5700 Tennyson Parkway, Suite 100
Plano, Texas 75024
(972) 801-1100
(Address, including zip code, and telephone
number, including area code, of registrant’s
principal executive offices)

NONE
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES þ NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 26, 2005:

Class		Outstanding
Common stock, $.01 par value per share		70,974,468

 

 

TABLE OF CONTENTS

				Page No.
PART I.		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements
		Consolidated Statements of Earnings for the three months ended September 30, 2005 and 2004			1
		Consolidated Statements of Earnings for the nine months ended September 30, 2005 and 2004			2
		Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004			3
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004			4
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			25
Item 4.		Controls and Procedures			25
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6.		Exhibits			30
SIGNATURES
First Amendment to Franchisee Financing Agreement
Certification Pursuant to Section 302 - Mark E. Speese
Certification Pursuant to Section 302 - Robert D. Davis
Certification Pursuant to Section 906 - Mark E. Speese
Certification Pursuant to Section 906 - Robert D. Davis

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

For the nine months ended September 30, 2005, the difference between the fair value of assets acquired and cash paid is due to indemnification arrangements with respect to stores acquired during the nine months ended September 30, 2005.

For the nine months ended September 30, 2004, the difference between the fair value of assets acquired and cash paid is due to non-cash consideration, including approximately $23.9 million in common stock issued and the approximately $6.1 million in fair value assigned to the stock options assumed in connection with the acquisition of Rent Rite, Inc.

See accompanying notes to consolidated financial statements.

RENT-A-CENTER, INC. AND SUBSIDIARIES

RENT-A-CENTER, INC. AND SUBSIDIARIES

We account for the Plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. If we had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) , to stock-based employee compensation, net earnings and earnings per share would have decreased as illustrated by the following table:

For all options granted prior to April 1, 2004, the fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility of 55.2%, risk-free interest rate of 2.9%, expected lives of four years, and no dividend yield. For options granted on or after April 1, 2004, the fair value of the options was estimated at the date of grant using the binomial method pricing model with the following weighted average assumptions: expected volatility of 47.8%, a risk-free interest rate of 3.5%, no dividend yield and an expected life of four years. Had we changed from using the Black-Scholes option pricing model to a binomial method pricing model effective January 1, 2004 rather than April 1, 2004, the impact would not have been significant.

RENT-A-CENTER, INC. AND SUBSIDIARIES

		Effect of New Accounting Pronouncements. In December 2004, the FASB enacted Statement of Financial Accounting Standards 123—revised 2004 (“SFAS 123R”), Share-Based Payment, which replaces SFAS 123, and supersedes APB 25 . SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statement of earnings. The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15, 2005.
		We are required to adopt SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See the Stock-Based Compensation section shown above for the pro forma net earnings and earnings per share amounts for the first nine months and third quarter of 2005 and 2004 as if we had used a fair-value-based method under SFAS 123 to measure compensation expense for employee stock incentive awards. The actual effects of SFAS 123R will depend on numerous factors, including the amounts of share-based payments granted in the future, the method used to value future share-based payments to our employees and estimated forfeiture rates. We estimate recognizing pre-tax compensation expense of approximately $0.04 and $0.03 per diluted share, for the years ended December 31, 2006 and 2007, respectively, based on the number of options outstanding at September 30, 2005, and assuming that we continue to issue stock options under the Plan consistent with our current policy and procedures.
		SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, whereas current accounting rules prescribe that the benefits be reported as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.
2.		Reconciliation of Merchandise Inventory .

The estimated remaining amortization expense, assuming current intangible balances and no new acquisitions, for each of the years ending December 31, is as follows:

Changes in the net carrying amount of goodwill are as follows:

The post purchase price allocation adjustments in 2004 of approximately $13.1 million were primarily attributable to inventory charge-offs for unrentable or missing merchandise acquired in acquisitions, reserves put into place for lease buyouts for acquired stores which were closed post-acquisition in compliance with executive management’s pre-acquisition plans, and the severance pay for the employees involved in the planned reduction in workforce inherited from certain of the acquired companies.

		For the nine months ended September 30, 2005 and 2004, the number of stock options that were outstanding but not included in the computation of diluted earnings per common share because their exercise price was greater than the average market price of our common stock, and therefore anti-dilutive, was 1,843,383 and 560,084, respectively.
		For the three months ended September 30, 2005 and 2004, the number of stock options that were outstanding but not included in the computation of diluted earnings per common share because their exercise price was greater than the average market price of our common stock, and therefore anti-dilutive, was 2,416,436 and 1,241,709, respectively.
5.		Subsidiary Guarantors.
		7 1 / 2 % Senior Subordinated Notes . On May 6, 2003, Rent-A-Center issued $300.0 million in senior subordinated notes due 2010, bearing interest at 7 1 / 2 %, pursuant to an indenture dated May 6, 2003, among Rent-A-Center, Inc., its subsidiary guarantors (the “Subsidiary Guarantors”) and The Bank of New York, as trustee. The proceeds of this offering were used to fund the repurchase and redemption of certain outstanding notes.
		The 2003 indenture contains covenants that limit Rent-A-Center’s ability to:

	•		incur additional debt;
	•		sell assets or its subsidiaries;
	•		grant liens to third parties;
	•		pay dividends or repurchase stock; and
	•		engage in a merger or sell substantially all of its assets.

RENT-A-CENTER, INC. AND SUBSIDIARIES

5.		Subsidiary Guarantors — (continued)
		Events of default under the 2003 indenture include customary events, such as a cross-acceleration provision in the event that Rent-A-Center defaults in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $50.0 million.
		The 7 1 / 2 % notes may be redeemed on or after May 1, 2006, at our option, in whole or in part, at a premium declining from 103.75%. The 7 1 / 2 % notes also require that upon the occurrence of a change of control (as defined in the 2003 indenture), the holders of the notes have the right to require Rent-A-Center 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 facility.
		Rent-A-Center and the Subsidiary Guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 7 1 / 2 % notes. Rent-A-Center has no independent assets or operations, and each Subsidiary Guarantor is 100% owned directly or indirectly by Rent-A-Center. The only direct or indirect subsidiaries of Rent-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 to Rent-A-Center in the form of loans, advances or dividends, except as provided by applicable law.
6.		Common and Preferred Stock Transactions.
		On October 24, 2003, we announced our Board of Directors had rescinded our old common stock repurchase program and authorized a new 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 $100.0 million of our common stock. Over a period of time, our Board of Directors increased the authorization for stock repurchases under our new common stock repurchase program to $400.0 million. As of September 30, 2005, we had purchased a total of 12,609,900 shares of our common stock for an aggregate of $321.6 million under our common stock repurchase program, of which 3,917,200 shares were repurchased during the third quarter of 2005 for approximately $80.0 million. Please see “Unregistered Sales of Equity Securities and Use of Proceeds” later in this report.
		In May 2005, Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (collectively, “Apollo”) sold all of the remaining shares of our common stock held by them in a public offering which closed on May 31, 2005. We did not receive any of the proceeds from the sale of the shares by Apollo. In connection with such sale, Apollo converted the two issued and outstanding shares of our Series C preferred stock into 180 shares of common stock all of which were sold in the public offering. As a result of the conversion, no shares of our Series C preferred stock remain outstanding. In addition, as a result of the sale by Apollo of all of the shares of our common stock held by them, our stockholders agreement with Apollo terminated pursuant to its terms.
7.		Acquisitions.
		Rent Rite, Inc . On May 7, 2004, we completed the acquisition of Rent Rite, Inc. d/b/a Rent Rite Rental Purchase for an aggregate purchase price of $59.9 million. Rent Rite operated 90 stores in 11 states, of which 26 stores were merged with our existing store locations. Approximately 40% of the consideration was paid with 815,592 shares of our common stock, with the remaining portion consisting of cash, the assumption of Rent Rite’s stock options and retirement of Rent Rite’s outstanding debt. The common stock paid as well as the assumption of stock options were recorded at the fair value determined at the effective date of the purchase. The table below summarizes the allocation of the purchase price based on the fair values of the significant assets acquired:

