##### Table of Contents



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 THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number 0-22026
 RENT-WAY, INC.
  
 PENNSYLVANIA
    
    25-1407782(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)
 ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
 (Registrants telephone number)
 þ o
  o þ o
 o þ
  Class
    
    Outstanding as of August 7, 2006Common Stock
    
    26,400,099




---



##### 



RENT-WAY, INC.
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and September 30, 2005
    
    
    3Consolidated Statements of Operations, three and nine-months
ended June 30, 2006 and 2005 (unaudited)
    
    
    4Consolidated Statements of Cash Flows, nine-months ended June
30, 2006 and 2005 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 6. Exhibits
    
    
    40Signatures
    
    
    41EX-10.28EX-10.29EX-10.30EX-31.1EX-31.2EX-32.1EX-99.1
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
  RENT-WAY, INC.
 
   June 30,
    
    
    September 30,2006
    
    
    2005(unaudited)ASSETSCash and cash equivalents
    
    $
    7,145
    
    
    $
    6,439Prepaid expenses
    
    
    5,967
    
    
    
    7,962Rental merchandise, net
    
    
    224,929
    
    
    
    194,178Rental merchandise credits due from vendors
    
    
    3⁄4
    
    
    
    400Property and equipment, net
    
    
    50,342
    
    
    
    47,720Goodwill
    
    
    190,765
    
    
    
    189,287Deferred financing costs, net
    
    
    5,473
    
    
    
    6,262Intangible assets, net
    
    
    2,006
    
    
    
    2,101Other assets
    
    
    7,409
    
    
    
    6,136Total assets
    
    $
    494,036
    
    
    $
    460,485LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    22,651
    
    
    $
    23,744Other liabilities
    
    
    62,763
    
    
    
    63,409Deferred tax liability
    
    
    20,292
    
    
    
    15,856Debt
    
    
    247,629
    
    
    
    221,313Total liabilities
    
    
    353,335
    
    
    
    324,322Contingencies
    
    
    3⁄4
    
    
    
    3⁄4Convertible redeemable preferred stock
    
    
    17,033
    
    
    
    17,929Shareholders equity:Preferred stock, without par value; 1,000,000 shares
authorized; 2,000 shares issued and outstanding as Series
A convertible preferred shares
    
    
    3⁄4
    
    
    
    3⁄4Common stock, without par value; 50,000,000 shares
authorized; 26,398,432 and 26,381,376 shares issued and
outstanding, respectively
    
    
    305,069
    
    
    
    305,033Additional paid in capital
    
    
    1,681
    
    
    
    3⁄4Accumulated deficit
    
    
    (183,082
    )
    
    
    (186,799
    )Total shareholders equity
    
    
    123,668
    
    
    
    118,234Total liabilities and shareholders equity
    
    $
    494,036
    
    
    $
    460,485
 The accompanying notes are an integral part of these financial statements.
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RENT-WAY, INC.
 
    Three-months Ended
    
    
    Nine-months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUES:Rental revenue
    
    $
    113,701
    
    
    $
    108,455
    
    
    $
    340,499
    
    
    $
    328,596Prepaid phone service revenue
    
    
    4,124
    
    
    
    4,313
    
    
    
    12,289
    
    
    
    13,617Other revenues
    
    
    17,543
    
    
    
    15,529
    
    
    
    52,821
    
    
    
    48,579Total revenues
    
    
    135,368
    
    
    
    128,297
    
    
    
    405,609
    
    
    
    390,792COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    35,881
    
    
    
    31,949
    
    
    
    108,474
    
    
    
    100,471Property and equipment
    
    
    3,783
    
    
    
    3,732
    
    
    
    11,009
    
    
    
    12,145Intangibles
    
    
    205
    
    
    
    195
    
    
    
    586
    
    
    
    251Cost of prepaid phone service
    
    
    2,464
    
    
    
    2,684
    
    
    
    7,733
    
    
    
    8,460Salaries and wages
    
    
    36,245
    
    
    
    35,580
    
    
    
    109,831
    
    
    
    105,164Advertising, net
    
    
    4,715
    
    
    
    5,438
    
    
    
    15,824
    
    
    
    15,524Occupancy
    
    
    10,324
    
    
    
    9,526
    
    
    
    30,454
    
    
    
    27,874Other operating expenses
    
    
    29,665
    
    
    
    26,886
    
    
    
    91,039
    
    
    
    83,133Total costs and operating expenses
    
    
    123,282
    
    
    
    115,990
    
    
    
    374,950
    
    
    
    353,022Operating income
    
    
    12,086
    
    
    
    12,307
    
    
    
    30,659
    
    
    
    37,770OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,403
    )
    
    
    (7,304
    )
    
    
    (21,711
    )
    
    
    (21,662
    )Interest income
    
    
    21
    
    
    
    9
    
    
    
    64
    
    
    
    22Amortization of deferred financing costs
    
    
    (333
    )
    
    
    (289
    )
    
    
    (982
    )
    
    
    (854
    )Other income (expense)
    
    
    (257
    )
    
    
    (4,362
    )
    
    
    2,012
    
    
    
    (4,601
    )Income before income taxes and discontinued operations
    
    
    4,114
    
    
    
    361
    
    
    
    10,042
    
    
    
    10,675Income tax expense
    
    
    1,351
    
    
    
    1,395
    
    
    
    4,436
    
    
    
    4,185Income (loss) before discontinued operations
    
    
    2,763
    
    
    
    (1,034
    )
    
    
    5,606
    
    
    
    6,490Loss from discontinued operations
    
    
    (27
    )
    
    
    (181
    )
    
    
    (120
    )
    
    
    (361
    )Net income (loss)
    
    
    2,736
    
    
    
    (1,215
    )
    
    
    5,486
    
    
    
    6,129Dividend and accretion of preferred stock
    
    
    (605
    )
    
    
    (549
    )
    
    
    (1,769
    )
    
    
    (1,619
    )Net income (loss) allocable to common shareholders
    
    $
    2,131
    
    
    $
    (1,764
    )
    
    $
    3,717
    
    
    $
    4,510EARNINGS (LOSS) PER COMMON SHARE (NOTE 5):Basic earnings (loss) per common share:Income (loss) before discontinued operations
    
    $
    0.10
    
    
    $
    (0.04
    )
    
    $
    0.21
    
    
    $
    0.24Net income (loss) allocable to common shareholders
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    0.14
    
    
    $
    0.17Diluted earnings (loss) per common share:Income (loss) before discontinued operations
    
    $
    0.10
    
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.24Net income (loss) allocable to common shareholders
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    0.13
    
    
    $
    0.17Weighted average common shares outstanding:Basic
    
    
    26,398
    
    
    
    26,250
    
    
    
    26,388
    
    
    
    26,246Diluted
    
    
    26,667
    
    
    
    26,250
    
    
    
    29,856
    
    
    
    26,778
 The accompanying notes are an integral part of these financial statements.
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RENT-WAY, INC.
 
    Nine-months EndedJune 30,2006
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    5,486
    
    
    $
    6,129Adjustments to reconcile net income to net cash used in operating activities:Loss from discontinued operations
    
    
    120
    
    
    
    361Depreciation and amortization
    
    
    109,414
    
    
    
    105,938Carrying value of rental merchandise sold
    
    
    11,973
    
    
    
    8,166Deferred income taxes
    
    
    4,436
    
    
    
    4,185Market adjustment for interest rate swap derivative
    
    
    3⁄4
    
    
    
    (1,408
    )Stock-based compensation expense
    
    
    237
    
    
    
    3⁄4Market adjustment for preferred stock conversion option derivative
    
    
    (1,468
    )
    
    
    6,551Write-down of property to realizable value
    
    
    105
    
    
    
    3⁄4Write-off of property and equipment
    
    
    152
    
    
    
    254Loss on sale of assets
    
    
    409
    
    
    
    3⁄4Changes in assets and liabilities:Prepaid expenses
    
    
    1,995
    
    
    
    (1,280
    )Rental merchandise
    
    
    (138,796
    )
    
    
    (124,328
    )Rental merchandise deposits and credits due from vendors
    
    
    400
    
    
    
    550Other assets
    
    
    (1,386
    )
    
    
    (838
    )Accounts payable
    
    
    (1,093
    )
    
    
    (8,880
    )Cash paid to settle class action lawsuit
    
    
    3⁄4
    
    
    
    (2,000
    )Other liabilities
    
    
    (2,490
    )
    
    
    (6,031
    )Net cash used in continuing operations
    
    
    (10,506
    )
    
