Back to GetFilings.com

UNITED STATES
U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-K

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004

COMMISSION FILE NUMBER: 0-22026

RENT-WAY,INC.
(Exact name of registrant as specified in its charter)

PENNSYLVANIA                                               25-1407782
(State of Incorporation)                (I.R.S. Employer Identification Number)

ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
(Address of principal executive offices)

(814) 455-5378
(Registrant’s telephone number,including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of common stock held by non-affiliates of the registrant as of March 31, 2004, was $197,491,483.

The number of shares outstanding of the registrant’s common stock as of December 6, 2004 was 26,243,676.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement for its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

RENT-WAY, INC.

TABLE OF CONTENTS

RENT-WAY, INC.

PART I

ITEM I. BUSINESS

GENERAL

        Rent-Way, Inc. (the “Company” or “Rent-Way”) operates 754 rental-purchase stores located in 33 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 (“DPI”), its 83.5%-owned subsidiary. DPI is a non-facilities based provider of local phone service.

        The Company’s principal executive offices are located at One RentWay Place, Erie, Pennsylvania 16505; and its telephone number is (814) 455-5378. The Company’s Internet address is http://www.rentway.com. Rent-Way makes available at no cost through the Investor Relations section of its internet website its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after this material is filed with or furnished to the SEC. The Company’s corporate governance guidelines, its board committee charters, and its codes of conduct are also available through the investor relations section of its Internet website where they may be accessed without charge. The Company will mail any of the foregoing documents without charge to any shareholder on request. Requests for mailings should be made to the Company’s Investor Relations Coordinator at the telephone number above.

BUSINESS HISTORY

        William Morgenstern, the Chief Executive Officer and Chairman of the Board, co-founded the Company in 1981 to operate a rental-purchase store in Erie, Pennsylvania. By 1993, the Company was operating 19 stores in three states and had completed its initial public offering. Concurrent with the initial public offering, the Company began implementing a strategy of aggressive store expansion driven primarily by acquisitions and facilitated by the consolidation trend in the rent-to-own market. From 1993 to 1998, the Company acquired 420 stores in various transactions. In fiscal 1999, the Company became the second largest company in the rental-purchase industry based on number of stores as a result of a merger with Home Choice Holdings, Inc., in which 458 stores were acquired, and the acquisition of 250 stores from Rentavision, Inc. and 21 stores from America’s Rent-to-Own Center, Inc. In November 2000, the Company operated 1,147 stores, which was the largest number of stores the Company has operated in its history. The Company acquired a 70% interest in DPI in 2000 for $7.5 million and acquired an additional 13.5% in 2004 for $0.4 million. In October 2000, the Company discovered accounting improprieties that had the effect of overstating operating income.

        Following the discovery of the accounting improprieties, management concentrated on addressing the business performance problems that had been masked by the improprieties, managing the litigation and governmental investigations arising from the improprieties, and refinancing its outstanding bank debt. In 2001, management developed and implemented a plan to increase gross margins, reduce debt and close or combine under-performing stores.

        In November 2002, management identified 295 under-performing stores that would have required a significant amount of capital investment to meet company performance targets and in which the Company was not willing to invest at that time. On December 17, 2002, the Company entered into a definitive purchase agreement to sell rental merchandise and related contracts of these 295 stores to Rent-A-Center, Inc. Rent-A-Center purchased certain fixed assets and assumed related store leases of 125 of these stores. The transaction closed on February 8, 2003, for approximately $100.4 million. Of the sale price, $14.7 million was paid for transaction, store closing and similar expenses. Rent-A-Center held back $10.0 million to secure the indemnification obligations in the sale. Rent-A-Center released $5.0 million of the holdback on May 8, 2003, and the remaining $5.0 million on August 8, 2004. The net sale proceeds were used to reduce outstanding bank debt. During the second quarter of fiscal 2003, management formulated a plan to restructure the corporate office through workforce reductions to rationalize corporate costs subsequent to the sale to Rent-A-Center. These restructuring activities were completed during the fiscal quarter ended March 31, 2003.

