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 September 30, 2001 Commission File Number 0-25370 RENT-A-CENTER, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-1024367 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5700 Tennyson Parkway, Third Floor Plano, Texas 75024 (972) 801-1100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 12, 2001: Class Outstanding ----- ----------- Common stock, $.01 par value per share 26,194,812
TABLE OF CONTENTS <Table> <Caption> PART I. FINANCIAL INFORMATION PAGE NO. -------- <S> <C> Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 Consolidated Statements of Earnings for the nine months ended 4 September 30, 2001 and 2000 Consolidated Statements of Earnings for the three months ended 5 September 30, 2001 and 2000 Consolidated Statements of Cash Flows for the nine months ended 6 September 30, 2001 and 2000 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 12 and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 28 </Table> 2
RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> (In thousands of dollars) September 30, December 31, 2001 2000 ------------- ------------- Unaudited <S> <C> <C> ASSETS Cash and cash equivalents $ 28,935 $ 36,495 Accounts receivable - trade 2,817 3,254 Prepaid expenses and other assets 33,737 31,805 Rental merchandise, net On rent 527,724 477,095 Held for rent 116,670 110,137 Property assets, net 101,383 87,168 Deferred income taxes 4,233 32,628 Intangible assets, net 714,845 708,328 ------------- ------------- $ 1,530,344 $ 1,486,910 ============= ============= LIABILITIES Accounts payable - trade $ 63,027 $ 65,696 Accrued liabilities 116,702 89,560 Senior debt 458,020 566,051 Subordinated notes payable 175,000 175,000 ------------- ------------- 812,749 896,307 COMMITMENTS AND CONTINGENCIES -- -- PREFERRED STOCK Redeemable convertible voting preferred stock, net of placement costs, $.01 par value; 5,000,000 shares authorized; 289,726 and 281,756 shares issued and outstanding in 2001 and 2000, respectively 289,201 281,232 STOCKHOLDERS' EQUITY Common stock, $.01 par value; 125,000,000 and 50,000,000 shares authorized in 2001 and 2000, respectively; 27,612,218 and 25,700,058 shares issued in 2001 and 2000, respectively 276 257 Additional paid-in capital 190,148 115,607 Accumulated comprehensive loss (6,020) -- Retained earnings 268,990 218,507 Treasury stock, 990,099 shares at cost (25,000) (25,000) ------------- ------------- 428,394 309,371 ------------- ------------- $ 1,530,344 $ 1,486,910 ============= ============= </Table> The accompanying notes are an integral part of these statements. 3
RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <Table> <Caption> (In thousands, except per share data) Nine months ended September 30, --------------------------------- 2001 2000 ------------- ------------- Unaudited <S> <C> <C> Revenues Store Rentals and fees $ 1,213,387 $ 1,082,949 Merchandise sales 72,440 63,906 Other 2,878 1,916 Franchise Merchandise sales 36,346 36,355 Royalty income and fees 4,484 4,613 ------------- ------------- 1,329,535 1,189,739 Operating expenses Direct store expenses Depreciation of rental merchandise 251,286 222,545 Cost of merchandise sold 54,176 51,744 Salaries and other expenses 748,576 639,041 Franchise cost of merchandise sold 34,821 35,049 ------------- ------------- 1,088,859 948,379 General and administrative expenses 40,777 36,189 Amortization of intangibles 22,402 21,098 Non-recurring litigation settlements 16,000 (22,383) ------------- ------------- Total operating expenses 1,168,038 983,283 Operating profit 161,497 206,456 Interest expense 47,215 56,284 Interest income (870) (1,094) ------------- ------------- Earnings before income taxes 115,152 151,266 Income tax expense 52,635 71,852 ------------- ------------- NET EARNINGS 62,517 79,414 Preferred dividends 12,087 7,764 ------------- ------------- Net earnings allocable to common stockholders $ 50,430 $ 71,650 ============= ============= Basic earnings per common share $ 1.96 $ 2.94 ============= ============= Diluted earnings per common share $ 1.68 $ 2.30 ============= ============= </Table> The accompanying notes are an integral part of these statements. 4
RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <Table> <Caption> (In thousands, except per share data) Three months ended September 30, --------------------------------- 2001 2000 ------------- ------------- Unaudited <S> <C> <C> Revenues Store Rentals and fees $ 411,241 $ 372,402 Merchandise sales 21,569 18,887 Other 640 922 Franchise Merchandise sales 12,087 11,143 Royalty income and fees 1,537 1,614 ------------- ------------- 447,074 404,968 Operating expenses Direct store expenses Depreciation of rental merchandise 86,198 77,014 Cost of merchandise sold 17,176 14,348 Salaries and other expenses 261,992 219,195 Franchise cost of merchandise sold 11,624 10,815 ------------- ------------- 376,990 321,372 General and administrative expenses 13,974 12,708 Amortization of intangibles 7,738 7,168 Non-recurring litigation settlements 16,000 -- ------------- ------------- Total operating expenses 414,702 341,248 Operating profit 32,372 63,720 Interest expense 14,837 18,915 Interest income (282) (720) ------------- ------------- Earnings before income taxes 17,817 45,525 Income tax expense 7,843 21,624 ------------- ------------- NET EARNINGS 9,974 23,901 Preferred dividends 2,709 2,631 ------------- ------------- Net earnings allocable to common stockholders $ 7,265 $ 21,270 ============= ============= Basic earnings per common share $ 0.27 $ 0.87 ============= ============= Diluted earnings per common share $ 0.26 $ 0.68 ============= ============= </Table> The accompanying notes are an integral part of these statements. 5
RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <Table> <Caption> Nine months ended September 30, --------------------------------- (In thousands of dollars) 2001 2000 ------------- ------------- Unaudited <S> <C> <C> Cash flows from operating activities Net earnings $ 62,517 $ 79,414 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise 251,286 222,545 Depreciation of property assets 28,106 24,662 Amortization of intangibles 22,402 21,098 Amortization of financing fees 2,070 2,015 Changes in operating assets and liabilities, net of effects of Acquisitions Rental merchandise (291,696) (252,954) Accounts receivable - trade 437 588 Prepaid expenses and other assets (3,946) (7,042) Deferred income taxes 28,395 59,478 Accounts payable - trade (2,669) 3,957 Accrued liabilities 19,903 (11,062) ------------- ------------- Net cash provided by operating activities 116,805 142,699 Cash flows from investing activities Purchase of property assets (42,282) (25,027) Proceeds from sale of property assets 395 1,071 Acquisitions of businesses, net of cash acquired (44,943) (39,955) ------------- ------------- Net cash used in investing activities (86,830) (63,911) Cash flows from financing activities Exercise of stock options 24,819 5,796 Proceeds from debt -- 229,985 Proceeds from issuance of common stock 45,677 -- Repayments of debt (108,031) (286,094) ------------- ------------- Net cash used in financing activities (37,535) (50,313) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,560) 28,475 Cash and cash equivalents at beginning of period 36,495 21,679 ------------- ------------- Cash and cash equivalents at end of period $ 28,935 $ 50,154 ============= ============= </Table> The accompanying notes are an integral part of these statements. 6
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, 2000, our Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2001, and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. In our opinion, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly our results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. SFAS 133. Effective January 1, 2001, we adopted Statement of Financial Accounting Standard No. 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS 133 on January 1, 2001 resulted in a cumulative pre-tax increase to other comprehensive income of $2.6 million, or $1.4 million after taxes. As a result of a decline in interest rates during the nine months ended September 30, 2001, accumulated other comprehensive loss for the nine months ended September 30, 2001 was $(6.0) million after taxes. We utilize our derivative instruments to manage our exposure to interest rate fluctuations. Our objective is to minimize the risk of fluctuations using the most effective methods to eliminate or reduce the impact of this exposure. SFAS 141 and SFAS 142. On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations and Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these statements and their effective dates for us are as follows: o all business combinations initiated after June 30, 2001 must use the purchase method of accounting; o intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; o goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized; o effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization; o effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator; and o all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. 7
