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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File Number 0-25370
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)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 3, 2003:
Class Outstanding
- -------------------------------------- -------------------------
Common stock, $.01 par value per share 80,894,580
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3
Consolidated Statements of Earnings for the nine months ended
September 30, 2003 and 2002 4
Consolidated Statements of Earnings for the three months ended
September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES
2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) 2003 2002
------------- ------------
UNAUDITED
ASSETS
Cash and cash equivalents...................................... $ 155,974 $ 85,723
Accounts receivable - trade.................................... 11,704 5,922
Prepaid expenses and other assets.............................. 29,880 42,882
Rental merchandise, net
On rent...................................................... 508,183 510,184
Held for rent................................................ 135,435 121,540
Property assets, net........................................... 117,626 105,949
Intangible assets, net......................................... 789,919 743,852
----------- -----------
$ 1,748,721 $ 1,616,052
=========== ===========
LIABILITIES
Accounts payable - trade....................................... $ 58,854 $ 43,461
Accrued liabilities............................................ 133,333 122,717
Deferred income taxes.......................................... 95,059 86,142
Senior debt.................................................... 399,000 249,500
Subordinated notes payable, net of discount.................... 300,000 271,830
Redeemable convertible voting preferred stock.................. 2 2
----------- -----------
986,248 773,652
COMMITMENTS AND CONTINGENCIES.................................... -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 125,000,000 shares authorized;
100,768,580 and 98,845,105 shares issued in 2003 and 2002,
respectively................................................. 1,008 988
Additional paid-in capital..................................... 564,978 532,082
Accumulated comprehensive loss................................. -- (3,726)
Retained earnings.............................................. 558,432 428,621
Treasury stock, 20,190,691 and 11,498,173 shares at cost in
2003 and 2002, respectively.................................. (361,945) (115,565)
----------- -----------
762,473 842,400
----------- -----------
$ 1,748,721 $ 1,616,052
=========== ===========
See accompanying notes to consolidated financial statements.
3
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
------------- --------------
UNAUDITED
Revenues
Store
Rentals and fees.......................... $ 1,495,652 $ 1,356,062
Merchandise sales......................... 119,645 88,309
Installment sales......................... 15,423 --
Other..................................... 2,224 1,742
Franchise
Merchandise sales......................... 32,087 37,305
Royalty income and fees................... 4,460 4,413
----------- -----------
1,669,491 1,487,831
Operating expenses
Direct store expenses
Depreciation of rental merchandise........ 323,778 282,085
Cost of merchandise sold.................. 86,684 62,950
Cost of installment sales................. 7,441 --
Salaries and other expenses............... 880,649 795,649
Franchise cost of merchandise sold........... 30,795 35,598
----------- -----------
1,329,347 1,176,282
General and administrative expenses.......... 49,761 47,727
Amortization of intangibles.................. 9,352 3,199
----------- -----------
Total operating expenses............... 1,388,460 1,227,208
Operating profit....................... 281,031 260,623
Non-recurring finance charges.................. 35,260 --
Interest expense............................... 38,158 49,565
Interest income................................ (3,284) (2,016)
----------- -----------
Earnings before income taxes........... 210,897 213,074
Income tax expense............................. 80,900 86,119
----------- -----------
NET EARNINGS........................... 129,997 126,955
----------- -----------
Preferred dividends............................ -- 10,211
----------- -----------
Net earnings allocable to common stockholders... $ 129,997 $ 116,744
=========== ===========
Basic earnings per common share................ $ 1.52 $ 1.70
=========== ===========
Diluted earnings per common share.............. $ 1.47 $ 1.39
=========== ===========
See accompanying notes to consolidated financial statements
4
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---------- ------------
UNAUDITED
Revenues
Store
Rentals and fees......................... $ 497,881 $ 456,208
Merchandise sales........................ 34,453 24,710
Installment sales........................ 4,633 --
Other.................................... 697 561
Franchise
Merchandise sales........................ 10,754 11,566
Royalty income and fees.................. 1,407 1,516
--------- ---------
549,825 494,561
Operating expenses
Direct store expenses
Depreciation of rental merchandise....... 107,777 95,508
Cost of merchandise sold................. 25,901 18,471
Cost of installment sales................ 2,120 --
Salaries and other expenses.............. 296,427 268,552
Franchise cost of merchandise sold.......... 10,298 11,061
--------- ---------
442,523 393,592
General and administrative expenses......... 16,617 15,325
Amortization of intangibles................. 3,183 1,557
--------- ---------
Total operating expenses.............. 462,323 410,474
Operating profit...................... 87,502 84,087
Non-recurring finance charges................. 7,512 --
Interest expense.............................. 11,565 15,301
Interest income............................... (1,305) (588)
--------- ---------
Earnings before income taxes.......... 69,730 69,374
Income tax expense............................ 25,992 27,925
--------- ---------
NET EARNINGS.......................... 43,738 41,449
Preferred dividends........................... -- 1,321
--------- ---------
Net earnings allocable to common stockholders.. $ 43,738 $ 40,128
========= =========
Basic earnings per common share................ $ 0.54 $ 0.50
========= =========
Diluted earnings per common share.............. $ 0.52 $ 0.46
========= =========
See accompanying notes to consolidated financial statements.
5
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(IN THOUSANDS OF DOLLARS) 2003 2002
---------- ----------
UNAUDITED
Cash flows from operating activities
Net earnings.................................................... $ 129,997 $ 126,955
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation of rental merchandise........................... 323,778 282,085
Depreciation of property assets.............................. 32,068 28,525
Amortization of intangibles.................................. 9,352 3,199
Amortization of financing fees............................... 631 5,451
Deferred income taxes........................................ 9,356 28,460
Non-recurring financing charges.............................. 23,329 --
Changes in operating assets and liabilities, net of effects of
acquisitions
Rental merchandise........................................... (281,684) (238,606)
Accounts receivable - trade.................................. (5,781) (1,221)
Prepaid expenses and other assets............................ 22,093 (6,327)
Accounts payable - trade..................................... 15,393 968
Accrued liabilities.......................................... 22,050 36,194
--------- ---------
Net cash provided by operating activities.................. 300,582 265,683
Cash flows from investing activities
Purchase of property assets..................................... (40,200) (27,606)
Proceeds from sale of property assets........................... 619 216
Acquisitions of businesses, net of cash acquired................ (110,900) (43,322)
--------- ---------
Net cash used in investing activities...................... (150,481) (70,712)
Cash flows from financing activities
Purchase of treasury stock...................................... (246,380) (46,603)
Exercise of stock options....................................... 25,035 23,185
Issuance of subordinated notes.................................. 300,000 --
Payment of refinancing charges.................................. (17,049) --
Proceeds from debt.............................................. 400,000 --
Repurchase of subordinated notes, including premium paid........ (290,956) (1,250)
Repayments of debt.............................................. (250,500) (168,000)
--------- ---------
Net cash used in financing activities...................... (79,850) (192,668)
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 70,251 2,303
Cash and cash equivalents at beginning of period................... 85,723 107,958
--------- ---------
Cash and cash equivalents at end of period......................... $ 155,974 $ 110,261
========= =========
See accompanying notes to consolidated financial statements.
6
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(IN THOUSANDS OF DOLLARS) 2003 2002
----------- ----------
UNAUDITED
Supplemental cash flow information
Cash paid during the year for:
Interest..................................................... $ 40,936 $ 47,468
Income taxes................................................. $ 45,800 $ 29,225
Supplemental schedule of non-cash investing and financing
activities
Fair value of assets acquired..................................... $ 110,900 $ 43,322
Cash paid......................................................... $ 110,900 $ 43,322
Liabilities assumed............................................... $ -- $ --
During the first nine months of 2003, the Company paid dividends on its
preferred stock of approximately $56 in cash. During the first nine months of
2002, the Company paid dividends on its preferred stock of approximately $10.2
million by issuing 7,371 shares of preferred stock.
