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, 1998
/ / 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
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11460 Cronridge Drive, Suite 120, Owings Mills, MD 21117
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(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. [x]
State issuer's revenues for its most recent fiscal year. $4,676,645
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4,162,792 shares of common stock were outstanding as of May 26, 1998.
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 $2,538,080 on May
26, 1998. 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. None
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
PART I Page
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Item 1. Description of Business................. 3
Item 2. Description of Property................. 8
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............................ 15
Item 7. Financial Statements.................... 23
Item 8. Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure.............. 50
Part III
- --------
Item 9. Directors and Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 50
Item 10. Executive Compensation.................. 50
Item 11. Security Ownership of Certain Beneficial
Owners and Management................. 52
Item 12. Certain Relationships and Related
Transactions.......................... 55
Item 13. Exhibits and Reports on Form 8-K........ 55
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PART I
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Item 1. Description of Business
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General
Rent-A-Wreck of America, Inc. (the "Company") was incorporated in
Delaware on October 12, 1983. The Company conducts its operations primarily
through its wholly owned subsidiary, Bundy American Corporation ("Bundy"). Bundy
was incorporated in California on April 22, 1977 and redomesticated in Maryland
effective October 22, 1996. The Company markets and administers the Rent-A-Wreck
(R) and PRICELE$$ (R) vehicle rental franchise programs and related services.
The Company's franchisees, in aggregate, operate one of the largest used vehicle
rental fleets in the nation, offering rentals of cars, trucks and vans at rates
that are generally less than those charged by new car rental companies. The
Company also has franchisees in Europe and Asia. Reference to the "Company"
includes Rent-A-Wreck of America, Inc. and its subsidiaries unless the context
otherwise requires.
The Franchise Program
The Company sells to qualified persons the right to operate a
Rent-A-Wreck or PRICELE$$ franchise, or both, for renting and leasing used motor
vehicles (automobiles, vans and trucks) to the general public. The franchisees
who participate in the PRICELE$$ used vehicle rental franchise program are
required by the Company to meet higher standards than the Rent-A-Wreck program,
such as utilizing vehicles that are under three years old. As of March 31, 1998,
73 of the Company's 484 franchisees are participating in this program. The
Company believes the PRICELE$$ name appeals to a different clientele and
therefore complements the Rent-A-Wreck program. The Company offers each
franchisee 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. 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.
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The Company provides its franchisees with a central reservation system
and marketing force for the insurance replacement business. This department is
based in Baltimore, Maryland, and the Company is developing this program so that
it can be used nationwide. The Company uses an established insurance company
client base, acquired in December 1996, 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.
Rent-A-Wreck One Way, Inc., a wholly owned subsidiary, operates a truck
rental program, on a limited, test basis, in the immediate area of the Company's
headquarters in Maryland. The Company has purchased three 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.
The Company believes the Rent-A-Wreck name is unique and enjoys
national recognition. Ongoing marketing programs further promote recognition of
the Rent-A-Wreck and PRICELE$$ names in both domestic and foreign markets. The
Company develops and executes advertising and marketing programs that have
included radio and television commercials, direct mail, print advertising,
promotional items and sponsorship at sporting events. 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 referral sources such as insurance
adjusters, automotive repair shops, travel agents and corporate travel managers.
Through July 1, 1997, the Company offered to its franchisees a physical
damage insurance program through its wholly owned subsidiary Central Life and
Casualty, Limited ("CLC"). Franchisees paid monthly premiums based on their
vehicles' wholesale value, and in return CLC provided them with coverage for
damage to their vehicles up to their wholesale value. CLC utilized Lindsey
Morden as its insurance adjuster and paid claims from premiums collected. During
the fiscal year ended March 31, 1998, approximately 11 of the Company's
franchisees participated in this program. The Company replaced this program with
the insurance program described in the following paragraph.
The Company has formed a wholly owned insurance subsidiary,
Consolidated American Rental Insurance Company, LTD ("CAR Insurance") domiciled
in Bermuda to provide automobile liability and physical damage reinsurance
through American International Group ("AIG") for the vehicles belonging to its
franchisees.
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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 and second year of this agreement,
thus capping CAR Insurance's exposure to loss. In carrying out the program, the
Company utilizes Willis Corroon as the insurance broker, Hertz Claim Management
Corporation as the Third Party Administrator, and AICCO Premium Financing. AICCO
finances premiums to participants in the program. CAR Insurance intends to limit
its exposure to 1,500 vehicles during fiscal year 1998 and 2,000 vehicles during
fiscal year 1999. The focus of growth for CAR Insurance will be in those states
where the Company's insurance advisor 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'
applications and, if approved, the franchisee is required to pay premiums in
advance on a monthly basis. Hertz Claim Management Corporation is responsible
for processing all claims. As of March 31, 1998, approximately 61 of the
Company's franchisees were insuring an approximate total of 1,259 of their
vehicles under this program.
The Company has arranged a program whereby franchisees may finance
vehicle purchases over a 24-30 month period. The program is available to
qualified applicants who 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, 1998, the Company
was financing 19 vehicles for 8 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, rental operations, promotion, publicity, advertising and sales
approaches, relevant aspects of insurance, accounting and other general business
skills. The Company also employs field service staff who have many years of
experience in the car rental industry and whose responsibility is to provide
continuous advice via personal visits and a toll-free telephone number.
Additionally, the Company holds and strongly encourages franchisees to
attend its convention once a year, and regional meetings which are held twice a
year in eastern and western regions of the United States.
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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. 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 Westwood One Radio, 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 four full time salespeople at its corporate headquarters, and in
addition the Company utilizes the services of three 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, 1998, 136 new franchises were
granted, 11 existing franchise locations were transferred to new ownership and
55 franchises were terminated by the Company. The majority of these terminations
resulted from monetary default. This resulted in approximately 542 franchised
locations throughout the United States, as well as 16 franchised locations
located in Europe and Asia at the end of this fiscal year compared to
approximately 468 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, 1997.
Employees
As of March 31, 1998, the Company employed 21 people, consisting of 13
full-time employees and 1 part-time employee engaged in franchise sales and
service and 6 full-time employees and 1 part-time employee engaged in
administrative activities. In addition, the Company retains the services of 3
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.
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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
U-Save compete nationwide. Dozens of local independent companies also compete
with the Company in various areas. In most major urban areas, companies such as
Hertz, Avis, National and Budget 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 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") has adopted regulations requiring full pre-sale disclosure to
prospective franchisees of certain information, including
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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 FTC
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.
As of April 1998, 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 33 foreign countries and is in the process of registering
its "PRICELE$$" trade and service mark in 4 foreign countries and the entire
European Community.
Trademarks
The Company believes that name recognition of its primary trademark
"Rent-A-Wreck" is important to its franchise program. A trademark may be held
for an indefinite duration, but it may be lost or its value diminished if
adequate steps to police its use are not taken. The Company believes that its
efforts to police the use of its trademarks are adequate.
The Company is actively promoting its existing "PRICELE$$" 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
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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 861 square feet of executive office space at
11460 Cronridge Drive, Suite 118, Owings
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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
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On October 1, 1997, suit was initiated in the District Court of
Oklahoma County, State of Oklahoma against the Company and a Rent-A-Wreck
franchisee by an automobile dealer in connection with the plaintiff's sale of
cars to the franchisee for which plaintiff has allegedly not yet been paid.
Plaintiff alleges that the Company fraudulently induced it to deal with the
franchisee and seeks $241,000 in damages plus interest. The claim against the
Company has been dismissed, but the Court now has before it Plaintiff's Motion
to Reconsider. If the motion is granted, the Company believes that Plaintiff's
counsel will dismiss the Company as a defendant.
A lawsuit that was initiated in August 1994 by Mongo, Inc. and John and
Roberta Batcher was dismissed in April 1997. The Company is aware that Mongo,
Inc. and John Batcher filed another summons on August 21, 1997 in the Supreme
Court, State of New York, County of Suffolk regarding a lawsuit against the
Company, Bundy, K.A.B. Inc., officers of the Company and other defendants. The
summons mentions relief sought of $7,000,000 plus interest. The summons is not
accompanied by a complaint, and the Company is investigating the basis for this
summons given that the plaintiffs' previous claims against the Company were
dismissed. In November 1997, the Company removed the case to the U.S. District
Court for the Eastern District of New York, and on February 4, 1998, the Company
petitioned the court to dismiss the case. The case was dismissed without
prejudice on May 11, 1998.
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 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. Such petition is still pending, and the Company intends to
pursue its remedies.
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The Company is also involved in routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the 4th
quarter of the fiscal year ended March 31, 1998.
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Part II. Other Information
Item 5. Market for the Common Equity and
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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:
Year Ended
March 31, 1998 High* Low*
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First Fiscal Quarter $ 1 1/2 $ 1 1/4
Second Fiscal Quarter 1 3/16 1 1/16
Third Fiscal Quarter 1 1
Fourth Fiscal Quarter 1 3/32 1
Year Ended
March 31, 1997 High* Low*
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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
* 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 1,366,000 shares
outstanding. This stock has a cumulative quarterly dividend of two cents per
share. Based on the current number of outstanding preferred shares, the annual
dividend is $109,280. 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
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public market for the preferred stock. At June 1, 1998, undeclared and unpaid
cumulative preferred dividend arrearages amounted to $177,209.
The number of stockholders of record of the Company's Common Stock as
of May 27, 1998 was 228. This figure does not include individual participants in
securities position listings of registered clearing agencies. The Company
believes that the number of beneficial stockholders was approximately 1,400 as
of May 26, 1998. 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.
On April 23, 1998, the Company approved the repurchase of up to an
additional 500,000 shares of the Company's outstanding common or preferred
stock.
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Selected Financial Data
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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, 1998, 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.
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
-----------------------------------------------------
(in thousands except per share
and number of franchises)
<S> <C> <C> <C> <C> <C>
Franchisees' Results (Unaudited)
Franchisees' Revenue (1) $ 25,522 $ 26,482 $ 29,864 $ 34,661 $ 40,018
Number of Franchises 365 384 429 477 558
Company's Results of Operations
Total Revenue $ 3,224 $ 3,003 $ 3,455 $ 3,785 $ 4,677
Costs and expenses and Other 3,511 2,655 3,029 3,252 3,983
Income (loss) before income
taxes $ (262) $ 416 $ 489 $ 600 $ 756
Net income (loss) (236) 383 459 537 548
Earnings (loss) per common share
Basic $ (.10) $ .06 $ .08 $ .10 $ .10
Weighted average common
shares 3,758 4,238 4,210 4,102 4,267
Diluted $ (.10) $ .06 $ .07 $ .09 $ .09
Weighted average common
shares plus options and
warrants 5,727 6,086 6,197 6,083 5,915
</TABLE>
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<TABLE>
Company's Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Working Capital $ 572 $ 850 $ 902 $ 1,191 $ 1,527
Total assets 2,553 2,102 2,164 2,594 3,664
Long-term obligations 119 -- 36 30 --
Shareholders' Equity 1,048 1,299 1,372 1,755 2,028
</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
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Financial Condition and Results of Operations
---------------------------------------------
RESULTS OF OPERATIONS
Year ended March 31, 1998 vs. year ended March 31, 1997
Revenue from franchising operations, which includes initial license
fees, continuing license fees, advertising fees and direct financing leases,
increased by $439,150 (12%). This increase occurred primarily due to an increase
in revenue from initial license fees, continuing license fees and advertising
fees. Initial license fees increased by $43,002 (6%) due to the addition of new
franchises. The timing of closings of new franchise sales, each of which is for
a relatively large amount, varies, contributing to periodic increases or
decreases in reported results. Management does not believe these short-term
variations are indicative of longer term trends. Continuing license fees
increased by $321,446 (15%), and advertising fees increased by $77,900 (12%) due
to the fleet growth at existing franchises and the Company's dedication of more
resources to its collection efforts. Revenues from insurance premiums were
$579,063 due to the new reinsurance program that started in March 1997,
partially offset by a $78,906 (86%) reduction in premiums from the physical
damage insurance program ("CLC") and by a $67,551 (100%) reduction in premiums
from the national insurance program ("URM") due to their termination and
replacement by the reinsurance program operated through CAR Insurance. Insurance
premium revenue is recognized ratably over the life of the policies. Other
revenue increased by $25,307 (24%) due primarily to an increase in the insurance
replacement program.
Total operating expenses increased by $730,923 (22%) in fiscal 1998
compared to the prior year due primarily to an increase in underwriting expenses
of $426,202 (1,586%) and an increase in general and administrative expenses of
$159,832 (19%). These increases resulted primarily from the new reinsurance
program. Advertising and promotion expenses increased by $100,048 (12%) due
primarily to an increase in national advertising expense to promote the Company.
Salary expense increased by $22,265 (3%) due to the growth of the Company. Sales
and marketing expenses increased by $15,779 (2%), which resulted primarily from
additional commission expenses due to the larger amount of franchise sales made
in fiscal 1998 compared to the prior year and additional marketing expenses for
attracting new franchisees, partially offset by a reduction in bad debt expenses
due to improved collection of outstanding accounts receivable and collection of
previously reserved accounts receivable.
Net interest income decreased $4,220 (6%). This decrease was primarily
due to lower interest received on the Company's direct financing leasing program
primarily because of increased attractiveness of competitive programs.
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Depreciation and amortization expense increased by $6,797 (6%) in
fiscal 1998 compared to the prior year. This increase was primarily due to the
additional investment to update computer software and hardware. Vehicles, office
furniture, equipment and leasehold improvements are carried at cost.
Depreciation has been provided by the straight-line method over the estimated
useful lives of the assets ranging from 3 to 5 years. Amortization of leasehold
improvements is calculated on the straight-line basis over the shorter of the
estimated life of the improvements or the term of the lease. Betterments,
renewals and extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed.
The Company realized operating income of $694,085, before taxes and
interest, in 1998 compared to operating income of $533,363 for 1997, reflecting
an increase of $160,722 (30%). This increase resulted primarily from the
increase in initial license fees and continuing license fees due to the addition
of new franchises, fleet growth at existing franchises and the Company's
improved collection efforts and collection of previously reserved accounts.
Income tax expense for the year ended March 31, 1998 increased by
$146,089 (234%) over 1997 due to higher pre-tax earnings and the depletion of
the Company's federal income tax net operating loss carryforward in fiscal 1997,
partially offset by a reduction in the deferred tax asset valuation allowance.
The valuation allowance is being reduced in light of favorable earnings and
expected future earnings and is re-assessed quarterly.