We will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001 under the current method until January 1, 2002, at which time quarterly and annual goodwill amortization of approximately $7.1 million and $28.4 million will no longer be recognized. We intend to complete a transitional impairment test of all intangible assets by March 31, 2002 and a transitional fair value based impairment test of goodwill as of January 1, 2002 by June 30, 2002. Impairment losses, if any, resulting from the initial transitional impairment testing will be recognized in the quarter ended March 31, 2002, as a cumulative effect of a change in accounting principle. SFAS 144. On October 3, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. We do not believe that the implementation of this standard will have a material effect on our financial position, results of operations, or cash flows. 2. EARNINGS PER SHARE Basic and diluted earnings per common share is computed based on the following information: <Table> <Caption> (In thousands, except per share data) Three months ended September 30, 2001 ------------------------------------------------ Net earnings Shares Per share ------------ ----------- ----------- <S> <C> <C> <C> Basic earnings per common share $ 7,265 26,666 $ 0.27 Effect of dilutive stock options -- 742 Assumed conversion of convertible Preferred stock 2,709(1) 10,371 ----------- ----------- Diluted earnings per common share $ 9,974 37,779 $ 0.26 =========== =========== =========== </Table> <Table> <Caption> Three months ended September 30, 2000 ------------------------------------------------ Net earnings Shares Per share ------------ ----------- ----------- <S> <C> <C> <C> Basic earnings per common share $ 21,270 24,404 $ 0.87 Effect of dilutive stock options -- 809 Assumed conversion of convertible Preferred stock 2,631(1) 9,900 ----------- ----------- Diluted earnings per common share $ 23,901 35,113 $ 0.68 =========== =========== =========== </Table> <Table> <Caption> Nine months ended September 30, 2001 ----------------------------------------------- Net earnings Shares Per share ------------ ----------- ----------- <S> <C> <C> <C> Basic earnings per common share $ 50,430 25,766 $ 1.96 Effect of dilutive stock options -- 1,074 Assumed conversion of convertible Preferred stock 12,087(1) 10,277 ----------- ----------- Diluted earnings per common share $ 62,517 37,117 $ 1.68 =========== =========== =========== </Table> <Table> <Caption> Nine months ended September 30, 2000 ----------------------------------------------- Net earnings Shares Per share ------------ ----------- ----------- <S> <C> <C> <C> Basic earnings per common share $ 71,650 24,347 $ 2.94 Effect of dilutive stock options -- 276 Assumed conversion of convertible Preferred stock 7,764(1) 9,978 ----------- ----------- Diluted earnings per common share $ 79,414 34,601 $ 2.30 =========== =========== =========== </Table> - ---------- (1) Dividends on our Series A preferred stock are payable quarterly at an annual rate of 3.75%. We account for shares of preferred stock distributed as dividends in-kind at the greater of the stated value or the value of the common stock obtainable upon conversion on the payment date. 8
For the three and nine months ended September 30, 2001, the number of stock options that were outstanding but not included in the computation of diluted earnings per common share because their exercise price was greater than the average market price of our common stock, and therefore anti-dilutive, was 441,500 and 685,500, respectively. For the three and nine months ended September 30, 2000, 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 362,750 and 362,750, respectively. 3. SUBSIDIARY GUARANTORS During 1998, we issued $175.0 million of senior subordinated notes, maturing on August 15, 2008. The notes require semi-annual interest-only payments at 11%, and are guaranteed by our two principal subsidiaries. We may redeem the subordinated notes after August 15, 2003, at our option, in whole or in part. The subordinated notes also require that upon the occurrence of a change in control (as defined in the indenture governing the subordinated notes), the holders of the subordinated notes have the right to require us to repurchase the subordinated notes at a price equal to 101% of the original principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. The indenture governing our subordinated notes contains covenants that limit our ability to: o incur additional debt; o sell assets or our subsidiaries; o grant liens to third parties; o pay dividends or repurchase stock; and o engage in a merger or sell substantially all of our assets. Our direct wholly-owned subsidiaries, consisting of ColorTyme, Inc. and Advantage Companies, Inc., have fully, jointly and severally, and unconditionally guaranteed our obligations under the subordinated notes. We have one indirect subsidiary that is not a guarantor of the subordinated notes because it is inconsequential. There are no restrictions on the ability of any of the guarantors to transfer funds to us in the form of loans, advances or dividends, except as provided by applicable law. Set forth below is certain condensed consolidating financial information (within the meaning of Rule 3-10 of Regulation S-X) as of September 30, 2001 and December 31, 2000 and for the three and nine months ended September 30, 2001 and 2000. The financial information includes the guarantors from the dates they were acquired or formed by us and is presented using the push-down basis of accounting. 9
3. SUBSIDIARY GUARANTORS - (continued) <Table> <Caption> Parent Subsidiary Consolidating Company Guarantors Adjustments Totals ------------- ------------- ------------- ------------- (In thousands) <S> <C> <C> <C> <C> Condensed consolidating balance sheets At September 30, 2001 (unaudited) Rental merchandise, net ..................... $ 644,394 $ -- $ -- $ 644,394 Intangible assets, net ...................... 367,768 347,077 -- 714,845 Other assets ................................ 498,003 18,008 (344,906) 171,105 ------------- ------------- ------------- ------------- Total assets ...................... $ 1,510,165 $ 365,085 $ (344,906) $ 1,530,344 ============= ============= ============= ============= Senior debt ................................. $ 458,020 $ -- $ -- $ 458,020 Other liabilities ........................... 349,100 5,629 -- 354,729 Preferred stock ............................. 289,201 -- -- 289,201 Stockholders' equity ........................ 413,844 359,456 (344,906) 428,394 ------------- ------------- ------------- ------------- Total liabilities and equity ...... $ 1,510,165 $ 365,085 $ (344,906) $ 1,530,344 ============= ============= ============= ============= At December 31, 2000 Rental merchandise, net ..................... $ 587,232 $ -- $ -- $ 587,232 Intangible assets, net ...................... 351,498 356,830 -- 708,328 Other assets ................................ 531,992 13,754 (354,396) 191,350 ------------- ------------- ------------- ------------- Total assets ...................... $ 1,470,722 $ 370,584 $ (354,396) $ 1,486,910 ============= ============= ============= ============= Senior debt ................................. $ 566,051 $ -- $ -- $ 566,051 Other liabilities ........................... 325,995 4,261 -- 330,256 Preferred stock ............................. 281,232 -- -- 281,232 Stockholders' equity ........................ 297,444 366,323 (354,396) 309,371 ------------- ------------- ------------- ------------- Total liabilities and equity ...... $ 1,470,722 $ 370,584 $ (354,396) $ 1,486,910 ============= ============= ============= ============= </Table> <Table> <Caption> Parent Subsidiary Company Guarantors Total ------------- ------------- ------------- (In thousands) <S> <C> <C> <C> Condensed consolidating statements of earnings Nine Months Ended September 30, 2001 (unaudited) Total revenues ................................. $ 1,288,705 $ 40,830 $ 1,329,535 Direct store expenses .......................... 1,054,038 -- 1,054,038 Other expenses ................................ 168,667 44,313 212,980 ------------- ------------- ------------- Net earnings (loss) ............................ $ 66,000 $ (3,483) $ 62,517 ============= ============= ============= Nine Months Ended September 30, 2000 (unaudited) Total revenues ................................. $ 1,148,771 $ 40,968 $ 1,189,739 Direct store expenses .......................... 913,330 -- 913,330 Other expenses ................................. 152,454 44,541 196,995 ------------- ------------- ------------- Net earnings (loss) ............................ $ 82,987 $ (3,573) $ 79,414 ============= ============= ============= </Table> 10
3. SUBSIDIARY GUARANTORS - (continued) <Table> <Caption> Parent Subsidiary Company Guarantors Total ------------- ------------- ------------- (In thousands) <S> <C> <C> <C> Condensed consolidating statements of earnings Three Months Ended September 30, 2001 (unaudited) Total revenues .............................. $ 433,450 $ 13,624 $ 447,074 Direct store expenses ....................... 365,366 -- 365,366 Other expenses .............................. 56,946 14,788 71,734 ------------- ------------- ------------- Net earnings (loss) ......................... $ 11,138 $ (1,164) $ 9,974 ============= ============= ============= Three Months Ended September 30, 2000 (unaudited) Total revenues .............................. $ 392,211 $ 12,757 $ 404,968 Direct store expenses ....................... 310,557 -- 310,557 Other expenses .............................. 56,531 13,979 70,510 ------------- ------------- ------------- Net earnings (loss) ......................... $ 25,123 $ (1,222) $ 23,901 ============= ============= ============= </Table> <Table> <Caption> Parent Subsidiary Company Guarantors Total ------------- ------------- ------------- (In thousands) <S> <C> <C> <C> Condensed consolidated statement of cash flows Nine months ended September 30, 2001 (unaudited) Net cash provided by operating activities ........ $ 111,905 $ 4,900 $ 116,805 ------------- ------------- ------------- Cash flows from investing activities Purchase of property assets .................... (42,237) (45) (42,282) Acquisitions of businesses, net of cash acquired (44,943) -- (44,943) Other .......................................... 395 -- 395 ------------- ------------- ------------- Net cash used in investing activities ............ (86,785) (45) (86,830) Cash flows from financing activities Exercise of stock options ...................... 24,819 -- 24,819 Repayments of debt ............................. (108,031) -- (108,031) Proceeds from the issuance of common stock ..... 45,677 -- 45,677 Intercompany advances .......................... 