
See accompanying notes to consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
--------- ---------
UNAUDITED
Revenues
Store
Rentals and fees ...................................... $ 493,419 $ 443,705
Installment sales ..................................... 6,045 --
Merchandise sales ..................................... 52,664 39,605
Other ................................................. 715 614
Franchise
Merchandise sales ..................................... 12,072 13,253
Royalty income and fees ............................... 1,491 1,433
--------- ---------
566,406 498,610
Operating expenses
Direct store expenses
Depreciation of rental merchandise .................... 106,660 92,223
Cost of installment sales ............................. 3,231 --
Cost of merchandise sold .............................. 36,548 26,982
Salaries and other expenses ........................... 292,496 262,619
Franchise cost of merchandise sold ....................... 11,551 12,653
--------- ---------
450,486 394,477
General and administrative expenses ...................... 16,756 15,117
Amortization of intangibles .............................. 2,873 720
--------- ---------
Total operating expenses ........................... 470,115 410,314
Operating profit ................................... 96,291 88,296
Interest expense ........................................... 13,523 15,798
Interest income ............................................ (771) (723)
--------- ---------
Earnings before income taxes ....................... 83,539 73,221
Income tax expense ......................................... 32,580 29,658
--------- ---------
NET EARNINGS ....................................... 50,959 43,563
Preferred dividends ........................................ -- 4,992
--------- ---------
Net earnings allocable to common stockholders .............. $ 50,959 $ 38,571
========= =========
Basic earnings per common share ............................ $ 1.46 $ 1.57
========= =========
Diluted earnings per common share .......................... $ 1.42 $ 1.20
========= =========
See accompanying notes to consolidated financial statements.
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS OF DOLLARS) 2003 2002
--------- ---------
UNAUDITED
Cash flows from operating activities
Net earnings .................................................... $ 50,959 $ 43,563
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation of rental merchandise ............................ 106,660 92,223
Depreciation of property assets ............................... 10,120 9,466
Amortization of intangibles ................................... 2,873 720
Amortization of financing fees ................................ 262 690
Deferred income taxes ......................................... (10,430) 12,076
Changes in operating assets and liabilities, net of effects of
acquisitions
Rental merchandise ............................................ (117,896) (93,826)
Accounts receivable - trade ................................... (3,525) (1,144)
Prepaid expenses and other assets ............................. 15,422 (3,435)
Accounts payable - trade ...................................... 35,931 15,468
Accrued liabilities ........................................... 34,414 20,530
--------- ---------
Net cash provided by operating activities .................. 124,790 96,331
Cash flows from investing activities
Purchase of property assets ..................................... (9,245) (8,100)
Proceeds from sale of property assets............................ 223 374
Acquisitions of businesses, net of cash acquired ................ (91,065) (3,549)
--------- ---------
Net cash used in investing activities ...................... (100,087) (11,275)
Cash flows from financing activities
Purchase of treasury stock ...................................... (13,438) (34,724)
Exercise of stock options ....................................... 6,163 8,974
--------- ---------
Net cash used in financing activities ...................... (7,275) (25,750)
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 17,428 59,306
Cash and cash equivalents at beginning of period ................... 85,723 107,958
--------- ---------
Cash and cash equivalents at end of period ......................... $ 103,151 $ 167,264
========= =========
Supplemental cash flow information
Cash paid during the year for:
Interest ...................................................... $ 20,839 $ 18,585
Income taxes .................................................. $ 2,569 $ 2,018
During the first quarter of 2003, the Company paid dividends on its
Series A preferred stock of approximately $20.00 in cash. During the
first quarter of 2002, the Company paid dividends on its Series A
preferred stock of approximately $2.8 million by issuing 2,764 shares
of Series A preferred stock.
See accompanying notes to consolidated financial statements.
5
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements of Rent-A-Center, Inc. included herein
have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the
Commission's rules and regulations, although we believe that the
disclosures are adequate to make the information presented not misleading.
We suggest that these financial statements be read in conjunction with the
financial statements and notes included in our Annual Report on Form 10-K
for the year ended December 31, 2002. In our opinion, the accompanying
unaudited interim financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary to present fairly our
results of operations and cash flows for the periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year.
2. Principles of Consolidation and Nature of Operations. Unless the context
indicates otherwise, references to "Rent-A-Center" refer only to
Rent-A-Center, Inc., the parent, and references to "we," "us" and "our"
refer to the consolidated business operations of Rent-A-Center and all of
its direct and indirect subsidiaries. These financial statements include
the accounts of Rent-A-Center and its direct and indirect wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
At March 31, 2003, we operated 2,542 company-owned stores nationwide and in
Puerto Rico, including 23 stores in Wisconsin operated by a subsidiary, Get
It Now, LLC, under the name "Get It Now." Rent-A-Center's primary operating
segment consists of leasing household durable goods to customers on a
rent-to-own basis. Get It Now offers merchandise on an installment sales
basis in Wisconsin.
ColorTyme, Inc., an indirect wholly-owned subsidiary of Rent-A-Center, is a
nationwide franchisor of rent-to-own stores. At March 31, 2003, ColorTyme
had 317 franchised stores operating in 40 states. These rent-to-own stores
offer high quality durable products such as home electronics, appliances,
computers, and furniture and accessories. ColorTyme's primary source of
revenues is the sale of rental merchandise to its franchisees, who, in
turn, offer the merchandise to the general public for rent or purchase
under a rent-to-own program. The balance of ColorTyme's revenues is
generated primarily from royalties based on franchisees' monthly gross
revenues.
3. Reconciliation of Rental Merchandise.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ ------------------
Beginning merchandise value.......................... $ 631,724 $ 653,701
Inventory additions through acquisitions............. 50,364 1,240
Purchases............................................ 172,500 137,893
Depreciation of rental merchandise................... (106,660) (92,223)
Cost of goods sold................................... (39,779) (26,982)
Skips and stolens.................................... (10,469) (12,107)
Other inventory deletions(1)......................... (4,356) (4,978)
------------- ------------
Ending merchandise value............................. $ 693,324 $ 656,544
============= ============
- ---------------
(1) Other inventory deletions include loss/damage waiver claims and
unrepairable and missing merchandise, as well as acquisition write-offs.
6
RENT-A-CENTER, INC. AND SUBSIDIARIES
4. Intangibles.
Amortization of intangibles consists primarily of the amortization of
customer relationships and non-compete agreements. Effective January 1,
2002, under SFAS 142 all goodwill and intangible assets with indefinite
lives are no longer subject to amortization. We conducted our transition
test in 2002, which showed no impairment of our goodwill.
Intangibles consist of the following (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------- --------------------------
AVG. GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ---------- ------------ --------- ------------
Amortizable intangible assets
Franchise network 10 $ 3,000 $ 2,025 $ 3,000 $ 1,950
Non-compete agreements...... 5 6,010 1,670 1,510 1,444
Customer relationships...... 1.5 20,694 8,938 12,706 6,365
Intangible assets not subject
to amortization
Goodwill.................... 871,055 99,162 835,557 99,162
---------- --------- --------- ---------
Total intangibles $ 900,759 $ 111,795 $ 852,773 $ 108,921
========== ========= ========= =========
The remaining estimated amortization expense, assuming current intangible
balances and no new acquisitions, for each of the years ending December 31,
is as follows:
ESTIMATED
AMORTIZATION EXPENSE
---------------------
(IN THOUSANDS)
2003........ $ 9,201
2004........ 5,074
2005........ 1,427
2006........ 1,275
2007........ 94
-------------
Total....... $ 17,071
=============
Changes in the carrying amount of goodwill for the three months ended March
31, 2003 are as follows (in thousands):
Balance as of January 1, 2003 $ 736,395
Additions during first quarter 35,498
----------
Balance as of March 31, 2003 $ 771,893
==========
5. Stock Based Compensation.
Rent-A-Center's Amended and Restated Long-Term Incentive Plan (the "Plan")
for the benefit of certain key employees, consultants and directors
provides the Board of Directors broad discretion in creating equity
incentives. Under the plan, 7,900,000 shares of Rent-A-Center's common
stock are reserved for issuance under stock options, stock appreciation
rights or restricted stock grants. Options granted to our employees under
the Plan generally become exercisable over a period of one to five years
from the date of grant and may be exercised up to a maximum 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 March 31, 2003, there were
1,345,314 shares available for issuance under the Plan. However, pursuant
to the terms of the Plan, when an optionee leaves our employ, unvested
options granted to that employee terminate and become available for
re-issuance under the Plan. Vested options not exercised within 90 days
from the date the optionee leaves the Company's employ terminate and become
available for re-issuance under the Plan.
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
Rent-A-Center accounts for the Plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based employee compensation cost is
reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net
earnings and earnings per share if Rent-A-Center had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings allocable to common stockholders
As reported....................................................... $ 50,959 $ 38,571
Deduct: Total stock-based employee compensation under fair value
based method for all awards, net of related tax expense......... 3,704 2,823
-------- ---------
Pro forma......................................................... $ 47,255 $ 35,748
======== =========
Basic earnings per common share
As reported....................................................... $ 1.46 $ 1.57
Pro forma......................................................... $ 1.35 $ 1.46
Diluted earnings per common share
As reported....................................................... $ 1.42 $ 1.20
Pro forma......................................................... $ 1.32 $ 1.12
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 55.2% and 56.7% and risk-free interest
rates of 3.7% and 5.1% in 2003 and 2002, respectively, no dividend yield
and expected lives of seven years.
6. Earnings Per Share.
Basic and diluted earnings per common share is computed based on the
following information:
THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) NET EARNINGS SHARES PER SHARE
------------ -------- ---------
Basic earnings per common share.................... $ 50,959 34,896 $ 1.46
Effect of dilutive stock options................... -- 1,040
Assumed conversion of convertible
Preferred stock................................... -- --
---------- ------
Diluted earnings per common share.................. $ 50,959 35,936 $ 1.42
========== ======= ========
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ ------ ---------
Basic earnings per common share.................... $ 38,571 24,515 $ 1.57
Effect of dilutive stock options................... -- 1,239
Assumed conversion of convertible
Preferred stock................................... 4,992 10,567
---------- ------
Diluted earnings per common share.................. $ 43,563 36,321 $ 1.20
========== ====== ========
For the three months ended March 31, 2003 and 2002, the number of stock
options that were outstanding but not included in the computation of
diluted earnings per common share because their exercise price was greater
than the average market price of our common stock, and therefore
anti-dilutive, was 932,000 and 577,000, respectively.
Dividends on our Series A preferred stock are payable quarterly at an
annual rate of 3.75%. We accounted for shares of preferred stock
distributed as dividends in-kind in 2002 at the greater of the stated value
or the value of the common stock obtainable upon conversion on the payment
date. In 2003, we began paying dividends on our Series A preferred stock in
cash and paid approximately $20.00 in the first quarter of 2003.
8
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. Subsidiary Guarantors.
At March 31, 2003, Rent-A-Center East, one of our subsidiaries, had $271.8
million, net of discount, of 11% senior subordinated notes outstanding,
maturing on August 15, 2008, including $100.0 million which were issued in
December 2001 at 99.5% of par. The notes require semi-annual interest-only
payments at 11%, and are guaranteed by Rent-A-Center and certain of
Rent-A-Center East's direct and indirect wholly-owned subsidiaries,
consisting of ColorTyme, Rent-A-Center West, Inc., Get It Now,
Rent-A-Center Texas, L.L.C. and Rent-A-Center Texas, L.P. (collectively,
the "Subsidiary Guarantors" and, together with Rent-A-Center, the
"Guarantors"). The notes are redeemable at Rent-A-Center East's option, at
any time on or after August 15, 2003, at a set redemption price that varies
depending upon the proximity of the redemption date to final maturity. Upon
a change of control, the holders of the subordinated notes have the right
to require Rent-A-Center East to redeem the notes.
