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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549** **FORM 10-Q** **(Mark One)**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006****OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934** **Commission File Number 0-22026****RENT-WAY, INC.**(Exact name of registrant as specified in its charter)    PENNSYLVANIA 25-1407782   (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505 (Address of principal executive offices)(814) 455-5378 (Registrant’s telephone number)Indicate by check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):     Large accelerated filer o Accelerated filer þ Non-accelerated filer oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No þIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date.   Class Outstandingas of May 5, 2006Common Stock 26,396,419  
 

 
**RENT-WAY, INC.**               **PAGE** **PART I** ******FINANCIAL INFORMATION**               Item 1. Financial Statements:                 Consolidated Balance Sheets as of March 31, 2006 (unaudited) and September 30, 2005  3              Consolidated Statements of Operations, three and six-months ended March 31, 2006 and 2005 (unaudited)  4              Consolidated Statements of Cash Flows, six-months ended March 31, 2006 and 2005 (unaudited)  5              Notes to Consolidated Financial Statements (unaudited)  6            Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  28            Item 3. Quantitative and Qualitative Disclosures About Market Risk  35            Item 4. Controls and Procedures  35          **PART II** ******OTHER INFORMATION**               Item 1. Legal Proceedings  36            Item 1A. Risk Factors  36            Item 4. Submission ofMatters to a Vote of Security Holders  39            Item 6. Exhibits  39            Signatures  40  EX-31.1 EX-31.2 EX-32.1 EX-99.1
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**PART I— FINANCIAL INFORMATION**Item 1. Financial Statements**RENT-WAY, INC.**CONSOLIDATED BALANCE SHEETS(all amounts in thousands, except share data)           March 31  September 30,   2006  2005   (unaudited)     ASSETS                 Cash and cash equivalents $7,378  $6,439 Prepaid expenses  6,637   7,962 Rental merchandise, net  234,551   194,178 Rental merchandise credits due from vendors  —   400 Property and equipment, net  50,550   47,720 Goodwill  191,052   189,287 Deferred financing costs, net  5,806   6,262 Intangible assets, net  2,064   2,101 Other assets  7,118   6,136        Total assets $505,156  $460,485                 LIABILITIES AND SHAREHOLDERS’ EQUITY                 Liabilities:        Accounts payable $40,768  $23,744 Other liabilities  69,428   63,409 Deferred tax liability  18,941   15,856 Debt  239,522   221,313        Total liabilities  368,659   324,322          Contingencies  —   —          Convertible redeemable preferred stock  16,483   17,929          Shareholders’ equity:        Preferred stock, without par value; 1,000,000 sharesauthorized; 2,000 shares issued and outstandingas Series A convertible preferred shares  —   — Common stock, without par value; 50,000,000 sharesauthorized; 26,396,419 and 26,381,376 shares issued andoutstanding, respectively  305,068   305,033 Additional paid in capital  159   — Accumulated deficit  (185,213)  (186,799)       Total shareholders’ equity  120,014   118,234        Total liabilities and shareholders’ equity $505,156  $460,485        *The accompanying notes are an integral part of these financial statements.*
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**RENT-WAY, INC.**CONSOLIDATED STATEMENTS OF OPERATIONS(all amounts in thousands, except per share data)(unaudited)                   Three-months Ended  Six-months Ended   March 31,  March 31,   2006  2005  2006  2005 REVENUES:                Rental revenue $119,564  $114,199  $226,798  $220,141 Prepaid phone service revenue  4,125   4,742   8,164   9,304 Other revenues  18,695   17,257   35,278   33,050              Total revenues  142,384   136,198   270,240   262,495                  COSTS AND OPERATING EXPENSES:                Depreciation and amortization:                Rental merchandise  38,950   36,005   72,593   68,521 Property and equipment  3,655   3,902   7,226   8,413 Intangibles  196   28   381   56 Cost of prepaid phone service  2,733   2,871   5,269   5,777 Salaries and wages  36,950   34,764   73,585   69,584 Advertising, net  5,156   4,733   11,109   10,085 Occupancy  10,195   9,289   20,130   18,349 Other operating expenses  33,351   30,305   61,374   56,247              Total costs and operating expenses  131,186   121,897   251,667   237,032              Operating income  11,198   14,301   18,573   25,463                  OTHER INCOME (EXPENSE):                Interest expense  (7,334)  (7,291)  (14,308)  (14,358)Interest income  21   7   42   13 Amortization of deferred financing costs  (331)  (285)  (649)  (565)Other income (expense)  355   1,025   2,269   (239)                              Income before income taxes and discontinued operations  3,909   7,757   5,927   10,314 Income tax expense  1,697   1,395   3,085   2,790              Income before discontinued operations  2,212   6,362   2,842   7,524 Loss from discontinued operations  (69)  (53)  (92)  (181)             Net income  2,143   6,309   2,750   7,343 Dividend and accretion of preferred stock  (585)  (534)  (1,164)  (1,069)             Net income allocable to common shareholders $1,558  $5,775  $1,586  $6,274                               EARNINGS PER COMMON SHARE (NOTE 5):                                 Basic earnings per common share:                Income before discontinued operations $0.08  $0.24  $0.11  $0.29              Net income allocable to common shareholders $0.06  $0.22  $0.06  $0.24                               Diluted earnings per common share:                Income before discontinued operations $0.08  $0.19  $0.03  $0.28              Net income allocable to common shareholders $0.06  $0.19  $0.03  $0.23                               Weighted average common shares outstanding:                Basic  26,387   26,244   26,384   26,244              Diluted  26,612   29,992   29,827   26,728              *The accompanying notes are an integral part of these financial statements.*
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**RENT-WAY, INC.