As filed with the Securities and Exchange Commission on May 2, 2011
RegistrationNo. 333-171867
UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 2002
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM
Amendment No. 2
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RENT-A-CENTER, INC.
COLORTYME, INC.
ADVANTAGE COMPANIES, INC.
(Exact
Rent-A-Center, Inc.
and Other Registrants
(see Table of Additional Registrants below)
(Exact name of co-registrantsregistrant as specified in its charter)
Delaware | 7359 | 45-0491516 | ||
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
5501 Headquarters Drive
Plano, Texas 75024
(972) 801-1100
(Address, including zip code, and telephone number,
including area code, ofeach Registrant'sregistrant’s principal executive offices)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
including area code, of
Dawn M. Wolverton, Esq.
Vice President — Associate General Counsel and Assistant Secretary
5501 Headquarters Drive
Plano, Texas 75024
(972) 801-1100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
including area code, of agent for service)
Copy to:
Thomas W. Hughes, Esq.
Fulbright & Jaworski L.L.P.
2200 Ross Ave, Suite 2800
Dallas, Texas 75201
(214) 855-8000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
registration statement.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box. [ ]
o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration numberstatement for the same offering. [ ]
o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
(1) Estimated solely foro
Indicate by check mark whether the purposeregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of calculating“large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the registration feeExchange Act
Large accelerated filer þ | Accelerate filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange ActRule 13e-4(i) (Cross-Border Issuer Tender Offer) o
Exchange ActRule 14d-1(d) (Cross-Border Third-Party Tender Offer) o
The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to Rule 457(o).
(2) said Section 8(a), may determine.
Table of Additional Registrants
| State or Other | Primary Standard | |||||||||||
| Exact Name of Registrant as | Jurisdiction of | Industrial | ||||||||||
| Specified in its | Incorporation or | Classification | I.R.S. Employer | |||||||||
Charter/Constituent Documents | Organization | Number | Identification No. | |||||||||
| ColorTyme, Inc. | Texas | 7359 | 75-2651408 | |||||||||
| ColorTyme Finance, Inc. | Texas | 7359 | 20-5732299 | |||||||||
| Rainbow Rentals, Inc. | Ohio | 7359 | 34-1512520 | |||||||||
| RAC National Product Service, LLC | Delaware | 7359 | 42-1626381 | |||||||||
| Remco America, Inc. | Delaware | 7359 | 76-0195669 | |||||||||
Rent-A-Center Addison, L.L.C. | Delaware | 7359 | 81-0642504 | |||||||||
Rent-A-Center East, Inc. | Delaware | 7359 | 48-1024367 | |||||||||
Rent-A-Center International Inc. | Delaware | 7359 | 81-0642507 | |||||||||
Rent-A-Center Texas, L.P. | Texas | 7359 | 45-0491512 | |||||||||
Rent-A-Center Texas, L.L.C. | Nevada | 7359 | 45-0491520 | |||||||||
Rent-A-Center West, Inc. | Delaware | 7359 | 48-1156618 | |||||||||
| Get It Now, LLC | Nevada | 7359 | 16-1628325 | |||||||||
| RAC East Ohio, LLC | Delaware | 7359 | 27-3437862 | |||||||||
| The Rental Store, Inc. | Arizona | 7359 | 86-0449010 | |||||||||
The address, including zip code, and Advantage Companies, Inc.,telephone number, including area code, of each a direct, wholly-owned
subsidiaryadditional registrant’s principal executive offices is shown on the cover page of Rent-A-Center, Inc., have each guaranteed the notes being
registered pursuant hereto.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
guarantees of the notes being registered.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Registration Statement onForm S-4.
| The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted. |
SUBJECT TO COMPLETION, DATED JANUARY 22, 2002
PROSPECTUS
[RENT-A-CENTER LOGO]
EXCHANGE OFFER FOR
$275,000,000
11% SENIOR SUBORDINATED NOTES DUE 2008, SERIES D
GUARANTEED BY
COLORTYME, INC.
ADVANTAGE COMPANIES, INC.
TermsMAY 2, 2011
Rent-A-Center, Inc.
Offer to Exchange
$300,000,000 Outstanding
6.625% Senior Notes due 2020
and Subsidiary Guarantees of the
6.625% Senior Notes due 2020
for
$300,000,000 Registered
6.625% Senior Notes due 2020
and Subsidiary Guarantees of the
Registered 6.625% Senior Notes due 2020
$300,000,000 Outstanding
6.625% Senior Notes due 2020
and Subsidiary Guarantees of the
6.625% Senior Notes due 2020
for
$300,000,000 Registered
6.625% Senior Notes due 2020
and Subsidiary Guarantees of the
Registered 6.625% Senior Notes due 2020
The Exchange Offer
- - Expires
The exchange offer expires at 5:00 p.m., New York City time, on , 2002,2011, unless extended
- - Notextended.
The exchange offer is not conditioned upon the tender of any minimum aggregate amount of the outstanding unregistered 6.625% Senior Notes due 2020, which we refer to in this prospectus as the outstanding notes.
All of the outstanding notes tendered according to the procedures set forth in this prospectus and not withdrawn will be exchanged for an equal principal amount of registered 6.625% Senior Notes due 2020, which we refer to in this prospectus as the exchange notes.
The exchange offer is not subject to any condition other than that the exchange offerit does not violate applicable lawlaws or any applicable interpretation of the staff of the Securities and Exchange Commission
- - TheCommission.
Broker-dealers who receive registered notes pursuant to be issued shall be exchanged for up to all of our outstanding 11%
Senior Subordinated Notes due 2008 issued under an indenture we entered into
in 1998 and our outstanding 11% Senior Subordinated Notes due 2008, Series C,
issued under an indenture we entered into in 2001
- - All outstanding notes that are validly tendered and not validly withdrawn will
be exchanged
- - Tenders of outstanding notes may be withdrawn any time prior to the expiration
of the exchange offer - - The exchangeacknowledge that they will deliver a prospectus in connection with any resale of such registered notes.
Broker-dealers who acquired the outstanding notes should not beas a taxable exchangeresult of market-making or other trading activities may use the prospectus for U.S. federal income
tax purposes
- - We will not receive any proceeds from the exchange offer, - - as supplemented or amended, in connection with resales of the registered notes.
We urge you to carefully review the risk factors beginning on page 10 of this prospectus, which you should consider before participating in the exchange offer.
The Exchange Notes
The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding 1998 and 2001 notes, except for certain transfer restrictions
and registration rights relating tothat we have registered the outstanding 2001 notes
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN RISKS THAT
YOU SHOULD CONSIDER BEFORE DECIDING WHETHER TO PARTICIPATE IN THE EXCHANGE
OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR
HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RENT-A-CENTER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RENT-A-CENTER
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this prospectus. This
information is available without charge to you upon written or oral request to
the Chief Financial Officer of Rent-A-Center, Inc., 5700 Tennyson Parkway, Third
Floor, Plano, Texas 75024, telephone (972) 801-1100. To obtain timely delivery,
you must make your request no later than five days before the date you must make
your decision to participate in the exchange offer, or , 2002.
i
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts, included in this
prospectus 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 such expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to:
- uncertainties regarding the ability to open new stores;
- our ability to acquire additional rent-to-own stores on favorable terms;
- the ability to enhance the performance of these acquired stores;
- our ability to control store level costs and implement 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;
- the aggregate amount of old notes tendered for exchange notes in the
exchange offer;
- the liquidity of our exchange notes; and
- the other risks detailed from time to time in our Securities and Exchange
Commission reports.
Additional factors that could cause our actual results to differ materially
from our expectations are discussed under the section entitled "Risk Factors"
and elsewhere in this prospectus. You should not unduly rely on these
forward-looking statements, which speak only as of the date of this prospectus.
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 prospectus or to reflect the occurrence of
unanticipated events.
ii
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all material
features of the exchange offer or all of the information that may be important
to you. For a more complete understanding of the exchange offer, we encourage
you to read the entire prospectus and the documents to which we refer you. You
should read the following summary together with the more detailed information
and consolidated financial statements and the notes to those statements
elsewhere in this prospectus. Unless otherwise indicated, "we," "us" and "our"
means Rent-A-Center, Inc. and our wholly-owned subsidiaries. The term "1998
notes" refers to our outstanding 11% Senior Subordinated Notes due 2008, which
we issued under an indenture we entered into in 1998. The term "2001 notes"
refers to our outstanding 11% Senior Subordinated Notes due 2008, Series C,
which we issued under an indenture we entered into in 2001. The term "exchange
notes" refers to the 11% Senior Subordinated Notes due 2008, Series D, which are
offered for exchange in this prospectus. The term "old notes" refers,
collectively, to the 1998 notes and the 2001 notes, each of which are to be
exchanged for exchange notes in the exchange offer.
THE EXCHANGE OFFER
EXCHANGE NOTES................ The forms and termsissuance of the exchange notes are
identical in all material respects to the terms
of the old notes, except for certain transfer
restrictions, registration rights and
liquidated damages provisions relating to the
2001 notes. These are described elsewhere in
this prospectus under "Description of the Notes
and Guarantees" and "2001 Notes Exchange and
Registration Rights Agreement."
OLD NOTES..................... In February 1999, we issued the 1998 notes in a
transaction registered underwith the Securities Act
of 1933 under an indenture that we entered into
in 1998 in exchange for previously issued
private notes. On December 19, 2001, we sold in
a private transactionand Exchange Commission. In addition, the 2001 notes. The 2001
notes were issued under a new indenture, which
is substantially similar to the 1998 indenture.
The 2001 notes also contain certain transfer
restrictions and registration rights. The 1998
notes and the 2001 notes collectively make up
the old notes to be tendered in exchange for
the exchange notes offered by this prospectus.
THE EXCHANGE OFFER............ We are offering to exchange up to $175,000,000
of exchange notes for up to $175,000,000 of
1998 notes and up to $100,000,000 of exchange
notes for up to $100,000,000 of 2001 notes. The
objective of the exchange offer is to create a
single series of debt securities having a total
outstanding principal amount which is larger
than that of either the 1998 notes or the 2001
notes as separate series, thus resulting in
greater liquidity for the exchange notes.
However, see "Risk Factors -- Because the total
outstanding principal of the exchange notes
will include the total outstanding principal
amount of the 1998 notes and the 2001 notes,
you will experience an immediate dilution of
your percentage of ownership
1
of such series." Old notes may be exchanged
only in $1,000 increments.
EXPIRATION DATE; WITHDRAWAL OF
TENDER........................ Unless we extend the exchange offer, it will
expire at 5:00 p.m., New York City time, on
, 2002. We will not extend this time
period to a date later than , 2002.
You may withdraw any old notes you tender
pursuant to the exchange offer at any time
prior to , 2002. We will return, as
promptly as practicable after the expiration or
termination of the exchange offer, any old
notes not accepted for exchange for any reason
without expense to you.
CERTAIN CONDITIONS TO THE
EXCHANGE OFFER................ The exchange offer is subject to the following
conditions, which we may waive. These
conditions permit us to refuse acceptance of
the old notes or to terminate the exchange
offer if:
- a lawsuit is instituted or threatened in a
court or before a government agency which may
impair our ability to proceed with the
exchange offer;
- a law, statute, rule or regulation is
proposed or enacted or interpreted by the SEC
which may impair our ability to proceed with
the exchange offer; or
- any governmental approval is not received
which we think is necessary to consummate the
exchange offer.
PROCEDURES FOR TENDERING OLD
NOTES......................... If you wish to accept the exchange offer, you
must complete, sign and date the appropriate
letter(s) of transmittal in accordance with the
instructions, and deliver the appropriate
letter(s) of transmittal, along with the old
notes and any other required documentation, to
the exchange agent. A separate letter of
transmittal must be used for the 1998 notes and
the 2001 notes.
By executing the letter(s) of transmittal
relating to the old notes, you will represent
to us that, among other things:
- any exchange notes you receive will be
acquired in the ordinary course of your
business;
- you have no arrangement or understanding with
any person to participate in the distribution
of the exchange notes; and
- you are not an affiliate of Rent-A-Center or,
if you are an affiliate, you will comply with
the registration and prospectus delivery
requirements of the Securities Act to the
extent applicable.
If you hold your old notes through the
Depository Trust Corporation and wish to
participate in the exchange offer, you may do
so through the Depository Trust
2
Corporation's Automated Tender Offer Program.
By participating in the exchange offer, you
will agree to be bound by the appropriate
letter(s) of transmittal as though you had
executed such respective letter(s) of
transmittal.
INTEREST ON THE EXCHANGE
NOTES......................... Interest on the exchange notes accrues from
February 15, 2002 at the rate of 11% per annum.
PAYMENT OF INTEREST ON THE
EXCHANGE NOTES................ Interest is payable semi-annually in arrears on
each February 15 and August 15, commencing on
August 15, 2002. Interest on the old notes will
be paid on February 15, 2002.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and wish to tender such old notes in the
exchange offer, please contact the registered
holder as soon as possible and instruct them to
tender on your behalf and comply with our
instructions set forth elsewhere in this
prospectus.
GUARANTEED DELIVERY
PROCEDURE..................... If you wish to tender your old notes, you may,
in certain instances, do so according to the
guaranteed delivery procedures set forth
elsewhere in this prospectus under "The
Exchange Offer -- Guaranteed Delivery
Procedures."
REGISTRATION RIGHTS
AGREEMENT..................... On December 19, 2001, we sold the 2001 notes
and the related guarantees to the initial
purchasers in a transaction exempt from the
registration requirements of the Securities
Act. At that time, we entered into a
registration rights agreement with the initial
purchasers that grants the holders of the 2001
notes certain exchange and registration rights.
The exchange offer satisfies those rights,
which terminate upon consummation of the
exchange offer. You will not be entitled to any
exchange or registration rights with respect to
the exchange notes. Because the 1998 notes were
issued pursuant to an effective registration
statement, the ability of holders of 1998 notes
to reoffer, resell or otherwise dispose of
their 1998 notes will not be affected by their
failure to participate in the exchange offer.
However, both 1998 notes and 2001 notes that
are not tendered in the exchange offer may
experience a significantly more limited trading
market, which might adversely affect the
liquidity of any remaining 1998 notes or 2001
notes. See "Risk Factors -- The market value of
your current notes may be lower if you do not
exchange your old notes or fail to properly
tender your old notes for
exchange -- Consequences of Failure to
Exchange."
3
CERTAIN FEDERAL TAX
CONSIDERATIONS................ With respect to the exchange of the old notes
for the exchange notes:
- the exchange should not constitute a taxable
exchange for U.S. federal income tax
purposes;
- you should not recognize gain or loss upon
receipt of the exchange notes;
- you must include interest in gross income to
the same extent as the old notes; and
- you should be able to tack the holding period
of the exchange notes to the holding period
of the old notes.
USE OF PROCEEDS............... We will not receive any proceeds from the
exchange of notes pursuant to the exchange
offer.
EXCHANGE AGENT................ We have appointed The Bank of New York as the
exchange agent for the exchange offer. The
address and telephone number of the Exchange
Agent are The Bank of New York, 15 Broad
Street, 16th Floor, New York, New York 10005,
Attn: Enrique Lopez -- Reorganization Unit,
facsimile (212) 235-2360, telephone (212)
235-2361.
4
TERMS OF THE EXCHANGE NOTES AND GUARANTEES
Pursuant to the exchange offer, we are offering to exchange up to $275.0
million aggregate principal amount of the exchange notes for up to an equal
aggregate principal amount of 1998 notes and 2001 notes. The form and terms of
the exchange notes are the same as the form and terms of the 1998 notes, except
for the total outstanding principal amount. The form and terms of the exchange
notes are the same as the form and terms of the 2001 notes, except for the total
outstanding principal amount and except that the exchange notes will have been
registered under the Securities Act and will not bear legends restricting their
transfer. The holders of exchange notes will not be entitledsubject to certain rights
of holders of 2001the transfer restrictions applicable to the outstanding notes underor contain provisions relating to additional interest, will bear a different CUSIP or ISIN number from the Exchange and Registration Rights Agreement,
which rights will terminate upon the consummation of the exchange offer.
The exchange notes will evidence the same debt of the 1998 notes and the
2001outstanding notes and will be issued under, and be entitlednot entitle the holder to the benefits of, the
indenture, dated December 19, 2001, between us, our subsidiary guarantors and
The Bank of New York. This indenture has terms substantially similar to the
indenture, dated August 18, 1998, between us, our subsidiary guarantors and The
Bank of New York, as successor in interest to IBJ Schroder Bank & Trust Company,
which governs the 1998 notes.
ISSUER........................ Rent-A-Center, Inc.
GUARANTORS.................... ColorTyme, Inc. and Advantage Companies, Inc.
SECURITIES OFFERED............ $275,000,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2008, Series D.
MATURITY...................... August 15, 2008.
INTEREST PAYMENT DATES........ February 15 and August 15 of each year,
commencing August 15, 2002. Interest on the old
notes will be paid on February 15, 2002.
SINKING FUND.................. None.
OPTIONAL REDEMPTION........... Except as described below and under "Change of
Control," we may not redeem the exchange notes
prior to August 15, 2003. After August 15,
2003, we may redeem any amount of the exchange
notes at any time at the redemption prices
(expressed as percentages of principal amount)
set forth below, plus accrued and unpaid
interest to the redemption date, if redeemed
during the twelve-month period beginning on
August 15 of the years indicated below.
CHANGE OF CONTROL............. Upon the occurrence of a change of control, we
will be required to repurchase the exchange
notes at a price equal to 101% of the original
aggregate principal amount, together with
accrued and unpaid interest, if any, to the
date of repurchase. See "Description of the
Notes and Guarantees -- Change of Control."
5
RANKING....................... The exchange notes will be unsecured and will
be subordinated to all existing and future
senior indebtedness. The exchange notes will
rank pari passu with all existing and future
senior subordinated indebtedness and will rank
senior to all existing and future subordinated
obligations. The exchange notes will be fully
and unconditionally guaranteed on an unsecured,
senior subordinated basis by our existing and
future restricted subsidiaries.
GUARANTEES.................... The exchange notes will be guaranteed by all of
our direct subsidiaries. Future subsidiaries
will also be required to guarantee the exchange
notes offered hereby, unless we designate the
subsidiary as an "unrestricted subsidiary" or
the subsidiary has insignificant assets.
RESTRICTIVE COVENANTS......... The indenture under which the exchange notes
will be issued, and under which the 2001 notes
were issued, limits:
- the incurrence of additional indebtedness by
us and our restricted subsidiaries;
- the payment of dividends on, and redemption
of, our capital stock and our restricted
subsidiaries' capital stock and the
redemption of certain subordinated
obligations of ours and our restricted
subsidiaries';
- investments;
- sales of assets and subsidiary stock;
- transactions with affiliates;
- sale and leaseback transactions; and
- liens.
In addition, the indenture limits our ability
to engage in consolidations, mergers and
transfers of substantially all of our assets
and also contains certain restrictions on
distributions from our subsidiaries. However,
all of these limitations and prohibitions are
subject to a number of important qualifications
and exceptions. See "Description of the Notes
and Guarantees -- Certain Covenants."
ABSENCE OF A PUBLIC MARKET FOR
THE EXCHANGE NOTES............ In general, you may freely transfer the
exchange notes. However, there are exceptions
to this general statement. Holders may not
freely transfer the exchange notes if:
- they acquire the exchange notes outside of
their ordinary course of business;
- they have an arrangement with any person to
participate in the distribution of the
exchange notes; or
- they are an affiliate of Rent-A-Center.
Further, the exchange notes will be new
securities for which thereregistration rights. We will not initially
be a market. As a result, the
6
development or liquidity of any market for the
exchange notes may not occur. The initial
purchasers of the 2001 notes have advised us
that they currently intend to make a market in
the exchange notes. However, you should be
aware that the initial purchasers are not
obligated to do so. In the event such a market
may develop, the initial purchasers may
discontinue it at any time without notice. We
do not intend to apply for a listing of the exchange notes on any securities exchange or arrange for them to be quoted on any automated dealer quotation system. 7
RENT-A-CENTER
COMPANY OVERVIEW
The outstanding notes and the exchange notes are referred to in this prospectus as the “notes.”
The Guarantees
The exchange notes will be jointly and severally guaranteed on a senior unsecured basis by all of our existing and future direct and indirect domestic subsidiaries that guarantee our indebtedness or indebtedness of our subsidiary guarantors.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2011.
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We have not authorized anyone to give you any information or to make any representations about anything we discuss in this prospectus other than those contained in the prospectus. If you are given any information or representation about these matters that is not discussed in this prospectus, you must not rely on that information.
We are not making an offer to sell, or a solicitation of an offer to buy, the exchange notes or the outstanding notes in any jurisdiction where, or to any person to or from whom, the offer or sale is not permitted.
In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offer, including the merits and risks involved. These securities have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.
We are not making any representation to any holder of the outstanding notes regarding the legality of an investment in the exchange notes under any legal investment or similar laws or regulations. We are not providing you with any legal, business, tax or other advice in this prospectus. You should consult your own attorney, business advisor and tax advisor to assist you in making your investment decision and to advise you whether you are legally permitted to invest in the exchange notes.
In connection with the exchange offer, we have filed with the U.S. Securities and Exchange Commission, or the “SEC,” a registration statement onForm S-4, under the Securities Act of 1933, as amended, relating to the exchange notes to be issued in the exchange offer. As permitted by the SEC, this prospectus omits information included in the registration statement. For a more complete understanding of the exchange offer, you should refer to the registration statement, including its exhibits.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and in accordance therewith file annual, quarterly and other reports and information with the SEC. For further information regarding us, you may desire to review reports and other information filed under the Exchange Act, including the reports and other information incorporated by reference into this prospectus. Such reports and other information may be read and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies can be obtained by mail at prescribed rates by writing to the public reference room mentioned above. You may obtain information on the operation of the public reference room by calling the SEC at1-800-SEC-0330.To obtain timely delivery of any requested information, holders of outstanding notes must make any request no later than at least five business days prior to the expiration of the exchange offer.You can also find our filings at the SEC’s website athttp://www.sec.gov and on our website athttp://www.rentacenter.com.
INCORPORATION OF DOCUMENTS BY REFERENCE
Certain information that we have filed with the SEC is “incorporated by reference” into this prospectus. The process of incorporation by reference allows us to disclose important business and financial information to you without duplicating that information in this prospectus. The information incorporated by reference is considered to be part of this prospectus, and information that we file later with the SEC will automatically update and supersede the information in this prospectus. We incorporate by reference the document(s) listed below that we have previously filed with the SEC (excluding any information furnished to the SEC pursuant to Item 2.02 or Item 7.01 on any Current Report onForm 8-K) and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the initial registration statement and prior to the effectiveness of the registration statement or prior to the termination of the exchange offer, except that we are not incorporating any information included in a Current Report onForm 8-K that has been or will be furnished to the SEC pursuant to Item 2.02 of Item 7.01 on any Current Report onForm 8-K (and not filed) with the SEC, unless such information is expressly incorporated herein by a reference in a furnished Current Report onForm 8-K or other furnished document:
| • | Our Annual Report onForm 10-K for the fiscal year ended December 31, 2010; |
| • | Our Quarterly Report on Form10-Q for the quarterly period ended March 31, 2011; and |
| • | Our Current Report on Form 8-K, dated March 22, 2011. |
You may request a copy of these filings at no cost, by writing or telephoning us at the following address:
Rent-A-Center, Inc.
Attention: Investor Relations
5501 Headquarters Dr.
Plano, Texas 75024
(972) 801-1100
Attention: Investor Relations
5501 Headquarters Dr.
Plano, Texas 75024
(972) 801-1100
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FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking statements. These statements are included throughout this prospectus, including in the sections entitled “Summary” and “Risk Factors,” and relate to, among other things, expectations regarding revenues, cash flows, capital expenditures and other financial items. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins and profitability. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases to identify forward-looking statements in this prospectus and in the documents incorporated by reference in this prospectus.
Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Accordingly, these forward-looking statements are qualified in their entirety by reference to the factors described in “Risk Factors” and included or incorporated by reference elsewhere in this prospectus.
Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors including, but not limited to:
| • | uncertainties regarding the ability to open new rent-to-own stores; | |
| • | our ability to acquire additional rent-to-own stores or customer accounts on favorable terms; | |
| • | our ability to control costs and increase profitability; | |
| • | our ability to enhance the performance of acquired stores; | |
| • | our ability to retain the revenue associated with acquired customer accounts; | |
| • | our ability to identify and successfully market products and services that appeal to our customer demographic; | |
| • | our ability to enter into new and collect on our rental purchase agreements; | |
| • | the passage of legislation adversely affecting the rent-to-own industries; |
| • | our failure to comply with statutes or regulations governing the rent-to-own or financial services industries; |
| • | interest rates; | |
| • | changes in the unemployment rate; |
| • | economic pressures, such as high fuel costs, affecting the disposable income available to our targeted consumers; |
| • | conditions affecting consumer spending and the impact, depth, and duration of current economic conditions; | |
| • | changes in our stock price, the number of shares of common stock that we may or may not repurchase, and future dividends, if any; | |
| • | changes in estimates relating to self-insurance liabilities and income tax and litigation reserves; | |
| • | changes in our effective tax rate; | |
| • | our ability to maintain an effective system of internal controls; |
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| • | changes in the number of share-based compensation grants, methods used to value future share-based payments and changes in estimated forfeiture rates with respect to share-based compensation; | |
| • | the resolution of any litigation; and | |
| • | the other risks detailed from time to time in our SEC reports. |
Because such statements are subject to risks, contingencies and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Many of these factors are described in greater detail in our filings with the SEC. You are cautioned not to place undue reliance on such statements which speak only as of the date on which they are made. Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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SUMMARY
This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by and should be read in conjunction with the detailed information and financial statements and related notes contained or incorporated by reference in this prospectus, including the matters discussed under the caption “Risk Factors.” The terms“Rent-A-Center,” the “Company,” “we,” “our,” “us” and similar terms refer toRent-A-Center, Inc. and its subsidiaries, except as otherwise indicated.
Company Overview
We are the largest rent-to-own operator in the United States rent-to-own industry with an approximate 29%35% market share based on our company-owned and franchised store count.count with a focus on consumer electronics, furniture, computers, household appliances and accessories. At DecemberMarch 31, 2001,2011, we operated 2,2813,018 company-owned stores nationwide and in 50 states,Canada, Puerto Rico and Mexico, including 41 retail installment sales stores under the District of Columbianames “Get It Now” and Puerto Rico. Our“Home Choice,” and 18 rent-to-own stores located in Canada under the names“Rent-A-Centre.” In addition, our subsidiary, ColorTyme, Inc., is a national franchisor of rent-to-own stores. At DecemberMarch 31, 2001,2011, ColorTyme had 342208 franchised rent-to-own stores in 42 states, 330 of which operate under the ColorTyme name and 12 stores which
operate under the Rent-A-Center name.32 states. These franchise stores represent a further
4%2% of our overall market share based on store count.
Rent-A-Center's and Advantage Companies' principal executive officescount as of March 31, 2011.
We also operate kiosk locations under the trade name “RAC Acceptance” which offers therent-to-own transaction to consumers who do not qualify for financing from the traditional retailer. These kiosks are located at 5700 Tennyson Parkway, Third Floor, Plano, Texas 75024, telephone
(972) 801-1100. ColorTyme's principal executive office is located at 5700
Tennyson Parkway, First Floor, Plano, Texas 75024, telephone (972) 608-5376.
Our storeswithin such retailer’s store locations. At March 31, 2011, we operated 485 RAC Acceptance locations.
We offer high quality, durable productswell known brands such as Sony, Philips, LG, Hitachi, Toshiba and Mitsubishi home electronics,
appliances, computers,electronics; Whirlpool appliances; Toshiba, Sony, Hewlett-Packard, Dell, Acer and Compaq computers; and Ashley, England, Standard, Albany and Klaussner furniture. For the year ended December 31, 2010, consumer electronic products accounted for approximately 33% of our store rental revenue, furniture and accessories for 32%, appliances for 18% and computers for 17%. We also offer a broad portfolio of customer services, including repair, pickup and delivery, generally at no additional charge.
From 2005 to 2010, we also offered an array of financial services in certain of our existing stores under flexible rental
purchase agreementsthe names “RAC Financial Services” and “Cash AdvantEdge.” The financial services we offered included, but were not limited to, short term secured and unsecured loans, debit cards, check cashing and money transfer services.
Industry overview
According to the Association of Progressive Rental Organizations (“APRO”), as of December 31, 2009, the rent-to-own industry in the United States and Canada is a $7.0 billion market, consisting of approximately 8,600 stores. We estimate that allow the customer to obtain ownershiptwo largest rent-to-own industry participants account for approximately 4,900 of the merchandise attotal number of stores. Although the conclusiontop two players have a substantial market share, the rest of an agreed upon rental period. These rental
purchase agreements are designedthe industry remains highly fragmented, consisting mainly of operations with less than 50 stores. The rent-to-own industry has experienced significant consolidation and we believe this trend will continue, presenting opportunities for us to appealcontinue to acquire additional stores or customer accounts on favorable terms.
The rent-to-own industry serves a highly diverse customer base. According to APRO, approximately 83% of rent-to-own customers have household incomes between $15,000 and $50,000 per year. The rent-to-own industry is able to serve a wide variety of customersconsumers 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 estimate that
approximately 62% of our business is from repeat customers. We offer well known
brands such as Philips, Sony and JVC home electronics, Whirlpool appliances,
Dell and Compaq computers and Ashley, La-Z-Boy and Benchcraft furniture. For the
nine months ended September 30, 2001, home electronics merchandise generated 41%
of revenue, 32% was derived from furniture and home furnishing accessories, 17%
from appliances and 10% from computers.
INDUSTRY OVERVIEW
According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,000 stores and provides approximately 7.0 million
products to over 3.0 million households each year. We estimate the six largest
rent-to-own industry participants account for 4,700 of the total number of
stores, and the majority of the remainder of the industry consists of operations
with fewer than 20 stores. The rent-to-own industry is highly fragmented and,
due primarily to the decreased availability of traditional financing sources,
has experienced, and we believe will continue to experience, consolidation.
STRATEGY
Our strategy includes:
- Enhancing Store Operations -- We continually seek to improve store
performance through strategies intended to produce gains in operating
efficiency and profitability. We have recently refocused our efforts to
control and improve store-level expenses as well as enhance store
revenues.
- 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.
- Building Our National Brand -- We have implemented a strategy to increase
our name recognition and enhance our national brand. As a part of a
national branding strategy,
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in April 2000 we launched a national advertising campaign featuring John
Madden as our national advertising spokesperson.
RISK FACTORS
You should carefully consider, along with the other information set forth
in this prospectus, the specific factors set forth under the section entitled
"Risk Factors" before deciding whether to participate in the exchange offer.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The data for the three years ended December 31, 2000 have been derived from
the audited consolidated financial statements included elsewhere in this
prospectus. The data as of and for the nine months ended September 30, 2000 and
2001 have been derived from our unaudited consolidated financial statements
which were prepared on the same basis as our audited consolidated financial
statements and include, in our opinion, all adjustments necessary to present
fairly the information presented for the interim periods. Interim period results
are not necessarily indicative of results that will be obtained for the full
year. Financial information for the twelve months ended September 30, 2001 has
been compiled from our audited consolidated financial statements and our
unaudited consolidated financial statements included in this prospectus. In May
and August 1998, we completed the acquisitions of Central Rents, Inc. and Thorn
Americas, Inc., respectively, both of which affect the comparability of the 1998
historical financial and operating data to the other periods presented.
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(1) Includes the effects of a pre-tax, non-recurring refund of $22.4 million for
unlocated class members associated with the coordinated settlement of three
class action lawsuits in the state of New Jersey.
(2) Same store revenue for each period presented includes revenues only of
stores open and operated by us throughout the full period and the comparable
prior period.
(3) EBITDA is defined as operating profit plus depreciation (exclusive of
depreciation of rental merchandise), amortization of intangibles and
non-recurring litigation settlements. EBITDA should not be considered as a
substitute for income from operations, net income or cash flow from
operating activities (as determined in accordance with generally accepted
accounting principles) for the purpose of analyzing operating performance,
financial position and cash flows.
(4) Excludes depreciation of rental merchandise and amortization other than
amortization of intangible assets.
(5) Cash interest expense is defined as interest expense less amortization of
financing fees.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income tax expense, plus fixed charges. Fixed
charges consist of interest expense (which includes amortization of deferred
financing costs) whether expensed or capitalized and one-fourth of rental
expense, deemed representative of that portion of rental expense estimated
to be attributable to interest.
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RISK FACTORS
Our business, operations and financial condition are subject to various
risks. Some of these risks are described below, and you should take these risks
into account in evaluating us or any investment decision involving us or in
deciding whether to participate in the exchange offer. This section does not
describe all risks applicable to us, our industry or our business, and it is
intended only as a summary of certain material factors.
RISKS RELATING TO THE EXCHANGE OFFER
THE MARKET VALUE OF YOUR CURRENT NOTES MAY BE LOWER IF YOU DO NOT EXCHANGE YOUR
OLD NOTES OR FAIL TO PROPERLY TENDER YOUR OLD NOTES FOR EXCHANGE.
Consequences of Failure to Exchange. To the extent that the old notes are
tendered and accepted for exchange pursuant to the exchange offer, the trading
market for old notes that remain outstanding may be significantly more limited,
which might adversely affect the liquidity of the old notes not tendered for
exchange. The extent of the market and the availability of price quotations for
old notes would depend upon a number of factors, including the number of holders
of old notes remaining at such time andconsumers lacking access to credit is increasing. According to a report issued by the interest in maintaining a market in
such old notesFair Isaac Corporation on the part of securities firms. An issue of securities with a
smaller outstanding market value available for trading, or float, may command a
lower price than would a comparable issue of securities with a greater float.
Therefore, the market price for old notes that are not exchangedJuly 13, 2010, consumers in the exchange
offer may be affected adversely to the extent that the amount that old notes
exchanged pursuant to the exchange offer reduces the float. The reduced float
also may tend to make the trading price of the old notes that are not exchanged
more volatile.
Consequences of Failure to Properly Tender. Issuance of the exchange notes
in exchange for the old notes pursuant to the exchange offer will be“subprime” category (those with credit scores below 650) made following the prior satisfaction, or waiver, of the conditions set forth in "The
Exchange Offer -- Certain Conditions to the Exchange Offer" and only after
timely receipt by the exchange agent of such old notes, a properly completed and
duly executed applicable letter(s) of transmittal and all other required
documents. Therefore, holders of old notes desiring to tender such old notes in
exchange for exchange notes should allow sufficient time to ensure timely
delivery of all required documentation. Neither we, the exchange agent nor any
other person is under any duty to give notification of defects or irregularities
with respect to the tenders of old notes for exchange. The old notes that may be
tendered in the exchange offer but which are not validly tendered will,
following consummation of the exchange offer, remain outstanding. Any 2001 notes
that remain outstanding following consummation of the exchange offer will
continue to be subject to the same transfer restrictions currently applicable to
the 2001 notes.
IF YOU FAIL TO TENDER YOUR 2001 NOTES FOR EXCHANGE, YOUR ABILITY TO TRANSFER
SUCH 2001 NOTES WILL BE LIMITED.
We issued the 2001 notes in a private offering. As a result, the 2001 notes
have not been registered under the Securities Act, and may not be resold by
purchasers thereof unless the 2001 notes are subsequently registered or an
exemption from the registration requirements of the Securities Act is available.
The 2001 notes that are not tendered in the exchange offer will continue to be
subject to the existing restrictions upon their transfer. We will have no
obligation to provide for the registration under the Securities Act of
unexchanged 2001 notes.
THERE IS NO PUBLIC MARKET FOR THE EXCHANGE NOTES AND WE CANNOT BE SURE AN ACTIVE
TRADING MARKET FOR THE EXCHANGE NOTES WILL DEVELOP.
The exchange notes will be new securities for which there will not
initially be a market. Accordingly, we cannot assure you as to the development
or liquidity of any market for the
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exchange notes, and we will have no obligation to create such a market. At the
time of the private placement of the 2001 notes, the initial purchasers of the
2001 notes advised us that they intended to make a market in the 2001 notes and,
if issued, the exchange notes. However, the initial purchasers are not obligated
to make a market in any of the notes, and they may discontinue at any time in
their sole discretion.
The liquidity of any market for the exchange notes will depend upon the
number of holders of the exchange notes, the overall market for high yield
securities, our financial performance or prospects or in the prospects for
companies in our industry generally, the interest of securities dealers in
making a market in the exchange notes and other factors.
BECAUSE THE TOTAL OUTSTANDING PRINCIPAL OF THE EXCHANGE NOTES WILL INCLUDE THE
TOTAL OUTSTANDING PRINCIPAL AMOUNT OF THE 1998 NOTES AND THE 2001 NOTES, YOU
WILL EXPERIENCE AN IMMEDIATE DILUTION OF YOUR PERCENTAGE OF OWNERSHIP OF SUCH
SERIES.
If all of the outstanding 1998 notes and 2001 notes are exchanged for
exchange notes, $275.0 million aggregate principal amount of exchange notes will
be outstanding following the consummation of the exchange offer, and the
exchange notes will be deemed to be a single series of notes outstanding under
the indenture. As a result, any actions requiring the consent of each holder or
the holders of a majority in outstanding principal amount of exchange notes
under the indenture will therefore require the consent of each holder of
exchange notes or the holders of a majority in aggregate principal amount of
outstanding exchange notes, and the current individual voting interest of each
holder of 1998 notes and 2001 notes will accordingly be diluted.
RISKS RELATING TO THE EXCHANGE NOTES
OUR DEBT AGREEMENTS IMPOSE RESTRICTIONS ON US WHICH MAY LIMIT OR PROHIBIT US
FROM ENGAGING IN CERTAIN TRANSACTIONS. IF A DEFAULT WERE TO OCCUR, OUR LENDERS
COULD ACCELERATE THE AMOUNTS OF DEBT OUTSTANDING, AND HOLDERS OF OUR SECURED
INDEBTEDNESS COULD FORCE US TO SELL OUR ASSETS TO SATISFY ALL OR A PART OF WHAT
IS OWED.
Covenants under our senior credit facilities and the indentures governing
the 1998 notes, the 2001 notes and the exchange notes restrict our ability to
engage in various operational matters as well as require us to maintain
specified financial ratios and satisfy specified financial tests. Our ability to
meet these financial ratios and tests may be affected by events beyond our
control. These restrictions could limit our ability to obtain future financing,
make needed capital expenditures or other investments, repurchase our
outstanding debt or equity, withstand a future downturn in our business or in
the economy, dispose of operations, engage in mergers, acquire additional stores
or otherwise conduct necessary corporate activities. Various transactions that
we may view as important opportunities, such as specified acquisitions, are also
subject to the consent of lenders under the senior credit facilities, which may
be withheld or granted subject to conditions specified at the time that may
affect the attractiveness or viability of the transaction.
If a default were to occur, the lenders under our senior credit facilities
could accelerate the amounts outstanding under the credit facilities and our
other lenders could declare immediately due and payable all amounts borrowed
under other instruments that contain certain provisions for cross-acceleration
or cross-default. In addition, the lenders under these agreements could
terminate their commitments to lend to us. If the lenders under these agreements
accelerated the repayment of borrowings, we may not have sufficient liquid
assets at that time to repay the amounts then outstanding under our indebtedness
or be able to find additional alternative financing. Even if we could obtain
additional alternative financing, the terms of the financing may not be
favorable or acceptable to us.
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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 the 1998 notes, the 2001 notes and
the exchange notes, as well as limiting our ability to refinance such notes.
A CHANGE OF CONTROL COULD ACCELERATE OUR OBLIGATION TO PAY OUR OUTSTANDING
INDEBTEDNESS, AND WE MAY NOT HAVE SUFFICIENT LIQUID ASSETS TO REPAY THESE
AMOUNTS.
Under our senior credit facilities, an event of default would result if
Apollo Management IV, L.P. and its affiliates cease to own at least 50% of the
amount of our voting stock that they owned on August 5, 1998. An event of
default would also result under the senior credit facilities if a third party
became the beneficial owner of 33.33% or more of our voting stock at a time when
certain permitted investors owned less than the third party or Apollo owned less
thanup 35% of the voting stock owned by the permitted investors. As of September
30, 2001, we are required to pay under our senior credit facilities $2.0 million
in each of 2002 and 2003, $29.1 million in 2004, $110.5 million in 2005 and
$314.4 million after 2005. These payments reduce our operating cash flow. If the
lenders under our debt instruments accelerated these obligations, we may not
have sufficient liquid assets to repay amounts outstanding under these
agreements.
Under the indentures governing the 1998 notes, the 2001 notes and the
exchange notes, in the event that a change in control occurs, we may be required
to offer to purchase all of our outstanding senior subordinated notes at 101% of
their original aggregate principal amount, plus accrued interest to the date of
repurchase. A change in control also would result in an event of default under
our senior credit facilities, which could then be accelerated by our lenders,
and would require us to offer to redeem our Series A preferred stock.
THE INCURRENCE OF THE SUBSIDIARY GUARANTEES MAY BE VOIDED BY A COURT IF THE
COURT DETERMINES THAT THE INCURRENCE OF THIS INDEBTEDNESS RESULTED IN A
FRAUDULENT TRANSFER.
In the event of the bankruptcy or insolvency of any of the subsidiary
guarantors, the incurrence by each subsidiary guarantor of its guarantee of the
exchange notes would be subject to review under relevant federal and state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or a lawsuit by or on behalf of creditors of such subsidiary guarantor.
Under those statutes, if a court were to find that the subsidiary guarantee was
incurred with the intent of hindering, delaying or defrauding creditors or that
such subsidiary guarantor received less than a reasonably equivalent value or
fair consideration therefor and, at the time of its incurrence, the subsidiary
guarantor either (A) was insolvent or rendered insolvent by reason thereof, (B)
was engaged in a business or transaction for which its remaining unencumbered
assets constituted unreasonably small capital, or (C) intended to or believed
that it would incur debts beyond its ability to pay as they matured or became
due, the court could void those obligations.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at a particular time is greater than the then fair value of its
assets, or if the fair saleable value of its assets is less than the amount that
would be required to pay its probable liability on its existing debts as they
become absolute and mature. As of September 30, 2001, we had total indebtedness
of approximately $633.0 million. We believe that each of our subsidiary
guarantors is (A) neither insolvent nor rendered insolvent by the incurrence of
its subsidiary guarantee, (B) in possession of sufficient capital to run its
business effectively, and (C) incurring debts within its ability to pay as the
same mature or become due. We cannot assure you, however, that the assumptions
14
and methodologies used by us in reaching our conclusions about the solvency of
the subsidiary guarantors would be adopted by a court or that a court would
concur with those conclusions.
In the event the subsidiary guarantee of a subsidiary guarantor was voided
as a fraudulent conveyance, such guarantees would effectively be subordinated to
all indebtedness and other liabilities and commitments of such subsidiary
guarantor.
RISKS RELATING TO OUR BUSINESS
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY, WHICH COULD
CAUSE OUR FUTURE EARNINGS TO GROW MORE SLOWLY OR EVEN DECREASE.
Our growth strategy could place a significant demand on our management and
our financial and operational resources. This growth strategy is subject to
various risks, including uncertainties regarding the ability to open new stores
and our ability to acquire additional stores on favorable terms. We may not be
able to continue to identify profitable new store locations or underperforming
competitors as we currently anticipate. If we are unable to implement our growth
strategy, our earnings may grow more slowly or even decrease.
IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH AND INTEGRATE NEW STORES, OUR
FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
The benefits we anticipate from our growth strategy may not be realized.
The addition of new stores, both through store openings and through
acquisitions, requires the integration of our management philosophies and
personnel, standardization of training programs, realization of operating
efficiencies and effective coordination of sales and marketing and financial
reporting efforts. In addition, acquisitions in general are subject to a number
of special risks, including adverse short-term effects on our reported operating
results, diversion of management's attention and unanticipated problems or legal
liabilities. Further, a newly opened store generally does not attain positive
cash flow during its first year of operations.
THERE ARE LEGAL PROCEEDINGS PENDING AGAINST US SEEKING MATERIAL DAMAGES. THE
COSTS WE INCUR IN DEFENDING OURSELVES OR ASSOCIATED WITH SETTLING ANY OF THESE
PROCEEDINGS, AS WELL AS A MATERIAL FINAL JUDGMENT OR DECREE AGAINST US, COULD
MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION BY REQUIRING THE PAYMENT OF
THE SETTLEMENT AMOUNT, A JUDGMENT OR THE POSTING OF A BOND.
Some lawsuits against us involve claims that our rental agreements
constitute installment sales contracts, violate state usury laws or violate
other state laws enacted to protect consumers. We are also defending two alleged
class action and other lawsuits asserting gender discrimination in our
employment practices as well as class action lawsuits alleging we violated the
securities 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 indentures governing the 1998 notes, the 2001 notes and
exchange notes.
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,
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such as requiring a grace period for late fees and contract reinstatement rights
in the event the rental purchase agreement is terminated. The rental purchase
laws of nine states limit the total amount of rentals that may be charged over
the life of a rental purchase agreement. Several states also effectively
regulate rental purchase transactions under other consumer protection statutes.
We are currently subject to outstanding judgments and other litigation alleging
that we have violated some of these statutory provisions.
Although there is no comprehensive federal legislation regulating
rental-purchase transactions, adverse federal legislation may be enacted in the
future. From time to time, legislation has been introduced in Congress seeking
to regulate our business. In addition, various legislatures in the states where
we currently do business may adopt new legislation or amend existing legislation
that could require us to alter our business practices.
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 and
Chief Executive Officer, Mitchell E. Fadel, our President, and Dana F. Goble and
David A. Kraemer, our Executive Vice-Presidents of Operations. We do not have
employment contracts with or maintain key-man insurance on the lives of any of
these officers and the loss of any one of them could disrupt our business.
A SMALL GROUP OF OUR DIRECTORS AND THEIR AFFILIATES HAVE SIGNIFICANT INFLUENCE
ON ALL STOCKHOLDER VOTES. AS A RESULT, THEY WILL CONTINUE TO HAVE THE ABILITY TO
EXERCISE EFFECTIVE CONTROL OVER THE OUTCOME OF ACTIONS REQUIRING THE APPROVAL OF
OUR STOCKHOLDERS, INCLUDING POTENTIAL ACQUISITIONS, ELECTIONS OF OUR BOARD OF
DIRECTORS AND SALES OR CHANGES IN CONTROL.
Mr. Speese, our Chairman and Chief Executive Officer, Apollo Investment
Fund IV, L.P. and Apollo Overseas Partners IV, L.P. are parties to a
stockholders agreement relating to the voting of our securities held by them at
meetings of our stockholders. Approximately 29.3% of our voting stock on a fully
diluted basis, assuming the conversion of our Series A preferred stock and all
outstanding options, is controlled by Mr. Speese and Apollo.
16
USE OF PROCEEDS OF THE EXCHANGE NOTES
The exchange offer is intended to satisfy our obligations under the
Exchange and Registration Rights Agreement dated as of December 19, 2001, by and
between Rent-A-Center, ColorTyme and Advantage Companies and J.P. Morgan
Securities Inc., Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and
Lehman Brothers Inc., as initial purchasers. We will not receive any cash
proceeds from the issuance of the exchange notes. We will only receive old notes
with a total principal amount equal to the total principal amount of the
exchange notes issued in the exchange offer. The 1998 notes and the 2001 notes
tendered for exchange will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the exchange notes will not result in any increase
in our debt.
17
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2001 on an actual basis and as adjusted to
give effect to the issuance of, and the application of the proceeds from, the
2001 notes. This table should be read in conjunction with our financial
statements and related notes and the other financial information contained in
this prospectus.
- ---------------
(1) We have $125 million of commitments under our revolving credit facilities.
Availability under the revolving credit facilities is reduced by commitments
on letters of credit. As of September 30, 2001, we had approximately $63.6
million commitments on our letters of credit outstanding.
18
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
At the time we issued the 2001 notes, we agreed to file a registration
statement to register the exchange of the 2001 notes for the exchange notes on
or prior to February 17, 2002, and to use our reasonable best efforts to cause
the registration statement to become effective under the Securities Act on or
prior to May 18, 2002. In the event that applicable interpretations of the staff
of the SEC do not permit us to effect the exchange offer, or if certain holders
of the 2001 notes notify us that they are not eligible to participate in, or
would not receive freely tradeable exchange notes in exchange for tendered old
notes pursuant to, the exchange offer, we will use our reasonable best efforts
to cause to become effective a shelf registration statement with respect to the
resale of the 2001 notes and to keep the shelf registration statement effective
until December 19, 2003. If the exchange offer registration statement is not
effective on May 17, 2002, we will be obligated to pay liquidated damages to
holders of the 2001 notes. See "2001 Notes Exchange and Registration Rights
Agreement."
We satisfied our obligations relating to the registration of the 1998 notes
under the Securities Act in 1999. Generally, the 1998 notes are freely tradable
securities. We are not bound by any agreement to exchange the 1998 notes for the
exchange notes offered by this prospectus. The objective of the exchange offer
is to create a single series of debt securities having a total outstanding
principal amount which is larger than that of either the 1998 notes or the 2001
notes as separate series, thus resulting in greater liquidity for the exchange
notes. However, see "Risk Factors -- Because the total outstanding principal of
the exchange notes will include the total outstanding principal amount of the
1998 notes and the 2001 notes, you will experience an immediate dilution of your
percentage of ownership of such series."
Each holder of old notes that wishes to exchange old notes for exchange
notes will be required to represent that:
- any exchange notes received will be acquired in the ordinary course of
its business;
- it has no arrangement or understanding with any person to participate in
the distribution of the exchange notes; and
- it is not an "affiliate," as defined in Rule 405 of the Securities Act,
of Rent-A-Center or, if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. See "Plan of Distribution."
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the SEC set forth in no-action
letters issued to third-parties, we believe that, except as described below,
exchange notes issued in the exchange offer may be offered for resale, resold
and otherwise transferred by any holder, other than a holder which is an
"affiliate" of us within the meaning of Rule 405 under the Securities Act,
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such exchange notes are acquired in the
ordinary course of such holder's business and such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such exchange notes. Any holder who tenders
in the exchange offer with the intention or for the purpose of participating in
a distribution of the exchange notes cannot rely on such interpretation by the
staff of the SEC and must comply with the registration and prospectus delivery
requirements of
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the Securities Act in connection with a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holder's information required by Item 507 of Regulation S-K under the
Securities Act. This prospectus may be used for an offer to resell, resale or
other retransfer of exchange notes only as specifically set forth herein. Only
broker-dealers who acquired the old notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives exchange notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such exchange
notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter(s) of transmittal, we will accept for exchange any and all old
notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on , 2002, unless we extend the exchange offer. We will issue
$1,000 principal amount of exchange notes in exchange for each $1,000 principal
amount of outstanding old notes surrendered pursuant to the exchange offer. Old
notes may be tendered only in $1,000 increments.
The form and terms of the exchange notes will be the same as the form and
terms of the old notes except that, with respect to the 2001 notes, the issuance
of the exchange notes will have been registered under the Securities Act, and
the exchange notes will not bear legends restricting their transfer. The
exchange notes will evidence the same debt as the old notes. The exchange notes
will be issued under and entitled to the benefits of the indenture which
authorized the issuance of the 2001 notes, such that the old notes and the
exchange notes will be treated as a single class of debt securities under the
indenture. See "Description of the Notes and Guarantees."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $175.0 million of the 1998 notes and the
$100.0 million of the 2001 notes are outstanding. This prospectus, together with
the respective letter(s) of transmittal, is being sent to all registered holders
of old notes. There will be no fixed record date for determining registered
holders of old notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the Exchange and Registration Rights Agreement and the applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations of the SEC thereunder. Old notes that are not tendered for exchange
in the exchange offer will remain outstanding and continue to accrue interest
and will be entitled to the rights and benefits such holders have under the
respective indentures and, in the case of the 2001 notes, the Exchange and
Registration Rights Agreement.
We will be deemed to have accepted for exchange properly tendered notes
when, as and if we shall have given oral or written notice of acceptance to the
exchange agent and complied with the provisions of Section 1 of the Exchange and
Registration Rights Agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the exchange notes from us. We
expressly reserve the right to amend or terminate the exchange offer, and not to
accept for exchange any old notes not accepted for exchange, upon the occurrence
of any of the conditions specified below under "-- Certain Conditions to the
Exchange Offer."
20
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
respective letter(s) of transmittal, transfer taxes with respect to the exchange
of old notes pursuant to the exchange offer. Rent-A-Center will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the exchange offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time on , 2002,
unless we, in our sole discretion, extend the exchange offer, in which case the
expiration date will mean the latest date and time to which the exchange offer
is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will issue a press release notifying
the registered holders of old notes of such extension, each prior to 9:00 a.m.,
New York City time, on the next business day after the expiration date.
We reserve the right, in our sole discretion:
- to delay accepting any old notes for exchange, to extend the exchange
offer or to terminate the exchange offer if any of the conditions set
forth below under "-- Certain Conditions to the Exchange Offer" have not
been satisfied, by giving oral or written notice of such delay, extension
or termination to the exchange agent; or
- to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of old notes. If the exchange offer is amended in a manner we
determine to constitute a material change, we will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and we will extend the exchange offer, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during such period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, we have no obligation to publish, advertise or otherwise communicate any
such public announcement, other than by making a timely releasepopulation.
According to an appropriate news agency.
If we extend the period of time during which the exchange offer is open, or
if we are delayed in accepting for exchange of, or in issuing and exchanging the
exchange notes for, any old notes, or are unable to accept for exchange of, or
issue exchange notes for, any old notes pursuant to the exchange offer for any
reason, then, without prejudice to our rights under the exchange offer, the
exchange agent may, on our behalf, retain all old notes tendered, and such old
notes may not be withdrawn except as otherwise provided below in "-- Withdrawal
of Tenders." The right to delay acceptance for exchange of, or the issuance and
the exchange of the exchange notes for, any old notes is subject to applicable
law, including Rule 14e-1(c) under the Exchange Act, which requires that we
either deliver the exchange notes or return the old notes deposited by or on
behalf of the holders thereof promptly after termination or withdrawal of the
exchange offer.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at a rate of 11% per annum, payable
semi-annually, on February 15 and August 15 of each year, commencing on August
15, 2002. Holders of the old notes will receive an interest payment on the old
notes on February 15, 2002. Holders of exchange notes will receive interest on
August 15, 2002 from the date of initial issuance of the
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exchange notes, plus an amount equal to the accrued interest on the old notes
through such date. Interest on the old notes accepted for exchange will cease to
accrue upon issuance of the exchange notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange any exchange notes for, any old
notes, and may terminate the exchange offer before the acceptance of any old
notes for exchange, if:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer;
- any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff
of the SEC, which, in our reasonable judgment, might materially impair
our ability to proceed with the exchange offer; or
- any governmental approval has not been obtained, which approval we shall,
in our reasonable discretion, deem necessary for the consummation of the
exchange offer as contemplated hereby.
If we determine in our sole discretion that any of these foregoing
conditions are not satisfied, we may
- refuse to accept any old notes and return all old notes to the tendering
holders;
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes; or
- waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
If such waiver constitutes a material change to the exchange offer, we will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the old notes and we will extend the
exchange offer for a period of five to ten business days, depending on the
significance of the waiver and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during such five to ten
day business period.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
exchange notes will be issued in exchange for any such old notes, if at such
time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Subject to the terms and conditions hereof and the letter(s) of
transmittal, only a holder of old notes may tender such old notes in the
exchange offer. To tender in the exchange offer, a holder must complete, sign
and date the appropriate letter(s) of transmittal pertaining to their old notes,
or facsimile thereof, have the signature thereon guaranteed if required by the
letter(s) of transmittal, and mail or otherwise deliver such letter(s) of
transmittal or such
22
facsimile to the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date or, in the alternative, comply with the Depository Trust
Corporation's Automated Tender Offer Program procedures described below. A
separate letter of transmittal will be used for the 1998 notes and 2001 notes.
In addition, either:
- old notes must be received by the exchange agent along with the
appropriate letter(s) of transmittal;
- a timely confirmation of book-entry transfer, which we call a book-entry
confirmation, of such old notes, if such procedure is available, into the
exchange agent's account at the Depository Trust Corporation, which we
call the Book-Entry Transfer Facility, pursuant to the procedure for
book-entry transfer described below or properly transmitted agent's
message, as defined below, must be received by the exchange agent prior
to the expiration date; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter(s) of transmittal and other required
documents must be received by the exchange agent at the address set forth below
under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth herein and in the letter(s) of
transmittal.
The method of delivery of old notes, the letter(s) of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter(s) of transmittal or old notes should be sent to us. Holders may request
their respective brokers, dealers, commercial banks, trust companies or other
nominees to effect the above transactions for such holders.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of old notes to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the letter(s) of transmittal and
delivering such owner's old notes, either make appropriate arrangements to
register ownership of the old notes in such owner's name or obtain a properly
completed bond power from the registered holder of old notes. The transfer of
registered ownership may take considerable time and may not be able to be
completed prior to the expiration date.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. See "Plan of Distribution."
Signatures on the letter(s) of transmittal and a notice of withdrawal
described below must be guaranteed by an eligible institution, as defined below,
unless the old notes are tendered (A) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter(s) of transmittal, or (B) for the account of an
eligible institution. In the event that signatures on the letter(s) of
transmittal or a notice of withdrawal are required to be guaranteed, such
guarantor must be an eligible institution, which means a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the
23
meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the
recognized signature guarantee programs identified in the letter(s) of
transmittal.
If the letter(s) of transmittal is signed by a person other than the
registered holder of any old notes listed therein, such old notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such old notes
with the signature thereon guaranteed by an eligible institution.
If the letter(s) of transmittal or any old notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, provide
evidence satisfactory to us of their authority to so act must be submitted with
the letter(s) of transmittal.
The exchange agent and the Depository Trust Corporation have confirmed that
any financial institution that is a participant in the Depository Trust
Corporation's system may utilize the Depository Trust Corporation's Automated
Tender Offer Program to tender. Accordingly, participants in the Depository
Trust Corporation's Automated Tender Offer Program may, in lieu of physically
completing and signing the letter(s) of transmittal and delivering it to the
exchange agent, electronically transmit their acceptance of the exchange offer
by causing the Depository Trust Corporation to transfer the old notes to the
exchange agent in accordance with the Depository Trust Corporation's Automated
Tender Offer Program procedures for transfer. The Depository Trust Corporation
will then send an agent's message to the exchange agent. The term "agent's
message" means a message transmitted by the Depository Trust Corporation
received by the exchange agent and forming part of the book-entry confirmation,
which states
- that the Depository Trust Corporation has received an express
acknowledgment from a participant in the Depository Trust Corporation's
Automated Tender Offer Program that is tendering old notes which are the
subject of such book entry confirmation;
- that such participant has received and agrees to be bound by the terms of
the letter(s) of transmittal, or, in the case of an agent's message
relating to guaranteed delivery, that such participant has received and
agrees to be bound by the applicable notice of guaranteed delivery; and
- that the agreement may be enforced against such participant.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion, which determination will be
final and binding. We reserve the absolute right to reject any and all old notes
not properly tendered or any old notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter(s) of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old notes, neither we, the exchange agent nor any other person shall incur any
liability for failure to give such notification. Tenders of old notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any old notes received by the exchange agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the exchange agent to the tendering holder, unless
otherwise provided in the letter(s) of transmittal, as soon as practicable
following the expiration date.
24
In all cases, issuance of exchange notes for old notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of old notes or a timely book-entry confirmation
of such old notes into the exchange agent's account at the book-entry transfer
facility, a properly completed and duly executed letter(s) of transmittal and
all other required documents. If any tendered old notes are not accepted for
exchange for any reason set forth in the terms and conditions of the exchange
offer or if old notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged old notes will be
returned without expense to the tendering holder thereof, or, in the case of old
notes tendered by book-entry transfer into the exchange agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described below, such non-exchanged notes will be credited to an account
maintained with such book-entry transfer facility, as promptly as practicable
after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at the book-entry transfer facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of old notes by causing the
book-entry transfer facility to transfer such old notes into the exchange
agent's account at the book-entry transfer facility in accordance with such
book-entry transfer facility's procedures for transfer. However, although
delivery of notes may be effected through book-entry transfer at the book-entry
transfer facility, the letter(s) of transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the exchange agent at the address set
forth below under "-- Exchange Agent" on or prior to the expiration date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the exchange
agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and (A) whose old notes are not
immediately available, or (B) who cannot deliver their old notes, the letter(s)
of transmittal or any other required documents to the exchange agent prior to
the expiration date, may effect a tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery,
setting forth the name and address of the holder, the registered
number(s) of such old notes and the principal amount of old notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
expiration date, the appropriate letter(s) of transmittal, or facsimile
thereof, together with the old notes or a book-entry confirmation, as the
case may be, and any other documents required by the letter(s) of
transmittal will be deposited by the eligible institution with the
exchange agent; and
- such properly completed and executed letter(s) of transmittal, or
facsimile thereof, or properly transmitted agent's message as well as all
tendered old notes in proper form for transfer or a book-entry
confirmation, as the case may be, and all other documents required by the
letter(s) of transmittal, are received by the exchange agent within three
New York Stock Exchange trading days after the expiration date.
25
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date.
For a withdrawal to be effective:
- a written notice of withdrawal must be received by the exchange agent at
one of the addresses set forth below under "-- Exchange Agent;" or
- holders must comply with the appropriate procedures of the Depository
Trust Company's automated tender offer program system.
Any such notice of withdrawal must specify the name of the person having
tendered the old notes to be withdrawn, identify the old notes to be withdrawn,
including the principal amount of such old notes, and, where certificates for
old notes have been transmitted, specify the name in which such old notes were
registered, if different from that of the withdrawing holder. If certificates
for old notes have been delivered or otherwise identified to the exchange agent,
then, prior to the release of such certificates, the withdrawing holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution. If old notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
book-entry transfer facility to be credited with the withdrawn old notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility, including time of receipt, of such notices will
be determined by us, which determination shall be final and binding on all
parties. Any old notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any old notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder, or, in the case
of old notes tendered by book-entry transfer into the exchange agent's account
at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such old notes will be credited to an account
maintained with such book-entry transfer facility for the old notes, as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn old notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering" above at any time on or
prior to the expiration date.
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EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or the letter(s) of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by us. The principal
solicitation is being made by mail. However, additional solicitation may be made
by telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us and are estimated in the aggregate to be approximately $300,000.
Such expenses include registration fees, fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, and related fees and
expenses.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of the
old notes for exchange notes pursuant to the exchange offer. If, however,
certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of notes tendered, or if
tendered notes are registered in the name of any person other than the person
signing the letter(s) of transmittal, or if a transfer tax is imposed for any
reason other than the exchange of notes pursuant to the exchange offer, then the
amount of any such transfer taxes, whether imposed on the registered holder or
any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the letter(s) of transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
2001 Notes. Holders of 2001 notes who do not exchange their 2001 notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of such 2001 notes, as set forth
- in the legend thereon as a consequence of the issuance of the 2001 notes
pursuant to the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws; and
27
- otherwise set forth in the offering memorandum dated December 12, 2001,
distributed in connection with the offering of the 2001 notes.
In general, the 2001 notes may not be offered or sold unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. We do not currently anticipate that we will register the resale of the
2001 notes under the Securities Act, except as required by the Exchange and
Registration Rights Agreement related to the 2001 notes.
Because the 1998 notes were issued pursuant to an effective registration
statement under the Securities Act, the ability of holders of 1998 notes to
reoffer, resell or otherwise dispose of their 1998 notes will not be affected by
their failure to participate in the exchange offer. However, to the extent 1998
notes and 2001 notes are tendered and accepted in the exchange offer, the
principal amount of outstanding 1998 notes and 2001 notes will decrease with a
resulting decrease in the liquidity in the market for those notes. Accordingly,
the liquidity of the market of the 1998 notes and 2001 notes could be adversely
affected. See "Risk Factors -- The market value of your current notes may be
lower if you do not exchange your old notes or fail to properly tender your old
notes for exchange -- Consequences of Failure to Exchange."
28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five years
ended December 31, 2000 have been derived from our consolidated financial
statements as audited by Grant Thornton LLP, independent certified public
accountants. Our selected financial and operating data as of and for the nine
months ended September 30, 2000 and 2001 have been derived from our unaudited
consolidated financial statements which were prepared on the same basis as our
audited consolidated financial statements and include, in our opinion, all
adjustments necessary to present fairly the information presented for the
interim periods. Interim period results are not necessarily indicative of
results that will be obtained for the full year. 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 elsewhere in this prospectus. 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 to the other periods presented. In May 1996, we
completed the acquisition of ColorTyme, which affects the comparability of the
1996 historical financial and operating data to the other periods presented.
29
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(1) Includes the effects of a pre-tax, non-recurring refund of $22.4 million for
unlocated class members associated with the coordinated settlement of three
class action lawsuits in the state of New Jersey.
(2) Same store revenue for each period presented includes revenues only of
stores open and operated by us throughout the full period and the comparable
prior period.
(3) EBITDA is defined as operating profit plus depreciation (exclusive of
depreciation of rental merchandise), amortization of intangibles and
non-recurring litigation settlements. EBITDA should not be considered as a
substitute for income from operations, net income or cash flow from
operating activities (as determined in accordance with generally accepted
accounting principles) for the purpose of analyzing operating performance,
financial position and cash flows.
(4) Excludes depreciation of rental merchandise and amortization other than
amortization of intangible assets.
(5) Cash interest expense is defined as interest expense less amortization of
financing fees.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OUR BUSINESS
We are the largest rent-to-own operator in the United States with an
approximate 29% market share based on store count. At December 31, 2001, we
operated 2,281 company-owned stores in 50 states, the District of Columbia and
Puerto Rico. Our subsidiary, ColorTyme, is a national franchisor of rent-to-own
stores. At December 31, 2001, ColorTyme had 342 franchised stores in 42 states,
330 of which operated under the ColorTyme name and 12 stores which operated
under the Rent-A-Center name. Our stores offer high quality durable products
such as home electronics, appliances, computers, and furniture and accessories
under flexible rental purchase agreements that allow the customer to obtain
ownership of the merchandise at the conclusion of an agreed-upon rental period.
These rental purchase agreements are designed to appeal to a wide variety of
customers by allowing them to obtain merchandise that they might otherwise be
unable to obtain due to insufficient cash resources or a lack of access to
credit. These agreements also cater to customers who only have a temporary need,
or who simply desire to rent rather than purchase the merchandise.
We have pursued an aggressive growth strategy since 1989. We have sought to
acquire underperforming stores to which we could apply our operating model as
well as open new stores. As a result, the acquired stores have generally
experienced more significant revenue growth during the initial periods following
their acquisition than in subsequent periods. Because of significant growth
since our formation, particularly due to the Thorn Americas acquisition, our
historical results of operations and period-to-period comparisons of such
results and other financial data, including the rate of earnings growth, may not
be meaningful or indicative of future results.
We plan to accomplish our future growth through selective and opportunistic
acquisitions, with an emphasis on new store development. Typically, a newly
opened store is profitable on a monthly basis in the ninth to twelfth month
after its initial opening. Historically, a typical store has achieved 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 are opened during that quarter and the quarters preceding
it. There can be no assurance that we will open any new stores in the future, or
as to the number, location or profitability thereof.
In addition, to provide any additional funds necessary for the continued
pursuit of our operating and growth strategies, we may incur from time to time
additional short or long-term bank indebtedness and may issue, in public or
private transactions, equity and debt securities. The availability and
attractiveness of any outside sources of financing will depend on a number of
factors, some of which will relate to our financial condition and performance,
and some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance additional financing will
be available, or if available, will be on terms acceptable to us.
If a change in control occurs, we may be required to offer to purchase all
of our outstanding senior subordinated notes at 101% of their principal amount,
plus accrued interest to the date of repurchase. Our senior credit facilities
restrict our ability to repurchase our senior subordinated notes, including in
the event of a change in control. In addition, a change in control would result
in an event of default under our senior credit facilities, which could then be
accelerated by our lenders, and would require us to offer to redeem our Series A
31
preferred stock. In the event a change in control occurs, we cannot be sure that
we would have enough funds to immediately pay our accelerated senior credit
facility obligations, all of our senior subordinated notes and for the
redemption of our Series A preferred stock, or that we would be able to obtain
financing to do so on favorable terms, if at all.
COMPONENTS OF INCOME AND EXPENSE
Revenue. We collect non-refundable rental payments and fees in advance,
generally on a weekly or monthly basis. This revenue is recognized over the term
of the agreement. Rental purchase agreements generally include a discounted
early purchase option. Amounts received upon sales of merchandise under these
options, and upon the sale of used merchandise, are recognized as revenue when
the merchandise is sold.
Franchise Revenue. Revenue from the sale of rental 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 does not consider salvage value and does not allow the depreciation
of rental merchandise during periods when it is not generating rental revenue.
For income tax purposes we depreciate our merchandise using the modified
accelerated cost recovery system, or MACRS, with a three-year life.
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, 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. In July 2001, the Financial
Accounting Standards Board issued SFAS 142, Goodwill and Intangible Assets,
which revises the accounting for purchased goodwill and intangible assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives acquired after
June 30, 2001 will not be amortized. Effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization. Also effective January 1, 2002, goodwill and
intangible assets with indefinite lives will be tested for impairment annually,
and in the event of an impairment indicator. SFAS 142 is effective for fiscal
years beginning after December 15, 2001.
RECENT DEVELOPMENTS
During the fourth quarter of 2001, we acquired four stores for
approximately $2.1 million in cash in four separate transactions and opened an
additional 15 stores. We also closed 26 stores, merging 23 with existing stores
and selling three stores. For the year ended December 31, 2001, we acquired a
total of 95 stores for approximately $43.1 million in 21 separate transactions,
opened 76 new stores, and closed 48 stores. Of the closed stores, 42 were merged
with existing stores and six were sold. It is our intention to increase the
number
32
of stores we operate by an average of approximately 5% to 10% per year over the
next several years.
On October 8, 2001, we announced the retirement of J. Ernest Talley as our
Chairman and Chief Executive Officer, and the appointment of Mark E. Speese as
our new Chairman and Chief Executive Officer. In connection with Mr. Talley's
retirement, our board of directors approved the repurchase of $25.0 million
worth of shares of our common stock 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 and a
minimum of $20.00 per share. Under this formula, the purchase price for the
repurchase was calculated at $20.258 per share. Accordingly, on October 23, 2001
we repurchased 493,632 shares of our common stock from Mr. Talley at $20.258 per
share 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 from Mr. Talley at
$20.258 per share, for a total purchase price of an additional $15.0 million. We
also have the option to repurchase all of the remaining 1,714,086 shares of our
common stock held by Mr. Talley at $20.258 per share, which we intend to
exercise. This option expires February 5, 2002.
On November 1, 2001, we announced that we reached an agreement in principle
for the settlement of the Margaret Bunch, et al. v. Rent-A-Center, Inc. matter
pending in federal court in Kansas City, Missouri. The court granted preliminary
approval of the settlement on November 29, 2001 and set a fairness hearing for
March 6, 2002. Under the terms of the proposed settlement, while not admitting
liability, we agreed to pay an aggregate of $12.25 million to the agreed upon
class, plus plaintiff's attorneys' fees as determined by the court, and costs to
administer the settlement process. Accordingly, to account for the
aforementioned costs, as well as our own attorneys' fees, we recorded a one time
non-recurring charge of $16.0 million in the third quarter.
On December 19, 2001, we issued $100.0 million in principal amount of the
2001 notes to the initial purchasers at a price of 99.5% of par value pursuant
to a purchase agreement dated December 12, 2001, which we entered into with our
subsidiary guarantors and the initial purchasers. The 2001 notes are governed by
an indenture among us, our subsidiary guarantors and The Bank of New York, as
trustee.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
Store Revenue. Total store revenue increased by $139.9 million, or 12.2%,
to $1,288.7 million for the nine months ended September 30, 2001 from $1,148.8
million for the nine months ended September 30, 2000. The increase in total
store revenue is directly attributable to the success of our efforts on
improving store operations through:
- increasing the number of units on rent;
- increasing our customer base;
- increasing the average price per unit on rent by upgrading our rental
merchandise; and
- incremental revenues through acquisitions and new store openings.
This focus resulted in same store revenues increasing by $79.2 million, or
7.5%, to $1,140.3 million for the nine months ended September 30, 2001 from
$1,061.1 million for the nine months ended September 30, 2000. 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, 2001 and 2000. This
improvement was primarily attributable to an increase in
33
the number of customers served, the number of items on rent, as well as revenue
earned per item on rent.
Franchise Revenue. Total franchise revenue decreased by $138,000, or 0.3%,
to $40.8 million for the nine months ended September 30, 2001 from $41.0 million
for the nine months ended September 30, 2000. This decrease was primarily
attributable to a decrease in the number of franchise locations during the first
three quarters of 2001 as compared to the first three quarters of 2000.
Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $28.7 million, or 12.9%, to $251.3 million for the nine months
ended September 30, 2001 from $222.5 million for the nine months ended September
30, 2000. This increase was primarily attributable to an increase in the number
of units on rent. Depreciation of rental merchandise expressed as a percent of
store rentals and fees revenue increased to 20.7% in 2001 from 20.6% for the
same period in 2000. This slight increase is primarily a result of in-store
promotions made during the third quarter of 2001. These promotions included a
reduction in the rates and terms on certain rental agreements, thus causing
depreciation to be a greater percent of store rentals and fees revenue on those
items rented.
Cost of Merchandise Sold. Cost of merchandise sold increased by $2.4
million, or 4.7%, to $54.2 million for the nine months ended September 30, 2001
from $51.7 million for the nine months ended September 30, 2000. This increase
was primarily a result of an increase in the number of items sold during the
first nine months of 2001 as compared to the first nine months of 2000.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue increased to 58.1% for the nine months ended
September 30, 2001 from 55.6% for the nine months ended September 30, 2000. This
increase was primarily attributable to the infrastructure expenses and costs
associated with the opening of 94 new stores since October 1, 2000 and increases
in store level labor, insurance costs, and other operating expenses.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
decreased by $228,000, or 0.7%, to $34.8 million for the nine months ended
September 30, 2001 from $35.0 million for the nine months ended September 30,
2000. This decrease is primarily a result of a decrease in the number of
franchise locations during the first three quarters of 2001 as compared to the
first three quarters of 2000.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue increased slightly to 3.1% for the nine
months ending September 30, 2001 from 3.0% for the nine months ending September
30, 2000. This increase is primarily attributable to an increase in home office
labor and other overhead expenses for the first three quarters of 2001 as
compared to the first three quarters of 2000.
Amortization of Intangibles. Amortization of intangibles increased by $1.3
million, or 6.2%, to $22.4 million for the nine months ended September 30, 2001
from $21.1 million for the nine months ended September 30, 2000. This increase
was primarily attributable to the additional goodwill amortization associated
with the acquisition of 39 stores in the last half of 2000 and the additional 78
stores acquired in the first half of 2001. Accounting for goodwill and
intangibles amortization will be revised under SFAS 142. However, we will
continue to amortize goodwill and intangible assets acquired prior to July 1,
2001 until January 1, 2002, at which time quarterly and annual goodwill
amortization of approximately $7.1 million and $28.4 million will no longer be
recognized.
Operating Profit. Operating profit decreased by $45.0 million, or 21.8%,
to $161.5 million for the nine months ended September 30, 2001 from $206.5
million for the nine months ended September 30, 2000. Excluding the pre-tax
effect of the class action litigation settlement of
34
$16.0 million recorded in the third quarter of 2001 and the class action
litigation settlement refund of $22.4 million received in the second quarter of
2000, operating profit decreased by $6.6 million, or 3.6%, to $177.5 million for
the nine months ended September 30, 2001 from $184.1 million for the nine months
ended September 30, 2000. Operating profit as a percentage of total revenue
decreased to 13.4% for the nine months ended September 30, 2001 before the
pre-tax class action litigation settlement of $16.0 million, from 15.5% for the
nine months ended September 30, 2000 before the pre-tax non-recurring class
action litigation settlement refund of $22.4 million. This decrease is primarily
attributable to the infrastructure expenses and initial costs associated with
the opening of 94 new stores since October 1, 2000 and increases in store level
labor, insurance, utility, and other operating expenses.
Net Earnings. Including the class action litigation settlement adjustments
noted above, net earnings were $62.5 million for the nine months ended September
30, 2001, and $79.4 million for the nine months ended September 30, 2000. Net
earnings increased by $3.8 million, or 5.6%, to $71.5 million for the nine
months ended September 30, 2001 before the after tax effect of the $16.0 million
class action litigation settlement, from $67.7 million for the nine months ended
September 30, 2000 before the after-tax effect of the $22.4 million class action
litigation settlement refund. This increase, excluding the after tax effect of
the class action litigation settlement adjustments, is primarily attributable to
growth in total revenues and reduced interest expenses resulting from a
reduction in outstanding debt.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. We account for shares of preferred stock
distributed as dividends in-kind at the greater of the stated value or the value
of the common stock obtainable upon conversion on the payment date. Preferred
dividends increased by $4.3 million, or 55.7%, to $12.1 million for the nine
months ended September 30, 2001 as compared to $7.8 million for the nine months
ended September 30, 2000. This increase is a result of more shares of Series A
Preferred stock outstanding in 2001 as compared to 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Store Revenue. Total store revenue increased by $182.3 million, or 13.4%,
to $1,543.9 million for 2000 from $1,361.6 million for 1999. The increase in
total store revenue is directly attributable to the success of our efforts on
improving store operations through:
- increasing the average price per unit on rent by upgrading our rental
merchandise, primarily at newly-acquired stores;
- increasing the number of units on rent;
- increasing the customer base; and
- incremental revenues through acquisitions.
Same store revenues increased by $161.2 million, or 12.6%, to $1,444.1
million for 2000 from $1,282.9 million in 1999. Same store revenues represent
those revenues earned in stores that were operated by us for the entire years
ending December 31, 2000 and 1999. This improvement was primarily attributable
to an increase in the number of customers served, the number of items on rent,
as well as revenue earned per item on rent.
Franchise Revenue. Total franchise revenue increased by $2.2 million, or
3.9%, to $57.8 million for 2000 from $55.6 million in 1999. This increase was
primarily attributable to an increase in the sale of rental merchandise to
franchisees resulting from growth in the franchise store operations.
Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $33.8 million, or 12.7%, to $299.3 million for 2000 from $265.5
million for 1999. Depreciation of rental merchandise expressed as a percentage
of store rentals and fees revenue decreased
35
from 20.9% in 1999 to 20.5% in 2000. This decrease is primarily attributable to
the successful implementation of our pricing strategies and inventory management
practices in newly acquired stores.
Cost of Merchandise Sold. Cost of merchandise sold decreased by $8.7
million, or 11.7%, to $65.3 million for 2000 from $74.0 million in 1999. This
decrease was a direct result of fewer cash sales of product in 2000 as compared
to 1999. During 1999, we focused our efforts on increasing the amount of
merchandise sales to reduce certain items acquired in the Thorn Americas and
Central Rents acquisitions that were not components of our normal merchandise
strategy.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue decreased to 56.1% for 2000 from 56.6% for
1999. This decrease is a result of the leveraging of our fixed and semi-fixed
costs such as labor, advertising and occupancy over a larger revenue base.
Expenses included in the salaries and other category are items such as labor,
delivery, service, utility, advertising, and occupancy costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
increased by $1.8 million, or 3.8%, to $49.7 million for 2000 from $47.9 million
in 1999. This increase is a direct result of an increase in merchandise sold to
franchisees in 2000 as compared to 1999.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue remained level at 3.0% in 2000 from 3.0%
in 1999. In the future, we expect general and administrative expenses to remain
relatively stable at 3.0% of total revenue.
Amortization of Intangibles. Amortization of intangibles increased by $1.2
million, or 4.4%, to $28.3 million for 2000 from $27.1 million in 1999. This
increase was primarily attributable to the additional goodwill amortization
associated with the acquisition of 74 stores acquired in 2000.
Operating Profit. Operating profit increased by $77.0 million, or 40.5%,
to $267.0 million for 2000 from $190.0 million for 1999. In the second quarter
of 2000, we received a pre-tax non-recurring class action litigation settlement
refund of $22.4 million associated with the settlement of three class action
lawsuits in the state of New Jersey. Operating profit stated before the effects
of this non-recurring settlement refund increased by $54.6 million, or 28.7%.
Operating profit as a percentage of total revenue increased to 15.3% in 2000
from 13.4% in 1999, calculated before the effects of the non-recurring
settlement refund. This increase is attributable to our efforts in improving the
efficiency and profitability of our stores.
Net Earnings. Net earnings increased by $43.7 million, or 73.6%, to $103.0
million in 2000 from $59.3 million in 1999. Excluding the effects of the
non-recurring settlement refund discussed above, net earnings increased by $31.8
million, or 53.6%.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. Preferred dividends increased by $381,000,
or 3.8%, to $10.4 million for 2000 as compared to $10.0 million in 1999. This
increase is a result of more shares of Series A preferred stock outstanding in
2000 as compared to 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Store Revenue. Total store revenue increased by $601.4 million, or 79.1%,
to $1,361.6 million for 1999 from $760.2 million for 1998. The increase in total
store revenue was primarily attributable to the inclusion of revenue from the
Thorn Americas and Central Rents stores acquired during fiscal year 1998 for the
entire year ended December 31, 1999. Same store revenues increased by $25.3
million, or 7.7%, to $354.3 million for 1999 from $329.0 million in 1998. Same
store revenues represent those revenues earned in stores that were operated by
us
36
for the entire years ending December 31, 1999 and 1998, and therefore exclude
the stores acquired from Thorn Americas and Central Rents. This improvement was
primarily attributable to an increase in both the number of items on rent and in
revenue earned per item on rent.
Franchise Revenue. Total franchise revenue increased by $6.1 million, or
12.2%, to $55.6 million for 1999 from $49.5 million in 1998. This increase was
primarily attributable to an increase in the sale of rental merchandise to
franchisees resulting from 41 additional franchise locations in 1999 as compared
to 1998.
Depreciation of Rental Merchandise. Depreciation of rental merchandise
increased by $100.8 million, or 61.2%, to $265.5 million for 1999 from $164.7
million for 1998. Depreciation of rental merchandise expressed as a percent of
store rentals and fees revenue decreased to 20.9% in 1999 from 23.1% in 1998.
This decrease is primarily attributable to Thorn Americas and Central Rents
experiencing depreciation rates of 22.9% and 29.8%, respectively, upon their
acquisition in 1998. These rates have decreased following the implementation of
our pricing strategies and inventory management practices.
Cost of Merchandise Sold. Cost of merchandise sold increased by $42.0
million, or 130.9%, to $74.0 million for 1999 from $32.0 million in 1998. This
increase was a direct result of the inclusion of merchandise sales and the costs
associated with those sales from the Thorn Americas and Central Rents stores
acquired during the year ended December 31, 1998 for the entire year ended
December 31, 1999.
Salaries and Other Expenses. Salaries and other expenses expressed as a
percentage of total store revenue increased to 56.6% for 1999 from 55.7% for
1998. This increase is principally attributable to incentive programs given to
store-based employees in 1999, which provided additional compensation if they
could achieve targeted gains in the number of items on rent and targeted
reductions in the percentage of delinquent accounts. Expenses included in the
salaries and other category are items such as labor, delivery, service, utility,
advertising, and occupancy costs.
Franchise Cost of Merchandise Sold. Franchise cost of merchandise sold
increased by $5.0 million, or 11.7%, to $47.9 million for 1999 from $42.9 in
1998. This increase is a direct result of an increase in merchandise sold to
franchisees in 1999 as compared to 1998 resulting from an additional 41
franchise store locations.
General and Administrative Expenses. General and administrative expenses
expressed as a percent of total revenue decreased to 3.0% in 1999 from 3.5% in
1998 (3.2% before the $2.5 million non-recurring expense detailed below). This
decrease was the result of increased revenues from the stores acquired from
Thorn Americas and Central Rents, allowing us to leverage our fixed and
semi-fixed costs over the larger revenue base.
Amortization of Intangibles. Amortization of intangibles increased by
$11.8 million, or 76.7%, to $27.1 million for 1999 from $15.3 million in 1998.
This increase was primarily attributable to the additional goodwill amortization
associated with the 1998 acquisitions of Thorn Americas and Central Rents
included for the full year ended December 31, 1999.
Operating Profit. Operating profit increased by $99.2 million, or 109.2%,
to $190.0 million for 1999 from $90.8 million for 1998. In the third quarter of
1998, we incurred a pre-tax non-recurring expense of $2.5 million to effect a
name change of the Renters Choice stores to Rent-A-Center. In the fourth quarter
of 1998, we incurred a pre-tax non-recurring class action litigation settlement
of $11.5 million. Stated before the effects of these expenses, operating profit
increased by $85.2 million, or 81.3%. Operating profit as a percentage of total
revenue increased to 13.4% in 1999 from 12.9% in 1998, calculated before the
effects of the non-recurring expenses. This increase is attributable to our
efforts in improving the efficiency and profitability of the stores acquired
from Thorn Americas and Central Rents.
37
Net Earnings. Net earnings increased by $34.6 million, or 139.7%, to $59.4
million in 1999 from $24.8 million in 1998. In addition to the $2.5 million and
$11.5 million pre-tax non-recurring expenses discussed above, we also incurred
pre-tax non-recurring financing costs of $5.0 million associated with interim
financing utilized in the acquisition of Thorn Americas until permanent
financing was obtained. The after-tax effect of these items was $10.3 million.
Calculated before the effects of these non-recurring expenses, net earnings
increased by $24.3 million, or 69.3%.
Preferred Dividends. Dividends on our Series A preferred stock are payable
quarterly at an annual rate of 3.75%. Dividends can be paid at our option in
cash or in additional shares of Series A preferred stock. Preferred dividends
increased by $6.1 million, or 153.9%, to $10.0 million for 1999 as compared to
$3.9 million in 1998. This increase is a result of the Series A preferred stock
outstanding for the full year in 1999 as compared to only a portion of the year
in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity requirements are for debt service, working capital,
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.
For the nine months ending September 30, 2001, cash provided by operating
activities decreased by $25.9 million to $116.8 million in 2001 from $142.7
million during the nine month period ending September 30, 2000. This decrease
was primarily the result of an increase in the amount of rental merchandise
resulting from strong consumer demand in the first nine months of 2001, as well
as lower net earnings. We purchased $395.0 million and $345.7 million of rental
merchandise during the first nine months of 2001 and 2000, respectively.
Cash used in investing activities increased by $22.9 million to $86.8
million during the nine month period ending September 30, 2001 from $63.9
million during the nine month period ending September 30, 2000. This increase is
primarily attributable to the cost associated with the opening and acquisition
of new stores during the first nine months of 2001. 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 $42.3 million and $25.0 million on capital
expenditures during the nine month periods ending September 30, 2001 and 2000,
respectively, and expect to spend no more than $12.8 million for the remainder
2001. In the second half of 2000, we resumed our strategy of increasing our
store base through opening new stores, as well as through opportunistic
acquisitions. During the fourth quarter of 2001, we acquired four stores, opened
15 additional stores and closed 26 stores, merging 23 with existing stores and
selling three stores. 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.
Cash used in financing activities decreased by $12.8 million to $37.5
million during the nine month period ending September 30, 2001 from $50.3
million during the nine month period ending September 30, 2000. This decrease is
primarily related to the net proceeds associated with the issuance of our common
stock in May 2001 and an increase in the amount of stock options exercised
during the first three quarters of 2001 as compared to the first three quarters
of 2000, offset by debt repayments under our senior credit facilities. During
the first nine months of 2001, we paid down $108.0 million in debt using the
proceeds from the issuance of
38
our common stock in the May 2001 offering and from stock options exercised
during the first three quarters of 2001, as well as from available cash flow
from operations. During the fourth quarter of 2001, we used a portion of the net
proceeds of the issuance of the 2001 notes to pay down approximately $30.0
million in debt.
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 important for us
to continue to open stores in new locations or acquire underperforming stores on
favorable terms. There can be no assurance that we will be able to acquire or
open new stores at the rates we expect, or at all. We cannot assure you that the
stores we do acquire or open will be profitable at the same levels that our
current stores are, or at all.
We believe the cashflow generated from operations, together with the
proceeds of the 2001 notes offering and amounts available under our senior
credit facilities, will be sufficient to fund our debt service requirements,
working capital needs, capital expenditures, the repurchase of our common stock
from our former Chairman and Chief Executive Officer and our store expansion
program for the foreseeable future. Our revolving credit facilities provide us
with revolving loans in an aggregate principal amount not exceeding $125.0
million. At September 30, 2001, we had $61.4 million available under our various
debt agreements.
Borrowings. The following table shows the scheduled maturity dates of our
senior debt outstanding at September 30, 2001.
Under our senior credit facilities, we are required to use 25% of the net
proceeds from any equity offering to repay our term loans. In June 2001, we used
the net proceeds of approximately $45.7 million from the May 2001 offering of
our common stock to repay a portion of our term loans. In December 2001, we also
utilized approximately $30.0 million from the net proceeds of the 2001 notes
offering to repay a portion of our term loans.
We intend to continue to make prepayments of debt under our senior credit
facilities, repurchase some of our senior subordinated notes or repurchase our
common stock under our common stock repurchase program to the extent we have
available cash that is not necessary for store openings or acquisitions. We
cannot, however, assure you that we will have excess cash available for these
purposes.
Senior Credit Facilities. The senior credit facilities are provided by a
syndicate of banks and other financial institutions led by JPMorgan Chase Bank,
as administrative agent. At September 30, 2001, we had a total of $458.0 million
outstanding under these facilities, all of which was under our term loans. At
September 30, 2001, we had $56.4 million of availability under this revolving
credit facility.
Borrowings under the senior credit facilities bear interest at varying
rates equal to 1.50% to 3.00% over LIBOR, which was 2.76% at September 30, 2001.
We also have a prime rate
39
option under the facilities, but do not have any exercised as of September 30,
2001. At September 30, 2001, the average rate on outstanding senior debt
borrowings was 5.23%.
During 1998, we entered into two interest rate protection agreements with
two banks, one of which expired this year. Under the terms of the current
interest rate agreement, the LIBOR rate used to calculate the interest rate
charged on $250.0 million of the outstanding senior term debt is fixed at an
average rate of 5.59%. The protection on the $250.0 million expires in 2003. The
senior credit facilities are secured by a security interest in substantially all
of our tangible and intangible assets, including intellectual property and real
property. The senior credit facilities are also secured by a pledge of the
capital stock of our subsidiaries.
The senior credit facilities contain covenants that limit our ability to:
- incur additional debt (including subordinated debt) in excess of $25
million, excluding the 2001 notes;
- repurchase our capital stock and senior subordinated notes;
- incur liens or other encumbrances;
- merge, consolidate or sell substantially all our property or business;
- sell assets, other than inventory;
- make investments or acquisitions unless we meet financial tests and other
requirements;
- make capital expenditures; or
- enter into a new line of business.
The senior credit facilities require us to comply with several financial
covenants, including a maximum leverage ratio, a minimum interest coverage ratio
and a minimum fixed charge coverage ratio. At September 30, 2001, the maximum
leverage ratio was 4.25:1, the minimum interest coverage ratio was 2.50:1, and
the minimum fixed charge coverage ratio was 1.3:1. On that date, our actual
ratios were 2.03:1, 4.77:1 and 2.13:1.
Events of default under the senior credit facilities include customary
events, such as a cross-acceleration provision in the event that we default on
other debt. In addition, an event of default under the senior credit facilities
would occur if we undergo a change of control. This is defined to include the
case where Apollo ceases to own at least 50% of the amount of our voting stock
that they owned on August 5, 1998, or a third party becomes the beneficial owner
of 33.33% or more of our voting stock at a time when certain permitted investors
own less than the third party or Apollo entities own less than 35% of the voting
stock owned by the permitted investors. We do not have the ability to prevent
Apollo from selling its stock, and therefore would be subject to an event of
default if Apollo did so and its sales were not agreed to by the lenders under
the senior credit facilities. This could result in the acceleration of the
maturity of our debt under the senior credit facilities, as well as under the
senior subordinated notes through their cross-acceleration provision.
1998 Senior Subordinated Notes. In August 1998, we issued $175.0 million
of senior subordinated notes, maturing on August 15, 2008, under an indenture
dated as of August 18, 1998 among us, our subsidiary guarantors and the trustee,
which is now The Bank of New York, as successor to IBJ Schroder Bank & Trust
Company. These notes were subsequently exchanged for the registered 1998 notes,
which are governed by the same indenture.
The indenture governing the 1998 notes contains covenants that limit our
ability to:
- incur additional debt;
- sell assets or our subsidiaries;
40
- grant liens to third parties;
- pay dividends or repurchase stock; and
- engage in a merger or sell substantially all of our assets.
Events of default under the indenture include customary events, such as a
cross-acceleration provision in the event that we default in the payment of
other debt due at maturity or upon acceleration for default in an amount
exceeding $25 million.
We may redeem the 1998 notes after August 15, 2003, at our option, in whole
or in part.
The 1998 notes also require that upon the occurrence of a change of control
(as defined in the indenture), the holders of the notes have the right to
require us to repurchase the notes at a price equal to 101% of the original
aggregate principal amount, together with accrued and unpaid interest, if any,
to the date of repurchase. If we did not comply with this repurchase obligation,
this would trigger an event of default under our senior credit facilities. We
are seeking to exchange the 1998 notes for the exchange notes in the exchange
offer.
2001 Senior Subordinated Notes. In December 2001, we issued an additional
$100.0 million of 11% senior subordinated notes, maturing on August 15, 2008,
under a separate indenture dated as of December 19, 2001 among us, our
subsidiary guarantors and The Bank of New York, as trustee. Although issued
pursuant to a separate indenture, the 2001 notes have substantially identical
terms as the 1998 notes, except for certain transfer restrictions and
registration rights relating to the 2001 notes. The indenture governing the 2001
notes, and which will govern the exchange notes, is substantially similar to the
indenture which governs the 1998 notes, including the restrictive covenants,
events of default and change of control and redemption provisions described
above. The primary difference between the indenture governing the 2001 notes and
the indenture governing the 1998 notes is that the indenture governing the 2001
notes and the exchange notes is open-ended, thereby permitted future issuances
of senior subordinated notes pursuant to the same indenture. We are seeking to
exchange the 2001 notes for the exchange notes in the exchange offer.
Sales of Equity Securities. On May 31, 2001, we completed an offering of
3,680,000 shares of our common stock at an offering price of $42.50 per share.
In this offering, 1,150,000 shares were offered by us and 2,530,000 shares were
offered by some of our stockholders. Net proceeds to us were approximately $45.7
million.
During 1998, we issued 260,000 shares of our Series A preferred stock at
$1,000 per share, resulting in aggregate proceeds of $260.0 million. Dividends
on our Series A preferred stock accrue on a quarterly basis, at the rate of
$37.50 per annum, per share, and are currently paid in additional shares of
Series A preferred stock because of restrictive provisions in our senior credit
facilities. Beginning in 2003, we will be required to pay the dividends in cash
and may do so under our senior credit facilities so long as we are not in
default.
The Series A preferred stock is not redeemable until 2002, after which time
we may, at our option, redeem the shares at 105% of the $1,000 per share
liquidation preference plus accrued and unpaid dividends.
Litigation. In 1998, we recorded an accrual of approximately $125.0
million for estimated probable losses on litigation assumed in connection with
the Thorn Americas acquisition. As of September 30, 2001, we have paid
approximately $117.1 million of this accrual in settlement of most of these
matters and legal fees. These settlements were funded primarily from amounts
available under our senior credit facilities, including the revolving credit
facility and the multidraw facility, as well as from cash flow from operations.
Additional settlements or judgments against us on our existing litigation could
affect our liquidity.
41
Talley Repurchase. In connection with Mr. Talley's retirement, we entered
into an agreement to repurchase $25.0 million worth of shares of our common
stock 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 and a minimum of $20.00 per share. Under this
formula, the purchase price for the repurchase was calculated at $20.258 per
share. Accordingly, on October 23, 2001 we repurchased 493,632 shares of our
common stock from Mr. Talley at $20.258 per share 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 from Mr. Talley at $20.258 per share, for a total
purchase price of an additional $15.0 million. We also have the option to
repurchase all of the remaining 1,714,086 shares of common stock held by Mr.
Talley at $20.258 per share, which we intend to exercise. This option expires
February 5, 2002.
Our senior credit facilities contain covenants that generally limit our
ability to repurchase our capital stock and senior subordinated notes. In
addition, the indentures governing our existing notes and these notes contain
covenants limiting our ability to repurchase our capital stock. Under these
agreements, we had the ability to effect the October 2001 and November 2001
repurchases of $10.0 million and $15.0 million, respectively, of our common
stock from Mr. Talley, and have the ability to exercise the option to purchase
the remaining 1,714,086 shares of common stock held by Mr. Talley. However,
these repurchases will limit our ability to make further repurchases of our
common stock, including pursuant to our common stock repurchase program, and our
ability to repurchase any outstanding notes.
Common Stock Repurchase Program. In April 2000 we announced that our
board of directors had authorized a program to repurchase in the open market up
to an aggregate of $25 million of our common stock. To date, no shares of common
stock have been purchased by us under this share repurchase program. However, we
may begin repurchasing shares of our common stock at any time, subject to the
limitations in our senior credit facilities and the indentures governing our
senior subordinated notes.
Economic Conditions. Although our performance has not suffered in previous
economic downturns, we cannot assure you that demand for our products,
particularly in higher price ranges, will not significantly decrease in the
event of a prolonged recession.
42
BUSINESS
OVERVIEW
We are the largest operator in the United States rent-to-own industry with
an approximate 29% market share based on store count. At December 31, 2001, we
operated 2,281 company-owned stores in 50 states, the District of Columbia and
Puerto Rico. Our subsidiary, ColorTyme, is a national franchisor of rent-to-own
stores. At December 31, 2001, ColorTyme had 342 franchised stores in 42 states,
330 of which operated under the ColorTyme name and 12 stores which operated
under the Rent-A-Center name. These franchise stores represent a further 4%
market share based on store count.
Our stores offer high quality, durable products such as home electronics,
appliances, computers, and furniture and accessories under flexible rental
purchase agreements that 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 estimate that
approximately 62% of our business is from repeat customers. We offer well known
brands such as Philips, Sony and JVC home electronics, Whirlpool appliances,
Dell and Compaq computers and Ashley, La-Z-Boy and Benchcraft furniture. For the
nine months ended September 30, 2001, home electronics merchandise generated 41%
of contract revenue, 32% was derived from furniture and home furnishing
accessories, 17% from appliances and 10% from computers.
INDUSTRY BACKGROUND
According to industry sources and our estimates, the rent-to-own industry
consists of approximately 8,000 stores, and provides approximately 7.0 million
products to over 3.0 million households each year. We estimate the six largest
rent-to-own industry participants account for 4,700 of the total number of
stores, and the majority of the remainder of the industry consists of operations
with fewer than 20 stores. The rent-to-own industry is highly fragmented and,
due primarily to the decreased availability of traditional financing sources,
has experienced, and we believe will continue to experience, increasing
consolidation. We believe this consolidation trend in the industry presents
opportunities for us to continue to acquire additional stores on favorable
terms.
The rent-to-own industry serves a highly diverse customer base. According
to the Association of Progressive Rental Organizations, 92% of rent-to-own
customers have incomes between $15,000 and $50,000 per year. Many of the
customers served by the industry do not have access to conventional forms of
credit and are typically cash constrained. For these customers, the rent-to-own
industry provides access to brand name products that they would not normally be
able to obtain. The Association of Progressive Rental Organizations also
estimates that 93% of customers have high school diplomas. According to a Federal Trade Commission study, 75% of rent-to-own customers were satisfied with their experience with rent-to-own transactions. The study noted that customers gave a wide variety of reasons for their satisfaction, "including theincluding “the ability to obtain merchandise they otherwise could not,not; the low payments,payments; the lack of a credit check,check; the convenience and flexibility of the transaction,transaction; the quality of the merchandise,merchandise; the quality of the maintenance, delivery, and other services,services; the friendliness and flexibility of the store employees,employees; and the lack of any problems or hassles."
43
STRATEGY
We currently focus our strategic efforts on:
- enhancing”
1
Over the operations and profitability in our store locations;
- opening new stores and acquiring existing rent-to-own stores; and
- building our national brand.
ENHANCING STORE OPERATIONS
We continually seek to improve store performance through strategies
intended to produce gains in operating efficiency and profitability. For
example, we recently implemented programs to refocus our operational personnel
to prioritize store profit growth, including the effective pricing of rental
merchandise and the management of store level operating expenses. Similarly, we
have instituted a transitional duty program to maintain store level productivity
as well as to minimize costs related to the workers compensation component of
our insurance programs.
We believe we will achieve further gains in revenues and operating margins
in both existing and newly acquired stores by continuing to:
- use focused advertising to increase store traffic;
- expand the offering of upscale, higher margin products, such as Philips,
Sony, JVC and Mitsubishi electronics, Ashley, La-Z-Boy and Benchcraft
furniture, Dell, Compaq and Hewlett Packard computers and Whirlpool
appliances, to increase the number of product rentals;
- employ strict store-level cost control;
- closely monitor each store's performance through the use of our
management information system to ensure each store's adherence to
established operating guidelines; and
- use a revenue and profit based incentive pay plan.
OPENING NEW STORES AND ACQUIRING EXISTING RENT-TO-OWN STORES
We intend to expand our business both by opening new stores in targeted
markets and by acquiring existing rent-to-own stores. We will focus new market
penetration in adjacent areas or regions that we believe are underserved bypast 25 years the rent-to-own industry which we believe represents a significant opportunity for
us. In addition, we intend to pursue our acquisition strategy— using the collective resources of targeting
under-performingAPRO — has proactively sought state 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 offederal legislation defining 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 an expanding number of our franchise locations, which we have the right of
first refusal to purchase.
Since March 1993, our company-owned store base has grown from 27 to 2,281,
primarily through acquisitions. During this period, we acquired over 2,000
company-owned stores and over 350 franchised stores in more than 70 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, which operated 176 stores, for approximately $100 million in cash. In
August 1998, we acquired Thorn Americas for approximately $900 million in cash,
including the repayment of certain debt of Thorn Americas. Prior to this
acquisition, Thorn Americas was our
44
largest competitor, operating 1,409 company-owned stores and franchising 65
stores in 49transaction. Currently, 46 states, and the District of Columbia.
In the second half of 2000, having successfully integrated the Thorn
Americas and Central Rents acquisitions, we resumed our strategy of increasing
our store base. For the year ended December 31, 2000, we opened 36 new stores,
acquired 74 stores and closed 27 existing stores. Of the 27 stores closed, 22
were merged with existing stores and five were sold. The 74 acquired stores were
the result of 19 separate acquisition transactions for an aggregate purchase
price of approximately $42.5 million in cash. During 2001, we acquired 95 stores
for approximately $43.1 million in cash in 21 separate transactions and opened
an additional 76 new stores. We also closed 48 stores, merging 42 with existing
stores and selling six stores, resulting in a total store count of 2,281 at
December 31, 2001.
We continue to believe there are attractive opportunities to expand our
presence in the rent-to-own industry. We intend to increase the number of stores
in which we operate by an average of approximately 5% to 10% per year over the
next several years. We plan to accomplish our future growth through both
selective and opportunistic acquisitions and new store development.
BUILDING OUR NATIONAL BRAND
We have implemented a strategy to increase our name recognition and enhance
our national brand. As a part of a branding strategy, in April 2000 we launched
a national advertising campaign featuring John Madden as our advertising
spokesperson. Mr. Madden appears in our advertising media used in the campaign,
including television and radio commercials, print, direct response and in-store
signage. We believe Mr. Madden possesses a unique balance of multi-cultural
appeal, a strong image identification among both men and women, and a
personality that people of all ages enjoy. We believe that as the Rent-A-Center
name gains in familiarity and national recognition through our advertising
efforts, we will continue to educate the consumer about the rent-to-own
alternative to merchandise purchases as well as solidify our reputation as a
leading provider of high quality branded merchandise.
45
OUR STORES
At December 31, 2001, we operated 2,281 stores in 50 states, Puerto Rico
and the District of Columbia. In addition, our subsidiary ColorTyme franchised
342 stores in 42 states. This information is illustrated by the following table:
Our stores average approximately 4,125 square feet and are located
primarily in strip malls. Because we receive merchandise shipments directly from
vendors, we are able to dedicate approximately 80% of the store space to
showroom floor, and also eliminate warehousing costs.
RENT-A-CENTER STORE OPERATIONS
PRODUCT SELECTION
Our stores offer merchandise from four basic product categories: home
electronics, appliances, computers, and furniture and accessories. Our stores
typically have available at any one time approximately 100 of the 150 different
items we offer. Although we seek to ensure our stores maintain sufficient
inventory to offer customers a wide variety of models, styles and brands, we
generally limit inventory to prescribed levels to ensure strict inventory
controls. We
46
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 nine
months ended September 30, 2001, home electronic products accounted for
approximately 41% of our store rentals and fees revenue, furniture and
accessories for 32%, appliances for 17% and computers for 10%. Customers may
request either new merchandise or previously rented merchandise. Previously
rented merchandise is offered at the same weekly or monthly rental rate as is
offered for new merchandise, but with an opportunity to obtain ownership of the
merchandise after fewer rental payments.
Home electronic products offered by our stores include televisions, DVD
players, home entertainment centers, video cassette recorders and stereos from
top brand manufacturers such as Philips, Sony, JVC and Mitsubishi. We rent major
appliances manufactured by Whirlpool, including refrigerators, washing machines,
dryers, microwave ovens, freezers and ranges. We offer personal computers from
Dell, Compaq and Hewlett Packard. We rent a variety of furniture products,
including dining room, living room and bedroom furniture featuring a number of
styles, materials and colors. We offer furniture made by Ashley, La-Z-Boy and
Benchcraft and other top brand manufacturers. Accessories include pictures,
plants, lamps and tables and are typically rented as part of a package of items,
such as a complete room of furniture. Showroom displays enable customers to
visualize how the product will look in their homes and provide a showcase for
accessories.
RENTAL PURCHASE AGREEMENTS
Our customers generally enter into weekly or monthly rental purchase
agreements, which renew automatically upon receipt of each payment. We retain
title to the merchandise during the term of the rental purchase agreement.
Ownership of merchandise transfers to the customer if the customer has
continuously renewed the rental purchase agreement for a period of 12 to 36
months, depending upon the product, or exercises a specified early purchase
option. Although we do not conduct a formal credit investigation of each
customer, a potential customer must provide store management with sufficient
personal information to allow us to verify their residence and sources of
income. References listed by the customer are contacted to verify the
information contained in the customer's rental purchase order form. Rental
payments are generally made in cash, by money order or debit card. Approximately
85% of our customers pay in the store on a weekly basis. Depending on state
regulatory requirements, we charge for the reinstatement of terminated accounts
or collect a delinquent account fee, and collect loss/damage waiver fees from
customers desiring product protection in case of theft or certain natural
disasters. These fees are standard in the industry and may be subject to
government-specified limits. Please read the section entitled "-- Government
Regulation."
PRODUCT TURNOVER
A minimum rental term of 18 months is generally required to obtain
ownership of new merchandise. We believe that only approximately 25% of our
initial rental purchase agreements are taken to the full term of the agreement,
although the average total life for each product is approximately 22 months,
which includes the initial rental period, all re-rental periods and idle time in
our system. Turnover varies significantly based on the type of merchandise
rented, with certain consumer electronics products, such as camcorders and video
cassette recorders, generally rented for shorter periods, while appliances and
furniture are generally rented for longer periods. To cover the relatively high
operating expenses generated by greater product turnover, rental purchase
agreements require higher aggregate payments than are generally charged under
other types of purchase plans, such as installment purchase or credit plans.
47
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 21 service centers,
the cost of which may be reimbursed by the vendor if the item is still under
factory warranty. If the product cannot be repaired at the customer's residence,
we provide a temporary replacement while the product is being repaired. The
customer is fully liable for damage, loss or destruction of the merchandise,
unless the customer purchases an optional loss/damage waiver. Most of the
products we offer are covered by a manufacturer's warranty for varying periods,
which, subject to the terms of the warranty, is transferred to the customer in
the event that the customer obtains ownership.
COLLECTIONS
Store managers use our computerized management information system to track
collections on a daily basis. If a customer fails to make a rental payment when
due, store personnel will attempt to contact the customer to obtain payment and
reinstate the agreement, or will terminate the account and arrange to regain
possession of the merchandise. We attempt to recover the rental items as soon as
possible following termination or default of a rental purchase agreement,
generally by the seventh to tenth day. Collection efforts are enhanced by the
numerous personal and job-related references required of first-time customers,
the personal nature of the relationships between the stores' employees and
customers and the fact that, following a period in which a customer is
temporarily unable to make payments on a piece of rental merchandise, 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 2.4% for the first nine months of 2001, 2.5% in 2000, 2.3% in 1999
and 2.5% in 1998. In an effort to improve collections at the stores acquired
during 2000, we implemented our collection procedures in these stores, including
our management incentive plans, which provide incentives to reduce the
percentage of delinquent accounts.
MANAGEMENT
We organize our network of stores geographically with multiple levels of
management. At the individual store level, each store manager is responsible for
customer and credit relations, delivery and collection of merchandise, inventory
management, staffing, training store personnel and certain marketing efforts.
Three times each week, the store manager is required to audit the idle inventory
on hand and compare the audit to our computer report, with the market manager
performing a similar audit at least once a month. In addition, our individual
store managers track their daily store performance for revenue collected as
compared to the projected performance of their store. Each store manager reports
to a market manager within close proximity who typically oversees six to eight
stores. Typically, a market manager focuses on developing the personnel in his
or her market and on ensuring that all stores meet our quality, cleanliness and
service standards. In addition, a market manager routinely audits numerous areas
of the stores operations, including gross profit per rental agreement, petty
cash, and customer order forms. A significant portion of a market manager's and
store manager's compensation is dependent upon store revenues and profits, which
are monitored by our management reporting system and our tight control over
inventory afforded by our direct shipment practice.
As of December 31, 2001, we had 326 market managers who, in turn, reported
to 55 regional directors. Regional directors monitor the results of their entire
region, with an emphasis on developing and supervising the market managers in
their region. Similar to the market managers, regional directors are responsible
for ensuring that store managers are
48
following the operational guidelines, particularly those involving store
presentation, collections, inventory levels, and order verification. The
regional directors report to nine senior vice presidents at our headquarters.
The regional directors receive a significant amount of their compensation based
on the profits the stores under their management generate.
Our executive management team at the home office directs and coordinates
purchasing, financial planning and controls, employee training, personnel
matters and new store site selection. Our executive management team also
evaluates the performance of each region, market and store, including the use of
on-site reviews. All members of our executive management team receive a
significant amount of their total compensation based on the profits generated by
the entire company. As a result, our business strategy emphasizes strict cost
containment.
MANAGEMENT INFORMATION SYSTEMS
Through a licensing agreement with High Touch, Inc., we utilize an
integrated computerized management information and control system. Each store is
equipped with a computer system utilizing point of sale software developed by
High Touch. This system tracks individual components of revenue, each item in
idle and rented inventory, total items on rent, delinquent accounts and other
account information. We electronically gather each day's activity report, which
provides our executive management with access to all operating and financial
information about any of our stores, markets or regions and generates management
reports on a daily, weekly, month-to-date and year-to-date basis for each store
and for every rental purchase transaction. The system enables us to track each
of our approximately 2.1 million units of merchandise and each of our
approximately 1.4 million rental purchase agreements, which often include more
than one item of merchandise. In addition, the system performs a daily sweep of
available funds from our stores' depository accounts into our central operating
account based on the balances reported by each store. Our system also includes
extensive management software and report-generating capabilities. The reports
for all stores are reviewed on a daily basis by executive management and unusual
items are typically addressed the following business day. Utilizing the
management information system, our executive management, regional directors,
market managers and store managers closely monitor the productivity of stores
under their supervision according to our prescribed guidelines.
The integration of the management information system developed by High
Touch with our accounting system, developed by Lawson Software, Inc.,
facilitates the production of our financial statements. These financial
statements are distributed monthly to all stores, markets, regions and our
executive management team for their review.
PURCHASING AND DISTRIBUTION
Our executive management determines the general product mix in our stores
based on analyses of customer rental patterns and the introduction of new
products on a test basis. Individual store managers are responsible for
determining the particular product selection for their store from the list of
products approved by executive management. Store and market managers make
specific purchasing decisions for the stores, subject to review by executive
management. All merchandise is shipped by vendors directly to each store, where
it is held for rental. We do not maintain any warehouse space. These practices
allow us to retain tight control over our inventory and, along with our
selection of products for which consistent historical demand has been shown,
reduces the number of obsolete items in our stores.
We purchase the majority of our merchandise from manufacturers, who ship
directly to each store. Our largest suppliers include Ashley, Whirlpool and
Philips, who accounted for approximately 14.6%, 13.1%, and 11.3%, respectively,
of merchandise purchased for the first nine months of 2001 and 12.1%, 13.3%, and
11.3%, respectively, of merchandise purchased in
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2000. No other supplier accounted for more than 10.0% of merchandise purchased
during this period. We do not generally enter into written contracts with our
suppliers. Although we expect to continue relationships with our existing
suppliers, we believe that there are numerous sources of products available, and
we do not believe that the success of our operations is dependent on any one or
more of our present suppliers.
MARKETING
We promote the products and services in our stores through direct mail
advertising, radio, television and secondary print media advertisements. Our
advertisements emphasize such features as product and brand-name selection,
prompt delivery and the absence of initial deposits, credit investigations or
long-term obligations. Advertising expense as a percentage of store revenue for
the first nine months of 2001 was approximately 4.0%, and for each of the years
ended December 31, 2000 and 1999, was 4.0%. As we obtain new stores in our
existing market areas, the advertising expenses of each store in the market can
be reduced by listing all stores in the same market-wide advertisement.
Mr. John Madden serves as our national advertising spokesman for the
advertising campaign we launched in April 2000. Mr. Madden appears in our
advertising media used in the campaign, including television and radio
commercials, print, direct response and in-store signage. We believe his
involvement in this campaign assists us in capturing new customers and
establishes a stronger national identity for Rent-A-Center. Mr. Madden's
agreement with us was recently extended to March 31, 2003.
COMPETITION
The rent-to-own industry is highly competitive. According to industry
sources and our estimates, the six largest industry participants account for
approximately 4,700 of the 8,000 rent-to-own stores in the United States. We are
the largest operator in the rent-to-own industry with 2,281 stores and 344
franchised locations as of December 31, 2001. Our stores compete with other
national and regional rent-to-own businesses, as well as with rental stores that
do not offer their customers a purchase option. With respect to customers
desiring to purchase merchandise for cash or on credit, we also compete with
department stores, credit card companies and discount stores. Competition is
based primarily on store location, product selection and availability, customer
service and rental rates and terms.
COLORTYME OPERATIONS
ColorTyme is our nationwide franchisor of rent-to-own stores. At December
31, 2001, ColorTyme franchised 342 rent-to-own stores in 42 states. These
rent-to-own stores offer high quality durable products such as home electronics,
appliances, computers, and furniture and accessories. During 2001, 31 new
franchise locations were added, 48 were sold, including 45 that we purchased,
and five were closed. During 2000, 46 new franchise locations were added, five
were merged with existing stores and 42 were sold, including 39 that we
purchased. During that same period, the number of new franchisees operating
stores under the ColorTyme name increased by 14.
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
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initial fee of between $7,500 per location for existing franchisees and up to
$25,000 per location for new franchisees.
ColorTyme has an arrangement with Textron Financial Corporation, who
provides inventory financing in amounts up to five times monthly revenues to
qualifying franchisees. Under the agreement, if a franchisee fails to repay the
loan, we may take ownership of the stores upon payment of the guaranteed amount.
The ColorTyme franchise agreement generally requires the franchised stores
to utilize specific computer hardware and software for the purpose of recording
rentals, sales and other record keeping and central functions. ColorTyme retains
the right to upload and download data, troubleshoot, and retrieve data and
information from the franchised stores' computer systems.
The franchise agreement also requires the franchised stores to exclusively
offer for rent or sale only those brands, types, and models of products that
ColorTyme has approved. The franchised stores are required to maintain an
adequate mix of inventory that consists of approved products for rent as
dictated by ColorTyme policy manuals, and must maintain on display such products
as specified by ColorTyme. ColorTyme negotiates purchase arrangements with
various suppliers it has approved. ColorTyme's largest supplier is Whirlpool,
which accounted for approximately 13.0% of merchandise purchased by ColorTyme in
the first nine months of 2001 and 14.0% of merchandise purchased by ColorTyme in
2000.
ColorTyme has established a national advertising fund for the franchised
stores, whereby ColorTyme has the right to collect up to 3% of the monthly gross
revenue from each franchisee as contributions to the fund. Currently, ColorTyme
has set the monthly franchisee contribution at $250 per store per month.
ColorTyme directs the advertising programs of the fund, generally consisting of
advertising in print, television and radio. The franchisees also are required to
expend 3% of their monthly gross revenue on local advertising.
ColorTyme licenses the use of its trademarks to the franchisees under the
franchise agreement. ColorTyme owns the registered trademarks ColorTyme(R),
ColorTyme-What's Right for You(R), and FlexTyme(R), along with certain design
and service marks.
Some of ColorTyme's franchisees may be in locations where they directly
compete with our company-owned stores, which could negatively impact the
business, financial condition and operating results of our company-owned store.
The ColorTyme franchise agreement provides us a right of first refusal to
purchase the franchise location of a ColorTyme franchisee wishing to exit the
business.
TRADEMARKS
We own various registered trademarks, including Rent-A-Center(R), Renters
Choice(R) and Remco(R). The products held for rent also bear trademarks and
service marks held by their respective manufacturers.
EMPLOYEES
As of December 31, 2001, we had approximately 12,900 employees, of whom
approximately 250 were assigned to our headquarters and the remainder of whom
were directly involved in the management and operation of our stores. 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
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by the Teamsters union. We are contesting the validity of this election. We
believe relationships with our employees and ColorTyme's relationships with its
employees are generally good.
PROPERTIES
We lease space for all of our stores, as well as our corporate and regional
offices, under operating leases expiring at various times through 2010. Most of
these leases contain renewal options for additional periods ranging from three
to five years at rental rates adjusted according to agreed-upon formulas. Both
our headquarters and ColorTyme's headquarters are located at 5700 Tennyson
Parkway, Plano, Texas, and consist of approximately 77,158 and 5,116 square feet
devoted to our operations and ColorTyme's operations, respectively. Store sizes
range from approximately 1,400 to 20,000 square feet, and average approximately
4,125 square feet. Approximately 80% of each store's space is generally used for
showroom space and 20% for offices and storage space.
We believe that suitable store space generally is available for lease, and
we would be able to relocate any of our stores without significant difficulty
should we be unable to renew a particular lease. We also expect additional space
is readily available at competitive rates to open new stores. Under various
federal and state laws, lessees may be liable for environmental problems at
leased sites even if they did not create, contribute to, or know of the problem.
We are not aware of and have not been notified of any violations of federal,
state or local environmental protection or health and safety laws, but cannot
guarantee that we will not incur material costs or liabilities under these laws
in the future.
GOVERNMENT REGULATION
STATE REGULATION
Currently 47 statesColumbia and Puerto Rico have legislation regulatingthat recognize and regulate rental purchase transactions.transactions as separate and distinct from credit sales. 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, mostRent-A-Center. Most related state legislation requires the lessor to make prescribed disclosures to customers about the rental purchase agreement and transaction, and provides time periods during which customers may reinstate agreements despite having failed to make a timely payment. Some stateHowever, in Minnesota, the rental purchase laws prescribe grace periods for
non-payment, prohibit or limit certain types of collection or other practices,
and limit certain fees that may be charged. Nine states limit the total rental
payments that can be charged. These limitations, however, do not become
applicabletransaction is treated as a credit sale subject to consumer lending restrictions pursuant to judicial decision. Courts in general unless the total rental payments required under agreements
exceed 2.0 times to 2.4 times of the disclosed cash price or the retail value.
Minnesota, which has a rental purchase statute, and Wisconsin and New Jersey which do not have rental purchase statutes, have had courtalso rendered decisions which treatclassify rental purchase transactions as credit sales subject to consumer lending restrictions. In response, we have developed and utilize separate rental
agreements which do not provide customers with an option to purchase rented
merchandise in both Minnesota and Wisconsin. In Wisconsin, customers are
provided an opportunity to purchase the rented merchandise in a separate
transaction. In New Jersey, we have provided increased disclosures and longer
grace periods. We operate four stores in Minnesota, 28 stores in Wisconsin and
48 stores in New Jersey. See the section entitled "-- Legal Proceedings."
North Carolina, and the District of Columbia have no rental purchase
legislation. However, the retail installment sales statute in North Carolina
recognizesprovides that rental purchaselease transactions which provide for more than a nominal purchase price at the end of the agreed rental period are not credit sales under the statute. We operate four stores in the District of Columbia and
86 stores in North Carolina.
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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
No comprehensive federal legislation has been enacted regulating or
otherwise impacting the rental purchase transaction. We do, however,transaction, althoughRent-A-Center does comply with the Federal Trade Commission recommendations for disclosure in rental purchase transactions. The recently adopted Dodd Frank Wall Street Reform and Consumer Protection Act does not regulate leases with terms of 90 days or less. The rent-to-own transaction is for a term of week-to-week, or, at most, month-to-month.
Our strengths
We believe our core strengths include the following:
Leading market share in a fragmented marketplace. According to APRO, we are the market leader in the rent-to-own industry with a 35% market share, based on our company-owned and franchised store count. We have operations in all 50 states, Puerto Rico, Canada and Mexico and are continually implementing strategies to further increase our name recognition, including the use of television and radio commercials, print, direct response and in-store signage. The next largest competitor has a 21% market share as of December 31, 2010, based on store count. No other competitor operates more than approximately 100 stores nationwide.
Broad geographic footprint. At March 31, 2011, we operated 3,018 stores nationwide and in Canada, Puerto Rico and Mexico. In addition, our subsidiary, ColorTyme, franchised 208 stores in 32 states. We also operated 485 RAC Acceptance kiosks locations at March 31, 2011. We believe this broad geographic footprint limits our exposure to local or regional adverse economics and diversifies our regulatory risk inasmuch as rent-to-own legislation is implemented largely on a state by state basis.
Financial strength generates consistent operating cash flow. We generate substantial free cash flow because of our profitability, limited capital expenditures and minimal required working capital investment. In addition, a large percentage of our monthly revenues are recurring and produce financial results that are generally more predictable than those typical of other retailers. Historically, our operations have generated strong cash flow, averaging $269.1 million in operating cash flow per year since 2001. As a result, we believe we are able to invest in store acquisitions and complementary business opportunities, such as our RAC Acceptance program, while maintaining a strong balance sheet.
Conservative financial policy resulting in meaningful deleveraging. Consistent operating results and the relatively low capital expenditure requirements of our business have enabled us to generate significant free cash flow for debt repayment. Since the acquisition of Rent-Way in 2006 through December 31, 2010, we repaid $576.4 million of debt.
Experienced management team with distinguished track record. Our senior management team averages over 20 years of rent-to-own or similar retail experience and has successfully grown and enhanced our business, including the successful integration of approximately 3,300 stores acquired through approximately 280 acquisition transactions. Our senior management team has an aggregate of over 100 years of service withRent-A-Center, Inc. as well as extensive industry experience. In addition, our management depth goes beyond the corporate office. Our regional and general managers have long tenures with us, and we have a track record for promoting management personnel from within. We believe our management’s experience at all levels has allowed us to continue to grow our revenue and store base while improving operations and driving efficiencies.
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Our strategy
Our strategies include the following:
Enhance the operations, revenue and profitability of our store locations. We continue to focus our operational personnel on prioritizing store profit growth, including increasing store revenue and managing store level operating expenses. We believe we will be positioned to achieve gains in revenues and operating margins in both existing and newly acquired stores by continuing to:
| • | focus on our customer’s in-store experience; | |
| • | attract customers with targeted advertising campaigns; | |
| • | create compelling product values for our customers through the use of strategic merchandise purchases; | |
| • | expand the offering of product lines to appeal to more customers to increase the number of transactions and grow our customer base; | |
| • | improve operational efficiencies, including through the development and implementation of improved technology; and | |
| • | designing compensation programs that focus our operational coworkers on prioritizing store revenue and profit growth. |
Seek additional distribution channels for our products and services. We believe there are opportunities for us to obtain new customers through sources other than our existing rent-to-own stores. Recent initiatives include:
| • | offering the rent-to-own transaction to consumers who do not qualify for financing from a traditional retailer by maintaining a presence inside such retailer’s store locations through our RAC Acceptance program; | |
| • | making the rent-to-own transaction more attractive and convenient to consumers by locating kiosks inside destination retailers such as grocers or mass merchandise retailers; | |
| • | altering the footprint and product mix for stores in urban locations; | |
| • | expanding our retail store operations; and | |
| • | expanding our operations in Canada and Mexico and seeking to identify other international markets in which we believe our products and services would be in demand. |
Leveraging our financial strength. We believe we can leverage our financial strength by investing significantly in people, processes and technology to increase revenue and reduce our cost infrastructure through our investments in the following:
| • | a new centralized purchasing system which allows us to better manage our rental merchandise at the store level while expanding availability of our most popular products; | |
| • | centralized procurement of all non-merchandise categories of supplies and services, including the development of an on-line procurement tool and a commitment to add dedicated resources at our home office to professionally manage our expenses; | |
| • | a customer relationship management system which we believe will drive customer relationship decisions with data and information; | |
| • | price and promotion software which we believe will improve our ability to match individual customers to specific, tailored product and price offers; and | |
| • | an enhanced point of sale system which will provide visibility and efficiency in all aspects of our store operations. |
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Strengthen customer relationships through community involvement. We seek to further strengthen relationships with our customers through community involvement both at the local store level and as a company through corporate donations and initiatives. We encourage the management of each of our stores to involve themselves with their respective local communities. In addition, we participate in various programs, including the following: North Texas Food Bank, Big Brothers Big Sisters of America, Make a Difference Scholarship, Boys & Girls Clubs, Junior Achievement and Random Acts of Caring.
Recent developments
On October 25, 2010, we announced that, in connection with our analysis of available growth initiatives, we were exploring strategic alternatives with respect to our financial services business, including the possible sale or divestiture of such business. As of March 31, 2011, we had ceased making new loans, sold a majority of our customer accounts, and had less than $2.7 million in remaining loan balances.
In connection with the expansion of our RAC Acceptance growth initiative, on December 22, 2010, we announced the acquisition of The Rental Store, Inc. (“TRS”), a leading provider of consumer lease-purchase financing through third-party retail furniture and electronics retailers, operating approximately 145 kiosk locations. We acquired TRS for $75.5 million on a debt free basis, primarily with cash on hand.
Corporate Offices
Our principal executive offices are located at 5501 Headquarters Dr., Plano, Texas 75024, and our telephone number at that address is(972) 801-1100. Our website address is www.rentacenter.com. The information on our website is not incorporated by reference into, and does not constitute part of, this prospectus.
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The Exchange Offer
| Background of the Outstanding Notes | Rent-A-Center, Inc. issued $300 million aggregate principal amount of the outstanding notes to J.P. Morgan Securities LLC, Banc of America Securities LLC, Goldman, Sachs & Co., Citigroup Global Markets Inc., and BB&T Capital Markets, a division of Scott & Stringfellow, LLC, as the initial purchasers, on November 2, 2010. The initial purchasers then sold the outstanding notes to qualified institutional buyers and certain non-U.S. investors in reliance on Rule 144A and Regulation S under the Securities Act of 1933 (the “Securities Act”). Because they were sold pursuant to exemptions from registration, the outstanding notes are subject to transfer restrictions. | |
| In connection with the issuance of the outstanding notes, we entered into a registration rights agreement in which we agreed to deliver to you this prospectus and to use our commercially reasonable best efforts to complete the exchange offer and to file and cause to become effective a registration statement covering the resale of the exchange notes. | ||
| The Exchange Offer | We are offering to exchange up to $300 million principal amount of the exchange notes for an identical principal amount of the outstanding notes. The outstanding notes may be exchanged only in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof. The terms of the exchange notes are identical in all material respects to the outstanding notes except that the exchange notes will be registered under the Securities Act and will not be subject to provisions relating to additional interest. Because we have registered the exchange notes, the exchange notes generally will not be subject to transfer restrictions and holders of exchange notes will have no registration rights. | |
| Resale of Exchange Notes | We believe you may offer, sell or otherwise transfer the exchange | |
| notes you receive in the exchange offer without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: | ||
| • you acquire the exchange notes you receive in the exchange offer in the ordinary course of your business; | ||
| • you are not participating in, and have no understanding with any person to participate in, the distribution of the exchange notes issued to you in the exchange offer; and | ||
| • you are not an affiliate of ours. | ||
| Expiration Date | 5:00 p.m., New York City time, on , 2011 unless we extend the exchange offer. It is possible that we will extend the exchange offer until all of the outstanding notes are tendered. You may withdraw the outstanding notes you tendered at any time before 5:00 p.m., New York City time, on the expiration date. See “The Exchange Offer — Expiration Date; Extensions; Amendments.” | |
| Withdrawal Rights | You may withdraw the outstanding notes you tender by furnishing a notice of withdrawal to the exchange agent or by complying with applicable Automated Tender Offer Program (ATOP) procedures of The Depositary Trust Company (DTC) at any time before 5:00 p.m., |
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| New York City time on the expiration date. See “The Exchange Offer — Withdrawal of Tenders.” | ||
| Accrual of Interest on the Outstanding Notes and the ExchangeNotes | The exchange notes will bear interest from November 2, 2010 or, if later, from the most recent date of payment of interest on the outstanding notes. | |
| Condition to the Exchange Offer | We will not be required to accept for exchange, or to issue exchange notes, any outstanding notes if we determine that the exchange offer would violate any applicable law or applicable interpretations of the staff of the SEC. In addition, we will not accept for exchange any outstanding notes tendered, and no exchange notes will be issued in exchange for any such outstanding notes: | |
| • at any time the stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part; or | ||
| • at any time any stop order is threatened or in effect with respect to the qualification of the indenture governing the notes under the Trust Indenture Act of 1939. | ||
| See “The Exchange Offer — Conditions.” The exchange offer is not conditioned on a minimum aggregate principal amount of outstanding notes being tendered. We reserve the right to terminate or amend the exchange offer at any time prior to the applicable expiration date upon the occurrence of any of the foregoing events. | ||
| Representations and Warranties | By participating in the exchange offer, you represent to us that, among other things: | |
| • you will acquire the exchange notes you receive in the exchange offer in the ordinary course of your business; | ||
| • you are not participating in, and have no agreement or understanding with any person to participate in and do not intend to engage in, the distribution of the exchange notes issued to you in the exchange offer; | ||
| • you are not an affiliate of ours or, if you are an affiliate, you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable; | ||
| • if you are not a broker-dealer, that you are not engaged in and do not intend to engage in the distribution of the exchange notes; and | ||
| • if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making or other trading activities, that you will deliver a prospectus, as required by law, in connection with any resale of those exchange notes. | ||
| Procedures for Tendering Our Outstanding Notes | To participate in the exchange offer, you must follow the procedures established by the DTC for tendering notes held in book-entry form. These procedures require that (i) the exchange agent receive, prior to the expiration date of the exchange offer, a computer generated message known as an “agent’s message” that is transmitted through |
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| DTC’s automated tender offer program, which we call “ATOP,” and (ii) DTC confirms that: | ||
| • DTC has received your instructions to exchange your notes, and | ||
| • you agree to be bound by the terms of the letter of transmittal. | ||
| For more information, see “The Exchange Offer — Procedures for Tendering.” | ||
| Tenders by Beneficial Owners | If you are a beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and wish to tender those outstanding notes in the exchange offer, please contact the registered holder as soon as possible and instruct that holder to tender on your behalf and comply with the instructions in this prospectus. | |
| Acceptance of the Outstanding Notes and Delivery of the ExchangeNotes | If the conditions described under “The Exchange Offer — Conditions” are satisfied, we will accept for exchange any and all outstanding notes that are properly tendered before 5:00 p.m., New York City time, on the expiration date. | |
| Effect of Not Tendering | Any of the outstanding notes that are not tendered and any of the outstanding notes that are tendered but not accepted will remain subject to restrictions on transfer. Since the outstanding notes have not been registered under the federal securities laws, their transfer will be restricted absent registration or the availability of an exemption from registration. Upon completion of the exchange offer, we will have no further obligation, except under limited circumstances, to provide for registration of the outstanding notes under the federal securities laws. In addition, upon completion of the exchange offer, there may be no market for the outstanding notes that are not tendered for exchange notes, and you may have difficulty selling them. | |
| Certain United States Federal Income Tax Considerations | We believe the exchange of outstanding notes for exchange notes will not be a taxable exchange for United States federal income tax purposes. See “Certain United States Federal Income Tax Considerations” for a discussion of U.S. federal income tax considerations we urge you to consider before tendering the outstanding notes in the exchange offer. | |
| Exchange Agent | The Bank of New York Mellon Trust Company, N.A. is serving as exchange agent for the exchange offer. The address for the exchange agent is listed under “The Exchange Offer — Exchange Agent.” |
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The Exchange Notes
The form and terms of the exchange notes to be issued in the exchange offer are the same as the form and terms of the outstanding notes except that the exchange notes will be registered under the Securities Act and, accordingly,
| • | will not contain certain restrictions with respect to their transfer; | |
| • | will not be subject to provisions relating to additional interest; | |
| • | will bear a different CUSIP or ISIN number from the outstanding notes; and | |
| • | will not entitle the holders to registration rights. |
The notes issued in the exchange offer will evidence the same debt as the outstanding notes, and both the outstanding notes and the exchange notes will be governed by the same indenture. We define certain capitalized terms used in this summary in the “Description of the Exchange Notes — Certain Definitions” section of this prospectus. The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Notes” section of this prospectus contains more detailed descriptions of the terms and conditions of the exchange notes.
| Issuer | Rent-A-Center, Inc. | |
| Securities offered | $300 million aggregate principal amount of 6.625% Senior Notes due 2020 | |
| Interest rate | 6.625% per year | |
| Interest payment dates | May 15 and November 15 of each year, commencing May 15, 2011 | |
| Maturity date | November 15, 2020 | |
| Subsidiary Guarantees | The exchange notes initially will be jointly and severally guaranteed on a senior unsecured basis by all of our existing and future direct and indirect domestic subsidiaries that guarantee our indebtedness or indebtedness of our subsidiary guarantors. Under certain circumstances, subsidiary guarantors may be released from their guarantees without the consent of the holders of the exchange notes. See “Description of Exchange Notes-Guarantees.” | |
| Ranking | The exchange notes and the exchange note guarantees will beRent-A-Center, Inc.’s and the subsidiary guarantors’ senior unsecured obligations and: | |
| • will rank equally in right of payment with all of our and the subsidiary guarantors’ existing and future unsecured senior indebtedness; | ||
| • will rank senior in right of payment to all of our and the subsidiary guarantors’ existing and future subordinated indebtedness; | ||
| • will be effectively subordinated to any of our and the subsidiary guarantors’ existing and future secured debt, to the extent of the value of the assets securing such debt; and | ||
| • will be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that does not guarantee the exchange note. | ||
| Optional redemption | At any time on or after November 15, 2015, we may redeem the exchange notes, in whole or part, at the redemption prices set forth in |
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| this prospectus under the heading “Description of Notes — Optional Redemption.” | ||
| At any time prior to November 15, 2013, we may redeem up to 35% of the exchange notes with the proceeds of certain equity offerings at the redemption price set forth in this prospectus under the heading “Description of Notes — Optional Redemption.” | ||
| At any time prior to November 15, 2015, we may redeem the exchange notes, in whole or part, at a “make-whole premium” plus accrued and unpaid interest, if any, to the date of redemption. | ||
| Mandatory offers to purchase | The occurrence of a change of control will be a triggering event requiring us to offer to purchase from you all or a portion of your exchange notes at a price equal to 101% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase. | |
| Under certain circumstances in connection with asset dispositions, we will be required to use the excess proceeds from such asset dispositions to make an offer to purchase the exchange notes at 100% of their principal amount, together with accrued and unpaid interest, if any, to the date of purchase. | ||
| Absence of Established Market for the Notes | The exchange notes will be new securities for which there is currently no market. Although the initial purchasers have informed us that they intend to make a market in the exchange notes, they are not obligated to do so and may discontinue market-making activities at any time without notice. We do not intend to apply for a listing of the exchange notes on any securities exchange or an automated dealer quotation system. Accordingly, we cannot assure you that a liquid market for the exchange notes will develop or be maintained. | |
| Use of Proceeds | We will not receive any cash proceeds from the exchange offer. |
Risk factors
You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading “Risk Factors” beginning on page 10 in evaluating an investment in the exchange notes and participation in the exchange offer.
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RISK FACTORS
You should carefully consider the risks described below and all of the information contained or incorporated by reference into this prospectus before deciding whether to participate in the exchange offer. We believe these are the material risks currently facing our business. Our business, financial condition, results of operations and cash flow could be materially adversely affected by these risks. You should carefully consider the factors described below in addition to the remainder of this prospectus and the information incorporated by reference before tendering your outstanding notes.
Risks related to the exchange offer
If you do not properly tender or you cannot tender your outstanding notes, your ability to transfer the outstanding notes will be adversely affected.
We will issue exchange notes only in exchange for outstanding notes that are timely and properly tendered to the exchange agent. Therefore, you should allow sufficient time to ensure timely delivery of the outstanding notes and you should carefully follow the instructions on how to tender your outstanding notes. Neither we nor the exchange agent is required to tell you of any defects or irregularities with respect to your tender of the outstanding notes. If you do not tender your outstanding notes or if we do not accept your outstanding notes because you did not tender your outstanding notes properly, then, after we consummate the exchange offer, you will continue to hold outstanding notes that are subject to the existing transfer restrictions.
You may be required to deliver a prospectus and comply with other requirements in connection with any resale of the exchange notes.
If you tender your outstanding notes for the purpose of participating in a distribution of the exchange notes, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. In addition, if you are a broker-dealer that receives exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or any other trading activities, you will be required to acknowledge that you will deliver a prospectus in connection with any resale of such exchange notes.
Risks related to the notes
Our significant indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes.
We have a significant amount of indebtedness. As of March 31, 2011, our total debt was approximately $658.6 million, excluding $258.0 million of unused commitments under our senior credit facilities.
Subject to the limits contained in the credit agreement governing our senior credit facilities, the indenture that governs the notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences to the holders of the notes, including:
| • | making it more difficult for us to satisfy our obligations with respect to the notes and our other debt; | |
| • | limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements; | |
| • | requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes; | |
| • | increasing our vulnerability to general adverse economic and industry conditions; | |
| • | exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the senior credit facilities, are at variable rates of interest; |
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| • | limiting our flexibility in planning for and reacting to changes in the industry in which we compete; | |
| • | placing us at a disadvantage compared to other, less leveraged competitors; and | |
| • | increasing our cost of borrowing. |
In addition, the indenture that governs the notes, and the credit agreement governing our senior credit facilities, contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations, including the notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, including the notes. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing the senior credit facilities and the indenture that governs the notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
In addition, we are a holding company, with no revenue generating operations and no assets other than our ownership interests in our direct and indirect subsidiaries, certain of which in the future may not be guarantors of the notes or our other indebtedness. Accordingly, repayment of our indebtedness, including the notes, is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, intercompany transfer, debt repayment or otherwise. Unless they are guarantors of the notes or our other indebtedness, our subsidiaries do not have any obligation to pay amounts due on the notes or our other indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture that governs the notes and the agreements governing certain of our other existing indebtedness will limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the notes.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under the notes.
If we cannot make scheduled payments on our debt, we will be in default and holders of the notes could declare all outstanding principal and interest to be due and payable, the lenders under the senior credit facilities could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. All of these events could result in you losing your investment in the notes.
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Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture that governs the notes and the credit agreement governing our senior credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If we incur any additional indebtedness that ranks equally with the notes, subject to collateral arrangements, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. This may have the effect of reducing the amount of proceeds paid to you. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of April 25, 2011, our senior credit facilities would have provided for unused commitments of $258.0 million. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the related risks that we and the guarantors now face could intensify. See “Description of Exchange Notes.”
The terms of our credit agreement governing our senior credit facilities and the indenture that governs the notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The indenture that governs the notes, and the credit agreement governing our senior credit facilities contains, and in the future may contain, a number of restrictive covenants that impose significant operating and financial restrictions (including maintaining specified financial ratios) on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
| • | incur additional indebtedness; | |
| • | pay dividends or make other distributions or repurchase or redeem capital stock; | |
| • | prepay, redeem or repurchase certain debt; | |
| • | make loans, capital expenditures and other investments; | |
| • | sell assets or dispose of operations; | |
| • | incur liens; | |
| • | enter into transactions with affiliates; | |
| • | alter the businesses we conduct; | |
| • | enter into agreements restricting our subsidiaries’ ability to pay dividends; and | |
| • | consolidate, merge or sell all or substantially all of our assets. |
A breach of the covenants under the indenture that governs the notes or under the credit agreement governing our senior credit facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders or note holders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. The existing indebtedness under our senior credit facilities is also 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. As a result of these restrictions, we may be:
| • | limited in how we conduct our business; | |
| • | unable to raise additional debt or equity financing to operate during general economic or business downturns; or | |
| • | unable to compete effectively or to take advantage of new business opportunities. |
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These restrictions may affect our ability to grow in accordance with our strategy.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our senior credit facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Based on our overall interest rate exposure at March 31, 2011, each one point change in interest rates would result in a $3.6 million pre-tax charge or credit to our statement of earnings. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
The notes will be effectively subordinated to our and our subsidiary guarantors’ indebtedness under our senior credit facilities and our other secured indebtedness to the extent of the value of the property securing that indebtedness.
The notes will not be secured by any of our or our subsidiary guarantors’ assets. As a result, the notes and the note guarantees will be effectively subordinated to our and our subsidiary guarantors’ indebtedness under our senior credit facilities with respect to the assets that secure that indebtedness. As of April 25, 2011, we had $137.0 million in letters of credit outstanding under our senior credit facilities, resulting in total unused availability of approximately $258.0 million. In addition, we may incur additional secured debt in the future. The effect of this subordination is that upon a default in payment on, or the acceleration of, any of our secured indebtedness, or in the event of bankruptcy, insolvency, liquidation, dissolution or reorganization of our company or the subsidiary guarantors of the senior credit facilities or of that other secured debt, the proceeds from the sale of assets securing our secured indebtedness will be available to pay obligations on the notes only after all indebtedness under the senior credit facilities and that other secured debt has been paid in full. As a result, the holders of the notes may receive less, ratably, than the holders of secured debt in the event of our or our subsidiary guarantors’ bankruptcy, insolvency, liquidation, dissolution or reorganization.
The notes will be structurally subordinated to all obligations of our existing and future subsidiaries that are not and do not become guarantors of the notes.
The notes will be guaranteed by each of our existing and subsequently acquired or organized domestic subsidiaries that guarantee our senior credit facilities or that, in the future, guarantee our indebtedness or indebtedness of another subsidiary guarantor. Our subsidiaries that do not guarantee the notes, including all of our non-domestic subsidiaries, will have no obligation, contingent or otherwise, to pay amounts due under the notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The notes will be structurally subordinated to all indebtedness and other obligations of any non-guarantor subsidiary such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not a guarantor, all of that subsidiary’s creditors (including trade creditors and preferred stockholders, if any) would be entitled to payment in full out of that subsidiary’s assets before we would be entitled to any payment. As of March 31, 2011, our non-guarantor subsidiaries represented an immaterial percentage of our operating income, assets and liabilities, in each case calculated on a consolidated basis.
In addition, the indenture that governs the notes will, subject to some limitations, permit these subsidiaries to incur additional indebtedness and will not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.
In addition, our subsidiaries that provide, or will provide, guarantees of the notes will be automatically released from those guarantees upon the occurrence of certain events, including:
| • | the designation of that subsidiary guarantor as an unrestricted subsidiary; |
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| • | the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the notes by such subsidiary guarantor; or | |
| • | the sale or other disposition, including the sale of substantially all the assets, of that subsidiary guarantor. |
If any subsidiary guarantee is released, no holder of the notes will have a claim as a creditor against that subsidiary, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary will be effectively senior to the claim of any holders of the notes. See “Description of Exchange Notes-Guarantees.”
We may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount, plus accrued and unpaid interest to the purchase date. Additionally, under our senior credit facilities, a change of control (as defined therein) constitutes an event of default that permits the lenders to accelerate the maturity of borrowings under the respective agreements and terminate their commitments to lend. The source of funds for any purchase of the notes and repayment of borrowings under our senior credit facilities would be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a change of control and repay our other indebtedness that will become due. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the notes may be limited by law. In order to avoid the obligations to repurchase the notes and events of default and potential breaches of the credit agreement governing our senior credit facilities, we may have to avoid certain change of control transactions that would otherwise be beneficial to us. In addition, some important corporate events, such as leveraged recapitalizations, may not, under the indenture that governs the notes, constitute a “change of control” that would require us to repurchase the notes, even though those corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the notes. See “Description of Exchange Notes-Change of control.”
Holders of the notes may not be able to determine when a change of control giving rise to their right to have the notes repurchased has occurred following a sale of “substantially all” of our assets.
The definition of change of control in the indenture that governs the notes includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of notes to require us to repurchase its notes as a result of a sale of less than all our assets to another person may be uncertain.