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on incurring
additional indebtedness, selling assets of the Subsidiary Guarantors,
granting liens to third parties, making restricted payments and engaging in
a merger or selling substantially all of Rent-A-Center East's assets.
Rent-A-Center and the Subsidiary Guarantors have fully, jointly and
severally, and unconditionally guaranteed the obligations of Rent-A-Center
East with respect to these notes. The only direct or indirect subsidiaries
of Rent-A-Center that are not Guarantors are minor subsidiaries. There are
no restrictions on the ability of any of the Guarantors to transfer funds
to Rent-A-Center East in the form of loans, advances or dividends, except
as provided by applicable law.
On May 6, 2003, Rent-A-Center East repurchased approximately $182.5 million
of its outstanding 11% senior subordinated notes pursuant to the early
tender provision of its tender offer announced in April 2003. Rent-A-Center
East currently intends to optionally redeem the remaining 11% senior
subordinated notes outstanding on August 15, 2003 pursuant to the terms of
the underlying indenture. See "Recent Developments" discussed later in this
report.
Set forth below is certain condensed consolidating financial information as
of March 31, 2003 and December 31, 2002, and for the three months ended
March 31, 2003 and 2002. The financial information includes the Subsidiary
Guarantors from the dates they were acquired or formed by Rent-A-Center and
Rent-A-Center East and is presented using the push-down basis of
accounting.
CONDENSED CONSOLIDATING BALANCE SHEETS
PARENT RENT-A-CENTER SUBSIDIARY CONSOLIDATING
COMPANY EAST GUARANTORS ADJUSTMENTS TOTALS
--------- ------------- ---------- ------------- ----------
(IN THOUSANDS)
MARCH 31, 2003 (UNAUDITED)
Rental merchandise, net................. $ -- $ 503,387 $ 189,937 $ -- $ 693,324
Intangible assets, net.................. -- 355,221 433,743 -- 788,964
Other assets............................ 423,825 127,871 37,376 (341,742) 247,330
--------- ----------- ---------- ------------- ----------
Total assets.................. $ 423,825 $ 986,479 $ 661,056 $ (341,742) $1,729,618
========= =========== ========== ============= ==========
Senior debt............................. $ -- $ 249,500 $ -- $ -- $ 249,500
Other liabilities....................... -- 386,920 205,267 -- 592,187
Preferred stock......................... 2 -- -- -- 2
Stockholders' equity.................... 423,823 350,059 455,789 (341,742) 887,929
--------- ----------- ---------- ------------- ----------
Total liabilities and equity.. $ 423,825 $ 986,479 $ 661,056 $ (341,742) $1,729,618
========= =========== ========== ============= ==========
DECEMBER 31, 2002
Rental merchandise, net................. $ -- $ 630,256 $ 1,468 $ -- $ 631,724
Intangible assets, net.................. -- 400,327 343,525 -- 743,852
Other assets............................ 417,507 121,758 42,953 (341,742) 240,476
--------- ----------- ---------- ------------- ----------
Total assets.................. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $1,616,052
========= =========== ========== ============= ==========
Senior debt............................. $ -- $ 249,500 $ -- $ -- $ 249,500
Other liabilities....................... -- 495,511 28,639 -- 524,150
Preferred stock......................... 2 -- -- -- 2
Stockholders' equity.................... 417,505 407,330 359,307 (341,742) 842,400
--------- ----------- ---------- ------------- ----------
Total liabilities and equity.. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $1,616,052
========= =========== ========== ============= ==========
9
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. Subsidiary Guarantors - (continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
PARENT RENT-A-CENTER SUBSIDIARY
COMPANY EAST GUARANTORS TOTAL
--------- ------------- ----------- ---------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
Total revenues...................................... $ -- $ 400,263 $ 166,143 $ 566,406
Direct store expenses............................... -- 297,466 141,469 438,935
Other expenses...................................... -- 50,274 26,238 76,512
--------- ----------- ---------- ---------
Net earnings (loss)................................. $ -- $ 52,523 $ (1,564) $ 50,959
========= =========== ========== =========
THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
Total revenues...................................... $ 483,924 $ -- $ 14,686 $ 498,610
Direct store expenses............................... 381,824 -- -- 381,824
Other expenses...................................... 60,570 -- 12,653 73,223
--------- ----------- ---------- ---------
Net earnings........................................ $ 41,530 $ -- $ 2,033 $ 43,563
========= =========== ========== =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
PARENT RENT-A-CENTER SUBSIDIARY
COMPANY EAST GUARANTORS TOTAL
--------- ------------- ---------- ---------
THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
Net cash provided by operating activities............ $ -- $ 89,864 $ 34,926 $ 124,790
--------- ----------- --------- ---------
Cash flows from investing activities
Purchase of property assets........................ -- (6,730) (2,515) (9,245)
Acquisitions of businesses, net of cash acquired... -- (60,504) (30,561) (91,065)
Other.............................................. -- 163 60 223
--------- ----------- --------- ---------
Net cash used in investing activities................ -- (67,071) (33,016) (100,087)
Cash flows from financing activities
Purchase of treasury stock......................... (13,438) -- -- (13,438)
Exercise of stock options.......................... 6,163 -- -- 6,163
Intercompany advances.............................. 7,275 (5,365) (1,910) --
--------- ----------- ---------- ---------
Net cash used in financing activities................ -- (5,365) (1,910) (7,275)
--------- ----------- ---------- ---------
Net increase in cash and cash equivalents............ -- 17,428 -- 17,428
--------- ----------- ---------- ---------
Cash and cash equivalents at beginning of period..... -- 85,723 -- 85,723
--------- ----------- ---------- ---------
Cash and cash equivalents at end of period........... $ -- $ 103,151 $ -- $ 103,151
========= =========== ========== =========
THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
Net cash provided by operating activities............ $ 96,052 $ -- $ 279 $ 96,331
--------- ----------- ---------- ---------
Cash flows from investing activities
Purchase of property assets........................ (8,811) -- 711 (8,100)
Acquisitions of businesses, net of cash acquired... (3,549) -- -- (3,549)
Other.............................................. 374 -- -- 374
--------- ----------- ---------- ---------
Net cash provided by (used in) investing activities.. (11,986) -- 711 (11,275)
Cash flows from financing activities
Purchase of treasury stock......................... (34,724) -- -- (34,724)
Exercise of stock options.......................... 8,974 -- -- 8,974
Intercompany advances.............................. 990 -- (990) --
--------- ----------- ---------- ---------
Net cash used in financing activities................ (24,760) -- (990) (25,750)
--------- ----------- ---------- ---------
Net increase in cash and cash equivalents............ 59,306 -- -- 59,306
--------- ----------- ---------- ---------
Cash and cash equivalents at beginning of period..... 107,958 -- -- 107,958
--------- ----------- ---------- ---------
Cash and cash equivalents at end of period........... $ 167,264 $ -- $ -- $ 167,264
========= =========== ========== =========
10
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. Comprehensive Income.
Comprehensive income includes net earnings and items of other comprehensive
income or loss. The following table provides information regarding
comprehensive income, net of tax:
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS)
2003 2002
--------- ----------
Net earnings.............................................................. $ 50,959 $ 43,563
Other comprehensive income:
Unrealized gain on derivatives held as cash flow hedges:
Change in unrealized gain during period.......................... 3,986 4,010
Reclassification adjustment for loss included in net earnings.... (2,611) (2,230)
--------- ----------
Other comprehensive income................................... 1,375 1,780
--------- ----------
Comprehensive income...................................................... $ 52,334 $ 45,343
========= ==========
9. Common and Preferred Stock Transactions.
Purchase of Treasury Stock. In connection with the retirement of J. Ernest
Talley, our former Chairman of the Board and Chief Executive Officer, we
entered into an agreement to repurchase $25.0 million worth of shares of
our common stock beneficially held by Mr. Talley at a purchase price equal
to the average closing price of our common stock over the 10 trading days
beginning October 9, 2001, subject to a maximum of $27.00 per share and a
minimum of $20.00 per share. Under this formula, the purchase price for the
repurchase was calculated at $20.258 per share. Accordingly, on October 23,
2001 we repurchased 493,632 shares of our common stock beneficially held by
Mr. Talley at $20.258 per share for a total purchase price of $10.0
million, and on November 30, 2001, we repurchased an additional 740,448
shares of our common stock beneficially held by Mr. Talley at $20.258 per
share, for a total purchase price of an additional $15.0 million. On
January 25, 2002, we exercised the option to repurchase all of the
remaining 1,714,086 shares of common stock beneficially held by Mr. Talley
at $20.258 per share. We repurchased those remaining shares on January 30,
2002.
In April 2000, we announced that our board of directors had authorized a
program to repurchase in the open market up to an aggregate of $25.0
million of our common stock. In October 2002, our Board of Directors
increased the amount of repurchases authorized under our common stock
repurchase program from $25.0 million to $50.0 million. In March 2003, our
Board of Directors again increased such amount from $50.0 million to $100.0
million. Through March 31, 2003, we have repurchased approximately 937,000
shares of our common stock under this program for approximately $44.3
million, 276,000 shares of which were purchased in the quarter ended March
31, 2003 for approximately $13.5 million. We have suspended our common
stock repurchase program pending the consummation of our recently announced
equity tender offer. See "Note 11" discussed later in this report. However,
we may begin repurchasing shares of our common stock at any time after the
tenth business day following the termination of the equity tender offer.
11
RENT-A-CENTER, INC. AND SUBSIDIARIES
10. Significant Acquisitions.
On February 8, 2003, we completed the acquisition of substantially all of
the assets of 295 rent-to-own stores from Rent-Way, Inc. for an aggregate
purchase price of $100.4 million in cash. Of the aggregate purchase price,
we held back $10.0 million to pay for various indemnified liabilities and
expenses, if any. We funded the acquisition entirely from cash on hand. Of
the 295 stores, 176 were subsequently merged with our existing store
locations. We entered into this transaction seeing it as an opportunistic
acquisition that would allow us to expand our store base in conjunction
with our strategic growth plans. The acquisition price was determined by
evaluating the average monthly rental income of the acquired stores and
applying a multiple to the total. We utilized a third party to review the
valuation of certain intangible assets, which resulted in a $4.0 million
decrease in the values assigned to customer relationships and a $4.0
million increase in the value placed on the non-compete agreement as
compared to our original estimates as disclosed in our 2002 annual report
on Form 10-K. The table below summarizes the allocation of the purchase
price based on the fair values of the assets acquired:
FAIR VALUES
(IN THOUSANDS)
-------------
Inventory............................. $ 50,100
Property assets....................... 4,300
Customer relationships................ 7,900
Non-compete agreement................. 4,500
Goodwill.............................. 33,600
---------
Total assets acquired................. $ 100,400
=========
Customer relationships will be amortized over an 18 month period. The
non-compete agreement is for four years and, in accordance with SFAS 142,
the goodwill associated with the acquisition will not be amortized.