        On June 2, 2003, the Company completed the sale of $205.0 million of senior secured notes, closed a new $60.0 million revolving line of credit facility and sold $15.0 million in newly authorized 8% redeemable convertible preferred stock through a private placement. The net proceeds of the offerings, together with borrowing under the new revolving credit facility and the net proceeds of the sale of the redeemable convertible preferred stock repaid all amounts outstanding under the Company’s previous senior bank credit facility. As a result of the completion of the refinancing, the Company’s corporate credit rating was raised by Standard & Poor’s Rating Services from ‘CCC’ to ‘B+'.

THE RENTAL-PURCHASE INDUSTRY

        Begun in the mid- to late-1960s, the rental-purchase business offers an alternative to traditional retail installment sales and generally serves customers that have annual household incomes ranging from $20,000 to $40,000. The Association of Progressive Rental Organizations (“APRO”), the industry’s trade association, estimated that at the end of 2003 the industry comprised approximately 8,300 stores providing 7.7 million products to 2.7 million households. Based on estimates from APRO, the rental-purchase industry generated gross revenues of $6.2 billion in 2003 from these transactions. The rental-purchase industry has grown consistently over the past several years despite significant fluctuations in the U.S. economy. From 1996 to 2003, revenues generated by the industry have increased with no year in the period reflecting growth less than 5.1%. Over the past five years, the industry has experienced significant consolidation.

STRATEGY

        In Fiscal year 2004 the company increased revenues, improved operating margins and profitability and the management team renewed its efforts to grow by opening new stores and leveraging its core competencies.

The priorities for the Company in 2005 will be:

OPERATIONS

        Store Locations. The Company uses a variety of information sources to identify store locations that are readily accessible to low and middle income customers. An ideal location for store is in a high traffic and high visibility area, such as neighborhood shopping centers that include a supermarket. The Company believes this type of location is convenient for its customers and enables customers to visit the stores on a more frequent basis.

        The Company’s stores average approximately 4,000 square feet in floor space and are generally uniform in interior appearance and design and display of available merchandise. The stores have separate storage areas, but generally do not use warehouse facilities.

As of September 30, 2004, the Company operated 754 stores in 33 states as follows:

        Product Selection. The Company offers home entertainment equipment, furniture, personal computers, major appliances and jewelry. Home entertainment equipment includes television sets, DVD players, home theater systems, camcorders and stereos. Major appliances include refrigerators, ranges, washers and dryers. The Company’s product line currently includes the Sharp, RCA, JVC, Phillips and Panasonic brands of home entertainment equipment; the Ashley, Bassett, Catnapper, Progressive and England Corsair brands of furniture; the Dell, IBM and Gateway brand of personal computers; and, the Amana, Crosley, Maytag, Sears Kenmore and General Electric brands of major appliances. The Company closely monitors inventory levels and customer rental requests and adjusts its product mix accordingly. Prepaid local phone service is also provided through DPI.

        For the fiscal year ended September 30, 2004, payments under rental-purchase contracts for home entertainment products, furniture, personal computers, major appliances and jewelry accounted for approximately 37.2%, 27.2%, 16.7%, 16.0%, and 2.9% of the Company’s rental revenues, respectively. Customers may rent either new merchandise or previously rented merchandise. As of September 30, 2004, weekly rentals currently range from $7.99 to $49.99 for home entertainment equipment, from $6.99 to $41.99 for furniture, from $14.99 to $44.99 for personal computers, from $9.99 to $31.99 for major appliances and from $9.99 to $25.99 for jewelry. Previously rented merchandise is typically offered at the same weekly or monthly rental rate as is offered for new merchandise but with an opportunity to obtain ownership of the merchandise after fewer rental payments.

         Rental-Purchase Agreements. Merchandise is provided to customers under written rental-purchase agreements that set forth the terms and conditions of the transaction. The Company uses standard form rental-purchase agreements, which are reviewed by legal counsel and customized to meet the legal requirements of the various states in which they are to be used. Generally, the rental-purchase agreement is signed at the store, but may be signed at the customer’s residence if the customer orders the product by telephone and requests home delivery. Customers rent merchandise on a week-to-week and, to a lesser extent, on a month-to-month basis with rent payable in advance. At the end of the initial and each subsequent rental period, the customer retains the merchandise for an additional week or month by paying the required rent or may terminate the agreement without further obligation. If the customer decides to terminate the agreement, the merchandise is returned to the store and is then available for rent to another customer. The Company retains title to the merchandise during the term of the rental-purchase agreement. If a customer rents merchandise for a sufficient period of time, usually 12 to 24 months, ownership is transferred to the customer without further payments being required, except in North Carolina where a final purchase option payment is required. Customers typically make rental payments in cash or by check or money order. The Company does not extend credit. See “ — Government Regulation.”

