##### 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 MARCH 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.)
 ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505   (814) 455-5378   Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Class
    
    Outstanding as of May 6 , 2005Common Stock
    
    26,248,676




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RENT-WAY, INC. PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004 (unaudited)
    
    
    3Consolidated Statements of Operations, three and six-months ended March 31, 2005 and 2004 (unaudited)
    
    
    4Consolidated Statements of Cash Flows, six-months ended March 31, 2005 and 2004 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    41Exhibit 10.1Exhibit 10.2EX-10.3EX-10.4Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements RENT-WAY, INC. 
 CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data) March 31
    
    
    September 30,2005
    
    
    2004(unaudited)
    
    
    (unaudited)(restated)ASSETSCash and cash equivalents
    
    $
    3,445
    
    
    $
    3,412Prepaid expenses
    
    
    9,633
    
    
    
    8,496Rental merchandise, net
    
    
    196,550
    
    
    
    173,929Rental merchandise credits due from vendors
    
    
    2,784
    
    
    
    3,242Property and equipment, net
    
    
    45,208
    
    
    
    39,542Goodwill
    
    
    188,849
    
    
    
    188,849Deferred financing costs, net
    
    
    6,854
    
    
    
    7,420Intangible assets, net
    
    
    56
    
    
    
    112Other assets
    
    
    5,802
    
    
    
    6,126Total assets
    
    $
    459,181
    
    
    $
    431,128LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    25,099
    
    
    $
    26,187Other liabilities
    
    
    62,465
    
    
    
    61,484Deferred tax liability
    
    
    13,285
    
    
    
    10,496Debt
    
    
    221,116
    
    
    
    203,934Total liabilities
    
    
    321,965
    
    
    
    302,101Contingencies
    
    
    3⁄4
    
    
    
    3⁄4Convertible redeemable preferred stock
    
    
    21,641
    
    
    
    19,790Shareholders equity:Preferred stock, without par value; 1,000,000 shares
authorized; 2,000 and 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; 26,243,676 and 26,243,676 shares issued and
outstanding, respectively
    
    
    304,403
    
    
    
    304,395Accumulated other comprehensive loss
    
    
    (37
    )
    
    
    (93
    )Accumulated deficit
    
    
    (188,791
    )
    
    
    (195,065
    )Total shareholders equity
    
    
    115,575
    
    
    
    109,237Total liabilities and shareholders equity
    
    $
    459,181
    
    
    $
    431,128
 The accompanying notes are an integral part of these financial statements. 3




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RENT-WAY, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited) Three-months Ended
    
    
    Six-months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)REVENUES:Rental revenue
    
    $
    114,199
    
    
    $
    111,251
    
    
    $
    220,141
    
    
    $
    213,304Prepaid phone service revenue
    
    
    4,742
    
    
    
    6,884
    
    
    
    9,304
    
    
    
    13,074Other revenues
    
    
    17,257
    
    
    
    17,188
    
    
    
    33,050
    
    
    
    32,128Total revenues
    
    
    136,198
    
    
    
    135,323
    
    
    
    262,495
    
    
    
    258,506COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    36,005
    
    
    
    37,151
    
    
    
    68,521
    
    
    
    69,921Property and equipment
    
    
    3,902
    
    
    
    4,040
    
    
    
    8,413
    
    
    
    8,406Amortization of intangibles
    
    
    28
    
    
    
    110
    
    
    
    56
    
    
    
    224Cost of prepaid phone service
    
    
    2,871
    
    
    
    4,952
    
    
    
    5,777
    
    
    
    8,931Salaries and wages
    
    
    34,764
    
    
    
    33,711
    
    
    
    69,584
    
    
    
    67,317Advertising, net
    
    
    4,733
    
    
    
    4,272
    
    
    
    10,085
    
    
    
    10,401Occupancy
    
    
    9,289
    
    
    
    8,452
    
    
    
    18,349
    
    
    
    16,867Restructuring costs
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    48Other operating expenses
    
    
    30,305
    
    
    
    27,562
    
    
    
    56,247
    
    
    
    53,162Total costs and operating expenses
    
    
    121,897
    
    
    
    120,250
    
    
    
    237,032
    
    
    
    235,277Operating income
    
    
    14,301
    
    
    
    15,073
    
    
    
    25,463
    
    
    
    23,229OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,291
    )
    
    
    (7,662
    )
    
    
    (14,358
    )
    
    
    (15,521
    )Interest income
    
    
    7
    
    
    
    14
    
    
    
    13
    
    
    
    784Amortization of deferred financing costs
    
    
    (285
    )
    
    
    (264
    )
    
    
    (565
    )
    
    
    (522
    )Other income (expense)
    
    
    1,025
    
    
    
    1,229
    
    
    
    (239
    )
    
    
    (3,093
    )Income before income taxes and discontinued operations
    
    
    7,757
    
    
    
    8,390
    
    
    
    10,314
    
    
    
    4,877Income tax expense
    
    
    1,395
    
    
    
    1,395
    
    
    
    2,790
    
    
    
    2,790Income before discontinued operations
    
    
    6,362
    
    
    
    6,995
    
    
    
    7,524
    
    
    
    2,087Loss from discontinued operations
    
    
    (53
    )
    
    
    (437
    )
    
    
    (181
    )
    
    
    (1,710
    )Net income
    
    
    6,309
    
    
    
    6,558
    
    
    
    7,343
    
    
    
    377Dividend and accretion of preferred stock
    
    
    (534
    )
    
    
    (403
    )
    
    
    (1,069
    )
    
    
    (798
    )Net income (loss) allocable to common shareholders
    
    $
    5,775
    
    
    $
    6,155
    
    
    $
    6,274
    
    
    $
    (421
    )EARNINGS (LOSS) PER COMMON SHARE (NOTE 5):Basic earnings (loss) per common share:Income before discontinued operations
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.08Net income (loss) allocable to common shareholders
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    (0.02
    )Diluted earnings (loss) per common share:Income before discontinued operations
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.08Net income (loss) allocable to common shareholders
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.23
    
    
    $
    (0.02
    )Weighted average common shares outstanding:Basic
    
    
    26,244
    
    
    
    26,172
    

    
    
    26,244
    
    
    
    26,125Diluted
    
    
    29,992
    
    
    
    30,026
    
    
    
    26,728
    
    
    
    26,125
 The accompanying notes are an integral part of these financial statements. 4




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RENT-WAY, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited) Six-months EndedMarch 31,2005
    
    
    2004(Restated)
    
    
    (Restated)OPERATING ACTIVITIES:Net income
    
    $
    7,343
    
    
    $
    377Adjustments to reconcile net income to net cash provided by operating
activities:Loss from discontinued operations
    
    
    181
    
    
    
    1,710Depreciation and amortization
    
    
    77,808
    
    
    
    79,154Deferred income taxes
    
    
    2,790
    
    
    
    2,790Market adjustment for interest rate swap derivative
    
    
    (1,028
    )
    
    
    (1,898
    )Market adjustment for preferred stock conversion option derivative
    
    
    1,581
    
    
    
    5,702Write-off of property and equipment
    
    
    106
    
    
    
    187Changes in assets and liabilities:Restricted cash
    
    
    3⁄4
    
    
    
    10,000Prepaid expenses
    
    
    (1,139
    )
    
    
    (3,128
    )Rental merchandise
    
    
    (91,142
    )
    
    
    (76,529
    )Rental merchandise deposits and credits due from vendors
    
    
    458
    
    
    
    571Income tax receivable
    
    
    3⁄4
    
    
    
    4,223Other assets
    
    
    325
    
    
    
    (1,063
    )Accounts payable
    
    
    4,902
    
    
    
    (8,688
    )Other liabilities
    
    
    274
    
    
    
    (11,030
    )Net cash provided by continuing operations
    
    
    2,459
    
    
    
    2,378Net cash used in discontinued operations
    
    
    (181
    )
    
    
    (683
    )Net cash provided by operating activities
    
    
    2,278
    
    
    
    1,695INVESTING ACTIVITIES:Purchase of business, net of cash acquired
    
    
    (75
    )
    
    
    3⁄4Purchases of property and equipment
    
    
    (8,539
    )
    
    
    (3,693
    )Net cash used in investing activities
    
    
    (8,614
    )
    
    
    (3,693
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    55,000
    
    
    
    78,000Payments on borrowings
    
    
    (37,016
    )
    
    
    (69,009
    )Payments on note for settlement of class action lawsuit
    
    
    (1,000
    )
    
    
    (1,000
    )Payments on capital leases
    
    
    (3,832
    )
    
    
    (3,855
    )Cash overdraft
    
    
    (5,989
    )
    
    
    (2,118
    )Issuance of common stock
    
    
    8
    
    
    
    802Proceeds from convertible preferred stock
    
    
    3⁄4
    
    
    
    1,330Dividends paid on convertible redeemable preferred stock
    
    
    (802
    )
    
    
    (605
    )Deferred financing costs
    
    
    3⁄4
    
    
    
    (35
    )Net cash provided by financing activities
    
    
    6,369
    
    
    
    3,510Increase in cash and cash equivalents
    
    
    33
    
    
    
    1,512Cash and cash equivalents at beginning of period
    
    
    3,412
    
    
    
    3,303Cash and cash equivalents at end of period
    
    $
    3,445
    
    
    $
    4,815
 The accompanying notes are an integral part of these financial statements. 5




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RENT-WAY, INC. 
 
 1. SUMMARY OF CRITICAL ACCOUNTING POLICIES: BUSINESS AND ORGANIZATION. Rent-Way, Inc. (the Company or Rent-Way) is a corporation organized
under the laws of the Commonwealth of Pennsylvania. The Company operates a chain of stores that
rent durable household products such as home entertainment equipment, furniture, major appliances,
computers, and jewelry to consumers on a weekly or monthly basis in thirty-four states. The stores
are primarily located in the Midwestern, Eastern and Southern regions of the United States. The
Company also provides prepaid local phone service to consumers on a monthly basis through its
majority-owned subsidiary, dPi Teleconnect, LLC (DPI). BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all
information and notes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles generally accepted in the United
States of America. In the opinion of management, all adjustments have been made, which, except as
discussed herein, consist of normal recurring adjustments, which are necessary for a fair statement
of the financial position, results of operations and cash flows of the Company. The results of
operations for the interim periods are not necessarily indicative of the results for the full year. The Company presents an unclassified balance sheet to conform to practice in the industry in which
it operates. The consolidated financial statements include the accounts of the Company and its
wholly owned and majority owned subsidiaries. All significant inter-company transactions and
balances have been eliminated. These financial statements and the notes thereto should be read in conjunction with the Companys
audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 2004. Certain information included in that Form 10-K will be restated as a result of
the lease and revenue recognition adjustments discussed in Note 2 below. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those
estimates. SEASONALITY OF BUSINESS. The Companys operating results are subject to seasonality. The first
fiscal quarter typically has a greater number of rental-purchase agreements entered into because of
traditional holiday shopping patterns. Management plans for these seasonal variances and takes
particular advantage of the first quarter with product promotions and marketing campaigns. Because
many of the Companys expenses do not fluctuate with seasonal revenue changes, such revenue changes
may cause fluctuations in the Companys quarterly earnings. CONVERTIBLE REDEEMABLE PREFERRED STOCK. On June 2, 2003, the Company sold $15,000 in newly
authorized convertible redeemable preferred stock through a private placement. The proceeds of
$14,161, net of issuance costs of $839, were used to repay the previous senior credit facility.
During the fiscal quarter ended June 30, 2004, the Company sold an additional $5,000 of convertible
redeemable preferred stock through the same private placement. The proceeds were used in
operations. The net proceeds are classified outside of permanent equity because of the mandatory
redemption date and other redemption provisions. (See Note 10). STATEMENT OF CASH FLOWS INFORMATION. Cash and cash equivalents consist of cash on hand and on
deposit and represent highly liquid investments with maturities of three-months or less when
purchased. Cash equivalents are stated at cost, which approximates market value. The Company
maintains deposits with several financial institutions. The Federal Deposit Insurance Corporation
does not insure deposits in excess of $100 and mutual funds. Supplemental disclosures of cash flow
information for the six-months ended March 31, 2005 and 2004 are as follows: Six-months ended March 31,2005
    
    
    2004CASH PAID DURING THE PERIOD FOR:Interest
    
    $
    14,490
    
    
    $
    16,548Income taxes (refunds)
    
    
    3⁄4
    
    
    
    (4,223
    )NONCASH INVESTING ACTIVITIES:Assets acquired under capital lease
    
    
    5,644
    
    
    
    6,600
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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) At March 31, 2005 and September 30, 2004, cash overdrafts of $7,302 and $1,312, respectively,
were included in accounts payable in the accompanying Consolidated Balance Sheets. RENTAL MERCHANDISE, RENTAL REVENUE AND DEPRECIATION. Rental merchandise is rented to customers
pursuant to rental agreements, which provide for either weekly, biweekly, semi-monthly or monthly
rental payments collected in advance. Rental revenues are recorded in the period they are earned.
Rental payments received prior to when they are earned are recorded as deferred rental revenue and
a receivable is recorded for the rental revenues earned in the current period and received in the
subsequent period (See Note 2). Merchandise rented to customers or available for rent is classified in the consolidated balance
sheet as rental merchandise and is valued at cost on a specific identification method. Write-offs
of rental merchandise arising from customers failure to return merchandise and losses due to
excessive wear and tear of merchandise are recognized using the allowance method. The Company uses the units of activity depreciation method for all rental merchandise except
computers and electronic game systems. 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. Personal computers are principally
depreciated on the straight-line basis over 24 months beginning on the acquisition date. DEFERRED FINANCING COSTS. Deferred financing costs consists of bond issuance costs and loan
origination costs incurred in connection with the sale of $205,000 of senior secured notes and a
new $60,000 revolving credit facility that was closed June 2, 2003. The bond issuance costs of
$6,704 are amortized using the effective interest method over the seven-year term of the bonds.
The loan origination costs of $2,062 are amortized on a straight-line basis over the five-year bank
credit agreement. Deferred financing cost amortization was $285 and $264 for the three-month
periods and $565 and $522 for the six-month period ended March 31, 2005 and 2004, respectively. COMPANY HEALTH INSURANCE PROGRAM. The Company determines its insurance liability based on funding
factors determined by cost plus rates for a fully insured plan and monthly headcount. The
contracted rate is determined based on experience, prior claims filed and an estimate of future
claims. A retrospective adjustment for over (under) funding of claims is recorded when determinable
and probable. COMPANY LIABILITY INSURANCE PROGRAMS. Starting in 2001, the Companys workers compensation,
automobile and general liability costs are determined based on claims filed and company experience.
Losses under the deductible in the workers compensation, automobile and general liability programs
are pre-funded based on the insurance companys loss estimates. Loss estimates are adjusted for
developed incurred losses at 18 months following policy inception and every 12 months thereafter.
Retrospective adjustments to loss estimates are recorded when determinable and probable. For fiscal years 2000 and 1998, the Company was insured under deductible programs with aggregate
stop loss coverage on major claims. Claims within the insured deductible limits that were less than
stop loss aggregates, were funded as claims developed using AM Best loss development factors. The
fiscal 1999 workers compensation insurance had no aggregate retention and was funded as claims
developed using AM Best loss development factors. Reserves were developed by independent actuaries
and totaled $742 and $994 at March 31, 2005 and September 30, 2004, respectively. OPERATING LEASES AND DEPRECIATION OF LEASEHOLD IMPROVEMENTS. Rent expense for operating leases,
which may have escalating rentals over the term of the lease, is recorded on a straight-line basis
over the initial lease term. The initial lease term includes the build out period of leases,
where no rent payments are typically due under the terms of the lease. The difference between rent
expense and rent paid is recorded as a deferred rent liability and is included in the consolidated balance
sheets. Construction allowances received from landlords are recorded
as a deferred rent liability and
amortized to rent expense over the initial term of the lease. The Companys statement of cash
flows reflects the receipt of construction allowances as an increase in cash flows from operating
activities. Depreciation of leasehold improvements is over the shorter of the term of the lease
(and those renewal periods that are reasonably assured) or the assets useful economic life (See
Note 2). DISCONTINUED OPERATIONS. On February 8, 2003, the Company sold rental merchandise and related
contracts of 295 stores to Rent-A-Center, Inc. Rent-A-Center, Inc. purchased certain fixed assets
and assumed related store leases of 125 of these stores.
Accordingly, for financial statement purposes, the assets, liabilities, results of operations and
cash flows of this component have been segregated from those of continuing operations and are
presented in the Companys financial statements as discontinued operations (see 7