4,855 (4,855) -- ------------- ------------- ------------- Net cash used in financing activities ............ (32,680) (4,855) (37,535) ------------- ------------- ------------- Net decrease in cash and cash equivalents ........ (7,560) -- (7,560) ------------- ------------- ------------- Cash and cash equivalents at beginning of period . 36,495 -- 36,495 ------------- ------------- ------------- Cash and cash equivalents at end of period ....... $ 28,935 $ -- $ 28,935 ============= ============= ============= Nine months ended September 30, 2000 (unaudited) Net cash provided by operating activities ........ $ 137,910 $ 4,789 $ 142,699 ------------- ------------- ------------- Cash flows from investing activities Purchase of property assets .................... (24,961) (66) (25,027) Acquisitions of businesses, net of cash acquired (39,955) -- (39,955) Other .......................................... 1,071 -- 1,071 ------------- ------------- ------------- Net cash used in investing activities ............ (63,845) (66) (63,911) Cash flows from financing activities Exercise of stock options ...................... 5,796 -- 5,796 Repayments of debt ............................. (286,094) -- (286,094) Proceeds from debt ............................. 229,985 -- 229,985 Intercompany advances .......................... 4,723 (4,723) -- ------------- ------------- ------------- Net cash used in financing activities ............ (45,590) (4,723) (50,313) ------------- ------------- ------------- Net increase in cash and cash equivalents ........ 28,475 -- 28,475 Cash and cash equivalents at beginning of period . 21,679 -- 21,679 ------------- ------------- ------------- Cash and cash equivalents at end of period ....... $ 50,154 $ -- $ 50,154 ============= ============= ============= </Table> 11
4. COMPREHENSIVE INCOME Comprehensive income includes net earnings and items of other comprehensive income or loss. The following table provides information regarding comprehensive income, net of tax: <Table> <Caption> Nine months ended Sept. 30, Three months ended Sept. 30, --------------------------- --------------------------- (in thousands) (in thousands) 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net earnings $ 62,517 $ 79,414 $ 9,974 $ 23,901 Other comprehensive (loss) income: Unrealized gain on derivatives held As cash flow hedges: Cumulative effect of adoption of SFAS 133 1,378 -- -- -- Change in unrealized loss during period (9,449) -- (5,256) -- Reclassification adjustment for loss included in net earnings 2,051 -- 1,765 -- -------- -------- -------- -------- Other comprehensive (loss) income (6,020) -- (3,491) -- -------- -------- -------- -------- Comprehensive income $ 56,497 $ 79,414 $ 6,483 $ 23,901 ======== ======== ======== ======== </Table> 5. LITIGATION SETTLEMENTS On November 1, 2001, we announced that we reached an agreement in principle for the settlement of the Margaret Bunch, et al. v. Rent-A-Center, Inc. matter pending in federal court in Kansas City, Missouri. The settlement is subject to court approval. Under the terms of the proposed settlement, while not admitting liability, we agreed to pay an aggregate of $12,250,000 to the agreed upon class, plus plaintiff's attorneys' fees as determined by the court, and costs to administer the settlement process. Accordingly, to account for the aforementioned costs, as well as our own attorneys' fees, we recorded a one time non-recurring charge of $16.0 million in the third quarter as a result of the settlement of this matter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate" or "believe." We believe that the expectations reflected in these forward-looking statements are accurate. However, we cannot assure you that these expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to these differences include, but are not limited to: o uncertainties regarding the ability to open new stores; o our ability to acquire additional rent-to-own stores on favorable terms; o our ability to enhance the performance of these acquired stores; o our ability to control store level costs; o the results of our litigation; o the passage of legislation adversely affecting the rent-to-own industry; o interest rates; o our ability to collect on our rental purchase agreements; o our ability to effectively hedge interest rates on our outstanding debt; o changes in our effective tax rate; and o the other risks detailed from time to time in our SEC reports. 12
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. 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, 2000. OUR BUSINESS We are the largest rent-to-own operator in the United States with an approximate 27% market share based on store count. At September 30, 2001, we operated 2,288 company-owned stores in 50 states, the District of Columbia and Puerto Rico. Our subsidiary, ColorTyme, is a national franchisor of rent-to-own stores. At September 30, 2001, ColorTyme franchised 346 stores in 42 states, 333 of which operated under the ColorTyme name and 13 stores which operated under the Rent-A-Center name. Our stores offer high quality durable products such as home electronics, appliances, computers, and furniture and accessories under flexible rental purchase agreements that allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period. These rental purchase agreements are designed to appeal to a wide variety of customers by allowing them to obtain merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. These agreements also cater to customers who only have a temporary need, or who simply desire to rent rather than purchase the merchandise. We have pursued an aggressive growth strategy since 1989. We have sought to acquire underperforming stores to which we could apply our operating model as well as open new stores. As a result, the acquired stores have generally experienced more significant revenue growth during the initial periods following their acquisition than in subsequent periods. Because of significant growth since our formation, particularly due to the Thorn Americas acquisition, our historical results of operations and period-to-period comparisons of such results and other financial data, including the rate of earnings growth, may not be meaningful or indicative of future results. We plan to accomplish our future growth through selective and opportunistic acquisitions, with an emphasis on new store development. Typically, a newly opened store is profitable on a monthly basis in the ninth to twelfth month after its initial opening. Historically, a typical store has achieved 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 are opened during that 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. We believe the cashflow generated from operations, together with amounts available under our senior credit facilities, will be sufficient to fund our debt service requirements, working capital needs, capital expenditures, the November 2001 repurchase of our common stock held by Mr. J. Ernest Talley as discussed below, and our store expansion program during the remainder of 2001. Our revolving credit facilities provide us with revolving loans in an aggregate principal amount not exceeding $125.0 million. At September 30, 2001, we had $61.4 million available under our various debt agreements. In addition, to provide any additional funds necessary for the continued pursuit of our operating and growth strategies, we may incur from time to time additional short or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which will relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general economic conditions. There can be no assurance additional financing will be available, or if available, will be on terms acceptable to us. If a change in control occurs, we may be required to offer to purchase all of our outstanding subordinated notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities restrict our ability to repurchase our subordinated notes, including in the event of a change in control. In addition, a change in control would result in an event of default under our senior credit facilities, which could then be accelerated by our lenders, and would require us to offer to redeem our Series A preferred stock. In the event a change in control occurs, we cannot be sure that we would have enough funds to immediately pay our accelerated senior credit facility obligations, all of our senior subordinated notes and for the redemption of our Series A preferred stock, or that we would be able to obtain financing to do so on favorable terms, if at all. 13