RENT-A-CENTER, INC. AND SUBSIDIARIES

7.		Acquisitions — (continued)
		Rainbow Rentals, Inc . On May 14, 2004, we completed the acquisition of Rainbow Rentals, Inc. for an aggregate purchase price of $109.0 million. Rainbow Rentals operated 124 stores in 15 states, of which 29 stores were merged with our existing store locations. We funded the acquisition entirely with cash on hand. The table below summarizes the allocation of the purchase price based on the fair values of the significant assets acquired:

		We entered into these transactions seeing them as opportunistic acquisitions that would allow us to expand our store base in conjunction with our strategic growth plans. The prices of the acquisitions were determined by evaluating the average monthly rental income of the acquired stores and applying a multiple to the total. Customer relationships acquired in these transactions are being amortized utilizing the straight-line method over an 18 month period. The non-compete agreements in these transactions are being amortized using the straight-line method over the life of the agreements and, in accordance with SFAS 142, the goodwill associated with the acquisitions are not being amortized.
		All acquisitions have been accounted for as purchases, and the operating results of the acquired stores and accounts have been included in our financial statements since their date of acquisition.
8.		Guarantees.
		ColorTyme Guarantee. ColorTyme is a party to an agreement with Wells Fargo Foothill, Inc., who provides $50.0 million in aggregate financing to qualifying franchisees of ColorTyme generally of up to five times their average monthly revenues. Under the Wells Fargo agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Wells Fargo can assign the loans and the collateral securing such loans to ColorTyme, with ColorTyme paying the outstanding debt to Wells Fargo and then succeeding to the rights of Wells Fargo under the debt agreements, including the right to foreclose on the collateral. An additional $20.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Wells Fargo financing. Rent-A-Center East, Inc., a subsidiary of Rent-A-Center, guarantees the obligations of ColorTyme under each of these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of $70.0 million, of which $26.0 million was outstanding as of September 30, 2005. Mark E. Speese, Rent-A-Center’s Chairman of the Board and Chief Executive Officer, is a passive investor in Texas Capital Bank, owning less than 1% of its outstanding equity.
		Other guarantees. We also provide assurance to our insurance providers that if they are not able to draw funds from us for claims paid, they have the ability to draw against our letters of credit. Generally, our letters of credit are renewed automatically every year unless we notify the institution not to renew. At September 30, 2005, we had $103.3 million in outstanding letters of credit under our senior credit facilities, all of which is supported by our $250.0 million revolving facility.
9.		Refinancing of Senior Debt.
		On July 14, 2004, we refinanced our then existing senior secured debt by entering into new $600.0 million senior credit facilities. Our new $600.0 million senior credit facilities consist of a $350.0 million term loan and a $250.0 million revolving credit facility. On that day, we drew down the $350.0 million term loan and $50.0 million of the revolving facility and utilized the proceeds to repay our existing senior term debt.

RENT-A-CENTER, INC. AND SUBSIDIARIES

10.		Store Consolidation Plan.
		On September 6, 2005, we announced our plan to close up to 162 stores by December 31, 2005. The decision to close these stores was based on management’s analysis and evaluation of the markets in which we operate, including our market share, operating results, competitive positioning and growth potential for the affected stores. The 162 stores include 114 stores that we intend to close and merge with our existing stores and up to 48 additional stores that we intend to sell, merge with a potential acquisition or close by December 31, 2005. As of September 30, 2005, we had merged 100 of the 114 stores identified to be merged with existing locations. Since September 30, 2005, we have merged seven of the remaining 14 and sold 14 of the additional 48 stores we intend to sell, close or merge with a potential acquisition.
		We expect to incur restructuring expenses in the range of $12.1 million to $25.1 million, which will be recorded in the third and fourth quarters of the fiscal year ending December 31, 2005, based on the closing date of the stores. During the third quarter of 2005, we recorded restructuring charges of $13.0 million. The charges included $6.5 million for lease terminations, $1.8 million for fixed asset disposals and approximately $4.7 for goodwill impairment and other expenses incurred in these closures. The following table presents the original range of estimated charges, the charges recorded in the third quarter and the estimated range of remaining charges to be recorded in the fourth quarter of the fiscal year ending December 31, 2005 (in thousands):

		We expect the total estimated cash outlay in connection with the store closing plan to be between $9.0 million to $13.7 million. The amount of cash used in the store closing plan during the third quarter was $1.2 million. Therefore, we expect to use approximately $7.8 million to $12.5 million of cash on hand for future payments primarily related to the satisfaction of lease obligations for closed stores.
11.		Effects of Hurricanes Katrina and Rita.
		During the third quarter of 2005, we recorded pre-tax expenses of approximately $7.7 million related to the damage caused by Hurricanes Katrina and Rita. These costs relate primarily to goodwill impairment of approximately $3.7 million and inventory losses of approximately $3.6 million.

RENT-A-CENTER, INC. AND SUBSIDIARIES

RENT-A-CENTER, INC. AND SUBSIDIARIES

Our stores generally offer high quality durable products such as major consumer electronics, appliances, computers, and furniture and accessories under flexible rental purchase agreements that generally allow the customer to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period. These rental purchase agreements are designed to appeal to a wide variety of customers by allowing them to obtain merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a lack of access to credit. These agreements also cater to customers who only have a temporary need or who simply desire to rent rather than purchase the merchandise.

Rental payments are made generally on a weekly basis and, together with applicable fees, constitute our primary revenue source. Our expenses primarily relate to merchandise costs and the operations of our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, merchandise delivery expenses, advertising expenses, lost, damaged, or stolen merchandise, fixed asset depreciation, and corporate and other expenses.

We have pursued an aggressive growth strategy since 1993. We have sought to acquire underperforming rent-to-own stores to which we could apply our operating model as well as open new stores. As a result, acquired stores have generally experienced more significant revenue growth during the initial periods following their acquisition than in subsequent periods. Because of significant growth since our formation, our historical results of operations and period-to-period comparisons of such results and other financial data, including the rate of earnings growth, may not be meaningful or indicative of future results.

We plan to accomplish our future growth through selective and opportunistic acquisitions of existing rent-to-own stores, and development of new rent-to-own stores. Typically, a newly opened rent-to-own store is profitable on a monthly basis in the ninth to twelfth month after its initial opening. Historically, a typical store has achieved cumulative break-even profitability in 18 to 24 months after its initial opening. Total financing requirements of a typical new store approximate $500,000, with roughly 75% of that amount relating to the purchase of rental merchandise inventory. A newly opened store historically has achieved results consistent with other stores that have been operating within the system for greater than two years by the end of its third year of operation. As a result, our quarterly earnings are impacted by how many new stores we opened during a particular quarter and the quarters preceding it. In addition, we strategically open or acquire stores near market areas served by existing stores (“cannibalize”) to enhance service levels, gain incremental sales and increase market penetration. This planned cannibalization may negatively impact our same store revenue. There can be no assurance that we will open any new rent-to-own stores in the future, or as to the number, location or profitability thereof.

Furthermore, we are evaluating other growth strategies, including offering additional products and services designed to appeal to our customer demographic, both through our new and existing rent-to-own stores as well as the entry into additional lines of business. On June 30, 2005, we acquired 27 stores in six Western states which offer an array of financial services in addition to traditional rent-to-own products. We intend to begin offering similar financial services in up to 25 existing Rent-A-Center store locations during the fourth quarter of 2005. There can be no assurance that we will be successful in our efforts to expand our operations to include such complementary financial products or services, or that such operations, should they be added, will prove to be profitable.

Recent Developments

As of October 26, 2005, we have acquired accounts from one store, opened three new stores and closed 27 stores during the fourth quarter of 2005. Of the closed stores, 14 were sold and 7 were merged with existing locations in connection with our store consolidation plan. Five other stores were closed as a result of Hurricane Katrina and another store, unrelated to our store closing plan, was sold. It is our intention to increase the number of rent-to-own stores we operate by an average of approximately 5% per year over the next several years.