    
    (12,631
    )Net cash used in discontinued operations
    
    
    (120
    )
    
    
    (361
    )Net cash used in operating activities
    
    
    (10,626
    )
    
    
    (12,992
    )INVESTING ACTIVITIES:Purchase of business, net of cash acquired
    
    
    (6,037
    )
    
    
    (754
    )Purchases of property and equipment
    
    
    (6,550
    )
    
    
    (11,008
    )Proceeds from sale of assets
    
    
    3,343
    
    
    
    3⁄4Net cash used in investing activities
    
    
    (9,244
    )
    
    
    (11,762
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    108,950
    
    
    
    100,000Payments on borrowings
    
    
    (82,970
    )
    
    
    (68,022
    )Payments on capital leases
    
    
    (5,490
    )
    
    
    (5,629
    )Issuance of common stock
    
    
    36
    
    
    
    77Short swing profits received from shareholder
    
    
    1,444
    
    
    
    3⁄4Dividends paid on convertible redeemable preferred stock
    
    
    (1,201
    )
    
    
    (1,197
    )Deferred financing costs
    
    
    (193
    )
    
    
    3⁄4Net cash provided by financing activities
    
    
    20,576
    
    
    
    25,229Increase in cash and cash equivalents
    
    
    706
    
    
    
    475Cash and cash equivalents at beginning of period
    
    
    6,439
    
    
    
    3,412Cash and cash equivalents at end of period
    
    $
    7,145
    
    
    $
    3,887
 The accompanying notes are an integral part of these financial statements.
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Nine-months ended June 30,2006
    
    2005CASH PAID DURING THE PERIOD FOR:Interest
    
    $
    27,657
    
    
    $
    27,760NONCASH INVESTING ACTIVITIES:Assets acquired under capital lease
    
    
    7,338
    
    
    
    8,513Assets acquired from exchange
    
    
    
    
    
    
    180
 6




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Three-months Ended June 30,
    
    
    Nine-months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating expenses from discontinued operations (including exit costs) (1)
    
    $
    (27
    )
    
    $
    (181
    )
    
    $
    (120
    )
    
    $
    (361
    )Net loss from discontinued operations
    
    $
    (27
    )
    
    $
    (181
    )
    
    $
    (120
    )
    
    $
    (361
    )
 
 (1)
    
    The Company records exit costs associated with the monthly rent and common area
maintenance charges until leases are terminated or expired, in accordance with SFAS 146.
  8




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June 30,
    
    
    September 30,2006
    
    
    2005Cost
    
    $
    350,792
    
    
    $
    317,912Less accumulated depreciation
    
    
    123,114
    
    
    
    120,898Less reserve for losses
    
    
    2,099
    
    
    
    1,261Less reserve for hurricane damages
    
    
    
    
    
    
    1,509Less deferred credits
    
    
    650
    
    
    
    66$
    224,929
    
    
    $
    194,178
   June 30,
    
    
    September 30,2006
    
    
    2005On-rent merchandise
    
    $
    279,433
    
    
    $
    258,328Held for rent merchandise
    
    
    71,359
    
    
    
    59,584$
    350,792
    
    
    $
    317,912
  Nine-Months Ended June 30,2006
    
    
    2005Lost merchandise
    
    $
    453
    
    
    $
    1,067Stolen merchandise
    
    
    10,474
    
    
    
    8,666Discarded merchandise
    
    
    1,934
    
    
    
    1,691Additional reserve for expected losses
    
    
    723
    
    
    
    484$
    13,584
    
    
    $
    11,908
 9




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##### Table of Contents



June 30,
    
    
    September 30,2006
    
    
    2005Transportation equipment
    
    $
    44,337
    
    
    $
    42,875Furniture and fixtures
    
    
    38,319
    
    
    
    36,431Leasehold improvements
    
    
    35,960
    
    
    
    34,259Signs
    
    
    5,171
    
    
    
    5,122Buildings
    
    
    5,548
    
    
    
    5,674Land
    
    
    1,939
    
    
    
    1,920131,274
    
    
    
    126,281Less accumulated depreciation and amortization
    
    
    (80,932
    )
    
    
    (78,561
    )$
    50,342
    
    
    $
    47,720
     Three-months Ended June 30,
    
    
    Nine-months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005COMPUTATION OF EARNINGS (LOSS) PER SHARE:BASICIncome (loss) before discontinued operations
    
    $
    2,763
    
    
    $
    (1,034
    )
    
    $
    5,606
    
    
    $
    6,490Loss from discontinued operations
    
    
    (27
    )
    
    
    (181
    )
    
    
    (120
    )
    
    
    (361
    )Net income (loss)
    
    
    2,736
    
    
    
    (1,215
    )
    
    
    5,486
    
    
    
    6,129Dividend and accretion of preferred stock
    
    
    (605
    )
    
    
    (549
    )
    
    
    (1,769
    )
    
    
    (1,619
    )Net income (loss) allocable to common shareholders
    
    $
    2,131
    
    
    $
    (1,764
    )
    
    $
    3,717
    
    
    $
    4,510Weighted average common shares outstanding
    
    
    26,398
    
    
    
    26,250
    
    
    
    26,388
    
    
    
    26,246Earnings (loss) per share:Income (loss) before discontinued operations
    
    $
    0.10
    
    
    $
    (0.04
    )
    
    $
    0.21
    
    
    $
    0.24Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Dividend and accretion of preferred stock
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.06
    )Net income (loss) allocable to common shareholders
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    0.14
    
    
    $
    0.17DILUTEDNet income (loss) allocable to common shareholders for basic earnings
(loss) per share
    
    $
    2,131
    
    
    $
    (1,764
    )
    
    $
    3,717
    
    
    $
    4,510Plus: Impact of assumed conversion:Conversion derivative market value adjustment (1)
    
    
    
    
    
    
    
    
    
    
    (1,468
    )
    
    
    Dividends on 8% convertible preferred stock (1)
    
    
    
    
    
    
    
    
    
    
    1,201
    
    
    
    Accretion to preferred stock redemption amount (1)
    
    
    
    
    
    
    
    
    
    
    568
    
    
    
    Net income (loss) allocable to common shareholders for diluted
earnings (loss) per share and assumed conversion
    
    $
    2,131
    
    
    
    (1,764
    )
    
    $
    4,018
    
    
    $
    4,510Weighted average common shares used in calculating basic earnings
(loss) per share
    
    
    26,398
    
    
    
    26,250
    
    
    
    26,388
    
    
    
    26,246Add incremental shares representing:Shares issuable upon exercise of stock options and warrants (2)
    
    
    269
    
    
    
    
    
    
    
    216
    
    
    
    532Shares issuable upon conversion of 8% convertible preferred stock (1)
    
    
    
    
    
    
    
    
    
    
    3,252
    
    
    
    Weighted average number of shares used in calculation of diluted
earnings (loss) per share
    
    
    26,667
    
    
    
    26,250
    
    
    
    29,856
    
    
    
    26,778
 10




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Three-months Ended June 30,
    
    
    Nine-months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Earnings (loss) per share:Income (loss) before discontinued operations
    
    $
    0.10
    
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.24Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )Dividend and accretion of preferred stock
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.06
    )Net income (loss) allocable to common shareholders
    
    $
    0.08
    
    
    $
    (0.07
    )
    
    $
    0.13
    
    
    $
    0.17
 
 (1)
    
    Including the effects of these items for the three-month period ended June 30,
2006 would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8%
convertible preferred stock are excluded from consideration in the calculation of
diluted earnings per share for the three-months ended June 30, 2006. There were
conversion derivative market value adjustments of $344, dividends on convertible
preferred stock of $399, and accretion to preferred stock redemption in the amount of
$206, which were not added back to net income allocable to common shareholders for basic
earnings per share on the diluted earnings per share because including the effects of
these items would be anti-dilutive for the three-months ended June 30, 2006.Including the effects of these items for the three-month period ended June 30, 2005
would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8%
convertible preferred stock are excluded from consideration in the calculation of
diluted loss per share for the three-months ended June 30, 2005. There were
conversion derivative market value adjustments of $4,969, dividends on convertible
preferred stock of $399, and accretion to preferred stock redemption in the amount of
$151, which were not added back to net loss allocable to common shareholders for basic
loss per share on the diluted loss per share because including the effects of these
items would be anti-dilutive for the three-months ended June 30, 2005.Including the effects of these items for the nine-month period ended June 30, 2005
would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8%
convertible preferred stock are excluded from consideration in the calculation of
diluted earnings per share for the nine-months ended June 30, 2005. There were
conversion derivative market value adjustments of $6,551, dividends on convertible
preferred stock of $1,198, and accretion to preferred stock redemption in the amount
of $421, which were not added back to net income allocable to common shareholders for
basic earnings per share on the diluted earnings per share because including the
effects of these items would be anti-dilutive for the nine-months ended June 30, 2005.(2)
    
