##### 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 DECEMBER 31, 2005
 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.)
  
   
  þ o
  o þ o
 o þ
  Class
    
    Outstanding as of February 6, 2006Common Stock
    
    26,381,376




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##### 



RENT-WAY, INC.
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated
Balance Sheets as of December 31, 2005 (unaudited) and September 30, 2005
    
    
    3Consolidated Statements of Operations, three-months ended December 31, 2005 and 2004 (unaudited)
    
    
    4Consolidated Statements of Cash Flows, three-months ended December 31, 2005 and 2004 (unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
  RENT-WAY, INC.
 
    December 31,
    
    
    September 30,2005
    
    
    2005ASSETSCash and cash equivalents
    
    $
    10,246
    
    
    $
    6,439Prepaid expenses
    
    
    4,573
    
    
    
    7,962Rental merchandise, net
    
    
    224,256
    
    
    
    194,178Rental merchandise credits due from vendors
    
    
    3⁄4
    
    
    
    400Property and equipment, net
    
    
    48,136
    
    
    
    47,720Goodwill
    
    
    190,877
    
    
    
    189,287Deferred financing costs, net
    
    
    6,137
    
    
    
    6,262Intangible assets, net
    
    
    2,166
    
    
    
    2,101Other assets
    
    
    7,003
    
    
    
    6,136Total assets
    
    $
    493,394
    
    
    $
    460,485LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    35,973
    
    
    $
    23,744Other liabilities
    
    
    62,013
    
    
    
    63,409Deferred tax liability
    
    
    17,244
    
    
    
    15,856Debt
    
    
    243,414
    
    
    
    221,313Total liabilities
    
    
    358,644
    
    
    
    324,322Contingencies
    
    
    3⁄4
    
    
    
    3⁄4Convertible redeemable preferred stock
    
    
    16,409
    
    
    
    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; 26,381,376 and 26,381,376 shares issued and
outstanding, respectively
    
    
    305,033
    
    
    
    305,033Additional paid in capital
    
    
    79
    
    
    
    3⁄4Accumulated deficit
    
    
    (186,771
    )
    
    
    (186,799
    )Total shareholders equity
    
    
    118,341
    
    
    
    118,234Total liabilities and shareholders equity
    
    $
    493,394
    
    
    $
    460,485
 The accompanying notes are an integral part of these financial statements.
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RENT-WAY, INC.
 
    Three-Months EndedDecember 31,2005
    
    
    2004(as restated)REVENUES:Rental revenue
    
    $
    107,233
    
    
    $
    105,942Prepaid phone service revenue
    
    
    4,040
    
    
    
    4,561Other revenues
    
    
    16,583
    
    
    
    15,794Total revenues
    
    
    127,856
    
    
    
    126,297COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    33,643
    
    
    
    32,516Property and equipment
    
    
    3,571
    
    
    
    4,511Amortization of intangibles
    
    
    185
    
    
    
    28Cost of prepaid phone service
    
    
    2,536
    
    
    
    2,906Salaries and wages
    
    
    36,635
    
    
    
    34,819Advertising, net
    
    
    5,954
    
    
    
    5,353Occupancy
    
    
    9,935
    
    
    
    9,060Other operating expenses
    
    
    28,023
    
    
    
    25,942Total costs and operating expenses
    
    
    120,482
    
    
    
    115,135Operating income
    
    
    7,374
    
    
    
    11,162OTHER INCOME (EXPENSE):Interest expense
    
    
    (6,974
    )
    
    
    (7,067
    )Interest income
    
    
    21
    
    
    
    6Amortization of deferred financing costs
    
    
    (318
    )
    
    
    (280
    )Other income (expense)
    
    
    1,915
    
    
    
    (1,264
    )Income before income taxes and discontinued operations
    
    
    2,018
    
    
    
    2,557Income tax expense
    
    
    1,388
    
    
    
    1,395Income before discontinued operations
    
    
    630
    
    
    
    1,162Loss from discontinued operations
    
    
    (23
    )
    
    
    (128
    )Net income
    
    
    607
    
    
    
    1,034Dividend and accretion of preferred stock
    
    
    (579
    )
    
    
    (535
    )Net income allocable to common shareholders
    
    $
    28
    
    
    $
    499EARNINGS PER COMMON SHARE (NOTE 6):Basic earnings per common share:Income before discontinued operations
    
    $
    0.02
    
    
    $
    0.04Net income allocable to common shareholders
    
    $
    3⁄4
    
    
    $
    0.02Diluted earnings per common share:Income (loss) before discontinued operations
    
    $
    (0.04
    )
    
    $
    0.04Net income (loss) allocable to common shareholders
    
    $
    (0.04
    )
    
    $
    0.02Weighted average common shares outstanding:Basic
    
    
    26,381
    
    
    
    26,244Diluted
    
    
    29,789
    
    
    
    26,717
 The accompanying notes are an integral part of these financial statements.
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RENT-WAY, INC.
 