Inflation has had no material impact on the operations and financial
condition of the Company for all years presented.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $1,526,934
compared to $1,191,019 at March 31, 1997. This increase of $335,915 primarily
resulted from net profit earned during the year and a reduction in allowance for
doubtful accounts based on the Company's historical reserves experience, offset
by increased reserves for the reinsurance program. Of the net increase, $96,404
is due to a reduction in the required allowance for doubtful accounts as a
result of improved collection efforts. In fiscal 1998, the Company's allowance
for doubtful accounts was $682,631 compared to $779,035 in the prior year. The
Company wrote off $169,859 of its doubtful accounts during fiscal 1998 and
$217,162 during the prior year. The Company generally requires officers and
directors of franchisees to provide personal guarantees of the franchisee's
obligations under the franchise agreement. In January 1997, the Company's
management improved its collection effort by dedicating part of the time of one
employee to coordinate collections from franchisees. This new effort
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resulted in more accounts being kept current and yielded a collection of $19,895
of receivables from franchisees and $52,999 on a note receivable arising out of
an asset sale at a franchise location. The Company had reserved against these
receivables in the prior year, and, accordingly, this collection improved cash
flow in fiscal 1998 compared to the prior year. In April 1998, the Company hired
a part-time employee to dedicate more resources to collection efforts. The
Company's collection effort is designed to increase liquidity through improved
cash flow; however, there can be no assurance that the Company will be
successful in these efforts.
Cash and cash equivalents increased by $607,189 (100%). This increase
resulted primarily from the increase in initial license fees and continuing
license fees due to the addition of new franchises, fleet growth at existing
franchises and the Company's collection efforts. Restricted cash decreased by
$75,130 (16%) due to higher advertising expenses. Restricted cash includes (1) a
deposit of $250,000 being held in the Bank of Butterfield (Bermuda) for securing
the letter of credit with The Chase Manhattan Bank ("Chase") as part of the
insurance program described below and (2) funds being held on behalf of the
Company's franchisees in the national advertising fund to be spent on different
advertising programs.
In March 1997, the Company deposited $250,000 on behalf of its CAR
Insurance subsidiary in the Bank of Butterfield. This deposit was restricted by
a $250,000 letter of credit with the Bank of Butterfield in connection with the
Company's CAR Insurance subsidiary. In June 1998, the Company made an additional
deposit of $388,000 in the Bank of Butterfield resulting in a total amount of
$638,000, all of which is restricted by a $638,000 letter of credit with the
Bank of Butterfield. This letter of credit is part of the agreement between the
Company and Chase as security for the letter of credit issued to American
International Group ("AIG") by Chase. Funds drawn against the letter of credit
bear interest at The Bank of Butterfield's prime commercial lending rate plus
2.0% (which prime rate was 8.5% on June 4, 1998). For the years ended March 31,
1997 and 1998, Chase has not drawn any funds from the letter of credit.
In June 1997, the Company finalized a $500,000 letter of credit with
Chase in connection with the Company's new CAR Insurance subsidiary. This letter
of credit is part of the reinsurance agreement with AIG to secure payment of
claims. In fiscal 1998, AIG requested the Company to increase the letter of
credit with Chase from $500,000 to $1,000,000. Chase approved the Company's
request to increase the letter of credit from $500,000 to $1,000,000, under the
terms and conditions of the letter of credit dated June 3, 1997, and a first
amendment dated June 1, 1998. Funds drawn against the letter of credit bear
interest at Chase's prime commercial lending rate plus 3% (which prime rate was
8.5% on June 4, 1998). For the years ended March 31, 1997 and 1998, AIG has not
drawn any funds from the letter of credit. This letter of credit is secured by
the
17
<PAGE>
letter of credit with the Bank of Butterfield and 50% of the Company's
receivables under 90 days old.
The Company was committed under capital lease agreements for various
equipment, and it rents its office facilities under the terms of an operating
lease. The capital lease obligations were $38,667 and $0 at March 31, 1997 and
March 31, 1998, respectively. The Company has utilized its working capital to
pay for these obligations. During the quarter ended September 30, 1997, the
Company fully paid its obligations under these capital leases. The monthly
office facilities lease commitments were $5,200 and $5,400 at March 31, 1997 and
1998, respectively. The Company also rents additional space on a month to month
basis for approximately $670 per month.
Furniture, equipment and leasehold improvements decreased by $212,054
(29%) from March 31, 1997 to March 31, 1998. This decrease occurred primarily
due to writing off the assets that were not in use or were fully depreciated.
Vehicles decreased by $29,678 (56%) from March 31, 1997 to March 31, 1998 due to
sales of a rental van and an executive vehicle which was partially offset by the
purchase of a truck for the Company's one way program.
The Company has made and will continue to make certain expenditures to
ensure that its software system and applications continue to function properly
in and after 2000. These expenditures have not been and are not anticipated to
be material to the Company's financial position or results of operations. The
Company expects to spend approximately $3,000 in its fiscal year 1999 to ensure
that its software systems and applications continue to function properly in and
after the year 2000. No amounts were spent in fiscal 1998.
Cash provided by operations was $398,372, resulting primarily from net
income before depreciation plus the increase in accounts payable, accrued
expenses and insurance fees, claims and loss reserves, offset by the increase in
the Company's receivables. Prepaid expenses and other increased primarily due to
purchase of additional promotional items. Insurance fees, claims and loss
reserves increased due to the new insurance program. Accounts and notes
receivable decreased primarily due to the Company's collections efforts. Cash
used in investing activities of $32,429 related primarily to the acquisition of
computer software and hardware and maintaining trademarks. Cash provided by
financing activities during the same period was $176,388, resulting from an
increase in insurance premiums payable and the issuance of common stock in
connection with the acquisition of assets, offset by the payment of preferred
dividends, repayment of long-term debt and buyback of common and preferred
stock.
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
18
<PAGE>
preferred stock. On April 8, 1996, the Board of Directors authorized the
repurchase of an additional 250,000 shares of the Company's outstanding common
and preferred stock. 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. During the year ended March 31, 1998,
the Company bought back 117,575 shares of its common stock at a cost of $121,509
and also bought back 20,625 shares of its preferred stock at a cost of $25,781.
These shares were retired in the year ended March 31, 1998. On April 23, 1998,
the Company approved the repurchase of up to an additional 500,000 shares of the
Company's outstanding common or preferred stock.
The Company believes it has sufficient working capital to support its
business plan through fiscal 1998.
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.
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
19
<PAGE>
domiciled 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 Claim Management
Corporation 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 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 of 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.
20
<PAGE>
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.
Compliance with Governmental Regulations. The Company's 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
21
<PAGE>
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, 1998, 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
environments, 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.
22
<PAGE>
Item 7. Financial Statements
- ------- --------------------
Index to Consolidated Financial Statements and Supporting Schedules
-------------------------------------------------------------------
Page
----
Report of Independent Certified Public Accountants... 24
Financial Statements:
Consolidated Balance Sheet as of March 31,
1998............................................. 25
Consolidated Statements of Earnings for
the Years Ended March 31, 1997 and
1998............................................. 27
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 1997
and 1998......................................... 28
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1997 and 1998.............. 29
Notes to Consolidated Financial
Statements....................................... 30
Supporting Schedules:
Schedule II - Valuation and Qualifying
Accounts........................... 57
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.
23
<PAGE>
[LETTERHEAD OF GRANT THORNTON LLP]
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, 1998,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the years ended March 31, 1998 and 1997. 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., and subsidiaries, as of March 31, 1998, and the consolidated
results of their operations and their consolidated cash flows for the years
ended March 31, 1998 and 1997 in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the years ended March 31, 1998 and 1997. 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
May 21, 1998
24
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
ASSETS
1998
----------
CURRENT ASSETS:
Cash and Cash Equivalents............................ $1,215,615
Restricted Cash...................................... 394,021
Accounts Receivable, net of allowance
for doubtful accounts of $682,631:
Continuing License Fees and
Advertising Fees............................... 302,367
Current Portion of Notes Receivable.............. 342,765
Current Portion of Direct Financing
Leases......................................... 37,653
Insurance Premiums Receivable.................... 560,219
Other............................................ 176,166
Prepaid Expenses and Other........................... 133,856
----------
TOTAL CURRENT ASSETS............................... 3,162,662
----------
PROPERTY AND EQUIPMENT:
Furniture............................................ 71,655
Computer Hardware and Software....................... 314,657
Machinery and Equipment.............................. 101,868
Leasehold Improvements............................... 37,896
Vehicles............................................. 23,347
----------
549,423
Less: Accumulated Depreciation and
Amortization.................................. (265,476)
-----------
NET PROPERTY AND EQUIPMENT......................... 283,947
-----------
OTHER ASSETS:
Trademarks and other Intangible Assets, net of
accumulated amortization of $105,951............... 203,129
Long-term Portion of Notes and Direct Financing Lease
Receivables, net of allowance of $0................ 14,374
----------
217,503
-----------
TOTAL ASSETS....................................... $3,664,112
==========
The accompanying notes are an integral part of this financial statement.
25
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
1998
-----------
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses................ $ 873,690
Dividends Payable.................................... 27,320
Insurance Premiums Payable........................... 489,903
Insurance Fees, Claims, and
Loss Reserves...................................... 244,815
-----------
TOTAL CURRENT LIABILITIES.......................... 1,635,728
-----------
TOTAL LIABILITIES.................................. 1,635,728
-----------
COMMITMENTS AND CONTINGENCIES -
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,366,000 shares
(aggregate liquidation preference $1,092,800) 13,660
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding 4,189,692 shares....................... 41,896
Additional Paid-In Capital........................... 2,900,382
Accumulated Deficit.................................. (927,554)
-----------
TOTAL SHAREHOLDERS' EQUITY......................... 2,028,384
-----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................................... $3,664,112
==========
The accompanying notes are an integral part of this financial statement.
26
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
1997 1998
----------- ----------
REVENUES:
Initial License Fees..................... $ 751,000 $ 794,002
Advertising Fees......................... 673,090 750,990
Continuing License Fees.................. 2,079,657 2,401,103
Insurance Premiums....................... 161,497 579,063
Vehicle Rental Operations................ 5,482 15,104
Direct Financing Leases to Franchisees... 6,923 3,725
Other.................................... 107,351 132,658
----------- ----------
3,785,000 4,676,645
----------- ----------
EXPENSES:
Salaries, Consulting Fees, and
Employee Benefits...................... 747,743 770,008
Advertising and Promotion................ 822,587 922,635
Underwriting Expenses.................... 26,880 453,082
Sales and Marketing ..................... 699,819 715,598
General and Administrative .............. 839,944 999,776
Depreciation and Amortization........... 114,664 121,461
----------- ----------
3,251,637 3,982,560
----------- ----------
OPERATING INCOME.................. 533,363 694,085
INTEREST INCOME, NET....................... 66,567 62,347
----------- ----------
INCOME BEFORE INCOME TAX EXPENSE.. 599,930 756,432
INCOME TAX EXPENSE......................... 62,439 208,528
----------- ----------
NET INCOME........................ 537,491 547,904
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK.......................... (119,648) (111,431)
----------- -----------
NET INCOME AFTER DIVIDENDS ON
CONVERTIBLE CUMULATIVE PREFERRED STOCK... $ 417,843 $ 436,473
=========== ==========
EARNINGS PER COMMON SHARE
Basic.................................... $ .10 $ .10
=========== ==========
Weighted average common shares............. 4,101,904 4,266,711
=========== ==========
Diluted.................................. $ .09 $ .09
=========== ==========
Weighted average common shares
plus options and warrants................. 6,083,043 5,914,752
=========== ==========
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<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, 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 dividend 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
Issuance of common stock ....... - - 20,000 200 24,800 - 25,000
Retirement of common stock...... - - (117,575) (1,176) (120,333) - (121,509)
Retirement of preferred stock... (20,625) (206) - - (25,575) - (25,781)
Conversion of preferred stock
into common stock............... (52,500) (525) 52,500 525 - - -
Preferred dividends paid ($.08
per share).................... - - - - - (111,431) (111,431)
Preferred dividend arrearages
paid ......................... - - - - - (41,127) (41,127)
Net income...................... - - - - - 547,904 547,904
----------- --------- --------- --------- ---------- ------------ ----------
Balance, March 31, 1998........... 1,366,000 $ 13,660 4,189,692 $ 41,896 $2,900,382 $ (927,554) $2,028,384
=========== ========= ========== ========= ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net Income............................................... $ 537,491 $ 547,904
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization........................ 114,664 121,461
Gain on disposal of property and equipment........... (2,403) (4,065)
Provision for doubtful accounts...................... (13,945) (96,404)
Changes in assets and liabilities:
Accounts and notes receivable........................ 192,949 (500,111)
Prepaid expenses and Other........................... (31,779) (16,290)
Accounts payable and accrued
expenses........................................... 119,357 151,890
Insurance fees, claims, and
loss reserves...................................... (58,867) 193,987
----------- -----------
Net cash provided by operating activities........... 857,467 398,372
----------- -----------
Cash flows from investing activities:
(Increase) decrease in restricted cash................... (469,152) 75,130
Proceeds from sale of property and equipment............. 29,075 36,683
Acquisition of property and equipment.................... (144,460) (75,270)
Additions to trademarks and other........................ (75,956) (4,114)
----------- -----------
Net cash (used in) provided by investing activities. (660,493) 32,429
----------- -----------
Cash flows from financing activities:
Increase in insurance premiums payable................... - 489,903
Issuance of common stock................................. 150,000 25,000
Repayments of obligation under capital lease............. (13,863) (38,667)
Retirement of common stock............................... (66,749) (121,509)
Retirement of preferred stock............................ (85,301) (25,781)
Preferred dividends paid................................. (152,506) (152,558)
----------- -----------
Net cash (used in) provided by financing activities. (168,419) 176,388
----------- -----------
Net increase in cash and cash
equivalents........................................ 28,555 607,189
Cash and cash equivalents at beginning of year............. 579,871 608,426
----------- -----------
Cash and cash equivalents at end of year................... $ 608,426 $1,215,615
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................ $ 6,096 $ 10,115
Taxes paid............................................... $ 38,722 $ 103,733
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 programs throughout the United States, as well as
various foreign countries.
Restricted Cash
Restricted cash includes a deposit of $250,000 being held in the Bank
of Butterfield (Bermuda) securing the letter of credit with The Chase Manhattan
Bank ("Chase") and funds being held for $144,021 on behalf of the Company's
franchisees in the national advertising fund to be spent on different
advertising programs.
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
30
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1998
Property and Equipment-continued
methods of depreciation are used for substantially all assets for income tax
purposes. The estimated service lives used in determining depreciation are as
follows:
Furniture 3 years
Computer Hardware and Software 5 years
Machinery and Equipment 5 years
Leasehold Improvements 3 years
Vehicles 5 years
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.
Insurance Reserves
The Company recognizes a liability for re-insured auto claims at the
time a claim is reported to the Company by the third party administrator. The
third party administrator establishes the initial claim reserve based on
information relating to the nature, severity and the cost of similar claims. The
Company provides for claims incurred, but not reported, based on industry-wide
data and the Company's past claims experience through consultation with third
party actuaries. The liability recorded may be more or less than the actual
amount of the claims when they are submitted and paid. Changes in the liability
are charged or credited to operations as the estimates are revised.
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
31
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1998
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.
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.
32
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1998
Stock-Based Compensation
Compensation costs for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of grant over the
amount to be paid to acquire the stock. Compensation cost for stock awards is
recorded based on the quoted market value of the Company's stock at the time of
grant.
