<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25370
------------------------
RENT-A-CENTER, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
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)
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, PAR VALUE $.01 PER SHARE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<TABLE>
<S> <C>
AGGREGATE MARKET VALUE OF THE 17,438,470 SHARES OF COMMON
STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AT THE
CLOSING SALES PRICE ON MARCH 23, 1999..................... $453,400,220
------------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON MARCH 23, 1999............................. 25,118,173
------------
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 1999 Annual
Meeting of Stockholders of Rent-A-Center, Inc., are incorporated by reference
into Part III of this report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 19
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 28
Item 13. Certain Relationships and Related Transactions.............. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 28
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
We are the largest operator in the United States rent-to-own industry with
an approximate 26% market share (based on store count). We currently operate
2,126 company-owned stores and 324 franchised stores, providing high quality
durable goods in 50 states, the District of Columbia and Puerto Rico. Our
subsidiary, ColorTyme, Inc., is a national franchisor of 324 stores in 40
states, 300 of which operate under the "ColorTyme" name, while the remaining 24
stores operate under the "Rent-A-Center" name. Our stores offer home
electronics, appliances, furniture and accessories under flexible rental
purchase arrangements that allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed upon rental period. These rental
purchase arrangements are designed to appeal to a wide variety of consumers by
allowing them to obtain merchandise that they might otherwise be unable or
unwilling to obtain due to insufficient cash resources, a lack of access to
credit, because they have a temporary need, or they simply desire to rent rather
than purchase the merchandise.
Our principal executive offices are located at 5700 Tennyson Parkway, Third
Floor, Plano, Texas 75024.
Acquisition History
We were incorporated in 1986. In 1989, J. Ernest Talley, our Chairman of
the Board and Chief Executive Officer, acquired a controlling interest in us and
certain of our related entities, which then owned 22 rent-to-own stores located
primarily in New Jersey and Puerto Rico. These related entities were merged
together under the name Vista Rent To Own, Inc. in 1990. In March 1993, we
formed Renters Choice, L.P. for the purpose of acquiring from DEF Investments,
Inc. and certain related entities, 84 stores located in 12 states. This
acquisition was consummated in April 1993. We changed our name to Renters
Choice, Inc. in December 1993 and in May 1994 we acquired all of the assets and
liabilities of Renters Choice, L.P. in connection with the dissolution of that
partnership. Effective as of January 1, 1995, Talley Lease To Own, Inc., a
rent-to-own company owned primarily by Mr. Talley and his son Michael C. Talley,
was merged into Renters Choice, Inc., with Renters Choice, Inc. being the
surviving corporation. In April 1995, we acquired 72 stores located in 18
states, including nine states in which we previously had no operations, from
Crown Leasing Corporation and certain of its affiliates. In September 1995, we
completed the acquisition of an additional 135 stores located in 10 states,
including one state in which we previously had no operations, from the
shareholders of the parent company of a chain of rent-to-own stores doing
business as Magic Rent-to-Own and Kelway Rent-to-Own. In May 1996, we acquired
ColorTyme, a national franchisor of rent-to-own stores. At the time of the
closing of this acquisition, ColorTyme was a franchisor of 313 stores in 40
states, and directly owned seven stores. As the pool of available large
acquisition candidates had significantly decreased in 1996 and 1997, we launched
an aggressive program to purchase smaller chains of rent-to-own stores, as well
as individual stores. As a result of this program, which began in mid-1996, we
acquired 98 stores located in 20 states in 24 separate transactions during 1996,
and 76 stores located in 16 states in 18 separate transactions during 1997.
Since 1993, our store count has grown from 27 to 2,126 through the above
acquisitions as well as the significant acquisition activity and new store
openings in 1998.
1998 DEVELOPMENTS
Acquisitions
In May 1998, we acquired substantially all of the assets of Central Rents,
Inc. for approximately $100 million in cash. Central Rents operated 176 stores
located primarily in California, the Southwest, Midwest, and South. This
acquisition expanded our presence in regions of the country which we had
strategically targeted for expansion.
1
<PAGE> 4
On August 5, 1998, we acquired Thorn Americas, Inc. for approximately $900
million in cash, including the repayment of certain debt of Thorn Americas.
Prior to this acquisition, Thorn Americas was our largest competitor with 1,409
company-owned stores and 65 franchised stores in 49 states and the District of
Columbia. Thorn Americas operated 1,158 stores under the "Rent-A-Center" brand,
the most widely recognized name in the rent-to-own industry.
We financed the acquisition of Thorn Americas through certain financing
arrangements, consisting of a senior credit facility and a senior subordinated
facility. We also issued a total of $260 million in preferred stock to certain
affiliates of Apollo Management, IV, L.P., and to an affiliate of Bear, Stearns
& Co. to assist in the funding of the acquisition of Thorn Americas, to
repurchase $25 million of our common stock, and to repay our prior credit
facility. On August 18, 1998, following the acquisition of Thorn Americas, we
issued $175 million of senior subordinated notes to repay the senior
subordinated facility.
During 1998, we also acquired the assets of 55 rent-to-own stores in 14
separate transactions for approximately $26.4 million in cash. As a result of
these acquisitions, a total of 1,637 stores were added to our store base.
Settlement of New Jersey Litigation
On December 14, 1998, we settled in principle three lawsuits arising out of
our operations in New Jersey for approximately $60 million. The settlement of
these three cases, Robinson v. Thorn Americas, Inc. et al, Gallagher v. Crown
Leasing Corporation et al and Boykin v. Renters Choice, Inc., are contingent
upon each other and subject to preliminary and final court approval. We
anticipate receiving preliminary court approval of these settlements in April
1999. Please read the section entitled "Business -- Legal Proceedings" for a
discussion concerning this settlement and our pending litigation.
Name Change
On December 31, 1998, we merged Thorn Americas into Renters Choice and
changed our name to Rent-A-Center, Inc. As part of the integration of the Thorn
Americas, we changed the name of all of our stores to the "Rent-A-Center" brand.
INDUSTRY OVERVIEW
According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,300 stores, and provides 6.4 million products to 2.9
million households. We estimate that the six largest rent-to-own industry
participants account for 3,700 of the total number of stores, and that the
majority of the industry consists of operations with fewer than 20 stores. The
rent-to-own industry is highly fragmented and, due primarily to the decreased
availability of traditional financing sources, has experienced and is expected
to continue to experience increasing consolidation. We believe that this
consolidation of operations in the industry presents opportunities for us, as
well as other well capitalized rent-to-own operators, to continue to acquire
additional stores on favorable terms.
STRATEGY
We are focusing our strategic efforts on (A) implementing our integration
plan, (B) continued efforts to enhance store operations, and (C) the pursuit of
strategic expansion once the integration plan is substantially in place.
Implement the Integration Plan
We developed a comprehensive program for the integration of Thorn Americas
and Central Rents. By December 31, 1998, we had completed the major steps of
this integration plan, namely:
- replacing Thorn Americas' nationwide distribution network with our vendor
drop shipment system;
- implementing a common management information system;
2
<PAGE> 5
- consolidating advertising, purchasing and human resource functions;
- closing Thorn Americas' and Central Rents' headquarters;
- integrating middle and senior management; and
- all stores, including former Renters Choice locations, adopting and
beginning to operate under the "Rent-A-Center" brand name.
Continue to Enhance Store Operations
With the major integration issues now behind us, we are currently focusing
our efforts on enhancing the operations in the stores acquired from Thorn
Americas and Central Rents. We are seeking to improve store performance through
strategies intended to produce gains in operating efficiency and profitability.
We believe that we will achieve gains in revenues and operating margins in our
stores by:
- using focused advertising to increase store traffic,
- expanding the offering of upscale, higher margin products, such as Sony
and JVC electronics and La-Z-Boy furniture, to increase the number of
product rentals,
- employing strict store-level cost control, and
- closely monitoring each store's performance through the use of its
management information system to ensure each store's adherence to
established operating guidelines.
Pursue Strategic Expansion
We have gained significant experience in the acquisition and integration of
other rent-to-own operators and believe that the fragmented nature of the
rent-to-own industry will result in ongoing growth opportunities. We typically
target under-performing and undercapitalized chains of rent-to-own stores. The
acquired stores benefit from the administrative network, improved product mix,
sophisticated management information system and purchasing power of the larger
organization while strengthening their local market position. In addition, we
have access to an expanding number of franchise locations, which we have the
right of first refusal to purchase. We believe that the rent-to-own market is
significantly under-penetrated and we plan to continue opening new stores in
current and new markets. We will focus new market penetration in adjacent areas
or regions which are under-served by the rent-to-own industry. In evaluating a
new market, we review demographic statistics, cost of advertising and the number
and nature of competitors.
3
<PAGE> 6
RENT-A-CENTER STORE OPERATIONS
As of December 31, 1998, we operated 2,126 stores and franchised 324 stores
in 50 states, Puerto Rico and the District of Columbia, as illustrated by the
following table:
<TABLE>
<CAPTION>
NUMBER OF STORES
--------------------
COMPANY
LOCATION OWNED FRANCHISE
-------- ------- ---------
<S> <C> <C>
Alabama.................. 46 --
Alaska................... 1 --
Arizona.................. 54 10
Arkansas................. 22 2
California............... 119 9
Colorado................. 26 3
Connecticut.............. 17 6
Delaware................. 15 1
District of Columbia..... 4 --
Florida.................. 135 8
Georgia.................. 95 5
Hawaii................... 11 1
Idaho.................... 1 2
Illinois................. 113 --
Indiana.................. 75 17
Iowa..................... 19 --
Kansas................... 28 18
Kentucky................. 41 7
Louisiana................ 35 5
Maine.................... -- 11
Maryland................. 46 6
Massachusetts............ 40 13
Michigan................. 95 14
Minnesota................ 6 --
Mississippi.............. 12 10
Missouri................. 49 7
Montana.................. 1 3
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF STORES
--------------------
COMPANY
LOCATION OWNED FRANCHISE
-------- ------- ---------
<S> <C> <C>
Nebraska................. 4 --
Nevada................... 16 4
New Hampshire............ 15 2
New Jersey............... 40 9
New Mexico............... 10 10
New York................. 100 19
North Carolina........... 94 10
North Dakota............. 1 --
Ohio..................... 127 8
Oklahoma................. 37 13
Oregon................... 6 4
Pennsylvania............. 76 5
Puerto Rico.............. 17 --
Rhode Island............. 7 4
South Carolina........... 28 1
South Dakota............. 2 --
Tennessee................ 82 8
Texas.................... 226 60
Utah..................... 16 1
Vermont.................. 6 --
Virginia................. 39 1
Washington............... 27 3
West Virginia............ 14 2
Wisconsin................ 29 2
Wyoming.................. 1 --
Total.......... 2,126 324
</TABLE>
Product Selection
Each of our stores offers merchandise from four basic product categories;
home electronics, appliances, computers, and furniture and accessories. Our
policy is to ensure that our stores maintain sufficient inventory to offer
customers a wide variety of models, styles and brands. We seek to provide a wide
variety of high quality merchandise to our customers, and we emphasize products
from brand-name manufacturers. During 1998, home electronic products accounted
for approximately 48% of our store revenue, appliances for 19%, computers for
4%, and furniture and accessories for 33%. Customers may request either new
merchandise or previously rented merchandise. Previously rented merchandise is
offered at the same weekly or monthly rental rate as is offered for new
merchandise, but with an opportunity to obtain ownership of the merchandise
after fewer rental payments. Many of the stores acquired in 1998 carried certain
merchandise from other product categories and different manufacturers than those
selected by us. As part of the integration process, we have standardized the
inventory in each of these stores.
Home electronic products offered by our stores include televisions, video
cassette recorders and stereos from top brand manufacturers such as Magnavox,
Sony, JVC and Technics. We rent major appliances manufactured by Whirlpool,
including refrigerators, washing machines, dryers, microwave ovens, freezers and
ranges. We offer computer hardware and software by Packard Bell. We rent a
variety of furniture products, including dining room, living room and bedroom
furniture featuring a number of styles, materials and colors.
4
<PAGE> 7
We offer furniture made by Ashley, England-Corsair, La-Z-Boy and other top brand
manufacturers, while accessories include pictures, plants, lamps and tables and
are typically rented as part of a package of items, such as a complete room of
furniture. Showroom displays enable customers to visualize how the product will
look in their homes and provide a showcase for accessories.
Rental Purchase Agreements
Our customers generally enter into weekly or monthly rental purchase
agreements, which renew automatically upon receipt of each payment. We retain
title to the merchandise during the term of the rental purchase agreement.
Ownership of the merchandise generally transfers to the customer if the customer
has continuously renewed the rental purchase agreement for a period of 18 to 36
months or exercises a specified early purchase option. Although we do not
conduct a formal credit investigation of each customer, a potential customer
must provide store management with sufficient personal information to allow us
to verify sources of income. References listed by the customer are contacted to
verify the information contained in the customer's rental purchase order form.
Rental payments are generally made in cash, by money order or debit card.
Depending on state regulatory requirements, we charge for the reinstatement of
terminated accounts or collect a delinquent account fee, and collect loss/damage
waiver fees from customers desiring such product protection in case of theft or
certain natural disasters. Such fees are standard in the industry and may be
subject to government-specified limits. Please read the section entitled
"Government Regulation" below.
Product Turnover
In the majority of our stores, a minimum rental term of 18 months is
generally required to obtain ownership of new merchandise. We believe that fewer
than 25% of our customers complete the full term of the agreement as to a given
item of merchandise. Turnover varies significantly based on the type of
merchandise rented, with certain consumer electronics products, such as
camcorders and VCRs, generally rented for shorter periods, while appliances and
furniture are generally rented for longer periods. In order to cover the
relatively high operating expenses generated by greater product turnover, rental
purchase agreements require higher aggregate payments than are generally charged
under installment purchase or credit plans.
Customer Service
We offer same day or 24-hour delivery and installation of our merchandise
at no additional cost to the customer. We provide any required service or repair
without charge, except for damage in excess of normal wear and tear. Repair
services are provided either through our network of service centers or by the
vendor if the product is still under factory warranty. If the product cannot be
repaired at the customer's residence, we provide a temporary replacement while
the product is being repaired. The customer is fully liable for damage, loss or
destruction of the merchandise, unless the customer purchases an optional
loss/damage waiver. Most of the products we offer are covered by a
manufacturer's warranty for varying periods, which, subject to the terms of the
warranty, is transferred to the customer in the event that the customer obtains
ownership.
Collections
Store managers use our computerized management information system to track
cash collections on a daily basis. In the event of a customer failing to make a
rental payment when due, store management will attempt to contact the customer
to obtain payment and reinstate the contract, or will terminate the account and
arrange to regain possession of the merchandise. We attempt to recover the
rental items by the seventh to tenth day following termination or default of a
rental purchase agreement. Charge-offs due to lost or stolen merchandise,
expressed as a percentage of store revenues, were approximately 2.5% in 1998, as
compared to approximately 2.1% in 1997. In an effort to improve collections at
the stores acquired during 1998, we have implemented our collection procedures
in such stores, including our management incentive plans, which provide
incentives to reduce the percentage of delinquent accounts.
5
<PAGE> 8
Management
Our network of stores is organized geographically with multiple levels of
management. At the individual store level, each store manager is responsible for
customer and credit relations, deliveries and pickups, inventory management,
staffing and certain marketing efforts. Each store manager reports to a market
manager who typically oversees eight stores. Market managers are primarily
responsible for monitoring individual store performance and inventory levels
within their respective regions. We have 268 market managers who, in turn,
report to 45 regional directors, who monitor the operations of regions and,
through the market managers, individual store performance. The regional
directors report to our senior executives. A significant portion of a market or
store manager's compensation is dependent upon store revenue and profits.
Our executive management directs and coordinates purchasing, financial
planning and controls, employee training, personnel matters and new store site
selection. Our management team also evaluates the performance of each store,
including on-site reviews. Our business strategy emphasizes strict cost
containment and operational controls.
MANAGEMENT INFORMATION SYSTEMS
We utilize an integrated computerized management information and control
system to track each unit of merchandise in our stores and each rental purchase
agreement. Our system also includes extensive management software and
report-generating capabilities. The reports for all stores are reviewed daily by
senior management and any irregularities are addressed the following business
day. Each store is equipped with a computer system that tracks individual
components of revenue, each item in idle and rented inventory, total items on
rent, delinquent accounts and other account information. We electronically
gather each day's activity report through the computer located at our
headquarters. This system provides our management with access to operating and
financial information about any store location or region in which we operate and
generates management reports on a daily, weekly, month-to-date and year-to-date
basis for each store and every rental purchase transaction. Utilizing the
management information system, executive management, regional directors, market
managers and store managers closely monitor the productivity of stores under
their supervision as compared to our prescribed guidelines. The integration of
the management information system with our accounting system facilitates the
production of the financial statements. As part of the integration process, we
fully incorporated the stores acquired in 1998 into our management information
system.