    Three-Months EndedDecember 31,2005
    
    
    2004(as restated)OPERATING ACTIVITIES:Net income
    
    $
    607
    
    
    $
    1,034Adjustments to reconcile net income to net cash used in operating activities:Loss from discontinued operations
    
    
    23
    
    
    
    128Depreciation and amortization
    
    
    37,823
    
    
    
    37,459Deferred income taxes
    
    
    1,388
    
    
    
    1,395Stock-based compensation expense
    
    
    79
    
    
    
    Market adjustment for interest rate swap derivative
    
    
    
    
    
    
    (568
    )Market adjustment for preferred stock conversion option derivative
    
    
    (1,696
    )
    
    
    2,191Write-off of property and equipment
    
    
    18
    
    
    
    84Changes in assets and liabilities:Prepaid expenses
    
    
    3,389
    
    
    
    (96
    )Rental merchandise
    
    
    (61,672
    )
    
    
    (53,151
    )Rental merchandise deposits and credits due from vendors
    
    
    400
    
    
    
    271Other assets
    
    
    (905
    )
    
    
    365Accounts payable
    
    
    12,229
    
    
    
    1,148Other liabilities
    
    
    (2,221
    )
    
    
    (7,182
    )Net cash used in continuing operations
    
    
    (10,538
    )
    
    
    (16,922
    )Net cash used in discontinued operations
    
    
    (23
    )
    
    
    (128
    )Net cash used in operating activities
    
    
    (10,561
    )
    
    
    (17,050
    )INVESTING ACTIVITIES:Purchase of business, net of cash acquired
    
    
    (3,812
    )
    
    
    (45
    )Purchases of property and equipment
    
    
    (1,548
    )
    
    
    (4,409
    )Net cash used in investing activities
    
    
    (5,360
    )
    
    
    (4,454
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    51,600
    
    
    
    41,000Payments on borrowings
    
    
    (29,606
    )
    
    
    (13,010
    )Payments on note for settlement of class action lawsuit
    
    
    
    
    
    
    (1,000
    )Payments on capital leases
    
    
    (1,670
    )
    
    
    (1,981
    )Deferred financing costs
    
    
    (193
    )
    
    
    Dividends paid on convertible redeemable preferred stock
    
    
    (403
    )
    
    
    (399
    )Net cash provided by financing activities
    
    
    19,728
    
    
    
    24,610Increase in cash and cash equivalents
    
    
    3,807
    
    
    
    3,106Cash and cash equivalents at beginning of period
    
    
    6,439
    
    
    
    3,412Cash and cash equivalents at end of period
    
    $
    10,246
    
    
    $
    6,518
 The accompanying notes are an integral part of these financial statements.
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Three-Months Ended December 31,2005
    
    
    2004CASH PAID DURING THE PERIOD FOR:Interest
    
    $
    12,940
    
    
    $
    13,273NONCASH INVESTING ACTIVITIES:Assets acquired under capital lease
    
    
    2,456
    
    
    
    3,429
  6




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Consolidated Balance Sheet  Three-Months Ended December 31, 2004
 BeforeRestatement
    
    Adjustments
    
    As RestatedProperty and equipment, net
    
    $
    46,051
    
    
    $
    (3,265
    )
    
    $
    42,786Total assets
    
    
    460,529
    
    
    
    (3,265
    )
    
    
    457,264Other liabilities
    
    
    54,321
    
    
    
    822
    
    
    
    55,143Accumulated deficit
    
    
    (190,479
    )
    
    
    (4,087
    )
    
    
    (194,566
    )Total shareholders equity
    
    
    113,851
    
    
    
    (4,087
    )
    
    
    109,764
 Consolidated Statements of Operations  Three-Months Ended December 31, 2004
 BeforeRestatement
    
    Adjustments
    
    As RestatedProperty and equipment depreciation
    
    $
    3,767
    
    
    $
    744
    
    
    $
    4,511Occupancy
    
    
    8,996
    
    
    
    64
    
    
    
    9,060Operating income
    
    
    11,970
    
    
    
    (808
    )
    
    
    11,162Other income (expense), net
    
    
    (3,832
    )
    
    
    2,568
    
    
    
    (1,264
    )Net income
    
    
    (726
    )
    
    
    1,760
    
    
    
    1,034Net income allocable to common shareholders
    
    
    (1,261
    )
    
    
    1,760
    
    
    
    499Basic net income allocable to common shareholders per common share
    
    $
    (0.05
    )
    
    $
    0.07
    
    
    $
    0.02Diluted net income allocable to common shareholders per common share
    
    $
    (0.05
    )
    
    $
    0.07
    
    
    $
    0.02
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Three-Months Ended December 31,2005
    
    
    2004Operating expenses from discontinued operations (including exit costs) (1)
    
    $
    (23
    )
    
    $
    (128
    )Net loss from discontinued operations
    
    $
    (23
    )
    
    $
    (128
    )
 
 (1)
    
    The Company recorded exit costs associated with the monthly rent and common area
maintenance charges until leases are terminated or expired, in accordance with SFAS 146.      December 31,
    
    
    September 30,2005
    
    
    2004Cost
    
    $
    346,811
    
    
    $
    317,912Less accumulated depreciation
    
    
    120,632
    
    
    
    120,898Less reserve for losses
    
    
    1,586
    
    
    
    1,261Less reserve for hurricane damages
    
    
    3⁄4
    
    
    
    1,509Less deferred credits
    
    
    337
    
    
    
    66$
    224,256
    
    
    $
    194,178
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December 31,
    
    
    September 30,2005
    
    
    2005On-rent merchandise
    
    $
    282,264
    
    
    $
    258,328Held for rent merchandise
    
    
    64,547
    
    
    
    59,584$
    346,811
    
    
    $
    317,912
  Three-Months Ended December 31,2005
    
    
    2004Lost merchandise
    
    $
    159
    
    
    $
    128Stolen merchandise
    
    
    2,955
    
    
    