**CONSOLIDATED STATEMENTS OF CASH FLOWS(all amounts in thousands)(unaudited)           Six-months Ended   March 31,   2006  2005 OPERATING ACTIVITIES:        Net income $2,750  $7,343 Adjustments to reconcile net income to net cash used in operating activities:        Loss from discontinued operations  92   181 Depreciation and amortization  73,034   71,957 Carryingvalue of rental merchandise sold  8,036   5,851 Deferred income taxes  3,085   2,790 Market adjustment for interest rate swap derivative  —   (1,028)Stock-based compensation expense  159     Market adjustment for preferred stock conversion option derivative  (1,813)  1,581 Cash paid to settle class action lawsuit  —   (1,000)Write-down of property to realizable value  105   — Write-off of property and equipment  89   106 Gain on sale of assets  (27)  — Changes in assets and liabilities:        Prepaid expenses  1,325   (1,139)Rental merchandise  (110,905)  (91,142)Rental merchandise deposits and credits due from vendors  400   458 Other assets  (1,057)  325 Accounts payable  17,024   (1,087)Other liabilities  3,995   274        Net cash used in continuing operations  (3,708)  (4,530)Net cash used in discontinued operations  (92)  (181)       Net cash used in operating activities  (3,800)  (4,711)                INVESTING ACTIVITIES:        Purchase of business, net of cash acquired  (4,217)  (75)Purchases of property and equipment  (4,708)  (8,539)Proceeds from sale of assets  150   —        Net cash used in investing activities  (8,775)  (8,614)                FINANCING ACTIVITIES:        Proceeds from borrowings  74,950   55,000 Payments on borrowings  (56,963)  (37,016)Payments on capital leases  (3,509)  (3,832)Issuance of common stock  35   8 Dividends paid on convertible redeemable preferred stock  (807)  (802)Deferred financing costs  (192)  —        Net cash provided by financing activities  13,514   13,358                 Increase in cash and cash equivalents  939   33          Cash and cash equivalents at beginning of period  6,439   3,412                 Cash and cash equivalents at end of period $7,378  $3,445        *The accompanying notes are an integral part of these financial statements.*
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1. SUMMARY OF CRITICAL ACCOUNTING POLICIES:BUSINESS AND ORGANIZATION. Rent-Way, Inc. (the “Company” or “Rent-Way”) is a corporation organizedunder the laws of the Commonwealth of Pennsylvania. The Company operates a chain of stores thatrents durable household products such as home entertainment equipment, furniture, major appliances,computers, and jewelry to consumers on a weekly, biweekly, semi-monthly or monthly basis inthirty-four states. The stores are primarily located in the Midwestern, Eastern and Southernregions of the United States. The Company also provides prepaid phone service to consumers ona monthly basis through its majority-owned subsidiary, dPi Teleconnect, LLC (“DPI”).BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q, and therefore, do not include allinformation and notes necessary for a fair presentation of financial position, results ofoperations and cash flows in conformity with accounting principles generally accepted in the UnitedStates of America. In the opinion of management, all adjustments have been made, which, except asdiscussed herein, consist of normal recurring adjustments, which are necessary for a fair statementof the financial position, results of operations and cash flows of the Company. The results ofoperations for the interim periods are not necessarily indicative of the results for the full year.The Company presents an unclassified balance sheet to conform to practice in the industry in whichit operates. The consolidated financial statements include the accounts of the Company and itswholly owned and majority owned subsidiaries. All significant inter-company transactions andbalances have been eliminated.These financial statements and the notes thereto should be read in conjunction with the Company’sfinancial statements included in its Annual Report on Form 10-K for the fiscal year ended September30, 2005.ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reporting periods. Actual results could differ from thoseestimates.SEASONALITY OF BUSINESS. The Company’s operating results are subject to seasonality. The firstfiscal quarter typically has a greater number of rental-purchase agreements entered into because oftraditional holiday shopping patterns. Becausemany of the Company’s expenses do not fluctuate with seasonal revenue changes, such revenue changesmay cause fluctuations in the Company’s quarterly earnings.CONVERTIBLE REDEEMABLE PREFERRED STOCK. On June 2, 2003, the Company sold $15,000 in newlyauthorized convertible redeemable preferred stock through a private placement. The proceeds of$14,161, net of issuance costs of $839, were used to repay the previous senior credit facility.The Company sold an additional $5,000 of convertible redeemable preferred stock through the sameprivate placement during fiscal year 2004. The proceeds were used in operations. The netproceeds are classified outside of permanent equity because of the mandatory redemption date andother redemption provisions. (See Note 10).STATEMENT OF CASH FLOWS INFORMATION. Cash and cash equivalents consist of cash on hand and ondeposit and represent highly liquid investments with maturities of three-months or less whenpurchased. Cash equivalents are stated at cost, which approximates market value. The Companymaintains deposits with several financial institutions. The Federal Deposit Insurance Corporationdoes not insure deposits in excess of $100 and mutual funds. Supplemental disclosures of cash flowinformation for the six-months ended March 31, 2006 and 2005 are as follows:           Six-months ended March 31,  2006 2005CASH PAID DURING THE PERIOD FOR:        Interest $14,327  $14,490 NONCASH INVESTING ACTIVITIES:        Assets acquired under capital lease  5,542   5,644 
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RENTAL MERCHANDISE, RENTAL REVENUE AND DEPRECIATION. Rental merchandise is rented to customerspursuant to rental agreements, which provide for either weekly, biweekly, semi-monthly or monthlyrental payments collected in advance. Rental revenues are recorded in the period they are earned.Rental payments received prior to when they are earned are recorded as deferred rental revenue anda receivable is recorded for the rental revenues earned in the current period and received in thesubsequent period. Incremental direct costs related to origination of these revenues are deferred.Merchandise rented to customers or available for rent is classified in the consolidated balancesheet as rental merchandise and is valued at cost on a specific identification method. Write-offsof rental merchandise arising from customers’ failure to return merchandise and losses due toexcessive wear and tear of merchandise are recognized using the allowance method.The Company uses the “units of activity” depreciation method for all rental merchandise exceptcomputers and electronic game systems. Under the units of activity method, rental merchandise isdepreciated as revenue is earned. Thus, rental merchandise is not depreciated during periods whenit is not on rent and therefore not generating rental revenue. Personal computers are principallydepreciated on the straight-line basis over 24 months beginning on the acquisition date.Electronic game systems are depreciated on the straight-line basis over 6 to 18 months.OTHER REVENUE. Other revenue includes revenue from various services and charges to rentalcustomers, including late fees, liability waiver fees, processing fees, sales of used merchandiseand preferred customer club membership fees. Liability waiver fees, processing fees and preferredcustomer club membership fees are recorded in the period they are earned. Payments received priorto when they are earned are recorded as deferred revenue and a receivable is recorded for therevenues earned in the current period and received in the subsequent period. Late fees and cashsales of used merchandise are recognized when received.DEFERRED FINANCING COSTS. Deferred financing costs consists of bond issuance costs and loanorigination costs incurred in connection with the sale of $205,000 of senior secured notes and a$60,000 revolving credit facility that closed on June 2, 2003. The bond issuance costs of $6,704are amortized using the effective interest method over the seven-year term of the