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UNITED STATES U. S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
 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 of Incorporation)
    
    (I.R.S. Employer Identification Number)
 
 
  TITLE OF CLASS
    
    NAME OF EXCHANGE ON WHICH REGISTEREDCOMMON STOCK, NO PAR VALUE
    
    NEW YORK STOCK EXCHANGE
  þ o
 o
 þ o
 o þ
 o þ
 o þ




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##### 



PAGEPART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    11Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    12Item 6.
    
    Selected Financial Data
    
    
    13Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8.
    
    Financial Statements and Supplementary Data
    
    
    29Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A.
    
    Controls and Procedures
    
    
    72Item 9B.
    
    Other Information
    
    
    72PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    73Item 11.
    
    Executive Compensation
    
    
    73Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    73Item 13.
    
    Certain Relationships and Related Transactions
    
    
    73Item 14.
    
    Principal Accountant Fees and Services
    
    
    73PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    74SIGNATURES
    
    
    
    
    75Exhibit 10.22Exhibit 10.23Exhibit 10.24Exhibit 10.25EX-10.28Exhibit 12.1Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1




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ITEM I. BUSINESS
   http://www.rentway.com
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Continue to increase revenues, profits and cash flow in core stores.
   Open stores and actively pursue acquisitions to leverage existing infrastructure.
  Enhance training and development programs.
  Emphasize our balanced marketing strategy and better capitalize on the RentWay brand.
  2




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Store Locations
   NUMBER OF
    
    
    
    NUMBER OF
    
    
    
    NUMBER OFLOCATION
    
    STORES
    
    LOCATION
    
    STORES
    
    LOCATION
    
    STORESFlorida
    
    
    72
    
    
    Indiana
    
    
    23
    
    
    Kansas
    
    
    10New York
    
    
    68
    
    
    Arkansas
    
    
    23
    
    
    New Hampshire
    
    
    9Texas
    
    
    60
    
    
    Michigan
    
    
    23
    
    
    Missouri
    
    
    8Pennsylvania
    
    
    56
    
    
    Georgia
    
    
    19
    
    
    Connecticut
    
    
    8South Carolina
    
    
    52
    
    
    Alabama
    
    
    19
    
    
    Maine
    
    
    7Ohio
    
    
    52
    
    
    Illinois
    
    
    17
    
    
    Oklahoma
    
    
    7North Carolina
    
    
    47
    
    
    Arizona
    
    
    16
    
    
    West Virginia
    
    
    7Kentucky
    
    
    34
    
    
    Massachusetts
    
    
    15
    
    
    Vermont
    
    
    6Virginia
    
    
    29
    
    
    Nebraska
    
    
    12
    
    
    New Mexico
    
    
    6Tennessee
    
    
    26
    
    
    Mississippi
    
    
    12
    
    
    Iowa
    
    
    6Louisiana
    
    
    24
    
    
    Maryland
    
    
    10
    
    
    Delaware
    
    
    4Rhode Island
    
    
    1
 Product Selection
  Rental-Purchase Agreements
 Product Turnover
 3




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Customer Service
 Collections
 Management
  Management Information System
 4




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Purchasing and Distribution
 Inventory Management
   Marketing and Advertising
 Competition
 Personnel
 Government Regulation
 5




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Service Marks
 Business of dPi Teleconnect LLC
    6




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The Companys significant indebtedness and dividend payment obligations limit cash flow
availability for operations.
  
    
    The Company must dedicate a substantial portion of its cash flow from operations to the
payment of principal and interest on debt and dividends on the Series A preferred stock, and, under
the indenture for the Companys $205 million of senior notes, must make an offer to purchase senior
notes on an annual basis from excess cash flow, reducing the funds available for operations;
    
    The Companys ability to obtain additional financing is limited;
    
    The Companys flexibility in planning for, or reacting to, changes in the markets in which the
Company competes is limited;
    
    The Company is at a competitive disadvantage relative to competitors with less indebtedness;
and
    
    The Company is rendered more vulnerable to general adverse economic and industry conditions.
 The Companys revolving credit facility imposes restrictions that limit operating and
financial flexibility.
  
    
    incur liens and debt;
    
    pay dividends;
    
    make redemptions and repurchases of capital stock;
    
    make loans, investments and capital expenditures;
    
    prepay, redeem or repurchase debt;
    
    engage in mergers, consolidations, asset dispositions,
sale-leaseback transactions and affiliate transactions; and
    
    change the business.
  7




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Restrictive covenants in the indenture for the Companys senior notes may also limit operating
and financial flexibility.
  
    
    incur additional debt;
    
    pay dividends or make other restricted payments;
    
    create or permit certain liens;
    
    sell assets;
    
    create or permit restrictions on the ability of restricted subsidiaries to pay dividends or make other
distributions to the Company or grant liens to secure debt under the indenture;
    
    enter into transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    consolidate or merge with or into other companies or sell all or substantially all of the Companys
assets.
  The Company may still be able to incur substantially more debt, which could
increase the risks described above.
 The Company depends, to a certain extent, on its subsidiaries for cash needed to service
obligations, and these subsidiaries may not be able to distribute cash to the Company.
 If the Company does not have sufficient capital, the Company may not be able to operate the
business successfully.
 
    
    to purchase new rental merchandise for
stores;
    
    to service its debt; and
    
    to open or acquire new stores.
  Since a substantial portion of the Companys assets consists of intangible assets, the value
of some of these intangible assets may not be realized.
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If the Company is unable to offer new products or services or to continue strategic
relationships with suppliers, the Company may be unable to attract new customers and to maintain
existing customers.
 
    
    The Company may have overestimated customers demand for these products;
    
    The Company may have mispriced these products given limited experience with them;
    
    The Company may have underestimated the costs required to support new product
offerings;
    
    The Company may have underestimated the difficulty in training store personnel to sell
and service these products;
    
    The Company may incur disruptions in relationships with suppliers of these new
products;
    
    The Company may experience a decrease in demand due to technological obsolescence of
some of new products; and
    
    The Company may face competition from current rental-purchase competitors and other
retailers who offer similar products to their customers.
 If the Company is unable to open new stores and operate them profitably, sales growth and
profits may be reduced.
  
    
    continued customer demand for the Companys products at levels that can support acceptable profit margins;
    
    the hiring, training and retaining of skilled personnel;
    
    the availability of adequate management and financial resources;
    
    the ability and willingness of suppliers to supply merchandise on a timely basis at competitive prices;
    
    the identification and acquisition of suitable sites and the negotiation of acceptable leases for such sites;
and
    
    non-compete provisions of Company agreements to sell stores under which the Company agrees not to open new
stores within specified radius of the store sold.
  The Company needs to continue to improve operations in order to improve its financial
condition, but operations will not improve if the Company cannot continue to effectively implement
its business strategy or if general economic conditions are unfavorable.
 The Company is dependent on its management team, and the loss of their services may result in
poor business performance including lower revenues and operating income.
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If the Company fails to comply with extensive laws and governmental regulations relating to
the rental-purchase industry or other operations, it could suffer penalties or be required to make
significant changes to its operations.
  The Company faces intense competition in the rental-purchase industry, which could reduce its
market share in existing markets and affect its entry into new markets
  10




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ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  YEAR ENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2005
    
    
    SEPTEMBER 30, 2004HIGH
    
    
    LOW
    
    
    HIGH
    
    
    LOWFirst Quarter
    
    $
    8.77
    
    
    $
    7.20
    
    
    $
    8.23
    
    
    $
    5.23Second Quarter
    
    
    8.71
    
    
    
    7.49
    
    
    
    9.08
    
    
    
    7.47Third Quarter
    
    
    9.95
    
    
    
    7.79
    
    
    
    10.05
    
    
    
    8.09Fourth Quarter
    
    
    9.99
    
    
    
    6.81
    
    
    
    9.00
    
    
    
    6.68
    Number of securities remainingNumber of securities to be
    
    
    Weighted-average
    
    
    available for future issuanceissued upon exercise of
    
    
    exercise price of
    
    
    under equity compensationoutstanding options,
    
    
    outstanding options,
    
    
    plans (excluding securitiesPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Rent Way, Inc. equity compensation plans approved by security holders
    
    
    2,968,494
    
    
    $
    7.74
    
    
    
    2,757,888Home Choice Holdings, Inc. equity compensation plans approved by security holders
    
    
    7,159
    
    
    $
    22.14
    
    
    
    Individual compensation arrangements
    
    
    40,000
    
    
    $
    11.67
    
    
    
    Total
    
    
    3,015,653
    
    
    $
    7.83
    
    
    
    2,757,888
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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  YEAR ENDED SEPTEMBER 30,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(as restated)
    
    
    (as restated)
    
    
    (as restated)
    
    
    (as restated)(unaudited)
    
    
    (unaudited)(Dollars in thousands, except per share data)STATEMENT OF OPERATIONS DATA:Total revenues
    
    $
    517,009
    
    
    $
    493,420
    
    
    $
    490,688
    
    
    $
    504,710
    
    
    $
    515,891Operating income (loss)
    
    
    (21,204
    )
    
    
    23,445
    
    
    
    36,903
    
    
    
    41,090
    
    
    
    40,728Income (loss) before cumulative effect of change in
accounting principle and discontinued operations
    
    
    (68,626
    )
    
    
    (34,757
    )
    
    
    (13,187
    )
    
    
    11,399
    
    
    
    10,807Cumulative effect of change in accounting principle(2)
    
    
    3⁄4
    
    
    
    (41,527
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Income (loss) from discontinued operations (1)
    
    
    5,742
    
    
    
    60
    
    
    
    (14,249
    )
    
    
    (2,253
    )
    
    
    (355
    )Net income (loss)
    
    
    (62,884
    )
    
    
    (76,224
    )
    
    
    (27,436
    )
    
    
    9,146
    
    
    
    10,452Preferred stock dividend and accretion of preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (513
    )
    
    
    (1,805
    )
    
    
    (2,185
    )Net income (loss) allocable to common shareholders
    
    
    (62,884
    )
    
    
    (76,224
    )
    
    
    (27,949
    )
    
    
    7,341
    
    
    
    8,267Adjusted net income (loss) (2)
    
    
    (50,193
    )
    
    
    (76,224
    )
    
    
    (27,949
    )
    
    
    7,341
    
    
    
    8,267Basic earnings (loss) per common share:Income (loss) before cumulative effect of change in
accounting principle and discontinued operations
    
    $
    (2.80
    )
    
    $
    (1.39
    )
    
    $
    (0.51
    )
    
    $
    0.44
    
    
    $
    0.41Net income (loss)
    
    $
    (2.57
    )
    
    $
    (3.05
    )
    
    $
    (1.06
    )
    
    $
    0.35
    
    
    $
    0.40Net income (loss) allocable to common shareholders
    
    $
    (2.57
    )
    
    $
    (3.05
    )
    
    $
    (1.08
    )
    
    $
    0.28
    
    
    $
    0.31Adjusted net income (loss) (2)
    
    $
    (2.05
    )
    
    $
    (3.05
    )
    
    $
    (1.08
    )
    
    $
    0.28
    
    
    $
    0.31Diluted earnings (loss) per common share:Income (loss) before cumulative effect of change in
accounting principle and discontinued operations
    
    $
    (2.80
    )
    
    $
    (1.39
    )
    
    $
    (0.51
    )
    
    $
    0.33
    
    
    $
    0.28Net income (loss)
    
    $
    (2.57
    )
    
    $
    (3.05
    )
    
    $
    (1.06
    )
    
    $
    0.25
    
    
    $
    0.27Net income (loss) allocable to common shareholders
    
    $
    (2.57
    )
    
    $
    (3.05
    )
    
    $
    (1.08
    )
    
    $
    0.25
    
    
    $
    0.27Adjusted net income (loss) (2)
    
    $
    (2.05
    )
    
    $
    (3.05
    )
    
    $
    (1.08
    )
    
    $
    0.25
    
    
    $
    0.27Weighted average shares outstanding (in thousands):Basic
    
    
    24,501
    
    
    
    25,021
    
    
    
    25,780
    
    
    
    26,177
    
    
    
    26,265Diluted
    
    
    24,501
    
    
    
    25,021
    
    
    
    25,780
    
    
    
    29,938
    
    
    
    30,049BALANCE SHEET DATA:Rental merchandise, net
    
    $
    157,802
    
    
    $
    148,366
    
    
    $
    172,892
    
    
    $
    173,929
    
    
    $
    194,178Total assets
    
    
    628,536
    
    
    
    511,836
    
    
    
    459,610
    
    
    
    431,128
    
    
    
    460,485Long-term obligations, including capital lease obligations
    
    
    333,057
    
    
    
    294,102
    
    
    
    226,895
    
    
    
    218,904
    
    
    
    240,722Convertible redeemable preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    15,991
    
    
    
    19,790
    
    
    
    17,929Shareholders equity
    
    
    198,107
    
    
    
    128,909
    
    
    
    101,040
    
    
    
    109,237
    
    
    
    118,234
 
 (1)
    
    On February 8, 2003, the company sold 295 stores. As a result of such sale, the Company
reclassified the consolidated financial statements to reflect the sale and to treat the
operating results of such stores as discontinued operations as required by SFAS 144.(2)
    
    The adjusted net income (loss) reflects previously reported net loss adjusted to exclude
goodwill amortization as if Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142) had been adopted in fiscal year 2001. 
 13




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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YEARS ENDED SEPTEMBER 30,STORES
    
    2003
    
    2004
    
    2005Open at Beginning of Period
    
    
    1,062
    
    
    
    753
    
    
    
    754Opened
    
    
    1
    
    
    
    2
    
    
    
    44Locations Acquired
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1Locations Sold
    
    
    (298
    )
    
    
    3⁄4
    
    
    
    (2
    )Closed or Combined
    
    
    (12
    )
    
    
    (1
    )
    
    
    (9
    )Open at End of Period
    
    
    753
    
    
    
    754
    
    
    
    788
    
    
    Continue to increase revenues, profits and cash flows in core stores.
    