    Including the effects of this item for the three-months ended June 30, 2005,
would be anti-dilutive. For the three-months ended June 30, 2005, the number of stock
options that were outstanding but not included in the computation of diluted loss per
common share in which the exercise price was greater that the average market price was
649.
    Household
    
    
    Prepaid TelephoneRental Segment
    
    
    Service Segment
    
    
    TotalBalance at September 30, 2005
    
    $
    182,343
    
    
    $
    6,944
    
    
    $
    189,287Acquisitions
    
    
    2,674
    
    
    
    
    
    
    
    2,674Disposals
    
    
    (1,196
    )
    
    
    
    
    
    
    (1,196
    )Balance at June 30,2006
    
    $
    183,821
    
    
    $
    6,944
    
    
    $
    190,765
  Purchase
    
    
    Cumulative
    
    
    Net CarryingBalance at June 30, 2006:
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Music rights license
    
    $
    1,882
    
    
    $
    (287
    )
    
    $
    1,595Non-compete agreements
    
    
    2,838
    
    
    
    (2,664
    )
    
    
    174Customer list
    
    
    283
    
    
    
    (108
    )
    
    
    175Customer contracts
    
    
    162
    
    
    
    (100
    )
    
    
    62$
    5,165
    
    
    $
    (3,159
    )
    
    $
    2,006
 Purchase
    
    
    Cumulative
    
    
    Net CarryingBalance at September 30, 2005:
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Music rights license
    
    $
    1,882
    
    
    $
    (7
    )
    
    $
    1,875Non-compete agreements
    
    
    2,650
    
    
    
    (2,623
    )
    
    
    27Customer list
    
    
    93
    
    
    
    (21
    )
    
    
    72Customer contracts
    
    
    162
    
    
    
    (35
    )
    
    
    127$
    4,787
    
    
    $
    (2,686
    )
    
    $
    2,101
 11




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##### Table of Contents



Fiscal Year
    
    AmountRemaining 2006
    
    $
    1752007
    
    
    6062008
    
    
    4582009
    
    
    3942010
    
    
    373$
    2,006
    June 30,
    
    
    September 30,2006
    
    
    2005Other receivables
    
    $
    3,305
    
    
    $
    2,425Other inventory
    
    
    666
    
    
    
    571Deposits
    
    
    864
    
    
    
    786Other
    
    
    2,574
    
    
    
    2,354$
    7,409
    
    
    $
    6,136
   June 30,
    
    
    September 30,2006
    
    
    2005Accrued salaries, wages, taxes and benefits
    
    $
    14,045
    
    
    $
    9,367Capital lease obligations
    
    
    21,032
    
    
    
    19,409Deferred rental revenue
    
    
    8,199
    
    
    
    7,704Accrued dividends and interest
    
    
    1,826
    
    
    
    7,771Vacant facility lease obligations
    
    
    2,480
    
    
    
    2,541Accrued property taxes
    
    
    2,728
    
    
    
    3,200Other
    
    
    12,453
    
    
    
    13,417$
    62,763
    
    
    $
    63,409
   June 30,
    
    
    September 30,2006
    
    
    2005Senior secured notes
    
    $
    202,619
    
    
    $
    202,284Revolving credit facility
    
    
    45,000
    
    
    
    19,000Note payable
    
    
    10
    
    
    
    29$
    247,629
    
    
    $
    221,313
  a)
    
    100% of the principal amount of the notes to be redeemed; and
 12




---



##### Table of Contents



b)
    
    the sum of the present values of (i) 100% of the principal amount of the notes to
be redeemed at June 15, 2010, and (ii) the remaining scheduled payments of interest from
the redemption date through June 15, 2010, but excluding accrued
and unpaid interest to the redemption date, discounted to the redemption date at the
treasury rate plus 175 basis points;
       13




---



##### Table of Contents



WeightedOptions
    
    
    Average
    
    
    Aggregate(in thousands, except per share amounts)
    
    Outstanding
    
    
    Exercise Price
    
    
    Intrinsic Value (1)Balance at September 30, 2004
    
    
    2,987,908
    
    
    $
    8.87Granted
    
    
    748,500
    
    
    
    7.70Exercised
    
    
    (137,700
    )
    
    
    4.63Cancelled
    
    
    (583,055
    )
    
    
    13.74Balance at September 30, 2005
    
    
    3,015,653
    
    
    
    7.83Granted
    
    
    
    
    
    
    Exercised
    
    
    (17,056
    )
    
    
    5.78Cancelled
    
    
    (444,698
    )
    
    
    8.66Balance at June 30, 2006
    
    
    2,553,899
    
    
    $
    7.70
    
    
    $
    Exercisable at June 30, 2006
    
    
    1,717,649
    
    
    $
    8.77
    
    
    $
    
 
 (1)
    
    The intrinsic value of a stock option is the amount by which the current market value
of the underlying stock exceeds the exercise price of the option. The exercise prices of
the outstanding and exercisable options exceed the market value at June 30, 2006;
therefore, there is no intrinsic value.
  14




---



##### Table of Contents



Nine-Months EndedJune 30, 2006Impact of Equity-(in thousands, except per share amounts)
    
    As Reported
    
    Based CompensationIncome before income taxes and discontinued
operations
    
    $
    10,042
    
    
    $
    (238
    )Net income
    
    $
    5,486
    
    
    $
    (238
    )Net income allocable to common shareholders
    
    $
    3,717
    
    
    $
    (238
    )Net income allocable to common shareholders   Basic
    
    $
    0.14
    
    
    $
    (0.01
    )Net income allocable to common shareholders 
Diluted
    
    $
    0.13
    
    
    $
    (0.01
    )
  Nine-Months EndedJune 30,2005Income before discontinued operations:As reported
    
    $
    6,490Plus: Compensation expense
    
    
    Less: Stock-based employee compensation under
fair-value based method for all awards, net of
related tax effects
    
    
    (3,265
    )Pro-forma
    
    $
    3,225Net income allocable to common shareholders:As reported
    
    $
    4,510Plus: Compensation expense
    
    
    Less: Stock-based employee compensation under
fair-value based method for all awards, net of
related tax effects
    
    
    (3,265
    )Pro-forma
    
    $
    1,245Basic earnings per common share:Net income before discontinued operations:As reported
    
    $
    0.24Pro-forma
    
    $
    0.12Net income allocable to common shareholders:As reported
    
    $
    0.17Pro-forma
    
    $
    0.05Diluted earnings per common share:Net income before discontinued operations:As reported
    
    $
    0.24Pro-forma
    
    $
    0.12Net income allocable to common shareholders:As reported
    
    $
    0.17Pro-forma
    
    $
    0.05
  15




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##### Table of Contents



Nine-months EndedJune 30, 2005Average risk free interest rate
    
    
    3.76
    %Expected dividend yield
    
    
    Expected life
    
    6 yearsExpected volatility
    
    
    97.67
    %
       Other Comprehensive
    
    
    Other ComprehensiveIncome
    
    
    IncomeFor Nine-months Ended
    
    
    For Nine-months EndedJune 30, 2006
    
    
    June 30, 2005Net income
    
    $
    5,486
    
    
    $
    6,129Amortization of SFAS 133
Transition amount
    
    
    
    
    
    
    84Other comprehensive income
    
    $
    5,486
    
    
    $
    6,213
 Accumulated OtherComprehensiveLossAt September 30, 2005Balance at October 1, 2004
    
    $
    (93
    )Amortization of SFAS 133
Transition amount
    
    
    93Accumulated other comprehensive
loss
    
    $
    
 16




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##### Table of Contents



Rent-Way
     17




---



##### Table of Contents



Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the three months ended June 30, 2006
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsRental revenues
    
    $
    113,701
    
    
    $
    
    
    
    $
    
    
    
    $
    113,701Prepaid phone service revenue
    
    
    
    
    
    
    4,124
    
    
    
    
    
    
    
    4,124Sales of merchandise
    
    
    4,041
    
    
    
    
    
    
    
    
    
    
    
    4,041Customer club fee revenue
    
    
    6,371
    
    
    
    
    
    
    
    
    
    
    
    6,371Liability damage waiver fee revenue
    
    
    2,347
    
    
    
    
    
    
    
    
    