Earnings Per Common Share
The computation of earnings per common share is presented on a basic
and diluted basis in accordance with Statement of Financial Accounting Standards
128, Earnings Per Share. In computing basic earnings per share, preferred
dividends are subtracted from net income to arrive at the earnings applicable to
common shareholders. In computing diluted earnings per share, the dilutive
effect of stock options, warrants, and the conversion of cumulative preferred
stock was considered in determining the weighted average number of common and
common equivalent shares.
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 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 Standard
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes revised
standards under which an entity must report business segment information in its
financial statements. The Company plans to adopt SFAS 131 in the fiscal year
beginning April 1, 1998.
33
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Reclassifications
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
2. 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.
As security for the reinsurance arrangement with AIG, the Company has
obtained standby letters of credit from Chase ($500,000) and Bank of Butterfield
($250,000). In addition, certain assets of the Company have been pledged to
secure the agreement with Chase. The letters of credit were increased subsequent
to year end (see note 14).
34
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
3. DIRECT FINANCING LEASES
The components of the Company's net investment in direct financing
leases are as follows:
March 31,
1998
------------
Total Minimum Lease Payments to be Received........ $69,184
Less Amounts Representing
Administration Costs Included in
Total Minimum Lease Payments............ 1,292
-------
Minimum Lease Payment Receivable................... 67,892
Less Allowance for Uncollectibles......... 15,927
-------
Net Minimum Lease Payments Receivable.............. 51,965
Less Unearned Income...................... 3,405
-------
Net Investment in Direct Financing Leases.......... 48,560
-------
Current Portion .......................... $37,653
Non-Current Portion....................... 10,907
-------
Net Investment in Direct Financing Leases.......... $48,560
=======
The total minimum lease payments receivable in the two succeeding
fiscal years are as follows:
1999 .............................$56,937
2000.............................. 12,247
-------
Total $69,184
=======
35
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31,
1998
---------
Accounts Payable............................... $ 161,830
National Advertising Fund...................... 144,022
Payroll........................................ 30,219
Commissions and Royalties...................... 144,040
Professional Fees.............................. 83,254
Income Taxes Payable........................... 201,676
Other.......................................... 108,649
---------
$ 873,690
=========
36
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
5.EARNINGS PER SHARE
A reconciliation of the numerators and denominators in the computation
of basic and diluted earnings per share for the years ended March 31, 1997 and
1998 is as follows:
1997 1998
---------- -----------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to
common shares $ 417,843 $ 436,473
Denominator:
Weighted average common
shares 4,101,904 4,266,711
---------- ----------
Basic EPS $ .10 $ .10
========== ==========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to
common shares $ 417,843 $ 436,473
Dividends on convertible
preferred stock 119,648 111,431
---------- ---------
537,491 547,904
---------- ---------
Denominator
Weighted average common
shares 4,101,904 4,266,711
Convertible preferred
stock 1,439,125 1,366,000
Weighted average options
and warrants 542,014 282,041
---------- ---------
6,083,043 5,914,752
Diluted EPS $ .09 $ .09
========== ==========
37
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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, 1997 and 1998 consists of the following:
1997 1998
---- ----
Currently payable
State income taxes................. $ 28,214 $ 51,341
Federal income taxes............... 34,225 225,695
-------- -------
Total currently payable...... 62,439 277,036
Deferred............................. - (68,508)
-------- -------
Total........................ $ 62,439 $208,528
======== ========
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, 1997 and 1998 is as follows:
1997 1998
--------- ---------
Federal taxes at statutory
rate............................ $ 189,825 $ 257,187
Utilization of tax loss
carryforward.................... (155,600) -
Reduction in valuation allowance.. - (100,000)
State and local taxes, net........ 28,214 51,341
--------- ---------
Total....................... $ 62,439 $ 208,528
========= =========
38
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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, 1998 is as follows:
1998
----------
Deferred tax assets:
Reserve for doubtful accounts................. $ 266,225
Accrued expenses.............................. 101,190
Other ........................................ 10,891
----------
378,306
Deferred tax liabilities:
Fixed assets.................................. (33,068)
----------
Net deferred tax asset before
valuation allowance........................... 345,238
Valuation allowance............................. (276,730)
----------
Net deferred tax asset.......................... $ 68,508
==========
The net change in the valuation allowance for the year ended March 31,
1998 was a decrease of $100,000. The valuation allowance is being reduced in
light of favorable earnings and expected future earnings and is re-assessed
quarterly.
39
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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:
March 31,
---------
1999.....................$66,712
2000.....................$45,357
Total rent expense for the years ended March 31, 1997 and 1998 was
$70,064 and $71,999, of which $7,189 and $9,649, respectively was to the related
party (see Note 8).
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,
1997 and 1998 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).
40
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
8. RELATED PARTY TRANSACTIONS - continued
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 $7,189 and $9,649 for the
years ended March 31, 1997 and 1998, respectively, 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, 1997 and 1998, $34,204 and
$21,839, respectively, have been paid to ABIS under this agreement.
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, 1997 and 1998, there were no fees paid
to Richter & Co., Inc. pursuant to this agreement.
Richter & Co., Inc. provides 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 and available for issuance upon the exercise of
options granted to employees, including officers and directors. At March 31,
1998, no options were outstanding under the plan.
The Company has issued stock options to acquire 2,250,000 shares of its
common stock to
41
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued
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 in the fixed vesting date until July 1, 2002), and the
addition of a cashless exercise feature.
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 year 1997: risk
free interest rate of 6.870%; expected volatility of 57.880%, and expected lives
of 2.92 to 6.21 years. There were no stock options granted during fiscal year
1998.
42
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued
The following table summarizes option activity:
1997 1998
Weighted Weighted
Average Average
1997 1998 Exercise Exercise
Shares Shares Price Price
--------- --------- -------- --------
Options outstanding at
beginning of year 2,305,000 2,265,000 $ 1.17 $ 1.08
Options exercised - - - -
Options granted 2,250,000 - 1.15 -
Options canceled (2,250,000) - 1.30 -
Options expired (40,000) (15,000) - 1.44
----------- ----------
Options outstanding at
end of year 2,265,000 2,250,000 $ 1.08 $ 1.08
Option price range at
end of year $ 1.00 to $ 1.00 to
$ 1.44 $ 1.15
Option price range for
exercised shares - -
Weighted-average fair
value of options,
granted during
the year $ 0.70 $ -
At March 31, 1997 and 1998, 1,015,000 and 1,000,000 options, respectively, were
exercisable.
43
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued
The following table summarizes options outstanding at March 31, 1998:
Weighted Average
Number Exercise Weighted Average Remaining
Outstanding Price Exercise Price Contractual Life
----------- --------- ---------------- ----------------
2,250,000 $ 1.00 to $ 1.08 5.25 years
$ 1.15
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 recognized based on the fair
value at the grant date on a straight-line basis over the vesting period of the
grant for the fiscal 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:
1997 1998
----------- -----------
Net income applicable to common
and common equivalent shares
As reported $ 417,843 $ 436,473
Pro forma $ 190,546 $ 351,579
Earnings per share
Basic:
As reported $ .10 $ .10
Pro forma $ .05 $ .08
Diluted:
As reported $ .09 $ .09
Pro forma $ .03 $ .06
44
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued
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.
In April, 1996, the Company 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, 1998 is as follows:
Number of Exercise Price
Warrants per Warrant
---------- --------------
Outstanding, beginning of year.. 290,000 $.80 - $1.50
Issued.......................... -
Exercised....................... -
Canceled........................ (5,000) $1.25
----------
Outstanding, end of year........ 285,000 $.80 - $1.25
==========
45
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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 96% of the Preferred Stock, and, by virtue of his control
over Richter Investment Corp., William L. Richter can be deemed to have 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, 1998, the Company repurchased and
retired 20,625 shares of preferred stock and 52,500 preferred shares were
converted to common shares, reducing the total outstanding preferred shares from
1,439,125 to 1,366,000. At March 31, 1998, undeclared and unpaid cumulative
preferred dividends amounted to $221,511. During the year ended March 31, 1998,
the Company declared preferred dividends totaling $111,431, plus $41,127 of
dividend arrearages, and at March 31, 1998, unpaid declared preferred dividends
totaled $27,320.
11. OTHER REVENUES
Components of other revenues for the years ended March 31, 1997 and
1998 were as follows:
1997 1998
-------- --------
Promotional materials....... 94,685 106,779
Other....................... 12,666 25,879
-------- --------
$107,351 $132,658
======== ========
46
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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.
13. GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in two principal segments: Vehicle
Rental Franchise Programs and Insurance Coverage.
The Company's foreign operations are presently conducted by CAR
Insurance in Bermuda.
Information by geographic area and industry segment is as follows:
1997 1998
---------- ----------
Net revenues to unaffiliated customers
Vehicle Rental Franchises-United States $3,623,503 $4,097,582
Insurance-United States 161,497 20,921
Insurance-Bermuda - 558,142
---------- ----------
$3,785,000 $4,676,645
========== ==========
Operating income (loss)
Vehicle Rental Franchises-United States $ 438,622 $ 645,103
Insurance-United States 94,741 26,460
Insurance-Bermuda - 22,522
---------- ----------
$ 533,363 $ 694,085
========== ==========
Assets
Vehicle Rental Franchises-United States $2,247,278 $2,630,585
Insurance-United States 77,495 10,625
Insurance-Bermuda 269,170 1,022,902
---------- ----------
$2,593,943 $3,664,112
========== ==========
Capital expenditures
Vehicle Rental Franchises-United States $ 144,460 $ 75,270
Insurance-United States - -
Insurance-Bermuda - -
---------- ----------
$ 144,460 $ 75,270
========== ==========
Depreciation and amortization expense
Vehicle Rental Franchises-United States $ 114,664 $ 121,461
Insurance-United States - -
Insurance-Bermuda - -
---------- ----------
$ 114,664 $ 121,461
========== ==========
47
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
14. SUBSEQUENT EVENTS
On April 23, 1998, the Company approved the repurchase of up to an
additional 500,000 shares of the Company's outstanding common or preferred
stock, subject to the same terms and conditions of the share repurchase program
initiated in the year ended March 31, 1996.
On May 15, 1998, the Company paid 20% of the dividend arrearages on all
preferred shares outstanding as of March 31, 1998. These paid arrearages totaled
$44,302, which was paid with and in addition to the regular quarterly preferred
dividend on May 15, 1998. Remaining undeclared and unpaid cumulative preferred
dividends were reduced to $177,209.
In June 1998, Chase increased the letter of credit associated with the
reinsurance arrangement from $500,000 to $1,000,000. The Company made an
additional deposit of $388,000 in the Bank of Butterfield resulting in a total
restricted deposit of $638,000, which is secured by a $638,000 letter of credit
with the Bank of Butterfield.
48
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
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
-------------------
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than 10% of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established, and the Company is required to disclose any failure to file by
these dates. The Company believes that all of these filing requirements were
satisfied during the fiscal year ended March 31, 1998. In making these
disclosures, the Company has relied solely on representations of its directors
and executive officers and copies of the reports that they have filed with the
Commission.
Item 10. EXECUTIVE COMPENSATION
- -------- ----------------------
Summary Compensation Table
--------------------------
The following table and related notes set forth information regarding
the compensation awarded to, earned by or paid to the Company's Chief Executive
Officer for services rendered to the Company during the fiscal years ended March
31, 1996, 1997 and 1998. No other executive officer who was serving as an
executive officer during the year ended March 31, 1998 received salary and bonus
which aggregated at least $100,000 for services rendered to the Company during
the fiscal year.
49
<PAGE>
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
---------------- -------------------------
Securities Underlying
Name and Principal Position Year Salary($)(1) Options/SARs(#)
- ---------------------------- -------- ---------------- -------------------------
<S> <C> <C> <C>
Kenneth L. Blum, Sr., CEO 1998 $250,000 --(2)
1997 250,000 --(2)
1996 200,000 --(2)
</TABLE>
(1) Mr. Blum became Chief Executive Officer of the Company in connection
with a Management Agreement between the Company and K.A.B., Inc., a
Florida corporation ("K.A.B.") effective June 30, 1993. Mr. Blum does
not receive cash compensation directly from the Company. K.A.B.
receives cash compensation pursuant to the Management Agreement of
$250,000 per year plus expense reimbursements (in the amount of
$8,037). The amounts indicated in the table represent compensation
received by K.A.B. pursuant to the Management Agreement. Mr. Blum is
the sole stockholder of K.A.B. See Item 12. Certain Relationships and
Related Transactions under the caption "Certain Transactions -
Management Agreement with K.A.B., Inc. and Related Transactions -
Management Agreement."
(2) During the year ended March 31, 1994, K.A.B. received options for the
purchase of 2,250,000 shares of the Company's Common Stock in
connection with the Management Agreement. During the year ended March
31, 1995, the Board of Directors approved the vesting of 1,000,000 of
these options at an exercise price of $1.00 per share. Effective July
20, 1995 the exercise price of the balance of the options was set by
the Board of Directors at $1.15 per share, with vesting, subject to
continued employment, on July 1, 2002, or earlier subject to
satisfaction of performance targets. Also effective on that date,
K.A.B. transferred the Options to certain transferees. See Item 12.
Certain Relationships and Related Transactions under the caption
"Certain Transactions - Management Agreement with K.A.B., Inc. and
Related Transactions - Stock Option Grant."
50
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Option/SAR Grants in Last Fiscal Year
No stock options or SARs were granted to the executive officer named in
the Summary Compensation Table during the last fiscal year. See Item 12. Certain
Relationships and Related Transactions under the caption "Certain Transactions -
Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option
Grant."
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value Table
No executive officer named in the Summary Compensation Table held or
exercised options at the end of the last fiscal year. See Item 12. Certain
Relationships and Related Transactions under the caption "Certain Transactions -
Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option
Grant."
Employment/Change of Control Arrangements
In the event of termination of the Management Agreement with K.A.B.
without cause, all options granted to K.A.B. in connection with the Management
Agreement remain outstanding for the balance of their ten-year term. See Item
12. Certain Relationships and Related Transactions under the caption "Certain
Relationships and Related Transactions -- Management Agreement with K.A.B., Inc.
and Related Transactions - Stock Option Grant."
