Rent-Way, Inc. 10-Q

RENT-WAY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(all amounts in thousands, except per share data)

(unaudited)


	Three-months Ended						Nine-months Ended
	June 30,						June 30,
	2006			2005			2006			2005
REVENUES:
Rental revenue	$	113,701		$	108,455		$	340,499		$	328,596
Prepaid phone service revenue		4,124			4,313			12,289			13,617
Other revenues		17,543			15,529			52,821			48,579

Total revenues		135,368			128,297			405,609			390,792

COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise		35,881			31,949			108,474			100,471
Property and equipment		3,783			3,732			11,009			12,145
Intangibles		205			195			586			251
Cost of prepaid phone service		2,464			2,684			7,733			8,460
Salaries and wages		36,245			35,580			109,831			105,164
Advertising, net		4,715			5,438			15,824			15,524
Occupancy		10,324			9,526			30,454			27,874
Other operating expenses		29,665			26,886			91,039			83,133

Total costs and operating expenses		123,282			115,990			374,950			353,022

Operating income		12,086			12,307			30,659			37,770

OTHER INCOME (EXPENSE):
Interest expense		(7,403	)		(7,304	)		(21,711	)		(21,662	)
Interest income		21			9			64			22
Amortization of deferred financing costs		(333	)		(289	)		(982	)		(854	)
Other income (expense)		(257	)		(4,362	)		2,012			(4,601	)


Income before income taxes and discontinued operations		4,114			361			10,042			10,675
Income tax expense		1,351			1,395			4,436			4,185

Income (loss) before discontinued operations		2,763			(1,034	)		5,606			6,490
Loss from discontinued operations		(27	)		(181	)		(120	)		(361	)

Net income (loss)		2,736			(1,215	)		5,486			6,129
Dividend and accretion of preferred stock		(605	)		(549	)		(1,769	)		(1,619	)

Net income (loss) allocable to common shareholders	$	2,131		$	(1,764	)	$	3,717		$	4,510


EARNINGS (LOSS) PER COMMON SHARE (NOTE 5):

Basic earnings (loss) per common share:
Income (loss) before discontinued operations	$	0.10		$	(0.04	)	$	0.21		$	0.24

Net income (loss) allocable to common shareholders	$	0.08		$	(0.07	)	$	0.14		$	0.17


Diluted earnings (loss) per common share:
Income (loss) before discontinued operations	$	0.10		$	(0.04	)	$	0.14		$	0.24

Net income (loss) allocable to common shareholders	$	0.08		$	(0.07	)	$	0.13		$	0.17


Weighted average common shares outstanding:
Basic		26,398			26,250			26,388			26,246

Diluted		26,667			26,250			29,856			26,778

The accompanying notes are an integral part of these financial statements.

RENT-WAY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(all amounts in thousands)

(unaudited)


	Nine-months Ended
	June 30,
	2006			2005
OPERATING ACTIVITIES:
Net income	$	5,486		$	6,129
Adjustments to reconcile net income to net cash used in operating activities:
Loss from discontinued operations		120			361
Depreciation and amortization		109,414			105,938
Carrying value of rental merchandise sold		11,973			8,166
Deferred income taxes		4,436			4,185
Market adjustment for interest rate swap derivative		¾			(1,408	)
Stock-based compensation expense		237			¾
Market adjustment for preferred stock conversion option derivative		(1,468	)		6,551
Write-down of property to realizable value		105			¾
Write-off of property and equipment		152			254
Loss on sale of assets		409			¾
Changes in assets and liabilities:
Prepaid expenses		1,995			(1,280	)
Rental merchandise		(138,796	)		(124,328	)
Rental merchandise deposits and credits due from vendors		400			550
Other assets		(1,386	)		(838	)
Accounts payable		(1,093	)		(8,880	)
Cash paid to settle class action lawsuit		¾			(2,000	)
Other liabilities		(2,490	)		(6,031	)

Net cash used in continuing operations		(10,506	)		(12,631	)
Net cash used in discontinued operations		(120	)		(361	)

Net cash used in operating activities		(10,626	)		(12,992	)


INVESTING ACTIVITIES:
Purchase of business, net of cash acquired		(6,037	)		(754	)
Purchases of property and equipment		(6,550	)		(11,008	)
Proceeds from sale of assets		3,343			¾

Net cash used in investing activities		(9,244	)		(11,762	)


FINANCING ACTIVITIES:
Proceeds from borrowings		108,950			100,000
Payments on borrowings		(82,970	)		(68,022	)
Payments on capital leases		(5,490	)		(5,629	)
Issuance of common stock		36			77
Short swing profits received from shareholder		1,444			¾
Dividends paid on convertible redeemable preferred stock		(1,201	)		(1,197	)
Deferred financing costs		(193	)		¾

Net cash provided by financing activities		20,576			25,229


Increase in cash and cash equivalents		706			475

Cash and cash equivalents at beginning of period		6,439			3,412


Cash and cash equivalents at end of period	$	7,145		$	3,887

The accompanying notes are an integral part of these financial statements.

RENT-WAY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(all dollars in thousands, except share and per share data)

(unaudited)

1. SUMMARY OF CRITICAL ACCOUNTING POLICIES:

BUSINESS AND ORGANIZATION. Rent-Way, Inc. (the “Company” or “Rent-Way”) is a corporation organized under the laws of the Commonwealth of Pennsylvania. The Company operates a chain of stores that rents durable household products such as home entertainment equipment, furniture, major appliances, computers, and jewelry to consumers on a weekly, biweekly, semi-monthly or monthly basis in thirty-four states. The stores are primarily located in the Midwestern, Eastern and Southern regions of the United States. The Company also provides prepaid phone service to consumers on a monthly basis through its majority-owned subsidiary, dPi Teleconnect, LLC (“DPI”).

BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments have been made, which, except as discussed herein, consist of normal recurring adjustments, which are necessary for a fair statement of the financial position, results of operations and cash flows of the Company. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The Company presents an unclassified balance sheet to conform to practice in the industry in which it operates. The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant inter-company transactions and balances have been eliminated.

These financial statements and the notes thereto should be read in conjunction with the Company’s financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

SEASONALITY OF BUSINESS. The Company’s operating results are subject to seasonality. The first fiscal quarter typically will have a greater number of rental-purchase agreements entered into because of traditional holiday shopping patterns. Because many of the Company’s expenses do not fluctuate with seasonal revenue changes, such revenue changes may cause fluctuations in the Company’s quarterly earnings.

CONVERTIBLE REDEEMABLE PREFERRED STOCK. On June 2, 2003, the Company sold $15,000 in newly authorized convertible redeemable preferred stock through a private placement. The proceeds of $14,161, net of issuance costs of $839, were used to repay the previous senior credit facility. The Company sold an additional $5,000 of convertible redeemable preferred stock through a private placement during fiscal year 2004. The proceeds were used in operations. The net proceeds are classified outside of permanent equity because of the mandatory redemption date and other redemption provisions. (see Note 10).

STATEMENT OF CASH FLOWS INFORMATION. Cash and cash equivalents consist of cash on hand and on deposit and represent highly liquid investments with maturities of three-months or less when purchased. Cash equivalents are stated at cost, which approximates market value. The Company maintains deposits with several financial institutions. The Federal Deposit Insurance Corporation does not insure deposits in excess of $100 and mutual funds. Supplemental disclosures of cash flow information for the nine-months ended June 30, 2006 and 2005 are as follows:


	Nine-months ended June 30,
	2006		2005
CASH PAID DURING THE PERIOD FOR:
Interest	$	27,657	$	27,760
NONCASH INVESTING ACTIVITIES:
Assets acquired under capital lease		7,338		8,513
Assets acquired from exchange		—		180

RENTAL MERCHANDISE, RENTAL REVENUE AND DEPRECIATION. Rental merchandise is rented to customers pursuant to rental agreements, which provide for either weekly, biweekly, semi-monthly or monthly rental payments collected in advance. Rental revenues are recorded in the period they are earned. Rental payments received prior to when they are earned are recorded as deferred rental revenue and a receivable is recorded for the rental revenues earned in the current period and received in the subsequent period. Incremental direct costs related to origination of these revenues are deferred.

Merchandise rented to customers or available for rent is classified in the consolidated balance sheet as rental merchandise and is valued at cost on a specific identification method. Write-offs of rental merchandise arising from customers’ failure to return merchandise and losses due to excessive wear and tear of merchandise are recognized using the allowance method.

The Company uses the “units of activity” depreciation method for all rental merchandise except computers, electronic game systems and cell phones. Under the units of activity method, rental merchandise is depreciated as revenue is earned. Thus, rental merchandise is not depreciated during periods when it is not on rent and therefore not generating rental revenue. Personal computers are principally depreciated on the straight-line basis over 24 months beginning on the acquisition date. Electronic game systems are depreciated on the straight-line basis over 6 to 18 months. Cell phones are depreciated on a straight-line basis over 12 months.

OTHER REVENUE. Other revenue includes revenue from various services and charges to rental customers, including late fees, liability waiver fees, processing fees, sales of used merchandise and preferred customer club membership fees. Liability waiver fees, processing fees and preferred customer club membership fees are recorded in the period they are earned. Payments received prior to when they are earned are recorded as deferred revenue and a receivable is recorded for the revenues earned in the current period and received in the subsequent period. Late fees and cash sales of used merchandise are recognized when received.

DEFERRED FINANCING COSTS. Deferred financing costs consists of bond issuance costs and loan origination costs incurred in connection with the sale of $205,000 of senior secured notes and a $60,000 revolving credit facility that closed on June 2, 2003. The bond issuance costs of $6,704 are amortized using the effective interest method over the seven-year term of the bonds. The loan origination costs of $2,062 are amortized on a straight-line basis over the five-year bank credit agreement. On November 18, 2005, the Company incurred $193 of deferred costs associated with an amendment to the bank revolving credit facility. Those costs are being amortized over the remaining term of the agreement. Deferred financing cost amortization was $333 and $289 for the three-month periods ended June 30, 2006 and 2005, respectively, and was $982 and $854 for the nine-month periods ended June 30, 2006 and 2005, respectively.

COMPANY HEALTH INSURANCE PROGRAM. Effective January 1, 2006, the Company converted to a fully self-insured program. The Company funds actual claims and uses a claims lag report provided by the insurance company to estimate the Company’s incurred but not reported (IBNR) claims liability. The Company’s IBNR claims liability was $1,537 at June 30, 2006, and is included in accrued liabilities on the accompanying consolidated balance sheet.

In calendar year 2005, the Company determined its insurance liability based on funding factors determined by cost plus rates for a fully insured plan and monthly headcount. The contracted rate was determined based on experience, prior claims filed and an estimate of future claims. A retrospective adjustment for over (under) funding of claims is recorded in other operating expenses in the consolidated statement of operations when determinable and probable. The retrospective adjustment to income was approximately $422 for the three-months ended June 30, 2006, $836 for the nine-months ended June 30, 2006, and $1,542 for the three and nine-month periods ended June 30, 2005.

