RENT A CENTER INC DE - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 0-25370
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RENT-A-CENTER, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 48-1024367
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5700 TENNYSON PARKWAY
THIRD FLOOR
PLANO, TEXAS 75024
972-801-1100
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

AGGREGATE MARKET VALUE OF THE 22,694,926 SHARES OF COMMON STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT AT THE CLOSING SALES PRICE ON
MARCH 22, 2002..........................................$1,150,178,850

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THE CLOSE OF
BUSINESS ON MARCH 22,
2002:.......................................................24,086,397

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive proxy statement relating to the 2002 Annual
Meeting of Stockholders of Rent-A-Center, Inc. are incorporated by reference
into Part III of this report.
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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

OVERVIEW

We are the largest operator in the United States rent-to-own industry with
an approximate 29% market share based on store count. At December 31, 2001, we
operated 2,281 company-owned stores in 50 states, the District of Columbia and
Puerto Rico. Our subsidiary, ColorTyme, Inc., is a national franchisor of
rent-to-own stores. At December 31, 2001, ColorTyme had 342 franchised stores in
42 states, 330 of which operated under the ColorTyme name and 12 stores of which
operated under the Rent-A-Center name. These franchise stores represent a
further 4% market share based on store count.

Our stores offer high quality, durable products such as home electronics,
appliances, computers, and furniture and accessories under flexible rental
purchase agreements that typically allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed upon rental period. These rental
purchase agreements are designed to appeal to a wide variety of customers by
allowing them to obtain merchandise that they might otherwise be unable to
obtain due to insufficient cash resources or a lack of access to credit. These
agreements also cater to customers who only have a temporary need, or who simply
desire to rent rather than purchase the merchandise. We offer well known brands
such as Philips, Sony, JVC, Toshiba and Mitsubishi home electronics, Whirlpool
appliances, Dell, Compaq and Hewlett Packard computers and Ashley, England and
Benchcraft furniture.

Our customers often lack access to conventional forms of credit. We offer
products such as big screen televisions, computers and sofas, and well known
brands that might otherwise be unavailable without credit. We also offer high
levels of customer service, including free repair, pick-up and delivery. Our
customers benefit from the ability to return merchandise at any time without
further obligation and make payments that build toward ownership. We estimate
that approximately 62% of our business is from repeat customers.

We were incorporated as a Delaware corporation on September 16, 1986. Our
principal executive offices are located at 5700 Tennyson Parkway, Third Floor,
Plano, Texas 75024. Our telephone number is (972) 801-1100 and our company
website is www.rentacenter.com.

INDUSTRY OVERVIEW

According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,000 stores, and provides approximately 7.0 million
products to over 3.0 million households each year. We estimate the six largest
rent-to-own industry participants account for 4,700 of the total number of
stores, and the majority of the remainder 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 we believe will continue to experience, increasing
consolidation. We believe this consolidation trend in the industry presents
opportunities for us to continue to acquire additional stores on favorable
terms.

The rent-to-own industry serves a highly diverse customer base. According
to the Association of Progressive Rental Organizations, 92% of rent-to-own
customers have incomes between $15,000 and $50,000 per year. Many of the
customers served by the industry do not have access to conventional forms of
credit and are typically cash constrained. For these customers, the rent-to-own
industry provides access to brand name products that they would not normally be
able to obtain. The Association of Progressive Rental Organizations also
estimates that 93% of customers have high school diplomas. According to a
Federal Trade Commission study, 75% of rent-to-own customers were satisfied with
their experience with rent-to-own transactions. The study noted that customers
gave a wide variety of reasons for their satisfaction, "including the ability to
obtain merchandise they otherwise could not, the low payments, the lack of a
credit check, the convenience and flexibility of the transaction, the quality of
the merchandise, the quality of the maintenance, delivery, and other services,
the friendliness and flexibility of the store employees, and the lack of any
problems or hassles."

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STRATEGY

We are currently focusing our strategic efforts on:

- enhancing the operations and profitability in our store locations;

- opening new stores and acquiring existing rent-to-own stores; and

- building our national brand.

ENHANCING STORE OPERATIONS

We continually seek to improve store performance through strategies
intended to produce gains in operating efficiency and profitability. For
example, we recently implemented programs to refocus our operational personnel
to prioritize store profit growth, including the effective pricing of rental
merchandise and the management of store level operating expenses. Similarly, we
have instituted a transitional duty program to maintain store level productivity
as well as to minimize costs related to the workers compensation component of
our insurance programs.

We believe we will achieve further gains in revenues and operating margins
in both existing and newly acquired stores by continuing to:

- use focused advertising to increase store traffic;

- expand the offering of upscale, higher margin products, such as Philips,
Sony, JVC, Toshiba and Mitsubishi home electronics, Whirlpool appliances,
Dell, Compaq and Hewlett Packard computers and Ashley, England and
Benchcraft furniture to increase the number of product rentals;

- employ strict store-level cost control;

- closely monitor each store's performance through the use of our
management information system to ensure each store's adherence to
established operating guidelines; and

- use a revenue and profit based incentive pay plan.

OPENING NEW STORES AND ACQUIRING EXISTING RENT-TO-OWN STORES

We intend to expand our business both by opening new stores in targeted
markets and by acquiring existing rent-to-own stores. We will focus new market
penetration in adjacent areas or regions that we believe are underserved by the
rent-to-own industry, which we believe represents a significant opportunity for
us. In addition, we intend to pursue our acquisition strategy of targeting
under-performing and under-capitalized chains of rent-to-own stores. We have
gained significant experience in the acquisition and integration of other
rent-to-own operators and believe the fragmented nature of the rent-to-own
industry will result in ongoing consolidation opportunities. Acquired stores
benefit from our administrative network, improved product mix, sophisticated
management information system and purchasing power. In addition, we have access
to our franchise locations, which we have the right of first refusal to
purchase.

Since March 1993, our company-owned store base has grown from 27 to 2,281
at December 31, 2001, primarily through acquisitions. During this period, we
acquired over 2,100 company-owned stores and over 350 franchised stores in more
than 80 separate transactions, including six transactions where we acquired in
excess of 70 stores. In May 1998, we acquired substantially all of the assets of
Central Rents, Inc., which operated 176 stores, for approximately $100 million
in cash. In August 1998, we acquired Thorn Americas, Inc. for approximately $900
million in cash, including the repayment of certain debt of Thorn Americas.
Prior to this acquisition, Thorn Americas was our largest competitor, operating
1,409 company-owned stores and franchising 65 stores in 49 states and the
District of Columbia.

In the second half of 2000, having successfully integrated the Thorn
Americas and Central Rents acquisitions, we resumed our strategy of increasing
our store base. For the year ended December 31, 2000, we opened 36 new stores,
acquired 74 stores, purchased accounts from 73 competitors locations and closed
27 stores. Of the 27 stores closed, 22 were merged with existing stores, four
were sold and one was closed with no
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surviving store. For the year ended December 31, 2001, we opened 76 new stores,
acquired 95 stores, purchased accounts from 90 competitors' locations and closed
48 existing stores. Of the 48 stores closed, 42 were merged with existing stores
and six were sold. The 95 acquired stores and acquired accounts were the result
of 52 separate transactions for an aggregate purchase price of approximately
$49.8 million in cash. Through March 22, 2002, we acquired an additional three
stores and accounts from 14 competitors' locations for approximately $2.7
million in cash in 13 separate transactions and opened an additional six new
stores. We also closed four stores, merging three with existing stores and
selling one store, resulting in a total store count of 2,286 at March 22, 2002.

We continue to believe there are attractive opportunities to expand our
presence in the rent-to-own industry. We intend to increase the number of stores
in which we operate by an average of approximately 5% to 10% per year over the
next several years. We plan to accomplish our future growth through both
selective and opportunistic acquisitions and new store development.

BUILDING OUR NATIONAL BRAND

We have implemented a strategy to increase our name recognition and enhance
our national brand. As a part of a branding strategy, in April 2000 we launched
a national advertising campaign featuring John Madden as our advertising
spokesperson. Mr. Madden appears in our advertising media used in the campaign,
including television and radio commercials, print, direct response and in-store
signage. We believe Mr. Madden possesses a unique balance of multi-cultural
appeal, a strong image identification among both men and women, and a
personality that people of all ages enjoy. We believe that as the Rent-A-Center
name gains in familiarity and national recognition through our advertising
efforts, we will continue to educate the consumer about the rent-to-own
alternative to merchandise purchases as well as solidify our reputation as a
leading provider of high quality branded merchandise. Mr. Madden's agreement
with us expires on March 31, 2003.

