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, 2002
[ ] 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 45-0491516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

AGGREGATE MARKET VALUE OF THE 33,631,901 SHARES OF COMMON STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT AT THE CLOSING SALES PRICE ON
MARCH 24, 2003......................................... $1,854,799,340

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF THE CLOSE OF
BUSINESS ON MARCH 24,
2003:.......................................................34,853,773

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive proxy statement relating to the 2003 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

Unless the context indicates otherwise, references to "we," "us" and "our"
refers to the consolidated business operations of Rent-A-Center, Inc., the
parent, and all of its direct and indirect subsidiaries.

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, 2002, we
operated 2,407 company-owned stores nationwide and in Puerto Rico, including 23
stores in Wisconsin operated by our subsidiary Get It Now, LLC under the name
"Get It Now." Another of our subsidiaries, ColorTyme, Inc., is a national
franchisor of rent-to-own stores. At December 31, 2002, ColorTyme had 318
franchised stores in 40 states, 306 of which operated under the ColorTyme name
and 12 of which operated under the Rent-A-Center name. These franchise stores
represent a further 4% market share based on store count.

Our stores generally offer high quality, durable products such as home
electronics, appliances, computers and furniture and accessories under flexible
rental purchase agreements that generally allow the customer to obtain ownership
of the merchandise at the conclusion of an agreed upon rental period. These
rental purchase agreements are designed to appeal to a wide variety of customers
by allowing them to obtain merchandise that they might otherwise be unable to
obtain due to insufficient cash resources or a lack of access to credit. These
agreements also cater to customers who only have a temporary need or who simply
desire to rent rather than purchase the merchandise. Get It Now offers our
merchandise on an installment sales basis in Wisconsin. We offer well known
brands such as Philips, Sony, JVC, Toshiba and Mitsubishi home electronics,
Whirlpool appliances, Dell, IBM, Compaq and Hewlett-Packard computers and
Ashley, England, Berkline and Standard 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 at no charge, including 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.

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. We do not intend for information
contained on our website to be part of this Form 10-K. We make available free of
charge on or through our website our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
or furnish it to the SEC. Additionally, we voluntarily will provide electronic
or paper copies of our filings free of charge upon request.

CORPORATE REORGANIZATION

Effective as of December 31, 2002, we completed a tax-free internal
reorganization of our corporate structure. The reorganization was effected
through an inversion merger whereby Rent-A-Center, Inc. became a wholly-owned
subsidiary of Rent-A-Center Holdings, Inc., a newly formed Delaware holding
company, which was incorporated as a Delaware corporation on November 26, 2002.
Upon the merger, Rent-A-Center, Inc. changed its name to "Rent-A-Center East,
Inc.," and Rent-A-Center Holdings, Inc. adopted the name "Rent-A-Center, Inc."
The newly formed parent company, Rent-A-Center, Inc., is deemed the "successor
issuer" to Rent-A-Center East, Inc. Rent-A-Center East was originally
incorporated as a Delaware corporation on September 16, 1986.

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INDUSTRY OVERVIEW

According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,300 stores, and provides approximately 7.0 million
products to over 2.8 million households each year. We estimate the six largest
rent-to-own industry participants account for approximately 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."

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, in the later part of 2001, we 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 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, IBM, Compaq and Hewlett-Packard computers and Ashley, England,
Berkline and Standard 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.

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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 2,407
at December 31, 2002, primarily through acquisitions. During this period, we
acquired over 2,200 company-owned stores and over 350 franchised stores in more
than 120 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.

Having successfully integrated the Thorn Americas and Central Rents
acquisitions, we resumed our strategy of increasing our store base. The table
below summarizes the store growth activity over the last three fiscal years.

In February 2003, we acquired substantially all of the assets of 295 stores
located throughout the United States from Rent-Way, Inc. and certain of its
subsidiaries for approximately $100.4 million in cash. Of the 295 stores, 176
were merged with existing locations. For more details on the Rent-Way
transaction, please read the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments." Furthermore, since December 31, 2002, we acquired additional
accounts from one store location for approximately $100,000 in cash and opened
an additional 20 new stores. We also closed three stores, merging them with
existing stores, resulting in a total store count of 2,543 at March 24, 2003.

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 strategies to increase our name recognition and enhance
our national brand. As part of that strategy, we utilize television and radio
commercials, print, direct response and in-store signage, all of which are
designed to increase our name recognition among our customers and potential
customers. 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 customer about the rent-to-own alternative to merchandise purchases
as well as solidify our reputation as a leading provider of high quality branded
merchandise.

4

OUR STORES

At December 31, 2002, we operated 2,407 stores nationwide and in Puerto
Rico. In addition, our subsidiary ColorTyme franchised 318 stores in 40 states.
This information is illustrated by the following table:

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* Represents stores operated by Get It Now, LLC, one of our subsidiaries.

