10-Q 1 rac-331201410xq.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)

ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014
or

¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 0-25370
Rent-A-Center, Inc.
(Exact name of registrant as specified in its charter)

Delaware |  | 45-0491516
(State or other jurisdiction of |  | (I.R.S. Employer
incorporation or organization) |  | Identification No.)

5501 Headquarters Drive
Plano, Texas 75024
(Address, including zip code of registrant’s
principal executive offices)
Registrant’s telephone number, including area code: 972-801-1100
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 ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ý |  |  | Accelerated filer | ¨
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) |  | Smaller reporting company | ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 21, 2014:

Class |  | Outstanding
Common stock, $.01 par value per share |  | 52,795,549

TABLE OF CONTENTS

|  | Page No.
PART I. | FINANCIAL INFORMATION |
Item 1. | Consolidated Financial Statements |
| Consolidated Statements of Earnings for the three months ended March 31, 2014 and 2013 | 1
| Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013 | 2
| Consolidated Balance Sheets as of March 31, 2014, and December 31, 2013 | 3
| Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 | 4
| Notes to Consolidated Financial Statements | 5
Item 1A. | Risk Factors | 13
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28
Item 4. | Controls and Procedures | 29
PART II. | OTHER INFORMATION |
Item 6. | Exhibits | 29
SIGNATURES |

i

Item 1. Consolidated Financial Statements.
RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

| Three Months Ended March 31,
| 2014 |  | 2013
(In thousands, except per share data) | Unaudited
Revenues |
Store |  |  |
Rentals and fees | $ | 694,168 |  |  | $ | 673,604 |
Merchandise sales | 108,061 |  |  | 113,573 |
Installment sales | 18,356 |  |  | 17,127 |
Other | 4,258 |  |  | 4,760 |
Total store revenues | 824,843 |  |  | 809,064 |
Franchise |  |  |
Merchandise sales | 7,324 |  |  | 8,833 |
Royalty income and fees | 1,579 |  |  | 1,384 |
Total revenues | 833,746 |  |  | 819,281 |
Cost of revenues |  |  |
Store |  |  |
Cost of rentals and fees | 177,870 |  |  | 167,919 |
Cost of merchandise sold | 79,617 |  |  | 86,299 |
Cost of installment sales | 6,382 |  |  | 5,969 |
Total cost of store revenues | 263,869 |  |  | 260,187 |
Franchise cost of merchandise sold | 7,000 |  |  | 8,416 |
Total cost of revenues | 270,869 |  |  | 268,603 |
Gross profit | 562,877 |  |  | 550,678 |
Operating expenses |  |  |
Salaries and other expenses | 457,630 |  |  | 432,191 |
General and administrative expenses | 44,737 |  |  | 38,813 |
Amortization and write-down of intangibles | 747 |  |  | 890 |
| 503,114 |  |  | 471,894 |
Operating profit | 59,763 |  |  | 78,784 |
Finance charges from refinancing | 1,946 |  |  | — |
Interest expense | 11,401 |  |  | 8,001 |
Interest income | (236 | ) |  | (293 | )
Earnings before income taxes | 46,652 |  |  | 71,076 |
Income tax expense | 17,795 |  |  | 24,943 |
NET EARNINGS | $ | 28,857 |  |  | $ | 46,133 |
Basic earnings per common share | $ | 0.55 |  |  | $ | 0.80 |
Diluted earnings per common share | $ | 0.54 |  |  | $ | 0.79 |
Cash dividends declared per common share | $ | 0.23 |  |  | $ | 0.21 |

See accompanying notes to consolidated financial statements
1

RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| Three Months Ended March 31,
| 2014 |  | 2013
(In thousands) | Unaudited
Net earnings | $ | 28,857 |  |  | $ | 46,133 |
Other comprehensive income (loss): |  |  |
Foreign currency translation adjustments | (97 | ) |  | 1,623 |
Total other comprehensive income (loss) | (97 | ) |  | 1,623 |
COMPREHENSIVE INCOME | $ | 28,760 |  |  | $ | 47,756 |

See accompanying notes to consolidated financial statements.
2

RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

| March 31, 2014 |  | December 31, 2013
(In thousands, except share and par value data) | Unaudited |  |
ASSETS |  |  |
Cash and cash equivalents | $ | 81,012 |  |  | $ | 42,274 |
Receivables, net of allowance for doubtful accounts of $3,610 and $3,700 in 2014 in 2013, respectively | 57,871 |  |  | 58,686 |
Prepaid expenses and other assets | 80,739 |  |  | 78,471 |
Rental merchandise, net |  |  |
On rent | 892,341 |  |  | 914,618 |
Held for rent | 203,272 |  |  | 210,450 |
Merchandise held for installment sale | 3,730 |  |  | 4,038 |
Property assets, net of accumulated depreciation of $449,638 and $433,935 in 2014 and 2013, respectively | 339,801 |  |  | 336,498 |
Goodwill, net | 1,364,081 |  |  | 1,364,549 |
Other intangible assets, net | 8,216 |  |  | 8,969 |
| $ | 3,031,063 |  |  | $ | 3,018,553 |
LIABILITIES |  |  |
Accounts payable – trade | $ | 122,534 |  |  | $ | 120,166 |
Accrued liabilities | 372,394 |  |  | 315,235 |
Deferred income taxes | 298,957 |  |  | 323,326 |
Senior debt | 325,000 |  |  | 366,275 |
Senior notes | 550,000 |  |  | 550,000 |
| 1,668,885 |  |  | 1,675,002 |
COMMITMENTS AND CONTINGENCIES |  |  |  |
STOCKHOLDERS’ EQUITY |  |  |
Common stock, $.01 par value; 250,000,000 shares authorized; 109,158,738 and 109,108,218 shares issued in 2014 and 2013, respectively | 1,091 |  |  | 1,091 |
Additional paid-in capital | 804,205 |  |  | 802,124 |
Retained earnings | 1,904,645 |  |  | 1,888,002 |
Treasury stock at cost, 56,369,752 shares in 2014 and 2013 | (1,347,677 | ) |  | (1,347,677 | )
Accumulated other comprehensive income (loss) | (86 | ) |  | 11 |
| 1,362,178 |  |  | 1,343,551 |
| $ | 3,031,063 |  |  | $ | 3,018,553 |

See accompanying notes to consolidated financial statements.
3

RENT-A-CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

| Three Months Ended
| 2014 |  | 2013
(In thousands) | Unaudited
Cash flows from operating activities |  |  |
Net earnings | $ | 28,857 |  |  | $ | 46,133 |
Adjustments to reconcile net earnings to net cash provided by operating activities |  |  |
Depreciation of rental merchandise | 169,843 |  |  | 160,983 |
Bad debt expense | 3,664 |  |  | 2,897 |
Stock-based compensation expense | 1,472 |  |  | 2,129 |
Depreciation of property assets | 19,139 |  |  | 18,473 |
Loss on sale or disposal of property assets | 1,487 |  |  | 1,367 |
Amortization of intangibles | 747 |  |  | 715 |
Amortization of financing fees | 870 |  |  | 691 |
Finance charges from refinancing | 1,946 |  |  | — |
Deferred income taxes | (24,370 | ) |  | 969 |
Excess tax benefit related to stock awards | (20 | ) |  | (1,136 | )
Changes in operating assets and liabilities, net of effects of acquisitions |  |  |
Rental merchandise | (135,407 | ) |  | (187,583 | )
Receivables | (2,849 | ) |  | (135 | )
Prepaid expenses and other assets | (4,609 | ) |  | 6,635 |
Accounts payable – trade | 2,368 |  |  | 32,997 |
Accrued liabilities | 56,922 |  |  | 28,329 |
Net cash provided by operating activities | 120,060 |  |  | 113,464 |
Cash flows from investing activities |  |  |
Purchase of property assets | (23,108 | ) |  | (19,637 | )
Proceeds from sale of property assets | 7 |  |  | 8 |
Acquisitions of businesses | (5,369 | ) |  | (2,079 | )
Net cash used in investing activities | (28,470 | ) |  | (21,708 | )
Cash flows from financing activities |  |  |
Purchase of treasury stock | — |  |  | (17,419 | )
Exercise of stock options | 632 |  |  | 3,702 |
Excess tax benefit related to stock awards | 20 |  |  | 1,136 |
Proceeds from debt | 176,580 |  |  | 95,225 |
Repayments of debt | (217,855 | ) |  | (141,440 | )
Dividends paid | (12,147 | ) |  | (12,187 | )
Net cash used in financing activities | (52,770 | ) |  | (70,983 | )
Effect of exchange rate changes on cash | (82 | ) |  | 394 |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 38,738 |  |  | 21,167 |
Cash and cash equivalents at beginning of period | 42,274 |  |  | 61,087 |
Cash and cash equivalents at end of period | $ | 81,012 |  |  | $ | 82,254 |

Noncash Financing Activities:
During March 2014, we incurred $225.0 million of term loans and $100.0 million of revolving debt when we refinanced $187.5 million of existing term loans and $140.0 million of existing revolving debt as discussed further in Note 3. The difference of $2.5 million was repaid in cash and is included in repayments of debt in the statement above.
See accompanying notes to consolidated financial statements.
4

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies and Nature of Operations.
The interim consolidated financial statements of Rent-A-Center, Inc. included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“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 these financial statements be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2013. 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 of Rent-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 to Rent-A-Center, Inc., the parent, and references to “we,” “us” and “our” refer to the consolidated business operations of Rent-A-Center and any or all of its direct and indirect subsidiaries. We report four operating segments: Core U.S., Acceptance Now, Mexico (formerly reported as International, see Note 8 to the consolidated financial statements) and Franchising.
Our Core U.S. segment consists of company-owned rent-to-own stores in the United States, Canada and Puerto Rico that lease household durable goods to customers on a rent-to-own basis. Our stores in Canada operate under the name “Rent-A-Centre.” We also offer merchandise on an installment sales basis in certain of our stores under the names “Get It Now” and “Home Choice.”
Our Acceptance Now segment generally offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer of household durable goods through kiosks located within such retailers’ locations.
Our Mexico segment consists of our company-owned rent-to-own stores in Mexico that lease household durable goods to customers on a rent-to-own basis.
Rent-A-Center Franchising International, Inc., an indirect wholly owned subsidiary of Rent-A-Center, is a franchisor of rent-to-own stores. Our Franchising segment’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 transaction. The balance of our Franchising segment’s revenue is generated primarily from royalties based on franchisees’ monthly gross revenues.
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. 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-based method similar to the units of production method. We depreciate merchandise that is held for rent for at least 180 consecutive days using the straight-line method over a period generally not to exceed 18 months.
Rental merchandise which is damaged and inoperable is expensed when such impairment occurs. If a customer does not return the merchandise or make payment, the remaining book value of the rental merchandise associated with delinquent accounts is generally charged off on or before the 90 th day following the time the account became past due in the Core U.S. and International segments, and on or before the 150 th day in the Acceptance Now segment. 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.
Correction of Immaterial Errors
During the fourth quarter of 2013, we identified errors in accounting for our estimates for rental merchandise reserves and for the allowance for doubtful accounts, resulting in an immaterial overstatement of on rent merchandise and understatements of held for rent merchandise and receivables which affected periods beginning prior to 2011 through December 31, 2013. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the errors from qualitative and quantitative perspectives, and concluded the errors were immaterial to the prior periods. The errors resulted in an understatement of salaries and other expenses of $0.5 million for the three-month period ended March 31, 2013. The understatement of salaries and other expenses discussed above, adjusted for the related income tax impact, resulted in an overstatement of net earnings of $0.3 million for the three-month period ended March 31, 2013. Due to the immaterial nature of the error correction, we revised our historical financial statements based on the amounts discussed above for 2013 herein.
5