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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) Note 3). 2. RESTATEMENT OF PRIOR FINANCIAL INFORMATION On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission
(SEC) issued a letter to the Center for Public Company Audit Firms of the American Institute of
Certified Public Accountants, which clarified existing generally accepted accounting principles
applicable to leases and leasehold improvements. After conducting an internal review of its lease
accounting procedures, the Company determined that its historical accounting for leases was not
consistent with the accounting principles described in the SECs letter. To correct its
accounting, the Company has reviewed its property lease portfolio and has restated its financial
results for the prior periods presented in this report. The Company will also be restating the
financial results contained in its Annual Report on Form 10-K for the year ended September 30, 2004
and its From 10-Q for the quarter ended December 31, 2004. In determining to restate, the Company
reviewed the accounting for rent holidays, lives used in the calculation of the depreciation of
leasehold improvements and accounting for tenant allowances. During the fiscal quarter ended
December 31, 2004, the Company changed its revenue recognition policy from cash to the accrual
basis of accounting. The Company recorded an adjustment of $2,568, which had the effect of
decreasing earnings in that fiscal quarter. The Company reversed this adjustment recorded during
the first fiscal quarter ended December 31, 2004, and included this change to the accrual basis for
revenue recognition in the restatement of its financial statements. The following is a summary of the impact of the restatement of the Companys consolidated balance
sheet at September 30, 2004, the consolidated statements of operations for the three and six-month
periods ended March 31, 2004, and the consolidated statements of cash flows for the six-month
periods ended March 31, 2004. Consolidated Balance SheetFiscal Year Ended September 30, 2004 BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedRental merchandise, net
    
    $
    173,164
    
    
    $
    765
    
    
    $
    173,929Property and equipment, net
    
    
    42,063
    
    
    
    (2,521
    )
    
    
    39,542Other Assets
    
    
    3,896
    
    
    
    2,230
    
    
    
    6,126Total Assets
    
    
    430,655
    
    
    
    473
    
    
    
    431,128Other Liabilities
    
    
    55,163
    
    
    
    6,321
    
    
    
    61,484Accumulated Deficit
    
    
    (189,217
    )
    
    
    (5,848
    )
    
    
    (195,065
    )Total shareholders equity
    
    
    115,085
    
    
    
    (5,848
    )
    
    
    109,237Total liabilities and shareholders equity
    
    $
    430,655
    
    
    $
    473
    
    
    $
    431,128
 Consolidated Statements of Operations Three Month Period Ended March 31, 2004BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedRental Revenue
    
    $
    111,126
    
    
    $
    125
    
    
    $
    111,251Other Revenue
    
    
    17,035
    
    
    
    153
    
    
    
    17,188Total Revenue
    
    
    135,045
    
    
    
    278
    
    
    
    135,323Rental merchandise depreciation
    
    
    37,131
    
    
    
    20
    
    
    
    37,151Property and equipment depreciation
    
    
    3,741
    
    
    
    299
    
    
    
    4,040Salaries and wages
    
    
    33,598
    
    
    
    113
    
    
    
    33,711Occupancy
    
    
    8,495
    
    
    
    (43
    )
    
    
    8,452Other operating expenses
    
    
    27,505
    
    
    
    57
    
    
    
    27,562Operating income
    
    
    15,241
    
    
    
    (168
    )
    
    
    15,073
 8




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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) Three Month Period Ended March 31, 2004BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedNet income
    
    
    6,726
    
    
    
    (168
    )
    
    
    6,558Basic net income allocable to common shareholders per common share
    
    $
    0.24
    
    
    $
    
    
    
    $
    0.24Diluted net income allocable to common shareholders per common share
    
    $
    0.22
    
    
    $
    
    
    
    $
    0.22
 Six Month Period Ended March 31, 2004 Consolidated Statements of Operations BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedRental Revenue
    
    $
    213,554
    
    
    $
    (250
    )
    
    $
    213,304Other Revenue
    
    
    32,026
    
    
    
    102
    
    
    
    32,128Total Revenue
    
    
    258,654
    
    
    
    (148
    )
    
    
    258,506Rental merchandise depreciation
    
    
    70,003
    
    
    
    (82
    )
    
    
    69,921Property and equipment depreciation
    
    
    7,723
    
    
    
    683
    
    
    
    8,406Salaries and wages
    
    
    67,240
    
    
    
    77
    
    
    
    67,317Occupancy
    
    
    17,196
    
    
    
    (329
    )
    
    
    16,867Other operating expenses
    
    
    53,128
    
    
    
    34
    
    
    
    53,162Operating income
    
    
    23,760
    
    
    
    (531
    )
    
    
    23,229Net income
    
    
    908
    
    
    
    (531
    )
    
    
    377Basic net income (loss) allocable
to common shareholders per common
share
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )Diluted net income (loss)
allocable to common shareholders
per common share
    
    $
    0.00
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )
 Consolidated Statements of Cash Flows Six Month Period Ended March 31, 2004 BeforeRestatement
    
    
    Adjustments
    
    
    As RestatedNet cash provided by operating activities
    
    $
    1,695
    
    
    $
    
    
    
    $
    1,695Net cash used for investing activities
    
    $
    3,693
    
    
    
    
    
    
    $
    3,693
 3. DISCONTINUED OPERATIONS: On December 17, 2002, the Company entered into a definitive purchase agreement to sell rental
merchandise and related contracts of 295 stores to Rent-A-Center, Inc. for approximately $101,500.
These stores were all included in the household rental segment. Rent-A-Center, Inc. purchased
certain fixed assets and assumed related store leases of 125 of these stores. The transaction
closed on February 8, 2003. The final purchase price for the stores was approximately $100,400.
As required under the Companys credit agreement, all proceeds of the sale, net of transaction
costs, store closing and similar expenses, were used to pay existing bank debt. Of the approximate
$100,400 purchase price, $10,000 was held back by Rent-A-Center, Inc. to secure the Companys
indemnification obligations, $5,000 for 90 days following closing, which was refunded to the
Company in May 2003, and an additional $5,000 for 18 months following closing, which was refunded
to the Company in August 2004. Also, there was a $24,500 escrow held by National City Bank, which
was used to pay transaction costs, store closing and similar expenses. The balance of this escrow,
approximately $3,000, was used to pay down debt at the closing of the refinancing on June 2, 2003.
The assets sold included rental merchandise, vehicles under capital leases and certain fixed
assets. Vehicle lease obligations were paid by the Company out of the proceeds from the sale. The asset group was distinguishable as a component of the Company and classified as held for sale
in accordance with Statement of
Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment on Disposal of
Long-Lived Assets. Direct costs to transact the sale were comprised of, but not limited to,
broker commissions, legal and title transfer fees and closing costs. In connection with the sale of the stores, the Company has and will continue to incur additional
direct costs related to the sale and exit costs related to these discontinued operations. Costs
associated with an exit activity include, but are not limited to termination benefits, costs to
terminate a contract that is not a capital lease and costs to consolidate facilities or relocate
employees, in accordance with 9




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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities. There was a transition period
as defined in the asset purchase agreement comprised of a period of thirty days from the date
immediately following the closing date. During this transition period, the Company was liable for
certain exit costs attributable to the operation and
transition of the purchased stores, including, but not limited to, rent, utilities, costs
applicable to office equipment, costs associated with vehicles, employee payroll, health and other
employee benefits, workers compensation claims, health care claims and all other costs related to
transition personnel. The Company accrued employee separation costs as costs were incurred in
accordance with SFAS 146. These costs were included in the results of discontinued operations in
accordance with SFAS 144. Related operating results have been reported as discontinued operations in accordance with SFAS
144. The Company has reclassified the results of operations of the component disposed for the
prior periods in accordance with provisions of SFAS 144. There have been no corporate expenses
included in expenses from discontinued operations. Interest on debt that was required to be repaid
as a result of the disposal transaction was allocated to income (loss) from discontinued
operations. The effective interest rate on the outstanding debt of the Company at the time of the
disposal was applied to the $68,643 estimated debt pay-down from the proceeds. There was no
interest reclassified to loss from discontinued operations for the six-months ended March 31, 2005
and 2004. Revenues and net income (loss) from the discontinued operations were as follows: Three-months Ended March 31,
    
    
    Six-months Ended March 31,2005
    
    
    2005
    
    
    2005
    
    
    2004Operating expenses from discontinued operations (including exit costs) (1)
    
    $
    (53
    )
    
    $
    (437
    )
    
    $
    (181
    )
    
    $
    (1,710
    )Net loss from discontinued operations
    
    $
    (53
    )
    
    $
    (437
    )
    
    $
    (181
    )
    
    $
    (1,710
    )
   (1)
    
    The Company recorded exit costs associated with the operation and transition of the
stores to Rent-A-Center, Inc. for 30 days after closing, and monthly rent and common area
maintenance charges until leases are terminated or expired, in accordance with SFAS 146.
This includes a $1,027 write-off of leasehold improvements for the six-months ended March
31, 2004. There were no assets or liabilities held for sale included in the Consolidated Balance Sheet
as of March 31, 2005, and September 30, 2004. 4. BUSINESS RATIONALIZATION: The Company periodically closes under-performing stores and takes other actions to maximize its
overall profitability. In connection with the closing of stores and taking other actions, it
incurs employee severance, fixed asset write offs, lease obligation (termination) costs and other
direct exit costs related to these activities. Employee severance costs related to the closing of
under-performing stores were immaterial in each of the periods reported below. The net amount of
fixed asset write-off and lease obligation costs were as follows: Fixed
    
    
    LeaseAsset
    
    
    ObligationWrite Offs
    
    
    Costs
    
    
    TotalBalance at September 30, 2004
    
    $
    3⁄4
    
    
    $
    209
    
    
    $
    209Fiscal 2005 Provision
    
    
    17
    
    
    
    25
    
    
    
    42Amount Utilized in 2005
    
    
    (17
    )
    
    
    (169
    )
    
    
    (186
    )Balance at March 31, 2005
    
    $
    3⁄4
    
    
    $
    65
    
    
    $
    65
 Lease termination costs will be paid according to the contract terms. 5. EARNINGS (LOSS) PER COMMON SHARE: Basic earnings (loss) per common share is computed using income (loss) allocable to common
shareholders divided by the weighted average number of common shares outstanding. Diluted income
(loss) per common share is computed using income (loss) allocable to common shareholders and the
weighted average number of shares outstanding adjusted for the potential impact of options,
warrants, conversion of convertible redeemable preferred stock, convertible preferred stock
conversion derivative, dividends on convertible preferred stock and accretion of convertible
preferred stock discount where the effects are dilutive. Because operating results were a loss for
the six-months ended March 31, 2004, basic and diluted loss per common share were the same. 10




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) The following table discloses the reconciliation of numerators and denominators of the basic and
diluted earnings (loss) per share computation : Three-months Ended March 31,
    
    
    Six-months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)COMPUTATION OF EARNINGS (LOSS) PER SHARE:BASICIncome before discontinued operations
    
    $
    6,362
    
    
    $
    6,995
    
    
    $
    7,524
    
    
    $
    2,087Loss from discontinued operations
    
    
    (53
    )
    
    
    (437
    )
    
    
    (181
    )
    
    
    (1,710
    )Net income
    
    
    6,309
    
    
    
    6,558
    
    
    
    7,343
    
    
    
    377Dividend and accretion of preferred stock
    
    
    (534
    )
    
    
    (403
    )
    
    
    (1,069
    )
    
    
    (798
    )Net income (loss) allocable to common shareholders
    
    $
    5,775
    
    
    $
    6,155
    
    
    $
    6,274
    
    
    $
    (421
    )Weighted average common shares outstanding
    
    
    26,244
    
    
    
    26,172
    
    
    
    26,244
    
    
    
    26,125Earnings (loss) per share:Income before discontinued operations
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.08Loss from discontinued operations
    
    
    3⁄4
    
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.07
    )Dividend and accretion of preferred stock
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss) allocable to common shareholders
    
    $
    0.22
    
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    (0.02
    )DILUTEDNet income (loss) allocable to common shareholders for basic earnings
(loss) per share
    
    $
    5,775
    
    
    $
    6,155
    
    
    $
    6,274
    
    
    $
    (421
    )Plus: Impact of assumed conversion:Conversion derivative market value adjustment (1)
    
    
    (610
    )
    
    
    (1
    )
    
    
    3⁄4
    
    
    
    3⁄4Dividends on 8% convertible preferred stock (1)
    
    
    394
    
    
    
    302
    
    
    
    3⁄4
    
    
    
    3⁄4Accretion to preferred stock redemption amount (1)
    
    
    140
    
    
    
    101
    
    
    
    
    
    
    