bonds. The loanorigination costs of $2,062 are amortized on a straight-line basis over the five-year bank creditagreement. On November 18, 2005, the Company incurred $192 of deferred costs associated with anamendment to the bank revolving credit facility. Those costs are being amortized over theremaining term of the agreement. Deferred financing cost amortization was $649 and $565 for thesix-month periods ended March 31, 2006 and 2005, respectively.COMPANY HEALTH INSURANCE PROGRAM. Effective January 1, 2006, the Company converted to a fullyself-insured program. The Company funds actual claims and uses a claims lag report provided by theinsurance company to estimate the Company’s incurred but not reported (IBNR) claims liability. TheCompany’s IBNR claims liability was $1,305 at March 31,2006, and is in accrued liabilities on the accompanying consolidatedbalance sheet.In calendar year 2005, the Company determined its insurance liability based on funding factorsdetermined by cost plus rates for a fully insured plan and monthly headcount. The contracted ratewas determined based on experience, prior claims filed and an estimate of future claims. Aretrospective adjustment for over (under) funding of claims is recorded in other operating expensesin the consolidated statement of operations when determinable and probable.COMPANY LIABILITY INSURANCE PROGRAMS. Starting in 2001, the Company’s workers’ compensation,automobile and general liability costs are determined based on claims filed and company experience.Losses under the deductible in the workers’ compensation, automobile and general liability programsare pre-funded based on the insurance company’s loss estimates. Loss estimates are adjusted fordeveloped incurred losses at 18 months following policy inception and every 12 months thereafter.Retrospective adjustments to loss estimates are recorded in other operating expenses in theconsolidated statement of operations when determinable and probable.For fiscalyear 2000, the Company was insured under deductible programs with aggregatestop loss coverage on major claims. Claims within the insured deductible limits that were less thanstop loss aggregates, were funded as claims developed using AM Best loss development factors. Thefiscal 1999 worker’s compensation insurance had no aggregate retention and was funded as claimsdeveloped using AM Best loss development factors. Reserves were developed by independentconsultants and totaled $620 at March 31, 2006 and $599 at September 30, 2005.OPERATING LEASES AND DEPRECIATION OF LEASEHOLD IMPROVEMENTS. Rent expense for operating leases,which may have escalating rentals over the term of the lease, is recorded on a straight-line basisover the initial lease term. The initial lease term includes the “build out” period of leases,where no rent payments are typically due under the terms of the lease. The difference
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between rent expense and rent paid is recorded as a deferred rent liability and is included in theconsolidated balance sheets. Construction allowances received from landlords are recorded as adeferred rent liability and amortized to rent expense over the initial term of the lease. TheCompany’s statement of cash flows reflects the receipt of construction allowances as an increase incash flows from operating activities. Depreciation of leasehold improvements is over the shorterof the term of the lease (and those renewal periods that are reasonably assured) or the asset’suseful economic life.DISCONTINUED OPERATIONS. On February 8, 2003, the Company sold rental merchandise and relatedcontracts of 295 stores to Rent-A-Center, Inc. Rent-A-Center, Inc. purchased certain fixed assetsand assumed related store leases of 125 of these stores. Accordingly, for financial statementpurposes, the assets, liabilities, results of operations and cash flows of this component have beensegregated from those of continuing operations and are presented in the Company’s financialstatements as discontinued operations (see Note 2).RECLASSIFICATIONS. Certain amounts inthe prior period consolidated statement of cash flows werereclassified to conform to the March 31, 2006 presentation.2. DISCONTINUED OPERATIONS:The Company sold rental merchandise and related contracts of 295 stores to Rent-A-Center, Inc. forapproximately $100,400 during the 2003 fiscal year. These stores were all included in thehousehold rental segment. Rent-A-Center purchased certain fixed assets and assumed related storeleases of 125 of these stores. As required under the Company’s credit agreement, all proceeds ofthe sale, net of transaction costs, store closing and similar expenses, were used to pay existingbank debt. The assets sold included rental merchandise, vehicles under capital leases and certainfixed assets. Vehicle lease obligations were paid by the Company out of the proceeds from thesale.The asset group was distinguishable as a component of the Company and classified as held for salein accordance with Statement ofFinancial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment on Disposal ofLong-Lived Assets.” Direct costs to transact the sale were comprised of, but not limited to,broker commissions, legal and title transfer fees and closing costs.In connection with the sale of the stores, the Company has and will continue to incur additionaldirect costs related to the sale and exit costs related to these discontinued operations. Costsassociated with an exit activity include, but are not limited to termination benefits, costs toterminate a contract that is not a capital lease and costs to consolidate facilities or relocateemployees, in accordance with Statement of Financial Accounting Standards No. 146 (“SFAS 146”),“Accounting for Costs Associated with Exit or Disposal Activities.” The Company accrued employeeseparation costs as costs were incurred in accordance with SFAS 146. These costs were included inthe results of discontinued operations in accordance with SFAS 144.Related operating results have been reported as discontinued operations in accordance with SFAS144. The Company has reclassified the results of operations of the component disposed for theprior periods in accordance with provisions of SFAS 144. There have been no corporate expensesincluded in expenses from discontinued operations. The net loss from the discontinued operationswere as follows:                   Three-months Ended March 31,  Six-months Ended March 31,   2006  2005  2006  2005 Operating expenses from discontinued operations (including exit costs) (1) $(69) $(53) $(92) $(181)             Net loss from discontinued operations $(69) $(53) $(92) $(181)              (1) The Company recorded exit costs associated with the monthly rent and common areamaintenance charges until leases are terminated or expired, in accordance with SFAS 146.There were no assets or liabilities held for sale included in the Consolidated Balance Sheetas of March 31, 2006, and September 30, 2005.3. ACQUISITIONS:In October 2005, the Company acquired rental contracts and merchandise of 12 rental-purchasestores from Rent-A-Center, Inc. The purchase price was approximately$3,464. Based on thepreliminary allocation, the Company assigned a value of $1,908 to the acquired rental merchandise,$183 to amortizable assets (non-compete agreements and customerlists), and $1,373 to goodwill.The intangible asset allocation was based on a valuation performed by a third party.