    Open new stores to leverage existing infrastructure.
    
    Actively pursue acquisitions to leverage existing infrastructure.
    
    Enhance training and development programs.
    
    Emphasize a balanced marketing strategy to differentiate the brand and drive traffic.
    
    
    Increased its same store performance and controlled overhead costs.
    
    Continued the Companys new store growth program and opened 44 new stores.
    
    Initiated an intensive study of the industry and customers to further enhance and distinguish the Companys unique brand.
    
    Reported net income and improved overall profitability.
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
    
    increased its same store performance, improved collections and controlled overhead costs.
    
    featured employees and highlighted the brand identity in its advertising campaigns.
    
    conducted customer surveys that provided insight into consumer perceptions of brand and
performance relative to competitors.
    
    initiated a new store growth program to selectively open new stores in existing markets
to leverage its existing management, corporate infrastructure and advertising budgets.
There were two new stores opened by September 30, 2004.
    
    reported net income and improved overall profitability.
        16




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Analysis of Consolidated Statements of Operations
 For the Years Ended September 30,
    
    
    Percent Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03(as restated)
    
    
    (as restated)REVENUES:Rental revenue
    
    $
    433,189
    
    
    $
    417,290
    
    
    $
    396,837
    
    
    
    4
    
    
    
    5Prepaid phone service revenue
    
    
    17,389
    
    
    
    24,967
    
    
    
    35,319
    
    
    
    (30
    )
    
    
    (29
    )Other revenues
    
    
    65,313
    
    
    
    62,453
    
    
    
    58,532
    
    
    
    5
    
    
    
    7Total revenues
    
    
    515,891
    
    
    
    504,710
    
    
    
    490,688
    
    
    
    2
    
    
    
    3COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    133,537
    
    
    
    132,922
    
    
    
    122,136
    
    
    
    3⁄4
    
    
    
    9Property and equipment
    
    
    15,771
    
    
    
    16,330
    
    
    
    19,430
    
    
    
    (3
    )
    
    
    (16
    )Amortization of intangibles
    
    
    223
    
    
    
    391
    
    
    
    1,360
    
    
    
    (43
    )
    
    
    (71
    )Cost of prepaid phone service
    
    
    10,773
    
    
    
    16,398
    
    
    
    21,871
    
    
    
    (34
    )
    
    
    (25
    )Salaries and wages
    
    
    138,836
    
    
    
    134,227
    
    
    
    130,622
    
    
    
    3
    
    
    
    3Advertising, net
    
    
    21,291
    
    
    
    20,136
    
    
    
    22,251
    
    
    
    6
    
    
    
    (10
    )Occupancy
    
    
    37,612
    
    
    
    33,997
    
    
    
    32,365
    
    
    
    11
    
    
    
    5Restructuring costs
    
    
    3⁄4
    
    
    
    48
    
    
    
    3,046
    
    
    
    (100
    )
    
    
    (98
    )Other operating expenses
    
    
    117,120
    
    
    
    109,171
    
    
    
    100,704
    
    
    
    7
    
    
    
    8Total costs and operating
expenses
    
    
    475,163
    
    
    
    463,620
    
    
    
    453,785
    
    
    
    2
    
    
    
    2Operating income
    
    
    40,728
    
    
    
    41,090
    
    
    
    36,903
    
    
    
    (1
    )
    
    
    11OTHER INCOME (EXPENSE):Settlement of class action lawsuit
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (14,000
    )
    
    
    3⁄4
    
    
    
    (100
    )Interest expense
    
    
    (28,670
    )
    
    
    (30,322
    )
    
    
    (33,110
    )
    
    
    (5
    )
    
    
    (8
    )Interest income
    
    
    111
    
    
    
    797
    
    
    
    93
    
    
    
    (86
    )
    
    
    757Amortization and write-off of
deferred financing costs
    
    
    (1,158
    )
    
    
    (1,025
    )
    
    
    (3,061
    )
    
    
    13
    
    
    
    (67
    )Other income (expense), net
    
    
    5,156
    
    
    
    6,439
    
    
    
    4,028
    
    
    
    (20
    )
    
    
    60Income (loss) before income taxes
and discontinued operations
    
    
    16,167
    
    
    
    16,979
    
    
    
    (9,147
    )
    
    
    (5
    )
    
    
    (286
    )Income tax expense
    
    
    5,360
    
    
    
    5,580
    
    
    
    4,040
    
    
    
    (4
    )
    
    
    38Income (loss) before discontinued
operations
    
    
    10,807
    
    
    
    11,399
    
    
    
    (13,187
    )
    
    
    (5
    )
    
    
    (186
    )Loss from discontinued operations
    
    
    (355
    )
    
    
    (2,253
    )
    
    
    (14,249
    )
    
    
    (84
    )
    
    
    (84
    )Net income (loss)
    
    
    10,452
    
    
    
    9,146
    
    
    
    (27,436
    )
    
    
    14
    
    
    
    133Amortization of deemed dividend
and accretion of preferred stock
    
    
    (2,185
    )
    
    
    (1,805
    )
    
    
    (513
    )
    
    
    21
    
    
    
    252Net income (loss) allocable to
common shareholders
    
    $
    8,267
    
    
    $
    7,341
    
    
    $
    (27,949
    )
    
    
    13
    
    
    
    126
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##### Table of Contents




    
    Same store revenue is a measure that indicates whether the Companys existing stores
continue to grow. Same store revenues consists of revenues from stores in the household
rental segment that have been operating for more than fifteen months and have had no
changes affecting operations during that time, i.e. mergers, dispositions or acquisitions.
Stores that experienced mergers, dispositions or acquisitions during that period are not
included in the calculation of same store revenues. Same store revenues increased 2.13%
for fiscal 2005 versus 5.16% in fiscal 2004. The decline in the percentage increase year
over
year is attributable to a decrease of 35,000 rental agreements year over year in the
Companys core stores offset by offering higher-end revenue-generating merchandise to
customers and increasing rental rates on certain products.
    
    Gross weekly rental revenue (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 $8.7 million based on active agreements at September 30,
2005, versus $8.5 million for active agreements at September 30, 2004. This is
attributable to the opening of 44 new stores, offering higher revenue-generating products,
and increasing rental rates on certain products.
    
    Performance percentage is a metric that measures store and Company overall operating
performance. The Company defines performance percentage as total rental revenue collected
as a percentage of total GWRR or, potential revenue. Performance percentage was 89.1% for
fiscal 2005 and 89.6% for fiscal 2004. Senior management, as well as store managers, use
the Companys computerized management information system to monitor cash collection on a
daily basis. Daily cash collections expectations are 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 game
systems, which are depreciated on the straight-line method. Under the units of activity
method, rental merchandise is depreciated as revenue is collected. 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 26.8% for fiscal 2005 versus 27.7% in fiscal 2004. The
improvement in rental merchandise depreciation is attributable to purchasing efficiencies
and improvement in managing previously rented merchandise.
    
    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 8.3% of total revenue for fiscal 2005 versus
9.0% of total revenues for fiscal 2004. This decrease is attributable to the costs
associated with the opening of 46 new stores and $2.0 million in losses incurred as a
result of hurricanes Katrina and Rita.
    19




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.
  20




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.
  1)
    
    A $2.1 million increase in service repair costs is due to an increase in
merchandise on rent and a Company-wide initiative to better care for used
merchandise, which increased the store-level repair volume. Also, the Company
implemented a third party service program for which the associated revenue was
recorded in other revenue on the consolidated statement of operations.2)
    
    A $3.0 million increase in liability insurance costs because the fiscal
2004 retroactive refunds were $3.0 million less compared to fiscal 2003.3)
    
    State and local taxes for fiscal 2004 were $1.2 million higher than
fiscal 2003 because there was a reversal of a $1.6 million accrual in 2003 and no
such reversal occurred in fiscal 2004.4)
    
    Beginning in the three-month period ended September 30, 2004, the Company
began recording rental merchandise losses on the allowance method. This change to
the allowance method had the effect of increasing other operating
 21




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expenses for a
one-time adjustment of approximately $1.1 million to set up a rental merchandise
allowance reserve on the balance sheet. The Company expects rental merchandise
write-offs in the future under this new method to be materially consistent with
prior years adjustments under the direct write-off method.
 .
     .
   22




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Cash flows from operating activities
 For the Years Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)Net cash provided by (used in) operating activities
    
    $
    8,879
    
    
    $
    28,077
    
    
    $
    (26,402
    )
  
    
    Increase in rental merchandise year over year of $19.6 million as a result of new store openings.
    
    Cash received from income tax refunds of $4.2 million in fiscal year 2004.
  
    
    Funding of the settlement of the class action lawsuit, which used $10.0 million in cash
in fiscal 2003, and $2.0 million in fiscal 2004.
    
    Decreases in rental merchandise purchases year over year of $36.3 million as a result of the sale of stores in 2003.
    
    Reduction in cash used in discontinued operations of $6.1 million year over year.
 Cash flows from investing activities
 For the Years Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)Purchase of businesses, net of cash acquired
    
    $
    (1,119
    )
    
    $
    (275
    )
    
    $
    (259
    )Purchases of property and equipment
    
    
    (13,505
    )
    
    
    (9,308
    )
    
    
    (8,155
    )Purchase at music rights license
    
    
    (400
    )
    
    
    3⁄4
    
    
    
    3⁄4Proceeds from sale of stores and other assets
    
    
    188
    
    
    
    3⁄4
    
    
    
    95,589Net cash provided by (used in) investing activities
    
    $
    (14,836
    )
    
    $
    (9,583
    )
    
    $
    87,175
  Financing Activities
 For the Years Ended September 30,2005
    
    
    2004
    
    
    2003Proceeds from borrowings
    
    $
    111,000
    
    
    $
    96,000
    
    
    $
    667,423Payments on borrowings
    
    
    (92,028
    )
    
    
    (109,014
    )
    
    
    (730,143
    )Payments on class action lawsuit note payable
    
    
    (2,000
    )
    
    
    (2,000
    )
    
    
    3⁄4
 23




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For the Years Ended September 30,2005
    
    
    2004
    
    
    2003Payments on capital leases
    
    
    (7,031
    )
    
    
    (8,070
    )
    
    
    (8,282
    )Proceeds from convertible preferred stock
    
    
    3⁄4
    
    
    
    5,000
    
    
    
    14,119Deferred financing costs
    
    
    3⁄4
    
    
    
    (35
    )
    
    
    (8,579
    )Issuance of common stock
    
    
    638
    
    
    
    1,019
    
    
    
    514Dividends paid
    
    
    (1,595
    )
    
    
    (1,285
    )
    
    
    (99
    )Interest on shareholder loans
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3
    )Payment of loans by directors/shareholders
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    285Net cash
provided by (used in) financing activities
    
    $
    8,984
    
    
    $
    (18,385
    )
    
    $
    (64,765
    )
       Shall Not ExceedCredit Agreement as
    
    Amended Creditof
    
    Agreement as ofSeptember 30,
    
    November 18,From and Including
    
    To and Including
    
    2005
    
    2005July 1, 2005
    
    December 31, 2005
    
    4.75 to 1.00January 1, 2006
    
    March 31, 2006
    
    4.50 to 1.00April 1, 2006
    
    June 30, 2006
    
    4.25 to 1.00July 1, 2006
    
    Credit Agreement
    
    3.75 to 1.00Termination DateDecember 31, 2005
    
    3⁄4
    
    3⁄4
    
    5.25 to 1.0January 1, 2006
    
    June 30, 2006
    
    3⁄4
    
    5.75 to 1.0July 1, 2006
    
    December 31, 2006
    
    3⁄4
    
    5.00 to 1.0January 1, 2007
    
    June 30, 2007
    
    3⁄4
    
    4.50 to 1.0July 1, 2007
    
    Thereafter
    
    3⁄4
    
    4.25 to 1.0
 24




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Minimum EBITDAAmended CreditCredit Agreement as of
    