See accompanying notes to consolidated financial statements.
7
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements of Rent-A-Center, Inc. included herein
have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the
Commission's rules and regulations, although we believe that the
disclosures are adequate to make the information presented not
misleading. We suggest that these financial statements be read in
conjunction with the financial statements and notes included in our
Annual Report on Form 10-K for the year ended December 31, 2002, our
Quarterly Report on Form 10-Q for the three months ended March 31,
2003, and our Quarterly Report on Form 10-Q for the six months ended
June 30, 2003. In our opinion, the accompanying unaudited interim
financial statements contain all adjustments, consisting only of those
of a normal recurring nature, necessary to present fairly our results
of operations and cash flows for the periods presented. The results of
operations for the periods presented are not necessarily indicative of
the results to be expected for the full year.
2. Stock Split. On July 28, 2003, we announced that our Board of Directors
had approved a 5 for 2 stock split on our common stock to be paid in
the form of a stock dividend. Each common stockholder of record on
August 15, 2003 received 1.5 additional shares of common stock for each
share of common stock held on that date. No fractional shares were
issued in connection with the stock dividend. Each stockholder who
would otherwise have received a fractional share received an additional
share of common stock. The distribution date for the stock dividend was
August 29, 2003. The effect of the stock split has been recognized
retroactively in the stockholder's equity accounts and in all share
data in the consolidated statements of earnings, notes to the
consolidated financial statements and management's discussion and
analysis, unless otherwise noted.
3. New Accounting Pronouncement. In May 2003, the Financial Accounting
Standards Board issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS
No.150 revised the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new
statement requires that those instruments be classified as liabilities
in statements of financial condition. SFAS No.150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is generally effective at the beginning of the first interim
period beginning after June 15, 2003. We adopted this standard for the
quarter ended September 30, 2003 and reclassified $2,000 of redeemable
convertible voting preferred stock to liabilities. The adoption of SFAS
No.150 did not have a material impact on our results of operations,
financial condition or cash flows.
4. Principles of Consolidation and Nature of Operations. Unless the
context indicates otherwise, references to "Rent-A-Center" refer only
to Rent-A-Center, Inc., the parent, and references to "we," "us" and
"our" refer to the consolidated business operations of Rent-A-Center
and all of its direct and indirect subsidiaries. These financial
statements include the accounts of Rent-A-Center and its direct and
indirect wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
At September 30, 2003, we operated 2,600 company-owned stores
nationwide and in Puerto Rico, including 23 stores in Wisconsin
operated by a subsidiary, Get It Now, LLC, under the name "Get It Now."
Rent-A-Center's primary operating segment consists of leasing household
durable goods to customers on a rent-to-own basis. Get It Now offers
merchandise on an installment sales basis in Wisconsin.
ColorTyme, Inc., an indirect wholly-owned subsidiary of Rent-A-Center,
is a nationwide franchisor of rent-to-own stores. At September 30,
2003, ColorTyme had 326 franchised stores operating in 40 states.
ColorTyme's primary source of revenues 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.
The balance of ColorTyme's revenues is generated primarily from
royalties based on franchisees' monthly gross revenues.
8
RENT-A-CENTER, INC. AND SUBSIDIARIES
5. Reconciliation of Rental Merchandise.
NINE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Beginning merchandise value ...................... $ 631,724 $ 653,701
Inventory additions through acquisitions ......... 53,988 14,372
Purchases ........................................ 424,021 354,431
Depreciation of rental merchandise ............... (323,778) (282,085)
Cost of goods sold ............................... (94,125) (62,950)
Skips and stolens ................................ (36,527) (34,651)
Other inventory deletions(1) ..................... (11,685) (18,224)
--------- ---------
Ending merchandise value ......................... $ 643,618 $ 624,594
========= =========
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Beginning merchandise value ...................... $ 676,330 $ 649,205
Inventory additions through acquisitions ......... 1,730 6,746
Purchases ........................................ 118,891 102,111
Depreciation of rental merchandise ............... (107,777) (95,508)
Cost of goods sold ............................... (28,021) (18,471)
Skips and stolens ................................ (14,224) (11,272)
Other inventory deletions(1) ..................... (3,311) (8,217)
--------- ---------
Ending merchandise value ......................... $ 643,618 $ 624,594
========= =========
- -----------------
(1) Other inventory deletions include loss/damage waiver claims and unrepairable
and missing merchandise, as well as acquisition write-offs.
6. Intangibles.
Amortization of intangibles consists primarily of the amortization of
customer relationships and non-compete agreements. Effective January 1,
2002, under SFAS 142 all goodwill and intangible assets with indefinite
lives are no longer subject to amortization. We conducted the required
transition test, which showed no impairment of our goodwill.
Intangibles consist of the following (in thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------- ----------------------------
AVG. GROSS GROSS
LIFE CARRYING ACCUMULATED CARRYING ACCUMULATED
(YEARS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- -------- ------------ -------- ------------
Amortizable intangible assets
Franchise network ....................... 10 $ 3,000 $ 2,175 $ 3,000 $ 1,950
Non-compete agreements .................. 5 5,260 1,504 1,510 1,444
Customer relationships .................. 1.5 19,594 12,760 12,706 6,365
Intangible assets not subject to
amortization
Goodwill ................................ 877,666 99,162 835,557 99,162
-------- -------- -------- --------
Total intangibles ........................... $905,520 $115,601 $852,773 $108,921
======== ======== ======== ========
9
RENT-A-CENTER, INC. AND SUBSIDIARIES
6. Intangibles - (continued)
The estimated remaining amortization expense, assuming current
intangible balances and no new acquisitions, for each of the years
ending December 31, is as follows:
ESTIMATED
AMORTIZATION EXPENSE
--------------------
(IN THOUSANDS)
2003..... $ 3,003
2004..... 5,585
2005..... 1,458
2006..... 1,275
2007..... 94
-------
Total.... $11,415
=======
Changes in the net carrying amount of goodwill for the nine months
ended September 30, 2003 are as follows (in thousands):
Balance as of January 1, 2003 $736,395
Additions during first nine months 42,109
--------
Balance as of September 30, 2003 $778,504
========
7. Stock Based Compensation.
Rent-A-Center's Amended and Restated Long-Term Incentive Plan (the
"Plan") for the benefit of certain key employees, consultants and
directors provides the Board of Directors broad discretion in creating
equity incentives. Under the Plan, 14,562,865 shares of Rent-A-Center's
common stock have been reserved for issuance under stock options, stock
appreciation rights or restricted stock grants. Options granted to our
employees under the Plan generally become exercisable over a period of
one to four years from the date of grant and may be exercised up to a
maximum of 10 years from the date of grant. Options granted to
directors are immediately exercisable. There have been no grants of
stock appreciation rights and all options have been granted with fixed
prices. At September 30, 2003, there were 11,108,951 shares available
for issuance under the Plan, of which 6,845,149 shares were allocated
to options currently outstanding. However, pursuant to the terms of the
Plan, when an optionee leaves our employ, unvested options granted to
that employee terminate and become available for re-issuance under the
Plan. Vested options not exercised within 90 days from the date the
optionee leaves the Company's employ terminate and become available for
re-issuance under the Plan.