Our stores average approximately 4,400 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. 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

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December 31, 2002, home electronic products accounted for approximately 42% of
our store rental revenue, furniture and accessories for 32%, appliances for 16%
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 high definition and
wide-screen 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 and laptop computers from Dell, IBM, 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, Berkline and Standard and
other top brand manufacturers. Accessories include pictures, 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 6 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 the store in cash, by money order or debit card.
Approximately 85% of our customers pay 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

On average, 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 23 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 covering the
particular loss. Most of the products we offer are covered by a
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manufacturer's warranty for varying periods, which, subject to the terms of the
warranty, is transferred to the customer in the event that the customer obtains
ownership.

COLLECTIONS

Store managers use our management information system to track collections
on a daily basis. Our goal is to have no more than 6.50% of our rental
agreements past due one day or more each Saturday evening. For fiscal years
2002, 2001 and 2000, the average week ending past due percentages were 5.95%,
5.74% and 5.83%, respectively. 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 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 each of 2002, 2001 and 2000.

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, store management is required to count the store's
inventory on hand and compare the count to the accounting records, with the
market manager performing a similar audit at least bi-monthly. 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 ensuring 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, 2002, we had 328 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 store managers are following the operational guidelines,
particularly those involving store presentation, collections, inventory levels
and order verification. The regional directors report to eight senior vice
presidents at our headquarters. The regional directors receive a significant
amount of their compensation based on the profitability of the stores under
their management.

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 management information and control system. Each store is equipped
with a computer system utilizing point of sale software developed

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by High Touch. This system tracks individual components of revenue, each item in
idle and rented inventory, total items on rent, delinquent accounts, items in
service and other account information. We electronically gather each day's
activity report, which provides our executive management with access to all
operating and financial information concerning 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 1.5 million rental purchase
agreements, which often include more than one unit of merchandise. In addition,
our bank reconciliation 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 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 our 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. Additionally, we have predetermined levels of inventory allowed in
each store which restrict levels of merchandise that may be purchased. All
merchandise is shipped by vendors directly to each store, where it is held for
rental. We do not utilize any distribution centers. 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 16.3%, 14.0%, and 10.0%, respectively,
of merchandise purchased in 2002. 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 that obligate us to meet certain minimum
purchasing levels. 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 years ended December 31, 2002, 2001 and 2000 was approximately 3.2%, 4.0%
and 4.0%, respectively. 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.

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 8,300 rent-to-own stores in the United States. We are
the largest operator in the rent-to-own industry with 2,407 stores and 318
franchised locations

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as of December 31, 2002. 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, 2002, ColorTyme franchised 318 rent-to-own stores in 40 states. These
rent-to-own stores offer high quality durable products such as home electronics,
appliances, computers and furniture and accessories. During 2002, 16 new
locations were added, four were closed and 36 were sold, of which 35 were sold
to us.

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 2.0% 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 retrieve data and information from the franchised stores' computer
systems. The franchise agreements also limit the ability of the franchisees to
compete against other franchisees.

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. ColorTyme negotiates purchase arrangements
with various suppliers it has approved. ColorTyme's largest supplier is
Whirlpool, which accounted for approximately 14.9% of merchandise purchased by
ColorTyme in 2002.

ColorTyme is a party to an agreement with Textron Financial Corporation,
who provides $40.0 million in aggregate 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. An
additional $10.0 million of financing is provided by Texas Capital Bank,
National Association under an arrangement similar to the Textron financing. We
guarantee the obligations of ColorTyme under these agreements up to a maximum
amount of $50.0 million, of which $33.8 million was outstanding as of December
31, 2002. Mark E. Speese, our Chairman of the Board and Chief Executive Officer,
is a passive investor in Texas Capital Bank, owning less than 1% of its
outstanding equity.

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. ColorTyme also has the right to
require franchisees 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.

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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 stores.

The ColorTyme franchise agreement provides us a right of first refusal to
purchase the franchise location of a ColorTyme franchisee that wishes to exit
the business or that goes into default under their financing agreement.

GET IT NOW OPERATIONS

On September 30, 2002, we transferred all of our Wisconsin store operations
to a newly formed wholly-owned subsidiary, Get It Now, LLC. On October 1, 2002,
Get It Now began operations in the state of Wisconsin under a retail operation
which generates installment credit sales through a retail transaction. As of
December 31, 2002, we operated 23 company-owned stores within Wisconsin, all of
which operate under the name "Get It Now."

TRADEMARKS

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

EMPLOYEES

As of March 21, 2003, we had approximately 14,300 employees, of whom 255
are assigned to our headquarters and the remainder are directly involved in the
management and operation of our stores and service centers. As of the same date,
we had approximately 20 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. However, we have not entered into a collective bargaining agreement
covering these employees. We believe relationships with our employees and
ColorTyme's relationships with its employees are generally good.