    Agreement as ofSeptember 30, 2005
    
    November 18, 2005September 2005  August 2006
    
    $55.0 millionSeptember 2006  Each Month Thereafter
    
    $60.0 millionOctober 1, 2005  March 31, 2006
    
    3⁄4
    
    $45.0 millionApril 1, 2006  May 31, 2006
    
    3⁄4
    
    $40.0 millionJune 1, 2006  August 31, 2006
    
    3⁄4
    
    $42.0 millionSeptember 1, 2006  November 30, 2006
    
    3⁄4
    
    $45.0 millionDecember 1, 2006  February 28, 2007
    
    3⁄4
    
    $50.0 millionMarch 1, 2007  May 31, 2007
    
    3⁄4
    
    $52.5 millionJune 1, 2007  Thereafter
    
    3⁄4
    
    $55.0 million
 Off Balance Sheet Arrangements
 Contractual Obligations
 Due in less
    
    
    Due in
    
    
    Due in
    
    
    Due afterContractual Cash Obligations
    
    Total
    
    
    than one year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsDebt
    
    $
    205,000
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    205,000Revolving
Credit Facility(1)
    
    
    19,000
    
    
    
    19,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Capital lease obligations
    
    
    19,409
    
    
    
    6,309
    
    
    
    12,364
    
    
    
    736
    
    
    
    3⁄4Music rights obligation
    
    
    1,700
    
    
    
    400
    
    
    
    1,300
    
    
    
    3⁄4
    
    
    
    3⁄4Operating leases
    
    
    94,559
    
    
    
    28,111
    
    
    
    56,269
    
    
    
    9,450
    
    
    
    729Notes payable
    
    
    29
    
    
    
    24
    
    
    
    5
    
    
    
    3⁄4
    
    
    
    3⁄4Total cash obligations
    
    $
    339,697
    
    
    $
    53,844
    
    
    $
    69,938
    
    
    $
    10,186
    
    
    $
    205,729
   Total Amounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    OverOther Commercial Commitments
    
    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
    
    
    2,950
    
    
    
    2,950
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Guarantees
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Total commercial commitments
    
    $
    2,950
    
    
    $
    2,950
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
  25




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Seasonality and Inflation
 Recent Accounting Pronouncements
     26




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  27




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PAGEIndex to Financial StatementsReports of Independent Registered Public Accounting Firms
    
    
    29Financial Statements:Consolidated Balance Sheets, Years Ended September 30, 2005 and 2004
    
    
    34Consolidated Statements of Operations, Years Ended September 30, 2005, 2004, 2003
    
    
    35Consolidated Statements of Shareholders Equity, Years Ended September 30, 2005, 2004, 2003
    
    
    36Consolidated Statements of Cash Flows, Years Ended September 30, 2005, 2004, 2003
    
    
    37Notes to Consolidated Financial Statements
    
    
    38
 28




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29




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30




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/s/William S. Short
    
    /s/William A. McDonnellChief Executive Officer
    
    Chief Financial Officer
 31




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.
   
 32




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September 30,2005
    
    
    2004(as restated)ASSETSCash and cash equivalents
    
    $
    6,439
    
    
    $
    3,412Prepaid expenses
    
    
    7,962
    
    
    
    8,496Rental merchandise, net (Note 7)
    
    
    194,178
    
    
    
    173,929Rental merchandise credits due from vendors (Note 8)
    
    
    400
    
    
    
    3,242Deferred income taxes, net of valuation allowance of
$79,162 and $76,841, respectively (Note 16)
    
    
    3⁄4
    
    
    
    3⁄4Property and equipment, net (Note 7)
    
    
    47,720
    
    
    
    39,542Goodwill (Note 6)
    
    
    189,287
    
    
    
    188,849Deferred financing costs, net of accumulated amortization of $2,504 and $1,346, respectively
    
    
    6,262
    
    
    
    7,420Intangible assets, net of accumulated amortization of $2,686 and $3,682 respectively (Note 6)
    
    
    2,101
    
    
    
    112Other assets (Note 9)
    
    
    6,136
    
    
    
    6,126Total assets
    
    $
    460,485
    
    
    $
    431,128LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    23,744
    
    
    $
    26,187Other liabilities (Note 10)
    
    
    63,409
    
    
    
    61,484Deferred tax liability (Note 16)
    
    
    15,856
    
    
    
    10,496Debt (Note 11)
    
    
    221,313
    
    
    
    203,934Total liabilities
    
    
    324,322
    
    
    
    302,101Contingencies (Note 15)
    
    
    3⁄4
    
    
    
    3⁄4Convertible redeemable preferred stock (Note 12)
    
    
    17,929
    
    
    
    19,790Shareholders equity:Preferred stock, without par value; 1,000,000 shares authorized; 2,000 shares were issued
and outstanding as Series A convertible preferred shares at September 30, 2005 and 2004,
respectively
    
    
    3⁄4
    
    
    
    3⁄4Common stock, without par value; 50,000,000 shares authorized; 26,381,376 and
26,243,676 shares issued and outstanding, respectively
    
    
    305,033
    
    
    
    304,395Accumulated other comprehensive loss
    
    
    3⁄4
    
    
    
    (93
    )Accumulated deficit
    
    
    (186,799
    )
    
    
    (195,065
    )Total shareholders equity
    
    
    118,234
    
    
    
    109,237Total liabilities and shareholders equity
    
    $
    460,485
    
    
    $
    431,128
 The accompanying notes are an integral part of these financial statements
 33




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##### Table of Contents



For the Years Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)REVENUES:Rental revenue
    
    $
    433,189
    
    
    $
    417,290
    
    
    $
    396,837Prepaid phone service revenue
    
    
    17,389
    
    
    
    24,967
    
    
    
    35,319Other revenues
    
    
    65,313
    
    
    
    62,453
    
    
    
    58,532Total revenues
    
    
    515,891
    
    
    
    504,710
    
    
    
    490,688COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    133,537
    
    
    
    132,922
    
    
    
    122,136Property and equipment
    
    
    15,771
    
    
    
    16,330
    
    
    
    19,430Amortization of intangibles
    
    
    223
    
    
    
    391
    
    
    
    1,360Cost of prepaid phone service
    
    
    10,773
    
    
    
    16,398
    
    
    
    21,871Salaries and wages
    
    
    138,836
    
    
    
    134,227
    
    
    
    130,622Advertising, net
    
    
    21,291
    
    
    
    20,136
    
    
    
    22,251Occupancy
    
    
    37,612
    
    
    
    33,997
    
    
    
    32,365Restructuring costs
    
    
    3⁄4
    
    
    
    48
    
    
    
    3,046Other operating expenses
    
    
    117,120
    
    
    
    109,171
    
    
    
    100,704Total costs and operating expenses
    
    
    475,163
    
    
    
    463,620
    
    
    
    453,785Operating income
    
    
    40,728
    
    
    
    41,090
    
    
    
    36,903OTHER INCOME (EXPENSE):Settlement of class action lawsuit
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (14,000
    )Interest expense
    
    
    (28,670
    )
    
    
    (30,322
    )
    
    
    (33,110
    )Interest income
    
    
    111
    
    
    
    797
    
    
    
    93Amortization and write-off of deferred financing
costs
    
    
    (1,158
    )
    
    
    (1,025
    )
    
    
    (3,061
    )Other income, net
    
    
    5,156
    
    
    
    6,439
    
    
    
    4,028Income (loss) before income taxes and
discontinued operations
    
    
    16,167
    
    
    
    16,979
    
    
    
    (9,147
    )Income tax expense
    
    
    5,360
    
    
    
    5,580
    
    
    
    4,040Income (loss) before discontinued operations
    
    
    10,807
    
    
    
    11,399
    
    
    
    (13,187
    )Loss from discontinued operations
    
    
    (355
    )
    
    
    (2,253
    )
    
    
    (14,249
    )Net income (loss)
    
    
    10,452
    
    
    
    9,146
    
    
    
    (27,436
    )Preferred stock dividend and accretion of
preferred stock
    
    
    (2,185
    )
    
    
    (1,805
    )
    
    
    (513
    )Net income (loss) allocable to common shareholders
    
    $
    8,267
    
    
    $
    7,341
    
    
    $
    (27,949
    )EARNINGS (LOSS) PER COMMON SHARE:Basic earnings (loss) per common share:Income (loss) before discontinued operations
    
    $
    0.41
    
    
    $
    0.44
    
    
    $
    (0.51
    )Net income (loss) allocable to common
shareholders
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    (1.08
    )Diluted earnings (loss) per common share:Income (loss) before discontinued operations
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    (0.51
    )Net income (loss) allocable to common
shareholders
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    (1.08
    )Weighted average number of shares outstanding:Basic
    
    
    26,265
    
    
    
    26,177
    
    
    
    25,780Diluted
    
    
    30,049
    
    
    
    29,938
    
    
    
    25,780
 The accompanying notes are an integral part of these financial statements
 34




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AccumulatedCommon Stock Warrants
    
    
    Option to Purchase
    
    
    
    
    
    
    Other
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Number of
    
    
    
    
    
    
    Convertible
    
    
    Loans to
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Warrants
    
    
    Amount
    
    
    Preferred Stock
    
    
    Shareholders
    
    
    Income (Loss)
    
    
    Income (Loss)
    
    
    Deficit
    
    
    EquityBalance at September 30, 2002 (as previously reported)
    
    
    25,686
    
    
    $
    302,218
    
    
    
    100
    
    
    $
    644
    
    
    
    3⁄4
    
    
    $
    (282
    )
    
    $
    787
    
    
    $
    3⁄4
    
    
    $
    (166,770
    )
    
    
    136,597Cumulative effect of restatements on prior years (Note 2)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (7,687
    )
    
    
    (7,687
    )Balance at September 30, 2002 (as restated)
    
    
    25,686
    
    
    
    302,218
    
    
    
    100
    
    
    
    644
    
    
    
    3⁄4
    
    
    
    (282
    )
    
    
    787
    
    
    
    3⁄4
    
    
    
    (174,457
    )
    
    
    128,910Net loss
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (27,436
    )
    
    
    (27,436
    )
    
    
    (27,436
    )Amortization of transitional asset
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (856
    )
    
    
    (856
    )
    
    
    3⁄4
    
    
    
    (856
    )Issuance of common stock under stock option plans (Note 18)
    
    
    3
    
    
    
    14
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    14Issuance of common stock to Calm Waters Partnership (Note 19)
    
    
    333
    
    
    
    500
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    500Option to purchase convertible preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    142
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    142Revaluation of stock warrants (Note 19)
    
    
    3⁄4
    
    
    
    488
    
    
    
    3⁄4
    
    
    
    (488
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    0Payment of loans by directors
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    285
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    285Interest on loans to directors
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3
    )Preferred stock dividend
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (399
    )
    
    
    (399
    )Accretion of preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (114
    )
    
    
    (114
    )Total comprehensive income (loss)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (28,292
    )
    
    
    3⁄4
    
    
    
    3⁄4Balance at September 30, 2003 (as restated)
    
    
    26,022
    
    
    
    303,220
    
    
    
    100
    
    
    
    156
    
    
    
    142
    
    
    
    3⁄4
    
    
    
    (69
    )
    
    
    3⁄4
    
    
    
    (202,406
    )
    
    
    101,043Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9,146
    
    
    
    9,146
    
    
    
    9,146Amortization of transitional asset
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (24
    )
    
    
    (24
    )
    
    
    3⁄4
    
    
    
    (24
    )Issuance of common stock under stock option plans (Note 18)
    
    
    122
    
    
    
    529
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    529Issuance of common stock to Calm Waters Partnership (Note 19)
    
    
    100
    
    
    
    490
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    490Issuance of convertible preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (142
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (142
    )Exercise of Calm Waters Warrants
    
    
    3⁄4
    
    
    
    156
    
    
    
    (100
    )
    
    
    (156
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Preferred stock dividend
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,382
    )
    
    
    (1,382
    )Accretion of preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (423
    )
    
    
    (423
    )Total comprehensive income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    9,122
    
    
    
    3⁄4
    
    
    
    3⁄4Balance at September 30, 2004 (as restated)
    
    
    26,244
    
    
    
    304,395
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (93
    )
    
    
    3⁄4
    
    
    
    (195,065
    )
    
    $
    109,237Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10,452
    
    
    
    10,452
    
    
    
    10,452Amortization of transitional asset
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    93
    
    
    
    93
    
    
    
    3⁄4
    
    
    
    93Issuance of common stock under stock option plans (Note 18)
    
    
    137
    
    
    
    638
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    638Preferred stock dividend
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,602
    )
    
    
    (1,602
    )Accretion of preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (584
    )
    
    
    (584
    )Total comprehensive income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10,545
    
    
    
    3⁄4
    
    
    
    3⁄4Balance at September 30, 2005
    
    
    26,381
    
    
    $
    305,033
    
    
    
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    (186,799
    )
    
    $
    118,234
 The accompanying notes are an integral part of these financial statements.
 35




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##### Table of Contents



For the Years Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)OPERATING ACTIVITIES:Net income (loss)
    
    $
    10,452
    
    
    $
    9,146
    
    
    $
    (27,436
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Loss from discontinued operations
    
