RENT WAY INC - 10-K Annual Report

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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

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

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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 NO.)

ONE RENTWAY PLACE, ERIE, PENNSYLVANIA 16505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

814-455-5378
(REGISTRANT'S TELEPHONE NUMBER)

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

TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE, INC.

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 [ ] No [ X ].

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. [ ]

Based on the closing sales price on June 25, 2001, the aggregate market value
of stock held by non-affiliates of the registrant is $202,207,327.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

CLASS OUTSTANDING AS OF JUNE 25, 2001
Common Stock 24,509,979

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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RENT-WAY, INC.

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND FUTURE PROSPECTS................................... 1

PART I
Item 1. Business...................................................................................... 2
Item 2. Description of Properties..................................................................... 9
Item 3. Legal Proceedings.............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders...........................................10

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................11
Item 6. Selected Financial Data.......................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................18
Item 8. Financial Statements and Supplementary Data...................................................19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........47

PART III
Item 10. Directors and Executive Officers of the Company...............................................48
Item 11. Executive Compensation........................................................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management................................52
Item 13. Certain Relationships and Related Transactions................................................53
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................53

Signatures..............................................................................................54

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RENT-WAY, INC.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND FUTURE PROSPECTS

This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding Rent-Way's future prospects. See particularly statements
appearing in Item 1, "Business--Accounting Investigation and Related
Developments" and Item 7, "Management's Discussion and Analysis of Financial
Condition," among others. These statements may be identified by terms and
phrases such as "anticipate", "believe", "intend", "estimate", "expect",
"continue", "should", "could", "may", "plan", "project", "predict", "will" and
similar expressions and relate to future events and occurrences. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements. Factors
that could cause actual results to differ materially from those expressed or
implied in such statements include but are not limited to:

Rent-Way's ability to control and normalize operating expenses and to
continue to realize operating efficiencies.

Rent-Way's ability to make principal and interest payments on its
high-level of outstanding bank debt.

Rent-Way's ability to negotiate an amendment to its existing senior
credit facility, under which it is currently in default, or to
refinance the debt thereunder.

The outcome of any class action and derivative lawsuits commenced
against Rent-Way and its officers and directors and any proceedings
or investigations involving Rent-Way commenced by governmental
authorities, including the Securities and Exchange Commission and the
United States Department of Justice.

Rent-Way's ability to develop, implement, and maintain reliable and
adequate internal accounting systems and controls.

Rent-Way's ability to retain existing senior management and attract
additional management employees.

General economic, business, and demographic conditions, including
demand for Rent-Way's products and services.

General conditions relating to the rental-purchase industry and the
prepaid local phone service industry, including the impact of state
and federal laws regulating or otherwise affecting the
rental-purchase transaction and prepaid local phone service
transaction.

Competition in the rental-purchase industry and prepaid local phone
service industry, including competition with traditional retailers.

Rent-Way's ability to enter into and to maintain relationships with
vendors of its rental merchandise including its ability to obtain
goods and services on favorable credit terms.

Given these factors, undue reliance should not be placed on any
forward-looking statements, including statements regarding Rent-Way's future
prospects. Such statements speak only as of the date made. Rent-Way undertakes
no obligation to update or revise any such statements whether as a result of new
information, the occurrence of future events, or otherwise.

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PART I
ITEM I. BUSINESS

GENERAL

Rent-Way, Inc. (the "Company" or "Rent-Way") is the second largest operator
in the rental-purchase industry with 1,134 stores in 42 states as of June 1,
2001. The Company offers quality brand name computers, home entertainment
equipment, furniture, 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 70%-owned subsidiary. Management
believes that these rental-purchase arrangements appeal to a wide variety of
customers by allowing them to obtain merchandise that they might otherwise be
unable or unwilling to obtain due to insufficient cash resources or lack of
access to credit or because they have a temporary, short-term need for the
merchandise or a desire to rent rather than purchase the merchandise. The
Company operates in two segments: in the rental-purchase industry and, through
DPI, in the prepaid local phone service industry.

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.

ACCOUNTING INVESTIGATION AND RELATED DEVELOPMENTS

Background. On October 30, 2000, Rent-Way announced that it was
investigating certain accounting matters, including potential accounting
improprieties, affecting its financial results for fiscal 2000 and that based on
its preliminary investigation it expected these matters to have a negative,
non-cash impact of between $25.0 and $35.0 million on its estimated fiscal 2000
pre-tax earnings. These matters were discovered by management prior to
completion of preparation of the Company's fiscal 2000 audited financial
statements. The Audit Committee of the Board of Directors immediately instituted
an investigation of the these matters with the assistance of the Company's
outside counsel, Hodgson Russ LLP, special counsel to the Audit Committee, Ross
& Hardies, and a special investigative team from PricewaterhouseCoopers LLP,
Rent-Way's independent auditors. The Audit Committee and Rent-Way's bank lenders
also jointly retained Ernst & Young LLP, to assist in the investigation and to
review the investigation conducted by PricewaterhouseCoopers LLP. On the
discovery of these matters, Matthew J. Marini, the Company's Controller and
Chief Accounting Officer, was suspended; Jeffrey A. Conway, the Company's
President and Chief Operating Officer, was asked to relinquish his operating
responsibilities.

On December 12, 2000, the Company announced that based on its investigation
to that date it expected the accounting matters to have a negative, non-cash
impact of between $65.0 and $75.0 million on its estimated fiscal 2000 pre-tax
earnings and possibly require revision of its fiscal 1999 audited financial
statements. Also on December 12, 2000, the employment of Mr. Marini was
terminated. At the request of the Board of Directors, Mr. Conway resigned
effective December 31, 2000. Mr. Conway also resigned from the Board of
Directors. As a result of information developed in the investigation, the scope
of the fiscal 2000 audit was expanded, additional auditing procedures were
conducted, and the Company undertook an expanded review of its financial
reporting matters.

On May 24, 2001, the Company announced that it expected the accounting
matters to have an aggregate negative, non-cash impact of approximately $127.0
million on estimated fiscal 2000 and audited fiscal 1999 pre-tax earnings. The
Company also announced that it was examining its fiscal 1998 audited financial
statements for possible revision.

Results of Investigation and Audit. After evaluating information revealed
in the investigation and in preparation of its fiscal 2000 year-end financial
statements, the Company has determined that improper accounting entries were
made in fiscal 2000, 1999 and 1998 that overstated assets and income and
understated liabilities and expense. These entries were made by or at the
direction of the Company's former Controller. The entries were numerous,
involved several different accounts, were often in relatively small amounts, and
had the effect of overstating operating income. There were several techniques
used to hide these improprieties including preparing false monthly management
reports for review by senior management, instructing lower-level employees to
manipulate the Company's management information system in order to support the
improper entries, requesting third-party vendors to issue documents used to
support the improper entries and misleading the Company's independent auditors
regarding the existence and results of internal inventories of Company assets,
among others. The total amount of adjustments relating to these improper entries
affecting pre-tax operating income in fiscal 2000, 1999 and 1998 is $74.3
million, $21.0 million and $2.3 million, respectively. Additional adjustments in
fiscal 2000 totaling $24.5 million consist of (1) year-end audit adjustments,
including increases in expense accruals and reserves, $4.0 million, write-offs
of unrealizable or non-existent balance sheet assets, including cash, accounts
receivable, idle and missing rental merchandise and prepaid items, $7.5 million,
and updates and reconciliations of asset and liability account balances, $9.5
million, (2) adjustments necessary to give effect to the operations of DPI, $2.7
million and (3) adjustments relating to changes in accounting method or adoption
of new accounting policies, $0.8 million. With respect to fiscal 1999 and 1998,
the Company has also made adjustments to conform the application of certain
accounting principles for all periods presented. The

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total amount of adjustments relating to these changes in accounting principles
affecting pre-tax operating income in fiscal 1999 and 1998 is $2.6 million and
$0.6 million, respectively. In addition, the Company has also decided to record
certain previously unrecorded recurring adjustments that were initially
identified in its preparation of its fiscal 1999 and 1998 financial statements.
The Company had previously decided not to record these adjustments on the basis
of immateriality. The Company has now decided to give effect to these
adjustments in fiscal 1999 and 1998 as appropriate. The total amount of these
adjustments affecting pre-tax operating income in fiscal 1999 and 1998 are ($0.7
million) and $3.4 million, respectively.

As a result, the Company has determined to restate its previously reported
fiscal 1999 and 1998 financial statements and its fiscal 2000 unaudited
quarterly financial statements. The restated fiscal 1999 and 1998 financial
statements are included with the financial statements contained in this report.
The fiscal 2000 year-end financial statements included in this report give
effect to the required restatements to the Company's previously reported fiscal
2000 unaudited quarterly financial results. The Company will file amended Form
10-Qs for the fiscal 2000 quarters ended June 30, and March 31, 2000, and
December 31, 1999, as soon as practicable.