Compensation of Directors
Currently, directors of the Company who also serve as officers of the
Company and outside directors receive no cash compensation in connection with
the services they render as directors. (Officers, however, receive compensation
in their capacity as officers as described above.) Directors are reimbursed for
expenses incurred in connection with their board service.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -------- -----------------------------------------------
AND MANAGEMENT
--------------
As of May 26, 1998, the persons and entities identified in the
following table, including all directors, executive officers and persons known
to the Company to own more than 5% of the Company's voting securities, owned
beneficially, within the meaning of Securities and Exchange Commission Rule
13d-3, the shares of voting
51
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -------- -----------------------------------------------
AND MANAGEMENT-continued
------------------------
securities reflected in such table. All the outstanding shares of Preferred
Stock are immediately convertible at the option of the holder into Common Stock,
on a share-for-share basis. Except as otherwise specified, the named beneficial
owner has sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
Total(1)
----------------------------
Shares
Name and Address of Beneficial Title of Beneficially % of
Owner Class Owned % of Class Common
- ------------------------------- -------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C>
David Schwartz Common 865,000(2) 20.8 --
Bundy Rent-A-Wreck
12333 W. Pico Blvd.
Los Angeles, CA 90064
Cumberland Associates Common 151,200(3) 3.6 --
1114 Ave. of the Amer. Preferred(4) 96,250 7.0 5.8
New York, NY 10035
William L. Richter Common 881,040(5) 20.5 --
c/o Richter & Co., Inc. Preferred(4) 1,342,875(5) 96.0 33.1(6)
450 Park Avenue
New York, NY 100022
Alan L. Aufzien Common 32,500 ** --
P.O. Box 2369 Preferred(4) 34,375 2.5 1.6
Secaucus, NJ 07094
Kenneth L. Blum, Sr.(8) -- -- -- --
11460 Cronridge Dr., #120
Owings Mills, MD 21117
Kenneth L. Blum, Jr.(7)(8) Common 650,000 14.0 --
11460 Cronridge Dr., #120
Owings Mills, MD 21117
Robin Cohn (7)(8) Common 649,999 14.0 --
c/o Rent-A-Wreck of America, Inc.
11460 Cronridge Dr., #120
Owings Mills, MD 21117
All Directors and Executive Officers Common 2,428,540(5) 50.7 --
as a Group, including the Directors (7)(8)
Named Above (5 persons) Preferred(4) 1,311,000(5) 96.0 57.4(6)
</TABLE>
52
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -------- -----------------------------------------------
AND MANAGEMENT-continued
------------------------
* Represents percentage ownership of Common Stock based upon shares of Common
Stock owned or deemed owned due to presently exercisable warrants and
options and after such person's conversion of Preferred Stock.
** Less than 1%.
(1) Based on 4,162,792 Common Shares and 1,366,000 shares of Preferred Stock
outstanding on the date of this table, May 26, 1998.
(2) Pledged to secure third-party bank loan to stockholder.
(3) Cumberland Associates is a limited partnership organized under the laws of
the State of New York and is engaged in the business of managing, on a
discretionary basis, eleven securities accounts. K. Tucker Andersen,
Richard Reiss, Jr., Robert Bruce III, and Oscar S. Schafer are the general
partners (the "General Partners") of Cumberland Associates. The business
address of each of the General Partners is the same as that of Cumberland
Associates. By virtue of Rule 13d-3, each of the General Partners may be
deemed the beneficial owner of all of the shares of Common Stock owned by
Cumberland Associates. The foregoing information is based on a Schedule 13D
dated October 10, 1989, filed by Cumberland Associates, as supplemented by
additional information supplied to the Company by Cumberland Associates.
(4) 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. Currently holders
of preferred stock nominate and elect two of the four directors. Pursuant
to the terms of proxies granted to Richter Investment Corp. ("RIC"), 96% of
the Preferred Stock may be voted by RIC as of the date of this table. The
proxies are effective until such time that less than $500,000 of Preferred
Stock remains outstanding. See note 5 below.
(5) Includes 57,334 shares of Common Stock issuable upon exercise of options
and warrants (currently exercisable or exercisable within 60 days), 178,750
shares of Preferred Stock, and 6,200 shares of Common Stock and 13,750
shares of Preferred Stock held by family members. Also includes 550,000
shares of Preferred Stock and 275,000 shares of Common Stock held by RIC,
144,375 shares of Common Stock and warrants (currently exercisable or
exercisable within 60 days) to acquire 82,000 shares of Common Stock held
by Richter & Co., Inc. ("RCI"), and 46,600 shares of Common Stock held in
RCI's trading account. Also includes an additional 568,500 shares of
Preferred Stock as to which RIC holds voting
53
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- -------- -----------------------------------------------
AND MANAGEMENT-continued
------------------------
authority via proxy (see note 4 above). Mr. Richter has voting control of
RIC, and RIC holds 100% of the outstanding stock of RCI. Mr. Richter, RIC
and RCI have the same address. Mr. Aufzien's 34,375 shares of preferred
stock are subject to a voting proxy granted to RIC.
(6) Excludes 568,500 shares of Preferred Stock as to which RIC holds voting
authority via proxy (see notes 4 and 5 above) because RIC would not have
voting or investment control of the Common Stock issued upon conversion of
such Preferred Stock.
(7) Mr. Blum, Sr. is the father of Kenneth L. Blum Jr. and Robin Cohn; see note
9 below. Mr. Blum disclaims beneficial ownership of shares held by Mr.
Blum, Jr. and Ms. Cohn. See also Item 12. Certain Relationships and Related
Transactions.
(8) Includes 483,333 shares issuable pursuant to currently exercisable options
and, in the case of Ms. Cohn, includes 166,666 shares held jointly with
spouse. See note 8 above. Mr. Blum, Jr. and Ms. Cohn disclaim beneficial
ownership of shares held by each other. For information regarding
additional options held by Mr. Blum, Jr. and Ms. Cohn which are not
currently exercisable (and thus not deemed beneficially owned for purposes
of the above table), see Item 12. Certain Relationships and Related
Transactions under the caption "Certain Transactions - Management Agreement
with K.A.B., Inc. and Related Transactions - Stock Option Grant."
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Reference is made to footnote 8 of the Company's audited financial
statements for the description of such information.
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.
54
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Item 13. Exhibits and Reports on Form 8-K-continued
- -------- ------------------------------------------
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, 1997 and 1998, as applicable.
55
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997 and 1998
<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, 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
========= ========= ============ ========= =========
MARCH 31, 1998
Allowance for
doubtful accounts $ 779,035 $ 73,455 $ - $ 169,859 (1) $ 682,631
========= ========= ============ ========= =========
Valuation allowance on
net deferred tax assets $ 377,000 $ - $ - $ 100,000 $ 277,000
========= ========= ============ ========== =========
</TABLE>
(1) Accounts written off
56
<PAGE>
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
57
<PAGE>
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 Ghahramanlou June 25, 1998
- ----------------------------- -----------------------------
Mitra Ghahramanlou
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:
58
<PAGE>
Signature and Title Date
- ------------------- ----
/s/ Kenneth L. Blum, Sr. June 25, 1998
- ------------------------------ ------------------------
Kenneth L. Blum, Sr.
Chairman of the Board
and Director (Principal
Executive Officer)
/s/ Mitra Ghahramanlou June 25, 1998
- ------------------------------ ------------------------
Mitra Ghahramanlou
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
/s/ David Schwartz June 25, 1998
- ------------------------------ ------------------------
David Schwartz
Vice Chairman of the Board
/s/ William L. Richter June 25, 1998
- ------------------------------ ------------------------
William L. Richter
Vice Chairman of the Board
/s/ Alan Aufzien June 25, 1998
- ------------------------------ ------------------------
Alan Aufzien, Director
59
<PAGE>
RENT-A-WRECK OF AMERICA, INC.
EXHIBIT INDEX
FORM 10-KSB
FOR FISCAL YEAR
ENDED MARCH 31, 1998
Incorporated
Exhibit No. Exhibit by Reference from
- ----------- ------- -----------------
3.1 Certificate of Form 10-K for the
Incorporation Fiscal year ended
March 31, 1997.
3.2 Bylaws, Form 10-K
as amended for the fiscal
year ended March 31,
1986, in which the Bylaws,
are incorporated by reference
and amendments to Bylaws
are filed therein.
4.1 Terms of $250,000 Form 10-QSB for the
Letter of Credit quarter ended
issued by the December 31, 1997.
Bank of Butterfield,
as contained in
application dated June
20, 1997, with attached
Letter of Set-Off
4.15 Amendment to Letter Filed herewith.
Of Credit terms of
$638,000 by the
Bank of Butterfield,
as contained in
application dated
June 20, 1997,
with attached
Letter of Set-Off
60
<PAGE>
4.2 Financing Statement Form 10-QSB for the
dated June 10, 1997 quarter ended
by Rent-A-Wreck June 30, 1997.
Leasing in favor
of The Chase
Manhattan Bank
4.3 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4, 1997 by June 30, 1997.
Rent-A-Wreck
Leasing in favor
of The Chase
Manhattan Bank
4.4 Financing Statement Form 10-QSB for the
dated June 10, quarter ended
1997 by Rent-A-Wreck June 30, 1997.
Operation, Inc. in
favor of The Chase
Manhattan Bank
4.5 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4, 1997 by June 30, 1997.
Rent-A-Wreck
Operation, Inc. in
favor of The Chase
Manhattan Bank
4.6 Financing Statement Form 10-QSB for the
dated June 10, 1997 quarter ended
by Rent-A-Wreck One June 30, 1997.
Way in favor of The
Chase Manhattan Bank
4.7 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4,1997 by June 30, 1997.
Rent-A-Wreck One
Way in favor of
The Chase Manhattan
Bank
61
<PAGE>
4.8 Financing Statement Form 10-QSB for the
dated June 10, 1997 quarter ended
by Bundy American June 30, 1997.
Corporation in favor
of The Chase Manhattan
Bank
4.9 General Security Form 10-QSB for the
Agreement dated June 4, quarter ended
1997 by Bundy American June 30, 1997.
Corporation in favor of
The Chase Manhattan Bank
4.10 Financing Statement Form 10-QSB for the
by Rent-A-Wreck of quarter ended
America, Inc. dated June 30, 1997.
June 10, 1997 in
favor of The Chase
Manhattan Bank
4.11 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4, 1997 by June 30, 1997.
Rent-A-Wreck
of America, Inc.
in favor of The
Chase Manhattan Bank
4.12 Financing Statement Form 10-QSB for the
dated June 10, 1997 quarter ended
by URM Corporation in June 30, 1997.
favor of The Chase
Manhattan Bank
4.13 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4, 1997 by June 30, 1997.
URM Corporation
in favor of The
Chase Manhattan
Bank
62
<PAGE>
4.14 Financing Statement Form 10-QSB for the
dated June 6, 1997 quarter ended
by Central Life and June 30, 1997.
Casualty Company,
Limited in favor of
The Chase Manhattan
Bank
4.15 General Security Form 10-QSB for the
Agreement dated quarter ended
June 4, 1997 by June 30, 1997.
Central Life
and Casualty
Company, Limited,
in favor of
The Chase
Manhattan Bank
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 ended 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.
63
<PAGE>
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 Form 10-K for the fiscal
Agreement with K.A.B., year ended March 31,
Inc., Related party 1997.
dated March 27, 1996
10.6 * Stock Option Grant to Form 8-K, dated June 30,
K.A.B., Inc. dated 1993 and is incorporated
June 30, 1993 by reference.
Amendment filed on Form
10-K for the fiscal
year ended March 31,
1997.
10.6.1 * Amendment to Stock Form 10-K for the fiscal
Option Grant to year ended March 31,
K.A.B., Inc. dated 1997.
July 20, 1995
10.7 * Registration Rights Form 8-K, dated June 30,
Agreement dated June 1993 and is incorporated
30, 1993, among K.A.B., by 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 ended
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 ended
March 31, 1994.
64
<PAGE>
10.10 Warrant Agreement - Form 8-K, dated June 30,
Richter & Co., Inc. 1993 and is incorporated
by reference.
10.11 Software Development Form 10-KSB for the
and Computer Usage fiscal year ended
Agreement effective March 31, 1995.
January 1, 1995 between
National Computer
Services, Inc. and
the Company.
10.12 Financial Advisory Form 10-KSB for the
Agreement between fiscal year ended
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 ended
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 ended
August 3, 1995 March 31, 1996.
10.15+ Facultative Filed herewith.
Reinsurance Agreement
dated March 1, 1997
between National
Union Fire Insurance
Company of Pittsburg,
PA. and Consolidated
American Rental
Insurance Company,
LTD.
65
<PAGE>
10.16 Standby or Performance Filed herewith.
Letter of Credit
Application and
Agreement dated June 3,
1997 between Rent-A-Wreck
Of America, Inc. and The
Chase Manhattan Bank
10.16.1 First Amendment dated Filed herewith.
June 1, 1998 to the
Standby or Performance
Letter of Credit
Application and
Agreement dated June 3,
1997 between Rent-A-Wreck
Of America, Inc. and The
Chase Manhattan Bank
21 List of Subsidiaries Filed herewith.
27.1 Financial Data Schedule Filed herewith.
27.2 Amended Financial Data
Schedule Filed herewith.
+ Confidential Treatment sought for a portion of this exhibit.
* Management contract or compensatory plan or arrangement.
66
FACULTATIVE REINSURANCE AGREEMENT
between
NATIONAL UNION FIRE INSURANCE COMPANY OF PlTTSBURGH, PA.
(hereinafter called the "Company")
and
CONSOLIDATED AMERICAN RENTAL INSURANCE COMPANY, LTD.
(hereinafter called "the Reinsurer")
WITNESSETH:
WHEREAS, the Company is willing to cede to the Reinsurer certain
insurance under the terms and conditions hereinafter set forth; and
WHEREAS, the Reinsurer is willing to reinsure such insurance on said
terms and conditions:
NOW, THEREFORE, in consideration of the premiums Schedule(s) and of the
mutual covenants and agreements herein set forth, the parties hereto hereby
covenant and agree as follows:
ARTICLE I
POLICY(IES) REINSURED:
- ----------------------
As per Schedule(s) attached hereto and made a part hereof.
[Confidential Treatment sought for Schedule I]
ARTICLE II
TERM:
- -----
This Agreement is effective at 12:01 A.M. Eastern Standard Time, the
1st day of March, 1997.
This Agreement shall continue in effect until terminated.
<PAGE>
ARTICLE III
TERRITORY:
- ----------
This Agreement shall cover Losses occurring within the territorial
limits provided by the Policies reinsured hereunder and listed in Schedule(s).
ARTICLE IV
DEFINITIONS:
- ------------
A. The term "Policies" as used in this Agreement shall mean any and all
binders, certificates, policies and contracts of insurance, accepted or
held covered provisionally or otherwise and issued to the Insured named
in Schedule(s) hereof.
B. The term "Ultimate Net Loss" as used in this Agreement shall mean the
actual Loss sustained by the Company, but salvages and all other
recoveries, including recoveries under all other reinsurance except
catastrophe excess reinsurance of the Company, shall be deducted from
such Loss to arrive at the amount of liability, if any, attached
hereunder. All salvages, recoveries, or payments recovered or received
subsequent to loss settlement hereunder, shall be applied as if
recovered or received prior to the aforesaid settlement, and all
necessary adjustments shall be made by the parties hereto. Nothing in
this clause shall be construed to mean that Losses are not recoverable
hereunder, until the Company's Ultimate Net Loss has been ascertained.