    
    355
    
    
    
    2,253
    
    
    
    14,249Depreciation and amortization
    
    
    151,189
    
    
    
    150,999
    
    
    
    142,695Deferred income taxes
    
    
    5,360
    
    
    
    5,580
    
    
    
    4,040Write-off of deferred financing costs
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,143Market adjustment for interest rate swap derivative
    
    
    (1,572
    )
    
    
    (3,564
    )
    
    
    (4,576
    )Market adjustment for preferred stock conversion option
derivative
    
    
    (2,444
    )
    
    
    (1,766
    )
    
    
    1,899Write-off of property and equipment
    
    
    282
    
    
    
    452
    
    
    
    3,665Write-off of rental merchandise credits
    
    
    2,227
    
    
    
    3⁄4
    
    
    
    3⁄4Gain on sale of assets
    
    
    (79
    )
    
    
    3⁄4
    
    
    
    (631
    )Changes in assets and liabilities:Decrease (increase) in restricted cash
    
    
    3⁄4
    
    
    
    10,000
    
    
    
    (10,000
    )Prepaid expenses
    
    
    539
    
    
    
    (350
    )
    
    
    2,217Rental merchandise
    
    
    (153,563
    )
    
    
    (133,959
    )
    
    
    (146,758
    )Rental merchandise deposits and credits due from vendors
    
    
    615
    
    
    
    913
    
    
    
    (3,161
    )Income tax receivable
    
    
    10
    
    
    
    4,235
    
    
    
    (54
    )Other assets
    
    
    (81
    )
    
    
    4,998
    
    
    
    (11,646
    )Accounts payable
    
    
    (2,443
    )
    
    
    (4,059
    )
    
    
    12,603Other liabilities
    
    
    (1,613
    )
    
    
    (15,575
    )
    
    
    2,667Net cash provided by (used in) continuing operations
    
    
    9,234
    
    
    
    29,303
    
    
    
    (19,084
    )Net cash (used in) provided by discontinued
operations
    
    
    (355
    )
    
    
    (1,226
    )
    
    
    (7,318
    )Net cash (used in) provided by operating activities
    
    
    8,879
    
    
    
    28,077
    
    
    
    (26,402
    )INVESTING ACTIVITIES:Investments in subsidiaries and other businesses, net of
cash acquired
    
    
    (1,119
    )
    
    
    (275
    )
    
    
    (259
    )Purchases of property and equipment
    
    
    (13,505
    )
    
    
    (9,308
    )
    
    
    (8,155
    )Purchase of music rights license
    
    
    (400
    )
    
    
    3⁄4
    
    
    
    3⁄4Proceeds from sale of stores and other assets
    
    
    188
    
    
    
    3⁄4
    
    
    
    95,589Net cash provided by (used in) investing activities
    
    
    (14,836
    )
    
    
    (9,583
    )
    
    
    87,175FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    111,000
    
    
    
    96,000
    
    
    
    667,423Payments on borrowings
    
    
    (92,028
    )
    
    
    (109,014
    )
    
    
    (730,143
    )Payments on class action lawsuit note payable
    
    
    (2,000
    )
    
    
    (2,000
    )
    
    
    3⁄4Payments on capital leases
    
    
    (7,031
    )
    
    
    (8,070
    )
    
    
    (8,282
    )Proceeds from convertible preferred stock
    
    
    3⁄4
    
    
    
    5,000
    
    
    
    14,119Deferred financing costs
    
    
    3⁄4
    
    
    
    (35
    )
    
    
    (8,579
    )Issuance of common stock
    
    
    638
    
    
    
    1,019
    
    
    
    514Dividends paid
    
    
    (1,595
    )
    
    
    (1,285
    )
    
    
    (99
    )Interest on shareholder loans
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3
    )Payment of loans by directors/shareholders
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    285Net cash provided by (used in) financing activities
    
    
    8,984
    
    
    
    (18,385
    )
    
    
    (64,765
    )Increase (decrease) in cash and cash equivalents
    
    
    3,027
    
    
    
    109
    
    
    
    (3,992
    )Cash and cash equivalents at beginning of year
    
    
    3,412
    
    
    
    3,303
    
    
    
    7,295Cash and cash equivalents at end of year
    
    $
    6,439
    
    
    $
    3,412
    
    
    $
    3,303
 The accompanying notes are an integral part of these financial statements.
 36




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##### Table of Contents



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(all dollars in thousands, except share and per share data)
            37




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##### Table of Contents



Year Ended September 30,2005
    
    2004
    
    2003CASH PAID (RECEIVED) DURING THE YEAR FOR:Interest
    
    $
    28,874
    
    
    $
    31,298
    
    
    $
    41,378Income taxes (refunds)
    
    
    (10
    )
    
    
    (4,228
    )
    
    
    (876
    )NONCASH INVESTING ACTIVITIES:Assets acquired under capital lease (Note 15)
    
    
    10,727
    
    
    
    14,970
    
    
    
    12,303Assets acquired from exchange
    
    
    180
    
    
    
    3⁄4
    
    
    
    3⁄4Purchase of music rights license
    
    
    1,482
    
    
    
    3⁄4
    
    
    
    3⁄4
       38




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##### Table of Contents



39




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##### Table of Contents



Carrying
    
    
    FairValue
    
    
    ValueConvert Option of Preferred stock
    
    $
    (10,886
    )
    
    $
    (10,886
    )Bonds payable
    
    $
    (202,284
    )
    
    $
    (225,000
    )
  Carrying
    
    
    FairValue
    
    
    ValueInterest Rate Swaps
    
    $
    (1,572
    )
    
    $
    (1,572
    )Convert Option of Preferred stock
    
    $
    (13,330
    )
    
    $
    (13,330
    )Bonds payable
    
    $
    (201,877
    )
    
    $
    (223,000
    )
      40




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##### Table of Contents



For The Year Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)Net income (loss) before discontinued operations:As reported
    
    $
    10,807
    
    
    $
    11,399
    
    
    $
    (13,187
    )Pro-forma
    
    $
    5,823
    
    
    $
    11,266
    
    
    $
    (17,429
    )Net income (loss) allocable to common stakeholders:As reported
    
    $
    8,267
    
    
    $
    7,341
    
    
    $
    (27,949
    )Pro-forma
    
    $
    3,283
    
    
    $
    7,208
    
    
    $
    (32,191
    )Diluted earnings (loss) per common share:Net income (loss) before discontinued operations:As reported
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    (0.51
    )Pro-forma
    
    $
    0.12
    
    
    $
    0.32
    
    
    $
    (0.68
    )Net income (loss) allocable to common stakeholdersAs reported
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    (1.08
    )Pro-forma
    
    $
    0.11
    
    
    $
    0.24
    
    
    $
    (1.25
    )
      Consolidated Balance Sheet  Fiscal Year Ended September 30, 2004
 Before
    
    RestatementRestatement
    
    Adjustments
    
    As RestatedRental merchandise, net
    
    $
    173,164
    
    
    $
    765
    
    
    $
    173,929Property and equipment, net
    
    
    42,063
    
    
    
    (2,521
    )
    
    
    39,542Other assets
    
    
    3,897
    
    
    
    2,229
    
    
    
    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
 41




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##### Table of Contents



Consolidated Statements of Operations  Fiscal Year Ended September 30, 2004
 BeforeRestatement
    
    Adjustments
    
    As RestatedRental revenue
    
    $
    416,563
    
    
    $
    727
    
    
    $
    417,290Other revenue
    
    
    62,247
    
    
    
    206
    
    
    
    62,453Total revenues
    
    
    503,777
    
    
    
    933
    
    
    
    504,710Property and equipment depreciation
    
    
    15,267
    
    
    
    1,063
    
    
    
    16,330Rental merchandise depreciation
    
    
    132,778
    
    
    
    144
    
    
    
    132,922Salaries and wages
    
    
    134,044
    
    
    
    183
    
    
    
    134,227Occupancy
    
    
    34,375
    
    
    
    (378
    )
    
    
    33,997Other operating expense
    
    
    109,148
    
    
    
    23
    
    
    
    109,171Operating income
    
    
    41,192
    
    
    
    (102
    )
    
    
    41,090Net income
    
    
    9,248
    
    
    
    (102
    )
    
    
    9,146Net income allocable to common shareholders
    
    
    7,443
    
    
    
    (102
    )
    
    
    7,341Basic net income allocable to common shareholders per common share
    
    $
    0.28
    
    
    $
    3⁄4
    
    
    $
    0.28Diluted net income allocable to common shareholders per common share
    
    $
    0.25
    
    
    $
    3⁄4
    
    
    $
    0.25
 Consolidated Statements of Operations  Fiscal Year Ended September 30, 2003
 BeforeRestatement
    
    Adjustments
    
    As RestatedRental revenue
    
    $
    397,420
    
    
    $
    (583
    )
    
    $
    396,837Other revenue
    
    
    58,571
    
    
    
    (39
    )
    
    
    58,532Total revenues
    
    
    491,310
    
    
    
    (622
    )
    
    
    490,688Rental merchandise depreciation
    
    
    122,287
    
    
    
    (151
    )
    
    
    122,136Salaries and wages
    
    
    130,700
    
    
    
    (78
    )
    
    
    130,622Property and equipment depreciation
    
    
    19,717
    
    
    
    (287
    )
    
    
    19,430Occupancy
    
    
    32,847
    
    
    
    (482
    )
    
    
    32,365Other operating expense
    
    
    100,738
    
    
    
    (34
    )
    
    
    100,704Operating income
    
    
    36,493
    
    
    
    410
    
    
    
    36,903Discontinued operations
    
    
    (15,780
    )
    
    
    1,531
    
    
    
    (14,249
    )Net income
    
    
    (29,377
    )
    
    
    1,941
    
    
    
    (27,436
    )Net loss allocable to common shareholders
    
    
    (29,890
    )
    
    
    1,941
    
    
    
    (27,949
    )Basic net income (loss) allocable to common shareholders per common share
    
    $
    (1.16
    )
    
    $
    0.08
    
    
    $
    (1.08
    )Diluted net income (loss) allocable to common shareholders per common share
    
    $
    (1.16
    )
    
    $
    0.08
    
    
    $
    (1.08
    )
 Consolidated Statements of Cash FlowsFiscal Year Ended September 30, 2004
 BeforeRestatement
    
    Adjustments
    
    As RestatedNet cash provided by operating activities
    
    $
    28,077
    
    
    $
    3⁄4
    
    
    $
    28,077Net cash used for investing activities
    
    $
    (9,583
    )
    
    $
    3⁄4
    
    
    $
    (9,583
    )
 42




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##### Table of Contents



Consolidated Statements of Cash Flows  Fiscal Year Ended September 30, 2003
 BeforeRestatement
    
    Adjustments
    
    As RestatedNet cash used in operating activities
    
    $
    (26,445
    )
    
    $
    43
    
    
    $
    (26,402
    )Net cash provided by investing activities
    
    $
    87,218
    
    
    
    (43
    )
    
    $
    87,175
      Year Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)Operating revenues
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    47,792Operating expenses from discontinued
operations (including exit costs) (1)
    
    
    (1,558
    )
    
    
    (4,952
    )
    
    
    (49,138
    )Rental merchandise fair value adjustment
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (4,744
    )Reserve for future minimum lease
payments on vacated stores, net of
present value discount (2)
    
    
    1,203
    
    
    
    2,699
    
    
    
    (4,500
    )Loss on sale of stores
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (623
    )Interest expense
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,036
    )Income tax benefit
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Net loss from discontinued operations
    
    $
    (355
    )
    
    $
    (2,253
    )
    
    $
    (14,249
    )
 43




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##### Table of Contents



(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 were terminated or expired, in accordance with SFAS 146.(2)
    
    The reserve for future lease payments on vacated stores relates to the 170 stores for
which Rent-A-Center, Inc. did not assume the leases. These costs are associated with the
exit activity related to the sale of the 295 stores to Rent-A-Center, Inc., and are
recorded in accordance with SFAS
146. In 2004, there was a reduction to the number of these leases that were originally
anticipated to be bought out or terminated which resulted in a change in estimate in 2004.   Fixed Asset
    
    
    LeaseWrite-Offs
    
    
    Termination Costs
    
    
    TotalBalance at September 30, 2002
    
    $
    
    
    
    $
    2,135
    
    
    $
    2,135Fiscal 2003 Provision
    
    
    2,299
    
    
    
    488
    
    
    
    2,787Amount utilized in fiscal 2003
    
    
    (2,299
    )
    
    
    (1,720
    )
    
    
    (4,019
    )Balance at September 30, 2003
    
    
    
    
    
    
    903
    
    
    
    903Fiscal 2004 Provision
    
    
    96
    
    
    
    (142
    )
    
    
    (46
    )Amount utilized in fiscal 2004
    
    
    (96
    )
    
    
    (552
    )
    
    
    (648
    )Balance at September 30, 2004
    
    
    
    
    
    
    209
    
    
    
    209Fiscal 2005 Provision
    
    
    49
    
    
    