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OUR STORES

At December 31, 2001, we operated 2,281 stores in 50 states, Puerto Rico
and the District of Columbia. In addition, our subsidiary ColorTyme franchised
342 stores in 42 states. This information is illustrated by the following table:

Our stores average approximately 4,300 square feet and are located
primarily in strip malls. Because we receive merchandise shipments directly from
vendors, we are able to dedicate approximately 80% of the store space to
showroom floor, and also eliminate warehousing costs.

RENT-A-CENTER STORE OPERATIONS

PRODUCT SELECTION

Our stores offer merchandise from four basic product categories: home
electronics, appliances, computers and furniture and accessories. Our stores
typically have available at any one time approximately 100 of the 150 different
items we offer. Although we seek to ensure our stores maintain sufficient
inventory to offer customers a wide variety of models, styles and brands, we
generally limit inventory to prescribed levels to ensure strict inventory
controls. We seek to provide a wide variety of high quality merchandise to our
customers, and we emphasize high-end products from brand-name manufacturers. For
the year ended December 31, 2001, home

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electronic products accounted for approximately 41% of our store rental revenue,
furniture and accessories for 32%, appliances for 17% and computers for 10%.
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.

Home electronic products offered by our stores include televisions, DVD
players, home entertainment centers, video cassette recorders and stereos from
top brand manufacturers such as Philips, Sony, JVC, Toshiba and Mitsubishi. We
rent major appliances manufactured by Whirlpool, including refrigerators,
washing machines, dryers, microwave ovens, freezers and ranges. We offer
personal computers from Dell, Compaq and Hewlett Packard. We rent a variety of
furniture products, including dining room, living room and bedroom furniture
featuring a number of styles, materials and colors. We offer furniture made by
Ashley, England and Benchcraft and other top brand manufacturers. 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 12 to 30
months, depending upon the product type, or exercises a specified early purchase
option. Although we do not conduct a formal credit investigation of each
customer, a potential customer must provide store management with sufficient
personal information to allow us to verify their residence and sources of
income. References listed by the customer are contacted to verify the
information contained in the customer's rental purchase order form. Rental
payments are generally made in cash, by money order or debit card. Approximately
85% of our customers pay in the store on a weekly basis. 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 product protection in case of theft or certain natural
disasters. These fees are standard in the industry and may be subject to
government-specified limits. Please read the section entitled "Government
Regulation."

PRODUCT TURNOVER

A minimum rental term of 18 months is generally required to obtain
ownership of new merchandise. We believe that only approximately 25% of our
initial rental purchase agreements are taken to the full term of the agreement,
although the average total life for each product is approximately 22 months,
which includes the initial rental period, all re-rental periods and idle time in
our system. Turnover varies significantly based on the type of merchandise
rented, with certain consumer electronics products, such as camcorders and video
cassette recorders, generally rented for shorter periods, while appliances and
furniture are generally rented for longer periods. To cover the relatively high
operating expenses generated by greater product turnover, rental purchase
agreements require higher aggregate payments than are generally charged under
other types of purchase plans, such as installment purchase or credit plans.

CUSTOMER SERVICE

We offer same day or 24-hour delivery and installation of our merchandise
at no additional cost to the customer. We provide any required service or repair
without additional charge, except for damage in excess of normal wear and tear.
Repair services are provided through our national network of 22 service centers,
the cost of which may be reimbursed by the vendor if the item 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

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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
collections on a daily basis. If a customer fails to make a rental payment when
due, store personnel will attempt to contact the customer to obtain payment and
reinstate the agreement, or will terminate the account and arrange to regain
possession of the merchandise. We attempt to recover the rental items as soon as
possible following termination or default of a rental purchase agreement,
generally by the seventh to tenth day. Collection efforts are enhanced by the
numerous personal and job-related references required of first-time customers,
the personal nature of the relationships between the stores' employees and
customers and the fact that, following a period in which a customer is
temporarily unable to make payments on a piece of rental merchandise and must
return the merchandise, that customer generally may re-rent a piece of
merchandise of similar type and age on the terms the customer enjoyed prior to
that period. Charge-offs due to lost or stolen merchandise, expressed as a
percentage of store revenues, were approximately 2.5% in 2001, 2.5% in 2000,
2.3% in 1999 and 2.5% in 1998.

MANAGEMENT

We organize our network of stores geographically with multiple levels of
management. At the individual store level, each store manager is responsible for
customer and credit relations, delivery and collection of merchandise, inventory
management, staffing, training store personnel and certain marketing efforts.
Three times each week, the store manager is required to audit the idle inventory
on hand and compare the audit to our computer report, with the market manager
performing a similar audit at least once a month. In addition, our individual
store managers track their daily store performance for revenue collected as
compared to the projected performance of their store. Each store manager reports
to a market manager within close proximity who typically oversees six to eight
stores. Typically, a market manager focuses on developing the personnel in his
or her market and on ensuring that all stores meet our quality, cleanliness and
service standards. In addition, a market manager routinely audits numerous areas
of the stores operations, including gross profit per rental agreement, petty
cash, and customer order forms. A significant portion of a market manager's and
store manager's compensation is dependent upon store revenues and profits, which
are monitored by our management reporting system and our tight control over
inventory afforded by our direct shipment practice.

At December 31, 2001, we had 326 market managers who, in turn, reported to
55 regional directors. Regional directors monitor the results of their entire
region, with an emphasis on developing and supervising the market managers in
their region. Similar to the market managers, regional directors are responsible
for ensuring that store managers are following the operational guidelines,
particularly those involving store presentation, collections, inventory levels,
and order verification. The regional directors report to nine senior vice
presidents at our headquarters. The regional directors receive a significant
amount of their compensation based on the profits the stores under their
management generate.

Our executive management team at the home office directs and coordinates
purchasing, financial planning and controls, employee training, personnel
matters and new store site selection. Our executive management team also
evaluates the performance of each region, market and store, including the use of
on-site reviews. All members of our executive management team receive a
significant amount of their total compensation based on the profits generated by
the entire company. As a result, our business strategy emphasizes strict cost
containment.

MANAGEMENT INFORMATION SYSTEMS

Through a licensing agreement with High Touch, Inc., we utilize an
integrated computerized management information and control system. Each store is
equipped with a computer system utilizing point of sale software developed by
High Touch. This system tracks individual components of revenue, each item in
idle and rented inventory, total items on rent, delinquent accounts and other
account information. We electroni-

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cally gather each day's activity report, which provides our executive management
with access to all operating and financial information about any of our stores,
markets or regions and generates management reports on a daily, weekly,
month-to-date and year-to-date basis for each store and for every rental
purchase transaction. The system enables us to track each of our approximately
2.3 million units of merchandise and each of our approximately 1.4 million
rental purchase agreements, which often include more than one unit of
merchandise. In addition, the system performs a daily sweep of available funds
from our stores' depository accounts into our central operating account based on
the balances reported by each store. Our system also includes extensive
management software and report-generating capabilities. The reports for all
stores are reviewed on a daily basis by executive management and unusual items
are typically addressed the following business day. Utilizing the management
information system, our executive management, regional directors, market
managers and store managers closely monitor the productivity of stores under
their supervision according to our prescribed guidelines.

The integration of the management information system developed by High
Touch with our accounting system, developed by Lawson Software, Inc.,
facilitates the production of our financial statements. These financial
statements are distributed monthly to all stores, markets, regions and our
executive management team for their review.

PURCHASING AND DISTRIBUTION

Our executive management determines the general product mix in our stores
based on analyses of customer rental patterns and the introduction of new
products on a test basis. Individual store managers are responsible for
determining the particular product selection for their store from the list of
products approved by executive management. Store and market managers make
specific purchasing decisions for the stores, subject to review by executive
management. All merchandise is shipped by vendors directly to each store, where
it is held for rental. We do not maintain any warehouse space. These practices
allow us to retain tight control over our inventory and, along with our
selection of products for which consistent historical demand has been shown,
reduces the number of obsolete items in our stores.

We purchase the majority of our merchandise from manufacturers, who ship
directly to each store. Our largest suppliers include Ashley, Whirlpool, and
Philips, who accounted for approximately 15.2%, 13.4%, and 11.5% respectively,
of merchandise purchased in 2001. No other supplier accounted for more than 10%
of merchandise purchased during this period. We do not generally enter into
written contracts with our suppliers. Although we expect to continue
relationships with our existing suppliers, we believe that there are numerous
sources of products available, and we do not believe that the success of our
operations is dependent on any one or more of our present suppliers.

MARKETING

We promote the products and services in our stores through direct mail
advertising, radio, television and secondary print media advertisements. Our
advertisements emphasize such features as product and brand-name selection,
prompt delivery and the absence of initial deposits, credit investigations or
long-term obligations. Advertising expense as a percentage of store revenue for
the year ended December 31, 2001 and 2000 was approximately 4.0%. As we obtain
new stores in our existing market areas, the advertising expenses of each store
in the market can be reduced by listing all stores in the same market-wide
advertisement.