Federal and state fraudulent transfer laws may permit a court to void the notes and/or the guarantees, and if that occurs, you may not receive any payments on the notes.
Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of the guarantees of the notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or the note guarantees thereof could be voided as a fraudulent transfer or conveyance if we or any of the guarantors, as applicable, (a) issued the notes or incurred the note guarantees with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the note guarantees and, in the case of (b) only, one of the following is also true at the time thereof:
| • | we or any of the subsidiary guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the note guarantees; | |
| • | the issuance of the notes or the incurrence of the note guarantees left us or any of the subsidiary guarantors, as applicable, with an unreasonably small amount of capital or assets to carry on the business; |
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| • | we or any of the subsidiary guarantors intended to, or believed that we or such subsidiary guarantor would, incur debts beyond our or the subsidiary guarantor’s ability to pay as they mature; or | |
| • | we or any of the subsidiary guarantors were a defendant in an action for money damages, or had a judgment for money damages docketed against us or the subsidiary guarantor if, in either case, the judgment is unsatisfied after final judgment. |
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A court would likely find that a subsidiary guarantor did not receive reasonably equivalent value or fair consideration for its note guarantee to the extent the subsidiary guarantor did not obtain a reasonably equivalent benefit directly or indirectly from the issuance of the notes.
We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were insolvent at the relevant time or, regardless of the standard that a court uses, whether the notes or the guarantees would be subordinated to our or any of our guarantors’ other debt. In general, however, a court would deem an entity insolvent if:
| • | the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets; | |
| • | the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or | |
| • | it could not pay its debts as they became due. |
If a court were to find that the issuance of the notes or the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or that guarantee, could subordinate the notes or that guarantee to presently existing and future indebtedness of ours or of the related guarantor or could require the holders of the notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the notes. Further, the avoidance of the notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of that debt.
Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the notes to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.
Your ability to transfer your exchange notes may be limited by the absence of an active trading market, and we cannot assure you that any active trading market will develop for your exchange notes.
We do not intend to list the notes on any national securities exchange or to seek the admission thereof to trading in the Nasdaq National Market. The exchange notes are expected to be eligible for trading in the PORTALsm Market. We have been advised by the initial purchasers that the initial purchasers are currently making a market in the outstanding notes. The initial purchasers are not obligated to do so, however, and any market-making activities with respect to the outstanding notes or the exchange notes may be discontinued at any time without notice. In addition, any market-making activity may be limited during the pendency of any shelf registration statement. Accordingly, we cannot assure you that an active public or other market will develop for the exchange notes or as to the liquidity of the trading market for the exchange notes. If a trading market does not develop or is not maintained, you may experience difficulty in reselling your exchange notes or you may be unable to sell them at all. If a market for the exchange notes develops, that market may be discontinued at any time. If a public trading market develops for your exchange notes, future trading prices of the exchange notes will depend on many factors, including among other things, prevailing interest rates, our financial condition and results of operations, and the market for similar notes. Depending on those and other factors, your exchange notes may trade at a discount from their principal amount.
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A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the notes. Credit ratings are not recommendations to purchase, hold or sell the notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the notes. Any downgrade by either Standard & Poor’s or Moody’s would decrease earnings and may result in higher borrowing costs.
Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing. If any credit rating initially assigned to the notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your notes without a substantial discount.
Risks relating to our business
Future revenue growth depends on our ability to identify and execute new growth strategies.
We have a mature store base. As a result, our same store sales have increased more slowly than in historical periods, or in some cases, decreased. Our future growth will require that we successfully increase revenue in our rent-to-own stores, as well as seek to identify additional distribution channels for our products and services. If we are unable to identify and successfully implement these strategic growth initiatives, our earnings may grow more slowly or even decrease.
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.
We are subject to various governmental regulations, including in our case, regulations specifically regarding rent-to-own transactions. Currently, 46 states, the District of Columbia and Puerto Rico have passed laws that regulate rental purchase transactions as separate and distinct from credit sales. One additional state has a retail installment sales statute that excludes leases, including rent-to-own transactions, from its coverage if the lease provides for more than a nominal purchase price at the end of the rental period. The specific rental purchase 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 ten states limit the total amount that may be charged over the life of a rental purchase agreement and the laws of four states limit the cash prices for which we may offer merchandise. Most states also regulate rental purchase transactions, as well as other consumer transactions, under various consumer protection statutes. The rental purchase statutes and other consumer protection statutes provide various consumer remedies, including monetary penalties, for violations. In our history, we have been the subject of litigation alleging that we have violated some of these statutory provisions.
Although there is currently no comprehensive federal legislation regulating rental purchase transactions, adverse federal legislation may be enacted in the future. From time to time, both favorable and adverse legislation seeking to regulate our business has been introduced in Congress
that would regulateCongress. In addition, various legislatures in the rental purchase transaction, includingstates where we currently do business may adopt new legislation or amend existing legislation that could require us to alter our business practices.
We may be subject to legal proceedings from time to time which seek 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.
In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. Significant settlement amounts or final judgments could materially and
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adversely affect our liquidity. The failure to pay any material judgment would subjectbe a default under our senior credit facilities and under the rental purchase transaction to interest rate, finance charge
and fee limitations,indenture governing the outstanding notes.
Financial services transactions are regulated by federal law as well as the Federallaws of certain states. Any adverse changes in these laws or the passage of adverse new laws with respect to the financial services business could expose us to litigation or alter our business practices in a manner that we may deem to be unacceptable.
Our financial services business is subject to federal statutes and regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the USA Patriot Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act. Any adverseAct, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Anti-Money Laundering Act and similar state laws. In addition, we are subject to various state regulations regarding the terms of our short term consumer loans and our policies, procedures and operations relating to those loans, including the fees we may charge, as well as fees we may charge in connection with our other financial services products. The failure to comply with such regulations may result in the imposition of material fines, penalties or injunctions. Congress, federal regulators,and/or the various legislatures in the states where we currently operate or intend to offer financial services products may adopt new legislation if enacted,or regulations, or amend existing legislation or regulations, with respect to our financial services business that could require us to alter our business practices in a manner that we may deem to be unacceptable.
Rent-A-Center’s organizational documents and our debt instruments contain provisions that may prevent or deter another group from paying a premium over the market price toRent-A-Center’s stockholders to acquire its stock.
Rent-A-Center’s organizational documents contain provisions that classify its Board of Directors, authorize its Board of Directors to issue blank check preferred stock and establish advance-notice requirements on its stockholders for director nominations and actions to be taken at meetings of the stockholders. In addition, as a Delaware corporation,Rent-A-Center is subject to Section 203 of the Delaware General Corporation Law relating to business combinations. Our senior credit facilities and the indenture governing the outstanding notes contain change of control provisions which, in the event of a change of control, would cause a default under the credit agreement and require us to offer to repurchase the notes under the indenture. 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 ofRent-A-Center’s common stock that some or a majority ofRent-A-Center’s stockholders might consider to be in their best interests.
Failure to achieve and maintain effective internal controls could have a material and adverse effect on us.
LEGAL PROCEEDINGS
Fromour business.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brand and operating results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we alongmay not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our subsidiaries,reported financial information, which could have a material adverse effect on our business.
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Our continued expansion into international markets presents unique challenges which may subject us to risks associated with the legislative, judicial, accounting, regulatory, political, cultural and economic factors specific to the countries or regions in which we currently operate or may operate in the future, which could adversely affect our financial performance.
We entered the Canadian market in 2004 and operate 18 stores in Canada as of March 31, 2011. We opened our first store in Mexico in October 2010, and operated ten stores in Mexico as of March 31, 2011. As these operations grow, they may require greater management and financial resources. International operations require the integration of personnel with varying cultural and business backgrounds and an understanding of the relevant differences in the cultural, legal and regulatory environments. In addition, these operations are partysubject to variousthe potential risks of changing economic and financial conditions in each of its markets, legal proceedings arisingand regulatory requirements in local jurisdictions, tariffs and trade barriers, difficulties in staffing and managing local operations, failure to understand the local culture and market, difficulties in protecting intellectual property, the burden of complying with foreign laws, including tax laws and financial accounting standards, and adverse local economic, political and social conditions in certain countries.
In addition, we are subject to exchange rate risks in the ordinary course of business. Exceptour business as described below, wea result of our operations in Canada and Mexico and are, not currently a partytherefore, exposed to any material litigation.
Colon v. Thorn Americas, Inc. The plaintiffs filed this class action in
November 1997 in New York state court. This matter was assumed by us in
connectionrisks associated with the Thorn Americas acquisition,fluctuations of foreign currencies, in particular U.S. dollars, Canadian dollars and appropriate purchase
accounting adjustments were made for such contingent liabilities. The plaintiffs
acknowledge that rent-to-own transactions in New YorkMexican pesos. Such foreign currency exchange rates and fluctuations may have an impact on our future costs or on future cash flows from our international operations, and could adversely affect our financial performance.
Our operations are subject to the
provisions of New York's Rental Purchase Statute but contend the Rental Purchase
Statute does not provide Thorn Americas immunity from suit for other statutory
violations. Plaintiffs allege Thorn Americas has a duty to disclosedependent on 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 their prayers for relief, the plaintiffs have requested the
following:
- class certification;
- injunctive relief requiring Thorn Americas to (A) cease certain marketing
practices, (B) price their rental purchase contracts in certain ways, and
(C) disclose effective interest;
- unspecified compensatory and punitive damages;
- rescission of the class members contracts;
- an order placing in trust all moneys received by Thorn Americas in
connection with the rental of merchandise during the class period;
- treble damages, attorney's fees, filing fees and costs of suit;
- pre- and post-judgment interest; and
- any further relief granted by the court.
The plaintiffs have not alleged a specific monetary amount with respect to
their request for damages.
The proposed class originally included all New York residents who were
party to Thorn Americas' rent-to-own contracts from November 26, 1991 through
November 26, 1997. In her class certification briefing, Plaintiff acknowledged
her claims under the General Business Law in New York are subject to a three
year statute of limitations, and is now requesting a class of all persons in New
York who paid for rental merchandise from us since November 26, 1994. We are
vigorously defending this action. In November 2000, following interlocutory
appeal by both
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parties from the denial of cross-motions for summary judgement, we obtained a
favorable ruling from the Appellate Division of the State of New York,
dismissing Plaintiff's claims based on the alleged failure to disclose an
effective interest rate. Plaintiff's other claims were not dismissed. Plaintiff
moved to certify a state-wide class in December 2000. Plaintiff's class
certification motion was heard by the court on November 7, 2001, at which time
the court took the motion under advisement. We are vigorously opposing class
certification. Although there can be no assurance that our position will
prevail, or that we will be found not to have any liability, we believe the
decision by the Appellate Division regarding interest rate disclosure to be a
significant and favorable development in this matter.
Wisconsin Attorney General Proceeding. On August 4, 1999, the Wisconsin
Attorney General filed suit against us and our subsidiary ColorTyme in the
Circuit Court of Milwaukee County, Wisconsin, alleging that our rent-to-rent
transaction violates the Wisconsin Consumer Act and the Wisconsin Deceptive
Advertising Statute. The Attorney General claims that our rent-to-rent
transaction, coupled with the opportunity afforded our customers to purchase
rental merchandise under what we believe is a separate transaction, is a
disguised credit sale subject to the Wisconsin Consumer Act. Accordingly, the
Attorney General alleges that we have failed to disclose credit terms,
misrepresented the terms of the transaction and engaged in unconscionable
practices. We currently operate 27 stores in Wisconsin.
The Attorney General seeks injunctive relief, restoration of any losses
suffered by any Wisconsin consumer harmed and civil forfeitures and penalties in
amounts ranging from $50 to $10,000 per violation. The Attorney General's claim
for monetary penalties applies to at least 9,060 transactions through September
30, 2001. On October 31, 2001, the Attorney General filed a motion for summary
judgment on several counts in the complaint, including the principal claim that
our rent-to-rent transaction is governed by the Wisconsin Consumer Act. Our
response was filed on December 17, 2001. A pre-trial conference and hearing on
the motion for summary judgment is currently scheduled to occur on January 22,
2002, with a trial date expected sometime in the spring of 2002.
Since the filing of this suit, we have attempted to negotiate a mutually
satisfactory resolutionmanagement information systems. Failure of these claims with the Wisconsin Attorney General's
office, including the consideration of possible changes insystems could negatively impact our business
practices in Wisconsin. To date, we have not been successful, but our efforts
are ongoing. If we are unableability to negotiate a settlement with the Attorney
General, we intend to litigate the suit. Although we cannot assure you that we
will be found to have no liability in this matter, we believe its ultimate
resolution will notmanage store operations, which could have a material adverse effect upon us.
Gender Discrimination Actions. In September 1999, an action was filed
against us in federal courton our business, financial condition and results of operations.
We utilize integrated management information and control systems. The efficient operation of our business is dependent on these systems to effectively manage our financial and operational data. The failure of our information systems to perform as designed, loss of data or any interruption of our information systems for a significant period of time could disrupt our business. If our information systems sustain repeated failures, we may not be able to manage our store operations, which could have a material adverse effect on our business, financial condition and results of operations.
We are currently investing in the Western Districtdevelopment of Tennesseenew point of sale systems and processes to further enhance our management information system. Such enhancements to or replacement of our management information system could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information systems. We can make no assurances that the costs of investments in our information systems will not exceed estimates, that the systems will be implemented without material disruption, or that the systems will be as beneficial as predicted. If any of these events occur, our results of operations could be harmed.
If we fail to protect the integrity and security of customer and co-worker information, we could be exposed to litigation or regulatory enforcement and our business could be adversely impacted.
The increasing costs associated with information security, such as increased investment in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud, could adversely impact our business. We also routinely possess sensitive customer and co-worker information and, while we have taken reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could harm our business, reputation, operating results and financial condition and may increase the costs we incur to protect against such information security breaches.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
We issued $300 million aggregate principal amount of the outstanding notes to the initial purchasers on November 2, 2010, in transactions not registered under the Securities Act in reliance on exemptions from registration. The initial purchasers then sold the outstanding notes to qualified institutional buyers and certainnon-U.S. investors in reliance on Rule 144A and Regulation S under the Securities Act. Because they were sold pursuant to exemptions from registration, the outstanding notes are subject to transfer restrictions.
In connection with the issuance of the outstanding notes, we agreed with the initial purchasers that we would:
| • | file a registration statement for the exchange offer (of which this prospectus is a part) to exchange the outstanding notes for publicly registered notes with identical terms; | |
| • | use our commercially reasonable efforts to cause the registration statement to become effective under the Securities Act; and | |
| • | offer to the holders of the outstanding notes the opportunity to exchange the outstanding notes for a like principal amount of exchange notes upon the effectiveness of the registration statement. |
Our failure to comply with these agreements within certain time periods would result in additional interest being due on the outstanding notes.
Based on existing interpretations of the Securities Act by the U.S.
Equal Employment Opportunity Commission, alleging that we engagedstaff of the SEC described in gender
discrimination with respectseveral no-action letters to four named femalesthird parties, and other unnamed female
employees and applicants within our Tennessee and Arkansas region. The EEOC, in
its prayer for relief, has requested injunctive relief, unspecified actual,
compensatory and punitive damages, attorney's fees and costs of suit, and
further relief granted bysubject to the court. The allegations underlying this EEOC action
involve charges of wrongful termination and denial of promotion, disparate
impact and failure to hire. The group of individuals on whose behalf EEOC seeks
relief is approximately 70 individuals. Discovery formally closed on October 1,
2001 with some further discovery to continue pursuant to an agreement between us
and EEOC. The court has set a trial date of March 25, 2002. Althoughfollowing sentence, we believe that the claimsexchange notes issued in this case arethe exchange offer may be offered for resale, resold and otherwise transferred by their holders, other than broker-dealers or our “affiliates,” without merit, we cannot assure you that we will be
found to have no liability in this matter.
In August 2000, a putative nationwide class action was filed against us in
federal court in East St. Louis, Illinois by Claudine Wilfongfurther compliance with the registration and 18 other
plaintiffs, alleging that we engaged in class-wide gender discrimination
following our acquisition of Thorn Americas. The allegations
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underlying Wilfong involve charges of wrongful termination, constructive
discharge, disparate treatment and disparate impact. The plaintiffs, in their
prayer for relief, have requested class certification, injunctive relief, actual
damages of $410,000,000, unspecified compensatory and punitive damages,
attorney's fees, filing fees and costs of suit, pre-judgment interest, and any
further relief granted by the court. In addition, the EEOC filed a motion to
intervene on behalfprospectus delivery provisions of the plaintiffs, whichSecurities Act. However, any holder of the court granted on May 14, 2001.
On November 1, 2001,outstanding notes who is an affiliate of ours, who is not acquiring the plaintiffs filed their motion for class certification.
Our response to their motion was filed on December 3, 2001. On December 27,
2001, the court granted the plaintiff's motion for class certification. Although
we believe the claims in this case are without merit, we cannot assure you that
we will be found to have no liability in this matter.
In December 2000, similar suits filed by Margaret Bunch and Tracy Levings
in federal courtexchange notes in the Western Districtordinary course of Missouri were amendedsuch holder’s business or who intends to allege
class action claims similar to thoseparticipate in Wilfong, although no specific amounts
were claimed as actual damages. In July 2001, the court stayed the Bunch and
Levings action and compelled the plaintiffs to arbitrate their claims. In
November 2001, we announced that we had reached an agreement in principleexchange offer for the settlementpurpose of distributing the exchange notes:
| • | will not be able to rely on the interpretations by the staff of the SEC described in the above-mentioned no-action letters; | |
| • | will not be able to tender the outstanding notes in the exchange offer; and | |
| • | must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the outstanding notes unless the sale or transfer is made under an exemption from these requirements. |
We do not intend to seek our own no-action letter, and there is no assurance that the staff of the Bunch matter, which is subjectSEC would make a similar determination regarding the exchange notes as it has in these no-action letters to court approval. Underthird parties.
Pursuant to the terms of the proposed settlement,registration rights agreement, we agreedwill begin to incur additional interest on the outstanding notes if we do not complete the exchange offer by May 2, 2011. The additional interest for failing to timely complete the exchange offer is 25 basis points for the first 90 days post May 2, 2011. This penalty increases every 90 days by another 25 basis points up to a maximum of 100 basis points over the original stated rate until the registration default ends. If at any time after May 2, 2011, we complete the exchange offer, the interest rate reverts back to the original stated rate.
As a result of the filing and effectiveness of the registration statement of which this prospectus is a part, we will satisfy our obligations under the registration rights agreement. Following the closing of the exchange offer, holders of the outstanding notes not tendered will not have any further registration rights except in limited circumstances requiring the filing of a shelf registration statement, and the outstanding notes will continue to be subject to restrictions on transfer. Accordingly, the liquidity of the market for the outstanding notes will be adversely affected.
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Terms of the Exchange Offer
Upon the terms and subject to the conditions stated in this prospectus and in the letter of transmittal, we will accept all outstanding notes properly tendered and not withdrawn before 5:00 p.m., New York City time, on the expiration date. After authentication of the exchange notes by the trustee or an authenticating agent, we will issue $1,000 principal amount of the exchange notes in exchange for each $1,000 principal amount of the outstanding notes accepted in the exchange offer (provided, however, that you may tender outstanding notes only in a minimum denomination of $2,000 or an integral multiple of $1,000 in excess thereof).
By tendering the outstanding notes for exchange notes in the exchange offer and signing or agreeing to be bound by the letter of transmittal, you will represent to us that:
| • | you will acquire the exchange notes you receive in the exchange offer in the ordinary course of your business; | |
| • | you are not participating in, have no understanding with any person to participate in, and do not intend to engage in the distribution of the exchange notes issued to you in the exchange offer; | |
| • | you are not an affiliate of ours or, if you are an affiliate, you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable; | |
| • | if you are not a broker-dealer, that you are not engaged in and do not intend to engage in the distribution of the exchange notes; and | |
| • | if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making or other trading activities, that you will deliver a prospectus, as required by law, in connection with any resale of those exchange notes. |
Broker-dealers that are receiving exchange notes for their own account must have acquired the outstanding notes as a result of market-making or other trading activities in order to participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account under the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. The letter of transmittal states that, by so acknowledging and by delivering a prospectus, a broker-dealer will not be admitting that it is an “underwriter” within the meaning of the Securities Act. We will be required to allow broker-dealers to use this prospectus following the exchange offer in connection with the resale of exchange notes received in exchange for outstanding notes acquired by broker-dealers for their own account as a result of market-making or other trading activities. If required by applicable securities laws, we will, upon written request, make this prospectus available to any broker-dealer for use in connection with a resale of exchange notes. See “Plan of Distribution.”
The exchange notes will evidence the same debt as the outstanding notes and will be issued under and entitled to the benefits of the same indenture. The form and terms of the exchange notes to be issued in the exchange offer are the same as the form and terms of the outstanding notes except that the exchange notes will be registered under the Securities Act and, accordingly,
| • | will not contain certain restrictions with respect to their transfer; | |
| • | will not be subject to provisions relating to additional interest; | |
| • | will bear a different CUSIP or ISIN number from the outstanding notes; and | |
| • | will not entitle the holders to registration rights. |
As of the date of this prospectus, $300 million aggregate principal amount of the 6.625% Senior Notes due 2020 are outstanding. In connection with the issuance of the outstanding notes, we arranged for the outstanding notes to be issued and transferable in book-entry form through the facilities of DTC, acting as depositary. The exchange notes will also be issuable and transferable in book-entry form through DTC.
This prospectus, together with the accompanying letter of transmittal, is initially being sent to all registered holders as of the close of business on , 2011. We intend to conduct the exchange offer as required by the
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Exchange Act, and the rules and regulations of the SEC under the Exchange Act, includingRule 14e-1, to the extent applicable.
Rule 14e-1 describes unlawful tender offer practices under the Exchange Act. This rule requires us, among other things:
| • | to hold our exchange offer open for 20 business days; | |
| • | to give at least ten business days notice of certain changes in the terms of this offer as specified inRule 14e-1(b); and | |
| • | to issue a press release in the event of an extension of the exchange offer. |
The exchange offer is not conditioned upon any minimum aggregate principal amount of the outstanding notes being tendered, and holders of the outstanding notes do not have any appraisal or dissenters’ rights under the Delaware General Corporation Law or under the indenture in connection with the exchange offer. We shall be considered to have accepted the outstanding notes tendered according to the procedures in this prospectus when, as and if we have given oral or written notice of acceptance to the exchange agent. See “— Exchange Agent.” The exchange agent will act as agent for the tendering holders for the purpose of receiving exchange notes from us and delivering exchange notes to those holders.
If any tendered outstanding notes are not accepted for exchange because of an invalid tender or the occurrence of other events described in this prospectus, these unaccepted outstanding notes will be returned, at our cost, into the holder’s account at DTC according to the procedures described below, promptly after the expiration date.
Holders who tender outstanding notes in the exchange offer will not be required to pay an aggregate of $12.25
millionbrokerage commissions or fees or, subject to the agreed upon class, plus plaintiffs' attorneys feesinstructions in the letter of transmittal, transfer taxes related to the exchange of the outstanding notes in the exchange offer. We will pay all charges and expenses, other than applicable taxes, in connection with the exchange offer. See “— Fees and Expenses.”
Neither we nor our board of directors makes any recommendation to holders of the outstanding notes as determined
to whether to tender or refrain from tendering all or any portion of their outstanding notes in the exchange offer. Moreover, no one has been authorized to make any such recommendation. Holders of the outstanding notes must make their own decision whether to tender in the exchange offer and, if so, the amount of the outstanding notes to tender after reading this prospectus and the letter of transmittal and consulting with their advisors, if any, based on their own financial position and requirements.
Expiration Date; Extensions; Amendments
The term “expiration date” shall mean 5:00 p.m., New York City time, on , 2011, unless we, in our sole discretion, extend the exchange offer, in which case the term “expiration date” shall mean the latest date to which the exchange offer is extended.
If any of the conditions described below under “—Conditions” have not been satisfied, we reserve the right, in our sole discretion:
| • | to extend the exchange offer, or | |
| • | to terminate the exchange offer, |
by giving oral or written notice of such extension or termination to the court,exchange agent, and costsany such oral or written notice given to administer the settlement. We haveexchange agent will disclose the principal amount of outstanding notes tendered as of the date of such notice. Subject to the terms of the registration rights agreement, we also reserve the right to terminateamend the settlementterms of the exchange offer in any manner.
Any delay in acceptance, termination, extension or amendment will be followed promptly by oral or written notice to the exchange agent and by making a public announcement. Any public announcement in the event that a certain agreed-upon numbercase of class
members opt outan extension of the settlement. Toexchange offer will be issued no later than 9:00 a.m., New York City time, on the extentnext business day after the previously scheduled expiration date. If the exchange offer is amended in a manner determined by us to constitute a material change, including the waiver of a material condition, we will promptly disclose the amendment
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in a manner reasonably calculated to inform the holders of the amendment. We will also extend the exchange offer for a period of at least five business days, as required by applicable law, depending upon the significance of the change and the manner of disclosure to the holders, if the exchange offer would otherwise expire during that extended period.
Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, termination, extension, or amendment of the exchange offer, we shall have no obligation to publish, advise, or otherwise communicate any public announcement, other than by making a timely release to PR Newswire.
You are advised that we may extend the exchange offer because some of the holders of the outstanding notes do not tender on a timely basis. In order to give these noteholders the ability to participate in the exchange and to avoid the significant reduction in liquidity associated with holding an unexchanged note, we may elect to extend the exchange offer.
Procedures for Tendering
All of the outstanding notes were issued in book-entry form, and all of the outstanding notes are currently represented by global certificates held for the account of DTC.
We understand that the claims ofexchange agent will make a purported
class member in Wilfong or a beneficiaryrequest promptly after the date of the Tennessee EEOC actionprospectus to establish accounts for the outstanding notes at DTC for the purpose of facilitating the exchange offer, and subject to their establishment, any financial institution that is a participant in DTC may make book-entry delivery of the outstanding notes by causing DTC to transfer the outstanding notes into the exchange agent’s account for the notes using DTC’s procedures for transfer.
In order to transfer outstanding notes held in book-entry form with DTC, the exchange agent must receive, before 5:00 p.m., New York City time, on the expiration date, at its address set forth in this prospectus,
| • | a confirmation of book-entry transfer of outstanding notes into the exchange agent’s account at DTC, which is referred to in this prospectus as a “book-entry confirmation,” and: | |
| • | a properly completed and validly executed letter of transmittal, or manually signed facsimile thereof, together with any signature guarantees and other documents required by the instructions in the letter of transmittal; or | |
| • | an agent’s message transmitted pursuant to ATOP. |
The exchange agent and DTC have confirmed that the exchange offer is eligible for ATOP. Accordingly, DTC participants may electronically transmit their acceptance of the exchange offer by causing DTC to transfer outstanding notes held in book-entry form to the exchange agent in accordance with DTC’s ATOP procedures for transfer. DTC will then send a book-entry confirmation, including an agent’s message, to the exchange agent.
The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that DTC has received an express acknowledgment from the participant in DTC tendering outstanding notes that are coveredthe subject of that book-entry confirmation that the participant has received and agrees to be bound by the terms of the Bunch settlementletter of transmittal, and that we may enforce such agreement against such participant. If you use ATOP procedures to tender outstanding notes, you will not be required to deliver a letter of transmittal to the exchange agent, but you will be bound by its terms as if you had signed it.
There is no procedure for guaranteed late delivery of the notes.
Acceptance of Outstanding Notes for Exchange; Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, we will accept, promptly after the expiration time, all outstanding notes properly tendered. We will issue the exchange notes promptly after acceptance of the outstanding notes. For purposes of an exchange offer, we will be deemed to have accepted
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properly tendered outstanding notes for exchange when, as and if we have given oral or written notice to the exchange agent, with prompt written confirmation of any oral notice.
For each outstanding note accepted for exchange, the holder will receive a new note registered under the Securities Act having a principal amount equal to that of the surrendered outstanding note. As a result, registered holders of exchange notes issued in the exchange offer on the relevant record date for the first interest payment date following the completion of the exchange offer will receive interest accruing from the most recent date to which interest has been paid on the outstanding notes or, if no interest has been paid on the outstanding notes, from November 2, 2010. Outstanding notes that we accept for exchange will cease to accrue interest from and after the date of completion of the exchange offer.
Return of Outstanding Notes Not Accepted or Exchanged
If we do not accept any tendered outstanding notes for exchange or if outstanding notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged outstanding notes will be returned without expense to their tendering holder. Such non-exchanged outstanding notes will be credited to an account maintained with DTC. These actions will occur promptly after the expiration or termination of the exchange offer.
Determinations of Validity
All questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of the tendered outstanding notes will be determined by us in our sole discretion. This determination will be final and binding. We reserve the absolute right to reject any and all outstanding notes not properly tendered or any outstanding notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any irregularities or conditions of tender as to particular outstanding notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of outstanding notes must be cured within the time we shall determine. Although we intend to notify holders of defects or irregularities related to tenders of outstanding notes, neither we, the exchange agent nor any other person shall be under any duty to give notification of defects or irregularities related to tenders of outstanding notes nor shall we or any of them incur liability for failure to give notification. Tenders of outstanding notes will not be considered to have been made until the irregularities have been cured or waived. Any outstanding notes received by the exchange agent that we determine are not properly tendered or the tender of which is otherwise rejected by us and as to which the defects or irregularities have not been cured or waived by us will be returned by the exchange agent to the tendering holder (unless otherwise provided in the letter of transmittal), promptly after the expiration date.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of outstanding notes may be withdrawn at any time before 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of outstanding notes in the exchange offer:
| • | a written or facsimile transmission of a notice of withdrawal must be received by the exchange agent at its address listed below before 5:00 p.m., New York City time, on the expiration date; or | |
| �� | you must comply with the appropriate procedures of ATOP. |
Any notice of withdrawal must:
| • | specify the name of the person having deposited the outstanding notes to be withdrawn; | |
| • | identify the outstanding notes to be withdrawn, including the principal amount of the outstanding notes or, in the case of the outstanding notes transferred by book-entry transfer, the name and number of the account at the depositary to be credited; |
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| • | be signed by the same person and in the same manner as the original signature on the letter of transmittal by which the outstanding notes were tendered, including any required signature guarantee, or be accompanied by documents of transfer sufficient to permit the trustee for the outstanding notes to register the transfer of the outstanding notes into the name of the person withdrawing the tender; and | |
| • | specify the name in which any of these outstanding notes are to be registered, if different from that of the person who deposited the outstanding notes to be withdrawn. |
All questions as to the validity, form and eligibility, including time of receipt, of the withdrawal notices will be determined by us, and our determination shall be final and binding on all parties. Any outstanding notes so withdrawn will be judged not to have been tendered according to the procedures in this prospectus for purposes of the exchange offer, and no exchange notes will be issued in exchange for those outstanding notes unless the outstanding notes so withdrawn are validly retendered. Any outstanding notes that have been tendered but are not accepted for exchange will be returned by transfer into the holder’s account at DTC according to the procedures described above. This return or crediting will take place promptly after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following one of the procedures described above under “— Procedures for Tendering” at any time before the expiration date.
Conditions
We will not be required to accept for exchange, or exchange any exchange notes for, any outstanding notes if the exchange offer, or the making of any exchange by a holder of outstanding notes, would violate applicable law or any applicable interpretation of the staff of the SEC. Similarly, we may terminate the exchange offer as provided in this prospectus before accepting outstanding notes for exchange in the event of such a potential violation.
In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us the representations described under “— Terms of the Exchange Offer” and such person doesother representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to allow us to use an appropriate form to register the exchange notes under the Securities Act.
We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any outstanding notes not opt outpreviously accepted for exchange, upon the occurrence of any of the Bunch settlement,conditions to the exchange offer specified above. We will give prompt written notice of any extension, amendment, non-acceptance or termination to the holders of the outstanding notes as promptly as practicable.
These conditions are for our sole benefit, and we may assert them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of these rights, this failure will not mean that we have waived our rights. Each such right will be deemed an ongoing right that we may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes tendered, and will not issue exchange notes in exchange for any such outstanding notes, if at such time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture relating to the notes under the Trust Indenture Act of 1939.
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Exchange Agent
The Bank of New York Mellon Trust Company, N.A., the trustee under the indenture, has been appointed as exchange agent for the exchange offer. In this capacity, the exchange agent has no fiduciary duties and will be acting solely on the basis of our directions. Requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent by mail addressed as follows:
By Registered or Certified Mail, Hand Delivery or Overnight Courier:
The Bank of New York Mellon Trust Company, N.A.
c/o The Bank of New York Mellon Corporation
Corporate Trust Operations — Reorganization Unit
480 Washington Boulevard,
27th Floor
Jersey City, New Jersey 07310
Attn: Mr. David Mauer
By Facsimile Transmission:
(for eligible institutions only)
(212) 298-1915
Attention: Mr. David Mauer
To Confirm by Telephone or for Information:
(212) 815-3687
Fees and Expenses
We will bear the expenses of soliciting holders of outstanding notes to determine if such holders wish to tender those outstanding notes for exchange notes. The principal solicitation under the exchange offer is being made by mail. Additional solicitations may be made by our officers and regular employees and our affiliates in person wouldor by telephone or telecopier.
We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or other persons soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket costs and expenses in connection with the exchange offer and will indemnify the exchange agent for all losses and claims incurred by it as a result of the exchange offer. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the outstanding notes and in handling or forwarding tenders for exchange.
We will pay the expenses to be incurred in connection with the exchange offer, including fees and expenses of the exchange agent and trustee and accounting and legal fees and printing costs.
You will not be obligated to pay any transfer tax in connection with the exchange, except if you instruct us to register exchange notes in the name of, or request that outstanding notes not tendered or not accepted in the exchange offer be returned to, a person other than you, in which event you will be responsible for the payment of any applicable transfer tax.
Federal Income Tax Consequences
We believe that the exchange offer of the outstanding notes will not constitute a taxable exchange for U.S. federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the outstanding notes as reflected in our accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be
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recognized by us upon the closing of the exchange offer. We will amortize the expenses of the exchange offer over the term of the exchange notes.
Participation in the Exchange Offer; Untendered Outstanding Notes
Participation in the exchange offer is voluntary. Holders of outstanding notes are urged to consult their financial and tax advisors in making their own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all of the outstanding notes tendered under the terms of, these exchange offer, we will have fulfilled a covenant contained in the terms of the registration rights agreement. Holders of outstanding notes who do not tender in the exchange offer will continue to hold their outstanding notes and will be entitled to herall the rights, and subject to the limitations, applicable portionto the outstanding notes under the indenture. Holders of the settlement proceeds in Bunch and accordingly would notoutstanding notes will no longer be entitled to any recovery for those claims in Wilfongrights under the registration rights agreement that by its terms terminates or ceases to have further effect as a result of the Tennessee EEOC action. Bothmaking of this exchange offer. See “Description of the individual plaintiffs in Wilfong and the EEOC have filed objectionsExchange Notes.” All untendered outstanding notes will continue to be subject to the settlementrestrictions on transfer described in the Bunch caseindenture. To the extent the outstanding notes are tendered and requested a stay in that proceeding. On
November 29, 2001,accepted, there will be fewer outstanding notes remaining following the court in Bunch denied their objections andexchange, which could significantly reduce the requested
stay, granted preliminary approvalliquidity of the settlement and set a fairness hearing
for March 6, 2002. The plaintiffs have filed an appeal withuntendered outstanding notes.
We may in the Eighth Circuit
Courtfuture seek to acquire our untendered outstanding notes in the open market or through privately negotiated transactions, through subsequent exchange offers or otherwise. We intend to make any acquisitions of Appeals, which is currently pending. Although we believe that the settlement as preliminarily approved byoutstanding notes following the court is fair, we cannot assure you
that it will be approved by the court in its present form.
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 in federal court in Texarkana, Texas. The
complaint alleges that the defendants violated Sections 10(b) and/or Section
20(a)applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations of the SEC under the Securities Exchange Act of 1934, includingRule 10b-5 promulgated
thereunder by issuing false and misleading statements and omitting material
facts regarding our financial performance and prospects for14e-1, to 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.extent applicable. We have been advisedno present plan to acquire any outstanding notes that are not tendered in the exchange offer or to file a similar
complaint or complaints have also been filed by other plaintiffsregistration statement to permit resales of any outstanding notes that are not tendered in Texarkana,
Texas alleging similar claims. We have yetthe exchange offer, except in those circumstances in which we may be obligated to be served with any of the
foregoing complaints. We believe that these claims are without merit and intendfile a shelf registration statement.
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USE OF PROCEEDS
The exchange offer is intended to vigorously defend ourselves. However, we cannot assure you that we will be
found to have no liability in this matter.
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DESCRIPTION OF CERTAIN DEBT
As of September 30, 2001, we had outstanding the following other
indebtedness (excluding capital lease obligations):
As of September 30, 2001,satisfy our debt obligations had the following
maturities:
SENIOR CREDIT FACILITIES
The senior credit facilities are provided by a syndicate of banks and other
financial institutions led by JPMorgan Chase Bank, as administrative agent. At
September 30, 2001, we had a total of $458.0 million outstanding under these
facilities, all of which was under our term loans. At September 30, 2001, we had
$56.4 million of availability under the revolving credit facility.
Borrowings underregistration rights agreement. We will not receive any proceeds from the senior credit facilities bear interest at varying
rates equal to 1.5% to 3.00% over LIBOR, which was 2.76% at September 30, 2001.
We also have a prime rate option under the facilities, but do not have any
exercised asissuance of September 30, 2001. At September 30, 2001, the average rate on
outstanding senior debt borrowings was 5.23%.
During 1998, we entered into two interest rate protection agreements with
two banks, one of which expired this year. Under the terms of the current
interest rate protection agreement, the LIBOR rate used to calculate the
interest rate charged on $250.0 million of the outstanding senior term debt is
fixed at an average rate of 5.59%. The protection on the $250.0 million expires
in 2003. The senior credit facilities are secured by a security interest in
substantially all of our tangible and intangible assets, including intellectual
property and real property. The senior credit facilities are also secured by a
pledge of the capital stock of our subsidiaries.
The senior credit facilities contain covenants that limit our ability to:
- incur additional debt (including subordinated debt) in excess of $25
million, excluding the 2001 notes;
- repurchase our capital stock and senior subordinated notes generally;
- incur liens or other encumbrances;
- merge, consolidate or sell substantially all our property or business;
- sell assets, other than inventory;
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- make investments or acquisitions unless we meet financial tests and other
requirements;
- make capital expenditures; or
- enter into a new line of business.
The senior credit facilities require us to comply with several financial
covenants, including a maximum leverage ratio, a minimum interest coverage ratio
and a minimum fixed charge coverage ratio. At September 30, 2001, the maximum
leverage ratio was 4.25:1, the minimum interest coverage ratio was 2.50:1, and
the minimum fixed charge coverage ratio was 1.3:1. On that date, our actual
ratios were 2.03:1, 4.77:1 and 2.13:1, respectively.
Events of default under the senior credit facilities include customary
events, such as a cross-acceleration provision in the event that we default on
other debt. In addition, an event of default under the senior credit facilities
would occur if we undergo a change of control. This is defined to include the
case where Apollo ceases to own at least 50% of the amount of our voting stock
that they owned on August 5, 1998, or a third party becomes the beneficial owner
of 33.33% or more or our voting stock at a time when certain permitted investors
own less than the third party or Apollo entities own less than 35% of the voting
stock owned by the permitted investors. We do not have the ability to prevent
Apollo from selling its stock, and therefore would be subject to an event of
default if Apollo did so and its sales were not agreed to by the lenders under
the senior credit facilities. This could result in the acceleration of the
maturity of our debt under the senior credit facilities, as well as under the
subordinated notes through their cross-acceleration provision.
The senior credit facilities are secured by a perfected first priority
security interest in substantially all of our tangible and intangible assets
including intellectual property, real property, and the capital stock of our
direct and indirect subsidiaries. The senior credit facilities are
unconditionally guaranteed by each of our direct and indirect domestic
subsidiaries.
11% SENIOR SUBORDINATED NOTES DUE 2008
1998 Notes. In August 1998, we issued $175.0 million of senior
subordinated notes, maturing on August 15, 2008, under an indenture dated as of
August 18, 1998 among us, our subsidiary guarantors and the trustee, which is
now The Bank of New York, as successor to IBJ Schroder Bank & Trust Company.
These notes were subsequently exchanged for the registered 1998 notes, which are
governed by the same indenture.
The indenture governing the 1998 notes contains covenants that limit our
ability to:
- incur additional debt;
- sell assets or our subsidiaries;
- grant liens to third parties;
- pay dividends or repurchase stock; and
- engage in a merger or sell substantially all of our assets.
Events of default under the indenture include customary events, such as a
cross-acceleration provision in the event that we default in the payment of
other debt due at maturity or upon acceleration for default in an amount
exceeding $25 million.
We may redeem the 1998 notes after August 15, 2003, at our option, in whole
or in part.
The 1998 notes also require that upon the occurrence of a change of control
(as defined in the indenture), the holders of the 1998 notes have the right to
require us to repurchase the 1998 notes at a price equal to 101% of the original
aggregate principal amount, together with
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accrued and unpaid interest, if any, to the date of repurchase. If we did not
comply with this repurchase obligation, this would trigger an event of default
under our senior credit facilities.
We are seeking to exchange the 1998 notes for the exchange notes in the exchange offer. 2001 Notes. In December 2001,Because we issued an additional $100.0are exchanging the outstanding notes for the exchange notes, which have substantially identical terms, the issuance of the exchange notes will not result in any increase in our indebtedness.
A portion of the net proceeds of the offering of the outstanding notes, which amounted to approximately $294.5 million, net of the initial purchasers purchasers’ discount, was used to repay $200 million of 11%the term loans under our existing senior subordinatedsecured credit facilities. The remaining net proceeds are being used to repurchase shares of our common stock.
RATIO OF EARNINGS TO FIXED CHARGES
We have computed the ratio of earnings to fixed charges for each of the following periods on a consolidated basis. For purposes of computing the ratio of earnings to fixed charges, “earnings” consist of pretax income from continuing operations plus fixed charges (excluding capitalized interest). “Fixed charges” represent interest incurred (whether expensed or capitalized), amortization of debt expense, and that portion of rental expense on operating leases deemed to be the equivalent of interest. You should read the ratio of earnings to fixed charges in conjunction with our consolidated and condensed financial statements that are incorporated by reference in this prospectus.
| Three Months Ended | ||||||||||||||||||||||||
| Year Ended December 31, | March 31, | |||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||
| Ratio of Earnings to Fixed Charges | 2.51x | 1.76x | 2.84x | 4.32x | 4.34x | 3.95x | ||||||||||||||||||
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DESCRIPTION OF THE EXCHANGE NOTES
Rent-A-Center, Inc. issued $300 million aggregate principal amount of the outstanding notes maturing on August 15, 2008, under a separatean indenture dated as of December 19, 2001 among us, our subsidiary guarantorsRent-A-Center, the Guarantors and The Bank of New York Mellon Trust Company, N.A., as trustee. Although issued pursuant to a separate
indenture, the 2001 notes have substantially identical termstrustee, dated as the 1998 notes,
except for certain transfer restrictions and registration rights relating to the
2001 notes.of November 2, 2010. The indenture governing the 2001 notes, and which will govern the exchange notes is substantially similar towill be issued under that indenture. In this section, the indenture which governs the 1998
notes, including the restrictive covenants, events of default and change of
control and redemption provisions described above. The primary difference
between the indenture governing the 2001 notes and the indenture governing the
1998 notes is that the indenture governing the 2001outstanding notes and the exchange notes is open-ended, thereby permitted future issuances of senior subordinated notes
pursuantare collectively referred to as the same indenture.
We are seeking to exchange the 2001 notes for the exchange notes in the
exchange offer.
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DESCRIPTION OF THE NOTES AND GUARANTEES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Rent-A-Center" refers only to Rent-A-Center and not to any of its subsidiaries,
the word "notes" refers only to the exchange notes, and the word "indenture"
refers to the 2001 indenture.
DIFFERENCES BETWEEN 1998 INDENTURE AND 2001 INDENTURE
The indenture that governs the 2001 notes and the exchange notes is
substantially similar to the indenture that governs the 1998 notes. The primary
difference is that the 2001 indenture places no limitations on the principal
amount of indebtedness the Company may issue under the indenture. The 1998
indenture generally limits the amount of indebtedness issued under that
indenture to the $175,000,000 aggregate principal amount issued in connection
with the offering of the 1998 notes. However, the 1998 indenture does not
prohibit us from issuing additional senior subordinated debt outside of the 1998
indenture. With respect to the material terms of the notes, events of default,
change of control and redemption provisions and restrictive covenants, the 2001
indenture and the 1998 indenture are substantially identical.
2001 INDENTURE
Rent-A-Center will issue the notes under an indenture among itself, the
subsidiary guarantors and The Bank of New York, as trustee.“Notes.” The terms of the notes include those statedprovisions contained in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939.
1939, as amended. The terms of the exchange notes will be identical in all material respects to the outstanding notes, except that the notes will not contain certain transfer restrictions and holders of the exchange notes will no longer have any registration rights or be entitled to additional interest.
We may issue an unlimited principal amount of additional notes having identical terms and conditions as the Notes other than the issue date, the issue price and the first interest-payment date (the “Additional Notes”). We will only be permitted to issue such Additional Notes if at the time of such issuance, we are in compliance with the covenants contained in the indenture.
The following description is a summary ofdiscussion summarizes the material provisions of the indenture. It does not restate the indenturepurport to be complete, and is qualified in its entirety. Although we
believe that we have disclosed in this prospectusentirety by reference to all of the material provisions of those agreements, including the indenture, wedefinition of certain terms, and to the Trust Indenture Act of 1939, as amended. We urge you to read the indenture because it, and not this description, defines your rights as holders of thesethe notes. We have filed copiesCopies of the indenture are available as an exhibit to the registration statement which includes this
prospectus.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The notes:
- are general obligations of Rent-A-Center;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of Rent-A-Center;
- are senior in right of payment to any future Subordinated Obligations of
Rent-A-Center; and
- are unconditionally guaranteed by the Subsidiary Guarantors.
As of September 30, 2001, Rent-A-Center and the Subsidiary Guarantors had
total Senior Indebtedness of approximately $458.0 million. As indicated above
and as discussed in detailset forth below under the subheading "Ranking," paymentscaption “— Additional Information.” You will find the definitions of capitalized terms used in this description of notes under the caption “— Certain definitions.” For purposes of this description of notes, references to “the Company,” “we,” “our” and “us” refer only toRent-A-Center, Inc. and not to its subsidiaries. Certain defined terms used in this description but not defined herein have the meanings assigned to them in the Indenture.
The registered holder of a note will be treated as the owner of it for all purposes. Only registered owners will have rights under the Indenture.
General
The Notes
The Notes:
| • | will be unsecured, senior obligations of the Company; | |
| • | will be limited to an aggregate principal amount of $300.0 million, subject to our ability to issue Additional Notes; | |
| • | mature on November 15, 2020; | |
| • | will be unconditionally Guaranteed on a senior unsecured basis by each Restricted Subsidiary that is a borrower under the Senior Credit Facility or that Guarantees any Indebtedness of the Company or any Guarantor,providedthat under certain circumstances, a Guarantor will be released from all of its obligations under the Indenture, and its Guarantee will terminate. On the Issue Date, each of the Company’s Subsidiaries, other than Foreign Subsidiaries and the Insurance Subsidiary, will be a Guarantor. See “— Guarantees;” | |
| • | will be issued in denominations of $2,000 or an integral multiple of $1,000 in excess thereof; | |
| • | will rank equally in right of payment with any existing and future senior Indebtedness of the Company; | |
| • | will be effectively subordinated to all existing and future Secured Indebtedness of the Company (including its Obligations under the Senior Credit Facility) to the extent of the value of the assets securing such Indebtedness; | |
| • | will be senior in right of payment to any existing and future Subordinated Obligations; |
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| • | will be structurally subordinated to obligations of any Non-Guarantor Subsidiary; and | |
| • | will be represented by one or more registered Notes in global form. |
Interest
Interest on the notesNotes will:
| • | accrue at the rate of 6.625% per annum; | |
| • | accrue from the date of original issuance or, if interest has already been paid, from the most recent interest payment date; | |
| • | be payable in cash semi-annually in arrears on May 15 and November 15, commencing on May 15, 2011; | |
| • | be payable to the Holders of record at the close of business on May 1 and November 1 immediately preceding the related interest-payment dates; and | |
| • | be computed on the basis of a360-day year comprised of twelve30-day months. |
We also will pay Additional Interest to Holders under certain circumstances if we do not file a registration statement relating to a registered exchange offer for the Guarantees will be subordinated toNotes or, in lieu thereof, a resale shelf registration statement for the payment of Senior
Indebtedness. The indenture will permit us and the Subsidiary Guarantors to
incur additional Senior Indebtedness.
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THE GUARANTEES
The notesNotes if such registration statement is not declared effective on a timely basis or if certain other circumstances are guaranteed by the following subsidiaries of Rent-A-Center:
ColorTyme, Inc.
Advantage Companies, Inc.
The Guarantees of the notes:
- are general obligations of each Subsidiary Guarantor;
- are subordinated in right of payment tonot satisfied, all existing and future Senior
Indebtedness of each Subsidiary Guarantor; and
- are senior in right of payment to any future subordinated Indebtedness of
each Subsidiary Guarantor.
PRINCIPAL, MATURITY AND INTEREST
Rent-A-Center may issue an unlimited principal amount subject to compliance
with the provisions of the indentureas more fully described below under "Limitationthe caption “Exchange offer; registration rights.”
Payments on Indebtedness." Rent-A-Centerthe Notes; Paying Agent and Registrar
We will pay the principal of, and premium, if any, and interest on, the Notes at the office or agency designated by the Company, except that we may, at our option, pay interest on the Notes by check mailed to Holders at their registered address set forth in the Registrar’s books. We have initially issueddesignated the 2001 notescorporate trust office of the Trustee to act as our Paying Agent and Registrar. We may, however, change the Paying Agent or Registrar without prior notice to the Holders, and the Company or any of its Restricted Subsidiaries may act as Paying Agent or Registrar.
We will pay principal of, and premium, if any, and interest on, Notes in global form registered in the name of or held by The Depository Trust Company or its nominee in immediately available funds to The Depository Trust Company or its nominee, as the case may be, as the registered Holder of such global Note.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a maximum
aggregate principal amount of $100.0 million. The exchange notesHolder, among other things, to furnish appropriate endorsements and transfer documents. No service charge will be issued
in an aggregate principal amountimposed by the Company, the Trustee or the Registrar for any registration of up to $275.0 million to effect thetransfer or exchange of Notes, but the 1998 notesCompany may require a Holder to pay a sum sufficient to cover any transfer tax or other governmental taxes and 2001 notes. Rent-A-Center will issue notes in
denominationsfees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of $1,000 and integral multiples15 days before the day of $1,000. any selection of Notes to be redeemed.
The notes will mature
on August 15, 2008.
Interest on the notes will accrue at the rateregistered Holder of 11% per annum anda Note will be payable semi-annually in arrears on Februarytreated as the owner of it for all purposes.
Optional Redemption
Except as described below, the Notes are not redeemable until November 15, 2015. On and Augustafter November 15, beginning on
August 15, 2002. Rent-A-Center will make each interest payment to2015, the holders of
record of these notes onCompany may redeem the immediately preceding February 1 and August 1.
Interest on the notes will accrue from the closing date or, if interest has
already been paid, from the date it was most recently paid. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
OPTIONAL REDEMPTION
The notes are redeemable, at Rent-A-Center's option,Notes, in whole or, in part,
at any time and from time to time, on and after August 15, 2003 and prior to
maturity. The notes may be redeemedin part, upon not less than 30 nor more than 60 days’ notice, at the following redemption prices expressed(expressed as a percentage of principal amount of the Notes to be redeemed) set forth below, plus accrued and unpaid interest on the Notes, if any, to the applicable date of redemption date, subject(subject to the right of holdersHolders of record on the relevant record date to receive interest due on the relevant interest paymentan
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interest-payment date following on or prior to such redemption date), if redeemed during the 12-monthtwelve-month period commencingbeginning on AugustNovember 15 of the years set
forthindicated below:
SELECTION AND NOTICE OF REDEMPTION
Year | Percentage | |||
| 2015 | 103.313 | % | ||
| 2016 | 102.208 | % | ||
| 2017 | 101.104 | % | ||
| 2018 and thereafter | 100.000 | % | ||
Prior to November 15, 2013, the Company may on any one or more occasions redeem up to 35% of the original aggregate principal amount of the Notes (calculated after giving effect to any issuance of Additional Notes) with the Net Cash Proceeds of one or more Equity Offerings at a redemption price equal to 106.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the applicable redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on an interest payment date following on or prior to such redemption date);provided that
(1) at least 65% of the original aggregate principal amount of the Notes (calculated after giving effect to any issuance of Additional Notes) remains outstanding after each such redemption; and
(2) such redemption occurs within 90 days after the closing of any such Equity Offering.
In addition, at any time prior to November 15, 2015, the Company may redeem the Notes, in whole or, from time to time, in part, upon not less than 30 nor more than 60 days’ prior notice mailed to each Holder or otherwise in accordance with the procedures of the depositary at a redemption price equal to 100% of the aggregate principal amount of the Notes plus the Applicable Premium, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on an interest payment date falling on or prior to such redemption date.
If the optional redemption date is on or after an interest record date and on or before the related interest payment date, the accrued and unpaid interest, if any, will be paid to the Person in whose name the Note is registered at the close of business, on such record date, and no additional interest will be payable to Holders whose Notes will be subject to redemption by the Company.
In the event that less than allcase of the notes are redeemed pursuant to an
optionalany partial redemption, selection of the notesNotes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed, then on a pro rata basis, by lot or by such other method as the Trustee shallin its sole discretion will deem to be fair and appropriate. No notesappropriate, although no Note of $1,000 or less may$2,000 in original principal amount will be redeemed in part. Notices of redemption must be mailed by first-class
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mail at least 30, but not more than 90, days before the redemption date to each
holder of notes to be redeemed at the holder's registered address.
If any noteNote is to be redeemed in part only, the notice of redemption that
relatesrelating to such note mustNote will state the portion of the principal amount or principal
amount at maturity, as the case may be,thereof to be redeemed. A new noteNote in a principal amount equal to the unredeemed portion thereof will be issued in the name of the holderHolder thereof upon cancellation of the original note. On and afterNote.
Any redemption or notice may, at the Company’s discretion, be subject to one or more conditions precedent, including completion of an Equity Offering or other corporate transaction.
Mandatory Redemption; Open Market Purchases
The Company is not required to make any mandatory redemption date, interest will ceaseor sinking fund payments with respect to accrue on notesthe Notes. However, under certain circumstances, the Company may be required to offer to purchase the Notes as described under the caption “— Repurchase at the option of holders.”
The Company may acquire Notes by means other than a redemption, whether by tender offer, open market purchases, negotiated transactions or portions thereof called for
redemption asotherwise, in accordance with applicable securities laws, so long as Rent-A-Center has deposited withsuch acquisition does not otherwise breach the paying agent for the
notes funds in satisfactionterms of the applicable redemption price pursuant toIndenture.
Ranking
The Notes will be senior unsecured obligations of the indenture.
RANKING
The indebtedness evidenced by the notes:
- is unsecured Senior Subordinated Indebtedness of Rent-A-Center;
- is subordinated in right of payment, as set forth in the indenture, to
the payment when due of all existing and future Senior Indebtedness of
Rent-A-Center, including Rent-A-Center's Obligations under the Senior
Credit Facility;
- ranks without preference in right of payment with all existing and future
Senior Subordinated Indebtedness of Rent-A-Center; and
- isCompany that rank senior in right of payment to all existing and future Subordinated
ObligationsIndebtedness of Rent-A-Center.
the Company that is expressly subordinated in right of payment to the Notes.
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The notes are alsoNotes will rank equally in right of payment with all existing and future Indebtedness of the Company that is not so subordinated and will be effectively subordinated to anyall of our Secured Indebtedness of
Rent-A-Center and its Subsidiaries to(to the extent of the value of the assets securing such Indebtedness.
Indebtedness) and liabilities of our Non-Guarantor Subsidiaries. In the event of bankruptcy, liquidation, reorganization or other winding up of the Company or upon a default in payment with respect to, or the acceleration of, any Indebtedness under the Senior Credit Facility or other Secured Indebtedness of the Company, the assets of the Company that secure such Secured Indebtedness will be available to pay obligations on the Notes only after all Indebtedness under such Senior Credit Facility and other Secured Indebtedness and certain hedging obligations and cash management obligations has been repaid in full from such assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all the Notes then outstanding.
Although the indenture contains limitations onIndenture will limit the amount of additional
Indebtedness which Rent-A-Centerthat the Company and its Restricted Subsidiaries may incur, under certain circumstances the
amount of such indebtedness could be substantial and, in any case,Incur, such Indebtedness may be Senior Indebtedness. See "-- Certain Covenants -- Limitation
on Indebtedness" below.
Rent-A-Center may not pay principal of, premium, if any, or interest on,
the notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any notes (collectively, "pay the notes") if
- any Senior Indebtedness is not paid when due in cash or Cash Equivalents;
or
- any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless,
in either case, (A) the default has been cured or waived and any such
acceleration has been rescinded in writing, or (B) such Senior
Indebtedness has been paid in full in cash or Cash Equivalents.
If any Designated Senior Indebtedness is in default and such default would
allow the acceleration of the Designated Senior Indebtedness without notice,
Rent-A-Center will not be permitted to pay the notes for a period (the "Payment
Blockage Period") beginning upon the receipt by the Trustee of written notice (a
"Blockage Notice") of such default from the Designated Senior Indebtedness
Representative specifying an election to effect a Payment Blockage Period. This
Payment Blockage Period will end on the earlier of
- written notice to the Trustee to terminate the period by the person who
gave the Blockage Notice;
- the discharge or repayment in full of the Designated Senior Indebtedness;
- the default giving rise to the Blockage Notice is no longer continuing;
or
- 179 days have passed following the delivery of the Blockage Notice.
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Unless the maturity of the Designated Senior Indebtedness has been
accelerated, Rent-A-Center will be permitted to resume payments on the notes
after the end of the Payment Blockage Period. Only one Blockage Notice may be
given in a 360-day period, regardless of the number of defaults on the
Designated Senior Indebtedness during that period. However, if a Blockage Notice
is given by a holder of Designated Senior Indebtedness other than Bank
Indebtedness during the 360-day period, a representative of Bank Indebtedness
may give another Blockage Notice during the 360-day period. In no event,
however, may the total number of days during which any Payment Blockage Period
or Periods is in effect exceed 179 days during any 360 consecutive day period.
The holders of Senior Indebtedness are entitled to receive payment in full
before the noteholders are entitled to receive any payment upon:
- any payment or distribution of the assets of Rent-A-Center upon a total
or partial liquidation, dissolution, reorganization or similar proceeding
relating to Rent-A-Center; or
- in a bankruptcy, insolvency, receivership or similar proceeding relating
to Rent-A-Center.
Until the Senior Indebtedness is paid in full, any payment or distribution
to which the noteholders would be entitled, but for the subordination provisions
of the indenture, will be made to the holders of the Senior Indebtedness. If a
distribution is made to the noteholders that should have not been made to them
as a result of these subordination provisions, the noteholders are required to
hold such a distribution in trust for the holders of the Senior Indebtedness and
pay it over to them.
If payment of the notes is accelerated because of an Event of Default,
Rent-A-Center or the Trustee is required to promptly notify the holders of the
Designated Senior Indebtedness. Rent-A-Center is not permitted to pay the notes
until five Business Days after such holders or the Representative of the
Designated Senior Indebtedness receive notice of such acceleration. At that
time, Rent-A-Center may pay the notes only if the subordination provisions of
the indenture otherwise permit payment at that time.
As a result of the subordination provisions in the indenture, creditors of
Rent-A-Center who are holders of Senior Indebtedness may recover more, ratably,
than the noteholders in the event of insolvency.
GUARANTEES
Each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, on an unsecured, senior subordinated basis, the full and prompt
payment of principal of, premium, if any, and interest on the notes, and of all
other obligations under the indenture.
Ranking. The indebtedness evidenced by each Subsidiary Guarantee,
including the payment of principal of, premium, if any, and interest on the
notes and other obligations with respect to the notes, will be subordinated to
all Guarantor Senior Indebtedness of such Subsidiary Guarantor on the same basis
as the notes are subordinated to Senior Indebtedness of Rent-A-Center. Each
Subsidiary Guarantee will in all respects rank without preference with all other
Senior Subordinated Indebtedness of such Subsidiary Guarantor.
A Subsidiary Guarantor may not incur any Indebtedness if such Indebtedness
is subordinate or junior in ranking in any respect to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Guarantor
Senior Subordinated Indebtedness of such Subsidiary Guarantor or is expressly
subordinated in right of payment to Guarantor Senior Subordinated Indebtedness
of such Subsidiary Guarantor. As of September 30, 2001, there was no Guarantor
Senior Indebtedness of Subsidiary Guarantors other than the Guarantees of the
Senior Credit Facility. See "Description of Other Indebtedness."
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Although the indenture contains limitations on the amount of additional
Indebtedness that Rent-A-Center's Restricted Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial and in any case,a significant portion of such Indebtedness may be Guarantor Senior Indebtedness.Secured Indebtedness or structurally senior to the Notes. See "-- Certain Covenants --“Certain covenants — Limitation on Indebtedness"indebtedness.”
Guarantees
Each Restricted Subsidiary that either is a borrower under the Senior Credit Facility or that Guarantees any Indebtedness of the Company or any other Restricted Subsidiary will initially Guarantee the Notes. The Guarantors will, jointly and "-- Ranking."severally, irrevocably and unconditionally guarantee, on a senior unsecured basis, the Company’s obligations under the Notes and under the Indenture. Each Guarantor will agree to pay, in addition to the obligations stated above, any and all costs and expenses (including reasonable attorneys’ fees and expenses) Incurred by the Trustee or the Holders in enforcing any rights against it under its Guarantee.
Each of the Guarantees:
| • | will be a senior unsecured obligation of each Guarantor; | |
| • | will rank equally in right of payment with any existing and future senior Indebtedness of the respective Guarantors; | |
| • | will be effectively subordinated to all existing and future Secured Indebtedness of a Guarantor (including the Obligations under its Guarantee of the Senior Credit Facility) to the extent of the value of the assets securing such Indebtedness; | |
| • | will be senior in right of payment to any existing and future Guarantor Subordinated Obligations; and | |
| • | will be subject to registration with the SEC pursuant to the registration rights agreement. |
In the event of bankruptcy, liquidation, reorganization or other winding up of a Guarantor or upon a default in payment with respect to, or the acceleration of, any Indebtedness under the Senior Credit Facility or other Secured Indebtedness of such Guarantor, the assets of the Guarantor that secure such Secured Indebtedness will be available to pay obligations on the Notes only after all Indebtedness under such Senior Credit Facility (and certain hedging obligations and cash management obligations) and other Secured Indebtedness of or guaranteed by such Guarantor has been repaid in full from such assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all the Notes then outstanding.
Although the Indenture will limit the amount of Indebtedness that the Guarantors may Incur, such Indebtedness may be substantial, and a significant portion of such Indebtedness may be Secured Indebtedness or structurally senior to the Notes. See “Certain covenants — Limitation on Subsidiary Guarantee. indebtedness.”
As of March 31, 2011, the Non-Guarantor Subsidiaries represented an immaterial percentage of our operating income, assets and liabilities, in each case calculated on a consolidated basis.
Any entity that makes a payment under its Guarantee will be entitled upon payment in full of all Obligations that are Guaranteed under the Indenture to a contribution from each other Guarantor in an amount equal to such other Guarantor’spro rataportion of such payment based on the respective net assets of all the Guarantors at the time of such payment, determined in accordance with GAAP.
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The obligationobligations of each Subsidiary Guarantor under its Subsidiary Guarantee iswill be limited as necessary to the maximum amount as
will not constituteprevent that Guarantee from constituting a fraudulent conveyance or fraudulent transfer under federal
or state law, after giving effect to:
-applicable law. The effectiveness of this limiting provision is not, however, free from doubt. If a Guarantee were rendered voidable, it could be subordinated by a court to all other Indebtedness (including Guarantees and other contingent and fixed liabilitiesliabilities) of the Subsidiary Guarantor, includingand, depending on the amount of such Indebtedness, a Guarantor’s liability on its Guarantee could be reduced to zero. See “Risk factors — Federal and state fraudulent transfer laws may permit a court to void the notesand/or the guarantees, and if that occurs, you may not receive any Guarantees underpayments on the Senior Credit Facility;notes.”
The Indenture will provide that each Guarantee by a Guarantor will be automatically and - any collections from or payments made by or on behalf of any other
Subsidiaryunconditionally released and discharged, and such Guarantor with respect to other Subsidiary Guarantor'sand its obligations under its Subsidiary Guarantee pursuant to its contribution
obligations underwill be automatically and unconditionally released and discharged, upon:
(1) (a) (i) any sale, assignment, transfer, conveyance, exchange, or other disposition (by merger, consolidation or otherwise) of the indenture.
Consolidation and Merger. Each SubsidiaryCapital Stock of such Guarantor after which the applicable Guarantor is permitted to
consolidateno longer a Restricted Subsidiary or merge into or sell its assets to Rent-A-Center or another Wholly
Owned Subsidiary Guarantor without limitation. Each Subsidiary Guarantor is
permitted to consolidate with or merge into or sell(ii) the sale of all or substantially all of itsthe assets of such Guarantor to a corporation, partnership, trust, limited partnership, limited
liability companyPerson which is not the Company or a Restricted Person (whether or not such Guarantor is the surviving Person in such transaction), in each case, which sale, assignment, transfer, conveyance, exchange, or other similar entitydisposition is made in compliance with the applicable provisions of the Indenture, including “Repurchase at the option of holders — Asset sales” (it being understood that only such portion of the Net Available Cash as is required to be applied on or before the date of such release in accordance with the terms of the Indenture needs to be applied in accordance therewith at such time);providedthat all the obligations of such Guarantor under all other than Rent-A-Center or another
Wholly Owned Subsidiary Guarantor if:
-Indebtedness of the provisions under the indenture, including the covenant described
under "-- Certain Covenants -- Limitations on Sales of Assets," are
complied with; and
- such Subsidiary Guarantor is released from all of its obligations under
the indentureCompany and its Subsidiary Guarantee. However, terminationRestricted Subsidiaries terminate upon consummation of such transaction;
(b) the release or discharge of such Guarantor from its Guarantee of Indebtedness of the Subsidiary Guarantee will only occur to the extent that the Subsidiary
Guarantor's obligationsCompany and Subsidiaries under the Senior Credit Facility (including by reason of the termination of the Senior Credit Facility), and all other Indebtedness of the Company and Subsidiariesand/or the Guarantee that resulted in the obligation of such Guarantor to Guarantee the Notes, if such Guarantor would not then otherwise be required to Guarantee the Notes pursuant to the Indenture, except a discharge or release by or as a result of payment under such Guarantee;provided, that if such Person has Incurred any Indebtedness in reliance on its status as a Guarantor under the covenant “— Certain covenants — Limitation on indebtedness,” such Guarantor’s obligations under such Indebtedness, as the case may be, so Incurred are satisfied in full and discharged or are otherwise permitted to be Incurred by a Restricted Subsidiary (other than a Guarantor) under “— Certain covenants — Limitation on indebtedness”;
(c) upon the proper designation of any Guarantor as an Unrestricted Subsidiary; or
(d) the Company exercising its legal defeasance option or covenant defeasance option as described under “— Defeasance” or the Company’s obligations under the Indenture being discharged in accordance with the terms of the Indenture; and
(2) such Guarantor delivering to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for in the Indenture relating to such transactionand/or release have been complied with.
In the event any released Guarantor thereafter borrows under or Guarantees ofIndebtedness under the Senior Credit Facility or Guarantees any other Indebtedness of Rent-A-Center also terminate.
CHANGE OF CONTROL
Upon the occurrenceCompany or any Guarantor, such former Guarantor will, if it is a Restricted Subsidiary, again provide a Guarantee of the Notes and, unless the Company and Guarantors have theretofore fulfilled their registration obligations thereunder, assume by written agreement all of the obligations of a Guarantor under the Registration Rights Agreement. See “— Certain covenants — Future guarantors.”
Repurchase at the Option of Holders
Change of Control
If a Change of Control (as defined below), each Holder
will haveoccurs, unless the Company has exercised its right to require Rent-A-Centerredeem all of the Notes as described under “— Optional redemption,” the Company will make an offer to repurchasepurchase all or any part of such Holder's notesthe Notes (the
32
“Change of Control Offer”) at a purchase price in cash equal to 101% of the principal amount thereof,of the Notes plus accrued and unpaid interest, if any, to the date of repurchase. Rent-A-Center will not be obligatedpurchase (the “Change of Control Payment”) (subject to purchase the notes, however,
if itright of Holders of record on the relevant record date to receive interest due on an interest payment date falling on or prior to the date of purchase).
Within 30 days following any Change of Control, unless the Company has exercised its right to redeem all of the notesNotes as described under "--“— Optional Redemption." A "Changeredemption,” the Company will mail a notice of Control" means
- any "Person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, other than one or more Permitted Holders, is or becomes the
beneficial owner, as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a Person shall be deemed to have "beneficial ownership"
of all shares that any such Person has the right to acquire within one
year, directly or indirectly, of more than 50% of the Voting Stock of
Rent-A-Center or a Successor Company, as defined below, including,
without limitation, through a merger or consolidation or purchase of
Voting Stock of Rent-A-Center; provided that the Permitted Holders do not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors, provided
further that the transfer of 100% of the voting stock of Rent-A-Center to
a Person that has an ownership structure identical to that of
Rent-A-Center prior to such transfer, such that Rent-A-Center becomes a
Wholly Owned Subsidiary of such Person, shall not be treated as a Change
of Control for purposes of the indenture;
63
- during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors, together
with any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of Rent-A-Center was approved
by a vote of a majority of the directors of Rent-A-Center then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board of Directors then in
office;
- the sale, lease, transfer, conveyance or other disposition, in one or a
series of related transactions other than a merger or consolidation, of
all or substantially all of the assets of Rent-A-Center and its
Restricted Subsidiaries taken as a whole to any Person or group of
related Persons other than a Permitted Holder; or
- the adoption of a plan relating to the liquidation or dissolution of
Rent-A-Center.
Unless Rent-A-Center has exercised its right to redeem all the notes as
described under "-- Optional Redemption," Rent-A-Center is required, within 30
days following any Change of Control, or at Rent-A-Center's option, prior to such Change of Control but after the public announcement thereof, to mail a
noticeOffer to each Holder, with a copy to the Trustee, stating:
-
(1) that a Change of Control has occurred or will occurOffer is being made and that all Notes properly tendered pursuant to such Holder
has, or upon such occurrenceChange of Control Offer will have,be accepted for purchase by the right to require
Rent-A-Center to purchase such Holder's notesCompany at a purchase price in cash equal to 101% of the principal amount thereof,of such Notes plus accrued and unpaid interest, if any, to the date of purchase subject(subject to the right of noteholdersHolders of record on a record date to receive interest on the
relevantan interest payment date;
-date);
(2) the circumstances and relevant facts and financial information regarding
such Change of Control;
- thepurchase date of purchase, which will(which shall be no earlier than 30 days norno later than 9060 days from the date such notice is mailed;
-mailed) (the “Change of Control Payment Date”); and
(3) the instructionsprocedures determined by Rent-A-Center,the Company, consistent with this
covenant,the Indenture, that a Holder must follow in order to have its notes purchased;Notes repurchased.
On the Change of Control Payment Date, the Company will, to the extent lawful:
(1) accept for payment all Notes or portions of Notes (of $2,000 or an integral multiple of $1,000 in excess thereof) properly tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes so tendered; and
-
(3) deliver or cause to be delivered to the Trustee for cancellation the Notes so accepted together with an Officers’ Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by the Company in accordance with the terms of this covenant.
The paying agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any;providedthat each such new Note will be in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof.
If the Change of Control Payment Date is on or after an interest record date and on or before the related interest-payment date, any accrued and unpaid interest to the Change of Control Payment Date will be paid on the relevant interest-payment date to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender pursuant to the Change of Control Offer.
The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable, except as set forth under the captions “— Defeasance” and “— Satisfaction and discharge.” Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.
Even if sufficient funds were otherwise available, the terms of the Senior Credit Facility may, and future Indebtedness may, prohibit the Company’s prepayment of the Notes before their scheduled maturity. Consequently, if the Company is not able to prepay the Indebtedness under the Senior Credit Facility and any such offer isother Indebtedness containing similar restrictions or obtain requisite consents, the Company will be unable to fulfill its repurchase obligations if Holders of Notes exercise their repurchase rights following a Change of Control, resulting in a default under the Indenture. A payment or acceleration under the Indenture will result in a cross-default under the current terms of the Senior Credit Facility.