    3⁄4Net income (loss) allocable to common shareholders for diluted
earnings (loss) per share and assumed conversion
    
    $
    5,699
    
    
    $
    6,557
    
    
    $
    6,274
    
    
    $
    (421
    )Weighted average common shares used in calculating basic earnings
(loss) per share
    
    
    26,244
    
    
    
    26,172
    
    
    
    26,244
    
    
    
    26,125Add incremental shares representing:Shares issuable upon exercise of stock options and warrants (3)
    
    
    496
    
    
    
    602
    
    
    
    484
    
    
    
    3⁄4Contingent
shares issuable upon the exercise of option to purchase
8% convertible preferred stock (2)
    
    
    3⁄4
    
    
    
    719
    
    
    
    3⁄4
    
    
    
    3⁄4Shares issuable upon conversion of 8% convertible preferred stock (1)
    
    
    3,252
    
    
    
    2,533
    
    
    
    3⁄4
    
    
    
    3⁄4Weighted average number of shares used in calculation of diluted
earnings (loss) per share
    
    
    29,992
    
    
    
    30,026
    
    
    
    26,728
    
    
    
    26,125Earnings (loss) per share:Income before discontinued operations
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.08Loss from discontinued operations
    
    
    3⁄4
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.07
    )Dividend and accretion of preferred stock
    
    
    3⁄4
    
    
    
    _ __
    
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss) allocable to common shareholders
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.23
    
    
    $
    (0.02
    )
   (1)
    
    Including the effects of these items for the six-month period ended March 31, 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 six-months ended March 31, 2005. There were conversion derivative market
value adjustments of $1,581, dividends on convertible preferred stock of $799 and
accretion to preferred stock redemption in the amount of $270 which were not added back to
net income allocable to common shareholders for basis earnings per share on the diluted
earnings per share because including the effects of these items would be anti-dilutive for
the six-months ended March 31, 2005.Including the effects of these items for the six-month period ended March 31, 2004 would be
anti-dilutive. Therefore, 2,533 shares issuable upon conversion of 8% convertible preferred
stock are excluded from consideration in the calculation of diluted loss per share for the
six-months ended March 31, 2004. There were conversion derivative market value adjustments
of $5,702, dividends on convertible preferred stock of $604 and accretion to preferred stock
redemption in the amount of $194 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.(2)
    
    Including the effects of these items for the six-month period ended March 31, 2004,
would be anti-dilutive. Therefore, 719 contingent shares issuable upon exercise of
warrants to purchase 8% convertible preferred stock are excluded from consideration in the
calculation of diluted loss per share for the six-months ended March 31, 2004.(3)
    
    Including the effects of these items for the six-month period ended March 31, 11




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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited)  2004
would be anti-dilutive. For the six-month period ended March 31, 2004, the number of stock
options that were outstanding but not included in the computation of diluted loss per
common share in which their exercise price was less than the average market price of common
stock was 477. 6. GOODWILLADOPTION OF STATEMENT 142: Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires that intangible assets not
subject to amortization and goodwill be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the carrying value may not be recoverable. SFAS
142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for
impairment while the second phase,
if necessary, measures the impairment. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations, ceased upon
adoption. Thus, no amortization for such goodwill and indefinite lived intangibles was recognized
in the accompanying consolidated statements of operations for the six-months ended March 31, 2005
and 2004. On an annual basis and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and a write down may be
necessary. The Rent-A-Center transaction (see Note 3) was an event that triggered an impairment assessment
under the provisions of SFAS 142. The Company performed an impairment test of the carrying value
of goodwill remaining after allocation of the fair value of goodwill to the assets held for sale as
set forth in the Rent-A-Center purchase agreement as of December 17, 2002, the date of the
agreement. There was no impairment of goodwill as a result of this assessment. The following table shows the net carrying value of goodwill for the Companys segments: Household
    
    
    Prepaid TelephoneRental Segment
    
    
    Service Segment
    
    
    

    
    
    
    TotalBalance at September 30, 2004
    
    $
    181,905
    
    
    $
    6,944
    
    
    
    
    
    
    $
    188,849Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2005
    
    $
    181,905
    
    
    $
    6,944
    
    
    
    
    
    
    $
    188,849
 The following tables reflect the components of amortizable intangible assets at March 31, 2005
and September 30, 2004: Purchase
    
    
    Cumulative
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountBalance at March 31, 2005:Amortizable intangible assets:Non-compete agreements
    
    $
    2,630
    
    
    $
    (2,574
    )
    
    $
    56Customer contracts
    
    
    1,164
    
    
    
    (1,164
    )
    
    
    3⁄4$
    3,794
    
    
    $
    (3,738
    )
    
    $
    56
 Purchase
    
    
    Cumulative
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountBalance at September 30, 2004:Amortizable intangible assets:Non-compete agreements
    
    $
    2,630
    
    
    $
    (2,518
    )
    
    $
    112Customer contracts
    
    
    1,164
    
    
    
    (1,164
    )
    
    
    3⁄4$
    3,794
    
    
    $
    (3,682
    )
    
    $
    112
 At March 31, 2005, future aggregate annual amortization of amortizable intangible
assets is as follows: Fiscal Year
    
    AmountRemaining 2005
    
    $
    422006
    
    
    14$
    56
 Amortization expense was $56 and $224 for the six-months ended March 31, 2005 and 2004,
respectively. There were no changes to the amortization methods and lives of the amortizable
intangible assets. 12




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) 7. OTHER ASSETS: Other assets consist of the following: March 31,
    
    
    September 30,2005
    
    
    2004(Restated)Other receivables
    
    $
    2,884
    
    
    $
    3,124Other inventory
    
    
    619
    
    
    
    537Deposits
    
    
    828
    
    
    
    832Other
    
    
    1,471
    
    
    
    1,633$
    5,802
    
    
    $
    6,126
 8. OTHER LIABILITIES: Other liabilities consist of the following: March 31,
    
    
    September 30,2005
    
    
    2004(Restated)Accrued salaries, wages, taxes and benefits
    
    $
    14,084
    
    
    $
    13,049Capital lease obligations
    
    
    16,782
    
    
    
    14,970Deferred rental revenue
    
    
    7,329
    
    
    
    5,564Accrued preferred dividend and interest
    
    
    7,870
    
    
    
    8,026Vacant facility lease obligations
    
    
    2,573
    
    
    
    3,390Swap liability
    
    
    543
    
    
    
    1,572Accrued property taxes
    
    
    2,829
    
    
    
    4,098Other
    
    
    10,455
    
    
    
    10,815$
    62,465
    
    
    $
    61,484
 9. DEBT: Debt consists of the following: March 31,
    
    
    September 30,2005
    
    
    2004Senior secured notes
    
    $
    202,074
    
    
    $
    201,877Revolving credit facility
    
    
    18,000
    
    
    
    3⁄4Notes payable lawsuit settlement
    
    
    1,000
    
    
    
    2,000Note payable
    
    
    42
    
    
    
    57$
    221,116
    
    
    $
    203,934
 The Companys senior secured notes have the following material terms. The $205,000 principal
amount of senior secured notes bears interest at 11.875% and are due June 15, 2010. The interest
on the secured notes is payable semiannually on June 15 and December 15. The secured notes are
guaranteed on a senior basis by all existing and future domestic restricted subsidiaries of the
Company other than DPI, which is an unrestricted subsidiary. The Company may redeem the secured
notes, in whole or in part, at any time prior to June 15, 2010, at a redemption price equal to the
greater of:  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; plus, in either case, accrued and unpaid interest to the redemption date. In addition, at any time prior to June 15, 2006, up to 25% of the aggregate principal amount of the
secured notes may be redeemed at
the Companys option, within 75 days of certain public equity offerings, at a redemption price of
111.875% of the principal amount, together with accrued and unpaid interest. Such redemption can
occur provided that after giving effect to any such redemption, at
least 75% of the original aggregate principal amount of the notes issued (including any notes
issued in future permitted issuances) remains 13




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RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) outstanding. The secured notes were offered at a discount of $3,583, which is being amortized using the
effective interest method, over the term of the secured notes. Amortization of the discount was
$101 and $89 for the three-month periods ending March 31, 2005, and 2004, and $197 and $169 for the
six-month periods ending March 31, 2005 and 2004 respectively, and is recorded as interest expense.
Costs representing underwriting fees and other professional fees of $6,704 are being amortized
over the seven-year term of the bonds using the effective interest method of amortization. The
secured notes rank senior in right to all of the Companys existing and future subordinated debt,
have a lien position ranking second to the bank revolving credit facility and effectively junior in
right of payment to all existing and future debt and other liabilities of the Companys
subsidiaries that are not subsidiary guarantors. The secured notes contain covenants that will,
among other things, limit the Companys ability to incur additional debt, make restricted payments,
incur any additional liens, sell certain assets, pay dividend distributions from restricted
subsidiaries, transact with affiliates, conduct certain sale and leaseback transactions and use
excess cash flow. The Company is in compliance with covenants at March 31, 2005, and expects to comply with covenants
based upon its fiscal 2005 projections. The Companys bank revolving credit facility has the following material terms. The facility is
with Harris Trust and Savings Bank, acting as administrative agent, and Bank of Montreal as lead
arranger, and provides for National City Bank to act as syndication agent and provides for senior
secured revolving loans of up to $60,000 including a $15,000 sub-limit for standby and commercial
letters of credit and a $5,000 swingline sub-limit. The credit facility will expire five years
from closing (June 2, 2008). The balance outstanding at March 31, 2005 was $18,000 with $38,690
available at March 31, 2005. Deferred financing costs of $2,062 are being amortized over the
5-year term of the bank agreement. The credit facility is guaranteed by all of the wholly owned
domestic subsidiaries and collateralized by first priority liens on substantially all of the
Companys and subsidiary guarantors assets, including rental contracts and the stock held in
domestic subsidiaries. The Company may elect that each borrowing of revolving loans be either base
rate loans or Eurodollar loans. The Eurodollar loans bear interest at a rate per annum equal to an
applicable margin plus LIBOR adjusted for a reserve percentage. Under the base rate option, the
Company may borrow money based on the greater of (a) the prime interest rate or (b) the federal
funds rate plus 0.50%, plus, in each case, a specified margin. A 0.50% commitment fee is payable
quarterly on the unused amount of the revolving credit facility. Upon a default, interest will
accrue at 2% over the applicable rate. The Company will be required to make specified mandatory
prepayments upon subsequent debt or equity offerings and asset dispositions. The Companys note payable for lawsuit settlement was agreed to in the settlement of a securities
class action lawsuit in June 2003. The note payable consists of a $4,000 unsecured subordinated
note, which bears interest at 6% annually and payable in four equal installments over two years on
June 30 and December 31. The remaining balance at March 31, 2005 was $1,000. 10. CONVERTIBLE REDEEMABLE PREFERRED STOCK: On June 2, 2003, the Company issued 1,500 shares of its Series A convertible preferred stock, for
$10,000 per share (the convertible preferred stock) and granted a one-year option to purchase an
additional 500 shares of convertible preferred stock (the additional preferred shares). The net
proceeds from the sale of the convertible preferred stock were used to repay the Companys prior
senior credit facility. The net proceeds of $14,161 from the original issuance of the convertible
preferred stock were net of issuance costs of $839, and are classified outside of permanent equity
because of the redemption date and other redemption provisions, except the option to purchase
additional convertible preferred stock which was included in permanent equity. The one-year option
to purchase additional shares was exercised during 2004 for $5,000. The convertible preferred stock
is being accreted to its maximum redemption amount possible pursuant to Topic D-98, Classification
and Measurement of Redeemable Securities, using the effective interest method from the issuance
date to the June 2, 2011, redemption date. The terms of the convertible preferred stock include a number of conversion and redemption
provisions that represent derivative financial instruments under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) (See
Note 12). Certain features of the convertible preferred stock are accounted for as embedded
derivative financial instruments. The Company determined the convertible feature of the convertible
preferred stock is a derivative financial instrument that does not qualify for scope exemption
under EITF 00-19, and, is required to be bifurcated, recorded at fair value, and marked to market.
The market value of this derivative financial instrument was $14,912 and $13,330 at March 31, 2005
and September 30, 2004, respectively, and is recorded in convertible redeemable preferred stock in
the consolidated balance sheet. The fair values of the derivatives were determined with the
assistance of an independent valuation firm. 14




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) 11. STOCK OPTIONS: The Company accounts for stock based compensation issued to its employees and directors in
accordance with APB No. 25 Accounting
for Stock Issued to Employees, and has elected to adopt the disclosure only provisions of SFAS
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. SFAS 148 amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require new prominent disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the method used on reported
results. For SFAS No. 148 purposes, the fair value of each option granted under the 1992 Plan, the 1995
Plan, the 1999 Plan, and the 2004 Plan is estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for options granted in
fiscal years 2003 through 2005: expected volatility ranging from 97.46% to 99.98%, risk-free
interest rates between 2.87% and 3.86%, and an expected lives ranging from two to six years. If the Company had elected to recognize the compensation cost of its stock option plans based on
the fair value of the awards under those plans in accordance with SFAS No. 148, net income (loss)
and earnings (loss) per common share would have been decreased to the pro-forma amounts below: For the Six-Month Period Ended March 31,2005
    
    
    2004(Restated)Income before discontinued operations:As reported
    
    $
    7,524
    
    
    $
    2,087Plus: Compensation expense
    
    
    3⁄4
    
    
    
    3⁄4Less: Stock-based employee compensation under
fair-value based method for all awards, net of related
tax effects
    
    
    (403
    )
    
    
    (66
    )Pro-forma
    
    $
    7,121
    
    
    $
    2,021Net income (loss) allocable to common shareholders:As reported
    
    $
    6,274
    
    
    $
    (421
    )Plus: Compensation expense
    
    
    3⁄4
    
    
    
    3⁄4Less: Stock-based employee compensation under
fair-value based method for all awards, net of related
tax effects
    
    
    (403
    )
    
    
    (66
    )Pro-forma
    
    $
    5,871
    
    
    $
    (487
    )Basic earnings (loss) per common share:Net income before discontinued operations:As reported
    
    $
    0.29
    
    
    $
    0.08Pro-forma
    
    $
    0.27
    
    
    $
    0.08Net income (loss) allocable to common shareholders:As reported
    
    $
    0.24
    
    
    $
    (0.02
    )Pro-forma
    
    $
    0.22
    
    
    $
    (0.02
    )Diluted earnings (loss) per common share:Net income before discontinued operations:As reported
    
