SEC Filing | Upbound Group, Inc.

1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 Commission File Number 0-25370 RENT-A-CENTER, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-1024367 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5700 Tennyson Parkway, Third Floor Plano, Texas 75024 (972) 801-1100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 8, 2000: Class Outstanding -------------------------------------- ----------- Common stock, $.01 par value per share 24,320,896

2 RENT-A-CENTER, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3 Consolidated Statements of Earnings for the three months ended 4 March 31, 2000 and 1999 Consolidated Statements of Cash Flows for the three months ended 5 March 31, 2000 and 1999 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 8 and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES Exhibit 27.1 2

3 RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars) March 31, December 31, 2000 1999 ------------ ------------ Unaudited ASSETS Cash and cash equivalents $ 14,093 $ 21,679 Rental merchandise, net On rent 458,195 425,469 Held for rent 100,901 105,754 Accounts receivable - trade 4,630 3,883 Prepaid expenses and other assets 26,580 27,867 Property assets, net 82,815 82,657 Deferred income taxes 110,367 110,367 Intangible assets, net 701,107 707,324 ----------- ----------- $ 1,498,688 $ 1,485,000 =========== =========== LIABILITIES Senior debt $ 628,950 $ 672,160 Subordinated notes payable 175,000 175,000 Accounts payable - trade 60,972 53,452 Accrued liabilities 135,201 106,796 ----------- ----------- 1,000,123 1,007,408 COMMITMENTS AND CONTINGENCIES -- -- PREFERRED STOCK Redeemable convertible voting preferred stock, net of placement costs, $.01 par value; 5,000,000 shares authorized; 273,992 and 271,426 shares issued and outstanding in 2000 and 1999, respectively 273,468 270,902 STOCKHOLDERS' EQUITY Common stock, $.01 par value; 50,000,000 shares authorized; 25,305,520 and 25,297,458 shares issued in 2000 and 1999, respectively 253 253 Additional paid-in capital 105,719 105,627 Retained earnings 144,125 125,810 ----------- ----------- 250,097 231,690 Treasury stock, 990,099 shares at cost in 2000 and 1999 (25,000) (25,000) ---------- ----------- 225,097 206,690 ----------- ----------- $ 1,498,688 $ 1,485,000 =========== =========== The accompanying notes are an integral part of these statements. 3

4 RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands of Dollars, except per share data) Three months ended March 31, ---------------------------- 2000 1999 --------- --------- Unaudited Revenues Store Rentals and fees $ 350,320 $ 301,707 Merchandise sales 27,339 31,886 Other 492 858 Franchise Merchandise sales 12,891 8,821 Royalty income and fees 1,484 1,425 --------- --------- 392,526 344,697 Operating expenses Direct store expenses Depreciation of rental merchandise 71,728 64,466 Cost of merchandise sold 22,830 25,916 Salaries and other expenses 208,525 186,430 Franchise cost of merchandise sold 12,441 8,542 --------- --------- 315,524 285,354 General and administrative expenses 11,475 11,251 Amortization of intangibles 6,975 6,390 --------- --------- Total operating expenses 333,974 302,995 Operating profit 58,552 41,702 Interest expense 19,008 18,642 Interest income (257) (286) --------- --------- Earnings before income taxes 39,801 23,346 Income tax expense 18,912 11,319 --------- --------- NET EARNINGS 20,889 12,027 Preferred dividends 2,554 2,441 --------- --------- Net earnings allocable to common stockholders $ 18,335 $ 9,586 ========= ========= Basic earnings per common share $ 0.75 $ 0.40 ========= ========= Diluted earnings per common share $ 0.61 $ 0.35 ========= ========= The accompanying notes are an integral part of these statements. 4

5 RENT-A-CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) Three months ended March 31, ---------------------------- 2000 1999 --------- --------- Unaudited Cash flows from operating activities Net earnings $ 20,889 $ 12,027 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise 71,728 64,466 Depreciation of property assets 8,103 7,663 Amortization of intangibles 6,975 6,390 Amortization of financing fees 652 652 Changes in operating assets and liabilities, net of effects of acquisitions Rental merchandise (98,726) (68,226) Accounts receivable - trade (747) 231 Prepaid expenses and other assets 560 1,317 Accounts payable - trade 7,520 11,343 Accrued liabilities 28,599 (24,131) -------- -------- Net cash provided by operating activities 45,553 11,732 -------- -------- Cash flows from investing activities Purchase of property assets (8,613) (9,118) Proceeds from sale of property assets 188 316 Acquisitions of businesses (1,596) -- -------- -------- Net cash used in investing activities (10,021) (8,802) -------- -------- Cash flows from financing activities Exercise of stock options 92 649 Proceeds from debt 20,980 11,226 Repayments of debt (64,190) (32,387) -------- -------- Net cash used in financing activities (43,118) (20,512) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (7,586) (17,582) Cash and cash equivalents at beginning of period 21,679 33,797 -------- -------- Cash and cash equivalents at end of period $ 14,093 $ 16,215 ======== ======== The accompanying notes are an integral part of these statements. 5