COMPANY LIABILITY INSURANCE PROGRAMS. Starting in 2001, the Company’s workers’ compensation, automobile and general liability costs are determined based on claims filed and company experience. Losses under the deductible in the workers’ compensation, automobile and general liability programs are pre-funded based on the insurance company’s loss estimates. Loss estimates are adjusted for developed incurred losses at 18 months following policy inception and every 12 months thereafter. Retrospective adjustments to loss estimates are recorded in other operating expenses in the consolidated statement of operations when determinable and probable. The retrospective adjustment to income was $1,500 and $310 for the three and nine-month periods ended June 30, 2006 and 2005, respectively.

For fiscal year 2000, the Company was insured under deductible programs with aggregate stop loss coverage on major claims. Claims within the insured deductible limits that were less than stop loss aggregates, were funded as claims developed using AM Best loss development factors. The fiscal 1999 worker’s compensation insurance had no aggregate retention and was funded as claims developed using AM Best loss development factors. Reserves were developed by independent consultants and totaled $570 at June 30, 2006 and $599 at September 30, 2005.

OPERATING LEASES AND DEPRECIATION OF LEASEHOLD IMPROVEMENTS. Rent expense for operating leases, which may have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term. The initial lease term includes the “build out” period of leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as a deferred rent liability and is included in the consolidated balance sheets. Construction allowances received from landlords are recorded as a deferred rent liability and amortized to rent expense over the initial term of the lease. The Company’s statement of cash flows reflects the receipt of construction allowances as an increase in cash flows from operating activities. Depreciation of leasehold improvements is over the shorter of the term of the lease (and those renewal periods that are reasonably assured) or the asset’s useful economic life.

DISCONTINUED OPERATIONS. On February 8, 2003, the Company sold rental merchandise and related contracts of 295 stores to Rent-A-Center. Rent-A-Center purchased certain fixed assets and assumed related store leases of 125 of these stores. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of this component have been segregated from those of continuing operations and are presented in the Company’s financial statements as discontinued operations (see Note 2).

RECLASSIFICATIONS. Certain amounts in the prior-period consolidated statements of cash flows were reclassified to conform to the June 30, 2006 presentation.

2. DISCONTINUED OPERATIONS:

The Company sold rental merchandise and related contracts of 295 stores to Rent-A-Center for approximately $100,400 during the 2003 fiscal year. These stores were all included in the household rental segment. Rent-A-Center purchased certain fixed assets and assumed related store leases of 125 of these stores. As required under the Company’s credit agreement, all proceeds of the sale, net of transaction costs, store closing and similar expenses, were used to pay existing bank debt. The assets sold included rental merchandise, vehicles under capital leases and certain fixed assets. Vehicle lease obligations were paid by the Company out of the proceeds from the sale.

The asset group was distinguishable as a component of the Company and classified as held for sale in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment on Disposal of Long-Lived Assets.” Direct costs to transact the sale were comprised of, but not limited to, broker commissions, legal and title transfer fees and closing costs.

In connection with the sale of the stores, the Company has and will continue to incur additional direct costs related to the sale and exit costs related to these discontinued operations. Costs associated with an exit activity include, but are not limited to termination benefits, costs to terminate a contract that is not a capital lease and costs to consolidate facilities or relocate employees, in accordance with Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” The Company accrued employee separation costs as costs were incurred in accordance with SFAS 146. These costs were included in the results of discontinued operations in accordance with SFAS 144.

Related operating results have been reported as discontinued operations in accordance with SFAS 144. The Company has reclassified the results of operations of the component disposed for the prior periods in accordance with provisions of SFAS 144. There have been no corporate expenses included in expenses from discontinued operations. The net loss from the discontinued operations were as follows:


	Three-months Ended June 30,						Nine-months Ended June 30,
	2006			2005			2006			2005
Operating expenses from discontinued operations (including exit costs) (1)	$	(27	)	$	(181	)	$	(120	)	$	(361	)

Net loss from discontinued operations	$	(27	)	$	(181	)	$	(120	)	$	(361	)


(1)		The Company records exit costs associated with the monthly rent and common area maintenance charges until leases are terminated or expired, in accordance with SFAS 146.

There were no assets or liabilities held for sale included in the consolidated balance sheet as of June 30, 2006, and September 30, 2005.

3. ACQUISITIONS AND DISPOSALS:

During fiscal year 2006, the Company acquired rental contracts and merchandise of 21 rental-purchase stores. The purchase price was approximately $6,036. The Company assigned a value of $2,984 to the acquired rental merchandise, $378 to amortizable assets (non-compete agreements and customer lists), and $2,674 to goodwill.

During fiscal year 2006, the Company sold rental contracts and merchandise of 11 rental-purchase stores. The sales price was approximately $3,343. The Company sold merchandise with a carrying value of $2,556 and fixed assets with a carrying value of $44. The goodwill allocated to these sales was approximately $1,196. The overall loss on these sales was $407 and was recorded in other income (expense) on the consolidated statement of operations.

The Company allocated goodwill to disposals based on their relative fair value of the Company as determined by a third party in the annual goodwill valuation in accordance with Statement of Financial Accounting Standards No. 143 “Goodwill and Other Intangible Assets.”

4. RENTAL MERCHANDISE AND PROPERTY AND EQUIPMENT:

Cost and accumulated depreciation of rental merchandise consists of the following:


	June 30,		September 30,
	2006		2005
Cost	$	350,792	$	317,912
Less accumulated depreciation		123,114		120,898
Less reserve for losses		2,099		1,261
Less reserve for hurricane damages		—		1,509
Less deferred credits		650		66

	$	224,929	$	194,178

During the three and nine months ended June 30, 2006, the Company received $500 and $1,100, respectively, of insurance proceeds for merchandise lost in last year’s hurricanes that was recorded as a reduction to other operating expenses. The $1,509 reduction of the reserve for hurricane damages in the nine-months ended June 30, 2006, was attributable to actual write-offs charged against the reserve, and the reversal of the $400 reserve for merchandise recovered.

The Company uses a direct-ship policy from their vendors to the stores. As a result, the Company has eliminated the need for internal warehousing and distribution. This policy reduces the amount of rental merchandise not on rent. On-rent and held for rent levels of rental merchandise consists of the following:


	June 30,		September 30,
	2006		2005
On-rent merchandise	$	279,433	$	258,328
Held for rent merchandise		71,359		59,584

	$	350,792	$	317,912

The Company uses the allowance method in accounting for losses (see Note 1). These losses are recorded in other operating expenses and were incurred as follows:


	Nine-Months Ended June 30,
	2006		2005
Lost merchandise	$	453	$	1,067
Stolen merchandise		10,474		8,666
Discarded merchandise		1,934		1,691
Additional reserve for expected losses		723		484

	$	13,584	$	11,908

Property and equipment consists of the following:


	June 30,			September 30,
	2006			2005
Transportation equipment	$	44,337		$	42,875
Furniture and fixtures		38,319			36,431
Leasehold improvements		35,960			34,259
Signs		5,171			5,122
Buildings		5,548			5,674
Land		1,939			1,920

		131,274			126,281
Less accumulated depreciation and amortization		(80,932	)		(78,561	)

	$	50,342		$	47,720

Furniture and fixtures includes computer hardware and software costs of $27,818, which includes software development costs of $2,910 in progress at June 30, 2006. There have been no charges to the statement of operations for software development costs because the software is not yet available for use.

5. EARNINGS (LOSS) PER COMMON SHARE:

Basic earnings (loss) per common share is computed using income (loss) allocable to common shareholders divided by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed using income (loss) allocable to common shareholders and the weighted average number of shares outstanding adjusted for the potential impact of options, warrants, conversion of convertible redeemable preferred stock, convertible preferred stock conversion derivative, dividends on convertible preferred stock and accretion of convertible preferred stock discount where the effects are dilutive.

The following table discloses the reconciliation of numerators and denominators of the basic and diluted earnings (loss) per share computation:


	Three-months Ended June 30,						Nine-months Ended June 30,
	2006			2005			2006			2005
COMPUTATION OF EARNINGS (LOSS) PER SHARE:
BASIC
Income (loss) before discontinued operations	$	2,763		$	(1,034	)	$	5,606		$	6,490
Loss from discontinued operations		(27	)		(181	)		(120	)		(361	)

Net income (loss)		2,736			(1,215	)		5,486			6,129
Dividend and accretion of preferred stock		(605	)		(549	)		(1,769	)		(1,619	)

Net income (loss) allocable to common shareholders	$	2,131		$	(1,764	)	$	3,717		$	4,510


Weighted average common shares outstanding		26,398			26,250			26,388			26,246


Earnings (loss) per share:
Income (loss) before discontinued operations	$	0.10		$	(0.04	)	$	0.21		$	0.24
Loss from discontinued operations		—			(0.01	)		—			(0.01	)
Dividend and accretion of preferred stock		(0.02	)		(0.02	)		(0.07	)		(0.06	)

Net income (loss) allocable to common shareholders	$	0.08		$	(0.07	)	$	0.14		$	0.17


DILUTED
Net income (loss) allocable to common shareholders for basic earnings (loss) per share	$	2,131		$	(1,764	)	$	3,717		$	4,510
Plus: Impact of assumed conversion:
Conversion derivative market value adjustment (1)		—			—			(1,468	)		—
Dividends on 8% convertible preferred stock (1)		—			—			1,201			—
Accretion to preferred stock redemption amount (1)		—			—			568			—

Net income (loss) allocable to common shareholders for diluted earnings (loss) per share and assumed conversion	$	2,131			(1,764	)	$	4,018		$	4,510


Weighted average common shares used in calculating basic earnings (loss) per share		26,398			26,250			26,388			26,246
Add incremental shares representing:
Shares issuable upon exercise of stock options and warrants (2)		269			—			216			532
Shares issuable upon conversion of 8% convertible preferred stock (1)		—			—			3,252			—

Weighted average number of shares used in calculation of diluted earnings (loss) per share		26,667			26,250			29,856			26,778


	Three-months Ended June 30,						Nine-months Ended June 30,
	2006			2005			2006			2005
Earnings (loss) per share:
Income (loss) before discontinued operations	$	0.10		$	(0.04	)	$	0.14		$	0.24
Loss from discontinued operations		—			(0.01	)		(0.01	)		(0.01	)
Dividend and accretion of preferred stock		(0.02	)		(0.02	)		—			(0.06	)

Net income (loss) allocable to common shareholders	$	0.08		$	(0.07	)	$	0.13		$	0.17


(1)		Including the effects of these items for the three-month period ended June 30, 2006 would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8% convertible preferred stock are excluded from consideration in the calculation of diluted earnings per share for the three-months ended June 30, 2006. There were conversion derivative market value adjustments of $344, dividends on convertible preferred stock of $399, and accretion to preferred stock redemption in the amount of $206, which were not added back to net income allocable to common shareholders for basic earnings per share on the diluted earnings per share because including the effects of these items would be anti-dilutive for the three-months ended June 30, 2006.

		Including the effects of these items for the three-month period ended June 30, 2005 would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8% convertible preferred stock are excluded from consideration in the calculation of diluted loss per share for the three-months ended June 30, 2005. There were conversion derivative market value adjustments of $4,969, dividends on convertible preferred stock of $399, and accretion to preferred stock redemption in the amount of $151, which were not added back to net loss allocable to common shareholders for basic loss per share on the diluted loss per share because including the effects of these items would be anti-dilutive for the three-months ended June 30, 2005.