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TheCompany acquired rental contracts and merchandise of three rental-purchasestores and exchanged rental contracts and merchandise of an existinglocation for rental contracts and merchandise of a competitor invarious other acquisitions during the six-months ended March 31,2006. The purchase price was $753. The Company assigned values of$275 to the acquired rental merchandise, $86 toamortizable assets (non-compete agreements and customer lists), and$392 to goodwill.4. RENTAL MERCHANDISE AND PROPERTY AND EQUIPMENT:Cost and accumulated depreciation of rental merchandise consists of the following:           March 31,  September 30,   2006  2005 Cost $355,834  $317,912 Less accumulated depreciation  119,055   120,898 Less reserve for losses  1,522   1,261 Less reserve for hurricane damages  —   1,509 Less deferred credits  706   66          $234,551  $194,178             During the six months ended March 31, 2006, the Company received $600 as insuranceproceeds for merchandise lost in last year’s hurricanes that wasrecorded as a reduction to other operatingexpenses. The reduction of the reserve for hurricane damages was attributable to actual write-offscharged against the reserve, and the reversal of the $400 reserve for merchandise recovered.     The Company uses a direct-ship policy from their vendors to the stores. As a result, theCompany has eliminated the need for internal warehousing and distribution. This policy reduces theamount of rental merchandise not on rent. On-rent and held for rent levels of rental merchandiseconsists of the following:           March 31,  September 30,   2006  2005 On-rent merchandise $290,020  $258,328 Held for rent merchandise  65,814   59,584          $355,834  $317,912             The Company uses the allowance method in accounting for losses (see Note 1). Theselosses are recorded in other operating expenses and were incurred as follows:           Six-Months Ended March 31,   2006  2005 Lost merchandise $305  $682 Stolen merchandise  6,471   5,509 Discarded merchandise  1,314   1,118 Additional reserve for expected losses  220   104          $8,310  $7,413             Property and equipment consists of the following:           March 31,  September 30,   2006  2005 Transportation equipment $44,403  $42,875 Furniture and fixtures  39,149   36,431 Leasehold improvements  35,623   34,259 Signs  5,260   5,122 Buildings  5,537   5,674 Land  1,924   1,920           131,896   126,281 Less accumulated depreciation and amortization  (81,346)  (78,561)         $50,550  $47,720             Furniture and fixtures includes computer hardware and software costs of $28,511,which includes software development costs of $3,272 in progress at March 31, 2006. There have beenno charges to the statement of operations for software development costs because the software isnot yet available for use.
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5. EARNINGS PER COMMON SHARE:Basic earnings per common share is computed using income allocable to common shareholders dividedby the weighted average number of common shares outstanding. Diluted earnings per common share iscomputed using income allocable to common shareholders and the weighted average number of sharesoutstanding adjusted for the potential impact of options, warrants, conversion of convertibleredeemable preferred stock, convertible preferred stock conversion derivative, dividends onconvertible preferred stock and accretion of convertible preferred stock discount where the effectsare dilutive.The following table discloses the reconciliation of numerators and denominators of the basic anddiluted earnings per share computation:                   Three-months Ended March 31,  Six-months Ended March 31,   2006  2005  2006  2005 COMPUTATION OF EARNINGS PER SHARE:                BASIC                Income before discontinued operations $2,212  $6,362  $2,842  $7,524 Loss from discontinued operations  (69)  (53)  (92)  (181)             Net income  2,143   6,309   2,750   7,343 Dividend and accretion of preferred stock  (585)  (534)  (1,164)  (1,069)             Net income allocable to common shareholders $1,558  $5,775  $1,586  $6,274                               Weighted average common shares outstanding  26,387   26,244   26,384   26,244                               Earnings per share:                Income before discontinued operations $0.08  $0.24  $0.11  $0.29 Loss from discontinued operations  —   —   —   (0.01)Dividend and accretion of preferred stock  (0.02)  (0.02)  (0.05)  (0.04)             Net income allocable to common shareholders $0.06  $0.22  $0.06  $0.24                               DILUTED                Net income allocable to common shareholders for basic earnings per share $1,558  $5,775  $1,586  $6,274 Plus: Impact of assumed conversion:                Conversion derivative market value adjustment (1)  —   (610)  (1,813)  — Dividends on 8% convertible preferred stock (1)  —   394   798   — Accretion to preferred stock redemption amount (1)  —   140   366   —              Net income allocable to common shareholders for diluted earnings per shareand assumed conversion $1,558  $5,699  $937  $6,274                               Weighted average common shares used in calculating basic earnings per share  26,387   26,244   26,384   26,244 Add incremental shares representing:                Shares issuable upon exercise of stock options and warrants  225   496   191   484 Shares issuable upon conversion of 8% convertible preferred stock (1)  —   3,252   3,252   —              Weighted average number of shares used in calculation of diluted earningsper share  26,612   29,992   29,827   26,728              Earnings per share:                Income before discontinued operations $0.08  $0.19  $0.03  $0.28 Loss from discontinued operations  —   —   —   (0.01)Dividend and accretion of preferred stock  (0.02)  —   —   (0.04)             Net income allocable to common shareholders $0.06  $0.19  $0.03  $0.23               (1) Including the effects of these items for the three-month period ended March 31, 2006 would beanti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8% convertible preferredstock are excluded from consideration in the calculation of diluted earnings per share for thethree-months ended March 31, 2006. There were favorable conversion derivative market value adjustmentsof $116, unfavorable dividends on convertible preferred stock of $395 and accretion to preferred stockredemption in the amount of $190 which were not added back to net income allocable to commonshareholders for basic earnings per share on the diluted earnings per share because includingthe effects of these items would be anti-dilutive.   Including the effects of these items for the six-month period ended March 31, 2005 would beanti-dilutive. Therefore 3,252 shares issuable upon conversion of 8% convertible preferredstock are excluded from consideration in the calculation of diluted earnings per share forthe six-months ended March 31, 2005. There were conversion derivative market valueadjustments of $1,581, dividends on convertible preferred stock of $799 and accretion topreferred stock redemption in the amount of $270 which were not added back to net incomeallocable to common shareholders for basis earnings per share on the diluted earnings pershare because including the effects of these items would be anti-dilutive for the six-monthsended March 31, 2005.