6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The interim financial statements of Rent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Commission's rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 1999. In our opinion, the accompanying unaudited interim financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly our results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. 2. EARNINGS PER SHARE Basic and diluted earnings per common share is computed based on the following information: (In Thousands, except for per share data) Three months ended March 31, 2000 ---------------------------------- Net earnings Shares Per share ------------ -------- --------- Basic earnings per common share $18,335 24,311 $ 0.75 Effect of dilutive stock options -- 117 Effect of convertible preferred stock 2,554 9,808 ------- ------- Diluted earnings per common share $20,889 34,236 $ 0.61 ======= ======= ======== (In Thousands, except for per share data) Three months ended March 31, 1999 ---------------------------------- Net earnings Shares Per share ------------ -------- --------- Basic earnings per common share $ 9,586 24,115 $ 0.40 Effect of dilutive stock options -- 542 Effect of convertible preferred stock 2,441 9,449 ------- ------- Diluted earnings per common share $12,027 34,106 $ 0.35 ======= ======= ======== 3. PREFERRED STOCK DIVIDENDS On March 31, 2000 we paid a 3.75% dividend on our redeemable convertible voting preferred stock. This dividend was paid through the issuance of 2,566 shares of in-kind preferred stock to holders of record on December 31, 1999. 6

7 4. SUBSIDIARY GUARANTORS Under our indenture governing the terms of our subordinated notes, our direct and wholly owned subsidiaries, ColorTyme, Inc. and Advantage Companies, Inc., have fully, jointly and severally, and unconditionally guaranteed our obligations under the notes. We have one indirect subsidiary that is not a guarantor of the notes because it is inconsequential. There are no restrictions on any of the guarantors to transfer funds to us in the forms of loans, advances or dividends, except as provided by applicable law. The following summarized financial information includes ColorTyme, Inc. and Advantage Companies, Inc. on a combined basis. Separate financial statements and other disclosures concerning the guarantors have not been included because management believes that they are not material to investors. Parent Subsidiary Company Guarantors Eliminations Consolidated ------------ ------------ ------------ ------------ (In Thousands of Dollars) Balance Sheet Data: March 31, 2000 Rental merchandise, net $ 559,096 $ -- $ -- $ 559,096 Intangible assets, net 334,520 366,587 -- 701,107 Total assets 1,135,788 377,359 (14,459) 1,498,688 Total debt 628,950 -- -- 628,950 Total liabilities 995,942 4,181 -- 1,000,123 December 31, 1999 Rental merchandise, net $ 531,223 $ -- $ -- $ 531,223 Intangible assets, net 337,486 369,838 -- 707,324 Total assets 1,119,360 380,099 (14,459) 1,485,000 Total debt 672,160 -- -- 672,160 Total liabilities 1,002,890 4,518 -- 1,007,408 Statements of Earnings Data: For the three months ended March 31, 2000 Total revenues $ 378,169 $ 14,357 $ -- $ 392,526 Direct store expenses 303,083 -- -- 303,083 Franchise cost of merchandise sold -- 12,441 -- 12,441 Net earnings (loss) 23,294 (2,405) -- 20,889 For the three months ended March 31, 1999 Total revenues $ 334,450 $ 10,247 $ -- $ 344,697 Direct store expenses 276,812 -- -- 276,812 Franchise cost of merchandise sold -- 8,542 -- 8,542 Net earnings (loss) 14,592 (2,565) -- 12,027 7