Mr. John Madden serves as our national advertising spokesman for the
advertising campaign we launched in April 2000. Mr. Madden appears in our
advertising media used in the campaign, including television and radio
commercials, print, direct response and in-store signage. We believe his
involvement in this campaign assists us in capturing new customers and
establishes a stronger national identity for Rent-A-Center. Mr. Madden's
agreement with us expires on March 31, 2003.

COMPETITION

The rent-to-own industry is highly competitive. According to industry
sources and our estimates, the six largest industry participants account for
approximately 4,700 of the 8,000 rent-to-own stores in the United
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States. We are the largest operator in the rent-to-own industry with 2,281
stores and 342 franchised locations as of December 31, 2001. 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, credit card companies 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 our nationwide franchisor of rent-to-own stores. At December
31, 2001, ColorTyme franchised 342 rent-to-own stores in 42 states. These
rent-to-own stores offer high quality durable products such as home electronics,
appliances, computers, and furniture and accessories. During 2001, 31 new
locations were added, 48 were sold, including 45 that we purchased, and five
were closed. During that same period, the number of franchisees operating stores
under the ColorTyme name increased by six.

All but 12 of the ColorTyme franchised stores use ColorTyme's tradenames,
service marks, trademarks, logos, emblems and indicia of origin. These 12 stores
are franchises acquired in the Thorn Americas acquisition and continue to use
the Rent-A-Center name. All stores operate under distinctive operating
procedures and standards. ColorTyme's primary source of revenue is the sale of
rental merchandise to its franchisees who, in turn, offer the merchandise to the
general public for rent or purchase under a rent-to-own program. As franchisor,
ColorTyme receives royalties of 2.1% to 4.0% of the franchisees' monthly gross
revenue and, generally, an initial fee of between $7,500 per location for
existing franchisees and up to $25,000 per location for new franchisees.

The ColorTyme franchise agreement generally requires the franchised stores
to utilize specific computer hardware and software for the purpose of recording
rentals, sales and other record keeping and central functions. ColorTyme retains
the right to upload and download data, troubleshoot, and retrieve data and
information from the franchised stores' computer systems.

The franchise agreement also requires the franchised stores to exclusively
offer for rent or sale only those brands, types, and models of products that
ColorTyme has approved. The franchised stores are required to maintain an
adequate mix of inventory that consists of approved products for rent as
dictated by ColorTyme policy manuals, and must maintain on display such products
as specified by ColorTyme. ColorTyme negotiates purchase arrangements with
various suppliers it has approved. ColorTyme's largest supplier is Whirlpool,
which accounted for approximately 12.8% of merchandise purchased by ColorTyme in
2001.

ColorTyme is a party to an agreement with Textron Financial Corporation,
who provides financing to qualifying franchisees of ColorTyme. Under this
agreement, in the event of default by the franchisee under agreements governing
this financing and upon the occurrence of certain events, Textron may assign the
loans and the collateral securing such loans to ColorTyme, with ColorTyme then
succeeding to the rights of Textron under the debt agreements, including the
rights to foreclose on the collateral. We guarantee the obligations of ColorTyme
under this agreement.

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
revenue from each franchisee as contributions to the fund. Currently, ColorTyme
has set the monthly franchisee contribution at $250 per store per month.
ColorTyme directs the advertising programs of the fund, generally consisting of
advertising in print, television and radio. The franchisees are also required to
expend 3% of their monthly gross revenue on local advertising.

ColorTyme licenses the use of its trademarks to the franchisees under the
franchise agreement. ColorTyme owns the registered trademarks ColorTyme(R),
ColorTyme-What's Right for You(R), and FlexTyme(R), along with certain design
and service marks.

Some of ColorTyme's franchisees may be in locations where they directly
compete with our company-owned stores, which could negatively impact the
business, financial condition and operating results of our company-owned store.

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The ColorTyme franchise agreement provides us a right of first refusal to
purchase the franchise location of a ColorTyme franchisee wishing to exit the
business.

TRADEMARKS

We own various registered trademarks, including Rent-A-Center(R), Renters
Choice(R) and Remco(R). The products held for rent also bear trademarks and
service marks held by their respective manufacturers.

EMPLOYEES

As of March 22, 2002, we had approximately 12,700 employees, of whom 243
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, we had
approximately 19 employees dedicated to ColorTyme, all of whom were employed
full-time. The employees of the ColorTyme franchisees are not employed by us.
None of our employees, including ColorTyme employees, are covered by a
collective bargaining agreement. However, in June 2001 the employees of six of
our stores in New York, New York elected to be represented by the Teamsters
union. We are contesting the validity of this election. We believe relationships
with our employees and ColorTyme's relationships with its employees are
generally good.

GOVERNMENT REGULATION

STATE REGULATION

Currently 47 states and Puerto Rico have legislation regulating rental
purchase transactions. We believe this existing legislation is generally
favorable to us, as it defines and clarifies the various disclosures, procedures
and transaction structures related to the rent-to-own business with which we
must comply. With some variations in individual states, most related 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 despite having failed to make a
timely payment. Some state rental purchase laws prescribe grace periods for
non-payment, prohibit or limit certain types of collection or other practices,
and limit certain fees that may be charged. Nine states limit the total rental
payments that can be charged. These limitations, however, do not become
applicable in general unless the total rental payments required under agreements
exceed 2.0 times to 2.4 times of the disclosed cash price or the retail value.

Minnesota, which has a rental purchase statute, and Wisconsin and New
Jersey, which do not have rental purchase statutes, have had court decisions
which treat rental purchase transactions as credit sales subject to consumer
lending restrictions. In response, we have developed and utilize separate rental
agreements which do not provide customers with an option to purchase rented
merchandise in both Minnesota and Wisconsin. In Wisconsin, customers are
provided an opportunity to purchase the rented merchandise in a separate
transaction. In New Jersey, we have provided increased disclosures and longer
grace periods. We operate four stores in Minnesota, 26 stores in Wisconsin and
40 stores in New Jersey. See the section entitled "-- Legal Proceedings."

North Carolina has no rental purchase legislation. However, the retail
installment sales statute in North Carolina recognizes that rental purchase
transactions which provide for more than a nominal purchase price at the end of
the agreed rental period are not credit sales under such statute. We operate 86
stores in North Carolina.

The District of Columbia has recently passed rental purchase legislation
which becomes effective April 2002. We operate 4 stores in the District of
Columbia.

There can be no assurance that new or revised rental purchase laws will not
be enacted or, if enacted, that the laws would not have a material and adverse
effect on us.

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FEDERAL LEGISLATION

No comprehensive federal legislation has been enacted regulating or
otherwise impacting the rental purchase transaction. We do, however, comply with
the Federal Trade Commission recommendations for disclosure in rental purchase
transactions. 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 adverse
federal legislation, if enacted, could have a material and adverse effect on us.

11

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing us.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. Our business, financial condition,
results of operations or cash flows could be materially adversely affected by
any of these risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment.

WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY, WHICH COULD
CAUSE OUR FUTURE EARNINGS TO GROW MORE SLOWLY OR EVEN DECREASE.

Our growth strategy could place a significant demand on our management and
our financial and operational resources. This growth strategy is subject to
various risks, including uncertainties regarding the ability to open new stores
and our ability to acquire additional stores on favorable terms. We may not be
able to continue to identify profitable new store locations or underperforming
competitors as we currently anticipate. If we are unable to implement our growth
strategy, our earnings may grow more slowly or even decrease.

IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH AND INTEGRATE NEW STORES, OUR
FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.

The benefits we anticipate from our growth strategy may not be realized.
The addition of new stores, both through store openings and through
acquisitions, requires the integration of our management philosophies and
personnel, standardization of training programs, realization of operating
efficiencies and effective coordination of sales and marketing and financial
reporting efforts. In addition, acquisitions in general are subject to a number
of special risks, including adverse short-term effects on our reported operating
results, diversion of management's attention and unanticipated problems or legal
liabilities. Further, a newly opened store generally does not attain positive
cash flow during its first year of operations.

THERE ARE LEGAL PROCEEDINGS PENDING AGAINST US SEEKING MATERIAL DAMAGES. THE
COSTS WE INCUR IN DEFENDING OURSELVES OR ASSOCIATED WITH SETTLING ANY OF THESE
PROCEEDINGS, AS WELL AS A MATERIAL FINAL JUDGMENT OR DECREE AGAINST US, COULD
MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION BY REQUIRING THE PAYMENT OF
THE SETTLEMENT AMOUNT, A JUDGMENT OR THE POSTING OF A BOND.