    
    
    2,347Other revenue
    
    
    5,030
    
    
    
    
    
    
    
    (246
    )
    
    
    4,784Total revenue
    
    $
    131,490
    
    
    $
    4,124
    
    
    $
    (246
    )
    
    $
    135,368Operating income (loss)
    
    $
    12,120
    
    
    $
    (64
    )
    
    $
    30
    
    
    $
    12,086Net income (loss)
    
    $
    2,855
    
    
    $
    (119
    )
    
    $
    
    
    
    $
    2,736Total Assets
    
    $
    497,619
    
    
    $
    2,890
    
    
    $
    (6,473
    )
    
    $
    494,036
 Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the nine months ended June 30, 2006
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsRental revenues
    
    $
    340,499
    
    
    $
    
    
    
    $
    
    
    
    $
    340,499Prepaid phone service revenue
    
    
    
    
    
    
    12,494
    
    
    
    (205
    )
    
    
    12,289Sales of merchandise
    
    
    12,779
    
    
    
    
    
    
    
    
    
    
    
    12,779Customer club fee revenue
    
    
    19,416
    
    
    
    
    
    
    
    
    
    
    
    19,416Liability damage waiver fee revenue
    
    
    7,038
    
    
    
    
    
    
    
    
    
    
    
    7,038Other revenue
    
    
    14,158
    
    
    
    
    
    
    
    (570
    )
    
    
    13,588Total revenue
    
    $
    393,890
    
    
    $
    12,494
    
    
    $
    (775
    )
    
    $
    405,609Operating income (loss)
    
    $
    31,323
    
    
    $
    (548
    )
    
    $
    (116
    )
    
    $
    30,659Net income (loss)
    
    $
    6,405
    
    
    $
    (714
    )
    
    $
    (205
    )
    
    $
    5,486Total Assets
    
    $
    497,619
    
    
    $
    2,890
    
    
    $
    (6,473
    )
    
    $
    494,036
 Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the three months ended June 30, 2005
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsRental revenues
    
    $
    108,455
    
    
    $
    
    
    
    $
    
    
    
    $
    108,455Prepaid phone service revenue
    
    
    
    
    
    
    4,313
    
    
    
    
    
    
    
    4,313Sales of merchandise
    
    
    2,519
    
    
    
    
    
    
    
    
    
    
    
    2,519Customer club fee revenue
    
    
    6,337
    
    
    
    
    
    
    
    
    
    
    
    6,337Liability damage waiver fee revenue
    
    
    2,222
    
    
    
    
    
    
    
    
    
    
    
    2,222Other revenue
    
    
    4,617
    
    
    
    
    
    
    
    (166
    )
    
    
    4,451Total revenue
    
    $
    124,150
    
    
    $
    4,313
    
    
    $
    (166
    )
    
    $
    128,297Operating income (loss)
    
    $
    12,437
    
    
    $
    (160
    )
    
    $
    30
    
    
    $
    12,307Net income (loss)
    
    $
    (995
    )
    
    $
    (220
    )
    
    $
    
    
    
    $
    (1,215
    )Total Assets
    
    $
    466,278
    
    
    $
    2,910
    
    
    $
    (5,465
    )
    
    $
    463,723
 Household Rental
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the nine-months ended June 30, 2005
    
    Service
    
    
    Service
    
    
    Activity
    
    
    TotalRental revenues
    
    $
    328,596
    
    
    $
    
    
    
    $
    
    
    
    $
    328,596Prepaid phone service revenue
    
    
    
    
    
    
    13,617
    
    
    
    
    
    
    
    13,617Sales of merchandise
    
    
    8,992
    
    
    
    
    
    
    
    
    
    
    
    8,992Customer club fee revenue
    
    
    19,157
    
    
    
    
    
    
    
    
    
    
    
    19,157Liability damage waiver fee revenue
    
    
    6,783
    
    
    
    
    
    
    
    
    
    
    
    6,783Other revenue
    
    
    14,152
    
    
    
    
    
    
    
    (505
    )
    
    
    13,647Total revenue
    
    $
    377,680
    
    
    $
    13,617
    
    
    $
    (505
    )
    
    $
    390,792Operating income (loss)
    
    $
    37,832
    
    
    $
    (152
    )
    
    $
    90
    
    
    $
    37,770Net income (loss)
    
    $
    6,460
    
    
    $
    (331
    )
    
    $
    
    
    
    $
    6,129Total Assets
    
    $
    466,278
    
    
    $
    2,910
    
    
    $
    (5,465
    )
    
    $
    463,723
 18




---



##### Table of Contents



19




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    5,939
    
    
    $
    769
    
    
    $
    437
    
    
    $
    
    
    
    $
    7,145Prepaid expenses
    
    
    4,831
    
    
    
    841
    
    
    
    295
    
    
    
    
    
    
    
    5,967Rental merchandise, net
    
    
    181,075
    
    
    
    43,854
    
    
    
    
    
    
    
    
    
    
    
    224,929Property and equipment, net
    
    
    42,190
    
    
    
    7,406
    
    
    
    746
    
    
    
    
    
    
    
    50,342Goodwill
    
    
    126,056
    
    
    
    57,765
    
    
    
    6,944
    
    
    
    
    
    
    
    190,765Deferred financing costs, net
    
    
    5,473
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,473Intangible assets, net
    
    
    1,982
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    2,006Other assets
    
    
    5,268
    
    
    
    888
    
    
    
    1,253
    
    
    
    
    
    
    
    7,409Investment in subsidiaries
    
    
    93,028
    
    
    
    
    
    
    
    
    
    
    
    (93,028
    )
    
    
    Total assets
    
    
    465,842
    
    
    
    111,547
    
    
    
    9,675
    
    
    
    (93,028
    )
    
    
    494,036LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    19,431
    
    
    $
    1,607
    
    
    $
    1,613
    
    
    
    
    
    
    $
    22,651Other liabilities
    
    
    49,457
    
    
    
    11,406
    
    
    
    1,900
    
    
    
    
    
    
    
    62,763Inter-company
    
    
    (11,667
    )
    
    
    9,842
    
    
    
    1,825
    
    
    
    
    
    
    
    Deferred tax liability
    
    
    20,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,292Debt
    
    
    247,628
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    247,629Total liabilities
    
    
    325,141
    
    
    
    22,855
    
    
    
    5,339
    
    
    
    
    
    
    
    353,335Convertible redeemable preferred stock
    
    
    17,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,033SHAREHOLDERS EQUITY:Common stock
    
    
    305,069
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    305,069Option to purchase convertible preferred stock
    
    
    1,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,681Retained earnings (accumulated deficit)
    
    
    (183,082
    )
    
    
    13,444
    
    
    
    2,736
    
    
    
    (16,180
    )
    
    
    (183,082
    )Total shareholders equity
    
    
    123,668
    
    
    
    88,692
    
    
    
    4,336
    
    
    
    (93,028
    )
    
    
    123,668Total liabilities and shareholders equity
    
    $
    465,842
    
    
    $
    111,547
    
    
    $
    9,675
    
    
    $
    (93,028
    )
    
    $
    494,036
 20




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    92,110
    
    
    $
    21,591
    
    
    $
    
    
    
    $
    
    
    
    $
    113,701Prepaid phone service
    
    
    
    
    
    
    
    
    
    
    4,124
    
    
    
    
    
    
    
    4,124Other revenues
    
    
    14,341
    
    
    
    3,202
    
    
    
    
    
    
    
    
    
    
    
    17,543Total revenues
    
    
    106,451
    
    
    
    24,793
    
    
    
    4,124
    
    
    
    
    
    
    
    135,368COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    29,069
    
    
    
    6,812
    
    
    
    
    
    
    
    
    
    
    
    35,881Property and equipment
    
    
    3,025
    
    
    
    655
    
    
    
    103
    
    
    
    
    
    
    
    3,783Intangibles
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205Cost of prepaid phone service
    
    
    
    
    
    
    
    
    
    
    2,464
    
    
    
    
    
    
    
    2,464Salaries and wages
    
    
    29,424
    
    
    
    6,182
    
    
    
    639
    
    
    
    
    
    
    
    36,245Advertising, net
    
    
    4,553
    
    
    
    37
    
    
    
    125
    
    
    
    
    
    
    
    4,715Occupancy
    
    
    8,294
    
    
    
    1,981
    
    
    
    49
    
    
    
    
    
    
    
    10,324Other operating expenses
    
    
    23,501
    
    
    
    5,631
    
    
    
    533
    
    
    
    
    
    
    