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent losses 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.
New Accounting Pronouncements. In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB Accounting Standards Codification Topic 740, Income Taxes. This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We adopted this standard prospectively effective January 1, 2014, and it did not have a material impact on our 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 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.
2. Intangible Assets and Acquisitions.
Amortizable intangible assets consist of the following (in thousands):

|  |  | March 31, 2014 |  | December 31, 2013
| Avg. Life (years) |  | Gross Carrying Amount |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
Non-compete agreements | 3 |  | $ | 6,337 |  |  | $ | 6,123 |  |  | $ | 6,337 |  |  | $ | 6,102 |
Customer relationships | 2 |  | 74,785 |  |  | 72,475 |  |  | 74,799 |  |  | 71,899 |
Vendor relationships | 11 |  | 7,538 |  |  | 1,846 |  |  | 7,538 |  |  | 1,704 |
Total |  |  | $ | 88,660 |  |  | $ | 80,444 |  |  | $ | 88,674 |  |  | $ | 79,705 |

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
2014 | $ | 1,957 |
2015 | 1,493 |
2016 | 636 |
2017 | 568 |
2018 | 445 |
Thereafter | 3,117 |
Total | $ | 8,216 |

At March 31, 2014, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was approximately $1,309.7 million and $54.4 million, respectively. At December 31, 2013, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was approximately $1,310.1 million and $54.4 million, respectively.
6

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the changes in recorded goodwill follows (in thousands):

| Three Months Ended |  | Year Ended
| March 31, 2014 |  | December 31, 2013
Balance as of January 1, | $ | 1,364,549 |  |  | $ | 1,344,665 |
Additions from acquisitions | — |  |  | 28,282 |
Goodwill impairments and write-offs related to stores sold or closed | — |  |  | (9,038 | )
Post purchase price allocation adjustments | (468 | ) |  | 640 |
Balance as of the end of the period | $ | 1,364,081 |  |  | $ | 1,364,549 |

3. Senior Debt.
On March 19, 2014, we entered into a Credit Agreement (the "Credit Agreement") among the Company, the several lenders from time to time parties to the Credit Agreement, Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, National Association and SunTrust Bank, as syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement represents a refinancing of our senior secured debt outstanding under our prior credit agreement, the Fourth Amended and Restated Credit Agreement, dated as of May 28, 2003, as amended and restated as of July 14, 2011, and as amended by the First Amendment dated as of April 13, 2012, among the Company, the several banks and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent (as amended, the "Prior Credit Agreement"). The Credit Agreement provides for a new $900 million senior credit facility consisting of $225 million in term loans (the "Term Loans") and a $675 million revolving credit facility (the "Revolving Facility"). The Term Loans are scheduled to mature on March 19, 2021, and the Revolving Facility has a scheduled maturity of March 19, 2019.
Also on March 19, 2014, we borrowed $225 million in Term Loans and $100 million under the Revolving Facility and utilized the proceeds to repay our prior senior secured debt outstanding under the Prior Credit Agreement. The Term Loans will be repayable in consecutive quarterly installments commencing on June 30, 2014, with each installment to be paid in an aggregate principal amount equal to 0.25% of the aggregate principal amount of the Term Loans, with a final installment equal to the remaining principal balance of the Term Loans due on March 19, 2021.
The amounts outstanding under the Term Loans and Revolving Facility at March 31, 2014, were $225.0 million and $100.0 million, respectively. Under the Prior Credit Agreement the amounts outstanding under the term loan and revolving credit facility at December 31, 2013, were $187.5 million and $160.5 million, respectively.
The full amount of the Revolving Facility may be used for the issuance of letters of credit, of which $104.7 million had been so utilized as of March 31, 2014, and at which date $470.3 million was available.
Borrowings under the Revolving Facility bear interest at varying rates equal to either the Eurodollar rate plus 1.50% to 2.75%, or the ABR rate plus 0.50% to 1.75%, at our election. The margins on the Eurodollar rate and on the ABR rate for borrowings under the Revolving Facility, which were 2.25% and 1.25%, respectively, at March 31, 2014, may fluctuate based upon an increase or decrease in our consolidated total leverage ratio as defined by a pricing grid included in the Credit Agreement. The margins on the Eurodollar rate and on the ABR rate for Term Loans are 3.00% and 2.00%, respectively, but may also fluctuate in the event the all-in pricing for any subsequent incremental Term Loan exceeds the all-in pricing for prior Term Loans by more than 0.50% per annum. A commitment fee equal to 0.30% to 0.50% of the unused portion of the Revolving Facility is payable quarterly, and fluctuates dependent upon an increase or decrease in our consolidated total leverage ratio. The commitment fee at March 31, 2014, is equal to 0.45% of the unused portion of the Revolving Facility.
Our borrowings under the Credit Agreement are, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property, and are also secured by a pledge of the capital stock of our U.S. subsidiaries.
The Credit Agreement also permits us to increase the amount of the Term Loans and/or the Revolving Facility from time to time on up to three occasions, in an aggregate amount of no more than $250 million, provided that we are not in default at the time and have obtained the consent of the administrative agent and the lenders providing such increase.
Subject to a number of exceptions, the Credit Agreement contains, without limitation, covenants that generally limits our ability and the ability of our subsidiaries to:

• | incur additional debt;

• | repurchase capital stock, 6.625% notes and 4.75% notes and/or pay cash dividends (subject to a restricted payments basket under which approximately $80 million is available);

7

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

• | incur liens or other encumbrances;

• | merge, consolidate or sell substantially all property or business;

• | sell, lease or otherwise transfer assets (other than in the ordinary course of business);

• | make investments or acquisitions (unless they meet financial tests and other requirements); or

• | enter into an unrelated line of business.

The Credit Agreement requires us to comply with several financial covenants, including: (i) a consolidated total leverage ratio of no greater than 4.50:1 from the quarter ended March 31, 2014, to the quarter ended September 30, 2015, 4.25:1 from the quarter ended December 31, 2015, to the quarter ended September 30, 2016, and 4.00:1 thereafter; (ii) a consolidated senior secured leverage ratio of no greater than 2.75:1; and (iii) a consolidated fixed charge coverage ratio of no less than 1.50:1 from the quarter ended March 31, 2014, to December 31, 2015, and 1.75:1 thereafter. The table below shows the required and actual ratios under the Credit Agreement calculated as of March 31, 2014:

| Required Ratio |  | Actual Ratio
Consolidated total leverage ratio | No greater than |  | 4.50:1 |  | 2.59:1
Consolidated senior secured leverage ratio | No greater than |  | 2.75:1 |  | 0.85:1
Consolidated fixed charge coverage ratio | No less than |  | 1.50:1 |  | 1.96:1

These financial covenants, as well as the related components of their computation, are defined in the Credit Agreement, which is included as an exhibit to our Current Report on Form 8-K dated as of March 19, 2014. In accordance with the Credit Agreement, the consolidated total leverage ratio was calculated by dividing the consolidated funded debt outstanding at March 31, 2014 ($819.0 million) by consolidated EBITDA for the 12-month period ending March 31, 2014 ($315.7 million). For purposes of the covenant calculations, (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 non-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 consolidated senior secured leverage ratio was calculated pursuant to the Credit Agreement by dividing the consolidated senior secured debt outstanding at March 31, 2014 ($269.0 million) by consolidated EBITDA for the 12-month period ending March 31, 2014 ($315.7 million). For purposes of the covenant calculation, “consolidated senior secured debt” is generally defined as the aggregate principal amount of consolidated funded debt that is then secured by liens on property or assets of the Company or its subsidiaries.
The consolidated fixed charge coverage ratio was calculated pursuant to the Credit Agreement by dividing consolidated EBITDA for the 12-month period ending March 31, 2014, and to the extent reducing consolidated net earnings for such period, consolidated lease expense ($558.8 million), by consolidated fixed charges for the 12-month period ending March 31, 2014 ($285.4 million). For purposes of the covenant calculation, “consolidated fixed charges” is defined as the sum of consolidated interest expense and consolidated lease expense.
Events of default under the Credit Agreement 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 Credit Agreement would occur if a change of control occurs. This is defined to include situations where a third party becomes the beneficial owner of 35% or more of our voting stock or certain changes in the composition of Rent-A-Center’s Board of Directors occur. An event of default would also occur if one or more judgments were entered against us of $50.0 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. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities.
In addition to the senior credit facilities discussed above, we maintain a $20.0 million unsecured, revolving line of credit with INTRUST Bank, N.A. to facilitate cash management. The outstanding balance of this line of credit was $0 and $18.3 million at March 31, 2014, and December 31, 2013, respectively.
8

RENT-A-CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Subsidiary Guarantors – Senior Notes.
Senior Notes Due 2020. On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our Prior Credit Agreement. The remaining net proceeds were used to repurchase shares of our common stock.
Senior Notes Due 2021. On May 2, 2013, we issued $250.0 million in senior unsecured notes due May 2021, bearing interest at 4.75%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repurchase shares of our common stock under a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our Prior Credit Agreement.
The indentures governing the 6.625% notes and the 4.75% notes are substantially similar. Each indenture contains covenants that limit our ability to:

• | incur additional debt;

• | sell assets or our subsidiaries;

• | grant liens to third parties;

• | pay cash divide nds or repurchase stock (subject to a restricted payment basket under which approximately $80 million is available); and

• | engage in a merger or sell substantially all of our assets.