		Including the effects of these items for the nine-month period ended June 30, 2005 would be anti-dilutive. Therefore, 3,252 shares issuable upon conversion of 8% convertible preferred stock are excluded from consideration in the calculation of diluted earnings per share for the nine-months ended June 30, 2005. There were conversion derivative market value adjustments of $6,551, dividends on convertible preferred stock of $1,198, and accretion to preferred stock redemption in the amount of $421, which were not added back to net income allocable to common shareholders for basic earnings per share on the diluted earnings per share because including the effects of these items would be anti-dilutive for the nine-months ended June 30, 2005.

(2)		Including the effects of this item for the three-months ended June 30, 2005, would be anti-dilutive. For the three-months ended June 30, 2005, the number of stock options that were outstanding but not included in the computation of diluted loss per common share in which the exercise price was greater that the average market price was 649.

6. INTANGIBLE ASSETS:

The Company accounts for goodwill in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

The following table shows the net carrying value of goodwill for the Company’s segments:


	Household			Prepaid Telephone
	Rental Segment			Service Segment		Total
Balance at September 30, 2005	$	182,343		$	6,944	$	189,287
Acquisitions		2,674			—		2,674
Disposals		(1,196	)		—		(1,196	)

Balance at June 30,2006	$	183,821		$	6,944	$	190,765

The following tables reflect the components of amortizable intangible assets at June 30, 2006 and September 30, 2005:


	Purchase		Cumulative			Net Carrying
Balance at June 30, 2006:	Amount		Amortization			Amount
Amortizable intangible assets:
Music rights license	$	1,882	$	(287	)	$	1,595
Non-compete agreements		2,838		(2,664	)		174
Customer list		283		(108	)		175
Customer contracts		162		(100	)		62

	$	5,165	$	(3,159	)	$	2,006


	Purchase		Cumulative			Net Carrying
Balance at September 30, 2005:	Amount		Amortization			Amount
Amortizable intangible assets:
Music rights license	$	1,882	$	(7	)	$	1,875
Non-compete agreements		2,650		(2,623	)		27
Customer list		93		(21	)		72
Customer contracts		162		(35	)		127

	$	4,787	$	(2,686	)	$	2,101

At June 30, 2006 future aggregate annual amortization of amortizable intangible assets is as follows:


Fiscal Year	Amount
Remaining 2006	$	175
2007		606
2008		458
2009		394
2010		373

	$	2,006

Amortization expense was $586 and $251 for the nine-months ended June 30, 2006 and 2005, respectively. There were no changes to the amortization methods and lives of the amortizable intangible assets. Customer lists are amortized over 22 months.

7. OTHER ASSETS:

Other assets consist of the following:


	June 30,		September 30,
	2006		2005
Other receivables	$	3,305	$	2,425
Other inventory		666		571
Deposits		864		786
Other		2,574		2,354

	$	7,409	$	6,136

8. OTHER LIABILITIES:

Other liabilities consist of the following:


	June 30,		September 30,
	2006		2005
Accrued salaries, wages, taxes and benefits	$	14,045	$	9,367
Capital lease obligations		21,032		19,409
Deferred rental revenue		8,199		7,704
Accrued dividends and interest		1,826		7,771
Vacant facility lease obligations		2,480		2,541
Accrued property taxes		2,728		3,200
Other		12,453		13,417

	$	62,763	$	63,409

9. DEBT:

Debt consists of the following:


	June 30,		September 30,
	2006		2005
Senior secured notes	$	202,619	$	202,284
Revolving credit facility		45,000		19,000
Note payable		10		29

	$	247,629	$	221,313

The Company’s senior secured notes have the following material terms. The $205,000 principal amount of senior secured notes bears interest at 11.875% and is due June 15, 2010. The interest on the secured notes is payable semiannually on June 15 and December 15. The secured notes are guaranteed on a senior basis by all existing and future domestic restricted subsidiaries of the Company other than DPI, which is an unrestricted subsidiary. The Company may redeem the secured notes, in whole or in part, at any time prior to June 15, 2010, at a redemption price equal to the greater of:

100% of the principal amount of the notes to be redeemed; and

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

plus, in either case, accrued and unpaid interest to the redemption date.

The secured notes were offered at a discount of $3,583, which is being amortized using the effective interest method, over the term of the secured notes. Amortization of the discount was $113 and $101 for the three-month periods ending June 30, 2006 and 2005 respectively, and $335 and $298 for the nine-month periods ending June 30, 2006 and 2005 respectively, and is recorded as interest expense. Costs representing underwriting fees and other professional fees of $6,704 are being amortized over the seven-year term of the notes using the effective interest method of amortization. The secured notes rank senior in right to all of the Company’s existing and future subordinated debt, have a lien position ranking second to the bank revolving credit facility and effectively junior in right of payment to all existing and future debt and other liabilities of the Company’s subsidiaries that are not subsidiary guarantors. The secured notes contain covenants that will, among other things, limit the Company’s ability to incur additional debt, make restricted payments, incur any additional liens, sell certain assets, pay dividend distributions from restricted subsidiaries, transact with affiliates, conduct certain sale and leaseback transactions and use excess cash flow.

The Company is in compliance with these covenants at June 30, 2006, and expects to remain in compliance through fiscal 2006 based upon its current projections.

The Company’s bank revolving credit facility has the following material terms. The facility is with Harris Trust and Savings Bank, acting as administrative agent, and Bank of Montreal as lead arranger, and provides for National City Bank to act as syndication agent and provides for senior secured revolving loans of up to $60,000 including a $15,000 sub-limit for standby and commercial letters of credit and a $5,000 swingline sub-limit. The credit facility will expire five years from closing, or June 2, 2008. The balance outstanding at June 30, 2006 was $45,000 with $11,804 available at June 30, 2006, and has an effective interest rate of 9.06% at June 30, 2006. Loan origination costs of $2,062 are being amortized over the 5-year term of the bank agreement. On November 18, 2005, the Company entered into a third amendment to the bank revolving credit facility and incurred $193 of deferred costs associated with that amendment. The amendment adjusted financial covenants, permitted acquisition limits and capital expenditure limits as disclosed in the Form 10-K for the fiscal year ended September 30, 2005. These deferred financing costs are being amortized over the remaining term of the agreement in accordance with EITF 98-14. The credit facility is guaranteed by all of the wholly owned domestic subsidiaries and collateralized by first priority liens on substantially all of the Company’s and subsidiary guarantors’ assets, including rental contracts and the stock held in domestic subsidiaries. The Company may elect that each borrowing of revolving loans be either base rate loans or Eurodollar loans. The Eurodollar loans bear interest at a rate per annum equal to an applicable margin plus LIBOR adjusted for a reserve percentage. Under the base rate option, the Company may borrow money based on the greater of (a) the prime interest rate or (b) the federal funds rate plus 0.50%, plus, in each case, a specified margin. A 0.50% commitment fee is payable quarterly on the unused amount of the revolving credit facility. Upon a default, interest will accrue at 2% over the applicable rate. The Company will be required to make specified mandatory prepayments upon subsequent debt or equity offerings and asset dispositions.

10. CONVERTIBLE REDEEMABLE PREFERRED STOCK:

On June 2, 2003, the Company issued 1,500 shares of its Series A convertible preferred stock, for $10,000 per share (the “initial preferred”) and granted a one-year option to purchase an additional 500 shares of convertible preferred stock (the “additional preferred”). The net proceeds from the sale of the initial preferred were used to repay the Company’s prior senior credit facility. The net proceeds of $14,161 from the issuance of the initial preferred were net of issuance costs of $839, and are classified outside of permanent equity because of the redemption date and other redemption provisions. The one-year option to purchase additional preferred was exercised during 2004 for $5,000. The Series A convertible preferred stock is being accreted to its maximum redemption amount possible pursuant to Topic D-98, “Classification and Measurement of Redeemable Securities,” using the effective interest method from the issuance date to the June 2, 2011 redemption date.

The terms of the convertible preferred stock include a number of conversion and redemption provisions that represent derivative financial instruments under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, (“SFAS 133”) (see Note 12). Certain features of the convertible preferred stock are accounted for as embedded derivative financial instruments. The Company determined the convertible feature of the convertible preferred stock is a derivative financial instrument that does not qualify for scope exemption under EITF 00-19, and, is required to be bifurcated, recorded at fair value, and marked to market. The market value of this derivative financial instrument was $9,418 and $10,886 at June 30, 2006 and September 30, 2005, respectively, and is recorded in convertible redeemable preferred stock in the consolidated balance sheet. The fair values of the derivatives were determined with the assistance of an independent valuation firm.

11. STOCK OPTIONS:

Effective October 1, 2005, the Company adopted the provisions of FASB Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) for its stock-based compensation plans. Prior to the first quarter of fiscal 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations, as permitted by the original provisions of Statement of Financial Accounting Standards No. 123, “Share-Based Payment”. Under APB 25, the Company recorded no compensation expense since the exercise price of its options equaled the fair market value of the underlying common stock on the date of grant. The Company instead utilized the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Under SFAS 123R, all stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense in the income statement over the requisite service period.

The Company adopted SFAS 123R using the modified prospective transition method. Under the modified prospective transition method, the Company is required to record equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards outstanding as of the date of adoption. Compensation cost related to the unvested portion of previously granted awards was based on the grant-date fair value estimated in accordance with the original provision of SFAS 123. There were no options granted during fiscal year 2006 through June 30, 2006. Results for prior periods have not been restated and do not reflect the recognition of stock-based compensation. The Company used the Black-Scholes option-pricing model to estimate the grant-date fair value of each option granted before the adoption of SFAS 123R. The total intrinsic value of stock options exercised during the first nine months of fiscal 2006 was immaterial. Total unrecognized compensation cost related to nonvested stock-based compensation totaled $1,645 as of the end of the third quarter of fiscal 2006. The unrecognized compensation cost will be recognized over a weighted-average period of three years.

The following table summarizes the transactions under the stock option plan through the nine months ended June 30, 2006:


				Weighted
	Options			Average		Aggregate
(in thousands, except per share amounts)	Outstanding			Exercise Price		Intrinsic Value (1)
Balance at September 30, 2004		2,987,908		$	8.87
Granted		748,500			7.70
Exercised		(137,700	)		4.63
Cancelled		(583,055	)		13.74

Balance at September 30, 2005		3,015,653			7.83
Granted		—			—
Exercised		(17,056	)		5.78
Cancelled		(444,698	)		8.66

Balance at June 30, 2006		2,553,899		$	7.70	$	—

Exercisable at June 30, 2006		1,717,649		$	8.77	$	—


(1)		The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option. The exercise prices of the outstanding and exercisable options exceed the market value at June 30, 2006; therefore, there is no intrinsic value.

On April 4, 2005, the Company’s Board of Directors approved the award of 515,000 options to certain executive officers, directors and certain members of management to acquire common stock under the Company’s stock option plans. On September 30, 2005, the Company’s Board of Directors approved the award of 125,000 options to certain executive officers to acquire common stock under the Company’s stock option plans. These options were awarded under forms of stock option agreements that provide for immediate vesting of the option on grant, but contain restrictions on transfer of the shares underlying options. These awards were made on an immediately vested basis and are expected to mitigate the impact of SFAS 123R while still maintaining some of the retention benefit associated with options that vest over time. The impact of the immediate vesting of 640,500 options issued in fiscal 2005 was $3,585, and is reflected in the SFAS 148 pro-forma compensation expense in the Form 10-K for the fiscal year ended September 30, 2005.