    2,572Discarded merchandise
    
    
    667
    
    
    
    550Additional reserve for expected losses
    
    
    299
    
    
    
    3⁄4$
    4,080
    
    
    $
    3,250
  December 31,
    
    
    September 30,2005
    
    
    2005Transportation equipment
    
    $
    43,444
    
    
    $
    42,875Furniture and fixtures
    
    
    37,200
    
    
    
    36,431Leasehold improvements
    
    
    34,683
    
    
    
    34,259Signs
    
    
    5,210
    
    
    
    5,122Buildings
    
    
    5,674
    
    
    
    5,674Land
    
    
    1,924
    
    
    
    1,920128,135
    
    
    
    126,281Less accumulated depreciation and amortization
    
    
    (79,999
    )
    
    
    (78,561
    )$
    48,136
    
    
    $
    47,720
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Three-Months Ended December 31,2005
    
    
    2004(as restated)COMPUTATION OF EARNINGS (LOSS) PER SHARE:BASICIncome before discontinued operations
    
    $
    630
    
    
    $
    1,162Loss from discontinued operations
    
    
    (23
    )
    
    
    (128
    )Net income
    
    
    607
    
    
    
    1,034Dividend and accretion of preferred stock
    
    
    (579
    )
    
    
    (535
    )Net income allocable to common shareholders
    
    $
    28
    
    
    $
    499Weighted average common shares outstanding
    
    
    26,381
    
    
    
    26,244Earnings per share:Income before discontinued operations
    
    $
    0.02
    
    
    $
    0.04Loss from discontinued operations
    
    
    
    
    
    
    Dividend and accretion of preferred stock
    
    
    (0.02
    )
    
    
    (0.02
    )Net income allocable to common shareholders
    
    $
    
    
    
    $
    0.02DILUTEDNet income allocable to common shareholders for basic earnings (loss)
per share
    
    $
    28
    
    
    $
    499Plus: Impact of assumed conversion:Conversion derivative market value adjustment (1)
    
    
    (1,696
    )
    
    
    Dividends on 8% convertible preferred stock (1)
    
    
    403
    
    
    
    Accretion to preferred stock redemption amount (1)
    
    
    176
    
    
    
    Net income (loss) allocable to common shareholders for diluted
earnings (loss) per share and assumed conversion
    
    $
    (1,089
    )
    
    $
    499Weighted average common shares used in calculating basic earnings
(loss) per share
    
    
    26,381
    
    
    
    26,244Add incremental shares representing:Shares issuable upon exercise of stock options and warrants
    
    
    156
    
    
    
    473Shares 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
    
    
    29,789
    
    
    
    26,717Earnings (loss) per share:Income (loss) before discontinued operations
    
    $
    (0.04
    )
    
    $
    0.04Loss from discontinued operations
    
    
    
    
    
    
    Dividend and accretion of preferred stock
    
    
    
    
    
    
    (0.02
    )Net income (loss) allocable to common shareholders
    
    $
    (0.04
    )
    
    $
    0.02
 
 (1)
    
    Including the effects of these items for the three-month period ended December
31, 2004 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 December 31, 2004. There were
conversion derivative market value adjustments of $2,191, dividends on convertible
preferred stock of $405 and accretion to preferred stock redemption in the amount of
$130 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 December 31, 2004.    Household
    
    
    Prepaid TelephoneRental Segment
    
    
    Service Segment
    
    
    TotalBalance at September 30, 2005
    
    $
    182,343
    
    
    $
    6,944
    
    
    $
    189,287Acquisitions
    
    
    1,590
    
    
    
    
    
    
    
    1,590Disposals
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    $
    183,933
    
    
    $
    6,944
    
    
    $
    190,877
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Purchase
    
    
    Cumulative
    
    
    Net CarryingBalance at December 31, 2005:
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Music rights license
    
    $
    1,882
    
    
    $
    (101
    )
    
    $
    1,781Non-compete agreements
    
    
    2,773
    
    
    
    (2,634
    )
    
    
    139Customer list
    
    
    183
    
    
    
    (43
    )
    
    
    140Customer contracts
    
    
    162
    
    
    
    (56
    )
    
    
    106$
    5,000
    
    
    $
    (2,834
    )
    
    $
    2,166
 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
  Fiscal Year
    
    AmountRemaining 2006
    
    $
    4612007
    
    
    5302008
    
    
    4212009
    
    
    3812010
    
    
    373$
    2,166
    December 31,
    
    
    September 30,2005
    
    
    2005Other receivables
    
    $
    3,061
    
    
    $
    2,425Other inventory
    
    
    497
    
    
    
    571Deposits
    
    
    805
    
    
    
    786Other
    
    
    2,640
    
    
    
    2,354$
    7,003
    
    
    $
    6,136
   December 31,
    
    
    September 30,2005
    
    
    2005Accrued salaries, wages, taxes and benefits
    
    $
    12,995
    
    
    $
    9,367Capital lease obligations
    
    
    20,121
    
    
    
    19,409Deferred revenue
    
    
    9,782
    
    
    
    7,704Accrued dividends and interest
    
    
    1,805
    
    
    
    7,771Vacant facility lease obligations
    
    
    2,400
    
    
    
    2,541Accrued property taxes
    
    
    1,662
    
    
    
    3,200Other
    
    
    13,248
    
    
    