    66
    
    
    
    115Amount utilized in fiscal 2005
    
    
    (49
    )
    
    
    (241
    )
    
    
    (290
    )Balance at September 30, 2005
    
    $
    
    
    
    $
    34
    
    
    $
    34
       44




---



##### Table of Contents



Purchase
    
    
    Cumulative
    
    
    Net CarryingBalance at September 30, 2005:
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Non-compete agreements
    
    $
    2,650
    
    
    $
    (2,623
    )
    
    $
    27Music rights license
    
    
    1,882
    
    
    
    (7
    )
    
    
    1,875Customer contracts
    
    
    162
    
    
    
    (35
    )
    
    
    127Customer list
    
    
    93
    
    
    
    (21
    )
    
    
    72$
    4,787
    
    
    $
    (2,686
    )
    
    $
    2,101
 Purchase
    
    
    Cumulative
    
    
    Net CarryingBalance at September 30, 2004:
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Non-compete agreements
    
    $
    2,630
    
    
    $
    (2,518
    )
    
    $
    112Customer contracts
    
    
    1,164
    
    
    
    (1,164
    )
    
    
    0$
    3,794
    
    
    $
    (3,682
    )
    
    $
    112
 45




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##### Table of Contents



Fiscal Year
    
    Amount2006
    
    $
    5422007
    
    
    4362008
    
    
    3762009
    
    
    3762010
    
    
    371$
    2,101
   Household
    
    
    Prepaid TelephoneRental Segment
    
    
    Service Segment
    
    
    TotalBalance at September 30,2003
    
    $
    181,905
    
    
    $
    6,594
    
    
    $
    188,499Additions (1)
    
    
    
    
    
    
    350
    
    
    
    350Disposal
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2004
    
    
    181,905
    
    
    
    6,944
    
    
    
    188,849Additions (2)
    
    
    438
    
    
    
    
    
    
    
    438Disposal
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2005
    
    $
    182,343
    
    
    $
    6,944
    
    
    $
    189,287
 
 (1)
    
    On April 7, 2004, the Company purchased 100 shares of DPI Holdings, Inc. from the
former chief operating officer.(2)
    
    The Company acquired rental merchandise and agreements of four stores in fiscal 2005.   Year Ended September 30,2005
    
    
    2004(as restated)Cost
    
    $
    317,912
    
    
    $
    305,153Less accumulated depreciation
    
    
    120,898
    
    
    
    129,863Less reserve for losses
    
    
    1,261
    
    
    
    1,100Less reserve for hurricane damages
    
    
    1,509
    
    
    
    Less deferred credits
    
    
    66
    
    
    
    261$
    194,178
    
    
    $
    173,929
  Year Ended September 30,2005
    
    
    2004On-rent merchandise
    
    $
    258,328
    
    
    $
    247,692Held for rent merchandise
    
    
    59,584
    
    
    
    57,461$
    317,912
    
    
    $
    305,153
  Year Ended September 30,2005
    
    
    2004
    
    
    2003Lost merchandise
    
    $
    534
    
    
    $
    526
    
    
    $
    964Stolen merchandise
    
    
    13,760
    
    
    
    10,993
    
    
    
    11,758Discarded merchandise
    
    
    2,394
    
    
    
    2,197
    
    
    
    2,486Losses from hurricane damages
    
    
    1,801
    
    
    
    
    
    
    
    Additional reserve for expected losses
    
    
    161
    
    
    
    1,100
    
    
    
    18,650
    
    
    
    14,816
    
    
    
    15,208Less losses included in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (2,384
    )Losses included in continuing operations
    
    $
    18,650
    
    
    $
    14,816
    
    
    $
    12,824
 46




---



##### Table of Contents



Year Ended September 30,2005
    
    
    2004(as restated)Transportation equipment
    
    $
    42,875
    
    
    $
    39,153Furniture and fixtures
    
    
    36,431
    
    
    
    33,079Leasehold improvements
    
    
    34,259
    
    
    
    29,420Signs
    
    
    5,122
    
    
    
    4,632Buildings
    
    
    5,674
    
    
    
    5,859Land
    
    
    1,920
    
    
    
    1,972126,281
    
    
    
    114,115Less accumulated depreciation and amortization
    
    
    (78,561
    )
    
    
    (74,573
    )$
    47,720
    
    
    $
    39,542
      Year Ended September 30,2005
    
    
    2004(as restated)Other receivables
    
    $
    2,425
    
    
    $
    1,955Other inventory
    
    
    571
    
    
    
    537Deposits
    
    
    786
    
    
    
    832Other
    
    
    2,354
    
    
    
    2,802Total other assets
    
    $
    6,136
    
    
    $
    6,126
   Year Ended September 30,2005
    
    
    2004(as restated)Accrued salaries, wages, tax and benefits
    
    $
    9,367
    
    
    $
    13,049Capital lease obligations
    
    
    19,409
    
    
    
    14,970Accrued preferred dividend and interest
    
    
    7,771
    
    
    
    8,026Vacant facility lease obligations
    
    
    2,541
    
    
    
    3,355Swap liability
    
    
    
    
    
    
    1,572Deferred revenue
    
    
    7,704
    
    
    
    5,563Accrued property taxes
    
    
    3,200
    
    
    
    4,098Other
    
    
    13,417
    
    
    
    10,851Total other liabilities
    
    $
    63,409
    
    
    $
    61,484
 47




---



##### Table of Contents



Year Ended September 30,2005
    
    
    2004Senior secured notes
    
    $
    202,284
    
    
    $
    201,877Revolving credit facility
    
    
    19,000
    
    
    
    Note payable lawsuit settled
    
    
    
    
    
    
    2,000Note payable and other
    
    
    29
    
    
    
    57$
    221,313
    
    
    $
    203,934
  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;
     48




---



##### Table of Contents



Shall Not ExceedCredit Agreement
    
    Amended Creditas of
    
    Agreement as ofFrom and Including
    
    To and Including
    
    September 30, 2005
    
    November 18, 2005July 1, 2005
    
    December 31, 2005
    
    4.75 to 1.00January 1, 2006
    
    March 31, 2006
    
    4.50 to 1.00April 1, 2006
    
    June 30, 2006
    
    4.25 to 1.00July 1, 2006
    
    Credit Agreement
    
    3.75 to 1.00Termination DateDecember 31, 2005
    
    
    
    
    
    5.25 to 1.0January 1, 2006
    
    June 30, 2006
    
    
    
    5.75 to 1.0July 1, 2006
    
    December 31, 2006
    
    
    
    5.00 to 1.0January 1, 2007
    
    June 30, 2007
    
    
    
    4.50 to 1.0July 1, 2007
    
    Thereafter
    
    
    
    4.25 to 1.0
   49




---



##### Table of Contents



For the period:
    
    Minimum EBITDACredit Agreement as
    
    Amended Creditof September 30,
    
    Agreement as of2005
    
    November 18, 2005September 2005  August 2006
    
    $55.0 millionSeptember 2006  Each Month Thereafter
    
    $60.0 millionOctober 1, 2005  March 31, 2006
    
    
    
    $45.0 millionApril 1, 2006  May 31, 2006
    
    
    
    $40.0 millionJune 1, 2006  August 31, 2006
    
    
    
    $42.0 millionSeptember 1, 2006  November 30, 2006
    
    
    
    $45.0 millionDecember 1, 2006  February 28, 2007
    
    
    
    $50.0 millionMarch 1, 2007  May 31, 2007
    
    
    
    $52.5 millionJune 1, 2007  Thereafter
    
    
    
    $55.0 million
        50




---



##### Table of Contents



51




---



##### Table of Contents



1)
    
    If the acquiring entity is a publicly-traded entity, the redemption price is the
greater of (A) the product of (i) the change of control redemption percentage (discussed
below) and (ii) the conversion amount; or (B) the sum of (i) the stated value and (ii) a
Black-Scholes valuation amount,2)
    
    If the acquiring entity is not a publicly traded entity, the redemption price is the
product of (i) the change of control redemption percentage and (ii) the conversion amount.
  1)
    
    125% for the period commencing on the initial issuance date and ending on the second
anniversary of the initial issuance date,2)
    
    120% for the period commencing on the day after the second anniversary and ending on
the third anniversary of the initial issuance date,3)
    
    115% for the period commencing on the date after the third anniversary of the initial
issuance date and ending on the maturity date.
           52




---



##### Table of Contents



Capital Leases
    
    
    Operating Leases2006
    
    $
    6,654
    
    
    $
    28,1112007
    
    
    5,646
    
    
    
    23,8912008
    
    
    4,731
    
    
    
    18,4752009
    
    
    2,561
    
    
    
    13,903Thereafter
    
    
    767
    
    
    
    10,179Total minimum payments required
    
    
    20,359
    
    
    
    94,559Amount representing interest obligations under capital lease
    
    
    (950
    )
    
    
    $
    19,409
    
    
    $
    94,559
   Year Ended September 30,2005
    
    
    2004Transportation equipment
    
    $
    42,770
    
    
    $
    39,015Satellite equipment
    
    
    1,459
    
    
    
    1,630Computer equipment
    
    
    2,103
    
    
    
    2,103Less accumulated amortization
    
    
    (26,969
    )
    
    
    (27,261
    )Net equipment under capital lease
    
    $
    19,363
    
    
    $
    15,487
   53




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##### Table of Contents



For The Year Ended September 30,2005
    
    
    2004
    
    
    2003Current expense (benefit):Federal
    
    $
    
    
    
    $
    
    
    
    $
    State and local
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred expense (benefit):Federal
    
    
    4,714
    
    
    
    4,592
    
    
    
    3,170State and local
    
    
    646
    
    
    
    988
    
    
    
    8705,360
    
    
    
    5,580
    
    
    
    4,040Income tax expense
    
    $
    5,360
    
    
    $
    5,580
    
    
    $
    4,040
  For The Year Ended September 30,2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)Tax provision at U.S. statutory rate
    
    $
    5,658
    
    
    $
    5,943
    
    
    $
    (3,201
    )State and local income taxes, net of federal benefit
    
    
    647
    
    
    
    773
    
    
    
    (416
    )Deferred tax valuation allowance
    
    
    (175
    )
    
    
    (600
    )
    
    
    7,493Other
    
    
    (770
    )
    
    
    (536
    )
    
    
    164Income tax expense
    
    $
    5,360
    
    
    $
    5,580
    
    
    $
    4,040
  Year Ended September 30,2005
    
    
    2004(as restated)Rental merchandise
    
    $
    (23,718
    )
    
    
    (20,881
    )Property and equipment
    
    
    4,678
    
    
    
    4,152Operating loss carryforwards
    
    
    88,548
    
    
    
    83,312Intangibles
    
    
    3,712
    
    
    
    4,235Goodwill
    
    
    (15,856
    )
    
    
    (10,495
    )Accrued expenses
    
    
    3,615
    
    
    
    3,175Other
    
    
    334
    
    
    
    531Tax credits
    
    
    450
    
    
    
    412Swap agreements
    
    
    0
    
    
    
    585Deferred revenue, net of expenses
    
    
    1,543
    
    
    
    1,319Deferred tax valuation allowance
    
    
    (79,162
    )
    
    
    (76,841
    )Net deferred tax asset (liability)
    
    $
    (15,856
    )
    
    $
    (10,496
    )
  54




---



##### Table of Contents



55




---



##### Table of Contents



WEIGHTED AVERAGESTOCK OPTIONS
    
    SHARES
    
    
    PRICE PER SHARESeptember 30, 2003
    
    
    3,833,032
    
    
    $
    10.40Granted
    
    
    120,000
    
    
    $
    7.32Exercised
    
    
    (221,640
    )
    
    $
    4.60Cancelled
    
    
    (743,484
    )
    
    $
    17.79September 30, 2004
    
    
    2,987,908
    
    
    $
    8.87Granted
    
    
    748,500
    
    
    $
    7.70Exercised
    
    
    (137,700
    )
    
    $
    4.63Cancelled
    
    
    (583,055
    )
    
    $
    13.74September 30, 2005
    
    
    3,015,653
    
    
    $
    7.83
      Range of
    
    Shares of
    
    
    Shares ofExercise Price
    
    Outstanding Options
    
    
    Exercisable Options$4.90  $7.35
    
    
    1,605,500
    
    
    
    608,000$7.36  $11.04
    
    
    722,000
    
    
    
    672,000$11.05  $16.57
    
    
    655,544
    
    
    
    655,544$16.58  $24.87
    
    
    4,382
    
    
    
    4,382$24.88  $29.75
    
    
    28,227
    
    
    
    28,2273,015,653
    
    
    
    1,968,153
 56




---



##### Table of Contents



For The Year Ended September 30,COMPUTATION OF EARNINGS (LOSS) PER SHARE:
    
    2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)BASICIncome (loss) before discontinued operations
    
    $
    10,807
    
    
    $
    11,399
    
    
    $
    (13,187
    )Loss from discontinued operations
    
    
    (355
    )
    
    
    (2,253
    )
    