Under SFAS 123R, compensation cost is recognized net of estimated forfeitures and is recognized over the awards’ service period on a straight-line basis. The compensation expense recorded during the first nine months of fiscal 2006 was $238 and is classified within salaries and wages in the Consolidated Statements of Operations. The Company has elected to adopt the alternative transition method, as permitted by FASB Staff Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” for calculating the tax effects of stock-based compensation pursuant to SFAS 123R for those employee awards that were outstanding upon adoption of SFAS 123R. The alternative transition method allows the use of simplified methods to calculate the beginning additional paid in capital pool related to the tax effects of employee stock-based compensation and to determine the subsequent impact of the tax effects of employee stock-based compensation awards on the additional paid in capital pool and the consolidated statements of cash flows. The following table illustrates the impact of stock-based compensation on reported amounts:


	Nine-Months Ended
	June 30, 2006
			Impact of Equity-
(in thousands, except per share amounts)	As Reported		Based Compensation

Income before income taxes and discontinued operations	$	10,042	$	(238	)
Net income	$	5,486	$	(238	)
Net income allocable to common shareholders	$	3,717	$	(238	)
Net income allocable to common shareholders — Basic	$	0.14	$	(0.01	)
Net income allocable to common shareholders — Diluted	$	0.13	$	(0.01	)

The following table illustrates the effect on net income and net income per share if the Company had adopted the fair value recognition provisions of SFAS 123R for the nine months ended June 30, 2005:


	Nine-Months Ended
	June 30,
	2005
Income before discontinued operations:
As reported	$	6,490
Plus: Compensation expense		—
Less: Stock-based employee compensation under fair-value based method for all awards, net of related tax effects		(3,265	)

Pro-forma	$	3,225


Net income allocable to common shareholders:

As reported	$	4,510
Plus: Compensation expense		—
Less: Stock-based employee compensation under fair-value based method for all awards, net of related tax effects		(3,265	)

Pro-forma	$	1,245


Basic earnings per common share:
Net income before discontinued operations:
As reported	$	0.24

Pro-forma	$	0.12


Net income allocable to common shareholders:
As reported	$	0.17

Pro-forma	$	0.05


Diluted earnings per common share:
Net income before discontinued operations:
As reported	$	0.24

Pro-forma	$	0.12


Net income allocable to common shareholders:
As reported	$	0.17

Pro-forma	$	0.05

During the nine months ended June 30, 2005, the weighted-average fair values of the options granted under the stock option plans were $5.98, using the following assumptions:


	Nine-months Ended
	June 30, 2005
Average risk free interest rate		3.76	%
Expected dividend yield		—
Expected life	6 years
Expected volatility		97.67	%

On March 29, 2005, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) No. 107 to express the view of the staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and to provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. The additional guidance of SAB 107 was taken into consideration with the implementation of SFAS 123R.

12. DERIVATIVE FINANCIAL INSTRUMENTS:

The Company’s outstanding convertible redeemable preferred stock (see Note 10) includes a number of conversion and redemption provisions that represent derivatives under SFAS No. 133. The Company has determined the conversion feature of the convertible redeemable preferred stock is a derivative financial instrument that does not qualify for SFAS 133 scope exemption under EITF 00-19. It was bifurcated and recorded in the temporary equity classification on the balance sheet. The change in the fair market value of the conversion feature was expense of $344 and $4,969 for the three-months ended June 30, 2006 and 2005, respectively; income of $1,468 and expense of $6,551 for the nine-months ended June 30, 2006 and 2005, respectively.

At June 30, 2005, the Company had interest rate swaps on a notional debt amount of $40,000 and a fair market value of $(164). The interest rate swaps matured in August 2005. The Company’s interest rate swaps did not meet the qualifications for hedge accounting treatment under SFAS No. 133. The Company’s positive change in the fair market value of the interest rate swap portfolio was $380 and $1,408 for the three-months and nine-months ended June 30, 2005. This was recorded to other income (expense) in the Company’s consolidated statements of operations.

13. COMPREHENSIVE INCOME:

Comprehensive income encompasses net income and changes in the components of accumulated other comprehensive income not reflected in the Company’s consolidated statements of operations during the periods presented. Accumulated other comprehensive income consists of the transition asset recorded at the time of adoption of SFAS No. 133.


	Other Comprehensive		Other Comprehensive
	Income		Income
	For Nine-months Ended		For Nine-months Ended
	June 30, 2006		June 30, 2005
Net income	$	5,486	$	6,129

Amortization of SFAS 133 Transition amount		—		84


Other comprehensive income	$	5,486	$	6,213


	Accumulated Other
	Comprehensive
	Loss
	At September 30, 2005
Balance at October 1, 2004	$	(93	)

Amortization of SFAS 133 Transition amount		93

Accumulated other comprehensive loss	$	—

14. CONTINGENCIES:

The Company is subject to legal proceedings and claims in the ordinary course of its business that have not been finally adjudicated. All but $158 of such claims will be, in the opinion of management, covered by insurance policies, or create only remote potential of any liability exposure to the Company and therefore should not have a material effect on the Company’s financial position, results of operations or cash flows. Additionally, threatened claims exist for which management is not yet able to reasonably estimate a potential loss. In management’s opinion, none of these threatened and unasserted claims will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Effective January 1, 2006, the Company converted to a fully self-insured health insurance program. The Company funds actual claims and uses a claims lag report provided by the insurance company to estimate the Company’s incurred but not reported (IBNR) claims liability.

In calendar year 2005, the Company determined its health insurance liability based on funding factors determined by cost plus rates for a fully insured plan and monthly headcount. The contracted rate was determined based on experience, prior claims filed and an estimate of future claims. A retrospective adjustment for over or under funding of claims is recorded in other operating expenses in the consolidated statement of operations when determinable and probable. The retrospective adjustment to income was approximately $422 for the three-months ended June 30, 2006, $836 for the nine-months ended June 30, 2006, and $1,542 for the three and nine-month periods ended June 30, 2005.

The Company’s workers’ compensation, automobile and general liability costs are determined based on claims filed and company experience. Losses in the workers’ compensation, automobile and general liability programs are pre-funded based on the insurance company’s loss estimates. Loss estimates will be adjusted for developed incurred losses at 18 months following policy inception and every 12 months thereafter. Retrospective adjustments to loss estimates are recorded in other operating expenses in the consolidated statement of operations when determinable and probable. The retrospective adjustment to income was $1,500 and $310 for the three and nine-month periods ended June 30, 2006 and 2005, respectively.

For fiscal year 2000, the Company was insured under deductible programs with aggregate stop loss coverage on major claims. Claims within the insured deductible limits that were less than stop loss aggregates, were funded as claims developed using AM Best loss development factors and not exceeding policy aggregate. The fiscal 1999 worker’s compensation insurance had no aggregate retention and was funded as claims developed using AM Best loss development factors.

The Company’s majority-owned subsidiary, DPI, is contingently liable for an amount relating to the acquisition of phone service accounts under an earn-out arrangement. Management estimates that a total amount of approximately $174 will be paid out under the arrangement over a nine-month period from July 2006 through March 2007 based on acquired phone service accounts’ projected future earnings.

15. INCOME TAXES:

During the first nine months of fiscal 2006, the Company recorded income tax expense and a deferred tax liability of $4,436 because the Company does not look to the reversal of the deferred tax liability associated with tax-deductible goodwill to offset a portion of its deferred tax asset, following the adoption of SFAS 142. The deferred tax liability for goodwill is $20,292 at June 30, 2006. The deferred tax asset, net of liabilities excluding goodwill, increased from $79,162 at September 30, 2005 to $79,310 at June 30, 2006. This represented a increase of $148 for the nine-months ended June 30, 2006. A full valuation allowance has been provided against the net deferred tax asset due to the uncertainty of its realization.

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, “(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of this interpretation.

16. EMPLOYEE BENEFIT PLANS:

On March 8, 2006, Rent-Way’s shareholders approved the Rent-Way, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan allows the Compensation Committee of the Board of Directors the ability to utilize various equity vehicles, including stock options, stock appreciation rights, restricted stock or restricted units, performance-based awards or stock bonuses, as deemed appropriate to attract, retain and incent employees’ and service providers. The Company’s 1999 and 2004 stock option plans were effectively frozen and no further grants will be made under these plans. All shares authorized under the Company’s stock option plans as of January 13, 2006, but not reserved for issuance under outstanding option grants, which was 2,468,561 shares, were transferred to and available for award under the 2006 Plan. There were 15,000 restricted stock units awarded under the 2006 Plan on May 4, 2006.

17. RELATED PARTY TRANSACTIONS

In June 2006, in accordance with Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company received $1,444 from a greater than 10% shareholder, which represented “short swing profits” under Section 16 of the Exchange Act. These profits arise from certain sales and purchases by the shareholder within six-month periods in violation of Section 16(b). The amount received was recorded as an increase to additional paid in capital.

18. SUBSEQUENT EVENTS:

On August 7, 2006, Rent-Way, Rent-A-Center, Inc. (“RAC”) and Vision Acquisition Corp. (“Vision”), a wholly-owned indirect subsidiary of RAC, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Vision will merge with and into Rent-Way, with Rent-Way continuing after the merger as the surviving entity and as a subsidiary of RAC (the “Merger”). At the effective time of the Merger, each outstanding share of Rent-Way common stock and each outstanding restricted stock unit will be converted into the right to receive $10.65 in cash, without interest. Also, at the effective time of the Merger, each outstanding option to purchase Rent-Way common stock will be canceled and converted into the right to receive an amount of cash per share equal to the excess, if any, of $10.65 over the exercise price of the option. In addition, upon the consummation of the Merger, Rent-Way will redeem all of its Series A Convertible Preferred Stock and all of its 11 7/8% Senior Notes due 2010.

Rent-Way has made customary representations and warranties and covenants in the Merger Agreement, including covenants relating to obtaining the requisite approval of Rent-Way’s shareholders, Rent-Way’s conduct of its business between the date of the signing of the Merger Agreement and the closing of the Merger and, subject to certain exceptions, Rent-Way’s agreement not to solicit, enter into discussions regarding, or provide confidential information in connection with, alternative transactions.

The Merger Agreement has been approved by Rent-Way’s and RAC’s respective boards of directors. The completion of the Merger is subject to customary closing conditions, including the approval of Rent-Way’s shareholders and the receipt of certain government and regulatory approvals, including the expiration of all waiting periods required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Merger Agreement contains certain termination rights of RAC and Rent-Way and provides that, upon the termination of the Merger Agreement under certain circumstances, Rent-Way would be required to pay RAC a termination fee of $17.5 million, plus up to S4.15 million of RAC’s out-of-pocket expenses incurred in connection with the Merger Agreement. The Merger is currently expected to close in the fourth calendar quarter of 2006.