    13,417$
    62,013
    
    
    $
    63,409
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December 31,
    
    
    September 30,2005
    
    
    2005Senior secured notes
    
    $
    202,391
    
    
    $
    202,284Revolving credit facility
    
    
    41,000
    
    
    
    19,000Note payable
    
    
    23
    
    
    
    29$
    243,414
    
    
    $
    221,313
  a)
    
    100% of the principal amount of the notes to be redeemed; andb)
    
    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




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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
    
    
    
    
    
    
    Cancelled
    
    
    162,945
    
    
    
    10.83Balance at December 31, 2005
    
    
    2,852,708
    
    
    $
    7.67
    
    
    $
    Exercisable at December 31, 2005
    
    
    1,926,458
    
    
    $
    8.65
    
    
    $
    
 
 (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 outstanding and exercisable options, exceed the
market value at December 31, 2005, therefore, there is no
intrinsic value   Three-Months EndedDecember 31, 2005Impact of Equity-(in thousands, except per share amounts)
    
    As Reported
    
    Based CompensationIncome before provision for taxes on income
    
    $
    2,018
    
    
    $
    (79
    )Net income
    
    $
    607
    
    
    $
    (79
    )Net income allocable to common shareholders
    
    $
    28
    
    
    $
    (79
    )Net income allocable to common shareholders  Basic
    
    $
    
    
    
    $
    Net income allocable to common shareholders  Diluted
    
    $
    (0.04
    )
    
    $
    
  Three-Months EndedDecember 31,2004(as restated)Income before discontinued operations:As reported
    
    $
    1,162Plus: Compensation expense
    
    
    Less: Stock-based employee compensation
under fair-value based method for all
awards, net of related tax effects
    
    
    (200
    )Pro-forma
    
    $
    962Net income allocable to common shareholders:As reported
    
    $
    499Plus: Compensation expense
    
    
    Less: Stock-based employee compensation
under fair-value based method for all
awards, net of related tax effects
    
    
    (200
    )Pro-forma
    
    $
    299Basic earnings per common share:Net income before discontinued operations:As reported
    
    $
    0.04Pro-forma
    
    $
    0.03
 15




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##### Table of Contents



Three-Months EndedDecember 31,2004(as restated)Net income allocable to common shareholders:As reported
    
    $
    0.02Pro-forma
    
    $
    0.01Diluted earnings per common share:Net income before discontinued operations:As reported
    
    $
    0.04Pro-forma
    
    $
    0.03Net income allocable to common shareholders:As reported
    
    $
    0.02Pro-forma
    
    $
    0.01
  Three-months EndedDecember 31, 2004Average risk free interest rate
    
    
    3.38
    %Expected dividend yield
    
    
    Expected life
    
    6 yearsExpected volatility
    
    
    98.24
    %
      Other Comprehensive
    
    
    Other ComprehensiveIncome
    
    
    IncomeFor Three-Months Ended
    
    
    For Three-Months EndedDecember 31, 2005
    
    
    December 31, 2004(as restated)Net income
    
    $
    607
    
    
    $
    1,034Amortization of SFAS 133Transition amount
    
    
    
    
    
    
    28Other comprehensive income
    
    $
    607
    
    
    $
    1,062
 16




---



##### Table of Contents



Accumulated OtherComprehensiveLossAt September 30, 2005Balance at October 1
    
    $
    (93
    )Amortization of SFAS 133Transition amount
    
    
    (93
    )Accumulated other
comprehensive loss
    
    $
    
          17




---



##### Table of Contents



Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentThree-Months Ended December 31, 2005
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsTotal revenue
    
    $
    123,955
    
    
    $
    4,040
    
    
    $
    (139
    )
    
    $
    127,856Operating income (loss)
    
    $
    7,497
    
    
    $
    (153
    )
    
    $
    30
    
    
    $
    7,374Net income (loss)
    
    $
    815
    
    
    $
    (208
    )
    
    $
    3⁄4
    
    
    $
    607Total Assets
    
    $
    496,111
    
    
    $
    3,096
    
    
    $
    (5,813
    )
    
    $
    493,394
 Three-Months Ended December 31, 2004
    
    Household Rental
    
    
    Prepaid Telephone
    
    
    Inter-segment(as restated)
    
    Service
    
    
    Service
    
    
    Activity
    
    
    TotalTotal revenue
    
    $
    121,885
    
    
    $
    4,561
    
    
    $
    (149
    )
    
    $
    126,297Operating income
    
    $
    11,087
    
    
    $
    45
    
    
    $
    30
    
    
    $
    11,162Net income
    
    $
    1,046
    
    
    $
    (12
    )
    
    $
    3⁄4
    
    
    $
    1,034Total Assets
    
    $
    459,736
    
    
    $
    2,735
    
    
    $
    (5,207
    )
    
    $
    457,264
    18




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    7,780
    
    
    $
    1,825
    
    
    $
    641
    
    
    $
    
    
    
    $
    10,246Prepaid expenses
    
    
    3,534
    
    
    
    669
    
    
    
    370
    
    
    
    
    
    
    
    4,573Rental merchandise, net
    
    
    182,241
    
    
    
    42,015
    
    
    
    
    
    
    
    
    
    
    
    224,256Property and equipment, net
    
    
    39,883
    
    
    
    7,248
    
    
    
    1,005
    
    
    
    
    
    
    
    48,136Goodwill
    
    
    126,106
    
    
    
    57,827
    
    
    
    6,944
    
    
    
    
    
    
    