Some lawsuits against us involve claims that our rental agreements
constitute installment sales contracts, violate state usury laws or violate
other state laws enacted to protect consumers. We are also defending class
action lawsuits alleging we violated the securities laws and have entered into a
proposed settlement covering claims associated with three alleged class actions
asserting gender discrimination in our employment practices. Because of the
uncertainties associated with litigation, we cannot estimate for you our
ultimate liability for these matters, if any. The failure to pay any judgment
would be a default under our senior credit facilities and the indentures
governing our outstanding subordinated notes.

OUR DEBT AGREEMENTS IMPOSE RESTRICTIONS ON US WHICH MAY LIMIT OR PROHIBIT US
FROM ENGAGING IN CERTAIN TRANSACTIONS. IF A DEFAULT WERE TO OCCUR, OUR LENDERS
COULD ACCELERATE THE AMOUNTS OF DEBT OUTSTANDING, AND HOLDERS OF OUR SECURED
INDEBTEDNESS COULD FORCE US TO SELL OUR ASSETS TO SATISFY ALL OR A PART OF WHAT
IS OWED.

Covenants under our senior credit facilities and the indentures governing
our outstanding subordinated notes restrict our ability to engage in various
operational matters as well as require us to maintain specified financial ratios
and satisfy specified financial tests. Our ability to meet these financial
ratios and tests may be affected by events beyond our control. These
restrictions could limit our ability to obtain future financing, make needed
capital expenditures or other investments, repurchase our outstanding debt or
equity, withstand a future downturn in our business or in the economy, dispose
of operations, engage in mergers, acquire additional stores or otherwise conduct
necessary corporate activities. Various transactions that we may view as
important opportunities, such as specified acquisitions, are also subject to the
consent of lenders under the

12

senior credit facilities, which may be withheld or granted subject to conditions
specified at the time that may affect the attractiveness or viability of the
transaction.

If a default were to occur, the lenders under our senior credit facilities
could accelerate the amounts outstanding under the credit facilities and our
other lenders could declare immediately due and payable all amounts borrowed
under other instruments that contain certain provisions for cross-acceleration
or cross-default. In addition, the lenders under these agreements could
terminate their commitments to lend to us. If the lenders under these agreements
accelerated the repayment of borrowings, we may not have sufficient liquid
assets at that time to repay the amounts then outstanding under our indebtedness
or be able to find additional alternative financing. Even if we could obtain
additional alternative financing, the terms of the financing may not be
favorable or acceptable to us.

The existing indebtedness under our senior credit facilities is secured by
substantially all of our assets. Should a default or acceleration of this
indebtedness occur, the holders of this indebtedness could sell the assets to
satisfy all or a part of what is owed. Our senior credit facilities also contain
provisions prohibiting the modification of our outstanding subordinated notes,
as well as limiting our ability to refinance such notes.

A CHANGE OF CONTROL COULD ACCELERATE OUR OBLIGATION TO PAY OUR OUTSTANDING
INDEBTEDNESS, AND WE MAY NOT HAVE SUFFICIENT LIQUID ASSETS TO REPAY THESE
AMOUNTS.

Under our senior credit facilities, an event of default would result if
Apollo Management IV, L.P. and its affiliates cease to own at least 50% of the
amount of our voting stock that they owned on August 5, 1998. An event of
default would also result under the senior credit facilities if a third party
became the beneficial owner of 33.33% or more of our voting stock at a time when
certain permitted investors owned less than the third party or Apollo owned less
than 35% of the voting stock owned by the permitted investors. As of December
31, 2001, we are required to pay under our senior credit facilities $1.9 million
in each of 2002 and 2003, $26.4 million in 2004, $100.0 million in 2005 and
$297.9 million after 2005. These payments reduce our operating cash flow. If the
lenders under our debt instruments accelerated these obligations, we may not
have sufficient liquid assets to repay amounts outstanding under these
agreements.

Under the indentures governing our outstanding subordinated notes, in the
event that a change in control occurs, we may be required to offer to purchase
all of our outstanding subordinated notes at 101% of their original aggregate
principal amount, plus accrued interest to the date of repurchase. A change in
control also would result in an event of default under our senior credit
facilities, which could then be accelerated by our lenders, and would require us
to offer to redeem our Series A preferred stock.

RENT-TO-OWN TRANSACTIONS ARE REGULATED BY LAW IN MOST STATES. ANY ADVERSE CHANGE
IN THESE LAWS OR THE PASSAGE OF ADVERSE NEW LAWS COULD EXPOSE US TO LITIGATION
OR REQUIRE US TO ALTER OUR BUSINESS PRACTICES.

As is the case with most businesses, we are subject to various governmental
regulations, including specifically in our case, regulations regarding
rent-to-own transactions. There are currently 47 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.
Several states also effectively regulate rental purchase transactions under
other consumer protection statutes. We are currently subject to outstanding
judgments and other litigation alleging that we have violated some of these
statutory provisions.

Although there is no comprehensive federal legislation regulating
rental-purchase transactions, adverse federal legislation may be enacted in the
future. From time to time, legislation has been introduced in Congress seeking
to regulate our business. In addition, various legislatures in the states where
we currently do business may adopt new legislation or amend existing legislation
that could require us to alter our business practices.
13

OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL, WITH WHOM WE DO NOT
HAVE EMPLOYMENT AGREEMENTS. THE LOSS OF ANY ONE OF THESE INDIVIDUALS COULD
DISRUPT OUR BUSINESS.

Our continued success is highly dependent upon the personal efforts and
abilities of our senior management, including Mark E. Speese, our Chairman of
the Board and Chief Executive Officer, Mitchell E. Fadel, our President, and
Dana F. Goble and David A. Kraemer, our Executive Vice-Presidents of Operations.
We do not have employment contracts with or maintain key-man insurance on the
lives of any of these officers and the loss of any one of them could disrupt our
business.

A SMALL GROUP OF OUR DIRECTORS AND THEIR AFFILIATES HAVE SIGNIFICANT INFLUENCE
ON ALL STOCKHOLDER VOTES. AS A RESULT, THEY WILL CONTINUE TO HAVE THE ABILITY TO
EXERCISE EFFECTIVE 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.

Mr. Speese, our Chairman and Chief Executive Officer, Apollo Investment
Fund IV, L.P. and Apollo Overseas Partners IV, L.P. are parties to a
stockholders agreement relating to the voting of our securities held by them at
meetings of our stockholders. Approximately 30.4% of our voting stock on a fully
diluted basis, assuming the conversion of our Series A preferred stock and all
outstanding options, is controlled by Mr. Speese and Apollo.

OUR ORGANIZATIONAL DOCUMENTS, SERIES A PREFERRED STOCK AND DEBT INSTRUMENTS
CONTAIN PROVISIONS THAT MAY PREVENT OR DETER ANOTHER GROUP FROM PAYING A PREMIUM
OVER THE MARKET PRICE TO OUR STOCKHOLDERS TO ACQUIRE OUR STOCK.

Our organizational documents contain provisions that classify our board of
directors, authorize our board of directors to issue blank check preferred stock
and establish advance notice requirements on our stockholders for director
nominations and actions to be taken at annual meetings of the stockholders. In
addition, as a Delaware corporation, we are subject to Section 203 of the
Delaware General Corporation Law relating to business combinations. Our senior
credit facilities, the indentures governing our subordinated notes and our
Series A preferred stock certificate of designations each contain various change
of control provisions which, in the event of a change of control, would cause a
default under those provisions. 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.

IF WE ARE REQUIRED TO ACCELERATE THE WRITE OFF OF SOME OR ALL OF OUR GOODWILL,
OUR ASSETS, AS WELL AS THE FINANCIAL OPERATING RESULTS IN THE PERIOD WE WRITE
OFF THE GOODWILL, WILL BE SUBSTANTIALLY REDUCED, WHICH COULD RESULT IN A LOWER
MARKET PRICE FOR OUR STOCK.

As of December 31, 2001, we had approximately $708.7 million in goodwill on
our balance sheet, representing approximately 44.1% of our total assets as of
that date. Under new accounting rules relating to purchase accounting, we no
longer amortize goodwill and are required to periodically conduct an impairment
review and write down goodwill to the extent of any impairment. A write down of
goodwill would decrease our earnings or result in an accounting loss, which
could cause our stock price to decline.

OUR STOCK PRICE IS VOLATILE, AND YOU MAY NOT BE ABLE TO RECOVER YOUR INVESTMENT
IF OUR STOCK PRICE DECLINES.

The stock price of our common stock has been volatile and can be expected
to be significantly affected by factors such as:

- quarterly variations in our results of operations, which may be impacted
by, among other things, when and how many stores we acquire or open;

- quarterly variations in our competitors' results of operations;

- announcements of new product offerings by us or our competitors;
14

- changes in earnings estimates or buy/sell recommendations by financial
analysts;

- the stock price performance of comparable companies; and

- general market conditions or market conditions specific to particular
industries.