    29,665Total costs and operating expenses
    
    
    98,071
    
    
    
    21,298
    
    
    
    3,913
    
    
    
    
    
    
    
    123,282Operating income (loss)
    
    
    8,380
    
    
    
    3,495
    
    
    
    211
    
    
    
    
    
    
    
    12,086OTHER INCOME (EXPENSE):Interest expense
    
    
    (8,258
    )
    
    
    855
    
    
    
    
    
    
    
    
    
    
    
    (7,403
    )Interest income
    
    
    10
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    21Amortization  deferred financial costs
    
    
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333
    )Other income (expense), net
    
    
    (365
    )
    
    
    111
    
    
    
    (3
    )
    
    
    
    
    
    
    (257
    )Equity in net income of subsidiaries
    
    
    4,678
    
    
    
    
    
    
    
    
    
    
    
    (4,678
    )
    
    
    Income
(loss) before income taxes and discontinued operations
    
    
    4,112
    
    
    
    4,461
    
    
    
    219
    
    
    
    (4,678
    )
    
    
    4,114Income tax expense
    
    
    1,351
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,351Income (loss) before discontinued operations
    
    
    2,761
    
    
    
    4,461
    
    
    
    219
    
    
    
    (4,678
    )
    
    
    2,763Loss from discontinued operations
    
    
    (25
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )Net income (loss)
    
    $
    2,736
    
    
    $
    4,459
    
    
    $
    219
    
    
    $
    (4,678
    )
    
    $
    2,736
 21




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    275,948
    
    
    $
    64,551
    
    
    $
    
    
    
    $
    
    
    
    $
    340,499Prepaid phone service
    
    
    
    
    
    
    
    
    
    
    12,289
    
    
    
    
    
    
    
    12,289Other revenues
    
    
    43,375
    
    
    
    9,446
    
    
    
    
    
    
    
    
    
    
    
    52,821Total revenues
    
    
    319,323
    
    
    
    73,997
    
    
    
    12,289
    
    
    
    
    
    
    
    405,609COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    87,973
    
    
    
    20,501
    
    
    
    
    
    
    
    
    
    
    
    108,474Property and equipment
    
    
    8,737
    
    
    
    1,946
    
    
    
    326
    
    
    
    
    
    
    
    11,009Intangibles
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    586Cost of prepaid phone service
    
    
    
    
    
    
    
    
    
    
    7,733
    
    
    
    
    
    
    
    7,733Salaries and wages
    
    
    89,387
    
    
    
    18,403
    
    
    
    2,041
    
    
    
    
    
    
    
    109,831Advertising, net
    
    
    15,347
    
    
    
    159
    
    
    
    318
    
    
    
    
    
    
    
    15,824Occupancy
    
    
    24,470
    
    
    
    5,842
    
    
    
    142
    
    
    
    
    
    
    
    30,454Other operating expenses
    
    
    72,879
    
    
    
    16,337
    
    
    
    1,823
    
    
    
    
    
    
    
    91,039Total costs and operating expenses
    
    
    299,379
    
    
    
    63,188
    
    
    
    12,383
    
    
    
    
    
    
    
    374,950Operating income (loss)
    
    
    19,944
    
    
    
    10,809
    
    
    
    (94
    )
    
    
    
    
    
    
    30,659OTHER INCOME (EXPENSE):Interest expense
    
    
    (24,035
    )
    
    
    2,321
    
    
    
    3
    
    
    
    
    
    
    
    (21,711
    )Interest income
    
    
    39
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    64Amortization  deferred financial costs
    
    
    (982
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (982
    )Other income (expense), net
    
    
    1,735
    
    
    
    289
    
    
    
    (12
    )
    
    
    
    
    
    
    2,012Equity in net income of subsidiaries
    
    
    13,331
    
    
    
    
    
    
    
    
    
    
    
    (13,331
    )
    
    
    Income (loss) before income taxes anddiscontinued operations
    
    
    10,032
    
    
    
    13,419
    
    
    
    (78
    )
    
    
    (13,331
    )
    
    
    10,042Income tax expense
    
    
    4,436
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,436Income (loss) before discontinued operations
    
    
    5,596
    
    
    
    13,419
    
    
    
    (78
    )
    
    
    (13,331
    )
    
    
    5,606Loss from discontinued operations
    
    
    (110
    )
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (120
    )Net income (loss)
    
    $
    5,486
    
    
    $
    13,409
    
    
    $
    (78
    )
    
    $
    (13,331
    )
    
    $
    5,486
 22




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    (12,894
    )
    
    $
    2,371
    
    
    $
    (103
    )
    
    $
    
    
    
    $
    (10,626
    )INVESTING ACTIVITIES:Purchases of business, net of cash acquired
    
    
    (4,912
    )
    
    
    (1,125
    )
    
    
    
    
    
    
    
    
    
    
    (6,037
    )Purchases of property and equipment
    
    
    (5,774
    )
    
    
    (687
    )
    
    
    (89
    )
    
    
    
    
    
    
    (6,550
    )Proceeds from sale of assets
    
    
    3,002
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    3,343Net cash used in investing activities
    
    
    (7,684
    )
    
    
    (1,471
    )
    
    
    (89
    )
    
    
    
    
    
    
    (9,244
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    108,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,950Payments on borrowings
    
    
    (82,971
    )
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (82,970
    )Payments on capital leases
    
    
    (4,337
    )
    
    
    (1,153
    )
    
    
    
    
    
    
    
    
    
    
    (5,490
    )Deferred financing costs
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Short swing profits received from shareholder
    
    
    (1,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,444
    )Issuance of common stock
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Dividends paid
    
    
    (1,201
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,201
    )Net cash provided by (used in) financing activities
    
    
    21,728
    
    
    
    (1,153
    )
    
    
    1
    
    
    
    
    
    
    
    20,576Increase (decrease) in cash and cash equivalents
    
    
    1,150
    
    
    
    (253
    )
    
    
    (191
    )
    
    
    
    
    
    
    706Cash and cash equivalents at beginning of year
    
    
    4,789
    
    
    
    1,022
    
    
    
    628
    
    
    
    
    
    
    
    6,439Cash and cash equivalents at end of year
    
    $
    5,939
    
    
    $
    769
    
    
    $
    437
    
    
    $
    
    
    
    $
    7,145
 23




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    4,789
    
    
    $
    1,022
    
    
    $
    628
    
    
    $
    
    
    
    $
    6,439Prepaid expenses
    
    
    6,380
    
    
    
    1,224
    
    
    
    358
    
    
    
    
    
    
    
    7,962Rental merchandise, net
    
    
    158,254
    
    
    
    35,924
    
    
    
    
    
    
    
    
    
    
    
    194,178Rental merchandise credits due from vendors
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400Property and equipment, net
    
    
    39,579
    
    
    
    7,158
    
    
    
    983
    
    
    
    
    
    
    
    47,720Goodwill
    
    
    124,895
    
    
    
    57,448
    
    
    
    6,944
    
    
    
    
    
    
    
    189,287Deferred financing costs, net
    
    
    6,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,262Intangible assets, net
    
    
    2,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,101Other assets
    
    
    4,436
    
    
    
    669
    
    
    
    1,031
    
    
    
    
    
    
    
    6,136Investment in subsidiaries
    
    
    79,697
    
    
    
    
    
    
    
    
    
    
    
    (79,697
    )
    
    
    Total assets
    
    $
    426,793
    
    
    $
    103,445
    
    
    $
    9,944
    
    
    $
    (79,697
    )
    
    $
    460,485LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    19,719
    
    
    $
    2,254
    
    
    $
    1,771
    
    
    
    
    
    
    $
    23,744Other liabilities
    
    
    51,288
    
    
    
    10,345
    
    
    
    1,776
    
    
    
    
    
    
    
    63,409Inter-company
    
    
    (17,546
    )
    
    
    15,563
    
    
    
    1,983
    
    
    
    
    
    
    
    Deferred tax liability
    
    
    15,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,856Debt
    
    
    221,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221,313Total liabilities
    
    
    290,630
    
    
    
    28,162
    
    
    
    5,530
    
    
    
    
    
    
    
    324,322Convertible redeemable preferred stock
    
    
    17,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,929SHAREHOLDERS EQUITY:Common stock
    
    
    305,033
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    305,033Retained earnings (accumulated deficit)
    
    
    (186,799
    )
    
    
    35
    
    
    
    2,814
    
    
    
    (2,849
    )
    
    
    (186,799
    )Total shareholders equity
    
    
    118,234
    
    
    
    75,283
    
    
    
    4,414
    
    
    