In connection with the settlement of the Wilfong matter finalized in
December 2002, we entered into a four-year consent decree, which can be extended
by the Wilfong court for an additional one year upon a showing of good cause. We
also 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 settlement of
the Wilfong matter.

GOVERNMENT REGULATION

STATE REGULATION

Currently 47 states, the District of Columbia 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

10

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, generally do not
become applicable unless the total rental payments required under an agreement
exceed 2.0 times to 2.4 times the disclosed cash price or the retail value of
the rental product.

Minnesota, which has a rental purchase statute, and New Jersey and
Wisconsin, 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 utilized a separate
rental agreement in Minnesota which does not provide customers with an option to
purchase rented merchandise. In New Jersey, we have provided increased
disclosures and longer grace periods. In Wisconsin, our Get It Now customers are
provided an opportunity to purchase our merchandise through an installment sale
transaction. We operate four stores in Minnesota and 40 stores in New Jersey.
Our subsidiary Get It Now operates 23 stores in Wisconsin. Please read 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 97
stores in North Carolina.

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.

FEDERAL LEGISLATION

To date, 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, we have supported legislation introduced in Congress
that would regulate the rental purchase transaction by establishing a national
standard relating to the various disclosures, procedures and rent-to-own
transaction structures with which we must comply. While both beneficial and
adverse legislation may be introduced in Congress in the future, 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. We believe these are all the material risks currently
facing our business. Our business, financial condition or results of operations
could be materially adversely affected by 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. You should also refer to the other information included
or incorporated by reference in this report, including our financial statements
and related notes.

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

As part of our growth strategy, we intend to increase our total number of
stores in both existing markets and new markets through a combination of new
store openings and store acquisitions. We increased our store base by 83 stores
in 2000, 123 stores in 2001 and 126 stores in 2002. We also recently completed
the acquisition of 295 stores from Rent-Way and certain of its subsidiaries. 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 our 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.

Our continued growth also depends on our ability to increase sales in our
existing stores. Our same store sales increased by 12.6%, 8.0% and 6.0% for
2000, 2001 and 2002, respectively. As a result of new store openings in existing
markets and because mature stores will represent an increasing proportion of our
store base over time, our same store sale increases in future periods may be
lower than historical levels.

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 a class
action lawsuit alleging we violated the securities laws and lawsuits alleging we
violated state wage and hour laws. 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 indenture governing Rent-A-Center East's 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 indenture governing
Rent-A-Center East's outstanding subordinated notes restrict our ability to pay
dividends, engage in various operational matters, as well as
12

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 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
accelerate 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 Rent-A-Center East's outstanding
subordinated notes, as well as limiting the 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 a
third party became the beneficial owner of 33.33% or more of our voting stock or
upon certain changes in the constitution of our Board of Directors. As of
December 31, 2002, we were required to make principal payments under our senior
credit facilities of $1.1 million in 2003, $13.0 million in 2004, $49.1 million
in 2005, $114.1 million in 2006, and $72.2 million after 2006. These payments
reduce our cash flow. If the lenders under our debt instruments accelerate these
obligations, we may not have sufficient liquid assets to repay amounts
outstanding under these agreements.

Under the indenture governing Rent-A-Center East's outstanding subordinated
notes, in the event that a change in control occurs, Rent-A-Center East may be
required to offer to purchase all of its 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.

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.

13

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.

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
Chief Operating Officer, and Dana F. Goble our Executive Vice President --
Operations. We do not have employment contracts with or maintain key-person
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
OVER THE OUTCOME OF CERTAIN CORPORATE TRANSACTIONS AFFECTING US, INCLUDING
POTENTIAL MERGERS OR ACQUISITIONS, THE CONSTITUTION OF OUR BOARD OF DIRECTORS
AND SALES OR CHANGES IN CONTROL.

Affiliates of Apollo Management IV, L.P. hold all of our outstanding Series
A preferred stock. Under the terms of our Series A preferred stock, the holders
of Series A preferred stock generally have the right to elect two members to our
board of directors. In addition, pursuant to the terms of a stockholders
agreement entered into among us, Apollo, Mark E. Speese and certain other
parties, Apollo has the right to designate a third person to be nominated to our
board of directors. The terms of our Series A preferred stock as well as the
stockholders agreement also contain provisions requiring Apollo's approval to
effect certain transactions involving us, including repurchasing shares of our
common stock, declaring or paying any dividend on our common stock, increasing
the size of our board of directors, selling all or substantially all of our
assets and entering into any merger or consolidation or other business
combination.

These documents also provide that one member of each of our audit
committee, compensation committee and finance committee must be a director who
was elected by Apollo. In addition, the terms of our Series A preferred stock
and the stockholders agreement restrict our ability to issue debt or equity
securities with a value in excess of $10 million without the majority
affirmative vote of our finance committee, and in most cases, require the
unanimous vote of our finance committee for the issuance of our equity
securities with a value in excess of $10 million.