8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate" or "believe." We believe that the expectations reflected in these forward-looking statements are accurate. However, we cannot assure you that these expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to these differences include, but are not limited to: o our ability to acquire additional rent-to-own stores on favorable terms; o our ability to enhance the performance of these acquired stores; o uncertainties regarding the ability to open new stores; o the passage of legislation adversely affecting the rent-to-own industry; o interest rates; o our ability to collect on our rental purchase agreements at the current rate; and o 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 in our Annual Report on Form 10-K for our fiscal year ended December 31, 1999. 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. OUR BUSINESS We are the largest operator in the United States rent-to-own industry with an approximate 26% market share based on store count. At March 31, 2000, we operated 2,073 company-owned stores and had 361 franchised stores, providing high quality durable goods in 50 states, the District of Columbia and Puerto Rico. We have pursued an aggressive growth strategy since we were acquired in 1989 by J. Ernest Talley, our Chairman of the Board and Chief Executive Officer. We have sought to acquire under-performing stores to which we could apply our operating strategies. The acquired stores benefit from our administrative network, improved product mix, sophisticated management information systems and the greater purchasing power of a larger organization. Since May 1993, our store base has grown from 27 to 2,073 primarily through acquisitions. During this period, we acquired over 2,000 company-owned stores and over 300 franchised stores in more than 60 separate transactions, including six transactions where we acquired in excess of 70 stores. As a result, we have gained significant experience in the acquisition and integration of other rent-to-own operators and believe that the fragmented nature of the industry will result in ongoing growth opportunities. RECENT DEVELOPMENTS During 2000, we resumed our strategy of increasing our store base and annual revenues and profits through acquisitions. During the first quarter of 2000, we acquired five stores for approximately $1.6 million in cash in three separate transactions. As at the date of this report, we have acquired a further nine stores for approximately $3.9 million in cash in one transaction during the second quarter of 2000. It is our intention to increase the number of stores in which we operate by an average of approximately 10-15% per annum over the next several years. 8

9 Since the acquisition of Central Rents and Thorn Americas in July and August of 1998, respectively, cashflows from operating activities have continued to improve. In the three months ended March 31, 2000, we generated positive cashflow from operations of $45.6 million, despite the continued investment in new merchandise necessary to achieve the desired product mix in all of our stores. Under the terms of our senior credit facility, we were obligated to repay $2.0 million of principal in 1999. However, our stronger than anticipated financial performance and cash flow position enabled us to meet this obligation and to pre-pay approximately $35.7 million of our term loans during 1999. In line with our intentions of making further principal repayments on our senior debt whenever our cash flow position is sufficiently strong, we re-paid $43.2 million of our term loans during the three months ended March 31, 2000. In conjunction with these payments, we amended our senior credit facility to allow us to make our year 2000 principal repayments early. As a result, we only have an obligation to repay a further $3.0 million of principal in 2000. In February 2000, we announced that Mr. John Madden would serve as our national advertising spokesman for our new, fully integrated advertising campaign that was launched in April 2000. Mr. Madden appears in advertising media used in the campaign, including television and radio commercials, print, direct response and in-store signage. We believe that Mr. Madden has a unique balance of multi-cultural appeal, a strong awareness amongst both men and women, and possesses a personality that people of all ages enjoy. We believe that he will help us capture new customers and help us establish a more powerful identity for Rent-A-Center. On April 6, 2000, we announced that our board of directors had authorized an open market share repurchase program of up to an aggregate of $25 million of our common stock. Under this program, we may, from time to time, purchase shares of our common stock, subject to market conditions. The share repurchase plan reflects our belief that, at current prices, our shares are undervalued, particularly in light of our long-term growth opportunities and our successful track record in achieving earnings growth through the improvements made in existing stores. The share repurchase program may be implemented or discontinued at any time. On April 25, 2000, we announced that in June 2000, we will begin offering Internet access to our customers through RentACenter.com. Unlike traditional Internet Service Providers, this Internet service will be available to customers on a weekly basis with no long-term commitment. Service can be paid for at any of our stores across the country without the need for a credit card or a checking account. We believe that this new service is the only one of its kind and could establish RentACenter.com as the leading ISP for those who may be unable to obtain Internet service through existing market participants like America Online. Access to the Internet through RentACenter.com will be available to everyone and will not be limited to customers that have a computer or other item on rent from us. For a price of approximately $5.99 per week, customers will receive unlimited hours and access to the Internet. In addition, RentACenter.com will provide complimentary services including e-mail, personal web space, access to shopping, chat rooms, games and more. We believe our weekly Internet service will open the door for thousands of middle and lower income households to gain access to the World Wide Web. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 Total revenue increased by $47.8 million, or 13.9%, to $392.5 million for 2000 from $344.7 million for 1999. The increase in total revenue is directly attributable to our near singular focus of ensuring a successful integration of the stores acquired from Central Rents and Thorn Americas. This focus resulted in same store revenues increasing by $45.8 million, or 14.2%, to $369.2 million for 2000 from $323.4 million in 1999. Same store revenues represent those revenues earned in stores that were operated by us for the entire three month period ending March 31, 2000 and 1999. This improvement was primarily attributable to an increase in both the number of items on rent and in revenue earned per item on rent. Depreciation of rental merchandise increased by $7.3 million, or 11.3%, to $71.7 million for 2000 from $64.5 million for 1999. Depreciation of rental merchandise expressed as a percent of store rentals and fees revenue decreased from 21.4% in 1999 to 20.5% in 2000. This decrease is primarily attributable to the stores acquired from Central Rents and Thorn Americas experiencing depreciation rates of 22.9% and 29.8%, respectively, upon their acquisition in 1998. These rates have decreased following the implementation of our pricing strategies and inventory management practices. Salaries and other expenses expressed as a percentage of total store revenue decreased to 55.1% for 2000 from 55.7% for 1999. General and administrative expenses expressed as a percent of total revenue decreased from 3.3% in 1999 to 2.9% in 2000. These decreases are directly attributable to the increased revenues from the stores acquired from Central Rents and Thorn Americas, allowing us to leverage our fixed and semi-fixed costs over the larger revenue base. Operating profit increased by $16.9 million, or 40.4%, to $58.6 million for 2000 from $41.7 million for 1999. Operating profit as a percentage of total revenue increased to 14.9% in 2000 from 12.1% in 1999. This increase is attributable to the improved profitability in the stores acquired from Central Rents and Thorn Americas. Net earnings increased by $8.9 million, or 73.7%, to $20.9 million in 2000 from $12.0 million in 1999. 9