COMPONENTS OF INCOME AND EXPENSE Revenue. We collect non-refundable rental payments and fees in advance, generally on a weekly or monthly basis. This revenue is recognized over the term of the agreement. Rental purchase agreements generally include a discounted early purchase option. Amounts received upon sales of merchandise under these options, and upon the sale of used merchandise, are recognized as revenue when the merchandise is sold. Franchise Revenue. Revenue from the sale of rental 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 does not consider salvage value and does not allow the depreciation of rental merchandise during periods when it is not generating rental revenue. For income tax purposes we depreciate our merchandise using the modified accelerated cost recovery system, or MACRS, with a three year life. Cost of Merchandise Sold. Cost of merchandise sold represents the book value net of accumulated depreciation of rental merchandise at time of sale. Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store level employees, together with market managers' salaries, travel and occupancy, including any related benefits and taxes, as well as all store level general and administrative expenses and selling, advertising, occupancy, fixed asset depreciation and other operating expenses. General and Administrative Expenses. General and administrative expenses include all corporate overhead expenses related to our headquarters such as salaries, taxes and benefits, occupancy, administrative and other operating expenses, as well as regional directors' salaries, travel and office expenses. Amortization of Intangibles. Amortization of intangibles consists primarily of the amortization of the excess of purchase price over the fair market value of acquired assets and liabilities. In July 2001, the Financial Accounting Standards Board issued SFAS 142, Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives acquired after June 30, 2001 will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. Also effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually, and in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted for companies with fiscal years beginning after March 15, 2001 if their first quarter financial statements have not previously been issued. RECENT DEVELOPMENTS In the second half of 2000, we resumed our strategy of increasing our store base and annual revenues and profits through opportunistic acquisitions and new store openings. During the third quarter of 2001, we acquired 13 stores for approximately $8.5 million in cash in 5 separate transactions and opened an additional 18 stores. We also closed 13 stores, merging them all with existing stores. For the nine months ended September 30, 2001, we acquired a total of 91 stores for approximately $41.0 million in 17 separate transactions, opened 61 new stores, and closed 22 stores. Of the closed stores, 19 were merged with existing stores and three were sold. As of November 13, 2001 we have acquired one additional store, opened ten new stores and closed two stores during the fourth quarter of 2001. The closed stores were merged with existing stores. It is our intention to increase the number of stores we operate by an average of approximately 5 to 10% per year over the next several years. On October 8, 2001, we announced the retirement of J. Ernest Talley as our Chairman and Chief Executive Officer, and the appointment of Mark E. Speese as our new Chairman and Chief Executive Officer. In connection with Mr. Talley's retirement, our board of directors approved the repurchase of $25.0 million worth of shares of our common stock held by Mr. Talley at a purchase price equal to the average closing price of our common stock over the 10 trading days beginning October 9, 2001, subject to a maximum of $27.00 per share and a minimum of $20.00 per share. Under this formula, the purchase price for the repurchase was calculated at $20.258 per share. Accordingly, on October 23, 2001 we repurchased 493,632 shares of our common stock from Mr. Talley at $20.258 per share for a total purchase price of $10.0 million. In addition, on or before November 30, 2001, we will repurchase an additional 740,488 shares of our common stock from Mr. Talley at $20.258 per share, for a total purchase price of an additional $15.0 million. Furthermore, we have the option to purchase any or all of the remaining 1,714,046 shares of our common stock held by Mr. Talley at $20.258 per share through February 5, 2002. 14
On November 1, 2001, we announced that we reached an agreement in principle for the settlement of the Margaret Bunch, et al. v. Rent-A-Center, Inc. matter pending in federal court in Kansas City, Missouri. The settlement is subject to court approval. Under the terms of the proposed settlement, while not admitting liability, we agreed to pay an aggregate of $12,250,000 to the agreed upon class, plus plaintiff's attorneys' fees as determined by the court, and costs to administer the settlement process. Accordingly, to account for the aforementioned costs, as well as our own attorneys' fees, we recorded a one time non-recurring charge of $16.0 million in the third quarter as a result of the settlement of this matter. RESULTS OF OPERATIONS THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Store Revenue. Total store revenue increased by $139.9 million, or 12.2%, to $1,288.7 million for the nine months ended September 30, 2001 from $1,148.8 million for the nine months ended September 30, 2000. The increase in total store revenue is directly attributable to the success of our efforts on improving store operations through: o increasing the number of units on rent; o increasing our customer base; o increasing the average price per unit on rent by upgrading our rental merchandise; and o incremental revenues through acquisitions and new store openings. This focus resulted in same store revenues increasing by $79.2 million, or 7.5%, to $1,140.3 million for the nine months ended September 30, 2001 from $1,061.1 million for the nine months ended September 30, 2000. Same store revenues represent those revenues earned in stores that were operated by us for each of the entire nine month periods ending September 30, 2001 and 2000. This improvement was primarily attributable to an increase in the number of customers served, the number of items on rent, as well as revenue earned per item on rent. Franchise Revenue. Total franchise revenue decreased by $138,000, or 0.3%, to $40.8 million for the nine months ended September 30, 2001 from $41.0 million for the nine months ended September 30, 2000. This decrease was primarily attributable to a decrease in the number of franchise locations during the first three quarters of 2001 as compared to the first three quarters of 2000. Depreciation of Rental Merchandise. Depreciation of rental merchandise increased by $28.7 million, or 12.9%, to $251.3 million for the nine months ended September 30, 2001 from $222.5 million for the nine months ended September 30, 2000. This increase was primarily attributable to an increase in the number of units on rent. Depreciation of rental merchandise expressed as a percent of store rentals and fees revenue increased to 20.7% in 2001 from 20.6% for the same period in 2000. This slight increase is primarily a result of in-store promotions made during the third quarter of 2001. These promotions included a reduction in the rates and terms on certain rental agreements, thus causing depreciation to be a greater percent of store rentals and fees revenue on those items rented. Cost of Merchandise Sold. Cost of merchandise sold increased by $2.4 million, or 4.7%, to $54.2 million for the nine months ended September 30, 2001 from $51.7 million for the nine months ended September 30, 2000. This increase was primarily a result of an increase in the number of items sold during the first nine months of 2001 as compared to the first nine months of 2000. Salaries and Other Expenses. Salaries and other expenses expressed as a percentage of total store revenue increased to 58.1% for the nine months ended September 30, 2001 from 55.6% for the nine months ended September 30, 2000. This increase was primarily attributable to the infrastructure expenses and costs associated with the opening of 94 new stores since October 1, 2000 and increases in store level labor, insurance costs, and other operating expenses. Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased by $228,000, or 0.7%, to $34.8 million for the nine months ended September 30, 2001 from $35.0 million for the nine months ended September 30, 2000. This decrease is primarily a result of a decrease in the number of franchise locations during the first three quarters of 2001 as compared to the first three quarters of 2000. 15
General and Administrative Expenses. General and administrative expenses expressed as a percent of total revenue increased slightly to 3.1% for the nine months ending September 30, 2001 from 3.0% for the nine months ending September 30, 2000. This increase is primarily attributable to an increase in home office labor and other overhead expenses for the first three quarters of 2001 as compared to the first three quarters of 2000. Amortization of Intangibles. Amortization of intangibles increased by $1.3 million, or 6.2%, to $22.4 million for the nine months ended September 30, 2001 from $21.1 million for the nine months ended September 30, 2000. This increase was primarily attributable to the additional goodwill amortization associated with the acquisition of 39 stores in the last half of 2000 and the additional 78 stores acquired in the first half of 2001. Accounting for goodwill and intangibles amortization will be revised under SFAS 142. However, we will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001 under the current method until January 1, 2002, at which time quarterly and annual goodwill amortization of approximately $7.1 million and $28.4 million will no longer be recognized. Operating Profit. Operating profit decreased by $45.0 million, or 21.8%, to $161.5 million for the nine months ended September 30, 2001 from $206.5 million for the nine months ended September 30, 2000. Excluding the pre-tax effect of the class action litigation settlement of $16.0 million recorded in the third quarter of 2001 and the class action litigation settlement refund of $22.4 million received in the second quarter of 2000, operating profit decreased by $6.6 million, or 3.6%, to $177.5 million for the nine months ended September 30, 2001 from $184.1 million for the nine months ended September 30, 2000. Operating profit as a percentage of total revenue decreased to 13.4% for the nine months ended September 30, 2001 before the pre-tax class action litigation settlement of $16.0 million, from 15.5% for the nine months ended September 30, 2000 before the pre-tax non-recurring class action litigation settlement refund of $22.4 million. This decrease is primarily attributable to the infrastructure expenses and initial costs associated with the opening of 94 new stores since October 1, 2000 and increases in store level labor, insurance, utility, and other operating expenses. Net Earnings. Including the class action litigation settlement adjustments noted above, net earnings were $62.5 million for the nine months ended September 30, 2001, and $79.4 