C. The term "Gross Premiums Written" as used in this Agreement shall mean
Direct Written Premiums for Policies covered hereunder, adding all
other Additional Premiums and subtracting all other Return Premiums and
cancellations; however, Direct Premiums written on installment premium
payment policies shall be deemed to be the installment due in the
period for which the account is rendered, in accordance with the
Reports and Remittances article contained in this Agreement.
D. The term "Unearned Premiums Reserve" as used in this Agreement shall
mean the premium represented by the unexpired portion of the policy in
force as of any specified date.
<PAGE>
E. The term "Losses Paid" as used in this Agreement shall mean Losses Paid
less Recoveries for Salvage and Subrogation.
F. The term "Allocated Loss Expenses" as used in this Agreement shall mean
all court costs and court expenses; pre- and postjudgment interest;
fees for service of process; attorneys' fees; cost of undercover
operative and detective services; costs of employing experts; costs for
legal transcripts; costs for copies of any public records; costs of
depositions and court-reported or recorded statements; costs and
expenses of subrogation and any similar fee, cost or expense reasonably
chargeable to the investigation, negotiation, settlement or defense of
a claim or loss or to the protection and perfection of the subrogation
rights of the Company and/or of the Client. "Allocated Loss Expenses"
shall not mean fees for attorneys who are employees of the Company or
on permanent retainer.
G. The term "Unallocated Loss Expense" as used in this Agreement shall
mean the Claims Service Fees charged hereunder as per Schedule(s)
hereof.
H. The term "AIGRM Supervision Fee" shall mean the fee for services
provided in serving as liaison between the Reinsurer and the Claims
Administrator, reviewing claims in accordance with the Claims Handling
Guidelines issued by AIG Risk Management, Inc. (AIGRM) and monitoring
and evaluating performance of the Claims Administrator, and shall be
adjusted as shown in the Schedule(s).
I. The term "Outstanding Loss Reserves" as used in this Agreement shall
mean losses reported to the Company which have been reserved but unpaid
at any specified date.
J. The term "Losses" as used in this Agreement shall mean payments to
claimants under Policies reinsured hereunder.
K. The term "Loss Escrow Fund" as used in this Agreement shall mean a
non-interest bearing escrow fund established in the amount shown in the
Schedule(s) and adjusted in accordance with Article VII.
L. The term "IBNR" (Incurred But Not Reported) as used in this Agreement
shall mean a reserve for liability for future payment on Losses which
have already occurred but have not
<PAGE>
yet been reported to the Company and shall also include expected future
development on Outstanding Loss Reserves.
M. The term "Obligations" as used in this Agreement shall mean:
(a) Losses and Allocated Loss Expenses paid by the Company but not
recovered from the Reinsurer;
(b) Outstanding Loss Reserves;
(c) Reserves for Losses Incurred But Not Reported;
(d) Reserves for Allocated Loss Expenses; and
(e) Reserves for Unearned Premium.
(f) Plus the difference between (a) through (e) above and the
amount of Security set by the Company.
N. Deductible Loss(es) as used in this Agreement shall mean those Losses
paid by the original insured under the Policy(ies) reinsured hereunder.
ARTICLE V
REINSURING CLAUSE: As per Schedule(s).
- -----------------
ARTICLE VI
PREMIUM AND COMMISSION:
- -----------------------
The Premiums due the Reinsurer for the Reinsurance hereunder shall be
calculated in accordance with the Schedule(s).
ARTICLE VII
CLAIMS:
- -------
The Reinsurer agrees to abide by the loss settlements of the Company,
it being understood, however, that when so requested, the Company will afford
the Reinsurer an opportunity to be associated with the Company, at the expense
of the Reinsurer, in the defense of any claim or suit or proceeding involving
this reinsurance, and that the Reinsurer may cooperate in every respect in the
defense or control of such claim, suit or proceeding.
<PAGE>
For the payment of Losses and Loss Expenses the Reinsurer will fund a
Loss Escrow Fund in the amount shown in the Schedule(s) or two and one half (2
1/2) months estimated Ultimate Net Loss which will be replenished by the
Reinsurer at the same time as the account current shown in Schedule(s).
The Company may deduct paid loss and loss expenses paid as provided for
in the REPORTS AND REMITTANCES ARTICLE, and the Company shall record and advise
the Reinsurer of these deductions as provided in the REPORTS AND REMITTANCES
ARTICLE. The Company may, at its option, demand prompt payment of any loss where
the Reinsurer's share exceeds the amount shown in the Schedule(s) where the
Reinsurer will promptly pay such amounts.
ARTICLE VIII
CLAIMS SERVICE FEES: Adjustable as per Schedule(s).
- -------------------
ARTICLE IX
REPORTS AND REMITTANCES:
- -----------------------
Within the time shown in the Schedule(s) while this Agreement remains
in effect, the Company shall render to the Reinsurer an account current and the
balance due shall be paid by the debtor party to the other within the time shown
in the Schedule(s) after the close of the month or as soon as reasonably
practicable thereafter.
ARTICLE X
RESERVE DEPOSIT (NON-ADMITTED REINSURER):
- -----------------------------------------
With respect to the premium derived from any jurisdiction in which an
insured risk is located and in which the Reinsurer is not admitted, the Company
shall be entitled to require from the Reinsurer any one or a combination of the
following; (1) a Letter of Credit complying with 11 NYCRR 79 (Regulation 133),
(2) A Security Trust complying with 11 NYCRR 126 (Regulation 114) and/or (3)
Cash as security for the payment of the latter's Obligations hereunder.
<PAGE>
The amount required shall initially equal the amount shown in the
Schedule(s). The amount shall be adjusted to equal the Reinsurer's Obligations.
Upon default by the Reinsurer of sums due and owing to the Company, the
Company may appropriate as much of the Letter of Credit, Security Trust and/or
Cash as necessary to eliminate the default. The Company may, however, at its
discretion, require payment of any sum in default, and it shall be no defense to
any such claim that the Company might have had recourse to the Letter of Credit,
Security Trust and/or Cash.
The Company and the Reinsurer hereby agree that the Letter of Credit,
Security Trust and/or Cash, provided pursuant to this Agreement may be drawn
upon at any time, notwithstanding any other provisions herein contained. The
Letter of Credit, Security Trust and/or Cash may be utilized by Company or any
successor by operation of law, including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Company for any of the following
reasons:
(i) To reimburse the Company for the Reinsurer's share of premiums
returned to the owners of the Policy(ies) reinsured hereunder
due to cancellations of said Policy(ies);
(ii) To reimburse the Company for the Reinsurer's share of
surrenders and benefits or losses paid by the Company under
the terms and provisions of the Policy(ies) reinsured
hereunder;
(iii) To fund an account with the Company in an amount at least
equal to the deduction, for reinsurance ceded, from the
Company's liabilities for Policy(ies) ceded hereunder. Such
amount shall include, but not be limited to, amounts for
policy reserves, reserves for claims and losses incurred
(including IBNR, Allocated Loss Expenses and Unearned
Premiums); and
(iv) To pay any other amounts due to the Company under this
Agreement.
All of the foregoing apply without diminution because of the insolvency
of the Company or the Reinsurer.
<PAGE>
ARTICLE Xl
INDEMNIFICATION AND ERRORS AND OMISSIONS:
- -----------------------------------------
Any recitals in this Agreement of the terms and provisions of the
original policy or policies are merely descriptive and the Reinsurer is
reinsuring, to the amount herein provided, the obligations of the Company under
the original policy or policies. The Company shall be the sole judge as to what
shall constitute a claim or loss covered under the Company's original policy or
policies and as to the Company's liability thereunder and as to amount or
amounts which it shall be proper for the Company to pay thereunder and the
Reinsurer shall be bound by the judgement of the Company as to the liability and
obligation of the Company under its policy or policies.
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it hereunder if
such delay, omission, or error had not been made, provided such delay, omission
or error is rectified as soon as possible.
ARTICLE XII
TAXES:
- ------
The Company will be liable for taxes (except Federal Excise Tax) on
premiums reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those reinsurers which are not
exempt from Federal Excise Tax.
The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax one percent (1%) of the subject premium shown in Schedule(s), or such
other rate that may be in effect from time to time, to the extent such premium
is subject to Federal Excise Tax.
<PAGE>
ARTICLE XIII
INSPECTION:
- -----------
The Company shall place at the disposal of the Reinsurer, and the
Reinsurer shall have the right to inspect, at all reasonable times, through its
authorized representatives, all books, records and papers of the Company in
connection with the reinsurance hereunder, or any claims in connection herewith.
ARTICLE XIV
FOLLOW THE FORTUNES CLAUSE:
- ---------------------------
The Reinsurer's liability shall attach simultaneously with that of the
Company and all reinsurance for which the Reinsurer shall be liable by virtue of
this Agreement shall be subject in all respects to the same risks, terms, rates,
conditions, interpretations, assessments, waivers, and to the same
modifications, alterations and cancellations, as the respective insurances (or
reinsurances) of the Company to which such reinsurances relate. This Agreement
shall further protect the Company in connection with any loss for which the
Company may be legally liable to pay in excess of the limit having been incurred
because of failure by it to settle within the policy limit or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action
against their Insured or in the preparation or prosecution of an appeal
consequent upon such action.
The true intent of the Agreement being that the Reinsurer shall, in
every case to which this Agreement applies and in the Proportions specified
herein, follow the fortunes of the Company.
This Article shall not apply insofar as it can be shown that the
Company has been negligent or guilty of bad faith in handling a claim which is
the subject matter of this Agreement.
<PAGE>
ARTICLE XV
INSOLVENCY:
- -----------
In the event of the insolvency of the Company, reinsurance under this
Agreement shall be payable by the Reinsurer (on the basis of the liability of
the Company under contract or contracts reinsured without diminution because of
the insolvency of the Company) to the Company or to its liquidator, receiver, or
statutory successor, except as provided by Section 4118 of the New York
Insurance Law or except:
(1) where the Agreement specifically provides another payee of
such reinsurance in the event of the insolvency of the
Company, and
(2) where the Reinsurer, with the consent of the direct insured or
insureds, has assumed such policy obligations of the Company
as direct obligations, of the Reinsurer to the payees under
such policies and in substitution for the obligations of the
Company to such payees.
It is agreed, however, that the liquidator or receiver or statutory
successor of the insolvent Company shall give written notice to the Reinsurer of
the pendency of a claim against the insolvent Company on the contract or
contracts reinsured within a reasonable time after such claim is filed in the
insolvency proceeding and that, during the pendency of such claim the Reinsurer
may investigate such claim and interpose at their own expense in the proceeding
where such claim is to be adjudicated, any defense or defenses which they may
deem available to the Company or its liquidator or receiver or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval against the insolvent Company as part of the expense
of liquidation to the extent of a proportionate share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.
ARTICLE XVI
ARBITRATION CLAUSE:
- -------------------
All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two (2) Arbitrators, one to be
chosen by each party, and in the event
<PAGE>
the Arbitrators fail to agree, to the decision of an Umpire to be chosen by the
Arbitrators. The Arbitrators and Umpire shall be executive officials of Fire and
Casualty Insurance or Reinsurance Companies. If either of the parties fails to
appoint an Arbitrator within one (1) month after being required by the other
party in writing to do so, or if the Arbitrators fail to appoint an Umpire,
within one (1) month of a request in writing by either of them to do so, such
Arbitrator or Umpire, as the case may be, shall at the request of either party
be appointed by a Justice of the Supreme Court of the State of New York.
The Arbitration proceedings shall take place in New York, New York. The
applicant shall submit its case within one (1) month after the appointment of
the Court of Arbitration, and the respondent shall submit his reply within one
(1) month after receipt of a claim. The Arbitrators and Umpire are relieved from
all Judicial formality and may abstain from following the strict rules of law.
They shall settle any dispute under this Agreement according to an equitable
rather than a strictly legal interpretation of its terms and their decision
shall be final and not subject to appeal.
Each party shall bear the expenses of its Arbitrator and shall jointly
and equally share with the other the expenses of the Umpire and of the
Arbitration.
This Article shall survive the termination of this Agreement.
ARTICLE XVII
RESERVES:
- ---------
The Reinsurer will maintain legal reserves with respect to Outstanding
Losses and Loss Expenses and Unearned Premium Reserves.
ARTICLE XVIII
TERMINATION:
- ------------
A. Neither the Company nor the Reinsurer may terminate this Agreement
while the Policy(ies) listed in the Schedule(s), Item B are in force;
however, if the policy(ies)
<PAGE>
listed in the Schedule(s), item B are in fact terminated then in that
event and that event only this Agreement may be terminated
simultaneously therewith.
B. However, the Company shall have the right to terminate this Agreement
immediately by giving the Reinsurer notice:
(1) If the performance of the whole or any part of this
Agreement be prohibited or rendered impossible de
jure or defacto in particular and without prejudice
to the generality of the preceding words in
consequence of any law or regulation which is or
shall be in force in any state or territory or if any
law or regulation shall prevent directly or
indirectly the remittance of any or all or any part
of the balance or payments due to or from the
Reinsurer.
(2) If the reinsurer at any time shall:
(a) Become insolvent, or
(b) Suffer any impairment of capital, or
(c) File a Petition in bankruptcy, or
(d) Go into liquidation or rehabilitation, or
(e) Have a receiver appointed, or
(f) Be acquired or controlled by any other
insurance company or organization.
(3) In the event of the severance or obstruction of free
and unfettered communication and/or normal commercial
and/or financial intercourse between the United
States of America and the country in which the
Reinsurer is incorporated or has its principal office
as a result of war, currency regulations, or any
circumstances arising out of political, financial or
economic emergency.
All notices of termination in accordance with any of the provisions of
this paragraph may be by Telex or Telegram and shall be deemed to be
served upon dispatch, or where communications between the parties are
interrupted, upon attempt dispatch.
<PAGE>
C. All notices of termination served in accordance with any of the
provisions of this Article shall be addressed to the party concerned at
its head office or at any other address previously designated by that
party herein.
D. In the event of this Agreement being terminated the rights and
obligations of both parties to this Agreement shall remain in full
force until the effective date of termination.
E. As respects coverage hereunder, it is understood and agreed that upon
termination of this Agreement, coverage will continue hereunder beyond
such termination date until the natural expiration date, the
cancellation date, or the date which the Company, as a matter of law,
may terminate coverage under the Policy(ies) listed in Article I
hereof.
F. Should this Agreement terminate while a loss occurrence is in progress,
the Reinsurer shall be liable to the extent of their interest, subject
to the other conditions of this contract, for all losses resulting from
such loss occurrence whether such losses arise before or after such
termination.
ARTICLE XIX
SERVICE OF SUIT:
- ----------------
It is agreed that in the event of the failure of the Reinsurer hereon
to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the
request of the Company, will submit to the jurisdiction of any court of
competent jurisdiction within the United States and will comply with all
requirements necessary to give such court jurisdiction and all matter arising
hereunder shall be determined in accordance with the law and practice of such
court.
It is further agreed that service of process in such suit may be made
upon the parties indicated in the Schedule(s) and that in any suit instituted
against any of them upon this contract, the Reinsurer will abide by the final
decision of such court or appellate court in the event of an appeal.