    $
    0.28
    
    
    $
    0.08Pro-forma
    
    $
    0.27
    
    
    $
    0.08Net income (loss) allocable to common shareholders:As reported
    
    $
    0.23
    
    
    $
    (0.02
    )Pro-forma
    
    $
    0.22
    
    
    $
    (0.02
    )
 There were 68,000 options granted during fiscal year 2005 through March 31, 2005: 48,000
granted October 1, with a grant price of $7.72, expiring in 2010, 10,000 options granted November
1, with a grant price of $7.93, expiring in 2010 and 10,000 options granted January 18, with a
grant price of $8.71, expiring in 2011. On April 4, 2005, the Board
of Directors approved the award of 515,500 options to acquire common
stock under the 1995 Stock Option Plan. These options provide for
immediate vesting on grant, but contain restrictions on transfer of the
shares underlying the options. 15




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) 12. DERIVATIVE FINANCIAL INSTRUMENTS: On June 2, 2003, the Company issued 1,500 shares of convertible redeemable preferred stock (see
Note 10). The terms of this preferred stock include a number of conversion and redemption
provisions that represent derivatives under SFAS No. 133. The Company has determined the conversion
feature of the convertible redeemable preferred stock is a derivative financial instrument that
does not qualify for SFAS 133 scope exemption under EITF 00-19. It was bifurcated and recorded in
the temporary equity classification on the balance sheet. The change in the fair market value of
the conversion feature was expense of $610 and income of $1,581 for the three-months and six-months
ended March 31, 2005 and was expense of $1 and income of $5,702 for the three-months and six
months ended March 31, 2004. At March 31, 2005, the Company had interest rate swaps on a notional debt amount of $40,000 and a
fair market value of $(544). The variable pay interest rate ranges from 6.88% to 6.97%. The
maturity dates run through August 2005. The Companys interest rate swaps do not meet the qualifications for hedge accounting treatment
under SFAS No. 133. The Companys positive change in the fair market value of the interest rate
swap portfolio was $(460) and $(1,028) for the three-months and six-months ended March 31, 2005 and
was $605 and $1,898 for the three-months and six-months ended March 31, 2004. This was recorded to
other expense in the Companys consolidated statements of operations. 13. COMPREHENSIVE LOSS: Comprehensive loss encompasses net loss and changes in the components of accumulated other
comprehensive loss not reflected in the Companys consolidated statements of operations during the
periods presented. Accumulated other comprehensive loss consists of the transition asset recorded
at the time of adoption of SFAS No. 133. Other Comprehensive
    
    
    Other ComprehensiveIncome
    
    
    IncomeFor Six-months Ended
    
    
    For Six-months EndedMarch 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Net income
    
    $
    7,343
    
    
    $
    377Amortization of SFAS 133
Transition amount
    
    
    56
    
    
    
    (90
    )Other comprehensive income
    
    $
    7,399
    
    
    $
    287
 Accumulated Other
    
    
    Accumulated OtherComprehensive
    
    
    ComprehensiveLoss
    
    
    LossAt March 31, 2005
    
    
    At September 30, 2004Balance at October 1
    
    $
    (93
    )
    
    $
    (69
    )Amortization of SFAS 133
Transition amount
    
    
    56
    
    
    
    (24
    )Accumulated other
comprehensive loss
    
    $
    (37
    )
    
    $
    (93
    )
 14. CONTINGENCIES: The Company is subject to legal proceedings and claims in the ordinary course of its business that
have not been finally adjudicated. Certain of these cases have resulted in initial claims totaling
$3,234. However, all but $319 of such claims are, in the opinion of management, covered by
insurance policies or indemnification agreements, or create only remote potential of any liability
exposure to the Company and therefore should not have a material effect on the Companys financial
position, results of operations or cash flows. Additionally, threatened claims exist for which
management is not yet able to reasonably estimate a potential loss. In managements opinion, none
of these threatened claims will have a material adverse effect on the Companys financial position,
results of operations or cash flows. 16




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) The Company determines health insurance liability based on funding factors determined by cost plus
rates for a fully insured plan and monthly headcount. The contracted rate is determined based on
experience, prior claims filed and an estimate of future claims. A retrospective adjustment for
over (under) funding of claims is recorded when determinable and probable. The Companys workers compensation, automobile and general liability costs are determined based on
claims filed and company experience. Losses in the workers compensation, automobile and general
liability programs are pre-funded based on the insurance companys loss estimates. Loss estimates
will be adjusted for developed incurred losses at 18 months following policy inception and every 12
months thereafter. Retrospective adjustments to loss estimates are recorded when determinable and
probable. For fiscal years 2000 and 1998, the Company was insured under deductible programs with
aggregate stop loss coverage on major claims. Claims within the insured deductible limits that
were less than stop loss aggregates, were funded as claims developed using AM Best loss development
factors and not exceeding policy aggregate. The fiscal 1999 workers compensation insurance had no
aggregate retention and was funded as claims developed using AM Best loss development factors. 15. INCOME TAXES: During the first six months of fiscal 2005, the Company recorded income tax expense and a deferred
tax liability of $2,790 because the Company can no longer look to the reversal of the deferred tax
liability associated with tax-deductible goodwill to offset a portion of its deferred tax asset,
following the adoption of SFAS 142. The deferred tax liability for goodwill is $13,285 at March
31, 2005. The deferred tax asset, net of liabilities excluding goodwill, decreased from $73,242 at
September 30, 2004 to $72,662 at March 31, 2005. This represented a decrease of $580 for the
six-months ended March 31, 2005. A full valuation allowance has been provided against the net
deferred tax asset. 16. SEGMENT INFORMATION: Rent-Way is a national rental-purchase chain that provides a variety of services to its customers
including rental of household items and prepaid local telephone service on a week-by-week or a
month-by-month basis. The Company has determined that its reportable segments are those that are
based on the Companys method of internal reporting, which disaggregates its business by product
category. The Companys reportable segments are household rentals and prepaid telephone service.
Its household rental segment rents name brand merchandise such as furniture, appliances,
electronics and computers on a weekly, biweekly, semimonthly, or monthly basis. Its prepaid
telephone service segment provides a local dial tone on a month-by-month basis. The financial results of the Companys segments follow the same accounting policies as described in
Summary of Critical Accounting Policies (see Note 1). Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the three months ended March 31, 2005
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsTotal revenue
    
    $
    131,646
    
    
    $
    4,742
    
    
    $
    (190
    )
    
    $
    136,198Operating income (loss)
    
    $
    14,308
    
    
    $
    (37
    )
    
    $
    30
    
    
    $
    14,301Net income (loss)
    
    $
    6,409
    
    
    $
    (100
    )
    
    $
    3⁄4
    
    
    $
    6,309Total Assets
    
    $
    461,310
    
    
    $
    3,171
    
    
    $
    (5,300
    )
    
    $
    459,181
 Household Rental
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the six-months ended March 31, 2005 (Restated)
    
    Service
    
    
    Service
    
    
    Activity
    
    
    TotalTotal revenue
    
    $
    253,531
    
    
    $
    9,303
    
    
    $
    (339
    )
    
    $
    262,495Operating income
    
    $
    25,395
    
    
    $
    8
    
    
    $
    60
    
    
    $
    25,463Net income (loss)
    
    $
    7,455
    
    
    $
    (112
    )
    
    $
    3⁄4
    
    
    $
    7,343Total Assets
    
    $
    461,310
    
    
    $
    3,171
    
    
    $
    (5,300
    )
    
    $
    459,181
 Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the three months ended March 31, 2004 (Restated)
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsTotal revenue
    
    $
    128,661
    
    
    $
    6,884
    
    
    $
    (222
    )
    
    $
    135,323Operating income (loss)
    
    $
    16,605
    
    
    $
    (1,562
    )
    
    $
    30
    
    
    $
    15,073
 17




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the three months ended March 31, 2004 (Restated)
    
    Rental Segment
    
    
    Service Segment
    
    
    Activity
    
    
    Total SegmentsNet income (loss)
    
    $
    8,148
    
    
    $
    (1,590
    )
    
    $
    3⁄4
    
    
    $
    6,558Total Assets
    
    $
    444,384
    
    
    $
    4,553
    
    
    $
    (4,114
    )
    
    $
    444,823
 Household
    
    
    Prepaid Telephone
    
    
    Inter-segmentFor the six months ended March 31, 2004 (Restated)
    
    Rental Segment
    
    
    Service Segment
    
    

    Activity
    
    
    Total SegmentsTotal revenue
    
    $
    245,837
    
    
    $
    13,074
    
    
    $
    (405
    )
    
    $
    258,506Operating income (loss)
    
    $
    25,342
    
    
    $
    (2,173
    )
    
    $
    60
    
    
    $
    23,229Net income (loss)
    
    $
    2,602
    
    
    $
    (2,225
    )
    
    $
    3⁄4
    
    
    $
    377Total Assets
    
    $
    444,384
    
    
    $
    4,553
    
    
    $
    (4,114
    )
    
    $
    444,823
 17. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES: The 11 7/8% senior secured notes issued by Rent-Way, Inc. (Parent) have been guaranteed by each
of its restricted subsidiaries (Guarantor Subsidiaries). The Guarantor Subsidiaries are 100%
owned subsidiaries of the Parent. The guarantees of the Subsidiary Guarantors are full,
unconditional and joint and several. Separate financial statements of the Parent and Guarantor
Subsidiaries are not presented in accordance with the exception provided by Rule 3-10 of Regulation
S-X. The following schedules set forth the condensed consolidating balance sheets as of March 31, 2005
and September 30, 2004 and condensed consolidating statements of operations for the six-months
ended March 31, 2005 and 2004, and condensed consolidating statements of cash flows for the
six-months ended March 31, 2005 and 2004. In the following schedules, Parent refers to Rent-Way,
Inc., Guarantor Subsidiaries refers to Rent-Ways wholly owned subsidiaries, and Non-Guarantor
Subsidiaries refers to DPI, the Companys 83.5% owned subsidiary. Eliminations represent the
adjustments necessary to eliminate inter-company investment in subsidiaries. 18




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2005
(All dollars in thousands) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    68
    
    
    $
    3,023
    
    
    $
    354
    
    
    $
    3⁄4
    
    
    $
    3,445Prepaid expenses
    
    
    7,691
    
    
    
    1,423
    
    
    
    519
    
    
    
    3⁄4
    
    
    
    9,633Rental merchandise, net
    
    
    157,977
    
    
    
    38,573
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    196,550Rental merchandise credits due from vendors
    
    
    2,149
    
    
    
    635
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,784Property and equipment, net
    
    
    37,698
    
    
    
    6,531
    
    
    
    979
    
    
    
    3⁄4
    
    
    
    45,208Goodwill
    
    
    124,807
    
    
    
    57,448
    
    
    
    6,594
    
    
    
    3⁄4
    
    
    
    188,849Deferred financing costs, net
    
    
    6,854
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,854Intangible assets, net
    
    
    56
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    56Other assets
    
    
    3,903
    
    
    
    623
    
    
    
    1,276
    
    
    
    3⁄4
    
    
    
    5,802Investment in subsidiaries
    
    
    75,017
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (75,017
    )
    
    
    3⁄4Total assets
    
    $
    416,220
    
    
    $
    108,256
    
    
    $
    9,722
    
    
    $
    (75,017
    )
    
    $
    459,181LIABILITES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    20,439
    
    
    $
    2,994
    
    
    $
    1,666
    
    
    $
    3⁄4
    
    
    $
    25,099Other liabilities
    
    
    47,912
    
    
    
    12,399
    
    
    
    2,154
    
    
    
    3⁄4
    
    
    
    62,465Inter-company
    
    
    (23,748
    )
    
    
    21,890
    
    
    
    1,858
    
    
    
    3⁄4
    
    
    
    3⁄4Deferred tax liability
    
    
    13,285
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    13,285Debt
    
    
    221,116
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    221,116Total liabilities
    
    
    279,004
    
    
    
    37,283
    
    
    
    5,678
    
    
    
    3⁄4
    
    
    
    321,965Convertible redeemable preferred stock
    
    
    21,641
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    21,641SHAREHOLDERS EQUITY:Common stock
    
    
    304,403
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    304,403Accumulated other comprehensive loss
    
    
    (37
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (37
    )Retained earnings (accumulated deficit)
    
    
    (188,791
    )
    
    
    (4,275
    )
    
    
    2,444
    
    
    
    1,831
    
    
    
    (188,791
    )Total shareholders equity
    
    
    115,575
    
    
    
    70,973
    
    
    
    4,044
    
    
    
    (75,017
    )
    
    
    115,575Total liabilities and shareholders equity
    
    $
    416,220
    
    
    $
    108,256
    
    
    $
    9,722
    
    
    $
    (75,017
    )
    
    $
    459,181
 19




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE-MONTHS ENDED MARCH 31, 2005
(All dollars in thousands) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    91,889
    
    
    $
    22,310
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    114,199Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,742
    
    
    
    3⁄4
    
    
    
    4,742Other revenues
    
    
    14,160
    
    
    
    3,097
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17,257Total revenues
    
    
    106,049
    
    
    
    25,407
    
    
    
    4,742
    
    
    
    3⁄4
    
    
    
    136,198COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    28,906
    
    
    
    7,099
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    36,005Property and equipment
    
    
    3,037
    
    
    
    718
    
    
    
    147
    
    
    
    3⁄4
    
    
    
    3,902Amortization of goodwill and other intangibles
    
    
    21
    
    
    
    7
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    28Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,871
    
    
    
    3⁄4
    
    
    
    2,871Salaries and wages
    
    
    28,142
    
    
    
    5,975
    
    
    
    647
    
    
    
    3⁄4
    
    
    
    34,764Advertising, net
    
    
    4,524
    
    
    
    125
    
    
    
    84
    
    
    
    3⁄4
    
    
    
    4,733Occupancy
    
    
    7,516
    
    
    
    1,724
    
    
    
    49
    
    
    
    3⁄4
    
    
    
    9,289Other operating expenses
    
    
    24,613
    
    
    
    4,933
    
    
    
    759
    
    
    
    3⁄4
    
    
    
    30,305Total costs and operating expenses
    
    
    96,759
    
    
    
    20,581
    
    
    
    4,557
    
    
    
    3⁄4
    
    
    
    121,897Operating income (loss)
    
    
    9,290
    
    
    
    4,826
    
    
    
    185
    
    
    
    3⁄4
    
    
    
    14,301OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,705
    )
    
    
    411
    
    
    
    3
    
    
    
    3⁄4
    
    
    
    (7,291
    )Interest income
    
    
    5
    
    
    
    3⁄4
    
    
    
    2
    
    
    
    3⁄4
    
    
    
    7Amortization of deferred financing costs
    
    
    (285
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (285
    )Other income (expense), net
    