Rent-A-Center accounts for the Plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net earnings, as all options
granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and earnings per
share if Rent-A-Center had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
10
RENT-A-CENTER, INC. AND SUBSIDIARIES
7. Stock Based Compensation - (continued)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings allocable to common stockholders
As reported .......................................................... $ 129,997 $ 116,744
Deduct: Total stock-based employee compensation under fair value
based method for all awards, net of related tax expense ............ 11,808 8,468
----------- -----------
Pro forma ............................................................ $ 118,189 $ 108,276
=========== ===========
Basic earnings per common share
As reported .......................................................... $ 1.52 $ 1.70
Pro forma ............................................................ $ 1.39 $ 1.57
Diluted earnings per common share
As reported .......................................................... $ 1.47 $ 1.39
Pro forma ............................................................ $ 1.34 $ 1.30
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings allocable to common stockholders
As reported ........................................................... $ 43,738 $ 40,128
Deduct: Total stock-based employee compensation under fair value
based method for all awards, net of related tax expense ............. 4,190 2,689
---------- ----------
Pro forma ............................................................. $ 39,548 $ 37,439
========== ==========
Basic earnings per common share
As reported ........................................................... $ 0.54 $ 0.50
Pro forma ............................................................. $ 0.49 $ 0.46
Diluted earnings per common share
As reported ........................................................... $ 0.52 $ 0.46
Pro forma ............................................................. $ 0.47 $ 0.43
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected volatility of 53.5% to 55.2% and
56.4% to 57.3% and risk-free interest rates of 3.2% to 3.7% and 4.7% to
5.5% in 2003 and 2002, respectively, no dividend yield and expected
lives of seven years.
11
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. Earnings Per Share.
Basic and diluted earnings per common share is computed based on the
following information:
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) NET EARNINGS SHARES PER SHARE
------------ ------ ---------
Basic earnings per common share ............. $129,997 85,331 $ 1.52
Effect of dilutive stock options ............ -- 3,006
-------- ------
Diluted earnings per common share ........... $129,997 88,337 $ 1.47
======== ====== =========
NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ ------ ---------
Basic earnings per common share ............. $116,744 68,815 $ 1.70
Effect of dilutive stock options ............ -- 3,558
Assumed conversion of convertible
preferred stock ........................... 10,211 18,850
-------- ------
Diluted earnings per common share ........... $126,955 91,223 $ 1.39
======== ====== ========
THREE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) NET EARNINGS SHARES PER SHARE
------------ ------ ---------
Basic earnings per common share ............. $43,738 81,253 $ 0.54
Effect of dilutive stock options ............ -- 3,153
------- ------
Diluted earnings per common share ........... $43,738 84,406 $ 0.52
======= ====== ========
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------
NET EARNINGS SHARES PER SHARE
------------ ------ ---------
Basic earnings per common share ............. $40,128 80,888 $ 0.50
Effect of dilutive stock options ............ -- 3,360
Assumed conversion of convertible
preferred stock ........................... 1,321 6,830
------- ------
Diluted earnings per common share ........... $41,449 91,078 $ 0.46
======= ====== ========
For the nine months ended September 30, 2003 and 2002, the number of
stock options that were outstanding but not included in the computation
of diluted earnings per common share because their exercise price was
greater than the average market price of our common stock, and
therefore anti-dilutive, was 276,125 and 787,500, respectively. For the
three months ended September 30, 2003 and 2002, the number of stock
options that were outstanding but not included in the computation of
diluted earnings per common share because their exercise price was
greater than the average market price of our common stock, and
therefore anti-dilutive, was 12,500 and 750,000, respectively.
Dividends on our preferred stock are payable quarterly at an annual
rate of 3.75%. We accounted for shares of preferred stock distributed
as dividends in-kind in 2002 at the greater of the stated value or the
value of the common stock obtainable upon conversion on the payment
date. In 2002, we began paying dividends on our preferred stock in cash
and paid approximately $17 in the third quarter of 2003.
12
RENT-A-CENTER, INC. AND SUBSIDIARIES
9. Subsidiary Guarantors.
11% Notes. At July 1, 2003, Rent-A-Center East, Inc., one of our
subsidiaries, had $84.5 million, net of discount, of 11% senior
subordinated notes outstanding, maturing on August 15, 2008. The notes
required semi-annual interest-only payments at 11%, and were guaranteed
by Rent-A-Center and certain of Rent-A-Center East's direct and
indirect wholly-owned subsidiaries, consisting of ColorTyme,
Rent-A-Center West, Inc., Get It Now, Rent-A-Center Texas, L.L.C. and
Rent-A-Center Texas, L.P. (collectively, the "2001 Subsidiary
Guarantors").
On August 15, 2003, we redeemed all of our remaining outstanding 11%
notes in accordance with the terms of the indenture governing the 11%
notes, at the applicable redemption price of 105.5% of the principal
amount thereof, plus accrued and unpaid interest. The total aggregate
redemption price for the 11% notes was approximately $93.75 million,
including $4.65 million in accrued interest and $4.65 million in
redemption premium. As of September 30, 2003, the 11% notes were no
longer outstanding.
7 1/2% Notes. On May 6, 2003, Rent-A-Center issued $300.0 million
aggregate principal amount of 7 1/2% senior subordinated notes,
maturing on May 1, 2010. The notes require semi-annual interest-only
payments at 7 1/2%, and are guaranteed by certain of Rent-A-Center's
direct and indirect wholly-owned subsidiaries, consisting of ColorTyme,
Rent-A-Center East, Get It Now, Rent-A-Center Texas, L.L.C.,
Rent-A-Center Texas, L.P. and Rent-A-Center West, Inc. (collectively,
the "2003 Subsidiary Guarantors" and together with the 2001 Subsidiary
Guarantors, the "Subsidiary Guarantors"). The notes are redeemable at
Rent-A-Center's option, at any time on or after May 1, 2006, at a set
redemption price that varies depending upon the proximity of the
redemption date to final maturity. Upon a change of control, the
holders of the 7 1/2% notes have the right to require Rent-A-Center to
redeem the notes.
The notes contain restrictive covenants, as defined therein, including
a consolidated coverage ratio and limitations on incurring additional
indebtedness, selling assets of the 2003 Subsidiary Guarantors,
granting liens to third parties, making restricted payments and
engaging in a merger or selling substantially all of Rent-A-Center's
assets.
The 2003 Subsidiary Guarantors have fully, jointly and severally, and
unconditionally guaranteed the obligations of Rent-A-Center with
respect to these notes. The only direct or indirect subsidiaries of
Rent-A-Center that are not Subsidiary Guarantors are minor
subsidiaries.
Set forth below is certain condensed consolidating financial
information as of September 30, 2003 and December 31, 2002 and for the
three and nine months ended September 30, 2003 and 2002. The financial
information includes the Subsidiary Guarantors from the dates they were
acquired or formed by Rent-A-Center and Rent-A-Center East and is
presented using the push-down basis of accounting.