    
    (14,249
    )Net income (loss)
    
    
    10,452
    
    
    
    9,146
    
    
    
    (27,436
    )Dividend and accretion of preferred stock
    
    
    (2,185
    )
    
    
    (1,805
    )
    
    
    (513
    )Net income (loss) allocable to common shareholders
    
    $
    8,267
    
    
    $
    7,341
    
    
    $
    (27,949
    )Weighted average common shares outstanding
    
    
    26,265
    
    
    
    26,177
    
    
    
    25,780Earnings (loss) per share:Income (loss) before discontinued operations
    
    $
    0.41
    
    
    $
    0.44
    
    
    $
    (0.51
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.09
    )
    
    
    (0.55
    )Dividend and accretion of preferred stock
    
    
    (0.09
    )
    
    
    (0.07
    )
    
    
    (0.02
    )Net income (loss) allocable to common shareholders
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    (1.08
    )DILUTEDNet income (loss) allocable to common shareholders for basic earnings (loss) per share
    
    $
    8,267
    
    
    $
    7,341
    
    
    $
    (27,949
    )Plus: income impact of assumed conversion:Conversion derivative market value adjustment (1)
    
    
    (2,444
    )
    
    
    (1,766
    )
    
    
    
 57




---



##### Table of Contents



For The Year Ended September 30,COMPUTATION OF EARNINGS (LOSS) PER SHARE:
    
    2005
    
    
    2004
    
    
    2003(as restated)
    
    
    (as restated)Dividends on 8% convertible preferred stock (1)
    
    
    1,602
    
    
    
    1,382
    
    
    
    Accretion to preferred stock redemption amount (1)
    
    
    583
    
    
    
    423
    
    
    
    Net income (loss) allocable to common shareholders for diluted earnings (loss) per
share and assumed conversion
    
    $
    8,008
    
    
    $
    7,380
    
    
    $
    (27,949
    )Weighted average common shares used in calculating basic earnings (loss) per share
    
    
    26,265
    
    
    
    26,177
    
    
    
    25,780Add incremental shares representing:Shares issuable upon exercise of stock options, warrants and escrowed shares (2)
    
    
    532
    
    
    
    509
    
    
    
    3⁄4Contingent shares issuable upon the exercise of warrants to purchase 8% convertible
preferred stock (3)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Shares issuable upon conversion of 8% convertible preferred stock (1)
    
    
    3,252
    
    
    
    3,252
    
    
    
    3⁄4Weighted average number of shares used in calculation of diluted earnings (loss)
per share
    
    
    30,049
    
    
    
    29,938
    
    
    
    25,780Earnings (loss) per share:Income (loss) before discontinued operations
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    (0.51
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.08
    )
    
    
    (0.55
    )Dividend and accretion of preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.02
    )Net income (loss) allocable to common shareholders
    
    $
    0.27
    
    
    $
    0.25
    
    
    $
    (1.08
    )
 
 (1)
    
    Including the effects of these items for the year ended September 30, 2003 would be
anti-dilutive. Therefore, 2,500 shares issuable upon conversion of 8% convertible
preferred stock are excluded from consideration in the calculation of diluted earnings
(loss) per share for the year ended September 30, 2003. There were conversion derivative
market value adjustments of $1,899, dividends on convertible preferred stock of $399 and
accretion to preferred stock redemption in the amount of $114 which were not added back to
net income (loss) allocable to common shareholders for basic earnings (loss) per share on
the diluted earnings (loss) per share because including the effects of these items would be
anti-dilutive.(2)
    
    Including the effects of these items for the years ended September 30, 2003, would be
anti-dilutive. For the years ended September 30, 2003, the number of stock options that
were outstanding but not included in the computation of diluted earnings per common share
in which their exercise price was greater than the average market price of common stock was
2,817. The number of stock options that were outstanding but not included in the
computation of diluted earnings per common share in which their exercise price was less
than the average market price of common stock was three for the year ended September 30,
2003.(3)
    
    Including the effects of these items for the year ended September 30, 2003 would be
anti-dilutive. Therefore, 752 contingent shares issuable upon exercise of option to
purchase 8% convertible preferred stock are excluded from consideration in the calculation
of diluted earnings (loss) per share for the year ended September 30, 2003.      Household
    
    Prepaid TelephoneRental Segment
    
    Service Segment
    
    Total SegmentsFor the year ended September 30, 2005Total revenues
    
    $
    498,502
    
    
    $
    17,389
    
    
    $
    515,891Operating income
    
    
    40,016
    
    
    
    712
    
    
    
    40,728Net income
    
    
    9,699
    
    
    
    753
    
    
    
    10,452Total
Assets (1)
    
    
    457,485
    
    
    
    3,000
    
    
    
    460,485For the year ended September 30, 2004 (as restated)Total revenues
    
    $
    479,743
    
    
    $
    24,967
    
    
    $
    504,710Operating income (loss)
    
    
    42,305
    
    
    
    (1,215
    )
    
    
    41,090Net income (loss)
    
    
    10,350
    
    
    
    (1,204
    )
    
    
    9,146Total Assets (1)
    
    
    428,287
    
    
    
    2,841
    
    
    
    431,128
 58




---



##### Table of Contents



Household
    
    Prepaid TelephoneRental Segment
    
    Service Segment
    
    Total SegmentsFor the year ended September 30, 2003 (as restated)Total revenues
    
    $
    455,369
    
    
    $
    35,319
    
    
    $
    490,688Operating income
    
    
    35,707
    
    
    
    1,196
    
    
    
    36,903Net income (loss)
    
    
    (28,385
    )
    
    
    949
    
    
    
    (27,436
    )Total Assets
(1)
    
    
    455,746
    
    
    
    3,865
    
    
    
    459,611
    For the Quarter EndedSeptember 30,2005(1)
    
    June 30, 2005
    
    March 31, 2005
    
    December 31, 2004(as restated)Total revenues
    
    $
    125,099
    
    
    $
    128,297
    
    
    $
    136,198
    
    
    $
    126,297Operating income
    
    
    2,958
    
    
    
    12,307
    
    
    
    14,301
    
    
    
    11,162Income (loss) before discontinued operations
    
    
    4,317
    
    
    
    (1,034
    )
    
    
    6,362
    
    
    
    1,162Net income (loss)
    
    
    4,324
    
    
    
    (1,215
    )
    
    
    6,309
    
    
    
    1,034Dividend and accretion of preferred stock
    
    
    (566
    )
    
    
    (549
    )
    
    
    (534
    )
    
    
    (536
    )Income (loss) allocable to common shareholders
    
    
    3,757
    
    
    
    (1,764
    )
    
    
    5,775
    
    
    
    499Basic:Income (loss) before discontinued operations
    
    $
    0.16
    
    
    $
    (0.04
    )
    
    $
    0.24
    
    
    $
    0.04Net income (loss)
    
    $
    0.16
    
    
    $
    (0.05
    )
    
    $
    0.24
    
    
    $
    0.04Net income (loss) available to common shareholders
    
    $
    0.14
    
    
    $
    (0.07
    )
    
    $
    0.22
    
    
    $
    0.02Diluted:Income (loss) before discontinued operations
    
    $
    (0.16
    )
    
    $
    (0.04
    )
    
    $
    0.19
    
    
    $
    0.04Net income (loss)
    
    $
    (0.16
    )
    
    $
    (0.05
    )
    
    $
    0.19
    
    
    $
    0.04Net income (loss) allocable to common shareholders
    
    $
    (0.16
    )
    
    $
    (0.07
    )
    
    $
    0.19
    
    
    $
    0.02Weighted average shares outstandingBasic
    
    
    26,320
    
    
    
    26,250
    
    
    
    26,244
    
    
    
    26,244Diluted
    
    
    30,111
    
    
    
    26,250
    
    
    
    29,992
    
    
    
    26,244
  For the Quarter EndedSeptember 30,2004(1)
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Total revenues
    
    $
    121,322
    
    
    $
    124,882
    
    
    $
    135,323
    
    
    $
    123,183Operating income
    
    
    5,533
    
    
    
    12,326
    
    
    
    15,074
    
    
    
    8,157Income (loss) before discontinued operations
    
    
    4,395
    
    
    
    4,915
    
    
    
    6,995
    
    
    
    (4,906
    )Net income (loss)
    
    
    3,863
    
    
    
    4,903
    
    
    
    6,558
    
    
    
    (6,178
    )Dividend and accretion of preferred stock
    
    
    (520
    )
    
    
    (487
    )
    
    
    (403
    )
    
    
    (395
    )Income (loss) allocable to common shareholders
    
    
    3,343
    
    
    
    4,416
    
    
    
    6,155
    
    
    
    (6,573
    )Basic:Income (loss) before discontinued operations
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    0.27
    
    
    $
    (0.19
    )Net income (loss)
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.25
    
    
    $
    (0.24
    )Net income (loss) available to common shareholders
    
    $
    0.13
    
    
    $
    0.17
    
    
    $
    0.24
    
    
    $
    (0.26
    )Diluted:Income (loss) before cumulative effect of change
in accounting principle and discontinued
operations
    
    $
    (0.10
    )
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    (0.19
    )Net income (loss)
    
    $
    (0.11
    )
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    (0.24
    )Net income (loss) allocable to common shareholders
    
    $
    (0.10
    )
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    (0.26
    )Weighted average shares outstandingBasic
    
    
    26,242
    
    
    
    26,216
    
    
    
    26,172
    
    
    
    26,078Diluted
    
    
    29,884
    
    
    
    30,125
    
    
    
    30,026
    
    
    
    26,078
 
 (1)
    
    There was a change in fair market value of the preferred stock conversion feature
derivative of $8,995 and $7,235 income that when reversed for the assumed conversion results in a
dilutive loss per share for the quarter ended September 30, 2005 and 2004, respectively. 59




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##### Table of Contents



60




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    4,789
    
    
    $
    1,022
    
    
    $
    628
    
    
    $
    3⁄4
    
    
    $
    6,439Prepaid expenses
    
    
    6,380
    
    
    
    1,224
    
    
    
    358
    
    
    
    3⁄4
    
    
    
    7,962Rental merchandise, net
    
    
    158,254
    
    
    
    35,924
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    194,178Rental merchandise credits due from vendors
    
    
    400
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    400Property and equipment, net
    
    
    39,579
    
    
    
    7,158
    
    
    
    983
    
    
    
    3⁄4
    
    
    
    47,720Goodwill
    
    
    124,895
    
    
    
    57,448
    
    
    
    6,944
    
    
    
    3⁄4
    
    
    
    189,287Deferred financing costs, net
    
    
    6,262
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,262Intangible assets, net
    
    
    2,101
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,101Other assets
    
    
    4,436
    
    
    
    669
    
    
    
    1,031
    
    
    
    3⁄4
    
    
    
    6,136Investment in subsidiaries
    
    
    79,697
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (79,697
    )
    
    
    3⁄4Total assets
    
    $
    426,793
    
    
    $
    103,445
    
    
    $
    9,944
    
    
    $
    (79,697
    )
    
    $
    460,485LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    19,719
    
    
    $
    2,254
    
    
    $
    1,771
    
    
    $
    3⁄4
    
    
    $
    23,744Other liabilities
    
    
    51,288
    
    
    
    10,345
    
    
    
    1,776
    
    
    
    3⁄4
    
    
    
    63,409Inter-company
    
    
    (17,546
    )
    
    
    15,563
    
    
    
    1,983
    
    
    
    3⁄4
    
    
    
    3⁄4Deferred tax liability
    
    
    15,856
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    15,856Debt
    
    
    221,313
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    221,313Total liabilities
    
    
    290,630
    
    
    
    28,162
    
    
    
    5,530
    
    
    
    3⁄4
    
    
    
    324,322Convertible redeemable preferred stock
    
    
    17,929
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17,929SHAREHOLDERS EQUITY:Common stock
    
    
    305,033
    
    
    
    75,248
    
    
    
    1,600
    
    
    
    (76,848
    )
    
    
    305,033Retained earnings (accumulated deficit)
    
    
    (186,799
    )
    
    
    35
    
    
    
    2,814
    
    
    
    (2,849
    )
    
    
    (186,799
    )Total shareholders equity
    
    
    118,234
    
    
    
    75,283
    
    
    
    4,414
    
    
    
    (79,697
    )
    
    
    118,234Total liabilities and shareholders equity
    
    $
    426,793
    
    
    $
    103,445
    
    
    $
    9,944
    
    
    $
    (79,697
    )
    
    $
    460,485
 61




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    349,194
    
    
    $
    83,995
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    433,189Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17,389
    
    
    
    3⁄4
    
    
    
    17,389Other revenues
    
    
    53,635
    
    
    
    11,678
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    65,313Total revenues
    
    
    402,829
    
    
    
    95,673
    
    
    
    17,389
    
    
    
    3⁄4
    
    
    
    515,891COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    107,543
    
    
    
    25,994
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    133,537Property and equipment
    
    
    12,310
    
    
    
    2,913
    
    
    
    548
    
    
    
    3⁄4
    
    
    