        Product Turnover. Generally, a minimum rental term of between 12 and 24 months is required to obtain ownership of new merchandise. An item of rental merchandise typically remains in the Company’s store inventory for about 24 months. During this period, the Company ordinarily rents the item to three to five different customers. If a customer returns the product, and if the product continues to meet certain quality standards, the Company will continue to rent the item. If the item no longer satisfies quality standards, the item is sold or discarded. Based upon merchandise returns for the year ended September 30, 2004, the Company believes that the average period of time during which customers rent merchandise is 16 to 18 weeks. However, turnover varies significantly based on the type of merchandise being rented. Certain consumer electronic products, such as camcorders, generally being rented for shorter periods, while computers, appliances and furniture are generally rented for longer periods. Most rental-purchase transactions require delivery and pickup of the product, weekly or monthly payment processing and, in some cases, repair and refurbishment of the product. Rental-purchase agreements require larger aggregate payments than are generally charged under installment purchase or credit plans for similar merchandise, primarily to cover the operating expenses generated by greater product turnover.

        Customer Service. The Company offers same-day delivery, installation and pick-up of its merchandise. The Company also provides any required service or repair without charge, except for damage in excess of normal wear and tear. If the product cannot be repaired at the customer’s residence, the Company provides a temporary replacement while the product is being repaired. The customer is fully liable for damage, loss or destruction of the merchandise, unless the customer purchases an optional loss/damage waiver or chooses to participate in the Preferred Customer Club program. Most of the products offered by the Company are covered by a manufacturer’s warranty for varying periods, which, subject to the terms of the warranty, is transferred to the customer in the event that the customer obtains ownership. Repair services are provided through in-house service technicians or independent contractors.. The Company offers Preferred Customer Club, a fee-based membership program that provides special loss and damage protection in the event of involuntary job loss, accidental death and dismemberment insurance, as well as other discounts on merchandise and services.

        Collections. Management believes that effective collection procedures are important to the Company’s success. The Company’s collection procedures increase the revenue per product, decrease the likelihood of default and reduce charge-offs. Senior management and store managers use the Company’s computerized management information system to monitor cash collections on a daily basis. In the event a customer fails to make a rental payment when due, store employees will attempt to contact the customer to obtain payment and reinstate the contract or will terminate the account and arrange to regain possession of the merchandise. However, store managers are given latitude to determine the appropriate collection action to be pursued based on individual circumstances. Depending on state regulatory requirements, the Company charges for the reinstatement of terminated accounts or collects a delinquent account fee. Such fees are standard in the industry and may be subject to state law limitations. See “ — Government Regulation.” Despite the fact that the Company is not subject to the federal Fair Debt Collection Practices Act, it is the Company’s policy in its collection procedures to generally abide by the primary restrictions of this law, which contains specific restrictions regarding communication with consumers designed to prohibit abusive debt collection practices. Charge-offs due to lost or stolen merchandise and discards were approximately 2.7%, 2.7% and 3.3 % of the Company’s household rental segment total revenues for the years ended September 30, 2004, 2003, and 2002, respectively. The charge-off rate for chains with over 40 stores reporting to APRO in 2003 was 2.9%.

        Management. The Company’s stores are organized geographically with several levels of management. At the individual store level, each store manager is responsible for customer relations, deliveries, pick-ups, inventory management, staffing and local marketing efforts. A Company store normally employs one store manager, one assistant manager, two account managers, and one full-time delivery or installation technician. The staffing of a store depends on the number of rental-purchase contracts serviced by the store.

        Each store manager reports to one regional manager, who typically oversees seven to ten stores. Regional managers are primarily responsible for monitoring individual store performance and inventory levels within their respective regions. The Company’s regional managers report to divisional vice presidents, who monitor the operations of their divisions and, through their regional managers, individual store performance. The divisional vice presidents report to one of two senior vice presidents, who monitor the overall operations of their assigned geographic area. The senior vice presidents report to the chief operating officer, who is responsible for overall Company-wide store operations. Senior management at the Company’s headquarters directs and coordinates purchasing, financial planning and controls, management information systems, employee training, personnel matters, advertising, and acquisitions. Personnel at the corporate headquarters also evaluate the performance of each store.