The Reinsurer will abide by the final decision of such court or of any
appellate court in the event of an appeal.
<PAGE>
The party(ies) listed in the Schedule(s) are authorized and directed to
accept service of process on behalf of the Reinsurer in any such suit and/or
upon the request of the Company to give a written undertaking to the Company
that they will enter a general appearance upon the Reinsurer's behalf in the
event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory, or district
of the United States which makes provisions therefor, Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement of
reinsurance, and hereby designate the above named as the person to whom the said
office is authorized to mail such process or a true copy thereof.
ARTICLE XX
FOREIGN EXCHANGE:
- -----------------
All premium and loss payments hereunder shall be in United States
Currency.
Premiums due hereunder in other than United States Currency shall be
paid by the Company in United States Dollars at the rates of exchange at which
the original accounts were settled. Failing this the rate of exchange applied
shall be that used by the Company in their own books of account or in accordance
with any subsequent adjustments thereto.
The amounts recoverable for losses in other than United Stales Currency
shall be converted into United States Dollars at the same rates of exchange as
were applied in the settlement of the original losses. Failing this the rate of
exchange applied shall be that used by the Company in their own books either at
the time of the settlement or in accordance with any subsequent adjustment
thereto.
<PAGE>
ARTICLE XXI
OFFSET CLAUSE:
- --------------
The Company and the Reinsurer shall have the right to offset any
balance(s) due from one to the other under this Agreement. The party asserting
the right of offset may exercise such right at any time whether the balance(s)
due are on account of premiums or losses or otherwise.
In the event of the insolvency of a party hereto, offsets shall only be
allowed in accordance with the provisions of Section 7427 of the Insurance Law
of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives in New York, New York this 5th
day of May, 1998.
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PA.
BY: /s/ Jeff Engelbrecht
-----------------------------------
TITLE: Attorney in Fact
--------------------------------
ADDRESS: 70 Pine Street
New York, NY 10270
and in Bermuda this 30 day of April, 1998
CONSOLIDATED AMERICAN RENTAL INSURANCE
CO., LTD.
--------------------------------------
BY: /s/ [Illegible]
-----------------------------------
TITLE: DIRECTOR
--------------------------------
ADDRESS: 40 CHURCH STREET
------------------------------
HAMILTON, BERMUDA
------------------------------
STANDBY OR PERFORMANCE LETTER OF CREDIT
APPLICATION AND AGREEMENT
This Agreement consists of three parts. The first part is an
Application for a Standby or Performance Letter of Credit in which the
Applicant(s) sets forth the terms of the Letter of Credit that it (they) has
(have) asked us to issue. The second part, which will apply in the event we
issue the Letter of Credit, sets forth the Terms and conditions that govern the
relationship between the Applicant(s) and us. Among other things, it covers the
obligation of the Applicant(s) to reimburse us, the security provide for their
obligations, that upon the occurrence of certain events the Applicant(s) will
deliver additional security for its (their) obligations and defines the rights
of, and remedies available to, us under various circumstances. The third part is
an Authorization of the Account Party, if the Account Party is not also the
Order Party, under which the Account Party agrees to be bound by this Agreement.
Part I: Application for Standby or Performance Letter of Credit
TO: THE CHASE MANHATTAN BANK, N.A.
Letter of Credit Division
4 Chase Metro Tech Center
Brooklyn, New York 11245
The undersigned hereby request(s) that you issue your irrevocable letter of
credit by:
|X| Airmail |_| Teletransmission (Specify means ________) |_| Courier Service
(if none specified, issuer may choose)
IN FAVOR OF TO BE ADVISED THROUGH: |_| Check Box if also
to be confirmed by
Advising Bank
National Union Fire Ins. Co.
- ---------------------------- -----------------------------
of Pittsburg, PA
- ---------------------------- -----------------------------
99 John Street - 10th Floor
- ---------------------------- -----------------------------
New York, NY 10270
- ---------------------------- -----------------------------
- -or-
P.O. Box 923
- ---------------------------- -----------------------------
Wall Street Station
- ---------------------------- -----------------------------
New York, NY 10268
- ---------------------------- -----------------------------
("Beneficiary")
By order of Rent-A-Wreck of America, Inc.
-----------------------------------------
("Order Party")
for account of Consolidated American Rental Insurance Co., Ltd.
------------------------------------------------------
("Account Party")
Up to an aggregate amount of $500,000 (U.S. Dollars)
--------------------------------
Available by (complete A or B, NOT both):
---
A. |_| Drafts at sight on the issuer payable at the Issuer's counters
accompanied by:
See attached.
B. |_| Tested Telex Demand to the Issuer stating:
EXPIRATION DATE:
Drafts and documents must be dated and presented to, or Tested Telex Demand
received by, the issuer not later than 5/ /98.
---------
|_| Credit to contain "Evergreen" clause with no less than 60 days'
notice of non-renewal to the Beneficiary. ------
|_| Partial drawings prohibited.
Unless otherwise stated herein, the negotiating/paying bank (if any) is
authorized to send all documents to you in one airmail or courier service, if
available.
|_| Special Instructions: Specify below. If additional space is needed,
include additional sheets. These sheets form an integral part of this
Application.
<PAGE>
Part II: Terms and Conditions
In consideration of the issuance by the Bank of the Credit as requested in the
Application, the Applicant hereby agrees with the Bank as follows:
1. Definitions. The following terms shall have the meanings set forth below:
(1) "Applicant" means each party signing the Application, whether as
Order Party or as Account Party.
(2) "Agreement" means the Application, the Terms and Conditions and the
Authorization.
(3) "Application" means Part I of this Agreement and shall also include
all subsequent written and oral requests by the Applicant for amendments to the
Credit.
(4) "Bank" means the issuer of the Credit as indicated in Part I.
(5) "Credit" means the letter of credit issued by the Bank by order of
the Applicant pursuant to the Application, as such Credit may be amended from
time to time.
(6) "Instrument" means any draft, receipt, acceptance, teletransmission
(including but not limited to telex or cable) or other written demand for
payment under the Credit.
(7) "Third Party" means any person or entity other than the Applicant
liable for the obligations of the Applicant under this Agreement.
(8) "Uniform Customs and Practice" means the Uniform Customs and
Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, or any subsequent revision thereof adhered to by
the Bank on the date the Credit is issued.
2. Reimbursement Obligation.
A. Payment. The Applicant will pay the Bank, on demand, at the Bank's
principal office, in immediately available funds, the amount required to pay
each instrument or other amount paid or to be paid under the Credit upon
documents presented in substantial compliance with the terms of the Credit. Such
payment shall be made with interest from the date of the Bank's payment of such
Instrument or other amount paid by the Bank to the date of reimbursement. Such
payments shall be made free and clear of and without deduction for any present
or future taxes, levies, imposts, deductions, charges, withholdings, and all
liabilities with respect thereto.
B. Authorization To Charge Accounts. The Applicant expressly authorizes
the Bank (but the Bank shall not be required), without demand for payment or
notice to the Applicant, which are hereby expressly waived, to charge, debit
and/or setoff against the demand deposit account referred to at the end of this
Agreement and any other account(s) maintained by the Applicant with any office
of the Bank or any subsidiary or any affiliate of the Bank (now or in the
future, whether general or special, time or demand, matured or unmatured) and to
apply immediately, any balance of deposits and any sums credited by or due or
payable from the Bank to the Applicant in such account or accounts, to the
payment of any and all of Applicant's obligations and liabilities to the Bank
hereunder, including without limitation, obligations and liabilities under
Paragraphs 2A and C and Paragraphs, 3 and 8 hereunder, all without prejudice to
the rights of the Bank against the Applicant with respect to any and all amounts
which may be or remain unpaid.
C. Foreign Currency Obligations. If the Instrument is in foreign
currency, the Applicant's payment shall be in United States currency at the
Bank's then current selling rate for cable transfers to the place of payment of
the Instrument on the date of such payment or of the Bank's settlement of its
obligation, as the Bank may require. If, for any cause, on the date of payment
or settlement, as the case may be, there is no selling rate or other rate of
exchange generally current in New York for effecting such transfers, the
Applicant will pay the Bank on demand an amount in United States currency
equivalent to the Bank's actual cost of settlement of its obligation however or
whenever the Bank shall make such settlement, with interest from the date of
settlement to the date of payment by the Applicant. The Applicant will comply
with all governmental exchange regulations now or hereafter applicable to the
Credit or Instrument or payments related thereto and will pay the Bank, on
demand, in United States currency, such amount as the Bank may have been
required to expend on account of such regulations.
3. Payment of Commissions, Expenses, Counsel Fees, Interest and Additional
Costs.
A. Commissions, Etc. The Applicant will pay the Bank, on demand, at its
principal office at 1 Chase Manhattan Plaza, New York, New York 10081, the
Bank's commission and all charges, costs and expenses paid or incurred by the
Bank in connection with the Credit, including fees and charges of counsel, and
costs allocated by the Bank's internal legal department in connection with the
preparation, performance or enforcement of this Agreement or the Credit.
Commissions payable hereunder shall be at the rate customarily charged by the
Bank at the time in like circumstances.
B. Interest. The Applicant agrees to pay interest on any amounts due
under this Agreement which are not paid when due at 3% plus that rate of
interest from time to time announced by the Bank at its principal office, as its
prime commercial lending rate, which rate shall not exceed the maximum rate
permissible under applicable law.
C. Additional Costs. The Applicant shall also pay to the Bank on demand
such amounts as the Bank in its sole discretion determines are necessary to
compensate it for any cost attributable to its issuing or having the Credit
outstanding. Such costs shall include any cost resulting from the application of
any law or regulation to the Bank regarding any reserve, assessment, capital
adequacy or similar requirement relating to letters of credit or the
reimbursement agreements with respect thereto or to similar liabilities or
assets of the Bank, whether existing at the time of issuance of the Credit or
adopted thereafter. In the case of sale of a participation permitted by
paragraph 16 hereof, all amounts payable by the Applicant under this paragraph,
shall be determined as if the Bank had not sold such participation. The
Applicant acknowledges that there may be various methods of allocating costs to
the Credit and agrees that the Bank's allocation for purposes of determining the
cost referred to above (including the cost of maintaining capital required in
connection with the Credit) shall be conclusive and binding upon the Applicant,
provided such allocation is made in good faith. The Applicant also agrees to pay
all withholding, stamp and other taxes or duties imposed by any taxing authority
on payments under the Credit and this Agreement and to indemnify the Bank
against all liabilities, costs, claims, and expenses resulting from any omission
to pay or delay in paying any such duty or tax.
4. Successors; Bank's Honoring. The Bank may honor, as complying with the terms
of the Credit and of the Application, any drawing by, or Instrument or other
document signed or issued by, a person (or a transferee of such person)
purporting to be an administrator, executor, trustee in bankruptcy, debtor in
possession, assignee for the benefit of creditors, liquidator, receiver, other
legal representative or successor by operation of law of the party authorized
under the Credit to draw under the Credit or to sign or issue such Instruments
or other documents; provided, that any such drawing, Instrument or other
document is otherwise in substantial compliance with the Credit.
<PAGE>
5. Amendment, Change, Modification, No Waiver. No amendment, change,
modification or waiver to which the Bank has consented shall be deemed to mean
that the Bank will consent or has consented to any other or subsequent request
to amend, change, modify or waive a term of the Credit. The Bank shall not be
deemed to have amended, changed or modified any term hereof or to have waived
any of its rights hereunder, unless the Bank or its authorized agent shall have
consented to such amendment, change or modification in writing or signed such
waiver.
6. U.C.P.; Agreements and Acknowledgments.
A. The Uniform Customs and Practice. The Uniform Customs and Practice
shall be binding on the Applicant and the Bank except to the extent it is
otherwise expressly agreed.
B. Other Agreements and Acknowledgments.
It is also agreed that:
(1) user(s) of the Credit shall not be deemed agents of the Bank;
(2) none of the Bank, its affiliates, subsidiaries or its
correspondents shall be responsible for, and the obligation of
the Applicant to pay the Bank under Section 2 hereof shall not
be affected by, (i) any act, error, neglect, default,
omission, insolvency or failure in business of any of its
correspondents or (ii) the form, validity, accuracy,
sufficiency, legal effect or genuineness of any Instrument or
other document presented under the Credit;
(3) any action, inaction or omission on the part of the Bank or
any of its affiliates, subsidiaries or correspondents under or
in connection with the Credit or the related Instruments,
documents or property, if in good faith, shall be binding upon
the Applicant and shall not place the Bank or any such
affiliate, subsidiary or correspondent under any liability to
the Applicant or affect in any way whatsoever the Applicant's
obligation to pay the Bank under Section 2 hereof and in no
event shall the Bank or any such affiliate, subsidiary or
correspondent be liable for any special or consequential
damages;
(4) the Applicant will promptly examine: (i) the copy of the
credit (and of any amendments thereof) sent to it by the Bank;
and (ii) all instruments and documents delivered to it from
time to time, and in the event of any claim of noncompliance
with Applicant's instructions or other irregularity, the
Applicant will immediately notify the Bank thereof in writing,
the Applicant being conclusively deemed to have waived any
such claim against the Bank and any of its affiliates,
subsidiaries and correspondents unless notice is given as
aforesaid;
(5) if the Credit states any condition (whether for information or
otherwise) without specifying the document to be presented to
determine compliance therewith, the Bank may (but shall not be
obligated to) treat such condition as not stated and disregard
it for purposes of determining compliance with the terms of
the Credit; and
(6) the Bank shall have no obligation to notify the Applicant of
discrepancies in any Instruments or other documents presented
under the Credit and any such notification or request for a
waiver of such discrepancies shall not constitute a waiver of
such discrepancies by the Bank nor an agreement to notify or
seek a waiver of any future discrepancies.
7. Instructions; No Liability. Instructions whether given orally (in person or
by telephone), in writing (by teletransmission or other means) or by electronic
means may be honored by the Bank when received from anyone purporting to be
authorized to give such instructions for the Applicant. Each oral instruction
shall be confirmed in writing by the person giving such instruction, or other
authorized officer, but the Bank's responsibility with respect to any
instruction shall not be affected by its failure to receive, or the content of,
such confirmation. The Bank shall have no responsibility to notify Applicant of
any discrepancies between Applicant's oral instructions and its written
confirmation, and in the event of any such discrepancy, the oral instruction
shall govern. The Bank shall be fully protected in, and shall incur no liability
to the Applicant for, acting upon any oral, written or electronic instructions
which the Bank in good faith believes to have been given by any authorized
person, and in no event shall the Bank be liable for special, indirect or
consequential damages. The Bank may, at its option, use any means of verifying
any instructions received by it. The Bank also may, at its option, refuse to act
on any instruction or any part thereof, without incurring any responsibility for
any loss, liability or expense arising out of such refusal.