15

ITEM 2. PROPERTIES

We lease space for all of our stores, as well as our corporate and regional
offices, under operating leases expiring at various times through 2010. Most of
these leases contain renewal options for additional periods ranging from three
to five years at rental rates adjusted according to agreed-upon formulas. Both
our headquarters and ColorTyme's headquarters are located at 5700 Tennyson
Parkway, Plano, Texas, and consist of approximately 77,158 and 5,116 square feet
devoted to our operations and ColorTyme's operations, respectively. Store sizes
range from approximately 1,400 to 17,000 square feet, and average approximately
4,300 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
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 additional space
is readily available at competitive rates to open new stores. Under various
federal and state laws, lessees may be liable for environmental problems at
leased sites even if they did not create, contribute to, or know of the problem.
We are not aware of and have not been notified of any violations of federal,
state or local environmental protection or health and safety laws, but cannot
guarantee that we will not incur material costs or liabilities under these laws
in the future.

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. Except as
described below, we are not currently a party to any material litigation.

Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in
November 1997 in New York state court. This matter was assumed by us in
connection with the Thorn Americas acquisition, and appropriate purchase
accounting adjustments were made for such contingent liabilities. The plaintiffs
acknowledge that rent-to-own transactions in New York are subject to the
provisions of New York's Rental Purchase Statute but contend the Rental Purchase
Statute does not provide Thorn Americas immunity from suit for other statutory
violations. Plaintiffs allege Thorn Americas has a duty to disclose effective
interest under New York consumer protection laws, and seek damages and
injunctive relief for Thorn Americas' failure to do so. This suit also alleges
violations related to excessive and unconscionable pricing, late fees,
harassment, undisclosed charges, and the ease of use and accuracy of its payment
records. In their prayers for relief, the plaintiffs have requested the
following:

- 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.

The plaintiffs have not alleged a specific monetary amount with respect to
their request for damages.

The proposed class originally included all New York residents who were
party to Thorn Americas' rent-to-own contracts from November 26, 1991 through
November 26, 1997. In her class certification briefing, Plaintiff acknowledged
her claims under the General Business Law in New York are subject to a three
year statute of limitations, and is now requesting a class of all persons in New
York who paid for rental merchandise from us since November 26, 1994. We are
vigorously defending this action. In November 2000,
16

following interlocutory appeal by both parties from the denial of cross-motions
for summary judgment, we obtained a favorable ruling from the Appellate Division
of the State of New York, dismissing Plaintiff's claims based on the alleged
failure to disclose an effective interest rate. Plaintiff's other claims were
not dismissed. Plaintiff moved to certify a state-wide class in December 2000.
Plaintiff's class certification motion was heard by the court on November 7,
2001, at which time the court took the motion under advisement. We are
vigorously opposing class certification. Although there can be no assurance that
our position will prevail, or that we will be found not to have any liability,
we believe the decision by the Appellate Division regarding interest rate
disclosure to be a significant and favorable development in this matter.

Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin
Attorney General filed suit against us and our subsidiary ColorTyme in the
Circuit Court of Milwaukee County, Wisconsin, alleging that our rent-to-rent
transaction violates the Wisconsin Consumer Act and the Wisconsin Deceptive
Advertising Statute. The Attorney General claims that our rent-to-rent
transaction, coupled with the opportunity afforded our customers to purchase
rental merchandise under what we believe is a separate transaction, is a
disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the
Attorney General alleges that we have failed to disclose credit terms,
misrepresented the terms of the transaction and engaged in unconscionable
practices. We currently operate 26 stores in Wisconsin.

The Attorney General seeks injunctive relief, restoration of any losses
suffered by any Wisconsin consumer harmed and civil forfeitures and penalties in
amounts ranging from $50 to $10,000 per violation. The Attorney General's claim
for monetary penalties applies to at least 9,060 transactions through September
30, 2001. On October 31, 2001, the Attorney General filed a motion for summary
judgment on several counts in the complaint, including the principal claim that
our rent-to-rent transaction is governed by the Wisconsin Consumer Act. Our
response was filed on December 17, 2001. A pre-trial conference and hearing on
the motion for summary judgment took place on January 22, 2002, at which time
the court ruled in favor of the Attorney General's motion for summary judgment
on the liability issues and set the case for trial on damages for February 2003.

Since the filing of this suit, we have attempted to negotiate a mutually
satisfactory resolution of these claims with the Wisconsin Attorney General's
office, including the consideration of possible changes in our business
practices in Wisconsin. To date, we have not been successful, but our efforts
are ongoing. If we are unable to negotiate a settlement with the Attorney
General, we intend to litigate the suit. We cannot assure you, however, that the
outcome of this matter will not have a material adverse impact on our financial
condition, results of operations or cash flows.

Gender Discrimination Actions. We are subject to three class action
lawsuits claiming gender discrimination. As described below, we have settled in
principle all of the claims covered by these three actions.

In September 1999, an action was filed against us in federal court in the
Western District of Tennessee by the U.S. Equal Employment Opportunity
Commission, alleging that we engaged in gender discrimination with respect to
four named females and other unnamed female employees and applicants within our
Tennessee and Arkansas region. The allegations underlying this EEOC action
involve charges of wrongful termination and denial of promotion, disparate
impact and failure to hire. The group of individuals on whose behalf EEOC seeks
relief is approximately seventy individuals.

In August 2000, a putative nationwide class action was filed against us in
federal court in East St. Louis, Illinois by Claudine Wilfong and eighteen other
plaintiffs, alleging that we engaged in class-wide gender discrimination
following our acquisition of Thorn Americas. The allegations underlying Wilfong
involve charges of wrongful termination, constructive discharge, disparate
treatment and disparate impact. In addition, the EEOC filed a motion to
intervene on behalf of the plaintiffs, which the court granted on May 14, 2001.
On December 27, 2001, the court granted the plaintiff's motion for class
certification.

In December 2000, similar suits filed by Margaret Bunch and Tracy Levings
in federal court in the Western District of Missouri were amended to allege
class action claims similar to those in Wilfong. In November 2001, we announced
that we had reached an agreement in principle for the settlement of the Bunch
matter, which is subject to court approval. Under the terms of the proposed
settlement, we agreed to pay an

17

aggregate of $12.25 million to the agreed upon class, plus plaintiffs' attorneys
fees as determined by the court and costs to administer the settlement subject
to an aggregate cap of $3.15 million. On November 29, 2001, the court in Bunch
granted preliminary approval of the settlement and set a fairness hearing on
such settlement for March 6, 2002.

In early March 2002, we reached an agreement in principle with the
plaintiffs attorneys in Wilfong and the EEOC to resolve the Wilfong suit and the
Tennessee EEOC action. Under the terms of the proposed settlement, while not
admitting any liability, we would pay an aggregate of $47.0 million to
approximately 5,300 female employees and a yet to be determined number of female
applicants who were employed by or applied for employment with us for a period
commencing no later than April 19, 1998 through the future date of the notice to
the applicable class, plus up to $375,000 in settlement administrative costs.
The $47.0 million payment includes the $12.25 million payment discussed in
connection with the Bunch settlement. Attorney fees for class counsel in Wilfong
would be paid out of the $47.0 million settlement fund in an amount to be
determined by the court. Members of the class who do not wish to participate in
the settlement would be given the opportunity to opt out of the settlement.

The proposed agreement contemplates the settlement would be subject to a
four-year consent decree, which could be extended by the court for an additional
one year upon a showing of good cause. Also, under the proposed settlement, we
agreed to augment our human resources department and our internal employee
complaint procedures; enhance our gender anti-discrimination training for all
employees; hire a consultant mutually acceptable to the parties for two years to
advise us on employment matters; provide certain reports to the EEOC during the
period of the consent decree; seek qualified female representation on our board
of directors; publicize our desire to recruit, hire and promote qualified women;
offer to fill job vacancies within our regional markets with qualified class
members who reside in those markets and express an interest in employment by us
to the extent of 10% of our job vacancies in such markets over a fifteen month
period; and to take certain other steps to improve opportunities for women. We
initiated many of the above programs prior to entering into the proposed
settlement.

Under the proposed agreement, we have the right to terminate the settlement
under certain circumstances, including in the event that more than sixty class
members elect to opt out of the settlement.

The proposed settlement contemplates that the Bunch case will be dismissed
with prejudice once such settlement becomes final. At the parties' request, the
court in the Bunch case stayed the proceedings in that case, including
postponing the fairness hearing previously scheduled for March 6, 2002. We
anticipate the Memphis federal court will stay the Tennessee EEOC action as
well.

The terms of the proposed settlement are subject to the parties entering
into a definitive settlement agreement and court approval. While we believe the
proposed settlement is fair, we cannot assure you that the settlement will be
approved by the court in its present form.