The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements
33
set forth in the Indenture applicable to a Change of Control Offer made prior toby the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control payment is
conditioned onOffer. Notwithstanding anything to the contrary herein, a Change of Control Offer may be made in advance of a Change of Control conditional upon the occurrence of such Change of Control.
Rent-A-CenterControl, if a definitive agreement is in place for the Change of Control contemporaneously with the making of the Change of Control Offer.
The Company will comply, to the extent applicable, with the requirements of Section 14(e) ofRule 14e-1 under the Exchange Act and any other securities laws or regulations in connection with the repurchase of notesNotes pursuant to this
covenant.
The Change of Control purchase feature is a result of negotiations between
Rent-A-Center and the initial purchasers. Rent-A-Center has no present plans to
engage in a transaction involving a Change of Control although it is possibleOffer. To the extent that Rent-A-Center would decidethe provisions of any securities laws or regulations conflict with provisions of the Indenture, the Company will comply with the applicable securities laws and regulations and will not be deemed to do sohave breached its obligations described in the future. Subject toIndenture by virtue of the limitations discussed below, Rent-A-Center could, in the future, enter into
certain transactions, including acquisitions, refinancings or recapitalizations,
that would not constitute a Change of Control under the indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect Rent-A-Center's capital structure or credit ratings.
The occurrence of a Change of Control would constitute a default under the
Senior Credit Agreement. Future Senior Indebtedness of Rent-A-Center may contain
prohibitions of certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require Rent-A-Center to
repurchase the notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
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repurchase on Rent-A-Center. Finally, Rent-A-Center's ability to pay cash to the
Holders upon a repurchase may be limited by Rent-A-Center's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
conflict.
The Change of Control provisions described above may deter certain mergers, tender offers and other takeover attempts involving Rent-A-Centerthe Company by increasing the capital required to effectuate such transactions. The definition of "Change“Change of Control"Control” includes a disposition of all or substantially all of the property and assets of Rent-A-Centerthe Company and its Subsidiaries. With respectRestricted Subsidiaries taken as a whole to the
dispositionany Person. Although there is a limited body of property or assets,case law interpreting the phrase "all or substantially all" as used
in the indenture varies according to the facts and circumstances“substantially all,” there is no precise established definition of the subject
transaction, has no clearly established meaningphrase under New York law and is
subject to judicial interpretation.applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertainingas to whether a particular transaction would involve a disposition of "all“all or substantially all"all” of the property or assets of a Person, and thereforePerson. As a result, it may be unclear as to whether a Change of Control has occurred and whether Rent-A-Center is requireda Holder may require the Company to make an offer to repurchase the notesNotes as described above. CERTAIN COVENANTS
Certain provisions under the Indenture relative to the Company’s obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in principal amount of the Notes.
Asset Sales
The indenture contains covenants, including, among others, the following:
LIMITATION ON INDEBTEDNESS
(A) Rent-A-Center shallCompany will not, and shallwill not permit any of its Restricted Subsidiaries to, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary, as the case may be, receives consideration at least equal to Incur any Indebtedness; provided, however, that Rent-A-Center and any
Restricted Subsidiary which is a Subsidiary Guarantor may Incur Indebtedness if,the Fair Market Value (such Fair Market Value to be determined on the date of contractually agreeing to such Asset Disposition) of the Incurrenceshares, property and assets subject to such Asset Disposition;
(2) at least 75% of the consideration from such Asset Disposition received by the Company or such Restricted Subsidiary, as the case may be, is in the form of cash or Cash Equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company or such Restricted Subsidiary, as the case may be, at the option of the Company and in the sequence it elects (subject to the terms of the Indebtedness referred to in clauses (a) and (b) below) to any of the following (or any combination thereof) within 365 days from the later of the date of such Asset Disposition or the receipt of such Net Available Cash, as follows:
(a) to permanently reduce (and permanently reduce commitments with respect thereto: (x) obligations under the Senior Credit Facility and (y) Secured Indebtedness of the Consolidated Coverage
RatioCompany (other than any Disqualified Stock or Subordinated Obligations) or Secured Indebtedness of a Restricted Subsidiary (other than any Disqualified Stock or Guarantor Subordinated Obligations) (in each case other than Indebtedness owed to the Company or an Affiliate of the Company);
(b) to permanently reduce obligations under other Indebtedness of the Company (other than any Disqualified Stock or Subordinated Obligations) or Indebtedness of a Restricted Subsidiary (other than any Disqualified Stock or Guarantor Subordinated Obligations), in each case other than Indebtedness owed to the Company or an Affiliate of the Company; provided that the Company shall equally and ratably reduce Obligations under the Notes through open market purchases (to the extent such purchases are at or above 100% of the principal amount thereof) or by making an offer (in accordance with the procedures set forth below for an Asset Disposition Offer) to all Holders to purchase their Notes at 100% of the principal amount thereof, plus the amount of accrued but unpaid interest on the amount of Notes that would otherwise be greater than 2.50prepaid; or
34
(c) to 1.00.
(B) Notwithstandinginvest in Additional Assets;
providedthat the Issuer will be deemed to have complied with the provisions described in clause (c) of this paragraph (A)if and to the extent that, within 365 days from the later of the date of such Asset Dispositions that generated the Net Available Cash or the receipt of such Net Available Cash, the Company or such Restricted Subsidiary has entered into and not abandoned or rejected a binding agreement to acquire the assets or Capital Stock of a Similar Business, make an Investment in Additional Assets or make a capital expenditure in compliance with the provision described in clause (c), and that acquisition, purchase, investment or capital expenditure is thereafter completed within 180 days after the end of such365-day period. Pending the final application of any such Net Available Cash in accordance with clause (a), (b) or (c) above, Rent-A-Centerthe Company and its Restricted Subsidiaries may Incurtemporarily reduce Indebtedness (including under a revolving Debt Facility) or otherwise invest such Net Available Cash in any manner not prohibited by the Indenture.
For the purposes of clauses (1) and (2), no Asset Disposition pursuant to condemnation, confiscation, appropriation or other similar taking, including by deed in lieu of condemnation, resulting from damage, destruction, or total loss, or pursuant to foreclosure or other enforcement of a Lien Incurred not in breach of the Indenture or exercise by the related lienholder of rights with respect thereto, including by deed or assignment in lieu of foreclosure shall, in any such case, be required to satisfy the conditions set forth in clause (1) and (2) above.
For the purposes of clause (2) above and for no other purpose, the following typeswill be deemed to be cash:
(1) any liabilities (as shown on the Company’s or such Restricted Subsidiary’s most recent balance sheet) of Indebtedness:
- Indebtedness Incurredthe Company or any Restricted Subsidiary (other than liabilities that are by their express terms subordinated in right of payment to the Notes or the Guarantees) that are assumed by the transferee of any such shares, property or other assets and from which the Company and all Restricted Subsidiaries have been validly released by all creditors in writing;
(2) any securities, notes or other obligations received by the Company or any Restricted Subsidiary from the transferee that are converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received) within 180 days following the closing of such Asset Disposition; and
(3) any Designated Noncash Consideration received by the Company or any of its Restricted Subsidiaries in such Asset Disposition having an aggregate Fair Market Value, taken together with all other Designated Noncash Consideration received pursuant to this clause (3) that is at that time outstanding, not to exceed the greater of (x) $25.0 million and (y) 2.5% of Total Tangible Assets at the time of the receipt of such Designated Noncash Consideration (with the Fair Market Value of each item of Designated Noncash Consideration being measured at the time received without giving effect to subsequent changes in value).
Any Net Available Cash from Asset Dispositions that are not applied or invested as provided in the first paragraph of this section will be deemed to constitute “Excess Proceeds” which, for the avoidance of doubt, shall not include any Net Available Cash that is the subject of an Asset Disposition Offer to the extent not accepted by the Holders on or before the applicable Asset Disposition Purchase Date pursuant to the Senior Credit Facility,terms described below. On the 366th day after an Asset Disposition, or, in the case of clause 3(c) above, upon abandonment of any refinancingsuch project, if the aggregate amount of Excess Proceeds exceeds $25.0 million, the Company will promptly thereafter be required to make an offer (“Asset Disposition Offer”) to all Holders and, to the extent required by the terms of outstanding Pari Passu Indebtedness, to all holders of such Pari Passu Indebtedness, to purchase the maximum aggregate principal amount of Notes and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on a record date to receive interest on the relevant interest payment date), in accordance with the procedures set forth in the Indenture or the agreements governing the Pari Passu Indebtedness, as applicable, in each case in denominations of $2,000 or an integral multiple of $1,000 in excess thereof. The Company shall commence an Asset Disposition Offer with respect to Excess Proceeds by mailing (or otherwise communicating in accordance with the procedures of DTC) the notice required pursuant to the terms of the Indenture, with a copy to the Trustee. To the extent that the aggregate amount of Notes and Pari Passu Indebtedness validly tendered and not properly withdrawn pursuant to an Asset Disposition Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate
35
purposes, subject to other covenants contained in the Indenture. If the aggregate principal amount of Notes surrendered by Holders thereof and other Pari Passu Indebtedness surrendered by holders or lenders, collectively, exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and Pari Passu Indebtedness to be purchased on a pro rata basis on the basis of the aggregate accreted value or principal amount of tendered Notes and Pari Passu Indebtedness. Upon completion of such Asset Disposition Offer, the amount of Excess Proceeds shall be reset at zero. The Asset Disposition Offer will remain open for a period of 20 Business Days following its commencement, except to the extent that a longer period is required by applicable law (the “Asset Disposition Offer Period”). No later than five Business Days after the termination of the Asset Disposition Offer Period (the “Asset Disposition Purchase Date”), the Company will apply all Excess Proceeds to the purchase of the aggregate principal amount of Notes and, if applicable, Pari Passu Indebtedness (on a pro rata basis, if applicable) required to be purchased pursuant to this covenant (the “Asset Disposition Offer Amount”) or, if less than the Asset Disposition Offer Amount of Notes (and, if applicable, Pari Passu Indebtedness) has been so validly tendered, all Notes and Pari Passu Indebtedness validly tendered in response to the Asset Disposition Offer. Payment for any Notes so purchased will be made in the same manner as interest payments are made.
If the Asset Disposition Purchase Date is on or after an interest record date and on or before the related-interest payment date, any accrued and unpaid interest will be paid to the Person in whose name a Note is registered at the close of business on such record date.
On or before the Asset Disposition Purchase Date, the Company will, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Asset Disposition Offer Amount of Notes and Pari Passu Indebtedness or portions thereof validly tendered and not properly withdrawn pursuant to the Asset Disposition Offer, or if less than the Asset Disposition Offer Amount has been validly tendered and not properly withdrawn, all Notes and Pari Passu Indebtedness so tendered, in each case in denominations of $2,000 or an integral multiple of $1,000 in excess thereof;providedthat if, following repurchase of a portion of a Note, the remaining principal amount of such Note outstanding immediately after such repurchase would be less than $2,000, then the portion of such Note so repurchased shall be reduced so that the remaining principal amount of such Note outstanding immediately after such repurchase is $2,000. The Company will deliver, or cause to be delivered, to the Trustee the Notes so accepted and an Officers’ Certificate stating the aggregate principal amount of Notes or portions thereof so accepted and that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this covenant. In addition, the Company will deliver all certificates and notes required, if any, by the agreements governing the Pari Passu Indebtedness. The Paying Agent or the Company, as the case may be, will promptly, but in no event, later than five Business Days after termination of the Asset Disposition Offer Period, mail or deliver to each tendering Holder or holder or lender of Pari Passu Indebtedness, as the case may be, an amount equal to the purchase price of the Notes or Pari Passu Indebtedness so validly tendered and not properly withdrawn by such holder or lender, as the case may be, and accepted by the Company for purchase, and the Company will promptly issue a new Note, and the Trustee, upon delivery of an authentication order from the Company, will authenticate and mail or deliver (or cause to be transferred by book-entry) such new Note to such Holder in a principal amount notequal to exceed $962.25 million;
-any unpurchased portion of the Subsidiary Guarantees and Guarantees of Indebtedness incurred
pursuant to paragraph (A) above, or, incurred pursuant to the Senior
Credit Facility, or any refinancing thereof,Note surrendered; provided that each such new Note will be in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof. In addition, the Company will take any and all other actions required by the agreements governing the Pari Passu Indebtedness. Any Note not so accepted will be promptly mailed or delivered by the Company to exceed $962.25 million;
-the Holder thereof. The Company will publicly announce the results of the Asset Disposition Offer on or promptly following the Asset Disposition Purchase Date.
The Company will comply, to the extent applicable, with the requirements ofRule 14e-1 under the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to an Asset Disposition Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the indenture by virtue of any conflict.
36
Certain Covenants
Limitation on Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, Incur any Indebtedness (including Acquired Indebtedness); provided, however, that the Company and the Guarantors may Incur Indebtedness (including Acquired Indebtedness) if on the date thereof and after giving effect thereto on a pro forma basis (including a pro forma application of net proceeds therefrom):
(1) the Consolidated Coverage Ratio for the Company and its Restricted Subsidiaries is at least 2.00 to 1.00; and
(2) no Default or Event of Default then exists or, immediately after giving effect thereto, would exist.
The first paragraph of this covenant will not prohibit the Incurrence of the following Indebtedness:
(1) Indebtedness of Rent-A-Centerthe Company or any Guarantor Incurred under one or more Debt Facilities and the issuance and creation of letters of credit and bankers’ acceptances thereunder (with undrawn trade letters of credit and reimbursement obligations relating to trade letters of credit satisfied within 30 days being excluded, and bankers’ acceptances being deemed to have a principal amount equal to the face amount thereof) in an aggregate outstanding amount equal to $1,000.0 million less the aggregate principal amount of all principal repayments with the proceeds from Asset Dispositions made pursuant to clause 3(a) of the first paragraph of “— Repurchase at the option of holders — Asset sales” in satisfaction of the requirements of such covenant;
(2) Indebtedness represented by the Notes and the related Guarantees (other than any Additional Notes and their related Guarantees) and any exchange notes issued in a registered exchange offer pursuant to the Registration Rights Agreement (“Exchange Notes”) and (any related Guarantees thereof);
(3) Indebtedness of the Company and its Restricted Subsidiaries in existence on the Issue Date (other than Indebtedness described in clauses (1), (2), (4), (5), (7), (9), (10) and (11) of this paragraph);
(4) (a) Guarantees by (i) the Company or Guarantors of Indebtedness permitted to be Incurred by the Company or a Guarantor in accordance with the provisions of the Indenture;providedthat in the event such Indebtedness that is being Guaranteed is a Subordinated Obligation or a Guarantor Subordinated Obligation, then the related Guarantee shall be subordinated in right of payment to the Notes or the Guarantee, as the case may be, and (ii) Non- Guarantor Subsidiaries of Indebtedness Incurred by Non-Guarantor Subsidiaries in accordance with the provisions of the Indenture;
(b) Guarantee Obligations incurred in the ordinary course of business by the Company or its Restricted Subsidiaries of obligations of any Foreign Subsidiary;
(5) Indebtedness of the Company owing to and held by any Restricted Subsidiary;
-Subsidiary or Indebtedness of any Wholly Owneda Restricted Subsidiary owing to Rent-A-Centerand held by the Company or any other Restricted Subsidiary. However,Subsidiary; provided, however,
(a) if the Company is the obligor on Indebtedness owing to a Non-Guarantor Subsidiary, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes;
(b) if a Guarantor is the obligor on such Indebtedness and a Non-Guarantor Subsidiary is the obligee, such Indebtedness is subordinated in right of payment to the Guarantees of such Guarantor; and
(c)(i) any subsequent issuance or transfer of any Capital Stock or any other event resultingwhich results in any such Wholly OwnedIndebtedness being beneficially held by a Person other than the Company or a Restricted Subsidiary ceasingof the Company; and
(ii) any sale or other transfer of any such Indebtedness to a Person other than the Company or a Restricted Subsidiary of the Company shall be a Wholly Owned Subsidiary or any other
subsequent transferdeemed, in each case, to constitute an Incurrence of such Indebtedness exceptby the Company or such Subsidiary, as the case may be.
37
(6) Indebtedness of Persons Incurred and outstanding on the date on which such Person became a Restricted Subsidiary or was acquired by, or merged into, the Company or any Restricted Subsidiary (other than Indebtedness Incurred (a) to Rent-A-Centerprovide all or any portion of the funds utilized to consummate the transaction or series of related transactions pursuant to which such Person became a Restricted Subsidiary or was otherwise acquired by the Company or (b) otherwise in connection with, or in contemplation of, such acquisition); provided, however, that at the time such Person is acquired (and after giving pro forma effect thereto), either
(a) the Company would have been able to Incur $1.00 of additional Indebtedness pursuant to the first paragraph of this covenant after giving effect to the Incurrence of such Indebtedness pursuant to this clause (6); or
(b) the Consolidated Coverage Ratio of the Company and its Restricted Subsidiaries is higher than such ratio immediately prior to such acquisition or merger.
(7) Indebtedness under Hedging Obligations that are Incurred in the ordinary course of business (and not for speculative purposes);
(8) (a) Indebtedness (including Capitalized Lease Obligations and Attributable Indebtedness) of the Company or a Wholly OwnedRestricted Subsidiary willIncurred to finance all or any part of the purchase, lease, construction or improvement of any property, plant or equipment used or to be deemed an incurrenceused in the business of Indebtedness by
Rent-A-Centerthe Company or such Restricted Subsidiary inwhether through the amount remaining
outstanding after such issuancedirect purchase, lease, construction or transferimprovement of such securities;
-property, plant or equipment, including any such Indebtedness representedassumed in connection with the purchase of such property, plant or equipment or secured by the notes offered herebya Lien thereon prior to such purchases, such property, plant or equipment, and the existing
notes issued under the Existing Indenture;
- Anyany Indebtedness and related Refinancing Indebtedness, other than the
Indebtedness described in any of the situations above,Company or a Restricted Subsidiary which serves to refund or refinance any Indebtedness Incurred pursuant to this clause (8)(a), in an aggregate outstanding onprincipal amount which, when taken together with the principal amount of all other Indebtedness Incurred pursuant to this clause (8)(a) and then outstanding, will not exceed $40.0 million, at any time outstanding (determined as of the date of such Incurrence;
(9) Indebtedness Incurred by the indenture,Company or its Restricted Subsidiaries (a) in respect of workers’ compensation claims, health, disability or other employee benefits or property, casualty or liability insurance, self-insurance obligations, performance, bid, surety, appeal and anysimilar bonds and completion Guarantees (not for borrowed money) provided in the ordinary course of business, including obligations in respect of letters of credit, bankers’ acceptances or other similar instruments issued for such purposes to the extent none of such instruments is drawn upon, or if drawn upon, is reimbursed no later than the fifth Business Day following receipt of demand for reimbursement following payment on the letter of credit, bankers’ acceptance or similar instrument and (b) arising from an obligation to repay customer deposits received in the ordinary course;
(10) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred or assumed in connection with the disposition of any business or assets of the Company or any business, assets or Capital Stock of a Restricted Subsidiary, other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or a Subsidiary for the purpose of financing such acquisition; provided that:
(a) the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds, including non-cash proceeds (the Fair Market Value of such non-cash proceeds being measured at the time received and without giving effect to subsequent changes in value), actually received by the Company and its Restricted Subsidiaries in connection with such disposition; and
(b) such Indebtedness is not reflected on the balance sheet of the Company or any of its Restricted Subsidiaries (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (10));
38
(11) Indebtedness described;
-arising from the honoring by a bank or other financial institution of a check, draft or similar instrument, including electronic transfers, wire transfers and credit card payments (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business (except in the form of lines of credit);provided,however, that such Indebtedness is extinguished within five Business Days of Rent-A-CenterIncurrence;
(12) the Incurrence or issuance by the Company or any Restricted Subsidiary in the form of
Capitalized Lease Obligations, Purchase Money Obligations or Attributable
Debt, and any related
65
Refinancing Indebtedness that serves to refund or refinance any Indebtedness Incurred as permitted under the first paragraph of this covenant and clauses (2), (3), (6), and this clause (12) of the second paragraph of this covenant, or any Indebtedness issued to so refund or refinance such Indebtedness, including additional Indebtedness Incurred to pay premiums (including reasonable, as determined in good faith by the Company, tender premiums), defeasance costs, accrued interest and fees and expenses in connection therewith;
(13) (a) Indebtedness of the Company and of any Restricted Subsidiary owing to the Insurance Subsidiary in an aggregate amount not to exceed 2.5% of
Consolidated Tangible Assets outstanding$65.0 million at any one time;
-time outstanding that cannot be subordinated to the obligations of the Company or such Restricted Subsidiary under the Indenture for regulatory reasons or would cause the carrying value for regulatory valuation purposes to be decreased; and
(b) Indebtedness of the Insurance Subsidiary permitted by clause (13) of the second paragraph under Hedging Obligations, as long as such Hedging
Obligations are entered into for bona fide hedging purposes of
Rent-A-Center“— Limitation on restricted payments” below);
(14) Guarantees by the Company or any Restricted Subsidiary and are eitherSubsidiaries in the ordinary
courserespect of business or are required by the Senior Credit Facility;
- Indebtedness evidenced by letters of credit issued in the ordinary course
of business of Rent-A-Center to secure workers' compensation and other
insurance coverage;
- Guarantees of Rent-A-Center foroutstanding Indebtedness of franchisees not to exceed $50(without duplication) a principal amount of $100.0 million outstanding at any one time;time outstanding;
(15) Indebtedness of the Company and - Indebtedness, which may include Bank Indebtedness,its Restricted Subsidiaries pursuant to lines of credit entered into in connection with cash management facilities and in an aggregate principal amount (for the Company and all Restricted Subsidiaries) not to exceed $25$30.0 million outstanding at any one time.
(C) Neither Rent-A-Center nortime, including the line of credit between RAC East, the Company, certain Subsidiaries of the Company and INTRUST Bank, N.A.;
(16) Indebtedness of Foreign Subsidiaries of the Company in an aggregate outstanding principal amount which will not exceed $75.0 million at any time outstanding;
(17) Indebtedness of the Company to the extent that the net proceeds thereof are promptly deposited to defease or to satisfy and discharge the Notes; and
(18) in addition to the items referred to in clauses (1) through (17) above, Indebtedness of the Company and the Restricted Subsidiary maySubsidiaries in an aggregate outstanding principal amount which, when taken together with the principal amount of all other Indebtedness Incurred pursuant to this clause (18) and then outstanding, will not exceed $100.0 million.
The Company will not Incur any Indebtedness pursuant tounder the preceding paragraph (B) above that permits Refinancing
Indebtedness related to Indebtedness that constitutes Subordinated Obligations, if the proceeds of such Refinancing Indebtednessthereof are used, directly or indirectly, to Refinancerefinance any Subordinated Obligations of the Company unless such
Subordinated Obligations. However, such Indebtedness is permitted if the
Refinancing Indebtedness will be subordinated to the notesNotes to at least to the same extent as such Subordinated Obligations. In addition, no SubsidiaryNo Guarantor may incurwill Incur any Indebtedness pursuant tounder the preceding paragraph (B) above that permits Refinancing Indebtedness with respect to
Indebtedness constituting Guarantor Subordinated Obligations, if the proceeds of
such Refinancing Indebtednessthereof are used, directly or indirectly, to Refinance suchrefinance any Guarantor Subordinated Obligations of such Subsidiary Guarantor. However,Guarantor unless such Indebtedness is
permitted if the Refinancing Indebtedness will be subordinated to the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee to at least the same extent as such Guarantor Subordinated Obligations. (D) IfNo Restricted Subsidiary (other than a Guarantor) may Incur any Indebtedness if the proceeds are used to refinance Indebtedness of the Company or a Guarantor.
For purposes of determining compliance with, and the outstanding principal amount of any particular Indebtedness Incurred pursuant to and in compliance with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in the first or second paragraph (B) above, then for purposes of determining
compliance with this covenant including(or any combination thereof), the outstanding principal amount of any
particular Indebtedness relating to this covenant:
- Rent-A-Center will haveCompany, in its sole discretion, towill classify such item of Indebtedness. Rent-A-Center isIndebtedness (or any one or more portions thereof) on the date of Incurrence and may later re-classify such item of Indebtedness (or any one or more portions thereof) in any manner that complies with the first or second paragraph of this covenant (or any combination thereof) and only be required only to include the amount and type of such Indebtedness in one of such clauses; provided that all
39
Indebtedness outstanding on the Issue Date under the Senior Credit Facility shall be deemed Incurred under clause (1) of the second paragraph of this covenant and -not the first paragraph or clause (3) of the second paragraph of this covenant and may not later be reclassified;
(2) Guarantees of, or obligations in respect of letters of credit relating to, Indebtedness that is otherwise included in the determination of a particular amount of Indebtedness shall not be included;
(3) if obligations in respect of letters of credit are Incurred pursuant to a Debt Facility and are being treated as Incurred pursuant to clause (1) of the second paragraph above and the letters of credit relate to other Indebtedness, then such other Indebtedness shall not be included;
(4) the principal amount of any Disqualified Stock of the Company or a Restricted Subsidiary, or Preferred Stock of a Non-Guarantor Subsidiary, will be equal to the greater of the maximum mandatory redemption or repurchase price (not including, in either case, any redemption or repurchase premium) or the liquidation preference thereof;
(5) Indebtedness permitted by this covenant need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this covenant permitting such Indebtedness; and
(6) the amount of Indebtedness issued at a price that is less than the principal amount of such Indebtedness shallthereof will be equal to the amount of the liability attributable to such Indebtednessin respect thereof determined in accordance with GAAP.
(E) Rent-A-Center
Accrual of interest, accrual of dividends, the accretion of accreted value, the amortization of debt discount, the payment of interest in the form of additional Indebtedness and the payment of dividends in the form of additional shares of Preferred Stock or Disqualified Stock will not be deemed to be an Incurrence of Indebtedness for purposes of this covenant. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof in the case of any Indebtedness issued with original issue discount or the aggregate principal amount outstanding in the case of Indebtedness issued with interest payable in kind and (ii) the principal amount or liquidation preference thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness.
In addition, the Company will not permit any of its Unrestricted SubsidiarySubsidiaries to incurIncur any Indebtedness or issue any shares of Disqualified Stock, other than Non-Recourse Debt. However, ifIf at any such Indebtedness
ceases to be Non-Recourse Debt, then such event shall constitutetime an Incurrence
of Indebtedness by Rent-A-Center orUnrestricted Subsidiary becomes a Restricted Subsidiary.
LIMITATION ON LAYERING
Rent-A-Center will not incurSubsidiary, any Indebtedness that is expressly subordinate
in right of payment to any Senior Indebtedness, unless such Indebtedness is
Senior Subordinated Indebtedness or is subordinated in right of payment to
Senior Subordinated Indebtedness by contract.
In addition, no Subsidiary Guarantor will incur any Indebtedness that is
expressly subordinate in right of payment to any Guarantor Senior Indebtedness,
unless such Indebted-
66
ness is Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor,
or is subordinated in right of payment to Guarantor Senior Subordinated
Indebtedness by contract.
Unsecured indebtedness is not considered subordinate to Secured
Indebtedness merely because it is unsecured, and Indebtedness that is not
guaranteed by a particular person is notshall be deemed to be subordinateIncurred by a Restricted Subsidiary as of such date (and, if such Indebtedness is not permitted to be Incurred as of such date under this “— Limitation on indebtedness” covenant, the Company shall be in Default of this covenant).
For purposes of determining compliance with any U.S. dollar-denominated restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was Incurred, in the case of term Indebtedness, or first committed, in the case of revolving credit Indebtedness; provided that if such Indebtedness is Incurred to refinance other Indebtedness denominated in a foreign currency, and such refinancing would cause the applicable U.S. dollar-denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such refinancing, such U.S. dollar-denominated restriction shall be deemed not to have been exceeded so long as the principal amount of such Refinancing Indebtedness does not exceed the principal amount of such Indebtedness being refinanced. Notwithstanding any other provision of this covenant, the maximum amount of Indebtedness that the Company may Incur pursuant to this covenant shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rate of currencies. The principal amount of any Indebtedness Incurred to refinance other Indebtedness, if Incurred in a different currency from the Indebtedness being refinanced, shall be calculated based on the currency exchange rate applicable to the currencies in which such Refinancing Indebtedness is so guaranteed, merely because itdenominated that is in effect on the date of such refinancing.
Limitation on Restricted Payments
The Company will not, guaranteed.
LIMITATION ON RESTRICTED PAYMENTS
(A) Rent-A-Center and will not permit any of its Restricted Subsidiaries, are not permitted to take
the following actions:
-directly or indirectly, to:
(1) declare or pay any dividend or make any distribution (whether made in cash, securities or other property) on or within respect toof its or any of its Restricted Subsidiaries’ Capital Stock including payments(including any payment in
40
connection with any merger or consolidation involving Rent-A-Center. However,the Company or any of its Restricted Subsidiaries) other than:
(a) dividends or distributions are permitted if they are either payable solely in Capital Stock otherof the Company (other than Disqualified Stock,Stock); and
(b) dividends or payable to
Rent-A-Center or any Restricted Subsidiary. If suchdistributions by a Restricted Subsidiary, so long as, in the case of any dividend or distribution payable on or in respect of any Capital Stock issued by a Restricted Subsidiary that is not a Wholly OwnedWholly-Owned Subsidiary, then the distributionsCompany or dividends may be payable tothe Restricted Subsidiary holding such Capital Stock receives at least its other shareholders only if on a pro rata basis, measured by value;
-share of such dividend or distribution;
(2) purchase, redeem, retire or otherwise acquire for value, including in connection with any merger or consolidation, any Capital Stock of Rent-A-Centerthe Company or any Restricted Subsidiarydirect or indirect parent of the Company held by Persons other than Rent-A-Centerthe Company or anothera Restricted Subsidiary;
-Subsidiary (other than in exchange for Capital Stock of the Company (other than Disqualified Stock));
(3) make any principal payment on, or purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to any Subordinated Obligation before scheduled maturity, scheduled repayment or installment, scheduled sinking fund payment provided that
this restriction does not applyor scheduled maturity, any Subordinated Obligations or Guarantor Subordinated Obligations, other than:
(a) Indebtedness of the Company owing to and held by any Guarantor or Indebtedness of a Guarantor owing to and held by the Company or any other Guarantor permitted under clause (5) or (13) of the second paragraph of the covenant “— Limitation on indebtedness” or
(b) the purchase, repurchase, redemption, defeasance or other acquisition madeor retirement of Subordinated Obligations or Guarantor Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition;purchase, repurchase, redemption, defeasance or
- make certain Restricted Payments, which are defined as any dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition retirement or retirement); or
(4) make any Restricted Investment,
(all such payments and other actions referred to in clauses (1) through (4) above (other than any exception thereto) shall be referred to as a Permitted
Investment
if“Restricted Payment”), unless, at the time Rent-A-Centerof and after giving effect to such Restricted Payment:
(a) no Default exists or its Restricted Subsidiary makesimmediately after giving effect thereto would exist;
(b) immediately after giving effect to such transaction on a Restricted Payment:
- a Default occurs and continues to occur or would result therefrom;
- Rent-A-Centerpro forma basis, the Company could not incur at leastIncur $1.00 of additional Indebtedness under paragraph (A)the provisions of the covenant described in
"Limitationfirst paragraph of Indebtedness;" or
-the “— Limitation on indebtedness” covenant; and
(c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made aftersubsequent to the dateIssue Date (excluding Restricted Payments made pursuant to clauses (1), (2), (3), (5), (8), (9), (10), (11), (12), (13), (14), (15) and (17) of the Existing
Indenturenext succeeding paragraph) would not exceed the sum of:
-of (without duplication):
(i) 50% of the Consolidated Net Income accrued duringfor the period treated(treated as one accounting period,period) from the endbeginning of the most
recent fiscal quarter ending beforein which the date of the Existing
IndentureIssue Date occurs to the end of the most recent fiscal quarter ending beforeprior to the date of such Restricted Payment for which consolidated financial statements of Rent-A-Center are available or, if(or, in case such Consolidated Net Income is a deficit, then minus 100% of such deficit;
-deficit);plus
(ii) 100% of the aggregate Net Cash Proceeds and the Fair Market Value of marketable securities or other property received by Rent-A-Centerthe Company from issuingthe issue or sellingsale of its Capital Stock other(other than Disqualified Stock, afterStock) or other capital contributions subsequent to the date of the Existing Indenture. This does not
apply toIssue Date, other than:
(x) Net Cash Proceeds received from an issuance or sale of such Capital Stock to a Restricted Subsidiary as
long asof the Company or to an employee stock ownership plan, option plan or similar trust to the extent such issuance or sale is to an employee stock ownership plan or similar trust is financed by loans from or Guaranteed by the Company or any Restricted Subsidiary unless such loans have been repaid with cash on or prior to the date of determination); and
41
(y) Net Cash Proceeds received by the Company from the issue and sale of its Capital Stock or capital contributions to the extent applied to redeem Notes in compliance with the provisions set forth under the second paragraph of “— Optional redemption;”plus
(iii) the amount by which Indebtedness of the Company or its Restricted Subsidiaries is reduced on the Company’s consolidated balance sheet upon the conversion or exchange (other than debt held by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company or its Restricted Subsidiaries convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair market value of any other trust establishedproperty, distributed by Rent-A-Centerthe Company upon such conversion or exchange);plus
(iv) the amount equal to the net reduction in Restricted Investments made by the Company or any of its 67
Restricted Subsidiaries forin any Person resulting from:
(x) repurchases or redemptions of such Restricted Investments by such Person, proceeds realized upon the benefitsale of their employees,such Restricted Investment to an unaffiliated purchaser, repayments of loans or advances, payments of interest and dividends or other transfers of assets (including by way of dividend or distribution) by such Person to the extent
thatCompany or any Restricted Subsidiary (other than for reimbursement of tax payments); or
(y) the purchase by such planredesignation of Unrestricted Subsidiaries as Restricted Subsidiaries or trust is financed by
Indebtednessthe merger or consolidation of such planan Unrestricted Subsidiary with and into the Company or trust and for which Rent-A-Center
is liableany of its Restricted Subsidiaries (valued in each case as a guarantor or otherwise, such aggregate amount of
Net Cash Proceeds shall be limited to the aggregate amount of
principal payments made by such plan or trust with respect to
such Indebtedness; and
-provided in the casedefinition of the disposition or repayment of any Investment
constituting a Restricted Payment, without duplication of any
amount deducted in calculating“Investment”) not to exceed the amount of Investments atpreviously made by the Company or any time outstandingRestricted Subsidiary in such Unrestricted Subsidiary, which amount in each case under this clause (iv) was included in the calculation of the amount of Restricted Payments,
anPayments; provided, however, that no amount equalwill be included under this clause (iv) to the lesser of the return of capital of
similar repayment with respect to such Investment, or the
initial amount of such Investment,extent it is already included in either case, less the
cost of the disposition of such Investment.
(B) Consolidated Net Income.
The provisions of the preceding paragraph (A) above will not prohibit the following
actions:
-prohibit:
(1) any purchase, repurchase, redemption, repurchase, defeasance retirement or other acquisition or retirement of Capital Stock, of Rent-A-CenterDisqualified Stock or Subordinated Obligations or Guarantor Subordinated Obligations made by exchange including any such exchange pursuant to
the exercise of a conversion right or privilege in connection with
which cash is paid in lieu of the issuance of fractional shares, for, or out of the proceeds of the substantially concurrent issuance or sale of, Capital Stock of Rent-A-Center, otherthe Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary or an employee stock ownership plan or othersimilar trust establishedto the extent such sale to an employee stock ownership plan or similar trust is financed by Rent-A-Centerloans from or Guaranteed by the Company or any Restricted Subsidiary unless such loans have been repaid with cash on or prior to the date of its Subsidiaries,determination); provided, that:
- such purchase, redemption, repurchase, defeasance, retirement
or other acquisition will be excluded in subsequent
calculations of the amount of Restricted Payments; and
-however, that the Net Cash Proceeds or reduction of Indebtedness from such sale of Capital Stock will be excluded in calculations under paragraph (A)
above;
-from clause (c)(ii) of the preceding paragraph;
(2) any purchase, repurchase, redemption, repurchase, defeasance retirement or other acquisition or retirement of Subordinated Obligations or Guarantor Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent issuance or sale of, Subordinated Obligations or any purchase, repurchase, redemption, defeasance or other acquisition or retirement of Rent-A-Center thatGuarantor Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent issuance or sale of, Guarantor Subordinated Obligations so long as such refinancing Subordinated Obligations or Guarantor Subordinated Obligations are permitted to be Incurred pursuant to the covenant described under “— Limitation on indebtedness” and constitute Refinancing Indebtedness;
(3) any purchase, repurchase, redemption, defeasance or other acquisition or retirement of Disqualified Stock of the Company or a Restricted Subsidiary made by exchange for, or out of the proceeds of the substantially concurrent issuance or sale of, Disqualified Stock of the Company or such Restricted Subsidiary, as the case may be, so long as such refinancing Disqualified Stock is permitted to be Incurred bypursuant to the covenant described under "Limitation“— Limitation on Indebtedness." However, suchindebtedness” and constitutes Refinancing Indebtedness;
(4) the purchase, repurchase, redemption, repurchase, defeasance retirement or other acquisition shall be excluded in subsequent calculationsor retirement for value of any Subordinated Obligation or Guarantor Subordinated Obligations (a) at a purchase price not greater than 101% of the principal amount of Restricted Payments;
- anysuch Subordinated Obligation or Guarantor Subordinated Obligations in the event of
42
a Change of Control in accordance with provisions similar to the “— Repurchase at the option of holders — Change of control” covenant or (b) at a purchase price not greater than 100% of the principal amount thereof in accordance with provisions similar to the “— Repurchase at the option of holders — Asset sales” covenant;providedthat, prior to or simultaneously with such purchase, repurchase, redemption, repurchase, defeasance retirement or other acquisition or retirement, the Company has made the Change of Control Offer or Asset Disposition Offer, as applicable, as provided in such covenant with respect to the Notes and has completed the repurchase or redemption of all Notes validly tendered for payment in connection with such Change of Control Offer or Asset Disposition Offer;
(5) any purchase or redemption of Subordinated Obligations or Guarantor Subordinated Obligations from Net Available Cash to the extent permitted byunder “— Repurchase at the covenant described under "Limitation on Salesoption of Assets." However, such purchase, redemption, repurchase,
defeasance, retirement or other acquisition shall be excluded in
subsequent calculationsholders — Asset sales”;
(6) the declaration of any dividend and the amount of Restricted Payments;
- payment of dividendsany dividend within 60 days after the date of declaration, of
such dividends, if at thesuch date of declaration such dividenddividends would have complied with paragraph (A) above. However, such dividend shall be
included in subsequent calculations ofthis provision;
(7) the amount of Restricted
Payments;
- any purchase, redemption or redemption of any shareother acquisition, cancellation or retirement for value of Capital Stock or equity appreciation rights of Rent-A-Center fromthe Company or any direct or indirect parent of the Company held by any existing or former employees, management, directors or consultants of Rent-A-Center and its Subsidiaries
pursuant tothe Company or any Subsidiary of the Company or their assigns, estates or heirs, in each case in connection with the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management
in an aggregate amount aftersuch Person approved by the dateBoard of Directors; provided that such Capital Stock or equity appreciation rights were received for services related to, or for the benefit of, the Existing IndentureCompany and its Restricted Subsidiaries; and provided, further, that such redemptions or repurchases pursuant to this clause will not in
excess of $2.5exceed $5.0 million in the aggregate during any fiscal year, plusconsecutive twelve-month period (plus any
68
unused amounts under this clause (7) from prior fiscal years. However,years), although such purchasesamount in any such period may be increased by an amount not to exceed:
(a) the Net Cash Proceeds from the sale of Capital Stock (other than Disqualified Stock) of the Company and, to the extent contributed to the Company, Capital Stock of any of the Company’s direct or redemptionsindirect parent companies, in each case to existing or former employees or members of management of the Company, any of its Subsidiaries or any of its direct or indirect parent companies that occurs after the Issue Date, to the extent the Net Cash Proceeds from the sale of such Capital Stock have not otherwise been applied to the payment of Restricted Payments (provided that the Net Cash Proceeds from such sales or contributions will be excluded in subsequent calculationsfrom clause (c)(ii) of the preceding paragraph);plus
(b) the cash proceeds of key man life insurance policies received by the Company or its Restricted Subsidiaries after the Issue Date;less
(c) the amount of any Restricted Payments;Payments previously made with the Net Cash Proceeds described in clauses (a) and (b) of this clause (7);
(8) the declaration and payment of dividends to holders of any class or -series of Disqualified Stock of the Company issued in accordance with the terms of the Indenture to the extent such dividends are included in the definition of “Consolidated Interest Expense;”
(9) repurchases of Capital Stock deemed to occur upon the exercise of stock options, warrants, other rights to purchase Capital Stock or other convertible securities if such Capital Stock represents a portion of the exercise price thereof;
(10) the purchase or redemption of any shares of Capital Stock of the Company, for cash, in an aggregate amount (net of related costs and expenses) not in excess of $100.0 million subsequent to the Issue Date;
(11) the distribution, by dividend or otherwise, of shares of Capital Stock of Unrestricted Subsidiaries (other than Unrestricted Subsidiaries the primary assets of which are cashand/or cash equivalents);
(12) in addition to the items referred to in clauses (1) through (11) above and clauses (13) through (17) below, Restricted Payments in an aggregate amount, which when taken together with all other Restricted Payments made pursuant to this clause (12) (as reduced by the amount of capital returned from any such
43
Restricted Payments that constituted Restricted Investments in the form of cash and Cash Equivalents (exclusive of items reflected in Consolidated Net Income)) not to exceed $75.0 million;
(13) Investments in the Insurance Subsidiary to the extent required to meet regulatory capital guidelines, policies or rules in an amount not to exceed at any time outstanding $35.0 million in the aggregate;
(14) the Company may repurchase shares of Rent-A-Centerits common stock from the Insurance Subsidiary in an amount not to exceed (when taken together with the amount of cash dispositions made pursuant to clause (17) of the definition of “Asset Disposition”) the amount necessary to (i) pay operating costs and expenses of the Insurance Subsidiary incurred in the ordinary course of business (not to exceed $250,000 per fiscal year of the Company) and (ii) permit the Insurance Subsidiary to make payments on insurance claims of the Borrowerand/or any of its Subsidiaries with the proceeds of such repurchase;
(15) the Insurance Subsidiary may purchase shares of the Common Stock of the Company from the Company or any Subsidiary;
(16) the declaration and payment of dividends on the Company’s Capital Stock in an aggregate amount during any fiscal year not to exceed $20.0 million; and
(17) Restricted Payments in an aggregate amount not to exceed $50.0 million in any fiscal year of the amount by whichCompany (with any unutilized amounts carried forward to the next fiscal year of the Company, but no further);provided, that, immediately after giving pro forma effect thereto (including the application of the proceeds thereof), the Company would have had a Leverage Ratio of less than 2.5 to 1.0.
provided, however, that at the time of and immediately after giving effect to, any Restricted Payment permitted under clauses (5), (7), (8), (10), (12), (16) and (17), no Default shall have occurred and be continuing or would occur as a consequence thereof.
In determining whether any Restricted Payment is permitted by the foregoing covenant, the Company may allocate or reallocate, at anytime and from the issuancetime to time, all or any portion of such Restricted Payment among all clauses of the Convertible Preferred Stock exceeds $235 million. However,preceding paragraph (as of the aggregateIssue Date, such clauses being clauses (1) through (17)) or among such clauses and the first paragraph of this covenant, provided that at the time of such allocation or reallocation, all such Restricted Payments, or allocated portions thereof, would be permitted under the various provisions of the foregoing covenant.
The amount of repurchases made pursuant to this clause shall not
exceed $25 million fromall Restricted Payments (other than cash) will be the Fair Market Value on the date of such Restricted Payment of the Existingassets or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment. The amount of all Restricted Payments paid in cash shall be its face amount. Not later than 30 days following the making any Restricted Payment, the Company shall deliver to the Trustee an Officers’ Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant “— Limitation on restricted payments” were computed, together with a copy of any fairness opinion or appraisal required by the Indenture.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES
As of the Issue Date, all of the Company’s Subsidiaries will be Restricted Subsidiaries. The BoardCompany will not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the last sentence of Directorsthe definition of Rent-A-Center may designate“Unrestricted Subsidiary.” For purposes of designating any Restricted Subsidiary as an Unrestricted Subsidiary, if such designation would not cause a
default. For purposes of making such determination, all outstanding Investments by Rent-A-Centerthe Company and its Restricted Subsidiaries except(except to the extent repaid in
cash,repaid) in the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation, and will reduce the amount available for Restricted
Payments under clause three of paragraph (A) of the covenant described in
"Limitation on Restricted Payments."
All such outstanding Investments will be deemed to constitute Investments in an amount equal todetermined as set forth in the greaterdefinition of the fair market value or the book value of
such Subsidiary at the time of such designation.“Investment.” Such Designationdesignation will be permitted only if sucha Restricted Payment in such amount would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Neither Rent-A-Center norUnrestricted Subsidiaries will not be subject to any of the restrictive covenants set forth in the Indenture.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, Incur, assume or permit to exist any Lien (other than Permitted Liens) upon any of its property or assets (including Capital Stock of Subsidiaries), or income or profits therefrom, including any collateral assignment or conveyance of
44
any right to receive income therefrom, whether owned on the Issue Date or acquired after that date, which Lien is securing any Indebtedness, unless contemporaneously with the Incurrence of such Liens:
(1) in the case of Liens securing Subordinated Obligations or Guarantor Subordinated Obligations, the Notes and related Guarantees are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens; or
(2) in all other cases, the Notes and related Guarantees are equally and ratably secured by Lien on such property, assets or proceeds or are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens.
Any Lien created for the benefit of Holders pursuant to this covenant shall be automatically and unconditionally released and discharged upon the release and discharge of each of the Liens described in clauses (1) and (2) above.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction unless:
(1) the Company or such Restricted Subsidiary could have Incurred Indebtedness in an amount equal to the Attributable Indebtedness in respect of such Sale/Leaseback Transaction pursuant to the covenant described under “— Limitation on indebtedness;”
(2) the Company or such Restricted Subsidiary would be permitted to create a Lien on the property subject to such Sale/Leaseback Transaction under the covenant described under “— Limitation on liens;” and
(3) the Sale/Leaseback Transaction is treated as an Asset Sale and all of the conditions of the Indenture described under “— Repurchase at the option of holders — Asset sales” (including the provisions concerning the application of Net Available Cash) are satisfied with respect to such Sale/Leaseback Transaction.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary willto, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to take the following actions:
-to:
(1) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness or other obligations owed to Rent-A-Center;
-the Company or any Restricted Subsidiary (it being understood that the priority of any Preferred Stock in receiving dividends or liquidating distributions prior to dividends or liquidating distributions being paid on Common Stock shall not be deemed a restriction on the ability to make distributions on Capital Stock);
(2) make any loans or advances to Rent-A-Center;the Company or -any Restricted Subsidiary (it being understood that the subordination of loans or advances made to the Company or any Restricted Subsidiary to other Indebtedness Incurred by the Company or any Restricted Subsidiary shall not be deemed a restriction on the ability to make loans or advances); or
(3) sell, lease or transfer any of its property or assets to Rent-A-Center.
However, this prohibition doesthe Company or any Restricted Subsidiary (it being understood that such transfers shall not apply to:
-include any restrictiontype of transfer described in clause (1) or (2) above).
The preceding provisions will not prohibit encumbrances or restrictions existing under or by reason of:
(a) contractual encumbrances or restrictions pursuant to an agreement(i) the Senior Credit Facility and related documentation (including agreements related to banking services, cash management services and Hedging Obligations) and (ii) other agreements or instruments in effect at or entered into on the dateIssue Date;
(b) the Indenture, the Notes, the Exchange Notes and the respective Guarantees and documentation related to each of the Existing Indenture, including, without limitation, the Senior
Credit Facility;
-foregoing;
45
(c) any restriction with respect to a Restricted Subsidiary that is either:
- pursuant to an agreement, organizational or governance document or other instrument of, or relating to any Indebtedness Incurredasset of, a Person acquired (by merger, consolidation or otherwise) by athe Company or any of its Restricted Subsidiary beforeSubsidiaries which is in existence at the date on which such Restricted
Subsidiary was acquired by Rent-A-Center, or of another Person that is
assumed by Rent-A-Center or a Restricted Subsidiary in connection with
the acquisition of assets from, or merger or consolidation with, such
Person and is outstanding on the datetime of such acquisition merger(but not created in contemplation thereof), which encumbrance or consolidation. However, this doesrestriction is not include Indebtedness Incurred
either as consideration in,applicable to any Person, or for the provisionproperties or assets of any portionPerson, other than the Person and its Subsidiaries, or the property or assets of the fundsPerson and its Subsidiaries, so acquired (including after-acquired property);
(d) any amendment, restatement, modification, renewal, supplement, refunding, replacement or credit support usedrefinancing of (i) an agreement, instrument or document referred to consummate,in clause (a), (b) or (c) of this paragraph or this clause (d); provided, however, that the transactionencumbrances or seriesrestrictions effected by such amendments, restatements, modifications, renewals, supplements, refundings, replacements or refinancings are, in the good faith judgment of related transactions pursuantthe Company, no more restrictive (taken as a whole with all other encumbrances and restrictions contained in such agreement, instrument or document) than the encumbrances and restrictions contained the agreements referred to whichin clause (a), (b) or (c) of this paragraph on the Issue Date or the date such Restricted Subsidiary became a Restricted Subsidiary or was merged into a Restricted Subsidiary, whichever is applicable;
(e) in the case of clause (3) of the first paragraph of this covenant, Liens permitted to be Incurred under the provisions of the covenant described under “— Limitation on liens” that limit the right of the debtor to dispose of the assets securing such Indebtedness;
(f) (i) purchase money obligations for property acquired by Rent-A-Center,in the ordinary course of business and (ii) Capitalized Lease Obligations permitted under the Indenture, in each case, that impose encumbrances or such acquisitionrestrictions of the nature described in clause (3) of the first paragraph of this covenant on the property so acquired;
(g) contracts for the sale of assets merger(including Sale/Leaseback Transactions) or consolidation; or
- pursuant to any agreement, not relating to any Indebtedness, existing
when a Person becomes a Subsidiary of Rent-A-Center or when such
agreement is acquired by 69
Rent-A-Center or any Subsidiary thereof, that is not created in
contemplation of such Person becoming such a Subsidiary or such
acquisition. For purposes of this clause, if another Person is the
Successor Company, any Subsidiary or agreement thereof shall be deemed
acquired or assumed by Rent-A-Center when such Person becomes the
Successor Company.
- any restrictionCapital Stock, including customary restrictions with respect to a Restricted Subsidiary of the Company pursuant to an agreement (a "Refinancing Agreement") effecting a refinancing of
Indebtedness Incurred pursuant to, or that otherwise extends, renews,
refinances or replaces, an agreement referred to in this covenant (an
"Initial Agreement") or contained in any amendment to an Initial
Agreement. However, the restrictions contained in any such Refinancing
Agreement or amendment cannot be less favorable to the Holders of the
notes taken as a whole than restrictions contained in the Initial
Agreement or Agreements to which such Refinancing Agreement or amendment
relates;
- any restriction that is a customary restriction on subletting, assignment
or transfer of any property or asset that is subject to a lease, license
or similar contract, or the assignment or transfer of any lease, license
or other contract;
- any restriction by virtue of a transfer, agreement to transfer, option,
right, or Lien with respect to any property or assets of Rent-A-Center or
any Restricted Subsidiary not otherwise prohibited by the indenture;
- any restriction contained in mortgages, pledges or other agreements
securing Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restrictions restrict the transfer of the property subject
to such mortgages, pledges or other security agreements;
- any restriction pursuant to customary restrictions on dispositions of
real property interests set forth in any reciprocal easement agreements
of Rent-A-Center or any Restricted Subsidiary;
- any restriction with respect to a Restricted Subsidiary, or any of its
property or assets, imposed pursuant to an agreementhas been entered into for the sale or disposition of all or substantially alla portion of the Capital Stock or assets of such Restricted Subsidiary,Subsidiary;
(h) cash or other deposits or net worth or similar requirements imposed by customers, suppliers or landlords under contracts entered into in the propertyordinary course of business;
(i) any customary provisions in joint venture agreements relating to joint ventures and other similar agreements entered into in the ordinary course of business;
(j) any customary provisions in leases, subleases or assets that are subject to
such restriction, pendinglicenses and other agreements entered into by the closing of such sale or disposition; or
- any restriction on the transfer of property or assets required by any
regulatory authority having jurisdiction over Rent-A-CenterCompany or any Restricted Subsidiary in the ordinary course of business;
(k) applicable law or any of their businesses.
LIMITATION ON SALES OF ASSETS
Neither Rent-A-Center nor any Restricted Subsidiary will make any Asset
Disposition unless:
- Rent-A-Centerapplicable rule, regulation or such Restricted Subsidiary receives consideration,
including relief from, or the assumption of another Person for, any
liabilities, contingent or otherwise, at the time of such Asset
Disposition at least equal to the fair market value of the shares and
assets subject to such Asset Disposition. The Board of Directors shall
determine the fair market value, and their determination shall be
conclusive, including as to the value of all non-cash consideration;
- at least 75% of the consideration for any Asset Disposition received by
Rent-A-Center or such Restricted Subsidiary is in the form of cash.
However, in the case of an Asset Disposition of assets, consideration is
excluded if it is by way of relief from, or by any other person assuming
responsibility for, any liabilities, contingent or otherwise, which are
not Indebtedness;
70
- Rent-A-Center or such Restricted Subsidiary applies an amount equal to
100% of the Net Available Cash from such Asset Disposition in the
following manner:
- first, to the extent Rent-A-Center elects, or is required by the termsorder of any Senior Indebtednessarbiter, tribunal or Indebtedness, other than Preferred Stock,
of a Restricted Subsidiary, to prepay, repay or purchase senior
indebtedness or such Indebtedness of a Restricted Subsidiary, in each
case other than the Indebtedness owed to Rent-A-Center or a Restricted
Subsidiary, within 365 days after the date of such Asset Disposition;
- second, to the extent of the balance of Net Available Cash, to the
extent Rent-A-Center or such Restricted Subsidiary elects, to reinvest
in Additional Assets, including by means of an Investment in Additional
Assets by a Restricted Subsidiarygovernmental authority;
(l) consensual arrangements with Net Available Cash received by
Rent-A-Center or another Restricted Subsidiary, within 365 days from
the date of such Asset Disposition or, if such reinvestment in
Additional Assets is a project authorized by the Board of Directors
that will take longer than 365 days to complete, the period of time
necessary to complete such project;
- third, to the extent of the balance of such Net Available Cash
remaining (the "Excess Proceeds"), to make an offer to purchase notes
at a price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the purchase date, and, to the
extent required by the terms thereof, any other Senior Subordinated
Indebtedness subject to the agreements governing such other
Indebtedness at a purchase price of 100% of the principal amount
thereof plus accrued and unpaid interest to the purchase date; and
- fourth, to the extent of the balance of such Excess Proceeds, to fund
any general corporate purpose, including the repayment of Subordinated
Obligations. However, in connection with any prepayments, repayment or
purchase of Indebtedness pursuant to the first and third clauses above,
Rent-A-Center or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment, if any, to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased.
The provisions of this covenant do not require Rent-A-Center and the
Restricted Subsidiaries to apply any Net Available Cash in accordance with this
covenant, except to the extent that the aggregate Net Available Cash from all
Asset Dispositions that is not applied in accordance with this covenant exceeds
$10.0 million.
To the extent that the aggregate principal amount of the notes and other
Senior Subordinated Indebtedness tendered pursuant to an offer to purchase made
in accordance with the third clause above exceeds the amount of Excess Proceeds,
the Trustee will select the notes and Senior Subordinated Indebtedness to be
purchased on a pro rata basis, based on the aggregate principal amount thereof
surrendered in such offer to purchase. When such offer to purchase is complete,
the amount of Excess Proceeds shall be reset to zero.
For the purposes of this covenant, the following are deemed to be cash:
- Cash Equivalents;
- the assumption of Indebtedness of Rent-A-Center, other than Disqualified
Stock of Rent-A-Center, or any Restricted Subsidiary and the release of
Rent-A-Center or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition;
- Indebtedness of any Restricted Subsidiary that is no longer a Restricted
Subsidiary as a result of such Asset Disposition, to the extent that
Rent-A-Center and each other Restricted Subsidiary is released from any
Guarantee, or is the beneficiary of any
71
indemnityinsurance regulators with respect to suchthe Insurance Subsidiary; and
(m) other Indebtedness which is securedIncurred by any
letter of creditthe Company or cash equivalents, of such Indebtedness in connection
with such Asset Disposition;
- securities received by Rent-A-Center or any Restricted Subsidiary from
the transferee that are promptly converted by Rent-A-Center or such
Restricted Subsidiary into cash; and
- consideration consisting of Indebtedness of Rent-A-Center or any
Restricted Subsidiary.
Rent-A-Center will comply with any applicable requirements of Section 14(e)
of the Exchange Act and any other securities laws or regulations in connection
with the repurchase of notes pursuant to this covenant. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, Rent-A-Center will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
covenant as a result of such compliance.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither Rent-A-Center nor any of its Restricted Subsidiaries or Preferred Stock issued by a Guarantor, in each case in accordance with “— Limitation on indebtedness,” that, in the good faith judgment of the Company, are not more restrictive, taken as a whole, than those applicable to the Company in the Indenture or the Senior Credit Facility on the Issue Date (which results in encumbrances or restrictions comparable to those applicable to the Company at a Restricted Subsidiary level).
Limitation on Affiliate Transactions
The Company will engage innot, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or conduct any material transaction or series of transactions, including(including the purchase, sale, lease or exchange of any property or asset or the rendering of any serviceservice) with any Affiliate of Rent-A-Centerthe Company (an "Affiliate Transaction"“Affiliate Transaction”) on, unless:
(1) the terms that:
- taken as a wholeof such Affiliate Transaction are not materially less favorable to Rent-A-Centerthe Company or such Restricted Subsidiary, as the case may be, than the termsthose that could be obtained by the Company or such Restricted
46
Subsidiary in a comparable transaction at the time of such transaction in arm's-lengtharms-length dealings with a non-affiliate; and,
-Person that is not an Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate amountconsideration in excess of $10.0 million is notbut less than or equal to $25.0 million, an Officers’ Certificate certifying that such Affiliate Transaction satisfies the criteria in writing and has notclause (1) above);
(3) in the event such Affiliate Transaction involves an aggregate consideration in excess of $25.0 million but less than or equal to $75.0 million, the terms of such transaction have been approved by a majority of the members of the Board of Directors of the Company and by a majority of the members of such Board of Directors having no material
personal financial intereststake in such transaction, if any (and such majority or majorities, as the case may be, determines that such Affiliate Transaction. If there are
noTransaction satisfies the criteria in clause (1) above); and
(4) in the event such Board members, then Rent-A-Center must obtainAffiliate Transaction involves an aggregate consideration in excess of $75.0 million, the Company has received a Fairness Opinion.
A Fairness Opinion means anwritten opinion from an independent investment
banking firm or appraiser of national prominence which indicatesIndependent Financial Advisor that such Affiliate Transaction satisfied the terms of such transaction are fair to Rent-A-Center or such Restricted
Subsidiary from a financial point of view.
In addition,criteria in clause (1) above.
The preceding paragraph will not apply to:
(1) (a) any transaction involving aggregate payments(i) between or other
transfers by Rent-A-Centeramong the Company and one or more of its Restricted Subsidiaries in excess of $20.0
million will also requireor (ii) between or among Restricted Subsidiaries and (b) any Guarantees issued by the Company or a Fairness Opinion.
The provisionsRestricted Subsidiary for the benefit of the paragraph above shall not prohibitCompany or a Restricted Subsidiary, as the following
actions:
-case may be, in accordance with “— Limitation on indebtedness;”
(2) any (i) Restricted Payment permitted byto be made pursuant to the covenant described under "Limitation“— Limitation on Restricted Payments"restricted payments” and (ii) Permitted Investments (other than pursuant to clause (2) of the definition thereof);
(3) any issuance of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or as the funding of, employment agreements and other compensation arrangements, options to purchase Capital Stock of the Company, restricted stock plans, long-term incentive plans, stock appreciation rights plans, participation plans or similar employee benefits plansand/or indemnity provided on behalf of Officers, employees and directors (and, if required by the governance documents of the Company), approved by the Board of Directors of the Company;
(4) the payment of reasonable and customary fees paid to, and benefit arrangements and indemnity provided for or on behalf of, employees, officers, directors of the Company or any Permitted Investment;
- the performanceRestricted Subsidiary;
(5) loans or advances to employees, Officers or directors of the obligations of Rent-A-Center or a Restricted
Subsidiary under any employment contract, collective bargaining
agreement, service agreement, employee benefit plan, related trust
agreementCompany or any other similar arrangement entered intoRestricted Subsidiary in the ordinary course of business;
- paymentbusiness consistent with past practices, in an aggregate amount not in excess of compensation, performance$1.0 million (without giving effect to the forgiveness of indemnificationany such loan) at any time outstanding;
(6) any agreement as in effect as of the Issue Date, as these agreements may be amended, restated, modified, supplemented, extended, replaced or contribution
obligations;
-renewed from time to time, so long as any issuance, grantsuch amendment, restatement, modification, supplement, extension, replacement, or awardrenewal does not, in any material respect, adversely affect the rights of stock, optionsthe Holders as compared to, when taken as a whole, the terms of the agreements on the Issue Date, as determined in good faith by the Company;
(7) any agreement between any Person and an Affiliate of such Person existing at the time such Person is acquired by or other securities, to
employees, officersmerged into the Company or directors in the ordinary course of business;
- any transaction between Rent-A-Center and a Restricted SubsidiarySubsidiary; provided, that such agreement was not entered into contemplation of such acquisition or between Restricted Subsidiaries;
-merger, and any amendment thereto (so long as any such amendment does not, in any material respect, adversely affect the Transactions andrights of the incurrence and payment of all fees and expenses
payableHolders as compared to, when taken as a whole, the applicable agreement as in connection therewith as described in or contemplated by the
offering memorandum relating to the 1998 notes;
72
- any other transaction arising out of agreements existingeffect on the date of such acquisition or merger), as determined in good faith by the Existing Indenture; and
-Company;
(8) transactions with customers, clients, suppliers, joint-venture partners or other purchasers or sellers of goods or services, in each case in the ordinary course of the business of the Company and its Restricted Subsidiaries and otherwise not in breach of the terms of the Indenture; provided that in the reasonable determination of the members of the Board of Directors or senior management of the Company, such transactions are on terms nothat
47
are not materially less favorable to Rent-A-Centerthe Company or the relevant Restricted Subsidiary than those that could be obtained at the time of such timetransactions in arm's-length dealingsa comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person;
(9) any issuance or sale of Capital Stock (other than Disqualified Stock) to Affiliates of the Company and the granting of registration and other customary rights in connection therewith;
(10) transactions with a non-affiliate.
LIMITATION ON THE SALE OR ISSUANCE OF PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES
Rent-A-Center will not sellPerson that is an Affiliate of the Company solely because the Company owns Capital Stock in, or controls, such Person;
(11) any shares of Preferred Stock of atransaction between the Company or any Restricted Subsidiary and will not permitany Person, a director of which is also a director of the Company or a Restricted Subsidiary; provided that such director abstains from voting as a director in connection with the approval of the transaction; and
(12) transactions in which the Company or any Restricted Subsidiary delivers to issuethe Trustee a letter from an Independent Financial Advisor stating that such transaction is fair to the Company or such Restricted Subsidiary from a financial point of view or stating that the terms are not materially less favorable than those that might reasonably have been obtained by the Company or such Restricted Subsidiary in a comparable transaction at such time on an arms-length basis from a Person that is not an Affiliate.
SEC Reports
Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the SEC, and if not filed electronically with the SEC through EDGAR (or any successor system), the Company will file with the SEC (to the extent permitted by the Exchange Act), and make available to the Trustee and the Holders, without cost to any Holder, the annual reports and the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act with respect to U.S. issuers within the time periods specified therein (including any grace period provided byRule 12b-25 under the Exchange Act) or in the relevant forms.
In the event that the Company is not permitted to file such reports, documents and information with the SEC pursuant to the Exchange Act, the Company will nevertheless make available such Exchange Act reports, documents and information to the Trustee and the Holders as if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act within the time periods specified therein or in the relevant forms, which requirement may be satisfied by posting such reports, documents and information on its website within the time periods specified by this covenant; provided, that the Company shall not be required to furnish any information, certifications or reports required by Items 307 or 308 ofRegulation S-K prior to the commencement of the exchange offer or the effectiveness of the shelf registration statement.
If the Company has designated any of its Subsidiaries as an Unrestricted Subsidiary, and such Unrestricted Subsidiary, either individually or collectively, would otherwise have been a Significant Subsidiary (based upon the most recently delivered financial statements) then the quarterly and annual financial information required by the initial paragraph of this section shall include a reasonably detailed presentation, as determined in good faith by Senior Management of the Company, either on the face of the financial statements or in the footnotes to the financial statements and in the “Management’s discussion and analysis of financial condition and results of operations” section, of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries.
The filing requirements set forth above for the applicable period may be satisfied by the Company prior to the commencement of the exchange offer or the effectiveness of the shelf registration statement (each as described under “Exchange offer; registration rights”) by the filing with the SEC of the exchange offer registration statementand/or shelf registration statement, and any amendments thereto, with such financial information that satisfiesRegulation S-X of the Securities Act; provided that this paragraph shall not supersede or in any manner suspend or delay the Company’s reporting obligations set forth in the first three paragraphs of this covenant.
48
In addition, the Company and the Guarantors have agreed that they will make available to the Holders and to prospective investors, upon the request of such Holders, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so long as the Notes are not freely transferable under the Securities Act. For purposes of this covenant, the Company and the Guarantors will be deemed to have furnished the reports to the Trustee and the Holders as required by this covenant if the Company has filed such reports with the SEC via the EDGAR filing system and such reports are publicly available.
Merger and Consolidation
The Company will not consolidate with or merge with or into or wind up into (whether or not the Company is the surviving corporation), or sell, any
sharesassign, convey, transfer, lease or otherwise dispose of all or substantially all of its Preferredproperties and assets, in one or more related transactions, to any Person unless:
(1) the resulting, surviving or transferee Person (if other than the Company, the “Successor Company”) is a Person (other than an individual) organized and existing under the laws of the United States of America, any state or territory thereof, or the District of Columbia;
(2) the Successor Company expressly assumes all of the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture or other documents or instruments in form reasonably satisfactory to the Trustee and assumes by written agreement all of the obligations of the Company under the Registration Rights Agreement;
(3) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing;
(4) immediately after giving pro forma effect to such transaction and any related financing transactions, as if such transactions had occurred at the beginning of the applicable four-quarter period,
(a) the Successor Company would be able to Incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the “— Limitation on indebtedness” covenant, or
(b) the Consolidated Coverage Ratio for the Successor Company and its Restricted Subsidiaries would be greater than such ratio for the Company and its Restricted Subsidiaries immediately prior to such transaction;
(5) each Guarantor (unless it is the other party to the transactions above, in which case clause (1) of the following paragraph shall apply) shall have by supplemental indenture confirmed that its Guarantee shall apply to such Successor Company’s obligations in respect of the Indenture and the Notes and shall have by written agreement confirmed that its obligations under the registration rights agreement shall continue to be in effect; and
(6) the Company shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, winding up or disposition and such supplemental indenture (if any) comply with the Indenture.
Notwithstanding the clauses (3) and (4) of the preceding paragraph,
(1) any Restricted Subsidiary may consolidate with, merge with or into or transfer all or part of its properties and assets to the Company so long as no Capital Stock of the Restricted Subsidiary is distributed to any Person other than to Rent-A-Center orthe Company; provided that, in the case of a Restricted Subsidiary.
LIMITATION ON LIENS
Neither Rent-A-Center norSubsidiary that merges into the Company, the Company will not be required to comply with clause (6) of the preceding paragraph; and
(2) the Company may merge with an Affiliate of the Company solely for the purpose of reincorporating the Company in another state or territory of the United States or the District of Columbia, so long as the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby.
In addition, the Company will not permit any Restricted Subsidiary will createGuarantor to consolidate with or permitmerge with or into or wind up into (whether or not such Guarantor is the surviving corporation), or sell, assign, convey, transfer, lease or otherwise
49
dispose of all or substantially all of its properties and assets, in one or more related transactions, to, exist any Lien,Person (other than, in the case of a Guarantor, to the Company and another Guarantor) unless:
(1) if such entity remains a Guarantor, (a) the resulting, surviving or transferee Person (the “Successor Guarantor”) is a Person (other than an individual) organized and existing under the laws of the United States of America, any state or territory thereof, or the District of Columbia; (b) the Successor Guarantor, if other than Permitted Liens, on anysuch Guarantor, expressly assumes all the obligations of such Guarantor under the Notes, the Indenture and its propertyGuarantee pursuant to a supplemental indenture or assets,
including Capital Stock, whether ownedother documents or instruments in form reasonably satisfactory to the Trustee; (c) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (d) the Company will have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, winding up or disposition and such supplemental indenture (if any) comply with the Indenture; and
(2) the transaction is made in compliance with the covenant described under “ — Repurchase at the option of holders — Asset sales” (it being understood that only such portion of the Net Available Cash as is required to be applied on the date of such transaction in accordance with the Existingterms of the Indenture needs to be applied in accordance therewith at such time) and this “— Merger and consolidation” covenant.
Subject to certain limitations described in the Indenture, the Successor Guarantor will succeed to, and be substituted for, such Guarantor under the Indenture and the Guarantee of such Guarantor. Notwithstanding the foregoing, any Guarantor may merge with or thereafter acquired, securing anyinto or transfer all or part of its properties and assets to a Guarantor or the Company or merge with a Restricted Subsidiary of the Company solely for the purpose of reincorporating the Guarantor in a state or territory of the United States or the District of Columbia, as long as the amount of Indebtedness thatof such Subsidiary Guarantor and its Restricted Subsidiaries is not Senior Indebtedness
(the "Initial Lien"), unless atincreased thereby.
For purposes of this covenant, the same time effective provision is made to
secure the obligations due under the indenture and the notessale, assignment, conveyance, transfer, lease or with respect to
Liens on any Restricted Subsidiary's property or assets, equally and ratably
with such obligation for so long as such obligation is secured by such Initial
Lien.
Any such Lien created in favorother disposition of the notes will be automatically and
unconditionally released and discharged upon:
- the release and discharge of the Initial Lien to which it relates; or
- any sale, exchange or transfer to a non-affiliate of Rent-A-Center of the
property or assets secured by such Initial Lien, or of all of the Capital
Stock held by Rent-A-Center or any Restricted Subsidiary, or all or substantially all of the properties and assets of any Restricted Subsidiary creating
such Lien.
REPORTING REQUIREMENTS
As long as anyone or more Subsidiaries of the notes are outstanding, Rent-A-CenterCompany, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the disposition of all or substantially all of the properties and assets of the Company.
Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve “all or substantially all” of the property or assets of a Person.
The Company and a Guarantor, as the case may be, will file withbe released from its obligations under the SEC, unlessIndenture and its Guarantee, as the SECcase may be, and the Successor Company and the Successor Guarantor, as the case may be, will succeed to, and be substituted for, and may exercise every right and power of, the Company or a Guarantor, as the case may be, under the Indenture, the Notes, the registration rights agreement and, such Guarantee, the Registration Rights Agreement; provided that, in the case of a lease of all or substantially all its assets, the Company will not accept suchbe released from the obligation to pay the principal of and interest on the Notes and a filing, the annual reports,
quarterly reports and other documents required toGuarantor will not be filed with the SEC pursuant
to Sections 13 and 15 of the Exchange Act, whether or not Rent-A-Center is then
obligated to file reports pursuant to such sections. Rent-A-Center will be
required to file with the Trustee and provide to each holder of notes copies of
such reports and documents within 15 days after filing with the SEC, or if any
such filing is not permittedreleased from its obligations under the Exchange Act, 15 days after Rent-A-Center
would have been required to make such filing.
FUTURE SUBSIDIARY GUARANTORS
After the date of the Existing Indenture, Rent-A-Centerits Guarantee.
Future Guarantors
The Company will cause each Restricted Subsidiary createdthat becomes a borrower under the Senior Credit Facility or acquired by Rent-A-Centerthat Guarantees, on the Issue Date or any time thereafter, any Indebtedness of the Company or any Guarantor to execute and deliver to the Trustee a Subsidiary Guarantee. Pursuantsupplemental indenture to such Subsidiary
Guarantee,the Indenture pursuant to which such Restricted Subsidiary will unconditionally Guarantee, on a joint and several basis, the full and prompt payment of the principal of, and premium, if any, and interest (including Additional Interest, if any) on, the notesNotes on a senior and unsecured basis.