We are fully aware of the issues associated with the programming code in
existing computer and software systems as the millennium (Year 2000) approaches.
The Year 2000 problem is pervasive and complex, as virtually every computer
operation could be affected in some way by the rollover of the two-digit year
value to "00". The issue is whether systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
complete system failures. While we do not believe that the rollover to the Year
2000 will materially affect our operations, you should read the discussion of
our Year 2000 readiness in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" later in this report.
PURCHASING AND DISTRIBUTION
The general product mix in our stores is determined by senior management,
based on an analysis of customer rental patterns and the introduction of new
products on a test basis. Individual store managers are responsible for
determining the particular product selection for their store from the list of
products approved by senior management. Specific purchasing decisions for the
stores are made by store and market managers, subject to review by headquarters
management. All merchandise is shipped by vendors directly to each store, where
it is held for rental. We do not maintain any warehouse space.
We purchase the majority of our merchandise directly from manufacturers.
Our largest suppliers include Whirlpool and Magnavox, who accounted for
approximately 14.5% and 13.4%, respectively, of merchandise purchased for the
stores in 1998. No other supplier accounted for more than 10% of merchandise
purchased during this period. We do not generally enter into written contracts
with our suppliers. Although we expect to continue relationships with our
existing suppliers, we believe that there are numerous sources of products
6
<PAGE> 9
available, and do not believe that the success of our operations is dependent on
any one or more of our present suppliers.
MARKETING
We promote the products and services in our stores primarily through direct
mail advertising and, to a lesser extent, radio and secondary print media
advertisement. In January 1999, we began broadcasting a series of national
television commercials. Our advertisements emphasize such features as product
and brand name selection, prompt delivery and the absence of initial deposits,
credit investigations or long-term obligations. Advertising expense as a
percentage of store revenue for the year ended December 31, 1998 and 1997, was
approximately 4.9% and 4.7%, respectively. As we obtain new stores in our
existing market areas, the advertising expenses of each store in the area can be
reduced by listing all stores in the same market-wide advertisement.
TRADEMARKS
We own various registered trademarks, including "Rent-A-Center", "Renters
Choice", and "Your Home Furnishing Outlets". The products held for rent also
bear trademarks and service marks held by their manufacturers.
COMPETITION
The rent-to-own industry is highly competitive. According to industry
sources and our estimates, the six largest industry participants account for
3,700 of the approximately 8,300 rent-to-own stores in the United States. We
currently are the largest operator of rent-to-own stores with 2,126 stores, and
324 franchised rental centers. Our stores compete with other national and
regional rent-to-own businesses, as well as with rental stores that do not offer
their customers a purchase option. With respect to customers desiring to
purchase merchandise for cash or on credit, we also compete with department
stores and discount stores. Competition is based primarily on store location,
product selection and availability, customer service and rental rates and terms.
COLORTYME OPERATIONS
ColorTyme is a nationwide franchisor of television, stereo and furniture
rental centers. During 1998, 77 new locations were added and 15 sold, of which
we acquired six. As of December 31, 1998, there were 324 franchised rental
centers operating in 40 states.
All but 24 of the ColorTyme franchised stores use ColorTyme's tradenames,
service marks, trademarks, logos, emblems and indicia of origin. The remaining
stores use the "Rent-A-Center" name. All stores operate under distinctive
operating procedures and standards specified by ColorTyme. ColorTyme's primary
source of revenue is the sale of rental merchandise to its franchisees who, in
turn, offer the merchandise to the general public for rent or purchase under a
rent-to-own program. As franchisor, ColorTyme receives royalties of 2.3% to 4.0%
of the franchisees' rental income and, generally, an initial fee of $15,000 per
location for existing franchisees and up to $25,000 per location for new
franchisees.
ColorTyme has an arrangement with STI Credit Corporation, who may provide
inventory financing to qualified new franchisees.
The ColorTyme franchise agreement generally requires the franchised stores
to utilize certain computer hardware and software for the purpose of recording
rentals, sales and other record keeping and central functions. ColorTyme retains
the right to upload and download data, troubleshoot, and retrieve data and
information from the franchised stores' computer systems.
The franchise agreement also requires the franchised stores to exclusively
offer for rent or sale only those brands, types, and models of products that
ColorTyme has approved. The franchised stores are required to maintain an
adequate mix of inventory that consists of approved products for rent as
dictated by ColorTyme policy manuals, and must maintain on display at the
franchised stores, such products as specified by
7
<PAGE> 10
ColorTyme. ColorTyme negotiates purchase arrangements with various suppliers it
has approved. ColorTyme's largest suppliers are Whirlpool and Magnavox, which
accounted for approximately 17.6% and 10.4%, respectively, of merchandise
purchased by ColorTyme in 1998.
ColorTyme has established a national advertising fund for the franchised
stores, whereby ColorTyme has the right to collect up to 3% of the monthly gross
rental payments and sales from each franchisee to be contributed to the fund.
Currently, ColorTyme has set the monthly franchisee contribution at $250 per
store per month. ColorTyme directs the advertising programs of the fund,
generally consisting of advertising in print, television and radio. Furthermore,
the franchisees are required to expend 3% of their monthly gross rental payments
and sales on local advertising.
ColorTyme licenses the use of its trademarks to the franchisees under the
franchise agreement. ColorTyme owns the registered trademarks "ColorTyme",
"ColorTyme -- What's Right for You", and "FlexTyme", along with certain design
and service marks.
GOVERNMENT REGULATION
State Regulation
There currently are 45 states, including Minnesota, that have legislation
regulating rental purchase transactions. With some variations in individual
states, most state legislation requires the lessor to make prescribed
disclosures to customers about the rental purchase agreement and transaction,
and provides time periods during which customers may reinstate agreements. Some
state rental purchase laws prescribe grace periods for nonpayment, prohibit or
limit certain types of collection or other practices, and limit certain fees
that may be charged. Nine states limit the total rental payments that can be
charged. Such limitations, however, do not become applicable in general unless
the total rental payments required under agreements exceed 2 times to 2.4 times
of the "disclosed cash price" or the retail value.
Minnesota and, more recently, New Jersey have had court decisions which
treat rental purchase transactions as credit sales subject to consumer lending
restrictions. In response, we have developed and utilize rent-to-rent
agreements, with certain variations, in both Wisconsin and Minnesota.
Alaska, Montana, North Carolina, New Jersey, Wisconsin, Puerto Rico and the
District of Columbia have no rental purchase legislation. However, in North
Carolina, the retail installment sales statute provides an objective test that
excludes our transaction from coverage under the North Carolina retail
installment sales statute. We operate 92 stores in the remaining jurisdictions,
excluding North Carolina, which have no rental purchase legislation.
There can be no assurance that new or revised rental purchase laws will not
be enacted or, if enacted, that such laws would not have a material adverse
effect on us.
Federal Legislation
No comprehensive federal legislation has been enacted regulating or
otherwise impacting the rental-purchase transaction. From time to time,
legislation has been introduced in Congress that would regulate the
rental-purchase transaction, including legislation that would subject the
rental-purchase transaction to interest rate, finance charge and fee
limitations, as well as the Federal Truth in Lending Act. Any such federal
legislation, if enacted, could have a material adverse effect on us.
EMPLOYEES
As of March 23, 1999, we had approximately 10,550 employees, of whom 195
are assigned to our headquarters and the remainder of whom are directly involved
in the management and operation of our stores. As of the same date, ColorTyme
had approximately 17 employees, all of which were employed full-time. None of
our employees, including ColorTyme employees, are covered by a collective
bargaining agreement. We believe that relationships with our employees are
generally good, and that ColorTyme's relationships with its employees are
generally good.
8
<PAGE> 11
RISK FACTORS
An investment in our common stock involves various risks. You should
carefully consider the information below in addition to any other information
contained in this report in evaluating whether or not you should invest in our
common stock.
IF WE CANNOT ADEQUATELY MANAGE OUR INCREASED SIZE RESULTING FROM OUR
ACQUISITION OF THORN AMERICAS, OUR FUTURE OPERATIONS MAY BE ADVERSELY AFFECTED.
Our operations more than doubled with the purchase of Thorn Americas. Our
future operations depend largely upon our ability to manage this sizeable and
growing business profitably. Although we believe that with the implementation of
our management philosophy, we can accomplish this task, we cannot guarantee to
you that we will. If we fail to manage the size and the growth of our business,
a material adverse effect could result.
WE HAVE SIGNIFICANT DEBT AND WE MAY NOT BE ABLE TO MEET OUR OBLIGATIONS.
Because of the acquisition of Thorn Americas, we have a significant amount
of debt outstanding. As of December 31, 1998, we owed approximately $805.7
million under our various debt agreements. The maximum amount of senior debt
that we could have borrowed on that date was $720.0 million. Under our term
loans, we will be required to make minimum principal payments totaling
approximately $2.0 million in 1999, $14.0 million in 2000, $22.0 million in
2001, $26.0 million in 2002 and $30.0 million in 2003 plus applicable interest.
You should be aware that this significant amount of debt could have important
consequences to you as a stockholder, including the following:
- We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes,
- A significant portion of our cash flow from operations must be dedicated
to the repayment of the indebtedness, thereby reducing the amount of cash
we have available for other purposes,
- We may be disadvantaged as compared to our competitors as a result of the
significant amount of debt we now owe, and
- Our ability to adjust to changing market conditions and our ability to
withstand competition may be hampered by the amount of debt we now owe.
It may also make us more vulnerable in a downturned market.
You should be aware that our ability to repay or refinance our current debt
depends on our successful financial and operating performance.
RESTRICTIONS IMPOSED ON RENT-A-CENTER BY OUR DEBT AGREEMENTS MAY
SIGNIFICANTLY LIMIT OR PROHIBIT US FROM ENGAGING IN CERTAIN TRANSACTIONS.
The indenture relating to our outstanding notes and our senior credit
facilities impose significant operating and financial restrictions on us and our
subsidiaries.
The loan documents we signed to borrow money to acquire Thorn Americas
impose significant restrictive covenants on us and require us to maintain
specified financial ratios and satisfy certain financial tests. Our ability to
meet these financial ratios and tests may be affected by events beyond our
control and, as a result, we cannot guarantee to you that we will be able to
meet such tests. In addition, the restrictions contained in our senior credit
facilities could limit our ability to obtain future financing, make needed
capital expenditures, withstand a future downturn in our business or in the
economy, or otherwise conduct necessary corporate activities. Our failure to
comply with the restrictions in the indenture and the senior credit facilities
could lead to a default under the terms of those documents. In the event of such
a default, the applicable lender could declare all amounts borrowed and all
amounts due under other instruments that contain certain provisions for
cross-acceleration or cross-default due and payable. In addition, the lenders
under such agreements could terminate their commitments to lend to us. If that
occurs, we cannot assure you that we would be able to make payments on our notes
or that we would be able to find additional alternative financing. Even if we
could
9
<PAGE> 12
obtain additional alternative financing, we cannot assure you that it would be
on terms that are favorable or acceptable to us.
You should also be aware that the existing indebtedness under the senior
credit facilities is secured by substantially all of our and our subsidiaries'
assets. Should a default or acceleration of such indebtedness occur, the holders
of such indebtedness could sell the assets to satisfy all or a part of what is
owed. The senior credit facilities also contain provisions prohibiting the
modification of our notes and limiting our ability to refinance the notes.
Our senior credit facilities prohibit us from paying dividends on our
common stock. We do not anticipate paying cash dividends on shares of our common
stock in the foreseeable future.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
CHANGE OF CONTROL OFFER WHICH MAY BE REQUIRED BY THE INDENTURE.
If a change of control occurs, we may be required to make an offer to
purchase all of our outstanding notes. We would be required to purchase the
notes at 101% of their principal amount, plus accrued interest to the date of
repurchase. If a change of control occurs, we cannot be sure that we would have
enough funds to pay for all of the notes. If we are required to purchase the
notes, we would need to secure third-party financing if we do not have available
funds to meet our purchase obligations. However, we cannot be sure that we would
be able to secure such financing on favorable terms, if at all.
Also, our financing arrangements will restrict our ability to repurchase
the notes, including pursuant to a change of control. Furthermore, a change of
control will result in an event of default under the senior credit facilities
and may lead to an acceleration of any other senior indebtedness we may have at
that time. In such event, the subordination provisions of the notes would
require us to pay our senior credit facilities and any other senior indebtedness
in full before repurchasing any notes. In addition, a change of control could
require us to repurchase our existing notes and we could be required to offer to
redeem our convertible preferred stock. The inability to repay senior
indebtedness, if accelerated, and to purchase all of the tendered notes, would
constitute an event of default under the indenture.
THERE ARE MATERIAL LEGAL PROCEEDINGS PENDING AGAINST RENT-A-CENTER, THORN
AMERICAS AND COLORTYME. COSTS INCURRED BY US IN OUR DEFENDING OURSELVES OR
ASSOCIATED WITH SETTLING ANY OF THESE PROCEEDINGS, OR A RULING AGAINST US IN ANY
OF THESE PROCEEDINGS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND OUR BUSINESS OPERATIONS.
WE ARE THE DEFENDANT IN SEVERAL LAWSUITS SEEKING MATERIAL DAMAGES. ONE OR
MORE JUDGMENTS AGAINST US IN THESE LAWSUITS COULD MATERIALLY ADVERSELY AFFECT
BOTH OUR FINANCIAL CONDITION AND OUR ABILITY TO CONTINUE OUR RENT-TO-OWN
BUSINESS AS PRESENTLY CONDUCTED.
The material lawsuits against us generally involve claims that rent-to-own
contracts are in fact disguised installment sales contracts, violate state usury
laws, or violate other state laws enacted to protect consumers.
We recently settled in principle three class actions arising out of our
operations in New Jersey. In Robinson v. Thorn Americas, Inc., a New Jersey
state court entered a judgment against Thorn Americas requiring Thorn Americas
to pay the class of plaintiffs an amount in excess of $140 million. Thorn
Americas posted a $163 million supersedeas bond. The other two class actions in
New Jersey assert claims similar to the claims made against Thorn Americas in
Robinson v. Thorn Americas, Inc. Robinson has been settled in principle for
$48.5 million, and the other two have been settled in principle for a total of
$11.5 million.
Because of the uncertainties associated with our remaining material
litigation, we cannot estimate for you our ultimate liability for these matters,
if any. You should be aware that an adverse ruling on any of these cases could
have a material adverse effect on our business operations and our financial
condition.
A final judgment against us could materially adversely affect our financial
condition by requiring the payment of the judgment or the posting of a bond. The
failure to pay any such judgment would be a default under our senior credit
facilities and the indenture.
10
<PAGE> 13
A final judgment in any of our material litigation cases could also
materially adversely affect our ability to transact our rent-to-own business as
presently conducted. While we believe we have meritorious defenses to all of the
material actions presently pending against us, we cannot assure you that such a
judgment will not be entered against us.
In addition, if such a judgment were entered against us and upheld on
appeal, it could be the basis for additional litigation against us by new
plaintiffs based on the same or similar claims.
RENT-TO-OWN TRANSACTIONS ARE REGULATED BY LAW IN MOST STATES. ANY CHANGE IN
THESE LAWS, OR THE PASSAGE OF NEW LAWS, COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS OPERATIONS OR INCREASE OUR EXPOSURE TO LITIGATION.
In the event that legislation having a negative impact on our business is
adopted, you should be aware that it could have a material adverse impact on our
business operations. As is the case with most businesses, we are subject to
certain governmental regulations, specifically in our case, regulations
regarding rent-to-own transactions. There are currently 45 states that have
passed laws regulating rental purchase transactions and another state that has a
retail installment sales statute that excludes rent-to-own transactions from its
coverage if certain criteria are met. These laws generally require certain
contractual and advertising disclosures. They also provide varying levels of
substantive consumer protection, such as requiring a grace period for late fees
and contract reinstatement rights in the event the rental purchase agreement is
terminated. The rental purchase laws of nine states limit the total amount of
rentals that may be charged over the life of a rental purchase agreement.
Certain states also effectively regulate rental purchase transactions under
other consumer protection statutes. You should also be aware that we are
currently subject to outstanding judgments and other litigation alleging that
we, or our subsidiaries, have violated some of these statutory provisions.
