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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
COMMISSION FILE NO. 0-14819
RENT-A-WRECK OF AMERICA, INC.
(EXACT NAME OF ISSUER IN ITS CHARTER)
DELAWARE 95-3926056
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11460 Cronridge Drive, Suite 120, Owings Mills, MD 21117
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (410) 581-5755
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $3,785,000
4,244,767 shares of common stock were outstanding as of May 1, 1997.
Aggregate market value of voting stock held by nonaffiliates of
registrant, based upon the average of the last bid and asked price of
the Common Stock on the Nasdaq SmallCap Market, was $2,997,266 on May
1, 1997. Shares of Common Stock held by each officer and director and
by each person who owns 10% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily conclusive.
The following documents are incorporated by reference and made a part
of the Form 10-KSB:
1. Portions of the Registrant's Proxy Statement for the 1997
Annual Meeting of Stockholders are incorporated by reference
in Part III hereof.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PART I
Item 1. Description of Business.................................... 3
Item 2. Description of Property.................................... 9
Item 3. Legal Proceedings.......................................... 9
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 10
PART II
Item 5. Market for the Common Equity and
Related Stockholder Matters................................ 11
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 14
Item 7. Financial Statements....................................... 19
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 41
PART III
Item 9. Directors and Executive Officers,
Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act..................... 41
Item 10. Executive Compensation..................................... 41
Item 11. Security Ownership of Certain Beneficial
Owners and Management...................................... 41
Item 12. Certain Relationships and Related
Transactions............................................... 41
Item 13. Exhibits and Reports on Form 8-K........................... 41
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Rent-A-Wreck of America, Inc. (the "Company" or "RAWA") (incorporated
in Delaware on October 12, 1983), which conducts its operations primarily
through its wholly owned subsidiary Bundy American Corporation ("Bundy")
(incorporated in California on April 22, 1977 and redomesticated in Maryland
effective October 22, 1996), markets and administers the Rent-A-Wreck (R)
vehicle rental franchise program. The Rent-A-Wreck franchisees in aggregate
operate one of the largest used vehicle rental fleets in the nation, offering
rentals of cars, trucks and vans at rates that are generally less than those
charged by new car rental companies. The Company also has franchisees in Europe
and Asia. Reference to the "Company" includes Rent-A-Wreck of America, Inc. and
its subsidiaries unless the context otherwise requires.
The Franchise Program
The Company sells to qualified persons the right to operate a
Rent-A-Wreck and/or PRICELE$$ franchise renting and leasing used motor vehicles
(automobiles, vans and trucks) to the general public. Further, the Company
offers each franchise territory rights in which the Company will not open
another franchise.
Franchisees purchase the right to use certain of the Company's
resources, experience and knowledge in connection with the operation of the
business for a specified period of time, typically ten years. The franchisee
utilizes the Company's systems, methods, specifications, standard operating
procedures, guidance, trade and service marks.
The Company believes the Rent-A-Wreck name is unique and currently
enjoys national recognition. Ongoing marketing programs further promote name
recognition, including internationally. The Company develops and executes
advertising and marketing programs that have included radio and television
commercials, direct mail, print advertising and promotional items.
On January 1, 1997, the Company began actively marketing its existing
trademark "PRICELE$$" (R). The franchisees who participate in this used vehicle
rental franchise program are required by the Company to meet higher standards
such as utilizing vehicles that are under three years old. As of March 31, 1997,
19 of the Company's franchisees are participating in this program. The Company
believes the PRICELE$$ name will appeal to a different clientele and therefore
will be a complement to the Rent-A-Wreck program.
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On December 3, 1996, the Company purchased the assets of Insurance
Rentals, Inc. (a subsidiary of Baltimore Car and Truck Rental) to provide a
central reservation system and marketing force for the insurance replacement
business. This business is based in Baltimore, Maryland and the Company is
developing this program so that it can be used nationwide. Insurance Rentals,
Inc. utilizes its established insurance company client base to provide the
Company's franchisees with referrals for insureds requiring temporary
replacement vehicles after an accident. The Company collects reservation fees
from its franchisees for these referrals.
During the fiscal year ended March 31, 1997, Rent-A-Wreck One Way, Inc.
started a truck rental program which is being developed and tested in the
immediate area of the Company's headquarters in Maryland. The Company has
purchased two trucks to operate under this program. These trucks and an existing
Company-owned van are placed with one or more of the Company's franchisees which
are utilizing them in their fleets. The franchisees pay fees to the Company for
these vehicles based on the mileage used.
Public relations activities conducted on the franchisees' behalf
include a franchise award announcement, grand opening press release and
anniversary press releases. Assistance in planning and implementing local
promotional activities is available to franchisees. The Public Relations
Department also publishes the "Rent-A-Wreck Reporter", which is distributed
internally to franchisees and externally to trade and consumer media, and the
Company's sources of referral such as insurance adjusters, automotive repair
shops, travel agents and corporate travel managers.
The Company maintained a national insurance program with an "A" rated
carrier which offered group insurance rates available to most franchisees. The
program was discontinued on February 16, 1997.
The Company offers its physical damage insurance program through its
wholly owned subsidiary Central Life and Casualty, Limited ("CLC") to its
franchisees. Franchisees pay monthly premiums based on their vehicles' wholesale
value, and in return CLC provides them with coverage for damage to their
vehicles up to their wholesale value. CLC utilizes Lindsey Morden as its
insurance adjuster and pays claims from premiums collected. As of March 31,
1997, approximately 3% of the Company's franchisees participate in this program.
The Company intends to replace this program with the Company's new insurance
program which is discussed in the following paragraph.
On March 1, 1997, the Company formed a wholly owned insurance
subsidiary domiciled in Bermuda to provide automobile liability and physical
damage reinsurance through American International Group ("AIG") for the vehicles
belonging to its franchisees. The company
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name for this captive is Consolidated American Rental Insurance Company, LTD
("CAR Insurance").
AIG provides insurance coverage for the Company's franchisees. CAR
Insurance reinsures AIG's coverage subject to a per loss limit of $100,000 per
person and $300,000 per accident. AIG also provides an aggregate stop loss
protection of $1,300,000 for the first year of this agreement, thus capping CAR
Insurance's exposure to loss. The other operational components of the program
include Willis Corroon as the broker, Hertz Claims Management as the Third Party
Administrator, and AICCO Premium Financing. AICCO is providing premium financing
to participants in the program. CAR Insurance intends to limit its exposure to
1,500 vehicles during the first year. The focus of growth for CAR Insurance will
be in those states where the Company's broker believes the driver's insurance is
deemed to be primarily responsible for any losses. Franchisees apply for this
insurance coverage with Willis Corroon. Willis Corroon processes the
franchisees' application and if approved the franchisee is required to pay
premiums in advance on a monthly basis. Hertz Claims Management is responsible
for processing all claims. As of March 31, 1997, approximately twenty of the
Company's franchisees were insuring an approximate total of 350 of their
vehicles under this program.
The Company has arranged a vehicle financing program whereby
franchisees may finance vehicles over a 24-30 month period. The program is
available to qualified applicants which maintain a level of creditworthiness
that the Company has assessed on a case by case basis. The franchisees'
qualification is based on their credit history with the Company, as well as
their credit standing as reported by national credit bureaus. The franchisees
are responsible for purchasing the vehicles with funds loaned by the Company,
and the Company is listed on the vehicles' title as a lienholder. As of March
31, 1997, the Company has financed twenty-four vehicles for eight of its
franchisees.
The Company is committed to educating and training its franchisees. The
Company conducts Rent-A-Wreck School at its headquarters in Maryland every 45
days. All new franchisees are required to attend. School is also available at no
charge to current franchisees and their staff. During an intensive five-day
period, attendees learn all aspects of the Rent-A-Wreck program. This includes
vehicle acquisition, maintenance and sales, telephone techniques, counter
procedures, and rental operations, promotion, publicity, advertising and sales
tactics, relevant aspects of insurance, accounting and other general business
skills.
The Company employs field service staff who have many years of
experience in the car rental industry. Their responsibility is to provide
continuous advice via personal visits and a toll-free telephone number.
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Additionally, the Company has organized several franchisee state
associations that meet periodically to discuss regional issues and exchange
ideas. Finally, the Company holds and strongly encourages franchisees to attend
regional meetings which are held annually in eastern and western regions of the
United States. The Company utilizes these meetings to present new programs to
franchisees and to provide continued training and advice.
The Company's National Franchisee Advisory Council, which consists of
seven members, meets quarterly. Six of the members are elected by the
franchisees in their region. The seventh member is a franchisee appointed by the
Company. The Council is a forum through which franchisees can express opinions
and concerns to the Company. The Council also provides suggestions as to how the
Company's national advertising fund is allocated.
When the Company sells a franchise, it charges an initial franchise fee
that varies according to the population of the franchisee's primary service area
at the time the franchise is granted. The Company may finance the initial fee
over a period not to exceed twelve months based on the creditworthiness of the
franchisee. Additionally, franchisees are required to pay the Company monthly
royalties and contribute to the national advertising fund. These fees vary
according to franchisees' fleet size or gross revenues.
Advertising monies paid into the national advertising fund are expended
by the Company on the franchisees' behalf after consultation with the National
Franchisee Advisory Council. Based on the Council's recommendations, the Company
has expended these funds on different programs such as advertising on the
Weather Channel and the Travel Channel and sponsoring a race car to further
promote the Company's national exposure.
The Company markets its franchise programs primarily by attending
various trade shows and by conducting an ongoing direct mailing campaign. The
Company employs three full time salespeople at its corporate headquarters and in
addition the Company utilizes the services of four independent franchise brokers
located throughout the United States. These representatives are responsible for
responding to potential franchisees' inquiries.
During the fiscal year ended March 31, 1997, 68 new franchises were
granted, 10 existing franchise locations were transferred to new ownership and
40 franchises were terminated by the Company. The majority of these terminations
resulted from monetary default. This resulted in approximately 448 franchised
locations throughout the United States, as well as 9 franchised locations
located in Europe and Asia at the end of this fiscal year compared to
approximately 420 franchised locations throughout the United States, as well as
9 franchised locations in Europe and Asia at the end of the fiscal year ended
March 31, 1996.
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EMPLOYEES
As of March 31, 1997, the Company employed twenty two people,
consisting of twelve full-time and three part-time employees engaged in
franchise sales and service and seven full-time employees engaged in
administrative activities. In addition, the Company retains the services of four
franchise brokers who sell the Company's franchises. None of the employees is
covered by a collective bargaining agreement, and management believes that its
relations with its employees are good.
COMPETITION
The Company pioneered the concept of used car rentals. Unlike the
traditional airport rental companies, Rent-A-Wreck developed its niche serving
the "neighborhood" rental market. The Company emphasizes convenience and service
and offers rentals of used cars, trucks and vans at rates that are typically
lower than those charged by new car rental companies.
The Company's customers generally are people from the local community,
although most franchisees service some business and leisure travelers from
outside the community. The Company's franchisees generally serve customers
needing vehicles for insurance and service replacement, commercial, short-term
moving and general use.
Rent-A-Wreck franchisee fleets usually consist of a variety of used
vehicles, although some locations rent new cars as well. The franchisees offer
to customers various vehicles according to local demand. Trucks, passenger vans
and cargo vans are available at many locations. This allows the franchisees the
flexibility to offer an appropriate range of vehicles for their area.