11. Subsequent Events.
Stock Repurchase Program. On April 28, 2003, we announced the commencement
of a tender offer to purchase up to 2.2 million shares of our common stock
at prices between $60 and $66 per share pursuant to a modified "Dutch
Auction." The tender offer will expire at 5:00 p.m., New York City time, on
June 5, 2003, unless extended. We also announced, on April 25, 2003, that
we have entered into an agreement with Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P. (Apollo) which provides for the
repurchase of a number of shares of our common stock sufficient to reduce
Apollo's aggregate beneficial ownership from approximately 20.03% to 19.00%
on an issued and outstanding basis. Apollo will not be obligated to sell
any shares under this agreement unless it would be entitled to sell at
least 666,667 shares in reaching the 19.00% ownership level. Approximately
950,000 shares must be validly tendered by stockholders participating in
the tender offer in order to result in Apollo selling at least 666,667
shares. The per share purchase price payable pursuant to this agreement
will be equal to the per share purchase price of our common stock set in
the tender offer. We will repurchase the shares from Apollo on the eleventh
business day following the successful completion of the tender offer. The
tender offer is not conditioned on the tender of any minimum number of
shares.
Senior Subordinated Notes. On April 23, 2003, we announced Rent-A-Center
East's tender offer for all of its $272.25 million 11% Senior Subordinated
Notes due 2008. This tender offer is scheduled to expire at 12:00 midnight,
New York City time, on Tuesday, May 20, 2003. On May 6, 2003, Rent-A-Center
East repurchased approximately $182.5 million principal amount of 11%
senior subordinated notes pursuant to the early tender provisions of the
tender offer. Rent-A-Center East currently intends to optionally redeem on
August 15, 2003, in accordance with the terms of the underlying indenture,
all of the 11% senior subordinated notes then outstanding at the applicable
redemption price. This statement of intent shall not constitute a notice of
redemption under the underlying indenture. Such notice, if made, will only
be made in accordance with the applicable provisions of the underlying
indenture. Furthermore, under the terms of our existing senior credit
facility, we are required to redeem our 11% senior subordinated notes no
later than August 15, 2003.
On May 6, 2003, we issued an additional $300.0 million in senior
subordinated notes due 2010, bearing interest at 7 1/2%, the proceeds of
which were to be used to fund the repurchase and redemption of the 11%
senior subordinated notes.
Senior Debt Refinancing. We recently announced that we anticipate
refinancing our existing senior debt by entering into a new $600.0 million
senior credit facility, consisting of a $400.0 million term loan, a $120.0
million revolving credit facility and the right to obtain an additional
term loan of up to $80.0 million. We anticipate that the terms of the new
senior credit facility will, among other things, permit us to repurchase up
to approximately an additional $200.0 million of our common stock.
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
12. Guarantees.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirement for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees
that an entity has issued. We have applied the recognition provisions of
FIN 45 prospectively to guarantees issued after December 31, 2002, and have
adopted the quarterly disclosure provisions of FIN 45 for the quarter ended
March 31, 2003. The adoption of FIN 45 did not have a material impact to
our results of operations, financial condition or cash flows.
We provide assurance to our insurance providers that if they are not be
able to draw funds from us for claims paid, they have the ability to draw
against our letters of credit. One of our letters of credit is renewed
automatically every year unless we notify the institution not to renew. The
other letter of credit expires in August 2003, but is automatically renewed
each year for a one year period unless the institution notifies us prior to
the applicable expiration date that they elect not to renew the letter of
credit for such additional one year period.
At March 31, 2003, we had $85.7 million to support our outstanding letters
of credit. Of the $85.7 million, $80.0 million is supported by our Tranche
D LC Facility. Under this Tranche D LC Facility, in the event that a letter
of credit is drawn upon, we have the right to either repay the Tranche D LC
lenders the amount withdrawn or request a loan in that amount. Interest on
any requested Tranche D LC loan accrues at an adjusted prime rate plus
1.75% or, at our option, at the Eurodollar Rate plus 2.80%, with the entire
amount of the Tranche D LC Facility due on December 31, 2007. The remaining
$5.7 million reduces the amount available under our $120.0 million
revolving facility.
ColorTyme is a party to an agreement with Textron Financial Corporation,
who provides $40.0 million in financing to qualifying franchisees of
ColorTyme of up to five times their average monthly revenues. Under this on
going agreement, upon an event of default by the franchisee under
agreements governing this financing and upon the occurrence of certain
other events, Textron may assign the loans and the collateral securing such
loans to ColorTyme, with ColorTyme then succeeding to the rights of Textron
under the debt agreements, including the rights to foreclose on the
collateral. An additional $10.0 million of financing is provided by Texas
Capital Bank, National Association under an agreement similar to the
Textron financing. Rent-A-Center guarantees the obligations of ColorTyme
under these agreements, excluding the effects of any amounts that could be
recovered under collateralization provisions, up to a maximum amount of
$50.0 million, of which $31.8 million was outstanding as of March 31, 2003.
Mark E. Speese, Rent-A-Center's Chairman of the Board and Chief Executive
Officer, is a passive investor in Texas Capital Bank, owning less than 1%
of its outstanding equity.
13
RENT-A-CENTER, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts, included in this
report are forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may," "will,"
"would", "expect," "intend," "could", "estimate," "should," "anticipate" or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that these expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to these differences include,
but are not limited to:
- - uncertainties regarding the ability to open new stores;
- - our ability to acquire additional rent-to-own stores on favorable terms;
- - our ability to enhance the performance of these acquired stores, including
the stores acquired in the Rent-Way acquisition;
- - our ability to control store level costs;
- - our ability to realize benefits from our margin enhancement initiatives;
- - the results of our litigation;
- - the passage of legislation adversely affecting the rent-to-own industry;
- - interest rates;
- - changes in the credit markets;
- - our ability to enter into a new senior credit agreement containing terms
acceptable to us;
- - our ability to collect on our rental purchase agreements;
- - our ability to effectively hedge interest rates on our outstanding debt;
- - changes in our effective tax rate;
- - factors that may restrict our ability to redeem our outstanding 11% senior
subordinated notes on August 15, 2003, including our financial situation at
that time;
- - changes in our stock price and the number of shares of common stock that we
may or may not repurchase; and
- - the other risks detailed from time to time in our SEC reports.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under Risk Factors in our Annual
Report on Form 10-K for our fiscal year ended December 31, 2002. You should not
unduly rely on these forward-looking statements, which speak only as of the date
of this report. Except as required by law, we are not obligated to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances occurring after the date of this report or to reflect the
occurrence of unanticipated events.
OUR BUSINESS
We are the largest rent-to-own operator in the United States with an approximate
31% market share based on store count. At March 31, 2003, we operated 2,542
company-owned stores nationwide and in Puerto Rico, including 23 stores located
in Wisconsin and operated by our subsidiary Get It Now, LLC under the name "Get
It Now." Another of our subsidiaries, ColorTyme, is a national franchisor of
rent-to-own stores. At March 31, 2003, ColorTyme had 317 franchised stores in 40
states, 305 of which operated under the ColorTyme name and 12 stores of which
operated under the Rent-A-Center name. Our stores generally offer high quality
durable products such as home electronics, appliances, computers, and furniture
and accessories under flexible rental purchase agreements that generally allow
the customer to obtain ownership of the merchandise at the conclusion of an
agreed-upon rental period. These rental purchase agreements are designed to
appeal to a wide variety of customers by allowing them to obtain merchandise
that they might otherwise be unable to obtain due to insufficient cash resources
or a lack of access to credit. These agreements also cater to customers who only
have a temporary need or who simply desire to rent rather than purchase the
merchandise.
14
RENT-A-CENTER, INC. AND SUBSIDIARIES
We have pursued an aggressive growth strategy since 1989. We have sought to
acquire underperforming stores to which we could apply our operating model as
well as open new stores. As a result, the acquired stores have generally
experienced more significant revenue growth during the initial periods following
their acquisition than in subsequent periods. Because of significant growth
since our formation, particularly the Thorn Americas acquisition, our historical
results of operations and period-to-period comparisons of such results and other
financial data, including the rate of earnings growth, may not be meaningful or
indicative of future results.
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an emphasis on new store development. Typically, a newly
opened store is profitable on a monthly basis in the ninth to twelfth month
after its initial opening. Historically, a typical store has achieved cumulative
break-even profitability in 18 to 24 months after its initial opening. Total
financing requirements of a typical new store approximate $450,000, with roughly
70% of that amount relating to the purchase of rental merchandise inventory. A
newly opened store historically has achieved results consistent with other
stores that have been operating within the system for greater than two years by
the end of its third year of operation. As a result, our quarterly earnings are
impacted by how many new stores we opened during a particular quarter and the
quarters preceding it. There can be no assurance that we will open any new
stores in the future or as to the number, location or profitability thereof.
In addition, to provide any additional funds necessary for the continued pursuit
of our operating and growth strategies, we may incur from time to time
additional short or long-term bank indebtedness and may issue, in public or
private transactions, equity and debt securities. The availability and
attractiveness of any outside sources of financing will depend on a number of
factors, some of which will relate to our financial condition and performance,
and some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance additional financing will
be available, or if available, will be on terms acceptable to us.
RECENT DEVELOPMENTS
Store Growth. We are actively seeking to increase our store base and annual
revenues and profits through opportunistic acquisitions and new store openings.
On February 8, 2003, we acquired substantially all of the assets of 295 stores
located throughout the United States from Rent-Way, Inc. and certain of its
subsidiaries for approximately $100.4 million in cash. Of the 295 stores, 176
were merged with existing locations. Furthermore, during the first quarter of
2003, we acquired one additional store, accounts from two additional locations,
opened 20 new stores, and closed five stores. All of the closed stores were
merged with existing store locations. The additional store and acquired accounts
were the result of three separate transactions for an aggregate price of
approximately $700,000 in cash. As of May 9, 2003, we have acquired three
additional stores, accounts from four additional locations and opened nine new
stores during the second quarter of 2003. It is our intention to increase the
number of stores we operate by an average of approximately 5 to 10% per year
over the next several years.
Stock Repurchase Program. On March 19, 2003, our Board of Directors increased
the amount of repurchases of our outstanding common stock authorized under our
common stock repurchase program from $50.0 million to $100.0 million. During the
first quarter of 2003, we repurchased approximately $13.5 million of our common
stock under the common stock repurchase program. We have suspended our common
stock repurchase program pending the consummation of our recently announced
equity tender offer discussed below. However, we may begin repurchasing shares
of our common stock at any time after the tenth business day following the
termination of the equity tender offer.
On April 28, 2003, we announced the commencement of a tender offer to purchase
up to 2.2 million shares of our common stock at prices between $60 and $66 per
share pursuant to a modified "Dutch Auction." The tender offer will expire at
5:00 p.m., New York City time, on June 5, 2003, unless extended. We also
announced on April 25, 2003, that we have entered into an agreement with Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. which provides
for the repurchase of a number of shares of our common stock sufficient to
reduce Apollo's aggregate beneficial ownership from approximately 20.03% to
19.00% on an issued and outstanding basis. Apollo will not be obligated to sell
any shares under this agreement unless it would be entitled to sell at least
666,667 shares in reaching the 19.00% ownership level. Approximately 950,000
shares must be validly tendered by stockholders participating in the tender
offer in order to result in Apollo selling at least 666,667 shares. The per
share purchase price payable pursuant to this agreement will be equal to the per
share purchase price of our common stock set in the tender offer. We will
repurchase the shares from Apollo on the eleventh business day following the
successful completion of the tender offer. The tender offer is not conditioned
on the tender of any minimum number of shares.
15
RENT-A-CENTER, INC. AND SUBSIDIARIES
Senior Subordinated Notes. On April 23, 2003, we announced Rent-A-Center East's
tender offer for all of its $272.25 million 11% Senior Subordinated Notes due
2008. This tender offer is scheduled to expire at 12:00 midnight, New York City
time, on Tuesday, May 20, 2003. On May 6, 2003, Rent-A-Center East repurchased
approximately $182.5 million principal amount of 11% senior subordinated notes
pursuant to the early tender provisions of the tender offer. Rent-A-Center East
currently intends to optionally redeem on August 15, 2003, in accordance with
the terms of the underlying indenture, all of the 11% senior subordinated notes
then outstanding at the applicable redemption price. This statement of intent
shall not constitute a notice of redemption under the underlying indenture. Such
notice, if made, will only be made in accordance with the applicable provisions
of the underlying indenture. Furthermore, under the terms of our existing senior
credit facility, we are required to redeem our 11% senior subordinated notes no
later than August 15, 2003.