Critical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in Our Financial Statements

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. 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. We believe the following are areas where the degree of judgment and complexity in determining amounts recorded in our consolidated financial statements make the accounting policies critical.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers’ compensation, general liability, auto liability and employee health insurance policies. We establish reserves for our liabilities associated with these losses by obtaining forecasts for the ultimate expected losses and estimating amounts needed to pay losses within our self-insured retentions.

We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, which are prepared using methods and assumptions in accordance with standard actuarial practice, and third party claim administrator loss estimates which are based on known facts surrounding individual claims. Each quarter, we reevaluate our estimate of liability within our self-insured retentions, including our assumptions related to our loss forecasts and estimates, using actuarial loss forecasts updated during the quarter and currently valued third party claim administrator loss estimates. We evaluate the adequacy of our accruals by comparing amounts accrued on our balance sheet for anticipated losses to our updated actuarial loss forecasts and third party claim administrator loss estimates, and make adjustments to our accruals as needed based upon such review.

Over the previous 10 years, our loss exposure has increased, primarily as a result of our growth. We instituted procedures to manage our loss exposure through a greater focus on the risk management function, a transitional duty program for injured workers, ongoing safety and accident prevention training, and various programs designed to minimize losses and improve our loss experience in our store locations.

As of September 30, 2005, the net amount accrued for losses within our self-insured retentions was $97.8 million, as compared to $83.6 million at September 30, 2004. The increase in the net amount accrued for the 2005 period is a result of an estimate for new claims expected for the current policy period, which incorporates our store growth, increased number of employees, increases in health care costs, and the net effect of prior period claims which have closed or for which additional development or changes in estimates have occurred.

Litigation Reserves. We are the subject of litigation in the ordinary course of our business. Our litigation involves, among other things, actions relating to claims that our rental purchase agreements constitute installment sales contracts, violate state usury laws or violate other state laws to protect consumers, claims asserting violations of wage and hour laws in our employment practices, as well as claims we violated the federal securities laws. In preparing our financial statements at a given point in time, we account for these contingencies pursuant to the provisions of SFAS No. 5, which requires that we accrue for losses that are both probable and reasonably estimable.

Each quarter, we make estimates of our probable liabilities, if reasonably estimable, and record such amounts in our consolidated financial statements. These amounts represent our best estimate, or may be the minimum range of probable loss when no single best estimate is determinable. We, together with our counsel, monitor developments related to these legal matters and, when appropriate, adjustments are made to reflect current facts and circumstances. As of September 30, 2005, we had accrued $1.9 million in connection with the prospective settlement of the Pucci/Chess matter, and an additional $400,000 for anticipated legal fees and expenses with respect to our other outstanding litigation (other than the Pucci/Chess matter) as compared to $49.6 million for the quarter ended September 30, 2004, of which we had accrued $47.0 million in connection with the settlement of the Griego/Carrillo matter, and an additional $2.6 million for probable litigation costs with respect to our outstanding litigation (other than the Griego/Carrillo matter). The amounts accrued, relating to the prospective settlement in the Pucci/Chess matter, and for anticipated legal fees and expenses with respect to our remaining outstanding litigation (other than the Pucci/Chess matter), represent our estimate of the probable liabilities with respect to such litigation. The ultimate outcome of our litigation is uncertain, and the amount of loss we may incur, if any, cannot in our judgment be reasonably estimated. Additional developments in our litigation or other adverse or positive developments or rulings in our litigation, could affect our assumptions and thus, our accrual.

If we make changes to our accruals in any of these areas in accordance with the policies described above, these changes would impact our earnings. Increases to our accruals would reduce earnings and similarly, reductions to our accruals would increase our earnings. A pre-tax change of $1.1 million in our estimates would result in a corresponding $.01 change in our earnings per share.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of our company. However, we do not suggest that other general risk factors, such as those discussed in our Annual Report on Form 10-K as well as changes in our growth objectives or performance of new or acquired stores, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Significant Accounting Policies

Our significant accounting policies are summarized below and in Note A to our consolidated financial statements included in our Annual Report on Form 10-K.

Revenue . Merchandise is rented to customers pursuant to rental-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 as payments are received and merchandise sales revenue is recognized when the customer exercises his/her purchase option and pays the cash price due. Revenue for the total amount of the rental purchase agreement is not accrued because the customer can cancel the rental contract at any time and we cannot enforce collection for non-payment of rents. Because Get It Now makes retail sales on an installment credit basis, Get It Now’s revenue is recognized at the time of such retail sale, as is the cost of the merchandise sold, net of a provision for uncollectible accounts.

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 . Depreciation of rental merchandise is included in the cost of rentals and fees on our statement of earnings. We depreciate our rental merchandise using the income forecasting method. The income forecasting method of depreciation we use does not consider salvage value and does not allow the depreciation of rental merchandise during periods when it is not generating rental revenue. The objective of this method of depreciation is to provide for consistent depreciation expense while the merchandise is on rent. We accelerate the depreciation on computers that are 24 months old or older and which have become idle using the straight-line method for a period of at least six months, generally not to exceed an aggregate depreciation period of 30 months. The purpose is to better reflect the depreciable life of a computer in our stores.

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

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

Results of Operations

During the third quarter of 2005, we recorded pre-tax expenses of approximately $7.7 million related to the damage caused by Hurricanes Katrina and Rita. These costs relate primarily to goodwill impairment of approximately $3.7 million and inventory losses of approximately $3.6 million.

Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30, 2004

Store Revenue . Total store revenue increased by $33.1 million, or 2.0%, to $1,725.8 million for the nine months ended September 30, 2005 as compared to $1,692.7 million for the nine months ended September 30, 2004. The increase in total store revenue is primarily attributable to approximately $70.5 million in incremental revenue from new stores and acquisitions, net of stores sold and the effects of merged stores, during the first nine months of 2005 as compared to 2004, offset by a decrease in same store sales of 2.8%.

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, 2005 and 2004, excluding store locations that received accounts through an acquisition or merger of an existing store location. Same store revenues decreased by $37.4 million, or 2.8%, to $1,303.2 million for the nine months ended September 30, 2005 as compared to $1,340.6 million in 2004. This decrease in same store revenues was primarily attributable to a decrease in the average number of customers and agreements on rent on a per store basis during the first nine months of 2005 as compared to the first nine months of 2004.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Franchise Revenue . Total franchise revenue decreased by $5.2 million, or 14.6%, to $30.1 million for the nine months ended September 30, 2005 as compared to $35.3 million in 2004. This decrease was primarily attributable to a decrease in merchandise sales to franchise locations as a result of 21 fewer franchised locations, on a weighted average basis, operating in the first nine months of 2005 as compared to the first nine months of 2004. The number of locations has declined as a result of the purchase of 53 franchise locations by other Rent-A-Center subsidiaries since September 30, 2004.

Cost of Rentals and Fees . Cost of rentals and fees consists of depreciation of rental merchandise and the costs associated with our membership programs, which began in 2004. Cost of rentals and fees for the nine months ended September 30, 2005 increased by $4.8 million, or 1.5%, to $338.7 million for the nine months ended September 30, 2005 as compared to $333.9 million in 2004. This increase is a result of an increase in rental revenue for the first nine months of 2005 compared to the first nine months of 2004. Cost of rentals and fees expressed as a percentage of store rentals and fees revenue was 21.7% for the nine months ending September 30, 2005 and 2004.

Cost of Merchandise Sold . Cost of merchandise sold increased by $9.5 million, or 10.5%, to $100.6 million for the nine months ended September 30, 2005 as compared to $91.1 million in 2004. This increase was primarily a result of an increase in the number of items sold during the first nine months of 2005 as compared to the first nine months of 2004. The gross margin percent of merchandise sales decreased to 27.9% in 2005 from 30.1% in 2004. This decrease is attributable to a decrease in the average selling price of merchandise sold during the first nine months of 2005 as compared to 2004.