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6. INTANGIBLE ASSETS:The Company accounts for goodwill in accordance with Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”The following table shows the net carrying value of goodwill for the Company’s segments:               Household  Prepaid Telephone      Rental Segment  Service Segment  Total Balance at September 30, 2005 $182,343  $6,944  $189,287 Acquisitions  1,765   —   1,765 Disposals  —   —   —           Balance at March 31, 2006 $184,108  $6,944  $191,052           The following tables reflect the components of amortizable intangible assets at March 31, 2006and September 30, 2005:               Purchase  Cumulative  Net Carrying   Amount  Amortization  Amount Balance at March 31, 2006:                         Amortizable intangible assets:            Music rights license $1,882  $(194) $1,688 Non-compete agreements  2,778   (2,648)  130 Customer list  234   (72)  162 Customer contracts  162   (78)  84             $5,056  $(2,992) $2,064                          Purchase  Cumulative  Net Carrying   Amount  Amortization  Amount Balance at September 30, 2005:                         Amortizable intangible assets:            Music rights license $1,882  $(7) $1,875 Non-compete agreements  2,650   (2,623)  27 Customer list  93   (21)  72 Customer contracts  162   (35)  127             $4,787  $(2,686) $2,101           At March 31, 2006, future aggregate annual amortization of amortizable intangibleassets is as follows:         Fiscal Year     Amount Remaining 2006     $324 2007      560 2008      426 2009      381 2010      373               $2,064         Amortization expense was $381 and $56 for the six-months ended March 31, 2006 and 2005,respectively. There were no changes to the amortization methods and lives of the amortizableintangible assets. Customer lists are amortized over 22 months.7. OTHER ASSETS:Other assets consist of the following:           March 31,  September 30,   2006  2005 Other receivables $2,876  $2,425 Other inventory  598   571 Deposits  846   786 Other  2,798   2,354          $7,118  $6,136        
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8. OTHER LIABILITIES:Other liabilities consist of the following:           March 31,  September 30,   2006  2005 Accrued salaries, wages, taxes and benefits $12,327  $9,367 Capital lease obligations  21,297   19,409 Deferred rental revenue  8,914   7,704 Accrued dividends and interest  7,748   7,771 Vacant facility lease obligations  2,424   2,541 Accrued property taxes  2,103   3,200 Other  14,615   13,417          $69,428  $63,409        9. DEBT:Debt consists of the following:           March 31,  September 30,   2006  2005 Senior secured notes $202,505  $202,284 Revolving credit facility  37,000   19,000 Note payable  17   29          $239,522  $221,313        The Company’s senior secured notes have the following material terms. The $205,000 principalamount of senior secured notes bears interest at 11.875% and is due June 15, 2010. The intereston the secured notes is payable semiannually on June 15 and December 15. The secured notes areguaranteed on a senior basis by all existing and future domestic restricted subsidiaries of theCompany other than DPI, which is an unrestricted subsidiary. The Company may redeem the securednotes, in whole or in part, at any time prior to June 15, 2010, at a redemption price equal to thegreater of: a) 100% of the principal amount of the notes to be redeemed; and  b) the sum of the present values of (i) 100% of the principal amount of the notes tobe redeemed at June 15, 2010, and (ii) the remaining scheduled payments of interest fromthe redemption date through June 15, 2010, but excluding accrued and unpaid interest tothe redemption date, discounted to the redemption date at the treasury rate plus 175basis points;plus, in either case, accrued and unpaid interest to the redemption date.In addition, at any time prior to June 15, 2006, up to 25% of the aggregate principal amount of thesecured notes may be redeemed atthe Company’s option, within 75 days of certain public equity offerings, at a redemption price of11.875% of the principal amount, together with accrued and unpaid interest. Such redemption canoccur provided that after giving effect to any such redemption, atleast 75% of the original aggregate principal amount of the notes issued (including any notesissued in future permitted issuances) remains outstanding.The secured notes were offered at a discount of $3,583, which is being amortized using theeffective interest method, over the term of the secured notes. Amortization of the discount was$115 and $101 for the three-month periods ending March 31, 2006 and 2005 respectively, and $221 and$197 for the six-month periods ending March 31, 2006 and 2005 respectively, and is recorded asinterest expense. Costs representing underwriting fees and other professional fees of $6,704 arebeing amortized over the seven-year term of the notes using the effective interest method ofamortization. The secured notes rank senior in right to all of the Company’s existing and futuresubordinated debt, have a lien position ranking second to the bank revolving credit facility andeffectively junior in right of payment to all existing and future debt and other liabilities of theCompany’s subsidiaries that are not subsidiary guarantors. The secured notes contain covenantsthat will, among other things, limit the Company’s ability to incur additional debt, makerestricted payments, incur any additional liens, sell certain assets, pay dividend distributionsfrom restricted subsidiaries, transact with affiliates, conduct certain sale and leasebacktransactions and use excess cash flow.The Company is in compliance with covenants at March 31, 2006, andexpects to remain in compliance through fiscal 2006 based upon itscurrent projections.