    15,771Amortization of intangibles
    
    
    223
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    223Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10,773
    
    
    
    3⁄4
    
    
    
    10,773Salaries and wages
    
    
    112,265
    
    
    
    24,139
    
    
    
    2,432
    
    
    
    3⁄4
    
    
    
    138,836Advertising, net
    
    
    16,266
    
    
    
    4,888
    
    
    
    137
    
    
    
    3⁄4
    
    
    
    21,291Occupancy
    
    
    30,088
    
    
    
    7,333
    
    
    
    191
    
    
    
    3⁄4
    
    
    
    37,612Other operating expenses
    
    
    94,191
    
    
    
    20,333
    
    
    
    2,596
    
    
    
    3⁄4
    
    
    
    117,120Total costs and operating expenses
    
    
    372,886
    
    
    
    85,600
    
    
    
    16,677
    
    
    
    3⁄4
    
    
    
    475,163Operating income
    
    
    29,943
    
    
    
    10,073
    
    
    
    712
    
    
    
    3⁄4
    
    
    
    40,728OTHER INCOME (EXPENSE):Interest expense
    
    
    (30,533
    )
    
    
    1,856
    
    
    
    7
    
    
    
    3⁄4
    
    
    
    (28,670
    )Interest income
    
    
    25
    
    
    
    3⁄4
    
    
    
    86
    
    
    
    3⁄4
    
    
    
    111Amortization and write-off of deferred financial costs
    
    
    (1,158
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,158
    )Equity in losses of subsidiaries
    
    
    13,096
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (13,096
    )
    
    
    3⁄4Other income, net
    
    
    4,859
    
    
    
    350
    
    
    
    (53
    )
    
    
    3⁄4
    
    
    
    5,156Income (loss) before income taxes and discontinued
operations
    
    
    16,232
    
    
    
    12,279
    
    
    
    752
    
    
    
    (13,096
    )
    
    
    16,167Income tax expense
    
    
    5,360
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5,360Income (loss) before discontinued operations
    
    
    10,872
    
    
    
    12,279
    
    
    
    752
    
    
    
    (13,096
    )
    
    
    10,807Loss from discontinued operations
    
    
    (420
    )
    
    
    65
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (355
    )Net income (loss)
    
    $
    10,452
    
    
    $
    12,344
    
    
    $
    752
    
    
    $
    (13,096
    )
    
    $
    10,452
 62




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by operating activities
    
    $
    4,099
    
    
    $
    3,477
    
    
    $
    1,303
    
    
    
    3⁄4
    
    
    $
    8,879INVESTING ACTIVITIES:Purchase of businesses, net of cash acquired
    
    
    (1,119
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,119
    )Purchases of property and equipment
    
    
    (11,189
    )
    
    
    (1,821
    )
    
    
    (495
    )
    
    
    3⁄4
    
    
    
    (13,505
    )Purchase of music rights license
    
    
    (400
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (400
    )Proceeds from sale of stores and other assets
    
    
    3⁄4
    
    
    
    188
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    188Net cash used in investing activities
    
    
    (12,708
    )
    
    
    (1,633
    )
    
    
    (495
    )
    
    
    3⁄4
    
    
    
    (14,836
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    111,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    111,000Payments on borrowings
    
    
    (92,023
    )
    
    
    3⁄4
    
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    (92,028
    )Payments on capital leases
    
    
    (5,575
    )
    
    
    (1,456
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (7,031
    )Proceeds from convertible preferred stock
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Deferred financing costs
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Issuance of Common Stock
    
    
    638
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    638Dividends paid
    
    
    (1,595
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,595
    )Payment on note for settlement of class action lawsuit
    
    
    (2,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (2,000
    )Net cash provided by (used in) financing activities
    
    
    10,445
    
    
    
    (1,456
    )
    
    
    (5
    )
    
    
    3⁄4
    
    
    
    8,984Increase (decrease) in cash and cash equivalents
    
    
    1,836
    
    
    
    388
    
    
    
    803
    
    
    
    3⁄4
    
    
    
    3,027Cash and cash equivalents at beginning of year
    
    
    2,603
    
    
    
    634
    
    
    
    175
    
    
    
    3⁄4
    
    
    
    3,412Cash and cash equivalents at end of year
    
    $
    4,439
    
    
    $
    1,022
    
    
    $
    978
    
    
    $
    3⁄4
    
    
    $
    6,439
 63




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    2,603
    
    
    $
    634
    
    
    $
    175
    
    
    $
    3⁄4
    
    
    $
    3,412Prepaid expenses
    
    
    6,918
    
    
    
    1,180
    
    
    
    398
    
    
    
    3⁄4
    
    
    
    8,496Income tax receivable
    
    
    10
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    10Rental merchandise, net
    
    
    138,887
    
    
    
    35,042
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    173,929Rental merchandise credits due from vendors
    
    
    2,592
    
    
    
    650
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,242Property and equipment, net
    
    
    32,929
    
    
    
    5,577
    
    
    
    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
    
    
    4,114
    
    
    
    771
    
    
    
    1,231
    
    
    
    3⁄4
    
    
    
    6,116Investment in subsidiaries
    
    
    66,601
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (66,601
    )
    
    
    3⁄4Total assets
    
    $
    386,993
    
    
    $
    101,302
    
    
    $
    9,434
    
    
    $
    (66,601
    )
    
    $
    431,128LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    20,298
    
    
    $
    4,325
    
    
    $
    1,564
    
    
    $
    3⁄4
    
    
    $
    26,187Other liabilities
    
    
    48,880
    
    
    
    10,474
    
    
    
    2,130
    
    
    
    3⁄4
    
    
    
    61,484Inter-company
    
    
    (25,637
    )
    
    
    23,564
    
    
    
    2,073
    
    
    
    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
    
    
    257,966
    
    
    
    38,363
    
    
    
    5,772
    
    
    
    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
    )
    
    
    (12,309
    )
    
    
    2,062
    
    
    
    10,247
    
    
    
    (195,065
    )Total shareholders equity
    
    
    109,237
    
    
    
    62,939
    
    
    
    3,662
    
    
    
    (66,601
    )
    
    
    109,237Total liabilities and shareholders equity
    
    $
    386,993
    
    
    $
    101,302
    
    
    $
    9,434
    
    
    $
    (66,601
    )
    
    $
    431,128
 64




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    333,945
    
    
    $
    83,345
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    417,290Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    24,967
    
    
    
    3⁄4
    
    
    
    24,967Other revenues
    
    
    51,062
    
    
    
    11,391
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    62,453Total revenues
    
    
    385,007
    
    
    
    94,736
    
    
    
    24,967
    
    
    
    3⁄4
    
    
    
    504,710COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    106,127
    
    
    
    26,795
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    132,922Property and equipment
    
    
    12,607
    
    
    
    3,143
    
    
    
    580
    
    
    
    3⁄4
    
    
    
    16,330Amortization of intangibles
    
    
    294
    
    
    
    97
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    391Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    16,398
    
    
    
    3⁄4
    
    
    
    16,398Salaries and wages
    
    
    106,352
    
    
    
    24,079
    
    
    
    3,796
    
    
    
    3⁄4
    
    
    
    134,227Advertising, net
    
    
    14,632
    
    
    
    4,281
    
    
    
    1,223
    
    
    
    3⁄4
    
    
    
    20,136Occupancy
    
    
    26,422
    
    
    
    7,218
    
    
    
    357
    
    
    
    3⁄4
    
    
    
    33,997Restructuring costs
    
    
    36
    
    
    
    12
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    48Other operating expenses
    
    
    85,513
    
    
    
    19,828
    
    
    
    3,830
    
    
    
    3⁄4
    
    
    
    109,171Total costs and operating expenses
    
    
    351,983
    
    
    
    85,453
    
    
    
    26,184
    
    
    
    3⁄4
    
    
    
    463,620Operating income
    
    
    33,024
    
    
    
    9,283
    
    
    
    (1,217
    )
    
    
    3⁄4
    
    
    
    41,090OTHER INCOME (EXPENSE):Interest expense
    
    
    (31,851
    )
    
    
    1,528
    
    
    
    1
    
    
    
    3⁄4
    
    
    
    (30,322
    )Interest income
    
    
    793
    
    
    
    3⁄4
    
    
    
    4
    
    
    
    3⁄4
    
    
    
    797Amortization and write-off of deferred financial costs
    
    
    (1,025
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,025
    )Equity in losses of subsidiaries
    
    
    9,107
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (9,107
    )
    
    
    3⁄4Other income, net
    
    
    6,244
    
    
    
    195
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,439Income (loss) before income taxes and discontinued
operations
    
    
    16,282
    
    
    
    11,006
    
    
    
    (1,212
    )
    
    
    (9,107
    )
    
    
    16,979Income tax expense
    
    
    5,580
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5,580Income (loss) before discontinued operations
    
    
    10,712
    
    
    
    11,006
    
    
    
    (1,212
    )
    
    
    (9,107
    )
    
    
    11,399Loss from discontinued operations
    
    
    (1,566
    )
    
    
    (687
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (2,253
    )Net income (loss)
    
    $
    9,146
    
    
    $
    10,319
    
    
    $
    (1,212
    )
    
    $
    (9,107
    )
    
    $
    9,146
 65




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    25,699
    
    
    $
    2,786
    
    
    $
    (408
    )
    
    $
    3⁄4
    
    
    $
    28,077INVESTING ACTIVITIES:Investments in subsidiaries and other businesses, net
of cash acquired
    
    
    (275
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (275
    )Purchases of property and equipment
    
    
    (7,872
    )
    
    
    (1,396
    )
    
    
    (40
    )
    
    
    3⁄4
    
    
    
    (9,308
    )Net cash used in investing activities
    
    
    (8,147
    )
    
    
    (1,396
    )
    
    
    (40
    )
    
    
    3⁄4
    
    
    
    (9,583
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    95,995
    
    
    
    3⁄4
    
    
    
    5
    
    
    
    3⁄4
    
    
    
    96,000Payments on borrowings
    
    
    (109,014
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (109,014
    )Payments on capital leases
    
    
    (6,432
    )
    
    
    (1,638
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (8,070
    )Payments on note for settlement of class action lawsuit
    
    
    (2,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (2,000
    )Proceeds from convertible preferred stock
    
    
    5,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    5,000Deferred financing costs
    
    
    (35
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (35
    )Issuance of Common Stock
    
    
    1,019
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,019Dividends paid
    
    
    (1,285
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,285
    )Net cash provided by (used in) financing activities
    
    
    (16,752
    )
    
    
    (1,638
    )
    
    
    5
    
    
    
    3⁄4
    
    
    
    (18,385
    )Increase (decrease) in cash and cash equivalents
    
    
    800
    
    
    
    (248
    )
    
    
    (443
    )
    
    
    3⁄4
    
    
    
    109Cash and cash equivalents at beginning of year
    
    
    1,803
    
    
    
    882
    
    
    
    618
    
    
    
    3⁄4
    
    
    
    3,303Cash and cash equivalents at end of year
    
    $
    2,603
    
    
    $
    634
    
    
    $
    175
    
    
    $
    3⁄4
    
    
    $
    3,412
 66




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedREVENUES:Rental revenues
    
    $
    301,487
    
    
    $
    95,350
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    396,837Prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    35,319
    
    
    
    3⁄4
    
    
    
    35,319Other revenues
    
    
    45,515
    
    
    
    13,017
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    58,532Total revenues
    
    
    347,002
    
    
    
    108,367
    
    
    
    35,319
    
    
    
    3⁄4
    
    
    
    490,688COSTS AND OPERATING EXPENSES:Depreciation and amortization:Rental merchandise
    
    
    92,143
    
    
    
    29,993
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    122,136Property and equipment
    
    
    16,509
    
    
    
    2,370
    
    
    
    551
    
    
    
    3⁄4
    
    
    
    19,430Amortization of intangibles
    
    
    1,120
    
    
    
    240
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,360Cost of prepaid phone service
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    21,871
    
    
    
    3⁄4
    
    
    
    21,871Salaries and wages
    
    
    96,683
    
    
    
    29,411
    
    
    
    4,528
    
    
    
    3⁄4
    
    
    
    130,622Advertising, net
    
    
    15,162
    
    
    
    4,777
    
    
    
    2,312
    
    
    
    3⁄4
    
    
    
    22,251Occupancy
    
    
    22,799
    
    
    
    9,164
    
    
    
    402
    
    
    
    3⁄4
    
    
    
    32,365Restructuring costs
    
    
    2,906
    
    
    
    140
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,046Other operating expenses
    
    
    68,861
    
    
    
    27,384
    
    
    
    4,459
    
    
    
    3⁄4
    
    
    
    100,704Total costs and operating expenses
    
    
    316,183
    
    
    
    103,479
    
    
    
    34,123
    
    
    
    3⁄4
    
    
    
    453,785Operating income
    
    
    30,819
    
    
    
    4,888
    
    
    
    1,196
    
    
    
    3⁄4
    
    
    