Salaries and Other Expenses . Salaries and other expenses increased by $70.8 million, or 7.5%, to $1,017.4 million for the nine months ended September 30, 2005 as compared to $946.6 million in 2004. The increase was primarily the result of an increase in salaries and wages and occupancy costs due to an increased number of stores in the 2005 period, higher fuel expenses relating to product deliveries and utility costs, as well as the impact of Hurricanes Katrina and Rita. For the nine months ended September 30, 2005, there were 102 more stores, on a weighted average basis, operating during the period as compared to 2004. Salaries and other expenses expressed as a percentage of total store revenue increased to 59.0% for the nine months ended September 30, 2005 from 55.9% in 2004. This percentage increase was primarily attributable to the decrease in same store sales during the first nine months of 2005 as compared to 2004.

Franchise Cost of Merchandise Sold . Franchise cost of merchandise sold decreased by $4.7 million, or 15.8%, to $25.0 million for the nine months ended September 30, 2005 as compared to $29.7 million in 2004. This decrease was primarily attributable to a decrease in merchandise sales to franchise locations as a result of 21 fewer franchised locations, on a weighted average basis, operating in the first nine months of 2005 as compared to the first nine months of 2004. The number of locations has declined as a result of the purchase of 53 franchise locations by other Rent-A-Center subsidiaries since September 30, 2004.

General and Administrative Expenses . General and administrative expenses increased by $4.3 million, or 7.7%, to $60.7 million for the nine months ended September 30, 2005, as compared to $56.4 million for the first nine months of 2004. General and administrative expenses expressed as a percentage of total revenue increased slightly to 3.5% for the nine months ending September 30, 2005 as compared to 3.3% for the nine months ending September 30, 2004.

Operating Profit . Operating profit decreased by $17.2 million, or 8.3%, to $190.0 million for the nine months ended September 30, 2005 as compared to $207.2 million in 2004. Excluding the pre-tax litigation reversion credit of $8.0 million recorded in the first quarter of 2005, the pre-tax restructuring charge of $13.0 million recorded in the third quarter of 2005 and the pre-tax litigation charge of $47.0 million recorded in the third quarter of 2004, operating profit decreased by $59.2 million, or 23.3%, to $195.0 million for the nine months ended September 30, 2005 as compared to $254.2 million in 2004. Operating profit as a percentage of total revenue decreased to 11.1% for the nine months ended September 30, 2005 before the pre-tax litigation reversion credit and restructuring charge in 2005, from 14.7% in the first nine months of 2004 before the pre-tax litigation charge in 2004. These decreases were primarily attributable to the decrease in same store sales and the increase in salaries and other expenses during the first nine months of 2005 versus 2004 as discussed above.

Net Earnings . Net earnings decreased by $8.3 million, or 7.6%, to $100.7 million for the nine months ended September 30, 2005 as compared to $109.0 million in 2004. Excluding the pre-tax litigation reversion credit of $8.0 million recorded in the first quarter of 2005, a pre-tax restructuring charge of $13.0 million recorded in the third quarter, a $2.0 million tax audit reserve credit recorded in the second quarter of 2005, and a $47.0 million litigation charge and $4.2 million refinance charge recorded in the third quarter of 2004, net earnings decreased by $39.1 million, or 27.7%, to $101.9 million for the nine months ended September 30, 2005 as compared to $141.0 million in 2004. This decrease was primarily attributable to the decrease in same store sales and the increase in salaries and other expenses during the first nine months of 2005 versus 2004 as discussed above.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Three Months Ended September 30, 2005 compared to Three Months Ended September 30, 2004

Store Revenue . Total store revenue increased by $5.7 million, or 1.0%, to $564.9 million for the three months ended September 30, 2005 as compared to $559.2 million for the three months ended September 30, 2004. The increase in total store revenue is primarily attributable to approximately $7.7 million in incremental revenue from new stores and acquisitions, net of stores sold and the effects of merged stores, during the third quarter of 2005 as compared to 2004, offset by a decrease in same store sales of 0.4%.

Same store revenues represent those revenues earned in stores that were operated by us for each of the entire three month periods ending September 30, 2005 and 2004, excluding store locations that received accounts through an acquisition or merger of an existing store location. Same store revenues decreased by $2.0 million, or 0.4%, to $465.4 million for the three months ended September 30, 2005 as compared to $467.4 million in 2004. This decrease in same store revenues was primarily attributable to a decrease in the average number of customers and agreements on rent on a per store basis during the third quarter of 2005 as compared to the third quarter of 2004.

Franchise Revenue . Total franchise revenue decreased by $1.8 million, or 17.6%, to $8.6 million for the three months ended September 30, 2005 as compared to $10.4 million in 2004. This decrease was primarily attributable to a decrease in merchandise sales to franchise locations as a result of 28 fewer franchised locations, on a weighted average basis, operating in the third quarter of 2005 as compared to the third quarter of 2004. The number of locations has declined as a result of the purchase of 53 franchise locations by other Rent-A-Center subsidiaries since September 30, 2004.

Cost of Rentals and Fees . Cost of rentals and fees consists of depreciation of rental merchandise and the costs associated with our membership programs, which began in 2004. Cost of rentals and fees for the three months ended September 30, 2005, decreased by approximately $400,000, or 0.4%, to $112.2 million for the three months ended September 30, 2005 as compared to $112.6 million in 2004. Cost of rentals and fees expressed as a percentage of store rentals and fees revenue decreased slightly to 21.7% for the quarter ending September 30, 2005 as compared to 21.8% for the same period in 2004.

Cost of Merchandise Sold . Cost of merchandise sold increased by $3.3 million, or 12.4%, to $30.3 million for the three months ended September 30, 2005 as compared to $27.0 million in 2004. This increase was primarily a result of an increase in the number of items sold during the third quarter of 2005 as compared to the third quarter 2004. The gross margin percent of merchandise sales decreased to 22.7% in 2005 from 25.6% in 2004. This decrease was primarily attributable to a decrease in the average selling price of merchandise sold during the third quarter of 2005 as compared to the third quarter of 2004.

Salaries and Other Expenses . Salaries and other expenses increased by $24.0 million, or 7.3%, to $350.4 million for the three months ended September 30, 2005 as compared to $326.4 million in 2004. Salaries and other expenses expressed as a percentage of total store revenue increased to 62.0% for the three months ended September 30, 2005 from 58.4% in 2004. The increases are primarily the result of an increase in salaries and wages and occupancy costs due to an increased number of stores in the 2005 period, higher fuel expenses relating to product deliveries and utility costs, as well as the impact of Hurricanes Katrina and Rita. For the three months ended September 30, 2005, there were 19 more stores, on a weighted average basis, operating during the period as compared to 2004.

Franchise Cost of Merchandise Sold . Franchise cost of merchandise sold decreased by $1.6 million, or 18.9%, to $7.0 million for the three months ended September 30, 2005 as compared to $8.6 million in 2004. This decrease was primarily attributable to a decrease in merchandise sales to franchise locations as a result of 28 fewer franchised locations, on a weighted average basis, operating in the third quarter of 2005 as compared to the third quarter of 2004. The number of locations has declined as a result of the purchase of 53 franchise locations by other Rent-A-Center subsidiaries since September 30, 2004.

General and Administrative Expenses . General and administrative expenses increased by $2.4 million, or 12.8%, to $21.2 million for the three months ended September 30, 2005, as compared to $18.8 million in 2004. General and administrative expenses expressed as a percentage of total revenue increased to 3.7% for the three months ending September 30, 2005 as compared to 3.3% for the three months ending September 30, 2004.