13
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. Subsidiary Guarantors - (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
PARENT SUBSIDIARY CONSOLIDATING
COMPANY GUARANTORS ADJUSTMENTS TOTALS
--------- ------------ ------------- -----------
(IN THOUSANDS)
SEPTEMBER 30, 2003 (UNAUDITED)
Rental merchandise, net................. $ -- $ 643,618 $ -- $ 643,618
Intangible assets, net.................. -- 789,919 -- 789,919
Other assets............................ 902,954 236,108 (823,878) 315,184
--------- ------------ ---------- -----------
Total assets.................. $ 902,954 $ 1,669,645 $ (823,878) $ 1,748,721
========= ============ ========== ===========
Senior debt............................. $ 399,000 $ -- $ -- $ 399,000
Other liabilities....................... 300,000 769,382 (482,136) 587,246
Preferred stock......................... 2 -- -- 2
Stockholders' equity.................... 203,952 900,263 (341,742) 762,473
--------- ------------ ---------- -----------
Total liabilities and equity.. $ 902,954 $ 1,669,645 $ (823,878) $ 1,748,721
========= ============ ========== ===========
PARENT RENT-A-CENTER SUBSIDIARY CONSOLIDATING
COMPANY EAST GUARANTORS ADJUSTMENTS TOTALS
--------- ------------- -------------- ------------- -----------
(IN THOUSANDS)
DECEMBER 31, 2002
Rental merchandise, net................. $ -- $ 630,256 $ 1,468 $ -- $ 631,724
Intangible assets, net.................. -- 400,327 343,525 -- 743,852
Other assets............................ 417,507 121,758 42,953 (341,742) 240,476
--------- ------------ ---------- ----------- -----------
Total assets.................. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $ 1,616,052
========= ============ ========== =========== ===========
Senior debt............................. $ -- $ 249,500 $ -- $ -- $ 249,500
Other liabilities....................... -- 495,511 28,639 -- 524,150
Preferred stock......................... 2 -- -- -- 2
Stockholders' equity.................... 417,505 407,330 359,307 (341,742) 842,400
--------- ------------ ---------- ----------- -----------
Total liabilities and equity.. $ 417,507 $ 1,152,341 $ 387,946 $ (341,742) $ 1,616,052
========= ============ ========== =========== ===========
14
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. Subsidiary Guarantors - (continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
----------- -------------- -----------
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Total revenues................................ $ -- $ 1,669,491 $ 1,669,491
Direct store expenses......................... -- 1,298,552 1,298,552
Other expenses............................... -- 240,942 240,942
----------- ------------ -----------
Net earnings ................................. $ -- $ 129,997 $ 129,997
=========== ============ ===========
NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
Total revenues................................ $ 1,446,113 $ 41,718 $ 1,487,831
Direct store expenses......................... 1,140,684 -- 1,140,684
Other expenses................................ 181,088 39,104 220,192
----------- ------------ -----------
Net earnings.................................. $ 124,341 $ 2,614 $ 126,955
=========== ============ ===========
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
----------- -------------- -----------
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Total revenues................................ $ -- $ 549,825 $ 549,825
Direct store expenses......................... -- 432,225 432,225
Other expenses............................... -- 73,862 73,862
----------- ------------- -----------
Net earnings.................................. $ -- $ 43,738 $ 43,738
=========== ============= ===========
THREE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
Total revenues................................ $ 481,479 $ 13,082 $ 494,561
Direct store expenses......................... 382,531 -- 382,531
Other expenses................................ 58,431 12,150 70,581
----------- ------------- -----------
Net earnings.................................. $ 40,517 $ 932 $ 41,449
=========== ============= ===========
15
RENT-A-CENTER, INC. AND SUBSIDIARIES
8. Subsidiary Guarantors - (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
PARENT SUBSIDIARY
COMPANY GUARANTORS TOTAL
--------- ------------ ----------
NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) (IN THOUSANDS)
Net cash provided by operating activities ................ $ -- $ 300,582 $ 300,582
--------- ---------- ----------
Cash flows from investing activities
Purchase of property assets ............................ -- (40,200) (40,200)
Acquisitions of businesses, net of cash acquired ....... -- (110,900) (110,900)
Proceeds from sale of property assets .................. -- 619 619
--------- ---------- ----------
Net cash used in investing activities .................... -- (150,481) (150,481)
Cash flows from financing activities
Purchase of treasury stock ............................. (246,380) -- (246,380)
Exercise of stock options .............................. 25,035 -- 25,035
Issuance of subordinated notes ......................... 300,000 -- 300,000
Payment of refinancing charges ......................... (17,049) -- (17,049)
Proceeds from debt ..................................... 400,000 -- 400,000
Repurchase of subordinated notes, including premium
paid ................................................. -- (290,956) (290,956)
Repayments of debt ..................................... (1,000) (249,500) (250,500)
Intercompany advances .................................. (394,414) 394,414 --
--------- ---------- ----------
Net cash provided by (used in) financing activities ...... 66,192 (146,042) (79,850)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ..... 66,192 4,059 70,251
--------- ---------- ----------
Cash and cash equivalents at beginning of period ......... -- 85,723 85,723
--------- ---------- ----------
Cash and cash equivalents at end of period ............... $ 66,192 $ 89,782 $ 155,974
========= ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
Net cash provided by operating activities ................ $ 262,273 $ 3,410 $ 265,683
--------- ---------- ----------
Cash flows from investing activities
Purchase of property assets ............................ (28,317) 711 (27,606)
Acquisitions of businesses, net of cash acquired ....... (43,322) -- (43,322)
Proceeds from sale of property assets .................. 216 -- 216
--------- ---------- ----------
Net cash provided by (used in) investing activities ...... (71,423) 711 (70,712)
Cash flows from financing activities
Purchase of treasury stock ............................. (46,603) -- (46,603)
Exercise of stock options .............................. 23,185 -- 23,185
Repurchase of subordinated notes ....................... (1,250) -- (1,250)
Repayments of debt ..................................... (168,000) -- (168,000)
Intercompany advances .................................. 4,121 (4,121) --
--------- ---------- ----------
Net cash used in financing activities .................... (188,547) (4,121) (192,668)
--------- ---------- ----------
Net increase in cash and cash equivalents ................ 2,303 -- 2,303
--------- ---------- ----------
Cash and cash equivalents at beginning of period ......... 107,958 -- 107,958
--------- ---------- ----------
Cash and cash equivalents at end of period ............... $ 110,261 $ -- $ 110,261
========= ========== ==========
16
RENT-A-CENTER, INC. AND SUBSIDIARIES
10. Comprehensive Income.
Comprehensive income includes net earnings and items of other
comprehensive income or loss. The following table provides information
regarding comprehensive income, net of tax:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
(IN THOUSANDS)
2003 2002 2003 2002
--------- --------- --------- ---------
Net earnings ................................... $ 129,997 $ 126,955 $ 43,738 $ 41,449
Other comprehensive (loss) income:
Unrealized gain on derivatives held
as cash flow hedges:
Change in unrealized gain during period.. 4,480 7,757 -- 2,541
Reclassification adjustment for loss
included in net earnings ............ (4,480) (6,947) -- (2,395)
--------- --------- --------- ---------
Other comprehensive income ........ -- 810 -- 146
--------- --------- --------- ---------
Comprehensive income ........................... $ 129,997 $ 127,765 $ 43,738 $ 41,595
========= ========= ========= =========
There are no components to other comprehensive income for the three
months ended September 30, 2003 as we have not entered into any
interest rate swap agreements with respect to term loans under our
senior credit facilities.
11. Common and Preferred Stock Transactions.
In connection with the retirement of J. Ernest Talley, our former
Chairman of the Board and Chief Executive Officer, we entered into an
agreement to repurchase $25.0 million worth of shares of our common
stock beneficially held by Mr. Talley at a purchase price equal to the
average closing price of our common stock over the 10 trading days
beginning October 9, 2001, subject to a maximum of $27.00 per share (on
a pre-split basis) and a minimum of $20.00 per share (on a pre-split
basis). Under this formula, the purchase price for the repurchase was
calculated at $20.258 per share (on a pre-split basis). Accordingly, on
October 23, 2001 we repurchased 493,632 shares of our common stock (on
a pre-split basis) beneficially held by Mr. Talley at $20.258 per share
(on a pre-split basis) for a total purchase price of $10.0 million, and
on November 30, 2001, we repurchased an additional 740,448 shares of
our common stock (on a pre-split basis) beneficially held by Mr. Talley
at $20.258 per share (on a pre-split basis), for a total purchase price
of an additional $15.0 million. On January 25, 2002, we exercised the
option to repurchase all of the remaining 1,714,086 shares of common
stock (on a pre-split basis) beneficially held by Mr. Talley at $20.258
per share (on a pre-split basis). We repurchased those remaining shares
on January 30, 2002.
On April 25, 2003, we announced that we entered into an agreement with
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
which provided for the repurchase of a number of shares of our common
stock sufficient to reduce Apollo's aggregate record ownership to
19.00% after consummation of our planned tender offer at the price per
share paid in the tender offer. On April 28, 2003, we commenced a
tender offer to purchase up to 2.2 million shares of our common stock
(on a pre-split basis) pursuant to a modified "Dutch Auction." On June
25, 2003, we closed the tender offer and purchased 1,769,960 shares of
our common stock (on a pre-split basis) at $73 per share (on a
pre-split basis) for approximately $129.2 million. On July 11, 2003, we
closed the Apollo transaction and purchased 774,547 shares of our
common stock (on a pre-split basis) at $73 per share (on a pre-split
basis) for approximately $56.5 million. As contemplated by the Apollo
agreement, Apollo also exchanged their shares of Series A preferred
stock for shares of Series C preferred stock. As a result, no shares of
Series A preferred stock remain outstanding. The terms of the Series A
preferred stock and Series C preferred stock are substantially similar,
except the Series C preferred stock does not have the right to directly
elect any members of our Board of Directors.