million for the nine months ended September 30, 2000. Net earnings increased by $3.8 million, or 5.6%, to $71.5 million for the nine months ended September 30, 2001 before the after tax effect of the $16.0 million class action litigation settlement, from $67.7 million for the nine months ended September 30, 2000 before the after-tax effect of the $22.4 million class action litigation settlement refund. This increase, excluding the after tax effect of the class action litigation settlement adjustments, is primarily attributable to growth in total revenues and reduced interest expenses resulting from a reduction in outstanding debt. Preferred Dividends. Dividends on our Series A preferred stock are payable quarterly at an annual rate of 3.75%. We account for shares of preferred stock distributed as dividends in-kind at the greater of the stated value or the value of the common stock obtainable upon conversion on the payment date. Preferred dividends increased by $4.3 million, or 55.7%, to $12.1 million for the nine months ended September 30, 2001 as compared to $7.8 million for the nine months ended September 30, 2000. This increase is a result of more shares of Series A Preferred stock outstanding in 2001 as compared to 2000. THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Store Revenue. Total store revenue increased by $41.2 million, or 10.5%, to $433.4 million for the three months ended September 30, 2001 from $392.2 million for the three months ended September 30, 2000. The increase in total store revenue is directly attributable to the success of our efforts on improving store operations through: o increasing the number of units on rent; o increasing our customer base; and o incremental revenues through acquisitions and new store openings. This focus resulted in same store revenues increasing by $16.7 million, or 4.5%, to $385.1 million for the three months ended September 30, 2001 from $368.3 million for the three months ended September 30, 2000. Same store revenues represent those revenues earned in stores that were operated by us for each of the entire three month periods ending September 30, 2001 and 2000. This improvement was primarily attributable to an increase in the number of customers served and the number of items on rent. 16
Franchise Revenue. Total franchise revenue increased by $867,000, or 6.8%, to $13.6 million for the three months ended September 30, 2001 from $12.8 million for the three months ended September 30, 2000. This increase was primarily attributable to an increase in merchandise sales to franchise locations during the third quarter of 2001 as compared to the third quarter of 2000. Depreciation of Rental Merchandise. Depreciation of rental merchandise increased by $9.2 million, or 11.9%, to $86.2 million for the three months ended September 30, 2001 from $77.0 million for the three months ended September 30, 2000. This increase was primarily attributable to an increase in the number of units on rent. Depreciation of rental merchandise expressed as a percent of store rentals and fees revenue increased to 21.0% in 2001 from 20.7% in 2000. This slight increase in primarily a result of in-store promotions made during the third quarter of 2001. These promotions included a reduction in the rates and terms on certain rental agreements, thus causing depreciation to be a greater percent of store rentals and fees revenue on those items rented. Cost of Merchandise Sold. Cost of merchandise sold increased by $2.8 million, or 19.7%, to $17.2 million for the three months ended September 30, 2001 from $14.3 million for the three months ended September 30, 2000. This increase was primarily a result of an increase in merchandise sold during the third quarter of 2001. Salaries and Other Expenses. Salaries and other expenses expressed as a percentage of total store revenue increased to 60.4% for the three months ended September 30, 2001 from 55.9% for the three months ended September 30, 2000. This increase was primarily attributable to the infrastructure expenses and costs associated with our new store growth initiatives and increases in store level labor, insurance costs, and other operating expenses. Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold increased by $809,000, or 7.5%, to $11.6 million for the three months ended September 30, 2001 from $10.8 million for the three months ended September 30, 2000. This increase is primarily a result of an increase in merchandise sales to franchise locations during the third quarter of 2001 as compared to the third quarter of 2000. General and Administrative Expenses. General and administrative expenses expressed as a percent of total revenue remained constant at 3.1% for the three months ending September 30, 2001 and 2000. Amortization of Intangibles. Amortization of intangibles increased by $570,000, or 8.0%, to $7.7 million for the three months ended September 30, 2001 from $7.2 million for the three months ended September 30, 2000. This increase was primarily attributable to the additional goodwill amortization associated with the acquisition of 39 stores in the last half of 2000 and the additional 78 stores acquired in the first half of 2001. Accounting for goodwill and intangibles amortization will be revised under SFAS 142. However, we will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001 under the current method until January 1, 2002, at which time quarterly and annual goodwill amortization of approximately $7.1 million and $28.4 million will no longer be recognized. Operating Profit. Operating profit decreased by $15.3 million, or 24.1%, to $48.4 million for the three months ended September 30, 2001, before the pre-tax non-recurring class action litigation settlement of $16.0 million, from $63.7 million for the three months ended September 30, 2000. Including the $16.0 million class action litigation settlement, operating profit was $32.4 million for the three months ending September 30, 2001. The decrease before the pre-tax class action litigation settlement is primarily attributable to the infrastructure expenses and initial costs associated with our new store growth initiatives, an increase in store level labor, insurance, utility, and other operating expenses, as well as a deterioration of the gross profit margin. Net Earnings. Net earnings decreased by $5.0 million, or 20.8%, to $18.9 million for the three months ended September 30, 2001, before the after-tax effect of the $16.0 million class action litigation settlement, from $23.9 million for the three months ended September 30, 2000. Net earnings were $10.0 million for the three months ended September 30, 2001 including the class action litigation settlement. The decrease before the after-tax effect of the litigation settlement is attributable to the infrastructure expenses and initial costs associated with our new store growth initiatives, an increase in store level labor, insurance, utility, and other operating expenses, as well as a deterioration of the gross profit margin. Preferred Dividends. Dividends on our Series A preferred stock are payable quarterly at an annual rate of 3.75%. We account for shares of preferred stock distributed as dividends in-kind at the greater of the stated value or the value of the common stock obtainable upon conversion on the payment date. Preferred dividends increased by $78,000, or 3.0%, to $2.7 million for the three months ended September 30, 2001 as compared to $2.6 million for the three months ended September 30, 2000. This increase is a result of more shares of Series A Preferred stock outstanding in 2001 as compared to 2000. 17
LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity requirements are for debt service, working capital, capital expenditures, acquisitions and new store openings. 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. For the nine months ending September 30, 2001, cash provided by operating activities decreased by $25.9 million to $116.8 million in 2001 from $142.7 million during the nine month period ending September 30, 2000. This decrease was primarily the result of an increase in the amount of rental merchandise resulting from strong consumer demand in the first nine months of 2001, as well as lower net earnings. We purchased $395.0 million and $345.7 million of rental merchandise during the first nine months of 2001 and 2000, respectively. Cash used in investing activities increased by $22.9 million to $86.8 million during the nine month period ending September 30, 2001 from $63.9 million during the nine month period ending September 30, 2000. This increase is primarily attributable to the cost associated with the opening and acquisition of new stores during the first nine months of 2001. 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 $42.3 million and $25.0 million on capital expenditures during the nine month periods ending September 30, 2001 and 2000, respectively, and expect to spend no more than $12.8 million for the remainder 2001. In the second half of 2000, we resumed our strategy of increasing our store base through opening new stores, as well as through opportunistic acquisitions. As of November 13, 2001, we have acquired one store, opened ten additional stores, and closed two stores in the fourth quarter of 2001. The closed stores were merged with existing stores. 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. Cash used in financing activities decreased by $12.8 million to $37.5 million during the nine month period ending September 30, 2001 from $50.3 million during the nine month period ending September 30, 2000. This decrease is primarily related to the net proceeds associated with the issuance of our common stock in May 2001 and an increase in the amount of stock options exercised during the first three quarters of 2001 as compared to the first three quarters of 2000, offset by debt repayments under our senior credit facilities. During the first nine months of 2001, we paid down $108.0 million in debt using the proceeds from the issuance of our common stock in the May 2001 offering and from stock options exercised during the first three quarters of 2001, as well as from available cash flow from operations. The profitability of our stores tends to grow at a slower rate approximately five years from the time we open or acquire them. As a result, in order for us to show improvements in our profitability, it is important for us to continue to open stores in new locations or acquire underperforming stores on favorable terms. There can be no assurance that we will be able to acquire or open new stores at the rates we expect, or at all. We cannot assure you that the stores we do acquire or open will be profitable at the same levels that our current stores are, or at all. Borrowings. The table below shows the scheduled maturity dates of our senior debt outstanding at September 30, 2001. <Table> <Caption> YEAR ENDING DECEMBER 31, (IN THOUSANDS) ------------ -------------- <S> <C> October 1 to December 31, 2001 $ 0 2002 1,980 2003 1,980 2004 29,104 2005 110,476 Thereafter 314,480 ------------ $ 458,020 ============ </Table> Under our senior credit facility, we are required to use 25% of the net proceeds from any equity offering to repay our term loans. In June 2001, we used the net proceeds of approximately $45.7 million from the offering of our common stock to repay a portion of our term loans. 18