Nature of the improprieties. For the year ended September 30, 2000, the
improper accounting entries primarily required adjustments to the following
asset accounts: rental merchandise and accumulated depreciation, $36.8 million;
advertising rebates receivable, $3.0 million; prepaid expenses, $3.7 million;
construction inventory, $2.9 million; and fixed assets, $11.7 million. In
addition, expense accruals were improperly reduced or eliminated, aggregating
$2.4 million; and certain operating expenses were not recorded in the period in
which they were incurred, primarily vendor invoices and other payables,
aggregating $6.7 million. In addition, improper purchase accounting entries were
made that charged expenses to goodwill related to the Company's acquisitions of
RentaVision, Inc., and America's Rent-to-Own, Inc., totaling $7.1 million.

For the year ended September 30, 1999, the improper accounting entries
primarily required adjustments to the following asset accounts: rental
merchandise and accumulated depreciation, $6.1 million; advertising rebates
receivable, $5.7 million; parts inventory, $1.1 million; and fixed assets, $2.0
million. In addition, certain operating expenses were not recorded in the period
in which they were incurred, primarily vendor invoices and other payables, which
aggregated $6.1 million. After adjusting for all matters arising in the
investigation and audit, the Company recalculated its income tax provision
reducing income tax expense by $8.0 million. The impact of these matters in
fiscal 1999 was to overstate income before taxes by $23.4 million and net income
by $15.4 million.

For the year ended September 30, 1998, the improper accounting entries
required adjustments to rental merchandise of $0.9 million and to prepaid
advertising of $.2 million. In addition, an advertising expense accrual of $1.0
million and an accrual for customer deposits of $.2 million were not recorded.
After adjusting for all matters, the Company recalculated its income tax
provision reducing income tax expense by $2.6 million. The impact of these
matters in fiscal 1998 was to overstate income before taxes by $6.5 million and
net income by $4.0 million.

For additional information regarding adjustments to the Company's financial
results, see "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operation" and Notes 1 and 19 of the "Notes to the
Consolidated Financial Statements" included in Item 8.

As a result of these accounting matters, the Company is in default of its
credit facility. The Company is currently operating under a forbearance
agreement with its bank lenders, which expires on July 31, 2001. See "Item
7--Management's Discussion and Analysis--Liquidity and Capital Resources."

Following the announcement of the investigation, twelve purported class
action lawsuits were filed against the Company and its officers. A lawsuit was
also filed as a purported shareholder derivative action against the Company, its
officers and certain directors. In addition, the Securities and Exchange
Commission and the United States Attorney for the Western District of
Pennsylvania are conducting investigations. See "Item 3--Legal Proceedings."

BUSINESS HISTORY

Rent-Way was founded in 1981 to operate a rental-purchase store in Erie,
Pennsylvania. In fiscal 1993, the Company was operating 19 stores in three
states and had completed its initial public offering. In fiscal 1994, the
Company acquired 20 rental-purchase stores through its acquisition of D.A.M.S.L.
Corporation. In fiscal 1995, the Company acquired 50 rental-purchase stores, 46
through the acquisition of McKenzie Leasing Corporation. In fiscal 1996, the
Company acquired 32 rental-purchase stores in four separate transactions. In
fiscal 1997, the Company acquired 92 rental-purchase stores, 70 of which were
acquired from Perry Electronics, Inc. d/b/a Rental King. In fiscal 1998, the
Company acquired 226 rental-purchase stores, 50 of which were acquired from Ace
Rentals and 145 of which were acquired from Champion Rentals, Inc. The Company
also opened 13 new stores in fiscal 1998.

On December 10, 1998, the Company completed a merger (the "Merger") with
Home Choice Holdings, Inc. ("HMCH" or "Home Choice"). The Merger, as per the
terms of the agreement, was recorded as a pooling of interests, in accordance
with Accounting Principles Board ("APB") Opinion No. 16. Under the terms of the
agreement the Company issued 0.588 shares of common stock for

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each outstanding share of HMCH common stock. The Merger increased the
outstanding shares of the Company by approximately 10,025,000 shares. HMCH, at
the time of the Merger, operated 458 stores in 26 states, primarily in the
southeastern, midwestern, and southwestern portions of the United States, with
annual revenues of approximately $260 million. As a result of the Merger, the
Company became the second largest company in the rental-purchase industry. Also
in fiscal 1999, the Company acquired 275 rental-purchase stores, 250 of which
were acquired from RentaVision, Inc. in September 1999 and 21 of which were
acquired from America's Rent-to-Own Center, Inc. in June 1999. The Company also
opened 12 new stores in fiscal 1999.

FISCAL 2000 DEVELOPMENTS

New Stores. During fiscal 2000, the Company entered into several
transactions in which it acquired 24 stores. On March 22, 2000, the Company
acquired 10 stores in Alabama and Tennessee from ABC Television d/b/a Prime Time
Rentals. On June 13, 2000, the Company acquired one store in Bartlesville, OK,
from Go Leasing, Inc. On August 16, 2000, the Company acquired a store in
Crossville, TN, from Rent-A-Center, Inc. On September 1, 2000, the Company
acquired one store in Easley, SC, from Delta Electronics, Inc. On September 14,
2000, the Company acquired 8 stores in North Carolina from eight separate
corporations doing business as Rent City. On September 21, 2000, the Company
acquired 3 stores in Oregon from Family Rent to Own, Inc. In connection with
acquisitions, the Company implements a strategy to improve the operations of the
acquired stores. As part of this strategy, the Company generally purchases new
merchandise, upgrades the appearance of the stores, increases the amount of
advertising utilized per store, and implements a training program for store
employees. During fiscal 2000, the Company also opened 68 new stores in 31
states.

Agreement with Gateway. The Company entered into a three-year agreement
with Gateway Companies, Inc. in April 2000 to be an authorized supplier of
Gateway personal computers and related peripherals in the rental-purchase
industry. Subject to Rent-Way meeting purchase volume requirements, Gateway has
agreed not to enter into any similar arrangement with any of Rent-Way's largest
industry competitors, including Rent-A-Center, Aaron Rents and Rainbow Rentals.
As part of this transaction, Gateway invested $7.0 million for 348,910 shares of
Rent-Way common stock. Under this agreement, the Company offers Gateway personal
computers and prepaid, unlimited Internet access to our customers under a
rental-purchase contract at between $19.99 and $29.99 per week, depending on
configuration.

Investment in dPi Teleconnect LLC. Rent-Way acquired a 49% interest in DPI
in January 2000 and an additional 21% interest in May 2000 and now owns 70% of
the company. DPI offers prepaid local phone service and targets its services to
customers whose local phone service has been disconnected. The service is paid
for in advance and requires no long-term obligation on the part of the customer.
As of June 1, 2001, DPI offered its services in 780 of the Company's stores and
approximately 1,600 locations of independent agents. The number of DPI customers
has grown from 14,000 at December 31, 1999, to 55,000 as of June 1, 2001.

THE RENTAL-PURCHASE INDUSTRY

Begun in the mid- to late-1960s, the rental-purchase business offers an
alternative to traditional retail installment sales. The rental-purchase
industry provides brand name merchandise to customers generally on a
week-to-week or month-to-month basis under a full service rental agreement,
which in most cases includes a purchase option. The customer may cancel the
rental agreement at any time without further obligation by returning the product
to the rental-purchase operator.

The Association of Progressive Rental Organizations ("APRO"), the
industry's trade association, estimated that at the end of 1999 the U.S.
rental-purchase industry comprised approximately 8,000 stores providing 6.9
million products to 3.1 million households. The Company believes that its
customers generally have annual household incomes ranging from $20,000 to
$40,000. Based on APRO estimates, the rental-purchase industry had gross
revenues of $5.0 billion in 1999. Until recently, the rental-purchase industry
was highly fragmented. Over the past five years, the industry has experienced
significant consolidation and maturation. The two largest national
rental-purchase chains, Rent-A-Center and Rent-Way, now operate approximately 44
percent of total industry stores.

STRATEGY

Management believes that the Company's continued success depends on
successful implementation of the following business strategies:

Improving Existing Store Performance. In fiscal 2001 the Company has
focused and intends to continue to focus on improving store operating margins
and cash flow by increasing existing rental merchandise usage, controlling
expenditures for new rental merchandise and operating expenses and making
competitive price increases. The improved cash flow will be used to pay down
existing debt.

Rental merchandise levels in the stores will be closely monitored. Store
managers will encounter greater scrutiny at the regional and corporate level of
orders placed for rental merchandise. Before orders are placed, inventory levels
will be reviewed against pre-approved standards to prevent the purchase of
excess inventory.

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In order to better control operating expenses, a greater focus will be
placed on payroll and store staffing levels. Store staffing level guidelines
have been developed to ensure the stores have adequate numbers of employees
during peak business hours while minimizing overtime and excess payroll.

Reducing Corporate Overhead. The Company is currently evaluating its
corporate-level processes, procedures and staffing levels and hopes to achieve
increased corporate-level efficiency and a reduction of corporate expenditures
as a result of this evaluation.