Events of default under each 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 6.625% 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 6.625% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 6.625% 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.
The 4.75% notes may be redeemed on or after May 1, 2016, at our option, in whole or in part, at a premium declining from 103.563%. The 4.75% notes may be redeemed on or after May 1, 2019, at our option, in whole or in part, at par. The 4.75% notes also require that upon the occurrence of a change of control (as defined in the 2013 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.
Any mandatory repurchase of the 6.625% notes and/or the 4.75% notes would trigger an event of default under our Credit Agreement. We are not required to maintain any financial ratios under either of the indentures.
Rent-A-Center and its subsidiary guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 6.625% notes and the 4.75% 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. 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. We are no longer subject to U.S. federal, state, foreign and local income tax examinations by tax authorities for years before 2010. The appeals process with the Internal Revenue Service (IRS) Office of Appeals for the years 2001 through 2007 has been completed. We reached agreement on all issues except one issue with respect to the 2003 tax year, an issue which occurs in 2004 through 2007 taxable years as well. This matter was heard by the United States Tax Court at trial during November 2011. A favorable decision was issued by the Court on January 14, 2014, and is subject to appeal by the IRS. Our 2010 U.S. federal income tax return has been selected for a limited scope audit and we are also under examination in various states. We do not anticipate that adjustments, if any, regarding the 2003 through 2007 disputed issue, the 2010 federal exam or the various 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 provide for uncertain tax positions and related interest and adjust our unrecognized tax benefits and accrued interest in the normal course of our business. At March 31, 2014, our unrecognized tax benefits were decreased by approximately $0.3 million from December 31, 2013.
We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for these non-U.S. subsidiaries was recorded in the accompanying consolidated statements of earnings.
6. Fair Value.
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. There were no changes in the methods and assumptions used in measuring fair value during the period.
At March 31, 2014, 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, 2014, and December 31, 2013, 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 Level 1 inputs. At March 31, 2014, the fair value of our 6.625% senior notes was $310.5 million, which was approximately $10.5 million above their carrying value of $300.0 million. At December 31, 2013, the fair value of our 6.625% senior notes was $316.7 million, which was approximately $16.7 million above their carrying value of $300.0 million. At March 31, 2014, the fair value of our 4.75% senior notes was $233.4 million, which was approximately $16.6 million below their carrying value of $250.0 million. At December 31, 2013, the fair value of our 4.75% senior notes was $234.7 million, which was approximately $15.3 million below their carrying value of $250.0 million
7. Stock Repurchase Plan.
Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, of up to an aggregate of $1.25 billion of Rent-A-Center common stock. We have repurchased a total o f 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million as of March 31, 2014, and December 31, 2013, respectively, under our common stock repurchase program. No shares were repurchased in the first quarter of 2014.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Segment Information.
The operating segments reported below are the segments for which separate financial information is available and for which segment results are evaluated by the chief operating decision makers. Our operating segments are organized based on factors including, but not limited to, type of business transactions, geographic location and store ownership. All operating segments offer merchandise from four basic product categories: consumer electronics, appliances, computers, furniture and accessories. On January 1, 2014, the Company realigned its reporting structure to include its 18 Canadian stores in the Core U.S. segment, which were previously reported in the International segment. These stores now report into the Core U.S. segment, and the chief operating decision makers no longer analyze their operating results as a part of the International segment. The accompanying prior-year disclosures have been revised to reflect this change, and we now refer to the segment formerly reported as "International" as "Mexico" since only that country's results are reported therein. Reportable segments and their respective operations are defined as follows.
Our Core U.S. segment primarily operates rent-to-own stores in the United States, Canada and Puerto Rico whose customers enter into weekly, semi-monthly or monthly rental purchase agreements, which renew automatically upon receipt of each payment. We retain the title to the merchandise during the term of the rental purchase agreement and ownership passes to the customer if the customer has continuously renewed the rental purchase agreement through the end of the term or exercises a specified early purchase option. This segment also includes the 45 stores operating in two states that utilize a retail model which generates installment credit sales through a retail sale transaction. Segment assets include cash, receivables, rental merchandise, property assets, goodwill and other intangible assets.
Our Acceptance Now segment operates kiosks within various traditional retailers’ locations where we generally offer the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer. The transaction offered is generally similar to that of the Core U.S. segment; however, the majority of the customers in this segment enter into monthly rather than weekly agreements. Segment assets include cash, rental merchandise, property assets, goodwill and other intangible assets.
Our Mexico segment consists of our company-owned rent-to-own stores in Mexico, and the nature of this segment’s operations and assets are the same as our Core U.S. segment.
The stores in our Franchising segment use Rent-A-Center’s, ColorTyme’s or RimTyme’s trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising’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, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and initial fees for new locations. Segment assets include cash, receivables and property assets.
We incur costs at our corporate headquarters that benefit our Core U.S., Acceptance Now and Mexico operating segments. Accordingly, we allocate such costs among these segments based on segment revenue to determine segment operating profit. Likewise, certain corporate assets used to support these operating segments, including the land and building in which the corporate headquarters are located and related property assets, cash and prepaid expenses are also allocated to these operating segments based on segment revenue. Because our Franchising segment has maintained a separate, independent corporate office, no additional corporate costs or assets have been allocated to that segment.
Segment information for the three months ended March 31, 2014 and 2013 is as follows (in thousands):

| Three Months Ended March 31, 2014
| Core U.S. |  | Acceptance Now |  | Mexico |  | Franchising |  | Total
Revenue | $ | 634,763 |  |  | $ | 174,207 |  |  | $ | 15,873 |  |  | $ | 8,903 |  |  | $ | 833,746 |
Gross profit | 456,589 |  |  | 92,907 |  |  | 11,478 |  |  | 1,903 |  |  | 562,877 |
Operating profit (loss) | 43,857 |  |  | 21,577 |  |  | (6,277 | ) |  | 606 |  |  | 59,763 |
Depreciation of property assets | 16,037 |  |  | 1,424 |  |  | 1,643 |  |  | 35 |  |  | 19,139 |
Amortization and write-down of intangibles | 605 |  |  | 142 |  |  | — |  |  | — |  |  | 747 |
Capital expenditures | 18,036 |  |  | 2,784 |  |  | 2,288 |  |  | — |  |  | 23,108 |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

| Three Months Ended March 31, 2013
| Core U.S. |  | Acceptance Now |  | Mexico |  | Franchising |  | Total
Revenue | $ | 672,408 |  |  | $ | 127,163 |  |  | $ | 9,493 |  |  | $ | 10,217 |  |  | $ | 819,281 |
Gross profit | 475,072 |  |  | 67,107 |  |  | 6,698 |  |  | 1,801 |  |  | 550,678 |
Operating profit (loss) | 67,078 |  |  | 15,650 |  |  | (4,647 | ) |  | 703 |  |  | 78,784 |
Depreciation of property assets | 16,174 |  |  | 1,089 |  |  | 1,190 |  |  | 20 |  |  | 18,473 |
Amortization and write-down of intangibles | 747 |  |  | 143 |  |  | — |  |  | — |  |  | 890 |
Capital expenditures | 15,052 |  |  | 1,940 |  |  | 2,645 |  |  | — |  |  | 19,637 |

Segment information – selected balance sheet data (in thousands): |  |  |  |  |  |
| March 31, 2014
| Core U.S. |  | Acceptance Now |  | Mexico |  | Franchising |  | Total
Rental merchandise, net |  |  |  |  |  |  |  |  |
On rent | $ | 580,767 |  |  | $ | 293,048 |  |  | $ | 18,526 |  |  | $ | — |  |  | $ | 892,341 |
Held for rent | 185,664 |  |  | 6,852 |  |  | 10,756 |  |  | — |  |  | 203,272 |
Total assets | 2,565,076 |  |  | 391,844 |  |  | 71,612 |  |  | 2,531 |  |  | 3,031,063 |

| December 31, 2013
| Core U.S. |  | Acceptance Now |  | Mexico |  | Franchising |  | Total
Rental merchandise, net |  |  |  |  |  |  |  |  |
On rent | $ | 612,517 |  |  | $ | 284,421 |  |  | $ | 17,680 |  |  | $ | — |  |  | $ | 914,618 |
Held for rent | 195,654 |  |  | 3,837 |  |  | 10,959 |  |  | — |  |  | 210,450 |
Total assets | 2,569,057 |  |  | 375,920 |  |  | 71,888 |  |  | 1,688 |  |  | 3,018,553 |

9. Stock-Based Compensation.
We recognized $1.5 million and $2.1 million in pre-tax compensation expense related to stock options and restricted stock units during the three-month periods ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014, we granted approximately 624,000 stock options, 216,000 performance-based restricted stock units and 143,000 time-vesting restricted stock units. The stock options granted were valued using a Black-Scholes pricing model with the following assumptions: an expected volatility of 25.29% to 41.41%, a risk-free interest rate of 0.51% to 2.37%, an expected dividend yield of 2.8% to 3.7% and an expected life of 2.33 to 8.33 years. The weighted-average exercise price of the options granted during the three months ended March 31, 2014, was $28.27 and the weighted-average grant-date fair value was $6.64. The restricted stock units are valued using the last trade before the day of the grant, adjusted for any provisions affecting fair value, such as the lack of dividends or dividend equivalents during the vesting period. The weighted-average grant date fair value of the restricted stock units granted during the three months ended March 31, 2014, was $23.03.
10. Litigation.
From time to time, we, along with our subsidiaries, are party to various legal proceedings arising in the ordinary course of business. We reserve for litigation loss contingencies that are both probable and reasonably estimable. We regularly monitor developments related to these legal proceedings, and review the adequacy of our legal reserves on a quarterly basis. We do not expect these losses to have a material impact on our consolidated financial statements if and when such losses are incurred.

11. | Earnings Per Common Share.

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share data):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

| Three Months Ended March 31, 2014
| Net Earnings |  | Weighted Average Shares |  | Per Share
Basic earnings per common share | $ | 28,857 |  |  | 52,795 |  |  | $ | 0.55 |
Effect of dilutive stock awards | — |  |  | 225 |  |  |
Diluted earnings per common share | $ | 28,857 |  |  | 53,020 |  |  | $ | 0.54 |

| Three Months Ended March 31, 2013
| Net Earnings |  | Weighted Average Shares |  | Per Share
Basic earnings per common share | $ | 46,133 |  |  | 57,947 |  |  | $ | 0.80 |
Effect of dilutive stock awards | — |  |  | 388 |  |  |
Diluted earnings per common share | $ | 46,133 |  |  | 58,335 |  |  | $ | 0.79 |

For the three-month periods ended March 31, 2014 and 2013, the number o f anti-dilutive stock awards that were outstanding but not included in the computation of diluted earnings per common share were 2,478,460 an d 1,302,773, respectively.
Item 1A. Risk Factors.
The risk factor below supersedes and replaces in its entirety the corresponding risk factor included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Our debt agreements impose restrictions on us which may limit or prohibit us from engaging in certain transactions. If a default were to occur, our lenders could accelerate the amounts of debt outstanding, and holders of our secured indebtedness could force us to sell our assets to satisfy all or a part of what is owed.
Covenants under our senior credit facilities and the indenture governing our outstanding senior unsecured notes restrict our ability to pay dividends and engage in various operational matters. In addition, covenants under our senior credit facilities require us to maintain specified financial ratios. Our ability to meet these financial ratios 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, pay dividends, 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. In addition, the lenders under these agreements could terminate their commitments to lend to us. If the lenders under these agreements accelerate the repayment of borrowings, we may not have sufficient liquid assets at that time to repay the amounts then outstanding under our indebtedness or be able to find additional alternative financing. Even if we could obtain additional alternative financing, the terms of the financing may not be favorable or acceptable to us.
The 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate” or “believe.” We believe the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that these expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to these differences include, but are not limited to:

• | the general strength of the economy and other economic conditions affecting consumer preferences and spending;

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RENT-A-CENTER, INC. AND SUBSIDIARIES

• | economic pressures, such as high fuel costs, affecting the disposable income available to our current and potential customers;

• | changes in the unemployment rate;

• | difficulties encountered in improving the financial performance of our Core U.S. segment or in executing our growth initiatives;

• | rapid inflation or deflation in prices of our products;

• | consumer preferences and perceptions of our brand;

• | our ability to identify and successfully market products and services that appeal to our customer demographic;

• | adverse changes in the economic conditions of the industries, countries or markets that we serve;

• | our ability to develop and successfully implement virtual or electronic commerce capabilities;

• | our available cash flow;

• | our ability to control costs and increase profitability;

• | our ability to enter into new and collect on our rental or lease purchase agreements;

• | uncertainties regarding the ability to open new locations;

• | our ability to acquire additional stores or customer accounts on favorable terms;

• | our ability to enhance the performance of acquired stores;

• | our ability to retain the revenue associated with acquired customer accounts;

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

• | our compliance with applicable statutes or regulations governing our transactions;

• | our ability to protect the integrity and security of individually identifiable data of our customers and employee;

• | the impact of any breaches in data security or other disturbances to our information technology and other networks;

• | information technology and data security costs;

• | changes in estimates relating to self-insurance liabilities and income tax and litigation reserves;

• | changes in our effective tax rate;

• | changes in interest rates;

• | changes in our stock price, the number of shares of common stock that we may or may not repurchase, and future dividends, if any;

• | fluctuations in foreign currency exchange rates;

• | our ability to maintain an effective system of internal controls;

• | the resolution of our litigation; and

• | the other risks detailed from time to time in our SEC reports.

Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, and elsewhere in this Quarterly Report on Form 10-Q. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Our Business
We are the largest rent-to-own operator in North America, focused on improving the quality of life for our customers by providing them the opportunity to obtain ownership of high-quality durable products, such as consumer electronics, appliances, computers, furniture and accessories, under flexible rental purchase agreements with no long-term obligation.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
We were incorporated in Delaware in 1986. From 1993 to 2006, we pursued an aggressive growth strategy in which we opened new stores and sought to acquire underperforming rent-to-own stores to which we could apply our operating model. As a result of this strategy, the number of our locations grew from 27 to over 3,400 in 2006, primarily through acquisitions. We acquired over 3,300 stores during this period, including approximately 390 of our franchised stores. These acquisitions occurred in approximately 200 separate transactions, including ten transactions in each of which we acquired in excess of 50 locations. In addition, we strategically opened or acquired stores near market areas served by our existing stores to enhance service levels, gain incremental sales and increase market penetration.
Historically, we achieved growth in our Core U.S. segment by opening new stores and acquiring underperforming rent-to-own stores to which we could apply our operating model. As a result, the acquired stores have generally experienced more significant revenue growth during the initial periods following their acquisition than in subsequent periods. Although we continue to believe there are attractive opportunities to expand our presence in the U.S. rent-to-own industry and we intend to continue our acquisition strategy of targeting under-performing and under-capitalized rent-to-own stores, the consolidation opportunities in the U.S. rent-to-own industry are more limited than in previous periods during which we experienced significant growth through acquisitions. Therefore, 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.
As our U.S. store base matured, we began to focus on attracting new customers through sources other than our existing U.S. rent-to-own store locations and to seek additional distribution channels for our products and services. One of our current growth strategies is our “Acceptance Now” model. With this model, we operate kiosks within various traditional retailers’ locations where we generally offer the rent-to-own transaction to consumers who do not qualify for financing from such retailers. We operated 1,355 Acceptance Now locations at March 31, 2014, and we intend to continue growing the Acceptance Now segment by expanding the number of our retail partners and the number of locations with our existing retail partners. In addition, our strategy includes enhancing our Acceptance Now offering by launching a virtual capability. Capital expenditures related to opening an Acceptance Now kiosk in a retailer's store are very low, since the only fixed assets required are the kiosk and computer equipment. There is no long-term lease associated with these stores and the retailer does not charge us rent. Our operating model is highly agile and dynamic because we can open locations quickly and efficiently, and we can also close locations quickly and efficiently when their performance does not meet our expectations. In addition, we are rapidly expanding our operations in Mexico, and we are seeking to identify other international markets in which we believe our products and services would be in demand.
We recently launched a multi-year program designed to transform and modernize our operations company-wide in order to improve the profitability of the Core U.S. segment while continuing to support our Acceptance Now and Mexico segments. This program is focused on building new competencies and capabilities through a variety of operational and infrastructure initiatives such as developing a new supply chain, formulating a customer-focused value-based pricing strategy, optimizing our store footprint, and innovating our digital e-commerce capabilities.
Total financing requirements of a typical new Acceptance Now kiosk location approximate $350,000, with roughly 80% of that amount relating to the purchase of rental merchandise. A newly opened Acceptance Now location is typically profitable on a monthly basis within seven months after its initial opening, and achieves cumulative break-even profitability in the second year after its initial opening.
Total financing requirements of a typical new Mexico store approximate $610,000, with roughly 50% of that amount relating to the purchase of rental merchandise. A newly opened Mexico store is typically profitable on a monthly basis within 12 months after its initial opening. Historically, a typical Mexico store has achieved cumulative break-even profitability in the third year after its initial opening.
As a result of the investment in new stores and kiosk locations and their growth curves described above, our quarterly earnings are impacted by how many new locations we opened during a particular quarter and the quarters preceding it.
Rental payments are generally made in advance on a weekly basis in our Core U.S. and Mexico segments and monthly in our Acceptance Now segment 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, advertising expenses, lost, damaged or stolen merchandise, fixed asset depreciation and corporate and other expenses.
The Rental Purchase Transaction
The rental purchase transaction is a flexible alternative for consumers to obtain use and enjoyment of brand name merchandise with no long-term obligation. Key features of the rental purchase transaction include:
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RENT-A-CENTER, INC. AND SUBSIDIARIES
Brand name merchandise. We offer well-known brands such as LG, Samsung, Sony, Toshiba and Vizio home electronics; Whirlpool appliances; Acer, Apple, Asus, Dell, Hewlett-Packard, Samsung, Sony and Toshiba computers and/or tablets; and Albany, Ashley, England, Klaussner, Lane, Standard and Welton furniture.
Convenient payment options. Our customers make payments on a weekly, semi-monthly or monthly basis in our stores, kiosks, online or by telephone. We accept cash and credit or debit cards. Rental payments are generally made in advance and, together with applicable fees, constitute our primary revenue source. Appro ximately 81% and 91% of our rental purchase agreements are on a weekly term in our Core U.S. rent-to-own stores and our Mexico segment, respectively. Paym ents are made in advance on a monthly basis in our Acceptance Now segment.
No negative consequences. A customer may terminate a rental purchase agreement at any time without penalty.
No credit needed. Generally, we do not conduct a formal credit investigation of our customers. We verify a customer’s residence and sources of income. References provided by the customer are also contacted to verify the information contained in the rental purchase order form.
Delivery & set-up included. We generally offer same-day or next-day delivery and installation of our merchandise at no additional cost to the customer in our rent-to-own stores. Our Acceptance Now locations rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer.
Product maintenance & replacement. 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 network of 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. If the product cannot be repaired, we will replace it with a product of comparable quality, age and condition.
Lifetime reinstatement. If a customer is temporarily unable to make payments on a piece of rental merchandise and must return the merchandise, that customer generally may later re-rent the same piece of merchandise (or if unavailable, a substitute of comparable quality, age and condition) on the terms that existed at the time the merchandise was returned, and pick up payments where they left off without losing what they previously paid.
Flexible options to obtain ownership. Ownership of the merchandise generally transfers to the customer if the customer has continuously renewed the rental purchase agreement for a period of seven to 30 months, depending upon the product type, or exercises a specified early purchase option.
Our Operating Segments
We report four operating segments: Core U.S., Acceptance Now, Mexico and Franchising. As discussed in Note 8 to the consolidated financial statements, we began reporting our Canadian stores in the Core U.S. segment effective January 1, 2014, and now we only report Mexico operations in the segment formerly reported as International. Additional information regarding our operating segments is provided in the Notes to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
Core U.S.
Our Core U.S. segment, consisting of our company-owned stores located in the United States, Canada and Puerto Rico, is our largest operating segment, comprising approximately 76.1% of our consolidated net revenues and approximately 73.4% of our operating profit for the three-month period ended March 31, 2014.
We recently launched a multi-year program designed to transform and modernize our operations company-wide in order to improve the profitability of the Core U.S. segment while continuing to support our Acceptance Now and Mexico segments. This program is focused on building new competencies and capabilities through a variety of operational and infrastructure initiatives such as developing a new supply chain, formulating a customer-focused value-based pricing strategy, optimizing our store footprint, and innovating our digital e-commerce capabilities.
At March 31, 2014, we operated 2,997 company-owned stores nationwide, in Canada and in Puerto Rico, including 45 retail installment sales stores under the names “Get It Now” and “Home Choice.” We routinely evaluate the markets in which we operate and will close, sell or merge underperforming stores.
Acceptance Now
Through our Acceptance Now segment, we generally provide an on-site rent-to-own option at a third-party retailer’s location. In the event a retail purchase credit application is declined, the customer can be introduced to an in-store Acceptance Now representative who explains an alternative transaction for acquiring the use and ownership of the merchandise. Because we neither require nor
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perform a credit investigation for the approval of the rental purchase transaction, applicants who meet the basic criteria are generally approved. We believe our Acceptance Now program is beneficial for both the retailer and the consumer. The retailer captures more sales because we buy the inventory item directly from it and future rental payments are generally made at the retailer’s location. We believe consumers also benefit from our Acceptance Now program because they are able to obtain the products they want and need without the necessity of credit.
Each Acceptance Now kiosk location typically consists of an area with a computer, desk and chairs. We occupy the space without charge by agreement with each retailer. Accordingly, capital expenditures with respect to a new Acceptance Now location are minimal. Likewise, any exit costs associated with the closure of a Acceptance Now location would also be immaterial on an individual basis.
We rely on our third-party retail partners to deliver merchandise rented by the customer. Such third-party retail partners typically charge us a fee for delivery, which we pass on to the customer. In the event the customer returns rented merchandise, we pick it up at no additional charge. Merchandise returned from an Acceptance Now kiosk location is offered for rent at one of our Core U.S. rent-to-own stores.
We intend to grow the Acceptance Now segment by increasing both the number of our retail partners and the number of locations with our existing retail partners. In addition, our strategy includes enhancing our Acceptance Now offering by launching a virtual capability. At March 31, 2014, we operated 1,355 kiosk locations inside furniture and electronics retailers located in 38 states and Puerto Rico. We expect to open approximately 100 kiosk locations in 2014.
Mexico
Our Mexico segment currently consists of our company-owned rent-to-own stores in Mexico. We are expanding our operations in Mexico and seeking to identify other international markets in which we believe our products and services would be in demand. We believe there are numerous opportunities to extend the rent-to-own transaction internationally.
We will expand operations into Mexico City and other complementary new market areas, while expanding our presence in currently existing market areas. At March 31, 2014, we operated 173 stores in Mexico, and we expect to open approximately 30 stores in 2014.
Franchising
The stores in our Franchising segment use Rent-A-Center’s, ColorTyme’s or RimTyme’s trade names, service marks, trademarks and logos, and operate under distinctive operating procedures and standards. Franchising’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 transaction.
At March 31, 2014, this segment franchised 178 stores in 30 states operating under the Rent-A-Center (90 stores), ColorTyme (61 stores) and RimTyme (27 stores) names. These rent-to-own stores primarily offer high quality durable products such as consumer electronics, appliances, computers, furniture and accessories, wheels and tires.
As franchisor, Franchising receives royalties of 2.0% to 6.0% of the franchisees’ monthly gross revenue and, generally, an initial franchise fee up to $35,000 per new location.
Critical Accounting Policies Involving Critical Estimates, Uncertainties or Assessments in Our Financial Statements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent losses and liabilities at the date of the consolidated 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.
If we make changes to our reserves in accordance with the policies described below, our earnings would be impacted. Increases to our reserves would reduce earnings and, similarly, reductions to our reserves would increase our earnings. A pre-tax change of approximately $0.9 million in our estimates would result in a corresponding $0.01 change in our diluted earnings per common share.
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Self-Insurance Liabilities. We have self-insured retentions with respect to losses under our workers’ compensation, general liability and vehicle liability 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 continually institute procedures to manage our loss exposure and increases in health care costs associated with our insurance claims through our risk management function, including a transitional duty program for injured workers, ongoing safety and accident prevention training, and various other programs designed to minimize losses and improve our loss experience in our store locations. We make assumptions on our liabilities within our self-insured retentions using actuarial loss forecasts, company-specific development factors, general industry loss development factors and third-party claim administrator loss estimates which are based on known facts surrounding individual claims. These assumptions incorporate expected increases in health care costs. Periodically, we reevaluate our estimate of liability within our self-insured retentions. At that time, we evaluate the adequacy of our reserves by comparing amounts reserved 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 reserves as needed.
As of March 31, 2014, and December 31, 2013, the amount reserved for losses within our self-insured retentions with respect to workers’ compensation, general liability and vehicle liability insurance was $119.5 million and $116.6 million, respectively. However, if any of the factors that contribute to the overall cost of insurance claims were to change, the actual amount incurred for our self-insurance liabilities could be more or less than the amounts currently reserved.
Income Taxes. Our annual tax rate is affected by many factors, including the mix of our earnings, legislation and acquisitions, and is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to differing interpretations between the taxpayer and the taxing authorities. Significant judgment is required in determining our tax expense, evaluating our tax positions and evaluating uncertainties. Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. We use our historical experience and our short- and long-range business forecasts to provide insight and assist us in determining recoverability. 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. A number of years may elapse before a particular matter, for which we have recorded a liability, is audited and effectively settled. We review our tax positions quarterly and adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Valuation of Goodwill. 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. Our reporting units are generally our reportable operating segments identified in Note 8 to the consolidated financial statements. At March 31, 2014, the amount of goodwill allocated to the Core U.S. and Acceptance Now segments was approximately $1,309.7 million and $54.4 million, respectively, and no impairment of goodwill was indicated.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe our consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of our company as of, and for, the periods presented in this Quarterly Report on Form 10-Q. However, we do not suggest that other general risk factors, such as those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, and elsewhere in this Quarterly Report on Form 10-Q, as well as changes in our growth objectives or performance of new or acquired locations, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.
Significant Accounting Policies
Our significant accounting policies are summarized below and in Note A to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
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
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purchase option or through payment of all required rentals. Rental revenue and fees are recognized over the rental term 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 terminate the rental agreement at any time and we cannot enforce collection for non-payment of future rents.
Revenues from the sale of merchandise in our retail installment stores are recognized when the installment note is signed, the customer has taken possession of the merchandise and collectability is reasonably assured.
Franchise Revenue. Revenues from the sale of rental merchandise are recognized upon shipment of the merchandise to the franchisee. Franchise royalty income and 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. Generally, we depreciate our rental merchandise using the income forecasting method. 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-based method similar to the units of production method. We depreciate merchandise that is held for rent for at least 180 consecutive days using the straight-line method over a period generally not to exceed 18 months.
Cost of Merchandise Sold. Cost of merchandise sold represents the net book value of rental merchandise at the time of sale.
Salaries and Other Expenses. Salaries and other expenses include all salaries and wages paid to store-level employees, together with district managers’ salaries, payroll taxes and benefits, and travel, as well as all store-level general and administrative expenses and selling, advertising, insurance, occupancy, delivery, charge offs due to customer stolen merchandise, 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, payroll taxes and benefits, stock-based compensation, occupancy, administrative and other operating expenses.
Stock-Based Compensation Expense. 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 award requires information about several variables that could include, but are not limited to, expected stock volatility over the term of the award, 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 as actual forfeitures occur. Stock options are valued using a Black-Scholes pricing model. Restricted stock units are valued using the last trade before the day of the grant.
Results of Operations
The following discussion focuses on our results of operations and issues related to our liquidity and capital resources. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Three Months Ended March 31, 2014, Compared to Three Months Ended March 31, 2013
Overview
The following table and the operating segment discussions reflect the revisions to reserves discussed in Note 1 to the consolidated financial statements.
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|  | Three Months Ended March 31, | Change
(Dollar amounts in thousands) |  | 2014 |  | 2013 |  | $ |  | %
Rentals and fees |  | 694,168 |  |  | $ | 673,604 |  |  | $ | 20,564 |  |  | 3.1 | %
Merchandise sales |  | 108,061 |  |  | 113,573 |  |  | (5,512 | ) |  | (4.9 | )%
Installment sales |  | 18,356 |  |  | 17,127 |  |  | 1,229 |  |  | 7.2 | %
Other |  | 4,258 |  |  | 4,760 |  |  | (502 | ) |  | (10.5 | )%
Franchise merchandise sales |  | 7,324 |  |  | 8,833 |  |  | (1,509 | ) |  | (17.1 | )%
Franchise royalty income and fees |  | 1,579 |  |  | 1,384 |  |  | 195 |  |  | 14.1 | %
Total revenues |  | 833,746 |  |  | 819,281 |  |  | 14,465 |  |  | 1.8 | %
Cost of rentals and fees |  | 177,870 |  |  | 167,919 |  |  | 9,951 |  |  | 5.9 | %
Cost of merchandise sold |  | 79,617 |  |  | 86,299 |  |  | (6,682 | ) |  | (7.7 | )%
Cost of installment sales |  | 6,382 |  |  | 5,969 |  |  | 413 |  |  | 6.9 | %
Franchise cost of merchandise sold |  | 7,000 |  |  | 8,416 |  |  | (1,416 | ) |  | (16.8 | )%
Total cost of revenues |  | 270,869 |  |  | 268,603 |  |  | 2,266 |  |  | 0.8 | %
Gross profit |  | 562,877 |  |  | 550,678 |  |  | 12,199 |  |  | 2.2 | %
Salaries and other |  | 457,630 |  |  | 432,191 |  |  | 25,439 |  |  | 5.9 | %
General and administrative |  | 44,737 |  |  | 38,813 |  |  | 5,924 |  |  | 15.3 | %
Amortization and write-down of intangibles |  | 747 |  |  | 890 |  |  | (143 | ) |  | (16.1 | )%
|  | 503,114 |  |  | 471,894 |  |  | 31,220 |  |  | 6.6 | %
Operating profit |  | 59,763 |  |  | 78,784 |  |  | (19,021 | ) |  | (24.1 | )%
Finance charges from refinancing |  | 1,946 |  |  | — |  |  | 1,946 |  |  | — |
Interest, net |  | 11,165 |  |  | 7,708 |  |  | 3,457 |  |  | 44.8 | %
Earnings before income taxes |  | 46,652 |  |  | 71,076 |  |  | (24,424 | ) |  | (34.4 | )%
Income tax expense |  | 17,795 |  |  | 24,943 |  |  | (7,148 | ) |  | (28.7 | )%
Net earnings |  | $ | 28,857 |  |  | $ | 46,133 |  |  | $ | (17,276 | ) |  | (37.4 | )%