Although there is no comprehensive federal legislation regulating
rental-purchase transactions, we cannot assure you that such legislation will
not be enacted in the future. From time to time, legislation has been introduced
in Congress seeking to regulate our business. In addition, we cannot assure you
that the various legislatures in the states where we currently do business will
not adopt new legislation or amend existing legislation that negatively affects
us.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, AND WE DO NOT
HAVE EMPLOYMENT AGREEMENTS WITH ANY OF THEM. THE LOSS OF ANY ONE OF THESE COULD
ADVERSELY AFFECT OUR BUSINESS.
Rent-A-Center's continued success is highly dependent upon the personal
efforts and abilities of our senior management, including J. Ernest Talley, our
Chairman of the Board and Chief Executive Officer, Mark E. Speese, our
President, and L. Dowell Arnette, our Executive Vice President and Chief
Operating Officer. We do not have employment contracts with any of these
officers and the loss of any one of them could impact us in a negative way.
48.7% OF OUR VOTING STOCK IS OWNED BY A SMALL GROUP OF OUR DIRECTORS AND
THEIR AFFILIATES. THIS GROUP WOULD BE ABLE TO EFFECTIVELY CONTROL RENT-A-CENTER
SINCE THE ELECTION OF DIRECTORS AND MAJOR TRANSACTIONS ONLY REQUIRE THE VOTE OF
A MAJORITY OF OUR STOCKHOLDERS.
You should be aware that a total of approximately 48.7% of our voting stock
on a fully diluted basis is controlled by Messrs. Talley and Speese and by
certain affiliates of Apollo Management IV, L.P. As a result, in the event they
act together, they have the ability to exercise practical control over the
outcome of actions requiring the approval of our stockholders, including
potential acquisitions, elections of our board of directors and sales or changes
in control of Rent-A-Center.
WE COULD BE ADVERSELY AFFECTED IF OUR OR OUR VENDORS' COMPUTER SYSTEMS ARE
NOT YEAR 2000 COMPLIANT.
Year 2000 issues exist when dates are recorded in computers using two
digits, rather than four, and are then used for arithmetic operations,
comparisons or sorting. A two-digit recording may recognize a date using "00" as
1900 rather than 2000, which could cause our computer systems to perform
inaccurate computations. We have received confirmation from our management
information systems vendors that our system is Year 2000 compliant. You should
be aware that Year 2000 issues relate not only to our systems, but also to those
used by our suppliers. We anticipate that system replacements and modifications
will resolve any Year 2000
11
<PAGE> 14
issues that may exist with our suppliers or their suppliers. However, we cannot
guarantee to you that such replacements or modifications will be completed
successfully or on time and, as a result, any failure to complete such
modifications on time could materially affect our financial and operating
results in a negative way.
OUR ORGANIZATIONAL DOCUMENTS CONTAIN PROVISIONS WHICH MAY PREVENT OR DETER
ANOTHER GROUP FROM PAYING A PREMIUM OVER THE MARKET PRICE TO OUR STOCKHOLDERS TO
ACQUIRE OUR STOCK
Our organizational documents contain provisions which classify our board of
directors, authorize our board of directors to issue "blank check" preferred
stock, and establish advance notice requirements on our stockholders for
director nominations and actions to be taken at annual meetings of the
stockholders. In addition, as a Delaware corporation, we are subject to Section
203 of the Delaware General Corporation Law. These provisions and arrangements
could delay, deter or prevent a merger, consolidation, tender offer or other
business combination or change of control involving us that could include a
premium over the market price of our common stock that some or a majority of our
stockholders might consider to be in their best interests.
ITEM 2. PROPERTIES
We lease space for all of our stores, as well as our corporate and regional
offices, under operating leases expiring at various times through 2008. Most of
these leases contain renewal options for additional periods ranging from three
to five years at rental rates adjusted according to agreed upon formulas. Our
headquarters are located at 5700 Tennyson Parkway, Plano, Texas, and consist of
approximately 77,158 and 5,116 square feet, devoted to our operations and
ColorTyme's operations, respectively. Store sizes range from approximately 1,500
to 8,200 square feet, and average approximately 3,800 square feet. Approximately
80% of each store's space is generally used for showroom space and 20% for
offices and storage space. We believe that suitable store space generally is
available for lease and that we would be able to relocate any of our stores
without significant difficulty should we be unable to renew a particular lease.
We also expect that additional space will be readily available at competitive
rates in the event that we desire to open new stores.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we, along with our subsidiaries, are party to various
legal proceedings arising in the ordinary course of business. The majority of
the material proceedings involve claims that may be generally characterized into
one of two categories, recharacterization claims and statutory compliance
claims. Recharacterization claims generally involve claims:
- in states that do not have rent-to-own legislation,
- that rent-to-own transactions are disguised installment sales in
violation of applicable state installment statutes, and
- that allege greater damages.
Statutory compliance claims generally involve claims:
- in states that have rent-to-own legislation,
- that the operator failed to comply with applicable state rental purchase
statutes, such as notices and late fees, and
- that allege lesser damages.
Except as described below, we are not currently a party to any material
litigation.
The following litigation matters were assumed with Thorn Americas pursuant
to the Thorn Americas acquisition. In connection with accounting for the Thorn
Americas acquisition, we made appropriate purchase accounting adjustments for
contingent liabilities associated with outstanding litigation.
12
<PAGE> 15
Robinson v. Thorn Americas, Inc. The plaintiffs filed this class action on
April 19, 1994 in state court in New Jersey. The class consists of all residents
of New Jersey who are or have been parties to Thorn Americas' rent-to-own
contracts since April 19, 1988. During this period, Thorn Americas operated
approximately 23 stores in New Jersey. The plaintiffs' claims are for alleged
violations of the New Jersey Retail Installment Sales Act and the New Jersey
Consumer Fraud Act, usury, unlawful contractual penalty and conversion. On
January 5, 1998, the court entered a judgment against Thorn Americas and ordered
Thorn Americas to pay the plaintiffs the amount equal to (A) all reinstatement
fees collected by Thorn Americas since April 29, 1988, and (B) 40% of all rental
revenue collected by Thorn Americas from the plaintiffs from April 29, 1988,
trebled. Later, the court added an incentive award to the class representative,
the inclusion of attorneys' fees, and granted plaintiff's counsel 25% of the
amount to be distributed to the class. The judgment is secured by a supersedeas
bond posted by Thorn Americas in the amount of $163 million, which amount was
derived from an accounting by plaintiffs of the projected amount of the judgment
liability through April 1999. Thorn Americas filed its notice of appeal on
January 26, 1998 and the appeal is now fully briefed. In December 1998, we
settled this matter in principle for approximately $48.5 million, subject to
preliminary and final approval of the court. The final settlement documents are
currently being negotiated. We anticipate that the execution of these settlement
documents and the preliminary approval of the court will occur in April 1999.
Burney v. Thorn Americas, Inc. The plaintiffs originally filed a class
action in federal court in Wisconsin alleging Thorn Americas' rent-to-own
contracts violated the Wisconsin Consumer Act and federal RICO and
truth-in-lending statutes. The court first granted the plaintiffs' motion for
summary judgment as to liability under the Wisconsin Consumer Act. The court
then withdrew that decision and dismissed the action for lack of federal subject
matter jurisdiction once the plaintiffs withdrew their federal claims. The
plaintiffs' refiled the action on February 28, 1997 in state court in Wisconsin,
and the court granted plaintiffs' motion for class certification on July 7,
1998. The class is comprised of the persons who were party to rent-to-own
contracts with Thorn Americas in Wisconsin after October 19, 1988 and who have
paid Thorn Americas an amount equal to or greater than the value of the
merchandise. During this period, Thorn Americas operated approximately 23 stores
in Wisconsin. The plaintiffs have asserted that the value of the merchandise for
class certification purposes is 60% of the amount required to obtain ownership.
This limitation on the members of the class distinguishes Burney from Robinson.
We settled this matter for $16.25 million, subject to final approval by the
court. The court approved the settlement on March 19, 1999.
Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in
November 1997 in New York state court. Thorn Americas removed the case to the
U.S. District Court for the Southern District of New York. Plaintiffs filed a
motion to remand, which was granted. The plaintiffs acknowledge that rent-to-own
transactions in New York are subject to the provisions of New York's Rental
Purchase Statute but contend the Rental Purchase Statute does not provide Thorn
Americas immunity from suit for other statutory violations. Plaintiffs allege
Thorn Americas has a duty to disclose "effective interest" under New York
consumer protection laws, and seek damages and injunctive relief for Thorn
Americas' failure to do so. In their prayers for relief, the plaintiffs have
requested the following:
- class certification,
- injunctive relief requiring Thorn Americas to (A) cease certain marketing
practices, (B) price their rental purchase contracts in certain ways, and
(C) disclose effective interest,
- unspecified compensatory and punitive damages,
- rescission of the class members contracts,
- an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period,
- treble damages, attorney's fees, filing fees and costs of suit,
- pre- and post-judgment interest, and
- any further relief granted by the court.
13
<PAGE> 16
This suit also alleges violations relating to late fees, harassment,
undisclosed charges, and the ease of use and accuracy of its payment records.
The plaintiffs did not specify a specific amount on their damages request.
The proposed class includes all New York residents who were party to Thorn
Americas' rent-to-own contracts from November 26, 1991 through November 26,
1997. We are vigorously defending this action and on September 24, 1998, filed
motions to deny class certification and dismiss the complaint. Plaintiff
responded and filed a motion for summary judgment asking the court to declare
that the transaction includes an undisclosed interest component. The motions are
fully briefed and are awaiting a ruling by the court. There can be no assurance
that these motions will be granted or that we will be found not to have any
liability.
Anslono v. Thorn Americas, Inc. This is a putative class action filed in
Massachusetts state court on January 6, 1998. Plaintiffs acknowledge that
rent-to-own contracts constitute "consumer leases" under Massachusetts'
rent-to-own statute, but contend that Thorn Americas failed to comply with
certain statutory provisions and Thorn Americas failed to provide certain
disclosures. Plaintiffs seek actual and statutory damages and an injunction to
prohibit Thorn Americas from engaging in the acts complained of. Specifically,
the plaintiffs have requested in their prayers for relief, the following:
- class certification,
- unspecified damages, together with an award of treble damages under
Massachusetts law,
- costs and expenses, including reasonable attorneys' fees,
- injunctive relief, enjoining Thorn Americas from engaging in unfair or
deceptive practices relating to certain advertising practices,
- an order eliminating the plaintiffs' obligation to pay their final
periodic rent-to-own installment payment, and
- any other further relief that the plaintiffs may be entitled to.
The proposed class includes all Massachusetts residents who were parties to
Thorn Americas' rent-to-own contracts in the four-year period prior to the
January 6, 1998 filing. We are vigorously defending this action. However, there
can be no assurance that we will be found not to have any liability.
Allen v. Thorn Americas, Inc. The plaintiffs filed August 15, 1997 a
putative nationwide class action suit in federal court in Missouri, alleging
that Thorn Americas has discriminated against African-Americans in its hiring,
compensation, promotional and termination policies. We settled this matter for
approximately $6.75 million, and the settlement was paid during 1998.
Cooks v. Thorn Americas, Inc. The plaintiff filed a putative class action
in Texas state court in 1993, alleging violations of Texas' usury statute,
Deceptive Trade Practices Act and Insurance Code. In their prayers for relief,
the plaintiffs have requested:
- class certification,
- unspecified compensatory damages in an amount less than $50,000 per class
member,
- reasonable attorneys' fees,
- costs of the suit,
- pre- and post-judgment interest, and
- other further relief, as the court may deem necessary or appropriate.
This case has been dormant since 1995. We intend to defend this action
should it once again become active. However, there can be no assurance that we
will be found not to have any liability.
14
<PAGE> 17
In connection with the Thorn Americas acquisition, Thorn plc agreed to
indemnify and hold us harmless from the following two lawsuits and deposited $40
million in escrow in respect of these two lawsuits and other indemnification
claims that we may have against Thorn plc.
Fogie v. Thorn Americas, Inc. The plaintiffs filed this class action on
December 4, 1991 in Minnesota. The class consists of residents of Minnesota who
entered rental purchase contracts with Thorn Americas from August 1, 1990
through November 30, 1996. The plaintiffs alleged that Thorn Americas'
rent-to-own contracts violated Minnesota's Consumer Credit Sales Act and the
Minnesota General Usury Statute. On April 15, 1998, the court entered a final
judgment against Thorn Americas and ordered it to pay approximately $30 million
to the plaintiffs. Under certain provisions of the judgment, Thorn Americas may
receive certain credits against the judgment. On May 15, 1998, Thorn Americas
filed a notice of appeal from the damages finding only and is vigorously
pursuing its appeal.
Willis v. Thorn Americas, Inc. The Willis action consolidated three
separate but related actions, the first of which was filed in 1994, that cover
the period from December 22, 1988 to September 9, 1996. The plaintiffs alleged
that prior to Pennsylvania's enactment of rent-to-own legislation, Thorn
Americas' rent-to-own contracts were actual installment sales contracts in
violation of Pennsylvania law. Thorn Americas entered into a settlement
agreement with the plaintiffs whereby Thorn Americas agreed to pay $9.35
million. On July 8, 1998, the court approved the settlement and rebate checks
have been sent to eligible members of the class.
The following litigation matters pending against us have been settled in
principal in connection with the settlement of the Robinson matter:
Gallagher v. Crown Leasing Corporation. On January 3, 1996, we were served
with a class action complaint adding us as a defendant in this action originally
filed in April 1994 against Crown and certain of its affiliates in state court
in New Jersey. The class consists of all New Jersey residents who entered into
rent-to-own contracts with Crown between April 25, 1988 and April 20, 1995.
During this period, Crown operated approximately five stores in New Jersey. The
lawsuit alleges, among other things, that under certain rent-to-own contracts
entered into between the plaintiff class and Crown, some of which were
purportedly acquired by us pursuant to the acquisition of Crown and certain of
its affiliates, the defendants failed to make the necessary disclosures and
charged the plaintiffs fees and expenses that violated the New Jersey Consumer
Fraud Act and the New Jersey Retail Installment Sales Act. The plaintiffs seek
damages including, among other things, a refund of all excessive fees and/or
interest charged or collected by the defendants in violation of such acts, state
usury laws and other related statutes and treble damages, as applicable.
Pursuant to the Asset Purchase Agreement entered into between Crown, its
controlling shareholder and us in connection with the Crown acquisition, we did
not contractually assume any liabilities pertaining to Crown's rent-to-own
contracts for the period prior to the acquisition of Crown. The plaintiffs have
obtained class certification and a summary judgment against Crown on the
liability issues. Subsequent to these decisions by the New Jersey state court,
Crown filed for protection from its creditors under Chapter 11 of the federal
bankruptcy laws. The bankruptcy court allowed the lawsuit to proceed in New
Jersey, where the state court granted summary judgment on the plaintiff's
damages formula against Crown. The plaintiffs calculated actual damages for
purposes of their summary judgment motion at approximately $7.6 million. The
court ruled that the plaintiffs are entitled to three times actual damages.
However, the state court's ruling requires certain minor adjustments pursuant to
an accounting. Together with the Boykin matter, we settled this matter in
principle for approximately $11.5 million, subject to preliminary and final
approval of the court. The final settlement documents are currently being
negotiated. We anticipate that the execution of these settlement documents and
the preliminary approval of the court will occur in April 1999.
Michelle Newhouse v. Rent-A-Center, Inc./Handy Boykin v. Rent-A-Center,
Inc. On November 26, 1997 a class action complaint was filed against us by
Michelle Newhouse in New Jersey state court alleging, among other things, that
under certain rent-to-own contracts entered into between the plaintiffs and us,
we failed to make the necessary disclosures and charged the plaintiffs fees and
expenses that violated the New Jersey Consumer Fraud Act and the New Jersey
Installment Sales Act. The claims arising from this action are similar to the
claims made in Robinson v. Thorn Americas, Inc. and Gallagher v. Crown Leasing
Corporation. The proposed class consists of all residents of New Jersey who are
or have been parties to
15
<PAGE> 18
contracts to rent-to-own merchandise from us within the past six years. During
this period, we operated approximately 17 stores in New Jersey.
We removed the case to federal court on January 21, 1998, and were then
advised by the plaintiffs' attorney that Michelle Newhouse no longer wished to
serve as class representative. A motion to voluntarily dismiss the Newhouse case
filed by the plaintiffs' attorney was granted shortly thereafter. However, on
May 1, 1998, a new class action complaint against us made by Handy Boykin was
filed by the plaintiffs' attorney in the Newhouse matter in New Jersey state
court alleging the same causes of action with the same proposed class as that of
the Newhouse matter. This new filing essentially constitutes a replacement of
the named plaintiff in the Newhouse matter with a new named plaintiff, Handy
Boykin. We anticipated this replacement. We removed the Boykin case to federal
court, where Boykin's motion to remand to New Jersey state court is now pending.