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 indenture governing Rent-A-Center East's 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.

14

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, changes in same store sales and when and how many
stores we acquire or open;

- quarterly variations in our competitors' results of operations;

- 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. Store
sizes range from approximately 1,800 to 25,000 square feet, and average
approximately 4,400 square feet. Approximately 80% of each store's space is
generally used for showroom space and 20% for offices and storage space. Our
headquarters, including Get It Now, and ColorTyme's headquarters are each
located at 5700 Tennyson Parkway, Plano, Texas, and consist of approximately
78,536 and 5,116 square feet devoted to our operations and ColorTyme's
operations, respectively.

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 material 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 plaintiff filed this class action in
November 1997 in New York state court. This matter was assumed by us in
connection with the Thorn Americas acquisition, and appropriate purchase
accounting adjustments were made for such contingent liabilities. The plaintiff
acknowledges that rent-to-own transactions in New York are subject to the
provisions of New York's Rental Purchase Statute but contends the Rental
Purchase Statute does not provide Thorn Americas immunity from suit for other
statutory violations. The plaintiff alleges Thorn Americas has a duty to
disclose effective interest under New York consumer protection laws, and seek
damages and injunctive relief for Thorn Americas' failure to do so. This suit
also alleges violations relating to excessive and unconscionable pricing, late
fees, harassment, undisclosed charges, and the ease of use and accuracy of its
payment records. In the prayer for relief, the plaintiff requested class
certification, injunctive relief requiring Thorn Americas to cease certain
marketing practices and price their rental purchase contracts in certain ways,
unspecified compensatory and punitive damages, rescission of the class members
contracts, an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period, treble
damages, attorney's fees, filing fees and costs of suit, pre- and post-judgment
interest, and any further relief granted by the court. The plaintiff has not
alleged a specific monetary amount with respect to the request for damages.

The proposed class includes all New York residents who were party to Thorn
Americas' rent-to-own contracts from November 26, 1994. In November 2000,
following interlocutory appeal by both parties from the denial of cross-motions
for summary judgment, we obtained a favorable ruling from the Appellate Division
of the State of New York, dismissing the plaintiff's claims based on the alleged
failure to disclose an effective interest rate. The plaintiff's other claims
were not dismissed. The plaintiff moved to certify a state-wide class in
December 2000. The plaintiff's class certification motion was heard by the court
on November 7, 2001 and, on September 12, 2002, the court issued an opinion
denying in part and granting in part the plaintiff's requested certification.
The opinion grants certification as to all of the plaintiff's claims except the
plaintiff's pricing claims pursuant to the Rental Purchase Statute, as to which
certification was denied. The parties have differing views as to the effect of
the court's opinion, and accordingly, the court has granted the parties
permission to submit competing orders as to the effect of the opinion on the
plaintiff's specific claims. We anticipate submitting our proposed order to the
court in the near future, but in any event intend to pursue an interlocutory
appeal of the court's certification order.

We believe these claims are without merit and will continue to vigorously
defend ourselves in this case. However, we cannot assure you that we will be
found to have no liability in this matter.
16

Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin
Attorney General filed suit against us and our subsidiary ColorTyme in the
Circuit Court of Milwaukee County, Wisconsin, alleging that our rent-to-rent
transaction, coupled with the opportunity afforded our rental customers to
purchase the rented merchandise under what we believed was a separate
transaction, was a disguised credit sale subject to the Wisconsin Consumer Act.
Accordingly, the Attorney General alleged that we failed to disclose credit
terms, misrepresented the terms of the transaction and engaged in unconscionable
practices. The Attorney General sought injunctive relief, restoration of any
losses suffered by any Wisconsin consumer harmed and civil forfeitures and
penalties in amounts ranging from $50 to $10,000 per violation.

On October 1, 2002, in anticipation of the settlement of this matter, we
changed our business practices in Wisconsin to a retail sale model. Accordingly,
our 23 Wisconsin stores now offer credit sale transactions and operate under our
subsidiary Get It Now, which is subject to regulation under the Wisconsin
Consumer Act.