Customer-Focused Philosophy. Management believes that through the continued
adherence to its "Welcome, Wanted and Important" business philosophy, it should
be able to increase its new and repeat customer base, and thus the number of
units it has on rent, thereby increasing revenues and net income. The "Welcome,
Wanted and Important" philosophy is a method by which the Company seeks to
create a store atmosphere conducive to customer loyalty. The Company attempts to
create this atmosphere through the effective use of advertising and
merchandising strategies, by maintaining the clean and well-stocked appearance
of its stores and by providing a high level of customer service (such as the
institution of a toll-free 1-800-RENTWAY complaint and comment line). The
Company's advertising emphasizes brand name merchandise from leading
manufacturers. In addition, merchandise selection within each product category
is periodically updated to incorporate the latest offerings from suppliers.
Services provided by the Company to the customer during the term of the contract
include home delivery, installation, ordinary maintenance and repair services
and pick-up at no additional charge. Store managers also work closely with each
customer in choosing merchandise, setting delivery dates and arranging a
suitable payment schedule. As part of the "Welcome, Wanted and Important"
philosophy, store managers are empowered, encouraged and trained to make
decisions regarding store operations subject only to certain Company-wide
operating guidelines and general policies.

Enhancing the Company's Product Lines--Leveraging Distribution Channel. One
of the Company's principal strategies is to provide the rental-purchase customer
with the opportunity to obtain high quality, state-of-the-art merchandise. The
Company attempts to maintain a broad selection of products representing the
latest in technology and style. The Company also believes it has a unique
distribution channel to a consumer that is underserved. Accordingly, the Company
intends to leverage this distribution channel by identifying opportunities to
offer other products and services not traditionally offered to the
rental-purchase customer.

Monitoring Store Performance. The Company's management information system
allows each store manager to track rental and collection activity on a daily
basis. The system generates detailed reports that track inventory movement by
piece and by product category and the number and frequency of past due accounts
and other collection activity. Physical inventories are regularly conducted at
each store to ensure the accuracy of the management information system data.
Senior management monitors this information to ensure adherence to established
operating guidelines. In addition, each store is provided with a monthly profit
and loss statement to track store performance. Management believes the Company's
management and accounting information systems enhance its ability to monitor and
affect the operating performance of existing stores and to integrate and improve
the performance of newly acquired stores. In fiscal 2000, the Company launched
an internal audit program. The audit program includes the inspection of a
store's cash, fixed assets, and rental merchandise agreements. In addition, the
auditors ensure compliance of certain company policies and procedures. Upon the
completion of a store audit, a report is generated and circulated to appropriate
management personnel. Follow up responses and visits are scheduled as
appropriate.

Results-Oriented Compensation. Management believes that an important reason
for the Company's positive store-level financial performance and growth has been
the structure of its management compensation system. A significant portion of
the Company's regional and store managers' total compensation is dependent upon
store performance. Profit incentives when earned can count for as much as 30
percent of a store manager's pay. Regional and store managers earn incentives by
increasing both store revenues and operating profits. As further incentive, the
Company grants managers stock options. Management believes that the Company's
emphasis on incentive-based compensation is instrumental in the Company's
ability to attract, retain, and motivate its regional and store managers.

Manager Training and Empowerment. The Company constantly updates its
training materials and procedures to reflect changing policies, products and
services. The Company will launch a new computer based training (CBT) initiative
in the fourth quarter of fiscal 2001. The advantage of the CBT format is easy
access through the company intranet and the ease of keeping training materials
up to date. All store personnel will be required to complete a variety of job
appropriate training programs. Tests will be given at the completion of each
stage of training to ensure that the employee comprehends the material.

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OPERATIONS

Company Stores. As of June 1, 2001, the Company operates 1,134 stores in 42
states as follows:

NUMBER OF NUMBER OF NUMBER OF NUMBER OF
LOCATION STORES LOCATION STORES LOCATION STORES LOCATION STORES
----------------- ------ ----------------- ------ ----------------- ------ ---------------- ------

Texas............. 122 Kentucky.......... 37 Massachusetts..... 13 California...... 4
Florida........... 89 Virginia.......... 36 Nebraska........... 13 Utah............ 4
New York.......... 76 Arkansas.......... 34 Colorado.......... 11 Connecticut..... 3
Ohio.............. 62 Michigan.......... 30 Washington......... 10 Rhode Island.... 2
Pennsylvania...... 62 Alabama........... 28 Iowa............... 9 South Dakota.... 2
South Carolina.... 62 Arizona........... 18 New Hampshire...... 9 Idaho........... 2
North Carolina.... 55 Kansas............. 18 New Mexico......... 9
Indiana........... 42 Missouri.......... 18 West Virginia...... 8
Louisiana......... 41 Oklahoma.......... 16 Vermont............ 7
Tennessee......... 41 Maryland.......... 16 Nevada............. 6
Georgia........... 40 Mississippi........ 15 Oregon............. 6
Illinois.......... 40 Maine............. 13 Delaware........... 5

The Company's stores average approximately 3,500 square feet in floor space
and are generally located in strip shopping centers in or near low to middle
income neighborhoods. Often, such shopping centers offer convenient free parking
to the Company's customers. The Company's stores 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. In
selecting store locations, the Company uses a variety of market information
sources to locate areas of a town or city that are readily accessible to low and
middle income consumers. The Company believes that within these areas, the best
locations are in neighborhood shopping centers that include a supermarket. The
Company believes this type of location makes frequent rental payments at its
stores more convenient for its customers. Generally, the Company refurbishes its
stores every two to five years.

Product Selection. The Company offers brand name computers, home
entertainment equipment, furniture, major appliances and jewelry. Home
entertainment equipment includes television sets, VCRs, camcorders and stereos.
Major appliances offered by the Company include refrigerators, ranges, washers
and dryers. The Company's product line currently includes the Zenith, RCA, JVC,
Phillips and Panasonic brands in home entertainment equipment, the Amana,
Crosley, General Electric, and Kenmore brands in major appliances and the
Ashley, Bassett, Howard Miller, and New England Corsair brands in furniture. In
June 2000, the Company added Gateway computers to its product line. The Company
closely monitors customer rental requests and adjusts its product mix
accordingly.

For the year ended September 30, 2000, payments under rental-purchase
contracts for home entertainment products including computers accounted for
approximately 47.1%, furniture for 28.2%, appliances for 19.8%, jewelry for
4.9%, and other items for 0.1% of the Company's rental revenues. Customers may
rent either new merchandise or previously rented merchandise. Weekly rentals
currently range from $7.99 to $44.99 for home entertainment equipment, from
$6.99 to $41.99 for furniture, from $10.99 to $31.99 for major appliances and
from $9.99 to $25.99 for jewelry. Gateway computers with Internet access are
offered as low as $19.99 per week. 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. Rental payments are typically made 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. Based upon
merchandise returns for the year ended September 30, 2000, the Company believes
that the average period of time during which customers rent merchandise is 17 to
18 weeks. However, turnover varies significantly based on the type of

6
9
merchandise being rented, with certain consumer electronic products, such as
camcorders and VCRs, generally being rented for shorter periods, while
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. In order to cover the relatively high operating expenses generated
by greater product turnover, rental-purchase agreements require larger aggregate
payments than are generally charged under installment purchase or credit plans
for similar merchandise.

Customer Service. The Company offers same-day delivery, installation and
pick-up of its merchandise at no additional cost to the customer. 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. 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,
independent contractors or under factory warranties. The Company offers Rent-Way
Plus, a fee-based membership program that provides special loss and damage
protection and an additional one year of service protection on rental
merchandise, preferred treatment in the event of involuntary job loss,
accidental death and dismemberment insurance and discounted emergency roadside
assistance, 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 with minimal associated costs, decrease the likelihood of default
and reduce charge-offs. Senior management, as well as store managers, uses 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 management 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 to abide by the restrictions of such law in its collection
procedures. Charge-offs due to lost or stolen merchandise and discards were
approximately 3.9%, 3.5% and 3.5% of the Company's revenues for the years ended
September 30, 2000, 1999, and 1998, respectively. The charge-off rate for chains
with over 40 stores reporting to APRO in 1999 was 3.6%.

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
certain marketing efforts. A Company store normally employs one store manager,
one assistant manager, two account managers, and one full-time delivery and
installation technician. The staffing of a store depends on the number of
rental-purchase contracts serviced by the store.

In December 2000, the Company reorganized its field management structure.
Each store manager reports to one regional manager, each of whom typically
oversees six 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, in turn, 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 Executive Vice Presidents who monitor the
overall operations of their assigned geographic area. The Executive Vice
Presidents report to the corporate-level Vice President of Operations 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. Headquarters personnel also evaluate the
performance of each store.

At the corporate level, since December 2000, the Company has hired a new
Vice President-Controller and Chief Accounting Officer and a new Vice President
of Marketing. The Company promoted an employee to be the new Vice President of
Purchasing and promoted an employee to be the new Assistant Controller.

DEVELOPMENT AND IMPLEMENTATION OF EFFECTIVE INTERNAL ACCOUNTING SYSTEMS
AND CONTROLS

The Company, in order to strengthen its internal controls, has engaged
Scott C. King, of King Capital Group, to assist in evaluating existing
accounting policies and procedures. Mr. King has 25 years of public company
accounting experience. In addition, Shaffner, Knight and Minnaugh, CPAs, Erie,
Pennsylvania, has been engaged to oversee the Company's internal audit function
and to monitor compliance with financial reporting and internal controls.