    36,903OTHER INCOME (EXPENSE):Interest expense
    
    
    (32,856
    )
    
    
    3⁄4
    
    
    
    (254
    )
    
    
    3⁄4
    
    
    
    (33,110
    )Interest income
    
    
    86
    
    
    
    3⁄4
    
    
    
    7
    
    
    
    3⁄4
    
    
    
    93Class action settlement
    
    
    (14,000
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (14,000
    )Amortization and write-off of deferred financial costs
    
    
    (3,061
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3,061
    )Equity in losses of subsidiaries
    
    
    (557
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    557
    
    
    
    3⁄4Other income, net
    
    
    3,931
    
    
    
    97
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,028Income (loss) before income taxes and discontinued
operations
    
    
    (15,638
    )
    
    
    4,985
    
    
    
    949
    
    
    
    557
    
    
    
    (9,147
    )Income tax expense
    
    
    3,186
    
    
    
    854
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,040Income (loss) before discontinued operations
    
    
    (18,824
    )
    
    
    4,131
    
    
    
    949
    
    
    
    557
    
    
    
    (13,187
    )Loss from discontinued operations
    
    
    (8,612
    )
    
    
    (5,637
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (14,249
    )Net income (loss)
    
    $
    (27,436
    )
    
    $
    (1,506
    )
    
    $
    949
    
    
    $
    557
    
    
    $
    (27,436
    )
 67




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##### Table of Contents



Parent
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Rent-WayIssuer
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedOPERATING ACTIVITIES:Net cash provided by (used in) operating activities
    
    $
    (10,578
    )
    
    $
    (16,430
    )
    
    $
    606
    
    
    $
    3⁄4
    
    
    $
    (26,402
    )INVESTING ACTIVITIES:Purchase of businesses, net of cash acquired
    
    
    (259
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (259
    )Purchases of property and equipment
    
    
    (6,319
    )
    
    
    (1,571
    )
    
    
    (265
    )
    
    
    3⁄4
    
    
    
    (8,155
    )Proceeds from sale of stores and other assets
    
    
    77,341
    
    
    
    18,248
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    95,589Net cash used in investing activities
    
    
    70,763
    
    
    
    16,677
    
    
    
    (265
    )
    
    
    3⁄4
    
    
    
    87,175FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    667,423
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    667,423Payments on borrowings
    
    
    (730,143
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (730,143
    )Payments on capital leases
    
    
    (6,601
    )
    
    
    (1,681
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (8,282
    )Proceeds from convertible preferred stock
    
    
    14,119
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    14,119Deferred financing costs
    
    
    (8,579
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (8,579
    )Issuance of Common Stock
    
    
    514
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    514Dividends paid
    
    
    (99
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (99
    )Payment of loans by directors/shareholders
    
    
    285
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    285Interest on shareholder loans
    
    
    (3
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (3
    )Net cash provided by (used in) financing activities
    
    
    (63,084
    )
    
    
    (64,765
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (64,765
    )Increase (decrease) in cash and cash equivalents
    
    
    (2,899
    )
    
    
    (1,434
    )
    
    
    341
    
    
    
    3⁄4
    
    
    
    (3,992
    )Cash and cash equivalents at beginning of year
    
    
    4,702
    
    
    
    2,316
    
    
    
    277
    
    
    
    3⁄4
    
    
    
    7,295Cash and cash equivalents at end of year
    
    $
    1,803
    
    
    $
    882
    
    
    $
    618
    
    
    $
    3⁄4
    
    
    $
    3,303
 68




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls
 
 ITEM 9B. OTHER INFORMATION
  69




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##### Table of Contents



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  70




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##### Table of Contents



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
       71




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##### Table of Contents



By:
    
    /s/ William S. Short
    
    By:
    
    /s/ William A. McDonnellPresident(Principal Executive
Officer)
    
    
    
    Senior Vice President
and Chief Financial
Officer(Principal Financial Officer)Date:
    
    December 28, 2005
    
    Date:
    
    December 28, 2005By:
    
    /s/ John A. LombardiVice President, Corporate Controller andChief Accounting Officer(Principal Accounting Officer)
   SIGNATURE
    
    TITLE
    
    DATE/s/ Gerald A. Ryan

                             Gerald A. Ryan
    
    Director
    
    December 28, 2005/s/ William E. Morgenstern

                       William E. Morgenstern
    
    Director
    
    December 28, 2005/s/ John W. Higbee

                           John W. Higbee
    
    Director
    
    December 28, 2005/s/ Robert B. Fagenson

                       Robert B. Fagenson
    
    Director
    
    December 28, 2005/s/ Marc W. Joseffer

                         Marc W. Joseffer
    
    Director
    
    December 28, 2005/s/ William Lerner

                        William Lerner
    
    Director
    
    December 28, 2005/s/ Jacqueline E. Woods

                      Jacqueline E. Woods
    
    Director
    
    December 28, 2005/s/ William S. Short

                       William S. Short
    
    Director
    
    December 28, 2005
 72




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##### Table of Contents



EXHIBIT INDEX
 EXHIBIT NO.
    
    DESCRIPTION2.1
    
    Agreement and Plan of Merger dated September 1, 1998 between the Company and Home Choice
Holdings, Inc. (incorporated by reference to exhibit 2.1 to the Companys Registration
Statement on Form S-4 (No. 333-66955) filed on November 6, 1998).2.2
    
    Asset Purchase Agreement between the Company, Rent-Way of Michigan, Inc., and Rent-Way of
TTIG, L.P., and Rent-A-Center, Inc., dated December 17, 2002 (incorporated by reference to
Exhibit 2.11 to the Companys Annual Report on Form 10-K for the fiscal year ended September
30, 2002 filed on December 30, 2002).2.3
    
    Amendment No. 1 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan,
Inc., and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated December 21, 2002
(incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 21, 2003 filed on February 14, 2003).2.4
    
    Amendment No. 2 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan,
Inc., and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated January 7, 2003
(incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 21, 2003 filed on February 14, 2003).2.5
    
    Amendment No. 3 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan,
Inc., and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated February 7, 2003
(incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 21, 2003 filed on February 14, 2003)2.6
    
    Amendment No. 4 to the Asset Purchase Agreement between the Company, Rent-Way of Michigan,
Inc., and Rent-Way of TTIG, L.P., and Rent-A-Center, Inc., dated February 10, 2003
(incorporated by reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q for
the quarter ended December 21, 2003 filed on February 14, 2003)3.1
    
    Articles of Incorporation of the Company, 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
on 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
    
    By-Laws of the Company, as amended (incorporated by reference to Exhibit 3.3 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005 filed on August 9,
2005).4.1
    
    Indenture dated June 2, 2003 among the Company, the subsidiary guarantors (as defined
therein) and Manufacturers and Traders Trust Company, as trustee (incorporated by reference
to Exhibit 4.1 to the Companys Current Report on Form 8-K filed June 3, 2003).4.2
    
    Form of 11 7/8% Senior Secured Note (incorporated by reference to Exhibit A to the Indenture
dated June 2, 2003 among the Company, the subsidiary guarantors (as defined therein) and
Manufacturers and Traders Trust Company, as trustee, filed as Exhibit 4.1 to the Companys
Current Report on Form 8-K on June 3, 2003).10.1
    
    Companys 1995 Stock Option Plan (incorporated by reference to an exhibit to the Companys
Registration Statement on Form SB-2 (No. 333-116) filed on January 5, 1996).10.2
    
    Form of Non-Plan Stock Option Agreement (incorporated by reference to an exhibit to the
Companys Registration Statement on Form S-18 (No. 33-55562-NY) filed on December 8, 1992).
 73




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##### Table of Contents



EXHIBIT NO.
    
    DESCRIPTION10.3
    
    Companys 1999 Stock Option Plan (incorporated by reference to the Companys Proxy Statement
on Schedule 14A filed on February 12, 1999).10.4
    
    2004 Stock Option Plan (incorporated by reference to the Companys Proxy Statement on
Schedule 14A filed on March 10, 2004)10.5
    
    Form of Stock Option Agreement
under 2004 Stock Option Plan (incorporated by reference to
exhibit 10.5 to the Companys Annual Report on Form 10-K
for the fiscal year ended September 30, 2004, filed on
December 10, 2004)10.6
    
    Form of Stock Option Agreements under 1992, 1995 and 1999 Stock Option Plans (incorporated by
reference to exhibit (d)(4) to the Companys Schedule TO filed on November 1, 2001)10.7
    
    Consulting Agreement between William E. Morgenstern and the Company, dated March 22, 2005
(incorporated by reference to exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2005 filed on May 10, 2005).10.8
    
    Non-Competition Agreement between William E. Morgenstern and the Company dated March 22, 2005
(incorporated by reference to exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2005 filed on May 10, 2005).10.9
    
    Engagement Agreement between Gerald A. Ryan and the Company, dated October 1, 1999
(incorporated by reference to exhibit 10.6 of the Companys Annual Report on Form 10-K filed
on December 22, 1999).10.10
    
    Employment Agreement between William McDonnell and the Company dated as of February 1, 2000
(incorporated by reference to exhibit 10.29 to the Companys Annual Report on Form 10-K for
the fiscal year ended September 30, 2000 filed on July 2, 2001).10.11
    
    Employment Agreement between Ronald
DeMoss and the Company dated as of March 13, 2001 (incorporated
by reference to exhibit 10.11 to the Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 2004,
filed on December 10, 2004).10.12
    
    Form of Stock Option Agreement for directors (immediately exercisable options) (incorporated
by reference to exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2005 filed May 10, 2005).10.13
    
    Common Stock and Warrant Purchase Agreement among the Company and Calm Waters Partnership,
Walter H. Morris and Charles A. Paquelet (with form of warrant attached) (incorporated by
reference to exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002 filed on May 14, 2003 ).10.14
    
    Registration Rights Agreement between the Company and Calm Waters Partnership, Walter H.
Morris and Charles A. Paquelet (incorporated by reference to exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed on May 14, 2002)10.15
    
    Credit Agreement dated as of June 2, 2003 among the Company, the guarantors from time to time
parties thereto, the lenders from time to time parties thereto and Harris Trust and Savings
Bank, as administrative agent, National City Bank of Pennsylvania, as syndication agent, and
BMO Nesbit Burns, as lead arranger (Credit Agreement) (incorporated by reference to exhibit
10.2 to the Companys Current Report on Form 8-K filed June 3, 2003).10.16
    
    Inter-Creditor Agreement dated as of June 2, 2003 among Harris Trust and Savings Bank, as
senior agent, Manufacturers and Traders Trust Company, as trustee and collateral agent under
the Indenture, and the Company (incorporated by reference to exhibit 10.3 to the Companys
Current Report on Form 8-K filed June 3, 2003).10.17
    
    Registration Rights Agreement dated May 23, 2003 among the Company, Citigroup Global Markets,
Inc., as the initial purchaser, and the subsidiary guarantors signatory thereto (incorporated
by reference to exhibit 10.1 to the Companys Current Report on Form 8-K filed June 3, 2003).10.18
    
    Securities Purchase Agreement dated June 2, 2003 among the Company and the investors listed
on the schedule of buyers attached thereto (incorporated by reference to exhibit 10.1 to the
Companys Current Report on Form 8-K filed June 3, 2003).
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##### Table of Contents



EXHIBIT NO.
    
    DESCRIPTION10.19
    
    Registration Rights Agreement dated June 2, 2003 among the Company and the buyers of the
Series A Convertible Preferred Stock (incorporated by reference to exhibit 10.2 to the
Companys Current Report on Form 8-K filed June 3, 2003).10.20
    
    First Omnibus Amendment to Credit Agreement dated July 2, 2003 (incorporated by reference to
exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 filed on August 14, 2003).10.21
    
    Second Amendment to Credit
Agreement dated December 7, 2004 (incorporated by reference to
exhibit 10.21 to the Companys Annual Report on Form 10-K
for the fiscal year ended September 30, 2004, filed
December 10, 2004).10.22*
    
    Employment Agreement between William S. Short and the Company dated October 1, 2005.10.23*
    
    Employment Agreement between Gregory L. Matheny and the Company dated October 1, 2005.10.24*
    
    Third Amendment to Credit Agreement dated November 18, 2005.10.25*
    
    Executive Non-Qualified Retirement Plan of the Company.10.26
    
    Form of stock option agreement for executive officers (immediately exercisable options)
(incorporated by reference to exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2005 filed May 10, 2005).10.27
    
    Description of 2006 Management Incentives for executive officers (incorporated by reference
to exhibit 10.1 to the Companys Current Report on Form 8-K filed on November 21, 2005).10.28*
    
    Employment Agreement between John A. Lombardi and the Company dated October 1, 2005.12.1*
    
    Ratio of Earnings to Fixed Charges21.1
    
    Subsidiaries of the Company (incorporated by reference to exhibit 21.1 to the Companys
Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed on December 28,
2001).23.1*
    
    Consent of Malin Bergquist & Company, LLP.23.2*
    
    Consent of Ernst & Young LLP31.1*
    
    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
 75