Significant competition exists in the local markets. Large systems like
Enterprise and U-Save compete nationwide. Dozens of local independent companies
also compete with the Company in various areas. In most major urban areas,
companies like Hertz, Avis, National and Budget also operate city, and suburban
offices, as well as operating in airport terminals.
Earlier this decade, many of the new car rental companies were owned,
wholly or partially, by automobile manufacturers who sold their rental
subsidiaries cars at discounted prices and guaranteed to repurchase cars after
four to nine months in rental service. This enabled the rental companies to pass
along their savings to retail customers in the form of lower rental prices. Over
the last few years, the rental companies have been returning to independent
ownership, the new car discounts and buybacks have been reduced, and new car
retail rental prices have risen, reflecting real costs more accurately. Because
the Company's franchisees generally attempt to provide substantial discounts off
the retail prices
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charged by the large new car rental companies, the Company believes that the
increase in prices charged by such companies has enabled the Company's
franchisees to compete more effectively and profitably.
GOVERNMENT REGULATION
The offering and sale of franchises is subject to Federal and State
regulation and regulations by foreign governments.
The Federal Trade Commission ("FTC"), pursuant to the Federal Trade
Commission Act, has adopted regulations requiring full pre-sale disclosure to
prospective franchisees of certain information, including information about the
franchisor, its existing franchises, the rights and obligations of franchisees,
and termination, cancellation and renewal of franchises. Disclosure is required
to be made prior to the sale in the form of an offering circular.
Many states in which the Company sells or may sell franchises may
require pre-sale registration of the Company and/or the Company's offering
circular and franchise agreement to be used in selling franchises from or in the
state. The Company must apply for renewal with many of these states annually.
Many states also regulate various aspects of the franchisor- franchisee
relationship, including regulations regarding awarding, renewing, and
terminating franchise relationships.
Compliance with the laws of the state from or in which the sale is to
be made, in addition to the Federal regulations, may be required because the FTC
has determined that its franchising regulations will not preempt state or local
laws and regulations which are consistent with its Federal regulations, or which
if inconsistent, would provide protection to prospective franchisees equal to or
greater than that imposed by the Federal franchising regulations.
The Company is currently authorized to sell franchises in all 50 states
under its "Rent-A-Wreck" and "PRICELE$$" trade and service marks. The Company
has registered its "Rent-A-Wreck" trade and service mark in approximately 24
foreign countries and is in the process of registering its "PRICELE$$" trade and
service mark in 17 foreign countries.
TRADEMARKS
The Company believes that name recognition of its primary trademark
"Rent-A-Wreck" is important to its franchise program. A trademark may be held
for an indefinite duration, but it may be lost or its value diminished if
adequate steps to police its use
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are not taken. The Company believes that its efforts to police the use of its
trademarks are adequate.
The Company is actively promoting its existing "PRICELE$$" trademark.
The Company believes this trademark will provide additional sales opportunities
for its franchisees due to new target customers of "PRICELE$$" rental fleets.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 6,790 square feet of
executive office space at 11460 Cronridge Drive, Suite 120, Owings Mills, MD
21117, which lease will expire in November 1999. The Company also rents on a
month-to-month basis approximately 1,000 square feet of executive office space
at 11460 Cronridge Drive, Suite 118, Owings Mills, MD 21117 (see Item 12 Certain
Relationships and Related Transactions).
Management believes that the facilities leased by the Company are
adequate for the Company's current and foreseeable future operations or that
adequate alternative space is readily available.
ITEM 3. LEGAL PROCEEDINGS
Suit was initiated against the Company, an officer of the Company, and
another defendant on August 17, 1994 in the Supreme Court of the State of New
York, County of Suffolk, by Mongo, Inc. and John and Roberta Batcher. The suit
subsequently was removed by the defendants to the United States District Court
for the Eastern District of New York. The suit alleged breach of contract, fraud
and RICO violations in connection with alleged promises of automobile financing
to be provided by the Company to a former franchisee, and sought damages of
approximately $4.1 million (of which $4.0 million represented claims for
punitive damages and treble damages under RICO). On September 6, 1996 all
allegations against all defendants were dismissed in the lawsuit, except the
claim against the Company's wholly owned subsidiary, Bundy American Corporation
("Bundy"). On April 16, 1997, the court also dismissed with prejudice the claim
against Bundy before it was submitted to the jury.
Bundy initiated a lawsuit on November 21, 1994 in the United States
District Court for the Southern District of New York to collect amounts owed by
a former franchisee, Motorcar Exchange, Inc., and its principals, Gary and
Debbie Blankfort. In April 1996, Bundy obtained a default judgment against the
defendants for approximately $140,000 in addition to a contempt judgment for
approximately $70,000 plus interest. Subsequently, one of the defendants, Debbie
Blankfort, filed a petition as a debtor under the United States bankruptcy laws.
On July 13, 1996, Bundy filed
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a petition in the Southern District of New York for a determination that the
amounts due pursuant to the judgment it received in April 1996 are not
dischargeable as a result of the bankruptcy petition filed by Debbie Blankfort.
On April 26, 1996, suit was initiated against Bundy and one of its
officers in the Circuit Court for Baltimore County, Maryland by a former
employee claiming $1.5 million in damages for wrongful discharge. The suit was
dismissed for failure to state a proper cause of action. On July 29, 1996, the
lawsuit was refiled against Bundy. On June 2, 1997, the suit was dismissed on
Bundy's motion with prejudice. On June 11, 1997, the plaintiff filed a motion
for reconsideration of the dismissal. On April 14, 1997, the same plaintiff
filed a lawsuit against Bundy under the Americans with Disabilities Act in the
U.S. District Court for the District of Maryland. The federal lawsuit is based
on the same circumstances as the state case. The plaintiff claims $1.5 million
in damages. The Company believes that the lawsuit is without merit and intends
to defend it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the 4th
quarter of the fiscal year ended March 31, 1997.
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PART II. OTHER INFORMATION
ITEM 5. MARKET FOR THE COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, trades on the Nasdaq
SmallCap Market under the symbol RAWA.
The range of high and low bid quotations for the quarterly periods of
the current and prior fiscal years were as follows:
<TABLE>
<CAPTION>
Year Ended
March 31, 1997 High* Low*
<S> <C> <C>
First Fiscal Quarter $ 1 1/2 $ 31/32
Second Fiscal Quarter 1 1/2 1 1/16
Third Fiscal Quarter 1 5/16 29/32
Fourth Fiscal Quarter 2 1/4 1
Year Ended
March 31, 1996 High* Low*
First Fiscal Quarter $ 1 1/32 $ 15/16
Second Fiscal Quarter 1 5/16 1 1/8
Third Fiscal Quarter 1 1/4 31/32
Fourth Fiscal Quarter 1 3/16 15/16
</TABLE>
* Bid quotations as reported by Nasdaq reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not represent actual
transactions.
The Company has never paid any cash dividends on its Common Stock, nor
does it anticipate paying dividends on its Common Stock in the foreseeable
future. The Company currently has preferred stock issued with 1,439,125 shares
outstanding. This stock has a quarterly cumulative dividend of two cents per
share. Based on current outstanding preferred shares, the annual dividend is
$115,130. The terms of the outstanding preferred stock provide that the Company
may not declare or pay dividends, whether in cash or in property, on the common
stock unless the full dividends on the preferred stock for all past dividend
periods and the current dividend period have been paid or declared and a sum set
aside for payment thereof. The preferred stock is convertible into common on a
share for share basis. There is no public market for the preferred stock. At
June 1, 1997, undeclared and unpaid cumulative preferred dividends amounted to
$232,159.
The number of stockholders of record of the Company's Common Stock as
of May 1, 1997 was 258. This figure does not include individual participants in
securities position listings of registered clearing agencies. The number of
beneficial
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stockholders was approximately 1,000 as of May 1, 1997. Trading activity with
respect to the Common Stock has been limited and the volume of transactions
should not of itself be deemed to constitute an "established public trading
market." A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.
RECENT SALES OF UNREGISTERED SECURITIES
The Company issued 25,250 and 34,375 shares of its common stock on
January 16, 1997, pursuant to Section 3(a) (9) of the Securities Act of 1933, as
amended (the "Act"). The shares were issued to holders of the Company's
preferred shares who converted their preferred shares into common shares on a
one-for-one basis.
On March 31, 1997, the Company issued an aggregate of 100,000 shares of
common stock pursuant to Section 4 (2) of the Act. The shares were issued upon
the exercise of outstanding common stock purchase warrants at $1.25 per share.
William L. Richter, a director of the Company, purchased 20,000 of the common
shares directly and 60,000 of the common shares through a corporation he
controls. The remaining 20,000 shares were purchased by an investment banker who
formerly was an employee of the corporation controlled by Mr. Richter, which
corporation provides financial management services to the Company. Both Mr.
Richter and the other investment banker received these warrants from the
corporation controlled by Mr. Richter pursuant to their employment with that
firm.
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of operations of the Company and its subsidiaries for
each of the five years in the period ended March 31, 1997, and with respect to
the balance sheets thereof at March 31 in each of those years.
The selected financial data have been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the financial statements and related notes thereto and other financial
information appearing elsewhere herein. The selected financial data is not
required by Form 10-KSB and has been included herein to provide an overview of
the Company's operations.
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<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands except per share
and number of franchises)
FRANCHISEES' RESULTS (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Franchisees' Revenue (1) $ 23,998 $ 25,522 $26,482 $29,864 $34,661
Number of Franchises 350 365 384 429 457
COMPANY'S RESULTS OF OPERATIONS
Total Revenue $ 4,508 $ 3,224 $ 3,003 $ 3,455 $ 3,785
Costs and expenses and Other 4,910 3,511 2,655 3,029 3,252
Income (loss) before income
taxes (438) (262) 416 489 600
Net income (loss) (443) (236) 383 459 537
Earnings (loss) per common share (.18) (.10) .06 .07 .08
Weighted average number of
shares outstanding 3,241 3,773 4,301 4,668 5,333
COMPANY'S BALANCE SHEET DATA
Working Capital $ 117 $ 572 $ 850 $ 902 $ 1,191
Total assets 2,579 2,553 2,102 2,164 2,594
Long-term obligations 421 119 -- 36 30
Shareholders' Equity 694 1,048 1,299 1,372 1,755
</TABLE>
(1) The franchisees' revenue data have been derived from unaudited license fee
reports provided by franchisees.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 1997 vs. year ended March 31, 1996
Revenue from franchising operations which includes initial license
fees, continuing license fees and direct financing leases increased by $288,447
(11%). This increase occurred primarily due to an increase in continuing license
fees by $287,799 (16%) due to the Company's dedication of more resources to the
collection effort. Other revenue decreased by $44,128 (14%). This decrease
occurred primarily due to a reduction in the level of activity of the physical
damage insurance program ("CLC") by $31,932 (26%), and the termination of the
national insurance program ('URM") in February 1997 by $7,663 (10%).
Total operating expenses increased by $222,237 (7%) in fiscal 1997
compared to the prior year. Salary expense increased by $73,793 (11%) due
primarily as a result of additional hires in response to the growth of the
Company. General and administrative expenses increased by $21,720 (3%), which
resulted primarily from an increase in management fees and expenses. In April,
1996, the Board approved an increase in management fees to KAB, Inc. from
$200,000 to $250,000 per year. (See "Item 12 - Certain Relationships and Related
Transactions"). Sales and marketing expenses decreased by $49,449 (8%), which
resulted primarily from a reduction in bad debt expenses due to collection of
outstanding notes receivable and a reduction in commission expense due to a
greater percentage of sales made by salespeople receiving a lower commission
rate.