On May 6, 2003, we issued an additional $300.0 million in senior subordinated
notes due 2010, bearing interest at 7 1/2%, the proceeds of which were to be
used to fund the repurchase and redemption of the 11% senior subordinated notes.
Senior Debt Refinancing. We recently announced that we anticipate refinancing
our existing senior debt by entering into a new $600.0 million senior credit
facility, consisting of a $400.0 million term loan, a $120.0 million revolving
credit facility and the right to obtain an additional term loan of up to $80.0
million. We anticipate that the terms of the new senior credit facility will,
among other things, permit us to repurchase up to approximately an additional
$200.0 million of our common stock.
CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ESTIMATES, UNCERTAINTIES OR
ASSESSMENTS IN OUR FINANCIAL STATEMENTS
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In applying accounting principles, we must often make
individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are generally
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as they
are known. Our estimates, judgments and assumptions are continually evaluated
based on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Actual results related to the estimates and assumptions made by us in preparing
our consolidated financial statements will emerge over periods of time, such as
estimates and assumptions underlying the determination of our self-insurance
liabilities. These estimates and assumptions are closely monitored by us and
periodically adjusted as circumstances warrant. For instance, our liability for
our self-insured retentions related to our workers compensation, general
liability, medical and auto liability may be adjusted based on higher or lower
actual loss experience. Although there is greater risk with respect to the
accuracy of these estimates and assumptions because of the period over which
actual results may emerge, such risk is mitigated by our ability to make changes
to these estimates and assumptions over the same period.
In preparing our financial statements at any point in time, we are also
periodically faced with uncertainties, the outcomes of which are not within our
control and will not be known for prolonged periods of time. As discussed in
Part II, Item 1 "Legal Proceedings" and the notes to our consolidated financial
statements included in our Annual Report on Form 10-K, we are involved in
actions relating to claims that our rental purchase agreements constitute
installment sales contracts, violate state usury laws or violate other state
laws enacted to protect consumers, claims asserting violations of wage and hour
laws in our employment practices, as well as claims we violated the federal
securities laws. We, together with our counsel, make estimates, if determinable,
of our probable liabilities and record such amounts in our consolidated
financial statements. These estimates represent our best estimate, or may be the
minimum range of probable loss when no single best estimate is determinable. We,
together with our counsel, monitor developments related to these legal matters
and, when appropriate, adjustments are made to liabilities to reflect current
facts and circumstances.
We periodically review the carrying value of our goodwill and other intangible
assets when events and circumstances warrant such a review. One of the methods
used for this review is performed using estimates of future cash flows. If the
carrying value of our goodwill or other intangible assets is considered
impaired, an impairment charge is recorded for the amount by which the carrying
value of the goodwill or intangible assets exceeds its fair value. We believe
that the estimates of future cash flows and fair value are reasonable. Changes
in estimates of such cash flows and fair value, however, could affect the
evaluation.
16
RENT-A-CENTER, INC. AND SUBSIDIARIES
Based on an assessment of our accounting policies and the underlying judgments
and uncertainties affecting the application of those policies, we believe that
our consolidated financial statements provide a meaningful and fair perspective
of our company. However, we do not suggest that other general risk factors, such
as those discussed in our Annual Report on Form 10-K as well as changes in our
growth objectives or performance of new or acquired stores, could not adversely
impact our consolidated financial position, results of operations and cash flows
in future periods.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are summarized below and in Note A to our
consolidated financial statements included in our Annual Report on Form 10-K.
Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over the term
of the agreement. Rental purchase agreements generally include a discounted
early purchase option. Upon exercise of this option, and upon sale of used
merchandise, revenue is recognized as these payments are received.
Franchise Revenue. Revenue from the sale of rental merchandise is recognized
upon shipment of the merchandise to the franchisee. Franchise fee revenue is
recognized upon completion of substantially all services and satisfaction of all
material conditions required under the terms of the franchise agreement.
Depreciation of Rental Merchandise. We depreciate our rental merchandise using
the income forecasting method. The income forecasting method of depreciation we
use does not consider salvage value and does not allow the depreciation of
rental merchandise during periods when it is not generating rental revenue. The
objective of this method of depreciation is to provide for consistent
depreciation expense while the merchandise is on rent. On July 1, 2002, we began
accelerating the depreciation on computers that are 21 months old or older and
which have become idle using the straight-line method for a period of at least
six months. The purpose for this change is to better reflect the depreciable
life of a computer in our stores and to encourage the sale of older computers.
Though this method will accelerate the depreciation expense on the affected
computers, we do not expect it to have a material effect on our financial
position, results of operations or cash flows in future periods.
Cost of Merchandise Sold. Cost of merchandise sold represents the book value net
of accumulated depreciation of rental merchandise at time of sale.
Salaries and Other Expenses. Salaries and other expenses include all salaries
and wages paid to store level employees, together with market managers'
salaries, travel and occupancy, including any related benefits and taxes, as
well as all store level general and administrative expenses and selling,
advertising, insurance, occupancy, fixed asset depreciation and other operating
expenses.
General and Administrative Expenses. 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 customer relationships and non-compete agreements resulting
from acquisitions. Effective January 1, 2002, under SFAS 142 all goodwill and
intangible assets with indefinite lives are no longer subject to amortization.
17
RENT-A-CENTER, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Store Revenue. Total store revenue increased by $68.9 million, or 14.2%, to
$552.8 million for the three months ended March 31, 2003 from $483.9 million for
the three months ended March 31, 2002. The increase in total store revenue is
primarily attributable to growth in same store revenues, an increase in cash
sales and early purchase options as well as incremental revenues related to the
acquisition of 295 Rent-Way stores on February 8, 2003.
Same store revenues represent those revenues earned in stores that were operated
by us for each of the entire three month periods ending March 31, 2003 and 2002.
Same store revenues increased by $25.6 million, or 6.2%, to $439.1 million for
the three months ended March 31, 2003 from $413.5 million in 2002. The increase
in same store revenues was primarily attributable to an increase in the number
of customers served (approximately 404 per day per store for 2003 vs.
approximately 403 per day per store for 2002 in same stores open), as well as
total revenue earned per customer including all rentals, fees and cash sales
(approximately $562 per customer for the quarter ending March 31, 2003 versus
approximately $532 per customer for the quarter ending March 31, 2002).
Merchandise sales increased $13.1 million, or 33%, to $52.7 million for 2003
from $39.6 million in 2002. The increase in merchandise sales was primarily
attributable to an increase in the number of items sold in the first quarter of
2003 (approximately 317,975) from the number of items sold in 2002
(approximately 258,063). This increase in the number of items sold in 2003
versus the same period in 2002 was primarily the result of an increase in the
amount of customers exercising early purchase options.
Franchise Revenue. Total franchise revenue decreased by $1.1 million, or 7.7%,
to $13.6 million for the three months ended March 31, 2003 from $14.7 million in
2002. This decrease was primarily attributable to a decrease in merchandise
sales to franchise locations as a result of a decrease in the number of
franchised locations in the first quarter of 2003 as compared to the first
quarter of 2002.
Depreciation of Rental Merchandise. Depreciation of rental merchandise increased
by $14.4 million, or 15.7%, to $106.7 million for the three months ended March
31, 2003 from $92.2 million in 2002. Depreciation of rental merchandise
expressed as a percent of store rentals and fees revenue increased to 21.6% in
2003 from 20.8% for the same period in 2002. These increases were primarily
attributable to an increase in rental and fee revenue, pricing and term changes
put into place in late 2001 and higher depreciation associated with the recently
acquired Rent-Way inventory.
Cost of Merchandise Sold. Cost of merchandise sold increased by $9.6 million, or
35.5%, to $36.5 million for the three months ended March 31, 2003 from $27.0
million in 2002. This increase was primarily a result of an increase in the
number of items sold during the first three months of 2003 as compared to the
first three months of 2002, as well as the additional sales of inventory gained
through the acquisition of 295 Rent-Way stores.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 52.9% for the three months ended
March 31, 2003 from 54.3% for the three months ended March 31, 2002. This
decrease was primarily attributable to an increase in store revenues in the
first quarter of 2003 as compared to 2002 coupled with the continued
improvements seen in the realization of our margin enhancement initiatives and
reductions in store level costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased
by $1.1, or 8.7%, to $11.6 million for the three months ended March 31, 2003
from $12.7 million in 2002. This decrease was primarily attributable to a
decrease in the number of franchised locations in the first quarter of 2003 as
compared to the first quarter of 2002.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue remained relatively constant at 3.0% for
the three months ending March 31, 2003 and 2002, respectively.
Amortization of Intangibles. Amortization of intangibles increased by $2.2
million, or 299.0%, to $2.9 million for the three months ended March 31, 2003
from $720,000 for the three months ended March 31, 2002. This increase was
attributable to the Rent-Way acquisition and the number of acquisitions made
during the later part of 2002 versus 2001. The result of those prior year
acquisitions is a higher amortization of intangibles in the first quarter of
2003 versus 2002.
Operating Profit. Operating profit increased by $8.0 million, or 9.1%, to $96.3
million for the three months ended March 31, 2003 from $88.3 million in 2002.
Operating profit as a percentage of total revenue decreased to 17.0% for the
three months ended March 31, 2003, from 17.7% in 2002. This decrease was
primarily attributable to the increases in depreciation of rental merchandise
and amortization of intangibles during the first quarter of 2003 versus 2002, as
well as the effect of the Rent-Way acquisition.
18
RENT-A-CENTER, INC. AND SUBSIDIARIES
Net Earnings. Net earnings increased by $7.4 million, or 17.0%, to $51.0 million
for the three months ended March 31, 2003 from $43.6 million in 2002. This
increase is primarily attributable to growth in total revenues, reduced interest
expenses resulting from a reduction in outstanding debt and the improvements
seen in salaries and other expenses under our cost control programs.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. Preferred dividends decreased by $5.0
million, or nearly 100%, for the three months ended March 31, 2003, primarily
due to the conversion of all but two shares of outstanding Series A preferred
stock in August 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $28.5 million to $124.8
million for the three months ending March 31, 2003 from $96.3 million in 2002.
This increase resulted primarily from an increase in net earnings, accounts
payable and accrued liabilities during the first three months of 2003 compared
to 2002, offset by increased purchases of inventory.
Cash used in investing activities increased by $88.8 million to $100.1 million
during the three month period ending March 31, 2003 from $11.3 million in 2002.
This increase is primarily attributable to the acquisition of 295 stores from
Rent-Way.
Cash used in financing activities decreased by $18.5 million to $7.3 million
during the three month period ending March 31, 2003 from $25.8 million in 2002.
This decrease is a result of the difference between our purchase of $34.7
million in treasury stock in the first quarter of 2002 as compared to $13.4
million during the first quarter of 2003, offset by fewer proceeds from options
exercised in 2003 as compared to 2002.
Liquidity Requirements. Our primary liquidity requirements are for debt service,
rental merchandise purchases, capital expenditures, litigation and our store
expansion program. Our primary sources of liquidity have been cash provided by
operations, borrowings and sales of equity securities. In the future, we may
incur additional debt, or may issue debt or equity securities to finance our
operating and growth strategies. The availability and attractiveness of any
outside sources of financing will depend on a number of factors, some of which
relate to our financial condition and performance, and some of which are beyond
our control, such as prevailing interest rates and general economic conditions.