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LIMITATION ON SALE/LEASEBACK TRANSACTIONS
Neither Rent-A-Center nor any Restricted Subsidiarybasis and all other obligations under the Indenture, on the same basis as so Guaranteed by all other then-existing Guarantors. Each Guarantee shall be released in accordance with the provisions of the Indenture described under “— Guarantees.”
The obligations of each Guarantor will enter into any
Sale/Leaseback Transaction for any property unless:
- Rent-A-Center or such Restricted Subsidiary would be entitled to Incur
Indebtedness in an amount equallimited to the Attributable Debt with respect to
such Sale/Leaseback Transaction pursuant to the covenant described under
"Limitation on Indebtedness;"
- the net proceeds received by Rent-A-Center or any Restricted Subsidiary
in connection with such Sale/Leaseback Transaction are at least equal to
the fair value,maximum amount as determined by the Board of Directors, of such
property; and
- the transfer of such property is permitted by the covenant described
under "Limitation on Sales of Assets," and Rent-A-Center or such
Restricted Subsidiary applies the proceeds of such transaction in
compliance with the covenant described under "Limitation on Sales of
Assets."
MERGER AND CONSOLIDATION
Rent-A-Center will, not, in a single transaction or a series of related
transactions, consolidate with or merge with or into, or convey, transfer or
lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia;
(2) the Successor Company, if not Rent-A-Center, will expressly
assume, by an indenture supplemental to the indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of Rent-A-Center under the notes and the indenture;
(3) immediately after giving effect to all other contingent and fixed liabilities of such transaction or series of
transactions no Default or Event of Default exists;
(4) Rent-A-Center or the Successor Company, if Rent-A-Center is not
the continuing obligorGuarantor (including, without limitation, any Guarantees under the indenture, will, at the time of such
transaction or series of transactions
50
Senior Credit Facility) and after giving pro forma effect thereto as if such transactionto any collections from or seriespayments made by or on behalf of transactions had occurred at
the beginningany other Guarantor in respect of the applicable four-quarter period, be permitted to Incur
at least an additional $1.00obligations of Indebtednesssuch other Guarantor under its Guarantee or pursuant to paragraph (A)its contribution obligations under the Indenture, result in the obligations of "-- Limitation on Indebtedness;"such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The effectiveness of this limiting provision is not, however, free from doubt.
Payments for Consent
The Company will not, and (5) Rent-A-Center will have deliverednot permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, to or for the Trusteebenefit of, any Holder for, or as an Officer's
Certificate and an Opinion of Counsel, each to the effect that such
consolidation, merger or transfer and such supplemental indenture, if any,
comply with the indenture, provided that:
(a) in giving such opinion such counsel may rely on such Officer's
Certificate asinducement to, any mattersconsent, waiver or amendment of fact, including without limitation asany of the terms or provisions of the Indenture or the Notes unless such consideration is offered to compliance with the foregoing clauses;be paid and (b) no Opinion of Counsel will be required for a consolidation,
mergeris paid to all Holders that consent, waive or transfer describedagree to amend in the previous paragraph of this covenant.
The Successor Company will be substituted for, and may exercise every right
and power of, Rent-A-Center under the indenture. Thereafter Rent-A-Center will
be relieved of all obligations and covenants under the indenture, except that,time frame set forth in the casesolicitation documents relating to such consent, waiver or amendment.
Events of a conveyance, transfer or leaseDefault
Each of all or substantially all its
assets, Rent-A-Center will not be released from the obligation to pay the
principalfollowing is an “Event of and interest on the notes.
74
The provisions of this covenant do not prohibit any Restricted Subsidiary
from consolidating with, merging into or transferring all or part of its
properties and assets to Rent-A-Center. Additionally, Rent-A-Center may merge
with an Affiliate incorporated or organized for the purpose of reincorporating
or reorganizing Rent-A-Center in another jurisdiction to realize tax or other
benefits.
DEFAULTS
An Event of Default under the indenture is defined as:
Default”:
(1) a default in any payment of interest or Additional Interest (as required by the registration rights agreement) on any noteNote when due, whether
or not such payment is prohibited by the provisions described under
"-- Ranking" above, continued for 30 days;
(2) a default in the payment of principal of, or premium, if any, noteon, any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibitedotherwise;
(3) failure by the provisions described under "-- Ranking" above;
(3) the failure by Rent-A-CenterCompany or any Guarantor to comply with its obligations under the covenant described under "--“Certain covenants — Merger and Consolidation" above;
consolidation;”
(4) the failure by Rent-A-Centerthe Company or the Guarantors to comply for 30 days after written
notice as provided below with any of itstheir obligations under the covenants described under "-- Change“— Repurchase at the option of Control" or "-- Certain Covenants" above, in each case, other
than a failure to purchase notes;
holders” above;
(5) the failure by Rent-A-Centerthe Company or any Guarantors to comply for 60 days after notice as provided below with its other agreements contained in the notesIndenture or the indenture;
Notes (other than a failure that is subject to clause (1), (2), (3) or (4) above);
(6) default under any mortgage, indenture or instrument under which there is issued or by which there is secured or evidenced any Indebtedness for money borrowed by the failure by Rent-A-CenterCompany or any Significantof its Restricted Subsidiaries (or the payment of which is Guaranteed by the Company or any of its Restricted Subsidiaries), other than Indebtedness owed to the Company or a Restricted Subsidiary, whether such Indebtedness or Guarantee now exists, or is created after the Issue Date, which default:
(a) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness within any applicableprior to the expiration of the grace period after finalprovided in such Indebtedness (“payment default”); or
(b) results in the acceleration of such Indebtedness prior to its stated maturity or(the “cross-acceleration provision”);
and, in each case, the accelerationprincipal amount of any such Indebtedness, bytogether with the holders thereof because of
a default if the totalprincipal amount of any other such Indebtedness unpaidunder which there has been a payment default or the maturity of which has been so accelerated, exceeds $25aggregates $50.0 million (the "Cross Acceleration Provision")or more (or its foreign currency equivalent);
(7) certain events of bankruptcy, insolvency or reorganization of Rent-A-Centerthe Company or a Significant Subsidiary (the "Bankruptcy Provisions");
(8)or group of Restricted Subsidiaries that, taken together (as of the rendering of any judgment or decreelatest audited consolidated financial statements for the paymentCompany and its Restricted Subsidiaries), would constitute a Significant Subsidiary (the “bankruptcy provisions”);
(8) failure by the Company or any Significant Subsidiary or group of money
in an amount, netRestricted Subsidiaries that, taken together (as of any insurance or indemnity payments actually received
in respect thereof priorthe latest audited consolidated financial statements for the Company and its Restricted Subsidiaries), would constitute a Significant Subsidiary to or within 90 days from the entry thereof, or to
be received in respect thereof in the event any appeal thereof shall be
unsuccessful,pay final and non-appealable judgments aggregating in excess of $25$50.0 million against Rent-A-Center or a
Significant Subsidiary(or its foreign currency equivalent) (net of any amounts that is not discharged, bonded or insuredare covered by
51
insurance issued by a third
Person if either an enforcement proceeding thereon is commenced,reputable and creditworthy insurance company that has not contested coverage), which judgments are not paid, discharged or such
judgment or decree remains outstandingstayed for a period of 9060 days or more after such judgment becomes final and is not
discharged, waived or stayednon-appealable (the "Judgment Default Provision"“judgment default provision”); or
(9) the failure of(a) any Guarantee of a Significant Subsidiary or group of Guarantors that, taken together (as of the notes bylatest audited consolidated financial statements for the Company and its Restricted Subsidiaries), would constitute a Significant Subsidiary Guarantorceases to be in full force exceptand effect (except as contemplated by the terms thereof
or of the indenture,Indenture or the denialGuarantee) or is declared null and void in writing bya judicial proceeding or (b) any suchGuarantor that is a Significant Subsidiary Guarantoror group of Guarantors that, taken together (as of the latest audited consolidated financial statements of the Company and its Restricted Subsidiaries), would constitute a Significant Subsidiary denies or disaffirms its obligations under the indentureIndenture or any such Guarantee if
such Default continues for 10 days.
The events listed above will constitute Events of Default regardless of
their reasons, whether voluntary or involuntary or whether effected by operation
of law or pursuant to any judgment, decree order, rule or regulation of any
administrative or governmental body.
its Guarantee.
However, a Default by Rent-A-Centerdefault under the covenants described under
"Changeclauses (4) and (5) of Control" or "Certain Covenants," or a failure by Rent-A-Center to
comply with agreements in the notes or the indenturethis paragraph will not constitute an Event of Default until the applicable Trustee
75
or the Holders of at least 25% of the aggregatein principal amount of the then outstanding applicable notesNotes notify, Rent-A-Centerin writing, the Company of the Default, and Rent-A-Centerthe Company does not cure such Default within the time specified in clauses (4) and (5) of this paragraph, as applicable, after receipt of such notice.
If an Event of Default other(other than aan Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of Rent-A-Center,described in clause (7) above) occurs and is continuing, either the Trustee by written notice to Rent-A-Center,the Company, specifying the Event of Default, or the Holders of at least a majority25% in principal amount of the then outstanding notes,Notes by written notice to Rent-A-Centerthe Company and the Trustee, may, and the Trustee at the request of such Holders shall, declare the principal of, and premium, if any, and accrued butand unpaid interest, if any, on, all of such notesthe Notes to be due and payable. Upon such a declaration, such principal, premium, if any, and accrued and unpaid interest, if any, will be due and payable immediately. In the event of a declaration of acceleration of the Notes because an Event of Default described in clause (6) under “— Events of default” has occurred and is continuing, the declaration of acceleration of the Notes shall be automatically annulled if the default triggering such Event of Default pursuant to clause (6) shall be remedied or cured by the Company or a Restricted Subsidiary or waived by the holders of the relevant Indebtedness within 20 days after the declaration of acceleration with respect thereto and if (1) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (2) all existing Events of Default, except nonpayment of principal of, and premium, if any, or interest on, the Notes that became due solely because of the acceleration of the Notes, have been cured or waived; however, if acceleration based on such Event of Default has not been annulled pursuant to the preceding clause, such acceleration may be rescinded pursuant to the provisions of the last sentence of this paragraph. If an Event of Default relatingdescribed in clause (7) above occurs with respect to events of bankruptcy,
insolvency or reorganization of Rent-A-Center occursthe Company and is continuing, the principal of, and premium, if any, and accrued and unpaid interest, if any, on, all the notesNotes will become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Under certain circumstances, theHolders. The Holders of a majority in principal amount of the outstanding notesNotes may waive all past defaults (except with respect to nonpayment of principal, premium or interest) and rescind any such acceleration with respect to the notesNotes and its consequences.
consequences if (1) rescission would not conflict with any judgment or decree of a court of competent jurisdiction and (2) all existing Events of Default, other than the nonpayment of the principal of, and premium, if any, and interest on, the Notes that have become due solely by such declaration of acceleration, have been cured or waived.
Subject to the provisions of the indentureIndenture relating to the duties of the Trustee, in caseif an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the indentureIndenture, the Notes and the Guarantees at the request or direction of any of the Holders unless such Holders have offered to the Trustee reasonable indemnity or security reasonably satisfactory to it against any loss, liability or expense.
Except to enforce the right to receive payment of principal, premium, if any, or interest when due, no Holder may pursue any remedy with respect to the indentureIndenture or the notesNotes unless:
-
(1) such Holder has previously given the Trustee notice that an Event of Default is continuing;
-
(2) Holders of at least 25% in principal amount of the then outstanding notesNotes have requested the Trustee to pursue the remedy;
-
(3) such Holders have offered the Trustee reasonable security or indemnity reasonably satisfactory to the Trustee against any loss, liability or expense;
-
52
(4) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity; and
-
(5) the Holders of a majority in principal amount of the applicable notesthen outstanding Notes have not given the Trustee a direction that, in the opinion of the Trustee, is inconsistent with such request within such60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount of the notesthen outstanding are given the right toNotes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Indenture provides that in the event an Event of Default has occurred and is continuing, the Trustee will be required in the exercise of its powers to use the degree of care that a prudent person would use under the circumstances in the conduct of its own affairs. The Trustee, however, may refuse to follow any direction that:
-that conflicts with law or the indenture;
-Indenture, the Notes or the Guarantee, or that the Trustee determines in good faith is unduly prejudicial to the rights of any other Holder;Holder or -that would involve the Trustee in personal liability. BeforePrior to taking any action under the indenture,Indenture, the Trustee will be entitled to indemnificationindemnity or security reasonably satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action.
The indentureIndenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee mustshall mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of, or premium, if any, or interest on, any note,Note, the Trustee may withhold from the Holders notice of any continuing Default if and so long as a committee of its Trust
76
Officersthe Trustee determines in good faith determines that withholding the notice is in the interests of the Noteholders.Holders. In addition, Rent-A-Centerthe Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year ending after the Issue Date, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. Rent-A-CenterThe Company also is required to deliver to the Trustee, within 30 days after the occurrence thereof and so long as it is then continuing, written notice of any eventevents which would constitute certain Defaults,a Default, their status and what action Rent-A-Centerthe Company is taking or proposesproposing to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions,
Amendments and Waivers
Except as provided in the indenturenext two succeeding paragraphs, the Indenture, the Notes and the Guarantees may be amended or supplemented with the consent of the Holders of a majority in principal amount of the notesNotes then outstanding. Additionally,outstanding (including without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes) and, subject to certain exceptions, any past default onor compliance with any provisions may be waived with the consent of the Holders of a majority in principal amount of the notesNotes then outstanding.outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes). However, without the consent of each Holder of an outstanding Note affected, no amendment, supplement or waiver may, among other things:
-
(1) reduce the principal amount of notesNotes whose Holders must consent to an amendment;
-amendment, supplement or waiver;
(2) reduce the stated rate of interest or extend the stated time for payment of interest on any note;
-Note;
(3) reduce the principal amount of or extend the Stated Maturity of any note;
-Note;
(4) waive a Default or Event of Default in the payment of principal of, or premium, if any, or interest on, the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in principal amount of the then outstanding Notes with respect to a nonpayment default and a waiver of the payment default that resulted from such acceleration);
(5) reduce the premium payable upon the redemption or repurchase of any noteNote or change the time at which any noteNote may be redeemed or repurchased as described above under "--“— Optional Redemption" above;
-redemption,” “— Repurchase at the option of holders — Change of control” or “Repurchase at the option of holders — Asset sales” whether through an amendment or waiver of provisions in the covenants, definitions or otherwise (except amendments to the definitions of “Change of Control”;
(6) make any noteNote payable in money other than that stated in the note;
- make any change to the subordination provisions of the indenture that
adversely affects the rights of any Holder;
-Note;
53
(7) impair the right of any Holder to receive payment of principal of, andor premium, if any, or interest on, such Holder's notesHolder’s Notes on or after the due dates therefor or to sueinstitute suit for the enforcement of any payment on or with respect to such Holder's notes; or
-Holder’s Notes;
(8) make any change in the amendment or waiver provisions which require each Holder's
consentHolder’s consent;
(9) modify the Guarantee of any Guarantor that is a Significant Subsidiary in any manner materially adverse to the Holders; or
(10) release any Guarantor that is a Significant Subsidiary from any of its obligations under its Guarantee or the Indenture, except in compliance with the waiver provisions.
Withoutterms thereof.
Notwithstanding the foregoing, without the consent of any Holder, Rent-A-Center, the Subsidiary Guarantors and the Trustee may amend the indenture, in the following manner:
- toNotes and the Guarantees to:
(1) cure any ambiguity, omission, defect or inconsistency;
- to
(2) provide for the assumption by a successor corporation of the obligations of Rent-A-Centerthe Company or any Guarantor under the indenture;
- toIndenture in accordance with “Certain covenants — Merger and Consolidation”;
(3) provide for or facilitate the issuance of uncertificated notesNotes in addition to or in place of certificated notes, Notes;provided however, that the uncertificated notesNotes are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated notesNotes are described in Section 163(f)(2)(B) of the Code;
-
(4) to comply with the rules of any applicable securities depositary;
(5) add GuaranteesGuarantors with respect to the notes, toNotes or release a Guarantor from its obligations under its Guarantee or the Indenture in accordance with the applicable provisions of the Indenture;
(6) secure the notes, toNotes and the Guarantees;
(7) add
to the covenants of Rent-A-Centerthe Company and its Restricted Subsidiaries or Events of Default for the benefit of Holders or to make changes that would provide additional rights to the noteholdersHolders or to surrender any right or power conferred upon Rent-A-Center; and
- tothe Company or any Guarantor;
(8) make any change that does not adversely affect the legal rights under the Indenture of any Holder; or
- to
(9) comply with any requirement of the SEC in connection with the qualification of the indentureIndenture under the TIA.
77
However, no amendment may be madeTrust Indenture Act;
(10) evidence and provide for the appointment and acceptance of an appointment under the Indenture of a successor trustee; provided that the successor trustee is otherwise qualified and eligible to act as such under the terms of the Indenture;
(11) conform the text of the Indenture, the Notes or the Guarantees to any provision of this “Description of notes” to the subordinationextent that such provision in this “Description of notes” was intended to be a verbatim recitation of a provision of the Indenture, the Notes or the Guarantees; or
(12) make any amendment to the provisions of the indentureIndenture relating to, or providing for, the issuance, transfer and legending of Notes as permitted by the Indenture, including, without limitation, to facilitate the issuance and administration of the Notes, Exchange Notes or, if Incurred in compliance with the Indenture, Additional Notes, and in each case, the related Guarantees; provided, however, that compliance with the Indenture as so amended would not result in Notes being issued or transferred in violation of the Securities Act or any applicable securities law and (B) such amendment does not materially and adversely affectsaffect the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness, or any group or
representative thereof authorizedHolders to give a consent, consent to such change.
transfer Notes.
The consent of the noteholdersHolders is not necessary under the indentureIndenture to approve the particular form of any proposed amendment.amendment, supplement or waiver. It is sufficient if such consent approves the substance of the proposed amendment.amendment, supplement or waiver. A consent to any amendment, supplement or waiver under the Indenture by any Holder given in connection with a tender of such Holder’s Notes will not be rendered invalid by such tender. After an amendment, supplement or waiver under the indentureIndenture becomes effective Rent-A-Centerpursuant to the first paragraph of
54
this section, the Company is required to mail to the applicable noteholdersHolders a notice briefly describing such amendment.amendment, supplement or waiver. However, the failure to givemail such notice to all such noteholders,the Holders, or any defect in suchthe notice will not impair or affect the validity of the amendment.
DEFEASANCE
Rent-A-Centeramendment, supplement or waiver.
Defeasance
The Company may, at its option and at any time, may terminateelect to have all of its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes issued under the notesIndenture and the indenture ("Guarantees (“legal defeasance"defeasance”), except for certain obligations,
including those respectingfor:
(1) the defeasance trust and obligationsrights of Holders to register the
transfer or exchangereceive payments in respect of the notes,principal of, or premium, if any, or interest on, such Notes when such payments are due, solely out of the trust referred to replacebelow;
(2) the Company’s obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen notesNotes and to maintain a registrarthe maintenance of an office or agency for payment and paying agentmoney for Note payments held in respecttrust;
(3) the rights, powers, trusts, duties and immunities of the notes. Rent-A-CenterTrustee, and the Company’s obligations in connection therewith; and
(4) the legal defeasance provisions of the Indenture.
If the Company exercises the legal defeasance option, the Guarantees in effect at such time will terminate.
The Company at any time may terminate its obligations, and the obligations of the Guarantors, described under “— Repurchase at the option of holders” and under the covenants described under "--“— Certain Covenants,"covenants” (other than “— Merger and consolidation”), the operation of the Cross
Acceleration Provision,cross-default upon a payment default, cross-acceleration provisions, the Bankruptcy Provisionsbankruptcy provisions with respect to Significant Subsidiaries, the judgment default provision and the Judgment Default ProvisionGuarantee provisions described under "-- Defaults"“— Events of default” above and the limitations contained in the third and fourth clausesclause (4) under "--“— Certain covenants — Merger and Consolidation"consolidation” above ("(“covenant defeasance"defeasance”).
Rent-A-Center
If the Company exercises the covenant defeasance option, the Guarantees in effect at such time will terminate.
The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If Rent-A-Centerthe Company exercises its legal defeasance option, payment of the notesNotes may not be accelerated because of an Event of Default.Default with respect to the Notes. If Rent-A-Centerthe Company exercises its covenant defeasance option, payment of the notesNotes may not be accelerated because of an Event of Default specified in clauses four, six, seven, but onlyclause (3) (only with respect to certain
bankruptcy events of a Significant Subsidiary, eight or nine under "-- Defaults"
above or because of the failure of Rent-A-Centerthe Company to comply with clause three or
four(4) under "--“— Certain covenants — Merger and Consolidation"consolidation” above), (4), (5), (6), (7) (with respect only to Significant Subsidiaries or any group of Restricted Subsidiaries that, taken together as of the date of the latest audited consolidated financial statements of the Company and its Restricted Subsidiaries) would constitute a Significant Subsidiary), (8) or (9) under “— Events of default” above.
Either defeasance option may be exercised before any redemption date or the
maturity date for the notes.
In order to exercise either legal defeasance option,
Rent-A-Centeror covenant defeasance under the Indenture:
(1) the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee, money orin trust, for the benefit of the Holders, cash in U.S. dollars, Government Obligations,Securities, or a combination thereof, forin amounts as will be sufficient, in the paymentopinion of a nationally recognized firm of independent public accountants without consideration of any reinvestment of interest, to pay the principal of, and premium, if any, and interest due on, the outstanding Notes on the Stated Maturity or on the applicable notes to redemption or maturity,date, as the case may be. Additionally,
Rent-A-Centerbe, and the Company must comply with other conditions, including deliveryspecify whether the Notes are being defeased to maturity or to a particular redemption date;
(2) in the case of legal defeasance, the Company has delivered to the Trustee of an Opinion of Counsel reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (b) since the Issue Date, there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, Holdersand based thereon such Opinion of Counsel will confirm that the notesHolders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit andlegal defeasance and will be subject to
55
U.S. federal income tax inon the same amount andamounts, in the same manner and at the same times as would have been the case if such deposit andlegal defeasance had not occurred. Inoccurred;
(3) in the case of legalcovenant defeasance, only,
suchthe Company has delivered to the Trustee an Opinion of Counsel must be based on a ruling ofreasonably acceptable to the Internal Revenue
ServiceTrustee confirming that, subject to customary assumptions and exclusions, the Holders will not recognize income, gain or other change in applicableloss for U.S. federal income tax purposes as a result of such covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred;
(4) such legal defeasance or covenant defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than the Indenture) to which the Company or any of its Restricted Subsidiaries is a party or by which the Company or any of its Restricted Subsidiaries is bound, or if such breach or default would occur, which is not waived as of, and for all purposes, on and after the date of, such defeasance;
(5) no Default or Event of Default has occurred and is continuing on the date of such deposit (other than a Default or an Event of Default resulting from the borrowing of funds to be applied to make such deposit and any similar and simultaneous deposit relating to other Indebtedness and, in each case, the granting of Liens in connection therewith) or insofar as Events of Default resulting from the borrowing of funds or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit;
(6) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that as of the date of such opinion and subject to customary assumptions and exclusions, including, that no intervening bankruptcy of the Company between the date of deposit and the 91st day following the deposit and assuming that no Holder is an “insider” of the Company under applicable bankruptcy law, sinceafter the 91st day following the deposit, the trust funds will not be subject to Section 547 of Title II, U.S. Code;
(7) the Company has delivered to the Trustee an Officers’ Certificate stating that the deposit was not made by the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company, any Guarantor or others;
(8) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel (which Opinion of Counsel may be subject to customary assumptions and exclusions), each stating that all conditions precedent relating to the legal defeasance or the covenant defeasance, as the case may be, have been complied with; and
(9) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be (which instructions may be contained in the Officers’ Certificate referred to in clause (8) above.
Satisfaction and discharge
The Indenture will be discharged and will cease to be of further effect as to all Notes issued thereunder, when:
(1) either:
(A) all Notes that have been authenticated, except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has been deposited in trust and thereafter repaid to the Company, have been delivered to the Trustee for cancellation; or
(B) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable by reason of the giving of a notice of redemption or otherwise, will become due and payable within one year or may be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company or any Guarantor has irrevocably deposited or caused to be deposited with the Trustee, as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, without consideration of any reinvestment of interest, to pay and
56
discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the date of the indenture.
CONCERNING THE TRUSTEE
deposit or will occur contemporaneously with such deposit as a result of the deposit (other than a Default or an Event of Default resulting from borrowing of funds to be applied to such deposit and the grant of any Lien securing such borrowing) and the deposit will not result in a breach or violation of, or constitute a default under, the Senior Credit Facility or any other material agreement or material instrument (other than the Indenture) to which the Company or any Guarantor is a party or by which the Company or any Guarantor is bound;
(3) the Company has paid or caused to be paid or otherwise made, to the satisfaction of the Trustee, provision for the payment of, all sums payable by it under the Indenture; and
(4) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an Officers’ Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future manager, director, officer, employee, incorporator, member, partner; stockholder or other owner of equity interests of the Company or any of its Subsidiaries, as such shall have any liability for any obligations of the Company or any Guarantor under the Notes, the Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under the federal securities law.
Notices
Notices given by publication will be deemed on the first date on which publication is made, and notices given by first-class mail, postage prepaid, will be deemed given five calendar days after mailing.
Concerning the Trustee
The Bank of New York will serve asMellon Trust Company, N.A. is the Trustee forunder the notes. The TrusteeIndenture and has been appointed by Rent-A-Centerthe Company as Registrar and Paying Agent with regard to the notes.
78
GOVERNING LAW
BothNotes.
Governing Law
The Indenture provides that it, the indentureNotes and the notesany Guarantee will be governed by, and construed in accordance with, the laws of the State of New York. Principles
Certain Definitions
“Acquired Indebtedness” means, with respect to any specified Person,
(a) Indebtedness of conflictsany other Person or any of law willits Subsidiaries existing at the time such other Person is merged with or becomes a Restricted Subsidiary of such specified Person; or
(b) assumed in connection with the acquisition of assets from such other Person, in each case whether or not applyIncurred by such Person in connection with, or in anticipation or contemplation of, such other Person being merged with or becoming a Restricted Subsidiary of, such specified Person or such acquisition, and Indebtedness secured by a Lien encumbering any asset acquired by such specified Person, but excluding Indebtedness extinguished, retired or repaid in connection with such Person merging with or becoming a Restricted Subsidiary of such specified Person. Acquired Indebtedness shall be deemed to the extent that such principles would require the
applicationhave been Incurred, with respect to clause (a) of the lawpreceding sentence, on the date such Person becomes a Restricted Subsidiary
57
and, with respect to clause (b) of another jurisdiction.
CERTAIN DEFINITIONS
"Additional Assets" means
the preceding sentence, on the date of consummation of such acquisition of assets.
“Additional Assets” means:
(1) any property, plant, equipment or other asset (for the avoidance of doubt, excluding working capital or current assets (other than Indebtednessbut including the purchase of merchandise (inventory) held for rent or sale, idle inventory, rental agreements associated with such merchandise, and Capital Stock)store or kiosk locations (including leases with respect thereto)), and improvements and additions thereto, and other capital expenditures with respect thereto, to be used by Rent-A-Centerthe Company or a Restricted Subsidiary in a RelatedSimilar Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by Rent-A-Centerthe Company or anothera Restricted Subsidiary; or
(3) Capital Stock ofconstituting a minority interest in any Person that at such time is a Restricted Subsidiary, acquired from a third party; Subsidiary;
provided,however, that, in the case of clauses (2) and (3), such Restricted Subsidiary is primarily engaged in a Related Business; or
(4) Capital Stock or Indebtedness of any Person which is primarily
engaged inSimilar Business.
“Additional Interest” means the additional interest payable as a Related Business; provided, however, for purposesconsequence of the covenant described under "-- Certain Covenants -- Limitation on Sales of
Assets,"failure to effectuate, within the aggregate amount of Net Available Cash permitted to be
invested pursuant to this clause (4) shall not exceed at any oneprescribed time outstanding 5% of Consolidated Tangible Assets.
"Affiliate"periods, the exchange offerand/or shelf registration procedures set forth in the registration rights agreement.
“Affiliate” of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control"“control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”) when used with respect to any Person means possession, directly or indirectly, of the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling"“controlling” and "controlled"“controlled” have meanings correlative to the foregoing.
JPMorgan Chase Bankforegoing; provided that exclusively for purposes of “Repurchase at the option of holders — Asset sales” and its Affiliates“Certain covenants — Limitation on affiliate transactions,” beneficial ownership of 10% or more of the Voting Stock of a Person shall not be deemed an Affiliateto be control.
“Applicable Premium” means, with respect to a Note on any date of Rent-A-Center.
"Apollo" means Apollo Management IV, L.P.redemption, the greater of:
(1) 1.0% of the principal amount of such Note, and its Affiliates or any entity
controlled thereby or
(2) the excess, if any, of (a) the partners thereof.
"Asset Disposition"present value as of such date of redemption of (i) the redemption price of such Note on November 15, 2015 (such redemption price being described under “Optional redemption”) plus (ii) all required interest payments due on such Note through November 15, 2015 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate as of such date of redemption plus 50 basis points, over (b) the then-outstanding principal of such Note.
“Asset Disposition” means any sale, lease (other than an operating lease entered into in the ordinary course of business), transfer, issuance or other disposition, or a series of related sales, leases (other than operating leases entered into in the ordinary course of business), transfers, issuances or dispositions that are part of a common plan, of (i) shares of Capital Stock of a Restricted Subsidiary other(other than directors'shares required by applicable law to be owned by another Person, including directors’ qualifying shares,shares), (ii) property or (iii) other assets each(each referred to for the purposes of this definition as a "disposition,"“disposition”) by Rent-A-Centerthe Company or any of its Restricted Subsidiaries, including any disposition by means of a merger, consolidation or similar transaction,transaction. For the avoidance of doubt, “Asset Disposition” does not mean the issuance or sale by the Company of Capital Stock, debt security or any other than:
security of the Company.
Notwithstanding the preceding, the following items shall not be deemed to be Asset Dispositions:
(1) a disposition of shares of Capital Stock, property or other assets by a Restricted Subsidiary to Rent-A-Centerthe Company or by Rent-A-Centerthe Company or a Restricted Subsidiary to a Restricted Subsidiary;
(2) a disposition of inventory, equipment, obsolete assets or surplus
personal property in the ordinary course of business;
(3) the sale of Temporary Cash Investmentscash or Cash Equivalents in the ordinary course of business;
(4)
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(3) a transaction or a seriesdisposition of related transactions in which either
(a) the fair market value of theproperty and assets disposed of, in the aggregate, does not exceed 2.5%ordinary course of business, including, without limitation, (i) the Consolidated Tangible Assetssale or rent of Rent-A-Center;merchandise to customers, (ii) the sale or (b) the EBITDA relatedother disposition of merchandise to such assets does not, in the aggregate,
exceed 2.5%franchisees for sale or rent to customers of Rent-A-Center's EBITDA;
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(5)franchisees and (iii) the sale or discount, with or without recourse, and on commercially reasonable terms, of delinquent accounts receivable or notes receivable arising in the ordinary course of business, or the conversion or exchange of accounts receivable for notes receivable;
(4) a disposition of obsolete or worn out equipment or equipment that is no longer used or useful in the conduct of the business of the Company and its Restricted Subsidiaries and that is disposed of in each case in the ordinary course of business;
(5) the disposition of all or substantially all of the assets of the Company in a manner permitted pursuant to “Certain Covenants — Merger and consolidation” or any disposition that constitutes a Change of Control pursuant to the Indenture;
(6) an issuance of Capital Stock by a Restricted Subsidiary to the Company or to another Restricted Subsidiary;
(7) for purposes of “Repurchase at the option of holders — Sales of assets” only, the making of a Permitted Investment (other than a Permitted Investment to the extent such transaction results in the receipt of cash or Cash Equivalents by the Company or its Restricted Subsidiaries) or a disposition subject to “Certain covenants — Limitation on restricted payments;”
(8) dispositions of assets in a single transaction or a series of related transactions in which the aggregate fair market value of the assets disposed does not exceed $1.0 million for each such transaction or series of related transactions;
(9) the creation of a Lien that is not prohibited by the Indenture and dispositions in connection with such Liens;
(10) dispositions of receivables in connection with the compromise, settlement or collection thereof in the ordinary course of business or in bankruptcy or similar proceedings and exclusive of factoring or similar arrangements;
(11) the issuance by a Restricted Subsidiary of Preferred Stock that is permitted by the covenant described under “Certain covenants — Limitation on indebtedness;”
(12) (a) the licensing or sublicensing of intellectual property or other general intangibles and (b) licenses, leases or subleases of other property in the ordinary course of business;
(7) an RTO Facility Swap;
(8) for purposesbusiness which do not materially interfere with the business of the covenantCompany and its Restricted Subsidiaries;
(13) foreclosure or other realization pursuant to Lien rights on assets;
(14) any sale of Capital Stock in, or Indebtedness or other securities of, an Unrestricted Subsidiary;
(15) dispositions to or by the Insurance Subsidiary of Capital Stock of the Company;
(16) dispositions to or by the Insurance Subsidiary of Indebtedness described in clause (13) of the second paragraph under "-- Certainthe caption “Certain Covenants --— Limitation on Sales of Assets" only, a disposition subjectindebtedness” to the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments;"Company or (9) a disposition of property or assets that is governedany Wholly-Owned Guarantor;
(17) dispositions by the provisions describedInsurance Subsidiary effected solely for the purpose of liquidating assets in order to permit the Insurance Subsidiary to pay expenses and to make payments on insurance claims of the Companyand/or any of its Subsidiaries with the proceeds of such dispositions;
(18) to the extent allowable under "-- MergerSection 1031 of the Code, any exchange of like property (excluding any boot thereon) for use in a Similar Business; and Consolidation."
"Attributable Debt"
(19) the concurrent purchase and sale or exchange, between the Company or any of its Restricted Subsidiaries and another Person, of Additional Assets (an “Asset Swap”) provided that any cash received in
59
connection with such transaction must be applied in accordance with “— Description of notes — Repurchase at the option of holders — Asset sales,” and provided, further:
(a) in the event such Asset Swap involves an aggregate consideration in excess of $25.0 million but less than or equal to $75 million, as determined by the a majority of the Board of Directors in good faith, the terms of such Asset Swap shall have been approved by a majority of the members of the Board of Directors of the Company; and
(b) in the event such Asset Swap involves an aggregate consideration in excess of $75.0 million, as determined by the a majority of the Board of Directors in good faith, the Company shall have received a written opinion from an Independent Financial Advisor that such Asset Swap is fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view.
“Attributable Indebtedness” in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value discounted(discounted at the interest rate assumedimplicit in making calculations in accordance with FAS 13,the transaction) of the total obligations of the lessee for rental payments (other than amounts required to be paid on account of property taxes, maintenance, repairs, insurance, assessments, utilities, operating and labor costs and other items that do not constitute payments for property rights) during the remaining term of the lease included in such Sale/Leaseback Transaction including(including any period for which such lease has been extended.
"Average Life"extended), determined in accordance with GAAP; provided, however, that if such Sale/Leaseback Transaction results in a Capitalized Lease Obligation, the amount of Indebtedness represented thereby will be determined in accordance with the definition of “Capitalized Lease Obligations.”
“Average Life” means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Indebtedness or Preferred Stock multiplied by the amount of such payment by (2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on
“Board of Directors” means:
(1) with respect to a corporation, the dateboard of directors of the Existing Indenturecorporation or thereafter Incurred, payable under or in
respect(other than for purposes of determining Change of Control) the executive committee of the Senior Credit Facility, including, without limitation, principal,
premium, ifboard of directors;
(2) with respect to a partnership, the board of directors of the general partner of the partnership; and
(3) with respect to any interest, including interest accruing onother Person, the board or after the filing of
any petition in bankruptcy or for reorganization relating to Rent-A-Center or
any Restricted Subsidiary whether or not a claim for postfiling interest is
allowed in such proceedings, fees, charges, expenses, reimbursement obligations,
guarantees, other monetary obligations of any nature and all other amounts
payable thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of Rent-A-Center or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day"Person serving a similar function.
“Business Day” means aeach day other thanthat is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York are authorized or required by law to close
in New York City.
"Capital Stock"close.
“Capital Stock” of any Person means any and all shares, interests, rights to purchase, warrants, equity appreciation rights, options, participations or other equivalents of or interests in however designated,(however designated) equity of such Person, including any Common Stock or Preferred Stock and limited liability company or partnership interests (whether member or general or limited), but excluding any debt securities convertible into such equity.
"Capitalized
“Capitalized Lease Obligations"Obligations” means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shallwill be the capitalized amount of such obligation at the time any determination thereof is to be made as determined in accordance with GAAP;GAAP, and the Stated Maturity thereof shallwill be the date of the last payment of rent or any other amount due under such lease.
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"Cash Equivalents" meanslease prior to the first date such lease may be terminated without penalty.
“Cash Equivalents” means:
(1) U.S. dollars, or in the case of any Foreign Subsidiary, such local currencies held by it from time to time in the ordinary course of the following:
(1)business;
(2) securities issued or directly and fully guaranteedGuaranteed or insured by the United States Government or any agency or instrumentality of the United States (provided that the full faith and credit of the United States is pledged in support thereof), having maturities of not more than one year from the date of acquisition;
60
(3) marketable general obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof (2)maturing within one year from the date of acquisition and, at the time deposits,of acquisition, having a credit rating of “A” or better from either Standard & Poor’s Ratings Group, Inc. or Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized Rating Agency, if both of the two named Rating Agencies cease publishing ratings of investments;
(4) certificates of deposit, time deposits, eurodollar time deposits, overnight bank deposits or bankers'bankers’ acceptances having maturities of (a) any lender undernot more than one year from the Senior Credit Agreement or
(b)date of acquisition thereof issued by any commercial bank the long-term debt of which is rated at the time of acquisition thereof at least “A” or the equivalent thereof by Standard & Poor’s Ratings Group, Inc., or “A” or the equivalent thereof by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized Rating Agency, if both of the two named Rating Agencies cease publishing ratings of investments, and having combined capital and surplus in excess of $500,000,000 and the commercial paper of the holding company of which
is rated at least "A-2" or the equivalent thereof by S&P or at least
"P-2" or the equivalent thereof by Moody's, or if at such time neither
is issuing ratings, then a comparable rating of another nationally
recognized rating agency,
(3) commercial paper rated at least "A1" or the equivalent thereof by
S&P or at least "P-1" or the equivalent thereof by Moody's, or if at such
time neither is issuing ratings, then a comparable rating of another
nationally recognized rating agency,
(4) investments in money market funds complying with the risk limiting
conditions of Rule 2a-7 or any successor rule of the SEC under the
Investment Company Act,
$500 million;
(5) repurchase obligations of any commercial bank satisfying the
requirements of clause (2) of this definition, havingwith a term of not more than 30seven days for underlying securities of the types described in clauses (2), (3) and (4) entered into with respect to securities issuedany bank meeting the qualifications specified in clause (4)(a) or fully guaranteed(b) above;
(6) commercial paper rated at the time of acquisition thereof at least“A-2” or insuredthe equivalent thereof by Standard & Poor’s Ratings Group, Inc. or“P-2” or the United States government,
(6) securities with maturitiesequivalent thereof by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized Rating Agency, if both of the two named Rating Agencies cease publishing ratings of investments, and in any case maturing within one year or less fromafter the date of acquisition issuedthereof; and
(7) interests in any investment company or fully guaranteed by any state, commonwealthmoney market fund which invests 95% or territorymore of its assets in instruments of the United States, bytype specified in clauses (1) through (6) above.
“Change of Control” means:
(1) any political subdivision“person” or taxing
authority“group” of related persons (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined inRules 13d-3 and13d-5 under the Exchange Act, except that such person or group shall be deemed to have “beneficial ownership” of all shares that any such state, commonwealthperson or territorygroup has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company or any of its direct or indirect parent entities (or their successors by any foreign
government,merger, consolidation or purchase of all or substantially all of their assets); or
(2) the securitiesfirst day on which a majority of which state, commonwealth, territory,
political subdivision, taxing authoritythe members of the Board of Directors of the Company are not Continuing Directors; or foreign government, as
(3) the case
may be, are rated at least "A"sale, assignment, conveyance, transfer, lease or other disposition (other than by S&Pway of merger or "A" by Moody's, and
(7) securities with maturitiesconsolidation), in one or a series of six monthsrelated transactions, of all or less from the date of
acquisition backed by standby letters of credit issued by any commercial
bank satisfying the requirements of clause (2) of this definition.
"Central Acquisition" means Rent-A-Center's acquisition of substantially all of the assets of Central Rents, Inc.
"Code"the Company and its Restricted Subsidiaries taken as a whole to any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act); or
(4) the adoption by the stockholders of the Company of a plan or proposal for the liquidation or dissolution of the Company; or
(5) the Company shall cease to own, directly or indirectly, 100% of the Voting Stock of RAC East.
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur upon the consummation of any actions undertaken by the Company or any of its Restricted Subsidiaries solely for the purpose of effecting a reorganization of the Company and its Restricted Subsidiaries, provided that none of the events described in paragraphs (1) through and including (4) of this definition has occurred.
“Code” means the Internal Revenue Code of 1986, as amended.
"Consolidated
“Common Stock” means with respect to any Capital Stock of any Person, any and all shares, interest or other participations in, and other equivalents (however designated and whether voting or nonvoting) of such Person’s
61
common stock whether or not outstanding on the Issue Date, and includes, without limitation, all series and classes of such common stock.
“Consolidated Coverage Ratio"Ration” means as of any date of determination, meanswith respect to any Person, the ratio of (1)(x) the aggregate amount of Consolidated EBITDA of Rent-A-Center and its Restricted
Subsidiariessuch Person for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which consolidated financial statements of Rent-A-Centerprepared on a consolidated basis in accordance with GAAP (subject to year-end audit adjustments and footnotes, as applicable) are available to (2)(y) Consolidated Interest Expense for such four fiscal quarters, in
each of clauses (1) and (2), determined, for each fiscal quarter, or
portion thereof, of the four fiscal quarters ending prior to the date of
the Existing Indenture, on a pro forma basis to give effect to the Central
Acquisition and the Transactions, including the anticipated disposition of
any non-rent-to-own businesses under contract for sale or held for sale
following the date of the Existing Indenture, as if they had occurred at
the beginning of such four-quarter period; provided, however, that:
(a)
(1) if Rent-A-Centerthe Company or any Restricted Subsidiary
-Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction 81
giving rise to the need to calculate the Consolidated Coverage Ratio is or includes an Incurrence of Indebtedness, Consolidated EBITDA and Consolidated Interest Expense for such period shallwill be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period except(except that in making such computation, the amount of Indebtedness under any revolving credit facilityDebt Facility outstanding on the date of such calculation shallwill be computed based on
-deemed to be (i) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or -(ii) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation,calculation), and the discharge of any other Indebtedness repaid, repurchased, redeemed, retired, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period,period; or
-
(b) has repaid, repurchased, redeemed, retired, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio involvesincludes a discharge of Indebtedness in(in each case, other than Indebtedness Incurred under any revolving credit facilityDebt Facility unless such Indebtedness has been permanently repaid and the related commitment terminated and not replaced), Consolidated EBITDA and Consolidated Interest Expense for such period shallwill be calculated after giving effect on a pro forma basis to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period;
(b)
(2) if since the beginning of such period, Rent-A-Centerthe Company or any Restricted Subsidiary shallwill have made any Asset Disposition or disposed of or discontinued (as defined under GAAP) any company, division, operating unit, segment, business, group of related assets or anyline of business or any group of assets,if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio includes such a transaction:
(a) the Consolidated EBITDA for such period shallwill be reduced by an amount equal to the Consolidated EBITDA if positive,
directly(if positive) attributable to the assets that are the subject of such Asset
Dispositiondisposition or discontinuation for such period or increased by an amount equal to the Consolidated EBITDA if negative, directly(if negative) attributable thereto for such periodperiod; and
(b) Consolidated Interest Expense for such period shallwill be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of Rent-A-Centerthe Company or any Restricted Subsidiary repaid, repurchased, redeemed, retired, defeased or otherwise discharged (to the extent the related commitment is permanently reduced) with respect to Rent-A-Centerthe Company and its continuing Restricted Subsidiaries in connection with such Asset Dispositiontransaction for such period and,(or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent Rent-A-Centerthe Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale;
(c)sale);
(3) if since the beginning of such period Rent-A-Centerthe Company or any Restricted Subsidiary by(by merger or otherwise, shallotherwise) will have made an Investment in any Restricted Subsidiary (or any Person that thereby becomes a Restricted Subsidiary or otherwise acquired any companyis merged with or any businessinto the Company or any groupa Restricted Subsidiary) or an acquisition of assets, including any such acquisition of assets occurring in connection with a transaction causing a calculation to be made
62
hereunder, which constitutes all or substantially all of a company, division, operating unit, segment, business, group of related assets or line of business, Consolidated EBITDA and Consolidated Interest Expense for such period shallwill be calculated after giving pro forma effect thereto including(including the Incurrence of any Indebtedness and including the pro forma expenses and cost reductions
calculated on a basis consistent with
82
Regulation S-X of the Securities Act,Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and
(d)
(4) if since the beginning of such period any Person that(that subsequently became a Restricted Subsidiary or was merged with or into Rent-A-Centerthe Company or any Restricted Subsidiary since the beginning of such period, shallperiod) will have Incurred any Indebtedness or discharged any Indebtedness, made any Asset Dispositiondisposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (b)(1), (2) or (c)(3) above if made by Rent-A-Centerthe Company or a Restricted Subsidiary during such period, Consolidated EBITDA and Consolidated Interest Expense for such period shallwill be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of
assetstransaction occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an Asset Disposition, Investment or acquisition of assets, or any transaction
governed by the provisions describedcalculation under "-- Merger and Consolidation," or the
amount of income or earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred or repaid,
repurchased, defeased or otherwise discharged in connection therewith,this definition, the pro forma calculations in respect thereof shallwill be as determined in good faith by a responsible financial or accounting officer of Rent-A-Center, basedthe Company (including pro forma expense and cost reductions calculated on reasonable assumptions.a basis consistent withRegulation S-X under the Securities Act). If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shallwill be calculated at a fixed rate as if the rate in effect on the date of determination had been the applicable rate for the entire period taking(taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months.months). If any Indebtedness bears, at the option of Rent-A-Center
or a Restricted Subsidiary, a fixed or floating rate of interest andthat is being given pro forma effect thebears an interest expense on such Indebtedness shall be
computed by applying,rate at the option of Rent-A-Center or such Restricted
Subsidiary, either a fixed or floating rate. If any Indebtedness which is being
given pro forma effect was Incurred under a revolving credit facility,the Company, the interest expense on such Indebtednessrate shall be computed based uponcalculated by applying such optional rate chosen by the average
daily balance of such Indebtedness during the applicable period.
"Consolidated Interest Expense"Company.
“Consolidated EBITDA” means, aswith respect to any Person for any period, the totalConsolidated Net Income of such Person for such period:
(1) increased (without duplication) by the following items to the extent deducted in calculating such Consolidated Net Income:
(a) Consolidated Interest Expense; plus
(b) Consolidated Income Taxes; plus
(c) consolidated interestdepreciation expense (excluding depreciation of rental merchandise); plus
(d) consolidated amortization expense or impairment charges recorded in connection with the application of Financial Accounting Standard No. 142 “Goodwill and Other Intangibles” and Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets;” plus
(e) other non-cash charges reducing Consolidated Net Income, including any write-offs or write-downs (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was capitalized at the time of payment) and non-cash compensation expense recorded from grants of stock appreciation or similar rights, stock options, restricted stock or other rights to officers, directors or employees;
(2) decreased (without duplication) by
(a) non-cash items increasing Consolidated Net Income of such Person for such period (excluding any items which represent the reversal of any accrual of, or reserve for, anticipated cash charges that reduced Consolidated EBITDA in any prior period); and
(b) any extraordinary or unusual or non-recurring income or gain (but not loss) (including gains, but not losses, realized upon the sale of or other disposition of an asset of the Company or its Restricted Subsidiaries that is disposed of other than in the ordinary course of business);
(3) increased or decreased (without duplication) to eliminate the following items reflected in Consolidated Net Income:
(a) any unrealized net gain or loss resulting in such period from Hedging Obligations and the application of Statement of Financial Accounting Standards No. 133;
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(b) any unrealized gains and losses relating to financial instruments to which fair value accounting is applied;
(c) any net gain or loss resulting in such period from currency translation gains or losses related to currency remeasurements of Indebtedness; and
(d) effects of adjustments (including the effects of such adjustments pushed down to the Company and its Restricted Subsidiaries) in any line item in such Person’s consolidated financial statements pursuant to GAAP resulting from the application of purchase accounting in relation to any completed acquisition.
Notwithstanding the foregoing, clauses (1)(b) through (e) relating to amounts of a Restricted Subsidiary of a Person will be added to Consolidated Net Income to compute Consolidated EBITDA of such Person only to the extent (and in the same proportion) that the net income (loss) of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person and, its Subsidiaries
determined in accordance with GAAP, minus, to the extent the amounts set forth in clauses (1)(b) through (e) are in excess of those necessary to offset a net loss of such Restricted Subsidiary or if such Restricted Subsidiary has net income for such period included in Consolidated Net Income, only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Restricted Subsidiary or its stockholders.
“Consolidated Income Taxes” means, with respect to any Person for any period, taxes imposed upon such Person or other payments required to be made by such Person by any governmental authority which taxes or other payments are imposed, measured or calculated by reference to the income or profits or capital of such Person or such Person and its Restricted Subsidiaries (to the extent such income or profits were included in computing Consolidated Net Income for such period), including, without limitation, state, franchise, capital and similar taxes and foreign withholding taxes regardless of whether such taxes or payments are required to be remitted to any governmental authority.
“Consolidated Interest Expense” means, for any period, the total interest expense amortizationof the Company and its consolidated Restricted Subsidiaries, whether paid or write-off of financing costsaccrued, plus, to the extent incurred by such Person and its Subsidiaries in such period but not included in such interest expense, without duplication,
expense:
(1) interest expense attributable to Capitalized Lease Obligations and the interest componentportion of rent expense associated with Attributable DebtIndebtedness in respect of the relevant lease giving rise thereto, determined as if such lease were a capitalized lease in accordance with GAAP and the interest component of any deferred payment obligations;
(2) amortization of debt discount (3) interest in respect(including the amortization of original issue discount resulting from the issuance of Indebtedness at less than par) and debt issuance cost; provided, however, that any amortization of bond premium will be credited to reduce Consolidated Interest Expense unless, pursuant to GAAP, such amortization of bond premium has otherwise reduced Consolidated Interest Expense;
(3) non-cash interest expense, but any non-cash interest income or expense attributable to the movement in the mark to market valuation of Hedging Obligations or other derivative instruments pursuant to GAAP shall be excluded from the calculation of Consolidated Interest Expense;
(4) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing;
(5) the interest expense on Indebtedness of another Person that has
beenis Guaranteed by such Person or any Subsidiary,one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries but only to the extent that such interest is actually paid by such Personthe Company or any such Restricted Subsidiary (4) non-cash interest expense,
(5) netunder any Guarantee of Indebtedness or other obligation of any other Person;
(6) costs associated with entering into Hedging Obligations (6)(including amortization of fees) related to Indebtedness;
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(7) interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period;
(8) the product of (a) mandatory Preferred Stockall dividends paid or payable, in cash, dividends in respectCash Equivalents or Indebtedness or accrued during such period on any series of all
Preferred Stock of Subsidiaries of such Person and Disqualified Stock of such Person held by Personsor on Preferred Stock of its Restricted Subsidiaries that are not Guarantors payable to a party other than such Personthe Company or a Wholly Owned Subsidiary, multiplied by
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times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state, provincial and local statutory tax rate of such Person, expressed as a decimal, in each case, determined on a consolidated basis and in accordance with GAAP,GAAP; and
(7)
(9) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person other(other than the referent Person or any
Subsidiary thereof,Company and its Restricted Subsidiaries) in connection with Indebtedness Incurred by such plan or trust; provided, however, that as to Rent-A-Center, theretrust.
For the purpose of calculating the Consolidated Coverage Ratio, the calculation of Consolidated Interest Expense shall be
excluded therefrom any suchinclude all interest expense (including any amounts described in clauses (1) through (9) above) relating to any Indebtedness of any Unrestricted Subsidiary
to the extent the related Indebtedness is not Guaranteed or paid by
Rent-A-CenterCompany or any Restricted Subsidiary.
Subsidiary described in the final paragraph of the definition of “Indebtedness.”
For purposes of the foregoing, grosstotal interest expense shallwill be determined (i) after giving effect to any net payments made or received by such Personthe Company and its Subsidiaries with respect to Interest Rate Agreements.
"ConsolidatedAgreements and (ii) exclusive of amounts classified as other comprehensive income in the balance sheet of the Company. Notwithstanding anything to the contrary contained herein, fees, interest and other charges (including by means of granting discounts) paid by the Company or any Restricted Subsidiary in connection with any transaction pursuant to which the Company or its Restricted Subsidiaries may sell, convey or otherwise transfer or grant a security interest in any accounts receivable or related assets shall be (without duplication) included in Consolidated Interest Expense.
“Consolidated Net Income"Income” means, as to any Person, for any period, the consolidated net income (loss) of such Personthe Company and its consolidated Restricted Subsidiaries before
preferred stock dividends, determined on a consolidated basis in accordance with GAAP; provided, however, that there shallwill not be included in such Consolidated Net Income:
Income on an after-tax basis:
(1) any net income (loss) of any Person if such Person is not (as to
Rent-A-Center) a Restricted Subsidiary and, as to any other Person, an
unconsolidated Person,or that is accounted for by the equity method of accounting, except that
that:
(a) subject to the limitations contained in clause (4)clauses (3) through (7) below, the referent Person'sCompany’s equity in the net income of any such Person for such period shallwill be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the referent PersonCompany or a Restricted Subsidiary as a dividend or other distribution subject,(subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (3) below,(2) below); and
(b) the Company’s equity in a net loss of any such Person shall(other than an Unrestricted Subsidiary) for such period will be included in determining such Consolidated Net Income to the extent such loss has been funded with cash from the Company or a Restricted Subsidiary;
(2) solely for the purpose of determining the aggregate Investmentamount available for Restricted Payments under clause 4(c)(i) of the referent Person or any of its
Subsidiaries in such Person;
(2)“Certain covenants — Limitation on restricted payments,” any net income (loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition;
(3) any net income (loss)(but not loss) of any Restricted Subsidiary as to
Rent-A-Center, or of any Subsidiary, as to any other Person,(other than a Guarantor) if such Restricted Subsidiary is subject to prior government approval or other restrictions due to the operation of its charter or any agreement, instrument, judgment, decree, order statute, rule or government regulation (which have not been waived), directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to Rent-A-Center,the Company, except that
that:
(a) subject to the limitations contained in (4)clauses (3) through (7) below, such
Person'sthe Company’s equity in the net income of any such Restricted Subsidiary for such period shallwill be included in such Consolidated Net Income up to the aggregate amount of cash that could have been distributed by such Restricted Subsidiary during such period to such Personthe Company or another Restricted Subsidiary as a dividend subject,(subject, in the case of a dividend that could have been
made to another Restricted Subsidiary, to the limitation contained in this clause,clause); and
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(b) the Company’s equity in a net loss of any such Restricted Subsidiary shallfor such period will be included in determining such Consolidated Net Income;
(3) any gain or loss (less all fees and expenses relating thereto) realized upon sales or other dispositions of any assets of the Company or such Restricted Subsidiary, other than in the ordinary course of business, as determined in good faith by (a) in respect of assets with a fair market value of less than or equal to $10.0 million, a responsible financial officer, (b) in respect of assets with a fair market value greater than $10.0 million but less than or equal to $25.0 million, a member of senior management, and (c) in respect of assets with a fair market value in excess of $25.0 million, the Board of Directors of the Company;
(4) any charges for costs and expenses associated withafter-tax effect of income (loss) from the Transactions;
early extinguishment of Indebtedness or Hedging Obligations or other derivative instruments;
(5) any extraordinary gain or loss;
(6) any net income (loss) included in the consolidated statement of operations due to the application of Financial Accounting Standard No. 160 “Noncontrolling Interests in Consolidated Financial Statements;” and
(6)
(7) the cumulative effect of a change in accounting principles.
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"Consolidated Tangible Assets"
“Continuing Directors” means, as of any date of determination, any member of the total assets, less goodwill and other intangibles, other than patents,
trademarks, copyrights, licenses and other intellectual property, shownBoard of Directors of the Company who: (1) was a member of such Board of Directors on the balance sheetIssue Date; or (2) was nominated for election or elected to such Board of Rent-A-Center and its Restricted Subsidiaries asDirectors with the approval of a majority of the most
recent date for whichContinuing Directors who were members of such a balance sheet is available, determined on a
consolidated basis in accordance with GAAP less all write-ups, other than
write-ups in connection with acquisitions, subsequent toBoard at the datetime of the
indenture in the book value of any asset, except any such intangible assets,
owned by Rent-A-Centernomination or any of its Restricted Subsidiaries.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of Rent-A-Center in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of Rent-A-Center in
any Unrestricted Subsidiary will be accounted for as an investment. The term
"Consolidated" has a correlative meaning.
"Convertible Preferred Stock" means
(1) the convertible preferred stock of Rent-A-Center issued to Apollo,
resulting in gross proceeds to Rent-A-Center of $250 million, and
(2) the convertible preferred stock of Rent-A-Center issued to an
Affiliate of Bear, Stearns & Co. on August 18, 1998.
"Currency Agreement"election.
“Currency Agreement” means in respect of a Person or any foreign exchange contract, currency swap agreement, futures contract, option contract or other similar agreement or arrangement,
including derivative agreements or arrangements, as to which such Person is a party or a beneficiary.
"Default"
“Debt Facility” or “Debt Facilities” means, with respect to the Company or any Guarantor, one or more debt facilities (including, without limitation, the Senior Credit Facility) or commercial paper facilities with banks or other institutional investors or lenders or dealers providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, supplemented, modified, renewed, refunded, replaced or refinanced (including by means of sales of debt securities to institutional investors) in whole or in part from time to time (and whether or not with the original trustee, holders, purchasers, administrative agent and lenders or another administrative agent or agents or other lenders and whether provided under the original Senior Credit Facility or any other credit or other agreement or indenture).
“Default” means any event or condition that is, or after notice or passage of time or both would be, an Event of Default.
"Designated Senior Indebtedness"
“Designated Non-Cash Consideration” means (1) the Bank Indebtednessnon-cash consideration received by the Company or one of its Restricted Subsidiaries in connection with an Asset Disposition that is so designated as Designated Non-Cash Consideration pursuant to an Officers’ Certificate setting forth the Fair Market Value of such Designated Non-Cash Consideration and (2) any other Senior Indebtedness which, at the datebasis of determination,
has an aggregate principalsuch valuation, less the amount of cash or under which, at the dateCash Equivalents received in connection with a subsequent sale, redemption or payment of, determination, the holders thereof are committedon, or with respect to, lend up to, at least
$25.0 million and is specifically designated by Rent-A-Center in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the indenture.
"Disqualified Stock"Designated Non-Cash Consideration.
“Disqualified Stock” means, with respect to any Person, any Capital Stock excluding the Convertible Preferred Stock,of such Person that by its terms or(or by the terms of any security into which it is convertible or for which it is exchangeable or
exercisable,exchangeable) or upon the happening of any event
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
otherwise;
(2) is convertible into or exchangeable for Indebtedness or Disqualified Stock (excluding Capital Stock which is convertible or exchangeable solely at the option of the Company or a Restricted Subsidiary (it being understood that upon such conversion or exchange it shall be an Incurrence of such Indebtedness or Disqualified Stock)); or
(3) is redeemable at the option of the holder thereof,of the Capital Stock in whole or in part,
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in theeach case of clauses (1), (2) and (3), on or prior to the 91st daydate 91 days after the earlier of the Stated Maturity of the notes.
"EBITDA" means, asNotes or the date the Notes are no longer outstanding; provided, however, that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such date will be deemed to be Disqualified Stock; provided, further that any Person, for any period,Capital Stock that would constitute Disqualified Stock solely because the Consolidated Net
Income for such period, plusholders thereof have the followingright to require the extent included in calculating
such Consolidated Net Income:
(1) income tax expense,
(2) Consolidated Interest Expense,
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(3) depreciation expense, other than depreciation expense relating to
rental merchandise,
(4) amortization expense, and
(5) other non-cash charges or non-cash losses, and minus any gain, but
not loss, realized upon the sale or other disposition of any asset of
Rent-A-CenterCompany or its Restricted Subsidiaries includingto repurchase such Capital Stock upon the occurrence of a Change of Control or Asset Disposition (each defined in a substantially identical manner to the corresponding definitions in the Indenture) shall not constitute Disqualified Stock if the terms of such Capital Stock (and all such securities into which it is convertible or exchangeable or for which it is redeemable) provide that the Company or its Restricted Subsidiaries, as applicable, is not required to repurchase or redeem any such Capital Stock (and all such securities into which it is convertible or exchangeable or for which it is redeemable) pursuant to such provision prior to compliance by the Company with the provisions of the Indenture described under the captions “Repurchase at the option of holders — Change of control” and “Repurchase at the option of holders — Asset sales” and such repurchase or redemption complies with “Certain covenants — Limitation on restricted payments.”
“Domestic Subsidiary” means with respect to any Sale/Leaseback Transaction,Person, any Restricted Subsidiary of such Person that is not soldorganized or otherwise disposedexisting under the laws of the United States of America, or any state thereof, or the District of Columbia.
“Equity Offering” means a public offering for cash by the Company of its Common Stock, or options, warrants or rights with respect to its Common Stock, other than (x) public offerings with respect to the Company’s Common Stock, or options, warrants or rights, registered onForm S-4 orS-8, (y) an issuance to any Subsidiary or (z) any offering of Common Stock issued in the ordinary courseconnection with a transaction that constitutes a Change of business.
"Exchange Act"Control.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
"Existing Indenture"amended, and the rules and regulations of the SEC promulgated thereunder.
“Exchange Notes” means Notes issued in a registered exchange offer pursuant to a corresponding Registration Rights Agreement.
“Fair Market Value” means, with respect to any asset or liability, the fair market value of such asset or liability as determined by a responsible financial officer of the Company in good faith; provided that certain indenture, datedif the fair market value exceeds $25.0 million, such determination shall be made by Senior Management of the Company, and provided, further, if the fair market value exceeds $75.0 million such determination shall be made by the Board of Directors of the Company or an authorized committee thereof in good faith (including as of August 18,
1998, as amended to the datevalue of all non-cash assets and liabilities).
“Foreign Subsidiary” means any Restricted Subsidiary that is not organized under the laws of the indenture, among Renters Choice, Inc., Color
Tyme, Inc., Rent-A-Center, Inc.United States of America or any state or territory thereof or the District of Columbia and IBJ Schroder Bank & Trust Company, as
Trustee.
"GAAP"any Restricted Subsidiary of such Restricted Subsidiary.
“GAAP” means generally accepted accounting principles in the United States of America as in effect on the dateas of the Existing Indenture, for purposes of
the definitions of the terms "Consolidated Coverage Ratio," "Consolidated
Interest Expense," "Consolidated Net Income" and "EBITDA," all defined terms in
the indenture to the extent used in or relating to any of the foregoing
definitions, and all ratios and computations based on any of the foregoing
definitions, and as in effect from time to time, for all other purposes of the
indenture,Issue Date, including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the indenture shallIndenture will be computed in conformity with GAAP.
"Guarantee"GAAP, except that in the event the Company is acquired in a transaction that is accounted for using purchase accounting, the effects of the application of purchase accounting shall be disregarded in the calculation of such ratios and other computations contained in the Indenture.
“Government Securities” means securities that are (a) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (b) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally Guaranteed as a full faith and credit obligation of the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such Government Securities or a specific payment of principal of or interest on any such Government Securities held by
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such custodian for the account of the holder of such depositary receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Securities or the specific payment of principal of or interest on the U.S. Government Securities evidenced by such depositary receipt.
“Guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other nonfinancial
obligation of any other Person includingand any such obligation, direct or indirect, contingent or otherwise, of such Person
Person:
(1) to purchase or pay or(or advance or supply funds for the purchase or payment of,of) such Indebtedness or such other obligation of such other Person whether(whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise,otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof in(in whole or in part;part); provided, however, that the term "Guarantee" shall“Guarantee” will not include endorsements for collection or deposits madedeposit in the ordinary course of business.
The term "Guarantee"“Guarantee” used as a verb has a correlativecorresponding meaning.
"Guarantor Senior Indebtedness"
“Guarantor” means with respect to aeach Restricted Subsidiary Guarantor, the following obligations, whether outstandingin existence on the date ofIssue Date that provides a Guarantee on the indenture or thereafter Incurred, without duplication:
(1) any Guarantee of the Senior Credit Facility by such Subsidiary
Guarantor and all other Guarantees by such Subsidiary Guarantor of Senior
Indebtedness of Rent-A-Center or Guarantor Indebtedness forIssue Date (and any other Restricted Subsidiary Guarantor; and
(2) all obligations consisting ofthat provides a Guarantee in accordance with the principal of and premium, if
any, and accrued and unpaid interest, including interest accruing on or
after the filling of any petition in bankruptcy or for reorganization
relating to the Subsidiary Guarantor regardless of whether post filing
interest is allowed in such proceeding, on, and fees and other amounts
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owing in respect of, all other Indebtedness of the Subsidiary Guarantor,
unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is expresslyIndenture); provided that the
obligations in respectupon release or discharge of such Indebtedness are not seniorRestricted Subsidiary from its Guarantee in accordance with the Indenture, such Restricted Subsidiary ceases to be a Guarantor.
“Guarantor Pari Passu Indebtedness” means indebtedness of a Guarantor that ranks equally in right of payment to its Guarantee.
Notwithstanding anything to the obligations of such Subsidiary Guarantor undercontrary in the Subsidiary Guarantee; provided, however, thatpreceding paragraph, Guarantor Senior Indebtedness will not include
(a)include:
(1) any Indebtedness Incurred in violation of the Indenture;
(2) any obligations of such Subsidiary Guarantor to another Subsidiary Guarantor or any other Affiliate of the Subsidiary Guarantor
or any such Affiliate's Subsidiaries,
(b)Company;
(3) any liability for Federal, state, local, foreign or other taxes owed or owing by such Subsidiary Guarantor,
(c)Guarantor;
(4) any accounts payable or other liability to trade creditors arising in the ordinary course of business including(including Guarantees thereof or instruments evidencing such liabilities, or other current
liabilities, other than current liabilities which constitute Bank
Indebtedness or the current portion of any long-term Indebtedness which
would constitute Senior Indebtedness but for the operation of this
clause (c),
(d)liabilities);
(5) any Indebtedness, Guarantee or obligation of such Subsidiary
Guarantor that is expressly subordinate or junior in right of payment to any other Indebtedness, Guarantee or obligation of such Subsidiary Guarantor,
includingGuarantor; or
(6) any Guarantor Senior Subordinated Indebtedness and Capital Stock.
“Guarantor Subordinated Obligations of such Subsidiary Guarantor,
(e) Indebtedness which is represented by redeemable Capital Stock,
or
(f) that portion of any Indebtedness that is incurred in violation
of the indenture. If any Designated Senior Indebtedness is disallowed,
avoided or subordinated pursuant to the provisions of Section 548 of
Title 11 of the United States Code or any applicable state fraudulent
conveyance law, such Designated Senior Indebtedness nevertheless will
constitute Senior Indebtedness.
"Guarantor Senior Subordinated Indebtedness"Obligation” means with respect to a
Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor,
whether outstanding on the date of the Existing Indenture or thereafter
Incurred, that specifically provides that such Indebtedness is to rank pari
passu in right of payment with the obligations of such Subsidiary Guarantor
under the Subsidiary Guarantee and is not expressly subordinated by its terms in
right of payment to any Indebtedness of such Subsidiary Guarantor which is not
Guarantor Senior Indebtedness of such Subsidiary Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor, whether(whether outstanding on the date of the Existing IndentureIssue Date or thereafter Incurred, whichIncurred) that is expressly subordinatesubordinated or junior in right of payment to the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee pursuant to a written agreement.
"Hedging Obligations"
“Hedging Obligations” of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder"
“Holder” means thea Person in whose name a noteNote is registered inon the Register.
"Incur"Registrar’s books.
“Incur” means issue, create, assume, enter into any Guarantee, of, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary whether(whether by merger, consolidation, acquisition or otherwise, shallotherwise) will be deemed to be Incurred by such Restricted Subsidiary at the time it becomes a Subsidiary. Any
Indebtedness issued at a discount, including Indebtedness on which interest is
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payable throughRestricted Subsidiary; and the issuance of additional Indebtedness, shall be deemed
incurred atterms “Incurred” and “Incurrence” have meanings correlative to the time of original issuance of the Indebtedness at the initial
accreted amount thereof.
"Indebtedness"foregoing.
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“Indebtedness” means, with respect to any Person on any date of determination without duplication:
(without duplication):
(1) the principal of Indebtednessand premium (if any) in respect of indebtedness of such Person for borrowed money,
money;
(2) the principal of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments,
instruments;
(3) the principal component of all reimbursement obligations of such Person including
reimbursement obligations in respect of letters of credit, bankers’ acceptances or other similar instruments the amount of such(including reimbursement obligations being equal at any timewith respect thereto except to the aggregate then undrawnextent such reimbursement obligation relates to a trade payable or similar obligations and unexpired amountsuch obligation is satisfied within 30 days of such lettersIncurrence;
(4) the principal component of credit or
other instruments plus the aggregate amount of drawings thereunder that
have not then been reimbursed,
(4) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, except Trade Payables,(including earn-out obligations), which purchase price is due more than one yearsix (6) months after the date of placing such property in final service or taking final delivery and title thereto, except (i) any such balance that constitutes a trade payable or similar obligation to a trade creditor, in each case accrued in the completionordinary course of business and (ii) any earn-out or other similar adjustment to purchase price obligation until the amount of such services,
obligation becomes a liability on the balance sheet of such Person in accordance with GAAP;
(5) all Capitalized Lease Obligations and all Attributable DebtIndebtedness of such Person (whether or not such items would appear on the balance sheet of the guarantor or obligor);
(6) the principal component or liquidation preference of all obligations of such Person with respect to the redemption, repayment or other repurchase amount of such
Personany Disqualified Stock or, with respect to any Disqualified Stock or, if such Person is aNon-Guarantor Subsidiary, of Rent-A-Center, any Preferred Stock of such Subsidiary, but(but excluding, in each case, any accrued dividends,dividends);
(7) the amountprincipal component of such
obligation to be equal at any time to the maximum fixed involuntary
redemption, repaymentindebtedness or repurchase price for such Capital Stock, or if
such Capital Stock has no fixed price, to the involuntary redemption,
repayment or repurchase price therefor calculated in accordance with the
terms thereof as if then redeemed, repaid or repurchased, and if such price
is based upon or measured by the fair market value of such Capital Stock,
such fair market value shall be as determined in good faith by the Board of
Directors or the board of directors of the issuer of such Capital Stock,
(7) all Indebtednessobligations of other Persons which are of a type referred to in clauses (1) through (6) above and (9) below and are secured by a Lien on any asset of such Person, whether or not such Indebtedness isindebtedness and obligations are assumed by such Person; provided, however, that the amount of Indebtedness of such Person shallindebtedness or obligations will be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such Indebtednessindebtedness or obligations of such other Persons,
Persons;
(8) all Indebtednessthe principal component of indebtedness or obligations of other Persons which are of a type referred to in clauses (1) through (6) above and (9) below, to the extent Guaranteed by such Person (whether or not such items would appear on a balance sheet of the guarantor or obligor); and
(9) to the extent not otherwise included in this definition, net Hedging Obligations of such Person (the amount of any such obligations to be equal at any time to the termination value of such agreement or arrangement giving rise to such Hedging Obligationobligation that would be payable by such Person at such time.
time); and
The amount of Indebtedness of any Person at any date will be (without duplication) the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that contingent obligations arising in the ordinary course of business and not with respect to borrowed money of such Person or other Persons shall not be deemed to constitute Indebtedness. Notwithstanding the foregoing, money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to pre-fund the payment of interest on such Indebtedness shall not be deemed to be “Indebtedness,” provided that such money is held to secure the payment of such interest.