10 LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity requirements are for debt service under our senior credit facilities, the subordinated notes, other indebtedness outstanding, working capital and capital expenditures. At March 31, 2000, we had in place an $791.2 million senior credit facility. The amounts outstanding under our senior credit facility and our subordinated notes as of this date were approximately $629.0 million and $175.0 million, respectively. We purchased $133.1 million of rental merchandise during the three months ended March 31, 2000. For the three months ended March 31, 2000, cash provided by operating activities increased by $33.8 million, from $11.7 million in 1999 to $45.6 million in 2000. This increase was primarily the result of the increased profitability of the acquired Central Rents and Thorn Americas stores, reductions in the amounts of acquisition-related liabilities paid in 2000 over 1999, offset by the increased investment in rental merchandise. Cash used in investing activities increased by $1.2 million from $8.8 million in 1999 to $10.0 million in 2000. Cash used in financing activities was $43.1 million in 2000, which represents the reduction of our senior debt as discussed earlier, compared to $20.5 million of net repayments made in 1999. Borrowings under the senior credit facility bear interest at varying rates equal to 0.25% to 1.75% over the designated prime rate, which was 9.0% per annum at March 31, 2000, or 1.25% to 2.75% over LIBOR, which was 6.14% at March 31, 2000, at our option. At March 31, 2000, the average rate on outstanding borrowings was 8.38%. We have entered into certain interest rate protection agreements with two banks. Under the terms of the interest rate agreements, the LIBOR rate used to calculate the interest rate charged on $500.0 million of the outstanding senior term debt has been fixed at an average rate of 5.59%. Individually, these interest rate agreements have amounts of $250.0 million, $140.0 million, and $110.0 million, and expire in September 2001, August 2003, and September 2003, respectively. Borrowings are collateralized by a lien on substantially all of our assets. A commitment fee equal to 0.25% to 0.50% of the unused portion of the term loan facility is payable quarterly. The senior credit facility includes certain net worth and fixed charge coverage requirements, as well as covenants which restrict additional indebtedness and the disposition of assets not in the ordinary course of business. Principal and interest payments under the senior credit facilities, the subordinated notes, and other indebtedness represent significant liquidity requirements for us. As of March 31, 2000, we owed approximately $804.0 million under our various debt agreements and our subordinated notes. Under our various debt agreements, we will be required to make minimum principal payments totaling approximately $3.0 million in 2000, $30.1 million in 2001, $33.4 million in 2002, $36.7 million in 2003, and $76.6 million in 2004, plus applicable interest. Loans under the senior credit facilities not covered by interest rate swap agreements bear interest at floating rates based upon the interest rate option selected by us. As discussed earlier, we re-paid $43.2 million of our senior debt during the first quarter of 2000. Capital expenditures are made generally to maintain existing operations and for new capital assets in new and acquired stores. We spent $8.6 million on capital expenditures during the three months ended March 31, 2000, and expect to spend a total of approximately $40.0 million on capital expenditures in the year ended December 31, 2000. Management is continuing to focus its efforts on enhancing the operations and the depth of management in the acquired stores. However, we have also resumed our strategy of increasing our store base and annual revenues and profits through the opening of new stores, as well as through opportunistic acquisitions. As of the date of this report, we have acquired 14 stores for $5.5 million in cash in four separate transactions during 2000. It is our intention to increase the number of stores in which we operate by an average of approximately 10-15% per year over the next several years. We plan to accomplish our future growth through selective and opportunistic acquisitions, with an increasing emphasis on new store development. Typically, a newly opened store is profitable on a monthly basis in the sixth to seventh month after its initial opening. Historically, a typical store has achieved break-even profitability in 12 to 15 10