We intend to continue to make prepayments of debt under our senior credit facilities, repurchase some of our senior subordinated notes or repurchase our common stock under our common stock repurchase program or pursuant to our agreement with Mr. Talley, to the extent we have available cash that is not necessary for store openings or acquisitions. We cannot, however, assure you that we will have excess cash available for these purposes. Senior Credit Facilities. The senior credit facilities are provided by a syndicate of banks and other financial institutions led by The Chase Manhattan Bank, as administrative agent. At September 30, 2001, we had a total of $458.0 million outstanding under these facilities, all of which was under our term loans. At September 30, 2001, we had $56.4 million of availability under the revolving credit facility. Borrowings under the senior credit facilities bear interest at varying rates equal to 1.25% to 2.75% over LIBOR, which was 2.76% at September 30, 2001. We also have a prime rate option under the facilities, but do not have any exercised as of September 30, 2001. At September 30, 2001, the average rate on outstanding senior debt borrowings was 5.23%. During 1998, we entered into interest rate protection agreements with two banks. Under the terms of the interest rate agreements, the LIBOR rate used to calculate the interest rate charged on $250.0 million of the outstanding senior term debt has been fixed at an average rate of 5.59%. The protection on the $250.0 million expires in 2003. The senior credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property and real property. The senior credit facilities are also secured by a pledge of the capital stock of our subsidiaries. The senior credit facilities contain covenants that limit our ability to: o incur additional debt (including subordinated debt) in excess of $25 million; o repurchase in excess of $50 million of our capital stock and senior subordinated notes generally; o incur liens or other encumbrances; o merge, consolidate or sell substantially all our property or business; o sell assets, other than inventory; o make investments or acquisitions unless we meet financial tests and other requirements; o make capital expenditures; or o enter into a new line of business. The senior credit facilities require us to comply with several financial covenants, including a maximum leverage ratio, a minimum interest coverage ratio and a minimum fixed charge coverage ratio. At September 30, 2001, the maximum leverage ratio was 4.25:1, the minimum interest coverage ratio was 2.50:1, and the minimum fixed charge coverage ratio was 1.3:1. On that date, our actual ratios were 2.03:1, 4.77:1 and 2.13:1. Events of default under the senior credit facilities include customary events, such as a cross-acceleration provision in the event that we default on other debt. In addition, an event of default under the senior credit facilities would occur if we undergo a change of control. This is defined to include the case where Apollo ceases to own at least 50% of the amount of our voting stock that they owned on August 5, 1998, or a third party becomes the beneficial owner of 33.33% or more of our voting stock at a time when certain permitted investors own less than the third party or Apollo entities own less than 35% of the voting stock owned by the permitted investors. We do not have the ability to prevent Apollo from selling its stock, and therefore would be subject to an event of default if Apollo did so and its sales were not agreed to by the lenders under the senior credit facilities. This could result in the acceleration of the maturity of our debt under the senior credit facilities, as well as under the subordinated notes through their cross-acceleration provision. 19
Subordinated Notes. In August 1998, we issued $175.0 million of subordinated notes, maturing on August 15, 2008, under an indenture dated as of August 18, 1998 among us, our subsidiary guarantors and IBJ Schroder Bank & Trust Company, as trustee. The indenture contains covenants that limit our ability to: o incur additional debt; o sell assets or our subsidiaries; o grant liens to third parties; o pay dividends or repurchase stock; and o engage in a merger or sell substantially all of our assets. Events of default under the indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $25 million. We may redeem the notes after August 15, 2003, at our option, in whole or in part. The subordinated notes also require that upon the occurrence of a change of control (as defined in the indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. If we did not comply with this repurchase obligation, this would trigger an event of default under our senior credit facilities. Sales of Equity Securities. On May 31, 2001, we completed an offering of 3,680,000 shares of our common stock at an offering price of $42.50 per share. In this 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 $45.7 million. During 1998, we issued 260,000 shares of our Series A preferred stock at $1,000 per share, resulting in aggregate proceeds of $260.0 million. Dividends on our Series A preferred stock accrue on a quarterly basis, at the rate of $37.50 per annum, per share, and are currently paid in additional shares of Series A preferred stock because of restrictive provisions in our senior credit facilities. Beginning in 2003, we will be required to pay the dividends in cash and may do so under our senior credit facilities so long as we are not in default. The Series A preferred stock is not redeemable until 2002, after which time we may, at our option, redeem the shares at 105% of the $1,000 per share liquidation preference plus accrued and unpaid dividends. 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 September 30, 2001, we have paid approximately $117.1 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. Additional settlements or judgments against us on our existing litigation could affect our liquidity. Talley Repurchase. In connection with Mr. Talley's retirement, we entered into an agreement to repurchase $25.0 million worth of shares of our common stock held by Mr. Talley at a purchase price equal to the average closing price of our common stock over the 10 trading days beginning October 9, 2001, subject to a maximum of $27.00 per share and a minimum of $20.00 per share. Under this formula, the purchase price for the repurchase was calculated at $20.258 per share. Accordingly, on October 23, 2001 we repurchased 493,632 shares of our common stock from Mr. Talley at $20.258 per share for a total purchase price of $10.0 million. In addition, on or before November 30, 2001, we will repurchase an additional 740,488 shares of our common stock from Mr. Talley at $20.258 per share, for a total purchase price of an additional $15.0 million. Furthermore, we have the option to purchase any or all of the remaining 1,714,046 shares of common stock held by Mr. Talley at $20.258 per share through February 5, 2002. 20
Our senior credit facilities contain covenants that generally limit our ability to repurchase in excess of $50.0 million of our capital stock and senior subordinated notes. In addition, the indenture governing our senior subordinated notes contains covenants limiting our ability to repurchase our capital stock. Under these agreements, we had the ability to effect the October 2001 repurchase of $10.0 million of our common stock from Mr. Talley and we currently have the ability to effect the November 2001 repurchase of $15.0 million of our common stock from Mr. Talley. However, each of these repurchases may limit our ability to make further repurchases of our common stock, including our ability to exercise the option to repurchase the remaining shares of our common stock held by Mr. Talley and pursuant to our Common Stock Repurchase Plan. Furthermore, the restrictions under our senior credit facilities may, in some instances, limit our ability to repurchase our senior subordinated notes following the November 2001 repurchase of $15.0 million of our common stock from Mr. Talley. Common Stock Repurchase Plan. In April 2000, we announced that our board of directors had authorized a program to repurchase in the open market up to an aggregate of $25 million of our common stock. To date, no shares of common stock have been purchased by us under this share repurchase program. However, we may begin repurchasing shares of our common stock at any time, subject to the limitations in our senior credit facilities and the indentures governing our senior subordinated notes. Economic Conditions. Although our performance has not suffered in previous economic downturns, we cannot assure you that demand for our products, particularly in higher price ranges, will not significantly decrease in the event of a prolonged recession. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS SFAS 133. Effective January 1, 2001, we adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The adoption of SFAS 133 on January 1, 2001 resulted in a cumulative pre-tax increase to other comprehensive income of $2.6 million, or $1.4 million after taxes. As a result of a decline in interest rates for the nine months ended September 30, 2001, accumulative other comprehensive loss at the end of the period was $2.5 million after taxes. SFAS 141 and SFAS 142. On July 20, 2001, the Financial Accounting Standards Board issued SFAS 141, Business Combinations and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these statements and their effective dates for us are as follows: o all business combinations initiated after June 30, 2001 must use the purchase method of accounting; o intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; o goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized; o effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization; o effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator; and o all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. 21