    190,877Deferred financing costs, net
    
    
    6,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,137Intangible assets, net
    
    
    2,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,166Other assets
    
    
    5,250
    
    
    
    782
    
    
    
    971
    
    
    
    
    
    
    
    7,003Investment in subsidiaries
    
    
    83,501
    
    
    
    
    
    
    
    
    
    
    
    (83,501
    )
    
    
    Total assets
    
    $
    456,598
    
    
    $
    110,366
    
    
    $
    9,931
    
    
    $
    (83,501
    )
    
    $
    493,394LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    29,977
    
    
    $
    4,211
    
    
    $
    1,785
    
    
    $
    
    
    
    $
    35,973Other liabilities
    
    
    48,860
    
    
    
    11,319
    
    
    
    1,834
    
    
    
    
    
    
    
    62,013Inter-company
    
    
    (17,646
    )
    
    
    15,767
    
    
    
    1,879
    
    
    
    
    
    
    
    Deferred tax liability
    
    
    17,244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,244Debt
    
    
    243,413
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    243,414Total liabilities
    
    
    321,848
    
    
    
    31,297
    
    
    
    5,499
    
    
    
    
    
    
    
    358,644Convertible redeemable preferred stock
    
    
    16,409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,409SHAREHOLDERS EQUITY:Common stock
    
    
    305,033
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    305,033Additional paid in capital
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79Retained earnings (accumulated deficit)
    
    
    (186,771
    )
    
    
    3,821
    
    
    
    2,832
    
    
    
    (6,653
    )
    
    
    (186,771
    )Total shareholders equity
    
    
    118,341
    
    
    
    79,069
    
    
    
    4,432
    
    
    
    (83,501
    )
    
    
    118,341Total liabilities and shareholders equity
    
    $
    456,598
    
    
    $
    110,366
    
    
    $
    9,931
    
    
    $
    (83,501
    )
    
    $
    493,394
 19




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    86,849
    
    
    $
    20,384
    
    
    $
    
    
    
    $
    
    
    
    $
    107,233Prepaid phone service
    
    
    
    
    
    
    
    
    
    
    4,040
    
    
    
    
    
    
    
    4,040Other revenues
    
    
    13,661
    
    
    
    2,922
    
    
    
    
    
    
    
    
    
    
    
    16,583Total revenues
    
    
    100,510
    
    
    
    23,306
    
    
    
    4,040
    
    
    
    
    
    
    
    127,856COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    27,285
    
    
    
    6,358
    
    
    
    
    
    
    
    
    
    
    
    33,643Property and equipment
    
    
    2,819
    
    
    
    635
    
    
    
    117
    
    
    
    
    
    
    
    3,571Amortization of goodwill and other intangibles
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Cost of prepaid phone service
    
    
    
    
    
    
    
    
    
    
    2,536
    
    
    
    
    
    
    
    2,536Salaries and wages
    
    
    29,868
    
    
    
    6,155
    
    
    
    612
    
    
    
    
    
    
    
    36,635Advertising, net
    
    
    5,811
    
    
    
    83
    
    
    
    60
    
    
    
    
    
    
    
    5,954Occupancy
    
    
    7,983
    
    
    
    1,906
    
    
    
    46
    
    
    
    
    
    
    
    9,935Other operating expenses
    
    
    22,191
    
    
    
    5,180
    
    
    
    652
    
    
    
    
    
    
    
    28,023Total costs and operating expenses
    
    
    96,142
    
    
    
    20,317
    
    
    
    4,023
    
    
    
    
    
    
    
    120,482Operating income (loss)
    
    
    4,368
    
    
    
    2,989
    
    
    
    17
    
    
    
    
    
    
    
    7,374OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,670
    )
    
    
    694
    
    
    
    2
    
    
    
    
    
    
    
    (6,974
    )Interest income
    
    
    15
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    21Amortization of deferred financing costs
    
    
    (318
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (318
    )Other income (expense), net
    
    
    1,814
    
    
    
    107
    
    
    
    (6
    )
    
    
    
    
    
    
    1,915Equity in net income of subsidiaries
    
    
    3,805
    
    
    
    
    
    
    
    
    
    
    
    (3,805
    )
    
    
    Income (loss) before income taxes and
discontinued operations
    
    
    2,014
    
    
    
    3,790
    
    
    
    19
    
    
    
    (3,805
    )
    
    
    2,018Income tax expense
    
    
    1,388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,388Income (loss) before discontinued operations
    
    
    626
    
    
    
    3,790
    
    
    
    19
    
    
    
    (3,805
    )
    
    
    630Loss from discontinued operations
    
    
    (19
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (23
    )Net income (loss)
    
    $
    607
    
    
    $
    3,786
    
    
    $
    19
    
    
    $
    (3,805
    )
    
    $
    607
 20




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    (13,046
    )
    
    $
    2,334
    
    
    $
    151
    
    
    $
    
    
    
    $
    (10,561
    )INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,172
    )
    
    
    (237
    )
    
    
    (139
    )
    
    
    
    
    
    
    (1,548
    )Purchase of business
    
    
    (2,855
    )
    
    
    (957
    )
    
    
    
    
    
    
    
    
    
    
    (3,812
    )Net cash used in investing activities
    
    
    (4,027
    )
    
    
    (1,194
    )
    
    
    (139
    )
    
    
    
    
    
    
    (5,360
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    51,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,600Payments on borrowings
    