11 months after its initial opening. Total financing requirements of a typical new store approximates $0.4 million, with roughly 80% to 85% of that amount relating to the purchase of rental merchandise inventory. Historically, a newly opened store has achieved results consistent with other stores that have been operating within our system for greater than two years by the end of its third year of operation. There can be no assurance that we will open any new stores in the future, or as to the number, location or profitability thereof. We believe that the cashflow generated from operations, together with amounts available under our senior credit facilities, will be sufficient to fund our debt service requirements, working capital needs, capital expenditures, litigation costs, and our store expansion intentions during 2000. At March 31, 2000, we had $111.3 million available under our various debt agreements. In addition, to provide any additional funds necessary for the continued pursuit of our operating and growth strategies, we may incur from time to time additional short or long-term bank indebtedness and may issue, in public or private transactions, equity and debt securities. The availability and attractiveness of any outside sources of financing will depend on a number of factors, some of which will relate to our financial condition and performance, and some of which will be beyond our control, such as prevailing interest rates and general economic conditions. There can be no assurance additional financing will be available, or if available, will be on terms acceptable to us. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards requiring that derivative instruments, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or a liability at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. We will adopt SFAS 133 no later than the first quarter of 2001. SFAS 133 is not expected to have a material impact on our consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE SENSITIVITY As of March 31, 2000, we had $175.0 million in subordinated notes outstanding at a fixed interest rate of 11.0%. At this date, we also had $581.2 million in term loans outstanding and $47.8 million outstanding under a multi-draw facility indexed to the LIBOR rate. The subordinated notes mature on August 15, 2008 and have a fixed interest rate of 11.0%. The fair value of the subordinated notes is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The fair value of the subordinated notes at March 31, 2000 was $173.3 million, which is $1.7 million below their carrying value. Unlike the subordinated notes, the $581.2 million in term loans and the $47.8 million outstanding under a multi-draw facility have variable interest rates indexed to current LIBOR rates. We entered into $500.0 million in interest rate swap agreements that lock in a LIBOR rate of 5.59%, hedging the risk of increased interest costs. Individually, these interest rate agreements have amounts of $250.0 million, $140.0 million, and $110.0 million, and expire in September 2001, August 2003, and September 2003, respectively. Given the current capital structure, including our interest rate swap agreements, we have $129.0 million, or 16.0% of our total debt, in variable rate debt. A hypothetical 1.0% change in the LIBOR rate would affect pre-tax earnings by approximately $0.3 million for the three month period. 11