There can be no assurance that additional financing will be available, or if
available, that it will be on terms we find acceptable.
We believe that the cash flow generated from operations, together with amounts
available under our existing senior credit facilities, will be sufficient to
fund our debt service requirements, rental merchandise purchases, capital
expenditures, litigation and our store expansion programs during 2003. Our
existing revolving credit facilities provide us with revolving loans in an
aggregate principal amount not exceeding $130.0 million, of which $124.3 million
was available at May 9, 2003. At May 9, 2003, we had $162.6 million in cash.
While our operating cash flow has been strong and we expect this strength to
continue, our liquidity could be negatively impacted if we do not remain as
profitable as we expect.
Our existing senior credit facility and the indentures governing our senior
subordinated notes contain certain change in control provisions. A change in
control would result in an event of default under our existing senior credit
facilities, and, pursuant to the underlying indentures, would also require us to
offer to repurchase all of our senior subordinated notes at 101% of their
principal amount, plus accrued interest to the date of repurchase. Provisions of
our existing senior credit facility would prohibit the repurchase of all of our
senior subordinated notes. In the event a change in control occurs, we cannot be
sure that we would have enough funds to immediately pay our accelerated senior
credit facility obligations and all of the senior subordinated notes, or that we
would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes. On March 9, 2002, President Bush signed into law the Job
Creation and Worker Assistance Act of 2002, which provides for accelerated tax
depreciation deductions for qualifying assets placed in service between
September 11, 2001 and September 10, 2004. Under these provisions, 30 percent of
the basis of qualifying property is deductible in the year the property is
placed in service, with the remaining 70 percent of the basis depreciated under
the normal tax depreciation rules. Accordingly, our cash flow will benefit from
having a lower current cash tax obligation, which in turn will provide
additional cash flows from operations until the deferred tax liabilities begin
to reverse. We estimate that our operating cash flow will increase by
approximately $60.0 million through 2004 before the deferred tax liabilities
begin to reverse over a three year period beginning in 2005.
Rental Merchandise Purchases. We purchased $172.5 million and $137.9 million of
rental merchandise during the three month periods ending March 31, 2003 and
2002, respectively.
19
RENT-A-CENTER, INC. AND SUBSIDIARIES
Capital Expenditures. We make capital expenditures in order to maintain our
existing operations as well as for new capital assets in new and acquired
stores. We spent $9.2 million and $8.1 million on capital expenditures during
the three month periods ending March 31, 2003 and 2002, respectively, and expect
to spend approximately $31.0 million for the remainder of 2003.
Acquisitions and New Store Openings. For the first three months of 2003, we
spent approximately $101.1 million on acquiring stores and accounts of which
$100.4 million was for the Rent-Way acquisition. For the entire year ending
December 31, 2003, we intend to add approximately 5% to 10% to our store base by
opening approximately 80 new store locations as well as continuing to pursue
opportunistic acquisitions.
The profitability of our stores tends to grow at a slower rate approximately
five years from the time we open or acquire them. As a result, in order for us
to show improvements in our profitability, it is important for us to continue to
open stores in new locations or acquire under-performing stores on favorable
terms. There can be no assurance that we will be able to acquire or open new
stores at the rates we expect, or at all. We cannot assure you that the stores
we do acquire or open will be profitable at the same levels that our current
stores are, or at all.
Borrowings. The table below shows the scheduled maturity dates of our existing
senior debt outstanding at March 31, 2003.
PERIOD (YEAR) ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------------- --------------
2003....... $ 1,063
2004....... 13,040
2005....... 49,093
2006....... 114,111
2007....... 72,193
Thereafter.......... --
---------
$ 249,500
=========
Since March 31, 2003 we have prepaid an additional $24.5 million of our existing
senior debt during the second quarter.
Senior Credit Facilities. Our existing senior credit facilities are provided by
a syndicate of banks and other financial institutions led by JPMorgan Chase
Bank, as administrative agent. At March 31, 2003, we had a total of $249.5
million outstanding under our existing senior credit facility related to our
term loans and $114.3 million of availability under the revolving credit line
portion of our existing senior credit facility.
Under our $80.0 million Tranche D LC Facility, in the event that a letter of
credit is drawn upon, we have the right to either repay the Tranche D LC
Facility lenders the amount withdrawn or request a loan in that amount. Interest
on any requested Tranche D LC Facility loan accrues at an adjusted prime rate
plus 1.75% or, at our option, at the Eurodollar base rate plus 2.80%, with the
entire amount of the Tranche D LC Facility due on December 31, 2007.
Borrowings under our existing senior credit facilities bear interest at varying
rates equal to 1.50% to 3.00% over the Eurodollar rate, which was 1.30% at March
31, 2003. We also have a prime rate option under the facilities, but have not
exercised it to date. For the quarter ended March 31, 2003, the average
effective rate on outstanding borrowings under our existing senior credit
facilities was 4.80%, before considering the interest rate swap agreements as
described below, and 9.04%, after giving effect to the interest rate swap
agreements in effect during the first quarter of 2003.
During 1998, we entered into interest rate protection agreements with two banks,
one of which expired in 2001. Under the terms of the current interest rate
agreements, the Eurodollar rate used to calculate the interest rate charged on
our $250.0 million outstanding senior term debt has been fixed at an average
rate of 5.60%. Of the $250.0 million under protection, $140.0 million expires in
August 2003 and the remaining $110.0 million expires in September 2003.
Our existing senior credit facilities are secured by a security interest in
substantially all of our tangible and intangible assets, including intellectual
property and real property. Our existing senior credit facilities are also
secured by a pledge of the capital stock of our subsidiaries.
20
RENT-A-CENTER, INC. AND SUBSIDIARIES
Our existing senior credit facilities contain covenants, including without
limitation, covenants that generally limit our ability to:
- incur additional debt (including subordinated debt) in excess of $25
million at any one time outstanding;
- repurchase our capital stock and senior subordinated notes;
- incur liens or other encumbrances;
- merge, consolidate or sell substantially all our property or business;
- sell assets, other than inventory in the ordinary course of business;
- make investments or acquisitions unless we meet financial tests and
other requirements;
- make capital expenditures; or
- enter into a new line of business.
Our existing senior credit facilities require us to comply with several
financial covenants, including a maximum consolidated leverage ratio, a minimum
consolidated interest coverage ratio and a minimum fixed charge coverage ratio.
At March 31, 2003, the maximum consolidated leverage ratio was 3.00:1, the
minimum consolidated interest coverage ratio was 3.50:1, and the minimum fixed
charge coverage ratio was 1.30:1. On that date, our actual ratios were 1.22:1,
6.78:1 and 2.70:1, respectively. In addition, we are required to use 25% of the
net proceeds from any equity offering to repay our term loans.
Events of default under our existing senior credit facilities include customary
events, such as a cross-acceleration provision in the event that we default on
other debt. In addition, an event of default under the senior credit facilities
would occur if we undergo a change of control. This is defined to include the
case where a third party becomes the beneficial owner of 33.33% or more of our
voting stock or certain changes in our Board of Directors occur.
We recently announced that we anticipate refinancing our existing senior credit
facilities by entering into a new $600.0 million senior credit facility,
consisting of a $400.0 million term loan, a $120.0 million revolving credit
facility and the right to obtain an additional term loan of up to $80.0 million.
We anticipate the terms of the new senior credit facility will, among other
things, permit us to repurchase up to approximately an additional $200.0 million
of our common stock.
11% Senior Subordinated Notes. As of March 31, 2003, Rent-A-Center East had
outstanding $272.25 million in 11% senior subordinated notes pursuant to an
indenture dated as of December 19, 2001 among Rent-A-Center East, its subsidiary
guarantors and The Bank of New York, as trustee.
The 2001 indenture contains covenants that limit Rent-A-Center East's ability
to:
- incur additional debt;
- sell assets or our subsidiaries;
- grant liens to third parties;
- pay dividends or repurchase stock; and
- engage in a merger or sell substantially all of our assets.
Events of default under the 2001 indenture include customary events, such as a
cross-acceleration provision in the event that we default in the payment of
other debt due at maturity or upon acceleration for default in an amount
exceeding $25.0 million.
The notes may be redeemed on or after August 15, 2003, at our option, in whole
or in part, at a premium declining from 105.5%. The subordinated notes also
require that upon the occurrence of a change of control (as defined in the 2001
indenture), the holders of the notes have the right to require us to repurchase
the notes at a price equal to 101% of the original aggregate principal amount,
together with accrued and unpaid interest, if any, to the date of repurchase. If
Rent-A-Center East did not comply with this repurchase obligation, this would
trigger an event of default under our senior credit facilities.
21
RENT-A-CENTER, INC. AND SUBSIDIARIES
On April 23, 2003, we announced Rent-A-Center East's tender offer for all of its
$272.25 million 11% senior subordinated notes. This tender offer is scheduled to
expire at 12:00 midnight, New York City time, on Tuesday, May 20, 2003. On May
6, 2003, Rent-A-Center East repurchased approximately $182.5 million principal
amount of 11% senior subordinated notes pursuant to the early tender provisions
of the tender offer. Rent-A-Center East currently intends to optionally redeem
on August 15, 2003, in accordance with the terms of the 2001 indenture, all of
the 11% senior subordinated notes then outstanding at the applicable redemption
price. This statement of intent shall not constitute a notice of redemption
under the underlying indenture. Such notice, if made, will only be made in
accordance with the applicable provisions of the underlying indenture.
7 1/2% Senior Subordinated Notes. On May 6, 2003, we issued an additional $300.0
million in senior subordinated notes due 2010, bearing interest at 7 1/2%,
pursuant to an indenture dated May 6, 2003, among Rent-A-Center, Inc., its
subsidiary guarantors and The Bank of New York, as trustee. The proceeds of this
offering are to be used to fund the repurchase and redemption of the 11% senior
subordinated notes.
The 2003 indenture contains covenants that limit Rent-A-Center's ability to:
- - incur additional debt;
- - sell assets or our subsidiaries;
- - grant liens to third parties;
- - pay dividends or repurchase stock; and
- - engage in a merger or sell substantially all of our assets.
Events of default under the 2003 indenture include customary events, such as a
cross-acceleration provision in the event that we default in the payment of
other debt due at maturity or upon acceleration for default in an amount
exceeding $50.0 million. It is also an event of default under the 2003 indenture
if we fail to purchase or redeem all of the 11% senior subordinated notes by
August 30, 2003.
The 7 1/2% notes may be redeemed on or after May 1, 2006, at our option, in
whole or in part, at a premium declining from 103.75%. The 7 1/2% subordinated
notes also require that upon the occurrence of a change of control (as defined
in the 2003 indenture), the holders of the notes have the right to require us to
repurchase the notes at a price equal to 101% of the original aggregate
principal amount, together with accrued and unpaid interest, if any, to the date
of repurchase. If we do not comply with this repurchase obligation, this would
trigger an event of default under our existing senior credit facilities.
Store Leases. We lease space for all of our stores as well as our corporate and
regional offices under operating leases expiring at various times through 2010.