We will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001, under our current method until January 1, 2002, at which time quarterly and annual goodwill amortization of approximately $7.1 million and $28.4 million will no longer be recognized. We intend to complete a transitional impairment test of all intangible assets by March 21, 2002 and a transitional fair value based impairment test of goodwill as of January 1, 2002 by June 30, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ended March 31, 2002, as a cumulative effect of a change in accounting principle. SFAS 144. On October 3, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. We do not believe that the implementation of this standard will have a material effect on our financial position, results of operations, or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE SENSITIVITY As of September 30, 2001, we had $175.0 million in senior subordinated notes outstanding at a fixed interest rate of 11.0%, and $458.0 million in term loans. Our senior subordinated notes mature on August 15, 2008. The fair value of the senior 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 senior subordinated notes at September 30, 2001 was $169.8 million, which is $5.2 million below their carrying value. Unlike the senior subordinated notes, the $458.0 million in term loans and all borrowings under the senior credit facility have variable interest rates indexed to current LIBOR rates. Because the variable rate structure exposes us to 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. The swap agreements had an aggregate fair value of ($11.5) million at September 30, 2001. A hypothetical 1.0% change in the LIBOR rate would have affected the fair value of the swaps by approximately $15.8 million. MARKET RISK Market risk is the potential change in an instrument's value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by the Board of Directors and senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. INTEREST RATE RISK We hold long-term debt with variable interest rates indexed to prime or LIBOR that exposes us to the risk of increased interest costs if interest rates rise. To reduce the risk related to unfavorable interest rate movements, we have entered into certain interest rate swap contracts on $250.0 million of debt to pay a fixed rate of 5.59%. 22
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. Except as described below, we are not currently a party to any material litigation. Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in November 1997 in New York state court. This matter was assumed by us in connection with the Thorn Americas acquisition, and appropriate purchase accounting adjustments were made for such contingent liabilities. The plaintiffs acknowledge that rent-to-own transactions in New York are subject to the provisions of New York's Rental Purchase Statute but contend the Rental Purchase Statute does not provide Thorn Americas immunity from suit for other statutory violations. Plaintiffs allege Thorn Americas has a duty to disclose effective interest under New York consumer protection laws, and seek damages and injunctive relief for Thorn Americas' failure to do so. This suit also alleges violations relating to excessive and unconscionable pricing, late fees, harassment, undisclosed charges, and the ease of use and accuracy of its payment records. In their prayers for relief, the plaintiffs have requested the following: o class certification; o injunctive relief requiring Thorn Americas to (A) cease certain marketing practices, (B) price their rental purchase contracts in certain ways, and (C) disclose effective interest; o unspecified compensatory and punitive damages; o rescission of the class members contracts; o an order placing in trust all moneys received by Thorn Americas in connection with the rental of merchandise during the class period; o treble damages, attorney's fees, filing fees and costs of suit; o pre- and post-judgment interest; and o any further relief granted by the court. The plaintiffs have not alleged a specific monetary amount with respect to their request for damages. The proposed class originally included all New York residents who were party to Thorn Americas' rent-to-own contracts from November 26, 1991 through November 26, 1997. In her class certification briefing, Plaintiff acknowledged her claims under the General Business Law in New York are subject to a three year statute of limitations, and is now requesting a class of all persons in New York who paid for rental merchandise from us since November 26, 1994. We are vigorously defending this action. In November 2000, following interlocutory appeal by both parties from the denial of cross-motions for summary judgement, we obtained a favorable ruling from the Appellate Division of the State of New York, dismissing Plaintiff's claims based on the alleged failure to disclose an effective interest rate. Plaintiff's other claims were not dismissed. Plaintiff moved to certify a state-wide class in December 2000. Plaintiff's class certification motion was heard by the court on November 7, 2001, at which time the court took the motion under advisement. We are vigorously opposing class certification. Although there can be no assurance that our position will prevail, or that we will be found not to have any liability, we believe the decision by the Appellate Division to be a significant and favorable development in this matter. Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin Attorney General filed suit against us and our subsidiary ColorTyme in the Circuit Court of Milwaukee County, Wisconsin, alleging that our rent-to-rent transaction violates the Wisconsin Consumer Act and the Wisconsin Deceptive Advertising Statute. The Attorney General claims that our rent-to-rent transaction, coupled with the opportunity afforded our customers to purchase rental merchandise under what we believe is a separate transaction, is a disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the Attorney General alleges that we have failed to disclose credit terms, misrepresented the terms of the transaction and engaged in unconscionable practices. We currently operate 27 stores in Wisconsin. 23
The Attorney General seeks injunctive relief, restoration of any losses suffered by any Wisconsin consumer harmed and civil forfeitures and penalties in amounts ranging from $50 to $10,000 per violation. The Attorney General's claim for monetary penalties applies to at least 7,746 transactions through June 30, 2001. On October 31, 2001, the Attorney General filed a motion for summary judgment. Our response is due on November 30, 2001. A pre-trial conference is currently scheduled to occur after November 30, 2001, with a trial date expected sometime in the spring of 2002. Since the filing of this suit, we have attempted to negotiate a mutually satisfactory resolution of these claims with the Wisconsin Attorney General's office, including the consideration of possible changes in our business practices in Wisconsin. To date, we have not been successful, but our efforts are ongoing. If we are unable to negotiate a settlement with the Attorney General, we intend to litigate the suits. Although we cannot assure you that we will be found to have no liability in this matter, we believe its ultimate resolution will not have a material adverse effect upon us. Wilfong, et. al. v. Rent-A-Center, Inc./Margaret Bunch, et. al. v. Rent-A-Center, Inc. In August 2000, a putative nationwide class action was filed against us in federal court in East St. Louis, Illinois by Claudine Wilfong and 18 other plaintiffs, alleging that we engaged in class-wide gender discrimination following our acquisition of Thorn Americas. The allegations underlying Wilfong involve charges of wrongful termination, constructive discharge, disparate treatment and disparate impact. The plaintiffs, in their prayer for relief, have requested class certification, injunctive relief, actual damages of $410,000,000, unspecified compensatory and punitive damages, attorney's fees, filing fees and costs of suit, pre-judgment interest, and any further relief granted by the court. In addition, the U.S. Equal Employment Opportunity Commission filed a motion to intervene on behalf of the plaintiffs, which the court granted on May 14, 2001. On November 1, 2001, the plaintiffs filed their motion for class certification. Our response to their motion is due in January 2002. Although we believe the claims in this case are without merit, we