During 2014, we have continued efforts under our multi-year program designed to transform and modernize our operations company-wide, initially focusing on pricing, market planning and supply chain, with additional efforts in e-commerce expected later in 2014 and 2015. We also realigned our reporting structure in 2014 to move our 18 Canadian stores to the Core U.S. segment, which were previously reported in the International segment. The accompanying prior-year amounts have been revised to reflect this change, and we now refer to that segment as "Mexico" since only that country's results are reported therein.
We continue to grow the Acceptance Now and Mexico segments, adding 30 Acceptance Now locations and 22 Mexico stores in the first quarter of 2014, and we had first quarter year-over-year revenue growth in those segments of 37% and 67%, respectively. Our Acceptance Now segment provided approximately 21% of our consolidated revenue and 36% of our consolidated operating profit in the first quarter of 2014. The expansion in the Acceptance Now and Mexico segments dilute operating profit due to additional operating expenses, primarily payroll-related. The decline in revenue in the Core U.S. segment eroded the revenue, gross profit and operating profit gains in the Acceptance Now and Mexico segments. We continually analyze every aspect of our business in an effort to improve operating and financial performance. Our customers remain under economic pressure and we face a highly promotional environment, which is driving the efforts of the multi-year program discussed above.
The investments we are making in the multi-year program to transform and modernize our operations, and the increased number of locations in our Acceptance Now and Mexico segments as a result of the expansion in such segments, have resulted in increases in certain of our expenses. Specifically, salaries and other expenses increased by $25.4 million, or 5.9%, to $457.6 million for the three months ended March 31, 2014, as compared to $432.2 million in 2013, primarily due to labor costs associated with the new locations in our Acceptance Now and Mexico segments. General and administrative expenses increased by $5.9 million, or 15.3%, to $44.7 million for the three months ended March 31, 2014, as compared to $38.8 million in 2013, attributable to costs associated
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with the multi-year modernization program and increased corporate overhead to support the growth in our Acceptance Now and Mexico segments.
Segment Performance
Core U.S. segment.

|  | Three Months Ended March 31, |  | Change
(Dollar amounts in thousands) |  | 2014 |  | 2013 |  | $ |  | %
Revenues |  | $ | 634,763 |  |  | $ | 672,408 |  |  | $ | (37,645 | ) |  | (5.6 | )%
Gross profit |  | 456,589 |  |  | 475,072 |  |  | (18,483 | ) |  | (3.9 | )%
Operating profit |  | 43,857 |  |  | 67,078 |  |  | (23,221 | ) |  | (34.6 | )%
Change in same store revenue |  |  |  |  |  |  |  |  | (6.1 | )%
Stores in same store revenue calculation |  |  |  |  |  |  |  | 2,666 |