Net interest income increased $3,131, primarily due to the Company's
collection effort.
Depreciation and amortization expense increased by $41,441 (57%) in
fiscal 1997 compared to the prior year. This increase was primarily due to the
additional investment in computer software and hardware.
The Company realized operating income of $533,363, before taxes and
interest, in 1997 compared to operating income of $425,386 for 1996, reflecting
an increase of $107,977. This increase resulted primarily from the increase in
continuing license fees due to the Company's collection efforts.
Income tax expense for the year ended March 31, 1997 increased by
$32,189 (106%) over 1996 due to higher pre-tax earnings and the depletion of the
Company's federal income tax net operating loss carryforward.
Inflation has had no material impact on the operations and financial
condition of the Company for all years presented.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had working capital of $1,191,019
compared to $901,774 at March 31, 1996. This increase of $289,245 primarily
resulted from net income for the year ended March 31, 1997.
The Company is pursuing a letter of credit with Chase-Manhattan Bank in
connection with the Company's new CAR Insurance subsidiary. This letter of
credit is part of the reinsurance agreement with AIG to insure payment of
claims. The Company intends to secure this letter of credit with cash and
receivables totaling $800,000. In event the $800,000 security is insufficient,
the Company may be responsible for the payments from its other assets.
The Company is committed under capital lease agreements for various
equipment, and rents its office facilities under the terms of an operating
lease. The Company is utilizing its working capital to pay for these
obligations.
Cash provided by operations was $857,467 resulting from an increase in
net income, plus depreciation and amortization and a decrease in accounts and
notes receivable due to the Company's collection effort. This increase also
resulted from an increase in accounts payable and accrued expenses due to the
growth of the Company. Cash used in investing activities of $191,341 related
primarily to the acquisition of computer software and hardware and maintaining
trademarks. Cash used in financing activities during the same period was
$168,419, which was applied to payments of preferred dividends, and the
retirement of common and preferred stock, offset by issuance of common stock in
connection with warrants exercised and the acquisition of assets.
During the year ended March 31, 1996, the Company announced a buyback
of up to 250,000 shares of its common stock and/or its Series A convertible
preferred stock. On April 8, 1996, the Board of Directors authorized to
repurchase up to an additional 250,000 shares of the Company's outstanding
common and preferred stock. During the year ended March 31, 1996, the Company
bought back 116,400 shares of its common stock at a cost of $118,562, and also
bought back 89,375 shares of its preferred stock at a cost of $117,907. These
shares were retired in the year ended March 31, 1996. During the year ended
March 31, 1997, the Company bought back 66,500 shares of its common stock at a
cost of $66,749, and also bought back 67,625 shares of its preferred stock at a
cost of $85,301. These shares were retired in the year ended March 31, 1997.
The Company believes it has sufficient working capital to support its
business plan through fiscal 1998.
15
<PAGE> 16
IMPORTANT FACTORS
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. This Report
contains forward-looking statements made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, including
the statements regarding anticipated growth of the Company and trends in the
industry. In connection with these "safe harbor" provisions, the Company
identifies important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such forward-looking statement is qualified by
reference to the following cautionary statements.
Limited Insurance Experience; Potential for Negative Claims Experience.
The Company's reinsurance business exposes its assets to significant liability
for claims and losses under the program. There can be no assurance that the
premiums collected will be adequate to cover the liabilities incurred. Because
of the Company's limited experience with insurance risks and the inherent
uncertainties in estimating the ultimate costs of claims, losses and adjustment
expenses may deviate substantially from expectations. Furthermore, the timing,
frequency and extent of liabilities under this program cannot be predicted
accurately because the conditions and events which established the Company's
loss expectancies may not recur in the future. Unexpected losses associated with
this program could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, if the Company
expands the program as anticipated, the effect of such losses could be
compounded. Because the Company recently began its reinsurance program, its
arrangements with the participants in the program are not yet formalized. If the
Company's expectations and understandings are not reflected in the actual
operations of the program, there may be a material adverse effect on the
Company.
Government Regulation Relating to Insurance Program. As part of the
insurance program, the Company utilizes Consolidated American Rental Insurance
Company, Ltd ("CAR Insurance"), its wholly owned subsidiary based in Bermuda.
Insurance companies such as CAR Insurance are subject to the laws and
regulations in the jurisdictions in which they are chartered and do business.
Such laws and regulations generally are designed to protect the interests of
policyholders rather than the interests of shareholders or the Company. In
general, insurance regulatory agencies have broad authority over insurers'
capital and surplus levels, dividend payments, financial disclosure, reserve
requirements, investment parameters and premium rates. The regulation of CAR
Insurance and its insurance program involving AIG, Hertz Claims Management and
AICCO Premium Financing, could have a material effect on the Company's business,
financial condition and results of operations.
The Company's insurance program offered through CAR Insurance is
conducted via "fronting" arrangements with AIG. Because some states currently
restrict or limit such arrangements, the ability of the Company
16
<PAGE> 17
to expand the program into those states is also limited. In addition, the
National Association of Insurance Commissioners ("NAIC") adopted a model act
concerning such "fronting" arrangements. The model act requires reporting and
prior approval of reinsurance transactions relating to these arrangements, and
limits the amount of premiums that can be written under certain circumstances.
No determination can be made as to whether, or in what form, such act may
ultimately be adopted by any state, and the Company is therefore unable to
predict whether the model act will affect its operations or relationships with
insurers. Some states currently regulate third party administration and premium
financing arrangements, such as those used by the Company. Any or all of these
regulations could have a material effect on the program being offered by the
Company.
State regulation requires licensing of persons soliciting the sale of
insurance within that state. In certain states, licenses are obtained by
individual agents rather than a corporate entity. Due to the Company's recent
development of the reinsurance program and limited experience with its other
insurance programs, there can be no assurance that its activities will not be
deemed to be in violation of licensing or other insurance laws or regulations.
Such violations could subject the Company to significant fines and penalties
which could have a material adverse effect on its business, financial condition
and results from operations.
Dependence on Franchisees; Credit Risks. The Company's revenues are
substantially dependent on fees paid by its franchisees. These fees fluctuate
based on the franchisee's performance. Franchisees are independent contractors
who operate their business independent of the Company. Any failure of
franchisees to operate their businesses, or inability of the Company to collect
fees owed by franchisees could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Trademarks. The Company's success depends in significant
part on its ability to maintain and protect its primary trademarks involving the
"Rent-A-Wreck" name. The Company's revenues are almost exclusively derived from
the goodwill associated with the name. Significant negative publicity related to
the name or the inability of the Company to pursue infringements and maintain
its proprietary rights would have a material adverse effect on the Company's
business, financial condition and results of operations.
Intense Competition. The vehicle rental industry in which the Company
and its franchisees operate is characterized by intense competition,
particularly with respect to price and service, from national, regional and
local vehicle rental companies. Many of these competitors, particularly national
competitors and those with relationships with vehicle manufacturers, have
substantially greater resources than the Company. In addition, competition
exists from many smaller, independent operations in local markets. Any failure
by the Company and its franchisees to offer services and prices that compete
favorably in the marketplace would have a material adverse effect on the
Company's business, financial condition and results of operations.
17
<PAGE> 18
Compliance with Governmental Regulations. The Company operations are
subject to numerous federal, state, local and foreign laws, including federal
and state laws governing the offer and sale of franchises and relationship with
franchisees. Several states' laws require the Company to renew its state
franchise registration annually. If the Company does not maintain required state
registrations, it must terminate franchise sales activity in those states. While
the Company has suspended franchise sales activity in the past until such
registrations were properly renewed, the Company believes that it is currently
in material compliance with such laws. Changes in franchise laws could require
the Company to make material alterations to its core business. Additionally,
failure to comply with franchise or other laws could subject the Company to
significant fines and penalties and have a material adverse effect on the
Company's business, financial condition and results of operations.
During the past several years, a number of states have interpreted
existing laws as requiring out-of-state companies which generate income by
granting franchises in the state to file returns and pay tax in the state.
Following this trend, other states have adopted laws specifically designed to
impose tax on out-of-state companies granting franchises in the state. While
many companies, along with many tax practitioners and commentators, contend that
the application of such laws violates the federal constitution, the United
States Supreme Court has not yet ruled on the issue directly. If the application
of these laws is constitutional, if the laws apply to the activities of the
Company, or if the states' interpretation of existing laws is applied
retroactively, any resulting taxes and associated interest and penalties for
which the Company may be liable also could have a material adverse effect on the
Company.
Risks of International Operations. During the fiscal year ended March
31, 1997, approximately 1% of the Company's revenues were derived from
international operations. The Company's international operations are subject to
certain risks, including adverse developments in foreign political and economic
environment, varying government regulations, including regulations regarding the
protection of trademarks and the offer and sale of franchises, foreign currency
fluctuations and potential adverse tax consequences. There can be no assurance
that any of these factors, especially if the Company is successful in expanding
its international presence, will not have a material effect on the Company's
business, financial condition and results of operations.
Developments in any of these areas, which are more fully described
elsewhere in "Item 1 -- Description of Business" which is incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and Supporting Schedules
Page
Report of Independent Certified Public Accountants... 20
Financial Statements:
Consolidated Balance Sheet as of March 31,
1997............................................. 21
Consolidated Statements of Earnings for
the Years Ended March 31, 1996 and
1997............................................. 23
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 1996
and 1997......................................... 24
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1996 and 1997.............. 25
Notes to Consolidated Financial
Statements....................................... 26
Supporting Schedules:
Schedule II - Valuation and Qualifying
Accounts........................... 42
Schedules other than those listed above have been omitted because they are
either not required, inapplicable, or the required information is included in
the Consolidated Financial Statements or notes thereto.
19
<PAGE> 20
GRANT THORNTON LLP
Accountants and Management Consultants
The U.S. Member Firm of
Grant Thornton International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Rent-A-Wreck of America, Inc.
We have audited the accompanying consolidated balance sheet of Rent-A-Wreck of
America, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the years ending March 31, 1997 and 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rent-A-Wreck of
America, Inc. as of March 31, 1997, and the consolidated results of their
operations and their consolidated cash flows for the years ending March 31, 1997
and 1996 in conformity with generally accepted accounting principles.