In addition, “Indebtedness” of any Person shall include Indebtedness as defined in the preceding paragraph that would not appear as a liability on the balance sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture that is not a Restricted Subsidiary (a “Joint Venture”);
(2) such Person or a Restricted Subsidiary of such Person is a general partner of the Joint Venture (a “General Partner”); and
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(3) there is recourse, by contract or operation of law, with respect to the payment of such Indebtedness to property or assets of such Person or a Restricted Subsidiary of such Person; and then such Indebtedness shall be included in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and (ii) the amount of such obligations to the extent that there is recourse, by contract or operation of law, to the property or assets of such Person or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined as
set forthpursuant to clause (a) immediately above, the actual amount of such Indebtedness that is recourse to such Person or otherwise provideda Restricted Subsidiary of such Person, if the Indebtedness is evidenced by a writing and is for a determinable amount.
“Independent Financial Advisor” means an accounting, appraisal or investment banking firm or consultant to Persons engaged in Similar Businesses of nationally recognized standing that is, in the indenture, or otherwise in
accordancegood faith judgment of the Company, qualified to perform the task for which it has been engaged.
“Insurance Subsidiary” Legacy Insurance Co., Ltd., a Bermuda company and a Wholly Owned Subsidiary of the Company formed for the sole purpose of writing insurance only for the risks of the Company and its Subsidiaries, and its successors and permitted assigns.
“interest” with GAAP.
"Interestrespect to the Notes means interest with respect thereto and (without duplication) “Additional Interest,” if any.
“Interest Rate Agreement"Agreement” means, with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement including derivative agreements or arrangements, as to which such Person is party or a beneficiary; provided, however, any such agreements
entered into in connectionbeneficiary.
“Investment” means, with the Notes shall not be included.
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"Investment" inrespect to any Person, all investments by anysuch Person in other Person meansPersons (including Affiliates) in the form of any direct or indirect advance, loan (other than advances or other extensionextensions of credit other than to customers and commissions, moving, travel and similar advances to officers, employees, directors officers or employees of any Personand consultants, in each case made in the ordinary course of business,business) or other extensions of credit (including by way of Guarantee or similar arrangement, but excluding any debt or extension of credit represented by a bank deposit (other than a time deposit)) or capital contribution to by(by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others,others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by, such Person. If Rent-A-CenterPerson and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that none of the following will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of business and in compliance with the Indenture;
(2) endorsements of negotiable instruments and documents in the ordinary course of business; and
(3) an acquisition of assets, Capital Stock or other securities by the Company or a Subsidiary for consideration to the extent such consideration consists of (a) Capital Stock (other than Disqualified Stock) of the Company or (b) proceeds of a substantially concurrent issuance or sale of Capital Stock (other than Disqualified Stock) of the Company.
For purposes of “Certain covenants — Limitation on restricted payments,”
(1) “Investment” will include the portion (proportionate to the Company’s equity interest in a Restricted Subsidiary that is to be designated an Unrestricted Subsidiary) of the Fair Market Value of the net assets of such Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company will be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary in an amount (if positive) equal to (a) the Company’s aggregate “Investment” in such Subsidiary as of the time of such redesignation less (b) the portion (proportionate to the Company’s equity interest in such Subsidiary) of the
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Fair Market Value of the net assets of such Subsidiary at the time that such Subsidiary is so re-designated a Restricted Subsidiary;
(2) any property transferred to or from an Unrestricted Subsidiary will be valued at its Fair Market Value at the time of such transfer; and
(3) if the Company or any Restricted Subsidiary of Rent-A-Center sells or otherwise disposes of any CapitalVoting Stock of any direct or indirect Restricted Subsidiary of Rent-A-Center such that, after giving effect to any such sale or disposition, such entity is no longer a Subsidiary of Rent-A-Center, Rent-A-Centerthe Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market
valueFair Market Value of the Capital Stock of such Subsidiary not sold or disposed of.
"JPMorgan"
“Investment Grade Rating” means JPMorgan Chase Bank.
"Lien"a rating equal to or higher than Baa3 (or the equivalent) by Moody’s Investors Service, Inc. or BBB- (or the equivalent) by Standard & Poor’s Ratings Group, Inc., or any equivalent rating by any Rating Agency, in each case, with a stable or better outlook.
“Issue Date” means November 2, 2010.
“Leverage Ratio” means, as of any date of determination, the ratio of:
(1) the sum of the aggregate outstanding Indebtedness of the Company and its Restricted Subsidiaries as of the end of the most recent fiscal quarter for which internal financial statements prepared on a consolidated basis in accordance with GAAP (subject to year-end audit adjustments and footnotes, as applicable) are available, to
(2) Consolidated EBITDA of the Company and its Restricted Subsidiaries for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which financial statements are available;
provided, however, that:
(3) if the Company or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Leverage Ratio is an Incurrence of Indebtedness, Indebtedness at the end of such period, Consolidated EBITDA and Consolidated Interest Expense for such period will be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (except that in making such computation, the amount of Indebtedness under any revolving Debt Facility outstanding on the date of such calculation will be deemed to be:
(i) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or
(ii) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation),
and the discharge of any other Indebtedness repaid, repurchased, redeemed, retired, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period; or
(b) has repaid, repurchased, redeemed, retired, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination or if the transaction giving rise to the need to calculate the Leverage Ratio includes a discharge of Indebtedness (in each case, other than Indebtedness Incurred under any revolving Debt Facility unless such Indebtedness has been permanently repaid and the related commitment terminated), Consolidated EBITDA, Consolidated Interest Expense and Indebtedness for such period will be calculated after giving effect on a pro forma basis to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period;
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(4) if since the beginning of such period the Company or any Restricted Subsidiary will have made any Asset Disposition or disposed of or discontinued any company, division, operating unit, segment, business, group of related assets or line of business or if the transaction giving rise to the need to calculate the Leverage Ratio includes such an Asset Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to such disposition or discontinuation for such period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such period;
(b) Consolidated Interest Expense for such period will be reduced by an amount equal to the Consolidated Interest Expense attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, redeemed, retired, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such transaction for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale); and
(c) Indebtedness at the end of such period will be reduced by an amount equal to the Indebtedness repaid, repurchased, redeemed, retired, defeased or otherwise discharged with the Net Available Cash of such Asset Disposition and the assumption of Indebtedness by the transferee;
(5) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) will have made an Investment in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary or is merged with or into the Company or a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of a company, division, operating unit, segment, business or group of related assets or line of business, Consolidated EBITDA, Consolidated Interest Expense and Indebtedness for such period will be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and
(6) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) will have Incurred any Indebtedness or discharged any Indebtedness or made any disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3), (4) or (5) above if made by the Company or a Restricted Subsidiary during such period, Consolidated EBITDA, Consolidated Interest Expense and Indebtedness for such period will be calculated after giving pro forma effect thereto as if such transaction occurred on the first day of such period.
The pro forma calculations will be determined in good faith by a responsible financial or accounting Officer of the Company (including pro forma expense and cost reductions calculated on a basis consistent withRegulation S-X under the Securities Act). If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months).
“Lien” means, with respect to any asset, any mortgage, lien (statutory or otherwise), pledge, hypothecation, charge, security interest, encumbrance, lienpreference, priority or chargeencumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, orany lease in the nature thereof.
"Moody's" means Moody's Investors Service, Inc.,thereof, any option or other agreement to sell or give a security interest in and its successors.
"Netany filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction; provided that in no event shall an operating lease or a contractual provision that restricts the ability to grant or permit a Lien on property or assets, or a contractual provision similar to “Redemption at the option of Holders — Asset sales” that requires the application of sale proceeds on unsecured properties or assets to specified Indebtedness, to be deemed to constitute a Lien.
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“Net Available Cash"Cash” from an Asset Disposition means cash payments received including(including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and net proceeds from the sale or other disposition of any securities or other assets received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring personPerson of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form,non-cash form) therefrom, in each case net of
of:
(1) all legal, accounting, investment banking, title and recording tax expenses, commissions and other fees and expenses incurred, including, without limitation, fees and
expenses of legal counsel, accountants and financial advisors,Incurred, and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP (after taking into account any available tax credits or deductions and any tax sharing agreements), as a consequence of such Asset Disposition,
Disposition;
(2) all payments made on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, or thatwhich must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition,
Disposition;
(3) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition or to any other Person, other than Rent-A-Center or
any Restricted Subsidiary, owning a beneficial interest inDisposition; and
(4) the assets
disposeddeduction of in such Asset Disposition, and
(4) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the assets disposed of in such Asset Disposition and retained by Rent-A-Centerthe Company or any Restricted Subsidiary after such Asset Disposition.
"Net
“Net Cash Proceeds"Proceeds” means, with respect to any issuance or sale of any
securities of Rent-A-CenterCapital Stock or any Subsidiary by Rent-A-Center or any
Subsidiary, or any capital contribution,Indebtedness, the cash proceeds of such issuance sale or contributionsale, net of attorneys'attorneys’ fees, accountants'accountants’ fees, underwriters'underwriters’ or placement agents'agents’ fees, listing fees, discounts or commissions and brokerage, consultant and other fees and expensescharges actually incurredIncurred in connection with such issuance sale
or contributionsale and net of taxes paid or payable as a result thereof.
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"Non-Recourse Debt"of such issuance or sale (after taking into account any available tax credit or deductions and any tax sharing arrangements).
“Non-Guarantor Subsidiary” means any Restricted Subsidiary that is not a Guarantor.
“Non-Recourse Debts” means Indebtedness of a Person:
(1) as to which neither Rent-A-Centerthe Company nor any Restricted Subsidiary (a) provides any Guarantee or credit support of any kind including(including any undertaking, Guarantee, indemnity, agreement or instrument that would constitute Indebtedness (but excluding any pledge of stock of Capital Stock of an Unrestricted Subsidiary that is an obligor of the related Indebtedness) or (b) is directly or indirectly liable as(as a guarantor or otherwise, and
otherwise);
(2) no default with respect to which including(including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary,Subsidiary) would permit upon(upon notice, lapse of time or both,both) any holder of any other Indebtedness of Rent-A-Centerthe Company or any Restricted Subsidiary to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity.
"Officer"Stated Maturity; and
(3) the explicit terms of which provide there is no recourse against any of the assets of the Company (other than the Capital Stock of an Unrestricted Subsidiary that is an obligor of such Indebtedness) or its Restricted Subsidiaries.
“Obligations” means any principal, interest (including any interest accruing subsequent to the filing of a petition in bankruptcy, reorganization or similar proceeding at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable state, federal or foreign law), other monetary obligations, penalties, fees, indemnifications, reimbursements (including reimbursement obligations with respect to letters of credit and bankers acceptances), damages and other liabilities, and Guarantees of payment of such principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities, payable under the documentation governing any Indebtedness.
“Officer” means the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer, any Executive Vice President, Controller,Senior Vice President or Vice President, the Treasurer or the Secretary of the Company or, Treasurerin the event that the Company is a partnership or a limited liability company that has no such officers, a
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person duly authorized under applicable law by the general partner, managers, members or a similar body to act on behalf of Rent-A-Center.
"Officers' Certificate"the Company. Officer of any Guarantor has a correlative meaning.
“Officers’ Certificate” means a certificate signed by two Officers.
"OpinionOfficers of Counsel"the Company, one of whom is the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company.
“Opinion of Counsel” means a written opinion from legal counsel. The counsel may be an employee of or counsel to Rent-A-Center orthe Company who is acceptable to the Trustee.
"Permitted Holders"
“Pari Passu Indebtedness” means Apollo, J. Ernest Talley and Mark E. Speese,
their respective Affiliates and successors or assigns and any Person actingIndebtedness that ranks equally in right of payment to the capacity of an underwriter in connection with a public or private offering
of Rent-A-Center's Capital Stock.
"Permitted Investment"Notes (without giving effect to collateral arrangements).
“Permitted Investments” means an Investment by Rent-A-Centerthe Company or any Restricted Subsidiary in any of the following:
in:
(1) a Restricted Subsidiary, Rent-A-CenterSubsidiary;
(2) any Investment by the Company or any of its Restricted Subsidiaries in a Person that will, upon
the making of such Investment, becomeis engaged in a Restricted Subsidiary;
(2) another PersonSimilar Business if as a result of such InvestmentInvestment:
(a) such other Person becomes a Restricted Subsidiary; or
(b) such Person, in one transaction or a series of related transactions, is merged or consolidated with or into, or transfers or conveys all or
substantially all of its assets to, Rent-A-Centeror is liquidated into, the Company or a Restricted Subsidiary;
Subsidiary,
and, in each case, any Investment held by such Person; provided, that such Investment was not acquired by such Person in contemplation of such acquisition, merger, consolidation or transfer;
(3) Temporary Cash Investments orcash and Cash Equivalents;
(4) franchise contracts, installment contracts, rental contracts, service plans and all other amounts and receivables owing to Rent-A-Centerthe Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as Rent-A-Centerthe Company or any such Restricted Subsidiary deems reasonable under the circumstances;
(5) securities or other Investments receivedpayroll, travel, commissions and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as consideration in
connection with RTO Facility Swaps or in sales or other dispositions of
property or assetsexpenses for accounting purposes and that are made in compliance with the covenant described under
"Certain Covenants -- Limitation on Salesordinary course of Assets;"
business;
(6) securitiesloans or other Investments received in settlementadvances to employees, officers or directors of debts
createdthe Company or any Restricted Subsidiary in the ordinary course of business and owing to Rent-A-Centerin an aggregate amount not in excess of $1.0 million at any one time outstanding;
(7) any Investment acquired by the Company or any of its Restricted Subsidiaries:
(a) in exchange for any other Investment or accounts receivable held by the Company or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable;
(b) as a result of a foreclosure perfectionby the Company or enforcementany of its Restricted Subsidiaries with respect to any Lien,secured Investment or other transfer of title with respect to any secured Investment in satisfactiondefault; or
(c) in settlement of judgments, includingdebts, claims and disputes owed to the Company or any of the Restricted Subsidiaries which arose out of transactions in the ordinary course of business;
(5) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company;
(6) any Investment received in settlement of debts, claims or disputes owed to the Company or any Restricted Subsidiary of the Company that arose out of transactions in the ordinary course of business;
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(7) any Investment received in connection with anyor as a result of a bankruptcy, proceedingworkout or other reorganization of anotherany Person;
(7)
(8) Investments in existence or(a) made as a result of the receipt of non-cash consideration from an Asset Disposition that was made pursuant to legally binding
written commitmentsand in compliance with “Repurchase at the option of holders — Asset sales” or any other disposition of assets not constituting an Asset Disposition and (b) Investments in Additional Assets made in connection with an Asset Swap as described in clause (19) under the caption “Repurchase of the Option of the Holders — Asset Sales;”
(9) Investments in existence on the dateIssue Date, and renewals and replacements thereof on terms not materially less favorable to the Company or the Restricted Subsidiaries, as the case may be, than the terms of the Existing Indenture;
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(8)Investments being renewed or replaced;
(10) Currency Agreements, Interest Rate Agreements and related Hedging Obligations, which transactions or obligations are Incurred in compliance with the covenant
described under "-- Certain Covenants --“Certain covenants — Limitation on indebtedness;”
(11) Guarantees issued in accordance with “Certain covenants — Limitations on Indebtedness;"
(9)indebtedness” and Guarantees received with respect to any Permitted Investment described in any of the above or below clauses;
(12) Investments made in connection with the funding of contributions under any nonqualified retirement plan or similar employee compensation plan in an amount not to exceed the amount of compensation expense recognized by the Company and its Restricted Subsidiaries in connection with such plans;
(13) Investments by the Insurance Subsidiary in indebtedness of the Company and any Restricted Subsidiary described in clause (13) of the second paragraph of “Certain covenants — Limitation on indebtedness;”
(14) Investments in the Insurance Subsidiary in amounts not to exceed, in any fiscal year of the Company, the lesser of (x) $75.0 million and (y) the amount that will appear as an expense for self-insurance costs on the Company’s consolidated income statement;
(15) Investments in Symbius Inc. up to an aggregate amount from and after the Issue Date not to exceed $10.0 million;
(16) Short-term loans extended by the Company or any Guarantor in the ordinary course of its financial services business; and
(17) to the extent not otherwise permitted in any other clause of this definition, Investments by the Company or any of its Restricted Subsidiaries, together with all other Investments pursuant to this clause (17) in an aggregate principal amount at the time of such Investment not to exceed $35.0 million.
“Permitted Liens” means, with respect to any Person:
(1) Liens securing Indebtedness and related obligations under the Debt Facilities permitted to be Incurred pursuant to clause (1) of the second paragraph under “Certain covenants — Limitations on indebtedness;”
(2) pledges or deposits (a)by such Person under workers’ compensation laws, unemployment and other insurance laws (including pledges or deposits securing liabilities to insurance carriers under insurance or self-insurance arrangements) and old age pensions and other social security or retirement benefits or similar legislation, or good faith deposits in connection with respectbids, tenders, contracts (other than for the payment of Indebtedness) or leases to leaseswhich such Person is a party, or utilities provideddeposits to third partiessecure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import or customs duties or for the payment of rent, in each case Incurred in the ordinary course of business;
(3) Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen and other similar Liens Incurred in the ordinary course of business or (b) otherwise described in the definitionthat are imposed by, or arise by operation of, "Permitted Liens;"
(10) Investments in a Related Business in an amount not to exceed $10
million in the aggregate; and
(11) other Investments in an aggregate amount not to exceed the sum of
$10 million and the aggregate non-cash net proceeds received by
Rent-A-Center from the issue or sale of its Capital Stock, other than
Disqualified Stock, subsequent to the date of the Existing Indenture, other
than non-cash proceeds from an issuance or sale of such Capital Stock to a
Subsidiary of Rent-A-Center or an employee stock ownership plan or similar
trust; provided, however, that the value of such non-cash net proceeds
shall be as conclusively determined by the Board of Directors in good
faith, except that in the event the value of any non-cash net proceeds
shall be $25 million or more, the value shall be as determined in writing
by an independent investment banking firm of nationally recognized
standing.
"Permitted Liens" means:
(1)law;
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(4) Liens for material taxes, assessments or other governmental charges not yet delinquent or the nonpayment of which in the aggregate would not be
reasonably expectedsubject to have a material adverse effect on Rent-A-Center and
its Restricted Subsidiaries,penalties for non-payment or that are being contested in good faith and, if necessary, by appropriate proceedings if adequateprovided appropriate reserves with respect thereto are
maintained on the books of Rent-A-Center or such Subsidiary, as the case
may be, in accordance with GAAP;
(2) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of businessrequired pursuant to GAAP have been made in respect of obligations that are not overdue for a period of more than 60
days or that are bonded or that are being contested in good faith and by
appropriate proceedings;
(3) pledges, deposits or Liens in connection with workers'
compensation, unemployment insurance and other social security legislation
and/or similar legislation or other insurance-related obligations,
including, without limitation, pledges or deposits securing liability to
insurance carriers under insurance or self-insurance arrangements;
(4) pledges, deposits orthereof;
(5) Liens to secure the performance of bids, tenders, trade government or other contracts other(other than for borrowed money, obligations for or under or in respect of utilities,money), leases,
licenses, statutory obligations, surety judgment and appeal bonds, performance bonds or letters of credit or bankers’ acceptances or similar obligations issued pursuant to the request of and other obligationsfor the account of a like nature incurredsuch Person in the ordinary course of its business; (5)provided, however, that such letters of credit do not constitute Indebtedness;
(6) encumbrances, ground leases, easements including reciprocal easement agreements,
rights-of-way, building, zoningor reservations of, or rights of others for, licenses, rights of way, sewers, electric lines, telegraph and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes,telephone lines and other similar encumbrancespurposes, or zoning, building codes or other restrictions (including, without limitation, minor defects or irregularities in title defects incurred,and similar encumbrances) as to the use of real properties or leasesLiens incidental to the conduct of the business of such Person or subleases granted to others, in the ordinary courseownership of business, whichits properties that do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of the Company and its Restricted Subsidiaries, taken as a whole;
(7) Liens securing Hedging Obligations so long as the related Indebtedness is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such Hedging Obligation;
(8) leases, licenses, subleases and sublicenses of assets (including, without limitation, real property and intellectual property rights) that do not materially interfere with the ordinary conduct of the business of Rent-A-Centerthe Company and its Restricted Subsidiaries, taken as a whole;
(6)
(9) judgment Liens existing on, or provided for under written arrangements
existing on, the datenot giving rise to an Event of the Existing Indenture, or, in the case of any
such Liens securing Indebtedness of Rent-A-Center or any of its
Subsidiaries existing or arising under written arrangements
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existing on the date of the Existing Indenture, securing any Refinancing
Indebtedness in respect of such IndebtednessDefault so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the Lien securingreview of such Refinancing Indebtedness is limited to all or part of the same
property or assets, plus improvements, accessions, proceeds or dividends or
distributions in respect thereof, that secured, or under such written
arrangements could secure, the original Indebtedness;
(7) Liens securing Hedging Obligations incurred in compliance with the
covenant described under "-- Certain Covenants -- Limitation on
Indebtedness;"
(8) Liens arising out of judgments, decrees, orders or awards in
respect of which Rent-A-Center shall in good faith be prosecuting an appeal
or proceedings for review which appeal or proceedings shalljudgment have not have been finally terminated or the period within which such appeal or proceedings may be initiated shallhas not have expired;
(9)
(10) Liens for the purpose of securing (a) Indebtedness Incurred in compliance with clause (b)(1),
(b)(2)the payment of all or (b)(5)a part of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness,"purchase price of, or clause (b)(4) thereof,Capitalized Lease Obligations, mortgage financings, purchase money obligations or other payments Incurred to finance assets or property (other than Refinancing Indebtedness IncurredCapital Stock or other Investments) acquired, constructed, improved or leased in the ordinary course of business; provided that, with respect ofto Indebtedness described in paragraph this clause (b):
(a) thereof,the aggregate principal amount of Indebtedness secured by such Liens is otherwise permitted to be Incurred under the Indenture and does not exceed the cost of the assets or property so acquired, constructed or improved; and
(b) Banksuch Liens are created within 180 days of construction, acquisition or improvement of such assets or property and do not encumber any other assets or property of the Company or any Restricted Subsidiary other than such assets or property and assets affixed or appurtenant thereto;
(11) Liens that constitute banker’s Liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depositary institution, whether arising by operation of law or pursuant to contract; provided that (a) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the Federal Reserve Board; and (b) such deposit account is not intended by the Company or any Restricted Subsidiary to provide collateral to the depositary institution to secure Indebtedness;
(10)
(12) Liens on propertiesarising from Uniform Commercial Code financing statement filings regarding operating leases, consigned goods or assetssimilar arrangements, entered into or authorized by the Company or its Restricted Subsidiaries in the ordinary course of Rent-A-Center securing Senior
Indebtedness;
(11)business or otherwise made as precautionary filings pursuant to such or similar types of filings;
(13) Liens existing on the Issue Date (other than Liens permitted under clause (1)); provided that no such Lien shall extend to any additional property (other than improvements, accessions, “products” and “proceeds” thereof, or, if provided therein, “after-acquired” property, as each such term is defined in the Uniform Commercial Code of the respective states that govern the creation of such Liens) and that the amount of Indebtedness secured thereby is not increased;
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(14) Liens on property or assetsshares of stock of a Person at the time such Person becomes a Subsidiary of Rent-A-Center, or at the time Rent-A-Center
or a Restricted Subsidiary acquires such property or assets;Subsidiary; provided, however, that such Liens are not createdIncurred in connection with, or in contemplation of, such other Person becoming a Restricted Subsidiary; provided further, however, that any such Lien may not extend to any other property owned by the Company or any Restricted Subsidiary;
(15) Liens on property at the time the Company or a Restricted Subsidiary acquired the property, including any acquisition by means of a merger or such
acquisition of such propertyconsolidation with or assets, andinto the Company or any Restricted Subsidiary; provided, however, that such Liens are limited to
allnot Incurred in connection with, or partin contemplation of, the same property or assets, plus improvements, accessions,
proceeds or dividends or distributions in respect thereof,such acquisition; provided further, however, that secured,
or, under the written arrangements under which such Liens arose, could
secure,may not extend to any other property owned by the obligations to which suchCompany or any Restricted Subsidiary;
(16) Liens relate;
(12) Liens on Capital Stock of an Unrestricted Subsidiary that securesecuring Indebtedness or other obligations of such Unrestricteda Restricted Subsidiary owing to the Company or another Restricted Subsidiary;
(13)
(17) Liens securing the Notes;Notes and (14)Guarantees (and the exchange notes issued in exchange therefor and the related Guarantees) and any obligations owing to the Trustee under the Indenture as provided thereby;
(18) Liens securing Refinancing Indebtedness Incurred in respect of
any Indebtedness secured by,to refinance, refund, replace, amend, extend or securing any refinancing, refunding,
extension, renewal or replacement, inmodify, as a whole or in part, Indebtedness that was previously so secured pursuant to clauses (10), (13), (14), (15), (17), this clause (18) and (21) of any other
obligation secured by, any other Permitted Liens,this definition, provided that any such
new Lien is limited to all or part of the same property or assets plus(plus improvements, accessions, after-acquired property provided for therein, proceeds or dividends or distributions in respect thereof,thereof) that secured or,(or, under the written arrangements under which the original Lien arose, could secure) the Indebtedness being refinanced or is in respect of property that is the security for a Permitted Lien hereunder;
(19) any interest or title of a lessor under any Capitalized Lease Obligation or operating lease;
(20) Liens in favor of the Company or any Restricted Subsidiary;
(21) to the extent not otherwise permitted in any other clauses of this definition, Liens securing Indebtedness Incurred subsequent to the Issue Date and any Refinancing Indebtedness (other than Subordinated Obligations and Guarantor Subordinated Obligations) in an aggregate principal amount outstanding at any one time not to exceed $100.0 million.
(22) Liens on property and assets used to secure Indebtedness, the obligationsnet proceeds of which are promptly deposited to defease or satisfy and discharge the Notes;
(23) Liens to secure Indebtedness of a Foreign Subsidiary, which suchIndebtedness is permitted to be Incurred pursuant to clause (16) of the second paragraph under “Certain covenants — Limitation on indebtedness;” and
(24) Liens relate.
"Person"in favor of the Trustee as provided for in the Indenture in money or other property held or collected by the Trustee in its capacity as trustee under the Indenture.
“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization, government or any agency or political subdivision thereofhereof or any other entity.
"Preferred Stock"
“Preferred Stock” means, as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes however designated,(however designated) that is preferred as to the payment of dividends upon liquidation, dissolution or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolutionwinding up of such corporation,Person over shares of Capital Stock of any other class or such Person.
“RAC East” meansRent-A-Center East, Inc. a Delaware corporation.
“Rating Agency” means each of such corporation.
"Purchase Money Obligations" means any Indebtedness of Rent-A-CenterStandard & Poor’s Ratings Group, Inc. (or successor) and Moody’s Investors Service, Inc. (or successor) or any
Restricted Subsidiary incurred to finance the acquisition, constructionif Standard & Poor’s Ratings Group, Inc. (or successor) or capital improvement of any propertyMoody’s Investors Service, Inc. (or successor) or business, including Indebtedness Incurred
within 90 days following such acquisition
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or construction, including Indebtedness of a Person existing at the time such
Person becomes a Restricted Subsidiary or assumed by Rent-A-Center or a
Restricted Subsidiary in connection with the acquisition of assets from such
Person; provided, however, that any Lien on such Indebtednessboth shall not extend
to any property other thanmake a rating on the property so acquiredNotes publicly available, a nationally recognized statistical rating agency or constructed.
"Refinancing Indebtedness"agencies, as the case may be, selected by the Company (as certified by a resolution of the Board of Directors) which shall be substituted for Standard & Poor’s Ratings Group, Inc. (or successor) or Moody’s Investors Service, Inc. (or successor) or both, as the case may be.
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“Refinancing Indebtedness” means Indebtedness that is Incurred to refund, refinance, replace, exchange, renew, repay or extend including(including pursuant to any defeasance or discharge mechanism,mechanism) (collectively, "refinances,"“refinance,” “refinances” and "refinanced"“refinanced” shall each have a correlative meaning) any Indebtedness existing on the date of the indentureIssue Date or Incurred in compliance with the indenture, includingIndenture (including Indebtedness of Rent-A-Centerthe Company that refinances Indebtedness of any Restricted Subsidiary to the
extent permitted in the indenture, and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary,Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;Indebtedness, provided, however, that
that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is earlier than the Stated Maturity of the Notes, the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced or (b) if the Stated Maturity of the Indebtedness being refinanced is later than the Stated Maturity of the Notes, the Refinancing Indebtedness has a Stated Maturity at least 91 days later than the Stated Maturity of the Notes;
(2) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced and
refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal amount or(or if issued with original issue discount, an aggregate issue price,price) that is equal to or less than the sum of the aggregate principal amount or(or if issued with original issue discount, the aggregate accreted value,value) then outstanding of the Indebtedness being refinanced plus(plus, without duplication, any additional Indebtedness Incurred to pay interest or premiums required by the instruments governing such existing Indebtedness and fees underwriting discounts, premiums and other costs and expenses incurredIncurred in connection withtherewith);
(4) if the Indebtedness being refinanced is subordinated in right of payment to the Notes or the Guarantee, such Refinancing Indebtedness; provided further, however,
thatIndebtedness is subordinated in right of payment to the Notes or the Guarantee on terms at least as favorable to the Holders as those contained in the documentation governing the Indebtedness being refinanced; and
(5) Refinancing Indebtedness shall not include (a) Indebtedness of a RestrictedNon-Guarantor Subsidiary that refinances Indebtedness of Rent-A-Center or
(b) Indebtedness of Rent-A-Centerthe Company or a Guarantor.
“Registration Rights Agreement” means that certain Registration Rights Agreement dated as of the Issue Date by and among the Company, the Guarantors and the initial purchasers set forth therein and, with respect to any Additional Notes, one or more substantially similar registration rights agreements among the Company and the other parties thereto, as such agreements may be amended from time to time.
“Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business"Investment” means those businesses,any Investment other than the car rental
business, in which Rent-A-Center or any of its Subsidiaries is engaged on the
date of the Existing Indenture or that are reasonably related or incidental
thereto.
"Rent-A-Center" means Rent-A-Center, Inc., a Delaware corporation.
"Representative" means the trustee, agent or representative, if any, for an
issue of Senior Indebtedness.
"Restricted Subsidiary"Permitted Investment.
“Restricted Subsidiary” means any Subsidiary of Rent-A-Centerthe Company other than an Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility under the
Senior Credit Facility, which may include any swing line or letter of credit
facility or subfacility thereunder.
"RTO Facility" means any facility through which Rent-A-Center or any of its
Restricted Subsidiaries conducts the business of renting merchandise to its
customers and any facility through which a franchise of Rent-A-Center or any of
its Subsidiaries conducts the business of renting merchandise to customers.
"RTO Facility Swap" means an exchange of assets, including Capital Stock of
a Subsidiary or Rent-A-Center, of substantially equivalent fair market value, as
conclusively determined in good faith by the Board of Directors, by
Rent-A-Center or a Restricted Subsidiary for one or
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more RTO Facilities or for cash, Capital Stock, Indebtedness or other securities
of any Person owning or operating one or more RTO Facilities and primarily
engaged in a Related Business; provided, however, that any Net Cash Proceeds
received by Rent-A-Center or any Restricted Subsidiary in connection with any
such transaction must be applied in accordance with the covenant described under
"-- Certain Covenants -- Limitation on Sale of Assets."
"Sale/
“Sale/Leaseback Transaction"Transaction” means an arrangement relating to principal property now owned or hereafter acquired by Rent-A-Centerwhereby the Company or a Restricted Subsidiary whereby
Rent-A-Center or such Restricted Subsidiary transfers such property to a Person (other than the Company or any of its Subsidiaries) and Rent-A-Centerthe Company or sucha Restricted Subsidiary leases it from such Person,
other than leases
(1) between Rent-A-Center and a Restricted Subsidiary or
(2) required to be classified and accounted for as capitalized leases
for financial reporting purposes in accordance with GAAP.
"SEC"Person.
“SEC” means the United States Securities and Exchange Commission.
"Secured Indebtedness"
“Secured Indebtedness” means any Indebtedness of Rent-A-Centerthe Company or any of its Restricted Subsidiaries secured by a Lien.
"Senior Credit Agreement"
“Securities Act” means the credit agreementSecurities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.
“Senior Credit Facility” means the Third Amended and Restated Credit Agreement, as amended and restated as of November 15, 2006 (as amended by that certain First Amendment dated as of August 5,
1998,December 2, 2009), among Rent-A-Center, the banks and other financial institutions partyCompany, the several lenders parties thereto from time to time Comerica,the several documentation agents parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, as the documentation agent,
NationsBank, N.A. as syndication agent and JPMorgan, as administrative agent, as
such agreementsame has been, or may be assumed by any successor in interest, and as such
agreement mayhereafter be, amended, restated, supplemented, waivedmodified, renewed, refunded, replaced or otherwise modified from time
to time, or refunded, refinanced restructured, replaced, renewed, repaid,
increased or extended from time to time (whether in whole or in part whether(whether with any of the original agent andagents or lenders or one or more other agents and lenders or otherwise,
and whether provided under the original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective referencepursuant to the Senior
Credit Agreement, any Loan Documents, as defined therein, any notes and letters
of credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications andsame or one or more other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modifiedgoverning agreements) from time to time or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time, whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise. Without limiting the generality
of the foregoing, the term "Senior Credit Facility" shall include any agreement
(1) changing the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
(2) adding Subsidiaries of Rent-A-Center as additional borrowers or
guarantors thereunder,
(3)(including increasing the amount of Indebtedness incurredloaned thereunder, or
available to be borrowed thereunder or
(4) otherwise altering the terms and conditions thereof.
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"Senior Indebtedness" means the following obligations, whether outstanding
on the date of the Existing Indenture or thereafter issued, without duplication:
(1) all obligations consisting of Bank Indebtedness; and
(2) all obligations consisting of the principal of and premium, if
any, and accrued and unpaid interest, including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to Rent-A-Center regardless of whether postfiling interest is
allowed in such proceeding, on, and fees and other amounts owing in respect
of, all other Indebtedness of Rent-A-Center, unless, in the instrument
creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that the obligations in respect of such additional Indebtedness are not superior in right of payment to the notes; provided,
however, that Senior Indebtedness shall not include
(a) any obligation of Rent-A-Center to any Subsidiary or any
other Affiliate of Rent-A-Center, or any such Affiliate's
Subsidiaries,
(b) any liability for Federal, state, foreign, local or other
taxes owed or owing by Rent-A-Center,
(c) any accounts payable or other liability to trade creditors
arising in the ordinary course of business, including Guarantees
thereof or instruments evidencing such liabilities, or other current
liabilities, other than current liabilities which constitute Bank
Indebtedness or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of
this clause (c),
(d) any Indebtedness, Guarantee or obligations of Rent-A-Center
that is expressly subordinate or junior to any other Indebtedness,
Guarantee or obligation of Rent-A-Center,
(e) Indebtedness which is represented by redeemable Capital Stock
or
(f) that portion of any Indebtedness that is Incurred in violationaccordance with the covenant described under “Certain
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covenants — Limitation on indebtedness”); provided that a Senior Credit Facility shall not (1) include Indebtedness issued, created or Incurred pursuant to a registered offering of securities under the Securities Act or a private placement of securities (including under Rule 144A or Regulation S) pursuant to an exemption from the registration requirements of the indentures. IfSecurities Act or (2) relate to Indebtedness Incurred thereunder that does not consist exclusively of Pari Passu Indebtedness or Guarantor Pari Passu Indebtedness.
“Senior Management” means any Designated Senior Indebtedness is
disallowed, avoided or subordinated pursuant to the provisions of
Section 548 of Title 11 of the United States CodeChief Executive Officer, the Chief Financial Officer or the Controller.
“Significant Subsidiary” means any Restricted Subsidiary that would be a “Significant Subsidiary” of the Company within the meaning ofRule 1-02 underRegulation S-X promulgated by the SEC.
“Similar Business” means any business conducted or proposed to be conducted by the Company and its Restricted Subsidiaries on the Issue Date or any applicable
state fraudulent conveyance law, such Designated Senior Indebtedness
nevertheless will constitute Senior Indebtedness.
"Senior Subordinated Indebtedness" means the notes and any other
Indebtedness of Rent-A-Center that
(1) specifically provides that such Indebtedness is to rank pari passu
with the notes or is otherwise entitled Senior Subordinated Indebtedness,
and
(2) is not subordinated by its terms to any Indebtedness or other
obligation of Rent-A-Centerbusiness that is not Senior Indebtedness.
"Significant Subsidiary" means
(1) each Subsidiary that for the most recent fiscal year of such
Subsidiary had consolidated revenues greater than $10.0 millionsimilar, reasonably related, incidental or as at
the end of such fiscal year had assets or liabilities greater than $10.0
million, and
(2) any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Stated Maturity"ancillary thereto.
“Stated Maturity” means, with respect to any security, the date specified in the agreement governing or certificate relating to such securityIndebtedness as the fixed date on which the final payment of principal of such security is due and payable, including 95
pursuant to any mandatory redemption provision, but excludingshall not include any provision
providingcontingent obligations to repay, redeem or repurchase any such principal prior to the date originally scheduled for the repurchase of such security at the option of the holder
thereof upon the happening of any contingency beyond the control of the issuer
unless such contingency has occurred.
"Subordinated Obligation"payment thereof.
“Subordinated Obligation” means any Indebtedness of Rent-A-Center, whetherthe Company (whether outstanding on the date of the indentureIssue Date or thereafter Incurred, whichIncurred) that is subordinateexpressly subordinated or junior in right of payment to the notesobligations of the Company to the Notes pursuant to a written agreement.
"Subsidiary"
“Subsidiary” of any Person means (a) any corporation, association partnership or other business entity (other than a partnership, joint venture, limited liability company or similar entity) of which more than 50% of the total ordinary voting power of shares of Capital Stock or other interests, including partnership interests,
entitled without(without regard to the occurrence of any contingency,contingency) to vote in the election of directors, managers or trustees thereof (or Persons performing similar functions) or (b) any partnership, joint venture limited liability company or similar entity of which more than 50% of the capital accounts, distribution rights, total equity and voting interests or general or limited partnership interests, as applicable, is, in the case of clauses (a) and (b), at the time owned or controlled, directly or indirectly, by (1) such Person, (2) such Person and one or (2)more Subsidiaries of such Person or (3) one or more Subsidiaries of such Person. "Subsidiary Guarantee" means, individually, any Guarantee of paymentUnless otherwise specified herein, each reference to a Subsidiary will refer to a Subsidiary of the notesCompany.
“Total Assets” means the total assets of the Company and its Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP, as shown on the most recent consolidated balance sheet of the Company and its Restricted Subsidiaries.
“Total Tangible Assets” means Total Assets after deducting accumulated depreciation and amortization, allowances for doubtful accounts, other applicable reserves and other similar items of the Company and its Restricted Subsidiaries and after deducting, to the extent otherwise included therein, the amounts of (without duplication):
(1) the excess of cost over the fair market value of assets or business acquired, as determined by the Company in good faith (or if such fair market value exceeds $50.0 million, in writing by its Board of Directors);
(2) any revaluation or otherwrite-up in book value of assets subsequent to the last day of the fiscal quarter of the Company immediately preceding the Issue Date as a Subsidiary Guarantorresult of a change in the method of valuation in accordance with GAAP;
(3) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items;
(4) minority interest in consolidated Subsidiaries held by Persons other than the Company or any Restricted Subsidiary;
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(5) treasury stock;
(6) cash or securities set aside and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock; and
(7) Investments in and assets of Unrestricted Subsidiaries.
“Treasury Rate” means, as of any date of redemption of Notes pursuant to the termsthird paragraph under the above caption “— Optional redemption,” the yield to maturity at such date of United States Treasury securities with a constant maturity (as compiled and published in the indenture, and,
collectively, allmost recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to such Guarantees. Eachredemption date (or, if such Subsidiary GuaranteeStatistical Release is no longer published, any publicly available source or similar market data)) most nearly equal to the period from such redemption date to November 15, 2015; provided, however, that if the period from such redemption date to November 15, 2015 is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the period from the redemption date to November 15, 2015 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be in the
form prescribed in the indenture.
"Subsidiary Guarantor" means
(1) ColorTyme, Inc. and Advantage Companies, Inc. and
(2) any Restricted Subsidiary created or acquired by Rent-A-Center
after the date of this indenture.
"Successor Company" shall have the meaning assigned thereto in clause (1)
under "-- Merger and Consolidation."
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations
(a) of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency
thereof or
(b) of any foreign country recognized by the United States of
America rated at least "A" by S&P or "A1" by Moody's,
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States of America having capital and surplus
aggregating in excess of $250 million, or the foreign currency equivalent
thereof, and whose long-term debt is rated "A" by S&P or "A-1" by Moody's,
(3) repurchase obligations with a term of not more than 180 days for
underlying securities of the types described in clause (1) or (2) above
entered into with a bank meeting the qualifications described in clause (2)
above,
(4) Investments in commercial paper, maturing not more than 180 days
after the date of acquisition, issued by a corporation, other than an
Affiliate of Rent-A-Center, organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
Investment therein is made of "P-1," or higher, according to Moody's or
"A-1," or higher, according to S&P,
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(5) Investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A" by Moody's,
(6) any money market deposit accounts issued or offered by a domestic
commercial bank or a commercial bank organized and located in a country
recognized by the United States of America, in each case, having capital
and surplus in excess of $250 million, or the foreign currency equivalent
thereof, or investments in money market funds complying with the risk
limiting conditions of Rule 2a-7, or any short-term successor rule, of the
SEC, under the Investment Company Act of 1940, as amended, and
(7) similar short-term investments approved by the Board of Directors
in the ordinary course of business.
"Thorn Americas Acquisition" means the acquisition of Thorn Americas by
Rent-A-Center.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec. 77aaa-77bbbb) as in effect on the date of the indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions," means collectively the Thorn Americas Acquisition, the
offering of the notes under the Existing Indenture, the initial borrowings under
the Senior Credit Facility, and all other transactions relating to the Thorn
Americas Acquisition or the financing thereof, including the issuance of
Convertible Preferred Stock.
"Trustee" means the party named as such in the indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means, when used with respect to the Trustee, any officer
within the corporate trust department of the Trustee, including any vice
president, assistant vice president, assistant secretary, assistant treasurer,
trust officer or any other officer of the Trustee who customarily performs
functions similar to those performed by the Persons who at the time shall be
such officers, respectively, or to whom any corporate trust matter is referred
because of such person's knowledge of and familiarity with the particular
subject and who shall have direct responsibility for the administration of the
indenture.
"Unrestricted Subsidiary" means
used.
“Unrestricted Subsidiary” means:
(1) any Subsidiary of Rent-A-Center thatthe Company which at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of the Company in the manner provided belowbelow; and
(2) anyeach Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of Rent-A-Center, includingthe Company (including any newly acquired or newly formed Subsidiary of Rent-A-Center,or a Person becoming a Subsidiary through merger or consolidation or Investment therein) to be an Unrestricted Subsidiary unlessonly if:
(1) such Subsidiary or any of its Subsidiaries ownsdoes not own any Capital Stock or Indebtedness of or ownshave any Investment in, or holdsown or hold any Lien on any property of, Rent-A-Center or any other Subsidiary of Rent-A-Centerthe Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however,designated or otherwise an Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall, at the date of designation, and will at all times thereafter, consist of Non-Recourse Debt;
(3) such designation and the Investment of the Company in such Subsidiary complies with “Certain covenants — Limitation on restricted payments;”
(4) such Subsidiary, either alone or in the aggregate with all other Unrestricted Subsidiaries, does not operate, directly or indirectly, all or substantially all of the business of the Company and its Subsidiaries;
(5) such Subsidiary is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary, such Subsidiary is not a party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary with terms substantially less favorable to the Company than those that either
(a)might have been obtained from Persons who are not Affiliates of the Company.
Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing with the Trustee a resolution of the Board of Directors of the Company giving effect to such designation and an Officers’ Certificate certifying that such designation complies with the foregoing conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
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thereafter cease to be so designated has total consolidated
assetsan Unrestricted Subsidiary for purposes of $10,000 or less or
(b) ifthe Indenture and any Indebtedness of such Subsidiary has consolidated assets greater than
$10,000, thenshall be deemed to be Incurred as of such designation would be permitted under "-- Certain
Covenants -- Limitation on Re-
97
stricted Payments." date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided however, that immediately after giving effect to such designation, - Rent-A-Center could incur at least $1.00 of additional
Indebtedness under paragraph (a) in the covenant described
under "-- Certain Covenants -- Limitation on Indebtedness" and
- no Default or Event of Default shall have occurredexist and be
continuing. Any such designation by the BoardCompany could Incur at least $1.00 of Directors
shall be evidencedadditional Indebtedness pursuant to the Trustee by promptly filing with the
Trustee a copyfirst paragraph of the resolution“Certain covenants — Limitation on indebtedness” covenant on a pro forma basis taking into account such designation.
“Voting Stock” of Rent-A-Center's Board of
Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" of an entityany Person means all classes of Capital Stock of such entityPerson then outstanding and normally entitled to vote in the election of directors, managers or all interests in such entity with the ability to control the
management or actionstrustees, as applicable, of such entity.
"Wholly Owned Subsidiary"Person.
“Wholly-Owned Subsidiary” means a Restricted Subsidiary, all of Rent-A-Center
all the Capital Stock of which other(other than directors' qualifying shares is
owned by Rent-A-Center or another Wholly Owned Subsidiary.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
Except as set forth below, the exchange notes will be represented by one
permanent global registered note in global form, without interest coupons (the
"global note"). The global note will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC, or will remain in the custody of the Trustee pursuant to the
FAST Balance Certificate Agreement between DTC and the Trustee.
The descriptions of the operations and procedures of DTC, Euroclear Bank
S.A/N.V and Clearstream Bank, societe anonyme set forth below are provided
solely as a matter of convenience. These operations and procedures are solely
within the control of the respective settlement systems and are subject to
change by them from time to time. We take no responsibility for these operations
or procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended; and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between DTC participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of certificates.
DTC participants include securities brokers and dealers, banks and trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies, called indirect participants, that clear
through or maintain a custodial relationship with a DTC
98
participant, either directly or indirectly. Investors who are not DTC
participants may beneficially own securities held by or on behalf of DTC only
through participants or indirect participants.
We expect that under procedures established by DTC:
- upon deposit of the global note, DTC will credit the accounts of DTC
participants designated by the trustee with an interest in the global
note; and
- ownership of the notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC, with
respect to the interests of DTC participants, and the records of DTC
participants and the indirect participants, with respect to the interests
of persons other than DTC participants.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to such persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through DTC participants, the ability of a person having an
interest in notes represented by a global note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note will not be entitled to have notes represented by such global note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated notes, and will not be considered the owners or holders
thereof under the indenture for any purpose, including with respect to the
giving of any direction, instruction or approval to the Trustee thereunder.
Accordingly, each holder owning a beneficial interest in a global note must rely
on the procedures of DTC and, if such holder is not a DTC participant or an
indirect participant, on the procedures of the DTC participant through which
such holder owns its interest, to exercise any rights of a holder of notes under
the indenture or such global note. We understand that under existing industry
practice, in the event that we request any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that DTC, as the holder of such global note, is entitled to
take, DTC would authorize the DTC participants to take such action and the DTC
participants would authorize holders owning through such DTC participants to
take such action or would otherwise act upon the instruction of such holders.
Neither we nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
notes.
Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a global note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the global note representing such notes
under the indenture. Under the terms of the indenture, we and the Trustee may
treat the persons in whose names the notes, including the global notes, are
registered as the owners thereof for the purpose of receiving payment thereon
and for any and all other purposes whatsoever. Accordingly, neither we nor the
Trustee has or will have any responsibility or liability for the payment of such
amounts to owners of beneficial interests in a global note (including principal,
premium, if any, liquidated damages, if any, and interest). Payments by the DTC
participants and the indirect participants to the owners of beneficial interests
in a global note will be governed by standing instructions and customary
industry practice and will be the responsibility of the DTC participants or the
indirect participants and DTC.
99
Transfers between DTC participants will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the DTC participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary. However, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counter party in such system in
accordance with the rules and procedures and within the established deadlines,
Brussels time, of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant global notes in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositaries for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day, which must be a business day for Euroclear and Clearstream,
immediately following the settlement date of DTC. Cash received in Euroclear or
Clearstream as a result of sales of interest in a global security by or through
a Euroclear or Clearstream participant to a DTC participant will be received
with value on the settlement date of DTC but will be available in the relevant
Euroclear or Clearstream cash account only as of the business day for Euroclear
or Clearstream following DTC's settlement date.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED NOTES
Notes in physical, certificated form will be issued and delivered to each
person that DTC identifies as a beneficial owner of the related notes only if:
- DTC notifies Rent-A-Center at any time that it is unwilling or unable to
continue as depository for the global notes and a successor depository is
not appointed within 90 days;
- DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depository is not appointed within
90 days;
- Rent-A-Center, at its option, notifies the Trustee that it elects to
cause the issuance of certificated notes; or
- certain other events provided in the indenture should occur.
100
2001 NOTES EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the 2001 notes, we and the initial
purchasers of the 2001 notes entered into the Exchange and Registration Rights
Agreement on December 19, 2001. Pursuant to this agreement, we agreed to
- file with the SEC on or prior to February 17, 2002 a registration
statement, relating to the exchange offer for the 2001 notes under the
Securities Act; and
- use our reasonable efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act on or prior
to May 18, 2002.
As soon as practicable after the effectiveness of the exchange offer
registration statement, we will offer to the holders of transfer restricted
securities, as defined below, who are not prohibited by any law or policy of the
SEC from participating in the exchange offer, the opportunity to exchange their
transfer restricted securities for an issue of the exchange notes which are
identical in all material respects to the 2001 notes, except that the exchange
notes will not contain terms with respect to transfer restrictions and that
would be registered under the Securities Act. We will keep the exchange offer
open for not less than 30 days or longer, if required by applicable law after
the date on which notice of the exchange offerto be owned by another Person, including directors��� qualifying shares) is mailed to the holders of the
notes.
If:
- because of any change in lawowned, directly or applicable interpretations thereofindirectly, by the staff of the SEC, we are not permitted to effect the exchange offer as
contemplated hereby;
- any 2001 notes validly tendered pursuant to the exchange offer are not
exchanged for exchange notes within 180 days after the issue date;
- any initial purchaser of the 2001 notes so requests with respect to 2001
notes not eligible to be exchanged for exchange notes in the exchange
offer;
- any applicable lawCompany or interpretations do not permit any holder of 2001
notes to participate in the exchange offer;
- any holder of 2001 notes that participates in the exchange offer does not
receive freely transferable exchange notes in exchange for tendered old
notes; or
- we so elect,
then we will file with the SEC a shelf registration statement to cover resales
of transfer restricted securities by such holders who satisfy certain conditions
relating to the provision of information in connection with the shelf
registration statement.
For purposes of the foregoing, "transfer restricted securities" means each
2001 note until
- the date on which such 2001 note has been exchanged for a freely
transferable exchange note in the exchange offer;
- the date on which such 2001 note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement; or
- the date on which such 2001 note is distributed to the public pursuant to
Rule 144 under the Securities Act or is salable pursuant to Rule 144(k)
under the Securities Act.
We will use our reasonable efforts to have the exchange offer registration
statement or, if applicable, the shelf registration statement declared effective
by the SEC as promptly as practicable after the filing thereof. Unless the
exchange offer would not be permitted by a policy of the SEC, we will commence
the exchange offer and use our reasonable efforts to consummate the exchange
offer as promptly as practicable, but in any event prior to 180 days
101
after the issue date. If necessary, we will use our commercially reasonable
efforts to keep the shelf registration statement effective for a period of two
years after the issue date.
If:
- the applicable exchange offer registration statement or, if applicable,
the shelf registration statement, is not filed with the SEC on or prior
to February 17, 2002;
- the applicable exchange offer registration statement or, if applicable,
the shelf registration statement, is not declared effective on or prior
to May 18, 2002;
- the exchange offer is not consummated on or prior to June 17, 2002; or
- the shelf registration statement is filed and declared effective on or
prior to May 18, 2002 but shall thereafter cease to be effective, at any
time that we are obligated to maintain the effectiveness thereof, without
being succeeded within 45 days by an additional registration statement
filed and declared effective,
we will be obligated to pay liquidated damages to each holder of transfer
restricted securities, during the period of one or more such above events, in an
amount equal to $0.192 per week per $1,000 principal amount of the 2001 notes
constituting transfer restricted securities held by such holder until the
applicable registration statement is filed, the exchange offer registration
statement is declared effective and the exchange offer is consummated or the
shelf registration statement is declared effective or again becomes effective,
as the case may be. All accrued liquidated damages shall be paid to holders in
the same manner as interest payments on the 2001 notes on semi-annual payment
dates which correspond to interest payment dates for the 2001 notes. The accrual
of liquidated damages will cease on the day on which all registration defaults
are cured.
other Wholly-Owned Subsidiaries.
81
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The exchange and registration rights agreement also provides that we shall:
- make available for a period of 180 days after the consummation of the
exchange offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any
such exchange notes; and
- pay all expenses incident to the exchange offer, including the expense of
one counsel to the holders of the notes and will indemnify certain
holders of the notes, including any broker-dealer, against certain
liabilities, including liabilities under the Securities Act.
A broker-dealer that delivers such a prospectus to purchasers in connection
with such resales will be subject to certain of the civil liability provisions
under the Securities Act and will be bound by the provisions of the exchange and
registration rights agreement, including certain indemnification rights and
obligations.
Each holder of old notes who wishes to exchange such oldoutstanding notes for exchange notes in the exchange offer will be required to make certain representations,
including representations that:
- any exchange notes it receives will be acquired in the ordinary course of
its business;
- it has no arrangement or understanding with any person to participate in
the distribution of the exchange notes; and
- it is not an "affiliate," as defined in Rule 405 under the Securities
Act, of us, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for notes that
102
were acquired as a result of market-making activities or other trading
activities, it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes.
Holders of the 2001 notes will be required to make certain representations
to Rent-A-Center in order to participate in the exchange offer and will be
required to deliver information to be used in connection with the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells 2001 notes
pursuant to the shelf registration statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the exchange and registration rights agreement which
are applicable to such a holder, including certain indemnification obligations.
For so long as the old notes are outstanding, we will continue to provide
to holders of the old notes and to prospective purchasers of the old notes the
information required by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the exchange and registration rights agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the exchange and registration rights
agreement which is filed as an exhibit to the registration statement of which
this prospectus is a part. However, we believe that this prospectus disclosure
presents all the material terms of the exchange and registration rights
agreement.
The original issuance of the 1998 notes was registered under the Securities
Act, and thus the 1998 notes are, generally, freely tradable securities. The
objective of the exchange offer is to create a single series of debt securities
having a total outstanding principal amount which is larger than that of either
the 1998 notes or the 2001 notes as separate series, thus resulting in greater
liquidity for the exchange notes. However, see "Risk Factors -- Because the
total outstanding principal of the exchange notes will include the total
outstanding principal amount of the 1998 notes and the 2001 notes, you will
experience an immediate dilution of your percentage of ownership of such
series."
103
CERTAIN U.S. FEDERAL
INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain U.S. federal income tax consequences
associated with the exchange of old notes for exchange notes pursuant to the
exchange offer, and does not purport to be a complete analysis of all potential
tax consequences. This summary is based upon the Internal Revenue Code of 1986,
as amended, existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. This
summary is not binding on the Internal Revenue Service or on the courts, and no
ruling will be requested from the Internal Revenue Service on any issues
described below. There can be no assurance that the Internal Revenue Service
will not take a different position concerning the matters discussed below.
This summary applies only to those persons who are the initial holders of
old notes, who acquired old notes for cash and who hold old notes as capital
assets, and assumes that the old notes were not issued with "original issue
discount," as defined in the Internal Revenue Code. It does not address the tax
consequences to taxpayers who are subject to special rules, such as financial
institutions, tax-exempt organizations, insurance companies and persons who are
not "U.S. Holders", or the effect of any applicable U.S. federal estate and gift
tax laws or state, local or foreign tax laws. For purposes of this summary, a
"U.S. Holder" means a beneficial owner of a note who purchased the notes
pursuant to the offering that is for U.S. federal income tax purposes
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust, and (B) one or
more U.S. fiduciaries have the authority to control all substantial
decisions of the trust.
EXCHANGE OFFER
The exchange of old notes for exchange notes pursuant to the exchange offer
should not constitute a taxable exchange by the holders for U.S.United States federal income tax purposes.
Accordingly, a U.S. Holder should not recognize gain or loss uponpurposes, and accordingly, the receipt of
exchange notes pursuant to the exchange offer, and a U.S. holder should be
required to include interest on the exchange notes in grossUnited States federal income in the manner
and to the extent interest income was includible under the old notes. A U.S.
holder's holding period for the exchange notes should include the holding period
of the old notes exchanged therefor, and such holder's adjusted basis in the
exchange notes should be the same as the adjusted basis of the old notes
exchanged therefor immediately before the exchange.
The foregoing discussion is included herein for general information only.
Accordingly, each holder should consult with its own tax advisors concerning the tax consequences of the exchange offer with respect to its particular situation,
including the application and effect of state, local and foreign income and
other tax laws.
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PLAN OF DISTRIBUTION
Based on interpretations by the SEC set forth in no-action letters issued
to third parties, we believe that exchange notes issued pursuant to the exchange
offer in exchange for the old notes may be offered for resale, resold and
otherwise transferred by holders thereof, other than any holder which is:
- an "affiliate" of us within the meaning of Rule 405 under the Securities
Act;
- a broker-dealer who acquired notes directly from us; or
- broker-dealers who acquired notes as a result of market-making or other
trading activities,
without compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such exchange notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such exchange notes. However,
broker-dealers receiving exchange notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of such exchange
notes. To date, the SEC has taken the position that these broker-dealers may
fulfill their prospectus delivery requirements with respect to transactions
involving an exchange of securities such as the exchange pursuant to the
exchange offer, other than a resale of an unsold allotment from the sale of the
old notes to the initial purchasers, with the prospectus contained in the
exchange offer registration statement. Pursuant to the exchange and registration
rights agreement, we have agreed to permit these broker-dealers to use this
prospectus in connection with the resale of such exchange notes. We have agreed
that, for a period of 180 days after the expiration date, we will make this
prospectus, and any amendment or supplement to this prospectus, available to any
broker-dealer that requests such documents in the letter(s) of transmittal.
The objective of the exchange offer is to create a single series of debt
securities having a total outstanding principal amount which is larger than that
of either the 1998 notes or the 2001 notes as separate series, thus resulting in
greater liquidity for the exchange notes. However, see "Risk Factors -- Because
the total outstanding principal ofholding the exchange notes will includebe identical to those of holding the total
outstanding principal amountnotes. As a result, no gain or loss will be recognized for United States federal income tax purposes by a holder upon receipt of an exchange note in exchange for an outstanding note and any such holder will have the 1998 notessame adjusted basis and holding period in the 2001 notes, you will
experience an immediate dilution of your percentage of ownership of such
series."
Eachexchange note as in the outstanding note immediately before the exchange.
This discussion is provided for general information only and does not constitute legal advice to any holder of the old notes who wishes tooutstanding notes. Persons considering the exchange its oldof outstanding notes for exchange notes in the exchange offer should consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction.
82
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the purchase of the exchange notes by employee benefit plans that are subject to Title I of ERISA, plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or provisions under any federal, state, local,non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (collectively, “Similar Laws”), and entities whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement (each, a “Plan”).
General fiduciary matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code (an “ERISA Plan”) and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such an ERISA Plan or the management or disposition of the assets of such an ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the exchange notes of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.
Prohibited transaction issues
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code. The acquisitionand/or holding of notes or exchange notes by an ERISA Plan with respect to which the issuer, the initial purchasers or the guarantors are considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISAand/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption.
In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions, or “PTCEs,” that may provide exemptive relief for direct or indirect prohibited transactions resulting from the sale, purchase or holding of the notes or exchange notes. These class exemptions include, without limitation,PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, as amended effective November 3, 2010,PTCE 90-1 respecting insurance company pooled separate accounts,PTCE 91-38 respecting bank collective investment funds,PTCE 95-60 respecting life insurance company general accounts, andPTCE 96-23 respecting transactions determined by in-house asset managers. In addition, Section 408(b)(17) of ERISA and 4975(d)(20) of the Code provide relief from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions,providedthat neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render investment advice with respect to the assets of any ERISA Plan involved in the transaction and provided further that the ERISA Plan pays no more than adequate consideration in connection with the transaction. There can be no assurance that all of the conditions of any such exemptions will be required to make certain
representations to us as set forth in "The Exchange Offer -- Purpose and Effectsatisfied.
Because of the Exchange Offer."
foregoing, the exchange notes should not be purchased or held by any person investing “plan assets” of any Plan, unless such purchase and holding will not constitute a non-exempt prohibited transaction under ERISA and the Code or similar violation of any applicable Similar Laws.
83
Representation
Accordingly, by acceptance of an exchange note each purchaser and subsequent transferee will be deemed to have represented and warranted that either (i) no portion of the assets used by such purchaser or transferee to acquire or hold the notes or exchange notes constitutes assets of any Plan or (ii) the acquisition and holding of the exchange notes by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in nonexempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing the exchange notes (and holding the exchange notes) on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the purchase and holding of the exchange notes.
Purchasers of the exchange notes have the exclusive responsibility for ensuring that their purchase and holding of the exchange notes complies with the fiduciary responsibility rules of ERISA and does not violate the prohibited transaction rules of ERISA, the Code or applicable Similar Laws.
The sale of any exchange note to a Plan, or to a person using assets of any Plan to effect its purchase of any exchange note, is in no respect a representation by the issuer, the managers or the collateral manager that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate for Plans generally or any particular Plan.
84
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for oldoutstanding notes where such oldoutstanding notes were acquired as a result of market-
makingmarket-making activities or other trading activities. Until , 2002, all
dealers effecting transactionsWe have agreed that, for a period of 180 days after the effective date of the registration statement of which this prospectus is a part, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in the exchange notes may be required to deliver
a prospectus.
connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation
105
in the form of commissions or concessions from any such broker-dealer or the purchasers of any such exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an "underwriter"“underwriter” within the meaning of the Securities Act and any profit on any such resale of exchange notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The lettersletter of transmittal statestates that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter"“underwriter” within the meaning of the Securities Act.
For a period of 90180 days after the consummationeffective date of the exchange offer,registration statement of which this prospectus is a part, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter(s)letter of transmittal. We have agreed to pay all expenses incidentincurred by us or at our discretion in connection with the performance of our obligations relating to the exchange offer,offers (but not including the expenses of one counsel for the holders of the
2001 notes, other thanany commissions or concessions of any broker-dealersbrokers or dealers) and will indemnify the holders of the 2001 notes including(including any broker-dealers,broker-dealers) against certain liabilities, including liabilities under the Securities Act.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Based on the interpretations by the staff of the SEC as set forth in no-action letters issued to third parties (including Exxon Capital Holdings Corporation (available May 13, 1998), Morgan Stanley & Co. Incorporated (available June 5, 1991), K-11 Communications Corporation (available May 14, 1993) and Shearman & Sterling (available July 2, 1993)), we believe that the exchange notes issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by any holder of such exchange note, other than any such holder that is a broker-dealer or an “affiliate” of us within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:
| • | such exchange notes are acquired in the ordinary course of business; | |
| • | at the time of the commencement of the exchange offer, such holder has no arrangement or understanding with any person to participate in a distribution of such exchange notes; and | |
| • | such holder is not engaged in and does not intend to engage in a distribution of such exchange notes. |
We have not sought and do not intend to seek a no-action letter from the SEC, with respect to the effects of the exchange offer, and there can be no assurance that the staff of the SEC would make a similar determination with respect to the exchange notes as it has in such no-action letters.
85
LEGAL MATTERS
Certain legal matters relating to the exchange notes and the guarantees offered by this prospectus will be passed upon for us by Fulbright & Jaworski L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements ofRent-A-Center, Inc. as of December 31, 19992010 and 2000,2009 and for each of the three years in the period ended December 31, 2000, included in this
prospectus2010 and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2010 have been so includedincorporated by reference herein and in the registration statement in reliance onupon the reportreports of Grant Thornton LLP, independent certifiedregistered public accountants, given onaccounting firm, incorporated by reference herein, and upon the authority of suchsaid firm as experts in accounting and auditing.
Grant Thornton LLP has advised us that from December 28, 1998 through March
27, 2000, a benefit plan managed by a third-party brokerage firm for the benefit
of Grant Thornton LLP's employees owned up to 120 shares of our common stock.
Accordingly, this has raised an issue as to Grant Thornton LLP's independence.
Grant Thornton LLP has disclosed the situation to the SEC. Grant Thornton LLP
has also advised us that, notwithstanding the benefit plan's investment in our
common stock, Grant Thornton LLP intends to sign audit opinions and consents to
incorporation by reference as necessary in connection with documents filed by us
with the SEC and other third parties.
LEGAL MATTERS
The validity of the exchange notes offered by this prospectus will be
passed upon for us by Winstead Sechrest & Minick P.C., Dallas, Texas.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxyaudited financial statements and other
information with the Securities and Exchange Commission, or SEC. You may read
this information at the SEC's public reference room at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549.
Please call 1-800-SEC-0330 for further information on its regional public
reference rooms. You may also obtain copies of this information by mail from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Our SEC filings are also available
to the public at the SEC's web site at http://www.sec.gov. You may also inspect
reports, proxy statements and other information about us at the offices of The Nasdaq Stock Market,Rental Store, Inc. National Market System, 1735 K. Street, N.W.,
Washington, D.C. 20006-1500.
We, together with the subsidiary guarantors, have filed a registration
statement on Form S-4 to register with the SEC the exchange notes to be issued
in exchange for the old
106
notes. This prospectus is part of that registration statement. As allowed by the
SEC's rules, this prospectus does not contain all of the information you can
find in the registration statement or the exhibits to the registration
statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference in
this prospectus is considered to be a part of this prospectus, and later
information filed with the SEC or contained in this prospectus updates and
supersedes this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 until our offering is completed:
- Our Annual Report on Form 10-K for the fiscal year ended December 31, 2000;
- Our Quarterly Report on Form 10-Q/A for2009 have been included in the quarter ended March 31, 2001;
- Our Current Report on Form 8-K filed May 11, 2001;
- Our Quarterly Report on Form 10/Q forregistration statement in reliance upon the quarter ended June 30, 2001;
- Our Current Report on Form 8-K filed October 11, 2001;
- Our Quarterly Report on Form 10-Q for the quarter ended September 30,
2001;
- Those portionsreports of our Current Report in Item 5 of, and the exhibits to,
Form 8-K filed December 4, 2001 (but specifically excluding those
portions merely furnished to the SEC under Item 9);
- Our Current Report on Form 8-K filed December 19, 2001; and
- The portions of our proxy statement for our 2001 annual meeting of our
stockholders that have beenGrant Thornton, LLP, independent public accounting firm, incorporated by reference into our annual
report.
You may request a copyherein, and upon the authority of these filings, at no cost, by writing or
telephoning us at the following address:
Rent-A-Center, Inc.
Attention: Corporate Secretary
5700 Tennyson Parkway
Third Floor
Plano, Texas 75024
Telephone: (972) 801-1100
107
RENT-A-CENTER, INC. AND SUBSIDIARIES
said firm as experts in accounting and auditing.
86
INDEX TO FINANCIAL STATEMENTS
| Page | ||||
Rent-A-Center, Inc. and Subsidiaries | ||||
| F-2 | ||||
| F-4 | ||||
| Consolidated Financial Statements | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| F-9 | ||||
Rent-A-Center, Inc. and Subsidiaries | ||||
| F-30 | ||||
| F-31 | ||||
| F-32 | ||||
| F-33 | ||||
The Rental Store, Inc. | ||||
| F-38 | ||||
| Financial Statements (December 31, 2009) | F-39 | |||
| F-39 | ||||
| F-40 | ||||
| F-41 | ||||
| F-42 | ||||
| F-43 | ||||
| Financial Statements (September 30, 2010) | F-51 | |||
| F-51 | ||||
| F-52 | ||||
| F-53 | ||||
| F-54 | ||||
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Rent-A-Center, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets ofRent-A-Center, Inc. and Subsidiaries as of December 31, 20002010 and 1999,2009, and the related consolidated statements of earnings, stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000.2010. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position ofRent-A-Center, Inc. and Subsidiaries as of December 31, 20002010 and 1999,2009, and the consolidated
results of theirits operations and their consolidatedits cash flows for each of the three years in the period ended December 31, 2000,2010, in conformity with accounting principles generally accepted in the United States of America.
GRANT THORNTON
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),Rent-A-Center, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 25, 2011, expressed an unqualified opinion.
/s/ Grant Thornton LLP
Dallas, Texas
February 9, 2001
25, 2011 (except for Note G, Paragraph 4, as to which the date is May 2, 2011)
F-2
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------- SEPTEMBER 30,
1999 2000 2001
---------- ---------- -------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............................ $ 21,679 $ 36,495 $ 28,935
Accounts receivable -- trade....................... 3,883 3,254 2,817
Prepaid expenses and other assets.................. 27,867 31,805 33,737
Rental merchandise, net
On rent......................................... 425,469 477,095 527,724
Held for rent................................... 105,754 110,137 116,670
Property assets, net............................... 82,657 87,168 101,383
Deferred income taxes.............................. 110,367 32,628 4,233
Intangible assets, net............................. 707,324 708,328 714,845
---------- ---------- ----------
$1,485,000 $1,486,910 $1,530,344
========== ========== ==========
LIABILITIES
Accounts payable -- trade............................ $ 53,452 $ 65,696 $ 63,027
Accrued liabilities.................................. 106,796 89,560 116,702
Senior debt.......................................... 672,160 566,051 458,020
Subordinated notes payable........................... 175,000 175,000 175,000
---------- ---------- ----------
1,007,408 896,307 812,749
COMMITMENTS AND CONTINGENCIES........................ -- -- --
PREFERRED STOCK
Redeemable convertible voting preferred stock, net
of placement costs, $.01 par value; 5,000,000
shares authorized; 271,426 and 281,756 shares
issued and outstanding in 1999 and 2000,
respectively, and 289,726 shares at September
30, 2001........................................ 270,902 281,232 289,201
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized in 1999 and 2000; 125,000,000 shares
authorized in 2001; 25,297,458 and 25,700,058
shares issued in 1999 and 2000, respectively,
and 27,612,218 shares at September 30, 2001..... 253 257 276
Additional paid-in capital......................... 105,627 115,607 190,148
Accumulated other comprehensive loss............... -- -- (6,020)
Retained earnings.................................. 125,810 218,507 268,990
Treasury stock, 990,099 shares at cost............. (25,000) (25,000) (25,000)
---------- ---------- ----------
206,690 309,371 428,394
---------- ---------- ----------
$1,485,000 $1,486,910 $1,530,344
========== ========== ==========
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Rent-A-Center, Inc. and Subsidiaries
We have auditedRent-A-Center, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying notesManagement’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,Rent-A-Center, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010, and our report dated February 25, 2011, expressed an integral partunqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Dallas, Texas
February 25, 2011
F-3
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
OVER FINANCIAL REPORTING
Management of these statements.
F-3
RENT-A-CENTER, INC. AND SUBSIDIARIES
the Company, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control system was designed to provide reasonable assurance to management and the Company’s Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control —Integrated Framework.Based on this assessment, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria.
Grant Thornton LLP, the Company’s independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears onpage F-3.
F-4
Rent-A-Center, Inc. and Subsidiaries
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Revenues | ||||||||||||
| Store | ||||||||||||
| Rentals and fees | $ | 2,335,496 | $ | 2,346,849 | $ | 2,505,268 | ||||||
| Merchandise sales | 220,329 | 261,631 | 256,731 | |||||||||
| Installment sales | 63,833 | 53,035 | 41,193 | |||||||||
| Other | 76,542 | 57,601 | 42,759 | |||||||||
| Franchise | ||||||||||||
| Merchandise sales | 30,575 | 28,065 | 33,283 | |||||||||
| Royalty income and fees | 4,857 | 4,775 | 4,938 | |||||||||
| 2,731,632 | 2,751,956 | 2,884,172 | ||||||||||
| Operating expenses | ||||||||||||
| Direct store expenses | ||||||||||||
| Cost of rentals and fees | 519,282 | 530,018 | 572,900 | |||||||||
| Cost of merchandise sold | 164,133 | 188,433 | 194,595 | |||||||||
| Cost of installment sales | 23,303 | 18,687 | 16,620 | |||||||||
| Salaries and other expenses | 1,543,391 | 1,556,074 | 1,651,805 | |||||||||
| Franchise cost of merchandise sold | 29,242 | 26,820 | 31,705 | |||||||||
| 2,279,351 | 2,320,032 | 2,467,625 | ||||||||||
| General and administrative expenses | 126,319 | 137,626 | 125,632 | |||||||||
| Amortization and write-down of intangibles | 3,254 | 2,843 | 16,637 | |||||||||
| Litigation expense (credit) | — | (4,869 | ) | (4,607 | ) | |||||||
| Impairment charge | 18,939 | — | — | |||||||||
| Restructuring charge | — | — | 4,497 | |||||||||
| Total operating expenses | 2,427,863 | 2,455,632 | 2,609,784 | |||||||||
| Operating profit | 303,769 | 296,324 | 274,388 | |||||||||
| Finance charges from refinancing | 3,100 | — | — | |||||||||
| Gain on extinguishment of debt | — | — | (4,335 | ) | ||||||||
| Interest expense | 26,766 | 26,791 | 66,241 | |||||||||
| Interest income | (854 | ) | (837 | ) | (8,860 | ) | ||||||
| Earnings before income taxes | 274,757 | 270,370 | 221,342 | |||||||||
| Income tax expense | 103,115 | 102,515 | 81,718 | |||||||||
| NET EARNINGS | $ | 171,642 | $ | 167,855 | $ | 139,624 | ||||||
| Basic earnings per common share | $ | 2.64 | $ | 2.54 | $ | 2.10 | ||||||
| Diluted earnings per common share | $ | 2.60 | $ | 2.52 | $ | 2.08 | ||||||
| Cash dividends per common share | $ | 0.12 | $ | — | $ | — | ||||||
See accompanying notes are an integral part of theseto consolidated financial statements.