Together with the Gallagher matter, we settled this matter in principle for
approximately $11.5 million, subject to preliminary and final approval by the
court. The final settlement documents are currently being negotiated. We
anticipate that the execution of these settlement documents and the preliminary
approval of the court will occur in April 1999.
The settlements in Robinson, Gallagher and Boykin are contingent on one
another.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 20, 1998, we held a special meeting of the stockholders of
Rent-A-Center to approve (A) the conversion of the shares of our Series B
Preferred Stock we issued at the time of the Thorn Americas acquisition into
shares of our Series A Preferred Stock, along with the terms of the Series A
Preferred Stock, and (B) an amendment to our Long-Term Incentive Plan to
increase the number of shares of our common stock reserved under the plan from
3,000,000 to 4,500,000 shares. Of the 20,984,041 shares of our Series A
Preferred Stock (which had in the aggregate 5,004,152 votes) present in person
or by proxy at the meeting, 16,423,486 shares were voted for the conversion of
the Series B Preferred Stock into Series A Preferred Stock, along with the terms
of the Series A Preferred Stock, 4,551,314 shares were voted against such
proposal, and 5,013,394 shares abstained from voting on that matter. With
respect to the amendment to our Long-Term Incentive Plan, 19,598,588 shares were
voted for the proposal, 6,382,144 shares were voted against the proposal, and
7,462 shares abstained from voting with respect to this matter. There were no
broker non-votes for either proposal.
16
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the National Market of the Nasdaq Stock
Market, Inc. under the symbol "RCII" since January 25, 1995, the date we
commenced our initial public offering. The following table sets forth, for the
periods indicated, the high and low sales price per share of the common stock as
reported.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
First Quarter............................................... $27.000 $18.000
Second Quarter.............................................. 32.000 24.313
Third Quarter............................................... 28.625 21.563
Fourth Quarter.............................................. 32.500 22.125
1997
First Quarter............................................... $17.500 $11.750
Second Quarter.............................................. 20.625 13.250
Third Quarter............................................... 24.250 17.000
Fourth Quarter.............................................. 24.250 18.000
</TABLE>
As of March 23, 1999, there were 73 record holders of our common stock.
Since our initial public offering in 1995, we have not paid any cash
dividends and expect that we will retain all available earnings generated by our
operations for the development and growth of our business. In addition, our
senior credit facility prohibits us from paying any cash dividends on our common
stock. Dividends on our preferred stock are payable in additional shares of
preferred stock until the year 2003, after which time we have the option of
paying dividends in cash or in additional shares of preferred stock. Any change
in our dividend policy will be made at the discretion of the Board of Directors
and will depend on a number of factors, including the future earnings, capital
requirements, contractual restrictions, financial condition, future prospects,
and such other factors as the Board of Directors may deem relevant. You should
read "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" later in this report.
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended
December 31, 1998 have been derived from our consolidated financial statements
as audited by Grant Thornton LLP, independent certified public accountants. The
historical financial data are qualified in their entirety by, and should be read
in conjunction with, the financial statements and the notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
-----------------------------------------------------
1998(2) 1997 1996(3) 1995(4) 1994(5)
---------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenues
Store
Rentals and fees.............................. $ 711,443 $275,344 $198,486 $126,264 $70,590
Merchandise sales............................. 41,456 14,125 10,604 6,383 3,470
Other......................................... 7,282 679 687 642 325
Franchise(7)
Merchandise sales............................. 44,365 37,385 25,229 -- --
Royalty income and fees....................... 5,170 4,008 2,959 -- --
---------- -------- -------- -------- -------
809,716 331,541 237,965 133,289 74,385
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise.............. 164,651 57,223 42,978 29,640 15,614
Cost of merchandise sold........................ 32,056 11,365 8,357 4,954 2,915
Salaries and other expenses..................... 428,767 162,458 116,577 70,012 37,786
Franchise cost of merchandise sold................ 42,886 35,841 24,010 -- --
---------- -------- -------- -------- -------
668,360 266,887 191,922 104,606 56,315
General and administrative expenses............... 23,698 13,304 10,111 5,766 2,809
Amortization of intangibles....................... 15,345 5,412 4,891 3,109 6,022
Class action litigation settlements............... 11,500 -- -- -- --
---------- -------- -------- -------- -------
Total operating expenses................. 718,903 285,603 206,924 113,481 65,146
---------- -------- -------- -------- -------
Operating profit......................... 90,813 45,938 31,041 19,808 9,239
Interest expense.................................. 39,144 2,194 606 2,202 2,160
Non-recurring financing costs..................... 5,018 -- -- -- --
Interest income................................... (2,004) (304) (667) (890) --
---------- -------- -------- -------- -------
Earnings before income taxes............. 48,655 44,048 31,102 18,496 7,079
Income tax expense................................ 23,897 18,170 13,076 7,784 1,600
---------- -------- -------- -------- -------
NET EARNINGS............................. 24,758 25,878 18,026 10,712 5,479
Preferred dividends............................... 3,954 -- -- -- --
---------- -------- -------- -------- -------
Net earnings allocable to common stockholders..... $ 20,804 $ 25,878 $ 18,026 $ 10,712 $ 5,479
========== ======== ======== ======== =======
Basic earnings per share.......................... $ 0.84 $ 1.04 $ 0.73 $ 0.52
========== ======== ======== ========
Diluted earnings per share........................ $ 0.83 $ 1.03 $ 0.72 $ 0.52
========== ======== ======== ========
OPERATING DATA
Stores open at end of period.................... 2,126 504 423 325 114
Comparable store revenue growth(6).............. 8.1% 8.1% 3.8% 18.1% 10.8%
BALANCE SHEET DATA
Rental merchandise, net......................... $ 408,806 $112,759 $ 95,110 $ 64,240 $28,096
Intangible assets, net.......................... 727,976 61,183 47,192 29,549 3,712
Total assets.................................... 1,502,989 208,868 174,467 147,294 36,959
Total debt...................................... 805,700 26,280 18,993 40,850 23,383
Total liabilities............................... 1,088,600 56,115 48,964 50,810 27,673
Redeemable convertible voting preferred stock... 259,476 -- -- -- --
Stockholders' equity............................ 154,913 152,753 125,503 96,484 9,286
</TABLE>
- ---------------
(1) We have pursued an aggressive growth strategy since we were acquired in 1989
by our Chairman of the Board and Chief Executive Officer, J. Ernest Talley.
Because of the significant growth since our formation, our historical
results of operations, our period-to-period comparisons of such results and
certain financial data may not be comparable, meaningful or indicative of
future results.
18
<PAGE> 21
(2) In May and August 1998, we completed the acquisitions of Central Rents and
Thorn Americas, respectively, both of which affect the comparability between
the historical financial and operating data for the periods presented.
(3) In May 1996, we completed the acquisition of ColorTyme, which affects the
comparability between the historical financial and operating data for the
periods presented.
(4) In April and September 1995, we completed the acquisitions of Crown and
Magic, respectively, both of which affect the comparability between the
historical financial and operating data for the periods presented.
(5) In 1994, we operated as an S corporation under Subchapter S of the Internal
Revenue Code and comparable provisions of certain state tax laws.
Accordingly, we were not subject to federal income taxation. Earnings per
share data is not provided for 1994 because operating results are not
comparable.
(6) Comparable store revenue for each period presented includes revenues only of
stores open throughout the full period and the comparable prior period.
(7) Prior to the acquisition of ColorTyme in May 1996, we conducted no franchise
operations. Therefore, franchise operations financial information is
presented for the years ended December 31, 1998 and 1997 only.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements, other than statements of historical facts included in this
report are forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", "anticipate" or "believe". We believe that the
expectations reflected in such forward-looking statements are accurate. However,
we cannot assure you that such expectations will occur. Our actual future
performance could differ materially from such statements. Factors that could
cause or contribute to such differences include, but are not limited to:
- the ability to enhance the performance of acquired stores and to
integrate them into our operations,
- the ability to acquire additional rent-to-own stores on favorable terms,
- uncertainties regarding the ability to open new stores,
- the passage of legislation adversely affecting the rent-to-own industry,
- interest rates,
- our ability to collect on our rental purchase agreements at the current
rate, and
- the other risks detailed from time to time in our SEC reports.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this report. Except as required by law, we are not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events. Important factors that could
cause our actual results to differ materially from our expectations are
discussed under "Risk Factors" and elsewhere in this report. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the
statements in those sections.
The following discussion and analysis should be read in conjunction with
the information set forth under the caption "Selected Financial Data", and our
consolidated financial statements and the accompanying notes thereto included
elsewhere in this report.
GENERAL
We have pursued an aggressive growth strategy since we were acquired in
1989 by J. Ernest Talley, our Chairman of the Board and Chief Executive Officer.
We have sought to acquire underperforming stores to
19
<PAGE> 22
which we could apply our operating strategies. As a result, the acquired stores
have generally experienced more significant revenue growth during the initial
periods following their acquisition than in subsequent periods. Because of
significant growth since our formation, our historical results of operations and
period-to-period comparisons of such results and certain financial data may not
be meaningful or indicative of future results.
We expect to grow through both the acquisition of existing stores and the
opening of new stores. If we open new stores or acquire under-performing or
unprofitable stores, start-up costs associated with new stores and excess
salaries, other overhead costs and operating results associated with acquired
stores could negatively impact our earnings until these stores are fully
integrated into our operations and become profitable.
COMPONENTS OF INCOME
Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over the term
of the agreement. Rental purchase agreements generally include a discounted
early purchase option. Amounts received upon sales of merchandise pursuant to
such options, and upon the sale of used merchandise, are recognized as revenue
when the merchandise is sold.
Franchise Revenue. Revenue from the sale of rental equipment is recognized
upon shipment of the equipment to the franchisee. Franchise fee revenue is
recognized upon completion of substantially all services and satisfaction of all
material conditions required under the terms of the franchise agreement.
Depreciation of Rental Merchandise. Except for tax purposes, we depreciate
our rental merchandise using the income forecasting method. The income
forecasting method of depreciation does not consider salvage value and does not
allow the depreciation of rental merchandise during periods when it is not
generating rental revenue. For periods prior to 1996, we used the income
forecasting method to calculate depreciation of our rental merchandise for tax
purposes. However, in 1996, we began using the MACRS method of depreciation
using a five-year class life for our rental purchase merchandise. In August
1997, the Internal Revenue Service issued a revenue ruling requiring rental
purchase companies to use MACRS, with a three-year class life for all purchases
after August 5, 1997. We began application of the ruling for all purchases
effective August 5, 1997, and thereafter.
Cost of Merchandise Sold. Cost of merchandise sold represents the book
value net of accumulated depreciation of rental merchandise at time of sale.
Salaries and Other Expenses. Salaries and other expenses include all
salaries and wages paid to store level employees, together with Market Manager
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.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
historical Statement of Earnings data as a percentage of total revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- -----------------------
(COMPANY OWNED STORES ONLY) (FRANCHISE OPERATIONS)
1998 1997 1996 1998 1997 1996
------- ------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rentals and fees........................... 93.6% 94.9% 94.7% --% --% --%
Merchandise Sales.......................... 5.5 4.9 5.0 89.6 90.3 89.6
Other/Royalty income and fees.............. 0.9 0.2 0.3 10.4 9.7 10.4
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
OPERATING EXPENSES
Direct store expenses
Depreciation of rental merchandise....... 21.7% 19.7% 20.5% --% --% --%
Cost of merchandise sold................. 4.2 3.9 3.9 86.6 86.6 85.0
Salaries and other expenses.............. 56.4 56.0 55.6 -- -- --
----- ----- ----- ----- ----- -----
82.3 79.6 80.0 86.6 86.6 85.0
General and administrative expenses........ 2.8 3.8 3.8 4.9 5.3 7.7
Amortization of intangibles................ 2.0 1.7 2.3 0.7 1.0 0.6
Class action litigation settlements........ 1.5 -- -- -- -- --
----- ----- ----- ----- ----- -----
Total operating expenses................... 88.6 85.1 86.1 92.2 92.9 93.3
----- ----- ----- ----- ----- -----
Operating profit........................... 11.4 14.9 13.9 7.8 7.1 6.7
Interest expense/(income).................. 5.0 0.8 0.1 (0.7) (0.6) (1.9)
Nonrecurring financing costs............... 0.7 -- -- -- -- --
----- ----- ----- ----- ----- -----
Earnings before income taxes............... 5.7% 14.1% 13.8% 8.5% 7.7% 8.6%
===== ===== ===== ===== ===== =====
</TABLE>
Comparison of Years ended December 31, 1998 and 1997
Between January 1, 1998 and December 31, 1998 we acquired 1,637 stores, 15
of which were subsequently consolidated with existing locations and one of which
was sold. These acquisitions were accounted for as purchases, and accordingly,
the operating results of the acquired operations have been included in the
results of operations since the respective dates of acquisition. Primarily as a
result of the effects of these acquisitions on our results of operations,
comparisons of operating results for 1998 and 1997 may not be meaningful or
indicative of future results.
Total revenue increased by $478.2 million, or 144.3% to $809.7 million for
1998 from $331.5 million for 1997. The increase in total revenue was primarily
attributable to the inclusion of 1,622 stores purchased in 1998, net of store
consolidations. Total revenue exclusive of these 1,622 new stores increased by
$44.8 million, or 15.4% to $334.9 million for 1998 from $290.1 million in 1997.
Depreciation of rental merchandise increased by $107.5 million, or 187.9%
to $164.7 million for 1998 from $57.2 million for 1997. Depreciation of rental
merchandise as a percent of total store revenue increased to 21.7% for 1998 from
19.7% for 1997. The increase in depreciation of rental merchandise as a percent
of total store revenue was primarily attributable to lower rental rates on
rental merchandise acquired in the 1998 acquisitions.
Salaries and other expenses as a percentage of store revenue increased to
56.4% for 1998 from 56.0% for 1997. This increase is attributable to the
increase in salaries for employees and other expenses of the acquired stores
immediately following the acquisitions. Occupancy costs also increased as a
percentage of total store revenue due to the relocation of certain stores
acquired in 1997 and 1998 to locations that are larger in square footage.
Generally, revenue from these stores increased gradually while the additional
payroll and occupancy costs were incurred immediately.
21
<PAGE> 24
General and administrative expenses expressed as a percentage of total
revenue decreased from 4.0% in 1997 to 2.9% in 1998. Expressed as a percentage
of store revenue only, general and administrative expenses, exclusive of
expenses relative to ColorTyme, decreased to 2.8% in 1998 from 3.8% in 1997.
This decrease is primarily attributable to the leveraging of fixed and
semi-fixed costs over a larger revenue base. Franchise general and
administrative expenses as a percentage of franchise revenue totaled 4.9% in
1998, down from 5.3% in 1997. This decrease was primarily attributable to our
continuous streamlining efforts associated with our franchise operations.
Operating profit increased by $44.9 million, or 97.7%, to $90.8 million for
1998 from $45.9 million for 1997. This improvement was primarily due to an
increase in both the number of items on rent and in revenue earned per item on
rent in the stores acquired before 1998. The revenue increase exceeded increases
in direct store expenses and the $11.5 million legal settlement expensed as a
result of us settling certain class action litigation in New Jersey.
Net earnings decreased by $1.1 million, or 4.3%, to $24.8 million in 1998
from $25.9 million in 1997. The decrease was primarily the result of us
incurring non-recurring financing costs of $5.0 million associated with the
interim financing utilized in the Thorn Americas acquisition, $2.5 million in
losses on disposed Renters Choice signage as a result of the name change to
"Rent-A-Center", and $11.5 million relating to certain class action legal
settlements, as well as increased interest expense relating to the financing
required to complete the acquisitions completed in 1998. All of the above costs
are stated gross of the effects of income taxes.
Comparison of Years ended December 31, 1997 and 1996
Between January 1, 1997 and December 31, 1997 we acquired 76 stores, five
of which were subsequently consolidated with existing locations. These
acquisitions were accounted for as purchases, and accordingly, the operating
results of the acquired operations have been included in the results of
operations since the respective dates of acquisition. Primarily as a result of
these acquisitions, comparisons of operating results for 1997 and 1996 may not
be meaningful or indicative of future results.