Terry Walker, et. al. v. Rent-A-Center, Inc., et. al.; Chaim Klein, et. al.
v. Rent-A-Center, Inc., et. al.; John Farrar, et. al. v. Rent-A-Center, Inc.,
et. al. On January 4, 2002, a putative class action was filed against us and
certain of our current and former officers and directors by Terry Walker in
federal court in Texarkana, Texas. The complaint alleges that the defendants
violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by issuing false and misleading
statements and omitting material facts regarding our financial performance and
prospects for the third and fourth quarters of 2001. The complaint purports to
be brought on behalf of all purchasers of our common stock from April 25, 2001
through October 8, 2001 and seeks damages in unspecified amounts. Complaints
have also been filed by Chaim Klein and John Farrar in Texarkana, Texas alleging
similar claims. We believe that these claims are without merit and intend to
vigorously defend ourselves. However, we cannot assure you that we will be found
to have no liability in this matter.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

18

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been listed on the Nasdaq Stock Market(R) under the
symbol "RCII" since January 25, 1995, the date we commenced our initial public
offering. The following table sets forth, for the periods indicated, the high
and low sales price per share of the common stock as reported.

As of March 22, 2002, there were approximately 47 record holders of our
common stock.

We have not paid any cash dividends since the time of our initial public
offering. Our senior credit facility currently prohibits the payment of cash
dividends on our common stock and preferred stock and the indentures governing
our subordinated notes place restrictions on our ability to do so. We do not
anticipate paying cash dividends on our common stock in the foreseeable future.

We have not paid any cash dividends on our Series A preferred stock to
date. Under the terms of the certificate of designations governing our Series A
preferred stock, we may pay dividends on our Series A preferred stock, at our
option, in cash or additional shares of Series A preferred stock until August
2003, after which time the dividends are payable in cash. Since the time of the
issuance of our Series A preferred stock, we have paid the required dividends in
additional shares of Series A preferred stock. These additional shares are
issued under the same terms and with the same conversion ratio as were the
shares of our Series A preferred stock issued in August 1998. Accordingly, the
shares of Series A preferred stock issued as a dividend are convertible into our
common stock at a conversion price of $27.935. Based on a liquidation preference
of $292,434,000 as of December 31, 2001, the Series A preferred stock was
convertible into 10,468,373 shares of common stock. Our senior credit facilities
agreement allows us to pay cash dividends on our Series A preferred stock
beginning in August 2003 so long as we are not in default under that agreement.
Cash dividend payments are also subject to the restrictions in the indentures
governing our subordinated notes. These restrictions in the indentures would not
currently prohibit the payment of cash dividends.

Any change in our dividend policy, including our dividend policy on our
Series A preferred stock, will be made at the discretion of our Board of
Directors and will depend on a number of factors, including future earnings,
capital requirements, contractual restrictions, financial condition, future
prospects and any other factors our Board of Directors may deem relevant. You
should read the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" discussed later in this report.

19

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the five years ended
December 31, 2001 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, the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and other financial information included in this report.

In May and August 1998, we completed the acquisitions of Central Rents and
Thorn Americas, respectively, both of which affect the comparability of the 1998
historical financial and operating data for the periods presented.

- ---------------

(1) Includes the effects of a pre-tax legal reversion of $22.4 million
associated with the 1999 settlement of three class action lawsuits in the
state of New Jersey.

(2) Includes the effects of a pre-tax legal settlement of $52.0 million
associated with the 2001 settlement of class action lawsuits in the states
of Missouri, Illinois, and Tennessee.

(3) Comparable store revenue for each period presented includes revenues only of
stores open throughout the full period and the comparable prior period.

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We are the largest rent-to-own operator in the United States with an
approximate 29% market share based on store count. At December 31, 2001, we
operated 2,281 company-owned stores in 50 states, the District of Columbia and
Puerto Rico. Our subsidiary, ColorTyme, is a national franchisor of rent-to-own
stores. At December 31, 2001, ColorTyme had 342 franchised stores in 42 states,
330 of which operated under the ColorTyme name and 12 stores of which operated
under the Rent-A-Center name. Our stores offer high quality durable products
such as home electronics, appliances, computers, and furniture and accessories
under flexible rental purchase agreements that allow the customer to obtain
ownership of the merchandise at the conclusion of an agreed-upon rental period.
These rental purchase agreements are designed to appeal to a wide variety of
customers by allowing them to obtain merchandise that they might otherwise be
unable to obtain due to insufficient cash resources or a lack of access to
credit. These agreements also cater to customers who only have a temporary need,
or who simply desire to rent rather than purchase the merchandise.

We have pursued an aggressive growth strategy since 1989. We have sought to
acquire underperforming stores to which we could apply our operating model as
well as open new stores. As a result, the acquired stores have generally
experienced more significant revenue growth during the initial periods following
their acquisition than in subsequent periods. Because of significant growth
since our formation, particularly due to the Thorn Americas acquisition, our
historical results of operations and period-to-period comparisons of such
results and other financial data, including the rate of earnings growth, may not
be meaningful or indicative of future results.

We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an emphasis on new store development. Typically, a newly
opened store is profitable on a monthly basis in the ninth to twelfth month
after its initial opening. Historically, a typical store has achieved cumulative
break-even profitability in 18 to 24 months after its initial opening. Total
financing requirements of a typical new store approximate $450,000, with roughly
70% of that amount relating to the purchase of rental merchandise inventory. A
newly opened store historically has achieved results consistent with other
stores that have been operating within the system for greater than two years by
the end of its third year of operation. As a result, our quarterly earnings are
impacted by how many new stores we opened during a particular quarter and the
quarters preceding it. There can be no assurance that we will open any new
stores in the future, or as to the number, location or profitability thereof.

In addition, to provide any additional funds necessary for the continued
pursuit of our operating and growth strategies, we may incur from time to time
additional short or long-term bank indebtedness and may issue, in public or
private transactions, equity and debt securities. The availability and
attractiveness of any outside sources of financing will depend on a number of
factors, some of which will relate to our financial condition and performance,
and some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance additional financing will
be available, or if available, will be on terms acceptable to us.

If a change in control occurs, we may be required to offer to repurchase
all of our outstanding senior subordinated notes at 101% of their principal
amount, plus accrued interest to the date of repurchase. Our senior credit
facilities restrict our ability to repurchase our senior subordinated notes,
including in the event of a change in control. In addition, a change in control
would result in an event of default under our senior credit facilities, which
could then be accelerated by our lenders, and would require us to offer to
redeem our Series A preferred stock. In the event a change in control occurs, we
cannot be sure that we would have enough funds to immediately pay our
accelerated senior credit facility obligations, all of our senior subordinated
notes and for the redemption of our Series A preferred stock, or that we would
be able to obtain financing to do so on favorable terms, if at all.

22

FORWARD-LOOKING STATEMENTS

The statements, other than statements of historical facts, included in this
report are forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology, such as "may," "will,"
"would," "expect," "intend," "could," "estimate," "should," "anticipate" or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that 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:

- uncertainties regarding the ability to open new stores;

- our ability to acquire additional rent-to-own stores on favorable terms;

- our ability to enhance the performance of these acquired stores;

- our ability to control store level costs and implement our margin
enhancement initiatives;

- our ability to realize benefits from our margin enhancement initiatives;

- the results of our litigation;

- the passage of legislation adversely affecting the rent-to-own industry;

- interest rates;

- our ability to collect on our rental purchase agreements;

- our ability to effectively hedge interest rates on our outstanding debt;

- changes in our effective tax rate; and

- the other risks detailed from time to time in our Securities and Exchange
Commission reports.

Additional factors that could cause our actual results to differ materially
from our expectations are discussed under the section entitled "Risk Factors"
and elsewhere in this report. 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.

CRITICAL ESTIMATES, UNCERTAINTIES OR ASSESSMENTS IN OUR FINANCIAL STATEMENTS

The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In applying our accounting principles, we must
often make individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are generally
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as they
are known. Our estimates, judgments and assumptions are continually evaluated
based on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.

Actual results related to the estimates and assumptions made by us in
preparing our consolidated financial statements will emerge over periods of
time, such as estimates and assumptions underlying the determination of our
self-insurance liabilities. These estimates and assumptions are monitored by us
and periodically adjusted as circumstances warrant. For instance, our liability
for self-insurance related to our workers compensation, general liability,
medical and auto liability may be adjusted based on higher or lower actual loss
experience. Although there is greater risk with respect to the accuracy of these
estimates and assumptions because of the period over which actual results may
emerge, such risk is mitigated by our ability to make changes to these estimates
and assumptions over the same period.