8. Indemnification. The Applicant agrees to indemnify and hold harmless the
Bank, each affiliate and subsidiary of the Bank and the correspondents of any of
them, against any and all claims, losses, liabilities, damages, costs, penalties
and fines, including reasonable counsel fees and allocated costs of internal
counsel, howsoever arising from or in connection with the Credit, including,
without limitation, any such claim, liability, damage, cost liability or fine
arising out of any transfer, sale, delivery, surrender or endorsement of any
document at any time(s) held by the Bank or any of its affiliates or
subsidiaries, or held for the account of any of them by any correspondent of any
of them, or arising out of any action, suit or proceeding for injunctive or
other judicial or administrative relief or any other judicial or governmental
order and affecting, directly or indirectly, the Bank or such affiliate,
subsidiary or correspondent.
9. Licenses. The Applicant will procure promptly any necessary import, export or
other licenses in connection with the Credit and any property shipped
thereunder, and will comply with all foreign and domestic governmental
regulations in regard to the shipment of such property or the financing thereof
and will furnish the Bank on its demand, with evidence thereof.
10. Pledge and Assignment of Security.
A. Pledge and Grant of Security Interests. As security for the payment
or performance of (i) any and all of the Applicant's obligations and/or
liabilities to the Bank under this Agreement (including the contingent
obligation under paragraph 11 to pay or deliver to the Bank the maximum amount
available under the Credit whether or not a drawing, claim or demand for payment
has been made under the Credit) and (ii) all other obligations and/or
liabilities of the Applicant to the Bank, absolute or contingent, due or to
become due, or which are now or may at any time(s) hereafter be owing by the
Applicant to the Bank, the Applicant hereby:
(1) pledges and/or grants to the Bank a continuing lien upon and
assignment of all right, title and interest of the Applicant in and to
the balance of every deposit account, now or at any time hereafter
existing, or the Applicant with any office of the bank or any affiliate
or subsidiary thereof, wherever located, and any other claims of the
Applicant against any office of the Bank or any affiliate or subsidiary
thereof, and in and to all money, instruments, securities, documents,
chattel paper, demands, precious metals, funds, and all claims and
demands and rights and interest therein of the Applicant, and in and to
all evidences thereof, which have been or at any time shall be
delivered to or otherwise come into the possession, custody or control
of any office of the Bank or any affiliate or subsidiary thereof, or
into the possession, custody or control of any affiliate, agent or
correspondent of any such entity for any purpose, whether or not for
the express purpose of being used by any such entity as collateral
security or for safekeeping and the Bank shall be deemed to have
possession, custody or control of all such property actually in transit
to, or set apart
<PAGE>
for, it or any of its affiliates or subsidiaries (or any of their
agents, correspondents or others acting in their behalf), it being
understood that the receipt at any time by such entities (or any of
their agents, correspondents, or others acting in their behalf), of
other security of whatever nature, including cash, shall not be deemed
a waiver of any of the Bank's rights or powers hereunder. The Applicant
agrees that such affiliates or subsidiaries shall be agent(s) of the
Bank for the purpose of perfecting a security interest in any such
deposit accounts or other property; and
(2) pledges and/or grants to the Bank a security interest in any and
all property the Applicant holds as security for the obligations of any
party related to the Credit, and further, subordinates its right to
payment from such property and the proceeds thereof to the rights of
the Bank, until the bank is paid in full, and agrees that it will hold
in trust for and promptly deliver to the Bank any payment received from
such property or proceeds.
B. Additional Rights of the Bank. The Bank is authorized to take any
action necessary to protect its rights in the security provided hereunder
(whether or not a drawing, claim or demand for payment has been made under the
Credit) including but not limited to segregating all or any part of the balance
of any deposit account referred to in paragraph 10(A) or other security to be
applied to the Applicant's obligations to the Bank as provided in paragraph 11.
11. Events of Default; Obligations; Remedies. Upon the occurrence of any of the
events described in this paragraph 11 (whether or not a drawing, claim or demand
for payment has been made under the Credit) the Applicant agrees that (A) any
and all obligations and liabilities of the Applicant to the Bank, matured or
unmatured, absolute or contingent, whether now existing or hereafter incurred
(including the obligations hereunder), shall be due and payable forthwith
without notice or demand and (B) the Bank may (i) charge, debit and/or setoff
against any account of the Applicant maintained at any office of the Bank or at
any subsidiary or affiliate of the Bank (now or in the future, whether general
or special, time or demand, matured or unmatured) for the maximum amount
available under the Credit and also for any and all other obligations and
liabilities of the Applicant (and for those of each of its subsidiaries and
affiliates) to the Bank hereunder or otherwise, matured or unmatured, absolute
or contingent, whether now existing or hereafter incurred, (ii) demand that the
Applicant, and the Applicant shall upon such demand, deliver, transfer or assign
to the Bank cash or other property of a value and character satisfactory to the
Bank (together with executed financing statements in such form as the Bank may
reasonably require) as security for all such obligations and liabilities and/or
(iii) liquidate any or all of the property pledged, assigned and/or in which the
Bank has been granted a security interest, and in each case, the Bank shall hold
such amounts, proceeds and collateral as security for (or at the Bank's option,
make payment in satisfaction of) the Applicant's (and such subsidiaries' and
affiliates) obligations and liabilities, matured or unmatured, absolute or
contingent, whether now existing or hereafter incurred, hereunder or otherwise
to the Bank:
(1) if there shall occur any material adverse change in the condition
(financial or otherwise), business, operations or prospects of the
Applicant or any Third Party;
(2) if any statement made, or any information or report furnished to,
the Bank in connection with this Agreement contained any misstatement
of a material fact or omitted to state a material fact or any fact
necessary to make any statement contained therein not materially
misleading;
(3) the death or dissolution of the Applicant or any Third Party;
(4) if any obligation and/or liability of the Applicant or any Third
Party shall not be paid or performed when due, or any default or event
of default (as such is defined under any agreement for the payment of
money to which the Applicant or a Third Party is a party) remains
uncured after the cure period provided in the related agreement has
elapsed; or
(5) if the Applicant or a Third Party shall become insolvent (however
such insolvency may be evidenced or defined) or generally not be able
to pay its debts as they become due, or make a general assignment for
the benefit of creditors, or if the Applicant or a Third Party shall
suspend the transaction of its usual business or be expelled or
suspended from any exchange, or if an application is made by any
judgment creditor of the Applicant or a Third Party for an order
directing the Bank to pay over money or to deliver other property, or
if a petition in bankruptcy shall be filed by or against the Applicant
or a Third party, or if a petition shall be filed by or against the
Applicant or any proceeding shall be instituted by or against the
Applicant or a Third Party for any relief under any bankruptcy or
insolvency laws or any law relating to the relief of debtors,
readjustment or indebtedness, reorganization, composition or
extensions, or if any governmental authority, or any court at the
instance of any governmental authority, shall take possession of any
substantial part of the property of the Applicant or a Third Party or
shall assume control over the affairs or operations of the Applicant or
a Third Party, or if a receiver or custodian shall be appointed of, or
a writ or order of attachment or garnishment shall be issued or made
against, any of the property or assets of the Applicant or a Third
Party or the Applicant or a Third Party shall represent that any of the
foregoing has occurred or will occur;
(6) if a temporary restraining order, injunction (preliminary or
permanent) or any similar order is issued in connection with the Credit
or any Instrument or document relating thereto which order may apply,
directly or indirectly, to the Bank; or
(7) the Bank shall in good faith deem itself insecure at any time.
12. Continuing Rights and Obligations. The Bank's rights and liens hereunder
shall continue unimpaired, and the Applicant shall be and remain obligated in
accordance with the terms and provisions hereof, notwithstanding the release
and/or substitution of any property which may be held as security hereunder at
any time, or of any rights or interest therein or the release of any Third
Party. No delay, extension of time, renewal, compromise or other indulgence
which may occur or be granted by the Bank shall impair the Bank's rights or
liens hereunder.
13. Partnership Applicants; Multiple Applicants, Etc. If the Applicant is a
partnership, its obligation hereunder shall continue in force, and apply,
notwithstanding any change in the membership of such partnership, however
arising, or the release of any partner from liability. If more than one entity
and/or person signs this Agreement whether as Order Party or Account Party, (i)
each of them shall be jointly and severally liable hereunder and all the terms
and provisions regarding liabilities, obligations and property of such entities
and/or persons shall apply to any liabilities, obligations and property of any
and all of them and (ii) each of them hereby agrees that, without notice to or
further consent by the other, the liability of any Applicant hereunder may from
time to time, in whole or in part, be renewed, extended, modified, released or
reduced by the Bank without affecting or releasing in any way the liability of
the other Applicant. The Applicant waives any defense whatsoever which might
constitute a defense available to, or discharge of, a surety or a guarantor.
14. Jurisdiction and Venue; Service of Process; Appointment of Agent; Waiver;
Commencement of Action. The Applicant hereby consents to the nonexclusive
jurisdiction over the person of the Applicant of any court of record of the
State in which the branch of the Bank to which this Agreement is addressed is
located or of the United States District Court for the appropriate District of
such State and agrees that such court shall be a proper forum for any action or
suit brought by the Bank. Service of process in any action or suit arising out
of or in connection with this Agreement or the Credit may be made upon the
Applicant by mailing a copy of the summons to the Applicant either at the
address set forth in the Application or at the Applicant's last address
appearing in the Bank's records. In addition, if the Applicant is organized or
incorporated in a jurisdiction outside the United States of America, the
Applicant designates the Consul General or equivalent official of the country of
incorporation of the Applicant as the true and lawful agent and attorney-in-
<PAGE>
fact of the Applicant for receipt of the summons, writs and notices in
connection with any such action or suit. No litigation in respect of any matter
arising under or in connection with the Credit or this Agreement may be brought
by the Applicant against the Bank unless such litigation shall be commenced in a
court of competent jurisdiction in the City of New York, State of New York,
within one (1) year after (i) the expiration date of the Credit or (ii) the
alleged breach shall have purportedly occurred, whichever is earlier.
The Applicant also waives:
(1) the right to trial by jury in the event of any litigation to which
the Bank and the Applicant are parties in respect of any matter arising
under of in respect of the Credit or, this Agreement, whether or not
such litigation has been commenced in respect of the Credit (including,
but not limited to, this Agreement) and whether or not other persons
are also parties thereto;
(2) the right to interpose any claim, setoff, or counterclaim, of any
nature or description and any defense based upon the statute of
limitations, laches, waiver, estoppel or setoff, howsoever described.
(3) any immunity it or its property may now or hereafter have from
suit, jurisdiction attachment (whether prior to judgment or in aid or
execution), execution or other legal process;
(4) any claim against the Bank for consequential or special damages;
and
(5) notice of acceptance of this Agreement.
15. Assignment and Applicable Law. This Agreement may not be assigned by the
Applicant without the prior written consent of the Bank. The Bank may assign or
sell participations in all or any part of the Credit or this Agreement to
another entity and the Bank may disseminate credit information relating to the
Applicant in connection with any proposed participation. This Agreement and all
rights, obligations and liabilities arising hereunder shall be binding upon and
inure to the benefit of the Bank and the Applicant and their respective
successors and permitted assigns and shall be governed by, and construed in
accordance with, the internal laws of the jurisdiction in which the branch of
the Bank to which this Agreement is addressed is located, without reference to
that jurisdiction's principles of conflicts of law, and to the extent that there
is any conflict between such laws and the Uniform Customs and Practice, the
Uniform Customs and Practice shall control.
Demand Deposit A/C #__________________
THE TERMS AND CONDITIONS SET FORTH
ABOVE HAVE BEEN READ AND ARE HEREBY
ACCEPTED AND MADE APPLICABLE TO THIS
AGREEMENT AND THE CREDIT.
WE WARRANT THAT NO SHIPMENT
OR PAYMENT TO BE MADE IN
CONNECTION WITH THIS AGREEMENT Rent-A-Wreck of America, Inc.
IS IN VIOLATION OF UNITED STATES -----------------------------
TRADE, CURRENCY CONTROL OR (Order Party)
OTHER REGULATIONS. WE FURTHER 11460 Cronridge Drive, #120
WARRANT THAT THE AGREEMENT Owings Mills, MD 21116
BELOW HAS BEEN DULY AND VALIDLY -----------------------------
EXECUTED BY OR ON BEHALF OF THE (Address)
ACCOUNT PARTY.
/s/ Kenneth Blum, Jr.
-----------------------------
(Authorized Signature) (Title)
5/16/97
-----------------------------
(Date)
Craig W. Clausen
Vice-President
Middle Market Banking Group
1411 Broadway-5th Floor
New York, New York 10018
(212) 391-7157
(212) 391-7117 (Fax)
June 1, 1998
Mr. Kenneth Blum, Jr., President
Ms. Mitra Khosravi, Chief Financial Officer
Rent a Wreck of America, Inc.
11460 Cronridge Drive-Suite 120
Owings Mills, Maryland 21117
Dear Mr. Blum, Jr. and Ms. Khosravi,
The Chase Manhattan Bank ("Chase") is pleased to inform you that it has approved
your request to increase your current $500,000.000 standby letter of credit up
to but not to exceed $1,000,000.00, under the terms and conditions of the
Standby or Performance Letter of Credit Application and Agreement (the
"Agreement") dated June 3, 1997 and a First Amendment thereto (the "Amendment")
dated June 1, 1998.
The amendment increasing your existing standby letter of credit will be issued,
once a duly signed copy of the "Amendment" is received, all terms and conditions
of the "Amendment" are fulfilled, including but not limited to the receipt of
the increased standby letter of credit for $638,000.00 issued by The Bank N T of
Butterfield, LTD., in favor of Chase.
Yours truly,
Craig W. Clausen
cc: Robert A Bova
<PAGE>
FIRST AMENDMENT (the "Amendment") dated as of June 1, 1998 to
the STANDBY OR PERFORMANCE LETTER OF CREDIT APPLICATION AND AGREEMENT dated June
3, 1997 (the "AGREEMENT") between RENT-A-WRECK OF AMERICA, INC., a California
corporation (the "Applicant") and THE CHASE MANHATTAN BANK, a New York banking
corporation (the "Bank").
WHEREAS, the Applicant and the Bank are parties to the
Agreement; and
WHEREAS, the parties desire to amend the Agreement as
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein contained, the parties hereto hereby agree as follows:
1. Definitions. Except as otherwise stated, capitalized terms
defined in the Agreement and used herein without definition shall have the
respective meanings assigned to them in the Agreement.
2. Amendments to the Agreement.
(a) Section 11, Events of Default; Obligations;
Remedies is amended as follows:
(1) by deleting "$1,300,000" in Section 11(9)
and substituting therefor "$2,000,000" as
the amended Consolidated Tangible Net Worth
requirement;
(2) by adding two additional Event Of Defaults
as Section (12) and (13) which shall read:
"(12) if the Collateral Pool is less than
$1,000,000 at any fiscal quarter end.
("Collateral Pool""is defined as the sum of
(a) the stated amount of the standby letter
of credit in favor of the Bank issued by The
Bank of N T Butterfield, LTD. in the
original stated amount of $638,000 (as
amended, extended or supplemented from time
to time, the "Back Up L/C") and (b) 50% of
the Eligible Receivables of the Applicant
and all of its wholly-owned subsidiaries
("Borrowing Base"). Eligible Receivables are
those receivables where no more than 90 days
has elapsed from invoice date and are
otherwise satisfactory to the Bank.)