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MANAGEMENT INFORMATION SYSTEM

The Company believes that its proprietary management information system
provides it with a competitive advantage over many small rental-purchase
operations. The Company uses an integrated computerized management information
and control system to track each unit of merchandise and each rental-purchase
agreement. The Company's system also includes extensive management software and
report generating capabilities. Reports for all stores are reviewed daily by
senior management and any issues are addressed the following business day. Each
store has the ability to track individual components of revenue, idle items,
items on rent, delinquent accounts and other account information. Management
electronically gathers each day's activity report. Company management has access
to operating and financial information about any store location or region in
which the Company operates and generates management reports 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 as compared to
Company-prescribed guidelines. While the Company believes its management
information system is competitive to meet its needs for the foreseeable future,
the Company is currently developing a new enhanced store-level point of sale
system.

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. All purchase orders are executed through regional managers
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, where it is held for rental. The Company purchases its
merchandise directly from manufacturers or distributors. 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's operations is dependent on any one or
more of its present suppliers.

MARKETING AND ADVERTISING

The Company promotes its products and services through targeted direct
mail, spot and national television advertising and, to a lesser extent, through
radio and secondary print media advertisement. The Company also solicits
business to former and prospective customers via telemarketing. The Company's
advertisements emphasize 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, 2000, 1999 and 1998 were 3.4%, 4.8% and 5.2%, respectively. In
addition to the Company's national advertising efforts, a good deal of emphasis
has been placed on the development of a local store-marketing plan to allow the
stores to leverage market specific knowledge. As the Company obtains new stores
in its existing markets, the advertising expenses of each store in the market
can be reduced by listing all stores in the same market-wide advertisement. In
addition, the Company participates in cooperative advertising programs with many
of its major vendors.

COMPETITION

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 rental rates and terms, product selection and availability, and
customer service. 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. The Company is the second largest operator
in the rental-purchase industry, second only to Rent-A-Center. Rent-A-Center has
significantly greater financial and operating resources and name recognition
than does the Company.

PERSONNEL

As of June 1, 2001, the Company had approximately 5,417 employees, 275 of
which are located at the corporate headquarters in Erie, Pennsylvania. None of
the Company's employees are represented by a labor union. Management believes
its relations with its employees are good.

GOVERNMENT REGULATION

Forty-seven states have enacted legislation for the purpose of regulating
rental-purchase transactions. All of these state laws other than Alaska, Hawaii
and Montana were enacted five or more years ago. 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 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.

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All of the states in which the Company operates 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 (with exception of Minnesota, New
Jersey and Wisconsin) have characterized rental-purchase transactions as leases
rather than credit sales. Court decisions in Minnesota, New Jersey and Wisconsin
have created a regulatory environment in those states that is prohibitive to
traditional rental-purchase transactions. The Company does not operate in those
states.

The Company instructs its 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 there is little likelihood of state or federal
legislation or additional court decisions re-characterizing rental-purchase
transactions as credit sales. The Company, in conjunction with the
rental-purchase industry's trade association, 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" service mark under the Lanham
Act. The Company believes that this mark has acquired significant market
recognition and goodwill in the communities in which its stores are located.
Related designs have also been registered by the Company under the Lanham Act.
In connection with the Home Choice merger, the Company acquired the "Home
Choice" service mark, which is registered under the Lanham Act.

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. This business was made possible by the
Telecommunications Act of 1996, which encouraged the establishment of
competitive local exchange carriers, or CLECs. DPI currently operates in a niche
segment of the CLEC industry. CLECs compete with the regional Bell operating
companies or their established, 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 Rent-Way'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 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
such 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. The Company, with 780 stores now offering the service, is
DPI's largest agent. 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
Company's 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 June 2001, DPI had 55,000 customers.

ITEM 2. DESCRIPTION OF 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 Company to pay real estate taxes, utilities and maintenance. The Company has
optional renewal privileges on most of its 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, that the terms
will be favorable to the Company. Management believes that suitable store space
is generally available for lease and that the Company would be able to relocate
any of its stores without significant difficulty should it be unable to renew a
particular lease. Management also expects that additional space will be readily
available at competitive rates for new store openings. The Company owns its
corporate headquarters located in Erie, Pennsylvania, which comprises 74,000
square feet. The Company owns an office building in Erie, Pennsylvania, which
was a satellite office of its former headquarters and is now listed for sale.
The Company also owns an office building in Erie, Pennsylvania, which is used
for record retention and comprises approximately 8,200 square feet.

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ITEM 3. LEGAL PROCEEDINGS

Investigations. There are currently pending federal governmental
investigations by the SEC and the United States Attorney involving the Company's
financial reporting. Rent-Way is cooperating fully in these investigations.
Also, as previously discussed, the law firms of Hodgson Russ LLP and Ross &
Hardies are conducting an independent investigation of financial reporting
issues. A joint interim attorneys' report regarding this investigation dated
June 19, 2001, has been conveyed to the board of directors and to management and
was considered in connection with the preparation of the Company's financial
statements and this report. The investigations are ongoing and the Company
cannot predict their outcomes. If Rent-Way were convicted of any crime or
subjected to sanctions, or if substantial penalties, damages or other monetary
remedies are assessed against Rent-Way, this could have a material adverse
effect on the Company's results of operations and financial condition.

Securities Litigation. As of June 1, 2001, Rent-Way has been served with
twelve complaints in purported class action lawsuits filed in or transferred to
the U.S. District Court for the Western District of Pennsylvania. The complaints
allege that, among other things, as a result of accounting irregularities, the
Company's previously issued financial statements were materially false and
misleading thus constituting violations of federal securities laws by the
Company and by certain officers. The actions allege that the defendants violated
Sections 10(b) and/or Section 20(a) of the Securities Exchange Act and Rule
10b-5 promulgated thereunder. The actions seek damages in unspecified amounts.
The actions purport to be brought on behalf of purchasers of the Company's
common stock during various periods, all of which fall between January 18, 2000,
and October 30, 2000. The District Court has ordered that the actions be
consolidated and on March 9, 2001, appointed Cramer Rosenthal McGlynn, LLC, an
investment advisor that purchased the Company's common stock for the accounts of
its clients, to serve as lead plaintiff and the firm of Gold, Bennett, Cera &
Sidener LLP to serve as lead counsel. The lead plaintiff must file a
consolidated complaint within 20 days of the filing of this report. Rent-Way is
currently evaluating these claims and possible defenses thereto. Additional
purported class action lawsuits similar to those described above may be filed,
and the existing complaints may be amended to increase the purported class.

Certain of Rent-Way's officers and directors and Rent-Way, as nominal
defendant, have been sued in a shareholder derivative action brought on behalf
of Rent-Way in the U.S. District Court for the Western District of Pennsylvania.
The derivative complaint purports to assert claims on behalf of Rent-Way against
the defendants for violation of duties asserted to be owed by the defendants to
Rent-Way and which relate to the events which gave rise to the purported class
actions described above. All proceedings in the derivative case have been stayed
pending the resolution of the class action lawsuits.

Rent-Way is presently unable to predict or determine the final outcome of,
or to estimate the amounts or potential range of loss with respect to, these
matters. Management believes that these matters could have a material adverse
impact on the Company's financial position and results of operations.

Pursuant to its bylaws, Rent-Way is obligated to indemnify its officers and
directors under certain circumstances against claims within the lawsuits.
Rent-Way may also be obligated to indemnify certain of its officers and
directors for the costs they incur as a result of the investigations and
lawsuits.

Rent-Way is also subject to litigation in the ordinary course of business.
In the opinion of management, the ultimate outcome of any existing litigation,
other than the investigations and the lawsuits described above, would not have a
material adverse effect on the Company's financial condition or results of
operations.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the New York Stock Exchange under
the symbol "RWY." The Company's common stock began trading on the New York Stock
Exchange on October 8, 1998. The Company's common stock was previously traded on
the NASDAQ National Market under the symbol "RWAY". The following table sets
forth, for the periods indicated, the high and low bid information per share of
the common stock as reported on the NASDAQ National Market for the period prior
to October 8, 1998, and the high and low sales prices per share of the common
stock as reported on New York Stock Exchange for the period on and after October
8, 1998.

YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------------- --------------------
HIGH LOW HIGH LOW
First Quarter.......... $20.25 $13.9375 $28.00 $17.50
Second Quarter......... 21.00 15.25 27.88 21.38
Third Quarter.......... 30.375 19.50 29.44 20.50
Fourth Quarter......... 32.25 20.00 25.06 19.00

As of June 1, 2001, there were 232 record shareholders of Rent-Way's common
stock.

The Company has not paid any cash dividends to shareholders. The
declaration of any 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 does not intend to pay any cash dividends in the
foreseeable future. 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 Company's bank credit facility prohibits the
payment of dividends.

On September 14, 2000, the Company issued 1,943 shares of its common stock
as partial consideration in connection with its acquisition of Rent City. The
shares bear restrictions on transfer. The issuance of the shares was exempt from
registration under Section 4 (2) of the Securities Act of 1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for the years ended September 30,
1996, 1997, 1998, 1999 and 2000 were derived from the audited financial
statements of the Company for those periods. All periods prior to the year ended
September 30, 1999, have been restated to reflect the Company's merger with Home
Choice in December 1998, which was accounted for as a pooling of interests. The
years ended September 30, 1998 and 1999, have been restated to reflect
adjustments described in Note 19 to the financial statements included in this
report. 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.

YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1996(1)(2) 1997(1)(3) 1998(1)(4) 1999(5) 2000(6)
---------------------------------------------------------------
(as restated) (as restated)
-------------
(Dollars in millions, except per share data)

STATEMENT OF OPERATIONS DATA:
Total revenues .................................... $175,333 $320,330 $436,031 $494,352 $592,686
Operating profit (loss) ........................... 8,710 10,998 8,589 24,062 (742)
Income (loss) before extraordinary item ........... 3,945 1,566 (5,819) (246) (28,041)
Net income (loss) ................................. 3,945 1,297 (5,819) (765) (28,041)
Earnings (loss) applicable to common shares ....... 3,816 1,577 (5,819) (765) (28,041)
Basic:
Income (loss) before extraordinary item ......... $ 0.34 $ 0.11 $ (0.29) $ (0.01) $ (1.20)
Net income (loss) ............................... $ 0.34 $ 0.09 $ (0.29) $ (0.04) $ (1.20)

Diluted:
Income (loss) before extraordinary item ......... $ 0.32 $ 0.11 $ (0.29) $ (0.01) $ (1.20)
Net income (loss) ............................... $ 0.32 $ 0.09 $ (0.29) $ (0.04) $ (1.20)
Weighted average shares outstanding (in thousands):
Basic ........................................... 11,954 16,653 20,283 21,341 23,314
Diluted ......................................... 12,089 16,653 20,283 21,341 23,314

BALANCE SHEET DATA:
Rental merchandise, net ........................... $ 76,586 $132,393 $175,085 $196,510 $282,052
Total assets ...................................... 219,105 319,849 481,710 599,502 764,602
Debt .............................................. 19,751 96,318 179,603 288,130 387,852
Shareholders' equity .............................. 177,063 183,968 244,090 258,487 267,822

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1) The year ended September 30, 1998 reflects the combination of the preceding
twelve-month financial periods for each of Rent-Way and Home Choice. The
years ended September 30, 1997, and 1996, reflect the combination of twelve
months ended September 30 for Rent-Way and twelve months ended December 31
for Home Choice.

2) During the year ended September 30, 1996, the Company acquired 190
rental-purchase stores, 102 through the acquisition of Action TV &
Appliance Rental, Inc., which affects the comparability of the historical
financial information for the periods presented.

3) During the year ended September 30, 1997, the Company acquired 214
rental-purchase stores, 70 of which were acquired in February 1997 from
Perry Electronics, Inc. d/b/a Rental King, which affects the comparability
of the historical financial information for the periods presented.

4) During the year ended September 30, 1998, the Company acquired 250
rental-purchase stores, 50 of which were acquired in January 1998 from Ace
Rentals and 145 of which were acquired in February 1998 from Champion,
which affects the comparability of the historical financial information for
the periods presented.

5) During the year ended September 30, 1999, the Company acquired 275
rental-purchase stores, 250 of which were acquired in September 1999 from
RentaVision, which affects the comparability of the historical financial
information for the periods presented.

6) During the year ended September 30, 2000, the Company acquired 24
rental-purchase stores and a 70% interest in DPI, which affects the
comparability of the historical financial information for the periods
presented.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The Company has determined that its unaudited financial statements as of
and for the periods ended June 30, 2000, March 31, 2000, and December 31, 1999,
and its audited financial statements as of and for the years ended September 30,
1999 and 1998, were inaccurate and require restatement. These inaccuracies and
required restatements are discussed at "Business--Accounting Investigation and
Related Developments" and at Notes 1 and 19 of the notes to the Company's
financial statements included in this report. This Management's Discussion and
Analysis of Financial Condition and Results of Operations for the years ended
September 30, 2000 and 1999 reflects the restatement of the Company's previously
reported financial results for the year ended September 30, 1999 and 1998.

OVERVIEW

Rent-Way is the second largest operator in the rental-purchase industry
with 1,134 in 42 states as of June 1, 2001. The Company offers quality brand
name home entertainment equipment, furniture, appliances, computers, 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. Segment information for the
Company is presented in Note 18 of the notes to the financial statements
included in this report. The Company has not presented separate information in
this Item 7 regarding its prepaid telephone service segment except in the
discussion of total revenues and operating income. The Company believes that
other items for the prepaid telephone service segment are immaterial.

Rental-Purchase Acquisitions and Store Openings. Primarily through
acquisitions, the number of stores operated by the Company has increased from
597 as of September 30, 1997 to 1,138 as of September 30, 2000. The following
table shows the number of stores opened, acquired and/or combined during this
three-year period. Since September 30, 2000, the Company has closed or combined
38 stores and opened or acquired 34 stores.

YEARS ENDED SEPTEMBER 30,
-----------------------------------
STORES 1998 1999 2000
----------------------------------- ------- ------- -------

Open at Beginning of Period ....... 597 869 1,114
Opened ............................ 65 12 68
Acquired .......................... 250 275 24
Locations Sold .................... (8) -- (4)
Closed or Combined ................ (35) (42) (64)
------- ------- -------
Open at End of Period ............. 869 1,114 1,138
======= ======= =======

Fiscal 2000 Acquisitions. On September 21, 2000, the Company acquired from
Family Rent-to-Own, Inc., three stores located in Oregon with annual revenues of
approximately $2.3 million in exchange for consideration of $1.2 million in
cash. On September 14, 2000, the Company acquired one store each from eight
companies all doing business as RentCity, with combined annual revenues of
approximately $3.4 million. Total consideration for the acquisition was $2.0
million in cash and $50,000 in common stock. On June 13, 2000, the Company
acquired one store in Bartlesville, OK, from Go Leasing, Inc. On August 16,
2000, the Company acquired one store in Crossville, TN, from Rent-A-Center, Inc.
On September 1, 2000, the Company acquired one store in Easley, SC, from Delta
Electronics, Inc.

On March 22, 2000, the Company purchased the rental merchandise and rental
contracts of ABC Television and Appliance Rental, Inc., doing business as Prime
Time Rentals ("Prime Time"). The Company purchased the assets of ten stores
located in Alabama and Tennessee with annual revenues of approximately $3.8
million in exchange for consideration of $3.1 million in cash. The acquisition
was accounted for using the purchase method of accounting. The acquired assets
were recorded at their fair values at the date of the acquisition. The excess of
the fair value of net assets acquired ("goodwill") of $2.0 million is being
amortized over 20 years on a straight-line basis. The total cost of net assets
acquired was $3.1 million and consisted of assets of $3.1 million less
acquisition costs of $8,000. Assets acquired at estimated fair value, other
than goodwill, include rental merchandise of $1.1 million and a non-compete
agreement of $60,000.

On October 19, 2000, the Company acquired 4 stores in Kentucky, North
Carolina, and Tennessee from Paradise Valley Holdings, Inc. d/b/a Ace Rentals.

Fiscal 2000 Store Openings. During the year ended September 30, 2000, the
Company opened 68 stores in 31 states. The Company opened 12 more stores during
the first quarter of fiscal 2001.

Acquisition of dPi Teleconnect. On January 4, 2000, the Company acquired a
49% interest in DPI. The Company acquired an additional 21% interest in June
2000. In addition to its ownership interest, the Company acts as an agent for
DPI. The Company currently offers DPI's services at 780 of its stores. See
"Business of dPi Teleconnect" elsewhere in this report.

Gateway Agreement. In April 2000 the Company entered into an agreement with
Gateway under which the Company became an authorized supplier of Gateway
computers and peripherals. Under the agreement, which calls for an initial term
of three years, Rent-Way will offer Gateway computers, complete with Internet
access, exclusively to customers on a rental-purchase basis. The agreement
provides that subject to certain conditions, Gateway will not enter into any
similar arrangements with the Company's large

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industry competitors. Also as part of the agreement, Gateway purchased 348,910
shares of Rent-Way's common stock for approximately $7.0 million.

Other events. On February 6, 2000, the Company's $20.0 million subordinated
convertible debentures were converted at a conversion price of $13.37 per share
into 1,495,986 shares of common stock.

RESULTS OF OPERATIONS

As an aid to understanding the Company's operating results, the following
table expresses certain items of the Company's Consolidated Statements of
Operations for the years ended September 30, 2000, 1999 and 1998 as a percentage
of total revenues.