12 MARKET RISK Market risk is the potential change in an instrument's value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by the Board of Directors and senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings. INTEREST RATE RISK We hold long-term debt with variable interest rates indexed to prime or LIBOR that exposes us to the risk of increased interest costs if interest rates rise. To reduce the risk related to unfavorable interest rate movements, we have entered into certain interest rate swap contracts on $500.0 million of debt to pay a fixed rate of 5.59%. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. 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: o in states that do not have rent-to-own legislation; o that rent-to-own transactions are disguised installment sales in violation of applicable state installment statutes; and o that allege greater damages. Statutory compliance claims generally involve claims: o in states that have rent-to-own legislation; o that the operator failed to comply with applicable state rental purchase statutes, such as notices and late fees; and o that allege lesser damages. Except as described below, we are not currently a party to any material litigation. Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in November 1997 in New York state court. 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: o class certification; o injunctive relief requiring Thorn Americas to (A) cease certain marketing practices, (B) price their rental purchase contracts in certain ways, and (C) disclose effective interest; o unspecified compensatory and punitive damages; o rescission of the class members contracts; o an order placing in trust all moneys received by Thorn Americas in connection with the rental of merchandise during the class period; o treble damages, attorney's fees, filing fees and costs of suit; o pre- and post-judgment interest; and o any further relief granted by the court. This suit also alleges violations relating to late fees, harassment, undisclosed charges, and the ease of use and accuracy of its payment records. The plaintiffs did not specify a specific amount on their damages request. The proposed class includes all New York residents who were party to Thorn Americas' rent-to-own contracts from November 26, 1991 through November 26, 1997. We are vigorously defending this action and on September 24, 1998, filed motions to deny class certification and dismiss the complaint. Plaintiff responded and filed a motion for summary judgment asking the court to declare that the transaction includes an undisclosed interest component. The court denied our motion to dismiss and plaintiffs' motion for summary judgement on August 24, 1999. Both sides are appealing the court's ruling to the Appellate Division. The appeal is scheduled for oral argument in June 2000. There can be no assurance that our position will prevail, or that we will be found not to have any liability. This matter was assumed by us pursuant to the Thorn Americas acquisition, and appropriate purchase accounting adjustments were made for such contingent liabilities. 12

13 Murray v. Rent-A-Center, Inc. In May 1999, the plaintiffs filed a putative nationwide class action in federal court in Missouri, alleging that we have discriminated against African Americans in our hiring, compensation, promotion and termination policies. Plaintiffs alleged no specific amount of damages in their complaint. We have filed an answer in the matter denying plaintiffs' allegations and intend to vigorously defend this action. No discovery in this litigation has occurred to date. Members of the regional class defined in our completed settlement of the Allen v. Thorn Americas, Inc. litigation would not be included in the Murray case. We believe plaintiffs' claims in this suit are without merit. However, given the early stage of this proceeding, there can be no assurance that we will be found to have no liability. Otero v. Rent-A-Center, Inc. In September 1999, the plaintiff filed this putative class action in Los Angeles Superior Court in California alleging our classification of and pay to our executive assistant managers and our inside/outside managers is contrary to California wage and hour laws. In March 2000, we settled this matter in principle for approximately $3.1 million. Robinson v. Thorn Americas, Inc., Gallagher v. Crown Leasing Corporation, and Michelle Newhouse v. Rent-A-Center, Inc./Handy Boykin v. Rent-A-Center, Inc. In December 1991, January 1996, and November 1997, respectively, we were served with three class action lawsuits in New Jersey. The details of these individual cases were fully described in the Legal Proceedings section of our Annual Report on Form 10-K for the year ended December 31, 1999. The Robinson matter was assumed by us pursuant to the Thorn Americas acquisition, and appropriate purchase accounting adjustments were made for such contingent liabilities. All three of these matters were settled in principle in December 1998 for approximately $60.0 million less certain amounts to be refunded to us based on unlocated class members, subject to preliminary and final approval of the court. Final approval of the court occurred on October 13, 1999. We funded the settlement in November 1999, and as of March 31, 2000, we had received refunds totaling approximately $11.0 million. We expect additional refunds as a result of unlocated class members pursuant to the settlement agreement. However, we are unable to reasonably estimate such amounts at this time. 13

14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. CURRENT REPORTS ON FORM 8-K. None. EXHIBITS EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 2.1(1) -- Asset Purchase Agreement, dated May 1, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.2(2) -- Letter Agreement, dated as of May 26, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.3(3) -- Stock Purchase Agreement, dated as of June 16, 1998, among Renters Choice, Inc., Thorn International BV and Thorn plc (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, the Company will supplementally supply such schedules and exhibits to the Commission.) 3.1(4) -- Amended and Restated Certificate of Incorporation of Renters Choice 3.2(5) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice 3.3(6) -- Amended and Restated Bylaws of Rent-A-Center 4.1(7) -- Form of Certificate evidencing Common Stock 4.2(8) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(9) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4(10) -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, as Trustee 4.5(11) -- Form of Certificate evidencing Series A Preferred Stock 4.6(12) -- Form of Exchange Note 4.7(13) -- First Supplemental Indenture, dated as of December 31, 1998, by and among Renters Choice Inc., Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies, Inc. and IBJ Schroder Bank & Trust Company, as Trustee. 10.1(14) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(15) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.3(16) -- First Amendment, dated as of February 25, 2000, to the Credit Agreement, dated August 5, 1998, among Rent-A-Center, Inc. (formerly known as Renters Choice, Inc.), Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and the Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.4(17) -- Guarantee and Collateral Agreement, dated August 5, 1998, made by Renters Choice, Inc., and certain of its Subsidiaries in favor of the Chase Manhattan Bank, as Administrative Agent 10.5(18) -- $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 14