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The Company’s bank revolving credit facility has the following material terms. The facility iswith Harris Trust and Savings Bank, acting as administrative agent, and Bank of Montreal as leadarranger, and provides for National City Bank to act as syndication agent and provides for seniorsecured revolving loans of up to $60,000 including a $15,000 sub-limit for standby and commercialletters of credit and a $5,000 swingline sub-limit. The credit facility will expire five yearsfrom closing, or June 2, 2008. The balance outstanding at March 31, 2006 was $37,000 with $19,803available at March 31, 2006, and has an effective interest rate of 8.57% at March 31, 2006. Loanorigination costs of $2,062 are being amortized over the 5-year term of the bank agreement. OnNovember 18, 2005, the Company entered into a third amendment to the bank revolving credit facilityand incurred $193 of deferred costs associated with that amendment. The amendment adjustedfinancial covenants, permitted acquisition limits and capital expenditure limits as disclosed inthe Form 10-K for fiscal year ended September 30, 2005. These deferred financing costs are beingamortized over the remaining term of the agreement in accordance with EITF 98-14. The creditfacility is guaranteed by all of the wholly owned domestic subsidiaries and collateralized by firstpriority liens on substantially all of the Company’s and subsidiary guarantors’ assets, includingrental contracts and the stock held in domestic subsidiaries. The Company may elect that eachborrowing of revolving loans be either base rate loans or Eurodollar loans. The Eurodollar loansbear interest at a rate per annum equal to an applicable margin plus LIBOR adjusted for a reservepercentage. Under the base rate option, the Company may borrow money based on the greater of (a)the prime interest rate or (b) the federal funds rate plus 0.50%, plus, in each case, a specifiedmargin. A 0.50% commitment fee is payable quarterly on the unused amount of the revolving creditfacility. Upon a default, interest will accrue at 2% over the applicable rate. The Company willbe required to make specified mandatory prepayments upon subsequent debt or equity offerings andasset dispositions.10. CONVERTIBLE REDEEMABLE PREFERRED STOCK:On June 2, 2003, the Company issued 1,500 shares of its Series A convertible preferred stock, for$10,000 per share (the “initial preferred”) and granted a one-year option to purchase an additional500 shares of convertible preferred stock (the “additional preferred”). The net proceeds from thesale of the initial preferred were used to repay the Company’s prior senior credit facility. Thenet proceeds of $14,161 from the issuance of the initial preferred were net of issuance costs of$839, and are classified outside of permanent equity because of the redemption date and otherredemption provisions. The one-year option to purchase additional preferred was exercised during2004 for $5,000. The Series A convertible preferred stock is being accreted to its maximumredemption amount possible pursuant to Topic D-98, “Classification and Measurement of RedeemableSecurities,” using the effective interest method from the issuance date to the June 2, 2011redemption date.The terms of the convertible preferred stock include a number of conversion and redemptionprovisions that represent derivative financial instruments under Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and Hedging Activities, (“SFAS 133”) (SeeNote 12). Certain features of the convertible preferred stock are accounted for as embeddedderivative financial instruments. The Company determined the convertible feature of the convertiblepreferred stock is a derivative financial instrument that does not qualify for scope exemptionunder EITF 00-19, and, is required to be bifurcated, recorded at fair value, and marked to market.The market value of this derivative financial instrument was $9,074 and $10,886 at March 31, 2006and September 30, 2005, respectively, and is recorded in convertible redeemable preferred stock inthe consolidated balance sheet. The fair values of the derivatives were determined with theassistance of an independent valuation firm.11. STOCK OPTIONS:Effective October 1, 2005, the Company adopted the provisions of FASB Statement of FinancialAccounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) for its stock-basedcompensation plans. Prior to the first quarter of fiscal 2006, the Company accounted forstock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations, as permitted bythe original provisions of Statement of Financial Accounting Standards No. 123, “Share-BasedPayment”. Under APB 25, the Company recorded no compensation expense since the exercise price ofits options equaled the fair market value of the underlying common stock on the date of grant. TheCompany instead utilized the disclosure-only provisions of Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Under SFAS123R, all stock-based compensation cost is measured at the grant date, based on the fair value ofthe award, and is recognized as an expense in the income statement over the requisite serviceperiod.The Company adopted SFAS 123R using the modified prospective transition method. Under the modifiedprospective transition method, the Company is required to record equity-based compensation expensefor all awards granted after the date of adoption and for the unvested portion of previouslygranted awards outstanding as of the date of adoption. Compensation cost related to the
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unvested portion of previously granted awards was based on the grant-date fair value estimated inaccordance with the original provision of SFAS 123. There were no options granted during fiscalyear 2006 through March 31, 2006. Results for prior periods have not been restated and do notreflect the recognition of stock-based compensation. The Company used the Black-Scholesoption-pricing model to estimate the grant-date fair value of each option granted before theadoption of SFAS 123R. The total intrinsic value of stock options exercised during the firstsix months of fiscal 2006 was immaterial. Total unrecognized compensation cost related to nonvestedstock-based compensation totaled $1,725 as of the end of the second quarter of fiscal 2006. Theunrecognized compensation cost will be recognized over a weighted-average period of three years.The following table summarizes thetransactions under the stock option plan through the six months endedMarch 31, 2006:                   Weighted      Options  Average  Aggregate (in thousands, except per share amounts) Outstanding  Exercise Price  Intrinsic Value (1) Balance at September 30, 2004  2,987,908  $8.87     Granted  748,500   7.70     Exercised  (137,700)  4.63     Cancelled  (583,055)  13.74                Balance at September 30, 2005  3,015,653   7.83     Granted  —   —     Exercised  (15,043)  5.81     Cancelled  (372,552)  8.93                Balance at March 31, 2006  2,628,058  $7.69  $—           Exercisable at March 31, 2006  1,771,808  $8.74  $—            (1) The intrinsic value of a stock option is the amount by which the current market valueof the underlying stock exceeds the exercise price of the option. The exercise prices ofthe outstanding and exercisable options exceed the market value at March 31, 2006;therefore, there is no intrinsic value.On April 4, 2005, the Company’s Board of Directors approved the award of 515,000 options tocertain executive officers, directors and certain members ofmanagement to acquire common stock under the Company’s stock optionplans. On September 30, 2005, the Company’s Board of Directors approved the award of 125,000options to certain executive officers to acquire common stock under the Company’s stock optionplans. These options were awarded under forms of stock option agreements that provide for immediatevesting of the option on grant, but contain restrictions on transfer of the shares underlyingoptions. These awards were made on an immediately vested basis and are expected to mitigate theimpact of SFAS 123(R) while still maintaining some of the retention benefit associated with optionsthat vest over time. The impact of the immediate vesting of 640,500 options issued in fiscal 2005was $3,585, and is reflected in the SFAS 148 pro-forma compensation expense in the Form 10-K forthe fiscal year ended September 30, 2005, filed December 29, 2005.Under SFAS 123R, compensation cost is recognized net of estimated forfeitures and is recognizedover the awards’ service period on a straight-line basis. The compensation expense recorded duringthe first six months of fiscal 2006 was $158 and is classified within salaries and wages in theConsolidated Statements of Operations. The Company has elected to adopt the alternative transitionmethod, as permitted by FASB Staff Position No. FAS 123R-3 “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards,” for calculating the tax effects ofstock-based compensation pursuant to SFAS 123R for those employee awards that were outstanding uponadoption of SFAS 123R. The alternative transition method allows the use of simplified methods tocalculate the beginning additional paid in capital pool related to the tax effects of employeestock-based compensation and to determine the subsequent impact of the tax effects of employeestock-based compensation awards on the additional paid in capital pool and the ConsolidatedStatements of Cash Flows. The following table illustrates the impact of stock-based compensationon reported amounts:           Six-Months Ended  March 31, 2006      Impact of Equity-(in thousands, except per share amounts) As Reported Based CompensationIncome before provision for taxes on income $5,927  $(158)Net income $2,750  $(158)Net income allocable to common shareholders $1,586  $(158)Net incomeallocable to common shareholders — Basic $0.06  $(0.01)Net incomeallocable to common shareholders — Diluted $0.03  $(0.01)