Total revenue increased by $93.5 million, or 39.3%, to $331.5 million for
1997 from $238.0 million for 1996. Store revenues increased $80.3 million, or
38.3% to $290.1 million in 1997 from $209.8 million in 1996. The increase in
store revenue was primarily due to the inclusion of 76 stores acquired in 1997
and the full year impact of the 94 stores acquired in 1996. Store revenues also
increased as a result of the increase in same store revenue growth of 8.1%. Same
store revenues increased due to an increase in both the number of items on rent
and in revenue earned per item on rent. Franchise revenues increased $13.2
million, or 46.9% to $41.4 million from $28.2 million in 1996. This increase was
primarily due to the inclusion of the franchise operations for an entire year in
1997, compared to only eight months in 1996.
Depreciation of rental merchandise increased by $14.2 million, or 33%, to
$57.2 million for 1997 from $43.0 million for 1996. Depreciation of rental
merchandise as a percent of total store revenue decreased to 19.7% for 1997 from
20.5% for 1996. The decrease in depreciation of rental merchandise as a percent
of revenue was primarily attributable to higher rental rates on rental
merchandise.
Salaries and other expenses as a percentage of store revenue increased to
56.0% for 1997 from 55.6% for 1996. This increase is attributable to the
increase in salaries for employees and other expenses of the acquired stores
immediately following the acquisitions. Occupancy costs also increased as a
percent of total store revenue due to the relocation of certain stores acquired
in 1996 and 1997 to locations that are larger in square footage. Generally,
revenue from these stores increased gradually while the additional payroll and
occupancy costs were incurred immediately. The average square footage per store
was approximately 4,150 at December 31, 1996 as compared to 4,290 for 1997.
General and administrative expenses expressed as a percentage of total
revenue decreased from 4.2% in 1996 to 4.0% in 1997. Expressed as a percentage
of store revenue only, general and administrative expenses, exclusive of
expenses relative to ColorTyme, were 3.8% in both 1997 and 1996. Franchise
general and administrative expenses as a percentage of franchise revenue totaled
5.3% in 1997, down significantly from
22
<PAGE> 25
7.7% in 1996. This decrease was primarily attributable to our streamlining
efforts as overhead reductions were implemented in 1996 and 1997.
Operating profit increased by $14.9 million, or 48.1%, to $45.9 million for
1997 from $31.0 million for 1996.
Net earnings increased by $7.9 million, or 43.9% to $25.9 million in 1997
from $18.0 million in 1996. The improvement was the result of the increase in
operating profit described above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity requirements are for debt service under our senior
credit facilities, the subordinated notes, other indebtedness outstanding,
working capital and capital expenditures. As of December 31, 1998, our
consolidated indebtedness was approximately $805.7 million, consisting primarily
of $630.7 million of the senior credit facilities, and $175.0 million of the
notes. In addition, we raised $260 million through the sale of our convertible
preferred stock. During the year ended December 31, 1998, we acquired 1,637
stores for an aggregate purchase price of approximately $1.0 billion. We also
opened one new store during the year.
We purchased $207.7 million of rental merchandise during the year ended
December 31, 1998.
For the year ended December 31, 1998, cash provided by operating activities
decreased by $22.4 million, from $28.8 million in 1997 to $6.4 million in 1998,
primarily due to payments on liabilities assumed in the acquisition of Thorn
Americas. Cash used in investing activities increased by $928.2 million from
$40.6 million in 1997 to $968.8 million in 1998, principally related to the
greater number of stores acquired in 1998 as compared to the number of stores
acquired during the same period for 1997. Cash provided by financing activities
was $991.4 million for the year ended December 31, 1998.
At December 31, 1998, we had in place a $962.3 million senior credit
facility. Borrowings under the senior credit facility bore interest at a rate
equal to 0.25% to 1.75% over the designated prime rate, which was 7.75% per
annum at December 31, 1998, or 1.25% to 2.75% over LIBOR, which was 5.09% at
December 31, 1998, at our option. At December 31, 1998, the average rate on
outstanding borrowings was 8.03%. During the year, we entered into certain
interest rate protection agreements with two banks. Under the terms of the
interest rate agreements, the LIBOR rate used to calculate the interest rate
charged on $500 million of the outstanding senior term debt has been fixed at an
average rate of 5.59%. These interest rate agreements have terms of three and
five years. Borrowings were collateralized by a lien on substantially all of our
assets. A commitment fee equal to 0.25% to 0.50% of the unused portion of the
term loan facility was payable quarterly. The senior credit facility includes
certain net worth and fixed charge coverage requirements, as well as covenants
which restrict additional indebtedness and the disposition of assets not in the
ordinary course of business. At December 31, 1998, the outstanding borrowings
under the senior credit facility were $630.7 million.
Principal and interest payments under the senior credit facilities and the
notes will represent significant liquidity requirements for us. Under the term
loans, we will be required to make principal payments totaling approximately
$2.0 million in 1999, $14.0 million in 2000, $22.0 million in 2001, $26.0
million in 2002, and $30.0 million in 2003. Loans under the senior credit
facilities not covered by interest rate swap agreements bear interest at
floating rates based upon the interest rate option selected by us. Under the
terms of the senior credit facilities, we are required to purchase and maintain
interest rate protection with respect to 50% of the term loans for three years.
During the year, we entered into a three-year interest rate swap for $250
million and a five-year interest rate swap for $250 million. These swaps fixed
the interest rate plus the applicable spread for the applicable periods. The
blended interest rate for the swaps is 5.59%.
During the year, we issued $175 million of senior subordinated notes in a
private placement transaction under Rule 144A. The proceeds from the note
issuance were used to retire a $175 million senior subordinated credit facility
entered into in conjunction with the senior credit facility.
Capital expenditures are made generally to maintain existing operations and
for the acquisition and opening of stores. We spent $21.9 million in 1998, and
expect to spend approximately $24.8 million in 1999 on
23
<PAGE> 26
capital expenditure, all of which are to maintain existing operations.
Furthermore, we purchase new property and equipment in connection with a store
acquisition or new store opening.
With the major steps of the integration plan relating to Thorn Americas now
behind us, we are currently focusing our efforts on enhancing the operations in
the stores acquired from Thorn Americas and Central Rents. Once completed, we
intend to resume our strategy of increasing our store base and annual revenues
and profits through the opening of new stores, as well as opportunistic
acquisitions. We anticipate ample opportunities to increase our store base
through our continued participation in the industry consolidation.
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an increasing emphasis on new store development. Typically, a
newly opened rental store is profitable on a monthly basis in the sixth to
seventh month after its initial opening. Historically, a typical store has
achieved break-even profitability in twelve to fifteen months after its initial
opening. Total financing requirements of a typical new store approximates $0.35
million, with roughly 80% to 85% of that amount relating to the purchase of
rental merchandise inventory. A newly opened store historically has achieved
results consistent with other stores that have been operating within the system
for greater than two years by the end of its third year of operation. There can
be no assurance that we will open any new stores in the future, or as to the
number, location or profitability thereof.
We believe that cash flow from operations together with amounts available
under the senior credit facilities, including the revolving credit facility and
letter of credit/multidraw facility therein, will be sufficient to fund our debt
service requirements, working capital needs, capital expenditures and litigation
exposure during 1999. The revolving credit facility provides us with revolving
loans in an aggregate principal amount not exceeding $120.0 million and the
letter of credit/multidraw facility will provide us with an additional $122.3
million of financing to support certain litigation assumed in connection with
the Thorn Americas acquisition. Based upon our extensive review and analysis of
such litigation and our potential exposure thereon, we believe that we will have
sufficient funds available to pay any litigation expenses related to such
litigation. In addition, once the letter of credit is terminated, the letter of
credit/multidraw facility will convert to a $85 million term loan.
In addition, to provide any additional funds necessary for the continued
pursuit of our growth strategies, we may incur from time to time additional
short or long-term bank indebtedness and may issue, in public or private
transactions, equity and debt securities. The availability and attractiveness of
any outside sources of financing will depend on a number of factors, some of
which will relate to our financial condition and performance, and some of which
will be beyond our control, such as prevailing interest rates and general
economic conditions. There can be no assurance such additional financing will be
available, or if available, will be on terms acceptable to us.
INFLATION
During the years ended December 31, 1998, 1997 and 1996, the cost of rental
merchandise, lease expense and salaries and wages have increased modestly. The
increases have not had a significant effect on our results of operations because
we have been able to charge commensurately higher rental rates for our
merchandise.
YEAR 2000 OVERVIEW
Year 2000 issues exist when dates are recorded on computers using two
digits, rather than four, and are then used for arithmetic operations,
comparisons or sorting. A two digit recording may recognize a date using "00" as
1900, rather than 2000, which could cause computer systems to perform inaccurate
computations or shut down. Many of the world's computer systems currently record
years in this two-digit format and will be unable to properly interpret dates
beyond the year 1999 if not remedied.
Management Information Systems. Our primary information technology system
controls all of our computer operations in our rent-to-own stores and home
office. We have received written assurance from our software vendor that the
system is Year 2000 compliant, which means that it is equipped to interpret
dates beyond the year 1999. We have engaged external resources to complete an
independent review of our
24
<PAGE> 27
information systems. Based in part upon the results of this review, we believe
that our management information systems are prepared for the Year 2000.
As of December 31, 1998, we have incurred costs of approximately $160,000
in assuring Year 2000 compliance through upgrades. Additionally, as part of our
recent expansion, we purchased new hardware and software for our home office
that is warranted to be Year 2000 compliant. All upgrades in both our
headquarters and ColorTyme's offices have been completed.
Our primary information technology system has also been integrated into the
retail outlets and operations acquired from Thorn Americas. During 1999, we
anticipate upgrading all of our retail stores to the Year 2000 compliant system
at an estimated cost of $62,500. Furthermore, we plan to test each store's
hardware for Year 2000 compliance. Currently, we anticipate that approximately
300 retail stores will need to upgrade hardware, at an aggregate cost of
$900,000.
Major Suppliers. We are currently requesting written assurances from each
of our vendors, confirming that such vendors are Year 2000 compliant. We utilize
many suppliers and no single supplier is material to our operations. As a
result, we believe that we have the ability to obtain merchandise for our retail
outlets from many different vendors. In the event any vendors are not Year 2000
compliant, we anticipate having sufficient alternate supply sources available to
serve our needs.
Other Systems. We are in the process of identifying certain on-site
non-information technology systems that may be Year 2000 sensitive. Once these
systems have been fully identified, we will determine, with the help of outside
vendors, whether these systems are vulnerable to Year 2000 problems. Potential
non-information technology systems include:
- alarms,
- elevators,
- irrigation systems,
- thermostats, and
- utility meters and switches.
We plan to complete the identification, testing, and replacing of these
systems for Year 2000 compliance during 1999. We do not believe that the cost to
repair or replace any vulnerable non-information technology systems will be
material. However, there can be no guarantee that the systems of other companies
on which we rely will be timely converted and will not have an adverse effect on
our operations.
In the event of a complete failure of our information technology systems,
we would continue the affected functions either manually or through the use of
systems that are Year 2000 compliant. The primary costs associated with such a
necessity would be (A) increased time delays in the posting of information, and
(B) increased personnel to manually process the information. We believe that the
increased costs associated with such personnel would not have a material adverse
affect on our operations or financial conditions.
We do not currently have a contingency plan in place, but we will evaluate
the need for such a plan in 1999 as our Year 2000 conversion progresses.
The cost of Year 2000 compliance and the estimated date of completion of
necessary modifications are based on our best estimates, which were derived from
various assumptions of future events, including the continued availability of
resources, third party modification plans and other factors. However, we cannot
guarantee these estimates are accurate and actual results could differ
materially from those anticipated.
25
<PAGE> 28
QUARTERLY RESULTS
The following table contains certain unaudited historical financial
information for the quarters indicated.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER(3) 4TH QUARTER(4)
----------- ----------- -------------- --------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1998(1)
Revenue........................... $90,233 $103,313 $ 265,886 $350,284
Operating profit.................. 13,721 15,547 30,467 31,078
Net earnings...................... 7,856 8,529 4,643 3,730
Basic earnings per share.......... 0.32 0.34 0.13 0.05
Diluted earnings per share........ $ 0.31 $ 0.34 $ 0.13 $ 0.05
Year ended December 31, 1997(2)
Revenue........................... $74,587 $ 80,803 $ 83,864 $ 92,287
Operating profit.................. 9,639 11,341 11,766 13,192
Net earnings...................... 5,412 6,357 6,724 7,385
Basic earnings per share.......... 0.22 0.25 0.27 0.30
Diluted earnings per share........ $ 0.22 $ 0.25 $ 0.27 $ 0.29
</TABLE>
- ---------------
(1) During 1998, six stores were purchased during the first quarter; 177 stores
were purchased during the second quarter; 1,450 stores were purchased during
the third quarter; and four stores were purchased during the fourth quarter.
Of the 1,637 stores acquired, 15 were subsequently consolidated with
existing store locations. In addition, one store was opened during the first
quarter, and one store was sold during the third quarter.
(2) During 1997, 28 stores were purchased during the first quarter; 39 stores
were purchased during the second quarter; and nine stores were purchased
during the third quarter. Of the 76 stores acquired, five were subsequently
consolidated with existing store locations. In addition, two stores were
opened during the first quarter; two stores were opened during the second
quarter; four stores were opened during the third quarter; and two stores
were opened during the fourth quarter.
(3) During the third quarter of 1998, we incurred non-recurring financing costs
of $5.0 million associated with the interim financing utilized in the
acquisition of Thorn Americas, and $2.5 million associated with effecting a
name change of the Renters Choice stores to "Rent-A-Center".
(4) During the fourth quarter of 1998, we charged $11.5 million to earnings
classified as class action legal settlements, in conjunction with the
settlement of certain class action litigation in New Jersey.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its components.
The only component of comprehensive income for the three years in the period
ended December 31, 1998 was net earnings as reported in the Consolidated
Statements of Earnings.
During the second quarter of 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which will be effective for the fiscal year 2000. This statement
establishes accounting and reporting standards requiring that derivative
instruments, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met.
26
<PAGE> 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
As of December 31, 1998 we had $175.0 million in subordinated notes at a
fixed interest rate of 11.0% and $630.7 million in term loans indexed to the
LIBOR rate. The subordinated notes mature on August 15, 2008 and have a fixed
interest rate of 11.0%. The fair value of the subordinated notes is estimated
based on discounted cash flow analysis using interest rates currently offered
for loans with similar terms to borrowers of similar credit quality. The fair
value of the subordinated notes is $177.6 million, which is $2.6 million in
excess of their carrying value of $175 million. Unlike the subordinated notes,
the $630.7 million in term loans have variable interest rates indexed to current
LIBOR rates. Because the variable rate structure exposes us to the risk of
increased interest cost if interest rates rise, we have entered into interest
rate swap agreements to hedge this risk. In August and September 1998, we
entered into $500 million in interest rate swap agreements that lock in a LIBOR
rate of 5.59%. These contracts have an average life of four years. Given the
current capital structure, including our interest rate swap agreements, we have
$130.7 million, or 16.2% of our total debt, in variable rate debt. A
hypothetical 1.0% change in the LIBOR rate would affect pre-tax earnings by
approximately $1.3 million. The swap agreements had an aggregate fair value of
an unfavorable $7.5 million at December 31, 1998. A hypothetical 1.0% change in
the LIBOR rate would affect the fair value of the swaps by approximately $15.5
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 which exposes us to the risk of increased interest costs if interest rates
rise. To reduce the risk related to unfavorable interest rate movements, we have
entered into certain interest rate swap contracts on $500 million of debt to pay
a fixed rate of 5.59%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements required to be included in this Item
8 are set forth in Item 14 of this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(*)
ITEM 11. EXECUTIVE COMPENSATION(*)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(*)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(*)
- ---------------
* The information required by Items 10, 11, 12 and 13 is or will be set forth
in the definitive proxy statement relating to the 1999 Annual Meeting of
Stockholders of Rent-A-Center, Inc., which is to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. This definitive proxy statement relates to
a meeting of stockholders involving the election of directors and the
portions therefrom required to be set forth in this Form 10-K by Items 10,
11, 12 and 13 are incorporated herein by reference pursuant to General
Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
<TABLE>
<S> <C>
Report Of Independent Certified Public Accountants.......... F-2
Consolidated Financial Statements
Balance Sheets............................................ F-3
Statements Of Earnings.................................... F-4
Statement Of Stockholders' Equity......................... F-5
Statements Of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements................ F-8
</TABLE>
Schedules Supporting Financial Statements
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions or inapplicable.
CURRENT REPORTS ON FORM 8-K
None.
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned duly authorized.
RENT-A-CENTER, INC.