On November 12, 2002, we signed a settlement agreement for this suit with
the Attorney General, which was approved by the court on the same day. Under the
terms of the settlement, we created a restitution fund in the amount of $7.0
million for our eligible Wisconsin customers who had completed or active
transactions with us as of September 30, 2002. In addition, we paid $1.4 million
to the State of Wisconsin for fines, penalties, costs and fees. A portion of the
restitution fund is allocated for customers with completed transactions as of
September 30, 2002, and the balance is allocated for restitution on active
transactions as of September 30, 2002, which will be allowed to terminate
according to their terms when customers either acquire or return the
merchandise. Restitution will be offered on the active transactions when all
such active transactions have terminated, which we anticipate will occur by the
fall of 2004. Any unclaimed restitution funds at the conclusion of the
restitution period will be returned to us. To the extent the amount in the
restitution fund is insufficient to pay the required amount of restitution, we
are obligated to provide additional funds to do so. However, we believe the
amount in the restitution fund allocated for the active transactions, together
with the amount of funds we anticipate will remain unclaimed by customers with
completed transactions, will be sufficient to pay the required amount of
restitution on all eligible active transactions. Any customer accepting a
restitution check will be required to release us and our subsidiary ColorTyme
from all claims related to their transaction or transactions with us. We,
together with ColorTyme, also agreed to enter into an injunction requiring each
of us to comply with the Wisconsin Consumer Act in any transaction in Wisconsin
in which the customer can become the owner of merchandise other than through a
single lump sum payment.

Terry Walker, et. al. v. Rent-A-Center, Inc., et. al. On January 4, 2002,
a putative class action was filed against us and certain of our current and
former officers and directors by Terry Walker in federal court in Texarkana,
Texas. The complaint alleges that the defendants violated Sections 10(b) and/or
Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by issuing false and misleading statements and omitting material
facts regarding our financial performance and prospects for the third and fourth
quarters of 2001. The complaint purports to be brought on behalf of all
purchasers of our common stock from April 25, 2001 through October 8, 2001 and
seeks damages in unspecified amounts. Similar complaints were consolidated by
the court with the Walker matter in October 2002.

On November 25, 2002, the lead plaintiffs in the Walker matter filed an
amended consolidated complaint which added certain of our outside directors as
defendants to the Exchange Act claims. The amended complaint also added
additional claims that we, and certain of our current and former officers and
directors, violated various provisions of the Securities Act of 1933 as a result
of alleged misrepresentations and omissions in connection with an offering in
May 2001 and also added the managing underwriters in that offering as
defendants.

On February 7, 2003, we, along with the officer and director defendants,
filed a motion to dismiss the matter as well as a motion to transfer venue. On
February 19, 2003, the underwriter defendants also filed a motion to dismiss.
The court has scheduled a hearing for June 26, 2003 to hear each of these
motions.

We believe the plaintiff's claims in this matter are without merit and
intend to vigorously defend ourselves. However, we cannot assure you that we
will be found to have no liability in this matter.

Gregory Griffin, et. al. v. Rent-A-Center, Inc. On June 25, 2002, a suit
originally filed by Gregory Griffin in state court in Philadelphia, Pennsylvania
was amended to seek relief both individually and on behalf of a class of
customers in Pennsylvania, alleging that we violated the Pennsylvania Goods and
Services Installment

17

Sales Act and the Pennsylvania Unfair Trade Practices and Consumer Protection
Law. The amended complaint asserts that our rental purchase transactions are, in
fact, retail installment sales transactions, and as such, are not governed by
the Pennsylvania Rental-Purchase Agreement Act, which was enacted after the
adoption of the Pennsylvania Goods and Services Installment Sales Act and the
Pennsylvania Unfair Trade Practices Act. Griffin's suit seeks class-wide
remedies, including injunctive relief, unspecified statutory, actual and treble
damages, as well as attorney's fees and costs.

In July 2002, we filed preliminary objections to the complaint in Griffin.
On December 13, 2002, the court granted our preliminary objections and dismissed
the plaintiffs' claims. On January 6, 2003, the plaintiffs filed a notice of
appeal. We believe the plaintiffs' claims in this matter are without merit and
intend to vigorously defend ourselves. However, we cannot assure you that we
will be found to have no liability in this matter.

State Wage and Hour Class Actions. On August 20, 2001, a putative class
action was filed against us in state court in Multnomah County, Oregon entitled
Rob Pucci, et. al. v. Rent-A-Center, Inc. alleging violations of Oregon state
law regarding overtime, lunch and work breaks and failure to timely pay all
wages due our Oregon employees, as well as contract claims that we promised but
failed to pay overtime. Pucci seeks to represent a class of all present and
former executive assistants, inside/outside managers and account managers
employed by us within the six year period prior to the filing of the complaint
as to the contract claims, and three years as to the statutory claims, and seeks
class certification, payments for all unpaid wages under Oregon law, statutory
and civil penalties, costs and disbursements, pre- and post-judgment interest in
the amount of 9% per annum and attorneys fees. As of March 24, 2003, we operated
23 stores in Oregon. On July 25, 2002, the plaintiffs filed a motion for class
certification and on July 31, 2002, we filed our motion for summary judgment. On
January 15, 2003, the court orally granted our motion for summary judgment in
part, ruling that the plaintiffs were prevented from recovering overtime
payments at the rate of "time and a half," but stated that the plaintiffs may
recover "straight-time" to the extent plaintiffs could prove purported class
members worked in excess of forty hours in a work week but were not paid for
such time worked. The court denied our motion for summary judgment on the
remaining claims and granted plaintiff's motion for class certification with
respect to the remaining claims. We strongly disagree with the court's rulings
against our positions and have requested that the court grant us interlocutory
appeal on those matters. Although we believe the claims remaining in this case
are without merit, we cannot assure you we will be found to have no liability in
this matter.