    
    (29,607
    )
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (29,606
    )Payments on capital leases
    
    
    (1,333
    )
    
    
    (337
    )
    
    
    
    
    
    
    
    
    
    
    (1,670
    )Deferred financing costs
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Dividends paid
    
    
    (403
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )Net cash provided by (used in) financing activities
    
    
    20,064
    
    
    
    (337
    )
    
    
    1
    
    
    
    
    
    
    
    19,728Increase (decrease) in cash and cash equivalents
    
    
    2,991
    
    
    
    803
    
    
    
    13
    
    
    
    
    
    
    
    3,807Cash and cash equivalents at beginning of year
    
    
    4,789
    
    
    
    1,022
    
    
    
    628
    
    
    
    
    
    
    
    6,439Cash and cash equivalents at end of year
    
    $
    7,780
    
    
    $
    1,825
    
    
    $
    641
    
    
    $
    
    
    
    $
    10,246
 21




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    4,789
    
    
    $
    1,022
    
    
    $
    628
    
    
    $
    3⁄4
    
    
    $
    6,439Prepaid expenses
    
    
    6,380
    
    
    
    1,224
    
    
    
    358
    
    
    
    3⁄4
    
    
    
    7,962Rental merchandise, net
    
    
    158,254
    
    
    
    35,924
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    194,178Rental merchandise credits due from vendors
    
    
    400
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    400Property and equipment, net
    
    
    39,579
    
    
    
    7,158
    
    
    
    983
    
    
    
    3⁄4
    
    
    
    47,720Goodwill
    
    
    124,895
    
    
    
    57,448
    
    
    
    6,944
    
    
    
    3⁄4
    
    
    
    189,287Deferred financing costs, net
    
    
    6,262
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,262Intangible assets, net
    
    
    2,101
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,101Other assets
    
    
    4,436
    
    
    
    669
    
    
    
    1,031
    
    
    
    3⁄4
    
    
    
    6,136Investment in subsidiaries
    
    
    79,697
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (79,697
    )
    
    
    3⁄4Total assets
    
    $
    426,793
    
    
    $
    103,445
    
    
    $
    9,944
    
    
    $
    (79,697
    )
    
    $
    460,485LIABILITES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    19,719
    
    
    $
    2,254
    
    
    $
    1,771
    
    
    
    3⁄4
    
    
    $
    23,744Other liabilities
    
    
    51,288
    
    
    
    10,345
    
    
    
    1,776
    
    
    
    3⁄4
    
    
    
    63,409Inter-company
    
    
    (17,546
    )
    
    
    15,563
    
    
    
    1,983
    
    
    
    3⁄4
    
    
    
    3⁄4Deferred tax liability
    
    
    15,856
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    15,856Debt
    
    
    221,313
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    221,313Total liabilities
    
    
    290,630
    
    
    
    28,162
    
    
    
    5,530
    
    
    
    3⁄4
    
    
    
    324,322Convertible redeemable preferred stock
    
    
    17,929
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    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
 22




---



##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    84,580
    
    
    $
    21,362
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    105,942Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,561
    
    
    
    3⁄4
    
    
    
    4,561Other revenues
    
    
    12,877
    
    
    
    2,917
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    15,794Total revenues
    
    
    97,457
    
    
    
    24,279
    
    
    
    4,561
    
    
    
    3⁄4
    
    
    
    126,297COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    26,039
    
    
    
    6,477
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    32,516Property and equipment
    
    
    3,507
    
    
    
    855
    
    
    
    149
    
    
    
    3⁄4
    
    
    
    4,511Amortization of goodwill and other intangibles
    
    
    21
    
    
    
    7
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    28Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,906
    
    
    
    3⁄4
    
    
    
    2,906Salaries and wages
    
    
    28,138
    
    
    
    6,085
    
    
    
    596
    
    
    
    3⁄4
    
    
    
    34,819Advertising, net
    
    
    4,112
    
    
    
    1,234
    
    
    
    7
    
    
    
    3⁄4
    
    
    
    5,353Occupancy
    
    
    7,204
    
    
    
    1,806
    
    
    
    50
    
    
    
    3⁄4
    
    
    
    9,060Other operating expenses
    
    
    20,591
    
    
    
    4,722
    
    
    
    629
    
    
    
    3⁄4
    
    
    
    25,942Total costs and operating expenses
    
    
    89,612
    
    
    
    21,186
    
    
    
    4,337
    
    
    
    3⁄4
    
    
    
    115,135Operating income (loss)
    
    
    7,845
    
    
    
    3,093
    
    
    
    224
    
    
    
    3⁄4
    
    
    
    11,162OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,391
    )
    
    
    321
    
    
    
    3
    
    
    
    3⁄4
    
    
    
    (7,067
    )Interest income
    
    
    5
    
    
    
    3⁄4
    
    
    
    1
    
    
    
    3⁄4
    
    
    
    6Amortization  deferred financial costs
    
    
    (280
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (280
    )Other income (expense), net
    
    
    (1,342
    )
    
    
    94
    
    
    
    (16
    )
    
    
    3⁄4
    
    
    
    (1,264
    )Equity in net income of subsidiaries
    
    
    3,773
    
    
    
    3⁄4
    
    
    
    
    
    
    
    (3,773
    )
    
    
    3⁄4Income (loss) before income taxes and
discontinued operations
    
    
    2,610
    
    
    
    3,508
    
    
    
    212
    
    
    
    (3,773
    )
    
    
    2,557Income tax expense
    
    
    1,395
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,395Income (loss) before discontinued operations
    
    
    1,215
    
    
    
    3,508
    
    
    
    212
    
    
    
    (3,773
    )
    
    
    1,162Loss from discontinued operations
    
    
    (181
    )
    
    
    53
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (128
    )Net income (loss)
    
    $
    1,034
    
    
    $
    3,561
    
    
    $
    212
    
    
    $
    (3,773
    )
    
    $
    1,034
 23




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities.
    