In April 2000, we announced that our Board of Directors had authorized
a program to repurchase in the open market and in privately negotiated
transactions up to an aggregate of $25.0 million of our common stock.
In October 2002, our Board of Directors increased the amount of
repurchases authorized under our common stock repurchase program from
$25.0 million to $50.0 million. In March 2003, our Board of Directors
again increased such amount from $50.0 million to $100.0 million. On
August 1, 2003, we agreed to purchase an aggregate of 440,000 shares of
our common stock (on a pre-split basis) at $73 per share (on a
pre-split basis), 200,000 of which were repurchased from Mark E.
Speese, our Chairman of the Board and Chief Executive Officer, 200,000
of which were repurchased from Apollo Investment Fund IV, L.P. and
Apollo Overseas Partners IV, L.P., and 40,000 of which were repurchased
from Mitchell E. Fadel, our President and Chief Operating Officer.
Through September 30, 2003, we repurchased approximately 1.6 million
17
RENT-A-CENTER, INC. AND SUBSIDIARIES
shares of our common stock (on a pre-split basis) under this program
for approximately $91.5 million, of which 216,500 shares (on a
pre-split basis) were purchased during the third quarter of 2003 for
approximately $15.1 million.
12. Rent-Way Acquisition.
On February 8, 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, of which $5.0 million was
remitted in the second quarter of 2003 and the remaining amount, up to
$5.0 million, will be remitted in August 2004. We funded the
acquisition entirely from cash on hand. Of the 295 stores, 176 were
subsequently merged with our existing store locations. We entered into
this transaction seeing it as an opportunistic acquisition that would
allow us to expand our store base in conjunction with our strategic
growth plans. The acquisition price was determined by evaluating the
average monthly rental income of the acquired stores and applying a
multiple to the total. We utilized a third party to review the
valuation of certain intangible assets, which resulted in a $4.0
million decrease in the value assigned to customer relationships and a
$4.0 increase in the value placed on the non-compete agreement as
compared to our original estimates as disclosed in our 2002 annual
report on Form 10-K. The table below summarizes the allocation of the
purchase price based on the fair values of the assets acquired:
FAIR VALUES
(IN THOUSANDS)
--------------
Inventory............................. $ 50,100
Property assets....................... 4,300
Customer relationships................ 7,900
Non-compete agreement................. 4,500
Goodwill.............................. 33,600
---------
Total assets acquired................. $ 100,400
=========
Customer relationships are amortized over an 18 month period. The
non-compete agreement is for four years and, in accordance with SFAS
142, the goodwill associated with the acquisition will not be
amortized.
13. Guarantees.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirement for Guarantees, Including
Guarantees of Indebtedness of Others." FIN 45 requires a liability be
recorded on the guarantor's balance sheet upon issuance of a guarantee.
In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued. We have applied the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002, and have
adopted the quarterly disclosure provisions of FIN 45 for the quarter
ended September 30, 2003. The adoption of FIN 45 did not have a
material impact on our results of operations, financial condition or
cash flows.
During the third quarter 2003, ColorTyme was a party to an agreement
with Textron Financial Corporation, who provided $40.0 million in
financing to qualifying franchisees of ColorTyme. On October 1, 2003,
ColorTyme refinanced its existing franchisee financing facility with
Textron Financial Corporation by entering into a new $50.0 million
credit facility, provided by Wells Fargo Foothill, Inc., which provides
financing to qualifying franchisees of ColorTyme of up to five times
their average monthly revenues. Under the Wells Fargo agreement, upon
an event of default by the franchisee under agreements governing this
financing and upon the occurrence of certain other events, Wells Fargo
can assign the loans and the collateral securing such loans to
ColorTyme, with ColorTyme then succeeding to the rights of Wells Fargo
under the debt agreements, including the right to foreclose on the
collateral. An additional $15.0 million of financing is provided by
Texas Capital Bank, National Association under an agreement similar to
the Wells Fargo financing. Rent-A-Center East guarantees the
obligations of ColorTyme under each of these agreements, excluding the
effects of any amounts that could be recovered under collateralization
provisions, up to a maximum amount of $65.0 million, of which $29.5
million was outstanding as of September 30, 2003. Mark E. Speese,
Rent-A-Center's Chairman of the Board and Chief Executive Officer, is a
passive investor in Texas Capital Bank, owning less than 1% of its
outstanding equity.
We also provide assurance to our insurance providers that if they are
not able to draw funds from us for claims paid, they have the ability
to draw against our letters of credit. One of our letters of credit is
renewed automatically every year unless we notify the institution not
to renew. The other letter of credit expires in August 2004.
At September 30, 2003, we had $108.8 million in outstanding letters of
credit. Of the $108.8 million, $80.0 million is supported by our
additional term loan facility. Under this additional term loan
facility, in the event that a letter of credit is drawn upon, we have
the right to either repay the additional term loan facility lenders the
18
RENT-A-CENTER, INC. AND SUBSIDIARIES
amount withdrawn or request a loan in that amount. Interest on any
requested additional term loan facility accrues at the adjusted prime
rate plus 1.25% or, at our option, at the Eurodollar Rate plus 2.25%,
with the entire amount of the additional term loan facility due on May
28, 2008. The remaining $28.8 million reduces the amount available
under our $120.0 million revolving facility.
14. Recapitalization.
In April 2003, we commenced a program to recapitalize a portion of our
financial structure in a series of transactions. The recapitalization
consisted of the tender offer for all of our $272.25 million principal
amount of 11% notes, the redemption of the remaining 11% notes, the
issuance of $300.0 million principal amount of 7 1/2% notes, the
refinancing of our senior debt and the repurchase of shares of our
common stock.
On April 23, 2003, we announced a tender offer for all of our $272.25
million principal amount of 11% notes. On May 6, 2003, we repurchased
approximately $183.0 million principal amount of 11% notes pursuant to
the debt tender offer. On August 15, 2003, we redeemed all of the
remaining outstanding 11% notes in accordance with the terms of the
indenture governing the 11% notes, at the applicable redemption price
of 105.5% of the principal amount thereof, plus accrued and unpaid
interest to that date. The total aggregate redemption price for the 11%
notes was approximately $93.75 million, including $4.65 million in
accrued interest and $4.65 million in redemption premium. Proceeds from
the offering of $300 million in 7 1/2% senior subordinated notes due
2010 (discussed below) were used to fund the redemption.
On April 25, 2003, we announced that we entered into an agreement with
Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P.
which provided for the repurchase of a number of shares of our common
stock sufficient to reduce Apollo's aggregate record ownership to
19.00% after consummation of our planned tender offer at the price per
share paid in the tender offer. On April 28, 2003, we commenced a
tender offer to purchase up to 2.2 million shares of our common stock
(on a pre-split basis) pursuant to a modified "Dutch Auction." On June
25, 2003, we closed the tender offer and purchased 1,769,960 shares of
our common stock (on a pre-split basis) at $73 per share (on a
pre-split basis) for approximately $129.2 million. On July 11, 2003, we
closed the Apollo transaction and purchased 774,547 shares of our
common stock (on a pre-split basis) at $73 per share (on a pre-split
basis) for approximately $56.5 million. As contemplated by the Apollo
agreement, Apollo also exchanged their shares of Series A preferred
stock for shares of Series C preferred stock. As a result, no shares of
Series A preferred stock remain outstanding. The terms of the Series A
preferred stock and Series C preferred stock are substantially similar,
except the Series C preferred stock does not have the right to directly
elect any members of our Board of Directors.
On May 6, 2003, we issued $300.0 million in senior subordinated notes
due 2010, bearing interest at 7 1/2%, the proceeds of which were used,
in part, to fund the repurchase and redemption of the 11% notes.