19. SEGMENT INFORMATION:

Rent-Way is a national rental-purchase chain that provides a variety of services to its customers including rental of household items and prepaid telephone. The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting, which disaggregates its business by product category. The Company’s reportable segments are household rentals and prepaid telephone service. Its household rental segment rents name brand merchandise such as furniture, appliances, electronics and computers on a weekly, biweekly, semimonthly, or monthly basis. Its prepaid telephone service segment provides a local dial tone on a month-by-month basis.

The financial results of the Company’s segments follow the same accounting policies as described in “Summary of Critical Accounting Policies” (see Note 1).


	Household		Prepaid Telephone			Inter-segment
For the three months ended June 30, 2006	Rental Segment		Service Segment			Activity			Total Segments
Rental revenues	$	113,701	$	—		$	—		$	113,701
Prepaid phone service revenue		—		4,124			—			4,124
Sales of merchandise		4,041		—			—			4,041
Customer club fee revenue		6,371		—			—			6,371
Liability damage waiver fee revenue		2,347		—			—			2,347
Other revenue		5,030		—			(246	)		4,784

Total revenue	$	131,490	$	4,124		$	(246	)	$	135,368

Operating income (loss)	$	12,120	$	(64	)	$	30		$	12,086

Net income (loss)	$	2,855	$	(119	)	$	—		$	2,736


Total Assets	$	497,619	$	2,890		$	(6,473	)	$	494,036


	Household		Prepaid Telephone			Inter-segment
For the nine months ended June 30, 2006	Rental Segment		Service Segment			Activity			Total Segments
Rental revenues	$	340,499	$	—		$	—		$	340,499
Prepaid phone service revenue		—		12,494			(205	)		12,289
Sales of merchandise		12,779		—			—			12,779
Customer club fee revenue		19,416		—			—			19,416
Liability damage waiver fee revenue		7,038		—			—			7,038
Other revenue		14,158		—			(570	)		13,588

Total revenue	$	393,890	$	12,494		$	(775	)	$	405,609

Operating income (loss)	$	31,323	$	(548	)	$	(116	)	$	30,659

Net income (loss)	$	6,405	$	(714	)	$	(205	)	$	5,486


Total Assets	$	497,619	$	2,890		$	(6,473	)	$	494,036


	Household			Prepaid Telephone			Inter-segment
For the three months ended June 30, 2005	Rental Segment			Service Segment			Activity			Total Segments
Rental revenues	$	108,455		$	—		$	—		$	108,455
Prepaid phone service revenue		—			4,313			—			4,313
Sales of merchandise		2,519			—			—			2,519
Customer club fee revenue		6,337			—			—			6,337
Liability damage waiver fee revenue		2,222			—			—			2,222
Other revenue		4,617			—			(166	)		4,451

Total revenue	$	124,150		$	4,313		$	(166	)	$	128,297

Operating income (loss)	$	12,437		$	(160	)	$	30		$	12,307

Net income (loss)	$	(995	)	$	(220	)	$	—		$	(1,215	)


Total Assets	$	466,278		$	2,910		$	(5,465	)	$	463,723


	Household Rental		Prepaid Telephone			Inter-segment
For the nine-months ended June 30, 2005	Service		Service			Activity			Total
Rental revenues	$	328,596	$	—		$	—		$	328,596
Prepaid phone service revenue		—		13,617			—			13,617
Sales of merchandise		8,992		—			—			8,992
Customer club fee revenue		19,157		—			—			19,157
Liability damage waiver fee revenue		6,783		—			—			6,783
Other revenue		14,152		—			(505	)		13,647

Total revenue	$	377,680	$	13,617		$	(505	)	$	390,792

Operating income (loss)	$	37,832	$	(152	)	$	90		$	37,770

Net income (loss)	$	6,460	$	(331	)	$	—		$	6,129


Total Assets	$	466,278	$	2,910		$	(5,465	)	$	463,723


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

Management’s discussion and analysis is provided as a supplement to, and should be read in conjunction with, the unaudited financial statements and accompanying notes to the consolidated financial statements of Rent-Way.

OVERVIEW

At June 30, 2006, Rent-Way operated 784 rental-purchase stores located in 34 states. The Company offers quality brand name home entertainment equipment, furniture, computers, major appliances, and jewelry to customers under full-service rental-purchase agreements that generally allow the customer to obtain ownership of the merchandise at the conclusion of an agreed upon rental period. The Company also provides prepaid local phone service to consumers on a monthly basis through dPi Teleconnect LLC, or “DPI.” DPI is a non-facilities based provider of local phone service.

Rent-Way operates in the highly competitive rental-purchase industry in the United States. The Company faces strong sales competition from other rental-purchase businesses, department stores, discount stores and retail outlets that offer an installment sales program or comparable products and prices. Additionally, Rent-Way competes with a number of companies for prime retail site locations, as well as for attracting and retaining quality employees. Rent-Way, along with other rental-purchase and retail companies, is influenced by a number of factors including, but not limited to: cost of merchandise, consumer debt levels, economic conditions, customer preferences, employment, inflation, fuel prices and weather patterns.

Operating results for the nine-months ended June 30, 2006 are not indicative of results that may be expected for the fiscal year ending September 30, 2006 because of seasonality. The typical store experiences a slight decrease in the number of agreements during the summer months while, on balance, the rest of the year demonstrates growth in agreements. While there is constant turnover within the portfolio of rental agreements, the total number of rental agreements in a store does not change significantly. This stability in the number of rental agreements facilitates revenue forecasting.

Through the opening of new stores and acquisitions, the number of stores operated by the Company has increased from 753 as of September 30, 2004, to 784 as of June 30, 2006. The following table shows the number of stores opened, acquired, sold, closed and/or combined during this period.


							NINE-MONTH
	YEARS ENDED SEPTEMBER 30,						PERIOD ENDED
STORES	2004			2005			JUNE 30, 2006
Open at Beginning of Period		753			754			788
Opened		2			44			8
Locations Acquired		0			1			—
Locations Sold		0			(2	)		(11	)
Closed or Combined		(1	)		(9	)		(1	)

Open at End of Period		754			788			784

CRITICAL ACCOUNTING ESTIMATES

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In applying accounting principles, management must often make individual estimates and assumptions regarding expected outcomes or uncertainties. The actual results of outcomes are generally different than the estimated or assumed amounts. These differences are usually insignificant and are included in the consolidated financial statements as soon as they are known. The estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from these estimates.

CRITICAL ACCOUNTING POLICIES

The Company included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2005, a discussion of the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial

condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

COMPANY PERFORMANCE MEASURES

Management uses a number of metrics to assess its performance. The following are some of these metrics:

	•		Same store revenue is a measure that indicates whether the Company’s existing stores continue to grow. Same store revenues consists of revenues from stores in the household rental segment that have been operating for more than fifteen months and have had no changes affecting operations during that time, i.e. mergers, dispositions or acquisitions. Stores that experienced mergers, dispositions or acquisitions during that period are not included in the calculation of same store revenues. Same store revenues increased 4.05% for the quarter ended June 30, 2006 compared to the same period in the prior year. This is attributable to the continuation of offering higher-end merchandise to customers, an increase in cash sales of rental merchandise and an increase in customers period over period.

	•		Rental merchandise depreciation as a percentage of rental revenue plus other revenue has long been an indicator of gross profit margins on rental contracts. The Company uses the units of activity depreciation method for all rental merchandise except computers, electronic game systems, and cell phones, which are depreciated on the straight-line method. Under the units of activity method, rental merchandise is depreciated as revenue is earned. Thus, rental merchandise is not depreciated during periods when it is not on rent and therefore not generating rental revenue. Rental merchandise depreciation as a percentage of rental revenue plus other revenue was 27.3% for the three-month period ended June 30, 2006 versus 25.8% for the three-month period ended June 30, 2005. Generally, the increase in rental merchandise depreciation as a percentage of rental revenue is primarily attributable to the increase in merchandise sales. The margins in merchandise sales are lower than the margins on rental contracts. Cell phone depreciation is attributable for 0.4% of the increase.

	•		Operating income of the household rental segment is a key measure that management uses to monitor how revenue growth and cost control measures impact profitability. Operating income of the household rental segment was 9.2% of total revenue for the three-month period ended June 30, 2006 versus 10.0% of total revenues for the three-month period ended June 30, 2005. This is attributable to lower margins on increased cash sales of merchandise period over period and general increases in other operating expense.

RESULTS OF OPERATIONS

As an aid to understanding the Company’s operating results, the following tables express items of the Company’s unaudited consolidated statements of operations for the three and nine-month periods ended June 30, 2006 and 2005 as a period-over-period percentage change.

COMPARISON OF THREE-MONTHS ENDED JUNE 30, 2006 AND 2005


	Three-Months Ended
	June 30,
In thousands	2006		2005		Percent Change
REVENUES:
Rental revenue	$	113,701	$	108,455		5
Prepaid phone service revenue		4,124		4,313		(4	)
Other revenue		17,543		15,529		13

Total revenues		135,368		128,297		6

COSTS AND OPERATING EXPENSES:
Depreciation and amortization Rental merchandise		35,881		31,949		12
Property and equipment		3,783		3,732		1
Amortization of intangibles		205		195		5
Cost of prepaid phone service		2,464		2,684		(8	)
Salaries and wages		36,245		35,580		2
Advertising		4,715		5,438		(13	)
Occupancy		10,324		9,526		8
Other operating expenses		29,665		26,886		10

Total costs and operating expenses		123,282		115,990		6

Operating income		12,086		12,307		(2	)


	Three-Months Ended
	June 30,
In thousands	2006			2005			Percent Change
OTHER INCOME (EXPENSE):
Interest expense		(7,403	)		(7,304	)		1
Interest income		21			9			133
Amortization of deferred financing costs		(333	)		(289	)		15
Other income (expense)		(257	)		(4,362	)		(94	)

Income before income taxes and discontinued operations		4,114			361			1,040
Income tax expense		1,351			1,395			(3	)

Income (loss) before discontinued operations		2,763			(1,034	)		367
Loss from discontinued operations		(27	)		(181	)		85

Net income (loss)		2,736			(1,215	)		325
Dividend and accretion of preferred stock		(605	)		(549	)		(10	)

Net income (loss) allocable to common shareholders	$	2,131		$	(1,764	)		221

Total revenues. Total revenues increased $7.1 million to $135.4 million from $128.3 million. Rental revenue increased $5.2 million, of which $4.5 million is attributable to the opening of new stores and $1.3 million is due to offering higher revenue-generating products and increasing rental rates on certain products, offset by a $0.6 million decrease in revenues associated with selling and closing stores destroyed by hurricanes.

Prepaid phone service decreased by $0.2 million. Much of the $0.2 million decrease in prepaid phone service revenue is attributable to the loss of DPI customers’ year over year due to an increase in competition.

Other revenue increased $2.0 million, of which $0.7 million is attributable to the opening of new stores and a $1.5 million increase in cash sales of rental merchandise year over year. This increase in cash sales is attributable to continued efforts to better manage older, slower-moving merchandise through cash sales rather than write-offs.

Rental Merchandise Depreciation. Rental merchandise depreciation as a percentage of rental revenue plus other revenue was 27.3% for the three-months ended June 30, 2006 versus 25.8% for the three-months ended June 30, 2005. The increase in rental merchandise depreciation is attributable to the increase in merchandise sales. The margins on merchandise sales are lower than the margins on rental contracts. Cell phone depreciation is attributable for 0.4% of the increase.

Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to $2.5 million from $2.7 million. The decrease in costs is due to a general decrease in the customer base year over year.

Salaries and Wages. Salaries and wages increased to $36.2 million from $35.6 million. This increase is generally due to annual increases in wages and salaries and an increase of $0.7 million as a result of new store openings.

Advertising. Advertising expense decreased $0.7 million to $4.7 million from $5.4 million. The decrease is primarily due to a decrease in circular mailings, local store marketing, and new store grand openings offset by an increase in television advertising.

Occupancy. Occupancy expense increased to $10.3 million from $9.5 million. The increase is principally due to $0.4 million in general rent increases and $0.4 million in occupancy expenses associated with opening new stores.

Other Operating Expenses. Other operating expenses increased to $29.7 million from $26.9 million. This increase is principally due to an increase of $1.0 million in auto fuel and utilities, $0.7 million in merchandise losses, $0.4 million in professional fees, and increases in various other expenses. There was a partial hurricane loss insurance settlement of $0.5 million received in the three-months ended June 30, 2006, that offset the increase in other operating expenses period over period.

Other Income (Expense), Net. Other expense was $0.3 million for the three-months ended June 30, 2006, compared to expense of $4.4 million for the three-months ended June 30, 2005. This change is primarily due to the change in the fair market value of the convert feature of the convertible redeemable preferred stock derivative, which resulted in expense of $0.3 million in the three-month period ended June 30, 2006, compared to $5.0 million expense for the three-month period ended June 30, 2005.

Income Tax Expense. Income tax expense was $1.4 million for the three-months ended June 30, 2006, compared to $1.4 million for the three-months ended June 30, 2005. The expense is due to the Company’s inability to look to the reversal of the deferred tax liability associated with tax-deductible goodwill to offset a portion of its deferred tax asset following the adoption of SFAS 142.

Net Income (Loss). The Company generated net income of $2.7 million in the three-month period ended June 30, 2006 as a result of

the factors described above compared to a net loss of $1.2 million in the same period last year.

Net Income (Loss) Allocable To Common Shareholders. The dividend and the accretion of preferred stock totaled $0.6 million and $0.5 million and were charged to the accumulated deficit, and reduced net income and increased net loss allocable to common shareholders for the periods ended June 30, 2006 and 2005, respectively.

COMPARISON OF NINE-MONTHS ENDED JUNE 30, 2006 AND 2005


	Nine-Months Ended
	June 30,
In thousands	2006			2005			Percent Change
REVENUES:
Rental revenue	$	340,499		$	328,596			4
Prepaid phone service revenue		12,289			13,617			(10	)
Other revenue		52,821			48,579			9

Total revenues		405,609			390,792			4
COSTS AND OPERATING EXPENSES:
Depreciation and amortization
Rental merchandise		108,474			100,471			8
Property and equipment		11,009			12,145			(9	)
Amortization of intangibles		586			251			133
Cost of prepaid phone service		7,733			8,460			(9	)
Salaries and wages		109,831			105,164			4
Advertising		15,824			15,524			2
Occupancy		30,454			27,874			9
Other operating expenses		91,039			83,133			10

Total costs and operating expenses		374,950			353,022			6

Operating income		30,659			37,770			(19	)
OTHER INCOME (EXPENSE):
Interest expense		(21,711	)		(21,622	)		—
Interest income		64			22			191
Amortization and write-off of deferred financing costs		(982	)		(854	)		(15	)
Other income (expense)		2,012			(4,601	)		144

Income before income taxes and discontinued operations		10,042			10,675			(6	)
Income tax expense		4,436			4,185			6

Income before discontinued operations		5,606			6,490			(14	)
Loss from discontinued operations		(120	)		(361	)		(67	)

Net income		5,486			6,129			(10	)
Dividend and accretion of preferred stock		(1,769	)		(1,619	)		9

Net income allocable to common shareholders	$	3,717		$	4,510			(18	)

Total revenues. Total revenues increased $14.8 million to $405.6 million from $390.8 million. Rental revenue increased $11.9 million, of which $14.8 million is attributable to new store openings offset by a $2.1 million decrease in revenues associated with selling and closing stores destroyed by hurricanes and other various decreases.

Prepaid phone service decreased by $1.3 million. The decrease in prepaid phone service revenue was attributable to the loss of DPI customers’ period over period due to an increase in competition.

Other revenue increased $4.2 million, of which $2.1 million was attributable to the opening of new stores and a $3.8 million increase in cash sales of rental merchandise period over period, offset by various other decreases. The increase in cash sales is attributable to continued efforts to better manage older, slower-moving merchandise through cash sales other than write-offs.

Rental Merchandise Depreciation. Rental merchandise depreciation as a percentage of rental revenue plus other revenue was 27.6% for the nine-months ended June 30, 2006 versus 26.6% for the nine-months ended June 30, 2005. This was attributable to an increase in merchandise sales, which have lower gross profit margins than those on rental contracts. Cell phone depreciation is attributable for 0.2% of the increase.

Property and Equipment Depreciation. Property and equipment depreciation decreased to $11.0 million from $12.1 million. This decrease is due to the expiration of depreciation periods for certain fixed assets and the increase in the life of capitalized vehicle leases.

Cost of Prepaid Phone Service. The cost of prepaid phone service decreased to $7.7 million from $8.5 million. The decrease in costs is due to a general decrease in the customer base year over year.

Salaries and Wages. Salaries and wages increased to $109.8 million from $105.2 million. This increase is generally due to annual increases in wages and salaries and an increase of $2.6 million as a result of new store openings.

Advertising. Advertising expense increased $0.3 million to $15.8 million from $15.5 million. The increase is primarily due to more focus on television advertising in an effort to keep ads current and televising with greater frequency.

Occupancy. Occupancy expense increased to $30.5 million from $27.9 million. This increase is principally due to $1.5 million in general rent increases and $1.1 million in occupancy expenses associated with opening new stores.

Other Operating Expenses. Other operating expenses increased to $91.0 million from $83.1 million. This increase is principally due to an increase of $2.8 million in fuel and utilities, $0.9 in professional fees, $1.6 million in rental merchandise losses, $1.1 million in payroll tax expense, health insurance costs of $1.6 million, and various other increases in expenses. The increase to other operating expenses was offset by a reduction to the reserve for hurricane losses due to a reversal of a merchandise reserve totaling $0.4 million, the receipt of $1.1 million of insurance proceeds for merchandise lost in last year’s hurricanes, and an increase of $0.5 million of retrospective insurance adjustments period over period.

Interest Expense. Interest expense was $21.7 million for both the nine-months ended June 30, 2006 and 2005. There was an increase in interest expense of $1.4 million related to the increase in the outstanding balance of the revolving credit facility period over period. This increase was offset by a $1.3 million decrease in interest expense related to interest swaps in the prior period that expired August 2005.

Other Income (Expense), Net. Other income was $2.0 million for the nine-months ended June 30, 2006, compared to expense of $4.6 million for the nine-months ended June 30, 2005. This change is primarily due to the change in the fair market value of the convert feature of the convertible redeemable preferred stock derivative, which resulted in income of $1.5 million in the nine-month period ended June 30, 2006, compared to $6.6 million expense for the nine-month period ended June 30, 2005. The increase to other income period over period was reduced by the $1.4 million favorable fair value adjustment recorded in the prior year period for interest rate swaps that matured August 2005.

Income Tax Expense. Income tax expense was $4.4 million for the nine-months ended June 30, 2006, compared to $4.2 million for the nine-months ended June 30, 2005. This expense is due to the Company’s inability to look to the reversal of the deferred tax liability associated with tax-deductible goodwill to offset a portion of its deferred tax asset following the adoption of SFAS 142.

Net Income. The Company generated net income of $5.5 million in the nine-month period ended June 30, 2006 as a result of the factors described above compared to net income of $6.1 million in the same period last year.

Net Income Allocable To Common Shareholders. The dividend and the accretion of preferred stock totaled $1.8 million and $1.6 million and were charged to the accumulated deficit, and reduced net income allocable to common shareholders for the nine-month periods ended June 30, 2006 and 2005, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s capital requirements relate primarily to purchasing additional rental merchandise, replacing rental merchandise that has been sold or is no longer suitable for rent and new store openings. The Company’s principal sources of liquidity are cash flows from operations, debt capacity available under its revolving credit facility and available cash reserves.

Cash flows from operating activities The Company’s statements of cash flows are summarized as follows:


	For the Nine-Months Ended June 30,
In thousands	2006			2005
Net cash used in operating activities	$	(10,626	)	$	(12,992	)

Cash flows used in operating activities decreased by $2.4 million period over period. The main reason for this decrease was an increase in accounts payable of $7.8 million, a reduction of $2.0 million cash paid to settle lawsuit, offset by an increase in rental

merchandise purchases of $6.6 million.

Cash flows from investing activities. The Company’s statement of cash flows are summarized as follows:


	For the Nine-Months Ended June 30,
In thousands	2006			2005
Purchase of businesses, net of cash acquired	$	(6,037	)	$	(754	)
Purchases of property and equipment		(6,550	)		(11,008	)
Proceeds from sale of assets		3,343			—

Net cash used in investing activities	$	(9,244	)	$	(11,762	)

Cash flows used in investing activities for the nine-months ended June 30, 2006 includes the acquisition of rental contracts and merchandise of 21 rental-purchase stores from Rent-A-Center. The aggregate purchase price was approximately $6.0 million. The cash used to purchase the rental contracts and agreements was offset by proceeds from the sale of rental contracts, merchandise and certain fixed assets of 11 stores of $3.3 million (see Note 3) and a decrease in capital expenditures compared to the same period in the prior year.

Financing Activities. The Company’s statement of cash flows are summarized as follows:


	For the Nine-Months Ended June30,
In thousands	2006			2005
Proceeds from borrowings	$	108,950		$	100,000
Payments on borrowings		(82,970	)		(68,022	)
Payments on capital leases		(5,490	)		(5,629	)
Issuance of common stock		36			77
Short swing profits		1,444			—
Dividends paid on convertible redeemable preferred stock		(1,201	)		(1,197	)
Deferred financing costs		(193	)		—

Net cash provided by financing activities	$	20,576		$	25,229

Proceeds and payments on borrowings included both short-term and long-term financing activities. At June 30, 2006, the Company had $11.8 million available of its $60.0 million bank revolving credit facility. There was a $45.0 million balance outstanding on the bank revolving credit facility and there were $3.2 million letters of credit outstanding.

The Company’s revolving credit facility contains several financial covenants related to ratio requirements for leverage, fixed coverage, rental merchandise inventory, and thresholds for capital expenditures, consolidated net worth and minimum EBITDA. EBITDA is defined in the credit facility as net income plus the sum of all amounts deducted in arriving at such net income amount for interest expense, federal, state and local income taxes for such period, depreciation of fixed assets and amortization of intangible assets for such period (excluding depreciation of rental merchandise), any fees, costs or expenses paid in connection with the execution and delivery of the credit facility and the other loan documents and the issuance and sale of the senior notes and preferred stock to the extent such fees, costs or expenses are not capitalized. Adjustments shall be made for any four fiscal quarter rolling period to EBITDA with respect to one-time, non-cash charges in amounts, which are reasonable and acceptable to the required lenders, or “Credit Facility EBITDA.” These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

The secured notes contain covenants that, among other things, limit the Company’s ability to incur additional debt, make restricted payments, incur any additional liens, sell certain assets, pay dividend distributions from restricted subsidiaries, transact with affiliates, conduct certain sale and leaseback transactions and use excess cash flow.