    $
    (19,723
    )
    
    $
    2,743
    
    
    $
    (70
    )
    
    $
    3⁄4
    
    
    $
    (17,050
    )INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (3,797
    )
    
    
    (518
    )
    
    
    (94
    )
    
    
    3⁄4
    
    
    
    (4,409
    )Investment in subsidiary
    
    
    (45
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (45
    )Net cash used in investing activities
    
    
    (3,842
    )
    
    
    (518
    )
    
    
    (94
    )
    
    
    3⁄4
    
    
    
    (4,454
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    41,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    41,000Payments on borrowings
    
    
    (13,005
    )
    
    
    3⁄4
    
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    (13,010
    )Payments on note for settlement of class action lawsuit
    
    
    (1,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,000
    )Payments on capital leases
    
    
    (1,565
    )
    
    
    (416
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,981
    )Dividends paid
    
    
    (399
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (399
    )Net cash provided by (used in) financing activities.
    
    
    25,031
    
    
    
    (416
    )
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    24,610Increase (decrease) in cash and cash equivalents
    
    
    1,466
    
    
    
    1,809
    
    
    
    (169
    )
    
    
    3⁄4
    
    
    
    3,106Cash and cash equivalents at beginning of year
    
    
    2,603
    
    
    
    634
    
    
    
    175
    
    
    
    3⁄4
    
    
    
    3,412Cash and cash equivalents at end of year
    
    $
    4,069
    
    
    $
    2,443
    
    
    $
    6
    
    
    $
    3⁄4
    
    
    $
    6,518
 24




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
          25




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##### Table of Contents



YEARS ENDED SEPTEMBER 30,
    
    QUARTER ENDEDSTORES
    
    2005
    
    2004
    
    December 31, 2005Open at Beginning of Period
    
    
    754
    
    
    
    753
    
    
    
    788Opened
    
    
    44
    
    
    
    2
    
    
    
    5Locations Acquired
    
    
    1
    
    
    
    3⁄4
    
    
    
    3⁄4Locations Sold
    
    
    (2
    )
    
    
    3⁄4
    
    
    
    3⁄4Closed or Combined
    
    
    (9
    )
    
    
    (1
    )
    
    
    3⁄4Open at End of Period
    
    
    788
    
    
    
    754
    
    
    
    793
        
    
    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, such as: 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
decreased 2.4% quarter over quarter. This is attributable to a decline in active rental
agreements year over year.
    
    Gross weekly rental revenue, or GWRR, is a key measure of the Companys growth. GWRR is
the total potential rental revenue that could be collected from all active rental
agreements based on a weekly payment cycle. This is monitored at the individual store
level and Company level. Total GWRR was $9.5 million based on active agreements at
December 31, 2005, versus $9.1 million for active agreements at December 31, 2004. This
increase is attributable to the continuation of offering higher-end merchandise to
customers and increasing rental rates on certain products. It is also due to 27 additional
stores year over year.
    
    Performance percentage is one metric the Company uses to measure overall operating
performance. The Company defines performance percentage as total rental revenue collected
as a percentage of total GWRR or, potential revenue. Performance percentage was 89.5% for
the three-month period ended December 31, 2005 and 91.5% for the three-month period ended
December 31, 2004. The performance percentage reflects the results of 793 stores and 766
stores for the three-month periods ended December 31, 2005 and 2004, respectively. Senior
management, as well as store managers, use the Companys computerized management
information system to monitor cash collection on a daily basis. There are daily cash
collections expectations conveyed to the field and closely monitored by senior management.
 26




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##### Table of Contents




    
    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 and
electronic game systems, 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 27.2% for the three-month period ended December 31, 2005
versus 26.7% for the three-month period ended December 31, 2004. The increase in rental
merchandise depreciation is attributable to an increase in merchandise sales. The gross
profit margins on merchandise sales are lower than the gross profit margins on rental
contracts.
    
    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 6.0% of total revenue for the three-month period
ended December 31, 2005 versus 9.1% of total revenues for the three-month period ended
December 31, 2004. This is primarily attributable to a decrease in same store revenues
discussed above.
   27




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##### Table of Contents



Three-Months EndedDecember 31,
    
    
    Percent ChangeIn thousands
    
    2005
    
    
    2004(as restated)REVENUES:Rental revenue
    
    $
    107,233
    
    
    $
    105,942
    
    
    
    1Prepaid phone service revenue
    
    
    4,040
    
    
    
    4,561
    
    
    
    (11
    )Other revenue
    
    
    16,583
    
    
    
    15,794
    
    
    
    5Total revenues
    
    
    127,856
    
    
    
    126,297
    
    
    
    1COSTS AND OPERATING EXPENSES:Depreciation and amortizationRental merchandise
    
    
    33,643
    
    
    
    32,516
    
    
    
    3Property and equipment
    
    
    3,571
    
    
    
    4,511
    
    
    
    (21
    )Amortization of intangibles
    
    
    185
    
    
    