YEARS ENDED
SEPTEMBER 30,
-------------------------------------------
2000 1999 1998
----------- ------------- -------------
(As restated) (As restated)
------------- -------------

Revenues:.........................
Rental.......................... 84.2% 86.4% 88.1%
Prepaid phone service........... 1.5 -- --
Other........................... 14.3 13.6 11.9
---------- ---------- ----------
Total revenues............... 100.0 100.0 100.0
Costs and operating expenses:
Depreciation and amortization:
Rental merchandise........... 26.5 25.3 25.0
Property and equipment....... 2.7 3.2 2.4
Amortization of goodwill..... 2.4 2.0 2.6
Cost of prepaid phone service... 1.0 -- --
Salaries and wages.............. 25.5 26.3 27.7
Advertising, net ............... 3.4 4.8 5.2
Occupancy....................... 7.7 6.6 7.0
Name change expense............. -- -- 0.4
Business combination costs...... -- 3.6 2.6
Other operating expense......... 30.9 23.3 25.1
---------- ---------- ----------
Total costs and operating
expenses................... 100.1 95.1 98.0
---------- ---------- ----------
Operating income (loss)......... (0.1) 4.9 2.0
Interest expense................ (4.7) (3.3) (2.7)
Equity in loss of subsidiary.... (0.1) -- --
Other income (expenses), net.... 0.3 (0.1) --
----------- ---------- ----------
Income (loss) before income
taxes and extraordinary item. (4.8) 1.4 (0.7)
Income tax expense (benefit).... (0.1) 1.5 (0.5)
---------- ---------- ----------
(Loss) before
extraordinary item........... (4.7) (0.1) (1.3)
Extraordinary item.............. -- (0.1) --
------------ ----------- ----------
Net (loss)................... (4.7%) (0.2%) (1.3%)
============ ============= ==========

FISCAL 2000 COMPARED TO FISCAL 1999 (AS RESTATED)

Total Revenues. Total revenues increased $98.3 million, or 19.9%, to $592.7
million from $494.4 million. The increase is attributable to the inclusion of a
full year's results for the stores acquired and opened in fiscal 1999, a partial
year's operations for the stores acquired and opened in fiscal 2000, the
addition of DPI revenue, and increased same store revenues offset by the revenue
lost from stores closed or merged. The stores acquired in the RentaVision
acquisition accounted for $83.5 million, or 85.0%, of the increase. The
America's Rent-to-Own acquisition accounted for $6.7 million, or 6.8%, of the
increase. The Prime Time acquisition accounted for $1.6 million, or 1.6%, of the
increase. Other 2000 acquisitions accounted for $0.2 million, or 0.2%, of the
increase. DPI revenue accounted for $9.2 million, or 9.4%, of the increase.
Stores opened in fiscal 1999 and 2000 accounted for $11.0 million, or 11.1% of
the increase. The Company's same stores accounted for $14.8 million, or 15.0%,
of the increase. These increases were offset by a $28.6 million loss in revenue
that resulted from stores closed or merged. Same store revenues increased 3.2%
to $476.2 million from $461.6 million. This increase in same store revenues is
due in part to Gateway computers and prepaid phone service added to the
Company's line of products and services during fiscal 2000. Gateway computers
accounted for $4.8 million of the increase. Prepaid phone service accounted for
$0.8 million of the increase. The Company expects increased same store revenues
in fiscal 2001 due to, among many other factors, the addition of new products
and services. Management believes that opportunities exist to provide additional
non-traditional merchandise and services to its customers.

Depreciation and Amortization. Depreciation expense related to rental
merchandise increased to 26.5% as a percentage of total revenues from 25.3%.
This increase is primarily due to the depreciation expense related to the new
Gateway computers along with the depreciation expense related to the Compaq
computers. These computers, added to the Company's product line in June 2000 and
June 1999, respectively, are depreciated on a straight-line basis.

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17

Depreciation expense related to property and equipment decreased to 2.7% as
a percentage of total revenues from 3.2%. This decrease is due to the write-off
of assets written off in 1999 and 2000.

Amortization of goodwill increased to 2.4% as a percentage of total revenues
from 2.0%. The increase in amortization expense in 2000 is primarily due to the
RentaVision acquisition.

Salaries And Wages. Salaries and wages increased by $20.7 million to $150.9
million from $130.2 million primarily due to the addition of a full year's
salaries and wages for stores acquired in 1999 as well as additions to corporate
personnel. Salaries and wages decreased to 25.5% as a percentage of total
revenues from 26.3%. This decrease is due to the Company's ability to spread
corporate and regional managers' payroll over an increased store revenue base.

Advertising. Advertising expense decreased from $24.0 million in 1999 to
$20.1 million in 2000. The decrease in advertising was due to the advertising in
1999 related to the Home Choice acquisition, not repeated in 2000.

Occupancy. Occupancy expense increased to $45.8 million from $32.8 million
primarily due to the addition of the stores opened and acquired in fiscal 1999
and 2000.

Other Operating Expenses. Other operating expenses increased by $68.4
million and increased to 30.9% as a percentage of total revenue from 23.3%. The
increase in other operating expenses includes increases in rental merchandise
losses, automotive expenses, payroll taxes, service repairs, write-offs of
property and equipment, health and disability insurance, utilities, and state
and local taxes. Included in other operating expenses is $2.8 million for the
write-off of inventory that was over 365 days idle as of December 31, 2000. The
increase in other operating costs is the result of the significant increase in
the number of stores in 2000 combined with the accounting improprieties, which
hid from management the true increase in these cost areas. Management is
developing a plan to reduce these operating costs in fiscal 2001.

Operating Income (Loss). Operating income declined to a loss of $0.7
million in 2000 as compared to operating income of $24.1 million in 1999, which
was after business combination costs of $18.2 million. The rental-purchase
rental segment had operating income of $3.1 million while the prepaid telephone
service segment had an operating loss of $3.9 million. The decrease is the
result of the factors discussed above.

Interest Expense. Interest expense increased to 4.7% from 3.3% of total
revenues. The increase is due to the increased borrowings by the Company for the
RentaVision acquisition and to fund operations during 2000.

Income Tax Expense. A tax benefit of $.2 million and tax expense of $7.2
million has been reflected for fiscal 2000 and fiscal 1999, respectively. The
net deferred tax asset of $10.0 million in fiscal 2000 has been fully offset by
a valuation allowance based on management's determination that is more likely
than not that some of the deferred tax assets will not be realized. The Company
has generated tax losses in fiscal 2000 and fiscal 1999 and intends to file
amended returns and carryback these net operating losses against taxable income
in prior years to the fullest extent possible. The Company's tax benefit in
fiscal 2000 is lower than the statutory rate primarily due to the deferred tax
valuation allowance and nondeductible goodwill. The tax expense in fiscal 1999
is higher than the statutory rate primarily due to nondeductible acquisition
costs and nondeductible goodwill.

Net Loss. Net loss increased by $27.3 million as a result of the factors
described above.

FISCAL 1999 (AS RESTATED) COMPARED TO FISCAL 1998 (AS RESTATED)

Total Revenue. Total revenues increased $58.4 million, or 13.4%, to $494.4
million from $436.0 million. The increase is attributable to the inclusion of a
full year's results for the stores acquired in fiscal 1998, a partial year's
operations for the stores acquired and opened in fiscal 1999, and increased same
store revenues. The stores acquired in the Champion acquisition, consummated on
February 5, 1998, accounted for $29.5 million, or 50.5%, of the increase. The
stores acquired in the Ace Rentals acquisition, consummated on January 7, 1998,
accounted for $5.0 million, or 8.6%, of the increase. The stores acquired in
other 1998 acquisitions accounted for $12.2 million, or 20.9%, of the increase.
The stores acquired in 1999 acquisitions accounted for $3.4 million, or 5.8%, of
the increase. The stores opened in fiscal 1999 accounted for $2.7 million, or
4.6%, of the increase. The Company's same stores accounted for $5.6 million, or
9.6%, of the increase. Appliance rentals and merchandise sales remained
unchanged as a percentage of total revenues. During the third quarter of fiscal
1999, the Company added Compaq personal computers to its product line. In
addition, the Company began to act as an agent to provide prepaid phone service
through a third party. This program was tested on a limited basis. Management
believes that opportunities exist to provide additional non-traditional
merchandise to its customers.

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18
Depreciation and Amortization. Depreciation expense related to rental
merchandise increased slightly to 25.3% as a percentage of total revenues from
25.0%. This increase is primarily due to the depreciation expense related to the
new Compaq computers. These computers, added to the Company's product line in
June 1999, are depreciated on the straight-line basis.

Depreciation expense related to property and equipment increased to 3.2% as
a percentage of total revenues from 2.4%. This increase is principally due to
the restatement of transportation equipment previously treated as operating
leases that are now capitalized, the new corporate building purchased in June
1998, new store signage and remodels associated with the Home Choice stores, and
the computer and software costs associated with the Company's implementation of
a PeopleSoft software package in January 1999.

Amortization of goodwill decreased to 2.0% as a percentage of total
revenues from 2.6%. This is attributable to the reduced amortization expense of
1996 and 1997 purchase acquisitions primarily for customer rental agreements,
which are amortized on an accelerated method over an estimated useful life of 18
months.

Salaries and Wages. Salaries and wages increased by $9.5 million to $130.2
million from $120.7 million principally due to the addition of 526 new stores
and additions to corporate personnel. Salaries and wages decreased to 26.3% as a
percentage of total revenues from 27.7%. This decrease is due to the Company's
ability to spread corporate and regional managers' payroll over an increased
store revenue base. This decrease is also attributable to the Company bringing
Home Choice payroll and store personnel levels within the Company's standards.
Also, this expense was restated in fiscal 1998 primarily to record compensation
expense on the exercise of stock options and in fiscal 1999 to accrue for
vacation pay.