We have also audited Schedule II for the years ended March 31, 1997 and 1996. In
our opinion, this schedule presents fairly in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Baltimore, Maryland
June 2, 1997
20
<PAGE> 21
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
ASSETS
<TABLE>
<CAPTION>
1997
----
<S> <C>
CURRENT ASSETS:
Cash and Cash Equivalents, including restricted cash .. $ 1,077,578
Accounts Receivable, net of allowance
for doubtful accounts of $762,757:
Continuing License Fees and
Advertising Fees ................................ 291,181
Current Portion of Notes Receivable ............... 415,072
Current Portion of Direct Financing
Leases .......................................... 47,228
Insurance Premiums Receivable ..................... 25,784
Other ............................................. 25,136
Prepaid Expenses ...................................... 117,566
----------
TOTAL CURRENT ASSETS .............................. 1,999,545
----------
PROPERTY AND EQUIPMENT:
Vehicles ............................................ 53,025
Furniture, Equipment and Leasehold
Improvements ...................................... 738,130
Less: Accumulated Depreciation and
Amortization ................................. (448,472)
----------
NET PROPERTY AND EQUIPMENT ............................ 342,683
----------
OTHER ASSETS:
Trademarks and other Intangible Assets, net of
accumulated amortization of $14,207 ............... 219,086
Long-term Portion of Notes and Direct Financing Lease
Receivables, net of allowance of $16,278 .......... 32,629
----------
251,715
----------
TOTAL ASSETS ...................................... $ 2,593,943
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
21
<PAGE> 22
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ..................................... $ 720,338
Dividends Payable ......................................................... 28,782
Insurance Premiums, Deposits, and Provision for
Loss .................................................................... 50,828
Current Maturities of Capital Lease Obligations ........................... 8,578
-----------
TOTAL CURRENT LIABILITIES ............................................... 808,526
-----------
CAPITAL LEASE OBLIGATIONS, Less Current Maturities .......................... 30,089
-----------
TOTAL LIABILITIES ....................................................... 838,615
-----------
COMMITMENTS AND CONTINGENCIES ............................................... --
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding 1,439,125 shares
(aggregate liquidation preference $1,151,300) ........................... 14,391
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding 4,234,767 shares ............................................ 42,347
Additional Paid-In Capital ................................................ 3,021,490
Accumulated Deficit ....................................................... (1,322,900)
-----------
TOTAL SHAREHOLDERS' EQUITY .............................................. 1,755,328
-----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................................ $ 2,593,943
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
22
<PAGE> 23
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
REVENUES:
Initial License Fees .................... $ 750,494 $ 751,000
Advertising Fees ........................ 588,927 673,090
Continuing License Fees ................. 1,791,858 2,079,657
Vehicle Rental Operations ............... 3,750 5,482
Direct Financing Leases to Franchisees .. 6,781 6,923
Other ................................... 312,976 268,848
----------- -----------
3,454,786 3,785,000
----------- -----------
EXPENSES:
Salaries, Consulting Fees, and
Employee Benefits ..................... 673,950 747,743
Advertising and Promotion ............... 827,578 938,563
Sales and Marketing ..................... 636,425 610,723
General and Administrative .............. 818,224 839,944
Depreciation and Amortization .......... 73,223 114,664
----------- -----------
3,029,400 3,251,637
----------- -----------
OPERATING INCOME ................. 425,386 533,363
INTEREST INCOME, NET ...................... 63,436 66,567
----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE ................... 488,822 599,930
INCOME TAX EXPENSE ........................ 30,250 62,439
----------- -----------
NET INCOME ....................... 458,572 537,491
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK ......................... (130,122) (119,648)
----------- -----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ............ $ 328,450 $ 417,843
=========== ===========
EARNINGS PER COMMON SHARE ................. $ .07 $ .08
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING .... 4,668,068 5,332,737
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- -------- --------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1995 ......... 1,655,750 $ 16,558 4,238,042 $ 42,380 $ 3,198,920 $(1,959,139) $ 1,298,719
Retirement of common stock ... -- -- (116,400) (1,164) (123,741) 6,343 (118,562)
Retirement of
preferred stock ............ (89,375) (894) -- -- (82,981) (34,032) (117,907)
Preferred dividends paid ($.08
per share) ................. -- -- -- -- -- (130,122) (130,122)
Preferred dividends arrearages
paid ....................... -- -- -- -- -- (18,307) (18,307)
Net income ................... -- -- -- -- -- 458,572 458,572
--------- -------- --------- -------- ----------- ----------- -----------
Balance, March 31, 1996 ........ 1,566,375 $ 15,664 4,121,642 $ 41,216 $ 2,992,198 $(1,676,685) $ 1,372,393
Issuance of common stock and
exercise of warrants ....... -- -- 120,000 1,200 148,800 -- 150,000
Retirement of common stock ... -- -- (66,500) (665) (66,084) -- (66,749)
Retirement of
preferred stock ............ (67,625) (677) -- -- (53,424) (31,200) (85,301)
Conversion of preferred stock
into common stock ............ (59,625) (596) 59,625 596 -- -- --
Preferred dividends paid ($.08
per share) ................. -- -- -- -- -- (119,648) (119,648)
Preferred dividends arrearages
paid ....................... -- -- -- -- -- (32,858) (32,858)
Net income ................... -- -- -- -- -- 537,491 537,491
--------- -------- --------- -------- ----------- ----------- -----------
Balance, March 31, 1997 ........ 1,439,125 $ 14,391 4,234,767 $ 42,347 $ 3,021,490 $(1,322,900) $ 1,755,328
========== ======== ========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
Increase (decrease) in cash and cash --------- -----------
equivalents
<S> <C> <C>
Cash flows from operating activities:
Net Income .......................................... $ 458,572 $ 537,491
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................... 73,223 114,664
Loss (Gain) on disposal of
property and equipment ........................ (1,800) (2,403)
Provision for doubtful accounts ................. 146,418 (13,945)
Changes in assets and liabilities:
Accounts and notes receivables .................. (34,265) 192,949
Prepaid expenses ................................ 13,603 (31,779)
Accounts payable and accrued
expenses ...................................... 22,722 119,357
Insurance premiums, deposits, and
loss reserves ................................. (5,760) (58,867)
--------- -----------
Net cash provided by operating activities .... 672,713 857,467
--------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment ........ 37,200 29,075
Acquisition of property and equipment ............... (234,265) (144,460)
Additions to trademarks and other ................... (19,518) (75,956)
--------- -----------
Net cash used in investing activities ........ (216,583) (191,341)
--------- -----------
Cash flows from financing activities:
Issuance of common stock ............................ -- 150,000
Repayments of long-term debt ........................ (57,733) (13,863)
Retirement of common stock .......................... (118,562) (66,749)
Retirement of preferred stock ....................... (117,907) (85,301)
Preferred dividends paid ............................ (148,429) (152,506)
--------- -----------
Net cash used in financing activities ........ (442,631) (168,419)
--------- -----------
Net increase in cash and cash
equivalents .................................. 13,499 497,707
Cash and cash equivalents at beginning of year ........ 566,372 579,871
--------- -----------
Cash and cash equivalents at end of year .............. $ 579,871 $ 1,077,578
========= ===========
Supplemental disclosure of cash flow information:
Interest paid ....................................... $ 6,349 $ 6,096
Taxes paid .......................................... $ 33,857 $ 38,722
Non-cash transactions:
Capital Lease Obligations ........................... $ 29,568 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements presented herein include the
accounts of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned
subsidiaries, Rent-A-Wreck Operations, Inc. ("RAW OPS"), Rent-A-Wreck One Way,
Inc. ("RAW One Way"), Consolidated American Rental Insurance Company, LTD ("CAR
Insurance") and Bundy American Corporation ("Bundy"), and Bundy's subsidiaries,
Rent-A- Wreck Leasing, Inc. ("RAW Leasing"), URM Corporation ("URM") and Central
Life and Casualty Company, Limited ("CLC").
All of the above entities are collectively referred to as the "Company"
unless the context provides or requires otherwise. All material intercompany
balances and transactions have been eliminated.
The Company markets and administers the Rent-A-Wreck and PRICELE$$
vehicle rental franchise program throughout the United States, as well as
various foreign countries.
CASH
Included in cash and cash equivalents is cash restricted for use in the
National Advertising Fund. Restricted cash totaled $296,543 as of March 31,
1997.
ACCOUNTS AND NOTES RECEIVABLE
Substantially all receivables derived from franchises granted by the
Company are personally guaranteed by the officers or directors of the
franchisees. Initial license fees are collected upon execution of the contract
or financed, generally over a twelve-month period with interest.
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives, utilizing primarily the straight-line method for financial statement
purposes. Accelerated methods of depreciation are used for substantially all
assets for income tax purposes.
26
<PAGE> 27
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
TRADEMARKS AND OTHER INTANGIBLE ASSETS
Costs associated with trademarks are capitalized and amortized on the
straight-line method to operations over periods ranging from ten to forty years.
Intangibles represent costs in excess of net assets acquired in connection with
businesses acquired and are being amortized to operations on a straight-line
basis over ten years. The recoverability of carrying values of intangible assets
is evaluated on a recurring basis. The primary indicators are current or
forecasted profitability of the related business. There have been no adjustments
to the carrying values of intangible assets resulting from these evaluations.
INCOME TAXES
Income taxes are provided for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly,
liabilities and assets are recognized for the deferred tax consequences of
temporary differences or carryforwards that will result in net taxable income or
deductible amounts in future periods. Deferred tax expense or benefit is the
result of changes in the net asset or liability for deferred taxes. The
principal items giving rise to temporary differences are depreciation, reserves
and accrued liabilities.
REVENUE RECOGNITION
Initial License, Advertising and Continuing License Fees
Revenues are composed primarily of initial license fees, continuing
license fees, and advertising fees. Franchisees have certain rights to use the
Company's trademarked names, "Rent-A-Wreck" and "PRICELE$$" in a specified
territory. Although the franchisee has continuing access to the use of certain
of the Company's resources, experience and knowledge, the Company recognizes the
initial license fee as revenue upon completion of an initial orientation and
training course since this represents substantially all of the initial services
required. Many franchisees have had prior business experience and, therefore,
require little assistance in commencing business. There is no obligation beyond
the initial training as related to the initial license fee. Continuing license
and advertising fees are recognized as revenues on a monthly basis over the
contract year based primarily on franchisees' reported gross revenues.
27
<PAGE> 28
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
Direct Financing Leases
The Company offers, on a selective basis to qualified franchisees, the
opportunity to finance vehicles for their rental fleets under a direct financing
program. The Company recognizes the related interest, documentation and
administrative revenues as they are received. The Company accounts for the
financing of the vehicles with the franchisees as direct financing leases (see
Note 3).
Other
Insurance administration and physical damage program revenues are
recognized ratably over the term of the coverage. Promotional material revenues
are recorded when shipped.
ADVERTISING
Advertising costs are expensed as incurred and are classified as
advertising and promotion expenses.
EARNINGS PER COMMON SHARE
Earnings per common share for the years ended March 31, 1996 and 1997
are presented on a fully diluted basis and are based upon the combined weighted
average number of shares of common stock outstanding during each year. The
dilutive effect of stock options and warrants was considered in the computations
of earnings per common share, and preferred dividends for each year were
subtracted from net income to arrive at the earnings applicable to common
shareholders.
Primary earnings per common share for the years ended March 31, 1996
and 1997 were the same as fully diluted earnings per common share.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid financial instruments purchased with a maturity of three months or
less to be cash equivalents.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make
28
<PAGE> 29
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and reported revenues and
expenses. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, which became effective in
1997. As permitted by SFAS No. 123, the Company has disclosed the impact of
stock based employee compensation on operations and will continue to follow the
accounting provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, for applicable transactions with
employees. The adoption of SFAS No. 123 did not have a material effect on the
Company's financial statements.
The provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, which is effective for years beginning after December 15, 1995,
did not impact the Company's 1997 financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1997 presentation.
2. FORMATION OF CAPTIVE INSURANCE COMPANY
In March, 1997, Rent-A-Wreck of America, Inc. formed a wholly owned,
Bermuda-based captive insurance subsidiary, Consolidated American Rental
Insurance Company, LTD ("CAR Insurance"), to provide automobile liability and
physical damage insurance for vehicles owned by participating franchisees.