Operating Profit . Operating profit increased by $6.7 million, or 27.3%, to $31.0 million for the three months ended September 30, 2005 as compared to $24.3 million in 2004. Excluding the pre-tax restructuring charge of $13.0 million recorded in the third quarter of 2005 and the pre-tax litigation charge of $47.0 million recorded in the third quarter of 2004, operating profit decreased by $27.3 million, or 38.3%, to $44.0 million for the three months ended September 30, 2005 as

RENT-A-CENTER, INC. AND SUBSIDIARIES

compared to $71.3 million in 2004. Operating profit as a percentage of total revenue decreased to 7.7% for the three months ended September 30, 2005 before the pre-tax restructuring charge in 2005, from 12.5% for the three months ended September 30, 2004 before the pre-tax litigation charge in 2004. These decreases were primarily attributable to the decrease in same store sales and the increase in salaries and other expenses during the third quarter of 2005 versus 2004 as discussed above.

Net Earnings . Net earnings increased by $5.7 million, or 102.4%, to $11.3 million for the three months ended September 30, 2005 as compared to $5.6 million in 2004. Excluding the a pre-tax restructuring charge of $13.0 million recorded in the third quarter, a pre-tax litigation charge of $47.0 million and a pre-tax refinance charge of $4.2 million, both recorded in the third quarter of 2004, net earnings decreased by $16.6 million, or 44.2%, to $20.9 million for the three months ended September 30, 2005 as compared to $37.5 million in 2004. This decrease was primarily attributable to the decrease in same store sales and the increase in salaries and other expenses during the third quarter of 2005 versus 2004 as discussed above.

Liquidity and Capital Resources

Cash provided by operating activities decreased by $140.4 million to $143.7 million for the nine months ending September 30, 2005 as compared to $284.1 million in 2004. This decrease is primarily attributable to a decrease in our deferred income taxes related to the reversal of the cash benefit related to the Jobs and Growth Tax Relief Reconciliation Act of 2003 discussed later in this report, an increase in inventory purchases related to our increased store base and a decrease in the change in our accrued liabilities during the first nine months of 2005 as compared to the first nine months of 2004. The decrease in our accrued liabilities was primarily due to the recording of the $47.0 million Griego settlement in 2004 (which was paid in 2005), and an increase of approximately $14.6 million in income tax liabilities paid in 2005 as compared to 2004.

Cash used in investing activities decreased by $135.0 million to $73.1 million during the nine month period ending September 30, 2005 as compared to $208.1 million in 2004. This decrease is primarily attributable to the larger acquisitions that occurred in the first nine months of 2004, such as the acquisitions of Rainbow Rentals, Inc. and Rent Rite, Inc., as compared to the acquisitions that occurred in the first nine months of 2005.

Cash used in financing activities decreased by $78.8 million to $76.6 million during the nine month period ending September 30, 2005 as compared to $155.4 million in 2004. This decrease is primarily a result of a reduction in our stock repurchases during the first nine months of 2005 as compared to the same period in 2004.

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

We believe that the cash flow generated from operations, together with amounts available under our senior credit facilities, will be sufficient to fund our debt service requirements, rental merchandise purchases, capital expenditures and our store expansion programs into 2006. Our revolving credit facilities, as well as our $10.0 million line of credit at Intrust Bank, provide us with revolving loans in an aggregate principal amount not exceeding $260.0 million, of which $111.4 million was available at October 26, 2005. At October 26, 2005, we had approximately $46.5 million in cash. To the extent we have available cash that is not necessary for store openings or acquisitions, we intend to repurchase additional shares of our common stock as well as make additional payments to service our existing debt. While our operating cash flow has been strong and we expect this strength to continue, our liquidity could be negatively impacted if we do not remain as profitable as we expect.

Our senior credit facilities and the indenture governing our 7 ¹ / 2 % notes contain certain change in control provisions. A change in control would result in an event of default under our senior credit facilities, and, pursuant to the underlying indenture, would also require us to offer to repurchase all of our 7 ¹ / 2 % notes at 101% of their principal amount, plus accrued interest, if any, to the date of repurchase. Provisions of our senior credit facilities restrict the repurchase of all of our 7 ¹ / 2 % notes. In the event a change in control occurs, we cannot be sure that we would have enough funds to immediately pay our accelerated senior credit facility obligations and all of the 7 ¹ / 2 % notes, or that we would be able to obtain financing to do so on favorable terms, if at all.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Litigation. On June 23, 2005, we reached an agreement in principle with the plaintiffs to resolved the Rob Pucci, et. al. v. Rent-A-Center, Inc. and Jeremy Chess et. al v. Rent-A-Center, Inc., et. al. matters pending in state court in Multnomah County, Oregon. These matters allege violations of various provisions of Oregon state law regarding overtime, lunch and work breaks, failure to pay wages due to our Oregon employees, and various contract claims that we promised but failed to pay overtime. Under the terms of the settlement, which has now been documented and preliminarily approved by the court, we anticipate we will pay $1.75 million in cash to settle total class claims, provided that the class does not exceed 650 individuals. If the class exceeds 650 individuals, we agreed to pay an additional $750.00 per individual class member over 650. To account for the settlement, as well as our own attorneys’ fees, we have accrued an aggregate of $1.9 million as of September 30, 2005. We expect to pay the entire settlement amount in the first quarter of 2006, following final approval of the settlement by the court.

While we believe that the terms of this settlement are fair, there can be no assurance that the settlement, if completed, will be approved by the court in its present form. We believe that the cash flow generated from operations will be sufficient to fund the prospective settlement without adversely affecting our liquidity.

Additional settlements or judgments against us on our existing litigation could affect our liquidity. Please refer to “Legal Proceedings” later in this report.

Income Taxes. On March 9, 2002, President Bush signed into law the Job Creation and Worker Assistance Act of 2002, which provides for accelerated tax depreciation deductions for qualifying assets placed in service between September 11, 2001 and September 10, 2004. Under these provisions, 30 percent of the basis of qualifying property is deductible in the year the property is placed in service, with the remaining 70 percent of the basis depreciated under the normal tax depreciation rules. For assets placed in service between May 6, 2003 and December 31, 2004, the Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the percent of the basis of qualifying property deductible in the year the property was placed in service from 30% to 50%. Accordingly, our cash flow during 2002 through 2004 benefited from having a lower current cash tax obligation, which in turn provided additional cash flows from operations. We estimate that our operating cash flow increased by approximately $106.3 million through 2004 from the accelerated tax depreciation deductions. The associated deferred tax liabilities now have begun to reverse, doing so over a three year period beginning in 2005. Approximately 75% will reverse in 2005, 20% will reverse in 2006 and the remainder will reverse in 2007. We expect to pay approximately $28.5 million in taxes during the remainder of 2005. We also expect to pay approximately $21.3 million and $5.3 million in additional cash taxes in 2006 and 2007, respectively, due to the reversal of the deferred tax liabilities discussed above.

Rental Merchandise Purchases . We purchased $486.2 million and $453.4 million of rental merchandise during the nine month periods ending September 30, 2005 and 2004, respectively.

Capital Expenditures . We make capital expenditures in order to maintain our existing operations as well as for new capital assets in new and acquired stores. We spent $41.0 million and $53.4 million on capital expenditures during the nine month periods ending September 30, 2005 and 2004, respectively, and expect to spend approximately $19.0 million for the remainder of 2005.

In December 2005, we expect to close the acquisition of approximately 15 acres of land located in Plano Texas, on which we intend to build a new corporate headquarters facility. The purchase price for the land is expected to be approximately $4.5 million. Building costs are expected to be in the range of $20.0-$25.0 million, with construction beginning in December 2005. Building costs will be paid on a percentage of completion basis throughout the construction period, and the building is expected to be completed by the end of 2006. We intend to finance this project from cash flow generated from operations.

Acquisitions and New Store Openings. During the first nine months of 2005, we acquired 39 stores, accounts from 35 additional locations, opened 39 new stores, and closed 166 stores. Of the closed stores, 152 were merged with existing store locations, eight stores were closed due to Hurricane Katrina and six stores were sold. The acquired stores and accounts were the result of 33 separate transactions for an aggregate price of approximately $35.6 million, of which $3.4 million will be paid at the conclusion of an escrow period.