        Management Information System. The Company uses an integrated computerized management information and control system to track units of merchandise, rental-purchase agreements and customers. The system also includes management software that provides extensive report generating capabilities specifically tailored to the Company’s operating procedures. Each store has the ability to track individual components of revenue, idle items, items on rent, product on order, delinquent accounts and other account and customer information. Management electronically gathers each day’s activity report and has access to operating and financial information about any store location or region in which the Company operates. Management reports are generated on a daily, weekly, month-to-date and year-to-date basis. Utilizing the management information system, senior management, regional managers and store managers can closely monitor the productivity of stores under their supervision. 

        Purchasing and Distribution. The Company’s general product mix is determined by senior management based on an analysis of customer rental patterns and introduction of new products on a test basis. Individual store managers are responsible for determining the particular product selection for their store from a list of products approved by senior management. Store managers order products on-line using the Company’s Intranet. These electronic purchase orders are reviewed, approved and executed through regional managers, divisional vice presidents and the Company’s purchasing department to ensure that inventory levels and mix at the store level are appropriate. Merchandise is generally shipped by vendors directly to each store and held for rental at the individual locations. The Company purchases its merchandise directly from manufacturers or distributors. The Company believes that its size enables it to purchase large volumes of inventory from the suppliers at favorable terms. The Company generally does not enter into written contracts with its suppliers. Although the Company currently expects to continue its existing relationships, management believes there are numerous sources of products available to the Company and does not believe that the success of the Company is dependent on any one or more of its current suppliers. 

        Inventory Management. Because inventory management is critical to the business, the Company has developed numerous controls and management tools to optimize inventory use. The Company uses an online inventory management system to monitor the inventory down to the store level on a daily basis. For each store, the Company has developed optimum, or “par”, levels of inventory in each category based on that store’s showroom size and volume of rental-purchase agreements. These par levels and actual levels are updated through the internal software program and are automatically refreshed as inventory changes in the store.

        Operations management, from regional managers to executive management, can review the inventory at each of the stores on a continuous basis to ensure both the proper level and mix of inventory. The Company considers it part of a regional manager’s daily responsibility to ensure that his or her stores are properly merchandised. Rental products are actively transferred from one store or region to another whenever store stocks are out of balance. The Company has implemented additional controls that prohibit a store from ordering additional inventory if existing par inventory levels are exceeded.

        Operations and corporate management meet weekly to discuss merchandise inventory levels, merchandise utilization rates and merchandise needed for promotions and seasonality. In addition, the Company performs a quarterly obsolescence review of the rental and service history of the key product categories, as well as idle and age parameters of the merchandise. If a product category has been identified as not meeting the expectations for gross margins or if a product has had higher than average service problems throughout its life cycle, the stores are notified to accelerate the product through the system by either selling it or renting it at a discount. Whatever merchandise in that category remains unsold or not on rent at the end of the quarter is written off. The Company believes that the inventory management policies ensure that the highest quality of inventory is available to the customer.

        Marketing and Advertising. The Company promotes its products and services through direct mail and direct-response television advertising on national cable networks and syndicated programs. The Company also solicits via local telemarketing. The advertisements emphasize feature sale pricing, 100% satisfaction guarantee, 1-800 RentWay toll-free satisfaction line, 120 days same as cash payment terms, product and brand name selection, prompt delivery and repair, and the absence of any down payment, credit investigation or long-term obligation. Advertising expense as a percentage of revenue for the years ended September 30, 2004, 2003 and 2002 were 4.0%, 4.5% and 5.5%, respectively. In addition to the national advertising efforts, the Company manages an automated on-line local store-marketing plan to allow the stores to leverage market-specific knowledge. The local store marketing effort plays an active role in the communities in which it operates and targets the customer base through direct mail promotions. As the Company obtains new stores in its existing markets, the advertising expense of each store in the market is reduced by listing all stores in the same market-wide advertisement.