    (79,697
    )
    
    
    118,234Total liabilities and shareholders equity
    
    $
    426,793
    
    
    $
    103,445
    
    
    $
    9,944
    
    
    $
    (79,697
    )
    
    $
    460,485
 24




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    87,583
    
    
    $
    20,872
    
    
    $
    
    
    
    $
    
    
    
    $
    108,455Prepaid phone service
    
    
    
    
    
    
    
    
    
    
    4,313
    
    
    
    
    
    
    
    4,313Other revenues
    
    
    12,800
    
    
    
    2,729
    
    
    
    
    
    
    
    
    
    
    
    15,529Total revenues
    
    
    100,383
    
    
    
    23,601
    
    
    
    4,313
    
    
    
    
    
    
    
    128,297COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    25,765
    
    
    
    6,184
    
    
    
    
    
    
    
    
    
    
    
    31,949Property and equipment
    
    
    2,913
    
    
    
    687
    
    
    
    132
    
    
    
    
    
    
    
    3,732Intangibles
    
    
    141
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    195Cost of prepaid phone service
    
    
    
    
    
    
    
    
    
    
    2,684
    
    
    
    
    
    
    
    2,684Salaries and wages
    
    
    28,702
    
    
    
    6,181
    
    
    
    697
    
    
    
    
    
    
    
    35,580Advertising, net
    
    
    5,195
    
    
    
    223
    
    
    
    20
    
    
    
    
    
    
    
    5,438Occupancy
    
    
    7,611
    
    
    
    1,866
    
    
    
    49
    
    
    
    
    
    
    
    9,526Other operating expenses
    
    
    21,165
    
    
    
    5,025
    
    
    
    696
    
    
    
    
    
    
    
    26,886Total costs and operating expenses
    
    
    91,492
    
    
    
    20,220
    
    
    
    4,278
    
    
    
    
    
    
    
    115,990Operating income
    
    
    8,891
    
    
    
    3,381
    
    
    
    35
    
    
    
    
    
    
    
    12,307OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,305
    )
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (7,304
    )Interest income
    
    
    5
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    9Amortization of deferred financing costs
    
    
    (289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (289
    )Other income (expense), net
    
    
    (4,416
    )
    
    
    67
    
    
    
    (13
    )
    
    
    
    
    
    
    (4,362
    )Equity in net income of subsidiaries
    
    
    3,468
    
    
    
    
    
    
    
    
    
    
    
    (3,468
    )
    
    
    Income before income taxes and discontinued
operations
    
    
    354
    
    
    
    3,448
    
    
    
    27
    
    
    
    (3,468
    )
    
    
    361Income tax expense
    
    
    1,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,395Income (loss) before discontinued operations
    
    
    (1,041
    )
    
    
    3,448
    
    
    
    27
    
    
    
    (3,468
    )
    
    
    (1,034
    )Loss from discontinued operations
    
    
    (174
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (181
    )Net income (loss)
    
    $
    (1,215
    )
    
    $
    3,441
    
    
    $
    27
    
    
    $
    (3,468
    )
    
    $
    (1,215
    )
 25




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    264,528
    
    
    $
    64,068
    
    
    $
    
    
    
    $
    
    
    
    $
    328,596Prepaid phone service
    
    
    
    
    
    
    
    
    
    
    13,617
    
    
    
    
    
    
    
    13,617Other revenues
    
    
    39,899
    
    
    
    8,680
    
    
    
    
    
    
    
    
    
    
    
    48,579Total revenues
    
    
    304,427
    
    
    
    72,748
    
    
    
    13,617
    
    
    
    
    
    
    
    390,792COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    80,811
    
    
    
    19,660
    
    
    
    
    
    
    
    
    
    
    
    100,471Property and equipment
    
    
    9,459
    
    
    
    2,258
    
    
    
    428
    
    
    
    
    
    
    
    12,145Intangibles
    
    
    183
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    251Cost of prepaid phone service
    
    
    
    
    
    
    
    
    
    
    8,460
    
    
    
    
    
    
    
    8,460Salaries and wages
    
    
    85,036
    
    
    
    18,188
    
    
    
    1,940
    
    
    
    
    
    
    
    105,164Advertising, net
    
    
    13,831
    
    
    
    1,582
    
    
    
    111
    
    
    
    
    
    
    
    15,524Occupancy
    
    
    22,330
    
    
    
    5,396
    
    
    
    148
    
    
    
    
    
    
    
    27,874Other operating expenses
    
    
    66,388
    
    
    
    14,661
    
    
    
    2,084
    
    
    
    
    
    
    
    83,133Total costs and operating expenses
    
    
    278,038
    
    
    
    61,813
    
    
    
    13,171
    
    
    
    
    
    
    
    353,022Operating income
    
    
    26,389
    
    
    
    10,935
    
    
    
    446
    
    
    
    
    
    
    
    37,770OTHER INCOME (EXPENSE):Interest expense
    
    
    (21,669
    )
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    (21,662
    )Interest income
    
    
    15
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    22Amortization of deferred financing costs
    
    
    (854
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (854
    )Other income (expense), net
    
    
    (4,712
    )
    
    
    161
    
    
    
    (50
    )
    
    
    
    
    
    
    (4,601
    )Equity in net income of subsidiaries
    
    
    11,566
    
    
    
    
    
    
    
    
    
    
    
    (11,566
    )
    
    
    Income before income taxes and
discontinued operations
    
    
    10,735
    
    
    
    11,096
    
    
    
    410
    
    
    
    (11,566
    )
    
    
    10,675Income tax expense
    
    
    4,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,185Income before discontinued operations
    
    
    6,550
    
    
    
    11,096
    
    
    
    410
    
    
    
    (11,566
    )
    
    
    6,490Loss from discontinued operations
    
    
    (421
    )
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    (361
    )Net income
    
    $
    6,129
    
    
    $
    11,156
    
    
    $
    410
    
    
    $
    (11,566
    )
    
    $
    6,129
 26




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    (16,194
    )
    
    $
    2,549
    
    
    $
    653
    
    
    $
    
    
    
    $
    (12,992
    )INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (9,295
    )
    
    
    (1,431
    )
    
    
    (282
    )
    
    
    
    
    
    
    (11,008
    )Investment in subsidiary
    
    
    (754
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (754
    )Net cash used in investing activities
    
    
    (10,049
    )
    
    
    (1,431
    )
    
    
    (282
    )
    
    
    
    
    
    
    (11,762
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Payments on borrowings
    
    
    (68,017
    )
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (68,022
    )Payments on capital leases
    
    
    (4,477
    )
    
    
    (1,152
    )
    
    
    
    
    
    
    
    
    
    
    (5,629
    )Issuance of common stock
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Dividends paid
    
    
    (1,197
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,197
    )Net cash provided by (used in) financing activities
    
    
    26,386
    
    
    
    (1,152
    )
    
    
    (5
    )
    
    
    
    
    
    
    25,229Increase (decrease) in cash and cash equivalents
    
    
    143
    
    
    
    (34
    )
    
    
    366
    
    
    
    
    
    
    
    475Cash and cash equivalents at beginning of year
    
    
    2,603
    
    
    
    634
    
    
    
    175
    
    
    
    
    
    
    
    3,412Cash and cash equivalents at end of year
    
    $
    2,746
    
    
    $
    600
    
    
    $
    541
    
    
    $
    
    
    
    $
    3,887
 27




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
       NINE-MONTHYEARS ENDED SEPTEMBER 30,
    
    PERIOD ENDEDSTORES
    
    2004
    
    2005
    
    JUNE 30, 2006Open at Beginning of Period
    
    
    753
    
    
    
    754
    
    
    
    788Opened
    
    
    2
    
    
    
    44
    
    
    
    8Locations Acquired
    
    
    0
    
    
    
    1
    
    
    
    Locations Sold
    
    
    0
    
    
    
    (2
    )
    
    
    (11
    )Closed or Combined
    
    
    (1
    )
    
    
    (9
    )
    
    
    (1
    )Open at End of Period
    
    
    754
    
    
    
    788
    
    
    
    784
     28




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##### Table of Contents




    
    Same store revenue is a measure that indicates whether the Companys existing stores
continue to grow. Same store revenues consists of revenues from stores in the household
rental segment that have been operating for more than fifteen months and have had no
changes affecting operations during that time, i.e. mergers, dispositions or acquisitions.
Stores that experienced mergers, dispositions or acquisitions during that period are not
included in the calculation of same store revenues. Same store revenues increased 4.05%
for the quarter ended June 30, 2006 compared to the same period in the prior year. This is
attributable to the continuation of offering higher-end merchandise to customers, an
increase in cash sales of rental merchandise and an increase in customers period over
period.
    