By: /s/ J. ERNEST TALLEY
----------------------------------
J. Ernest Talley
Chairman of the Board and
Chief Executive Officer
Date: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. ERNEST TALLEY Chairman of the Board and March 24, 1999
- ----------------------------------------------------- Chief Executive Officer
J. Ernest Talley (Principal Executive
Officer)
/s/ MARK E. SPEESE President and Director March 24, 1999
- -----------------------------------------------------
Mark E. Speese
/s/ ROBERT D. DAVIS Vice President -- Finance, March 24, 1999
- ----------------------------------------------------- Treasurer and Chief
Robert D. Davis Financial Officer
(Principal Financial and
Accounting Officer)
/s/ J. V. LENTELL Director March 24, 1999
- -----------------------------------------------------
J. V. Lentell
/s/ JOSEPH V. MARINER, JR. Director March 24, 1999
- -----------------------------------------------------
Joseph V. Mariner, Jr.
/s/ REX W. THOMPSON Director March 24, 1999
- -----------------------------------------------------
Rex W. Thompson
/s/ PETER P. COPSES Director March 24, 1999
- -----------------------------------------------------
Peter P. Copses
/s/ LAURENCE M. BERG Director March 24, 1999
- -----------------------------------------------------
Laurence M. Berg
</TABLE>
29
<PAGE> 32
ITEM 1. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc., and CT
Acquisition Corporation (Pursuant to the rules of the
Commission, the schedules and exhibits have been omitted.
Upon the request of the Commission, Renters Choice will
supplementally supply such schedules and exhibits to the
Commission.)
2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998,
among Renters Choice, Inc., Thorn International BV and
Thorn plc (Pursuant to the rules of the Commission, the
schedules and exhibits have been omitted. Upon the
request of the Commission, the Company will
supplementally supply such schedules and exhibits to the
Commission.)
3.1(5) -- Amended and Restated Certificate of Incorporation of
Renters Choice
3.2(6) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice
3.3(7) -- Amended and Restated Bylaws of Renters Choice
3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters
Choice
4.1(9) -- Form of Certificate evidencing Common Stock
4.2(10) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series A Preferred Stock of
Renters Choice, Inc.
4.3(11) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series B Preferred Stock of
Renters Choice, Inc.
4.4(12) -- 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(13) -- Form of Certificate evidencing Series A Preferred Stock
4.6(14) -- Form of Exchange Note
4.7(15) -- 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(16) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(17) -- Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice, Inc. and
certain other lenders
10.3(18) -- Portfolio Acquisition Agreement dated May 15, 1996, by
and among Renters Choice, Inc., ColorTyme Financial
Services, Inc., and STI Credit Corporation
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4(19) -- Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.5(20) -- Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.6(21) -- 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
10.7(22) -- 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
10.8(23) -- $175,000,000 Senior Subordinated Credit Agreement, dated
as of August 5, 1998, among Renters Choice, Inc., certain
other lenders and the Chase Manhattan Bank
10.9(24) -- Stockholders Agreement, dated as of August 5, 1998, by
and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark E.
Speese, Renters Choice, Inc., and certain other persons
10.10(25) -- 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
10.11(26) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series B Convertible Preferred Stock
10.13(27) -- Stock Purchase Agreement, dated August 5, 1998, among
Renters Choice, Inc., Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P.
10.14(28) -- Exchange and Registration Rights Agreement, dated August
18, 1998, by and among Renters Choice, Inc. and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC and Credit Suisse First Boston
Corporation
10.15* -- Employment Agreement, dated October 1, 1998, by and
between Rent-A-Center, Inc. and Bradley W. Denison
21.1(29) -- Subsidiaries of Registrant
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 28, 1998
(3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(4) Incorporated herein by reference to Exhibit 2.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(5) 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
(6) 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
31
<PAGE> 34
(7) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
(8) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(9) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form
S-4 filed on January 19, 1999
(10) 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
(11) 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
(12) Incorporated herein by reference to Exhibit 4.4 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(13) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(14) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(15) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(16) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Registration Statement on Form S-8 (File No. 333- 53471)
(17) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
(18) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(19) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(20) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(21) 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
(22) 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
(23) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(24) Incorporated herein by reference to Exhibit 10.21 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(25) 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
(26) Incorporated herein by reference to Exhibit 10.23 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(27) Incorporated herein by reference to Exhibit 2.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(28) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(29) Incorporated herein by reference to Exhibit 21.1 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
32
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RENT-A-CENTER, INC. AND SUBSIDIARIES
Report Of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Earnings F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes To Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 36
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Rent-A-Center, Inc.
We have audited the accompanying consolidated balance sheets of Rent-A-Center,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rent-A-Center,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
February 16, 1999
F-2
<PAGE> 37
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1998 1997
(In Thousands of Dollars) ---------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 33,797 $ 4,744
Rental merchandise, net
On rent 311,650 89,007
Held for rent 97,156 23,752
Accounts receivable -- trade 3,296 2,839
Prepaid expenses and other assets 65,689 3,164
Property assets, net 85,018 17,700
Deferred income taxes 178,407 6,479
Intangible assets, net 727,976 61,183
---------- --------
$1,502,989 $208,868
========== ========
LIABILITIES
Senior debt $ 630,700 $ 26,280
Subordinated notes payable 175,000 --
Accounts payable -- trade 43,868 11,935
Accrued liabilities 239,032 17,900
---------- --------
1,088,600 56,115
COMMITMENTS AND CONTINGENCIES -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock, net of
placement costs, $.01 par value; 5,000,000 shares
authorized; 260,000 shares issued and outstanding 259,476 --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized; 25,073,583 and 24,904,721 shares issued in
1998 and 1997, respectively 251 249
Additional paid-in capital 101,781 99,381
Retained earnings 77,881 53,123
---------- --------
179,913 152,753
Treasury stock, 990,099 shares at cost (25,000) --
---------- --------
154,913 152,753
---------- --------
$1,502,989 $208,868
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 38
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands of Dollars, except per share data) -------- -------- --------
<S> <C> <C> <C>
Revenues
Store
Rentals and fees $711,443 $275,344 $198,486
Merchandise sales 41,456 14,125 10,604
Other 7,282 679 687
Franchise
Merchandise sales 44,365 37,385 25,229
Royalty income and fees 5,170 4,008 2,959
-------- -------- --------
809,716 331,541 237,965
Operating expenses
Direct store expenses
Depreciation of rental merchandise 164,651 57,223 42,978
Cost of merchandise sold 32,056 11,365 8,357
Salaries and other expenses 428,767 162,458 116,577
Franchise cost of merchandise sold 42,886 35,841 24,010
-------- -------- --------
668,360 266,887 191,922
General and administrative expenses 23,698 13,304 10,111
Amortization of intangibles 15,345 5,412 4,891
Class action litigation settlements 11,500 -- --
-------- -------- --------
Total operating expenses 718,903 285,603 206,924
-------- -------- --------
Operating profit 90,813 45,938 31,041
Interest expense 39,144 2,194 606
Non-recurring financing costs 5,018 -- --
Interest income (2,004) (304) (667)
-------- -------- --------
Earnings before income taxes 48,655 44,048 31,102
Income tax expense 23,897 18,170 13,076
-------- -------- --------
NET EARNINGS 24,758 25,878 18,026
Preferred dividends 3,954 -- --
-------- -------- --------
Net earnings allocable to common stockholders $ 20,804 $ 25,878 $ 18,026
======== ======== ========
Basic earnings per share $ 0.84 $ 1.04 $ 0.73
======== ======== ========
Diluted earnings per share $ 0.83 $ 1.03 $ 0.72
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 39
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized
Common Stock Additional Value of
--------------- Paid-In Retained Stock Treasury
Shares Amount Capital Earnings Award Stock Total
(In Thousands) ------ ------ ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 24,378 $244 $ 87,919 $ 9,219 $(898) $ -- $ 96,484
Net earnings -- -- -- 18,026 -- -- 18,026
Amortization of stock award -- -- -- -- 322 -- 322
Termination of stock award (37) -- (576) -- 576 -- --
Exercise of stock options 107 1 695 -- -- -- 696
Tax benefits related to
exercise of stock options -- -- 460 -- -- -- 460
Acquisition of ColorTyme, Inc. 343 3 9,512 -- -- -- 9,515
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1996 24,791 248 98,010 27,245 -- -- 125,503
Net earnings -- -- -- 25,878 -- -- 25,878
Exercise of stock options 114 1 950 -- -- -- 951
Tax benefits related to
exercise of stock options -- -- 421 -- -- -- 421
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1997 24,905 249 99,381 53,123 -- -- 152,753
Net earnings -- -- -- 24,758 -- -- 24,758
Purchase of treasury stock --
990 shares -- -- -- -- -- (25,000) (25,000)
Exercise of stock options 169 2 1,872 -- -- -- 1,874
Tax benefits related to
exercise of stock options -- -- 528 -- -- -- 528
------ ---- -------- ------- ----- -------- --------
Balance at December 31, 1998 25,074 $251 $101,781 $77,881 $ -- $(25,000) $154,913
====== ==== ======== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 40
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands of Dollars) ---------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 24,758 $ 25,878 $ 18,026
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of rental merchandise 164,651 57,223 42,978
Depreciation of property assets 17,482 5,601 3,680
Amortization of intangibles 15,345 5,412 4,891
Non-recurring charges -- loss on assets related to name
change 2,451 -- --
Amortization of financing fees 1,326 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions
Rental merchandise (171,263) (64,346) (64,927)
Accounts receivable -- trade (155) 182 (602)
Prepaid expenses and other assets 5,240 1,252 524
Deferred income taxes 20,565 (341) 4,961
Accounts payable -- trade (27,508) (5,112) 10,745
Accrued liabilities (46,492) 3,033 (915)
---------- -------- --------
Net cash provided by operating activities 6,400 28,782 19,361
Cash flows from investing activities
Purchase of property assets (21,860) (10,446) (8,187)
Proceeds from sale of property assets 740 376 303
Acquisitions of businesses, net of cash acquired (947,655) (30,491) (28,367)
---------- -------- --------
Net cash used in investing activities (968,775) (40,561) (36,251)
---------- -------- --------
Cash flows from financing activities
Purchase of treasury stock (25,000) -- --
Financing fees paid (24,017) -- --
Proceeds from issuance of preferred stock, net of issuance
costs 259,476 -- --
Exercise of stock options 1,874 951 696
Proceeds from debt 1,258,464 80,656 37,733
Repayments of debt (479,369) (71,004) (72,278)
Sale of notes receivable -- -- 21,338
---------- -------- --------
Net cash provided by (used in) financing activities 991,428 10,603 (12,511)
---------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 29,053 (1,176) (29,401)
Cash and cash equivalents at beginning of year 4,744 5,920 35,321
---------- -------- --------
Cash and cash equivalents at end of year $ 33,797 $ 4,744 $ 5,920
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 41
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
<TABLE>
<CAPTION>
(In Thousands of Dollars)
<S> <C> <C> <C>
Supplemental cash flow information 1998 1997 1996
---------- -------- --------
Cash paid during the year for:
Interest $ 26,091 $ 1,962 $ 929
Income taxes $ 10,212 $ 13,983 $ 8,426
Supplemental schedule of non-cash investing activities
In conjunction with the businesses acquired, liabilities
were assumed as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired, including cash of $56,027 in
1998 $1,340,480 $ 30,491 $ 57,223
Stock and options issued -- -- (9,515)
Cash paid (1,003,682) (30,491) (28,367)
---------- -------- --------
Liabilities assumed $ 336,798 $ -- $ 19,341
========== ======== ========
</TABLE>
F-7
<PAGE> 42
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation and Nature of Operations
The accompanying financial statements include the accounts of Rent-A-Center,
Inc. (Rent-A-Center), formerly Renters Choice, Inc., and its wholly-owned
subsidiaries (collectively, the Company). All significant intercompany accounts
and transactions have been eliminated. Rent-A-Center leases household durable
goods to customers on a rent-to-own basis. At December 31, 1998, the Company
operated 2,126 stores which were located throughout the United States and the
Commonwealth of Puerto Rico (17 stores).
ColorTyme, Inc. (ColorTyme), the only subsidiary with substantive operations, is
a nationwide franchisor of television, stereo and furniture rental centers.
ColorTyme's primary source of revenues is the sale of rental equipment to its
franchisees, who, in turn, offer the equipment to the general public for rent or
purchase under a rent-to-own program. The balance of ColorTyme's revenues are
generated primarily from royalties based on franchisees' monthly gross revenues.
At December 31, 1998, there were 324 franchised rental centers operating in 40
states.
Rental Merchandise
Rental merchandise is carried at cost, net of accumulated depreciation.
Depreciation is provided using the income forecasting method, which is intended
to match as closely as practicable the recognition of depreciation expense with
the consumption of the rental merchandise, and assumes no salvage value. The
consumption of rental merchandise occurs during periods of rental and directly
coincides with the receipt of rental revenue over the rental-purchase agreement
period, generally 18 to 24 months. Under the income forecasting method,
merchandise held for rent is not depreciated, and merchandise on rent is
depreciated in the proportion of rents received to total rents provided in the
rental contract, which is an activity based method similar to the units of
production method.
Rental merchandise which is damaged and inoperable, or not returned by the
customer after becoming delinquent on payments, is written-off when such
impairment is incurred.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include all highly liquid
investments with an original maturity of three months or less.
Rental Revenue and Fees
Merchandise is rented to customers pursuant to rental-purchase agreements which
provide for weekly or monthly rental terms with nonrefundable rental payments.
Generally, the customer has the right to acquire title either through a purchase
option or through payment of all required rentals. Rental revenue and fees are
recognized over the rental term. No revenue is accrued because the customer can
cancel the rental contract at any time and the Company cannot enforce collection
for nonpayment of rents.
ColorTyme's revenue from the sale of rental equipment is recognized upon
shipment of the equipment to the franchisee.
F-8
<PAGE> 43
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS (continued)
Property Assets and Related Depreciation
Furniture, equipment and vehicles are stated at cost. Depreciation is provided
over the estimated useful lives of the respective assets (generally five years)
by the straight-line method. Leasehold improvements are amortized over the term
of the applicable leases by the straight-line method.
Intangible Assets and Amortization
Intangible assets are stated at cost less accumulated amortization calculated by
the straight-line method.
Accounting for Impairment of Long-Lived Assets
The Company evaluates all long-lived assets, including all intangible assets and
rental merchandise, for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. Impairment is
recognized when the carrying amounts of such assets cannot be recovered by the
undiscounted net cash flows they will generate. Impairment is measured as the
amount by which the carrying value of the asset exceeds the fair value. Fair
value is based on management's knowledge of current market conditions or the
present value of estimated expected future cash flows.
Income Taxes
The Company provides deferred taxes for temporary differences between the tax
and financial reporting bases of assets and liabilities at the rate expected to
be in effect when taxes become payable.
Earnings Per Share
Basic earnings per share are based upon the weighted average number of common
shares outstanding during each period presented. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period, plus, if dilutive, the assumed exercise of stock options and the assumed
conversion of other convertible securities at the beginning of the year, or for
the period outstanding during the year for current year issuances.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expense was $37.2 million, $13.7 million, and $10.6
million in 1998, 1997 and 1996, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
F-9
<PAGE> 44
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS (continued)
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues during the reporting period. Actual results could differ
from those estimates.
Derivative Financial Instruments
The Company uses interest rate swap agreements to manage interest rate risk on
its variable rate debt. Amounts due to or from counterparties are recorded in
interest expense as incurred.
During the second quarter of 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which will be effective for the Company's fiscal year 2000. This
statement establishes accounting and reporting standards requiring that
derivative instruments, including certain derivative instruments imbedded in
other contracts, be recorded in the balance sheet as either an asset or a
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company is currently assessing the impact of
this new statement on its consolidated financial position, liquidity, and
results of operations.
Reclassifications
Certain reclassifications have been made to prior year financial information in
order to conform to the 1998 presentation.
NOTE B -- ACQUISITIONS
On August 5, 1998, the Company acquired all of the outstanding common stock of
Thorn Americas, Inc. (Thorn), which operated 1,404 stores, for approximately
$900 million in cash. The acquisition, together with the increased working
capital requirements of the combined entity, was financed via $720 million in
variable-rate senior debt maturing in 6 to 8.5 years, $175 million of 11% senior
subordinated debt maturing in 10 years, and $260 million of redeemable
convertible voting preferred stock. The purchase price exceeded the fair value
of net assets acquired by approximately $591 million, which has been recorded as
goodwill and is being amortized over 30 years.