We are subject to a similar suit pending in Clark County, Washington
entitled Kevin Rose, et al. v. Rent-A-Center, Inc., et al. and two similar suits
pending in Los Angeles, California entitled Jeremy Burdusis, et al. v.
Rent-A-Center, Inc., et al. and Israel French, et al. v. Rent-A-Center, Inc.,
each of which allege similar violations of the wage and hour laws of those
respective states. As of March 24, 2003, we operated 41 stores in Washington and
151 stores in California. The same law firm seeking to represent the purported
class in Pucci is seeking to represent the purported class in two of the three
similar suits. Although the wage and hour laws and class certification
procedures of Oregon, Washington and California contain certain differences that
could cause differences in the outcome of the pending litigation in these
states, we believe the claims of the purported classes involved in each are
without merit. We cannot assure you, however, that we will be found to have no
liability in these matters.

Gender Discrimination Actions. In June 2002, we agreed to settle the
Wilfong and Tennessee EEOC gender discrimination matters for an aggregate of
$47.0 million, including attorneys fees. Such settlement contemplated dismissal
of the Bunch proceeding, a similar suit for gender discrimination pending in a
separate federal district court, and provided for a separate $2.0 million
dispute resolution fund for the Bunch plaintiffs, which was subsequently
approved by the Bunch court. On October 4, 2002, the court in the Wilfong matter
approved the settlement we had reached with the Wilfong plaintiffs and entered a
final judgment. Only 50 individuals opted out of the settlement and no timely
objections were filed with the court. No party filed an appeal of the court's
order, and we funded the settlement as provided for in the settlement agreement
in December 2002. As contemplated by the Wilfong settlement, the Tennessee EEOC
action was dismissed in December 2002, and the Bunch matter will be dismissed in
the near future.

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 24, 2003, there were approximately 52 record holders of our
common stock.

We have not paid any cash dividends on our common stock since the time of
our initial public offering.

Under the terms of the certificate of designations governing our Series A
preferred stock, dividends on our Series A preferred stock may be paid in cash
or additional shares of Series A preferred stock, at our option, until August 5,
2003, after which time the dividends must be paid in cash. From the time of the
issuance of our Series A preferred stock in August 1998 until December 2002, we
paid the required dividends in additional shares of Series A preferred stock due
to restrictions under our senior credit facility. These additional shares were
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 were convertible into
our common stock at a conversion price of $27.935.

On August 5, 2002, the first date on which we had the right to optionally
redeem the shares of Series A preferred stock, the holders of our Series A
preferred stock converted all but two shares of our Series A preferred stock
held by them into 7,281,548 shares of our common stock, thereby substantially
eliminating the Series A preferred stock dividend requirements. In December
2002, we amended our senior credit facility to, among other things, allow for
payments of dividends in cash, subject to certain restrictions.

Cash dividend payments are also subject to the restrictions in the
indenture governing Rent-A-Center East's subordinated notes. These restrictions
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.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the five years ended
December 31, 2002 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 settlement of $52.0 million
associated with the 2001 settlement of class action lawsuits 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 1999 settlement of three class action lawsuits in the
state of New Jersey.

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

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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, 2002, we
operated 2,407 company-owned stores nationwide and in Puerto Rico, including 23
stores located in Wisconsin and operated by our subsidiary Get It Now, LLC under
the name "Get It Now." Another of our subsidiaries, ColorTyme, is a national
franchisor of rent-to-own stores. At December 31, 2002, ColorTyme had 318
franchised stores in 40 states, 306 of which operated under the ColorTyme name
and 12 stores of which operated under the Rent-A-Center name. Our stores
generally offer high quality durable products such as home electronics,
appliances, computers, and furniture and accessories under flexible rental
purchase agreements that generally allow the customer to obtain ownership of the
merchandise at the conclusion of an agreed-upon rental period. These rental
purchase agreements are designed to appeal to a wide variety of customers by
allowing them to obtain merchandise that they might otherwise be unable to
obtain due to insufficient cash resources or a lack of access to credit. These
agreements also cater to customers who only have a temporary need, or who simply
desire to rent rather than purchase the merchandise.

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

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

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

If a change in control occurs, Rent-A-Center East may be required to offer
to repurchase all of its outstanding subordinated notes at 101% of their
principal amount, plus accrued interest to the date of repurchase. Our senior
credit facility restricts our ability to repurchase the 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. In the event a change in control
occurs, we cannot be sure we would have enough funds to immediately pay our
accelerated senior credit facility obligations and all of the subordinated
notes, or that we would be able to obtain financing to do so on favorable terms,
if at all.