    Rental merchandise depreciation as a percentage of rental revenue plus other revenue has
long been an indicator of gross profit margins on rental contracts. The Company uses the
units of activity depreciation method for all rental merchandise except computers,
electronic game systems, and cell phones, which are depreciated on the straight-line
method. Under the units of activity method, rental merchandise is depreciated as revenue
is earned. Thus, rental merchandise is not depreciated during periods when it is not on
rent and therefore not generating rental revenue. Rental merchandise depreciation as a
percentage of rental revenue plus other revenue was 27.3% for the three-month period ended
June 30, 2006 versus 25.8% for the three-month period ended June 30, 2005. Generally, the
increase in rental merchandise depreciation as a percentage of rental revenue is primarily
attributable to the increase in merchandise sales. The margins in merchandise sales are
lower than the margins on rental contracts. Cell phone depreciation is attributable for
0.4% of the increase.
    
    Operating income of the household rental segment is a key measure that management uses
to monitor how revenue growth and cost control measures impact profitability. Operating
income of the household rental segment was 9.2% of total revenue for the three-month period
ended June 30, 2006 versus 10.0% of total revenues for the three-month period ended June
30, 2005. This is attributable to lower margins on increased cash sales of merchandise
period over period and general increases in other operating expense.
    Three-Months EndedJune 30,In thousands
    
    2006
    
    
    2005
    
    
    Percent ChangeREVENUES:Rental revenue
    
    $
    113,701
    
    
    $
    108,455
    
    
    
    5Prepaid phone service revenue
    
    
    4,124
    
    
    
    4,313
    
    
    
    (4
    )Other revenue
    
    
    17,543
    
    
    
    15,529
    
    
    
    13Total revenues
    
    
    135,368
    
    
    
    128,297
    
    
    
    6COSTS AND OPERATING EXPENSES:Depreciation and amortization Rental merchandise
    
    
    35,881
    
    
    
    31,949
    
    
    
    12Property and equipment
    
    
    3,783
    
    
    
    3,732
    
    
    
    1Amortization of intangibles
    
    
    205
    
    
    
    195
    
    
    
    5Cost of prepaid phone service
    
    
    2,464
    
    
    
    2,684
    
    
    
    (8
    )Salaries and wages
    
    
    36,245
    
    
    
    35,580
    
    
    
    2Advertising
    
    
    4,715
    
    
    
    5,438
    
    
    
    (13
    )Occupancy
    
    
    10,324
    
    
    
    9,526
    
    
    
    8Other operating expenses
    
    
    29,665
    
    
    
    26,886
    
    
    
    10Total costs and operating expenses
    
    
    123,282
    
    
    
    115,990
    
    
    
    6Operating income
    
    
    12,086
    
    
    
    12,307
    
    
    
    (2
    )
 29




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##### Table of Contents



Three-Months EndedJune 30,In thousands
    
    2006
    
    
    2005
    
    
    Percent ChangeOTHER INCOME (EXPENSE):Interest expense
    
    
    (7,403
    )
    
    
    (7,304
    )
    
    
    1Interest income
    
    
    21
    
    
    
    9
    
    
    
    133Amortization of deferred financing costs
    
    
    (333
    )
    
    
    (289
    )
    
    
    15Other income (expense)
    
    
    (257
    )
    
    
    (4,362
    )
    
    
    (94
    )Income before income taxes and discontinued operations
    
    
    4,114
    
    
    
    361
    
    
    
    1,040Income tax expense
    
    
    1,351
    
    
    
    1,395
    
    
    
    (3
    )Income (loss) before discontinued operations
    
    
    2,763
    
    
    
    (1,034
    )
    
    
    367Loss from discontinued operations
    
    
    (27
    )
    
    
    (181
    )
    
    
    85Net income (loss)
    
    
    2,736
    
    
    
    (1,215
    )
    
    
    325Dividend and accretion of preferred stock
    
    
    (605
    )
    
    
    (549
    )
    
    
    (10
    )Net income (loss) allocable to common shareholders
    
    $
    2,131
    
    
    $
    (1,764
    )
    
    
    221
 Total revenues
   Rental Merchandise Depreciation
 Cost of Prepaid Phone Service
 Salaries and Wages
 Advertising
 Occupancy
 Other Operating Expenses
 Other Income (Expense), Net
 Income Tax Expense
 Net Income (Loss)
 30




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##### Table of Contents



Net Income (Loss) Allocable To Common Shareholders
  Nine-Months EndedJune 30,In thousands
    
    2006
    
    
    2005
    
    
    Percent ChangeREVENUES:Rental revenue
    
    $
    340,499
    
    
    $
    328,596
    
    
    
    4Prepaid phone service revenue
    
    
    12,289
    
    
    
    13,617
    
    
    
    (10
    )Other revenue
    
    
    52,821
    
    
    
    48,579
    
    
    
    9Total revenues
    
    
    405,609
    
    
    
    390,792
    
    
    
    4COSTS AND OPERATING EXPENSES:Depreciation and amortizationRental merchandise
    
    
    108,474
    
    
    
    100,471
    
    
    
    8Property and equipment
    
    
    11,009
    
    
    
    12,145
    
    
    
    (9
    )Amortization of intangibles
    
    
    586
    
    
    
    251
    
    
    
    133Cost of prepaid phone service
    
    
    7,733
    
    
    
    8,460
    
    
    
    (9
    )Salaries and wages
    
    
    109,831
    
    
    
    105,164
    
    
    
    4Advertising
    
    
    15,824
    
    
    
    15,524
    
    
    
    2Occupancy
    
    
    30,454
    
    
    
    27,874
    
    
    
    9Other operating expenses
    
    
    91,039
    
    
    
    83,133
    
    
    
    10Total costs and operating expenses
    
    
    374,950
    
    
    
    353,022
    
    
    
    6Operating income
    
    
    30,659
    
    
    
    37,770
    
    
    
    (19
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (21,711
    )
    
    
    (21,622
    )
    
    
    Interest income
    
    
    64
    
    
    
    22
    
    
    
    191Amortization and write-off of deferred financing costs
    
    
    (982
    )
    
    
    (854
    )
    
    
    (15
    )Other income (expense)
    
    
    2,012
    
    
    
    (4,601
    )
    
    
    144Income before income taxes and discontinued operations
    
    
    10,042
    
    
    
    10,675
    
    
    
    (6
    )Income tax expense
    
    
    4,436
    
    
    
    4,185
    
    
    
    6Income before discontinued operations
    
    
    5,606
    
    
    
    6,490
    
    
    
    (14
    )Loss from discontinued operations
    
    
    (120
    )
    
    
    (361
    )
    
    
    (67
    )Net income
    
    
    5,486
    
    
    
    6,129
    
    
    
    (10
    )Dividend and accretion of preferred stock
    
    
    (1,769
    )
    
    
    (1,619
    )
    
    
    9Net income allocable to common shareholders
    
    $
    3,717
    
    
    $
    4,510
    
    
    
    (18
    )
 Total
revenues
   Rental Merchandise Depreciation
 Property and Equipment Depreciation.
 31




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##### Table of Contents



Cost of Prepaid Phone Service
 Salaries and Wages
 Advertising
 Occupancy
 Other Operating Expenses
 Interest Expense
 Other Income (Expense), Net
 Income Tax Expense
 Net Income
 Net Income Allocable To Common Shareholders.
   Cash flows from operating activities
 For the Nine-Months Ended June 30,In thousands
    
    2006
    
    
    2005Net cash used in operating activities
    
    $
    (10,626
    )
    
    $
    (12,992
    )
  32




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##### Table of Contents



Cash flows from investing activities
 For the Nine-Months Ended June 30,In thousands
    
    2006
    
    
    2005Purchase of businesses, net of cash acquired
    
    $
    (6,037
    )
    
    $
    (754
    )Purchases of property and equipment
    
    
    (6,550
    )
    
    
    (11,008
    )Proceeds from sale of assets
    
    
    3,343
    
    
    
    Net cash used in investing activities
    
    $
    (9,244
    )
    
    $
    (11,762
    )
  Financing Activities
 For the Nine-Months Ended June30,In thousands
    
    2006
    
    
    2005Proceeds from borrowings
    
    $
    108,950
    
    
    $
    100,000Payments on borrowings
    
    
    (82,970
    )
    
    
    (68,022
    )Payments on capital leases
    
    
    (5,490
    )
    