On May 28, 2003, we refinanced our then existing senior debt by
entering into a new $600.0 million senior credit facility, consisting
of a $400.0 million term loan, a $120.0 million revolving credit
facility and an $80.0 million additional term loan.
During the second and third quarter of 2003, we recorded $35.3 million
in non-recurring financing charges in connection with the foregoing
recapitalization, of which $7.5 million was recorded in the third
quarter.
15. Subsequent Events.
New Common Stock Repurchase Program. On October 27, 2003, we announced
that our Board of Directors had authorized a new $100 million common
stock repurchase program. Our new common stock repurchase program
permits us to repurchase shares of our common stock, from time to time,
in open market and privately negotiated transactions. In connection
with authorizing our new common stock repurchase program, our Board of
Directors rescinded the authority to repurchase shares under our
previous common stock repurchase program.
19
RENT-A-CENTER, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that these expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to these differences include,
but are not limited to:
- - uncertainties regarding the ability to open new stores;
- - our ability to acquire additional rent-to-own stores on favorable
terms;
- - our ability to enhance the performance of these acquired stores,
including the stores acquired in the Rent-Way acquisition;
- - 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;
- - 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; and
- - the other risks detailed from time to time in our SEC reports.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under Risk Factors in our Annual
Report on Form 10-K for our fiscal year ended December 31, 2002. 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.
OUR BUSINESS
We are the largest rent-to-own operator in the United States with an approximate
31% market share based on store count. At September 30, 2003, we operated 2,600
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 September 30, 2003, ColorTyme had 326 franchised stores
in 40 states, 314 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, acquired stores have generally experienced
more significant revenue growth during the initial periods following their
acquisition than in subsequent periods. Because of significant growth since our
formation, our historical results of operations and period-to-period comparisons
of such results and other financial data, including the rate of earnings growth,
may not be meaningful or indicative of future results.
20
RENT-A-CENTER, INC. AND SUBSIDIARIES
We plan to accomplish our future growth through selective and opportunistic
acquisitions. 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.
RECENT DEVELOPMENTS
Store Growth. We are actively seeking to increase our store base and annual
revenues and profits through opportunistic acquisitions and new store openings.
On February 8, 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. Furthermore, during the first nine months
of 2003, we acquired 24 additional stores, accounts from 23 additional
locations, opened 65 new stores, and closed 15 stores. All of the closed stores
were merged with existing store locations. The additional stores and acquired
accounts were the result of 26 separate transactions for an aggregate price of
approximately $10.5 million in cash. As of November 3, 2003, we have acquired 13
additional stores, accounts from 15 additional locations and opened 12 new
stores during the fourth quarter of 2003. It is our intention to increase the
number of stores we operate by an average of approximately 5 to 10% per year
over the next several years.
Recapitalization. In April 2003, we commenced a program to recapitalize a
portion of our financial structure in a series of transactions. The
recapitalization consisted of the tender offer for all of our $272.25 million
principal amount of 11% notes, the redemption of the remaining 11% notes, the
issuance of $300.0 million principal amount of 7 1/2% notes, the refinancing of
our senior debt and the repurchase of shares of our common stock.
On April 23, 2003, we announced a tender offer for all of our $272.25 million
principal amount of 11% notes. On May 6, 2003, we repurchased approximately
$183.0 million principal amount of 11% notes pursuant to the debt tender offer.
On August 15, 2003, we redeemed all of the remaining outstanding 11% notes in
accordance with the terms of the indenture governing the 11% notes, at the
applicable redemption price of 105.5% of the principal amount thereof, plus
accrued and unpaid interest to that date. The total aggregate redemption price
for the remaining 11% notes was approximately $93.75 million, including $4.65
million in accrued interest and $4.65 million in redemption premium. Proceeds
from the offering of $300 million in 7 1/2% senior subordinated notes due 2010
were used to pay for the redemption.
During the second and third quarter of 2003, we recorded $35.3 million in
non-recurring financing charges in connection with the foregoing
recapitalization, of which $7.5 million was recorded in the third quarter.
Repurchase of Common Stock. On July 11, 2003, we repurchased a total of 774,547
shares of our common stock (on a pre-split basis) at $73 per share (on a
pre-split basis) pursuant to the previously announced agreement with Apollo
Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. As contemplated
by the Apollo agreement, Apollo also exchanged their shares of Series A
preferred stock for shares of Series C preferred stock. As a result, no shares
of Series A preferred stock remain outstanding. The terms of the Series A
preferred stock and Series C preferred stock are substantially similar, except
the Series C preferred stock does not have the right to directly elect any
members of our Board of Directors. We funded this transaction with the proceeds
of our senior credit financing.
On August 1, 2003, we agreed to purchase an aggregate of 440,000 shares of our
common stock (on a pre-split basis) at $73 per share (on a pre-split basis)
pursuant to our previous common stock repurchase program, 200,000 of which were
repurchased from Mark E. Speese, our Chairman of the Board and Chief Executive
Officer, 200,000 of which were repurchased from Apollo Investment Fund IV, L.P.
and Apollo Overseas Partners IV, L.P., and 40,000 of which were repurchased from
Mitchell E. Fadel, our President and Chief Operating Officer. We repurchased an
additional 216,500 shares of our common stock (on a pre-split basis) under this
program for approximately $15.1 million during the third quarter of 2003.
21
RENT-A-CENTER, INC. AND SUBSIDIARIES
Stock Split. On July 28, 2003, we announced that our Board of Directors had
approved a 5 for 2 stock split on our common stock to be paid in the form of a
stock dividend. Each common stockholder of record on August 15, 2003 received
1.5 additional shares of common stock for each share of common stock held on
that date. No fractional shares were issued in connection with the stock
dividend. Each stockholder who would otherwise have received a fractional share
received an additional share of common stock. The distribution date for the
stock dividend was August 29, 2003. The effect of the stock split has been
recognized retroactively in the stockholder's equity accounts and in all share
data in the consolidated statements of earnings, notes to the consolidated
financial statements and management's discussion and analysis, unless otherwise
noted.
New Common Stock Repurchase Program. On October 27, 2003, we announced that our
Board of Directors had authorized a new $100 million common stock repurchase
program. Our new common stock repurchase program permits us to repurchase shares
of our common stock, from time to time, in open market and privately negotiated
transactions. In connection with authorizing our new common stock repurchase
program, our Board of Directors rescinded the authority to repurchase shares
under our previous common stock repurchase program.
CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ESTIMATES, UNCERTAINTIES OR
ASSESSMENTS IN OUR FINANCIAL STATEMENTS
The preparation of our financial statements in conformity with accounting
principles generally accepted 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 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 II, Item 1 "Legal Proceedings" and the notes to our consolidated financial
statements included in our Annual Report on Form 10-K, 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 provide a meaningful and fair perspective
of our company. However, we do not suggest that other general risk factors, such
as those discussed in our Annual Report on Form 10-K 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.
22
RENT-A-CENTER, INC. AND SUBSIDIARIES
OTHER SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are summarized below and in Note A to our
consolidated financial statements included in our Annual Report on Form 10-K.
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 generally 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.
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 customer relationships and non-compete agreements resulting
from acquisitions. Effective January 1, 2002, under SFAS 142 all goodwill and
intangible assets with indefinite lives are no longer subject to amortization.
23
RENT-A-CENTER, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Store Revenue. Total store revenue increased by $186.8 million, or 12.9%, to
$1,632.9 million for the nine months ended September 30, 2003 as compared to
$1,446.1 million for the nine months ended September 30, 2002. The increase in
total store revenue is primarily attributable to growth in same store revenues,
an increase in cash sales and early purchase options, new stores, incremental
revenues related to acquisitions, including 295 Rent-Way stores acquired in
February 2003, as well as installment sales in our Get It Now stores.