Revenues. The decrease in revenue for the three months ended March 31, 2014, compared to 2013 was approximately evenly split between rentals and fees revenue and merchandise sales. Average price per unit, while down year over year, has improved sequentially as we have promoted more term discounts rather than rate discounts, which has partially offset a decrease in deliveries.
We have evaluated every market in which we operate based on operating results, competitive positioning and growth potential and have identified approximately 150 Core U.S. stores that we intend to consolidate by the end of the second quarter by merging those accounts into existing Core U.S. stores. The stores to be closed will be in markets that can be effectively and more efficiently served by nearby stores. These closures will result in a second quarter charge of approximately $4.0 million related to store fixed assets and other miscellaneous items. The majority of the remaining lease obligations related to the consolidated stores of approximately $8.0 million will be paid out through 2016. Approximately half of the remaining lease obligations will be paid in 2014.
Gross Profit. Gross profit decreased for the three months ended March 31, 2014, from 2013 primarily due to decreased store revenue as discussed above. Gross profit as a percentage of total segment revenue increased to 71.9% for the three months ended March 31, 2014, from 70.7% in 2013, primarily due to changes in early purchase option pricing.
Operating Profit. Operating profit as a percentage of segment revenue decreased to 6.9% for the three months ended March 31, 2014, from 10.0% for 2013. Operating profit in 2014 was impacted by decreased gross profit as discussed above, and investments we are making to improve the Core U.S. business. Charge offs in our Core U.S. rent-to-own stores due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 2.8% for the three months ended March 31, 2014, as compared to 2.4% in 2013. Operating expenses expressed as a percentage of total segment revenue increased to 65.0% for the three months ended March 31, 2014, from 60.7% in 2013, primarily due to a decrease in revenue.
Acceptance Now segment.

|  | Three Months Ended March 31, |  | Change
(Dollar amounts in thousands) |  | 2014 |  | 2013 |  | $ |  | %
Revenues |  | $ | 174,207 |  |  | $ | 127,163 |  |  | $ | 47,044 |  |  | 37.0 | %
Gross profit |  | 92,907 |  |  | 67,107 |  |  | 25,800 |  |  | 38.4 | %
Operating profit |  | 21,577 |  |  | 15,650 |  |  | 5,927 |  |  | 37.9 | %
Change in same store revenue |  |  |  |  |  |  |  | 26.1 | %
Stores in same store revenue calculation |  |  |  |  |  |  |  | 900 |

Revenues. The increase in revenues in the first quarter of 2014 over 2013 was driven by the 26.1% growth in same store revenue and the 592 kiosks that we added during the 12 months ended March 31, 2014. This segment contributed approximately 21% of consolidated revenues and approximately 36% of operating profit in the first quarter of 2014 compared to approximately 16% of revenue and 20% of operating profit for the comparable period in 2013.
Gross profit. Gross profit as a percentage of revenues was 53.3% in 2014 as compared to 52.8% in 2013 as a result of a maturing store base.
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Operating profit. Operating profit was positively impacted by the revenue growth in this segment. Operating profit as a percentage of total segment revenue increased to 12.4% for the three months ended March 31, 2014, from 12.3% in 2013. As the store base matures and efficiencies are achieved, these improvements help offset the increased operating expenses created by our growth plan. Charge-offs in our Acceptance Now locations due to customer stolen merchandise, expressed as a percentage of revenues, were approximately 6.3% for the three months ended March 31, 2014, as compared to 4.9% in 2013. The ratio of agreement charge-offs to total agreements in this segment is comparable to the Core U.S. segment but the percentage is higher, primarily due to the higher cost of rental merchandise in this segment. While the higher cost of merchandise results in lower gross margins in this segment, this segment's kiosk model has lower operating costs than our other operating segments, resulting in a positive contribution to operating profit while maintaining an aggressive growth plan.
Mexico segment.

|  | Three Months Ended March 31, |  | Change
(Dollar amounts in thousands) |  | 2014 |  | 2013 |  | $ |  | %
Revenues |  | $ | 15,873 |  |  | $ | 9,493 |  |  | $ | 6,380 |  |  | 67.2 | %
Gross profit |  | 11,478 |  |  | 6,698 |  |  | 4,780 |  |  | 71.4 | %
Operating profit |  | (6,277 | ) |  | (4,647 | ) |  | (1,630 | ) |  | 35.1 | %
Change in same store revenue |  |  |  |  |  |  |  |  | 20.3 | %
Stores in same store revenue calculation |  |  |  |  |  |  |  | 90 |

Revenues. The increase in total revenues in the first quarter of 2014 over 2013 was driven by the 20.3% growth in same store revenue and the 63 stores that we added during the 12 months ended March 31, 2014.
Gross Profit. Gross profit increased for the three months ended March 31, 2014, compared to 2013, primarily due to increased revenue as discussed above. Gross profit as a percentage of total revenues increased to 72.3% for the three months ended March 31, 2014, from 70.6% in 2013 as a result of a maturing store base.
Operating Loss. Operating loss as a percentage of total segment revenue decreased to 39.5% for the three months ended March 31, 2014, from 49.0% for 2013. As the older stores in Mexico become profitable, those profits have been more than offset by the losses experienced in the newly opened stores.
Franchising segment.

|  | Three Months Ended March 31, |  | Change
(Dollar amounts in thousands) |  | 2014 |  | 2013 |  | $ |  | %
Revenues |  | $ | 8,903 |  |  | $ | 10,217 |  |  | $ | (1,314 | ) |  | (12.9 | )%
Gross profit |  | 1,903 |  |  | 1,801 |  |  | 102 |  |  | 5.7 | %
Operating profit |  | 606 |  |  | 703 |  |  | (97 | ) |  | (13.8 | )%

Revenues. Merchandise sales decreased $1.5 million in the first quarter of 2014 compared to 2013 due to the rebranding initiative, which decreased overall store count in this segment, partially offset by a $0.2 million increase in royalty income and fees.
Gross Profit. Gross profit as a percentage of revenues increased to 21.4% for the three months ended March 31, 2014, from 17.6% in 2013, primarily due to an increase in royalty revenue.
Operating Profit. Operating profit as a percentage of total segment revenue decreased to 6.8% for the three months ended March 31, 2014, from 6.9% for 2013 as we incurred approximately $0.2 million of expenses to complete the rebranding initiative that began in 2013, including replacing graphics on windows and trucks and minor store remodeling costs.
Other Consolidated Expenses
Finance Charges From Refinancing. As discussed in Note 3 to the consolidated financial statements, we refinanced our senior credit facility during March 2014 and recognized a $1.9 million charge to write off unamortized financing costs from our previous credit agreement.
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Interest, net. Net interest expense increased by $3.5 million, or 44.8%, to $11.2 million for the three months ended March 31, 2014, as compared to $7.7 million in 2013. This increase is due primarily to the additional $250 million of senior unsecured notes that were issued in May 2013.
Net Earnings and Earnings per Share. Net earnings decreased by $17.3 million, or 37.4%, to $28.9 million for the three months ended March 31, 2014, as compared to $46.1 million in 2013. This decrease was attributable to a $19.0 million decrease in operating profit, a $3.5 million increase in net interest and a $1.9 million charge from the refinance of our senior credit facility, partially offset by a $7.1 million decrease in income tax expense in 2014 as compared to 2013. Diluted earnings per share decreased $0.25, or 31.6%, to $0.54 for the three months ended March 31, 2014, compared to $0.79 in 2013, primarily due to a decrease in earnings, partially offset by a decrease in weighted shares outstanding resulting from our 2013 accelerated stock buyback program.
Liquidity and Capital Resources
Overview. During the three months ended March 31, 2014, we generated $120.1 million in operating cash flow. We refinanced our senior credit facility, reducing our secured debt outstanding by $23.0 million from December 31, 2013, and increasing our revolving credit facility by $175.0 million. We used cash in the amount of $23.1 million for capital expenditures and $12.1 million for payment of dividends. We ended the three-month period with $81.0 million of cash and cash equivalents.
Analysis of Cash Flow. Cash provided by operating activities increased $6.6 million to $120.1 million for the three months ended March 31, 2014, from $113.5 million in 2013. This increase was primarily attributable to a reduction in inventory purchases, mostly offset by a decrease in net earnings and other net operating cash outflows.
Cash used in investing activities increased $6.8 million to $28.5 million for the three months ended March 31, 2014, from $21.7 million in 2013, due primarily to an increase in acquisitions of businesses and an increase in capital expenditures.
Net cash used in financing activities decreased $18.2 million to $52.8 million for the three months ended March 31, 2014, from $71.0 million million in 2013. We made no repurchases of our common stock during the three months ended March 31, 2014, compared to $17.4 million purchased in the comparable period of 2013.
Liquidity Requirements. Our primary liquidity requirements are for rental merchandise purchases, implementation of our growth strategies, capital expenditures and debt service. Our primary sources of liquidity have been cash provided by operations and borrowings. In the future, to provide any additional funds necessary for the continued operations and expansion of our business, we may incur from time to time additional short-term 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 relate to our financial condition and performance, and some of which are beyond our control, such as prevailing interest rates and general financing and economic conditions. The global financial markets continue to experience volatility and adverse conditions and such conditions in the capital markets may affect our ability to access additional sources of financing. 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 the cash flow generated from operations, together with amounts available under our Credit Agreement, will be sufficient to fund our liquidity requirements as discussed above during the next 12 months. Our revolving credit facilities, including our $20.0 million line of credit at INTRUST Bank, provide us with revolving loans in an aggregate principal amount not exceeding $695.0 million, of which $505.3 million was available at April 21, 2014, at which date we had $66.1 million in cash. To the extent we have available cash that is not necessary to fund the items listed above, we may declare and pay dividends on our common stock, repurchase additional shares of our common stock or 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.
A change in control would result in an event of default under our senior credit facilities which would allow our lenders to accelerate the indebtedness owed to them. In addition, if a change in control occurs, we may be required to offer to repurchase all of our outstanding senior unsecured notes at 101% of their principal amount, plus accrued interest to the date of repurchase. Our senior credit facilities restrict our ability to repurchase the senior unsecured notes, including in the event of a change in control. In the event a change in control occurs, we cannot be sure we would have enough funds to immediately pay our accelerated senior credit facility and senior note obligations or that we would be able to obtain financing to do so on favorable terms, if at all.
Deferred Taxes. Certain federal tax legislation enacted during the period 2009 to 2013 permitted bonus first-year depreciation deductions ranging from 50% to 100% of the adjusted basis of qualified property placed in service during such years. The depreciation benefits associated with these tax acts are now reversing and had a negative effect on our 2013 cash flow. We estimate the negative effect of these acts in 2013 was $14 million. We estimate that the remaining tax deferral associated with these acts approximates $167 million at December 31, 2013, of which approximately 75%, or $126 million will reverse in 2014, and the remainder will reverse between 2015 and 2016.
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We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for these non-U.S. subsidiaries was recorded in the accompanying Consolidated Statements of Earnings.
Merchandise. A reconciliation of merchandise, which includes purchases, follows:

| Three Months Ended March 31, 2014 |  | Three Months Ended March 31, 2013
| (In thousands)
Beginning merchandise value | $ | 1,129,106 |  |  | $ | 1,011,260 |
Merchandise additions through acquisitions | 4,673 |  |  | 843 |
Purchases | 264,333 |  |  | 313,486 |
Depreciation of rental merchandise | (169,843 | ) |  | (160,983 | )
Cost of goods sold | (85,999 | ) |  | (92,268 | )
Skips and stolens | (31,139 | ) |  | (24,550 | )
Other merchandise deletions (1) | (11,788 | ) |  | (9,083 | )
Ending merchandise value | $ | 1,099,343 |  |  | $ | 1,038,705 |

(1) | Other merchandise deletions include loss/damage waiver claims and unrepairable and missing merchandise, as well as acquisition write-offs.