    
    1,046
    
    
    
    3⁄4
    
    
    
    (21
    )
    
    
    3⁄4
    
    
    
    1,025Equity in net income of subsidiaries
    
    
    5,420
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (5,420
    )
    
    
    3⁄4Income (loss) before income taxes and
discontinued operations
    
    
    7,771
    
    
    
    5,237
    
    
    
    169
    
    
    
    (5,420
    )
    
    
    7,757Income tax expense
    
    
    1,395
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,395Income (loss) before discontinued operations
    
    
    6,376
    
    
    
    5,237
    
    
    
    169
    
    
    
    (5,420
    )
    
    
    6,362Loss from discontinued operations
    
    
    (67
    )
    
    
    14
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (53
    )Net income (loss)
    
    $
    6,309
    
    
    $
    5,251
    
    
    $
    169
    
    
    $
    (5,420
    )
    
    $
    6,309
 20




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX-MONTHS ENDED MARCH 31, 2005
(All dollars in thousands)(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    176,945
    
    
    $
    43,196
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    220,141Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9,304
    
    
    
    3⁄4
    
    
    
    9,304Other revenues
    
    
    27,100
    
    
    
    5,950
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    33,050Total revenues
    
    
    204,045
    
    
    
    49,146
    
    
    
    9,304
    
    
    
    3⁄4
    
    
    
    262,495COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    55,045
    
    
    
    13,476
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    68,521Property and equipment
    
    
    6,546
    
    
    
    1,571
    
    
    
    296
    
    
    
    3⁄4
    
    
    
    8,413Amortization of goodwill and other intangibles
    
    
    42
    
    
    
    14
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    56Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5,777
    
    
    
    3⁄4
    
    
    
    5,777Salaries and wages
    
    
    56,319
    
    
    
    12,021
    
    
    
    1,244
    
    
    
    3⁄4
    
    
    
    69,584Advertising, net
    
    
    8,636
    
    
    
    1,358
    
    
    
    91
    
    
    
    3⁄4
    
    
    
    10,085Occupancy
    
    
    14,714
    
    
    
    3,536
    
    
    
    99
    
    
    
    3⁄4
    
    
    
    18,349Other operating expenses
    
    
    45,181
    
    
    
    9,678
    
    
    
    1,388
    
    
    
    3⁄4
    
    
    
    56,247Total costs and operating expenses
    
    
    186,483
    
    
    
    41,654
    
    
    
    8,895
    
    
    
    3⁄4
    
    
    
    237,032Operating income (loss)
    
    
    17,562
    
    
    
    7,492
    
    
    
    409
    
    
    
    3⁄4
    
    
    
    25,463OTHER INCOME (EXPENSE):Interest expense
    
    
    (15,097
    )
    
    
    733
    
    
    
    6
    
    
    
    3⁄4
    
    
    
    (14,358
    )Interest income
    
    
    10
    
    
    
    3⁄4
    
    
    
    3
    
    
    
    3⁄4
    
    
    
    13Amortization of deferred financing costs
    
    
    (565
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (565
    )Other income (expense), net
    
    
    (296
    )
    
    
    94
    
    
    
    (37
    )
    
    
    3⁄4
    
    
    
    (239
    )Equity in net income of subsidiaries
    
    
    8,766
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (8,766
    )
    
    
    3⁄4Income (loss) before income taxes and
discontinued operations
    
    
    10,380
    
    
    
    8,319
    
    
    
    381
    
    
    
    (8,766
    )
    
    
    10,314Income tax expense
    
    
    2,790
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,790Income (loss) before discontinued operations
    
    
    7,590
    
    
    
    8,319
    
    
    
    381
    
    
    
    (8,766
    )
    
    
    7,524Loss from discontinued operations
    
    
    (247
    )
    
    
    66
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (181
    )Net income (loss)
    
    $
    7,343
    
    
    $
    8,385
    
    
    $
    381
    
    
    $
    (8,766
    )
    
    $
    7,343
 21




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX-MONTHS ENDED MARCH 31, 2005
(All dollars in thousands)
(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    (2,485
    )
    
    $
    4,340
    
    
    $
    423
    
    
    $
    3⁄4
    
    
    $
    2,278INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (7,138
    )
    
    
    (1,162
    )
    
    
    (239
    )
    
    
    3⁄4
    
    
    
    (8,539
    )Investment in subsidiary
    
    
    (75
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (75
    )Net cash used in investing activities
    
    
    (7,213
    )
    
    
    (1,162
    )
    
    
    (239
    )
    
    
    3⁄4
    
    
    
    (8,614
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    55,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    55,000Payments on borrowings
    
    
    (37,011
    )
    
    
    3⁄4
    
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    (37,016
    )Payments on note for settlement of class action lawsuit
    
    
    (1,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,000
    )Payments on capital leases
    
    
    (3,043
    )
    
    
    (789
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,832
    )Cash overdraft
    
    
    (5,989
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (5,989
    )Issuance of common stock
    
    
    8
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    8Dividends paid
    
    
    (802
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (802
    )Net cash provided by (used in) financing activities
    
    
    7,163
    
    
    
    (789
    )
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    6,369Increase (decrease) in cash and cash equivalents
    
    
    (2,535
    )
    
    
    2,389
    
    
    
    179
    
    
    
    3⁄4
    
    
    
    33Cash and cash equivalents at beginning of year
    
    
    2,603
    
    
    
    634
    
    
    
    175
    
    
    
    3⁄4
    
    
    
    3,412Cash and cash equivalents at end of year
    
    $
    68
    
    
    $
    3,023
    
    
    $
    354
    
    
    $
    3⁄4
    
    
    $
    3,445
 22




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(all dollars in thousands)
(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    2,603
    
    
    $
    634
    
    
    $
    175
    
    
    $
    3⁄4
    
    
    $
    3,412Prepaid expenses
    
    
    6,916
    
    
    
    1,182
    
    
    
    398
    
    
    
    3⁄4
    
    
    
    8,496Rental merchandise, net
    
    
    138,888
    
    
    
    35,041
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    173,929Rental merchandise credits due from vendors.
    
    
    2,592
    
    
    
    650
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,242Property and equipment, net
    
    
    32,933
    
    
    
    5,573
    
    
    

    1,036
    
    
    
    3⁄4
    
    
    
    39,542Goodwill
    
    
    124,807
    
    
    
    57,448
    
    
    
    6,594
    
    
    
    3⁄4
    
    
    
    188,849Deferred financing costs, net
    
    
    7,420
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    7,420Intangible assets, net
    
    
    112
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    112Other assets
    
    
    4,124
    
    
    
    771
    
    
    
    1,231
    
    
    
    3⁄4
    
    
    
    6,126Investment in subsidiaries
    
    
    66,187
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (66,187
    )
    
    
    3⁄4Total assets
    
    $
    386,582
    
    
    $
    101,299
    
    
    $
    9,434
    
    
    $
    (66,187
    )
    
    $
    431,128LIABILITES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    20,298
    
    
    $
    4,325
    
    
    $
    1,564
    
    
    
    3⁄4
    
    
    $
    26,187Other liabilities
    
    
    48,964
    
    
    
    10,390
    
    
    
    2,130
    
    
    
    3⁄4
    
    
    
    61,484Inter-company
    
    
    (26,132
    )
    
    
    24,060
    
    
    
    2,072
    
    
    
    3⁄4
    
    
    
    3⁄4Deferred tax liability
    
    
    10,496
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10,496Debt
    
    
    203,929
    
    
    
    3⁄4
    
    
    
    5
    
    
    
    3⁄4
    
    
    
    203,934Total liabilities
    
    
    257,555
    
    
    
    38,775
    
    
    
    5,771
    
    
    
    3⁄4
    
    
    
    302,101Convertible redeemable preferred stock
    
    
    19,790
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    19,790SHAREHOLDERS EQUITY:Common stock
    
    
    304,395
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    304,395Accumulated other comprehensive income
    
    
    (93
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (93
    )Retained earnings (accumulated deficit)
    
    
    (195,065
    )
    
    
    (12,724
    )
    
    
    2,063
    
    
    
    10,661
    
    
    
    (195,065
    )Total shareholders equity
    
    
    109,237
    
    
    
    62,524
    
    
    
    3,663
    
    
    
    (66,187
    )
    
    
    109,237Total liabilities and shareholders equity
    
    $
    386,582
    
    
    $
    101,299
    
    
    $
    9,434
    
    
    $
    (66,187
    )
    
    $
    431,128
 23




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE-MONTHS ENDED MARCH 31, 2004
(All dollars in thousands)
(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    89,133
    
    
    $
    22,118
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    111,251Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,884
    
    
    
    3⁄4
    
    
    
    6,884Other revenues
    
    
    14,029
    
    
    
    3,159
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17,188Total revenues
    
    
    103,162
    
    
    
    25,277
    
    
    
    6,884
    
    
    
    3⁄4
    
    
    
    135,323COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    29,680
    
    
    
    7,471
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    37,151Property and equipment
    
    
    3,111
    
    
    
    779
    
    
    
    150
    
    
    
    3⁄4
    
    
    
    4,040Amortization of goodwill and other intangibles
    
    
    83
    
    
    
    27
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    110Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,952
    
    
    
    3⁄4
    
    
    
    4,952Salaries and wages
    
    
    26,622
    
    
    
    5,761
    
    
    
    1,328
    
    
    
    3⁄4
    
    
    
    33,711Advertising, net
    
    
    3,793
    
    
    
    57
    
    
    
    422
    
    
    
    3⁄4
    
    
    
    4,272Occupancy
    
    
    6,644
    
    
    
    1,716
    
    
    
    92
    
    
    
    3⁄4
    
    
    
    8,452Other operating expenses
    
    
    21,541
    
    
    
    4,771
    
    
    
    1,250
    
    
    
    3⁄4
    
    
    
    27,562Total costs and operating expenses
    
    
    91,474
    
    
    
    20,582
    
    
    
    8,194
    
    
    
    3⁄4
    
    
    
    120,250Operating income (loss)
    
    
    11,688
    
    
    
    4,695
    
    
    
    (1,310
    )
    
    
    3⁄4
    
    
    
    15,073OTHER INCOME (EXPENSE):Interest expense
    
    
    (8,034
    )
    
    
    372
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (7,662
    )Interest income
    
    
    13
    
    
    
    3⁄4
    
    
    
    1
    
    
    
    3⁄4
    
    
    
    14Amortization  deferred financial costs
    
    
    (264
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (264
    )Other income (expense), net
    
    
    1,170
    
    
    
    59
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,229Equity in net income of subsidiaries
    
    
    3,710
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,710
    )
    
    
    3⁄4Income (loss) before income taxes and
discontinued operations
    
    
    8,283
    
    
    
    5,126
    
    
    
    (1,309
    )
    
    
    (3,710
    )
    
    
    8,390Income tax expense
    
    
    1,395
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,395Income (loss) before discontinued operations
    
    
    6,888
    
    
    
    5,126
    
    
    
    (1,309
    )
    
    
    (3,710
    )
    
    
    6,995Loss from discontinued operations
    
    
    (330
    )
    
    
    (107
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (437
    )Net income (loss)
    
    $
    6,558
    
    
    $
    5,019
    
    
    $
    (1,309
    )
    
    $
    (3,710
    )
    
    $
    6,558
 24




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTHS ENDED MARCH 31, 2004
(All dollars in thousands)
(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    170,696
    
    
    $
    42,608
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    213,304Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    13,074
    
    
    
    3⁄4
    
    
    
    13,074Other revenues
    
    
    26,300
    
    
    
    5,828
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    32,128Total revenues
    
    
    196,996
    
    
    
    48,436
    
    
    
    13,074
    
    
    
    3⁄4
    
    
    
    258,506COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    55,760
    
    
    
    14,161
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    69,921Property and equipment
    
    
    6,439
    
    
    
    1,670
    
    
    
    297
    
    
    
    3⁄4
    
    
    
    8,406Amortization of goodwill and other intangibles
    
    
    168
    
    
    
    56
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    224Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    8,931
    
    
    
    3⁄4
    
    
    
    8,931Salaries and wages
    
    
    52,899
    
    
    
    12,087
    
    
    
    2,331
    
    
    
    3⁄4
    
    
    
    67,317Advertising, net
    
    
    9,388
    
    
    
    96
    
    
    
    917
    
    
    
    3⁄4
    
    
    
    10,401Occupancy
    
    
    12,856
    
    
    
    3,817
    
    
    
    194
    
    
    
    3⁄4
    
    
    
    16,867Restructuring costs
    
    
    36
    
    
    
    12
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    48Other operating expenses
    
    
    41,486
    
    
    
    9,563
    
    
    
    2,113
    
    
    
    3⁄4
    
    
    
    53,162Total costs and operating expenses
    
    
    179,032
    
    
    
    41,462
    
    
    
    14,783
    
    
    
    3⁄4
    
    
    
    235,277Operating income (loss)
    
    
    17,964
    
    
    
    6,974
    
    
    
    (1,709
    )
    
    
    3⁄4
    
    
    
    23,229OTHER INCOME (EXPENSE):Interest expense
    
    
    (16,203
    )
    
    
    682
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (15,521
    )Interest income
    
    
    782
    
    
    
    3⁄4
    
    
    
    2
    
    
    
    3⁄4
    
    
    
    784Amortization  deferred financial costs
    
    
    (522
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (522
    )Other income (expense), net
    
    
    (3,187
    )
    
    
    94
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,093
    )Equity in net income of subsidiaries
    
    
    5,323
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (5,323
    )
    
    
    3⁄4Income (loss) before income taxes and
discontinued operations

    
    
    4,157
    
    
    
    7,750
    
    
    
    (1,707
    )
    
    
    (5,323
    )
    
    
    4,877Income tax expense
    
    
    2,790
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,790Income (loss) before discontinued operations
    
    
    1,367
    
    
    
    7,750
    
    
    
    (1,707
    )
    
    
    (5,323
    )
    
    
    2,087Loss from discontinued operations
    
    
    (990
    )
    
    
    (720
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,710
    )Net income (loss)
    
    $
    377
    
    
    $
    7,030
    
    
    $
    (1,707
    )
    
    $
    (5,323
    )
    
    $
    377
 25




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##### Table of Contents



RENT-WAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands , except per share data)
(Unaudited) RENT-WAY, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX-MONTHS ENDED MARCH 31, 2004
(All dollars in thousands)
(Restated) Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    Rent-WayIssuer
    
    
    Subsidiaries
    
    
    Subsidiary
    
    
    Eliminations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    359
    
    
    $
    825
    
    
    $
    511
    
    
    $
    3⁄4
    
    
    $
    1,695INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,646
    )
    