The Company is in compliance with all debt covenants at June 30, 2006, and expects to be able to comply with those covenants for the remainder of fiscal 2006 based upon its fiscal 2006 projections. In November 2005, the Company amended its bank credit facility to change the financial covenants to allow for the effect of opening and acquiring new stores. The leverage ratio, minimum Credit Facility EBITDA and, capital expenditure covenants were amended as described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

The table below shows the required performance under the financial covenants, and the Company’s actual performance under those covenants, as set forth in the Company’s revolving credit facility at June 30, 2006.


	Required			Actual
Maximum leverage ratio		5.75			5.26
Minimum fixed charge coverage ratio		1.25			1.64
Minimum rental merchandise under lease usage		77	%		81	%
Maximum idle jewelry merchandise		7.5	%		1.7	%
Maximum capital expenditures	$25.0 million			$11.9 million
Minimum consolidated net worth	$107.6 million			$130.6 million
Minimum Credit Facility EBITDA	$42.0 million			$55.9 million

If the Company fails to comply with these covenants, the Company will be in default under this commitment, and all amounts would become due immediately. The Company is in compliance with all of these covenants at June 30, 2006. A reconciliation of Credit Facility EBITDA to cash flow used in operations is set forth in Exhibit 99.1 to this report.

The terms of the Company’s revolving credit facility and the indenture governing the senior notes do not fully prohibit the Company or its subsidiaries from incurring additional debt. As a result, the Company may be able to incur additional debt in the future.

Financial Condition. The increase in debt for the nine-month period ended June 30, 2006 is attributable to a $26.0 million increase in the bank revolving credit facility, which was primarily used to fund rental merchandise purchases.

Off Balance Sheet Arrangements. The Company is not subject to any off-balance sheet arrangements within the meaning of Rule 303(a)(4) of Regulation S-K.

Contractual Obligations. The following table presents obligations and commitments to make future payments under contracts and contingent commitments at June 30, 2006:


			Due in less		Due in		Due in		Due after
Contractual Cash Obligations (In thousands)	Total		than one year		1-3 years		4-5 years		5 years
Debt	$	205,000	$	—	$	—	$	205,000	$	—
Revolving credit facility (1)		45,000		45,000		—		—		—
Capital lease obligations		22,059		7,534		13,847		678		—
Operating leases		91,363		28,351		55,768		6,780		464
Music rights obligation		1,481		400		1,081		—		—
Notes payable		9		9		—		—		—
Interest payable (2)		96,713		23,589		73,117		7		—

Total cash obligations	$	461,625	$	104,883	$	143,813	$	212,465	$	464


(1)		The revolving credit facility matures June 2, 2008.

(2)		The revolving credit facility bears interest at a rate per annum equal to an applicable margin plus LIBOR adjusted for a reserve percentage. The interest payable attributable to the revolving credit facility includes the interest payable under the borrowing contracts in place at June 30, 2006. Interest payments on the senior secured notes are $12.2 million payable on each June 15 and December 15.


	Amount of Commitment Expiration Per Period
	Total Amounts		Less than						Over
Other Commercial Commitments (In thousands)	Committed		one year		1-3 years		4-5 years		5 years
Lines of credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		3,196		3,196		—		—		—
Guarantees		—		—		—		—		—

Total commercial commitments	$	3,196	$	3,196	$	—	$	—	$	—

Standby letters of credit are generally required for fleet and insurance guarantees. These one year letters are renewed on an annual basis.

Seasonality and Inflation. The Company’s operating results are subject to seasonality. The first quarter typically will have a greater number of rental-purchase agreements entered into because of traditional holiday shopping patterns. Because many of the Company’s expenses do not fluctuate with seasonal revenue changes, such revenue changes may cause fluctuations in the Company’s quarterly earnings. In the event of a prolonged recession, the Company acknowledges the possibility of a decrease in demand, particularly for higher-end products.

CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS

Certain written and oral statements made by the Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this report and in other filings with the Securities and Exchange Commission. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that the Company expects or anticipates will occur in the future—including statements relating to future financial results and statements expressing general optimism about future operating results—are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and the Company’s present expectations or projections. Caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of June 30, 2006, the Company had $202.6 million in senior secured notes outstanding at a fixed interest rate of 11.875% and $45.0 million in revolving lines of credit outstanding at interest rates indexed to the Eurodollar rate. The fair value of the subordinated notes is estimated based on traded values. The fair value of the 11.875% senior secured notes at June 30, 2006 was approximately $213.0 million. Unlike the senior secured notes, the $45.0 million in revolving lines of credit have variable interest rates indexed to current Eurodollar rates. As of June 30, 2006, the Company has not entered into any interest rate swap agreements with respect to revolving lines of credit.

Market Risk

Market risk is the potential change in an instrument’s value caused by fluctuations in interest rates. The primary market risk exposure is fluctuations in interest rates. Monitoring and managing this risk is a continual process carried out by our management. The Company manages market risk based on an ongoing assessment of trends in interest rates and economic developments, giving consideration to possible effects on both total return and reported earnings.

ITEM 4. CONTROLS AND PROCEDURES

A. Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 (e) under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, the Company’s disclosure controls and procedures were effective.

B. Changes in Internal Control Over Financial Reporting. There has not been any change in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II —OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to litigation in the ordinary course of business. The Company believes the ultimate outcome of any existing litigation would not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

ITEM 1A. RISK FACTORS

The Company’s significant indebtedness and dividend payment obligations limit cash flow availability for operations. The Company has incurred substantial debt to finance growth and has pledged substantially all assets as collateral for debt. The Company may need to incur additional indebtedness to operate the business successfully. The debt under the Company’s bank credit facility is subject to variable rates of interest. This exposes the Company to the risk that interest rates will rise and the amount of interest the Company pays to the bank lenders will increase. The Company also has dividend payment obligations on its $20 million of outstanding Series A preferred stock. The Series A preferred stock bears dividends at 8% per year of stated value, payable at the Company’s option either in cash or, under specified circumstances, shares of common stock.

The degree to which the Company is leveraged could have other important consequences to holders of the common stock, including the following:

	•		The Company must dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on debt and dividends on the Series A preferred stock, and, under the indenture for the Company’s $205 million of senior notes, must make an offer to purchase senior notes on an annual basis from excess cash flow, reducing the funds available for operations;

	•		The Company’s ability to obtain additional financing is limited;

	•		The Company’s flexibility in planning for, or reacting to, changes in the markets in which the Company competes is limited;

	•		The Company is at a competitive disadvantage relative to competitors with less indebtedness; and

	•		The Company is rendered more vulnerable to general adverse economic and industry conditions.

The Company’s revolving credit facility imposes restrictions that limit operating and financial flexibility.

Covenants in the Company’s revolving credit facility will restrict the Company’s ability to:

	•		incur liens and debt,

	•		pay dividends;

	•		make redemptions and repurchases of capital stock;

	•		make loans, investments and capital expenditures;

	•		prepay, redeem or repurchase debt;

	•		engage in mergers, consolidations, asset dispositions, sale-leaseback transactions and affiliate transactions; and

	•		change the business.

These covenants also require the Company to maintain compliance with financial ratios, each as defined in the credit facility, such as a minimum fixed charge coverage ratio, a maximum leverage ratio, a minimum rental merchandise usage ratio, and minimum levels of net worth and monthly Credit Facility EBITDA, among others. If the Company is unable to meet the terms of these covenants or if the Company breaches any of these covenants, a default could result under the credit facility. A default, if not waived by the Company’s lenders, could impair the Company’s ability to borrow additional funds under the credit facility and could result in outstanding amounts there under becoming immediately due and payable. If acceleration occurs, the Company may not be able to repay its debt and the Company may not be able to borrow sufficient additional funds to refinance the debt. If the Company is unable to repay outstanding amounts under the revolving credit facility, the holders of the debt could foreclose on the Company’s assets securing this debt.

Restrictive covenants in the indenture for the Company’s senior notes may also limit operating and financial flexibility.

The terms of the indenture for the senior notes contain a number of operating and financial covenants that will restrict the Company’s ability to, among other things:

	•		incur additional debt;

	•		pay dividends or make other restricted payments;

	•		create or permit certain liens;

	•		sell assets;

	•		create or permit restrictions on the ability of restricted subsidiaries to pay dividends or make other distributions to the Company or grant liens to secure debt under the indenture;

	•		enter into transactions with affiliates;

	•		enter into sale and leaseback transactions; and

	•		consolidate or merge with or into other companies or sell all or substantially all of the Company’s assets.

The Company’s ability to comply with the covenants contained in the indenture may be affected by events beyond its control, including economic, financial and industry conditions. The Company’s failure to comply with these covenants could result in an event of default which, if not cured or waived, could require repayment of the notes prior to their maturity, which would adversely affect the Company’s financial condition. In addition, an event of default under the indenture for the senior notes will also constitute an event of default under the senior credit facility. Even if the Company is able to comply with all applicable covenants, the restrictions on its ability to manage the business could adversely affect business by, among other things, limiting the Company’s ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that the Company believes would be beneficial to it.

The Company may still be able to incur additional debt, which could increase the risks described above. The terms of the Company’s revolving credit facility and the indenture governing the senior notes do not fully prohibit the Company or its subsidiaries from incurring additional debt. As a result, the Company may be able to incur additional debt in the future. If the Company does so, the risks described above could intensify.

The Company depends, to a certain extent, on its subsidiaries for cash needed to service obligations, and these subsidiaries may not be able to distribute cash to the Company. The Company needs the cash generated by its subsidiaries’ operations to service obligations. The Company’s subsidiaries are not obligated to make funds available. Subsidiaries’ ability to make payments to the Company will depend upon their operating results and will also be subject to applicable laws and contractual restrictions. Some subsidiaries may become subject to loan agreements and indentures that restrict sales of assets and prohibit or significantly restrict the payment of dividends or the making of distributions, loans or advances to shareholders and partners. Furthermore, the indenture governing the notes permits subsidiaries to incur debt with similar prohibitions and restrictions in the future.

If the Company does not have sufficient capital, the Company may not be able to operate the business successfully. The Company’s capital needs are significant. The Company needs capital:

	•		to purchase new rental merchandise for stores;

	•		to service debt; and

	•		to open or acquire new stores.

The Company may have to issue debt or equity securities that are senior to its common stock. The Company may have to issue additional shares of common stock that may dilute the ownership interest of existing shareholders. The Company may not be able to raise additional capital on terms acceptable to the Company. In April 2002, the Company raised capital by selling common stock and warrants to acquire common stock in a private placement at a price that was below the then prevailing market price of the Company’s common stock. The terms of the Series A preferred stock prohibit the Company from issuing any additional shares of preferred stock that would be senior to or pari passu with the Series A preferred stock. If the Company is unable to raise additional capital, it may not be able to purchase new rental merchandise for stores, service or repay outstanding debt or open or acquire new stores.