    28
    
    
    
    561Cost of prepaid phone service
    
    
    2,536
    
    
    
    2,906
    
    
    
    (13
    )Salaries and wages
    
    
    36,635
    
    
    
    34,819
    
    
    
    5Advertising
    
    
    5,954
    
    
    
    5,353
    
    
    
    11Occupancy
    
    
    9,935
    
    
    
    9,060
    
    
    
    10Other operating expenses
    
    
    28,023
    
    
    
    25,942
    
    
    
    8Total costs and operating expenses
    
    
    120,482
    
    
    
    115,135
    
    
    
    5Operating income
    
    
    7,374
    
    
    
    11,162
    
    
    
    (34
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (6,974
    )
    
    
    (7,067
    )
    
    
    (1
    )Interest income
    
    
    21
    
    
    
    6
    
    
    
    250Amortization of deferred financing costs
    
    
    (318
    )
    
    
    (280
    )
    
    
    (14
    )Other income (expense)
    
    
    1,915
    
    
    
    (1,264
    )
    
    
    252Income before income taxes and discontinued operations
    
    
    2,018
    
    
    
    2,557
    
    
    
    (21
    )Income tax expense
    
    
    1,388
    
    
    
    1,395
    
    
    
    (1
    )Income before discontinued operations
    
    
    630
    
    
    
    1,162
    
    
    
    (46
    )Loss from discontinued operations
    
    
    (23
    )
    
    
    (128
    )
    
    
    (82
    )Net income
    
    
    607
    
    
    
    1,034
    
    
    
    (41
    )Dividend and accretion of preferred stock
    
    
    (579
    )
    
    
    (535
    )
    
    
    8Net income allocable to common shareholders
    
    $
    28
    
    
    $
    499
    
    
    
    (94
    )
 Total revenues
 Rental Merchandise Depreciation
 Property and Equipment Depreciation.
 Cost of Prepaid Phone Service
 Salaries and Wages
 Advertising
 28




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##### Table of Contents



Occupancy
 Other Operating Expense
 Interest Expense
 Other Income (Expense), Net
 Income Tax Expense
 Net Income
 Net Income Allocable To Common Shareholders
   Cash flows from operating activities
 For the Three-Months Ended December 31,In thousands
    
    2005
    
    
    2004Net cash used in operating activities
    
    $
    (10,561
    )
    
    $
    (17,050
    )
  Cash flows from investing activities
 For the Three-Months Ended December 31,In thousands
    
    2005
    
    
    2004Purchase of businesses, net of cash acquired
    
    $
    (3,812
    )
    
    $
    (45
    )Purchases of property and equipment
    
    
    (1,548
    )
    
    
    (4,409
    )Net cash used in investing activities
    
    $
    (5,360
    )
    
    $
    (4,454
    )
 29




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##### Table of Contents



Cash flows from Financing Activities
 For the Three-Months Ended December 31,In thousands
    
    2005
    
    
    2004Proceeds from borrowings
    
    $
    51,600
    
    
    $
    41,000Payments on borrowings
    
    
    (29,606
    )
    
    
    (13,010
    )Payments on class action lawsuit note payable
    
    
    3⁄4
    
    
    
    (1,000
    )Payments on capital leases
    
    
    (1,670
    )
    
    
    (1,981
    )Deferred financing costs
    
    
    (193
    )
    
    
    3⁄4Dividends paid
    
    
    (403
    )
    
    
    (399
    )Net cash provided by financing activities
    
    $
    19,728
    
    
    $
    24,610
      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
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    205,000Revolving credit facility (1)
    
    
    41,000
    
    
    
    
    
    
    
    41,000
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    20,121
    
    
    
    6,591
    
    
    
    12,802
    
    
    
    728
    
    
    
    Operating leases
    
    
    93,968
    
    
    
    28,150
    
    
    
    56,584
    
    
    
    8,626
    
    
    
    608Notes payable
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    Total cash obligations
    
    $
    360,112
    
    
    $
    34,764
    
    
    $
    110,386
    
    
    $
    9,354
    
    
    $
    205,608
 
 (1)
    
    The revolving credit facility matures
June 2, 2008. 30




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##### Table of Contents



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
    
    
    2,950
    
    
    
    2,950
    
    
    
    
    
    
    
    
    
    
    
    Guarantees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    2,950
    
    
    $
    2,950
    
    
    $
    
    
    
    $
    
    
    
    $
    
  Seasonality and Inflation
   31




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##### Table of Contents



A.
    
    Disclosure Controls and Procedures. The Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 (e)
under the Securities Exchange Act of 1934. Based upon that evaluation, the Companys Chief
Executive Officer and Interim Chief Financial Officer concluded that, as of December 31, 2005, the
Companys disclosure controls and procedures were effective to ensure that information
required to be disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified by the SECs
rules and forms.
 B.
    
    Changes in Internal Control Over Financial Reporting. There has not been any change in the
Companys internal control over financial reporting, as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
 32




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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.
  33




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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.
 34




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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.
 35




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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
  
   36




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##### Table of Contents



Rent-Way, Inc.(Registrant)By: /s/ John A. LombardiFebruary 8, 2006Date
    
    
    
    
    
    (Signature)John A. LombardiVice President, Corporate Controller andInterim Chief Financial Officer
 37




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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.12.1*
    
    Ratio of Earnings to Fixed Charges Calculation31.1*
    
    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 2002
 
 *
    
    Filed herewith. 38