    
    (892
    )
    
    
    (155
    )
    
    
    3⁄4
    
    
    
    (3,693
    )Net cash used in investing activities
    
    
    (2,646
    )
    
    
    (892
    )
    
    
    (155
    )
    
    
    3⁄4
    
    
    
    (3,693
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    78,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    78,000Payments on borrowings
    
    
    (69,009
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (69,009
    )Payments on note for settlement of class action lawsuit
    
    
    (1,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,000
    )Payments on capital leases
    
    
    (3,029
    )
    
    
    (826
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,855
    )Book overdraft
    
    
    (2,118
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (2,118
    )Deferred financing costs
    
    
    (35
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (35
    )Issuance of common stock
    
    
    802
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    802Proceeds from convertible preferred stock
    
    
    1,330
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,330Dividends paid
    
    
    (605
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (605
    )Net cash provided by (used in) financing activities
    
    
    4,336
    
    
    
    (826
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,510Increase (decrease) in cash and cash equivalents
    
    
    2,049
    
    
    
    (893
    )
    
    
    356
    
    
    
    3⁄4
    
    
    
    1,512Cash and cash equivalents at beginning of year
    
    
    1,803
    
    
    
    882
    
    
    
    618
    
    
    
    3⁄4
    
    
    
    3,303Cash and cash equivalents at end of year
    
    $
    3,852
    
    
    $
    (11
    )
    
    $
    974
    
    
    $
    3⁄4
    
    
    $
    4,815
 18. RECENT ACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R). SFAS
123R requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide service in exchange for
the award  the requisite service period (usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not render the requisite service. This
Statement is effective as of the beginning of the first interim or annual reporting period of the
registrants first fiscal year beginning on or after June 15, 2005. The Company is currently
evaluating the provisions of this Statement and will be required to expense the fair value of the
equity instruments awarded to employees over the requisite service period. 26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Managements discussion and analysis is provided as a supplement to, and should be read in
conjunction with, the unaudited financial statements and accompanying notes to the consolidated
financial statements of Rent-Way. OVERVIEW At March 31, 2005, Rent-Way operated 776 rental-purchase stores located in 34 states. The
Company offers quality brand name home entertainment equipment, furniture, computers, major
appliances, and jewelry to customers under full-service rental-purchase agreements that generally
allow the customer to obtain ownership of the merchandise at the conclusion of an agreed upon
rental period. The Company also provides prepaid local phone service to consumers on a monthly
basis through DPI. DPI is a non-facilities based provider of local phone service. Rent-Way operates in the highly competitive rental-purchase industry in the United States.
The Company faces strong sales competition from other rental-purchase businesses, department
stores, discount stores and retail outlets that offer an installment sales program or comparable
products and prices. Additionally, Rent-Way competes with a number of companies for prime retail
site locations, as well as for attracting and retaining quality employees. Rent-Way, along with
other rental-purchase and retail companies, is influenced by a number of factors including, but not
limited to: cost of merchandise, consumer debt levels, economic conditions, customer preferences,
employment, inflation, fuel prices and weather patterns. Operating results for the six-months ended March 31, 2005 are not indicative of results that
may be expected for the fiscal year ending September 30, 2005 because of seasonality. The typical
store experiences a slight decrease in the number of agreements during the summer months while, on
balance, the rest of the year demonstrates growth in agreements. While there is constant turnover
within the portfolio of rental agreements, the total number of rental agreements in a store does
not change significantly. This stability in the number of rental agreements facilitates revenue
forecasting. Through sales, closures and combinations, the number of stores operated by the Company has
decreased from 1,062 as of September 30, 2002, to 776 as of March 31, 2005. The following table
shows the number of stores opened, acquired, sold, closed and/or combined during this period. YEARS ENDED SEPTEMBER 30,
    
    
    PERIOD ENDEDSTORES
    
    2003
    
    
    2004
    
    
    MARCH 31, 2005Open at Beginning of Period
    
    
    1,062
    
    
    
    753
    
    
    
    754Opened
    
    
    1
    
    
    
    2
    
    
    
    23Locations Sold
    
    
    (298
    )
    
    
    0
    
    
    
    0Closed or Combined
    
    
    (12
    )
    
    
    (1
    )
    
    
    (1
    )Open at End of Period
    
    
    753
    
    
    
    754
    
    
    
    776
 As discussed further in Note 2 to the consolidated financial statements, the Company recently
reviewed its operating lease and revenue recognition accounting and determined that it was
appropriate to restate consolidated financial statements for the fiscal years 2002 through 2004,
and for the first quarter of fiscal 2005. The Company is in the process of preparing an amendment
to its Form 10-K for the year ended September 30, 2004 and its Form 10-Q for the fiscal quarter
ended December 31, 2004. On February 7, 2005, the Office of the Chief Accountant of the Securities
and Exchange Commission (SEC) issued a letter to the Center for Public Company Audit Firms of the
American Institute of Certified Public Accountants, which clarified existing generally accepted
accounting principles applicable to leases and leasehold improvements. The restatement adjustments
relate to lease accounting matters, including those discussed in the SEC Letter. In the SEC
Letter, the SEC expressed its view on the amortization of leasehold improvements, rent holidays and
landlord/tenant incentives. The restatement adjustments also relate to revenue recognition as a
result of the Companys change from the cash basis of accounting to the accrual basis of
accounting. The impact of the restatement on the consolidated balance sheet as of September 30, 2004, and the
consolidated statement of operations for the three-month and six-month periods ended March 31, 2004
and the consolidated statement of cash flows for the six-month period ended March 31, 2004 is
presented in Note 2 to the consolidated financial statements included in this report. As a result
of these entries, rental merchandise, net increased by $0.8 million, property and equipment, net
decreased by $2.5 million, other assets increased by $2.2 million and other liabilities increased
by $6.3 million as of September 30, 2004. Revenues increased $0.1 million and decreased $0.3
million for the three-month and six-month periods ended March 31, 2004, respectively. Operating
income and net income decreased $0.2 million and $0.5 million for the three-month and six-month
period ended March 31, 2004, respectively. The 27




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##### Table of Contents



restatement had no impact on previously reported diluted earnings per share for the three-month
period ended March 31, 2004, but did decrease diluted earnings per share for the six-month period
ended March 31, 2004 by $0.02 to $(0.02). There was no impact to net cash provided by operating
activities, net cash used in investing activities or net cash provided by financing activities for
the six-month period ending March 31, 2004. CRITICAL ACCOUNTING ESTIMATES The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. In applying accounting principles, management must often make individual
estimates and assumptions regarding expected outcomes or uncertainties. The actual results of
outcomes are generally different than the estimated or assumed amounts. These differences are
usually insignificant and are included in the consolidated financial statements as soon as they are
known. The estimates, judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the financial reporting
process, actual results could differ from these estimates. CRITICAL ACCOUNTING POLICIES The Company included in its Annual Report on Form 10-K for the fiscal year ended September 30,
2004, a discussion of the Companys most critical accounting policies, which are those that are
most important to the portrayal of the Companys financial condition and results of operations and
require managements most difficult, subjective and complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. Changes to
certain of these policies are discussed below. The financial results reported in the Form 10-K
will be restated as a result of lease and revenue recognition adjustments described in Note 2 to
the consolidated financial statements. Revenue. Rental merchandise is rented to customers pursuant to rental agreements, which provide for
either weekly, biweekly, semi-monthly or monthly rental payments collected in advance. Rental
revenues are recorded in the period they are earned. Rental payments received prior to when they
are earned are recorded as deferred rental revenue and a receivable is recorded for the rental
revenues earned in the current period and received in the subsequent period. (See Note 2 to the
financial statements). Rental Merchandise and Rental Merchandise Depreciation. The Company uses the units of activity
depreciation method for all rental merchandise except computers and computer games. 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. Personal computers are principally depreciated on the straight-line basis beginning
on acquisition date over 24 months. Write-offs of rental merchandise arising from customers
failure to return merchandise, obsolescence and losses due to excessive wear and tear of
merchandise are recognized using the allowance method. Operating Leases and Depreciation of Leasehold Improvements. Rent expense for operating leases,
which may have escalating rentals over the term of the lease, is recorded on a straight-line basis
over the initial lease term. The initial lease term includes the build out period of leases,
where no rent payments are typically due under the terms of the lease. The difference between rent
expense and rent paid is recorded as deferred rent and is included in the consolidated balance
sheets. Construction allowances received from landlords are recorded as a deferred rent credit and
amortized to rent expense over the initial term of the lease. The Companys statement of cash
flows reflects the receipt of construction allowances as on increase in cash flows from operating
activities. Depreciation of leasehold improvements is over the shorter of the term of the lease
(and those renewal periods that are reasonably assured) or the assets useful economic life. COMPANY PERFORMANCE MEASURES Management uses a number of metrics to assess its performance. The following are the more
important of these metrics:  
    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 1.4%
quarter over quarter. This is attributable to the continuation of offering higher-end
merchandise to customers and increasing rental rates on certain products. 28




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##### Table of Contents




    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 $9.1 million based on active agreements at March
31, 2005, versus $8.7 million for active agreements at March 31, 2004. This increase is
attributable to the continuation of offering higher end merchandise to stores, increasing
rental rates on certain products and the addition of 25 new stores.
    Performance percentage is one metric the Company uses to measures 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 88.9% for
the three-month period ended March 31, 2005 and 91.6% for the three-month period ended
March 31, 2004. The performance percentage reflects the results of 776 stores and 753
stores for the three-month periods ended March 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.
    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 27.4% for the three-month period ended March 31, 2005 versus
28.9% for the three-month period ended March 31, 2004. The improvement in rental
merchandise depreciation is attributable to the Company increasing its turns during this
time period, which measures rental revenue collected versus product cost.
    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 10.9% of total revenue for the three-month
period ended March 31, 2005 versus 12.9% of total revenues for the three-month period ended
March 31, 2004. This is attributable to the expenses associated with opening 25 new stores. Management believes that an important reason for the Companys positive store-level financial
performance and growth has been the structure of its management compensation system. A significant
portion of the Companys regional and store managers total compensation is dependent upon store
performance. Profit incentives are tied to certain key performance metrics and can count for as
much as 30% of a store managers pay. RESULTS OF OPERATIONS As an aid to understanding the Companys operating results, the following tables express items of
the Companys unaudited consolidated statements of operations for the three and six-month periods
ended March 31, 2005 and 2004 as a period-over-period percentage change. COMPARISON OF THREE-MONTHS ENDED MARCH 31, 2005 AND 2004 Three-Months EndedMarch 31,
    
    
    Percent ChangeIn thousands
    
    2005
    
    
    2004(Restated)REVENUES:Rental revenue
    
    $
    114,199
    
    
    $
    111,251
    
    
    
    3Prepaid phone service revenue
    
    
    4,742
    
    
    
    6,884
    
    
    
    (31
    )Other revenue
    
    
    17,257
    
    
    
    17,188
    
    
    
    3⁄4Total revenues
    
    
    136,198
    
    
    
    135,323
    
    
    
    1COSTS AND OPERATING EXPENSES:Depreciation and amortizationRental merchandise
    
    
    36,005
    
    
    
    37,151
    
    
    
    (3
    )Property and equipment
    
    
    3,902
    
    
    
    4,040
    
    
    
    (3
    )Amortization of intangibles
    
    
    28
    
    
    
    110
    
    
    
    (75
    )Cost of prepaid phone service
    
    
    2,871
    
    
    
    4,952
    
    
    
    (42
    )Salaries and wages
    
    
    34,764
    
    
    
    33,711
    
    
    
    3Advertising
    
    
    4,733
    
    
    
    4,272
    
    
    
    11
 29




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##### Table of Contents



Three-Months EndedMarch 31,
    
    
    Percent ChangeIn thousands
    
    2005
    
    
    2004(Restated)Occupancy
    
    
    9,289
    
    
    
    8,452
    
    
    
    10Other operating expenses
    
    
    30,305
    
    
    
    27,562
    
    
    
    10Total costs and operating expenses
    
    
    121,897
    
    
    
    120,250
    
    
    
    1Operating income
    
    
    14,301
    
    
    
    15,073
    
    
    
    (5
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (7,291
    )
    
    
    (7,662
    )
    
    
    (5
    )Interest income
    
    
    7
    
    
    
    14
    
    
    
    (50
    )Amortization and write-off of deferred financing costs
    
    
    (285
    )
    
    
    (264
    )
    
    
    8Other income (expense)
    
    
    1,025
    
    
    
    1,229
    
    
    
    (17
    )Income before income taxes and discontinued operations
    
    
    7,757
    
    
    
    8,390
    
    
    
    (8
    )Income tax expense
    
    
    1,395
    
    
    
    1,395
    
    
    
    3⁄4Income before discontinued operations
    
    
    6,362
    
    
    
    6,995
    
    
    
    (9
    )Loss from discontinued operations
    
    
    (53
    )
    
    
    (437
    )
    
    
    (88
    )Net income
    
    
    6,309
    
    
    
    6,558
    
    
    
    (4
    )Dividend and accretion of preferred stock
    
    
    (534
    )
    
    
    (403
    )
    
    
    33Net income allocable to common shareholders
    
    $
    5,775
    
    
    $
    6,155
    
    
    
    (6
    )
 Total revenues. Total revenues increased $0.9 million to $136.2 million from $135.3 million.
Rental revenue increased by $2.9 million, which is attributable to opening new stores, the
continuation of offering higher end merchandise to stores and increasing rental rates on certain
products. The $2.9 million increase in rental revenue was offset by $2.1 million decrease in
prepaid phone service revenue attributable to a loss of customers year over year. Rental Merchandise Depreciation. Rental merchandise depreciation as a percentage of rental revenue
plus other revenue was 27.4% for the three months ended March 31, 2005 versus 28.9% for the three
months ended March 31, 2004. This decrease is due to the Company increasing rental rates on
certain products in 2005. Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to $2.9 million from
$5.0 million. The decrease in costs is due to a general decrease in the customer base year over
year. Salaries and Wages. Salaries and wages increased to $34.8 million from $33.7 million. This 3%
increase is generally due to annual increases in wages and salaries and an increase in headcount
year over year as a result of new store openings. Advertising. Advertising expense increased $0.4 million to $4.7 million from $4.3 million. This
increase is primarily due to grand opening expenses associated with the new store initiative. Occupancy. Occupancy expense increased to $9.3 million from $8.5 million primarily due to general
rent increases, increases in maintenance expense resulting from a strategic initiative to improve
the appearance and consistency of the Companys stores, and the opening of new stores. Other Operating Expense. Other operating expense increased to $30.3 million from $27.6 million.
This increase is principally due to an increase in training and conference, postage related to
local store marketing, payroll taxes, auto fuel and service expense, some of which is related to
opening new stores. Interest Expense. Interest expense decreased to $7.3 million from $7.7 million. This decrease is
primarily due to reduction of debt year over year. Other Income (Expense), Net. Other income was $1.0 million for the three-months ended March 31,
2005, compared to $1.2 million for the three-months ended March 31, 2004. Other income for the
three months ended March 31, 2005 included $0.6 million of income as a result of the change in the
fair market value of the convertibility feature of the convertible redeemable preferred stock
derivative and income of $0.4 million due to a positive change in the fair market value of the
interest rate swap portfolio. Other income for the three months ended March 31, 2004 included
income of $0.6 million due to a positive change in the fair market value of the interest rate swap
portfolio and a $0.5 million gain on the sale of vehicles under capital leases. Income Tax Expense. During the second quarter of fiscal 2005 and 2004, the Company recorded income
tax expense of $1.4 million due to the Companys inability to look to the reversal of the deferred
tax liability associated with tax deductible goodwill to offset a portion of its deferred tax asset
following the adoption of SFAS 142. Loss From Discontinued Operations. The loss from discontinued operations was $0.1 million for the
three-months ended March 31, 30