In conjunction with the Thorn acquisition, the Company terminated substantially
all of the existing Thorn home office employees (approximately 550), and
discontinued using Thorn's distribution facilities. As a result, at acquisition
the Company recorded liabilities for employee termination costs, primarily
related to severance agreements, of approximately $21.4 million and costs
associated with the discontinued use of leased distribution facilities of
approximately $18.4 million. As of December 31, 1998, approximately $18.9
million and $4.7 million of these respective costs, had been paid. The Company
anticipates that the final payments associated with these actions will be made
in early 1999.
At acquisition, the Company recorded an accrual of approximately $125 million
for estimated probable losses on Thorn litigation, including $34.5 million
related to Fogie v. Thorn Americas, Inc. and Willis v. Thorn Americas, Inc. The
Company has been indemnified by the seller for losses relating to the Fogie and
Willis cases, and has recorded a corresponding receivable. Differences between
the Company's estimates of these pre-acquisition contingencies and actual or
updated estimated amounts determined during the allocation period will be
treated as an adjustment to the purchase price, and accordingly, the goodwill
recorded on the transaction may be changed. Details regarding acquired
litigation are described in Note K.
In May 1998, the Company acquired substantially all of the assets of Central
Rents, Inc. (Central Rents), which consisted of 176 stores, for approximately
$100 million in cash. The purchase price exceeded the fair
F-10
<PAGE> 45
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE B -- ACQUISITIONS (continued)
value of assets acquired by approximately $72 million, which has been recorded
as goodwill and is being amortized over 30 years.
The Company also acquired the assets of 52 stores in 14 separate transactions
during 1998 for approximately $26.4 million.
During 1997, the Company acquired the assets of 76 stores in 18 separate
transactions for approximately $30.5 million in cash.
On May 15, 1996 the Company acquired all the outstanding common stock of
ColorTyme for $14.5 million, including acquisition costs, comprised of cash of
$4.7 million and 343,175 shares of the Company's common stock and 314,000
options for the Company's common stock valued at $3.0 million. Immediately
following the purchase of ColorTyme by the Company, ColorTyme sold its loan
portfolio (with certain recourse provisions) to a third party for approximately
$21.7 million. No gain or loss was recognized on the sale. ColorTyme
simultaneously paid off notes payable owed to a finance company of approximately
$13.2 million. The Company acquired the assets of an additional 88 stores in 23
transactions during 1996, for approximately $25.6 million in cash and $1.8
million in notes.
All acquisitions have been accounted for as purchases, and the operating results
of the acquired businesses have been included in the financial statements of the
Company since their date of acquisition.
The following pro forma information combines the results of operations as if the
acquisitions of Thorn and Central Rents had been consummated as of the beginning
of each of the years presented, after including the impact of adjustments for
amortization of intangibles, and the impact of interest expense and preferred
dividends as a result of acquisition financing. The results of operations of the
other acquired stores were not material in relation to the Company's
consolidated results of operations.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997
(In Thousands of Dollars, except per share data) ---------- ----------
<S> <C> <C>
Revenue $1,377,864 $1,314,712
Net earnings allocable to common stockholders 2,591 9,129
Basic earnings per common share 0.10 0.37
Diluted earnings per common share 0.10 0.36
</TABLE>
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of operating results that would have occurred
had these acquisitions been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
F-11
<PAGE> 46
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C -- RENTAL MERCHANDISE
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
(In Thousands of Dollars) -------- -------
<S> <C> <C>
On rent
Cost $414,089 $142,408
Less accumulated depreciation 102,439 53,401
-------- --------
$311,650 $ 89,007
======== ========
Held for rent
Cost $105,539 $ 29,975
Less accumulated depreciation 8,383 6,223
-------- --------
$ 97,156 $ 23,752
======== ========
</TABLE>
NOTE D -- PROPERTY ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
(In Thousands of Dollars) -------- -------
<S> <C> <C>
Furniture and equipment $ 35,025 $ 13,115
Transportation equipment 31,287 2,608
Building and leasehold improvements 38,629 14,499
Construction in progress 768 547
-------- --------
105,709 30,769
Less accumulated depreciation 20,691 13,069
-------- --------
$ 85,018 $ 17,700
======== ========
</TABLE>
NOTE E -- INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31,
Amortization ----------------------
Period 1998 1997
(In Thousands of Dollars) ------------- -------- --------
<S> <C> <C> <C>
Noncompete agreements 2 - 5 years $ 5,152 $ 3,652
Franchise network 10 years 3,000 3,000
Goodwill 20 - 30 years 741,786 61,228
Other Various 1,178 1,773
-------- --------
751,116 69,653
Less accumulated amortization 23,140 8,470
-------- --------
$727,976 $ 61,183
======== ========
</TABLE>
NOTE F -- SENIOR DEBT
In conjunction with the acquisition of Thorn, the Company entered into a $962.3
million Senior Credit Facility (the Facility) with a syndicate of banks. The
Facility consists of a six-year revolving credit line of up to $120.0 million
for working capital and general corporate purposes, including acquisitions; a
six-year $122.3 million letter of credit/multidraw facility; and $720.0 million
in term loans. The term loans consist of a six-year $120.0 million Term A
facility, a seven and one-half year $270.0 million Term B facility, and an eight
and one-half year $330.0 million Term C facility. Borrowings under the Facility
bear interest at varying rates equal to 0.25% to 1.75% over the designated prime
rate (7.75% per annum at December 31, 1998) or 1.25% to
F-12
<PAGE> 47
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F -- SENIOR DEBT (continued)
2.75% over LIBOR (5.09% at December 31, 1998) at the Company's option, and are
subject to quarterly adjustments based on certain leverage ratios. At December
31, 1998, the average rate on outstanding borrowings was 8.03%. At December 31,
1998, the Company had $630.7 million of term loans outstanding under the
Facility, and had used the letter of credit facility to support a bond relating
to certain litigation in New Jersey, and certain insurance obligations. No
borrowings are outstanding under the revolving credit facility. At December 31,
1998, the Company had $67.6 million available under the revolving credit line
and letter of credit portions of the Facility. A commitment fee equal to 0.25%
to 0.50% of the unused portion of the Facility is payable quarterly.
The Facility is collateralized by substantially all of the Company's tangible
and intangible assets, and is unconditionally guaranteed by each of the
Company's subsidiaries. In addition, the Facility contains several financial
covenants as defined therein, including a maximum leverage ratio, a minimum
interest coverage ratio, and a minimum fixed charge coverage ratio, as well as
restrictions on capital expenditures, additional indebtedness, and the
disposition of assets not in the ordinary course of business.
During 1998, the Company entered into three interest rate swap agreements to
limit the effect of increases in interest rates. These agreements expire in 2001
and 2003, and has an aggregate notional principal amount of $500 million. The
effect of these agreements is to limit the Company's interest rate exposure by
fixing the LIBOR rate at 5.59%. The agreements had no cost to the Company, and
at December 31, 1998 they had an aggregate fair value of an unfavorable $7.5
million.
The following are scheduled maturities of senior debt at December 31, 1998:
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------ (In Thousands of Dollars)
<S> <C> <C>
1999 $ 2,000
2000 14,000
2001 22,000
2002 26,000
2003 30,000
Thereafter 536,700
--------
$630,700
========
</TABLE>
Prior to August 1998, the Company had a $90 million three-year revolving credit
facility with a group of banks which was retired with the proceeds from the
Facility. Borrowings of approximately $26.3 million were outstanding under this
revolving credit agreement at December 31, 1997. The outstanding borrowings were
collateralized by substantially all of the Company's assets and bore interest at
prime or LIBOR plus 1.10% to 1.65%, at the Company's option.
NOTE G -- SUBORDINATED NOTES PAYABLE
During 1998, the Company issued $175.0 million of subordinated notes, maturing
on August 15, 2008. The notes require semi-annual interest-only payments at 11%,
and are guaranteed by the Company's two principal subsidiaries. The notes are
redeemable at the Company's option, at any time on or after August 15, 2003, at
a set redemption price that varies depending upon the proximity of the
redemption date to final maturity. In addition, prior to August 15, 2001, the
Company may redeem up to 33.33% of the original aggregate principal with the
cash proceeds of one or more equity offerings, at a redemption price of 111%.
Upon a change of control, the holders of the subordinated notes have the right
to require the Company to redeem the notes.
F-13
<PAGE> 48
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G -- SUBORDINATED NOTES PAYABLE (continued)
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on additional indebtedness
and restricted payments.
The $5.0 million non-recurring financing costs expensed during 1998, relate to
fees paid for bridge financing necessary to complete the Thorn acquisition,
which was subsequently replaced with the subordinated notes.
The Company's direct and wholly-owned subsidiaries, consisting of ColorTyme,
Inc. and Advantage Companies, Inc. (collectively, the Guarantors), have fully,
jointly and severally, and unconditionally guaranteed the obligations of the
Company with respect to these notes. The only direct or indirect subsidiaries of
the Company that are not Guarantors are inconsequential subsidiaries. There are
no restrictions on the ability of any of the Guarantors to transfer funds to the
Company in the form of loans, advances or dividends, except as provided by
applicable law.
Set forth below is certain summarized combined financial information (within the
meaning of Rule 1-02(bb) of Regulation S-X) for the Guarantors, as of December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998. The summarized combined financial information includes ColorTyme, Inc.
and Advantage Companies, Inc. from the dates they were acquired or formed by the
Company (May 1996 and November 1998, respectively) and is presented using the
push-down basis of accounting. Separate financial statements and other
disclosures concerning the Guarantors have not been included because management
believes that they are not material to investors.
Balance Sheet Data
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
(In Thousands of Dollars) ------- -------
<S> <C> <C>
Accounts receivable, net $ 3,296 $ 2,809
Intangible assets, net 3,136 3,485
Deferred taxes 4,276 3,954
Total assets 11,676 11,866
Total liabilities 3,921 2,747
</TABLE>
Statements of Earnings Data
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
(In Thousands of Dollars) ------- ------- -------
<S> <C> <C> <C>
Total revenues $48,285 $42,036 $28,322
Franchise cost of merchandise sold 41,974 36,301 28,062
Net earnings 2,109 2,018 1,477
</TABLE>
F-14
<PAGE> 49
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H -- ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
(In Thousands of Dollars) -------- -------
<S> <C> <C>
Taxes other than income $ 13,869 $ 3,700
Income taxes payable -- 1,762
Accrued litigation costs 122,326 4,038
Accrued insurance costs 27,049 3,033
Accrued compensation and other 75,788 5,367
-------- -------
$239,032 $17,900
======== =======
</TABLE>
NOTE I -- REDEEMABLE CONVERTIBLE VOTING PREFERRED STOCK
During 1998, the Company issued 260,000 shares of redeemable convertible voting
preferred stock at $1,000 per share, resulting in aggregate proceeds of $260
million. Placement costs of approximately $0.5 million were charged against
these proceeds to arrive at the current carrying value.
The preferred stock is convertible, at any time, into shares of the Company's
common stock at a conversion price equal to $27.935 per share, and has a
liquidation preference of $1,000 per share, plus all accrued and unpaid
dividends. No distributions may be made to holders of common stock until the
holders of the preferred stock have received the liquidation preference.
Dividends accrue on a quarterly basis, at the rate of $37.50 per annum, per
share. Under the terms of the subordinated notes payable, preferred dividends
must be paid in additional preferred stock until 2003, after which the Company
can pay the dividends in either cash or additional preferred stock.
The preferred stock is not redeemable for four years, after which the Company
may, at its option, redeem the shares at 105% of the liquidation preference plus
accrued and unpaid dividends. Holders of the preferred stock have the right to
require the Company to redeem the preferred stock upon a change of control, if
the Company ceases to be listed on a United States national securities exchange
or the NASDAQ National Market System, or upon the eleventh anniversary of the
issuance of the preferred stock, at a price equal to the liquidation preference
value.
Holders of the preferred stock are entitled to two seats on the Company's Board
of Directors, and are entitled to vote on all matters presented to the holders
of the Company's common stock. The number of votes per preferred share is equal
to the number of votes associated with the underlying voting common stock into
which the preferred stock is convertible.
F-15
<PAGE> 50
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J -- INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
(In Thousands of Dollars) ------- ------- -------
<S> <C> <C> <C>
Current
Federal $ -- $15,028 $ 5,262
State 1,756 1,911 1,297
Foreign 1,576 1,572 1,556
------- ------- -------
Total current 3,332 18,511 8,115
------- ------- -------
Deferred
Federal 18,377 (351) 3,866
State 2,188 10 1,095
------- ------- -------
Total deferred 20,565 (341) 4,961
------- ------- -------
Total $23,897 $18,170 $13,076
======= ======= =======
</TABLE>
The income tax provision reconciled to the tax computed at the statutory Federal
rate is:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal benefit 5.1 4.6 5.1
Effect of foreign operations, net of foreign tax credits 0.3 0.4 0.5
Goodwill amortization 7.3 1.1 1.8
Other, net 1.4 0.2 0.6
---- ---- ----
Total 49.1% 41.3% 42.0%
==== ==== ====
</TABLE>
F-16
<PAGE> 51
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J -- INCOME TAXES (continued)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
(In Thousands of Dollars) -------- -------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards
Federal $ 27,359 $ 4,202
State 3,638 2,614
Rental merchandise 1,601 --
Accrued expenses 83,387 4,267
Intangible assets 39,984 1,079
Property assets 14,692 783
Other tax credit carryforwards 12,843 463
Other -- 124
-------- -------
183,504 13,532
Less valuation allowance 2,930 2,930
-------- -------
180,574 10,602
Deferred tax liability
Rental merchandise -- 4,123
Other 2,167 --
-------- -------
Net deferred tax asset $178,407 $ 6,479
======== =======
</TABLE>
The Company has Federal net operating loss carryforwards of approximately $78.1
million at December 31, 1998. Approximately $10.8 million of the Federal net
operating loss carryforwards were acquired in connection with purchased
companies, expire between 2005 and 2010, and are limited to approximately $3.5
million per year. The Company also has various state net operating loss
carryforwards. Because of uncertainties with respect to allocation of future
taxable income to the various states, a valuation allowance has been provided
against these carryforwards. The remaining $67.3 million of Federal net
operating loss carryforwards were generated in 1998 as a result of events
relating to the acquisition of Thorn such as the payment of change of control
bonuses and severance to former employees, the sale of Thorn's non-rent-to-own
businesses and its corporate headquarters, and the abandonment of certain
internally developed software. These carryforwards expire in 2018. At December
31, 1998, the Company had approximately $10.8 million of alternative minimum tax
credit carryforwards which can be used indefinitely to reduce future tax
liabilities.
F-17
<PAGE> 52
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and store facilities and certain delivery
vehicles. Rental expense was $51.4 million, $22.0 million and $15.7 million for
1998, 1997 and 1996, respectively. Future minimum rental payments under
operating leases with remaining noncancelable lease terms in excess of one year
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------ (In Thousands of Dollars)
<S> <C> <C>
1999 $ 67,463
2000 50,414
2001 31,618
2002 15,983
2003 7,911
Thereafter 11,364
--------
$184,753
========
</TABLE>
From time to time, the Company, along with its subsidiaries, is party to various
legal proceedings arising in the ordinary course of business. The majority of
the material proceedings involve claims that may be generally categorized as
recharacterization claims and statutory compliance claims. Recharacterization
claims generally involve claims (i) in states that do not have rent-to-own
legislation, (ii) that rent-to-own transactions are disguised installment sales
in violation of applicable state installment statutes, and (iii) that allege
greater damages. Statutory compliance claims generally involve claims (i) in
states that have rent-to-own legislation, (ii) that the operator failed to
comply with applicable state rental purchase statutes (e.g., notices and late
fees), and (iii) that allege lesser damages. Except as described below, the
Company is not currently a party to any material litigation.
In conjunction with the settlement of Robinson v. Thorn Americas, Inc., as
described below, the Company settled in principal its two existing class action
lawsuits in New Jersey alleging violations of the New Jersey Consumer Fraud Act,
Retail Installment Sales Act and usury laws for $11.5 million, subject to
preliminary and final approval of the court. This resulted in a charge to
earnings during 1998 which was classified as class action legal settlements.
The following litigation matters were acquired as a result of the acquisition of
Thorn. In connection with accounting for this acquisition, the Company made
appropriate purchase accounting adjustments for liabilities associated with
outstanding litigation.
Robinson v. Thorn Americas, Inc. In April 1994, the plaintiffs filed this class
action in New Jersey alleging violations of the New Jersey Retail Installment
Sales Act and the New Jersey Consumer Fraud Act, usury laws, unlawful
contractual penalty and conversion. This matter has been subsequently settled in
principal for approximately $48.5 million, subject to preliminary and final
approval of the court.