    
    (5,629
    )Issuance of common stock
    
    
    36
    
    
    
    77Short swing profits
    
    
    1,444
    
    
    
    Dividends paid on convertible redeemable preferred stock
    
    
    (1,201
    )
    
    
    (1,197
    )Deferred financing costs
    
    
    (193
    )
    
    
    Net cash provided by financing activities
    
    $
    20,576
    
    
    $
    25,229
      33




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##### Table of Contents



Required
    
    
    ActualMaximum leverage ratio
    
    
    5.75
    
    
    
    5.26Minimum fixed charge coverage ratio
    
    
    1.25
    
    
    
    1.64Minimum rental merchandise under lease usage
    
    
    77
    %
    
    
    81
    %Maximum idle jewelry merchandise
    
    
    7.5
    %
    
    
    1.7
    %Maximum capital expenditures
    
    $25.0 million
    
    $11.9 millionMinimum consolidated net worth
    
    $107.6 million
    
    $130.6 millionMinimum Credit Facility EBITDA
    
    $42.0 million
    
    $55.9 million
   Financial
Condition
 Off Balance Sheet Arrangements
 Contractual Obligations
 Due in less
    
    
    Due in
    
    
    Due in
    
    
    Due afterContractual Cash Obligations (In thousands)
    
    Total
    
    
    than one year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsDebt
    
    $
    205,000
    
    
    $
    
    
    
    $
    
    
    
    $
    205,000
    
    
    $
    Revolving credit facility (1)
    
    
    45,000
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    22,059
    
    
    
    7,534
    
    
    
    13,847
    
    
    
    678
    
    
    
    Operating leases
    
    
    91,363
    
    
    
    28,351
    
    
    
    55,768
    
    
    
    6,780
    
    
    
    464Music rights obligation
    
    
    1,481
    
    
    
    400
    
    
    
    1,081
    
    
    
    
    
    
    
    Notes payable
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    Interest payable (2)
    
    
    96,713
    
    
    
    23,589
    
    
    
    73,117
    
    
    
    7
    
    
    
    Total cash obligations
    
    $
    461,625
    
    
    $
    104,883
    
    
    $
    143,813
    
    
    $
    212,465
    
    
    $
    464
 
 (1)
    
    The revolving credit facility matures June 2, 2008.(2)
    
    The revolving credit facility bears interest at a rate per annum equal to an applicable
margin plus LIBOR adjusted for a reserve percentage. The interest payable attributable to
the revolving credit facility includes the interest payable under the borrowing contracts in
place at June 30, 2006. Interest payments on the senior secured notes are $12.2 million
payable on each June 15 and December 15. Amount of Commitment Expiration Per PeriodTotal Amounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    OverOther Commercial Commitments (In thousands)
    
    Committed
    
    
    one year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsLines of credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby letters of credit
    
    
    3,196
    
    
    
    3,196
    
    
    
    
    
    
    
    
    
    
    
    Guarantees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    3,196
    
    
    $
    3,196
    
    
    $
    
    
    
    $
    
    
    
    $
    
  Seasonality and Inflation
 34




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##### Table of Contents



35




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##### Table of Contents



PART II OTHER INFORMATION
 
   
  The Companys significant indebtedness and dividend payment obligations limit cash flow
availability for operations.
  
    
    The Company must dedicate a substantial portion of its cash flow from operations to the
payment of principal and interest on debt and dividends on the Series A preferred stock, and, under
the indenture for the Companys $205 million of senior notes, must make an offer to purchase senior
notes on an annual basis from excess cash flow, reducing the funds available for operations;
    
    The Companys ability to obtain additional financing is limited;
    
    The Companys flexibility in planning for, or reacting to, changes in the markets in which the
Company competes is limited;
    
    The Company is at a competitive disadvantage relative to competitors with less indebtedness;
and
    
    The Company is rendered more vulnerable to general adverse economic and industry conditions.
 The Companys revolving credit facility imposes restrictions that limit operating and financial
flexibility.
  
    
    incur liens and debt,
    
    pay dividends;
    
    make redemptions and repurchases of capital stock;
    
    make loans, investments and capital expenditures;
    
    prepay, redeem or repurchase debt;
    
    engage in mergers, consolidations, asset dispositions,
sale-leaseback transactions and affiliate transactions; and
    
    change the business.
  36




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##### Table of Contents



Restrictive covenants in the indenture for the Companys senior notes may also limit operating and
financial flexibility.
  
    
    incur additional debt;
    
    pay dividends or make other restricted payments;
    
    create or permit certain liens;
    
    sell assets;
    
    create or permit restrictions on the ability of restricted subsidiaries to pay dividends or make other
distributions to the Company or grant liens to secure debt under the indenture;
    
    enter into transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    consolidate or merge with or into other companies or sell all or substantially all of the Companys
assets.
  The Company may still be able to incur additional debt, which could increase
the risks described above.
 The Company depends, to a certain extent, on its subsidiaries for cash needed to service
obligations, and these subsidiaries may not be able to distribute cash to the Company.
 If the Company does not have sufficient capital, the Company may not be able to operate the
business successfully.
 
    
    to purchase new rental merchandise for
stores;
    
    to service debt; and
    
    to open or acquire new stores.
  Since a substantial portion of the Companys assets consists of intangible assets, the value
of some of these intangible assets may not be realized.
 37




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##### Table of Contents



If the Company is unable to offer new products or services or to continue strategic
relationships with suppliers, the Company may be unable to attract new customers and to maintain
existing customers.
 
    
    The Company may have overestimated customers demand for these products;
    
    The Company may have mispriced these products given limited experience with them;
    
    The Company may have underestimated the costs required to support new product
offerings;
    
    The Company may have underestimated the difficulty in training store personnel to sell
and service these products;
    
    The Company may incur disruptions in relationships with suppliers of these new
products;
    
    The Company may experience a decrease in demand due to technological obsolescence of
some of new products; and
    
    The Company may face competition from current rental-purchase competitors and other
retailers who offer similar products to their customers.
 If the Company is unable to open new stores and operate them profitably, sales growth and
profits may be reduced.
  
    
    continued customer demand for the Companys products at levels that can support acceptable profit margins;
    
    the hiring, training and retaining of skilled personnel;
    
    the availability of adequate management and financial resources;
    
    the ability and willingness of suppliers to supply merchandise on a timely basis at competitive prices
    
    the identification and acquisition of suitable sites and the negotiation of acceptable leases for such sites;
and
    
    non-compete provisions of Company agreements to sell stores under which the Company agrees not to open new
stores within specified radius of the store sold.
  The Company needs to continue to improve operations in order to improve its financial
condition, but operations will not improve if the Company cannot continue to effectively implement
its business strategy or if general economic conditions are unfavorable.
 The Company is dependent on its management team, and the loss of their services may result in
poor business performance including lower revenues and operating income.
 38




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##### Table of Contents



If the Company fails to comply with extensive laws and governmental regulations relating to
the rental-purchase industry or other operations, it could suffer penalties or be required to make
significant changes to its operations.
  The Company faces intense competition in the rental-purchase industry, which could reduce its
market share in existing markets and affect its entry into new markets
  
   39




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##### Table of Contents



Rent-Way, Inc.(Registrant)
 August 9, 2006
    
    By: /s/ John A. LombardiDate
    
    (Signature)John A. LombardiSenior Vice President and Chief Financial Officer
 40




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##### Table of Contents



No.
    
    Exhibit Name3.1
    
    Articles of Incorporation of Rent-Way, Inc., as amended (incorporated by reference to Exhibit
3.1 to the Companys Annual Report on Form 10-K for the year ended September 30, 1997, filed
November 6, 1997.)3.2
    
    Statement with Respect to Shares of Series A Convertible Preferred Stock of the Company dated
May 30, 2003 (incorporated by reference to exhibit 3.1 to Amendment No. 5 to the Companys
registration statement on Form S-3, No. 333-102525 filed on June 25, 2003).3.3
    
    Bylaws of Rent-Way, Inc., as amended.10.28*
    
    Employment Agreement between John A. Lombardi and the Company dated April 1, 200610.29*
    
    Restricted Stock Unit award Agreement between John A. Lombardi and the Company dated May 4,
200610.30*
    
    Employment Agreement between Roger Zwingler and the Company dated June 2005.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1*
    
    Certification pursuant to Section 906 of Sarbanes-Oxley Action of 200299.1*
    
    Calculation of Reconciliation of Net Cash Used in Operations to Credit Facility EBITDA
 
 *
    
    Filed herewith. 41