ColorTyme Guarantee. ColorTyme is a party to an agreement with Textron Financial
Corporation, who generally provides $40.0 million in aggregate financing to
qualifying franchisees of ColorTyme of up to five times their average monthly
revenues. Under this agreement, upon an event of default by the franchisee under
agreements governing this financing and upon the occurrence of certain other
events, Textron may assign the loans and the collateral securing such loans to
ColorTyme, with ColorTyme then succeeding to the rights of Textron under the
debt agreements, including the rights to foreclose on the collateral. An
additional $10.0 million of financing is provided by Texas Capital Bank,
National Association under an arrangement similar to the Textron financing. We
guarantee the obligations of ColorTyme under these agreements up to a maximum
amount of $50.0 million, of which $31.8 million was outstanding as of March 31,
2003. Mark E. Speese, our Chairman of the Board and Chief Executive Officer, is
a passive investor in Texas Capital Bank, owning less than 1% of its outstanding
equity.
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
Litigation. In 1998, we recorded an accrual of approximately $125.0 million for
estimated probable losses on litigation assumed in connection with the Thorn
Americas acquisition. As of March 31, 2003, we have paid approximately $124.5
million of this accrual in settlement of most of these matters and legal fees.
These settlements were funded primarily from amounts available under our senior
credit facilities, including the revolving credit facility and the multidraw
facility, as well as from cash flow from operations.
On November 12, 2002, we signed a settlement agreement settling the Wisconsin
Attorney General matter, which was approved by the court on the same day. Under
the terms of the settlement, we created a restitution fund in the amount of $7.0
million for our eligible Wisconsin customers who had completed or active
transactions with us as of September 30, 2002. In addition, we paid $1.4 million
to the State of Wisconsin for fines, penalties, costs and fees. The settlement
of this matter was fully reserved for in our financial statements. A portion of
the restitution fund is allocated for customers with completed transactions as
of September 30, 2002, and the balance is allocated for restitution on active
transactions as of September 30, 2002, which will be allowed to terminate
according to their terms when customers either acquire or return the
merchandise. Restitution will be offered on the active transactions when all
such active transactions have terminated, which we anticipate will occur by the
fall of 2004. Any unclaimed restitution funds at the conclusion of the
restitution period will be returned to us. To the extent the amount in the
restitution fund is insufficient to pay the required amount of restitution, we
are obligated to provide additional funds to do so. However, we believe the
amount in the restitution fund allocated for the active transactions, together
with the amount of funds we anticipate will remain unclaimed by customers with
completed transactions, will be sufficient to pay the required amount of
restitution on all eligible active transactions.
Additional settlements or judgments against us on our existing litigation could
affect our liquidity. Please refer to Note J or our consolidated financial
statements included in our Annual Report on Form 10-K.
Sales of Equity Securities. During 1998, we issued 260,000 shares of our Series
A preferred stock at $1,000 per share, resulting in aggregate proceeds of $260.0
million. Dividends on our Series A preferred stock accrue on a quarterly basis
at the rate of 3.75%, or $37.50 per annum. Prior to the conversion of all but
two shares of our Series A preferred stock in August 2002, we paid these
dividends in additional shares of Series A preferred stock because of
restrictive provisions in our senior credit facilities. We have the ability to
pay the dividends in cash and may do so under our existing senior credit
facilities so long as we are not in default.
On May 31, 2001, we completed an offering of 3,680,000 shares of our common
stock at an offering price of $42.50 per share. In that offering, 1,150,000
shares were offered by us and 2,530,000 shares were offered by some of our
stockholders. Net proceeds to us were approximately $45.6 million.
In connection with the issuance of our Series A preferred stock in August 1998,
we entered into a registration rights agreement with Apollo which, among other
things, granted them two rights to request that their shares be registered, and
a registration rights agreement with an affiliate of Bear Stearns, which granted
them the right to participate in any company-initiated registration of shares,
subject to certain exceptions. In May 2002, Apollo exercised one of their two
rights to request that their shares be registered and an affiliate of Bear
Stearns elected to participate in such registration. In connection therewith,
Apollo and an affiliate of Bear Stearns converted 97,197 shares of our Series A
preferred stock held by them into 3,500,000 shares of our common stock, which
they sold in the May 2002 public offering that was the subject of Apollo's
request. We did not receive any of the proceeds from this offering.
On August 5, 2002, the first date on which we had the right to optionally redeem
the shares of Series A preferred stock, the holders of our Series A preferred
stock converted all but two shares of our Series A preferred stock held by them
into 7,281,548 shares of our common stock. As a result, the dividend on our
Series A preferred stock has been substantially eliminated for future periods.
In connection with Apollo's conversion of all but two of the shares of Series A
preferred stock held by them on August 5, 2002, we granted Apollo an additional
right to effect a demand registration under the existing registration rights
agreement we entered into with them in 1998, such that Apollo now has two demand
rights.
23
RENT-A-CENTER, INC. AND SUBSIDIARIES
Contractual Cash Commitments. The table below summarizes debt, lease and other
minimum cash obligations outstanding as of March 31, 2003:
PAYMENTS DUE BY YEAR END
Contractual Cash Obligations(1) TOTAL 2003 2004 2005 2006 2007 2008 AND THEREAFTER
------------------------------- ----- ---- ---- ---- ---- ---- -------------------
(IN THOUSANDS)
Existing Senior Credit Facilities
(including current portion)....... $ 249,500 $ 1,063 $ 13,040 $ 49,093 $114,111 $ 72,193 $ --
11% Senior Subordinated
Notes (2)........................ 436,961 14,974 29,948 29,948 29,948 29,948 302,195
Operating Leases..................... 395,076 127,258 110,057 83,764 47,877 21,158 4,962
- ------------------------------------- ---------- -------- --------- --------- -------- -------- --------
Total $1,081,537 $143,295 $ 153,045 $ 162,805 $191,936 $123,299 $307,157
- ------------------------
(1) Excludes transactions which have occurred since March 31, 2003,
including the repurchase of approximately $182.5 million of 11% Notes
pursuant to the tender offer, obligations under the ColorTyme
guarantee, the change in control and acceleration provisions under the
senior credit facilities, and the optional redemption, change in
control and acceleration provisions under the indentures governing
Rent-A-Center East's subordinated notes.
(2) Includes interest payments of $14.97 million on each of February 15 and
August 15 of each year.
Repurchases of Outstanding Securities. In connection with the retirement of J.
Ernest Talley, our former Chairman of the Board and Chief Executive Officer, we
entered into an agreement to repurchase $25.0 million worth of shares of our
common stock beneficially held by Mr. Talley at a purchase price equal to the
average closing price of our common stock over the 10 trading days beginning
October 9, 2001, subject to a maximum of $27.00 per share and a minimum of
$20.00 per share. Under this formula, the purchase price for the repurchase was
calculated at $20.258 per share. Accordingly, on October 23, 2001 we repurchased
493,632 shares of our common stock beneficially held by Mr. Talley at $20.258
per share for a total purchase price of $10.0 million, and on November 30, 2001,
we repurchased an additional 740,448 shares of our common stock beneficially
held by Mr. Talley at $20.258 per share, for a total purchase price of an
additional $15.0 million. On January 25, 2002, we exercised the option to
repurchase all of the remaining 1,714,086 shares of common stock beneficially
held by Mr. Talley at $20.258 per share. We repurchased those remaining shares
on January 30, 2002.
In April 2000, we announced that our board of directors had authorized a program
to repurchase in the open market up to an aggregate of $25.0 million of our
common stock. In October 2002, our Board of Directors increased the amount of
repurchases authorized under our common stock repurchase program from $25.0
million to $50.0 million. In March 2003, our Board of Directors again increased
such amount from $50.0 million to $100.0 million. Through March 31, 2003, we
have repurchased approximately 937,000 shares of our common stock under this
program for approximately $44.3 million, 276,000 shares of which were purchased
in the quarter ended March 31, 2003 for approximately $13.5 million. We have
suspended our common stock repurchase program pending the consummation of our
recently announced equity tender offer. See "Recent Developments" discussed
previously in this report. However, we may begin repurchasing shares of our
common stock at any time after the tenth business day following the termination
of the equity tender offer.
On April 28, 2003, we announced the commencement of a tender offer to purchase
up to 2.2 million shares of our common stock at prices between $60 and $66 per
share pursuant to a modified "Dutch Auction." The tender offer will expire at
5:00pm, New York City time, on June 5, 2003, unless extended. We also announced
that we have entered into an agreement with Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P. which provides for the repurchase of a number
of shares of our common stock sufficient to reduce Apollo's aggregate beneficial
ownership from approximately 20.03% to 19.00% on an issued and outstanding
basis. Apollo will not be obligated to sell any shares under this agreement
unless it would be entitled to sell at least 666,667 shares in reaching the
19.00% ownership level. Approximately 950,000 shares must be validly tendered by
stockholders participating in the tender offer in order to result in Apollo
selling at least 666,667 shares. The per share purchase price payable pursuant
to this agreement will be equal to the per share purchase price of our common
stock set in the tender offer. We will repurchase the shares from Apollo on the
eleventh business day following the successful completion of the tender offer.
The tender offer is not conditioned on the tender of any minimum number of
shares.
Economic Conditions. Although our performance has not suffered in previous
economic downturns, we cannot assure you that demand for our products,
particularly in higher price ranges, will not significantly decrease in the
event of a prolonged recession.
24
RENT-A-CENTER, INC. AND SUBSIDIARIES
Seasonality. Our revenue mix is moderately seasonal, with the first quarter of
each fiscal year generally providing higher merchandise sales than any other
quarter during a fiscal year, primarily related to federal income tax refunds.
Generally, our customers will more frequently exercise their early purchase
option on their existing rental purchase agreements or purchase pre-leased
merchandise off the showroom floor during the first quarter of each fiscal year.
We expect this trend to continue in future periods. Furthermore, we tend to
experience slower growth in the number of rental purchase agreements on rent in
the third quarter of each fiscal year when to compared to other quarters
throughout the year. As a result, we would expect revenues for the third quarter
of each fiscal year to remain relatively flat with the prior quarter. We expect
this trend to continue in future periods unless we add significantly to our
store base during the third quarter of future fiscal years as a result of new
store openings or opportunistic acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
As of March 31, 2003, we had $272.25 million in subordinated notes outstanding
at a fixed interest rate of 11.0% and $249.5 million in term loans outstanding
at interest rates indexed to the LIBOR rate. The subordinated notes mature on
August 15, 2008. The fair value of the subordinated notes is estimated based on
discounted cash flow analysis using interest rates currently offered for loans
with similar terms to borrowers of similar credit quality. The fair value of the
subordinated notes at March 31, 2003 was $292.7 million, which is $20.9 million
above their carrying value. Unlike the subordinated notes, the $249.5 million in
term loans have variable interest rates indexed to current LIBOR rates. Because
the variable rate structure exposes us to the risk of increased interest cost if
interest rates rise, in 1998 we entered into $500.0 million in interest rate
swap agreements that lock in a LIBOR rate of 5.59%, thus hedging this risk. Of
the $500.0 million in agreements, $250.0 million expired in September 2001 and
the remaining $250.0 million will expire in 2003, of which $140.0 million will
expire on August 5, 2003 and the remaining $110.0 million will expire on
September 5, 2003. The swap agreements had an aggregate negative fair value of
$4.2 million and $7.3 million at March 31, 2003 and 2002, respectively. A
hypothetical 1.0% change in the LIBOR rate would have affected the fair value of
the swaps by approximately $300,000.
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest rates. Our primary market risk exposure is fluctuations
in interest rates. Monitoring and managing this risk is a continual process
carried out by the Board of Directors and senior management. We manage our
market risk based on an ongoing assessment of trends in interest rates and
economic developments, giving consideration to possible effects on both total
return and reported earnings.
INTEREST RATE RISK
We hold long-term debt with variable interest rates indexed to prime or LIBOR
that exposes us to the risk of increased interest costs if interest rates rise.