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The following table illustrates the effect on net income and net income per share if theCompany had adopted the fair value recognition provisions of SFAS 123 for the six months endedMarch 31, 2005:       Six-Months Ended   March 31,   2005 Income before discontinued operations:    As reported $7,524 Plus: Compensation expense  — Less: Stock-based employee compensationunder fair-value based method for all awards,net of related tax effects  (403)    Pro-forma $7,121          Net income allocable to common shareholders:    As reported $6,274 Plus: Compensation expense  — Less: Stock-based employee compensationunder fair-value based method for all awards,net of related tax effects  (403)    Pro-forma $5,871          Basic earnings per common share:    Net income before discontinued operations:    As reported $0.29     Pro-forma $0.27          Net income allocable to common shareholders:    As reported $0.24     Pro-forma $0.22          Diluted earnings per common share:    Net income before discontinued operations:    As reported $0.28     Pro-forma $0.27          Net income allocable to common shareholders:    As reported $0.23     Pro-forma $0.22     During the six months ended March 31, 2005, the weighted-average fair values of the optionsgranted under the stock option plans were $6.90, using the following assumptions:       Six-months Ended  March 31, 2005Average risk free interest rate  3.49%Expected dividend yield  — Expected life 6 yearsExpected volatility  97.98%On March 29, 2005, the Securities and Exchange Commission (“SEC”) staff issued StaffAccounting Bulletin (“SAB”) No. 107 to express the view of the staff regarding the interactionbetween SFAS 123R and certain SEC rules and regulations and to provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies. The additional guidance ofSAB 107 was taken into consideration with the implementation of SFAS 123R.
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12. DERIVATIVE FINANCIAL INSTRUMENTS:The Company’s outstanding convertible redeemable preferred stock (See Note 10) includes a number ofconversion and redemption provisions that represent derivatives under SFAS No. 133. The Company hasdetermined the conversion feature of the convertible redeemable preferred stock is a derivativefinancial instrument that does not qualify for SFAS 133 scope exemption under EITF 00-19. It wasbifurcated and recorded in the temporary equity classification on the balance sheet. The change inthe fair market value of the conversion feature was income of $116and $610 for the three-monthsended March 31,2006 and 2005, respectively, income of $1,813 for the six-months ended March 31,2006, and was expense of $1,581 for the six-months ended March 31, 2005.At March 31, 2005,the Company had interest rate swaps on a notional debt amount of$40,000 and an unfavorable fair market value of $544. The interest rate swaps maturedAugust 2005. The Company’s interestrate swaps did not meet the qualifications for hedge accounting treatment under SFAS No. 133. TheCompany’s positive change in the fair market value of the interest rate swap portfoliowas $460and $1,028 for the three-months and six-months ended March 31, 2005. This was recorded to otherincome (expense) in the Company’s consolidated statements of operations.13. COMPREHENSIVE INCOME:Comprehensive income encompasses net income and changes in the components of accumulated othercomprehensive income not reflected in the Company’s consolidated statements of operations duringthe periods presented. Accumulated other comprehensive income consists of the transition assetrecorded at the time of adoption of SFAS No. 133.           Other Comprehensive  Other Comprehensive   Income  Income   For Six-months Ended  For Six-months Ended   March 31, 2006  March 31, 2005 Net income $2,750  $7,343          Amortization of SFAS 133Transition amount  —   56                 Other comprehensive income $2,750  $7,399               Accumulated Other   Comprehensive   Loss   At September 30, 2005 Balance atOctober 1, 2004 $(93)     Amortization of SFAS 133Transition amount  93     Accumulated other comprehensive loss $—     
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14. CONTINGENCIES:The Company is subject to legal proceedings and claims in the ordinary course ofits business thathave not been finally adjudicated. All but $23 of such claims will be in the opinion of management, covered by insurancepolicies, or create only remote potential of any liability exposureto the Company and therefore should not have a material effect on the Company’s financial position,results of operations or cash flows. Additionally, threatened claims exist for which management isnot yet able to reasonably estimate a potential loss. In management’s opinion, none of thesethreatened and unasserted claims will have a material adverse effect on the Company’s financial position, resultsof operations or cash flows.Effective January 1, 2006, the Company converted to a fully self-insured health insurance program.The Company funds actual claims and uses a claims lag report provided by the insurance company toestimate the Company’s incurred but not reported (IBNR) claims liability.In calendar year 2005, the Company determined its health insurance liability based on fundingfactors determined by cost plus rates for a fully insured plan and monthly headcount. Thecontracted rate was determined based on experience, prior claims filed and an estimate of futureclaims. A retrospective adjustment for over or under funding of claims is recorded in otheroperating expenses in the consolidated statement of operations when determinable and probable.The Company’s workers’ compensation, automobile and general liability costs are determined based onclaims filed and company experience. Losses in the workers’ compensation, automobile and generalliability programs are pre-funded based on the insurance company’s loss estimates. Loss estimateswill be adjusted for developed incurred losses at 18 months following policy inception and every 12months thereafter. Retrospective adjustments to loss estimates are recorded in other operatingexpenses in the consolidated statement of operations when determinable and probable.For fiscal year 2000, the Company was insured under deductible programs withaggregate stop loss coverage on major claims. Claims within the insured deductible limits thatwere less than stop loss aggregates, were funded as claims developed using AM Best loss developmentfactors and not exceeding policy aggregate. The fiscal 1999 worker’s compensation insurance had noaggregate retention and was funded as claims developed using AM Best loss development factors.15. INCOME TAXES:During the first six months of fiscal 2006, the Company recorded income tax expense and a deferredtax liability of $3,085 because the Company does not look to the reversal of the deferred taxliability associated with tax-deductible goodwill to offset a portion of its deferred tax asset,following the adoption of SFAS 142. The deferred tax liability for goodwill is $18,941 at March31, 2006. The deferred tax asset, net of liabilities excluding goodwill, decreased from $79,162 atSeptember 30, 2005 to $78,440 at March 31, 2006. This represented a decrease of $722 for thesix-months ended March 31, 2006. A full valuation allowance has been provided against the netdeferred tax asset due to the uncertainty of its realization.16. SEGMENT INFORMATION:Rent-Way is a national rental-purchase chain that provides a variety of services to its customersincluding rental of household items and prepaid telephone. The Company has determined thatits reportable segments are those that are based on the Company’s method of internal reporting,which disaggregates its business by product category. The Company’s reportable segments arehousehold rentals and prepaid telephone service. Its household rental segment rents name brandmerchandise such as furniture, appliances, electronics and computers on a weekly, biweekly,semimonthly, or monthly basis. Its prepaid telephone service segment provides a local dial tone ona month-by-month basis.The financial results of the Company’s segments follow the same accounting policies as described in“Summary of Critical Accounting Policies” (see Note 1).