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##### Table of Contents



2005 as compared to $0.4 million for the same period ended March 31, 2004. Net Income. The Company generated net income of $6.3 million in the three-month period ended March
31, 2005 as a result of the factors described above compared to net income of $6.6 million in the
same period last year. Net Income Allocable To Common Shareholders. On June 2, 2003, the Company issued 1,500 shares of
convertible redeemable preferred stock for $10,000 per share and a one-year option to purchase an
additional 500 shares of convertible redeemable preferred stock. As of June 30, 2004, the option
was fully exercised. The dividend and the accretion of preferred stock totaled $0.5 million and
$0.4 million and were charged to the accumulated deficit, and reduced net income allocable to
common shareholders for the period ended March 31, 2005 and 2004, respectively. COMPARISON OF SIX-MONTHS ENDED MARCH 31, 2005 AND 2004 Six-Months EndedMarch 31,
    
    
    Percent ChangeIn thousands
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)REVENUES:Rental revenue
    
    
    220,141
    
    
    $
    213,304
    
    
    
    3Prepaid phone service revenue
    
    
    9,304
    
    
    
    13,074
    
    
    
    (29
    )Other revenue
    
    
    33,050
    
    
    
    32,128
    
    
    
    3Total revenues
    
    
    262,495
    
    
    
    258,506
    
    
    
    2COSTS AND OPERATING EXPENSES:Depreciation and amortizationRental merchandise
    
    
    68,521
    
    
    
    69,921
    
    
    
    (2
    )Property and equipment
    
    
    8,413
    
    
    
    8,406
    
    
    
    3⁄4Amortization of intangibles
    
    
    56
    
    
    
    224
    
    
    
    (75
    )Cost of prepaid phone service
    
    
    5,777
    
    
    
    8,931
    
    
    
    (35
    )Salaries and wages
    
    
    69,584
    
    
    
    67,317
    
    
    
    3Advertising
    
    
    10,085
    
    
    
    10,401
    
    
    
    (3
    )Occupancy
    
    
    18,349
    
    
    
    16,867
    
    
    
    9Restructuring Costs
    
    
    3⁄4
    
    
    
    48
    
    
    
    (100
    )Other operating expenses
    
    
    56,247
    
    
    
    53,162
    
    
    
    6Total costs and operating expenses
    
    
    237,032
    
    
    
    235,277
    
    
    
    1Operating income
    
    
    25,463
    
    
    
    23,229
    
    
    
    10OTHER INCOME (EXPENSE):Interest expense
    
    
    (14,358
    )
    
    
    (15,521
    )
    
    
    (7
    )Interest income
    
    
    13
    
    
    
    784
    
    
    
    (98
    )Amortization and write-off of deferred financing costs
    
    
    (565
    )
    
    
    (522
    )
    
    
    8Other income (expense)
    
    
    (239
    )
    
    
    (3,093
    )
    
    
    (92
    )Income before income taxes and discontinued operations
    
    
    10,314
    
    
    
    4,877
    
    
    
    111Income tax expense
    
    
    2,790
    
    
    
    2,790
    
    
    
    3⁄4Loss before discontinued operations
    
    
    7,524
    
    
    
    2,087
    
    
    
    261Loss from discontinued operations
    
    
    (181
    )
    
    
    (1,710
    )
    
    
    (89
    )Net loss
    
    
    7,343
    
    
    
    377
    
    
    
    1,848Dividend and accretion of preferred stock
    
    
    (1,069
    )
    
    
    (798
    )
    
    
    34Net loss allocable to common shareholders
    
    $
    6,274
    
    
    $
    (421
    )
    
    
    1,590
 Total revenues. Total revenues increased $4.0 million to $262.5 million from $258.5 million.
Rental revenue increased by $6.8 million, which is attributable to opening new stores, the
continuation of offering higher end merchandise to stores and increasing rental rates on certain
products. The $6.8 million increase in rental revenue was offset by $3.8 million decrease in
prepaid phone service revenue attributable to a loss of customers year over year. Rental Merchandise Depreciation. Rental merchandise depreciation as a percentage of rental revenue
plus other revenue was 27.1% for the six months ended March 31, 2005 versus 28.5% for the six
months ended March 31, 2004. This decrease is primarily driven by the purchasing cycle for
computer merchandise. The Company added significantly more computers to the portfolio in fiscal
year 2003 that are now becoming fully depreciated. This decrease is also attributable to the
Company increasing rental rates on certain products in 2005. Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to $5.8 million from
$8.9 million. The decrease in costs is due to a general decrease in the customer base year over
year. 31




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Salaries and Wages. Salaries and wages increased to $69.6 million from $67.3 million. This 4%
increase is generally due to annual increases in wages and salaries and an increase in headcount
year over year as a result of new store openings. Advertising. Advertising expense decreased $0.3 million to $10.1 million from $10.4 million. This
decrease is primarily due to a reduction in television advertising offset by an increase in grand
opening expenses associated with new store openings. Occupancy. Occupancy expense increased to $18.3 million from $16.9 million primarily due to general
rent increases, increases in maintenance expense resulting from a strategic initiative to improve
the appearance and consistency of the Companys stores, and the opening of new stores. Other Operating Expense. Other operating expense increased to $56.2 million from $53.2 million.
This increase is principally due to an increase in training and conference, postage related to
local store marketing, the use of temporary labor, payroll taxes, auto fuel and service expense,
some of which is related to opening new stores. Interest Expense. Interest expense decreased to $14.4 million from $15.5 million. This decrease is
primarily due to reduction of debt year over year. Other Income (Expense), Net. Other expense was $0.2 million for the six-months ended March 31,
2005, compared to $3.1 million for the six-months ended March 31, 2004. This change is primarily
due to the change in the fair market value of the feature of the convertible redeemable preferred
stock derivative, which resulted in expense of $1.6 million in the six month period ended March 31,
2005, compared to $5.7 million expense for the six month period ended March 31, 2004. Income Tax Expense. During the first six months of fiscal years 2005 and 2004, the Company
recorded income tax expense of $2.8 million due to the Companys inability to look to the reversal
of the deferred tax liability associated with tax deductible goodwill to offset a portion of its
deferred tax asset following the adoption of SFAS 142. Loss From Discontinued Operations. The loss from discontinued operations was $0.2 million for the
six-months ended March 31, 2005 as compared to $1.7 million for the same period ended March 31,
2004. The decrease in discontinued operations is primarily due to the write-off of leasehold
improvements of $1.0 million in the six-month period ended March 31, 2004. Net Income. The Company generated net income of $7.3 million in the six-month period ended March
31, 2005 as a result of the factors described above compared to net income of $0.4 million in the
same period last year. Net Income (Loss) Allocable To Common Shareholders. On June 2, 2003, the Company issued 1,500
shares of convertible redeemable preferred stock for $10,000 per share and a one-year option to
purchase an additional 500 shares of convertible redeemable preferred stock. As of June 30, 2004,
the option was fully exercised. The dividend and the accretion of preferred stock totaled $1.1
million and $0.8 million and were charged to the accumulated deficit, and reduced net income
allocable to common shareholders for the six-month period ended March 31, 2005 and 2004,
respectively. LIQUIDITY AND CAPITAL RESOURCES The Companys capital requirements relate primarily to purchasing additional rental
merchandise, replacing rental merchandise that has been sold or is no longer suitable for rent and
new store openings. The Companys principal sources of liquidity are cash flows from operations,
debt capacity available under its revolving credit facility and available cash reserves. Cash flows from operating activities The Companys statements of cash flows are
summarized as follows: For the Six-Months Ended March 31In thousands
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)Net cash provided by operating activities
    
    $
    2,278
    
    
    $
    1,695
 Cash flows provided by operating activities increased by $0.6 million period over
period. The main reason for this increase was an increase in profits and accounts payable offset
by an increase in rental merchandise purchases and a decrease in income taxes receivable period
over period. 32




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Cash flows from investing activities. The Companys statement of cash flows are summarized
as follows: For the Six-Months Ended March 31,In thousands
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)Purchase of businesses, net of cash acquired
    
    $
    (75
    )
    
    $
    3⁄4Purchases of property and equipment
    
    
    (8,539
    )
    
    
    (3,693
    )Net cash used in investing activities
    
    $
    (8,614
    )
    
    $
    (3,693
    )
 Purchases of property and equipment accounted for the most significant increases in
investing activities. The increase in purchases of property and equipment is due to the Companys
effort to open new stores and improve the appearance of its stores through leasehold improvements
and upgrading computer systems in the stores. Financing Activities. The Companys statement of cash flows are summarized as follows: For the Six-Months Ended March 31,In thousands
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)Proceeds from borrowings
    
    $
    55,000
    
    
    $
    78,000Payments on borrowings
    
    
    (37,016
    )
    
    
    (69,009
    )Payments on class action lawsuit note payable
    
    
    (1,000
    )
    
    
    (1,000
    )Payments on capital leases
    
    
    (3,832
    )
    
    
    (3,855
    )Cash overdraft
    
    
    (5,989
    )
    
    
    (2,118
    )Deferred financing costs
    
    
    3⁄4
    
    
    
    (35
    )Issuance of common stock
    
    
    8
    
    
    
    802Proceeds from convertible preferred stock
    
    
    3⁄4
    
    
    
    1,330Dividends paid
    
    $
    (802
    )
    
    
    (605
    )Net cash provided by financing activities
    
    
    6,369
    
    
    $
    3,510
 Proceeds and payments on borrowings included both short-term and long-term financing
activities. At March 31, 2005, the Company had $38.7 million available of its $60.0 million bank
revolving credit facility. There was a $18.0 million balance outstanding on the bank revolving
credit facility and there were $3.3 million letters of credits outstanding. The Companys revolving credit facility contains several financial covenants related to ratio
requirements for leverage, fixed coverage, rental merchandise inventory, and thresholds for capital
expenditures, consolidated net worth and minimum EBITDA. These covenants do not currently, and the
Company does not anticipate they will, restrict its liquidity or capital resources. The secured notes contain covenants that, among other things, limit the Companys ability to
incur additional debt, make restricted payments, incur any additional liens, sell certain assets,
pay dividend distributions from restricted subsidiaries, transact with affiliates, conduct certain
sale and leaseback transactions and use excess cash flow. The Company is in compliance with all debt covenants at March 31, 2005, and expects to be able
to comply with those covenants for the remainder of fiscal 2005 based upon its fiscal 2005
projections. In December 2004, the Company amended its bank credit facility to change the financial
covenants to allow for the effect of opening new stores. The leverage ratio and minimum financial
EBITDA covenants were amended as shown in the financial covenants required under the credit
facility included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2004. The terms of the Companys revolving credit facility and the indenture governing the senior
notes do not fully prohibit the Company or its subsidiaries from incurring additional debt. As a
result, the Company may be able to incur additional debt in the future. The Company paid $1.0 million on the note payable from settlement of the securities class
action lawsuit related to former accounting improprieties during the six months ended March 31,
2005. Financial Condition.The increase in debt for the six month period ended March 31,
2005 is an $18.0 million increase in the bank revolving credit facility, which was primarily used
to fund rental merchandise purchases. The first fiscal quarter is typically the period with the
highest volume of rental merchandise purchases due to buying for the holiday season. 33




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Off Balance Sheet Arrangements. The Company is not subject to any off-balance sheet
arrangements within the meaning of Rule 303(a)(4) of Regulation S-K. Contractual Obligations. The following table presents obligations and commitments to
make future payments under contracts and contingent commitments at March 31, 2005: 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 (1)
    
    $
    220,074
    
    
    $
    18,000
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    202,074Capital lease obligations
    
    
    16,782
    
    
    
    6,030
    
    
    
    10,737
    
    
    
    15
    
    
    
    3⁄4Operating leases
    
    
    90,319
    
    
    
    27,136
    
    
    
    52,688
    
    
    
    9,798
    
    
    
    697Notes payable
    
    
    42
    
    
    
    18
    
    
    
    24
    
    
    
    3⁄4
    
    
    
    3⁄4Settlement of class action lawsuit (2)
    
    
    1,000
    
    
    
    1,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Total cash obligations
    
    $
    328,217
    
    
    $
    52,184
    
    
    $
    63,449
    
    
    $
    9,813
    
    
    $
    202,771
   (1)
    
    Consists of senior secured notes, net of discount. The Companys $60.0 million revolving
bank credit facility was at $18,000 at March 31, 2005. The short-term loans from the
revolving bank credit facility are renewable throughout the term of the bank facility which
expires June 2, 2008.(2)
    
    Consists of principal due on outstanding note. 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
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4Standby letters of credit
    
    
    3,310
    
    
    
    3,310
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Guarantees
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Total commercial commitments
    