Same store revenues represent those revenues earned in stores that were operated
by us for each of the entire nine month periods ending September 30, 2003 and
2002. Same store revenues increased by $47.2 million, or 3.9%, to $1,260.5
million for the nine months ended September 30, 2003 from $1,213.3 million in
2002. The increase in same store revenues was primarily attributable to an
increase in the total revenue earned per customer including all rentals, fees
and cash sales (approximately $1,660 per customer for the nine months ending
September 30, 2003 versus approximately $1,590 per customer for the nine months
ending September 30, 2002) partially offset by a decrease in customer count.
Merchandise sales for all stores increased $31.3 million, or 35.5%, to $119.6
million for 2003 from $88.3 million in 2002. The increase in merchandise sales
was primarily attributable to an increase in the number of items sold in the
first nine months of 2003 (approximately 860,000) from the number of items sold
in 2002 (approximately 652,000). This increase in the number of items sold in
2003 versus the same period in 2002 was primarily the result of an increase in
the number of customers exercising early purchase options.
Franchise Revenue. Total franchise revenue decreased by $5.2 million, or 12.4%,
to $36.5 million for the nine months ended September 30, 2003 as compared to
$41.7 million in 2002. This decrease was primarily attributable to a decrease in
merchandise sales to franchise locations as a result of fewer franchised
locations, many of which were acquired by us, during the first nine months of
2003 as compared to the first nine months of 2002.
Depreciation of Rental Merchandise. Depreciation of rental merchandise increased
by $41.7 million, or 14.8%, to $323.8 million for the nine months ended
September 30, 2003 from $282.1 million in 2002. Depreciation of rental
merchandise expressed as a percentage of store rentals and fees revenue
increased to 21.6% in 2003 from 20.8% for the same period in 2002. These
increases were primarily attributable to an increase in rental and fee revenue,
a different pricing strategy in 2003 versus 2002 and higher depreciation
associated with the Rent-Way inventory acquired in February 2003.
Cost of Merchandise Sold. Cost of merchandise sold increased by $23.7 million,
or 37.7%, to $86.7 million for the nine months ended September 30, 2003 as
compared to $63.0 million in 2002. This increase was primarily a result of an
increase in the number of items sold during the first nine months of 2003 as
compared to the first nine months of 2002, as well as the additional sales of
inventory gained through the acquisition of 295 Rent-Way stores. The gross
margin percentage of merchandise sales decreased to 27.5% in 2003 from 28.7% in
2002. This percentage decrease was primarily attributable to the sale of
merchandise acquired from Rent-Way in February 2003.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 53.9% for the nine months ended
September 30, 2003 from 55.0% for the nine months ended September 30, 2002. This
decrease was primarily attributable to an increase in store revenues in the
first nine months of 2003 as compared to 2002 coupled with the continued
realization of our margin enhancement initiatives and reductions in store level
costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased
by $4.8 million, or 13.5%, to $30.8 million for the nine months ended September
30, 2003 as compared to $35.6 million in 2002. This decrease was primarily
attributable to a decrease in merchandise sales to franchise locations as a
result of fewer franchised locations, many of which were acquired by us, in the
first nine months of 2003 as compared to the first nine months of 2002.
General and Administrative Expenses. General and administrative expenses
expressed as a percentage of total revenue decreased to 3.0% for the nine months
ending September 30, 2003 as compared to 3.2% for the nine months ending
September 30, 2002. This decrease is primarily attributable to the effect of a
$2.0 million legal charge associated with the settlement of class action gender
discrimination lawsuits in the second quarter of 2002.
Amortization of Intangibles. Amortization of intangibles increased by $6.2
million, or 192.3%, to $9.4 million for the nine months ended September 30, 2003
as compared to $3.2 for the nine months ended September 30, 2002. This increase
was primarily attributable to the Rent-Way acquisition and the number of
acquisitions made during the later part of 2002 versus 2001. As a result of
these acquisitions, amortization of intangibles is higher in the first nine
months of 2003 versus 2002.
24
RENT-A-CENTER, INC. AND SUBSIDIARIES
Operating Profit. Operating profit increased by $20.4 million, or 7.8%, to
$281.0 million for the nine months ended September 30, 2003 as compared to
$260.6 million in 2002. This increase was primarily attributable to growth in
total revenues and the improvements in salaries and other expenses under our
cost control programs. Operating profit as a percentage of total revenue
decreased to 16.8% for the nine months ended September 30, 2003, from 17.5% in
2002. This percentage decrease was primarily attributable to the increase in
amortization of intangibles during the first nine months of 2003 versus 2002, as
well as the effect of the Rent-Way acquisition.
Net Earnings. Net earnings increased by $3.0 million, or 2.4%, to $130.0 million
for the nine months ended September 30, 2003 as compared to $127.0 million in
2002. Before the after-tax effect of the $35.3 million non-recurring
recapitalization charges recorded in the first nine months of 2003, net earnings
increased by $24.8 million, or 19.5%, to $151.7 million for the nine months
ended September 30, 2003 as compared to $127.0 million in 2002. This increase is
primarily attributable to growth in total revenues, a decrease in interest
expense, a lower effective tax rate and the improvements in salaries and other
expenses under our cost control programs offset by an increase in amortization
of intangibles.
Preferred Dividends. Dividends on our preferred stock are payable quarterly at
an annual rate of 3.75%. Preferred dividends decreased by $10.2 million, or 100%
for the nine months ended September 30, 2003, due to the conversion of all but
two shares of outstanding preferred stock in August 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Store Revenue. Total store revenue increased by $56.2 million, or 11.7%, to
$537.7 million for the three months ended September 30, 2003 as compared to
$481.5 million for the three months ended September 30, 2002. The increase in
total store revenue is primarily attributable to growth in same store revenues,
an increase in cash sales and early purchase options, new stores, incremental
revenues related to acquisitions, including 295 Rent-Way stores acquired in
February 2003, as well as installment sales in our Get It Now stores.
Same store revenues represent those revenues earned in stores that were operated
by us for each of the entire three month periods ending September 30, 2003 and
2002. Same store revenues increased by $14.3 million, or 3.4%, to $432.2 million
for the three months ended September 30, 2003 as compared to $417.9 million in
2002. The increase in same store revenues was primarily attributable to an
increase in the total revenue earned per customer including all rentals, fees
and cash sales (approximately $551 per customer for the quarter ending September
30, 2003 versus approximately $525 per customer for the quarter ending September
30, 2002) partially offset by a decrease in customer count. Merchandise sales
for all stores increased $9.7 million, or 39.4%, to $34.4 million for the three
months ended September 30, 2003 as compared to $24.7 million in 2002. The
increase in merchandise sales was primarily attributable to an increase in the
number of items sold in the third quarter of 2003 (approximately 290,000) from
the number of items sold in 2002 (approximately 206,000). This increase in the
number of items sold in 2003 versus the same period in 2002 was primarily the
result of an increase in the number of customers exercising early purchase
options.
Franchise Revenue. Total franchise revenue decreased by $921,000, or 7.0%, to
$12.2 million for the three months ended September 30, 2003 as compared to $13.1
million in 2002. This decrease was primarily attributable to a decrease in
merchandise sales to franchise locations as a result of a decrease in the number
of franchised locations, many of which were acquired by us, in the third quarter
of 2003 as compared to the third quarter of 2002.
Depreciation of Rental Merchandise. Depreciation of rental merchandise increased
by $12.3 million, or 12.8%, to $107.8 million for the three months ended
September 30, 2003 as compared to $95.5 million in 2002. Depreciation of rental
merchandise expressed as a percentage of store rentals and fees revenue
increased to 21.6% in 2003 from 20.9% for the same period in 2002. These
increases were primarily attributable to an increase in rental and fee revenue,
a different pricing strategy in 2003 versus 2002 and higher depreciation
associated with the Rent-Way inventory acquired in February 2003.