15 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.6(19) -- Stockholders Agreement, dated as of August 5, 1998, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Renters Choice, Inc., and certain other persons 10.7(20) -- Agreements to be Bound to Stockholders Agreement, each dated September 9, 1999, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Rent-A-Center, Inc. and certain other persons. 10.8(21) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series A Convertible Preferred Stock 10.9(22) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series B Convertible Preferred Stock 10.10(23) -- Stock Purchase Agreement, dated August 5, 1998, among Renters Choice, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.11(24) -- Exchange and Registration Rights Agreement, dated August 18, 1998, by and among Renters Choice, Inc. and Chase Securities Inc., Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC and Credit Suisse First Boston Corporation 10.12(25) -- Employment Agreement, dated October 1, 1998, by and between Rent-A-Center, Inc. and Bradley W. Denison 27.1* -- Financial Data Schedule - ---------- * Filed herewith. (1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 28, 1998 (2) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated May 28, 1998 (3) Incorporated herein by reference to Exhibit 2.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (4) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (5) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (6) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (7) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form S-4 filed on January 19, 1999. (8) Incorporated herein by reference to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (9) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (10) Incorporated herein by reference to Exhibit 4.4 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 15

16 (11) Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (12) Incorporated herein by reference to Exhibit 4.6 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (13) Incorporated herein by reference to Exhibit 4.7 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (14) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement on Form S-8 (File No. 333- 53471) (15) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (16) Incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1999 (17) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (19) Incorporated herein by reference to Exhibit 10.21 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (20) Incorporated herein by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (21) 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 (22) 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 (23) 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 (24) Incorporated herein by reference to Exhibit 10.14 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (25) Incorporated herein by reference to Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998 - ---------- * Filed herewith. 16

17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned duly authorized officer. RENT-A-CENTER, INC. By: /s/ Robert D. Davis -------------------------------- Robert D. Davis Senior Vice President-Finance and Chief Financial Officer Date: May 9, 2000 Rent-A-Center, Inc. 17

18 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 2.1(1) -- Asset Purchase Agreement, dated May 1, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.2(2) -- Letter Agreement, dated as of May 26, 1998, by and among Renters Choice, Inc., Central Rents, Inc., Central Rents Holding, Inc. and Banner Holdings, Inc. (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, Renters Choice will supplementally supply such schedules and exhibits to the Commission.) 2.3(3) -- Stock Purchase Agreement, dated as of June 16, 1998, among Renters Choice, Inc., Thorn International BV and Thorn plc (Pursuant to the rules of the Commission, the schedules and exhibits have been omitted. Upon the request of the Commission, the Company will supplementally supply such schedules and exhibits to the Commission.) 3.1(4) -- Amended and Restated Certificate of Incorporation of Renters Choice 3.2(5) -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Renters Choice 3.3(6) -- Amended and Restated Bylaws of Rent-A-Center 4.1(7) -- Form of Certificate evidencing Common Stock 4.2(8) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series A Preferred Stock of Renters Choice, Inc. 4.3(9) -- Certificate of Designations, Preferences and Relative Rights and Limitations of Series B Preferred Stock of Renters Choice, Inc. 4.4(10) -- Indenture, dated as of August 18, 1998, by and among Renters Choice, Inc., as Issuer, ColorTyme, Inc. and Rent-A-Center, Inc., as Subsidiary Guarantors, and IBJ Schroder Bank & Trust Company, as Trustee 4.5(11) -- Form of Certificate evidencing Series A Preferred Stock 4.6(12) -- Form of Exchange Note 4.7(13) -- First Supplemental Indenture, dated as of December 31, 1998, by and among Renters Choice Inc., Rent-A-Center, Inc., ColorTyme, Inc., Advantage Companies, Inc. and IBJ Schroder Bank & Trust Company, as Trustee. 10.1(14) -- Amended and Restated 1994 Renters Choice, Inc. Long-Term Incentive Plan 10.2(15) -- Credit Agreement, dated August 5, 1998, among Renters Choice, Inc., Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and The Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.3(16) -- First Amendment, dated as of February 25, 2000, to the Credit Agreement, dated August 5, 1998, among Rent-A-Center, Inc. (formerly known as Renters Choice, Inc.), Comerica Bank, as Documentation Agent, NationsBank N.A., as Syndication Agent, and the Chase Manhattan Bank, as Administrative Agent, and certain other lenders 10.4(17) -- Guarantee and Collateral Agreement, dated August 5, 1998, made by Renters Choice, Inc., and certain of its Subsidiaries in favor of the Chase Manhattan Bank, as Administrative Agent 10.5(18) -- $175,000,000 Senior Subordinated Credit Agreement, dated as of August 5, 1998, among Renters Choice, Inc., certain other lenders and the Chase Manhattan Bank 10.6(19) -- Stockholders Agreement, dated as of August 5, 1998, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Renters Choice, Inc., and certain other persons 10.7(20) -- Agreements to be Bound to Stockholders Agreement, each dated September 9, 1999, by and among Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., J. Ernest Talley, Mark E. Speese, Rent-A-Center, Inc. and certain other persons. 10.8(21) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series A Convertible Preferred Stock