    $
    3,310
    
    
    $
    3,310
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
 Standby letters of credit are generally required for fleet and insurance guarantees. These
one year letters are renewed on an annual basis. Seasonality and Inflation. The Companys operating results are subject to seasonality.
The first quarter typically has a greater number of rental-purchase agreements entered into because
of traditional holiday shopping patterns. Management plans for these seasonal variances and takes
particular advantage of the first quarter with product promotions and marketing campaigns. Because
many of the Companys expenses do not fluctuate with seasonal revenue changes, such revenue changes
may cause fluctuations in the Companys quarterly earnings. In the event of a prolonged recession,
the Company acknowledges the possibility of a decrease in demand, particularly for higher-end
products. Recent Accounting Pronouncements. In December 2004, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (SFAS 123R). SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity instruments based on the
grant date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award  the requisite service period
(usually the vesting period). No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. This Statement is effective as of the beginning of
the first interim or annual reporting period of the registrants first fiscal year beginning on or
after June 15, 2005. The Company is currently evaluating the provisions of this Statement and will
be required to expense the fair value of the equity instruments awarded to employees over the
requisite service period. CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS Certain written and oral statements made by the Company may constitute forward-looking
statements as defined under the Private Securities Litigation Reform Act of 1995, including
statements made in this report and in other filings with the Securities and Exchange Commission.
Generally, the words believe, expect, intend, estimate, anticipate, project, will and
similar expressions identify forward-looking statements, which generally are not historical in
nature. All statements that address operating performance, events or developments that the Company
expects or anticipates will occur in the futureincluding statements relating to future financial
results and statements expressing general optimism about future operating resultsare
forward-looking statements. Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the Companys historical
experience and the Companys present expectations or projections. Caution should be taken not to
place undue reliance on any such forward-looking statements since such statements speak only as of
the date made. The Company undertakes no 34




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obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following are some of the factors that could cause the Companys actual results to differ
materially from the expected results described in or underlying the Companys forward-looking
statements. The Companys significant indebtedness and dividend payment obligations limit cash flow
availability for operations.The Company has incurred substantial debt to finance growth and has
pledged substantially all assets as collateral for debt. The Company may need to incur additional
indebtedness to operate the business successfully. The debt under the Companys bank credit
facility is subject to variable rates of interest. This exposes the Company to the risk that
interest rates will rise and the amount of interest the Company pays to the bank lenders will
increase. The Company also has dividend payment obligations on its $20 million of
outstanding Series A preferred stock. The Series A preferred stock bears dividends at 8% per year
of stated value, payable at the Companys option either in cash or, under specified circumstances,
shares of common stock. The degree to which the Company is leveraged could have other important consequences to
holders of the common stock, including the following:  
    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. Covenants in the Companys revolving credit facility will restrict the Companys ability to:  
    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. These covenants will also require the Company to maintain compliance with financial ratios,
each as defined in the credit facility, such as a minimum fixed charge coverage ratio, a maximum
leverage ratio, a minimum rental merchandise usage ratio, and minimum levels of net worth and
monthly EBITDA, among others. If the Company is unable to meet the terms of these covenants or if
the Company breaches any of these covenants, a default could result under the credit facility. A
default, if not waived by the Companys lenders, could impair the Companys ability to borrow
additional funds under the credit facility and could result in outstanding amounts there under
becoming immediately due and payable. If acceleration occurs, the Company may not be able to repay
its debt and the Company may not be able to borrow sufficient additional funds to refinance the
debt. If the Company is unable to repay outstanding amounts under the revolving credit facility,
the holders of the debt could foreclose on the Companys assets securing this debt. Restrictive covenants in the indenture for the Companys senior notes may also limit operating and
financial flexibility. The terms of the indenture for the senior notes contain a number of operating and financial
covenants that will restrict the Companys ability to, among other things:  
    incur additional debt;
    pay dividends or make other restricted payments;
    create or permit certain liens; 35




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
    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s ability to comply with the covenants contained in the indenture may be affected
by events beyond its control, including economic, financial and industry conditions. The Companys
failure to comply with these covenants could result in an event of default which, if not cured or
waived, could require repayment of the notes prior to their maturity, which would adversely affect
the Companys financial condition. In addition, an event of default under the indenture for the
senior notes will also constitute an event of default under the senior credit facility. Even if the
Company is able to comply with all applicable covenants, the restrictions on its ability to manage
the business could adversely affect business by, among other things, limiting the Companys ability
to take advantage of financings, mergers, acquisitions and other corporate opportunities that the
Company believes would be beneficial to it. The Company may still be able to incur additional debt, which could increase
the risks described above.The terms of the Companys revolving credit facility and the indenture
governing the senior notes do not fully prohibit the Company or its subsidiaries from incurring
additional debt. As a result, the Company may be able to incur additional debt in the future. If
the Company does so, the risks described above could intensify. 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.The Company
needs the cash generated by its subsidiaries operations to service obligations. The Companys
subsidiaries are not obligated to make funds available. Subsidiaries ability to make payments to
the Company will depend upon their operating results and will also be subject to applicable laws
and contractual restrictions. Some subsidiaries may become subject to loan agreements and
indentures that restrict sales of assets and prohibit or significantly restrict the payment of
dividends or the making of distributions, loans or advances to shareholders and partners.
Furthermore, the indenture governing the notes permits subsidiaries to incur debt with similar
prohibitions and restrictions in the future. If the Company does not have sufficient capital, the Company may not be able to operate the
business successfully.The Companys capital needs are significant. The Company needs capital:  
    to purchase new rental merchandise for
stores;
    to service debt; and
    to open or acquire new stores. The Company may have to issue debt or equity securities that are senior to its common stock.
The Company may have to issue additional shares of common stock that may dilute the ownership
interest of existing shareholders. The Company may not be able to raise additional capital on terms
acceptable to the Company. In April 2002, the Company raised capital by selling common stock and
warrants to acquire common stock in a private placement at a price that was below the then
prevailing market price of the Companys common stock. The terms of the Series A preferred stock
prohibit the Company from issuing any additional shares of preferred stock that would be senior to
or pari passu with the Series A preferred stock. If the Company is unable to raise additional
capital, it may not be able to purchase new rental merchandise for stores, service or repay
outstanding debt or 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.A substantial portion of the Companys
assets consist of intangible assets, including goodwill and covenants not to compete relating to
acquired stores. The value of the Companys intangible assets may not be realized on sale,
liquidation or otherwise. The Company will also be required to reduce the carrying value of
intangible assets if their value becomes impaired. This type of reduction could reduce earnings
significantly. 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.New product offerings help the Company attract new customers and satisfy the
needs and demands of existing customers. The Companys new product offerings may be unsuccessful
for several reasons, including:  
    The Company may have overestimated customers demand for these products; 36




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
    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.An important part of the Companys growth strategy is to increase the
number of stores the Company operates and to operate those stores profitably. In fiscal 2005 and
2006, the Company expects to open between 40 and 50 new stores each year. The Companys failure to
execute this growth strategy could reduce future sales growth and profitability. New stores
generally operate at a loss for approximately eight months after opening. There can be no
assurances that future new stores will achieve profitability levels comparable to those of existing
stores within the expected time frame or become profitable at all. A number of other factors could also affect the Companys ability to open new profitable
stores consistent with its strategy. These factors include:  
    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s continued growth also depends on its ability to increase sales in existing
stores. The opening of additional stores in an existing market could result in lower sales at
existing stores in that market. 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.To improve operations,
management developed and is implementing business strategy focused on controlling operating
expenses, providing higher margin products, engaging in marketing efforts to differentiate the
Company from its competitors, enhancing relationships with customers and selectively opening new
stores in new and existing markets. If the Company is not successful in implementing its business
strategy, or if the business strategy is not effective, the Company may not be able to continue to
improve operations. The Companys operating success is also dependent on its ability to maintain
appropriate levels of inventory, achieve and maintain a product mix that satisfies changing
customer demands and preferences and purchase high quality merchandise at attractive prices. In
addition, any adverse change in general economic conditions may reduce consumer demand for products
and reduce sales. Failure to continue to improve operations or a decline in general economic
conditions would cause revenues and operating income to decline and impair the Companys ability to
service its debt. 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.The success of the
Companys business is materially dependent upon the continued services of its management team. The
loss of key personnel could result in poor performance including lower revenues, lower operating
income and loss of employee and supplier confidence. Additionally, the Company cannot assure that
it will be able to attract or retain other skilled personnel in the future. The Company does not
maintain key-man life insurance policies on any member of its management team. 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.Forty-seven states have enacted laws regulating or otherwise
impacting rental-purchase transactions. All states in which the Companys stores are located have
enacted these types of laws. These laws generally require specific written disclosures concerning
the nature of the transaction. They also may require a grace period for late payments and contract
reinstatement rights in the event the rental-purchase agreement is terminated for non-payment. The
rental-purchase laws of some states limit the total dollar amount of payments that may be charged 37




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over the life of the rental-purchase agreement. States having these laws include Michigan, New
York, Ohio, Pennsylvania and West Virginia. Enactment of new or revised rental purchase laws could
require the Company to change the way in which it does business which could increase its operating
expenses and thus decrease its profitability. In addition, the Company offers prepaid local phone service through DPI. DPIs business was
made possible by the Telecommunications Act of 1996. In order to conduct this business, DPI must
obtain governmental authorization in each state in which it provides local telephone service. Any
state or federal regulation that limits the Telecommunications Act of 1996 or any of the state laws
regulating this business may require DPI to change the way it does business or to discontinue
providing this service in some or all states. 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. The Company competes with
other rental-purchase businesses, and, to a lesser degree, with rental stores that do not offer
their customers a purchase option as well as with traditional retail businesses that offer an
installment sales program or offer comparable products and prices. Competition with these
businesses is based primarily on customer service, although competition with other rental-purchase
businesses is also based on prices, terms, product selection and product availability. The
Companys inability to compete effectively with other businesses and other rental stores could
cause customers to choose these other businesses or rental stores for their rental-purchase needs.
The Companys largest industry competitor is Rent-A-Center, Inc. Rent-A-Center is national in scope
and has significantly greater financial resources and name recognition than the Company. As a
result, Rent-A-Center may be able to adapt more quickly to changes in customer requirements and may
also be able to devote greater resources to the promotion and rental of its products. Furthermore, new competitors may emerge. The cost of entering the rental-purchase business is
relatively low. Current and potential competitors may establish financial or strategic
relationships among themselves or with third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire significant market
share. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys major market risk exposure is primarily due to fluctuations in interest rates. The
Company manages its exposure to changes in short-term interest rates, particularly to reduce the
impact on floating-rate borrowings under its revolving credit facility, by entering into interest
rate swap agreements. These swap agreements involve the receipt of amounts by the Company when
floating rates exceed fixed rates and the payment of amounts by the Company to the counter parties
when fixed rates exceed the floating rates in the agreements over their term. The Company accrues
the differential as interest rates change, and recognizes it as an adjustment to the floating rate
interest expense related to the debt. The counter-parties to these contracts are high credit
quality commercial banks, which the Company believes minimizes the risk of counter party default,
to a large extent. At March 31, 2005, the Company had swap agreements with total notional principal amounts of $40.0
million, which effectively fixed the interest rate on obligations in the notional amount of $18.0
million of debt under the $60.0 million revolving credit facility. The swap agreements lock in a
LIBOR rate ranging from 6.88% to 6.97% and mature in August 2005. Falling interest rates and/or a
flattening of the yield curve will negatively impact the market value of the interest rate swaps.
Changes in the valuation of such swap agreements are recorded directly to earnings. The face value
of interest rate swap agreements was a liability of approximately $0.5 million at March 31, 2005.
A 1% adverse change in the interest rates on variable rate obligations would affect pre-tax
earnings by approximately $0.4 million. The Company does not enter into derivative financial instruments for trading or speculative
purposes. Currently, and since June 2, 2003, the Company is over-hedged because of the
refinancing. The existing interest rate swaps hedged a portion of the previous LIBOR debt. As a
result of the refinancing, the only LIBOR debt the Company has is the $60.0 million revolver credit
facility, of which $18.0 million was outstanding at March 31, 2005. The Company will reduce its
interest rate swap position as they mature through August 2005 because of the current cost to
terminate those agreements. 
 ITEM 4. CONTROLS AND PROCEDURES  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 Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15. Based
upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that, as of March 31, 2005, the Companys disclosure controls and procedures were
effective to ensure that information required to be disclosed in Company 38




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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.Subsequent to the period covered by this report, the Companys management and Audit Committee of
the Board of Directors determined the need to correct the Companys accounting for leases in
order to conform with generally accepted accounting principles, as discussed in further detail
in Note 2 to the consolidated financial statements included in this report. The Company also
determined to give effect to its previously announced change in recognizing rental business
revenues in periods prior to September 30, 2004. Accordingly, the Company intends to file an
amendment to its Annual Report on Form 10-K for the year ended September 30, 2004 and an
amendment to its Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 to
restate the financial results contained in the financial statements provided with those reports.
As a result of the discovery of the lease accounting issue, the Company re-evaluated the
effectiveness of the design and operation of its disclosure controls and procedures as of March
31, 2005, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of March 31, 2005.B.
    Changes in Internal Control Over Financial Reporting. There has not been any change in the
Companys internal control over financial reporting 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.As discussed above, subsequent to the period covered by this report, the Company conducted a
review of its accounting related to leases, corrected its method of accounting for leases and
changed its internal controls to specifically identify the procedures to follow to ensure that
its lease accounting complies with generally accepted accounting principles 39




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PART II OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Company is subject to litigation in the ordinary course of business. The Company believes
the ultimate outcome of any existing litigation would not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The 2005 Annual Meeting of Shareholders was held on March 9, 2005, at the Crowne Plaza Hotel,
Times Square, Manhattan, New York, New York. The matters voted on at the Annual Meeting were as
follows: The election of two (2) Class I directors to serve until the 2008 Annual Meeting of Shareholders.
The result of the vote was as follows: Name of Director
    
    Class
    
    
    Votes For
    
    
    Withheld AuthorityGerald A. Ryan
    
    
    I
    
    
    
    21,384,733
    
    
    
    657,013Robert B. Fagenson
    
    
    I
    
    
    
    21,441,412
    
    
    
    600,234
 William Lerner, Jacqueline E. Woods, William E. Morgenstern, Marc W. Joseffer and John W.
Higbee are the other directors of the Company whose terms of office continue after the Annual
Meeting. 
 ITEM 6. EXHIBITS See exhibit index. 40




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(1) 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. Rent-Way, Inc.(Registrant)May 10, 2005
    
    
    
    By: /s/ William A. McDonnellDate
    
    
    
    (Signature)William A. McDonnellVice President and Chief Financial OfficerMay 10, 2005
    
    
    
    By: /s/ John A. LombardiDate
    
    
    
    (Signature)John A. LombardiChief Accounting Officer and Controller
 41




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EXHIBIT INDEX 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 (incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the year ended September 30, 2000, filed July 2,
2001.)10.1*
    
    Consulting Agreement dated March 22, 2005 between the Company and William E. Morgenstern10.2*
    
    Non-competition Agreement dated March 22, 2005 between the Company and William E. Morgenstern10.3*
    
    Form of stock option agreement for
directors (immediately exercisable options)


10.4*
    
    Form of stock option agreement for
executive officers (immediately exercisable options)


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. 42