        Competition. The Company is one of the largest operators of stores in the rental-purchase industry; however, the rental-purchase industry is highly competitive. The Company competes with other rental-purchase businesses and, to a lesser extent, with rental stores that do not offer their customers a purchase option. Competition is based primarily on customer service, although it is also based on rental rates and terms, product selection and product availability. With respect to consumers who are able to purchase a product for cash or on credit, the Company also competes with department stores, discount stores and retail outlets that offer an installment sales program or offer comparable products and prices.  

        Personnel. As of September 30, 2004, the Company had 3,929 employees, 159 of whom are corporate employees located at the corporate headquarters in Erie, Pennsylvania. None of the Company’s employees are represented by a labor union. The Company believes that its relationship with employees is good. This belief is supported by annual internal employee surveys.

        Government Regulation. Forty-seven states have enacted legislation for the express purpose of regulating rental-purchase transactions. All of these state laws, with the exception of Montana’s, were enacted five or more years ago and have had no material amendments. These laws generally require certain contractual and advertising disclosures concerning the nature of the rental-purchase transaction and also provide varying levels of substantive consumer protection, such as requiring a grace period for late payments, limiting certain fees or the total amount of rental payments that may be charged, and providing contract reinstatement rights in the event a rental-purchase agreement is terminated for non-payment. No federal legislation has been enacted regulating the rental-purchase transaction, although industry supported legislation has been introduced in Congress from time to time.

        All of the states in which the Company operates, except North Carolina, impose some type of statutory disclosure requirements either in rental-purchase agreements or in advertising or both. Rental-purchase legislation or other statutes in the majority of these states distinguish rental-purchase transactions from credit sales. Court decisions in the remaining states in which the Company operates have characterized rental-purchase transactions as leases rather than credit sales. Court decisions in Minnesota, New Jersey and Wisconsin, states where the Company has no operations, have characterized rental-purchase transactions as credit sales subject to consumer lending requirements and accordingly have created a regulatory environment in those states that is prohibitive to traditional rental-purchase transactions.  

        The Company instructs operations personnel in procedures required by applicable laws through policy manuals and on-the-job training. Management believes that the Company’s operations and point-of-sale systems are in compliance with the requirements of applicable laws in all material respects.

        Management believes that the potential for new or amendatory state or federal legislation re-characterizing rental-purchase transactions as credit sales is remote. The Company, in conjunction with competitors, closely monitors legislative and judicial activity and is working to legislatively resolve issues created by unfavorable court decisions in Minnesota, New Jersey and Wisconsin.

        Service Marks. The Company has registered the “Rent-Way” and “We Are Family” service marks and related designs under the Lanham Act. The Company believes that these marks have acquired significant market recognition and goodwill in the communities in which its stores are located. 

        Business of dPi Teleconnect LLC. DPI provides local prepaid telephone service on a month-to-month basis to subscribers who have been disconnected by the local telephone company. Generally, this is because they have previously failed to pay a local or long distance phone bill or, due to poor credit, are asked to remit a deposit to their local telephone company, which they are unable to do. Because DPI does not require credit checks or deposits, it is an attractive alternative to these customers. 

        DPI was formed in late 1998. The Telecommunications Act of 1996, which encouraged the establishment of competitive local exchange carriers, or CLECs, made this business possible. DPI currently operates in a niche segment of the CLEC industry. CLECs compete with the regional Bell operating companies or incumbent local telephone service providers, or ILECs. The market for DPI’s prepaid local telephone services is principally consumers whose credit rating or whose prior payment history with the ILEC is poor. Although not identical, the Company believes DPI’s potential customer base overlaps significantly with the Company’s customer base. 

        In order to conduct its business, DPI is required to obtain governmental authorization in each state in which it provides local telephone service. At the present time, DPI has obtained or has pending such authorization in 41 states. DPI’s licenses must be renewed on a periodic basis. In addition to governmental approval, DPI must enter into a resale contract with an ILEC to purchase service for resale. Under applicable federal law, all ILECs are required to negotiate these contracts with CLECs. At the present time, DPI has resale agreements in place with all existing major ILECs and is moving forward on agreements with several smaller regional ILECs. DPI markets and sells its services through a network of agents. As of September 30, 2004, the Company had 635 stores offering the service and was DPI’s largest agent based on revenues. Customers generally pay the Company and other agents of DPI between $30.00 and $65.00 per month for prepaid local telephone services, depending on area retail pricing and additional feature services. Under the contract with DPI, the Company is entitled to retain 10% of the customer’s payments as its agent’s fee, which is consistent with the fees retained by DPI’s other agents. As of September 30, 2004, DPI had approximately 27,000 customers. 