To reduce the risk related to unfavorable interest rate movements, we have
entered into certain interest rate swap contracts on $250.0 million of debt to
pay a fixed rate of 5.60%.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days before the filing of this quarterly
report. Based on that evaluation, our management, including our Chief Executive
Officer and our Chief Financial Officer, concluded that our disclosure controls
and procedures were effective. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to their evaluation.
25
RENT-A-CENTER, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we, along with our subsidiaries, are party to various legal
proceedings arising in the ordinary course of business. Except as described
below, we are not currently a party to any material litigation.
Colon v. Thorn Americas, Inc. The plaintiff filed this class action in November
1997 in New York state court. This matter was assumed by us in connection with
the Thorn Americas acquisition, and appropriate purchase accounting adjustments
were made for such contingent liabilities. The plaintiff acknowledges that
rent-to-own transactions in New York are subject to the provisions of New York's
Rental Purchase Statute but contends the Rental Purchase Statute does not
provide Thorn Americas immunity from suit for other statutory violations. The
plaintiff alleges Thorn Americas has a duty to disclose effective interest under
New York consumer protection laws, and seek damages and injunctive relief for
Thorn Americas' failure to do so. This suit also alleges violations relating to
excessive and unconscionable pricing, late fees, harassment, undisclosed
charges, and the ease of use and accuracy of its payment records. In the prayer
for relief, the plaintiff requested class certification, injunctive relief
requiring Thorn Americas to cease certain marketing practices and price their
rental purchase contracts in certain ways, unspecified compensatory and punitive
damages, rescission of the class members contracts, an order placing in trust
all moneys received by Thorn Americas in connection with the rental of
merchandise during the class period, treble damages, attorney's fees, filing
fees and costs of suit, pre- and post-judgment interest, and any further relief
granted by the court. The plaintiff has not alleged a specific monetary amount
with respect to the request for damages.
The proposed class includes all New York residents who were party to our
rent-to-own contracts from November 26, 1994. In November 2000, following
interlocutory appeal by both parties from the denial of cross-motions for
summary judgment, we obtained a favorable ruling from the Appellate Division of
the State of New York, dismissing the plaintiff's claims based on the alleged
failure to disclose an effective interest rate. The plaintiff's other claims
were not dismissed. The plaintiff moved to certify a state-wide class in
December 2000. The plaintiff's class certification motion was heard by the court
on November 7, 2001 and, on September 12, 2002, the court issued an opinion
denying in part and granting in part the plaintiff's requested certification.
The opinion grants certification as to all of the plaintiff's claims except the
plaintiff's pricing claims pursuant to the Rental Purchase Statute, as to which
certification was denied. The parties have differing views as to the effect of
the court's opinion, and accordingly, the court granted the parties permission
to submit competing orders as to the effect of the opinion on the plaintiff's
specific claims. Both proposed orders were submitted to the court on March 27,
2003. A hearing has been scheduled before the court for May 30, 2003 to
determine the form of order to be entered. Regardless of the determination of
the final certification order by the court, we intend to pursue an interlocutory
appeal of the court's certification order.
We believe these claims are without merit and will continue to vigorously defend
ourselves in this case. However, we cannot assure you that we will be found to
have no liability in this matter.
Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin Attorney
General filed suit against us and our subsidiary ColorTyme in the Circuit Court
of Milwaukee County, Wisconsin, alleging that our rent-to-rent transaction,
coupled with the opportunity afforded our rental customers to purchase the
rented merchandise under what we believed was a separate transaction, was a
disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the
Attorney General alleged that we failed to disclose credit terms, misrepresented
the terms of the transaction and engaged in unconscionable practices. The
Attorney General sought injunctive relief, restoration of any losses suffered by
any Wisconsin consumer harmed and civil forfeitures and penalties in amounts
ranging from $50 to $10,000 per violation.
On October 1, 2002, in anticipation of the settlement of this matter, we changed
our business practices in Wisconsin to a retail sale model. Accordingly, our 23
Wisconsin stores now offer credit sale transactions and operate under our
subsidiary Get It Now, which is subject to regulation under the Wisconsin
Consumer Act.
On November 12, 2002, we signed a settlement agreement for this suit with the
Attorney General, which was approved by the court on the same day. Under the
terms of the settlement, we created a restitution fund in the amount of $7.0
million for our eligible Wisconsin customers who had completed or active
transactions with us as of September 30, 2002. In addition, we paid $1.4 million
to the State of Wisconsin for fines, penalties, costs and fees. A portion of the
restitution fund is allocated for customers with completed transactions as of
September 30, 2002, and the balance is allocated for restitution on active
transactions as of September 30, 2002, which will be allowed to terminate
according to their terms when customers either acquire or return the
merchandise. Restitution will be offered on the active transactions when all
such active transactions
26
RENT-A-CENTER, INC. AND SUBSIDIARIES
have terminated, which we anticipate will occur by the fall of 2004. Any
unclaimed restitution funds at the conclusion of the restitution period will be
returned to us. To the extent the amount in the restitution fund is insufficient
to pay the required amount of restitution, we are obligated to provide
additional funds to do so. However, we believe the amount in the restitution
fund allocated for the active transactions, together with the amount of funds we
anticipate will remain unclaimed by customers with completed transactions, will
be sufficient to pay the required amount of restitution on all eligible active
transactions. Any customer accepting a restitution check will be required to
release us and our subsidiary ColorTyme from all claims related to their
transaction or transactions with us. We, together with ColorTyme, also agreed to
enter into an injunction requiring each of us to comply with the Wisconsin
Consumer Act in any transaction in Wisconsin in which the customer can become
the owner of merchandise other than through a single lump sum payment.
Terry Walker, et. al. v. Rent-A-Center, Inc., et. al. On January 4, 2002, a
putative class action was filed against us and certain of our current and former
officers and directors by Terry Walker in federal court in Texarkana, Texas. The
complaint alleges that the defendants violated Sections 10(b) and/or Section
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by issuing false and misleading statements and omitting material
facts regarding our financial performance and prospects for the third and fourth
quarters of 2001. The complaint purports to be brought on behalf of all
purchasers of our common stock from April 25, 2001 through October 8, 2001 and
seeks damages in unspecified amounts. Similar complaints were consolidated by
the court with the Walker matter in October 2002.
On November 25, 2002, the lead plaintiffs in the Walker matter filed an amended
consolidated complaint which added certain of our outside directors as
defendants to the Exchange Act claims. The amended complaint also added
additional claims that we, and certain of our current and former officers and
directors, violated various provisions of the Securities Act of 1933 as a result
of alleged misrepresentations and omissions in connection with an offering in
May 2001 and also added the managing underwriters in that offering as
defendants.
On February 7, 2003, we, along with certain officer and director defendants,
filed a motion to dismiss the matter as well as a motion to transfer venue. In
addition, our outside directors named in the matter separately filed a motion to
dismiss the Securities Act claims on statute of limitations grounds. On February
19, 2003, the underwriter defendants also filed a motion to dismiss the matter.
The plaintiffs filed response briefs to these motions, and our response to these
response briefs is due on May 21, 2003. The court has scheduled a hearing for
June 26, 2003 to hear each of these motions.
We believe the plaintiff's claims in this matter are without merit and intend to
vigorously defend ourselves. However, we cannot assure you that we will be found
to have no liability in this matter.
Gregory Griffin, et. al. v. Rent-A-Center, Inc. On June 25, 2002, a suit
originally filed by Gregory Griffin in state court in Philadelphia, Pennsylvania
was amended to seek relief both individually and on behalf of a class of
customers in Pennsylvania, alleging that we violated the Pennsylvania Goods and
Services Installment Sales Act and the Pennsylvania Unfair Trade Practices and
Consumer Protection Law. The amended complaint asserts that our rental purchase
transactions are, in fact, retail installment sales transactions, and as such,
are not governed by the Pennsylvania Rental-Purchase Agreement Act, which was
enacted after the adoption of the Pennsylvania Goods and Services Installment
Sales Act and the Pennsylvania Unfair Trade Practices Act. Griffin's suit seeks
class-wide remedies, including injunctive relief, unspecified statutory, actual
and treble damages, as well as attorney's fees and costs.
In July 2002, we filed preliminary objections to the complaint in Griffin. On
December 13, 2002, the court granted our preliminary objections and dismissed
the plaintiffs' claims. On January 6, 2003, the plaintiffs filed a notice of
appeal. The plaintiffs' appeal brief was filed on May 9, 2003. We believe the
plaintiffs' claims in this matter are without merit and intend to vigorously
defend ourselves. However, we cannot assure you that we will be found to have no
liability in this matter.
State Wage and Hour Class Actions. On August 20, 2001, a putative class action
was filed against us in state court in Multnomah County, Oregon entitled Rob
Pucci, et. al. v. Rent-A-Center, Inc. alleging violations of Oregon state law
regarding overtime, lunch and work breaks and failure to timely pay all wages
due our Oregon employees, as well as contract claims that we promised but failed
to pay overtime. Pucci seeks to represent a class of all present and former
executive assistants, inside/outside managers and account managers employed by
us within the six year period prior to the filing of the complaint as to the
contract claims, and three years as to the statutory claims, and seeks class
certification, payments for all unpaid wages under Oregon law, statutory and
civil penalties, costs and disbursements, pre- and post-judgment interest in the
amount of 9% per annum and attorneys fees. As of March 31, 2003, we operated 19
stores in Oregon. On July 25, 2002, the plaintiffs filed a motion for class
certification and on July 31, 2002, we filed our motion for summary judgment. On
January 15, 2003, the court orally granted our motion for summary judgment in
part, ruling that the plaintiffs were prevented from recovering overtime
payments at the rate of "time and a half," but stated that the plaintiffs may
recover "straight-time" to the
27
RENT-A-CENTER, INC. AND SUBSIDIARIES
extent plaintiffs could prove purported class members worked in excess of forty
hours in a work week but were not paid for such time worked. The court denied
our motion for summary judgment on the remaining claims and granted plaintiff's
motion for class certification with respect to the remaining claims. We strongly
disagree with the court's rulings against our positions and have requested that
the court grant us interlocutory appeal on those matters. Our request for
interlocutory appeal is currently pending before the Court. Although we believe
the claims remaining in this case are without merit, we cannot assure you we
will be found to have no liability in this matter.
We are subject to a similar suit pending in Clark County, Washington entitled
Kevin Rose, et al. v. Rent-A-Center, Inc., et al. and two similar suits pending
in Los Angeles, California entitled Jeremy Burdusis, et al. v. Rent-A-Center,
Inc., et al. and Israel French, et al. v. Rent-A-Center, Inc., each of which
allege similar violations of the wage and hour laws of those respective states.
As of March 31, 2003, we operated 41 stores in Washington and 151 stores in
California. The same law firm seeking to represent the purported class in Pucci
is seeking to represent the purported class in two of the three similar suits.
On March 24, 2003, the Burdusis court denied the plaintiffs' motion for class
certification in that case, which we view as a favorable development in that
proceeding. On April 25, 2003, the plaintiffs in Burdusis filed a notice of
appeal of that ruling, and on May 8, 2003, the Burdusis court, at our request,
stayed further proceedings in Burdusis and French pending the resolution on
appeal of the court's denial of class certification in Burdusis. The Burdusis
and French proceedings are pending before the same judge in California. Although
the wage and hour laws and class certification procedures of Oregon, Washington
and California contain certain differences that could cause differences in the
outcome of the pending litigation in these states, we believe the claims of the
purported classes involved in each are without merit. We cannot assure you,
however, that we will be found to have no liability in these matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
CURRENT REPORTS ON FORM 8-K
None.
EXHIBITS
The exhibits required to be furnished pursuant to Item 6 are listed in the
Exhibit Index filed herewith, which Exhibit Index is incorporated herein by
reference.