Burney v. Thorn Americas, Inc. In February 1997, the plaintiffs filed this class
action in Wisconsin alleging that Thorn's rent-to-own contracts violated the
Wisconsin Consumer Act and federal RICO and truth-in-lending statutes. This
matter has been subsequently settled for $16.25 million and has received
preliminary court approval.
The Company is also a defendant in statutory compliance class action lawsuits in
New York, Alabama and Massachusetts. The plaintiffs in these cases are seeking
damages, punitive damages, interest, attorneys fees and certain injunctive
relief. Although the Company intends to vigorously defend itself in these
actions, the ultimate outcome of these cases cannot presently be determined.
F-18
<PAGE> 53
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- COMMITMENTS AND CONTINGENCIES (continued)
In addition, two cases were assumed in the Thorn acquisition, for which the
Company received full indemnification from the seller for any incurred losses.
The details of these cases are as follows:
Fogie v. Thorn Americas, Inc. In December 1991, the plaintiffs filed this class
action in Minnesota alleging that Thorn's rent-to-own contracts violated
Minnesota's Consumer Credit Sales Act and the Minnesota General Usury Statute.
In April 1998, the court entered a final judgment against Thorn for
approximately $30 million. Under certain provisions of the judgment, Thorn may
receive certain credits against the judgment. The Company has filed a notice of
appeal from the damages finding only and is vigorously pursuing its appeal.
Willis v. Thorn Americas, Inc. In 1994, the plaintiffs filed this class action
in Pennsylvania alleging that prior to Pennsylvania's enactment of rent-to-own
legislation, Thorn's rent-to-own contracts were actually installment sales
contracts in violation of Pennsylvania law. This matter was settled for $9.35
million and has been paid during the year.
The Company is also involved in various other legal proceedings, claims and
litigation arising in the ordinary course of business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE L -- STOCK BASED COMPENSATION
In November 1994, the Company established a long-term incentive plan (the Plan)
for the benefit of certain key employees and directors. Under the plan, up to
4,500,000 shares of the Company's shares were reserved for issuance under stock
options, stock appreciation rights or restricted stock grants. Options granted
to employees under the plan become exercisable over a period of one to five
years from the date of grant and may be exercised up to a maximum of 10 years
from date of grant. Options granted to directors are exercisable immediately. As
a result of a stock award of 62,500 shares to an employee prior to 1996, the
Company charged earnings for compensation expense of $320,000 in 1996. Upon
termination of employment in 1996, the employee forfeited 37,500 shares in a
negotiated settlement with the Company. There have been no grants of stock
appreciation rights and all options had been granted with fixed prices. At
December 31, 1998, there were 604,750 shares reserved for issuance under the
Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for employee
stock options and continues to apply APB 25 for stock options granted under the
Plan. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Compensation
costs for all other stock-based compensation is accounted for under SFAS 123. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant date for options under the Plan consistent with the
F-19
<PAGE> 54
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- STOCK BASED COMPENSATION (continued)
methodology prescribed by SFAS 123, the Company's 1998, 1997 and 1996 net
earnings and earnings per share would be reduced to the pro forma amounts
indicated as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997 1996
(In Thousands of Dollars, except per share data) ------- ------- -------
<S> <C> <C> <C>
Net earnings allocable to common stockholders
As reported $20,804 $25,878 $18,026
Pro forma $17,580 $23,967 $16,469
Basic earnings per common share
As reported $ 0.84 $ 1.04 $ 0.73
Pro forma $ 0.71 $ 0.96 $ 0.67
Diluted earnings per common share
As reported $ 0.83 $ 1.03 $ 0.72
Pro forma $ 0.70 $ 0.95 $ 0.66
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 50 percent; risk-free interest rates ranging
from 4.34 to 6.92 percent; no dividend yield; and expected lives of seven years.
Additional information with respect to options outstanding under the Plan at
December 31, 1998, and changes for each of the three years in the period then
ended was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,324,250 $16.39 1,142,050 $15.74 906,000 $ 7.10
Granted 2,680,000 26.65 859,000 16.54 695,000 22.22
Exercised (168,862) 8.95 (113,925) 8.39 (109,700) 7.45
Forfeited (341,625) 18.28 (562,875) 17.13 (349,250) 13.81
--------- --------- ---------
Outstanding at end of
year 3,493,763 $23.96 1,324,250 $16.39 1,142,050 $15.74
========= ========= =========
Options exercisable at
end of year 377,263 $16.43 282,375 $14.53 127,800 $ 9.64
</TABLE>
The weighted average fair value per share of options granted during 1998, 1997
and 1996, was $15.22, $9.93, and $13.35, respectively, all of which were granted
at market value. Information about stock options outstanding at December 31,
1998 is summarized as follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
- ------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$3.34 to $6.67 205,163 6.36 years $ 6.56
$6.68 to $18.50 441,850 7.94 years $15.11
$18.51 to $28.50 2,846,750 9.51 years $26.58
---------
3,493,763
=========
</TABLE>
F-20
<PAGE> 55
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- STOCK BASED COMPENSATION (continued)
<TABLE>
<CAPTION>
Options exercisable
---------------------------------
Number Weighted average
Range of exercise prices exercisable exercise price
- ------------------------ ----------- ----------------
<S> <C> <C>
$3.34 to $6.67 111,038 $ 6.46
$6.68 to $18.50 123,475 $15.13
$18.51 to $28.50 142,750 $25.30
-------
377,263
=======
</TABLE>
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, senior
debt and subordinated notes payable. The carrying amount of cash and cash
equivalents approximates fair value at December 31, 1998 and 1997, because of
the short maturities of these instruments. The Company's senior debt is variable
rate debt that reprices frequently and entails no significant change in credit
risk, and as a result, fair value approximates carrying value. The fair value of
the subordinated notes payable is estimated based on discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The fair value of the subordinated notes is
$177.6 million, which is $2.6 million in excess of their carrying value of $175
million. Information relating to the fair value of the Company's interest rate
swap agreements is set forth in Note F.
NOTE N -- EARNINGS PER SHARE
Summarized basic and diluted earnings per common share were calculated as
follows:
<TABLE>
<CAPTION>
1998
-------------------------------------
Net Earnings Shares Per Share
(In Thousands of Dollars, except per share data) ------------ ------ ---------
<S> <C> <C> <C>
Basic earnings per common share $20,804 24,698 $0.84
Effect of dilutive stock options -- 405
------- ------
Diluted earnings per common share $20,804 25,103 $0.83
======= ======
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
Net Earnings Shares Per Share
------------ ------ ---------
<S> <C> <C> <C>
Basic earnings per common share $25,878 24,844 $1.04
Effect of dilutive stock options -- 350
------- ------
Diluted earnings per common share $25,878 25,194 $1.03
======= ======
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
Net Earnings Shares Per Share
------------ ------ ---------
<S> <C> <C> <C>
Basic earnings per common share $18,026 24,656 $0.73
Effect of dilutive stock options -- 409
------- ------
Diluted earnings per common share $18,026 25,065 $0.72
======= ======
</TABLE>
The assumed conversion of the redeemable convertible preferred stock issued in
1998 would have an anti-dilutive effect on diluted earnings per common share for
1998 and accordingly has been excluded from the computation thereof.
F-21
<PAGE> 56
Rent-A-Center, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- UNAUDITED QUARTERLY DATA
Summarized quarterly financial data for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(In Thousands of Dollars, except per 1st Quarter 2nd Quarter 3rd Quarter(1) 4th Quarter(2)
share data) ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue $ 90,233 $103,313 $265,886 $350,284
Operating profit 13,721 15,547 30,467 31,078
Net earnings 7,856 8,529 4,643 3,730
Basic earnings per share 0.32 0.34 0.13 0.05
Diluted earnings per share 0.31 0.34 0.13 0.05
</TABLE>
- ---------------
(1) During the third quarter of 1998, the Company incurred non-recurring
financing costs of $5.0 million associated with the interim financing
utilized in the Thorn acquisition, and $2.5 million in losses on disposed
Renters Choice signage as a result of the name change to "Rent-A-Center".
(2) During the fourth quarter of 1998, the Company charged $11.5 million to
earnings for certain class action legal settlements as described in Note K.
<TABLE>
<CAPTION>
(In Thousands of Dollars, except per 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
share data) ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Revenue $74,587 $80,803 $83,864 $92,287
Operating profit 9,639 11,341 11,766 13,192
Net earnings 5,412 6,357 6,724 7,385
Basic earnings per share 0.22 0.25 0.27 0.30
Diluted earnings per share 0.22 0.25 0.27 0.29
</TABLE>
NOTE P -- RELATED PARTY TRANSACTIONS
On August 18, 1998, the Company repurchased 990,099 shares of its common stock
for $25 million from J. Ernest Talley, its Chairman of the Board and Chief
Executive Officer. The repurchase of Mr. Talley's stock was approved by the
Company's Board of Directors on August 5, 1998. The price was determined by a
pricing committee, and was approved by the Board of Directors of the Company,
with Mr. Talley abstaining. The pricing committee met on August 17, 1998, after
the close of the markets, and Mr. Talley's shares were repurchased at the price
of $25.25 per share, the closing price of the Company's common stock on August
17, 1998.
F-22
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Agreement and Plan of Reorganization dated May 15, 1996,
among Renters Choice, Inc., ColorTyme, Inc., and CT
Acquisition Corporation (Pursuant to the rules of the
Commission, the schedules and exhibits have been omitted.
Upon the request of the Commission, Renters Choice will
supplementally supply such schedules and exhibits to the
Commission.)
2.2(2) -- Asset Purchase Agreement, dated May 1, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.3(3) -- Letter Agreement, dated as of May 26, 1998, by and among
Renters Choice, Inc., Central Rents, Inc., Central Rents
Holding, Inc. and Banner Holdings, Inc. (Pursuant to the
rules of the Commission, the schedules and exhibits have
been omitted. Upon the request of the Commission, Renters
Choice will supplementally supply such schedules and
exhibits to the Commission.)
2.4(4) -- Stock Purchase Agreement, dated as of June 16, 1998,
among Renters Choice, Inc., Thorn International BV and
Thorn plc (Pursuant to the rules of the Commission, the
schedules and exhibits have been omitted. Upon the
request of the Commission, the Company will
supplementally supply such schedules and exhibits to the
Commission.)
3.1(5) -- Amended and Restated Certificate of Incorporation of
Renters Choice
3.2(6) -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Renters Choice
3.3(7) -- Amended and Restated Bylaws of Renters Choice
3.4(8) -- Amendment to the Amended and Restated Bylaws of Renters
Choice
4.1(9) -- Form of Certificate evidencing Common Stock
4.2(10) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series A Preferred Stock of
Renters Choice, Inc.
4.3(11) -- Certificate of Designations, Preferences and Relative
Rights and Limitations of Series B Preferred Stock of
Renters Choice, Inc.
4.4(12) -- 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(13) -- Form of Certificate evidencing Series A Preferred Stock
4.6(14) -- Form of Exchange Note
4.7(15) -- 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(16) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term
Incentive Plan
10.2(17) -- Revolving Credit Agreement dated as of November 27, 1996
between Comerica Bank, as agent, Renters Choice, Inc. and
certain other lenders
10.3(18) -- Portfolio Acquisition Agreement dated May 15, 1996, by
and among Renters Choice, Inc., ColorTyme Financial
Services, Inc., and STI Credit Corporation
10.4(19) -- Employment Agreement, dated March 28, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5(20) -- Stock Option Agreement, dated April 1, 1997, by and
between Renters Choice, Inc. and Danny Z. Wilbanks
10.6(21) -- 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
10.7(22) -- 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
10.8(23) -- $175,000,000 Senior Subordinated Credit Agreement, dated
as of August 5, 1998, among Renters Choice, Inc., certain
other lenders and the Chase Manhattan Bank
10.9(24) -- Stockholders Agreement, dated as of August 5, 1998, by
and among Apollo Investment Fund IV, L.P., Apollo
Overseas Partners IV, L.P., J. Ernest Talley, Mark E.
Speese, Renters Choice, Inc., and certain other persons
10.10(25) -- 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
10.11(26) -- Registration Rights Agreement, dated August 5, 1998, by
and between Renters Choice, Inc., Apollo Investment Fund
IV, L.P., and Apollo Overseas Partners IV, L.P., related
to the Series B Convertible Preferred Stock
10.13(27) -- Stock Purchase Agreement, dated August 5, 1998, among
Renters Choice, Inc., Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P.
10.14(28) -- Exchange and Registration Rights Agreement, dated August
18, 1998, by and among Renters Choice, Inc. and Chase
Securities Inc., Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC and Credit Suisse First Boston
Corporation
10.15* -- Employment Agreement, dated October 1, 1998, by and
between Rent-A-Center, Inc. and Bradley W. Denison
21.1(29) -- Subsidiaries of Registrant
27* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(2) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated May 28, 1998
(3) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current
Report on Form 8-K dated May 15, 1996
(4) Incorporated herein by reference to Exhibit 2.9 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(5) 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
(6) 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
(7) Incorporated herein by reference to Exhibit 3.4 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1994
<PAGE> 59
(8) Incorporated herein by reference to Exhibit 3.3 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(9) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form
S-4 filed on January 19, 1999
(10) 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
(11) 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
(12) Incorporated herein by reference to Exhibit 4.4 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(13) Incorporated herein by reference to Exhibit 4.5 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(14) Incorporated herein by reference to Exhibit 4.6 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(15) Incorporated herein by reference to Exhibit 4.7 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(16) Incorporated herein by reference to Exhibit 99.1 to the registrant's
Registration Statement on Form S-8 (File No. 333- 53471)
(17) Incorporated herein by reference to Exhibit 10.2 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 1996
(18) Incorporated herein by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K dated May 15, 1996
(19) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(20) Incorporated herein by reference to Exhibit 10.16 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(21) 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
(22) 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
(23) Incorporated herein by reference to Exhibit 10.20 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(24) Incorporated herein by reference to Exhibit 10.21 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(25) 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
(26) Incorporated herein by reference to Exhibit 10.23 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(27) Incorporated herein by reference to Exhibit 2.10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(28) Incorporated herein by reference to Exhibit 10.14 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
(29) Incorporated herein by reference to Exhibit 21.1 to the registrant's
Registration Statement Form S-4 filed on January 19, 1999
<PAGE> 1
EXHIBIT 10.15
[RENT-A-CENTER, INC. LETTERHEAD]
MEMORANDUM
Date: October 1, 1998
To: Brad Denison
From: Ernie Talley
Re: General Counsel Position
This memo will confirm your employment with the combined companies of Renters
Choice and Rent-A-Center as General Counsel and Senior Vice President. The
summary of the compensation package for the General Counsel position as
described follows:
Base Salary: $235,000 beginning October 5, 1998
Bonus Program: $250 paid per quarter for each 1% of profit
Stock Options: 50,000 shares to vest as follows:
20,000 shares in four years - pro-rata
15,000 shares upon passage of New Jersey law
15,000 shares upon passage of Wisconsin law
All options to vest upon passage of federal
law if that occurs earlier.
Customary Benefits
Vacation: 3 weeks / 4 weeks after two years
Severance: One year base pay
Relocation: Moving and realtors fees for sale of Wichita home
/s/ J. ERNEST TALLEY
- -------------------------------------
J. Ernest Talley
Chairman and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS
FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,797
<SECURITIES> 0
<RECEIVABLES> 3,386
<ALLOWANCES> 90
<INVENTORY> 97,156<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 105,709
<DEPRECIATION> 20,691
<TOTAL-ASSETS> 1,502,989
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 175,000
259,476
0
<COMMON> 251
<OTHER-SE> 154,662<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,502,989
<SALES> 85,821<F4>
<TOTAL-REVENUES> 809,716
<CGS> 74,942<F5>
<TOTAL-COSTS> 668,360
<OTHER-EXPENSES> 50,543<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,158
<INCOME-PRETAX> 48,655
<INCOME-TAX> 23,897
<INCOME-CONTINUING> 24,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,758
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.83
<FN>
<F1>RENTAL MERCHANDISE, HELD FOR RENT.
<F2>BALANCE SHEET IS UNCLASSIFIED.
<F3>ADDITIONAL PAID IN CAPITAL, RETAINED EARNINGS AND TREASURY STOCK.
<F4>STORE AND FRANCHISE MERCHANDISE SALES.
<F5>STORE AND FRANCHISE COST OF MERCHANDISE SOLD.
<F6>GENERAL AND ADMINISTRATIVE EXPENSE, AMORTIZATION OF INTANGIBLES AND CLASS
ACTION LITIGATION SETTLEMENTS.
</FN>
</TABLE>