As of October 26, 2005, we have acquired accounts from one store, opened three new stores and closed 27 stores during the fourth quarter of 2005. Of the closed stores, 14 were sold and 7 were merged with existing locations in connection with our store consolidation plan. Five other stores were closed as a result of Hurricane Katrina and another store, unrelated to our store closing plan, was sold. For the entire year ending December 31, 2005, we intend to add to our store base by opening approximately 60-70 new store locations as well as pursuing opportunistic acquisitions.

RENT-A-CENTER, INC. AND SUBSIDIARIES

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 under-performing 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. Additionally, we cannot assure that the stores we do acquire or open will be profitable at the same levels that our current stores are, or at all.

Senior Credit Facilities. On July 14, 2004, we announced the completion of the refinancing of our senior secured debt. Our new $600.0 million senior credit facilities consist of a $350.0 million term loan and a $250.0 million revolving credit facility. On that day, we drew down the $350.0 million term loan and $50.0 million of the revolving facility and utilized the proceeds to repay our old senior term debt. The full amount of the revolving credit facility may be used for the issuance of letters of credit, of which $103.6 million had been utilized as of October 26, 2005. As of October 26, 2005, $101.4 million was available under our revolving facility. The revolving credit facility expires in July 2009 and the term loan expires in 2010.

The table below shows the scheduled maturity dates of our senior debt outstanding at September 30, 2005.

Borrowings under our senior credit facilities bear interest at varying rates equal to the Eurodollar rate plus 1.75% (the “Eurodollar Rate”), or the prime rate plus .75% (the “Prime Rate”). Currently, all borrowings under the senior credit facility bear interest at the Eurodollar Rate. The Eurodollar rate was 4.07% at October 26, 2005. We have not entered into any interest rate protection agreements with respect to the term loans under our senior credit facilities.

Our senior credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property. Our senior credit facilities are also secured by a pledge of the capital stock of our U.S. subsidiaries, and a portion of the capital stock of our international subsidiaries.

Our senior credit facilities contain, without limitation, covenants that generally limit our ability to:

	•		incur additional debt (including subordinated debt) in excess of $50 million at any one time outstanding;
	•		repurchase our capital stock and 7 1 / 2 % notes;
	•		incur liens or other encumbrances;
	•		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 a new line of business.

Our senior credit facilities require us to comply with several financial covenants, including a maximum consolidated leverage ratio, a minimum consolidated interest coverage ratio and a minimum fixed charge coverage ratio. The table below shows the required and actual ratios under our credit facilities calculated as at September 30, 2005:

RENT-A-CENTER, INC. AND SUBSIDIARIES

Events of default under our 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 there is a change of control. 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 in our Board of Directors occurs. An event of default would also occur if one or more judgments were entered against us of $20.0 million or more and such judgments were not satisfied or bonded pending appeal within 30 days after entry.

7 ¹ / 2 % Senior Subordinated Notes. On May 6, 2003, we issued $300.0 million in senior subordinated notes due 2010, bearing interest at 7 ¹ / 2 %, pursuant to an indenture dated May 6, 2003, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York, as trustee. The proceeds of this offering were used to fund the repurchase and redemption of certain outstanding notes.

The 2003 indenture contains covenants that limit Rent-A-Center’s 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 its assets.

Events of default under the 2003 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 7 ¹ / 2 % notes may be redeemed on or after May 1, 2006, at our option, in whole or in part, at a premium declining from 103.75%. The 7 ¹ / 2 % notes also require that upon the occurrence of a change of control (as defined in the 2003 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 new senior credit facilities. We are not required to maintain any financial ratios under the 2003 indenture.

Store Leases . We lease space for all of our stores and service center locations, as well as our corporate and regional offices under operating leases expiring at various times through 2016. Most of our store leases are five year leases and contain renewal options for additional periods ranging from three to five years at rental rates adjusted according to agreed-upon formulas.

ColorTyme Guarantee. ColorTyme is a party to an agreement with Wells Fargo Foothill, Inc., who provides $50.0 million in aggregate financing to qualifying franchisees of ColorTyme generally of up to five times their average monthly revenues. Under the Wells Fargo agreement, upon an event of default by the franchisee under agreements governing this financing and upon the occurrence of certain other events, Wells Fargo can assign the loans and the collateral securing such loans to ColorTyme, with ColorTyme paying the outstanding debt to Wells Fargo and then succeeding to the rights of Wells Fargo under the debt agreements, including the right to foreclose on the collateral. An additional $20.0 million of financing is provided by Texas Capital Bank, National Association under an agreement similar to the Wells Fargo financing. Rent-A-Center East guarantees the obligations of ColorTyme under each of these agreements, not considering the effects of any amounts that could be recovered under collateralization provisions, up to a maximum amount of $70.0 million, of which $26.0 million was outstanding as of September 30, 2005. Mark E. Speese, Rent-A-Center’s Chairman of the Board and Chief Executive Officer, is a passive investor in Texas Capital Bank, owning less than 1% of its outstanding equity.

RENT-A-CENTER, INC. AND SUBSIDIARIES

Repurchases of Outstanding Securities. On October 24, 2003, we announced that our Board of Directors had rescinded our old common stock repurchase program and authorized a new 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 $100.0 million of our common stock. Over a period of time, our Board of Directors increased the authorization for stock repurchases under our new common stock repurchase program to $400.0 million. As of September 30, 2005, we had purchased a total of 12,609,900 shares of our common stock for an aggregate of $321.6 million under this common stock repurchase program, of which 3,917,200 shares were repurchased in the third quarter of 2005 for approximately $80.0 million. Please see “Unregistered Sales of Equity Securities and Use of Proceeds” later in this report.

Store Consolidation Plan . We expect the total estimated cash outlay in connection with the store consolidation plan to be between $9.0 million to $13.7 million. The amount of cash used in the store closing plan during the third quarter was $1.2 million. Therefore, we expect to use approximately $7.8 million to $12.5 million of cash on hand for future payments primarily related to the satisfaction of lease obligations for closed stores. Please see “Store Consolidation Plan” in the Notes to Consolidated Financial Statements for more information on our store consolidation plan.

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. Fluctuations in our targeted customers’ monthly disposable income, such as those we believe may have been caused by nationwide increases in fuel and energy costs, could adversely impact our results of operations.

Seasonality . Our revenue mix is moderately seasonal, with the first quarter of each fiscal year generally providing higher merchandise sales than any other quarter during a fiscal year, primarily related to federal income tax refunds. Generally, our customers will more frequently exercise their early purchase option on their existing rental purchase agreements or purchase pre-leased merchandise off the showroom floor during the first quarter of each fiscal year. We expect this trend to continue in future periods. Furthermore, we tend to experience slower growth in the number of rental purchase agreements on rent in the third quarter of each fiscal year when compared to other quarters throughout the year. As a result, we would expect revenues for the third quarter of each fiscal year to remain relatively flat or slightly below the prior quarter. We expect this trend to continue in future periods unless we add significantly to our store base during the third quarter of future fiscal years as a result of new store openings or opportunistic acquisitions.

Effect of New Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board (“FASB”) enacted SFAS 123R, which replaces SFAS 123, and supersedes APB 25 . SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statement of earnings. The accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15, 2005.

We are required to adopt SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See the Stock-Based Compensation section shown above for the pro forma net earnings and earnings per share amounts for the first nine months and third quarter of 2005 and 2004 as if we had used a fair-value-based method under SFAS 123 to measure compensation expense for employee stock incentive awards. The actual effects of SFAS 123R will depend on numerous factors, including the amounts of share-based payments granted in the future, the method used to value future share-based payments to our employees and estimated forfeiture rates. We estimate recognizing additional pre-tax compensation expense of approximately $0.04 and $0.03 per diluted share, for the years ended December 31, 2006 and 2007, respectively, based on the number of options outstanding at September 30, 2005, and assuming that we continue to issue stock options under the Plan consistent with our current policy and procedures.

SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, whereas current accounting rules prescribe that the benefits be reported as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

RENT-A-CENTER, INC. AND SUBSIDIARIES

RENT-A-CENTER, INC. AND SUBSIDIARIES

RENT-A-CENTER, INC. AND SUBSIDIARIES

On February 7, 2003, we, along with certain officer and director defendants, filed a motion to dismiss the matter as well as a motion to transfer venue. In addition, our outside directors named in the matter separately filed a motion to dismiss the Securities Act claims on statute of limitations grounds. On February 19, 2003, the underwriter defendants also filed a motion to dismiss the matter. The plaintiffs filed response briefs to these motions, to which we replied on May 21, 2003. A hearing was held by the court on June 26, 2003 to hear each of these motions.

On September 30, 2003, the court granted our motion to dismiss without prejudice, dismissed without prejudice the outside directors’ and underwriters’ separate motions to dismiss and denied our motion to transfer venue. In its order on the motions to dismiss, the court granted the lead plaintiffs leave to replead the case within certain parameters.

On July 7, 2004, the plaintiffs again repled their claims by filing a third amended consolidated complaint, raising allegations of similar violations against the same parties generally based upon alleged facts not previously asserted. We, along with certain officer and director defendants and the underwriter defendants, filed motions to dismiss the third amended consolidated complaint on August 23, 2004. A hearing on the motions was held on April 14, 2005. On July 25, 2005, the court ruled on these motions, dismissing with prejudice the claims against our outside directors as well as the underwriter defendants, but denying our motion to dismiss. In evaluating this motion to dismiss, the court was required to view the pleadings in the light most favorable to the plaintiffs and to take the plaintiffs’ allegations as true. On August 18, 2005, we filed a motion to certify the dismissal order for an interlocutory appeal, which is currently pending.

We continue to believe the plaintiffs’ claims in this matter are without merit and intend to vigorously defend ourselves as this matter progresses. However, we cannot assure you that we will be found to have no liability in this matter.

Carey Duron, et. al. v. Rent-A-Center, Inc. This matter is a putative class action filed on August 29, 2003 in the District Court of Jefferson County, Texas by Carey Duron, who alleges we violated certain provisions of the Texas Business and Commerce Code relating to late fees charged by us under our rental purchase agreements in Texas. In the complaint, Duron alleges that her contract provided for a percentage late fee greater than that permitted by Texas law, that she was charged and paid a late fee in excess of the amount permitted by Texas law and that we had a policy and practice of assessing and collecting late fees in excess of that allowed by Texas law. Duron has not alleged specific damages in the complaint, but seeks to recover actual damages, statutory damages, interest, reasonable attorney’s fees and costs of court.

When this matter was filed, we promptly investigated Duron’s allegations, including the formula we use to calculate late fees in Texas. While we do not believe the formula utilized by us during this time period violated Texas law, in late 2003, we sent written notice to approximately 29,500 of our Texas customers for whom we had records and who were potentially adversely impacted by our calculation. We also refunded approximately $37,000 in the aggregate to the customers we could locate. In taking these measures, we believe we complied with the curative measures provided for under the Texas statute. We also reprogrammed our computer system in Texas to modify the formula by which late fees are calculated.

Under the Texas statute, a consumer damaged by a violation is entitled to recover actual damages, statutory damages equal to twenty-five percent of an amount equal to the total amount of payments required to obtain ownership of the merchandise involved (but not less than $250 nor more than $1,000), reasonable attorney’s fees and court costs. With respect to the approximately 29,500 Texas customers for whom we have records (representing approximately two years of the recently certified class), we believe that twenty-five percent of the total amount of payments to obtain ownership (the maximum percentage applicable to statutory damages) under those rental purchase agreements was approximately $600 per agreement on average.

On November 26, 2003, we filed a motion for summary judgment in this matter. On December 4, 2003, Duron filed her motion for class certification. On March 11, 2004, we were notified that the court denied our summary judgment motion and granted Duron’s motion for class certification. The certified class included our customers in Texas from August 29, 1999 through March 5, 2004 who were charged and paid a late fee in excess of the amount permitted by Texas law. We appealed the certification order to the Court of Appeals, which we were entitled to do as a matter of right under applicable Texas law. On October 28, 2004, the Court of Appeals reversed the trial court’s certification order and remanded the case back to the trial court. Duron did not perfect an appeal to the Texas Supreme Court, as she was entitled to do, and she has not taken any further action in the case since the decision by the Court of Appeals in October 2004.

We believe the claims in Duron’s complaint are unfounded and that we have meritorious defenses to the allegations made. Although we intend to vigorously defend ourselves in this case, we cannot assure you that we will be found to have no liability in this matter.

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California Attorney General Inquiry. During the second quarter of 2004, we received an inquiry from the California Attorney General regarding our business practices in California with respect to our cash prices and our membership program. We met with representatives of the Attorney General’s office during the first quarter of 2005 and provided additional information with respect to our membership program as requested. We are continuing to discuss these issues with the Attorney General’s office.

State Wage and Hour Class Actions

We are subject to various actions filed against us in the states of Oregon, California and Washington alleging we violated the wage and hour laws of such states. As of September 30, 2005, we operated 29 stores in Oregon, 149 stores in California and 46 stores in Washington.

Rob Pucci, et. al. v. Rent-A-Center, Inc; Jeremy Chess et. al. v. Rent-A-Center, Inc. et. al.; Clemmons et. al. v. Rent-A-Center, Inc., et. al.. On August 20, 2001, the putative class action Rob Pucci, et. al. v. Rent-A-Center, Inc. was filed in state court in Multnomah County, Oregon alleging we violated various provisions of Oregon state law regarding overtime, lunch and work breaks, that we failed to pay all wages due to our Oregon employees, and various contract claims that we promised but failed to pay overtime. Pucci seeks to represent a class of all present and former executive assistants, inside/outside managers and account managers employed by us within the six year period prior to the filing of the complaint as to the contract claims, and three years as to the statutory claims, and seeks class certification, payments for all unpaid wages under Oregon law, statutory and civil penalties, costs and disbursements, pre- and post-judgment interest in the amount of 9% per annum and attorneys fees.

On July 25, 2002, the plaintiffs filed a motion for class certification and on July 31, 2002, we filed our motion for summary judgment. On January 15, 2003, the court orally granted our motion for summary judgment in part, ruling that the plaintiffs were prevented from recovering overtime payments at the rate of “time and a half,” but stated that the plaintiffs may recover “straight-time” to the extent plaintiffs could prove purported class members worked in excess of forty hours in a work week but were not paid for such time worked. The court denied our motion for summary judgment on the remaining claims. We strongly disagree with the court’s rulings against our positions and requested that the court grant us interlocutory appeal on those matters.

The plaintiffs subsequently filed a motion for summary judgment seeking to resolve certain factual issues related to the purported class, which was denied on July 1, 2003. On October 10, 2003, the court issued an opinion letter stating that it would certify a class and not permit an interlocutory appeal, and issued its written order to that effect on December 9, 2003. On June 15, 2004, notice to the class was distributed advising them of their right to opt out of the class. We have not been advised that any class member has opted out of the class.

On January 31, 2005, the plaintiffs filed a partial motion for summary judgment regarding their allegation that we failed to timely pay wages on termination. On February 25, 2005, the court denied our motion to compel arbitration with respect to class members that signed agreements to arbitrate claims against us. In addition, the court rejected our proposal to enter an order permitting interlocutory appeal.

On March 17, 2005, Pucci class members Jeremy Chess and Chad Clemmons filed an amended class action complaint entitled Jeremy Chess et al. v. Rent-A-Center, Inc. et al , alleging similar claims as the plaintiffs in Pucci and seeking unspecified statutory and contractual damages and penalties, as well as injunctive relief. The Chess plaintiffs seek to represent a class of all present and former executive assistants, inside/outside managers and account managers employed by us within the six year period prior to the filing of the complaint as to the contract claims, and three years as to the statutory claims. On April 15, 2005, we filed pleadings removing the case to the federal court for the District of Oregon under the newly enacted Class Action Fairness Act of 2005. The Chess plaintiffs are represented by the same attorneys as the Pucci plaintiffs.