Cost of Merchandise Sold. Cost of merchandise sold increased by $7.4 million, or
40.2%, to $25.9 million for the three months ended September 30, 2003 as
compared to $18.5 million in 2002. This increase was primarily a result of an
increase in the number of items sold during the third quarter of 2003 as
compared to the third quarter 2002, as well as the additional sales of inventory
gained through the acquisition of 295 Rent-Way stores. The gross margin percent
of merchandise sales decreased to 24.8% in 2003 from 25.3% in 2002. This
percentage decrease was primarily attributable to the sale of merchandise
acquired from Rent-Way in February 2003.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 55.1% for the three months ended
September 30, 2003 from 55.8% for the three months ended September 30, 2002.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
This decrease was primarily attributable to an increase in store revenues in the
third quarter of 2003 as compared to 2002 coupled with the continued realization
of our margin enhancement initiatives and reductions in store level costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold decreased
by $763,000, or 6.9%, to $10.3 million or the three months ended September 30,
2003 as compared to $11.1 million in 2002. This decrease was primarily
attributable to a decrease in merchandise sales to franchise locations as a
result of fewer franchised locations, many of which were acquired by us, in the
third quarter of 2003 as compared to the third quarter of 2002.
General and Administrative Expenses. General and administrative expenses
expressed as a percentage of total revenue decreased to 3.0% for the three
months ending September 30, 2003 as compared to 3.1% for the three months ending
September 30, 2002.
Amortization of Intangibles. Amortization of intangibles increased by $1.6
million, or 104.4%, to $3.2 million for the three months ended September 30,
2003 as compared to $1.6 million for the three months ended September 30, 2002.
This increase was primarily attributable to the Rent-Way acquisition.
Operating Profit. Operating profit increased by $3.4 million, or 4.1%, to $87.5
million for the three months ended September 30, 2003 as compared to $84.1
million in 2002. This increase was primarily attributable to growth in total
revenues and the improvements in salaries and other expenses under our cost
control programs. Operating profit as a percentage of total revenue decreased to
15.9% for the three months ended September 30, 2003, from 17.0% in 2002. This
percentage decrease was primarily attributable to the increase in amortization
of intangibles during the third quarter of 2003 versus 2002, as well as the
effect of the Rent-Way acquisition.
Net Earnings. Net earnings increased by $2.3 million, or 5.5%, to $43.7 million
for the three months ended September 30, 2003 as compared to $41.4 million in
2002. Before the after-tax effect of the $7.5 million non-recurring
recapitalization charges recorded in the third quarter of 2003, net earnings
increased by $7.0 million, or 16.9%, to $48.4 million for the three months ended
September 30, 2003 as compared to $41.4 million in 2002. This increase is
primarily attributable to growth in total revenues, a decrease in interest
expense, a lower effective tax rate and the improvements in salaries and other
expenses under our cost control programs offset by an increase in amortization
of intangibles.
Preferred Dividends. Dividends on our preferred stock are payable quarterly at
an annual rate of 3.75%. Preferred dividends decreased by $1.3 million, or 100%
for the three months ended September 30, 2003, due to the conversion of all but
two shares of outstanding preferred stock in August 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $34.9 million to $300.6
million for the nine months ending September 30, 2003 as compared to $265.7
million in 2002. This increase resulted primarily from an increase in non-cash
depreciation expense and prepaid expenses as well as the non-recurring finance
charges in the second and third quarter of 2003 offset by increased inventory
purchases during the first nine months of 2003 as compared to 2002.
Cash used in investing activities increased by $79.8 million to $150.5 million
during the nine month period ending September 30, 2003 as compared to $70.7
million in 2002. This increase is primarily attributable to the acquisition of
295 stores from Rent-Way in February 2003.
Cash used in financing activities decreased by $112.8 million to $79.9 million
during the nine month period ending September 30, 2003 as compared to $192.7
million in 2002. This decrease is a result of the $300.0 million received from
our issuance of the 7 1/2% notes as well as the new $400.0 million term loan
under our senior credit facilities entered into in May 2003, offset by our
repurchase of $291.0 million of our 11% notes, the repayment of $250.5 million
on our senior credit facilities and repurchase of $246.4 million of our common
stock.
Liquidity Requirements. Our primary liquidity requirements are for debt service,
rental merchandise purchases, capital expenditures and our store expansion
program. Our primary sources of liquidity have been cash provided by operations,
borrowings and sales of debt and equity securities. In the future, we may incur
additional debt, or may issue debt or equity securities to finance our operating
and growth strategies. The availability and attractiveness of any outside
sources of financing will depend on a number of factors, some of which relate to
our financial condition and performance, and some of which are beyond our
control, such as prevailing interest rates and general economic conditions.
There can be no assurance that additional financing will be available, or if
available, that it will be on terms we find acceptable.
26
RENT-A-CENTER, INC. AND SUBSIDIARIES
We believe that the cash flow generated from operations, together with amounts
available under our senior credit facilities, will be sufficient to fund our
debt service requirements, rental merchandise purchases, capital expenditures
and our store expansion programs into 2004. Our existing revolving credit
facilities provide us with revolving loans in an aggregate principal amount not
exceeding $130.0 million, of which $101.2 million was available at November 5,
2003. At November 3, 2003, we had approximately $115.0 million in cash. To the
extent we have available cash that is not necessary for store openings or
acquisitions, we intend to repurchase additional shares of our common stock as
well as make payments to service our existing debt. While our operating cash
flow has been strong and we expect this strength to continue, our liquidity
could be negatively impacted if we do not remain as profitable as we expect.
Our senior credit facilities and the indenture governing our 7 1/2% notes
contain certain change in control provisions. A change in control would result
in an event of default under our senior credit facilities, and, pursuant to the
underlying indenture would also require us to offer to repurchase all of our 7
1/2% notes at 101% of their principal amount, plus accrued interest to the date
of repurchase. Provisions of our senior credit facilities restrict the
repurchase of all of our 7 1/2% notes. In the event a change in control occurs,
we cannot be sure that we would have enough funds to immediately pay our
accelerated senior credit facility obligations and all of the 7 1/2% notes, or
that we would be able to obtain financing to do so on favorable terms, if at
all.
Deferred Taxes. On March 9, 2002, President Bush signed into law the Job
Creation and Worker Assistance Act of 2002, which provides for accelerated tax
depreciation deductions for qualifying assets placed in service between
September 11, 2001 and September 10, 2004. Under these provisions, 30 percent of
the basis of qualifying property is deductible in the year the property is
placed in service, with the remaining 70 percent of the basis depreciated under
the normal tax depreciation rules. For assets placed in service between May 6,
2003 and December 31, 2004, the Jobs and Growth Tax Relief Reconciliation Act of
2003 increased the percent of the basis of qualifying property deductible in the
year the property is placed in service from 30% to 50%. Accordingly, our cash
flow will benefit from having a lower current cash tax obligation, which in turn
will provide additional cash flows from operations until the deferred tax
liabilities begin to reverse. We estimate that our operating cash flow will have
increased by approximately $103.1 million through 2004 before the deferred tax
liabilities begin to reverse over a three year period beginning in 2005.
Rental Merchandise Purchases. We purchased $424.0 million and $354.4 million of
rental merchandise during the nine month periods ending September 30, 2003 and
2002, respectively.
Capital Expenditures. We make capital expenditures in order to maintain our
existing operations as well as for new capital assets in new and acquired
stores. We spent $40.2 million and $27.6 million on capital expenditures during
the nine month periods ending September 30, 2003 and 2002, respectively, and
expect to spend approximately $10.0 million for the remainder of 2003.
Acquisitions and New Store Openings. For the first nine months of 2003, we spent
approximately $110.9 million on acquiring stores and accounts, of which $100.4
million was for the Rent-Way acquisition. For the entire year ending December
31, 2003, we intend to add approximately 10% to our store base by opening
approximately 90 new store locations as well as continuing to pursue
opportunistic acquisitions.
The profitability of our stores tends to grow at a slower rate approximately
five years from the time we open or acquire them. As a result, in order for us
to show improvements in our profitability, it is impor