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                   Household  Prepaid Telephone  Inter-segment    For the three months ended March 31, 2006 Rental Segment  Service Segment  Activity  Total Segments Rental revenues $119,564  $—  $—  $119,564 Prepaid phone service revenue  —   4,330   (205)  4,125 Sales of merchandise  5,102   —   —   5,102 Customer club fee revenue  6,553   —   —   6,553 Liability damage waiver fee revenue  2,379   —   —   2,379 Other revenue  4,847   —   (186)  4,661              Total revenue $138,445  $4,330  $(391) $142,384              Operating income (loss) $11,705  $(332) $(175) $11,198              Net income (loss) $2,734  $(386) $(205) $2,143                               Total Assets $507,791  $3,525  $(6,160) $505,156                                 Household  Prepaid Telephone  Inter-segment    For the six months ended March 31, 2006 Rental Segment  Service Segment  Activity  Total Segments Rental revenues $226,798  $—  $—  $226,798 Prepaid phone service revenue  —   8,369   (205)  8,164 Sales of merchandise  8,738   —   —   8,738 Customer club fee revenue  13,045   —   —   13,045 Liability damage waiver fee revenue  4,691   —   —   4,691 Other revenue  9,129   —   (325)  8,804              Total revenue $262,401  $8,369  $(530) $270,240              Operating income (loss) $19,202  $(485) $(144) $18,573              Net income (loss) $3,549  $(594) $(205) $2,750                               Total Assets $507,791  $3,525  $(6,160) $505,156                                 Household  Prepaid Telephone  Inter-segment    For the three months ended March 31, 2005 Rental Segment  Service Segment  Activity  Total Segments Rental revenues $114,199  $—  $—  $114,199 Prepaid phone service revenue  —   4,742   —   4,742 Sales of merchandise  3,886   —   —   3,886 Customer club fee revenue  6,356   —   —   6,356 Liability damage waiver fee revenue  2,248   —   —   2,248 Other revenue  4,957   —   (190)  4,767              Total revenue $131,646  $4,742  $(190) $136,198              Operating income (loss) $14,308  $(37) $30  $14,301              Net income (loss) $6,409  $(100) $—  $6,309                               Total Assets $461,310  $3,171  $(5,300) $459,181                                Household Rental  Prepaid Telephone  Inter-segment    For the six-months ended March 31, 2005 Service  Service  Activity  Total Rental revenues $220,141  $—  $—  $220,141 Prepaid phone service revenue  —   9,304   —   9,304 Sales of merchandise  6,473   —   —   6,473 Customer club fee revenue  12,820   —   —   12,820 Liability damage waiver fee revenue  4,561   —   —   4,561 Other revenue  9,535   —   (339)  9,196              Total revenue $253,530  $9,304  $(339) $262,495              Operating income $25,395  $8  $60  $25,463              Net income (loss) $7,455  $(112) $—  $7,343                               Total Assets $461,310  $3,171  $(5,300) $459,181              
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17. SUBSEQUENT EVENTS:On April 26, 2006, the Company sold customer contracts and merchandise to Rent-A-Center for $2,546.On April 27, 2006, the Company exchanged customer contracts and merchandise with Rent-A-Center andpaid $325 to Rent-A-Center for customer contracts and merchandise received in the exchange. Theacquired customer contracts and merchandise were integrated into existing Company stores.18. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:The 11.875% senior secured notes issued by Rent-Way, Inc. (“Parent”) have been guaranteed by eachof its restricted subsidiaries (“Guarantor Subsidiaries”). The Guarantor Subsidiaries are 100%owned subsidiaries of the Parent. The guarantees of the Subsidiary Guarantors are full,unconditional and joint and several. Separate financial statements of the Parent and GuarantorSubsidiaries are not presented in accordance with the exception provided by Rule 3-10 of RegulationS-X.The following schedules set forth the condensed consolidating balance sheets as of March 31, 2006and September 30, 2005 and condensed consolidating statements of operations for the six-monthsended March 31, 2006 and 2005, and condensed consolidating statements of cash flows for thesix-months ended March 31, 2006 and 2005. In the following schedules, “Parent” refers to Rent-Way,Inc., “Guarantor Subsidiaries” refers to Rent-Way’s wholly owned subsidiaries, and “Non-GuarantorSubsidiaries” refers to DPI, the Company’s 83.5% owned subsidiary. “Eliminations” represent theadjustments necessary to eliminate inter-company investment in subsidiaries.
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RENT-WAY, INC.