American International Group (AIG) provides policy fronting, excess insurance
coverage, and an aggregate stop loss protection of $1,300,000. CAR Insurance
reinsures AIG's coverage subject to a per loss limit of $100,000 per person and
$300,000 per accident. Operations of the new entity through March 31, 1997 were
not significant.
29
<PAGE> 30
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
3. DIRECT FINANCING LEASES
The components of the Company's net investment in direct financing
leases are as follows:
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
Total Minimum Lease Payments to be Received .................. $106,645
Less Amounts Representing
Administration Costs Included in
Total Minimum Lease Payments ........................ 2,582
--------
Minimum Lease Payment Receivable ............................. 104,063
Less Allowance for Uncollectibles ....................... 13,939
--------
Net Minimum Lease Payments Receivable ........................ 90,124
Less Unearned Income .................................... 10,267
--------
Net Investment in Direct Financing Leases .................... 79,857
--------
Current Portion Less Administration Cost ................ $ 47,228
Non-Current Portion ..................................... 32,629
--------
Net Investment in Direct Financing Leases .................... $ 79,857
========
</TABLE>
The total minimum lease payments receivable in the two succeeding
fiscal years are as follows:
<TABLE>
<S> <C>
1998.......................... $ 71,631
1999.......................... 35,014
--------
Total $106,645
========
</TABLE>
30
<PAGE> 31
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
Accounts Payable......................... $ 158,768
National Advertising Fund................ 219,152
Payroll.................................. 31,570
Commissions and Royalties................ 136,000
Professional Fees........................ 79,613
Other.................................... 95,235
---------
$ 720,338
=========
</TABLE>
5. CAPITAL LEASE OBLIGATIONS
Equipment leased under capital lease agreements are summarized below.
<TABLE>
<S> <C>
Equipment $71,663
Less accumulated amortization 31,142
-------
$40,521
=======
</TABLE>
Future minimum lease payments under the capital leases at March 31,
1997 are as follows:
<TABLE>
<S> <C>
Year ended March 31,
--------------------
1998 $13,929
1999 13,929
2000 13,502
2001 8,801
2002 733
-------
Total minimum lease payments 50,894
Less amount representing interest 12,227
-------
$38,667
-------
Current portion $ 8,578
Long-term portion 30,089
-------
$38,667
=======
</TABLE>
31
<PAGE> 32
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
6. INCOME TAXES
The Company accounts for income taxes on the liability method, as
prescribed by Statement of Financial Accounting Standards 109, Accounting for
Income Taxes (SFAS 109). The provision for income taxes for the years ended
March 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Currently payable
State income taxes................. $23,250 $28,214
Federal income taxes............... 7,000 34,225
------- -------
Total...... ................. $30,250 $62,439
======= =======
</TABLE>
The reconciliation of the provision for income taxes computed at
statutory rates to the provision for income taxes provided on pre-tax income for
the year ended March 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Federal taxes at statutory
rate ................................. $ 210,000 $ 189,825
Utilization of tax loss
carryforward ......................... (207,200) (155,600)
Federal alternative minimum tax ........ 4,200 --
State and local taxes, net ............. 23,250 28,214
--------- ---------
Total ........................ $ 30,250 $ 62,439
========= =========
</TABLE>
32
<PAGE> 33
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
6. INCOME TAXES - CONTINUED
The significant components of the deferred income tax asset and
(liability), stated by source of the difference between financial accounting and
tax basis as of March 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Reserve for doubtful accounts ... $ 303,000 $ 304,000
Accrued expenses ................ 69,000 72,000
Operating loss carryforwards .... 151,000 --
Other reserves .................. -- 4,000
--------- ---------
523,000 380,000
Deferred tax liabilities:
Fixed assets .................... (10,000) (3,000)
--------- ---------
Net deferred tax asset before
valuation allowance ............. 513,000 377,000
Valuation allowance ............... (513,000) (377,000)
--------- ---------
Net deferred tax asset ............ $ -- $ --
========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company's corporate offices are occupied under the terms of
operating leases from both related and non-related parties, the longest of which
expires in November, 1999. Future minimum lease payments under non-cancelable
agreements are as follows:
<TABLE>
<S> <C>
March 31,
---------
1998..................... $64,132
1999..................... $66,712
2000..................... $45,357
</TABLE>
Total rent expense for the years ended March 31, 1996 and 1997 was
$62,946 and $70,064, of which $25,814 and $7,189, respectively was to the
related party (see Note 8).
33
<PAGE> 34
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
7. COMMITMENTS AND CONTINGENCIES - CONTINUED
Litigation
The Company is party to legal proceedings incidental to its business
from time to time. Certain claims, suits and complaints arise in the ordinary
course of business and may be filed against the Company. Based on facts now
known to the Company, management believes all such matters are adequately
provided for, covered by insurance or, if not so covered or provided for, are
without merit, or involve such amounts that would not materially adversely
affect the consolidated results of operations or financial position of the
Company.
8. RELATED PARTY TRANSACTIONS
The Company has entered into a Management Agreement with K.A.B., Inc.
(KAB), a management consulting group controlled by and affiliated with Kenneth
L. Blum, Sr., Chairman of the Board of Directors and Chief Executive Officer of
the Company, which expires July 1, 2003. As a part of this agreement, KAB
provides direct overall management of the Company's operations. Total annual
fees paid to KAB under the management agreement for the years ended March 31,
1996 and 1997 were $200,000 and $250,000 respectively. KAB has also been granted
an option to purchase up to 2,250,000 shares of the Company's common stock (see
note 9).
The Company leases a portion of its corporate offices under the terms
of a month-to-month operating lease with American Business Information Systems,
Inc. (ABIS), a related party of KAB. The Company paid $25,814 and $7,189 for the
years ended March 31, 1996 and 1997 to ABIS under this agreement.
In 1995, the Company entered into an agreement with ABIS, a related
party of KAB, to develop computer software and related documentation over a
five-year term. For the years ended March 31, 1996 and 1997, $77,005 and $34,204
have been paid to ABIS under this agreement.
34
<PAGE> 35
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
8. RELATED PARTY TRANSACTIONS - CONTINUED
In 1995, the Company retained Richter & Co., Inc., a related party, to
serve as exclusive financial advisor and placement agent for the Company. For
its role of placement agent and financial advisor, Richter & Co., Inc.'s fees
will be contingent and based upon transactions completed, as defined in the
agreement. For the years ended March 31, 1996 and 1997, there were no fees paid
to Richter & Co., Inc. pursuant to this agreement.
Richter & Co., Inc. provides substantial ongoing financial management
services to the Company at no charge. In the opinion of management, the terms of
the Company's agreements with Richter, KAB and ABIS taken as a whole are at
least as favorable to the Company as could be obtained from third parties.
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS
Options and warrants to acquire shares of the Company's common stock
are granted at a value not less than 100% of the fair market value of the
underlying stock on the date of issuance.
Under the Company's stock option plans, 300,000 shares of the Company's
common stock are reserved for issuance upon the exercise of options granted to
employees, including officers and directors. Certain options granted are not
qualified as incentive stock options. At March 31, 1997, options have been
granted and are outstanding for a total of 15,000 shares under the plan, and
options for 285,000 shares are available.
The Company has issued stock options to acquire 2,250,000 shares of its
common stock to KAB in conjunction with its management agreement. These options
are not part of the foregoing plan. During the year ended March 31, 1996, KAB
transferred (a) 483,333 and 604,167 vested and unvested options, respectively,
to each of Kenneth L. Blum Jr., the Company's president, and Mr. Blum's sister,
Robin Cohn; (b) 20,000 and 25,000 vested and unvested options, respectively, to
Richter & Co., Inc., an affiliate of William L. Richter, a director of the
Company and financial advisor; and 13,333 and 16,666 vested and unvested
options, respectively, to Mr. Richter. In April 1996, the Company approved the
extension of the term of the KAB Management Agreement for five years expiring
June 30, 2003, the extension of the options originally granted to KAB by five
years (with a corresponding delay
35
<PAGE> 36
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS -- CONTINUED
in the fixed vesting date until July 1, 2002), and the addition of a cashless
exercise feature to the options held by KAB.
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants issued in fiscal years 1996 and
1997, respectively: risk free interest rates of 5.75% and 6.870%; expected
volatility of 76.580% and 57.880%, and expected lives of 2.92 and 6.21 years.
The following table summarizes option activity:
<TABLE>
<CAPTION>
1996 1997
Weighted Weighted
Average Average
1996 1997 Exercise Exercise
Shares Shares Price Price
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 2,305,000 2,305,000 $ 1.08 $ 1.17
Options exercised -- -- -- --
Options granted 1,250,000 2,250,000 $ 1.08 $ 1.15
Options canceled (1,250,000) (2,250,000) $ 1.08 $ 1.30
Options expired -- (40,000) $ 1.31 --
---------- ----------
Options outstanding at
end of year 2,305,000 2,265,000 $ 1.08 $ 1.08
Option price range at
end of year $ 1.00 to $ 1.00 to
$ 1.44 $ 1.44
Option price range for
exercised shares -- --
Weighted-average fair
value of options,
granted during
the year $ 0.46 $ 0.70
</TABLE>
At March 31, 1996 and 1997, 1,015,000 options were exercisable.
36
<PAGE> 37
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED
The following table summarizes options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Weighted Average Remaining
Outstanding Price Exercise Prices Contractual Life
----------- -------- ---------------- ----------------
<S> <C> <C> <C>
2,265,000 $ 1.00 to $ 1.08 6.21 years
$ 1.44
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock options plans. Had compensation cost been determined based on the fair
value at the grant date for the fiscal 1996 and 1997 awards consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income applicable to common
and common equivalent shares
As reported $417,843 $328,450
Pro forma $190,546 $295,231
Earnings per share
As reported $ .08 $ .07
Pro forma $ .04 $ .06
</TABLE>
This disclosure is not likely to be representative of the effects on
reported net earnings for future years, because options are subject to a vesting
schedule.
In consideration of services rendered in connection with the
negotiation of the management agreement with KAB, the Company granted Richter &
Co., Inc. five-year warrants, expiring June 30, 1998, to purchase 155,000 shares
of the Company's Common Stock for its services as investment banker. The
exercise price of 20,000 of such warrants was $.80, and the exercise price of
the remaining 135,000 warrants is tied to the exercise and vesting provisions of
the options issued to KAB in connection with the management agreement. Richter &
Co., Inc. assigned 62,000 of these warrants to William L. Richter.
37
<PAGE> 38
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
In April, 1996, the Company also extended 135,000 of the warrants
originally issued to Richter & Co., Inc. for an additional five years in
consideration of services rendered in connection with the renegotiation of the
KAB Management Agreement and related services.
Warrants for 30,000 shares of the Company's common stock exercisable at
$.80 per share have been issued to Richter & Co., Inc. in connection with
previous private placement transactions for which Richter & Co., Inc. acted as
agent. Richter & Co., Inc. has assigned 12,000 of these warrants to William L.
Richter and 4,000 warrants to Richter & Co., Inc. employees.
On September 30, 1994, the Company issued warrants for 100,000 shares
of the Company's common stock to Whale Securities Co., L.P. for consulting
services. The exercise price is $1.25 per share.