23

In preparing our financial statements at any point in time, we are also
periodically faced with uncertainties, the outcomes of which are not within our
control and will not be known for prolonged periods of time. As discussed in
Part I, Item 3 "Legal Proceedings" and the notes to our consolidated financial
statements, we are involved in actions relating to claims that our rental
purchase agreements constitute installment sales contracts, violate state usury
laws or violate other state laws enacted to protect consumers, claims asserting
gender discrimination in our employment practices, as well as claims we violated
the federal securities laws. We, together with our counsel, make estimates, if
determinable, of our probable liabilities and record such amounts in our
consolidated financial statements. These estimates represent our best estimate,
or may be the minimum range of probable loss when no single best estimate is
determinable. Disclosure is made, when determinable, of the additional possible
amount of loss on these claims, or if such estimate cannot be made, that fact is
disclosed. We, together with our counsel, monitor developments related to these
legal matters and, when appropriate, adjustments are made to liabilities to
reflect current facts and circumstances.

We periodically review the carrying value of our goodwill and other
intangible assets when events and circumstances warrant such a review. One of
the methods used for this review is performed using estimates of future cash
flows. If the carrying value of our goodwill or other intangible assets is
considered impaired, an impairment charge is recorded for the amount by which
the carrying value of the goodwill or intangible assets exceeds its fair value.
We believe that the estimates of future cash flows and fair value are
reasonable. Changes in estimates of such cash flows and fair value, however,
could affect the evaluation.

Based on an assessment of our accounting policies and the underlying
judgments and uncertainties affecting the application of those policies, we
believe that our consolidated financial statements provide a meaningful and fair
perspective of our company. We do not suggest that other general risk factors,
such as those discussed elsewhere in this report as well as changes in our
growth objectives or performance of new or acquired stores, could not adversely
impact our consolidated financial position, results of operations and cash flows
in future periods.

SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are summarized below and in Note A to
our consolidated financial statements included elsewhere herein.

Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over the term
of the agreement. Rental purchase agreements generally include a discounted
early purchase option. Upon exercise of this option, and upon sale of used
merchandise, revenue is recognized as these payments are received.

Franchise Revenue. Revenue from the sale of rental merchandise is
recognized upon shipment of the merchandise to the franchisee. Franchise fee
revenue is recognized upon completion of substantially all services and
satisfaction of all material conditions required under the terms of the
franchise agreement.

Depreciation of Rental Merchandise. We depreciate our rental merchandise
using the income forecasting method. The income forecasting method of
depreciation we use does not consider salvage value and does not allow the
depreciation of rental merchandise during periods when it is not generating
rental revenue. The objective of this method of depreciation is to provide for
consistent depreciation expense while the merchandise is on rent.

Cost of Merchandise Sold. Cost of merchandise sold represents the book
value net of accumulated depreciation of rental merchandise at time of sale.

Salaries and Other Expenses. Salaries and other expenses include all
salaries and wages paid to store level employees, together with market managers'
salaries, travel and occupancy, including any related benefits and taxes, as
well as all store level general and administrative expenses and selling,
advertising, insurance, occupancy, fixed asset depreciation and other operating
expenses.

24

General and Administrative Expenses. General and administrative expenses
include all corporate overhead expenses related to our headquarters such as
salaries, taxes and benefits, occupancy, administrative and other operating
expenses, as well as regional directors' salaries, travel and office expenses.

Amortization of Intangibles. Amortization of intangibles consists
primarily of the amortization of the excess of purchase price over the fair
market value of acquired assets and liabilities. In July 2001, the Financial
Accounting Standards Board issued SFAS 142, Goodwill and Intangible Assets,
which revises the accounting for purchased goodwill and intangible assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives acquired after
June 30, 2001 will not be amortized. Effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization. Also, effective January 1, 2002, goodwill and
intangible assets with indefinite lives will be tested for impairment annually,
and in the event of an impairment indicator.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, historical
Consolidated Statements of Earnings data as a percentage of total store and
franchise revenues.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

Store Revenue. Total store revenue increased by $205.2 million, or 13.3%,
to $1,749.1 million for 2001 from $1,543.9 million for 2000. The increase in
total store revenue was primarily attributable to growth in same store revenues
during 2001 as well as incremental revenues from the opening of 76 stores and
the acquisition of 95 stores in 2001. Same store revenues represent those
revenues earned in stores that were operated by us for the entire years ending
December 31, 2001 and 2000. Same store revenues increased by $111.6 million, or
8.0%, to $1,501.7 million for 2001 from $1,390.1 million in 2000. This
improvement was primarily attributable to an increase in the number of customers
served (approximately 407 per store as of December 31, 2001 vs. approximately
391 per store as of December 31, 2000 in same stores open), the number of
agreements on rent (approximately 624 per store as of December 31, 2001 vs.
approximately

25

597 per store as of December 31, 2000 in same stores open), as well as revenue
earned per agreement on rent (approximately $95 per month per agreement for 2001
vs. approximately $92 per month per agreement for 2000). This increase in
revenue was partially offset by loss of revenues associated with the divestiture
or consolidation of 48 stores in 2001.

Franchise Revenue. Total franchise revenue increased by $1.7 million, or
2.9%, to $59.5 million for 2001 from $57.8 million in 2000. This increase was
primarily attributable to an increase in merchandise sales to franchise
locations during 2001 as compared to 2000, partially offset by a decrease in the
number of franchised locations in 2001 as compared to 2000.

Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $43.9 million, or 14.7%, to $343.2 million for 2001 from $299.3
million for 2000. This increase was primarily attributable to an increase in
rental and fee revenue of $191.2 million, or 13.1%, to $1,650.9 million for 2001
from $1,459.7 for 2000. Depreciation of rental merchandise expressed as a
percentage of store rentals and fees revenue increased to 20.8% in 2001 from
20.5% in 2000. This increase is a result of an increase in the number of stores
acquired in 2001 of 95 from 74 in 2000, and in-store promotions made during the
third quarter of 2001, which included a reduction in the rates and terms on
certain rental agreements. These in-store promotions caused depreciation to be a
greater percentage of store rentals and fees revenue on those promotional items
rented.

Cost of Merchandise Sold. Cost of merchandise sold increased by $7.2
million, or 11.0%, to $72.5 million for 2001 from $65.3 million in 2000. This
increase was a result of an increase in the number of items sold in 2001,
primarily in the third and fourth quarters, as compared to 2000, resulting from
a reduction in the rates and terms on certain rental agreements beginning in the
third quarter of 2001.

Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue increased to 58.3% for 2001 from 56.1% for
2000. This increase was primarily attributable to the infrastructure expenses
and costs associated with the opening of new stores under our store growth
initiatives, such as labor and recruiting costs for training centers as well as
additional middle and senior management personnel, and increases in advertising,
store level labor, insurance, and other operating expenses in 2001 over 2000.

Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
increased by $1.5 million, or 3.1%, to $51.2 million for 2001 from $49.7 in
2000. This increase is a direct result of an increase in merchandise sales to
franchise locations in 2001 as compared to 2000.

General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue increased slightly to 3.1% in 2001 from
3.0% in 2000. This increase is primarily attributable to an increase in home
office labor and other overhead expenses for 2001 as compared to 2000.

Amortization of Intangibles. Amortization of intangibles increased by $1.9
million, or 6.7%, to $30.2 million for 2001 from $28.3 million in 2000. This
increase was primarily attributable to the amortization of additional goodwill
associated with the acquisition of 95 stores acquired in 2001. Under SFAS 142
discussed later, amortization of goodwill ceased effective January 1, 2002.
Amortization expense for other intangible assets, however, is expected to be
approximately $2.2 million for 2002, based on intangible assets other than
goodwill as of December 31, 2001.

Operating Profit. Operating profit decreased by $82.4 million, or 30.9%,
to $184.6 million for 2001 from $267.0 million for 2000. Excluding the pre-tax
effect of the class action litigation settlements of $16.0 million recorded in
the third quarter of 2001 and $36.0 million recorded in the fourth quarter of
2001, as well as the class action litigation settlement refund of $22.4 million
received in the second quarter of 2000, operating profit decreased by $8.0
million, or 3.3%, to $236.6 million for the year ended December 31, 2001 from
$244.6 million for the year ended December 31, 2000. Operating profit as a
percentage of total revenue decreased to 13.1% for the year ended December 31,
2001 before the pre-tax class action litigation settlement charges of $52.0
million, from 15.3% for the year ended December 31, 2000 before the pre-tax
class action litigation settlement refund of $22.4 million. The decrease in
operating profit before the effects of the class action litigation as a
percentage of total revenue is primarily attributable to costs incurred with the
opening of 76 new stores in 2001 and losses incurred for those stores in their
initial months of operations, increases in
26

advertising, store level labor, insurance, utility, and other operating expenses
in 2001 as compared to 2000, and lower gross profit margins in the third and
fourth quarter of 2001 resulting from in store promotions whereby rates and
terms were reduced on certain rental agreements. These costs were partially
offset by an increase in overall store revenue for 2001 and the implementation
of expense management efforts in the fourth quarter of 2001.