cannot assure you that we will be found to have no liability in this matter. In December 2000, a similar suit filed by Margaret Bunch in federal court in the Western District of Missouri was amended to allege class action claims similar to those in Wilfong, although no specific amounts were claimed as actual damages. In July 2001, the court stayed the Bunch action and compelled the plaintiffs to arbitrate their claims. In November 2001, we announced that we had reached an agreement in principle for the settlement of the Bunch matter, which is subject to court approval. Under the terms of the proposed settlement, we agreed to pay an aggregate of $12,250,000 to the agreed upon class, plus plaintiffs' attorneys fees as determined by the court, and costs to administer the settlement. We have the right to terminate the settlement in the event that more than ninety-two class members opt out of the settlement. To the extent that the claims of a purported class member in Wilfong are covered by the terms of the Bunch settlement and such class member does not opt out of the Bunch settlement, that class member would be entitled to her applicable portion of the settlement proceeds in Bunch and would accordingly not be entitled to any recovery for those claims in Wilfong. Both the individual plaintiffs in Wilfong and the EEOC have filed objections to the settlement in the Bunch case. We anticipate that the court in Bunch will set a date for determining preliminary approval of the settlement in the near future. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. CURRENT REPORTS ON FORM 8-K None. EXHIBITS EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1(1) -- Amended and Restated Certificate of Incorporation of Renters Choice, Inc. 3.2(2) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice, Inc. 3.3(3) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Rent-A-Center, Inc. 3.4(4) -- Amended and Restated Bylaws of Rent-A-Center, Inc. 4.1(5) -- Form of Certificate evidencing Common Stock 24
4.2(6) -- Certificate of Designations, Preferences and Relative Rights And Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(7) -- Certificate of Designations, Preferences and Relative Rights And Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4(8) -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., As Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, As Trustee 4.5(9) -- Form of Certificate evidencing Series A Preferred Stock 4.6(10) -- Form of Exchange Note 4.7(11) -- First Supplemental Indenture, dated as of December 31, 1998, by And among Renters Choice Inc., Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies, Inc. and IBJ Schroder Bank & Trust Company, as Trustee. 10.1(12) -- Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan 10.2(13) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.3(14) -- First Amendment, dated as of February 25, 2000, to the Credit Agreement, dated August 5, 1998, among Rent-A-Center, Inc. (formerly known as Renters Choice, Inc.), Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain Other lenders 10.4(15) -- Amended and Restated Credit Agreement, dated as of August 5, 1998 as amended and restated as of June 29, 2000, among Rent-A-Center, Inc., Comerica Bank, as Documentation Agent, Bank Of America, NA, as Syndication Agent, and The Chase Manhattan Bank, as Administration Agent 10.5(16) -- First Amendment, dated as of May 8, 2001, to the Credit Agreement, dated as of August 5, 1998, as amended and restated as Of June 29, 2000, among Rent-A-Center, Inc., the Lenders parties To the Credit Agreement, the Documentation Agent and Syndication Agent named therein and The Chase Manhattan Bank, as Administrative Agent. 10.6(17) -- Guarantee and Collateral Agreement, dated August 5, 1998, made By Renters Choice, Inc., and certain of its Subsidiaries in favor Of the Chase Manhattan Bank, as Administrative Agent 10.7* -- Amended and Restated Stockholders Agreement, effective 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 25
10.8(18) -- 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* -- 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. - ---------- * Filed herewith. (1) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (2) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (3) Incorporated herein by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (4) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (5) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form S-4 filed on January 19, 1999. (6) Incorporated herein by reference to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (7) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (8) Incorporated herein by reference to Exhibit 4.4 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (9) Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (10) Incorporated herein by reference to Exhibit 4.6 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (11) Incorporated herein by reference to Exhibit 4.7 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (12) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement of Form S-8 (File No. 333-62582) (13) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (14) Incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on form 10-K for the year ended December 31, 1999 (15) Incorporated herein by reference to Exhibit 10.4 to the registrant's Quarterly Report on form 10-Q for the quarter ended June 30, 2000 26
(16) Incorporated herein by reference to Exhibit 10.5 to the registrant's Quarterly Report on form 10-Q for the quarter ended March 31, 2001 (17) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.22 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 27
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: November 13, 2001 28
INDEX TO EXHIBITS <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 3.1(1) -- Amended and Restated Certificate of Incorporation of Renters Choice, Inc. 3.2(2) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice, Inc. 3.3(3) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Rent-A-Center, Inc. 3.4(4) -- Amended and Restated Bylaws of Rent-A-Center, Inc. 4.1(5) -- Form of Certificate evidencing Common Stock 4.2(6) -- Certificate of Designations, Preferences and Relative Rights And Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(7) -- Certificate of Designations, Preferences and Relative Rights And Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4(8) -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., As Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, As Trustee 4.5(9) -- Form of Certificate evidencing Series A Preferred Stock 4.6(10) -- Form of Exchange Note 4.7(11) -- First Supplemental Indenture, dated as of December 31, 1998, by And among Renters Choice Inc., Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies, Inc. and IBJ Schroder Bank & Trust Company, as Trustee. 10.1(12) -- Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan 10.2(13) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.3(14) -- First Amendment, dated as of February 25, 2000, to the Credit Agreement, dated August 5, 1998, among Rent-A-Center, Inc. (formerly known as Renters Choice, Inc.), Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain Other lenders 10.4(15) -- Amended and Restated Credit Agreement, dated as of August 5, 1998 as amended and restated as of June 29, 2000, among Rent-A-Center, Inc., Comerica Bank, as Documentation Agent, Bank Of America, NA, as Syndication Agent, and The Chase Manhattan Bank, as Administration Agent </Table> 29
<Table> <S> <C> 10.5(16) -- First Amendment, dated as of May 8, 2001, to the Credit Agreement, dated as of August 5, 1998, as amended and restated as Of June 29, 2000, among Rent-A-Center, Inc., the Lenders parties To the Credit Agreement, the Documentation Agent and Syndication Agent named therein and The Chase Manhattan Bank, as Administrative Agent. 10.6(17) -- Guarantee and Collateral Agreement, dated August 5, 1998, made By Renters Choice, Inc., and certain of its Subsidiaries in favor Of the Chase Manhattan Bank, as Administrative Agent 10.7* -- Amended and Restated Stockholders Agreement, effective as of October 8, 2001, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Rent-A-Center, Inc., and certain other persons 10.8(18) -- 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* -- 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. </Table> - ---------- * Filed herewith. (1) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (2) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (3) Incorporated herein by reference to Exhibit 3.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (4) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (5) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form S-4 filed on January 19, 1999. (6) Incorporated herein by reference to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (7) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (8) Incorporated herein by reference to Exhibit 4.4 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (9) Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (10) Incorporated herein by reference to Exhibit 4.6 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 30
(11) Incorporated herein by reference to Exhibit 4.7 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (12) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement of Form S-8 (File No. 333-62582) (13) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (14) Incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on form 10-K for the year ended December 31, 1999 (15) Incorporated herein by reference to Exhibit 10.4 to the registrant's Quarterly Report on form 10-Q for the quarter ended June 30, 2000 (16) Incorporated herein by reference to Exhibit 10.5 to the registrant's Quarterly Report on form 10-Q for the quarter ended March 31, 2001 (17) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.22 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 31