Since a substantial portion of the Company’s assets consists of intangible assets, the value of some of these intangible assets may not be realized. A substantial portion of the Company’s assets consist of intangible assets, including goodwill and covenants not to compete relating to acquired stores. The value of the Company’s intangible assets may not be realized on sale, liquidation or otherwise. The Company will also be required to reduce the carrying value of intangible assets if their value becomes impaired. This type of reduction could reduce earnings significantly.

If the Company is unable to offer new products or services or to continue strategic relationships with suppliers, the Company may be unable to attract new customers and to maintain existing customers. New product offerings help the Company attract new customers and satisfy the needs and demands of existing customers. The Company’s new product offerings may be unsuccessful for several reasons, including:

	•		The Company may have overestimated customers’ demand for these products;

	•		The Company may have mispriced these products given limited experience with them;

	•		The Company may have underestimated the costs required to support new product offerings;

	•		The Company may have underestimated the difficulty in training store personnel to sell and service these products;

	•		The Company may incur disruptions in relationships with suppliers of these new products;

	•		The Company may experience a decrease in demand due to technological obsolescence of some of new products; and

	•		The Company may face competition from current rental-purchase competitors and other retailers who offer similar products to their customers.

If the Company is unable to open new stores and operate them profitably, sales growth and profits may be reduced. An important part of the Company’s growth strategy is to increase the number of stores the Company operates and to operate those stores profitably. The Company’s failure to execute this growth strategy could reduce future sales growth and profitability. New stores generally operate at a loss for approximately eight months after opening. There can be no assurances that future new stores will achieve profitability levels comparable to those of existing stores within the expected time frame or become profitable at all.

A number of other factors could also affect the Company’s ability to open new profitable stores consistent with its strategy. These factors include:

	•		continued customer demand for the Company’s products at levels that can support acceptable profit margins;

	•		the hiring, training and retaining of skilled personnel;

	•		the availability of adequate management and financial resources;

	•		the ability and willingness of suppliers to supply merchandise on a timely basis at competitive prices

	•		the identification and acquisition of suitable sites and the negotiation of acceptable leases for such sites; and

	•		non-compete provisions of Company agreements to sell stores under which the Company agrees not to open new stores within specified radius of the store sold.

The Company’s continued growth also depends on its ability to increase sales in existing stores. The opening of additional stores in an existing market could result in lower sales at existing stores in that market.

The Company needs to continue to improve operations in order to improve its financial condition, but operations will not improve if the Company cannot continue to effectively implement its business strategy or if general economic conditions are unfavorable. To improve operations, management developed and is implementing business strategy focused on controlling operating expenses, providing higher margin products, engaging in marketing efforts to differentiate the Company from its competitors, enhancing relationships with customers and selectively opening new stores in new and existing markets. If the Company is not successful in implementing its business strategy, or if the business strategy is not effective, the Company may not be able to continue to improve operations. The Company’s operating success is also dependent on its ability to maintain appropriate levels of inventory, achieve and maintain a product mix that satisfies changing customer demands and preferences and purchase high quality merchandise at attractive prices. In addition, any adverse change in general economic conditions may reduce consumer demand for products and reduce sales. Failure to continue to improve operations or a decline in general economic conditions would cause revenues and operating income to decline and impair the Company’s ability to service its debt.

The Company is dependent on its management team, and the loss of their services may result in poor business performance including lower revenues and operating income. The success of the Company’s business is materially dependent upon the continued services of its management team. The loss of key personnel could result in poor performance including lower revenues, lower operating income and loss of employee and supplier confidence. Additionally, the Company cannot assure that it will be able to attract or retain other skilled personnel in the future. The Company does not maintain key-man life insurance policies on any member of its management team.

If the Company fails to comply with extensive laws and governmental regulations relating to the rental-purchase industry or other operations, it could suffer penalties or be required to make significant changes to its operations. Forty-seven states have enacted laws regulating or otherwise impacting rental-purchase transactions. All states in which the Company’s stores are located have enacted these types of laws. These laws generally require specific written disclosures concerning the nature of the transaction. They also may require a grace period for late payments and contract reinstatement rights in the event the rental-purchase agreement is terminated for non-payment. The rental-purchase laws of some states limit the total dollar amount of payments that may be charged over the life of the rental-purchase agreement. States having these laws include Michigan, New York, Ohio, Pennsylvania and West Virginia. Enactment of new or revised rental purchase laws could require the Company to change the way in which it does business which could increase its operating expenses and thus decrease its profitability.

In addition, the Company offers prepaid local phone service through DPI. DPI’s business was made possible by the Telecommunications Act of 1996. In order to conduct this business, DPI must obtain governmental authorization in each state in which it provides local telephone service. Any state or federal regulation that limits the Telecommunications Act of 1996 or any of the state laws regulating this business may require DPI to change the way it does business or to discontinue providing this service in some or all states.

The Company faces intense competition in the rental-purchase industry, which could reduce its market share in existing markets and affect its entry into new markets. The Company competes with other rental-purchase businesses, and, to a lesser degree, with rental stores that do not offer their customers a purchase option as well as with traditional retail businesses that offer an installment sales program or offer comparable products and prices. Competition with these businesses is based primarily on customer service, although competition with other rental-purchase businesses is also based on prices, terms, product selection and product availability. The Company’s inability to compete effectively with other businesses and other rental stores could cause customers to choose these other businesses or rental stores for their rental-purchase needs. The Company’s largest industry competitor is Rent-A-Center, Inc. Rent-A-Center is national in scope and has significantly greater financial resources and name recognition than the Company. As a result, Rent-A-Center may be able to adapt more quickly to changes in customer requirements and may also be able to devote greater resources to the promotion and rental of its products.

Furthermore, new competitors may emerge. The cost of entering the rental-purchase business is relatively low. Current and potential competitors may establish financial or strategic relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share.

ITEM 6. EXHIBITS

See exhibit index.


PENNSYLVANIA		25-1407782

(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)


Class		Outstanding as of August 7, 2006

Common Stock		26,400,099


	PAGE
PART I FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets as of June 30, 2006 (unaudited) and September 30, 2005		3

Consolidated Statements of Operations, three and nine-months ended June 30, 2006 and 2005 (unaudited)		4

Consolidated Statements of Cash Flows, nine-months ended June 30, 2006 and 2005 (unaudited)		5

Notes to Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3. Quantitative and Qualitative Disclosures About Market Risk		36

Item 4. Controls and Procedures		36

PART II OTHER INFORMATION

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

Item 6. Exhibits		40

Signatures		41
EX-10.28
EX-10.29
EX-10.30
EX-31.1
EX-31.2
EX-32.1
EX-99.1


	Parent			Guarantor		Non-Guarantor					Rent-Way
	Issuer			Subsidiaries		Subsidiary		Eliminations			Consolidated

ASSETS
Cash and cash equivalents	$	5,939		$	769	$	437	$	—		$	7,145
Prepaid expenses		4,831			841		295		—			5,967
Rental merchandise, net		181,075			43,854		—		—			224,929
Property and equipment, net		42,190			7,406		746		—			50,342
Goodwill		126,056			57,765		6,944		—			190,765
Deferred financing costs, net		5,473			—		—		—			5,473
Intangible assets, net		1,982			24		—		—			2,006
Other assets		5,268			888		1,253		—			7,409
Investment in subsidiaries		93,028			—		—		(93,028	)		—

Total assets		465,842			111,547		9,675		(93,028	)		494,036


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	19,431		$	1,607	$	1,613		—		$	22,651
Other liabilities		49,457			11,406		1,900		—			62,763
Inter-company		(11,667	)		9,842		1,825		—			—
Deferred tax liability		20,292			—		—		—			20,292
Debt		247,628			—		1		—			247,629

Total liabilities		325,141			22,855		5,339		—			353,335

Convertible redeemable preferred stock		17,033			—		—		—			17,033

SHAREHOLDERS’ EQUITY:
Common stock		305,069			75,248		1,600		(76,848	)		305,069
Option to purchase convertible preferred stock		1,681			—		—		—			1,681
Retained earnings (accumulated deficit)		(183,082	)		13,444		2,736		(16,180	)		(183,082	)

Total shareholders’ equity		123,668			88,692		4,336		(93,028	)		123,668

Total liabilities and shareholders’ equity	$	465,842		$	111,547	$	9,675	$	(93,028	)	$	494,036


	Parent			Guarantor		Non-Guarantor					Rent-Way
	Issuer			Subsidiaries		Subsidiary		Eliminations			Consolidated

ASSETS
Cash and cash equivalents	$	4,789		$	1,022	$	628	$	—		$	6,439
Prepaid expenses		6,380			1,224		358		—			7,962
Rental merchandise, net		158,254			35,924		—		—			194,178
Rental merchandise credits due from vendors		400			—		—		—			400
Property and equipment, net		39,579			7,158		983		—			47,720
Goodwill		124,895			57,448		6,944		—			189,287
Deferred financing costs, net		6,262			—		—		—			6,262
Intangible assets, net		2,101			—		—		—			2,101
Other assets		4,436			669		1,031		—			6,136
Investment in subsidiaries		79,697			—		—		(79,697	)		—

Total assets	$	426,793		$	103,445	$	9,944	$	(79,697	)	$	460,485


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	19,719		$	2,254	$	1,771		—		$	23,744
Other liabilities		51,288			10,345		1,776		—			63,409
Inter-company		(17,546	)		15,563		1,983		—			—
Deferred tax liability		15,856			—		—		—			15,856
Debt		221,313			—		—		—			221,313

Total liabilities		290,630			28,162		5,530		—			324,322

Convertible redeemable preferred stock		17,929			—		—		—			17,929

SHAREHOLDERS’ EQUITY:
Common stock		305,033			75,248		1,600		(76,848	)		305,033
Retained earnings (accumulated deficit)		(186,799	)		35		2,814		(2,849	)		(186,799	)

Total shareholders’ equity		118,234			75,283		4,414		(79,697	)		118,234

Total liabilities and shareholders’ equity	$	426,793		$	103,445	$	9,944	$	(79,697	)	$	460,485

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þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


August 9, 2006		By: /s/ John A. Lombardi

Date		(Signature)
		John A. Lombardi
		Senior Vice President and Chief Financial Officer


No.		Exhibit Name
3.1		Articles of Incorporation of Rent-Way, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1997, filed November 6, 1997.)

3.2		Statement with Respect to Shares of Series A Convertible Preferred Stock of the Company dated May 30, 2003 (incorporated by reference to exhibit 3.1 to Amendment No. 5 to the Company’s registration statement on Form S-3, No. 333-102525 filed on June 25, 2003).

3.3		Bylaws of Rent-Way, Inc., as amended.

10.28*		Employment Agreement between John A. Lombardi and the Company dated April 1, 2006

10.29*		Restricted Stock Unit award Agreement between John A. Lombardi and the Company dated May 4, 2006

10.30*		Employment Agreement between Roger Zwingler and the Company dated June 2005.

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1*		Certification pursuant to Section 906 of Sarbanes-Oxley Action of 2002

99.1*		Calculation of Reconciliation of Net Cash Used in Operations to Credit Facility EBITDA