A summary of changes in outstanding warrants for the year ended March
31, 1997 is as follows:
<TABLE>
<CAPTION>
Number of Exercise Price
Warrants per Warrant
--------- --------------
<S> <C> <C>
Outstanding, beginning of year.. 396,750 $.80 - $1.50
Issued.......................... --
Exercised....................... (100,000) $1.25
Canceled........................ (6,750) $1.50
--------
Outstanding, end of year........ 290,000 $.80 - $1.50
========
</TABLE>
10. PREFERRED STOCK
The terms of the outstanding preferred stock provide that the Company
may not declare or pay dividends, whether in cash or in property, on the common
stock unless all dividends on the preferred stock for all past dividend periods
and the then current dividend period shall have been paid or declared and a sum
set aside for payment thereof. Holders of Preferred Stock, voting as a class,
are entitled to elect up to four members of a seven member Board of Directors
and are also entitled to vote as a class on other significant corporate actions.
Pursuant to the terms of a voting trust, Richter Investment Corp. holds a proxy
to vote approximately 94% of the Preferred Stock and by virtue of his control
over Richter Investment Corp., William L. Richter can be deemed to have
38
<PAGE> 39
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
voting control over such shares. The holders of the Series A Preferred are
entitled to cumulative dividends at an annual rate of eight cents per share. The
Series A Preferred is convertible, at the option of the holder, into common
shares on the basis of one share of common for each share of Series A Preferred.
During the year ended March 31, 1997, the Company repurchased and
retired 67,625 shares of preferred stock and 59,625 preferred shares were
converted to common shares, reducing the total outstanding preferred shares from
1,566,375 to 1,439,125. At March 31, 1997, undeclared and unpaid cumulative
preferred dividends amounted to $274,180. During the year ended March 31, 1997,
the Company declared preferred dividends totaling $119,648, plus $32,858 of
dividend arrearages, and at March 31, 1997, unpaid declared preferred dividends
totaled $28,782.
11. OTHER REVENUES
Components of other revenues for the years ended March 31, 1996 and
1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Insurance administration
and physical damage
program................... $199,357 $159,761
Promotional materials....... 97,123 94,685
Other....................... 16,496 14,402
-------- --------
$312,976 $268,848
======== ========
</TABLE>
12. CONCENTRATIONS OF CREDIT RISK - CASH
The Company maintains its cash balances in a financial institution
located in Maryland, which at times may exceed federally insured limits. The
Company has not experienced any losses in such accounts, and management believes
the Company is not exposed to significant credit risk.
39
<PAGE> 40
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1997
13. SUBSEQUENT EVENTS
On May 15, 1997, the Company paid 15% of the dividend arrearages on all
preferred shares outstanding as of March 31, 1997. These paid arrearages totaled
$41,127, which was paid with and in addition to the regular quarterly preferred
dividend on May 15, 1997. Remaining undeclared and unpaid cumulative preferred
dividends were reduced to $232,159.
40
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable. (The Company need not provide the disclosure called for by this
Item because it has been previously reported, as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended).
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT
Reference is made to Company's 1997 Proxy Statement under the caption
"Election of Directors."
ITEM 10. EXECUTIVE COMPENSATION
Reference is made to the Company's 1997 Proxy Statement under the
caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Reference is made to the Company's 1997 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Company's 1997 Proxy Statement under the
caption "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements, notes thereto and Report of
Independent Public Accountants listed in the Index to
Consolidated Financial Statements set forth in Item 7.
2. The Exhibits listed in the Exhibit Index following the
Signatures page, which is incorporated herein by this
reference.
3. Financial Statement Schedules for the years in the period
ended March 31, 1996 and 1997, as applicable.
41
<PAGE> 42
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996 and 1997
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND CHARGED TO AT END
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- ----------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
MARCH 31, 1996
Allowance for
doubtful accounts $646,562 $ 272,518 $ -- $126,100(1) $792,980
======== =========== ========= ======== ========
Valuation allowance on
net deferred tax assets $577,000 $ -- $ -- $ 64,000 $513,000
======== =========== ========= ======== ========
MARCH 31, 1997
Allowance for
doubtful accounts $792,980 $ 203,217 $ -- $217,162(1) $779,035
======== =========== ========= ======== ========
Valuation allowance on
net deferred tax assets $513,000 $ -- $ -- $136,000 $377,000
======== =========== ========= ======== ========
</TABLE>
(1) Accounts written off
42
<PAGE> 43
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
43
<PAGE> 44
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, Rent-A-Wreck of America, Inc. has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
Rent-A-Wreck of America, Inc.
Registrant
By: Date:
/s/ Mitra Khosravi June 25, 1997
Mitra Khosravi
Chief Accounting Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates as indicated:
Signature and Title Date
/s/ Kenneth L. Blum, Sr. June 25, 1997
Kenneth L. Blum, Sr.
Chairman of the Board
and Director (Principal
Executive Officer)
/s/ Mitra Khosravi June 25, 1997
Mitra Khosravi
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
/s/ David Schwartz June 25, 1997
David Schwartz
Vice Chairman of the Board
/s/ William L. Richter June 25, 1997
William L. Richter
Vice Chairman of the Board
/s/ Alan Aufzien June 25, 1997
Alan Aufzien, Director
44
<PAGE> 45
RENT-A-WRECK OF AMERICA, INC.
EXHIBIT INDEX
FORM 10-KSB
FOR FISCAL YEAR
ENDED MARCH 31, 1997
Incorporated
Exhibit No. Exhibit by Reference from
3.1 Certificate of Filed herewith.
Incorporation
3.2 Bylaws, Form 10-K for the fiscal year ended
as amended March 31, 1986, in which the Bylaws,
are incorporated by reference and
amendments to Bylaws are filed
therein.
9 Voting Trust Form 10-K for the fiscal
Agreement year ended March 31, 1990
is incorporated by
reference.
10.1 Asset Purchase Form 10-QSB for the
Agreement dated quarter ending December
December 3, 1996 31, 1996.
Between Baltimore
Car and Truck
Rental, Inc.,
Insurance Rentals,
Inc., Mark Eisenberg,
and the Company.
10.2 Commercial Installment Form 8-K, Dated
Sales and Finance February 21, 1992 and is
Agreement, as Amended incorporated by reference;
Amendment filed with Form 10-KSB
for the fiscal year ended March 31,
1995 and is incorporated by reference.
10.3 Promissory Note - Form 10-K for the fiscal
David Schwartz, year ended March 31, 1993
Shareholder as Amended is incorporated by
reference.
45
<PAGE> 46
10.4 Option Plan Form 10-K for the fiscal
year ended March 31, 1993
is incorporated by
reference.
10.5 * Management Agreement - Form 8-K, dated June 30,
K.A.B., Inc., Related 1993 and is incorporated
party dated June 30, by reference.
1993
10.5.1 * Amendment to Management Filed herewith.
Agreement with K.A.B.,
Inc., Related party
dated March 27, 1996
10.6. * Stock Option Grant to Form 8-K, dated June 30,
K.A.B., Inc. dated 1993, incorporated by
June 30, 1993 reference.
Amendment filed herewith.
10.6.1 * Amendment to Stock Filed herewith.
Option Grant to
K.A.B., Inc. dated
July 20, 1995
10.7. * Registration Rights Form 8-K, dated June 30,
Agreement dated June 1993, incorporated by
30, 1993, among K.A.B., reference.
Inc., Kenneth L. Blum,
Jr., Alan S. Cohn and
the Company
10.8 Commercial Installment Form 10-KSB for the
Sales and Finance fiscal year ending
Agreement-K.A.B., Inc. March 31, 1994.
dated August 1, 1993
10.9 Franchise Agreement - Form 10-KSB for the
standard form fiscal year ending
March 31, 1994.
10.10 Warrant Agreement - Form 8-K, dated June 30,
Richter & Co., Inc. 1993, incorporated by
reference.
10.11 Software Development Form 10-KSB for the
and Computer Usage fiscal year ending
Agreement effective March 31, 1995.
January 1, 1995 between
46
<PAGE> 47
National Computer
Services, Inc. and
the Company.
10.12 Financial Advisory Form 10-KSB for the
Agreement between fiscal year ending
the Company and March 31, 1995.
Richter & Co., Inc.
dated March 20, 1995.
10.13 Lease between the Form 10-KSB for the
Company and Owings fiscal year ending
Mills Commerce March 31, 1996.
Centre Limited
Partnership dated
September 19, 1995 and
subordination, Attornment and
Non-Disturbance Agreement.
10.14 Franchise Agreement - Form 10-KSB for the
standard form as of fiscal year ending
August 3, 1995 March 31, 1996.
21 List of Subsidiaries Filed herewith.
27 Financial Data Schedule Filed herewith.
* Management contract or compensatory plan or arrangement.
47
<PAGE> 1
RESTATED CERTIFICATE OF INCORPORATION
OF
RENT-A-WRECK OF AMERICA, INC.
ARTICLE I
The name of the corporation is Rent-A-Wreck of America, Inc.
ARTICLE II
The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is THE CORPORATION TRUST COMPANY.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
A. Authorized Shares. The total number of shares of all classes of
stock which the corporation shall have authority to issue is 35,000,000 of which
(i) 25,000,000 shares par value $.01 shall be Common Stock and (ii) 10,000,000
shares par value $.01 shall be Series A Convertible Preferred Stock ("Series A
Preferred"). The Common Stock and the Series A Preferred shall be identical in
all respects, except as otherwise provided in Sections B and C of this Article
IV.
B. Common Stock.
1. Voting. The Common Stock shall have one vote per share on
each proposal submitted to stockholders of the corporation for their vote
thereon.
2. Dividends. With respect to the payment of dividends,
holders of Common Stock shall be entitled to receive dividends, including,
without limitation, cash dividends, when and as declared by the Board of
Directors, out of any funds or property of the corporation at the time legally
available for the payment of dividends after payment of dividends to holders of
Series A Preferred as required pursuant to Section C of this
1
<PAGE> 2
Article IV. No dividends shall be paid to, declared or set apart for payment of
holders of Common Stock, unless all past accumulated dividends on the Series A
Preferred shall have first been paid.
3. Liquidation. In the event of any liquidation, dissolution
or winding up of the corporation, whether voluntary or involuntary, the assets
of the corporation available for distribution to its stockholders shall be
distributed pro rata, first to the holders of Series A Preferred, as provided in
Section C(5) of this Article IV, and then among all shares of Common Stock then
outstanding. In determining amounts payable under this Section B(4), amounts
payable in respect of all shares registered on the books of the corporation in
the name of any one stockholder shall be cumulated and rounded to the nearest
one cent ($.01).
C. Series A Preferred.
1. Voting Rights. The Series A Preferred shall have identical
voting rights to vote on proposals submitted to the stockholders of the
corporation as the holders of the Common Stock, except that, holders of the
Series A Preferred shall, voting as a class, have the following additional
rights:
(a) The holders of the Series A Preferred shall have
the right to elect up to four members of the corporation's Board of Directors
consisting of a maximum of seven members until such time as less than $500,000
of Series A Preferred remains outstanding, at which such time the right to vote
as a class on the election of directors shall terminate and the Series A
Preferred shall vote on the election of directors on the same basis as the
Common Stock (i.e., one vote per share). Members of the board of directors (or
their successors) elected pursuant to this Section shall serve until the earlier
of their resignation or such time as their successors have been duly qualified
and elected. The failure of the Series A Preferred to elect any or all of such
members at any time shall not be deemed to be a waiver of this right.