Advertising. Advertising expense increased to $24.0 million from $22.7
million and as a percentage of total revenues decreased to 4.8% from 5.2%. This
decrease is principally due to the Company's ability to focus advertising
efforts in cluster markets. It is also due to the Company's participation in
co-operative advertising programs with its vendors. As part of these
co-operative programs, the Company is able to recoup a portion of its
advertising costs from its vendors in the form of rebates for advertising their
products in Rent-Way ads.

Occupancy. Occupancy expense increased to $32.8 million from $30.5 million
principally due to the addition of the stores opened and acquired in fiscal 1998
and 1999.

Business Combination Costs. In conjunction with the Merger, the Company
incurred $18.2 million in costs which included investment banker fees of $6.5
million, proxy preparation, printing, and other professional fees of $1.3
million, employee severance and stay-put arrangement costs of $4.5 million, due
diligence and other costs of $0.9 million, costs related to closing or disposing
of duplicate corporate headquarters, equipment and stores in overlapping markets
of $3.5 million, and the write-off of prepaid assets which could not be used of
$1.5 million. In addition, during fiscal 1999, $0.4 million of unutilized costs
associated with the Alrenco, Inc. and Rent-to-Own, Inc. merger were included as
a reduction to business combination costs. In fiscal 1998, the Company incurred
$11.2 million in business combination costs associated with Home Choice's
predecessor's merger with Alrenco, Inc. in February 1998. These costs included
investment banker fees, proxy preparation, printing, and other professional
fees, employee severance and other costs associated with relocating the
corporate headquarters from Indiana to Texas, costs related to closing and
merging stores in the same markets, amortization expense of stock awards which
vested fully upon the merger, and costs associated with terminating certain
leases.

Name Change Expense. Name change expense decreased to $0.1 million from
$1.8 million. In 1997, Home Choice launched a program to change the name of all
of its stores from the various trade names acquired to "HomeChoice Lease or
Own". In connection with this program, Home Choice incurred nonrecurring costs
which included the write-off of the net carrying values of old signs and branded
supplies and the expensing of new vehicle decals. The Company currently operates
under both the RentWay and HomeChoice trade names.

Other Operating Expenses. Other operating expenses increased to $115.0
million from $109.8 million and decreased to 23.3% as a percentage of total
revenue from 25.1%. The drop in percentage of total revenue is a result of the
higher revenues in 1999. The increase in the operating expenses in 1999 includes
health and disability insurance, losses of merchandise, telephone, write-off of
fixed assets and increase in Club Plan Expense (customer insurance).

Operating Income. Operating income increased to 4.9% from 2.0% due to the
factors discussed above. In connection with the Merger, the Company identified a
large number of rental merchandise items which failed to meet the accepted
quality standards of the Company's operating procedures. Accordingly, the
Company experienced an excessive amount of inventory deletions during the three
month period ended December 31, 1998. The amount of excessive inventory
write-offs included in the other operating expenses in the Consolidated
Statement of Operations for the year ended September 30, 1999 was approximately
$1.1 million. Excluding these write-offs and the business combination costs
described above, operating income increased to 8.7% from 4.6%.

16
19
Interest Expense. Interest expense increased to 3.3% from 2.7% as a
percentage of total revenues. This increase is mainly due to a full year of
interest accruing on the $81.0 million in funds drawn on the Company's senior
credit facility to consummate the Champion acquisition compared to a partial
year of interest accruing in fiscal 1998.

Income Tax Expense. Tax expense of $7.2 million and $2.2 million has been
reflected for fiscal 1999 and fiscal 1998, respectively. The Company has
generated tax losses in fiscal 1999 and fiscal 1998 and intends to file amended
returns and carryback these net operating losses against taxable income in prior
years to the fullest extent possible. The tax expense in fiscal 1999 and fiscal
1998 is higher than the statutory rate primarily due to nondeductible
acquisition costs and nondeductible goodwill.

Extraordinary Item. In connection with the Merger, the Company entered into
a new syndicated credit facility. As a result of this refinancing, the Company
wrote off the remainder of deferred financing costs associated with its and Home
Choice's previous credit facilities. The amount of the remaining deferred
financing costs was $0.9 million, $0.5 million net of tax benefit.

Net Loss. Net loss was reduced to $0.7 million from a net loss of $5.8
million due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements relate primarily to purchasing
additional rental merchandise and replacing rental merchandise that has been
sold or is no longer suitable for rent. As a result of the accounting matters
described above, the Company became in default of several of the covenants
contained in its bank credit facility including, without limitation, the
covenants regarding maximum leverage ratio, minimum interest coverage ratio,
minimum net worth, fixed charge coverage ratio, and rental merchandise usage and
the covenants regarding delivery of monthly, quarterly and annual financial
statements of the Company and is now operating under a forbearance agreement
with its bank lenders which expires on July 31, 2001. Currently, the Company's
ability to borrow funds is limited. The Company is in negotiations with its bank
lenders to obtain an amended credit facility that will provide the Company with
sufficient borrowing capacity and revised loan covenants. There can be no
assurance that the Company will be successful in negotiating an amended credit
facility. If the Company cannot obtain an amended credit facility on acceptable
terms, its financial condition and results of operations would be materially
adversely affected.

Net cash used in operating activities increased to $75.9 million for fiscal
2000 from cash provided of $22.4 million for fiscal 1999. This increase is
principally due to a $28.0 million net loss, a $108.3 million increase in rental
merchandise purchases, a $33.3 million increase in rental merchandise deposits
and credits due from vendors, and a $15.6 million increase in income tax
receivable offset by a $26.9 million increase in accounts payable and a $29.2
million increase in other liabilities.

Net cash used in investing activities decreased $47.9 million to $53.3
million in fiscal 2000 compared to $101.2 million in fiscal 1999. Capital
expenditures in fiscal 2000 included the acquisition of 24 stores in six
separate transactions and opening of 68 new stores. The Company also purchased a
70% interest in DPI for $7.5 million. The Company also completed a 40,000 square
foot addition to its current corporate headquarters facility on October 15,
2000. The cost was approximately $2.7 million. The Company funded this project
with borrowings on its senior credit facility. Capital expenditures in fiscal
1999 included the purchase of 21 stores from America's Rent-To-Own in June 1999
and 250 stores from RentaVision in September 1999. It also included the purchase
of new store signage and store remodeling costs associated with the stores
obtained in the Home Choice merger.

Net cash provided by financing activities increased to $131.2 million in
fiscal 2000 from $82.2 million in fiscal 1999. Cash flows from financing
activities were used to purchase rental merchandise and fund operations.

On June 28, 2000, the Company amended its credit facility with a syndicate
of banks led by National City Bank of Pennsylvania. The credit facility, co-led
by National City Bank, acting as administrative agent, Bank of America, N.A.,
acting as documentation agent, and Bank of Montreal and Harris Trust and Savings
Bank, acting as syndication agents, provided for loans and letters of credit up
to $435.0 million consisting of revolving loans and letters of credit of $114.4
million, and two term loans designated as Term Loan A for $143.1 million and
Term Loan B for $177.5 million. Borrowings under the credit facility bear
interest at the Company's option either at a base rate or a euro-rate. Under the
euro-rate option, the Company borrows money based on the London Interbank
Offered Rate plus 175-350 basis points. The actual basis points are determined
by the ratio of debt to cash flow generated from operations. Under the base rate
option, the Company borrows money based on the prime interest rate plus 0.25% to
2.0%. The actual spread is determined by the ratio of debt to cash flow
generated from operations. The credit facility requires the Company to meet
certain financial covenants and ratios including maximum leverage, minimum
interest coverage, minimum tangible net worth, fixed charge coverage, and rental
merchandise usage ratios.

The Company is currently in default of its credit facility. Until the
credit facility can be amended to relieve such defaults, all of the Company's
senior debt is classified as current. Because the Company is in default under
its credit facility, it is paying a default rate of interest, which is the base
rate plus 225-300 basis points. In addition, the Company's independent
accountants have included a going

17
20

concern paragraph in their report on the Company's financial statements. As a
result, certain vendors may no longer ship to the Company on favorable credit
terms, and the Company could experience cash flow problems or the inability to
obtain merchandise and services when required. In addition, vendors may require
cash in advance or deposits.

The Company is currently operating under a forbearance agreement with its
bank lenders, under which the Company may only borrow a maximum of $76.1 million
under the revolving portion of the credit facility. The Company's borrowings
under this portion of the facility at May 31, 2001 were $55.6 million.

In connection with the restatement of its financial statements, the
Company's lease obligations for vehicles under a master lease agreement that had
been previously classified as operating leases have now been classified as
capital leases. As a result of this classification, the Company's property and
equipment and capital leases have been increased by $ 20.9 million at September
30, 2000. This change will result in a reclassification of rent expense to
depreciation, interest and other operating expenses with no effect on results of
operations. For tax purposes, the vehicle leases remain classified as operating
leases.