19 EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.9(22) -- Registration Rights Agreement, dated August 5, 1998, by and between Renters Choice, Inc., Apollo Investment Fund IV, L.P., and Apollo Overseas Partners IV, L.P., related to the Series B Convertible Preferred Stock 10.10(23) -- Stock Purchase Agreement, dated August 5, 1998, among Renters Choice, Inc., Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. 10.11(24) -- Exchange and Registration Rights Agreement, dated August 18, 1998, by and among Renters Choice, Inc. and Chase Securities Inc., Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC and Credit Suisse First Boston Corporation 10.12(25) -- Employment Agreement, dated October 1, 1998, by and between Rent-A-Center, Inc. and Bradley W. Denison 27.1* -- Financial Data Schedule - ---------- * Filed herewith. (1) Incorporated herein by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K dated May 28, 1998 (2) Incorporated herein by reference to Exhibit 2.2 to the registrant's Current Report on Form 8-K dated May 28, 1998 (3) Incorporated herein by reference to Exhibit 2.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (4) Incorporated herein by reference to Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (5) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (6) Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (7) Incorporated herein by reference to Exhibit 4.1 to the registrant's Form S-4 filed on January 19, 1999. (8) Incorporated herein by reference to Exhibit 4.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (9) Incorporated herein by reference to Exhibit 4.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (10) Incorporated herein by reference to Exhibit 4.4 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (11) Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (12) Incorporated herein by reference to Exhibit 4.6 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (13) Incorporated herein by reference to Exhibit 4.7 to the registrant's Registration Statement Form S-4 filed on January 19, 1999

20 (14) Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement on Form S-8 (File No. 333- 53471) (15) Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (16) Incorporated herein by reference to Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1999 (17) Incorporated herein by reference to Exhibit 10.19 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (18) Incorporated herein by reference to Exhibit 10.20 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (19) Incorporated herein by reference to Exhibit 10.21 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (20) Incorporated herein by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (21) 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 (22) 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 (23) 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 (24) Incorporated herein by reference to Exhibit 10.14 to the registrant's Registration Statement Form S-4 filed on January 19, 1999 (25) Incorporated herein by reference to Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998 - ---------- * Filed herewith.

5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON PAGES 3 AND 4 OF OUR FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000. 1,000 3-MOS DEC-31-2000 MAR-31-2000 14,093 0 4,643 13 100,901

0 138,621 55,806 1,498,688 0 175,000 273,468 0 253 224,844

1,498,688 40,230

392,526 35,271

315,524 18,450

0 19,008 39,801 18,912 20,889 0 0 0 20,889 0.75 0.61 RENTAL MERCHANDISE, HELD FOR RENT. BALANCE SHEET IS UNCLASSIFIED. ADDITIONAL PAID IN CAPITAL, RETAINED EARNINGS AND TREASURY STOCK. STORE AND FRANCHISE MERCHANDISE SALES. STORE AND FRANCHISE COST OF MERCHANDISE SOLD. GENERAL AND ADMINISTRATIVE EXPENSE AND AMORTIZATION OF INTANGIBLES.