F-4
RENT-A-CENTER, INC. AND SUBSIDIARIES
F-5
Rent-A-Center, Inc. and Subsidiaries
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands, except share and par value data) | ||||||||
ASSETS | ||||||||
| Cash and cash equivalents | $ | 70,727 | $ | 101,803 | ||||
| Receivables, net of allowance for doubtful accounts of $8,673 in 2010 and $9,753 in 2009 | 53,890 | 63,439 | ||||||
| Prepaid expenses and other assets | 170,713 | 50,680 | ||||||
| Rental merchandise, net | ||||||||
| On rent | 655,248 | 589,066 | ||||||
| Held for rent | 181,606 | 160,932 | ||||||
| Merchandise held for installment sale | 5,417 | 4,069 | ||||||
| Property assets, net | 224,639 | 204,551 | ||||||
| Goodwill, net | 1,320,467 | 1,268,684 | ||||||
| Other intangible assets, net | 5,624 | 773 | ||||||
| $ | 2,688,331 | $ | 2,443,997 | |||||
| LIABILITIES | ||||||||
| Accounts payable — trade | $ | 126,051 | $ | 97,159 | ||||
| Accrued liabilities | 288,415 | 265,051 | ||||||
| Deferred income taxes | 218,952 | 123,115 | ||||||
| Senior debt | 401,114 | 711,158 | ||||||
| Senior notes | 300,000 | — | ||||||
| 1,334,532 | 1,196,483 | |||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $.01 par value; 250,000,000 shares authorized; 105,990,704 and 104,910,759 shares issued in 2010 and 2009, respectively | 1,060 | 1,049 | ||||||
| Additional paid-in capital | 712,600 | 686,592 | ||||||
| Retained earnings | 1,541,168 | 1,377,332 | ||||||
| Treasury stock, 42,845,444 and 39,259,949 shares at cost in 2010 and 2009, respectively | (904,274 | ) | (819,754 | ) | ||||
| Cumulative translation adjustment | 3,245 | 2,295 | ||||||
| 1,353,799 | 1,247,514 | |||||||
| $ | 2,688,331 | $ | 2,443,997 | |||||
See accompanying notes to consolidated financial statements.
F-6
Rent-A-Center, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OFSTOCKHOLDERS'STOCKHOLDERS’ EQUITY
The
For the three years ended December 31, 2010
(In thousands)
CONSOLIDATED STATEMENT OF
For the three years ended December 31, 2010
(In thousands)
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Treasury | |||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | Total | |||||||||||||||||||
| Balance at January 1, 2008 | 104,540 | $ | 1,045 | $ | 674,032 | $ | 1,069,553 | $ | (797,539 | ) | $ | 947,091 | ||||||||||||
| Net earnings | — | — | — | 139,624 | — | 139,624 | ||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 386 | — | 386 | ||||||||||||||||||
| Comprehensive income | 140,010 | |||||||||||||||||||||||
| Purchase of treasury stock (952 shares) | — | — | (24 | ) | — | (13,382 | ) | (13,406 | ) | |||||||||||||||
| Exercise of stock options | 229 | 2 | 3,167 | — | — | 3,169 | ||||||||||||||||||
| Tax benefits related to exercise of stock options | — | — | 560 | — | — | 560 | ||||||||||||||||||
| Stock-based compensation | — | �� | — | 3,341 | — | — | 3,341 | |||||||||||||||||
| Other | — | — | (9 | ) | (1,554 | ) | — | (1,563 | ) | |||||||||||||||
| Balance at December 31, 2008 | 104,769 | 1,047 | 681,067 | 1,208,009 | (810,921 | ) | 1,079,202 | |||||||||||||||||
| Net earnings | — | — | — | 167,855 | — | 167,855 | ||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 2,295 | — | 2,295 | ||||||||||||||||||
| Comprehensive income | 170,150 | |||||||||||||||||||||||
| Purchase of treasury stock (472 shares) | — | — | (13 | ) | — | (8,833 | ) | (8,846 | ) | |||||||||||||||
| Exercise of stock options | 142 | 2 | 1,535 | — | — | 1,537 | ||||||||||||||||||
| Tax benefits related to exercise of stock options | — | — | 270 | — | — | 270 | ||||||||||||||||||
| Stock-based compensation | — | — | 3,731 | — | — | 3,731 | ||||||||||||||||||
| Other | — | — | 2 | 1,468 | — | 1,470 | ||||||||||||||||||
| Balance at December 31, 2009 | 104,911 | 1,049 | 686,592 | 1,379,627 | (819,754 | ) | 1,247,514 | |||||||||||||||||
| Net earnings | — | — | — | 171,642 | — | 171,642 | ||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 950 | — | 950 | ||||||||||||||||||
| Comprehensive income | 172,592 | |||||||||||||||||||||||
| Purchase of treasury stock (3,585 shares) | — | — | (72 | ) | — | (84,520 | ) | (84,592 | ) | |||||||||||||||
| Exercise of stock options | 1,080 | 11 | 19,029 | — | — | 19,040 | ||||||||||||||||||
| Tax benefits related to exercise of stock options | — | — | 2,974 | — | — | 2,974 | ||||||||||||||||||
| Stock-based compensation | — | — | 4,123 | — | — | 4,123 | ||||||||||||||||||
| Dividends paid | — | — | — | (7,804 | ) | — | (7,804 | ) | ||||||||||||||||
| Other | — | — | (46 | ) | (2 | ) | — | (48 | ) | |||||||||||||||
| Balance at December 31, 2010 | 105,991 | $ | 1,060 | $ | 712,600 | $ | 1,544,413 | $ | (904,274 | ) | $ | 1,353,799 | ||||||||||||
See accompanying notes are an integral part of this statement.
F-5
RENT-A-CENTER, INC. AND SUBSIDIARIES
to consolidated financial statements.
F-7
Rent-A-Center, Inc. and Subsidiaries
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net earnings | $ | 171,642 | $ | 167,855 | $ | 139,624 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||||||
| Depreciation of rental merchandise | 506,854 | 519,103 | 561,414 | |||||||||
| Bad debt expense | 16,168 | 17,395 | 14,455 | |||||||||
| Stock-based compensation expense | 4,123 | 3,731 | 3,341 | |||||||||
| Depreciation of property assets | 63,410 | 65,788 | 72,683 | |||||||||
| Loss on sale or disposal of property assets | 13,599 | 5,856 | 375 | |||||||||
| Amortization of intangibles | 701 | 1,291 | 12,589 | |||||||||
| Amortization of financing fees | 2,047 | 1,970 | 1,703 | |||||||||
| Finance charges from refinancing | 3,100 | — | — | |||||||||
| Deferred income taxes | 95,837 | 35,899 | 77,538 | |||||||||
| Tax benefit related to stock option exercises | (2,974 | ) | (270 | ) | (560 | ) | ||||||
| Gain on extinguishment of debt | — | — | (4,335 | ) | ||||||||
| Impairment charge | 18,939 | — | — | |||||||||
| Restructuring charge | — | — | 4,497 | |||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions | ||||||||||||
| Rental merchandise | (567,733 | ) | (449,128 | ) | (438,964 | ) | ||||||
| Receivables | (6,620 | ) | (34,781 | ) | (24,572 | ) | ||||||
| Prepaid expenses and other assets | (123,649 | ) | (9,421 | ) | (7,056 | ) | ||||||
| Accounts payable — trade | 25,467 | 16,367 | (6,924 | ) | ||||||||
| Accrued liabilities | (4,422 | ) | (11,534 | ) | (21,472 | ) | ||||||
| Net cash provided by operating activities | 216,489 | 330,121 | 384,336 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Purchase of property assets | (93,007 | ) | (68,841 | ) | (61,931 | ) | ||||||
| Proceeds from sale of property assets | 203 | 3,122 | 6,144 | |||||||||
| Acquisitions of businesses, net of cash acquired | (74,378 | ) | (7,221 | ) | (15,700 | ) | ||||||
| Net cash used in investing activities | (167,182 | ) | (72,940 | ) | (71,487 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Purchase of treasury stock | (84,520 | ) | (8,833 | ) | (13,382 | ) | ||||||
| Exercise of stock options | 19,040 | 1,537 | 3,169 | |||||||||
| Tax benefit related to stock option exercises | 2,974 | 270 | 560 | |||||||||
| Payments on capital leases | (979 | ) | (2,100 | ) | (5,662 | ) | ||||||
| Issuance of senior notes | 300,000 | — | — | |||||||||
| Proceeds from debt | 92,230 | 186,100 | 213,050 | |||||||||
| Repayments of debt | (402,274 | ) | (196,654 | ) | (446,338 | ) | ||||||
| Repurchase of subordinated notes | — | (225,375 | ) | (74,625 | ) | |||||||
| Dividends paid | (7,804 | ) | — | — | ||||||||
| Net cash used in financing activities | (81,333 | ) | (245,055 | ) | (323,228 | ) | ||||||
| Effect of exchange rate changes on cash | 950 | 2,295 | 386 | |||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (31,076 | ) | 14,421 | (9,993 | ) | |||||||
| Cash and cash equivalents at beginning of year | 101,803 | 87,382 | 97,375 | |||||||||
| Cash and cash equivalents at end of year | $ | 70,727 | $ | 101,803 | $ | 87,382 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 20,569 | $ | 27,920 | $ | 70,688 | ||||||
| Income taxes (excludes $330, $1,380 and $34,656 of income taxes refunded in 2010, 2009 and 2008, respectively) | $ | 124,065 | $ | 69,312 | $ | 20,954 | ||||||
See accompanying notes are an integral part of theseto consolidated financial statements.
F-6
F-8
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
During the years ended December 31, 1999 and 2000 and the nine months ended
September 30, 2000 and 2001, the Company paid preferred dividends of
approximately $11.4 million, $10.3 million, $7.8 million and $12.1 million,
respectively, by issuing 11,426, 10,330, 7,764 and 8,022 shares of preferred
stock, respectively.
The accompanying notes are an integral part of these statements.
F-7
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES AND NATURE OF OPERATIONS
| Note A — | Summary of Accounting Policies and Nature of Operations |
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The accompanying
Principles of Consolidation and Nature of Operations
These financial statements include the accounts ofRent-A-Center, Inc. (Rent-A-Center), and its wholly-owned subsidiaries
(collectively, the Company).direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated. Rent-A-Center's soleUnless the context indicates otherwise, references to“Rent-A-Center” refer only toRent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations ofRent-A-Center and all of its direct and indirect subsidiaries.
Our primary operating segment consists of leasing household durable goods to customers on arent-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores. At December 31, 2000,2010, we operated 3,008 company-owned stores nationwide and in Canada, Puerto Rico and Mexico, including 42 retail installment sales stores under the Companynames “Get It Now” and “Home Choice,” and18 rent-to-own stores in Canada under the name“Rent-A-Centre.”
We also operate kiosk locations under the trade name “RAC Acceptance” which offers therent-to-own transaction to consumers who do not qualify for financing from the traditional retailer. These kiosks are located within such retailer’s store locations. At December 31, 2010, we operated 2,158 stores which were located
throughout the 50 United States, the District of Columbia and the Commonwealth
of Puerto Rico.
384 RAC Acceptance locations.
ColorTyme, Inc. (ColorTyme), the onlyan indirect wholly-owned subsidiary with substantive
operations,ofRent-A-Center, is a nationwide franchisor of 364rent-to-own stores. At December 31, 2010, ColorTyme had 209 franchised rent-to-own stores operating in 4232 states. These rent-to-own stores offer high quality durable
products such as home electronics, appliances, computers, and furniture and
accessories. ColorTyme'sColorTyme’s primary source of revenuesrevenue is the sale of rental merchandise to its franchisees, who in turn offer the merchandise to the general public for rent or purchase under arent-to-own program. The balance of ColorTyme's revenues areColorTyme’s revenue is generated primarily from royalties based on franchisees'franchisees’ monthly gross revenues.
RENTAL MERCHANDISE
From 2005 to 2010, we also offered an array of financial services in certain of our existing stores under the names “RAC Financial Services” and “Cash AdvantEdge.” The financial services we offered included, but were not limited to, short term secured and unsecured loans, debit cards, check cashing and money transfer services. As of February 18, 2011, we had ceased making new loans, sold a majority of our customer accounts, and had less than $5.0 million in remaining loan balance.
Rental Merchandise
Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation for merchandise is generally provided using the income forecasting method, which is intended to match as closely as practicable the recognition of depreciation expense with the consumption of the rental merchandise, and assumes no salvage value. The consumption of rental merchandise occurs during periods of rental and directly coincides with the receipt of rental revenue over the rental-purchase agreement period, generally 18seven to 3630 months. Under the income forecasting method, merchandise held for rent is not depreciated and merchandise on rent is depreciated in the proportion of rents received to total rents provided in the rental contract, which is an activity basedactivity-based method similar to the units of production method. We depreciate merchandise held for rent (except for computers) that is at least 270 days old and held for rent for at least 180 consecutive days using the straight-line method for a period generally not to exceed 20 months.
On computers that are 24 months old or older and which have become idle, depreciation is recognized using the straight-line method for a period of at least six months, generally not to exceed an aggregate depreciation period of 30 months.
Rental merchandise which is damaged and inoperable or not returned by the
customer after becoming delinquent on payments, is written-offexpensed when such impairment occurs. CASH EQUIVALENTS
For purposesIf the customer does not return the merchandise or make payment, the remaining book value of reporting cash flows, cashthe rental merchandise associated with delinquent accounts is generally charged off on or before the ninetieth day following the time the
F-9
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
account became past due. We maintain a reserve for these expected expenses. In addition, any minor repairs made to rental merchandise are expensed at the time of the repair.
Cash Equivalents
Cash equivalents include all highly liquid investments with an original maturity of three months or less. RENTAL REVENUE AND FEES
We maintain cash and cash equivalents at several financial institutions, which at times may not be federally insured or may exceed federally insured limits. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risks on such accounts.
Revenue
Merchandise is rented to customers pursuant to rental-purchaserental purchase agreements which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. Generally, the customer has the right to acquire title either through a purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term. Noterm and merchandise sales revenue is recognized when the customer exercises the purchase option and pays the cash price due. Cash received prior to the period in which it should be recognized is deferred and recognized according to the rental term. Revenue is accrued for uncollected amounts due based on historical collection experience. However, the total amount of the rental purchase agreement is not accrued because the customer can cancelterminate the rental contractagreement at any time and the Companywe cannot enforce collection for non-payment of future rents.
ColorTyme's revenue
Revenue from the sale of rental merchandise in our retail installment stores is recognized upon
shipmentwhen the installment note is signed, the customer has taken possession of the merchandise and collectability is reasonably assured.
The revenue from our financial services is recognized depending on the type of transaction. Fees collected on loans are recognized ratably over the term of the loan. For money orders, wire transfers, check cashing and other customer service type transactions, fee revenue is recognized at the time the service is performed.
Receivables and Allowance for Doubtful Accounts
The receivable associated with the sale of merchandise at our Get It Now and Home Choice stores generally consists of the sales price of the merchandise purchased and any additional fees for services the customer has chosen, less the customer’s down payment. No interest is accrued and interest income is recognized each time a customer makes a payment, generally on a monthly basis.
Our financial services business extends short term secured and unsecured loans. The amount and length of such loans may vary depending on applicable state law.
We have established an allowance for doubtful accounts for our installment notes and loan receivables. Our policy for determining the allowance is based on historical loss experience, as well as the results of management’s review and analysis of the payment and collection of the installment notes and loan receivables within the previous year. We believe our allowances are adequate to absorb any known or probable losses. Our policy is to charge off installment notes and loan receivables that are 90 days or more past due. Charge offs are applied as a reduction to the franchisee.
F-8
allowance for doubtful accounts and any recoveries of previously charged off balances are applied as an increase to the allowance for doubtful accounts.
The majority of ColorTyme’s accounts receivable relate to amounts due from franchisees. Credit is extended based on an evaluation of a franchisee’s financial condition and collateral is generally not required. Accounts receivable are due within 30 days and are stated at amounts due from franchisees net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. ColorTyme determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, ColorTyme’s previous loss history, the franchisee’s current ability to pay its obligation to
F-10
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY ASSETS AND RELATED DEPRECIATION
— (Continued)
ColorTyme, and the condition of the general economy and the industry as a whole. ColorTyme writes off accounts receivable that are 120 days or more past due and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Property Assets and Related Depreciation
Furniture, equipment and vehicles are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets (generally five years) by the straight-line method. Our building is depreciated over approximately 40 years. Leasehold improvements are amortized over the useful life of the asset or the initial term of the applicable leases by the straight-line method.
INTANGIBLE ASSETS AND AMORTIZATION
Intangible assetsmethod, whichever is shorter.
We have incurred costs to develop computer software for internal use. We capitalize the costs incurred during the application development stage, which includes designing the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary stages along with post-implementation stages of internally developed software are stated atexpensed as incurred. For the year ended December 31, 2010, we placed in service approximately $20.6 million and amortized approximately $2.0 million of internally developed software. As of December 31, 2009, we had not placed in service or amortized any internally developed software. Internally developed software costs, once placed in service, are amortized over various periods up to ten years.
We incur repair and maintenance expenses on our vehicles and equipment. These amounts are recognized when incurred, unless such repairs significantly extend the life of the asset, in which case we amortize the cost less accumulated amortization
calculated byof the repairs for the remaining life of the asset utilizing the straight-line method.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
Intangible Assets and Amortization
We record goodwill when the consideration paid for an acquisition exceeds the fair value of the identifiable net tangible and identifiable intangible assets acquired. Goodwill is not subject to amortization but must be periodically evaluated for impairment. Impairment occurs when the carrying value of goodwill is not recoverable from future cash flows. We perform an assessment of goodwill for impairment at the reporting unit level annually as of December 31 of each year, or when events or circumstances indicate that impairment may have occurred. Factors which could necessitate an interim impairment assessment include a sustained decline in our stock price, prolonged negative industry or economic trends and significant underperformance relative to expected historical or projected future operating results. We assess recoverability using methodologies which include the present value of estimated future cash flows and comparisons of multiples of enterprise values to earnings before interest, taxes, depreciation and amortization. The Company evaluatesanalysis is based upon available information regarding expected future cash flows and discount rates. Discount rates are based upon our cost of capital. If the carrying value exceeds the discounted fair value, a second analysis is performed to measure the fair value of all assets and liabilities. If, based on the second analysis, it is determined that the fair value of the assets and liabilities is less than the carrying value, we would recognize impairment charges in an amount equal to the excess of the carrying value over fair value. There were no impairment charges recognized related to goodwill in 2010, 2009 and 2008.
Accounting for Impairment of Long-Lived Assets
We evaluate all long-lived assets, including all intangible assets, and rental merchandise,excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate.
INCOME TAXES
Foreign Currency Translation
The Company providesfunctional currency of our foreign operations is predominantly the applicable local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the
F-11
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
last day of the reporting period. Revenues and expenses are generally translated at a daily exchange rate and equity transactions are translated using the actual rate on the day of the transaction.
Other Comprehensive Income
Other comprehensive income is comprised exclusively of our foreign currency translation adjustment. The cumulative currency translation adjustment was approximately $3.2 million and $2.3 million at December 31, 2010 and 2009, respectively.
Income Taxes
We record deferred taxes for temporary differences between the tax and financial reporting bases of assets and liabilities at the enacted tax rate expected to be in effect when taxes become payable. PREFERRED DIVIDENDS
Dividends onIncome tax accounting requires management to make estimates and apply judgments to events that will be recognized in one period under rules that apply to financial reporting in a different period in our tax returns. In particular, judgment is required when estimating the Company's Series A preferred stockvalue of future tax deductions, tax credits and net operating loss carryforwards (NOLs), as represented by deferred tax assets. When it is determined the recovery of all or a portion of a deferred tax asset is not likely, a valuation allowance is established. We include NOLs in the calculation of deferred tax assets. NOLs are payable quarterly
at an annual rate of 3.75%. The Company accounts for preferred stock distributed
as dividends in-kind atutilized to the greaterextent allowable due to the provisions of the stated value orInternal Revenue Code of 1986, as amended, and relevant state statutes.
Sales Taxes
We apply the valuenet basis for sales taxes imposed on our goods and services in our Consolidated Statements of Earnings. We are required by the payment date ofapplicable governmental authorities to collect and remit sales taxes. Accordingly, such amounts are charged to the common stock obtainable upon conversion.
EARNINGS PER COMMON SHARE
customer, collected and remitted directly to the appropriate jurisdictional entity.
Earnings Per Common Share
Basic earnings per common share are based upon the weighted average number of common shares outstanding during each period presented. Diluted earnings per common share are based upon the weighted average number of common shares outstanding during the period, plus, if dilutive, the assumed exercise of stock options and the assumed conversion of convertible securities at the beginning of the year, or for the period outstanding during the year for current year issuances.
ADVERTISING COSTS
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $37.2$77.3 million, $55.8$78.7 million and $61.2$82.5 million in 2010, 2009 and 2008, respectively.
Stock-Based Compensation
We maintain long-term incentive plans for eachthe benefit of certain employees, consultants and directors, which are described more fully in Note K. We recognize share-based payment awards to our employees and directors at the estimated fair value on the grant date. Determining the fair value of any share-based awards requires information about several variables including, but not limited to, expected stock volatility over the terms of the threeawards, expected dividend yields and the predicted employee exercise behavior. We base expected life on historical exercise and post-vesting employment-termination experience, and expected volatility on historical realized volatility trends. In addition, all stock-based compensation expense is recorded net of an estimated forfeiture rate. The forfeiture rate is based upon historical activity and is analyzed at least quarterly as actual forfeitures occur.
Compensation costs are recognized net of estimated forfeitures over the award’s requisite service period on a straight-line basis. For the years ended 1998, 1999December 31, 2010, 2009 and 2000, respectively.
STOCK-BASED COMPENSATION
The Company has chosen to account for2008, we recorded stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire that stock.
Option grants to non-employees are expensed at the time of grant.
F-9
F-12
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
— (Continued)
expense, net of related taxes, of approximately $2.6 million, $2.3 million and $2.1 million, respectively, related to stock options and restricted stock units granted.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management iswe are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assetslosses and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. ActualIn applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. 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. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements to manage interest rate risk
on its variable rate debt. Amounts due to or from counterpartiesWe believe self-insurance liabilities, litigation and tax reserves are areas where the degree of judgment and complexity in determining amounts recorded in interest income or expense as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
our consolidated financial statements make the accounting policies critical.
New Accounting Pronouncements
In June 1998,2009, the Financial Accounting Standards Board (FASB)(“FASB”) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133)Update2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities(“ASU2009-17”), Accounting which changes various aspects of accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
Statement No. 137, Accountingdisclosures of interests in variable interest entities. ASU2009-17 is effective for Derivative Instrumentsinterim and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133. In June
2000, the FASB issued Statement 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133.
Effective January 1, 2001, the Company adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings.annual periods beginning after November 15, 2009. The adoption of SFAS 133ASU2009-17 had no effect on January 1, 2001, resulted in a cumulative
pre-tax increaseour consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.
From time to time, new accounting pronouncements are issued by the FASB or other comprehensive income of $2.6 million, or $1.4 million
after taxes. As a result of a decline in interest rates for the nine months
ended September 30, 2001, accumulative other comprehensive loss at the endstandards setting bodies that we adopt as of the periodspecified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
| Note B — | Receivables and Allowance for Doubtful Accounts |
Receivables consist of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Installment sales receivable | $ | 42,839 | $ | 35,636 | ||||
| Financial services loans receivable | 12,232 | 26,021 | ||||||
| Trade and notes receivables | 7,492 | 11,535 | ||||||
| Total | 62,563 | 73,192 | ||||||
| Less allowance for doubtful accounts | (8,673 | ) | (9,753 | ) | ||||
| Net receivables | $ | 53,890 | $ | 63,439 | ||||
The allowance for doubtful accounts related to installment sales receivable was $6.0 million after taxes.
In July 2001,and $5.8 million, financial services loans receivable was $610,000 and $1.2 million, and trade receivables was $2.1 million and $2.8 million at December 31, 2010 and 2009, respectively. See Note O for additional information with respect to the FASB issued Statement of Financial Accounting Standards
No. 141 (SFAS 141), Business Combinations and Statement of Financial Accounting
Standards No. 142 (SFAS 142), Goodwill and Intangible Assets. SFAS 141 is
effectiveallowance for all business combinations completed after June 30, 2001. SFAS 142
is effectivedoubtful accounts for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142.
Major provisions of these statements and their effective dates are as
follows:
- all business combinations initiated after June 30, 2001 must use the
purchase method of accounting;
- intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the
F-10
financial services loans receivable.
F-13
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired entity and can be sold, transferred, licensed, rented or exchanged,
either individually or— (Continued)
Changes in our allowance for doubtful accounts are as part of a related contract, asset or liability;
- goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized;
- effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization;
- effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator; and
- all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
acquired prior to July 1, 2001 until January 1, 2002, at which time quarterly
and annual goodwill amortization of approximately $7.1follows:
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Beginning balance | $ | 9,753 | $ | 7,256 | $ | 4,945 | ||||||
| Bad debt expense | 16,168 | 17,395 | 14,455 | |||||||||
| Accounts written off | (23,107 | ) | (20,721 | ) | (17,843 | ) | ||||||
| Recoveries | 5,859 | 5,823 | 5,699 | |||||||||
| Ending balance | $ | 8,673 | $ | 9,753 | $ | 7,256 | ||||||
| Note C — | Rental Merchandise |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| On rent | ||||||||
| Cost | $ | 1,083,496 | $ | 1,038,408 | ||||
| Less accumulated depreciation | (428,248 | ) | (449,342 | ) | ||||
| Net book value, on rent | $ | 655,248 | $ | 589,066 | ||||
| Held for rent | ||||||||
| Cost | $ | 242,348 | $ | 220,523 | ||||
| Less accumulated depreciation | (60,742 | ) | (59,591 | ) | ||||
| Net book value, held for rent | $ | 181,606 | $ | 160,932 | ||||
| Note D — | Property Assets |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Furniture and equipment | $ | 249,392 | $ | 221,117 | ||||
| Transportation equipment | 14,032 | 16,835 | ||||||
| Building and leasehold improvements | 259,476 | 238,938 | ||||||
| Land and land improvements | 5,299 | 5,193 | ||||||
| Construction in progress | 42,291 | 26,919 | ||||||
| 570,490 | 509,002 | |||||||
| Less accumulated depreciation | (345,851 | ) | (304,451 | ) | ||||
| $ | 224,639 | $ | 204,551 | |||||
We had $37.8 million and $28.4 million
will no longer be recognized. The Company intends to complete a transitional
impairment test of all intangible assets by March 31, 2002 and a transitional
fair value based impairment test of goodwill as of January 1, 2002 by June 30,
2002. Impairment losses, if any, resulting from the initial transitional
impairment testing will be recognized in the quarter ended March 31, 2002, as a
cumulative effect of a change in accounting principle.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), Accounting for Impairment or Disposal of
Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company does not believe that the implementation of this
standard will have a material effect on its financial position, results of
operations, or cash flows.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements as of September 30, 2001 and for the nine months ended September 30,
2000 and 2001 include all adjustments, consisting only of those of a normal
recurring nature, necessary to present fairly the Company's consolidated
financial position as of September 30, 2001 and the results of their
consolidated operations and cash flows for the nine-month periods ended
September 30, 2000 and 2001. The results of operations for the nine months ended
September 30, 2001 are not necessarily indicative of the results to be expected
for the full year.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
information in order to conform to the 2000 presentation.
NOTE B -- ACQUISITIONS
On August 5, 1998, the Company acquired all of the outstanding common stock
of Thorn Americas, Inc. (Thorn), which operated 1,409 stores, for approximately
$900 million in cash. The acquisition, together with the increased working
capital requirements of the combined entity, was financed via $720 million in
variable-rate senior debt maturing in 6 to 8.5 years, $175$19.0 million of 11% senior
subordinated debt maturingcapitalized software costs included in 10 years,construction in progress at December 31, 2010 and $260 million of redeemable
convertible voting preferred stock. The purchase price exceeded the fair value
of
F-11
2009, respectively.
F-14
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net— (Continued)
| Note E — | Intangible Assets and Acquisitions |
Amortizable intangible assets acquired, as adjusted below, by approximately $596 million, which has
been recorded as goodwill and is being amortized over 30 years.
During 1999, goodwill relating to the Thorn acquisition was increased by
approximately $5.4 million as a result of downward adjustments to the fair valueconsist of the net assets acquired, the largest of which was a $3.8 million decrease in
deferred tax assets (Note J).
In conjunction with the Thorn acquisition, the Company terminated
substantially allfollowing (in thousands):
| December 31, | December 31, | |||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||
| Avg. | Gross | Gross | ||||||||||||||||||
| Life | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
| (years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
| Non-compete agreements | 3 | $ | 6,094 | $ | 6,057 | $ | 6,091 | $ | 6,021 | |||||||||||
| Customer relationships | 2 | 67,811 | 62,224 | 62,247 | 61,544 | |||||||||||||||
| Total | $ | 73,905 | $ | 68,281 | $ | 68,338 | $ | 67,565 | ||||||||||||
| Aggregate Amortization Expense | ||||
| Year ended December 31, 2010 | $ | 701 | ||
| Year ended December 31, 2009 | $ | 1,291 | ||
| Year ended December 31, 2008 | $ | 12,589 |
Estimated amortization expense, assuming current intangible balances and no new acquisitions, for each of the existing Thorn home office employees (approximately
550), and discontinued using Thorn's distribution facilities. As a result, at
acquisition the Company recorded liabilities for employee termination costs,
primarily related to severance agreements, of approximately $21.4 million and
costs associated with the discontinued use of leased distribution and store
facilities of approximately $18.4 million. As ofyears ending December 31, 2000, allis as follows:
| Estimated | ||||
| Amortization Expense | ||||
| (In thousands) | ||||
| 2011 | $ | 3,301 | ||
| 2012 | 2,323 | |||
| Total | $ | 5,624 | ||
A summary of the termination costs and $15.5changes in recorded goodwill follows (in thousands):
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Gross balance as of January 1, | $ | 1,367,836 | $ | 1,364,401 | ||||
| Accumulated amortization | (99,152 | ) | (99,152 | ) | ||||
| Additions from acquisitions | 55,922 | 4,456 | ||||||
| Goodwill related to stores sold or closed | (4,320 | )(1) | (1,552 | ) | ||||
| Post purchase price allocation adjustments | 181 | 531 | ||||||
| Balance as of the end of the period | $ | 1,320,467 | $ | 1,268,684 | ||||
| (1) | Includes $1.8 million of goodwill impairment related to the discontinuation of our financial services business. |
F-15
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisitions
The following table provides information concerning the costs associated withacquisitions made during the discontinued use of the leased distribution and store facilities had been paid.
At acquisition, the Company recorded an accrual of approximately $125
million for estimated probable losses on Thorn litigation, including $34.5
million related to Fogie v. Thorn Americas, Inc. and Willis v. Thorn Americas,
Inc. The Company was indemnified by the seller for losses relating to the Fogie
and Willis cases, and had recorded a corresponding receivable. As ofyears ended December 31, 2000 approximately $115 million has been paid in settlement of certain2010, 2009 and 2008.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Number of stores acquired remaining open | 3 | 1 | 5 | |||||||||
| Number of stores acquired that were merged with existing stores | 26 | 26 | 38 | |||||||||
| Number of kiosk locations acquired | 158 | — | — | |||||||||
| Number of transactions | 15 | 20 | 20 | |||||||||
| Total purchase price | $ | 74,378 | (1) | $ | 7,221 | $ | 15,700 | |||||
| Amounts allocated to: | ||||||||||||
| Goodwill | $ | 55,922 | $ | 4,456 | $ | 9,692 | ||||||
| Non-compete agreements | — | — | 2 | |||||||||
| Customer relationships | 5,551 | 554 | 1,091 | |||||||||
| Accounts receivable | — | 398 | — | |||||||||
| Property and other assets | 1,740 | — | 25 | |||||||||
| Rental merchandise | 27,325 | 1,813 | 4,890 | |||||||||
| Liabilities assumed | (16,160 | ) | — | — | ||||||||
| (1) | Of this amount, $71.0 million, net of cash acquired, was funded in connection with the acquisition of The Rental Store, Inc. |
Purchase prices are determined by evaluating the average monthly rental income of the acquired litigationstores and applying a multiple to the total for legal fees. Details regarding acquired
litigation, related settlements and accrued litigation costsrent-to-own store acquisitions. With respect to the acquisition of The Rental Store, Inc., the purchase price was determined using a pro forma multiple of earnings. Acquired customer relationships are described in
Note K.
In May 1998,amortized utilizing the Company acquired substantially allstraight-line method over a 21 month period, non-compete agreements are amortized using the straight-line method over the life of the agreements, other intangible assets are amortized using the straight-line method over the life of Central Rents, Inc. (Central Rents), which consisted of 176 stores,the asset and goodwill associated with acquisitions is not amortized. The weighted average amortization period was 2.0 years for approximately $100 million in cash. The purchase price exceeded the fair value
ofintangible assets acquired by approximately $72 million, which has been recorded asduring the year ended December 31, 2010. Additions to goodwill and is being amortized over 30 years.
The Company also acquired the assets of 52 storesdue to acquisitions in 14 separate
transactions during 1998 for approximately $26.4 million. 2010 were tax deductible.
All acquisitions have been accounted for as purchases, and the operating results of the acquired businessesstores and accounts have been included in the financial statements of the Company since their date of acquisition.
For
| Note F — | Senior Debt |
Our senior credit agreement, as amended, provides for a $1,024 million senior credit facility consisting of a $165 million term loan with the year ending December 31, 2000loans being referred to by us as the Company acquired 74 stores in 19
separate transactions for an aggregate“tranche A term loans,” a $484 million term loan with the loans being referred to by us as the “tranche B term loans,” and a $375 million revolving credit facility. The tranche A term loans are divided into two equalsub-tranches of $82.5 million each, referred to by us as the “existing tranche A term loans” and the “extended tranche A term loans.” The existing tranche A term loans mature on June 30, 2011, and the extended tranche A term loans mature on September 30, 2013. The tranche B term loans are divided into twosub-tranches of approximately $42.5$184 million in cash.
NOTE C -- RENTAL MERCHANDISE
F-12
and $300 million, referred to by us as the “existing tranche B term loans” and the “extended tranche B term loans,” respectively. The existing tranche B term loans mature on June 30, 2012, and the extended tranche B term loans mature on March 31, 2015.
F-16
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY ASSETS
NOTE E -- INTANGIBLE ASSETS
NOTE F -- SENIOR DEBT
In conjunction with the acquisition— (Continued)
The debt facilities as of Thorn, the Company entered into a
Senior Credit Facility (the Facility) with a syndicate of banks. The Company
also has other debt facilities. Senior debt consists of the following:
F-13
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------
(1) As at December 31, 19992010 and 20002009 are as follows:
| 2010 | 2009 | |||||||||||||||||||||||||||
| Facility | Maximum | Amount | Amount | Maximum | Amount | Amount | ||||||||||||||||||||||
| Maturity | Facility | Outstanding | Available | Facility | Outstanding | Available | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Senior Credit Facilities: | ||||||||||||||||||||||||||||
| Tranche A Term Loans | ||||||||||||||||||||||||||||
| Existing | 2011 | $ | 82,500 | $ | 18,750 | $ | — | $ | 82,500 | $ | 80,000 | $ | — | |||||||||||||||
| Tranche A Term Loans | ||||||||||||||||||||||||||||
| Extended | 2013 | 82,500 | 55,000 | — | 82,500 | 80,000 | — | |||||||||||||||||||||
| Tranche B Term Loans | ||||||||||||||||||||||||||||
| Existing | 2012 | 184,080 | 13,334 | — | 184,080 | 183,438 | — | |||||||||||||||||||||
| Tranche B Term Loans | ||||||||||||||||||||||||||||
| Extended | 2015 | 300,000 | 290,250 | — | 300,000 | 299,250 | — | |||||||||||||||||||||
Revolving Facility(1) | 2013 | 375,000 | 6,000 | 231,629 | 350,000 | 52,000 | 179,520 | |||||||||||||||||||||
| 1,024,080 | 383,334 | 231,629 | 999,080 | 694,688 | 179,520 | |||||||||||||||||||||||
| Other Indebtedness: | ||||||||||||||||||||||||||||
| Line of credit | 20,000 | 17,780 | 2,220 | 20,000 | 16,470 | 3,530 | ||||||||||||||||||||||
| Total | $ | 1,044,080 | $ | 401,114 | $ | 233,849 | $ | 1,019,080 | $ | 711,158 | $ | 183,050 | ||||||||||||||||
| (1) | At December 31, 2010 and 2009, the amounts available under the Revolving Facility were reduced by approximately $137.4 million and $118.5 million, respectively, for our outstanding letters of credit. |
Borrowings under the Company's
revolver facility were reduced by approximately $38.7 million and $43.7
million, respectively, for outstanding letters of credit. These letters of
credit are used to support the Company's insurance obligations.
(2) On June 29, 2000, we refinanced a portion of our amended senior credit facility by
adding a new $125 million Term D tranche to our existing facility. No
significant mandatory principal repayments are required on the Term D
facility until the tranche becomes due in 2007.
Borrowings under the Facility bearaccrue interest at varying rates equal to, 0.25%at our election, either (y) the prime rate plus (i) up to 0.75% in the case of existing tranche A term loans, (ii) 1.5% to 2.0% in the case of revolving loans or extended tranche A term loans, (iii) .75% in the case of existing tranche B term loans, and (iv) 2.0% in the case of extended tranche B term loans; or (z) the Eurodollar rate plus (i) .75% to 1.75% overin the designatedcase of existing tranche A term loans, (ii) 2.5% to 3.0% in the case of revolving loans or extended tranche A term loans, (iii) 1.75% in the case of existing tranche B term loans, and (iv) 3.0% in the case of extended tranche B term loans. Interest periods range from seven days (for borrowings under the revolving credit facility only) to one, two, three or six months, at our election. The weighted average Eurodollar rate on our outstanding debt was 0.31% at February 18, 2011. The margins on the Eurodollar rate and on the prime rate (9.50% per annum at December 31, 2000)for revolving loans, existing tranche A term loans, and extended tranche A term loans may fluctuate dependent upon an increase or 1.25%decrease in our consolidated leverage ratio as defined by a pricing grid included in the amended credit agreement. We have not entered into any interest rate protection agreements with respect to 2.75% over LIBOR (6.55% at December 31, 2000) at the Company's
option, and are subject to quarterly adjustments based on certain leverage
ratios. At December 31, 1999 and 2000, the average rate on outstanding
borrowings was 8.78% and 8.95%, respectively.term loans under our senior credit facilities. A commitment fee equal to 0.25%0.5% to 0.50%0.625% of the unused portionaverage daily amount of the Facilityavailable revolving commitment is payable quarterly.
The Facility is collateralized
Our senior credit facilities are secured by a security interest in substantially all of the Company'sour tangible and intangible assets, and is unconditionally guaranteedincluding intellectual property. Our senior credit facilities are also secured by eacha pledge of the Company's subsidiaries. In addition,capital stock of our wholly-owned U.S. subsidiaries (other than certain specified subsidiaries).
Our senior credit facilities contain, without limitation, covenants that generally limit our ability to:
| • | incur additional debt; | |
| • | repurchase our capital stock and pay cash dividends in the event the pro forma senior leverage ratio is greater than 2.50x; | |
| • | incur liens or other encumbrances; |
F-17
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| • | merge, consolidate or sell substantially all our property or business; | |
| • | sell assets, other than inventory, in the ordinary course of business; | |
| • | make investments or acquisitions unless we meet financial tests and other requirements; | |
| • | make capital expenditures; or | |
| • | enter into an unrelated line of business. |
Our senior credit facilities require us to comply with several financial covenants. The table below shows the Facility contains severalrequired and actual ratios under our credit facilities calculated as of December 31, 2010:
| Required Ratio | Actual Ratio | |||||||||
| Maximum consolidated leverage ratio | No greater than | 3.25:1 | 1.69:1 | |||||||
| Minimum fixed charge coverage ratio | No less than | 1.35:1 | 1.85:1 | |||||||
These financial covenants, as well as the related components of their computation, are defined therein, including ain the amended and restated credit agreement governing our senior credit facility, which is included as an exhibit to our Quarterly Report onForm 10-Q for the quarterly period ended June 30, 2010. In accordance with the credit agreement, the maximum consolidated leverage ratio was calculated by dividing the consolidated funded debt outstanding at December 31, 2010 ($656.7 million) by consolidated EBITDA for the twelve month period ended December 31, 2010 ($389.4 million). For purposes of the covenant calculation, (i) “consolidated funded debt” is defined as outstanding indebtedness less cash in excess of $25.0 million, and (ii) “consolidated EBITDA” is generally defined as consolidated net income (a) plus the sum of income taxes, interest expense, depreciation and amortization expense, extraordinary non-cash expenses or losses, and other non-cash charges, and (b) minus the sum of interest income, extraordinary income or gains, other non-cash income, and cash payments with respect to extraordinary non-cash expenses or losses recorded in prior fiscal quarters. Consolidated EBITDA is a minimum
interest coverage ratio, andnon-GAAP financial measure that is presented not as a measure of operating results, but rather as a measure used to determine covenant compliance under our senior credit facilities.
The minimum fixed charge coverage ratio was calculated pursuant to the credit agreement by dividing consolidated EBITDA for the twelve month period ended December 31, 2010, as well as
restrictions onadjusted for certain capital expenditures additional indebtedness,($485.7 million), by consolidated fixed charges for the twelve month period ended December 31, 2010 ($263.0 million). For purposes of the covenant calculation, “consolidated fixed charges” is defined as the sum of interest expense, lease expense, and the
dispositionmandatory debt repayments.
Events of assets notdefault under our senior credit facilities include customary events, such as a cross-acceleration provision in the ordinary course of business.
During 1998, the Company entered into three interest rate swap agreements
to limit the effect of increases in interest rates. These agreements expire in
2001 and 2003, and have an aggregate notional principal amount of $500 million.
The effect of these agreements is to limit the Company's interest rate exposure
by fixing the LIBOR rate at 5.59%. The agreements had no cost to the Company,
and at December 31, 1999 and 2000 they had aggregate fair values of $14.5
million and $2.6 million, respectively.
The following are scheduled maturities of senior debt at December 31, 2000:
NOTE G -- SUBORDINATED NOTES PAYABLE
During 1998, the Company issued $175.0 million of subordinated notes,
maturingevent that we default on August 15, 2008. The notes require semi-annual interest-only
payments at 11%, and are guaranteed by the Company's two principal subsidiaries.
The notes are redeemable at the Company's option, at any time on or after August
15, 2003, at a set redemption price that varies depending upon the proximity of
the redemption date to final maturity.other debt. In addition, prior to August 15, 2001,an event of default under the Company may redeem up to 33.33% of the original aggregate principal with the
cash proceeds of one or more equity offerings, at a redemption price of 111%.
Uponsenior credit facility would occur if a change of control occurs. This is defined to include the case where a third party becomes the beneficial owner of 35% or more of our voting stock or certain changes inRent-A-Center’s Board of Directors occurs. An event of default would also occur if one or more judgments were entered against us of $30.0 million or more and such judgments were not satisfied or bonded pending appeal within 30 days after entry.
We utilize our revolving credit facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow caused by the timing of cash receipts. In that regard, we may from time to time draw funds under the revolving credit facility for general corporate purposes. The funds drawn on individual occasions have varied in amounts of up to $98.0 million, with total amounts outstanding ranging from $2.0 million up to $108.0 million. The amounts drawn are generally outstanding for a short period of time and are generally paid down as cash is received from our operating activities.
F-18
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below shows the scheduled maturity dates of our senior debt outstanding at December 31, 2010.
Year Ending December 31, | ||||
| (In thousands) | ||||
| 2011 | $ | 36,530 | ||
| 2012 | 28,959 | |||
| 2013 | 48,375 | |||
| 2014 | 215,625 | |||
| 2015 | 71,625 | |||
| $ | 401,114 | |||
| Note G — | Senior Notes |
On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 65/8%, pursuant to an indenture dated November 2, 2010, amongRent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. The proceeds of this offering were used to repay outstanding term debt under our senior credit facility and to repurchase shares of our common stock.
The 2010 indenture contains covenants that limit our ability to:
| • | incur additional debt; | |
| • | sell assets or our subsidiaries; | |
| • | grant liens to third parties; | |
| • | pay cash dividends or repurchase stock; and | |
| • | engage in a merger or sell substantially all of our assets. |
Events of default under the 2010 indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million, as well as in the event a judgment is entered against us in excess of $50.0 million that is not discharged, bonded or insured.
The 65/8% notes may be redeemed on or after November 15, 2015, at our option, in whole or in part, at a premium declining from 103.313%. The 65/8% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 65/8% notes also require that upon the occurrence of a change of control (as defined in the 2010 indenture), the holders of the subordinated notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. This would trigger an event of default under our senior credit facilities. We are not required to maintain any financial ratios under the 2010 indenture.
The Company to redeemand the notes.
F-14
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notes contain restrictive covenants, as defined therein, including a
consolidated interest coverage ratio and limitations on additional indebtedness
and restricted payments.
The $5.0 million non-recurring financing costs expensed during 1998, relate
to fees paid for bridge financing necessary to complete the Thorn acquisition,
which was subsequently replaced with the subordinated notes.
The Company's direct and wholly-owned subsidiaries, consisting of
ColorTyme, Inc. and Advantage Companies, Inc. (collectively, the Guarantors),Subsidiary Guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of the Company with respect to these notes.the 65/8% Senior Notes due 2020. The Company has no independent assets or operations, and each Subsidiary Guarantor is 100% owned directly or indirectly by the Company. The only direct or indirect subsidiaries of the Company that are not Guarantorsguarantors are inconsequentialminor subsidiaries. There are no restrictions on the ability of any of the Subsidiary Guarantors to transfer funds to the Company in the form of loans, advances, or dividends, except as provided by applicable law.
F-15
F-19
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is certain condensed consolidating financial information
(within— (Continued)
| Note H — | Accrued Liabilities |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Accrued insurance costs | $ | 138,760 | $ | 137,824 | ||||
| Accrued compensation | 47,656 | 39,122 | ||||||
| Deferred revenue | 36,620 | 33,476 | ||||||
| Taxes other than income | 24,244 | 20,357 | ||||||
| Accrued capital lease obligations | 816 | 2,348 | ||||||
| Accrued interest payable | 5,245 | 1,193 | ||||||
| Accrued other | 35,074 | 30,731 | ||||||
| $ | 288,415 | $ | 265,051 | |||||
| Note I — | Income Taxes |
A reconciliation of income tax expense at the meaningfederal statutory rate of Rule 3-1035% to actual tax expense follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal benefit (expense) | 2.9 | % | 3.1 | % | 2.0 | % | ||||||
| Effect of foreign operations, net of foreign tax credits | 0.5 | % | — | % | — | % | ||||||
| Other, net | (0.9 | )% | (0.2 | )% | (0.1 | )% | ||||||
| Total | 37.5 | % | 37.9 | % | 36.9 | % | ||||||
The components of Regulation S-X)income tax expense are as of December 31, 1999 and
2000 and September 30, 2001, and for each of the three years in the period ended
December 31, 2000 and for the nine months ended September 30, 2000 and 2001. The
financial information includes the Guarantors from the dates they were acquired
or formed by the Company and is presented using the push-down basis of
accounting.
F-16
follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Current expense | ||||||||||||
| Federal | $ | 749 | $ | 55,101 | $ | 399 | ||||||
| State | 8,656 | 10,278 | 2,574 | |||||||||
| Foreign | 4,220 | 1,288 | 1,192 | |||||||||
| Total current | 13,625 | 66,667 | 4,165 | |||||||||
| Deferred expense | ||||||||||||
| Federal | 85,866 | 33,028 | 73,015 | |||||||||
| State | 3,624 | 2,820 | 4,538 | |||||||||
| Total deferred | 89,490 | 35,848 | 77,553 | |||||||||
| Total | $ | 103,115 | $ | 102,515 | $ | 81,718 | ||||||
F-20
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F-17
— (Continued)
Deferred tax assets (liabilities) consist of the following:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Deferred tax assets | ||||||||
| Federal net operating loss carryforwards | $ | 24,612 | $ | 32,067 | ||||
| State net operating loss carryforwards | 12,318 | 17,018 | ||||||
| Foreign net operating loss carryforwards | 595 | — | ||||||
| Accrued liabilities | 53,777 | 47,957 | ||||||
| Property assets | 1,141 | 15,014 | ||||||
| Other assets including credits | 1,261 | 1,701 | ||||||
| Foreign tax credit carryforwards | 2,207 | 1,218 | ||||||
| 95,911 | 114,975 | |||||||
| Valuation allowance | (5,951 | ) | (7,968 | ) | ||||
| Deferred tax liabilities | ||||||||
| Rental merchandise | (244,662 | ) | (181,533 | ) | ||||
| Intangible assets | (64,250 | ) | (48,589 | ) | ||||
| (308,912 | ) | (230,122 | ) | |||||
| Net deferred taxes | $ | (218,952 | ) | $ | (123,115 | ) | ||
At December 31, 2010, we had approximately $63.8 million of federal net operating loss (“NOL”) carryforwards available to offset future taxable income expiring between 2018 and 2025 and approximately $278.0 million of state NOL carryforwards expiring between 2011 and 2026. All of our federal NOLs and approximately $84.0 million of our state NOLs represent acquired NOLs and their utilization is subject to applicable annual limitations for U.S. state and U.S. federal tax purposes, including Section 382 of the Internal Revenue Code of 1986, as amended. We establish a valuation allowance to the extent we consider it more likely than not that the deferred tax assets attributable to our acquired state NOLs or foreign tax credits will not be recovered.
We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2007. The appeals process with the Internal Revenue Service (IRS) Office of Appeals for the years 2001 through 2005 has been completed. We reached agreement on all issues except one issue with respect to the 2003 tax year which also recurs in each of the 2004, 2005, 2006 and 2007 taxable years. The IRS concluded its examination of our consolidated income tax return for the years 2006 and 2007, and issued a Revenue Agent’s Report (RAR) on January 19, 2010. We reached agreement on all issues except the issue identified above. We believe the position and supporting case law applied by the IRS are incorrectly applied to our situation and that our fact pattern is distinguishable from the IRS’ position. We intend to vigorously defend our position on the issue. This matter, which now includes the years 2003 through 2007, has been docketed in the United States Tax Court for trial in late 2011. Currently, we are also under examination in various states. We do not anticipate that adjustments, if any, regarding the 2003 through 2007 disputed issue or state examinations will result in a material change to our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater
F-21
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F-18
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F-19
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- ACCRUED LIABILITIES
NOTE I -- REDEEMABLE CONVERTIBLE VOTING PREFERRED STOCK
During 1998,— (Continued)
than 50 percent likelihood of being realized upon the Company issued 260,000 shares of redeemable convertible
voting preferred stock at $1,000 per share, resulting in aggregate proceeds of
$260.0 million. Placement costs of approximately $0.5 million were charged
against these proceeds to arrive atultimate settlement with the original carrying value.
The preferred stock is convertible, at any time, into sharesrelevant tax authority. We review our tax positions quarterly and adjust the balance as new information becomes available.
A reconciliation of the Company's common stock at a conversion price equal to $27.935 per share,beginning and has
a liquidation preferenceending amount of $1,000 per share, plus all accrued and unpaid
dividends. No distributions may be made to holdersunrecognized tax benefits follows:
| (In thousands) | ||||
| Balance at January 1, 2009 | $ | 2,057 | ||
| Additions based on tax positions related to current year | — | |||
| Additions for tax positions of prior years | 1,744 | |||
| Reductions for tax positions of prior years | — | |||
| Settlements | (771 | ) | ||
| Balance at January 1, 2010 | 3,030 | |||
| Additions based on tax positions related to current year | 958 | |||
| Additions for tax positions of prior years | 2,928 | |||
| Reductions for tax positions of prior years | (241 | ) | ||
| Balance at December 31, 2010 | $ | 6,675 | ||
Included in the balance of common stock until the
holders of the preferred stock have received the liquidation preference.
Dividends accrue on a quarterly basis, at the rate of $37.50 per annum, per
share. A restriction under the Facility requires the Company to pay all
distributions with additional shares of preferred stock until August 2003 at
which time distributions must be paid in cash. During 1999 and 2000, the Company
paid approximately $11.4 million and $10.3 million in preferred dividends by
issuing 11,426 and 10,330 shares of preferred stock, respectively.
The preferred stock is not redeemable until 2002, after which time the
Company may, at its option, redeem the shares at 105% of the liquidation
preference plus accrued and unpaid dividends. Holders of the preferred stock
have the right to require the Company to redeem the preferred stock upon a
change of control, if the Company ceases to be listed on a United States
national securities exchange or the Nasdaq National Market System, or upon the
eleventh anniversary of the issuance of the preferred stock, at a price equal to
the liquidation preference value.
F-20
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of the preferred stock are entitled to two seats on the Company's
Board of Directors, and are entitled to vote on all matters presented to the
holders of the Company's common stock. The number of votes per preferred share
is equal to the number of votes associated with the underlying voting common
stock into which the preferred stock is convertible.
NOTE J -- INCOME TAXES
The incomeunrecognized tax provision reconciled to the tax computed at the statutory
Federal rate is:
The components of the income tax provision are as follows:
F-21
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consist of the following:
The Company has Federal net operating loss carryforwards of approximately
$104 millionbenefits at December 31, 2000, including $10.82010 is $4.8 million, net of Federal netfederal benefit, which, if ultimately recognized, will reduce our annual effective tax rate.
We classify interest accrued related to unrecognized tax benefits as interest expense and penalties related to unrecognized tax benefits as operating loss carryforwards which were acquired in connection with purchased
companies. The utilizationexpenses. We recorded interest expense of approximately $282,000 for the acquired losses is limited toyear ended December 31, 2010. As of December 31, 2010, we have accrued approximately $3.5 million per year. The Company also has various state net operating loss
carryforwards. If not utilized, all net operating loss carryforwards will expire
between 2005$787,000 for the payment of interest and 2019.
The Company has alternative minimum tax credit carryforwards and foreign
tax credit carryforwards aggregating approximately $5.4 million.
During 1999, the Company completed its analysis of the tax bases of assets
and liabilities acquired in the Thorn acquisition, resulting in a decrease in
its deferred tax asset of $3.8 million and a corresponding increase in goodwill.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases its officepenalties.
| Note J — | Commitments and Contingencies |
Leases
We lease our service center and store facilities and certainmost delivery vehicles. Certain of the store leases contain escalation clauses for increased taxes and operating expenses. Rental expense was $51.4$221.9 million, $96.8$219.0 million and $105.6$215.8 million for 1998, 19992010, 2009 and 2000,2008, respectively. Capital leases include certain transportation equipment. Future minimum rental payments under operatingoperating/capital leases with remaining non-cancelable lease terms in excess of one year at December 31, 20002010 are as follows:
Year Ending December 31, | Operating Leases | Capital Leases | ||||||
| (In thousands) | (In thousands) | |||||||
| 2011 | $ | 177,266 | $ | 649 | ||||
| 2012 | 145,658 | 298 | ||||||
| 2013 | 108,916 | — | ||||||
| 2014 | 66,160 | — | ||||||
| 2015 | 31,180 | — | ||||||
| Thereafter | 8,497 | — | ||||||
| 537,677 | 947 | |||||||
| Less amount representing interest obligations under capital lease | — | (131 | ) | |||||
| $ | 537,677 | $ | 816 | |||||
F-22
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
— (Continued)
Our investment in equipment under capital leases are as follows:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Equipment under capital lease | $ | 4,656 | $ | 7,714 | ||||
| Less accumulated amortization | (3,803 | ) | (5,257 | ) | ||||
| Equipment under capital lease, net | $ | 853 | $ | 2,457 | ||||
Litigation
From time to time, the Company,we, along with itsour subsidiaries, isare party to various legal proceedings arising in the ordinary course of business. The
CompanyWe accrue for losses that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expensed are incurred. As of December 31, 2010 and 2009, we had no accrual relating to probable losses for our outstanding litigation.
We continue to monitor our litigation exposure, and will review the adequacy of our legal reserves on a quarterly basis.
In our history, we have defended class action lawsuits alleging various regulatory violations and have paid material amounts to settle such claims. We cannot assure you that we will not be the subject of similar lawsuits in the future.
Guarantee
ColorTyme Guarantees. Our subsidiary, ColorTyme Finance, Inc., is currently a party to an agreement with Citibank, N.A., who provides up to $25.0 million in aggregate financing to qualifying franchisees of ColorTyme. Under the Citibank agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Citibank can assign the loans and the collateral securing such loans to ColorTyme Finance, with ColorTyme Finance paying or causing to be paid the outstanding debt to Citibank and then succeeding to the rights of Citibank under the debt agreements, including the right to foreclose on the collateral.Rent-A-Center and ColorTyme Finance guarantee the obligations of the franchise borrowers under the Citibank facility. An additional $20.0 million of financing is provided by Texas Capital Bank under an agreement similar to the Citibank financing, which is guaranteed byRent-A-Center East, Inc., a subsidiary ofRent-A-Center. The maximum guarantee obligations under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, is $45.0 million, of which $17.9 million was outstanding as of December 31, 2010.
| Note K — | Stock-Based Compensation |
We maintain long-term incentive plans for the benefit of certain employees, consultants and directors. Our plans consist of theRent-A-Center, Inc. Amended and Restated Long-Term Incentive Plan (the “Prior Plan”), theRent-A-Center, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”), and theRent-A-Center, Inc. 2006 Equity Incentive Plan (the “Equity Incentive Plan”), which are collectively known as the “Plans.”
The 2006 Plan authorizes the issuance of 7,000,000 shares ofRent-A-Center’s common stock that may be issued pursuant to awards granted under the 2006 Plan, of which no more than 3,500,000 shares may be issued in the form of restricted stock, deferred stock or similar forms of stock awards which have value without regard to future appreciation in value of or dividends declared on the underlying shares of common stock. In applying these limitations, the following material litigation:
Murray v. Rent-A-Center, Inc. In May 1999,shares will be deemed not to have been issued: (1) shares covered by the plaintiffs filed this class
action lawsuitunexercised portion of an option that terminates, expires, or is canceled or settled in Missouri, allegingcash, and (2) shares that the Company discriminated against
African Americans in its hiring, compensation, promotion and termination
policies. Plaintiffs alleged no specific amount of damages in their complaint.
The Company believes that the plaintiffs' claims are without merit and intends
to vigorously defend this action. However, given the early stage of this
proceeding, there can be no assurance that the Company will prevail without
liability.
Colon v. Thorn Americas, Inc. In November 1997, the plaintiffs filed this
statutory compliance class action lawsuit in New York alleging various statutory
violations of New York consumer protection laws. The plaintiffs are seeking
compensatory damages, punitive damages, interest, attorney's fees and certain
injunctive relief. Although the Company intends to vigorously defend itself in
this action, the ultimate outcome cannot presently be determined, and there can
be no assurance that the Company will prevail without liability.
Wisconsin Attorney General Proceeding. In August 1999, the Wisconsin
Attorney General filed suit against the Company and its subsidiary ColorTyme in
Wisconsin, alleging that its rent-to-rent transaction violates the Wisconsin
Consumer Act and the Wisconsin Deceptive Advertising Statute. The Attorney
General seeks injunctive relief, restoration of any losses suffered by any
Wisconsin Consumer harmed and civil forfeitures and penalties. The Company
intends to vigorously defend itself in this matter, and while there can be no
assurance that the Company will prevail without liability, the Company believes
the ultimate resolution will not have a material adverse effect.
Wilfong, et. al. v. Rent-A-Center, Inc./Margaret Bunch, et. al. v.
Rent-A-Center, Inc. In August 2000, a putative nationwide class action was
filed against the Company in federal court in East St. Louis, Illinois by
Claudine Wilfong and sixteen plaintiffs, alleging that it engaged in class-wide
gender discrimination following its acquisition of Thorn Americas. In December
2000, a similar suit filed by Margaret Bunch in federal court in the Western
District of Missouri was amended to allege similar class action claims. The
allegations underlying these matters involve charges of wrongful termination,
constructive discharge, disparate treatment and disparate impact. The Company
intends to vigorously defend itself in this matter. However, given the early
stage of these proceedings, there can be no assurance that the Company will
prevail without liability.
An adverse ruling in oneforfeited or more of the aforementioned cases could have a
material and adverse effect on the Company's consolidated financial statements;
however, the Company believes its accrual for litigation costs of $14.8 million
at December 31, 2000 is sufficient for its expected liabilities for the
aforementioned cases and other cases.
During 1999, the Company funded the $11.5 million settlement of its two
existing class action lawsuits in New Jersey, together with the $48.5 million
settlement of Robinson v. Thorn Americas, Inc. The settlement of the Company's
existing litigation resulted in a charge to earnings in 1998, classified as
class action legal settlements. In addition, the Company settled and funded
Anslono v. Thorn Americas, Inc. during 2000. Both the Robinson and Anslono cases
were acquired in the Thorn acquisition, and the Company made appropriate
purchase accounting adjustments for liabilities associated with this litigation.
Under the terms of these settlements the Company was entitled to receive refunds
for unlocated class members. During
F-23
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, the Company received refunds totaling approximately $22.4 million which— (Continued)
subject to awards that are presented as class action litigation settlements.
In addition, Fogie v. Thorn Americas, Inc., was acquiredforfeited, canceled, terminated or settled in cash. At December 31, 2010 and 2009, there were 1,796,575 and 1,838,155 shares, respectively, allocated to equity awards outstanding in the Thorn
acquisition; however,2006 Plan.
We acquired the Company received full indemnification fromEquity Incentive Plan (formerly known as the sellerRent-Way, Inc. 2006 Equity Incentive Plan) in conjunction with our acquisition of Rent-Way in 2006. There were 2,468,461 shares of our common stock reserved for any incurred losses. In December 1991,issuance under the plaintiffs filed this class
action in Minnesota alleging that Thorn's rent-to-own contracts violated
Minnesota's Consumer Credit Sales ActEquity Incentive Plan. There were 726,539 and the Minnesota General Usury Statute.
In April 1998, the court entered a final judgment against Thorn for
approximately $30.0 million. Following an unsuccessful appeal in August 1999,
Thorn plc deposited the judgment amount in an escrow account supervised by
plaintiff's counsel and the court in October 1999.
The Company is also involved in various other legal proceedings, claims and
litigation arising558,437 shares allocated to equity awards outstanding in the ordinary course of business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
As part of the ongoing financing arrangement with a credit corporation,
ColorTyme's franchisees can obtain debt financing. ColorTyme provides a limited
guarantee for amounts outstanding under this arrangement.
UPDATE THROUGH NOVEMBER 30, 2001 -- (UNAUDITED)
Murray v. Rent-A-Center, Inc. On May 11, 2001, the court denied the
plaintiffs' motion for class certification. The Eighth Circuit Court of Appeals
denied plaintiffs appeal of that decision. Accordingly, this case will proceed
on a individual plaintiff basis.
Wilfong et. al. v. Rent-A-Center, Inc./Margaret Bunch, et. al. v.
Rent-A-Center, Inc. On November 1, 2001, the Company announced that it reached
an agreement in principle for the settlement of the Margaret Bunch, et al. v.
Rent-A-Center, Inc. matter pending in federal court in Kansas City, Missouri.
The settlement is subject to court approval. Equity Incentive Plan at December 31, 2010 and 2009, respectively.
Under the terms of the proposed
settlement, while not admitting liability, the Company agreed to pay an
aggregate of $12.25 million to the agreed upon class, plus plaintiff's
attorneys' fees as determined by the court, and costs to administer the
settlement process. Accordingly, to account for the aforementioned costs, as
well as the Company's own attorneys' fees, the Company recorded a one time
non-recurring charge of $16.0 million in the third quarter.
NOTE L -- STOCK BASED COMPENSATION
The Company's 1994 long-term incentive plan (the Plan) for the benefit of
certain key employees and directors provides the Board of Directors broad
discretion in creating employee equity incentives. Under the plan, up to
6,200,000Prior Plan, 14,562,865 shares of the Company'sRent-A-Center’s common shares may bestock were reserved for issuance under stock options, stock appreciation rights or restricted stock grants. Options granted to our employees under the planPrior Plan generally become exercisable over a period of one to fivefour years from the date of grant and may be exercised up to a maximum of 10ten years from the date of grant. Options granted to directors are exercisable
immediately.were immediately exercisable. There have beenwere no grants of stock appreciation rights and all options have beenequity awards were granted with fixed prices. At December 31, 2000,2010 and 2009, there were 873,163 options available for issuance1,607,525 and 2,525,027 shares, respectively, allocated to equity awards outstanding under the Prior Plan. F-24
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Prior Plan was terminated on May 19, 2006, upon the approval by our stockholders of the 2006 Plan.
Information with respect to stock option activity related to the Plans follows. The information for the Plans is combined because the characteristics of the awards are similar.
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Equity Awards | Exercise | Remaining | Intrinsic | |||||||||||||
| Outstanding | Price | Contractual Life | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Balance outstanding at January 1, 2010 | 4,921,619 | $ | 20.43 | 5.44 years | $ | 8,584 | ||||||||||
| Granted | 796,345 | 20.22 | ||||||||||||||
| Exercised | (1,095,393 | ) | 17.52 | $ | 9,106 | |||||||||||
| Forfeited | (491,932 | ) | 24.02 | |||||||||||||
| Balance outstanding at December 31, 2010 | 4,130,639 | $ | 20.78 | 5.53 years | $ | 42,676 | ||||||||||
| Exercisable at December 31, 2010 | 2,606,049 | $ | 21.30 | 3.85 years | $ | 28,259 | ||||||||||
The intrinsic value of options exercised during the years ended December 31, 2009 and 2008 was $1.0 million and $1.7 million, respectively.
The fair value of unvested options that we expect to result in compensation expense was approximately $4.3 million with a weighted average number of years to vesting of 2.41 years at December 31, 2010. The total number of unvested options was 1,524,590 and 1,417,207, with intrinsic values of $14.4 million and $946,000 at December 31, 2010 and 2009, respectively. There were 423,497 and 194,128 restricted stock units outstanding as follows:
of December 31, 2010 and 2009, respectively.
The weighted average fair value per share of unvested options granted during 1998,
1999 and 2000 was $15.22 $14.38, and $14.97, respectively, all of which were
granted at market value. Information about stock options outstanding at December 31, 2000 is summarized as follows:
During 2000 the Company charged $65,000 to expense as a result of 25,000
options granted to non-employees for services.2010 and 2009 was $3.76 and $3.21, respectively. The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for stock options granted
under the Plan. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Compensation costs for all other stock-based compensation is accounted for under
SFAS 123. If the Company had elected to recognize compensation expense based
upon theweighted average fair value atof options forfeited during the grant date foryear ended December 31, 2010 was $7.35.
The total number of options undervested during the Plan consistentyear ended December 31, 2010 was 527,141, with a weighted average fair value of $5.27. The total fair value of options vested during the methodology
F-25
years ended December 31, 2010, 2009 and 2008, was $2.6 million, $3.0 million and $4.3 million, respectively.
F-24
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prescribed by SFAS 123,— (Continued)
During the Company's 1998, 1999 and 2000 net earnings and
earnings per common share would be reduced totwelve months ended December 31, 2010, the pro forma amounts indicated as
follows:
Theweighted average fair valuevalues of thesethe options was estimated atgranted under the date of grantPlans were calculated using the Black-Scholes option pricing modelbinomial method with the following weighted-average
assumptions: expected
| Employee options: | ||
| Risk free interest rate (0.26% to 2.16%) | Weighted average 1.01% | |
| Expected dividend yield | 0.80% | |
| Expected life | 5.48 years | |
| Expected volatility (34.95% to 56.30%) | Weighted average 47.87% | |
| Forfeiture rate (5.00% to 15.43%) | Weighted average 10.18% | |
| Employee stock options granted | 796,345 | |
| Weighted average grant date fair value | $6.00 |
During the twelve months ended December 31, 2009, the weighted average fair values of the options granted under the Plans were calculated using the binomial method with the following assumptions:
| Employee options: | ||
| Risk free interest rate (0.37% to 2.04%) | Weighted average 1.10% | |
| Expected dividend yield | — | |
| Expected life | 5.34 years | |
| Expected volatility (45.30% to 66.50%) | Weighted average 55.08% | |
| Forfeiture rate (3.64% to 24.80%) | Weighted average 11.23% | |
| Employee stock options granted | 678,370 | |
| Weighted average grant date fair value | $5.72 |
During the twelve months ended December 31, 2008, the weighted average fair values of the options granted under the Plans were calculated using the binomial method with the following assumptions:
| Employee options: | ||
| Risk free interest rate (1.62% to 3.17%) | Weighted average 2.43% | |
| Expected dividend yield | — | |
| Expected life | 4.20 years | |
| Expected volatility (33.85% to 53.58%) | Weighted average 42.08% | |
| Forfeiture rate (4.20% to 19.60%) | Weighted average 10.08% | |
| Employee stock options granted | 732,995 | |
| Weighted average grant date fair value | $4.66 |
| Non-employee director options: | ||
| Risk free interest rate | 3.54% | |
| Expected dividend yield | — | |
| Expected life | 6.90 years | |
| Expected volatility | 41.26% | |
| Forfeiture rate | 0.00% | |
| Non-employee director stock options granted | 24,000 | |
| Weighted average grant date fair value | $7.02 |
F-25
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax benefits from stock option exercises of $3.0 million, $270,000 and $560,000, respectively, for the twelve months ended December 31, 2010, 2009 and 2008 were reflected as an outflow from operating activities and an inflow from financing activities in the Consolidated Statement of Cash Flows.
| Note L — | Deferred Compensation Plan |
TheRent-A-Center, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) is an unfunded, nonqualified deferred compensation plan for a select group of our key management personnel and highly compensated employees. The Deferred Compensation Plan first became available to eligible employees in July 2007, with deferral elections taking effect as of August 3, 2007.
The Deferred Compensation Plan allows participants to defer up to 50% of their base compensation and up to 70%; risk-free interest rates100% of 5.55%, 6.50%any bonus compensation. Participants may invest the amounts deferred in measurement funds that are the same funds offered as the investment options in theRent-A-Center, Inc. 401(k) Retirement Savings Plan. We may make discretionary contributions to the Deferred Compensation Plan, which are subject to a five-year graded vesting schedule based on the participant’s years of service with us. We are obligated to pay the deferred compensation amounts in the future in accordance with the terms of the Deferred Compensation Plan. Assets and 6.0% to 6.77%associated liabilities of the Deferred Compensation Plan are included in 1998, 1999,prepaid and 2000, respectively; no
dividend yield;other assets and expected livesaccrued liabilities in our consolidated balance sheets. The deferred compensation plan liability was approximately $2.0 million and $1.3 million as of seven years.