(b) Until such time as less than $500,000 of the
Series A Preferred remains outstanding, the corporation will not without the
consent by holders of a majority of the then outstanding shares of Series A
Preferred, considered as a single class, given in writing without a meeting or
affirmative vote given in person or by proxy at a meeting called for such
purpose:
2
<PAGE> 3
(i) directly or through merger or
consolidation with any other corporation, amend, alter or repeal the certificate
of incorporation of the corporation if such amendment would affect any of the
rights, preferences or privileges of the Series A Preferred (except for
amendments reasonably required to correct ambiguities or inconsistencies in the
certificate of incorporation or which are nonmaterial and do not materially and
adversely affect the rights, preferences and privileges of holders of the Series
A Preferred);
(ii) enter into any transaction, agreement
or contract which, by its terms, would restrict the corporation's ability to pay
dividends, as required pursuant to this Section C of Article IV;
(iii) redeem or repurchase any outstanding
stock (except that no consent shall be required for repurchases
of Common Stock owned by employees of the corporation);
(iv) voluntarily liquidate or dissolve or
wind up the corporation or sell all or substantially all of the corporation's
assets;
(v) enter into any business other than (a)
the rental of cars and trucks, (b) the sale of franchises for the rental of cars
and trucks, (c) the operation of such franchise network, (d) the development of
various insurance products and arrangements for delivery and provision of
insurance products and services for franchises, and (e) the provision of fleet
financing and purchase money financing for franchises;
(vi) adopt any employee stock option plans;
(vii) amend any employee stock option plan,
whether outstanding on the date this Certificate is filed or adopted thereafter,
including, without limitation, the corporation's 1988 Stock Option Plan;
(viii) issue any Common Stock (except for
229,000 shares subject to grants of stock options outstanding on the date hereof
1,375,000 shares issuable upon conversion of the Series A Preferred and 827,500
shares issuable upon exercise of warrants outstanding on the date hereof, in all
cases such number of shares being subject to adjustment for anti-dilutive
provisions);
3
<PAGE> 4
(ix) issue any class of Preferred Stock,
other than the Series A Preferred, or securities convertible into Common Stock,
or options to acquire Common Stock or securities convertible into Common Stock
(except for Common Stock or options issuable pursuant to the corporation's 1988
Stock Option Plan); or
(x) engage in any transaction that would
result in a dividend to the holders of the Series A Preferred under Section 305
of the internal Revenue code of 1986, as amended.
2. Preferred Dividends. The holders of Series A Preferred
shall be entitled to the payment of a dividend out of any funds legally
available therefor equal to $0.80 per share multiplied by a coupon rate equal to
10% per annum, such rate accruing from the date of issue of the Series A
Preferred (the "Preferred Dividend"). The Preferred Dividend shall be payable
quarterly on the first day of each January, April, July and October (the
"Payment Dates"), for the preceding quarter commencing with the first of the
Payment Dates that follows a full quarter after the issuance of the Series A
Preferred hereunder; provided, however, the corporation may at its option, elect
to accrue any or all of the Preferred Dividends otherwise due and payable. In
the event that Preferred Dividends are not paid as provided in this Section
C(2), the right to such dividends on shares of Series A Preferred shall be
cumulative (but shall not compound) and shall accrue to holders of Series A
Preferred despite the fact that no or only a partial dividend on such shares was
declared in any prior period.
3. Conversion of Series A Preferred.
(a) At the option of the holder, and at any time, any
holder of Series A Preferred may convert all or any portion of such holder's
shares of Series A Preferred into shares of Common Stock.
(b) Upon receipt by the corporation from a record
holder of shares of Series A Preferred of a written request so to convert, the
shares of Series A Preferred subject to the request shall be converted into
Common Stock, subject to Paragraph (e) below, at a rate of one share of Common
Stock for each share of Series A Preferred converted. Such conversion shall be
effective on the date indicated in the request to convert or, if no date is
specified, on the date of such request to convert.
(c) All shares of Series A Preferred converted into
shares of Common Stock as provided in this Section C(3)
4
<PAGE> 5
shall be retired and cancelled and shall not be reissued, and the corporation
may from time to time take such appropriate action as may be necessary to reduce
the number of authorized shares of Series A Preferred by the number of shares of
Series A Preferred so cancelled.
(d) Upon receipt of notice by the corporation from a
record holder of shares of Series A Preferred of the holder's intention to
convert shares pursuant to this Section C(3), the outstanding shares of Series A
Preferred to be converted shall be converted as of the date provided in
Paragraph (b) of this Section C(3) without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the corporation, provided, however, that the corporation shall
not be obligated to issue certificates evidencing the shares issued upon such
conversion unless certificates evidencing such shares of Series A Preferred
being converted are either delivered to the corporation, or the holder notifies
the corporation that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection therewith. Upon the
occurrence of each such conversion of Series A Preferred, the holders of such
shares being converted shall surrender the certificates representing such shares
at the office of the corporation. Thereupon, there shall be issued and delivered
to each such holder a certificate or certificates for the number of shares of
Common Stock into which such shares were converted and a certificate or
certificates for any shares of Series A Preferred not so converted.
(e) The Conversion Rate and the number of shares of
Common Stock to be issued upon the conversion of shares of Series A Preferred
are subject to adjustment from time to time as follows:
(i) In case the corporation shall (w) pay a
dividend in shares of Common Stock or make a distribution in shares of Common
Stock, (x) subdivide its outstanding shares of Common Stock, (y) combine its
outstanding shares of common Stock into a smaller number of shares of Common
Stock, or (z) issue by reclassification any of its shares of Common Stock or
other securities of the corporation, the number of shares of Common Stock to be
issued upon the conversation of shares of Series A Preferred pursuant to this
Section C(3) immediately prior thereto shall be adjusted so that the holders of
the shares of Series A Preferred shall be entitled to receive the kind and
number of shares of Common Stock or other securities of the corporation which he
would have owned or have been entitled to receive after the happening of any of
the events described above, had such conversion been effected immediately prior
to the happening of such event or
5
<PAGE> 6
any record date with respect thereto. An adjustment made pursuant to this
subparagraph (i) shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
(ii) In case the corporation shall issue
rights, options or warrants to all holders of its outstanding Common Stock,
without charge to such holders, entitling them to subscribe for or purchase
shares of Common Stock, at a price per share which is lower at the date of
issuance than $.80 per share of Common Stock, the number of shares of Common
Stock thereafter to be issued upon the conversion of shares of Series A
Preferred pursuant to this Section C(3) shall be determined by multiplying the
number of shares of Common Stock theretofore to be issued upon conversion of
shares of Series A Preferred by a fraction, of which the numerator shall be (i)
the number of shares of Common Stock outstanding on the date of issuance of such
rights, options or warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be (ii)
the number of shares of Common Stock outstanding on the date of issuance of such
rights, options or warrants plus the number of shares which the aggregate
offering price of the total number of shares of Common Stock so offered would
purchase at $.80 per share of Common Stock. Such adjustment shall be made
whenever such rights, options or warrants are issued, and shall become effective
retroactively immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.
(iii) In case the corporation shall
distribute or sell at less than fair market value to all holders of its shares
of Common Stock evidences of its indebtedness or assets (excluding distributions
referred to in subparagraph (i) above) or rights, options or warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding those referred to in subparagraph
(ii) above), then in each case the number of shares of Common Stock thereafter
to be issued upon the conversion of shares of Series A Preferred pursuant to
this Section C(3) shall be determined by multiplying the number of shares of
Common Stock theretofore to be issued upon the conversion of shares of Series A
Preferred by a fraction, of which the numerator shall be (i) the then current
market price per share of common Stock (as defined in subparagraph (iv) below)
on the date of such distribution, and of which the denominator shall be (ii)
such current market price per share of Common Stock, plus, as determined in each
case on a per share basis, (a) the fair market value of any consideration
received by the corporation less (B) the then
6
<PAGE> 7
fair value (as determined by the Board of Directors of the corporation) of the
portion of the assets or evidences of indebtedness so distributed or such
rights, options or warrants, or of such convertible or exchangeable securities.
Such adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution.
(iv) For the purpose of any computation
under this Paragraph (e) of Section C(3), the current market price per share of
Common Stock at any date shall be the average of the daily closing prices for
the first 10 consecutive trading days commencing 15 trading days before the date
of such computation. The closing price for each day shall be the last reported
sale price on such day or, in case no such reported sales takes place on such
day, the average of the representative closing high bid and low asked quotations
for the Common Stock on NASDAQ or any comparable system or in the National Daily
Quotron Service Pink Sheets (the "Pink Sheets"). If the Common Stock is not
listed on NASDAQ or a comparable system or in the Pink Sheets, the fair market
value shall be determined in an appraisal made by an independent investment
banking firm selected by the corporation for that purpose.
(v) No adjustment in the number of shares of
Common Stock to be issued upon the conversion of shares of Series A Preferred
hereunder shall be required unless such adjustment would require an increase or
decrease of at least 1% in the number of shares of Common Stock to be issued
upon the conversion of shares of Series A Preferred; provided, however, that any
adjustments that by reason of this subparagraph (v) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(vi) In case the corporation shall sell any
shares for less than the Conversion Rate then in effect, or grant rights,
options, warrants or other securities convertible into Common Stock at less than
such conversion Rate, the Conversion Rate shall be reduced to the lowest such
per share price at which such shares, rights, options, warrants or other
securities convertible into Common Stock were offered prior to the date on which
the Series A Preferred is converted by each holder thereof.
(vii) For the purpose of any computation
under this Section C(3), the number of shares of Common Stock deemed outstanding
at any given time does not include shares owned or held by or for the account of
the corporation.
7
<PAGE> 8
(viii) For purposes of this Paragraph (e) of
Section C(3), the term "shares of Common Stock" shall mean (x) the class of
stock of the corporation designated as the Common Stock of the corporation at
the date the Certificate of Incorporation was filed, or (y) any other class of
stock resulting from successive changes or reclassifications of such Common
Stock. In the event that at any time, as a result of an adjustment made pursuant
to subparagraph (i) above, the holders of shares of Series A Preferred shall
become entitled to convert such shares into any shares of the corporation other
than shares of Common Stock, thereafter the number of such other shares to be
issued upon the conversion of shares of Series A Preferred and the Conversion
Rate with respect to such shares shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock to be issued upon the conversion of
shares of Series A Preferred contained in subparagraphs (i) through (vii),
inclusive, above, and the balance of the provisions hereof shall apply on like
terms to any such other shares.
(ix) Upon the expiration of any rights,
options, warrants or conversion or exchange privileges, if any thereof shall not
have been exercised, the Conversion Rate and the number of shares of Common
Stock to be issued upon the conversion of shares of Series A Preferred shall,
upon such expiration, be readjusted and shall thereafter be such as it would
have been had it been originally adjusted (or had the original adjustment not
been required as the case may be) as if (A) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion or exchange rights and
(B) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the corporation upon such exercise plus the
aggregate consideration, if any, actually received by the corporation for the
issuance, sale or grant of all of such rights, options, warrants or conversion
or exchange rights whether or not exercised, provided, that no such readjustment
shall have the effect of increasing the Conversion Rate by an amount in excess
of the amount of the adjustment initially made in respect to the issuance, sale
or grant of such rights, options, warrants or conversion or exchange rights.
(x) In the event of any adjustment pursuant
to this Paragraph (e) of Section C(3), no fractional shares of Common Stock
shall be issued in connection with the conversion of any shares of Series A
Preferred, but the corporation shall, in lieu of such fractional shares, make
such cash payment therefor on the basis of the current market price on the date
immediately prior to exercise.