The Company has also incurred substantial costs in fiscal 2001 in
connection with the process of reviewing financial reporting matters, the
investigation of accounting matters and the preparation of its audited financial
statements. The Company anticipates that it will continue to incur significant
legal and other expenses in connection with the ongoing litigation and
investigations to which it is subject.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's major market risk exposure is primarily due to possible
fluctuations in interest rates. As of September 30, 2000, the Company had $387.7
million in loans with floating interest rates indexed to current LIBOR and prime
rates. Because the floating rates expose the Company to the risk of increased
interest cost if interest rates rise, the Company began a policy in 1998 of
managing interest rate risk by utilizing interest rate swap agreements to
convert a portion of the floating interest rate loans to fixed interest rates.
As of September 30, 2000, the Company has $204.4 million in interest rate swap
agreements that fix in a LIBOR rate ranging from 5.09% to 6.97%. This
effectively fixes the interest rate on $204.4 million of loans, thus hedging
this risk. These interest rate swap agreements have maturities ranging from 2002
to 2005.

Given the Company's current capital structure, including interest rate swap
agreements, there is $183.0 million, or 47.2% of the Company's total debt, in
floating rate loans. A hypothetical 100 basis point change in the LIBOR rate
would affect pre-tax earnings by approximately $1.8 million.

The Company does not enter into derivative financial instruments for
trading or speculative purposes. The interest rate swap agreements are entered
into with major financial institutions thereby minimizing the risk of credit
loss.

SEASONALITY AND INFLATION

Management believes that operating results may be subject to seasonality.
In particular, the fourth quarter generally exhibits a slight tightening of
customer spending habits commensurate with summer vacations, back-to-school
needs and other factors. Conversely, the first quarter typically has a greater
percentage of rentals because of traditional holiday shopping patterns.
Management plans for these seasonal variances and takes particular advantage of
the first quarter with product promotions, marketing campaigns, and employee
incentives. 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.

During the year ended September 30, 2000, the costs of rental merchandise,
store lease rental expense and salaries and wages have increased modestly. These
increases have not had a significant effect on the Company's results of
operations because the Company has been able to charge commensurately higher
rental for its merchandise. This trend is expected to continue in the
foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities" is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company adopted SOP 98-5 on October 1, 1999, and
the adoption did not have a significant effect on the Company's consolidated
financial position and results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
No. 101"). SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements and requires adoption no later
than the fourth quarter of fiscal years beginning after December 31, 1999, which
in the case of the Company is its fourth quarter of fiscal 2001. The Company has
evaluated SAB No. 101 and its related interpretations and has determined there
will be no effect on the Company's consolidated financial position and results
of operations.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
requires the recognition of the fair value of all derivative instruments on the
balance sheet. The Company will adopt SFAS No. 133 and the corresponding
amendments under SFAS No. 138 effective as of October 1, 2000. As a result of
the adoption, the Company will recognize the fair value of its interest rate
swap portfolio on its balance sheet as an asset amounting to $2,510. Subsequent
adverse changes in fair value of the interest rate swap portfolio amounting to
$4,200 for the three months ended December 31, 2000 and $4,560 for the three
months ended March 31, 2001, will be charged to the Company's Consolidated
Statements of Operations.

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21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE
Index to Financial Statements
Report of Independent Accountants.............................. 20
Financial Statements:
Consolidated Balance Sheets, September 30, 2000 and 1999..... 21
Consolidated Statements of Operations, Years Ended
September 30, 2000, 1999, 1998............................. 22
Consolidated Statements of Shareholders' Equity, Years Ended
September 30, 2000, 1999, 1998............................. 23
Consolidated Statements of Cash Flows, Years Ended
September 30, 2000, 1999, 1998............................. 24
Notes to Consolidated Financial Statements................... 25

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22
RENT-WAY, INC.

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENT-WAY, INC.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 53 present fairly, in all material
respects, the financial position of Rent-Way, Inc. and its subsidiaries at
September 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company violated certain debt covenants
and is now operating under a forbearance agreement with its bank lenders, which
expires on July 31, 2001. The Company's ability to borrow additional funds is
limited. The Company is in active negotiations with its banks to eliminate the
forbearance agreement and to obtain an amended credit facility that will provide
the Company with sufficient liquidity. There can be no assurance that the
Company will be successful in negotiating an amendment with the banks. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2 to the consolidated financial statements. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.

As discussed in Notes 1 and 19 to the consolidated financial statements,
the Company restated its September 30, 1999 and 1998 consolidated financial
statements.

As discussed in Note 1 to the consolidated financial statements, the
Company has not presented the unaudited quarterly financial data, specified by
Item 302(a) of Regulation S-K, that the Securities and Exchange Commission
requires as supplementary information to the basic consolidated financial
statements.

PricewaterhouseCoopers LLP

Cleveland, Ohio
June 27, 2001

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23

RENT-WAY, INC.

CONSOLIDATED BALANCE SHEETS
(all dollars in thousands)

SEPTEMBER 30,
-----------------------------
2000 1999
---- ----
As Restated
(Notes 1 and 19)

ASSETS
Cash and cash equivalents ......................................... $ 10,654 $ 8,646
Prepaid expenses .................................................. 13,997 7,129
Income tax receivable ............................................. 20,607 4,968
Rental merchandise, net ........................................... 282,052 196,510
Rental merchandise deposits and credits due from vendors .......... 33,289 --
Deferred income taxes, net of valuation allowance of $10,050 in
2000 ............................................................ -- 98
Property and equipment, net ....................................... 76,699 59,915
Goodwill, net of accumulated amortization of $39,982 and $26,464,
respectively .................................................... 307,690 307,381
Deferred financing costs, net of accumulated amortization of $853
and $487, respectively .......................................... 5,068 3,732
Non-compete agreements and prepaid consulting fees, net of
accumulated amortization of $10,304 and $6,687, respectively .... 3,236 5,561
Other assets ...................................................... 11,310 5,562
--------- ---------
$ 764,602 $ 599,502
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable .................................................. $ 42,750 $ 15,861
Other liabilities ................................................. 66,178 37,024
Debt .............................................................. 387,852 288,130
--------- ---------
496,780 341,015
Commitments and contingencies (Note 11) ........................... -- --

Shareholders' equity:
Preferred stock, without par value; 1,000,000 shares authorized;
no shares issued and outstanding at September 30, 2000 and 1999,
respectively .................................................... -- --
Common stock, without par value; 50,000,000 shares authorized;
24,459,573 and 21,976,401 shares issued and outstanding at
September 30, 2000 and 1999, respectively ....................... 295,185 257,481
Loans to shareholders ............................................. (690) (362)
Retained earnings (accumulated deficit) ........................... (26,673) 1,368
--------- ---------
Total shareholders' equity ...................................... 267,822 258,487
--------- ---------
$ 764,602 $ 599,502
========= =========

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

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24

RENT-WAY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(all dollars in thousands, except per share data)

FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
2000 1999 1998
---- ---- ----
As Restated As Restated
(Notes 1 and 19) (Notes 1 and 19)

REVENUES:
Rental ...................................................... $ 498,876 $ 427,094 $ 377,918
Prepaid phone service ....................................... 9,244 -- --
Other revenues .............................................. 84,566 67,258 58,113
--------- --------- ---------
Total revenues ............................................ 592,686 494,352 436,031
COSTS AND OPERATING EXPENSES:
Depreciation and amortization:
Rental merchandise ........................................ 157,278 124,957 109,207
Property and equipment .................................... 16,173 15,700 10,331
Amortization of goodwill .................................. 13,855 9,837 11,248
Cost of prepaid phone service ............................... 5,988 -- --
Salaries and wages .......................................... 150,933 130,194 120,688
Advertising, net ............................................ 20,075 24,023 22,687
Occupancy ................................................... 45,787 32,790 30,482
Name change expense ......................................... -- 86 1,770
Business combination costs .................................. -- 17,726 11,210
Other operating expenses .................................... 183,339 114,977 109,819
--------- --------- ---------
Total costs and operating expenses .......................... 593,428 470,290 427,442
--------- --------- ---------
Operating income (loss) ................................ (742) 24,062 8,589
OTHER INCOME (EXPENSE):
Interest expense ............................................ (28,101) (16,309) (11,544)
Equity in loss of subsidiary ................................ (573) -- --
Amortization--deferred financing costs ...................... (654) (422) (358)
Interest income ............................................. 126 38 251
Other income (expense), net ................................. 1,703 (396) (540)
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Income (loss) before income taxes and extraordinary item (28,241) 6,973 (3,602)
Income tax expense (benefit) (Notes 5 and 12) ............... (200) 7,219 2,217
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Loss before extraordinary item ......................... (28,041) (246) (5,819)
Extraordinary item (Notes 3 and 9) .......................... -- (519) --
--------- --------- ---------
Net loss ............................................... $ (28,041) $ (765) $ (5,819)
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LOSS PER COMMON SHARE:
Basic loss per share
Loss before extraordinary item ......................... $ (1.20) $ (0.01) $ (0.29)
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Net loss ............................................... $ (1.20) $ (0.04) $ (0.29)
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Diluted loss per share
Loss before extraordinary item ......................... $ (1.20) $ (0.01) $ (0.29)
========= ========= =========
Net loss ............................................... $ (1.20) $ (0.04) $ (0.29)
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Weighted average number of shares outstanding (in thousands):
Basic .................................................. 23,314 21,341 20,283
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Diluted ................................................ 23,314 21,341 20,283
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