On June 23, 2005, we reached an agreement in principle to settle the claims in Pucci and Chess . Under the terms of the prospective settlement, we agreed to pay $1.75 million to settle total class claims, provided that the class does not exceed 650 individuals. If the class exceeds 650 individuals, we agreed to pay an additional $750.00 per individual class member over 650. On October 6, 2005, plaintiffs’ counsel in the Pucci and Chess matters filed a new class action complaint in Federal court entitled Clemmons et al v. Rent-A-Center Inc., et al , alleging substantially similar claims and seeking similar damages as in Pucci and Chess through the date of filing. The parties propose to use the Clemmons case to consolidate the Pucci and

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Chess claims, and facilitate final approval, administration and distribution of the proposed settlement. The settlement has been documented and preliminarily approved by the Pucci/Chess and Clemmons courts.

The terms of the settlement are subject to obtaining final approval from the Pucci/Chess and Clemmons courts. Notice of the settlement is expected to be mailed to class members on or about November 15, 2005. Objections to the settlement are due on December 15, 2005, and the final approval hearing is scheduled for January 20, 2006. We expect to fund the entire settlement amount within 14 days following final approval by the Clemmons court. While we believe that the terms of this prospective settlement are fair, there can be no assurance that the settlement, if completed, will be approved by the court in its present form. To account for the prospective settlement, as well as our own attorneys’ fees, we have accrued an aggregate of $1.9 million as of September 30, 2005.

Jeremy Burdusis, et al. v. Rent-A-Center, Inc., et al./Israel French, et al. v. Rent-A-Center, Inc . These matters pending in Los Angeles, California were filed on October 23, 2001, and October 30, 2001, respectively, and allege similar violations of the wage and hour laws of California as those in Pucci . The same law firm seeking to represent the purported class in Pucci is seeking to represent the purported class in Burdusis . The Burdusis and French proceedings are pending before the same judge in California. On March 24, 2003, the Burdusis court denied the plaintiffs’ motion for class certification in that case, which we view as a favorable development in that proceeding. On April 25, 2003, the plaintiffs in Burdusis filed a notice of appeal of that ruling, and on May 8, 2003, the Burdusis court, at our request, stayed further proceedings in Burdusis and French pending the resolution on appeal of the court’s denial of class certification in Burdusis . In June 2004, the Burdusis plaintiffs filed their appellate brief. Our response brief was filed in September 2004, and the Burdusis plaintiffs filed their reply in October 2004. On February 9, 2005, the California Court of Appeals reversed and remanded the trial court’s denial of class certification in Burdusis and directed the trial court to reconsider its ruling in light of two other recent appellate court decisions, including the opinions of the California Supreme Court in Sav-On Drugs Stores, Inc. v. Superior Court , and of the California appeals court in Bell v. Farmers Insurance Exchange . After remand, the plaintiffs filed a motion with the trial court seeking to remove from the case the trial court judge who previously denied their motion for class certification. The trial court denied the motion. In response, plaintiffs’ filed a petition for writ of mandate with the California Court of Appeals requesting review of the trial court’s decision. The California Court of Appeals heard oral arguments in this matter on August 29, 2005, and ruled against the plaintiffs, denying the requested relief. The case is now being returned to the trial court as previously ordered.

On October 30, 2003, the plaintiffs’ counsel in Burdusis and French filed a new non-class lawsuit in Orange County, California entitled Kris Corso, et al. v. Rent-A-Center, Inc . The plaintiffs’ counsel later amended this complaint to add additional plaintiffs, totaling approximately 339 individuals. The claims made are substantially the same as those in Burdusis . On January 16, 2004, we filed a demurrer to the complaint, arguing, among other things, that the plaintiffs in Corso were misjoined. On February 19, 2004, the court granted our demurrer on the misjoinder argument, with leave for the plaintiffs to replead. On March 8, 2004, the plaintiffs filed an amended complaint in Corso , increasing the number of plaintiffs to approximately 400. The claims in the amended complaint are substantially the same as those in Burdusis . We filed a demurrer with respect to the amended complaint on April 12, 2004, which the court granted on May 6, 2004. However, the court allowed the plaintiffs to again replead the action on a representative basis, which they did on May 26, 2004. We subsequently filed a demurrer with respect to the newly repled action, which the court granted on August 12, 2004. The court subsequently stayed the Corso matter pending the outcome of the Burdusis matter. On March 16, 2005, the court lifted the stay and on April 12, 2005, we answered the amended complaint. Discovery is now proceeding.

Kevin Rose, et al. v. Rent-A-Center, Inc. et al. This matter pending in Clark County, Washington was filed on June 26, 2001, and alleges similar violations of the wage and hour laws of Washington as those in Pucci . The same law firm seeking to represent the purported class in Pucci is seeking to represent the purported class in this matter. On May 14, 2003, the Rose court denied the plaintiffs’ motion for class certification in that case. On June 3, 2003, the plaintiffs in Rose filed a notice of appeal. On September 8, 2003, the Commissioner appointed by the Court of Appeals denied review of the Rose court decision. On October 10, 2003, the Rose plaintiffs filed a motion seeking to modify the Commissioner’s ruling, which was denied by the Court of Appeals on November 26, 2003. Following the denial by the Court of Appeals, the plaintiffs’ counsel filed 14 county-wide putative class actions in Washington with substantially the same claims as in Rose . In April 2005, the plaintiffs’ counsel filed another putative county-wide lawsuit, bringing the total to 15. The purported classes in these county-wide class actions range from approximately 20 individuals to approximately 100 individuals. Subsequently, we filed motions to dismiss and/or stay the class allegations in each of the county-wide actions, and we also filed motions for summary judgment in various counties with respect to the individual claims of some of the plaintiffs. Following disposition of these motions by the applicable courts, approximately 13 individual plaintiffs and class representatives remain with respect

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to the claims made in 12 counties. Ten of these county-wide claims are now proceeding as putative county-wide class actions and two are proceeding on an individual plaintiff basis. Certain plaintiffs have appealed some of the orders granting summary judgment. The plaintiffs in eight of the 12 counties have filed motions to certify a county-wide class. We intend to vigorously oppose class certification.

We also filed motions to compel arbitration with respect to 20 individual purported plaintiffs and class representatives in 10 counties, all of which were subsequently granted. Certain plaintiffs have appealed one of these orders compelling arbitration. The 20 arbitration plaintiffs filed separate putative nationwide class arbitration demands. In response, we filed motions to clarify the respective county courts’ orders compelling arbitration. Specifically, we asked each county court that previously struck all class allegations to make clear that the arbitration plaintiffs in those counties could not pursue any class claims, and we asked each county court in those counties that allowed plaintiffs to plead putative county-wide class claims, to make clear that such plaintiffs could only pursue county-wide claims. Three courts that granted our motions to compel arbitration and had previously struck all class allegations granted our motions and ruled that the plaintiffs could not pursue any class arbitration claims. Five courts ruled that the arbitration plaintiffs could only pursue county-wide class arbitration claims, and two of the county courts refused to limit the arbitration plaintiffs’ ability to pursue class arbitration demands. We intend to vigorously oppose these class arbitration demands, including vigorously challenging the ability of the plaintiffs to pursue in arbitration, on a putative nation-wide class basis, claims which were previously premised on purported violations of Washington state law.

Although the wage and hour laws and class certification procedures of Oregon, California and Washington contain certain differences that could cause differences in the outcome of the pending litigation in these states, we believe the claims of the purported classes involved in each are without merit and we intend to vigorously oppose each of these cases. We cannot assure you, however, that we will be found to have no liability in these matters.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

As of September 30, 2005, we are authorized to repurchase up to $400.0 million in aggregate purchase price of our common stock under our common stock repurchase program. As of September 30, 2005, we had repurchased $321.6 million in aggregate purchase price of our common stock under our stock repurchase program. In the third quarter of 2005, we effected the following repurchases of our common stock:

RENT-A-CENTER, INC. AND SUBSIDIARIES

RENT-A-CENTER, INC. AND SUBSIDIARIES