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FORWARD-LOOKING STATEMENTS

The statements, other than statements of historical facts, included in this
report are forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology, such as "may," "will,"
"would," "expect," "intend," "could," "estimate," "should," "anticipate" or
"believe." We believe 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 our 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;

- 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;

- changes in our stock price and the number of shares of common stock that
we may or may not repurchase under our common stock repurchase program;
and

- the other risks detailed from time to time in our SEC 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 ACCOUNTING POLICIES INVOLVING 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 accounting principles, we must often
make individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are generally
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as they
are known. Our estimates, judgments and assumptions are continually evaluated
based on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.

Actual results related to the estimates and assumptions made by us in
preparing our consolidated financial statements will emerge over periods of
time, such as estimates and assumptions underlying the determination of our
self-insurance liabilities. These estimates and assumptions are closely
monitored by us and periodically adjusted as circumstances warrant. For
instance, our liability for our self-insured retentions related to our workers
compensation, general liability, medical and auto liability may be adjusted
based on

23

higher or lower actual loss experience. Although there is greater risk with
respect to the accuracy of these estimates and assumptions because of the period
over which actual results may emerge, such risk is mitigated by our ability to
make changes to these estimates and assumptions over the same period.

In preparing our financial statements at any point in time, we are also
periodically faced with uncertainties, the outcomes of which are not within our
control and will not be known for prolonged periods of time. As discussed in
Part 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
violations of wage and hour laws in our employment practices, as well as claims
we violated the federal securities laws. We, together with our counsel, make
estimates, if determinable, of our probable liabilities and record such amounts
in our consolidated financial statements. These estimates represent our best
estimate, or may be the minimum range of probable loss when no single best
estimate is determinable. We, together with our counsel, monitor developments
related to these legal matters and, when appropriate, adjustments are made to
liabilities to reflect current facts and circumstances.

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

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 fairly present in all
material respects the financial condition, results of operations and cash flows
of our company as of, and for, the periods presented in this report. However, 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. On July 1,
2002, we began accelerating the depreciation on computers that are 21 months old
or older and which have become idle using the straight-line method for a period
of at least six months. The purpose for this change is to better reflect the
depreciable life of a computer in our stores and to encourage the sale of older
computers. Though this method will accelerate the depreciation expense on the
affected computers, we do not expect it to have a material effect on our
financial position, results of operations or cash flows in future periods.

24

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

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

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

Amortization of Intangibles. Amortization of intangibles consists
primarily of the amortization of the excess of purchase price over the fair
market value of acquired assets and liabilities. Effective January 1, 2002,
under SFAS 142 all goodwill and intangible assets with indefinite lives are no
longer subject to amortization. SFAS 142 requires that an impairment test be
conducted annually and in the event of an impairment indicator. We conducted our
transition test in 2002 which showed no impairment of our goodwill. Following
the adoption of SFAS 142, our primary source of amortization comes from customer
relationships and non-compete agreements.

RECENT DEVELOPMENTS

Rent-Way Acquisition. In February 2003, we completed the acquisition of
substantially all of the assets of 295 rent-to-own stores from Rent-Way, Inc.
for an aggregate purchase price of $100.4 million in cash. Of the aggregate
purchase price, we held back $10.0 million to pay for various indemnified
liabilities and expenses, if any. We funded the acquisition entirely from cash
on hand. Of the 295 stores, 176 were merged with our existing stores.

Stock Repurchases. From January 1, 2003 through March 24, 2003, we
repurchased 276,000 shares of our common stock pursuant to our common stock
repurchase program for approximately $13.5 million.

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, 2002 AND 2001

Store Revenue. Total store revenue increased by $203.6 million, or 11.6%,
to $1,952.7 million for 2002 from $1,749.1 million for 2001. The increase in
total store revenue was primarily attributable to growth in same store revenues
during 2002 as well as incremental revenues from the opening of 70 stores and
the acquisition of 83 stores and accounts from another 126 stores in 2002.

Same store revenues represent those revenues earned in 1,834 stores that
were operated by us for each of the entire years ending December 31, 2002 and
2001. Same store revenues increased by $88.9 million, or 6.0%, to $1,570.7
million for 2002 from $1,481.8 million in 2001. This improvement was primarily
attributable to an increase in the number of customers served (approximately 401
per day per store as of December 31, 2002 versus approximately 395 per day per
store as of December 31, 2001 in same stores open), as well as revenue earned
per customer (approximately $2,136 per customer for the year ending December 31,
2002 versus approximately $2,045 per customer for 2001). Merchandise sales
increased $20.8 million, or 21.9%, to $115.5 million for 2002 from $94.7 million
in 2001. The increase in merchandise sales was primarily attributable to an
increase in the number of items sold in 2002 (approximately 875,000) as compared
to the number of items sold in 2001 (approximately 761,000), which was primarily
the result of an increase in the number of customers exercising early purchase
options.