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, and investment in information technology. We spent $23.1 million and $19.6 million on capital expenditures during the three-month periods ended March 31, 2014 and 2013, respectively, and expect to spend an aggregate of approximately $100.0 million in 2014.
Acquisitions and New Location Openings. During the first quarter of 2014, we used approximately $5.4 million to acquire the assets of one of our suppliers of rental merchandise.
The table below summarizes the location activity for the three-month period ended March 31, 2014.

| Three Months Ended March 31, 2014
| Core U.S. |  | Acceptance Now |  | Mexico |  | Franchising |  | Total
Locations at beginning of period | 3,010 |  |  | 1,325 |  |  | 151 |  |  | 179 |  |  | 4,665 |
New location openings | 6 |  |  | 60 |  |  | 22 |  |  | 1 |  |  | 89 |
Acquired locations remaining open | — |  |  | — |  |  | — |  |  | — |  |  | — |
Closed locations |  |  |  |  |  |  |  |  |
Merged with existing locations | 19 |  |  | 29 |  |  | — |  |  | — |  |  | 48 |
Sold or closed with no surviving location | — |  |  | 1 |  |  | — |  |  | 2 |  |  | 3 |
Locations at end of period | 2,997 |  |  | 1,355 |  |  | 173 |  |  | 178 |  |  | 4,703 |
Acquired locations closed and accounts merged with existing locations | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total approximate purchase price of acquired stores (in thousands) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

Senior Debt. As discussed in Note 3 to the consolidated financial statements, we refinanced our Prior Credit Agreement on March 19, 2014. The following discussion refers to the new Credit Agreement, its Term Loans and its Revolving Facility described therein. The new $900.0 million Credit Agreement consists of $225.0 million, seven-year Term Loans and a $675.0 million, five-year Revolving Facility.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
The table below shows the scheduled maturity dates of our Term Loans outstanding at March 31, 2014:

Year Ending December 31, | (In thousands)
2014 | $ | 1,688 |
2015 | 2,250 |
2016 | 2,250 |
2017 | 2,250 |
2018 | 2,250 |
Thereafter | 214,312 |
| $ | 225,000 |

The full amount of the Revolving Facility may be used for the issuance of letters of credit, of which $104.7 million had been so utilized as of April 21, 2014, at which date $85.0 million was outstanding and $485.3 million was available. The Term Loans are scheduled to mature on March 19, 2021, and the Revolving Facility has a scheduled maturity of March 19, 2019.
Borrowings under our Revolving Facility bear interest at varying rates equal to either the Eurodollar rate plus 1.50% to 2.75%, or the ABR rate plus 0.50% to 1.75%, at our election. The margins on the Eurodollar rate and on the ABR rate for borrowings under the Revolving Facility, which were 2.25% and 1.25%, respectively, at April 21, 2014, may fluctuate based upon an increase or decrease in our consolidated total leverage ratio as defined by a pricing grid included in the Credit Agreement. The weighted average margin for the three-months ended March 31, 2014, was 2.32%. 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 0.58% at April 21, 2014. The margins on the Eurodollar rate and on the ABR rate for Term Loans, which are 3.00% and 2.00%, respectively, may also fluctuate in the event the all-in pricing for any subsequent incremental Term Loan exceeds the all-in pricing for existing Term Loans by more than 0.50% per annum. A commitment fee equal to 0.30% to 0.50% of the unused portion of the Revolving Facility is payable quarterly, and fluctuates dependent upon an increase or decrease in our consolidated leverage ratio. The commitment fee at March 31, 2014, is equal to 0.45% of the unused portion of the Revolving Facility. We have not entered into any interest rate protection agreements with respect to Term Loans under our Credit Agreement.
Our borrowings under the Credit Agreement are, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets, including intellectual property, and are also secured by a pledge of the capital stock of our U.S. subsidiaries.
The Credit Agreement also permits us to increase the amount of the Term Loans and/or the Revolving Facility from time to time on up to three occasions, in an aggregate amount of no more than $250 million, provided that we are not in default at the time and have obtained the consent of the administrative agent and the lenders providing such increase.
Subject to a number of exceptions, the Credit Agreement contains, without limitation, covenants that generally limits our ability and the ability of our subsidiaries to:

• | incur additional debt;

• | repurchase capital stock, 6.625% notes and 4.75% notes and/or pay cash dividends (subject to a restricted payments basket under which approximately $80 million is available);

• | incur liens or other encumbrances;

• | merge, consolidate or sell substantially all property or business;

• | sell, lease or otherwise transfer assets (other than in the ordinary course of business);

• | make investments or acquisitions (unless they meet financial tests and other requirements); or

• | enter into an unrelated line of business.

The Credit Agreement requires us to comply with several financial covenants, including: (i) a consolidated total leverage ratio of no greater than 4.50:1 from the quarter ended March 31, 2014, to the quarter ended September 30, 2015, 4.25:1 from the quarter ended December 31, 2015, to the quarter ended September 30, 2016, and 4.00:1 thereafter; (ii) a consolidated senior secured leverage ratio of no greater than 2.75:1; and (iii) a consolidated fixed charge coverage ratio of no less than 1.50:1 from the quarter ended March 31, 2014, to December 31, 2015, and 1.75:1 thereafter. The table below shows the required and actual ratios under the Credit Agreement calculated as of March 31, 2014:
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RENT-A-CENTER, INC. AND SUBSIDIARIES

| Required Ratio |  | Actual Ratio
Consolidated total leverage ratio | No greater than |  | 4.50:1 |  | 2.59:1
Consolidated senior secured leverage ratio | No greater than |  | 2.75:1 |  | 0.85:1
Consolidated fixed charge coverage ratio | No less than |  | 1.50:1 |  | 1.96:1

These financial covenants, as well as the related components of their computation, are defined in the Credit Agreement, which is included as an exhibit to our Current Report on Form 8-K dated as of March 20, 2014. In accordance with the Credit Agreement, the consolidated total leverage ratio was calculated by dividing the consolidated funded debt outstanding at March 31, 2014 ($819.0 million) by consolidated EBITDA for the 12-month period ending March 31, 2014 ($315.7 million). For purposes of the covenant calculations, (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 non-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 consolidated senior secured leverage ratio was calculated pursuant to the Credit Agreement by dividing the consolidated senior secured debt outstanding at March 31, 2014 ($269.0 million) by consolidated EBITDA for the 12-month period ending March 31, 2014 ($315.7 million). For purposes of the covenant calculation, “consolidated senior secured debt” is generally defined as the aggregate principal amount of consolidated funded debt that is then secured by liens on property or assets of the Company or its subsidiaries.
The consolidated fixed charge coverage ratio was calculated pursuant to the Credit Agreement by dividing consolidated EBITDA for the 12-month period ending March 31, 2014, and to the extent reducing consolidated net earnings for such period, consolidated lease expense ($558.8 million), by consolidated fixed charges for the 12-month period ending March 31, 2014 ($285.4 million). For purposes of the covenant calculation, “consolidated fixed charges” is defined as the sum of consolidated interest expense and consolidated lease expense.
Events of default under the Credit Agreement 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 Credit Agreement would occur if a change of control occurs. This is defined to include situations where a third party becomes the beneficial owner of 35% or more of our voting stock or certain changes in the composition of Rent-A-Center’s Board of Directors occur. An event of default would also occur if one or more judgments were entered against us of $50.0 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. Amounts are drawn as needed due to the timing of cash flows and are generally paid down as cash is generated by our operating activities.
In addition to the senior credit facilities discussed above, we maintain a $20.0 million unsecured, revolving line of credit with INTRUST Bank, N.A. to facilitate cash management. The outstanding balance of this line of credit was $0 and $18.3 million at March 31, 2014, and December 31, 2013, respectively.
Senior Notes. On November 2, 2010, we issued $300.0 million in senior unsecured notes due November 2020, bearing interest at 6.625%, pursuant to an indenture dated November 2, 2010, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repay approximately $200.0 million of outstanding term debt under our Credit Agreement. The remaining net proceeds were used to repurchase shares of our common stock.
On May 2, 2013, we issued $250.0 million in senior unsecured notes due May 2021, bearing interest at 4.75%, pursuant to an indenture dated May 2, 2013, among Rent-A-Center, Inc., its subsidiary guarantors and The Bank of New York Mellon Trust Company, as trustee. A portion of the proceeds of this offering were used to repurchase shares of our common stock under a $200.0 million accelerated stock buyback program. The remaining net proceeds were used to repay outstanding revolving debt under our Credit Agreement.
The indentures governing the 6.625% notes and the 4.75% notes are substantially similar. Each indenture contains covenants that limit our ability to:

• | incur additional debt;

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RENT-A-CENTER, INC. AND SUBSIDIARIES

• | sell assets or our subsidiaries;

• | grant liens to third parties;

• | pay cash dividends or repurchase stock (subject to a restricted payment basket under which approximately $80 million is available); and

• | engage in a merger or sell substantially all of our assets.

Events of default under each 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 6.625% 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 6.625% notes may be redeemed on or after November 15, 2018, at our option, in whole or in part, at par. The 6.625% 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.
The 4.75% notes may be redeemed on or after May 1, 2016, at our option, in whole or in part, at a premium declining from 103.563%. The 4.75% notes may be redeemed on or after May 1, 2019, at our option, in whole or in part, at par. The 4.75% notes also require that upon the occurrence of a change of control (as defined in the 2013 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.
Any mandatory repurchase of the 6.625% notes and/or the 4.75% notes would trigger an event of default under our Credit Agreement. We are not required to maintain any financial ratios under either of the indentures.
Rent-A-Center and its subsidiary guarantors have fully, jointly and severally, and unconditionally guaranteed the obligations of Rent-A-Center with respect to the 6.625% notes and the 4.75% 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.
Store Leases. We lease space for substantially all of our rent-to-own stores and certain support facilities under operating leases expiring at various times through 2023. 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.
Franchising Guarantees. Our subsidiary, ColorTyme Finance, Inc. ("ColorTyme Finance"), is a party to an agreement with Citibank, N.A., pursuant to which Citibank provides up to $40.0 million in aggregate financing to qualifying franchisees of Franchising. 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, National Association (“Texas Capital Bank”) under an agreement similar to the Citibank financing, which is guaranteed by Rent-A-Center East, Inc., a subsidiary of Rent-A-Center. The maximum guarantee obligations under these agreements, excluding the effects of any amounts that could be recovered under collateralization provisions, is $60.0 million, of which $17.1 million was outstanding as of March 31, 2014.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
Contractual Cash Commitments. The table below summarizes debt, lease and other minimum cash obligations outstanding as of March 31, 2014:

| Payments Due by Period
Contractual Cash Obligations | Total |  |  | 2014 |  | 2015-2016 |  | 2017-2018 |  | Thereafter
| (In thousands)
Senior Debt (including current portion)(1) | $ | 325,000 |  |  |  | $ | 1,688 |  |  | $ | 4,500 |  |  | $ | 4,500 |  |  | $ | 314,312 |
6.625% Senior Notes(2) | 439,125 |  |  |  | 19,875 |  |  | 39,750 |  |  | 39,750 |  |  | 339,750 |
4.75% Senior Notes(3) | 339,063 |  |  |  | 11,875 |  |  | 23,750 |  |  | 23,750 |  |  | 279,688 |
Operating Leases | 554,997 |  |  |  | 144,685 |  |  | 287,196 |  |  | 116,506 |  |  | 6,610 |
Total(4) | $ | 1,658,185 |  |  |  | $ | 178,123 |  |  | $ | 355,196 |  |  | $ | 184,506 |  |  | $ | 940,360 |

(1) | Amount referenced does not include interest payments. Our senior credit facilities bear interest at varying rates equal to the Eurodollar rate plus 1.50% to 3.00% or the ABR rate plus 0.50% to 2.00% at our election. The weighted average Eurodollar rate on our outstanding debt at March 31, 2014, was 0.56%.