NOTE M -- 401(k) PLAN
The Company sponsorsDecember 31, 2010 and 2009, respectively. No discretionary contributions were made for the years ended December 31, 2010, 2009 and 2008.
| Note M — | Employee Benefit Plan |
We sponsor a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees who have completed at least three months of service. Employees may elect to contribute up to 20%50% of their eligible compensation on a pre-tax basis, subject to limitations. The CompanyWe may make discretionary matching contributions to the 401(k) plan. During 1998, 19992010, 2009 and 2000,
the Company2008, we made matching cash contributions of $1,393,386, $2,283,575,$5.8 million, $5.6 million and $2,453,639,$5.3 million, respectively, which represents 50% of the employees'employees’ contributions to the 401(k) plan up to an amount not to exceed 4% of each employee'semployee’s respective compensation. NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company'sEmployees are permitted to elect to purchase our common stock as part of their 401(k) plan. As of December 31, 2010, 2009 and 2008, 12.0%, 9.0%, and 12.0%, respectively, of the total plan assets consisted of our common stock.
| Note N — | Fair Value |
At December 31, 2010, our financial instruments include cash and cash equivalents, receivables, payables, senior debt and subordinated notes payable.senior notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at December 31, 19992010 and 2000,2009, because of the short maturities of these instruments. The Company'sOur senior debt is variable rate debt that repricesre-prices frequently and entails no significant change in credit risk and, as a result, fair value approximates carrying value. The fair value of the subordinatedour senior notes payable is estimated based on discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.observable market data. At December 31, 20002010, the fair value of the
subordinatedour senior notes was $169.8$299.8 million, which is $5.2 millionwas approximately $200,000 below their carrying value of $175.0$300.0 million. Information relating to
We use a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of the
Company's interest rate swap agreements is set forthour non-financial assets and non-financial liabilities, which consist primarily of goodwill. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in Note F.
active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
F-26
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- EARNINGS PER COMMON SHARE
— (Continued)
We recorded charges for goodwill related to stores sold or closed of $4.3 million for the twelve months ended December 31, 2010. These charges were determined using both a revenue method and trading multiples, which are Level 3 inputs based on our historical experience with store acquisitions and divestitures.
| Note O — | Impairment Charge |
Our impairment charge consists of the following (in thousands):
| Year Ended | ||||
| December 31, 2010 | ||||
| Fixed asset disposal | $ | 11,753 | ||
| Goodwill impairment | 1,767 | |||
| Loan write-down | 2,059 | |||
| Other | 3,360 | |||
| Total | $ | 18,939 | ||
On October 25, 2010, we announced that, in connection with an analysis of our available growth initiatives, we were exploring strategic alternatives with respect to our financial services business, including the possible sale or divestiture of such business. As of February 18, 2011, we had ceased making new loans, sold a majority of our customer accounts, and had less than $5.0 million in remaining loan balance.
During the fourth quarter of 2010, we recorded a pre-tax impairment charge of approximately $18.9 million related to the discontinuation of our financial services business. The charge with respect to discontinuing the operations of all 331 store locations relate primarily to fixed asset disposals, goodwill impairment, loan write-downs and other miscellaneous items. The impairment charge was based on the amount that the carrying value exceeded the estimated fair value of the assets. The fair value was based on our historical experience with store acquisitions and divestitures, which are Level 3 inputs.
| Note P — | Stock Repurchase Plan |
Our Board of Directors has authorized a common stock repurchase program, permitting us to purchase, from time to time, in the open market and privately negotiated transactions, up to an aggregate of $800.0 million ofRent-A-Center common stock. We have repurchased a total of 23,470,345 shares and 19,884,850 shares ofRent-A-Center common stock for an aggregate purchase price of $551.2 million and $466.6 million as of December 31, 2010 and 2009, respectively, under this common stock repurchase program. Through the twelve months ended December 31, 2010, we have repurchased a total of 3,585,495 shares for approximately $84.6 million in cash. We repurchased 1,403,993 shares for $38.7 million in the fourth quarter of 2010.
F-27
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Note Q — | Earnings Per Common Share |
Summarized basic and diluted earnings per common share were calculated as follows:
- ---------------
The assumed conversion of the redeemable convertible preferred stock issued
in 1998 would have an anti-dilutive effect on diluted earnings per common share
for 1998
| Weighted Average | ||||||||||||
| Net Earnings | Shares | Per Share | ||||||||||
| (In thousands, except per share data) | ||||||||||||
Year ended December 31, 2010 | ||||||||||||
| Basic earnings per common share | $ | 171,642 | 65,104 | $ | 2.64 | |||||||
| Effect of dilutive stock options | — | 799 | ||||||||||
| Diluted earnings per common share | $ | 171,642 | 65,903 | $ | 2.60 | |||||||
Year ended December 31, 2009 | ||||||||||||
| Basic earnings per common share | 167,855 | 65,986 | $ | 2.54 | ||||||||
| Effect of dilutive stock options | — | 581 | ||||||||||
| Diluted earnings per common share | 167,855 | 66,567 | $ | 2.52 | ||||||||
Year ended December 31, 2008 | ||||||||||||
| Basic earnings per common share | 139,624 | 66,606 | $ | 2.10 | ||||||||
| Effect of dilutive stock options | — | 585 | ||||||||||
| Diluted earnings per common share | 139,624 | 67,191 | $ | 2.08 | ||||||||
For 2010, 2009, and accordingly has been excluded from the computation thereof.
For the three years ended December 31, 1998, 1999 and 2000 and for the nine
months ended September 30, 2000 and 2001,2008, 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 the common stock and, therefore anti-dilutive, was 498,201, 1,707,947,
1,485,118, 362,7501,839,225, 2,964,778, and 658,500,3,100,825, respectively.
F-27
F-28
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- UNAUDITED QUARTERLY DATA
— (Continued)
| Note R — | Unaudited Quarterly Data |
Summarized quarterly financial data for 19992010, 2009 and 20002008 is as follows:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Year ended December 31, 2010 | ||||||||||||||||
| Revenues | $ | 718,419 | $ | 671,543 | $ | 664,580 | $ | 677,090 | ||||||||
| Gross profit | 513,000 | 497,665 | 490,013 | 494,994 | ||||||||||||
| Operating profit | 88,703 | 82,831 | 69,393 | 62,842 | ||||||||||||
| Net earnings | 51,461 | 47,830 | 40,497 | 31,854 | ||||||||||||
| Basic earnings per common share | $ | 0.78 | $ | 0.73 | $ | 0.62 | $ | 0.50 | ||||||||
| Diluted earnings per common share | $ | 0.77 | $ | 0.72 | $ | 0.62 | $ | 0.49 | ||||||||
| Cash dividends per common share | $ | — | $ | — | $ | 0.06 | $ | 0.06 | ||||||||
Year ended December 31, 2009 | ||||||||||||||||
| Revenues | $ | 728,183 | $ | 679,609 | $ | 671,251 | $ | 672,913 | ||||||||
| Gross profit | 515,212 | 494,422 | 487,239 | 491,125 | ||||||||||||
| Operating profit | 82,092 | 75,283 | 64,367 | 74,582 | ||||||||||||
| Net earnings | 45,376 | 41,945 | 36,840 | 43,694 | ||||||||||||
| Basic earnings per common share | $ | 0.69 | $ | 0.64 | $ | 0.56 | $ | 0.66 | ||||||||
| Diluted earnings per common share | $ | 0.68 | $ | 0.63 | $ | 0.55 | $ | 0.66 | ||||||||
Year ended December 31, 2008 | ||||||||||||||||
| Revenues | $ | 756,636 | $ | 719,031 | $ | 708,755 | $ | 699,750 | ||||||||
| Gross profit | 533,733 | 517,329 | 510,022 | 507,268 | ||||||||||||
| Operating profit | 77,540 | 74,434 | 58,549 | 63,865 | ||||||||||||
| Net earnings | 36,358 | 37,741 | 29,379 | 36,146 | ||||||||||||
| Basic earnings per common share | $ | 0.55 | $ | 0.57 | $ | 0.44 | $ | 0.54 | ||||||||
| Diluted earnings per common share | $ | 0.54 | $ | 0.56 | $ | 0.44 | $ | 0.54 | ||||||||
F-29
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| Three Months Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
| (In thousands, except per share data) | ||||||||
| Unaudited | ||||||||
| Revenues | ||||||||
| Store | ||||||||
| Rentals and fees | $ | 610,428 | $ | 583,848 | ||||
| Merchandise sales | 99,266 | 89,397 | ||||||
| Installment sales | 16,687 | 15,137 | ||||||
| Other | 5,339 | 20,336 | ||||||
| Franchise Merchandise sales | 9,146 | 8,425 | ||||||
| Royalty income and fees | 1,312 | 1,276 | ||||||
| 742,178 | 718,419 | |||||||
| Operating expenses | ||||||||
| Direct store expenses Cost of rentals and fees | 135,649 | 130,114 | ||||||
| Cost of merchandise sold | 68,579 | 61,811 | ||||||
| Cost of installment sales | 6,048 | 5,426 | ||||||
| Salaries and other expenses | 397,198 | 391,471 | ||||||
| Franchise cost of merchandise sold | 8,754 | 8,068 | ||||||
| 616,228 | 596,890 | |||||||
| General and administrative expenses | 34,553 | 31,775 | ||||||
| Amortization and write-down of intangibles | 858 | 1,051 | ||||||
| Litigation settlement | 2,800 | |||||||
| Impairment charge | 7,320 | — | ||||||
| Total operating expenses | 661,759 | 629,716 | ||||||
| Operating profit | 80,419 | 88,703 | ||||||
| Interest expense | 9,760 | 6,083 | ||||||
| Interest income | (154 | ) | (168 | ) | ||||
| Earnings before income taxes | 70,813 | 82,788 | ||||||
| Income tax expense | 26,583 | 31,327 | ||||||
| NET EARNINGS | $ | 44,230 | $ | 51,461 | ||||
| Basic earnings per common share | $ | 0.70 | $ | 0.78 | ||||
| Diluted earnings per common share | $ | 0.69 | $ | 0.77 | ||||
| Cash dividends per common share | $ | 0.06 | $ | — | ||||
See accompanying notes to consolidated financial statements.
F-30
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| (In thousands, except share and par value data) | ||||||||
| Unaudited | ||||||||
ASSETS | ||||||||
| Cash and cash equivalents | $ | 145,000 | $ | 70,727 | ||||
| Receivables, net of allowance for doubtful accounts of $7,711 in 2011 and $8,673 in 2010 | 47,228 | 53,890 | ||||||
| Prepaid expenses and other assets | 56,942 | 170,713 | ||||||
| Rental merchandise, net On rent | 675,013 | 655,248 | ||||||
| Held for rent | 180,512 | 181,606 | ||||||
| Merchandise held for installment sale | 5,374 | 5,417 | ||||||
| Property assets, net | 235,145 | 224,639 | ||||||
| Goodwill, net | 1,329,234 | 1,320,467 | ||||||
| Other intangible assets, net | 4,806 | 5,624 | ||||||
| $ | 2,679,254 | $ | 2,688,331 | |||||
| LIABILITIES | ||||||||
| Accounts payable — trade | $ | 88,828 | $ | 126,051 | ||||
| Accrued liabilities | 300,345 | 288,415 | ||||||
| Deferred income taxes | 236,753 | 218,952 | ||||||
| Senior debt | 358,584 | 401,114 | ||||||
| Senior notes | 300,000 | 300,000 | ||||||
| 1,284,510 | 1,334,532 | |||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $.01 par value; 250,000,000 shares authorized; 107,261,412 and 105,990,704 shares issued in 2011 and 2010, respectively | 1,072 | 1,060 | ||||||
| Additional paid-in capital | 741,052 | 712,600 | ||||||
| Retained earnings | 1,581,390 | 1,541,168 | ||||||
| Treasury stock, 43,714,209 and 42,845,444 shares at cost in 2011 and 2010, respectively | (932,804 | ) | (904,274 | ) | ||||
| Cumulative translation adjustment | 4,034 | 3,245 | ||||||
| 1,394,744 | 1,353,799 | |||||||
| $ | 2,679,254 | $ | 2,688,331 | |||||
See accompanying notes to consolidated financial statements.
F-31
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, | ||||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
| Unaudited | ||||||||
| Cash flows from operating activities | ||||||||
| Net earnings | $ | 44,230 | $ | 51,461 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of rental merchandise | 132,397 | 127,111 | ||||||
| Bad debt expense | 521 | 3,118 | ||||||
| Stock-based compensation expense | 1,305 | 1,265 | ||||||
| Depreciation of property assets | 15,678 | 15,721 | ||||||
| Loss on sale or disposal of property assets | 92 | 978 | ||||||
| Amortization of intangibles | 858 | 211 | ||||||
| Amortization of financing fees | 505 | 514 | ||||||
| Deferred income taxes | 17,801 | (12,857 | ) | |||||
| Tax benefit related to stock option exercises | (6,238 | ) | (94 | ) | ||||
| Impairment charge | 7,320 | — | ||||||
| Changes in operating assets and liabilities, net of effects of acquisitions | ||||||||
| Rental merchandise | (155,784 | ) | (145,802 | ) | ||||
| Receivables | 6,141 | 720 | ||||||
| Prepaid expenses and other assets | 113,131 | 700 | ||||||
| Accounts payable — trade | (37,224 | ) | (28,537 | ) | ||||
| Accrued liabilities | 7,213 | 57,408 | ||||||
| Net cash provided by operating activities | 147,946 | 71,917 | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property assets | (27,144 | ) | (16,113 | ) | ||||
| Proceeds from sale of property assets | 79 | 34 | ||||||
| Acquisitions of businesses, net of cash acquired | (525 | ) | (368 | ) | ||||
| Net cash used in investing activities | (27,590 | ) | (16,447 | ) | ||||
| Cash flows from financing activities | ||||||||
| Purchase of treasury stock | (28,529 | ) | — | |||||
| Exercise of stock options | 21,889 | 1,758 | ||||||
| Tax benefit related to stock option exercises | 6,238 | 94 | ||||||
| Payments on capital leases | (137 | ) | (321 | ) | ||||
| Proceeds from debt | 115,305 | 43,035 | ||||||
| Repayments of debt | (157,835 | ) | (117,897 | ) | ||||
| Dividends paid | (3,803 | ) | — | |||||
| Net cash used in financing activities | (46,872 | ) | (73,331 | ) | ||||
| Effect of exchange rate changes on cash | 789 | 556 | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 74,273 | (17,305 | ) | |||||
| Cash and cash equivalents at beginning of period | 70,727 | 101,803 | ||||||
| Cash and cash equivalents at end of period | $ | 145,000 | $ | 84,498 | ||||
See accompanying notes to consolidated financial statements.
F-32
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Significant Accounting Policies and Nature of Operations. |
The interim financial statements ofRent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 SEC’s rules and regulations, although we believe 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 onForm 10-K for the year ended December 31, 2010. 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.
Principles of Consolidation and Nature of Operations. These financial statements include the accounts ofRent-A-Center, Inc. and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated. Unless the context indicates otherwise, references to“Rent-A-Center” refer only toRent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations ofRent-A-Center and all of its direct and indirect subsidiaries.
Our primary operating segment consists of leasing household durable goods to customers on arent-to-own basis. We also offer merchandise on an installment sales basis in certain of our stores. At March 31, 2011, we operated 3,018 company-owned stores nationwide and in Canada, Puerto Rico and Mexico, including 41 retail installment sales stores under the names “Get It Now” and “Home Choice,” and18 rent-to-own stores in Canada under the name“Rent-A-Centre.”
We also operate kiosk locations under the trade name “RAC Acceptance” which offers therent-to-own transaction to consumers who do not qualify for financing from the traditional retailer. These kiosks are located within such retailer’s store locations. At March 31, 2011, we operated 485 RAC Acceptance locations.
ColorTyme, Inc., an indirect wholly-owned subsidiary ofRent-A-Center, is a nationwide franchisor ofrent-to-own stores. At March 31, 2011, ColorTyme had 208 franchised stores operating in 32 states. 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 arent-to-own program. The balance of ColorTyme’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
From 2005 to 2010, we also offered an array of financial services in certain of our existing stores under the names “RAC Financial Services” and “Cash AdvantEdge.” The financial services we offered included, but were not limited to, short term secured and unsecured loans, debit cards, check cashing and money transfer services.
New Accounting Pronouncements. From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
F-33
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 2. | Intangible Assets and Acquisitions. |
Amortizable intangible assets consist of the following (in thousands):
| March 31, 2011 | December 31, 2010 | |||||||||||||||||||
| Avg. | Gross | Gross | ||||||||||||||||||
| Life | Carrying | Accumulated | Carrying | Accumulated | ||||||||||||||||
| (years) | Amount | Amortization | Amount | Amortization | ||||||||||||||||
| Non-compete agreements | 3 | $ | 6,096 | $ | 6,068 | $ | 6,094 | $ | 6,057 | |||||||||||
| Customer relationships | 2 | 67,858 | 63,080 | 67,811 | 62,224 | |||||||||||||||
| Total | $ | 73,954 | $ | 69,148 | $ | 73,905 | $ | 68,281 | ||||||||||||
Estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows (in thousands):
| Estimated | ||||
| Amortization Expense | ||||
| 2011 | $ | 2,467 | ||
| 2012 | 2,339 | |||
| Total | $ | 4,806 | ||
A summary of the changes in recorded goodwill follows (in thousands):
| March 31, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Gross balance as of January 1, | $ | 1,419,619 | $ | 1,367,836 | ||||
| Accumulated amortization | (99,152 | ) | (99,152 | ) | ||||
| Additions from acquisitions | 398 | 55,922 | ||||||
| Goodwill related to stores sold or closed | — | (4,320 | )(1) | |||||
| Post purchase price allocation adjustments | 8,369 | 181 | ||||||
| Balance as of the end of the period | $ | 1,329,234 | $ | 1,320,467 | ||||
| (1) | Includes $1.8 million of goodwill impairment related to the discontinuation of our financial services business. |
Additions to goodwill due to acquisitions in the first three months of 2011 were tax deductible.
The Rental Store, Inc.
On December 20, 2010, we acquired The Rental Store, Inc., a leading provider of consumer lease-purchase financing through third-party retail furniture and electronics retailers. This acquisition resulted in the addition of 158 kiosks to our RAC Acceptance program as of December 31, 2010. The initial accounting for the acquisition was not finalized as of December 31, 2010 due to the timing of the transaction. In the first quarter of 2011, we determined certain assets, primarily rental merchandise, were either unrentable or missing, and are reflected in the post purchase price allocation adjustments above. At March 31, 2011, certain other smaller balances remain to be reconciled.
| 3. | Subsidiary Guarantors. |
65/8% Senior Notes. On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 65/8%, pursuant to an indenture dated November 2, 2010, amongRent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the
F-34
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our senior credit facility. The remaining net proceeds are being used to repurchase shares of our common stock.
The 2010 indenture contains covenants that limit our ability to:
| • | incur additional debt; |
| • | sell assets or our subsidiaries; |
| • | grant liens to third parties; |
| • | pay cash dividends or repurchase stock; and |
| • | engage in a merger or sell substantially all of our assets. |
Events of default under the 2010 indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million, as well as in the event a judgment is entered against us in excess of $50.0 million that is not discharged, bonded or insured.
The 65/8% notes may be redeemed on or after November 15, 2015, at our option, in whole or in part, at a premium declining from 103.313%. The 65/8% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 65/8% notes also require that upon the occurrence of a change of control (as defined in the 2010 indenture), the holders of the notes have the right to require us to repurchase the notes at a price equal to 101% of the original aggregate principal amount, together with accrued and unpaid interest, if any, to the date of repurchase. This would trigger an event of default under our senior credit facilities. We are not required to maintain any financial ratios under the 2010 indenture.
Rent-A-Center and its subsidiary guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations ofRent-A-Center with respect to the 65/8% notes.Rent-A-Center has no independent assets or operations, and each subsidiary guarantor is 100% owned directly or indirectly byRent-A-Center. The only direct or indirect subsidiaries ofRent-A-Center that are not guarantors are minor subsidiaries. There are no restrictions on the ability of any of the subsidiary guarantors to transfer funds toRent-A-Center in the form of loans, advances or dividends, except as provided by applicable law.
| 4. | Income Taxes. |
We are subject to federal, state, local and foreign income taxes. Along with our U.S. subsidiaries, we file a U.S. federal consolidated income tax return. With few exceptions, we are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2007. The appeals process with the Internal Revenue Service (IRS) Office of Appeals for the years 2001 through 2005 has been completed. We reached agreement on all issues except one issue with respect to the 2003 tax year which also recurs in each of the 2004, 2005, 2006 and 2007 taxable years. The IRS concluded its examination of our consolidated income tax return for the years 2006 and 2007, and issued a Revenue Agent’s Report (RAR) on January 19, 2010. We reached agreement on all issues except the issue identified above. We believe the position and supporting case law applied by the IRS are incorrectly applied to our situation and that our fact pattern is distinguishable from the IRS’ position. We intend to vigorously defend our position on the issue. This matter, which now includes the years 2003 through 2007, has been docketed in the United States Tax Court for trial in November 2011. Currently, we are also under examination in various states. We do not anticipate that adjustments, if any, regarding the 2003 through 2007 disputed issue or state examinations will result in a material change to our consolidated statement of earnings, financial condition, statement of cash flows or earnings per share.
In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate based on forecasted annual income, permanent items, statutory tax rates and tax planning opportunities in the various jurisdictions in which we operate. Significant factors that could impact the annual effective tax rate include
F-35
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
management’s assessment of certain tax matters and the composition of taxable income between the various jurisdictions in which we operate. We recognize the impact of significant discrete items separately in the quarter in which they occur.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. We review our tax positions quarterly and adjust the balance as new information becomes available.
We provide for uncertain tax positions and related interest and penalties and adjust our unrecognized tax benefits, accrued interest and penalties in the normal course of our business. At March 31, 2011, our unrecognized tax benefits increased by $59,000 from December 31, 2010.
| 5. | Fair Value. |
At March 31, 2011, our financial instruments include cash and cash equivalents, receivables, payables, senior debt and senior notes. The carrying amount of cash and cash equivalents, receivables and payables approximates fair value at March 31, 2011 and December 31, 2010, because of the short maturities of these instruments. Our senior debt is variable rate debt that re-prices frequently and entails no significant change in credit risk and, as a result, fair value approximates carrying value. The fair value of our senior notes is based on observable market data. At March 31, 2011, the fair value of our senior notes was $295.5 million, which was approximately $4.5 million below their carrying value of $300.0 million. At December 31, 2010, the fair value of our senior notes was $299.8 million, which was approximately $200,000 below their carrying value of $300.0 million.
We use a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of our non-financial assets and non-financial liabilities, which consist primarily of goodwill. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
| 6. | Impairment Charge. |
Our impairment charge consists of the following (in thousands):
| Three Months Ended | ||||
| March 31, 2011 | ||||
| Loan write-down | $ | 2,569 | ||
| Fixed asset disposal | 1,172 | |||
| Other | 3,579 | |||
| Total | $ | 7,320 | ||
During the first quarter of 2011, we recorded a pre-tax impairment charge of approximately $7.3 million related to the discontinuation of our financial services business that was announced on October 25, 2010. The charge in 2011 primarily related to additional loan write-downs, fixed asset disposals (store reconstruction), and other miscellaneous items. During the fourth quarter of 2010, we recorded a pre-tax impairment charge of $18.9 million, which primarily related to fixed asset disposals, goodwill impairment, loan write-downs, and other miscellaneous items. The impairment charge was based on the amount that the carrying value exceeded the estimated fair value of the assets. The fair value was based on our historical experience with store acquisitions and divestitures, which are Level 3 inputs.
F-36
RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | Repurchases of Outstanding Securities. |
Our Board of Directors has authorized a common stock repurchase program, permitting us to purchase, from time to time, in the open market and privately negotiated transactions, up to an aggregate of $800.0 million ofRent-A-Center common stock. We have repurchased a total of 24,339,110 shares and 23,470,345 shares ofRent-A-Center common stock for an aggregate purchase price of $579.7 million and $551.2 million as of March 31, 2011 and December 31, 2010, respectively, under this common stock repurchase program. Through the three months ended March 31, 2011, we repurchased a total of 868,765 shares for approximately $28.5 million in cash.
| 8. | Earnings Per Share. |
Basic and diluted earnings per common share were calculated as follows:
| Three Months Ended March 31, 2011 | ||||||||||||
| Weighted | ||||||||||||
| (In thousands, except per share data) | Net Earnings | Average Shares | Per Share | |||||||||
| Basic earnings per common share | $ | 44,230 | 63,353 | $ | 0.70 | |||||||
| Effect of dilutive stock options | — | 939 | ||||||||||
| Diluted earnings per common share | $ | 44,230 | 64,292 | $ | 0.69 | |||||||
| Three Months Ended March 31, 2010 | ||||||||||||
| Weighted | ||||||||||||
| (In thousands, except per share data) | Net Earnings | Average Shares | Per Share | |||||||||
| Basic earnings per common share | $ | 51,461 | 65,699 | $ | 0.78 | |||||||
| Effect of dilutive stock options | — | 818 | ||||||||||
| Diluted earnings per common share | $ | 51,461 | 66,517 | $ | 0.77 | |||||||
For the three months ended March 31, 2011 and 2010, the number of stock options that were outstanding but not included in the computation of diluted earnings per common share and, therefore anti-dilutive, were 438,745 and 2,384,550, respectively.
F-37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders
The Rental Store, Inc.
We have audited the accompanying balance sheet of The Rental Store, Inc. as of December 31, 2009 and the related statements of income, stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Rental Store, Inc. as of December 31, 2009 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 11, the 2009 financial statements including accumulated deficit have been restated to correct misstatements.
/s/ Grant Thornton LLP
Dallas, Texas
Dallas, Texas
May 2, 2011
F-38
The Rental Store, Inc.
December 31, 2009
| (Restated) | ||||
ASSETS | ||||
| Cash | $ | 395,255 | ||
| Restricted cash | 537,870 | |||
| Rental merchandise, net | 23,638,127 | |||
| Prepaid expenses and other assets | 609,950 | |||
| Deposits | 141,460 | |||
| Income tax receivable | 1,259,803 | |||
| Equipment and leasehold improvements, net | 1,859,256 | |||
| $ | 28,441,721 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
| Line of credit | $ | 20,607,125 | ||
| Accounts payable | 1,187,184 | |||
| Accrued expenses | 2,099,789 | |||
| Customer deposits | 1,381,643 | |||
| Deferred income taxes | 1,406,204 | |||
| Note payable | 3,730,000 | |||
| Capital leases | 236,798 | |||
Total liabilities | 30,648,743 | |||
| COMMITMENTS AND CONTINGENCIES | ||||
STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
| Convertible preferred stock, 18% cumulative, Series A $0.001 par value; authorized 5,000,000 shares; issued and outstanding 5,000,000 shares | 5,000 | |||
| Convertible preferred stock, non-voting, 9% cumulative, Series B $0.001 par value; authorized 10,000,000 shares; issued and outstanding 6,000,000 | 6,000 | |||
| Common stock, $0.001 par value; authorized 200,000,000 shares; issued and outstanding 29,000,000 | 29,000 | |||
| Additional paid-in capital | 2,185,887 | |||
| Accumulated deficit | (4,432,909 | ) | ||
Total stockholders’ equity (deficit) | (2,207,022 | ) | ||
| $ | 28,441,721 | |||
The accompanying notes are an integral part of this financial statement.
F-39
The Rental Store, Inc.
Year Ended December 31, 2009
| (Restated) | ||||
| Revenue: | ||||
| Rental operations | $ | 78,375,029 | ||
| Retail sales | 1,362,961 | |||
Total revenue | 79,737,990 | |||
| Operating expenses: | ||||
| Cost of rental operations | 41,814,144 | |||
| Cost of retail sales | 2,069,405 | |||
| Compensation related expenses | 19,174,288 | |||
| General and administrative | 9,320,597 | |||
| Advertising | 522,614 | |||
| Depreciation and amortization | 683,659 | |||
Total operating expenses | 73,584,707 | |||
| Operating income | 6,153,283 | |||
| Interest expense | 3,327,550 | |||
Income before income tax expense | 2,825,733 | |||
| Income tax expense | 1,267,316 | |||
Net income | $ | 1,558,417 | ||
The accompanying notes are an integral part of this financial statement.
F-40
| Preferred Stock | Common | Additional | Accumulated | |||||||||||||||||||||
| Series A | Series B | Stock | Paid-in Capital | Deficit | Total | |||||||||||||||||||
| Balance, January 1, 2009 (as restated) | $ | 5,000 | $ | 6,000 | $ | 29,000 | $ | 3,985,887 | $ | (5,991,326 | ) | $ | (1,965,439 | ) | ||||||||||
| Dividends on preferred and common stock (restated) | — | — | — | (1,800,000 | ) | — | (1,800,000 | ) | ||||||||||||||||
| Net income (restated) | — | — | — | — | 1,558,417 | 1,558,417 | ||||||||||||||||||
| Balance, December 31, 2009 (restated) | $ | 5,000 | $ | 6,000 | $ | 29,000 | $ | 2,185,887 | $ | (4,432,909 | ) | $ | (2,207,022 | ) | ||||||||||
The accompanying notes are an integral part of this financial statement.
F-41
The Rental Store, Inc.
Year Ended December 31, 2009
| (Restated) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
| Net income | $ | 1,558,417 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation of rental merchandise | 15,820,108 | |||
| Depreciation and amortization | 683,659 | |||
| Deferred income taxes | 2,305,000 | |||
| Change in working capital components: | ||||
| Rental merchandise | (11,897,912 | ) | ||
| Prepaid expenses and other assets | 39,200 | |||
| Deposits | 18,146 | |||
| Income tax receivable | (1,001,803 | ) | ||
| Accounts payable | (234,184 | ) | ||
| Accrued expenses | 356,829 | |||
| Customer deposits | (222,036 | ) | ||
Net cash provided by operating activities | 7,425,424 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||
| Decrease in restricted cash | (189,155 | ) | ||
| Purchases of equipment and leasehold improvements | (322,856 | ) | ||
Net cash used in investing activities | (512,011 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
| Outstanding checks in excess of bank balance | (113,761 | ) | ||
| Payments on line of credit | (4,823,015 | ) | ||
| Payments on notes payable | (328,796 | ) | ||
| Payments on capital leases | (131,440 | ) | ||
| Dividend payments | (1,800,000 | ) | ||
Net cash used in financing activities | (7,197,012 | ) | ||
| Net decrease in cash | (283,599 | ) | ||
| Cash at beginning of year | 678,854 | |||
| Cash at end of year | $ | 395,255 | ||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||
| Cash paid for interest | $ | 3,307,387 | ||
| Cash received for income taxes, net of payments | $ | 35,880 | ||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||||
| Capital lease obligations incurred for use of equipment | $ | 268,685 | ||
The accompanying notes are an integral part of this financial statement.
F-42
THE RENTAL STORE, INC.
| Note 1. | Nature of Business and Significant Accounting Policies |
Nature of Business:
The Rental Store, Inc. (the Company), an Arizona corporation, doing business as TRS Home Furnishings, operates a chain of stores that sell and rent durable household products such as major appliances, home entertainment equipment, furniture and jewelry to consumers primarily in the southwestern United States. In addition, the Company operates within certain retail furniture outlets providing similar services.
A significant portion of the Company’s business is facilitated through certain retail furniture outlets that own several locations from which the Company operates. Eighty-nine percent of gross revenues were derived from such operations for the year ended December 31, 2009, of which 13%, 13% and 11% were concentrated with three entities.
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Revenue Recognition:
Rental merchandise is rented to customers pursuant to rental agreements which provide primarily for monthly rental payments collected in advance. Rental revenue is recognized as collected each month when the rental merchandise has been placed in service and delivery costs have been incurred. This method of revenue recognition does not produce materially different results than if rental revenue was recognized over the monthly rental term. At the end of each monthly rental period, the customer can renew the rental agreement or return the merchandise with no obligation. Anytime after three rental payments have been made, the customer may purchase the merchandise through a variety of purchase options. If a customer exercises a purchase option, the remaining net book value of the rental merchandise is transferred to cost of sales. If no purchase option is elected during the contract term and all payments have been made under the contract term, title to the rental merchandise transfers to the customer at the end of such term. Amounts received from sales under purchase options are included in rental operations revenue in the accompanying financial statements. Rental merchandise returned to the Company is generally sold to another customer. The Company recognizes revenue from sales of products upon delivery. The sales tax charged to customers is shown net in the statement of income.
Rental Merchandise:
Rental merchandise consists of merchandise rented to customers or in stores available for rent or sale. Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation on merchandise rented to customers is provided on a straight-line basis over 21 months, which is the average term of a rental agreement. Merchandise held for rent or sale is depreciated on a straight-line basis over 21 months.
Rental merchandise which is damaged and inoperable is expensed when such impairment occurs. If the customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with the delinquent account is generally charged off on or before the 180th day following the time the account became past due. The Company maintains a reserve for these expected expenses. In addition, any minor repairs made to rental merchandise are expensed at the time of the repair.
Restricted Cash:
All revenues collected from customers are transferred to a restricted cash account for payment on the line of credit. The bank applies the restricted cash against the line of credit every few days (See Note 5).
F-43
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Depreciation of vehicles, furniture and fixtures, and equipment is provided over the estimated useful lives of the respective assets (five to seven years) using the straight-line method. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the remaining lease term of the applicable lease, including option periods if renewal is probable and under the Company’s control to exercise, using the straight-line method. Gains and losses from the disposition of assets are recorded in the period of disposition. Repair and maintenance costs that do not improve or extend the useful life of the assets are expensed as incurred.
Computer software developed for internal use is recorded at cost. Such costs are capitalized for amounts incurred during the application development stage. Amortization is provided on the straight-line basis over an estimated useful life of the software of ten years.
Advertising:
The Company expenses the costs of advertising the first time the advertising takes place. Advertising costs for the year ended December 31, 2009 was approximately $523,000.
Concentration of Credit Risk:
The Company maintains certain bank balances in excess of federally insured amounts. The Company has not experienced any losses in such accounts and believes there is no significant exposure to credit risks on such accounts.
The customers of the Company typically are unable to obtain conventional financing and have chosen therent-to-own alternative for acquiring the products the Company offers. The Company generally does not require deposits; however, on most first-time rental agreements a deposit is collected. The deposit amount may be increased for greater credit risks.
Income Taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of asset and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. There was no valuation allowance recorded at December 31, 2009.
The Company recognizes the financial statement benefit of a pre-tax, non-recurringtax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. There are no reserves related to uncertain tax positions at December 31, 2009.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States of America requires management 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
F-44
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
New Accounting Pronouncements:
In June 2009, the FASB issued Accounting Standards Codification 105,Generally Accepted Accounting Principles(“ASC 105”). ASC 105 is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. ASC 105 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. ASC 105 is effective for financial statements issued for reporting periods ending after September 15, 2009. All references to authoritative accounting literature in the Company’s financial statements issued for reporting periods ending after September 15, 2009 are referenced in accordance with ASC 105.
In May 2009, the FASB issued ASC 855,Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 applies prospectively to both interim and annual financial periods ending after June 15, 2009. The adoption of ASC 855 did not result in any material change to the Company’s policies.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact of any other recently issued standards that are not yet effective are either not applicable to the Company at this time or will not have a material impact on the financial statements upon adoption.
| Note 2. | Rental Merchandise |
Rental merchandise at December 31, 2009 (restated) consists of the following:
| On rent | $ | 36,128,180 | ||
| Less accumulated depreciation | (15,329,543 | ) | ||
| 20,798,637 | ||||
| Held for rent or sale, net | 2,839,490 | |||
| $ | 23,638,127 | |||
| Note 3. | Equipment and Leasehold Improvements |
Equipment and leasehold improvements at December 31, 2009 (restated) consist of the following:
| Leasehold improvements | $ | 1,629,568 | ||
| Equipment | 3,422,773 | |||
| Furniture and fixtures | 71,919 | |||
| Computer software | 171,015 | |||
| 5,295,275 | ||||
| Less accumulated depreciation | (3,436,019 | ) | ||
| $ | 1,859,256 | |||
F-45
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| Note 4. | Notes Payable to Related Parties and Capital Leases |
| Unsecured note payable to three stockholders, interest is payable monthly at the greater of prime (3.25% at December 31, 2009) plus 4% per annum or 18%, due December 2012, subordinate to the line of credit (Note 5). | $ | 1,500,000 | ||
| Unsecured note payable to managing partner of Preferred Stock Investors, interest is payable monthly at 21.4%; due December 2012 subordinate to the line of credit (Note 5) and obligations to preferred stockholders (Note 8). | 2,050,000 | |||
| Unsecured note payable with related party, interest is payable monthly at greater of prime (3.25% at December 31, 2009) plus 4% per annum or 11.8%, due March 2011; subordinate to the line of credit (Note 5) and obligations to the preferred stockholders (Note 8). | 180,000 | |||
| Capital lease with related party, payable in monthly installments of $504, including interest at 10%, maturing April 2011, collateralized by equipment. | 7,525 | |||
| Capital leases, payable in monthly installments ranging from $70 to $1,700, including interest at 3% to 16%, maturing November 2011 to March 2017, collateralized by equipment (restated) | 229,273 | |||
| $ | 3,966,798 | |||
The Company has entered into equipment capital lease agreements which expire through March 2017. The gross amount of assets acquired under capital lease was approximately $155,000 as of December 31, 2009. The related accumulated depreciation was approximately $9,000 as of December 31, 2009.
Aggregate maturities required on the note payable to related parties and capital leases at December 31, 2009 are as follows:
Years Ending December 31: | Related Party | Unrelated Party | Total | |||||||||
| (restated) | ||||||||||||
| 2010 | $ | 5,549 | $ | 52,854 | $ | 58,403 | ||||||
| 2011 | 181,976 | 56,015 | 237,991 | |||||||||
| 2012 | 3,550,000 | 37,048 | 3,587,048 | |||||||||
| 2013 | — | 37,048 | 37,048 | |||||||||
| 2014 | — | 37,048 | 37,048 | |||||||||
| Thereafter | — | 9,260 | 9,260 | |||||||||
| $ | 3,737,525 | $ | 229,273 | $ | 3,966,798 | |||||||
Interest expense to related parties for the year ended December 31, 2009 totaled approximately $595,000 and is included in interest expense in the accompanying statement of income.
| Note 5. | Line of Credit |
The Company has a revolving credit facility for the lesser of $25,000,000, or the Advance Rate as defined in the agreement as the amount equal to 26% of the total lease payments remaining on each Eligible Receivable (as defined in the agreement). The Advance Rate may be modified, at the lender’s discretion, if for the prior twelve calendar month period the monthly collection percentage is less than 5%. The Company may request once a calendar quarter for the Facility Cap, as defined in the agreement, to be increased by an amount, not to exceed total borrowings of $25,000,000, for a fee equal to the amounts of 1.0% of such increase. At December 31, 2009, approximately $4,000,000 was available to the Company for additional draws under this agreement. The line of credit bears interest at the greater of prime or LIBOR (0.23% at December 31, 2009) plus 6.02% per annum, but not less than 11%. The line of credit matures on December 31, 2012. The Company was required to pay an initial
F-46
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
commitment fee of $350,000 for the line of credit, which has been capitalized and is amortized over the term of the line of credit, and is included in prepaid expenses and other assets on the balance sheet. In addition, the facility bears an unused line fee of 0.25% per annum and a collateral management fee of 0.25% per annum of the daily average outstanding advances, both of which are payable monthly. The line of credit contains certain financial and non-financial covenants, is secured by substantially all assets of the Company, and is guaranteed by the common stockholders of the Company.
| Note 6. | Income Taxes |
Net deferred tax liabilities consist of the following components as of December 31, 2009 (restated):
| Deferred taxes: | ||||
| Rental merchandise and equipment and leasehold improvements | $ | 2,600,204 | ||
| Accruals | (70,000 | ) | ||
| Alternative minimum tax credit | (62,000 | ) | ||
| Federal net operating loss carryforwards | (1,062,000 | ) | ||
| Net deferred tax liability | $ | 1,406,204 | ||
The provision for income taxes charged to operations for the twelve months ended December 31, 2009 (restated) consists of the following:
| Current taxes | $ | (138,888 | ) | |
| Deferred taxes | 1,406,204 | |||
| $ | 1,267,316 | |||
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the year ended December 31, 2009 (restated) as follows:
| Tax expense at federal statutory rate | $ | 989,007 | ||
| Nondeductible expenses | 278,309 | |||
| $ | 1,267,316 | |||
The Company’s Federal net operating loss carryforwards of approximately $3,034,000 expire in 2028.
| Note 7. | Commitments and Contingencies |
Operating Leases:
The Company leases its showroom and warehouse facilities under operating leases, some of which includes escalation clauses, which expire at various dates through 2017. The Company is responsible for real estate taxes, insurance and utilities relating to these leases. Certain leases include options to extend the lease agreements. Rent expense, including maintenance charges and utilities expenses, under all operating leases for the year ended December 31, 2009 totaled approximately $3,913,000.
F-47
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The total future minimum rental commitments at December 31, 2009 (restated) are as follows:
Years Ending December 31: | ||||
| 2010 | $ | 2,216,325 | ||
| 2011 | 1,845,777 | |||
| 2012 | 1,448,701 | |||
| 2013 | 1,343,513 | |||
| 2014 | 789,321 | |||
| Thereafter | 1,504,908 | |||
| $ | 9,148,545 | |||
Management Agreement:
Under the preferred stock agreements discussed in Note 8, the Company must pay the Series A and Series B preferred stockholders approximately $14,500 and $20,000 a month, respectively, for consulting services, until consummation of the sale of the Company or redemption of all the respective preferred shares. This expense was $414,000 for the year ended December 31, 2009, and is included in interest expense in the accompanying statement of income.
Litigation:
From time to time, the Company is involved in various legal reversionproceedings. These proceedings are, in the opinion of $22.4management, ordinary routine matters incidental to the normal business conducted by the Company. In the opinion of management, such proceedings are substantially covered by insurance, and the ultimate disposition of such proceedings are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
| Note 8. | Convertible Preferred Stock |
In prior years, the Company issued 5,000,000 shares of Series A $0.001 par value convertible preferred stock for $5,000,000. The stock requires quarterly payments of an 18% cumulative annual dividend. The preferred stockholder may elect to convert the shares to shares of common stock of the Company at any time prior to the redemption date at a preference amount of $1 per share. The stock is redeemable for $2 per share on or within fifteen days after December 31, 2012. However, if the line of credit is still outstanding on the redemption date, the lender must give consent for the Company to redeem the preferred shares for cash. If consent is not given or the Company otherwise fails to redeem the shares on the redemption date, the preferred shares will be converted into shares of common stock in the Company at a rate of $0.238 per share, resulting in a common stock ownership of 37.5%.
The Company issued 6,000,000 shares of Series B $0.001 par value convertible, non-voting, preferred stock for $10,000,000 during 2006. The stock requires quarterly payments of a 9% cumulative annual dividend. The preferred stockholders may elect to convert the shares to shares of common stock of the Company at any time prior to the redemption date at a preference amount of $1.6667 per share. The stock is redeemable for $2.9167 per share on or within fifteen days after December 31, 2012. However, if the line of credit is still outstanding on the redemption date, the lender must give consent for the Company to redeem the preferred shares for cash. If consent is not given or the Company otherwise fails to redeem the shares on the redemption date, the preferred shares will be converted into shares of common stock in the Company at a rate of $0.1341 per share, resulting in a common stock ownership of 45%. The preferred stock agreement carries certain affirmative and negative covenants, with which the Company must comply.
For Series A and B preferred stock, the liquidation preference is as follows: Upon occurrence of a liquidation event, each of the record holders will have the right to elect to convert all or part of their shares into shares of
F-48
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
common stock at the conversation ratio then in effect and any remaining funds and assets of the Company legally available for distribution to the shareholders will be distributed ratably among the shareholders (including the record holders) in accordance with their common stock holdings on an as converted basis.
| Note 9. | Employee Benefits |
The Company had established a salary deferral plan under Section 401(k) of the Internal Revenue Code. The plan allowed eligible employees to defer a portion of their compensation ranging from 1% to 100%. Such deferrals accumulated on a tax deferred basis until the employee withdrew the funds. The Company, at its option, could match a portion of the employees’ contribution. There were no matching contributions made for the year ended December 31, 2009.
The Plan also provided a profit sharing component where the Company could make a performance-based contribution to the Plan. No contributions were made for the year ended December 31, 2009.
The Plan was terminated effective December 17, 2009 and all assets were transferred out of the Plan.
| Note 10. | Stock Repurchase Agreement |
The stockholders of the Company have entered into a stock repurchase agreement. The stockholders must first offer the stock to the other stockholders on a prorata basis. If no stock is purchased by the other stockholders then the stock is offered to the Company on the same terms. The Company is not obligated to repurchase the stock.
| Note 11: | Restatement |
The Company’s financial statements are being restated to correct its method of accounting for rental merchandise and to correct for other less significant errors. The Company incorrectly included salvage value in calculating depreciation of rental merchandise, which is included in cost of rental operations. The Company has reduced beginning retained earnings by $5,991,326, net of taxes, for the impact of this error in years prior to 2009. The other errors relate to the incorrect capitalization of an operating lease and the under accrual of liabilities. As a result of these errors, additional paid-in capital instead of retained earnings, as previously reported, has been adjusted for the amount of dividends paid during 2009 and the impact of these adjustments on income taxes have been recorded. The impact of the adjustments on the Company’s 2009 financial statements is as follows:
| As previously | ||||||||||||
| presented | Adjustment | As restated | ||||||||||
Balance Sheet | ||||||||||||
| Retained earnings (accumulated deficit), beginning balance | $ | — | $ | (5,991,326 | ) | $ | (5,991,326 | ) | ||||
| Retained earnings (accumulated deficit), ending balance | 486,158 | (4,919,067 | ) | (4,432,909 | ) | |||||||
| Rental merchandise | 34,437,150 | (10,799,023 | ) | 23,638,127 | ||||||||
| Income tax receivable | 668,000 | 591,803 | 1,259,803 | |||||||||
| Equipment and leasehold improvements, net | 1,952,127 | (92,871 | ) | 1,859,256 | ||||||||
| Accrued expenses | 7,239,999 | 13,772 | 7,253,771 | |||||||||
| Deferred income taxes | 5,001,000 | (3,594,796 | ) | 1,406,204 | ||||||||
| Additional paid in capital | 3,985,887 | (1,800,000 | ) | 2,185,887 | ||||||||
Income Statement | ||||||||||||
| Cost of rental operations | 40,518,316 | 1,295,828 | 41,814,144 | |||||||||
| General and administrative | 31,742,143 | 80,292 | 31,822,435 | |||||||||
| Depreciation | 740,235 | (56,576 | ) | 683,659 | ||||||||
| Income tax expense | 1,859,119 | (591,803 | ) | 1,267,316 | ||||||||
| Net income | 2,286,158 | (727,741 | ) | 1,558,417 | ||||||||
F-49
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| As previously | ||||||||||||
| presented | Adjustment | As restated | ||||||||||
Cash Flows | ||||||||||||
| Operating activities | 7,476,606 | (51,182 | ) | 7,425,424 | ||||||||
| Investing activities | (507,495 | ) | (4,516 | ) | (512,011 | ) | ||||||
| Financing activities | (7,252,710 | ) | 55,698 | (7,197,012 | ) | |||||||
| Note 12. | Subsequent Events |
The Company has evaluated subsequent events through May 2, 2011, the date on which the financial statements were available to be issued.
On December 20, 2010, the Company was acquired byRent-A-Center, Inc., the nation’s largestrent-to-own operator, for $75.5 million in cash.
F-50
The Rental Store, Inc.
September 30, 2010
| (Restated) | ||||
ASSETS | ||||
| Cash | $ | 303,112 | ||
| Restricted cash | 479,018 | |||
| Rental merchandise, net | 22,988,637 | |||
| Prepaid expenses and other assets | 1,112,349 | |||
| Deposits | 145,203 | |||
| Income tax receivable | 1,324,721 | |||
| Equipment and leasehold improvements, net | 1,800,545 | |||
| $ | 28,153,585 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
| Line of credit | $ | 18,627,490 | ||
| Accounts payable | 1,380,446 | |||
| Accrued expenses | 2,163,387 | |||
| Customer deposits | 1,625,234 | |||
| Income tax payable | 1,310,000 | |||
| Deferred income taxes | 1,406,204 | |||
| Note payable | 4,232,907 | |||
| Capital leases | 236,798 | |||
Total liabilities | 30,982,466 | |||
| COMMITMENTS AND CONTINGENCIES | ||||
STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
| Convertible preferred stock, 18% cumulative, Series A $0.001 par value; authorized 5,000,000 shares; issued and outstanding 5,000,000 shares | 5,000 | |||
| Convertible preferred stock, non-voting, 9% cumulative, Series B $0.001 par value; authorized 10,000,000 shares; issued and outstanding 6,000,000 | 6,000 | |||
| Common stock, $0.001 par value; authorized 200,000,000 shares; issued and outstanding 29,000,000 | 29,000 | |||
| Additional paid-in capital | 835,887 | |||
| Accumulated deficit | (3,704,768 | ) | ||
Total stockholders’ equity (deficit) | (2,828,881 | ) | ||
| $ | 28,153,585 | |||
The accompanying notes are an integral part of this financial statement.
F-51
The Rental Store, Inc.
Nine Months Ended September 30, 2010 and 2009
| (Restated) | ||||||||
| 2010 | 2009 | |||||||
| Revenue: | ||||||||
| Rental operations | $ | 59,205,253 | $ | 60,982,144 | ||||
| Retail sales | 1,113,630 | 1,097,680 | ||||||
Total revenue | 60,318,883 | 62,079,824 | ||||||
| Operating expenses: | ||||||||
| Cost of rental operations | 31,341,150 | 31,577,045 | ||||||
| Cost of retail sales | 1,802,797 | 1,450,323 | ||||||
| Compensation related expenses | 14,522,527 | 14,920,955 | ||||||
| General and administrative | 7,590,375 | 7,436,796 | ||||||
| Advertising | 249,498 | 481,632 | ||||||
| Depreciation and amortization | 604,471 | 561,003 | ||||||
Total operating expenses | 56,110,818 | 56,427,754 | ||||||
| Operating income | 4,208,065 | 5,652,070 | ||||||
| Interest expense | 2,716,574 | 2,567,464 | ||||||
Income before income tax expense | 1,491,491 | 3,084,606 | ||||||
| Income tax expense | 763,350 | 1,604,542 | ||||||
Net income | $ | 728,141 | $ | 1,480,064 | ||||
The accompanying notes are an integral part of this financial statement.
F-52
The Rental Store, Inc.
Nine Months Ended September 30, 2010 and 2009
| (Restated) | ||||||||
| 2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 728,141 | $ | 1,480,064 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation of rental merchandise | — | 11,896,134 | ||||||
| Depreciation and amortization | 604,471 | 561,003 | ||||||
| Change in working capital components: | ||||||||
| Rental merchandise | 649,490 | (8,968,679 | ) | |||||
| Prepaid expenses and other assets | 508 | 203,037 | ||||||
| Deposits | (3,743 | ) | 245 | |||||
| Income tax receivable | (64,918 | ) | 258,000 | |||||
| Accounts payable | 193,262 | 210,615 | ||||||
| Accrued expenses | 63,598 | 128,624 | ||||||
| Customer deposits | 243,591 | (64,816 | ) | |||||
| Income tax payable | 1,310,000 | 1,356,212 | ||||||
Net cash provided by operating activities | 3,724,400 | 7,060,439 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Increase (decrease) in restricted cash | 58,852 | (536,757 | ) | |||||
| Purchases of equipment and leasehold improvements | (545,760 | ) | (545,490 | ) | ||||
Net cash used in investing activities | (486,908 | ) | (1,082,247 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Outstanding checks in excess of bank balance | — | (113,761 | ) | |||||
| Net borrowings on line of credit | (1,979,635 | ) | (4,451,319 | ) | ||||
| Payments on notes payable | — | (290,215 | ) | |||||
| Dividend payments | (1,350,000 | ) | (1,350,000 | ) | ||||
Net cash used in financing activities | (3,329,635 | ) | (6,205,295 | ) | ||||
| Net decrease in cash | (92,143 | ) | (227,103 | ) | ||||
| Cash at beginning of period | 395,255 | 678,854 | ||||||
| Cash at end of period | $ | 303,112 | $ | 451,751 | ||||
The accompanying notes are an integral part of this financial statement.
F-53
THE RENTAL STORE, INC.
| Note 1. | Nature of Business and Significant Accounting Policies |
Nature of Business:
The Rental Store, Inc. (the Company), an Arizona corporation, doing business as TRS Home Furnishings, operates a chain of stores that sell and rent durable household products such as major appliances, home entertainment equipment, furniture and jewelry to consumers primarily in the southwestern United States. In addition, the Company operates within certain retail furniture outlets providing similar services.
A significant portion of the Company’s business is facilitated through certain retail furniture outlets that own several locations from which the Company operates. Eighty-nine percent of gross revenues were derived from such operations for the nine months ended September 30, 2010 and 2009, of which 13% and 12% were concentrated with two entities.
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Revenue Recognition:
Rental merchandise is rented to customers pursuant to rental agreements which provide primarily for monthly rental payments collected in advance. Rental revenue is recognized as collected each month when the rental merchandise has been placed in service and delivery costs have been incurred. This method of revenue recognition does not produce materially different results than if rental revenue was recognized over the monthly rental term. At the end of each monthly rental period, the customer can renew the rental agreement or return the merchandise with no obligation. Anytime after three rental payments have been made, the customer may purchase the merchandise through a variety of purchase options. If a customer exercises a purchase option, the remaining net book value of the rental merchandise is transferred to cost of sales. If no purchase option is elected during the contract term and all payments have been made under the contract term, title to the rental merchandise transfers to the customer at the end of such term. Amounts received from sales under purchase options are included in rental operations revenue in the accompanying financial statements. Rental merchandise returned to the Company is generally sold to another customer. The Company recognizes revenue from sales of products upon delivery. The sales tax charged to customers is shown net in the statements of income.
Rental Merchandise:
Rental merchandise consists of merchandise rented to customers or in stores available for rent or sale. Rental merchandise is carried at cost, net of accumulated depreciation. Depreciation on merchandise rented to customers is provided on a straight-line basis over 21 months, which is the average term of a rental agreement. Merchandise held for rent or sale is depreciated on a straight-line basis over 21 months.
Rental merchandise which is damaged and inoperable is expensed when such impairment occurs. If the customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with the settlementdelinquent account is generally charged off on or before the 180th day following the time the account became past due. The Company maintains a reserve for these expected expenses. In addition, any minor repairs made to rental merchandise are expensed at the time of three class action lawsuitsthe repair.
Restricted Cash:
All revenues collected from customers are transferred to a restricted cash account for payment on the line of credit. The bank applies the restricted cash against the line of credit every few days (See Note 5).
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THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are stated at cost. Depreciation of vehicles, furniture and fixtures, and equipment is provided over the estimated useful lives of the respective assets (five to seven years) using the straight-line method. Leasehold improvements are depreciated over the shorter of the useful life of the asset or the remaining lease term of the applicable lease, including option periods if renewal is probable and under the Company’s control to exercise, using the straight-line method. Gains and losses from the disposition of assets are recorded in the stateperiod of New Jersey indisposition. Repair and maintenance costs that do not improve or extend the second quarter of 2000.
NOTE Q -- RELATED PARTY TRANSACTIONS
On August 18, 1998, the Company repurchased 990,099 shares of its common
stock for $25 million from J. Ernest Talley, its Chairmanuseful life of the Boardassets are expensed as incurred.
Computer software developed for internal use is recorded at cost. Such costs are capitalized for amounts incurred during the application development stage. Amortization is provided on the straight-line basis over an estimated useful life of the software of ten years.
Advertising:
The Company expenses the costs of advertising the first time the advertising takes place. Advertising costs for the nine months ended September 30, 2010 and Chief
Executive Officer. 2009, were approximately $249,000 and $482,000, respectively.
Concentration of Credit Risk:
The repurchaseCompany maintains certain bank balances in excess of Mr. Talley's stock was approved by the
Company's Board of Directorsfederally insured amounts. The Company has not experienced any losses in such accounts and believes there is no significant exposure to credit risks on August 5, 1998. such accounts.
The price was determined by a
pricing committee, and was approved by the Board of Directorscustomers of the Company with Mr. Talley abstaining.typically are unable to obtain conventional financing and have chosen therent-to-own alternative for acquiring the products the Company offers. The pricing committee metCompany generally does not require deposits; however, on August 17, 1998, aftermost first-time rental agreements a deposit is collected. The deposit amount may be increased for greater credit risks.
Income Taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the closedifferences between the reported amounts of asset and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the markets,deferred tax assets will not be realized. Deferred tax assets and Mr. Talley's shares were repurchasedliabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. There was no valuation allowance recorded at September 30, 2010.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate settlement with the relevant tax authority. There are no reserves related to uncertain tax positions at September 30, 2010.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the pricedate of $25.25the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
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THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
New Accounting Pronouncements:
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact of any other recently issued standards that are not yet effective are either not applicable to the Company at this time or will not have a material impact on the financial statements upon adoption.
| Note 2. | Rental Merchandise |
Rental merchandise at September 30, 2010 consists of the following:
| On rent | $ | 35,291,674 | ||
| Less accumulated depreciation | (15,823,455 | ) | ||
| 19,468,219 | ||||
| Held for rent or sale, net | 3,520,418 | |||
| $ | 22,988,637 | |||
| Note 3. | Equipment and Leasehold Improvements |
Equipment and leasehold improvements at September 30, 2010 consist of the following:
| Leasehold improvements | $ | 1,672,746 | ||
| Equipment | 3,945,328 | |||
| Furniture and fixtures | 72,229 | |||
| Computer software | 171,015 | |||
| 5,861,318 | ||||
| Less accumulated depreciation | (4,060,773 | ) | ||
| $ | 1,800,545 | |||
| Note 4. | Notes Payable to Related Parties and Capital Leases |
| Unsecured note payable to three stockholders, interest is payable monthly at the greater of prime (3.25% at September 30, 2010) plus 4% per annum or 18%, due December 2012, subordinate to the line of credit (Note 5) | $ | 1,500,000 | ||
| Unsecured note payable to managing partner of Preferred Stock Investors, interest is payable monthly at 21.4%; due December 2012 subordinate to the line of credit (Note 5) and obligations to preferred stockholders (Note 8) | 2,050,000 | |||
| Unsecured note payable with related party, interest is payable monthly at greater of prime (3.25% at September 30, 2010) plus 4% per annum or 11.8%, due March 2011; subordinate to the line of credit (Note 5) and obligations to the preferred stockholders (Note 8) | 682,907 | |||
| Capital lease with related party, payable in monthly installments of $504, including interest at 10%, maturing April 2011, collateralized by equipment | 7,525 | |||
| Capital leases, payable in monthly installments ranging from $70 to $1,700, including interest at 3% to 16%, maturing November 2011 to March 2017, collateralized by equipment | 229,273 | |||
| $ | 4,469,705 | |||
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THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Company has entered into equipment capital lease agreements which expire through March 2017. The gross amount of assets acquired under capital lease was approximately $352,000 as of September 30, 2010. The related accumulated depreciation was approximately $123,000 as of September 30, 2010.
Aggregate maturities required on the note payable to related parties and capital leases at September 30, 2010 are as follows:
Years Ending December 31: | Related Party | Unrelated Party | Total | |||||||||
| 2010 | $ | 5,549 | $ | 52,854 | $ | 58,403 | ||||||
| 2011 | 684,883 | 56,015 | 740,898 | |||||||||
| 2012 | 3,550,000 | 37,048 | 3,587,048 | |||||||||
| 2013 | — | 37,048 | 37,048 | |||||||||
| 2014 | — | 37,048 | 37,048 | |||||||||
| Thereafter | — | 9,260 | 9,260 | |||||||||
| $ | 4,240,432 | $ | 229,273 | $ | 4,469,705 | |||||||
Interest expense to related parties for the nine months ended September 30, 2010 and 2009 totaled approximately $547,000 and $440,000, respectively, and is included in interest expense in the accompanying statements of income.
| Note 5. | Line of Credit |
The Company has a revolving credit facility for the lesser of $25,000,000, or the Advance Rate as defined in the agreement as the amount equal to 26% of the total lease payments remaining on each Eligible Receivable (as defined in the agreement). The Advance Rate may be modified, at the lender’s discretion, if for the prior twelve calendar month period the monthly collection percentage is less than 5%. The Company may request once a calendar quarter for the Facility Cap, as defined in the agreement, to be increased by an amount, not to exceed total borrowings of $25,000,000, for a fee equal to the amounts of 1.0% of such increase. At September 30, 2010, approximately $6,000,000 was available to the Company for additional draws under this agreement. The line of credit bears interest at the greater of prime or LIBOR (0.26% at September 30, 2010) plus 6.02% per annum, but not less than 11%. The line of credit matures on December 31, 2012. The Company was required to pay an initial commitment fee of $350,000 for the line of credit, which has been capitalized and is amortized over the term of the line of credit, and is included in prepaid expenses and other assets on the balance sheet. In addition, the facility bears an unused line fee of 0.25% per annum and a collateral management fee of 0.25% per annum of the daily average outstanding advances, both of which are payable monthly. The line of credit contains certain financial and non-financial covenants, is secured by substantially all assets of the Company, and is guaranteed by the common stockholders of the Company.
| Note 6. | Income Taxes |
Net deferred tax liabilities consist of the following components as of September 30, 2010:
| Deferred taxes: | ||||
| Rental merchandise and equipment and leasehold improvements | $ | 2,600,204 | ||
| Accruals | (70,000 | ) | ||
| Alternative minimum tax credit | (62,000 | ) | ||
| Federal net operating loss carryforwards | (1,062,000 | ) | ||
| Net deferred tax liability | $ | 1,406,204 | ||
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THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The provision for income taxes charged to operations for the nine months ended September 30, 2010 consists of the following:
| Current taxes | $ | (642,854 | ) | |
| Deferred taxes | 1,406,204 | |||
| $ | 763,350 | |||
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the nine months ended September 30, 2010 and 2009 as follows:
| 2010 | 2009 | |||||||
| Tax expense at federal statutory rate | $ | 522,022 | $ | 1,079,612 | ||||
| Nondeductible expenses | 241,328 | 524,930 | ||||||
| $ | 763,350 | $ | 1,604,542 | |||||
The Company’s Federal net operating loss carryforwards of approximately $3,034,000 expire in 2028.
| Note 7. | Commitments and Contingencies |
Operating Leases:
The Company leases its showroom and warehouse facilities under operating leases, some of which includes escalation clauses, which expire at various dates through 2017. The Company is responsible for real estate taxes, insurance and utilities relating to these leases. Certain leases include options to extend the lease agreements. Rent expense, including maintenance charges and utilities expenses, under all operating leases for the nine months ended September 30, 2010 and 2009 totaled approximately $2,948,000 and $2,903,000, respectively.
The total future minimum rental commitments at September 30, 2010 are as follows:
Years Ending December 31: | ||||
| 2010 | 2,151,750 | |||
| 2011 | 1,892,230 | |||
| 2012 | 1,483,487 | |||
| 2013 | 1,343,513 | |||
| 2014 | 789,321 | |||
| Thereafter | 1,504,908 | |||
| $ | 9,165,209 | |||
Management Agreement:
Under the preferred stock agreements discussed in Note 8, the Company must pay the Series A and Series B preferred stockholders approximately $14,500 and $20,000 a month, respectively, for consulting services, until consummation of the sale of the Company or redemption of all the respective preferred shares. This expense was $310,500 for each of the nine months ended September 30, 2010 and 2009, and is included in interest expense in the accompanying statements of income.
Litigation:
From time to time, the Company is involved in various legal proceedings. These proceedings are, in the opinion of management, ordinary routine matters incidental to the normal business conducted by the Company. In the opinion of management, such proceedings are substantially covered by insurance, and the ultimate disposition of such proceedings are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
F-58
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| Note 8. | Convertible Preferred Stock |
In prior years, the Company issued 5,000,000 shares of Series A $0.001 par value convertible preferred stock for $5,000,000. The stock requires quarterly payments of an 18% cumulative annual dividend. The preferred stockholder may elect to convert the shares to shares of common stock of the Company at any time prior to the redemption date at a preference amount of $1 per share. The stock is redeemable for $2 per share on or within fifteen days after December 31, 2012. However, if the closing priceline of credit is still outstanding on the redemption date, the lender must give consent for the Company to redeem the preferred shares for cash. If consent is not given or the Company otherwise fails to redeem the shares on the redemption date, the preferred shares will be converted into shares of common stock in the Company at a rate of $0.238 per share, resulting in a common stock ownership of 37.5%. The Company issued 6,000,000 shares of Series B $0.001 par value convertible, non-voting, preferred stock for $10,000,000 during 2006. The stock requires quarterly payments of a 9% cumulative annual dividend. The preferred stockholders may elect to convert the shares to shares of common stock of the Company'sCompany at any time prior to the redemption date at a preference amount of $1.6667 per share. The stock is redeemable for $2.9167 per share on or within fifteen days after December 31, 2012. However, if the line of credit is still outstanding on the redemption date, the lender must give consent for the Company to redeem the preferred shares for cash. If consent is not given or the Company otherwise fails to redeem the shares on the redemption date, the preferred shares will be converted into shares of common stock in the Company at a rate of $0.1341 per share, resulting in a common stock ownership of 45%. The preferred stock agreement carries certain affirmative and negative covenants, with which the Company must comply.
For Series A and B preferred stock, the liquidation preference is as follows: Upon occurrence of a liquidation event, each of the record holders will have the right to elect to convert all or part of their shares into shares of common stock at the conversation ratio then in effect and any remaining funds and assets of the Company legally available for distribution to the shareholders will be distributed ratably among the shareholders (including the record holders) in accordance with their common stock holdings on Augustan as converted basis.
| Note 9. | Employee Benefits |
The Company had established a salary deferral plan under Section 401(k) of the Internal Revenue Code. The plan allowed eligible employees to defer a portion of their compensation ranging from 1% to 100%. Such deferrals accumulated on a tax deferred basis until the employee withdrew the funds. The Company, at its option, could match a portion of the employees’ contribution. There were no matching contributions made for the nine months ended September 30, 2009.
The Plan also provided a profit sharing component where the Company could make a performance-based contribution to the Plan. No contributions were made for the nine months ended September 30, 2009.
The Plan was terminated effective December 17, 1998.
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- --------------------------------------------------------------------------------
UNTIL 2009 and all assets were transferred out of the Plan.
| Note 10. | Stock Repurchase Agreement |
The stockholders of the Company have entered into a stock repurchase agreement. The stockholders must first offer the stock to the other stockholders on a prorata basis. If no stock is purchased by the other stockholders then the stock is offered to the Company on the same terms. The Company is not obligated to repurchase the stock.
F-59
THE RENTAL STORE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| Note 11: | Restatement |
The 2009 financial statements have been restated to correct errors in the Company’s method of accounting for rental merchandise. The adjustments reduced the carrying value of rental merchandise by $8,979,506 and reduced the Company’s deferred tax liability by $3,367,315. The amounts below are presented net of tax benefit of $3,594,796.
| As Previously | ||||||||||||
| Presented | Restatements | As Restated | ||||||||||
| Net Loss | (440,786 | ) | (5,991,326 | ) | (6,432,112 | ) | ||||||
| Accumulated Deficit | — | (5,991,326 | ) | (5,991,326 | ) | |||||||
| Note 12. | Subsequent Events |
The Company has evaluated subsequent events through May 2, 2011, the date on which the financial statements were available to be issued.
On December 20, 2010, the Company was acquired byRent-A-Center, Inc., 2002, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THE UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
RENT-A-CENTER, INC.
COLORTYME, INC.
ADVANTAGE COMPANIES, INC.
OFFER TO EXCHANGE
11% SENIOR
SUBORDINATED NOTES
DUE 2008, SERIES D
FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES
DUE 2008
AND
11% SENIOR SUBORDINATED NOTES
DUE 2008, SERIES C
----------------------
PROSPECTUS
----------------------
, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the nation’s largestrent-to-own operator, for $75.5 million in cash.
F-60
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW ("DGCL")
Capitalized terms used but not defined in Part II have the meanings ascribed to them in the prospectus contained in this Registration Statement.
| ITEM 20. | Indemnification of Directors and Officers |
Delaware General Corporation Law
Subsection (a) of Section 145 of the Delaware General Corporation Law or
DGCL,(the “DGCL”), empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys'attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agentsuch person acted in any of another corporation,
partnership, joint venture, trust or other enterprisethe capacities set forth above, against expenses (including attorneys'attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shallmay be made in respect ofto any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 145 of the DGCL further provides that to the extent a present or former director or officer of a corporation has been successful on the merits or otherwise in the defense of any such action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys'attorneys’ fees) actually and reasonably incurred by him or her in connection therewith; that the indemnification provided for by Section 145 shall not be deemed exclusive of any other rights which the indemnified party may be entitled; that indemnification provided by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person'sperson’s heirs, executors and administrators; and empowers thethat a corporation tomay purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liabilities under Section 145145.
Certificate of the DGCL.
II-1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
Incorporation, as Amended
Our certificate of incorporation, as amended, provides that our directors shall not be personally liable to us or to our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders,
- for acts or occasions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- in respect of certain unlawful dividend payments or stock purchases or
redemptions, or
- for any transaction from which the director derived an improper personal
benefit.
| • | for any breach of the director’s duty of loyalty to us or our stockholders, | |
| • | for acts or occasions not in good faith or which involve intentional misconduct or a knowing violation of law, |
II-1
| • | in respect of certain unlawful dividend payments or stock purchases or redemptions, or | |
| • | for any transaction from which the director derived an improper personal benefit. |
If the DGCL is amended to authorize the further elimination or limitation of the liability of directors, then the liability of our directors, in addition to the limitation on personal liability provided in ourthe certificate of incorporation, will be limited to the fullest extent permitted by the DGCL. Further, anyif such provision of the certificate of incorporation is repealed or modified by our stockholders, such repeal or modification of such provision of our certificate of
incorporation by our stockholders will be prospective only, and will not adversely affect any limitation on the personal liability of our directors arising from an act or omission occurring prior to the time of such repeal or modification.
AMENDED AND RESTATED BYLAWS
Amended and Restated Bylaws
Our bylaws provide that we shall indemnify and hold harmless our directors and officers threatened to be or made a party or a witness to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was oura director or officer ofRent-A-Center or its subsidiaries, whether the basis of such a proceeding is alleged action in such person'sperson’s official capacity or in another capacity while holding such office, to the fullest extent authorized by the DGCL or any other applicable law, against all expense, liability and loss actually and reasonably incurred or suffered by such person in connection with such proceeding, so long as a majority of a quorum of disinterested directors, the stockholders or legal counsel through a written opinion determines that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and in the case of a criminal proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such indemnification shall continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity thereunder and shall inure to the benefit of his or her heirs, executors and administrators. Our bylaws also contain certain provisions designed to facilitate receipt of such benefits by any such persons, including the prepayment of any such benefit.
INSURANCE
Insurance
We have obtained a directors'directors’ and officers'officers’ liability insurance policy insuring our directors and officers against certain losses resulting from wrongful acts committed by them as our directors and officers ofRent-A-Center, including liabilities arising under the Securities Act.
II-2
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
| ITEM 21. | Exhibits
II-3
II-4
II-5
II-6
Each of the To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) (ii) (iii) That, for the purpose of determining any liability under the Securities Act, To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. That, for the purpose of determining liability under the Securities Act to any purchaser, if such registrant is That, for the purpose of determining liability of such registrant under the a) any preliminary prospectus or prospectus of the undersigned registrants relating to the offering required to be filed pursuant to Rule 424; b) any free writing prospectus relating to the offering prepared by or on behalf of such registrant or used or referred to by the c) the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrants or their securities provided by or on behalf of such registrant; and d) any other communication that is an offer in the
That, for purposes of determining any liability under the Securities Act, Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons of the registrants, the registrants have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, such registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. To deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements ofRule 14a-3 orRule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 ofRegulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
SIGNATURES Pursuant to the requirements of the Securities Act, RENT-A-CENTER, INC.
Mark E. Speese, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act,
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, COLORTYME, INC.
Mark E. Speese, Vice-President Pursuant to the requirements of the Securities Act,
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, COLORTYME FINANCE, INC.
Mark E. Speese, Vice-President Pursuant to the requirements of the Securities Act,
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RAINBOW RENTALS, INC.
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RAC NATIONAL PRODUCT SERVICE, LLC
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. REMCO AMERICA, INC.
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RENT-A-CENTER ADDISON, L.L.C.
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RENT-A-CENTER EAST, INC.
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RENT-A-CENTER INTERNATIONAL INC.
Mark E. Speese, President Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RENT-A-CENTER TEXAS, L.P.
Mark E. Speese, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities indicated on the 2nd day of May, 2011.
*Signed by attorney-in-fact, Robert D. Davis
SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 2nd day of May, 2011. RENT-A-CENTER TEXAS, L.L.C.
Mark E. Speese, President Pursuant to the
*Signed by
SIGNATURES Pursuant to the RENT-A-CENTER WEST, INC.
Mark E. Speese, President Pursuant to the
*Signed by
SIGNATURES Pursuant to the GET IT NOW, LLC
Mark E. Speese, President Pursuant to the
*Signed by
SIGNATURES Pursuant to the RAC EAST OHIO, LLC
Mark E. Speese, President Pursuant to the
*Signed by
SIGNATURES Pursuant to the THE RENTAL STORE, INC.
Mark E. Speese, President Pursuant to the
*Signed by
EXHIBIT INDEX
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