Net Earnings. Net earnings were $66.2 million for the year ended December
31, 2001, and $103.0 million for the year ended December 31, 2000. Before the
after-tax effect of the $52.0 million class action litigation settlement charges
recorded in 2001 and the $22.4 million class action litigation settlement refund
received in the second quarter of 2000, net earnings increased by $6.2 million,
or 6.8%, to $97.5 million for the year ended December 31, 2001, from $91.3
million for the year ended December 31, 2000. This increase, excluding the after
tax effect of the class action litigation settlement adjustments, is primarily
attributable to growth in total revenues and reduced interest expenses resulting
from a reduction in outstanding debt from our May 2001 equity offering and
December 2001 debt offering, partially offset by the increased expenses incurred
in connection with the opening of 76 new stores in 2001, increases in operating
expenses and lower gross profit margins in the third and fourth quarters of
2001.

Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%.

We account for shares of preferred stock distributed as dividends in-kind
at the greater of the stated value or the value of the common stock obtainable
upon conversion on the payment date. Preferred dividends increased by $5.0
million, or 47.9%, to $15.4 million for the year ended December 31, 2001 as
compared to $10.4 million for the year ended December 31, 2000. This increase is
a result of more shares of Series A Preferred stock outstanding in 2001 as
compared to 2000.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999

Store Revenue. Total store revenue increased by $182.3 million, or 13.4%,
to $1,543.9 million for 2000 from $1,361.6 million for 1999. The increase in
total store revenue is directly attributable to the success of our efforts on
improving store operations through:

- increasing the average price per agreement on rent by upgrading our
rental merchandise, primarily at newly acquired stores;

- increasing the number of agreements on rent;

- increasing the customer base; and

- incremental revenues through acquisitions.

Same store revenues increased by $161.2 million, or 12.6%, to $1,444.1
million for 2000 from $1,282.9 million in 1999. Same store revenues represent
those revenues earned in stores that were operated by us for the entire years
ending December 31, 2000 and 1999. This improvement was primarily attributable
to an increase in the number of customers served, the number of agreements on
rent, as well as revenue earned per agreement on rent.

Franchise Revenue. Total franchise revenue increased by $2.2 million, or
3.9%, to $57.8 million for 2000 from $55.6 million in 1999. This increase was
primarily attributable to an increase in the sale of rental merchandise to
franchisees resulting from growth in the franchise store operations.

Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $33.8 million, or 12.7%, to $299.3 million for 2000 from $265.5
million for 1999. Depreciation of rental merchandise expressed as a percentage
of store rentals and fees revenue decreased from 20.9% in 1999 to 20.5% in 2000.
This decrease is primarily attributable to the successful implementation of our
pricing strategies and inventory management practices in newly acquired stores.

Cost of Merchandise Sold. Cost of merchandise sold decreased by $8.7
million, or 11.7%, to $65.3 million for 2000 from $74.0 million in 1999. This
decrease was a direct result of fewer cash sales of product in
27

2000 as compared to 1999. During 1999, we focused our efforts on increasing the
amount of merchandise sales to reduce certain items acquired in the Thorn
Americas and Central Rents acquisitions that were not components of our normal
merchandise strategy.

Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 56.1% for 2000 from 56.6% for
1999. This decrease is a result of the leveraging of our fixed and semi-fixed
costs such as labor, advertising and occupancy over a larger revenue base.
Expenses included in the salaries and other category are items such as labor,
delivery, service, utility, advertising, and occupancy costs.

Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
increased by $1.8 million, or 3.8%, to $49.7 million for 2000 from $47.9 in
1999. This increase is a direct result of an increase in merchandise sold to
franchisees in 2000 as compared to 1999.

General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue remained level at 3.0% in 2000 from 3.0%
in 1999. In the future, we expect general and administrative expenses to remain
relatively stable at 3.0% of total revenue.

Amortization of Intangibles. Amortization of intangibles increased by $1.2
million, or 4.4%, to $28.3 million for 2000 from $27.1 million in 1999. This
increase was primarily attributable to the additional goodwill amortization
associated with the acquisition of 74 stores acquired in 2000.

Operating Profit. Operating profit increased by $77.0 million, or 40.5%,
to $267.0 million for 2000 from $190.0 million for 1999. In the second quarter
of 2000, we received a pre-tax class action litigation settlement refund of
$22.4 million associated with the settlement of three class action lawsuits in
the state of New Jersey. Operating profit stated before the effects of this
settlement refund increased by $54.6 million, or 28.7%. Operating profit as a
percentage of total revenue increased to 15.3% in 2000 from 13.4% in 1999,
calculated before the effects of the non-recurring settlement refund. This
increase is attributable to our efforts in improving the efficiency and
profitability of our stores.

Net Earnings. Net earnings increased by $43.7 million, or 73.6%, to $103.0
million in 2000 from $59.3 million in 1999. Excluding the effects of the
settlement refund discussed above, net earnings increased by $31.8 million, or
53.6%.

Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. Dividends can be paid at our option in
cash or in additional shares of Series A preferred stock. Preferred dividends
increased by $381,000, or 3.8%, to $10.4 million for 2000 as compared to $10.0
million in 1999. This increase is a result of more shares of Series A preferred
stock outstanding in 2000 as compared to 1999.

28

QUARTERLY RESULTS

The following table contains certain unaudited historical financial
information for the quarters indicated.

- ---------------

(1) Includes the effects of a pre-tax legal settlement of $16.0 million in the
third quarter and $36 million in the forth quarter of 2001 associated with
the settlement of a class action lawsuit in the states of Missouri,
Illinois, and Tennessee.

(2) Includes the effects of a pre-tax legal reversion of $22.4 million
associated with the settlement of three class action lawsuits in the state
of New Jersey.

(3) During 1999, we did not acquire nor sell any stores. However, we did
consolidate 51 stores into existing locations.

29

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities decreased by $15.8 million to $175.7
million in 2001 from $191.5 million in 2000. This decrease resulted from a
decrease in net earnings, an increase in taxes paid or payable as a result of
the utilization of net operating loss carryforwards and an increase in the
amount of rental merchandise purchased during 2001 as a result of strong
consumer demand, offset by increased depreciation of rental merchandise and
increases in accrued liabilities primarily related to self-insurance liabilities
and litigation.

Cash used in investing activities increased by $27.6 million to $106.7
million in 2001 from $79.1 million in 2000. This increase is primarily
attributable to an increase in the amount of maintenance capital expenditures
made in 2001 versus 2000, the acquisition of more new store locations in 2001
and increases in purchases of property assets related to our store expansion
program.

Cash provided by financing activities increased by $100.1 million to $2.4
million in 2001, compared to net cash used of $97.7 million in 2000. This
increase is primarily related to the net proceeds of approximately $45.6 million
from the issuance of our common stock in May 2001, the net proceeds of
approximately $99.5 million from the issuance of our senior subordinated notes
in December 2001, as well as an increase in the amount of stock options
exercised during 2001 as compared to 2000. This increase was partially offset by
the repurchase of $25.0 million of our common stock from Mr. Talley and debt
repayments under our senior credit facilities of approximately $138.0 million
from the proceeds from the May 2001 offering, the December 2001 offering, and
from available cash flow from operations.

Liquidity Requirements. Our primary liquidity requirements are for debt
service, rental merchandise purchases, capital expenditures, litigation and our
store expansion program. Our primary sources of liquidity have been cash
provided by operations, borrowings and sales of debt and equity securities. In
the future, we may incur additional debt, or may issue debt or equity securities
to finance our operating and growth strategies. The availability and
attractiveness of any outside sources of financing will depend on a number of
factors, some of which relate to our financial condition and performance, and
some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance that additional financing
will be available, or if available, that it will be on terms we find acceptable.

We believe that the cash flow generated from operations, together with
amounts available under our senior credit facilities, will be sufficient to fund
our debt service requirements, rental merchandise purchases, capital
expenditures, litigation and our store expansion intentions during 2002. Our
revolving credit facilities provide us with revolving loans in an aggregate
principal amount not exceeding $130.0 million, of which $66.4 million was
available at March 22, 2002. At March 22, 2002, we had $142.0 million in cash.
While our operating cash flow has been strong and we expect this strength to
continue, our liquidity could be negatively impacted if we do not remain as
profitable as we expect.

Rental Merchandise Purchases. We purchased $532.5 million, $462.1 million
and $513.9 million of rental merchandise during 2001, 2000 and 1999,
respectively. During 1999, we ma