8
<PAGE> 9
4. Entitlement of Rights. In case the corporation shall issue
rights to all holders of outstanding Common Stock, without charge to such
holders, then, in addition to the adjustment provided for in Section
C(3)(e)(ii), such rights shall also be offered to holder of the Series A
Preferred and such holders shall be entitled to subscribe for such rights on the
same basis as holders of Common Stock as if the Series A Preferred had been
converted to Common Stock immediately prior to such offer.
5. Priority of Dividends. So long as any shares of Series A
Preferred shall be outstanding, no dividend shall be paid or declared and no
distribution shall be made on any Common Stock, unless and until the accrued
dividends on the Series A Preferred, for all previous periods at the rates
specified above, have been paid or declared and a sum sufficient for the payment
thereof set apart.
6. Rights on Liquidation, Dissolution and Winding Up. The
liquidation, dissolution and winding up (whether voluntary or involuntary)
preference of each share of Series A Preferred shall be $.80 plus all accrued
but unpaid dividends, if any, to be paid in full prior to any distribution on
the Common Stock or other classes or series of preferred stock hereafter
created. Neither the merger nor consolidation of the corporation into or with
any other corporation or of any other corporation into or with the corporation,
nor a sale or lease of less than substantially all of the assets of the
corporation shall be deemed to be a liquidation, dissolution or winding up of
the corporation within the meaning of this Section C(6). If upon any
liquidation, dissolution or winding up of the corporation whether voluntary or
involuntary, the assets of the corporation available for distribution to its
stockholders shall be insufficient to pay the full preferential amounts required
to be paid then, after payment of or provision for the liabilities of the
corporation, the entire.assets of the corporation shall be distributed ratably
among the holders of Series A Preferred.
7. Notices. Any notice required to be given to any holder of
shares of Series A Preferred shall be deemed given if delivered by messenger,
transmitted by facsimile or deposited in the United States mail, postage
prepaid, and addressed to such holder of record at his address appearing on the
books of the corporation. The date of any notice given pursuant to this Section
shall be the date delivered, transmitted or mailed.
8. No Reissuance of Series A Preferred. No share or shares of
Series A Preferred acquired by the corporation by reason of conversion shall be
reissued, and all such shares shall be cancelled, retired and eliminated from
the shares that the corporation shall be authorized to issue.
9
<PAGE> 10
ARTICLE V
A. Right to Indemnification. The corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person who was or is made or is
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding") by reason of the fact
that he, or a person for whom he is the legal representative, is or was a
director or officer of the corporation or is or was serving at the request of
the corporation as a director or officer of another corporation or of a
partnership, joint venture, trust, enterprise or non-profit entity, including
service with respect to employee benefit plans, against all monetary liability
and loss suffered and expenses reasonably incurred by such person. The
corporation shall be required to indemnify a person in connection with a
proceeding initiated by such person only if the proceeding was authorized by the
Board of Directors of the corporation.
B. Prepayment of Expenses. The corporation shall pay the expenses
incurred in defending any proceeding in advance of its final disposition,
provided, however, that the payment of expenses incurred by a director or
officer in advance of the final disposition of the proceeding shall be made only
upon receipt of an undertaking by the director or officer to repay all amounts
advanced if it should be ultimately determined that the director or officer is
not entitled to be indemnified under this Article V or otherwise.
C. Claims. If a claim for indemnification or payment of expenses under
this Article V is not paid in full within sixty (60) days after a written claim
therefor has been received by the corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action the corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
D. Non-Exclusivity of Rights. The rights conferred on any person by
this Article V shall not be exclusive of any other rights which such persons may
have or hereafter acquire under any statute, provision of this certificate of
incorporation, bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
E. Other Indemnification. The corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or
10
<PAGE> 11
non-profit entity shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
enterprise or non-profit entity.
F. Limitation on Directors' Liability. No director of this corporation
shall be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under Section
174 of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit.
G. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article V shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE VI
The Board of Directors shall have the power without the assent or vote
of the stockholders to make, alter, amend, change, add to or repeal the By-Laws
of the corporation.
11
<PAGE> 1
Exhibit 10.5.1
RENT A WRECK
March 27, 1996
Kenneth L. Blum, Sr.
K.A.B., Inc.
17133 Ericarose Court
Boca Raton, FL 33496
Dear Ken:
K.A.B., Inc. (KAB) has done a magnificent job restoring Rent-A-Wreck of
America, Inc. ("Rent-A-Wreck") to financial health and laying the groundwork for
an exciting and profitable future. Accordingly, Rent-A-Wreck would like to
propose, subject to your acceptance and approval by Rent-A-Wreck's Board of
Directors, that the Management Agreement between Rent-A-Wreck and KAB be
extended for five years through June 30, 2003. To induce you to accept this
extension and commit to Rent-A-Wreck for an additional five years, we propose
the following:
1. The expiration date of June 30, 1998 currently provided in the Option
Agreement with respect to the 2,250,000 options granted to KAB or its designees
will be extended to June 30, 2003, subject to the terms and conditions of the
Option Agreement.
2. The Option Agreement will be modified to permit payment of the exercise
price via the delivery of stock held for at least six months prior to the date
of exercise or other cashless exercise procedures which do not result in adverse
financial consequences for Rent-A-Wreck.
3. The Management Agreement will be amended to provide annual cash payment
of $250,000. The amendment will be effective April 1, 1996, meaning that
one-fourth of the increase will be payable during the current year of the
Management Agreement ending June 30, 1996.
Kindly indicate your acceptance of these terms by signing in the space
designated below.
Sincerely,
/s/ William L. Richter
William L. Richter
Vice Chairman
AGREED AND ACCEPTED:
K.A.B., Inc.
By /s/ K. Blum
---------------------------
Kenneth L. Blum, Sr.
BUNDY AMERICAN CORPORATION
11460 Cronridge Drive, Owings Mills, Maryland 21117
(800) 421-7253 - (410) 581-5755 - Fax (410) 581-1566
<PAGE> 1
Exhibit 10.6.1
AMENDMENT TO STOCK OPTION GRANT
This Amendment (this "Amendment") is dated effective July 20, 1995 and
amends the Stock Option Grant from Rent-A-Wreck of America, Inc., a Delaware
corporation (the "Company"), to K.A.B., Inc., a Florida corporation (the
"Optionee") dated June 30, 1993 (the "Grant Letter").
The Company and the Optionee agree as follows:
1. Options to acquire 1,000,000 Shares at an exercise price of $1.00
per share (representing (i) 500,000 options exercisable pursuant to the terms of
the Grant Letter upon completion of the first fiscal year in which Company has
Profits of at least $250,000 or in which the Stock Price is at least $2.00; and
(ii) 500,000 options exercisable pursuant to the terms of the Grant Letter upon
completion of the first fiscal year in which the Company has Profits of at least
$500,000 or in which the Stock Price is at least $3.00, shall be exercisable
effective October 19, 1994.
2. Section 2 of the Grant Letter shall be deleted in its entirety.
3. Section 3 of the Grant Letter shall be deleted in its entirety and
replaced with the following:
3. Exercise Term. (a) All or any portion of these options, to
the extent they have not previously become
exercisable pursuant to Section 3(b), may be exercised in
full at any time after April 1, 1998 and on or prior to
June 30, 1998, at an exercise price of $1.15 per share.
Notwithstanding anything herein to the contrary, options
can become and remain exercisable pursuant to this Section
3(a) only if the Management Agreement between Optionee and
the Company is in full force and effect and Optionee is
providing management services in compliance therewith.
(b) Notwithstanding Section 3(a), but subject to Section 5
herein, the numbers of Shares indicated below may be
purchased at an exercise price of $1.15 at any time after
achievement of the respective alternative vesting events
set forth below and on or prior to June 30, 1998:
<TABLE>
<CAPTION>
Number of Shares Alternative Vesting Event
<S> <C>
500,000 Completion of the first fiscal year in
which the Company has Profits of at
least $750,000 or in which the
Stock price is at least $4.00.
750,000 Completion of the first year in
which the Company has profits of at
least $1,000,000 or in which the
Stock Price is at least $5.00.
</TABLE>
<PAGE> 2
More than one tranche of options may become
exercisable at the same time. For example, if profits
in the year ended March 31, 1996 are $1,200,000 or
the Stock Price during that year is $5.25, both
tranches (options for an aggregate of 1,250,000
shares) would become exercisable at an exercise price
of $1.15 per share.
"Profits" of the Company in any fiscal
period shall mean the Company's pretax operating
profit during such period as determined in accordance
with generally accepted accounting principles
("GAAP") based on the Company's books and records,
and excluding any profit or loss from financial
transactions and any charge for compensation expense
relating to these stock options.
"Stock Price" means the average closing high
bid price for the Company's Common Stock as reported
on NASDAQ (or, if applicable, the NASD Bulletin Board
or pink sheets) over any 30 consecutive calendar days
during the applicable fiscal year.
4. Section 5(c) of the Grant Letter shall be amended by deleting the
reference to "Section 3" and replacing it with a reference to "Section 3(b)."
5. Section 5 of the Grant Letter shall be amended by deleting the
reference to the Company's former California address and replacing it with the
following: 11460 Cronridge Drive, Suite 118, Owings Mills, Maryland 21117.
6. The Option Grant shall remain in full force and effect except to the
extent specifically mentioned herein. In cases of ambiguity between the Option
Grant and this Amendment, the provisions of this Amendment shall prevail.
Capitalized terms used but not defined in this Amendment shall have the meanings
assigned to them in the Option Grant.
RENT-A-WRECK OF AMERICA, INC.
By /s/ William L. Richter
------------------------------------
William L. Richter
Vice-Chairman
K.A.B., INC.
By /s/ Kenneth L. Blum
------------------------------------
Kenneth L. Blum, Sr.
President
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES
RENT-A-WRECK OF AMERICA, INC.
State or Other
Subsidiary Name and Jurisdiction of
Name Under Which Business is Done Organization
1. RENT A WRECK ONE WAY, INC. Maryland
2. BUNDY AMERICAN CORPORATION Maryland
3. RENT A WRECK OPERATIONS, INC. California
4. RENT A WRECK LEASING, INC. Maryland
5. U R M CORPORATION California
6. CENTRAL LIFE AND CASUALTY COMPANY, LIMITED British Virgin
Islands
7. RENT-A-WRECK/URM, INC. Maryland
8. CONSOLIDATED AMERICAN RENTAL INSURANCE Bermuda
COMPANY, LTD
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
RENT-A-WRECK OF AMERICA INC.'S FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,007,578
<SECURITIES> 0
<RECEIVABLES> 1,590,929
<ALLOWANCES> 779,035
<INVENTORY> 0
<CURRENT-ASSETS> 1,999,545
<PP&E> 791,155
<DEPRECIATION> 448,472
<TOTAL-ASSETS> 2,593,943
<CURRENT-LIABILITIES> 808,526
<BONDS> 0
14,391
0
<COMMON> 42,347
<OTHER-SE> 1,698,590
<TOTAL-LIABILITY-AND-EQUITY> 2,593,943
<SALES> 0
<TOTAL-REVENUES> 3,785,000
<CGS> 0
<TOTAL-COSTS> 1,549,286
<OTHER-EXPENSES> 1,499,134
<LOSS-PROVISION> 203,217
<INTEREST-EXPENSE> 6,096
<INCOME-PRETAX> 599,930
<INCOME-TAX> 62,439
<INCOME-CONTINUING> 537,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 537,491
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