Franchise Revenue. Total franchise revenue decreased by $2.2 million, or
3.6%, to $57.3 million for 2002 from $59.5 million in 2001. This decrease was
primarily attributable to a decrease in merchandise sales to franchise locations
during 2002 as compared to 2001 resulting from a decrease in the number of
franchised locations from 342 at December 31, 2001 to 318 at December 31, 2002.

Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $40.2 million, or 11.7%, to $383.4 million for 2002 from $343.2
million for 2001. This increase was primarily attributable to an increase in
rental and fee revenue of $177.6 million, or 10.7%, to $1,828.5 million for 2002
from $1,650.9 for 2001, as well as $2.4 million of the additional depreciation
recognized on computers in 2002 relating to our revised depreciation policy on
computers. Depreciation of rental merchandise expressed as a percentage of store
rentals and fees revenue increased to 21.0% in 2002 from 20.8% in 2001. This
slight increase in 2002 is primarily a result of in-store promotions and pricing
changes made during the third quarter of 2001, which included a reduction in the
rates and terms on certain rental agreements, causing depreciation to be a
greater percentage of store rentals and fees revenue on those promotional items
rented through 2002.

Cost of Merchandise Sold. Cost of merchandise sold increased by $12.1
million, or 16.7%, to $84.6 million for 2002 from $72.5 million in 2001. This
increase was a result of an increase in the number of items sold in 2002, as
compared to 2001, resulting from an increase in early purchase options exercised
in 2002 as compared to 2001.

Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 54.8% for 2002 from 58.3% for
2001. This decrease was primarily attributable to an increase in store revenues
during the year ended December 31, 2002 as compared to 2001, coupled with the

26

realization of our margin enhancement initiatives and reductions in store level
costs in 2002, including our regional pay plan we implemented in 2002.

Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
decreased by $2.1 million, or 4.0%, to $49.2 million for 2002 from $51.3 in
2001. This decrease is a direct result of a decrease in merchandise sales to
franchise locations in 2002 as compared to 2001, offset by a slight increase in
gross profit on these sales, to 4.7% in 2002 as compared to 4.6% in 2001.

General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue increased slightly to 3.2% in 2002 from
3.1% in 2001. This increase is primarily attributable to an increase in home
office labor and other overhead expenses for 2002 as compared to 2001.

Amortization of Intangibles. Amortization of intangibles decreased by
$25.2 million, or 83.3%, to $5.0 million for 2002 from $30.2 million in 2001.
This decrease was directly attributable to the implementation of SFAS 142, which
requires that goodwill and other intangibles with indefinite lives no longer be
amortized.

Operating Profit. Operating profit increased by $165.8 million, or 89.9%,
to $350.4 million for 2002 from $184.6 million for 2001. 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, operating profit increased by $113.9 million, or 48.1%, for the year ended
December 31, 2002 from $236.6 million for the year ended December 31, 2001.
Operating profit as a percentage of total revenue increased to 17.4% for the
year ended December 31, 2002 from 13.1% for the year ended December 31, 2001
before the pre-tax class action litigation settlement charges of $52.0 million.
This increase was primarily attributable to an increase in store revenues during
the year ended December 31, 2002 as compared to 2001, coupled with the
realization of our margin enhancement initiatives, reduction of store level
costs and the reduction of intangible amortization expense as discussed above.
After adjusting reported results for the year ended December 31, 2001 to exclude
the effects of goodwill amortization and the non-recurring legal charges,
operating profit increased by $85.9 million, or 32.5% on a comparable basis.

Net Earnings. Net earnings were $172.2 million for the year ended December
31, 2002 and $66.2 million for the year ended December 31, 2001. Before the
after-tax effect of the $52.0 million class action litigation settlement charges
recorded in 2001, net earnings increased by $74.7 million, or 76.6%, for the
year ended December 31, 2002, from $97.5 million for the year ended December 31,
2001. This increase is primarily attributable to growth in operating profit as
discussed above. After adjusting reported results for the year ended December
31, 2001 to exclude the effects of goodwill amortization and the non-recurring
legal charges, net earnings increased by $52.7 million, or 43.1% on a comparable
basis.

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 decreased by $5.2 million, or 33.7%, to $10.2 million for the year
ended December 31, 2002 as compared to $15.4 million in 2001. This decrease is a
direct result of the conversion of 97,197 shares of preferred stock into
3,500,000 shares of our common stock in May 2002 and the conversion in August
2002 of all but two shares of our outstanding Series A preferred stock into
approximately 7,281,548 shares of our common stock, resulting in less preferred
shares outstanding in 2002, following the conversions, as compared to 2001.

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 1,854 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

27

number of agreements on rent (approximately 624 per store as of December 31,
2001 vs. approximately 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 increa