(2) | Includes interest payments of $9.9 million on each of May 15 and November 15 of each year.

(3) | Includes interest payments of $5.9 million on each of May 1 and November 1 of each year.

(4) | As of March 31, 2014, we have $12.9 million in uncertain tax positions. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, uncertain tax positions are not reflected in the contractual obligations table.

Repurchases of Outstanding Securities. Under our current common stock repurchase program, our Board of Directors has authorized the purchase, from time to time, in the open market and privately negotiated transactions, of up to an aggregate of $1.25 billion of Rent-A-Center common stock. We have repurchased a total of 36,994,653 shares of Rent-A-Center common stock for an aggregate purchase price of $994.8 million as of March 31, 2014, and December 31, 2013, under this common stock repurchase program.
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 the 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. Furthermore, we tend to experience slower growth in the number of rental purchase agreements in the third quarter of each fiscal year when compared to other quarters throughout the year. We expect these trends to continue in the future.
Effect of New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
As of March 31, 2014, we had $300.0 million in senior notes outstanding at a fixed interest rate of 6.625%, and $250.0 million in senior notes outstanding at a fixed interest rate of 4.75%. We also had $225.0 million outstanding in term loans, $100.0 million outstanding on our revolving credit facility and no balance outstanding on our INTRUST line of credit, each at interest rates indexed to the Eurodollar rate or the prime rate. The fair value of the 6.625% senior notes, based on the closing price at March 31, 2014, was $310.5 million. The fair value of the 4.75% senior notes, based on the closing price at March 31, 2014, was $233.4 million. Carrying value approximates fair value for all other indebtedness.
Market Risk
Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. Our primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our senior management. We manage our market risk based on an ongoing assessment of trends in interest rates and economic developments,
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RENT-A-CENTER, INC. AND SUBSIDIARIES
giving consideration to possible effects on both total return and reported earnings. As a result of such assessment, we may enter into swap contracts or other interest rate protection agreements from time to time to mitigate this risk.
Interest Rate Risk
We have outstanding debt with variable interest rates indexed to prime or Eurodollar rates that exposes us to the risk of increased interest costs if interest rates rise. As of March 31, 2014, we have not entered into any interest rate swap agreements. The credit markets have experienced adverse conditions, including wide fluctuations in rates. Such volatility in the credit markets could increase the costs associated with our existing long-term debt. Based on our overall interest rate exposure at March 31, 2014, a hypothetical 1.0% increase or decrease in interest rates would have the effect of causing a $1.9 million additional pre-tax charge or credit to our statement of earnings.
Foreign Currency Translation
We are exposed to market risk from foreign exchange rate fluctuations of the Mexican peso and Canadian dollar to the U.S. dollar as the financial position and operating results of our stores in those countries are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our Chief Executive Officer and our Interim Chief Financ ial Officer, concluded that, as of March 31, 2014, our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) were effective.
Changes in internal controls. For the quarter ended March 31, 2014, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – Other Information
Item 6. Exhibits.
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.
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RENT-A-CENTER, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
Rent-A-Center, Inc.
By /s/ Robert D. Davis
Robert D. Davis
Chief Executive Officer
Date: April 25, 2014
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INDEX TO EXHIBITS
Exhibit No. Description

3.1 | Certificate of Incorporation of Rent-A-Center, Inc., as amended (Incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K dated as of December 31, 2002.)
3.2 | Certificate of Amendment to the Certificate of Incorporation of Rent-A-Center, Inc., dated May 19, 2004 (Incorporated herein by reference to Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)
3.3 | Amended and Restated Bylaws of Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 3.1 to the registrant's Current Report on Form 8-K dated as of September 28, 2011.)
4.1 | Form of Certificate evidencing Common Stock (Incorporated herein by reference to Exhibit 4.1 to the registrant's Registration Statement on Form S-4/A filed on January 13, 1999.)
4.2 | Indenture, dated as of November 2, 2010, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated as of November 2, 2010.)
4.3 | Registration Rights Agreement relating to the 6.625% Senior Notes due 2020, dated as of November 2, 2010, among Rent-A-Center, Inc., the subsidiary guarantors party thereto and J.P. Morgan Securities LLC, as representative for the initial purchasers named therein (Incorporated herein by reference to Exhibit 4.2 to the registrant's Current Report on Form 8-K dated as of November 2, 2010.)
4.4 | Indenture, dated as of May 2, 2013, by and among Rent-A-Center, Inc., as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee (Incorporated herein by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated as of May 2, 2013.)
4.5 | Registration Rights Agreement relating to the 4.75% Senior Notes due 2021, dated as of May 2, 2013, among Rent-A-Center, Inc., the subsidiary guarantors party thereto and J.P. Morgan Securities LLC, as representative for the initial purchasers named therein (Incorporated herein by reference to Exhibit 4.2 to the registrant's Current Report on Form 8-K dated as of May 2, 2013.)
10.1† | Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)
10.2 | Guarantee and Collateral Agreement, dated March 19, 2014, by and among Rent-A-Center, Inc., its subsidiaries named as guarantors therein and JPMorgan Chase Bank, N.A. as Administrative Agent (Incorporated herein by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K dated March 19, 2014.)
10.3 | Franchisee Financing Agreement, dated April 30, 2002, but effective as of June 28, 2002, by and between Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.4 | Supplemental Letter Agreement to Franchisee Financing Agreement, dated May 26, 2003, by and between Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 10.23 to the registrant's Registration Statement on Form S-4 filed July 11, 2003.)
10.5 | First Amendment to Franchisee Financing Agreement, dated August 30, 2005, by and among Texas Capital Bank, National Association, ColorTyme, Inc. and Rent-A-Center East, Inc. (Incorporated herein by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.)
10.6 | Franchise Financing Agreement, dated as of August 2, 2010, between ColorTyme Finance, Inc. and Citibank, N.A. (Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated as of August 2, 2010.)
10.7 | Unconditional Guaranty of Rent-A-Center, Inc., dated as of August 2, 2010, executed by Rent-A-Center, Inc. in favor of Citibank, N.A. (Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated as of August 2, 2010.)
10.8 | Unconditional Guaranty of Rent-A-Center, Inc., dated as of August 2, 2010, executed by ColorTyme Finance, Inc. in favor of Citibank, N.A. (Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated as of August 2, 2010.)

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INDEX TO EXHIBITS
Exhibit No. Description

10.9† | Form of Stock Option Agreement issuable to Directors pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.20 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2004.)
10.10† | Form of Stock Option Agreement issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.21 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2004.)
10.11† | Summary of Director Compensation (Incorporated herein by reference to Exhibit 10.11 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013.)
10.12† | Form of Stock Compensation Agreement issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.15 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)
10.13† | Form of Long-Term Incentive Cash Award issuable to management pursuant to the Amended and Restated Rent-A-Center, Inc. Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.16 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)
10.14† | Form of Loyalty and Confidentiality Agreement entered into with management (Incorporated herein by reference to Exhibit 10.14 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.)
10.15† | Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.17 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
10.16† | Form of Stock Option Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.18 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
10.17† | Form of Stock Compensation Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Equity Incentive Plan (Incorporated herein by reference to Exhibit 10.19 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006.)
10.18† | Form of Long-Term Incentive Cash Award issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.20 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006.)
10.19† | Rent-A-Center, Inc. 2006 Equity Incentive Plan and Amendment (Incorporated herein by reference to Exhibit 4.5 to the registrant's Registration Statement on Form S-8 filed with the SEC on January 4, 2007.)
10.20† | Form of Stock Option Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Equity Incentive Plan (Incorporated herein by reference to Exhibit 10.22 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006.)
10.21† | Form of Stock Compensation Agreement issuable to management pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.23 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006.)
10.22† | Form of Stock Option Agreement issuable to Directors pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.24 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2006.)
10.23† | Form of Deferred Stock Unit Award Agreement issuable to Directors pursuant to the Rent-A-Center, Inc. 2006 Long-Term Incentive Plan (Incorporated herein by reference to Exhibit 10.23 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2010.)
10.24† | Form of Executive Transition Agreement entered into with management (Incorporated herein by reference to Exhibit 10.24 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.)
10.25† | Non-Qualified Stock Option Agreement, dated October 2, 2006, between Rent-A-Center, Inc. and Mark E. Speese (Incorporated herein by reference to Exhibit 10.23 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.)

32

INDEX TO EXHIBITS
Exhibit No. Description

10.26† | Rent-A-Center, Inc. Non-Qualified Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.28 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.)
10.27† | Rent-A-Center, Inc. 401-K Plan (Incorporated herein by reference to Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008.)
10.28 | Credit Agreement, dated as of March 19, 2014,among Rent-A-Center, Inc., the several lenders from time to time parties thereto, Bank of America, N.A., BBVA Compass Bank, Wells Fargo Bank, N.A. and Suntrust Bank, as syndication agents, and JPMorgan Chase Bank, N.A., as administrative agent (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated as of March 19, 2014.)
10.29† | Rent-A-Center East, Inc. Retirement Savings Plan for Puerto Rico Employees (Incorporated herein by reference to Exhibit 99.1 to the registrant's Registration Statement on Form S-8 filed January 28, 2011.)
10.30 | First Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of July 25, 2012 (Incorporated herein by reference to Exhibit 10.32 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
10.31 | Master Confirmation Agreement, dated as of May 2, 2013, between Rent-A-Center, Inc. and Goldman Sachs & Co. (Incorporated herein by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated as of May 2, 2013.)
10.32 | Second Amendment to Franchisee Financing Agreement between ColorTyme Finance, Inc. and Citibank, N.A., dated as of August 30, 2013 (Incorporated herein by reference to Exhibit 10.34 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.)
16.1 | Letter from Grant Thornton LLP to the Securities Exchange Commission dated December 19, 2012 (Incorporated herein by reference to Exhibit 16.1 to the registrant's Current Report on Form 8-K dated as of December 13, 2012.)
16.2 | Letter from Grant Thornton LLP to the Securities Exchange Commission dated February 25, 2013 (Incorporated herein by reference to Exhibit 16.1 to the registrant's Current Report on Form 8-K dated as of February 25, 2013.)
21.1 | Subsidiaries of Rent-A-Center, Inc. (Incorporated herein by reference to Exhibit 21.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013.)
31.1* | Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Robert D. Davis
31.2* | Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Michael S. Wilding
32.1* | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Robert D. Davis
32.2* | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael S. Wilding
101.INS* | XBRL Instance Document
101.SCH* | XBRL Taxonomy Extension Schema Document
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document

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† Management contract or compensatory plan or arrangement.
* Filed herewith.
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