28
RENT-A-CENTER, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned duly authorized officer.
RENT-A-CENTER, INC.
By: /s/ Robert D. Davis
---------------------------------
Robert D. Davis
Senior Vice President-Finance and
Chief Financial Officer
Date: May 13, 2003
29
RENT-A-CENTER, INC. AND SUBSIDIARIES
I, Mark E. Speese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-A-Center, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Mark E. Speese
----------------------------------------
Mark E. Speese
Chairman of the Board
and Chief Executive Officer
30
RENT-A-CENTER, INC. AND SUBSIDIARIES
I, Robert D. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rent-A-Center, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
f. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
/s/ Robert D. Davis
----------------------------------------
Robert D. Davis
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
31
RENT-A-CENTER, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1(1) -- Agreement and Plan of Merger, dated as of December 30, 2002, but
effective as of December 31, 2002, by and among Rent-A-Center, Inc.,
Rent-A-Center Holdings, Inc. and RAC Merger Sub, Inc.
2.2(2) -- Asset Purchase Agreement, dated as of December 17, 2002, by and
among Rent-A-Center East, Inc. and Rent-Way, Inc., Rent-Way of
Michigan, Inc. and Rent-Way of TTIG, L.P. (Pursuant to the rules of
the SEC, the schedules and exhibits have been omitted. Upon the
request of the SEC, Rent-A-Center, Inc. will supplementally supply
such schedules and exhibits to the SEC.)
2.3(3) -- Letter Agreement, dated December 31, 2002
2.4(4) -- Letter Agreement, dated January 7, 2003
2.5(5) -- Letter Agreement, dated February 7, 2003
2.6(6) -- Letter Agreement, dated February 10, 2003 (Pursuant to the rules
of the SEC, the exhibit has been omitted. Upon the request of the
SEC, Rent-A-Center will supplementally supply such exhibit to the
SEC.)
2.7(7) -- Letter Agreement, dated March 10, 2003 (Pursuant to the rules of
the SEC, the exhibit has been omitted. Upon the request of the SEC,
Rent-A-Center will supplementally supply such exhibit to the SEC.)
3.1(8) -- Certificate of Incorporation of Rent-A-Center, Inc., as amended
3.2(9) -- Amended and Restated Bylaws of Rent-A-Center, Inc.
4.1(10) -- Form of Certificate evidencing Common Stock
4.2(11) -- Certificate of Designations, Preferences and Relative Rights and
Limitations of Series A Preferred Stock of Rent-A-Center, Inc.
(formerly known as Rent-A-Center Holdings, Inc.)
4.3(12) -- Form of Certificate evidencing Series A Preferred Stock
4.4(13) -- Indenture, dated as of December 19, 2001, by and among
Rent-A-Center, Inc., as Issuer, ColorTyme, Inc., and Advantage
Companies, Inc., as Subsidiary Guarantors, and The Bank of New York,
as Trustee
4.5(14) -- First Supplemental Indenture, dated as of May 1, 2002, by and
among Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies,
Inc. and The Bank of New York, as Trustee
4.6(15) -- Second Supplemental Indenture, dated as of September 30, 2002, by
and among Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies,
Inc., Get It Now, LLC and The Bank of New York, as Trustee
4.7(16) -- Amended and Restated Third Supplemental Indenture, dated as of
December 31, 2002, by and among Rent-A-Center, Inc., Rent-A-Center
Holdings, Inc., ColorTyme, Inc., Rent-A-Center West, Inc. (formerly
known as Advantage Companies, Inc.), Get It Now, LLC, Rent-A-Center
Texas, LP, Rent-A-Center Texas, LLC and The Bank of New York, as
Trustee
4.8(17) -- Form of 2001 Exchange Note
4.9* -- Indenture, dated as of May 6, 2003, by and among Rent-A-Center,
Inc., as Issuer, Rent-A-Center East, Inc., ColorTyme, Inc.,
Rent-A-Center West, Inc., Get It Now, LLC, Rent-A-Center Texas, L.P.
and Rent-A-Center Texas, L.L.C., as Guarantors, and The Bank of New
York, as Trustee
10.1(18)+ -- Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan
10.2(19) -- Amended and Restated Credit Agreement, dated as of August 5,
1998, as amended and restated as of December 31, 2002, among
Rent-A-Center, Inc., Rent-A-Center East, Inc., Comerica Bank, as
Documentation Agent, Bank of America NA, as Syndication Agent, and
JP Morgan Chase Bank (formerly known as The Chase Manhattan Bank),
as Administrative Agent
10.3* -- First Amendment, dated as of April 22, 2003, to the Amended and
Restated Credit Agreement, dated as of August 5, 1998, as amended
and restated as of December 31, 2002, among Rent-A-Center, Inc.,
Rent-A-Center East, Inc., Comerica Bank, as Documentation Agent,
Bank of America NA, as Syndication Agent, and JP Morgan Chase Bank
(formerly known as The Chase Manhattan Bank), as Administrative
Agent
10.4(20) -- Guarantee and Collateral Agreement, dated as of August 5, 1998,
as amended and restated as of December 31, 2002, made by
Rent-A-Center, Inc., Rent-A-Center East, Inc. and certain of its
Subsidiaries in favor of JP Morgan Chase Bank (formerly known as The
Chase Manhattan Bank), as
RENT-A-CENTER, INC. AND SUBSIDIARIES
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
Administrative Agent
10.5(21) -- Amended and Restated Stockholders Agreement, dated as of October
8, 2001, by and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese,
Rent-A-Center, Inc., and certain other persons
10.6(22) -- Second Amended and Restated Stockholders Agreement, dated as of
August 5, 2002, by and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., Mark E. Speese, Rent-A-Center, Inc., and
certain other persons
10.7(23) -- Third Amended and Restated Stockholders Agreement, dated as of
December 31, 2002, by and among Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Mark E. Speese, Rent-A-Center,
Inc., and certain other persons
10.8(24) -- Registration Rights Agreement, dated August 5, 1998, by and
between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and
Apollo Overseas Partners IV, L.P., related to the Series A
Convertible Preferred Stock
10.9(25) -- Second Amendment to Registration Rights Agreement, dated as of
August 5, 2002, by and among Rent-A-Center, Inc., Apollo Investment
Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
10.10(26) -- Third Amendment to Registration Rights Agreement, dated as of
December 31, 2002, by and among Rent-A-Center, Inc., Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
10.11(27) -- Common Stock Purchase Agreement, dated as of October 8, 2001, by
and among J. Ernest Talley, Mary Ann Talley, the Talley 1999 Trust
and Rent-A-Center, Inc.
10.12(28) -- Exchange and Registration Rights Agreement, dated December 19,
2001, by and among Rent-A-Center, Inc., ColorTyme, Inc., Advantage
Companies, Inc., J.P. Morgan Securities, Inc., Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., and Lehman Brothers, Inc.
10.13(29) -- Amended and Restated Franchisee Financing Agreement, dated March
27, 2002, by and between Textron Financial Corporation, ColorTyme,
Inc. and Rent-A-Center, Inc.
10.14(30) -- Franchisee Financing Agreement, dated April 30, 2002, but
effective as of June 28, 2002, by and between Texas Capital Bank,
National Association, ColorTyme, Inc. and Rent-A-Center, Inc.
10.15(31) -- First Amendment to Franchisee Financing Agreement, dated July 23,
2002, by and between Textron Financial Corporation, ColorTyme, Inc.
and Rent-A-Center, Inc.
10.16(32) -- Second Amendment to Franchisee Financing Agreement, dated
September 30, 2002, by and between Textron Financial Corporation,
ColorTyme, Inc. and Rent-A-Center, Inc.
10.17(33) -- Third Amendment to Franchisee Financing Agreement, dated March
24, 2003, but effective as of December 31, 2002, by and between
Textron Financial Corporation, ColorTyme, Inc. and Rent-A-Center,
Inc.
10.18* -- Purchase Agreement, dated May 1, 2003, among Rent-A-Center, Inc.,
Rent-A-Center East, Inc., ColorTyme, Inc., Rent-A-Center West, Inc.,
Get It Now, LLC, Rent-A-Center Texas, L.P., Rent-A-Center Texas,
L.L.C., Lehman Brothers Inc., J.P. Morgan Securities, Inc., Morgan
Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS Warburg
LLC and Wachovia Securities, Inc. (Pursuant to the rules of the SEC,
the schedules and annexes have been omitted. Upon the request of the
SEC, Rent-A-Center, Inc. will supplementally supply such schedules
and annexes to the SEC.)
10.19* -- Registration Rights Agreement, dated as of May 6, 2003, by and
among Rent-A-Center, Inc., as Issuer, Rent-A-Center East, Inc.,
ColorTyme, Inc., Rent-A-Center West, Inc., Get It Now, LLC,
Rent-A-Center Texas, L.P. and Rent-A-Center Texas, L.L.C., as
Guarantors, and Lehman Brothers Inc., J.P. Morgan Securities, Inc.,
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., UBS
Warburg LLC and Wachovia Securities, Inc., as Initial Purchasers
10.20(34) -- Stock Purchase and Exchange Agreement, dated April 25, 2003, by
and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners
IV, L.P. and Rent-A-Center, Inc.
21.1(35) -- Subsidiaries of Rent-A-Center, Inc.
99.1* -- Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Mark E.
Speese
99.2* -- Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Robert
D. Davis
- -------------
* Filed herewith.
+ Management contract or company plan or arrangement
RENT-A-CENTER, INC. AND SUBSIDIARIES
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's
Current Report on Form 8-K dated as of December 31, 2002
(2) Incorporated herein by reference to Exhibit 2.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(3) Incorporated herein by reference to Exhibit 2.3 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(4) Incorporated herein by reference to Exhibit 2.4 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(5) Incorporated herein by reference to Exhibit 2.5 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(6) Incorporated herein by reference to Exhibit 2.6 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(7) Incorporated herein by reference to Exhibit 2.7 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(8) Incorporated herein by reference to Exhibit 3.1 to the registrant's
Current Report on Form 8-K dated as of December 31, 2002
(9) Incorporated herein by reference to Exhibit 3.2 to the registrant's
Current Report on Form 8-K dated as of December 31, 2002
(10) Incorporated herein by reference to Exhibit 4.1 to the registrant's
Form S-4 filed on January 11, 1999
(11) Incorporated herein by reference to Exhibit 3.1 to the registrant's
Current Report on Form 8-K dated as of December 31, 2002
(12) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 11, 1999
(13) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(14) Incorporated herein by reference to Exhibit 4.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(15) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(16) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(17) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(18) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Post-Effective Amendment No.1 to Form S-8 dated as of December 31, 2002
(19) Incorporated herein by reference to Exhibit 10.2 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(20) Incorporated herein by reference to Exhibit 10.3 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
RENT-A-CENTER, INC. AND SUBSIDIARIES
(21) Incorporated herein by reference to Exhibit 10.7 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
(22) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(23) Incorporated herein by reference to Exhibit 10.6 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(24) Incorporated herein by reference to Exhibit 10.22 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(25) Incorporated herein by reference to Exhibit 10.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(26) Incorporated herein by reference to Exhibit 10.8 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(27) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
(28) Incorporated herein by reference to Exhibit 10.9 to the registrant's
Registration Statement on Form S-4 filed on January 22, 2002
(29) Incorporated herein by reference to Exhibit 10.13 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(30) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(31) Incorporated herein by reference to Exhibit 10.15 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
(32) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(33) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
(34) Incorporated herein by reference to Exhibit 99(d)(1) to the
registrant's Schedule TO filed on April 28, 2003
(35) Incorporated herein by reference to Exhibit 21.1 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002