        The Company owns 83.5% of DPI. The holder of the remaining 16.5% interest in DPI, DPI Holdings, Inc., has the right in January 2005 to require DPI to purchase its 16.5% interest at a price equal to the fair market value of the interest. Under applicable GAAP rules, the Company currently records 100% of DPI losses and will record 100% of the income until losses are recovered, whereupon based on an agreement with DPI Holdings the minority interest will be recognized and income/loss will be recorded based on percentage of ownership of DPI.

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.

        The following are some of the factors that could cause the Company’s actual results to differ materially from the expected results described in or underlying the Company’s forward-looking statements.

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

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

The Company’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:

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

        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 substantially more 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 substantial 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:

        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:

         If the Company is unable to open new stores and operate them profitably, sales growth and profits may be reduced. An important part of the Company’s growth strategy is to increase the number of stores the Company operates and to operate those stores profitably. In fiscal 2005 and 2006, the Company expects to open between 40 and 50 new stores each year. The Company’s failure to execute this growth strategy could reduce future sales growth and profitability. New stores generally operate at a loss for approximately eight months after opening. There can be no assurances that future new stores will achieve profitability levels comparable to those of existing stores within the expected time frame or become profitable at all.

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

        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 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 you that it will be able to attract or retain other skilled personnel in the future. The Company does not maintain keyman 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. Our 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 2. PROPERTIES

        The Company leases substantially all of its store facilities under operating leases that generally have terms of three to five years and require the payment of real estate taxes, utilities and maintenance. There are optional renewal privileges on most of the leases for additional periods ranging from three to five years at rental rates generally adjusted for increases in the cost of living. There is no assurance that the Company can renew the leases that do not contain renewal options or that if it can renew them, the terms will be favorable to the Company. Management believes that suitable store space is generally available for lease and that the stores would be able to relocate without significant difficulty should the Company be unable to renew any particular lease. Management also expects that additional space will be readily available at competitive rates for new store openings.

        The Company owns the corporate headquarters located in Erie, Pennsylvania, which comprises 74,000 square feet. The Company also owns a portion of another office building in Erie, Pennsylvania, which is used for record storage and comprises approximately 8,200 square feet. 

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

RENT-WAY, INC.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The Company’s common stock is traded on the New York Stock Exchange under the symbol “RWY.” The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported on New York Stock Exchange. 

        As of September 30, 2004, there were 338 shareholders of record of Rent-Way’s common stock.

        The Company has not paid any cash dividends to common stock shareholders. The Company’s bank credit facility prohibits the payment of common stock dividends.  Management intends to use earnings, if any, to repay bank debt and, to the extent permitted by the Company’s bank lenders, to develop and expand the Company’s business. The declaration of any common stock cash dividends will be at the discretion of the Board of Directors and will depend upon earnings, capital requirements and the financial position of the Company, general economic conditions and other pertinent factors. The Company has no current plan for the eventual payment of any common stock cash dividends.

        The Company maintains the 1992, 1995, 1999 and 2004 Stock Option Plans. The Company also has options to acquire its common stock outstanding under stock option plans assumed in connection with the Company’s acquisition of Home Choice Holdings, Inc. in December 1998. The Company also has individual option award agreements outside of these plans with three employees covering an aggregate of 40,000 options to acquire shares of common stock. These non-plan options are evidenced by written agreements and have the following terms: expiration is five years from option grant date (June 13, 2002), vesting is one-half on grant date, one-half on first anniversary of grant date; the options terminate immediately on termination of employment except in the event of death, disability or involuntary termination, in which case they are exercisable (to the extent exercisable at termination) for an additional three months. 

ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial data for the years ended September 30, 2000, 2001, 2002, 2003 and 2004 were derived from the audited financial statements of the Company for those periods. The historical financial data are qualified in their entirety by, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements of the Company and notes thereto included elsewhere in this report.