(13) if the Borrowing Base is less than
$362,000 at any time, provided, however,
that the Applicant shall have 5 business
days after notice by the Bank to increase
the stated amount of the Back Up L/C
<PAGE>
by the amount of such deficiency (it being
understood that if the stated amount of the
Back Up L/C is so increased, it cannot
subsequently be reduced)."
3. Representations and Warranties. To induce the Bank to enter
into this First Amendment, the Applicant hereby represents and warrants that:
(a) It has the power, authority and legal right to make and
deliver this First Amendment and to perform its obligations under the
Agreement, as modified by this First Amendment, without any notice,
consent, approval or authorization not already obtained, and it has
taken all necessary action to authorize the same.
(b) The making and delivery of this First Amendment and the
performance of the Agreement as modified by this First Amendment do not
violate any provision of its charter or by-laws or other corporate
documents or result in the breach of or constitute a default under or
require any consent under any indenture or other agreement or
instrument to which it is a party or by which it or any of its property
may be bound or affected. The Agreement as modified by this First
Amendment constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms, except as the
enforceability thereof may be limited by any applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally.
(c) No Event of Default under the Agreement has occurred and
is continuing under the Agreement as of the date of this First
Amendment and after giving effect thereto.
4. Effective Date. This First Amendment shall become effective
as of the date hereof when the Bank shall have received (a) counterparts of this
First Amendment duly executed by each of the parties hereto and (b) its
requisite administrative and legal processing fees.
5. Counterparts. This First Amendment may be signed in any
number of counterparts, each of which shall be an original and all of which
taken together shall constitute a single instrument with the same effect as if
the signatures thereto and hereto were upon the same instrument.
6. Full Force and Effect. Except as expressly amended by this
First Amendment, all of the terms and provisions of the Agreement and any other
documents executed in connection therewith, shall continue in full force and
effect, are hereby ratified and confirmed in all respects, and all parties shall
be entitled to the benefits thereof.
7. Governing Law. This First Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executive and delivered by their proper and duly authorized
officers as of the date set forth above.
RENT-A-WRECK OF AMERICA, INC. THE CHASE MANHATTAN BANK
By:/s/ Mitra GH Khosravi By:/s/ Craig Clausen
--------------------------------- -------------------------------------
Title: Chief Accounting Officer Title: Vice President
By:/s/ Lori Sheffron
---------------------------------
Title: Vice President
3
<PAGE>
L/C No.: P-384861
Global Trade Services Group AMENDMENT NO: 2
P.O. Box 44 Church Street Station
New York, NY 10008-0044
Cable Address: CHAMANBANK New York
Advising Bank APPLICANT:
************DIRECT ************ CONSOLIDATED AMERICAN RENTAL
INSURANCE CO., LTD.
11460 CRONRIDGE DRIVE, SUITE 120
OWINGS MILLS, MARYLAND 21117
Beneficiary
NATIONAL UNION FIRE INSURANCE CO.
OF PITTSBURGH, PA
70 PINE ST. 4TH FLOOR NY, NY 10270
ATTN: ART STILLWELL
IN ACCORDANCE WITH INSTRUCTIONS RECEIVED, THE ABOVE-REFERENCED LETTER OF CREDIT
HAS BEEN AMENDED AS FOLLOWS:
1 - LETTER OF CREDIT AMOUNT IS INCREASED BY USD 500,000.00 (FIVE
HUNDRED THOUSAND AND 00/100 UNITED STATES DOLLARS).
THE AGGREGATE AMOUNT AVAILABLE UNDER THIS LETTER OF CREDIT
SHALL NOT EXCEED USD 1,000,000.00.
ALL OTHER TERMS AND CONDITIONS OF THE CREDIT REMAIN UNCHANGED.
P-384861- -009-A1-01- /S/ ELSIE VEGA
----------------------------------
AUTHORIZED SIGNATURE
ELSIE VEGA
<PAGE>
BANK OF N.T. BUTTERFIELD & SON LTD
OUTGOING
WIRE MESSAGE
TO: CHASE MANHATTAN BANK, N.A.
NEW YORK
ATTENTION: STANDBY LETTER OF CREDIT DEPT.
KINDLY ADVISE THE FOLLOWING AMENDMENT WITHOUT ADDING YOUR ENGAGEMENT TO YOUR:-
CHASE MANHATTAN BANK
380 MADISON AVENUE
GROUND FLOOR
NEW YORK, N.Y. 10017
ATTN: CRAIG CLAUSEN
YOUR REFERENCE: P386812
OUR REFERENCE: IRREVOCABLE LETTER OF CREDIT NO. G13163
WE HEREBY AMEND OUR IRREVOCABLE LETTER OF CREDIT NO. G13163 AS FOLLOWS:-
LETTER OF CREDIT IS INCREASED BY USD388,000.00 UP TO A MAXIMUM LIABILITY OF
USD638,000.00 (SIX HUNDRED AND THIRTY EIGHT THOUSAND UNITED STATES DOLLARS)
ALL OTHER TERMS AND CONDITIONS REMAIN THE SAME.
THESE ARE THE OPERATIVE INSTRUCTIONS AS PER I.C.C. PUBLICATION NO. 500.
KINDLY ADVISE BENEFICIARY URGENTLY ATTN: CRAIG W. CLAUSEN
REGARDS,
SABRINA CHARLTON
LETTERS OF CREDIT DEPT.
# 13163
CUSTOMER CONSOLIDATED AMERICAN RENTAL INS. CO. 06/01/98
<PAGE>
The Chase Manhattan Bank
Chase Corporate
Resolutions
CORPORATE RESOLUTIONS
I, the undersigned Secretary, hereby certify to The Chase Manhattan Bank, that
at a meeting of the Board of Directors of Rent A Wreck of America, Inc.
("Corporation") a corporation organized and existing under the laws of
California duly called and duly held on the 3 day of June, 1998, the following
Resolutions were duly adopted, and that the said Resolutions have been entered
upon the regular minute books of the Corporation, are in accordance with the
By-Laws and are now in full force and effect.
RESOLVED:
1. The Officers of Corporation, or any one or more of them, are hereby
authorized to open a bank account or accounts from time to time with
The Chase Manhattan Bank and its subsidiaries and affiliates (each
being hereinafter referred to as "Bank") for and in the name of
Corporation with such title or titles as he or they may designate.
2. The Mitro GS Khosrav, (CAO), Lori Shaffron (VP)
of Corporation, signing Mitro GS Khosrav, Lori Shaffron (anything
more than $500.00 (two).
and their successors ("Authorized Person(s)") are hereby authorized to
sign, by hand or by facsimile (including, but not limited to, computer
generated) signature(s), checks, drafts, acceptances and other
instruments (hereinafter each collectively referred to as "Item(s)").
Notwithstanding the above, any Authorized Person is authorized singly
to: (1) initiate Automated Clearing House ("ACH") debits without a
signature; (2) initiate payments by use of Depository Transfer Checks
("DTC") without a signature other than the name of Corporation printed
on the DTC; or (3) give instructions, by means other than the signing
of an Item, with respect to any account transaction, including, but not
limited to, the payment, transfer or withdrawal of funds by wire,
computer or other electronic means, or otherwise, or of money, credits,
items or property at any time held by Bank for account of Corporation
("Instructions").
3. Bank is hereby authorized to honor and pay Items, whether signed by
hand or by facsimile (including, but not limited to, computer
generated) signature(s). In the case of facsimile signatures, Bank is
authorized to pay any Item if the signature, regardless of how or by
whom affixed, and whether or not the form of signature used on such
Item was actually prepared by or for Corporation, resembles the
specimens filed with Bank by Corporation. Bank is further authorized to
honor and pay DTCs, ACHs, Instructions, and other orders given singly
by any Authorized Person, including such as may bring about or increase
an overdraft and such as may be payable to or for the benefit of any
Authorized Person or other Officer or employee individually, without
inquiry as to the circumstances of the issuance or the disposition of
the proceeds thereof and without limit as to amount.
4. Bank is hereby authorized to accept for deposit, for credit, or for
collection, or otherwise, Items endorsed by any person or by stamp or
other impression in the name of Corporation without inquiry as to the
circumstances of the endorsement or any lack of endorsement or any lack
or the disposition of the proceeds.
5. Any one of the Authorized Person(s) of Corporation is hereby authorized
to secure from Bank one or more Chase Business Banking Card(s) (the
"Card(s)") on behalf of Corporation which may be used by any cardholder
named by such Authorized Person(s) to initiate electronic fund
transactions as described in the Chase Business Banking Card Agreement
(the "Agreement") with respect to any and all such accounts of
Corporation as Corporation or such Authorized Person(s) may designate,
including without limitation, transfers from business credit line
accounts. Such Authorized Person(s) be, and each of them hereby is,
further authorized to execute and deliver in the name and on behalf of
Corporation an Agreement and supporting documentation governing the
issuance and use of such Cards with such changes, if any, as the
Authorized Person(s) executing the same shall approve, and to otherwise
conduct any business whatsoever relative to the account(s) and Cards as
may be necessary or advisable in order to carry out the full intent and
purposes of said Agreement and of these resolutions.
-----------------------------------------------------------------------
(Indicate account numbers to be accessed by Card)
Page 1 of 3
<PAGE>
6. The N/A
of Corporation, and each of them, and their successors in office, and
any other person hereafter authorized on behalf of Corporation to
possess a Card ACTING ALONE, may exercise all of the rights and
privileges of Corporation with regard to any account linked to the
Card.
7. The Ken Blum, Jr. (President), Mitro GS Khosrav (CAO)
of Corporation, signing singly
are hereby authorized to effect loans and advances and obtain credit at
any time for Corporation from Bank (and guarantee on behalf of
Corporation the obligations of others to Bank), secured or unsecured,
and for such loans and advances and credit and guarantees to make,
execute and deliver promissory notes and other written obligations or
evidence of indebtedness of Corporation, applications for letters of
credit, instruments of guarantee and indemnity and any agreements or
undertakings, general or specific, with respect to any of the
foregoing, and as security for the payment of loans, advances,
indebtedness, guarantees and liabilities of, or credit given to,
Corporation or others to pledge, hypothecate, mortgage, assign,
transfer, grant liens and security interests in, give rights with
respect to, endorse and deliver property of any description, real or
personal, and any interest therein and evidence of any thereof at any
time held by Corporation, and to execute mortgages, deeds of trust,
security agreements, instruments of transfer, assignment or pledge,
powers of attorney and other agreements or instruments which may be
necessary or desirable in connection therewith; and also to sell to, or
discount with Bank, commercial paper, bills receivable, accounts
receivable, stocks, bonds or any other securities or property at any
time held by Corporation, and to that end to endorse, assign, transfer
and deliver the same; to execute and deliver instruments or agreements
of subordination and assignment satisfactory to Bank and also to give
any orders or consents for the delivery, sale, exchange or other
disposition of any property or interest therein or evidence thereof
belonging to Corporation and at any time in hands of Bank, whether as
collateral or otherwise; and to execute and deliver such other
agreements, instruments and documents and to do such other acts and
things as may be necessary or desirable or required by Bank in
connection with any of the foregoing and Bank is hereby authorized to
honor, accept and execute any of the transactions described above.
8. All loans, discounts and advances heretofore obtained on behalf of
Corporation and all notes and other obligations or evidences thereof of
Corporation held by Bank are hereby approved, ratified, and confirmed.
9. Corporation does hereby give to Bank a continuing lien for the amount
of any and all liabilities and obligations of Corporation to Bank and
claims of every nature and description of Bank against Corporation,
whether now existing or hereafter incurred, originally contracted with
Bank and/or with another or others and now or hereafter owing to or
acquired in any manner by Bank, whether contracted by Corporation alone
or jointly and/or severally with another or others, absolute or
contingent, secured or unsecured, matured or unmatured upon any and all
moneys, securities and any and all other property of Corporation and
the proceeds thereof, now of hereafter actually or constructively held
or received by or in transit in any manner to or from Bank, its
correspondents or agents from or for Corporation, whether for
safekeeping, custody, pledge, transmission, collection or otherwise
coming into the possession of Bank in any way.
10. In case of conflicting claims or disputes, or doubt on Bank's part as
to the validity, extent, modification, revocation or exercise of any of
the authorities herein contained Bank may but need not recognize nor
give any effect to any notice from any Officer, or from any other
person, purporting to cancel, restrict or change any of said
authorities, or the exercise thereof, unless Bank is required to do so
by the judgment, decree or order of a court having jurisdiction of the
subject matter and of the parties to such conflicting claims or
disputes.
11. Corporation agrees to be bound by the Terms and Conditions for Business
Accounts and Services, currently in effect and as amended hereafter, as
well as any signature card, deposit ticket, checkbook, passbook,
statement of account, receipt instrument, document or other agreements,
such as but not limited to, funds transfer agreements, delivered or
made available to Corporation from Bank and by all notices posted at
the office of Bank at which the account of Corporation is maintained,
in each case with the same effect as if each and every term thereof
were set forth in full herein and made a part hereof.
12. The Officers of Corporation or any one or more of them are hereby
authorized to act for Corporation in all other matters and transactions
relating to any of its business with Bank including, but not limited
to, the execution and delivery of any agreements or contracts necessary
to effect the foregoing Resolutions.
Page 1 of 2
<PAGE>
13. Bank is hereby released from any liability and shall be indemnified
against any loss, liability or expense arising from honoring any of
these Resolutions.
14. Subject to paragraph 10 above, each of the foregoing Resolutions and
the authority thereby conferred shall remain in full force and effect
until written notice of revocation or modification by presentation of
new Corporate Resolutions and signature cards shall be received by
Bank; provided that such notice shall not be effective with respect to
any revocation or modification of said authorities until Bank shall
have had a reasonable opportunity to act thereon following receipt of
such notice or with respect to any checks or other instruments for the
payment of money or the withdrawal of funds dated on or prior to the
date of such notice, but presented to Bank after the receipt of such
notice. The Secretary or any Assistant Secretary or any other Officer
of Corporation is hereby authorized and directed to certify, under the
seal of Corporation or not, but with like effect in the latter case, to
Bank the foregoing Resolutions, the names of the Officers and other
representatives of Corporation and any changes from time to time in the
said Officers and representatives and specimens of their respective
signatures. Bank may conclusively assume that persons at any time
certified to it to be Officers or others representatives of Corporation
continue as such until receipt by Bank of written notice to the
contrary.
I FURTHER CERTIFY that the persons herein designated as Officers of Corporation
have been duly elected to and now hold the offices in Corporation set opposite
their respective names and that the following are the authentic, official
signatures of the said respective Officers and of the named signatories who are
not Corporate Officers, to wit:
<TABLE>
<CAPTION>
Name (Typewritten or Printed) Office Signatures
- ----------------------------- ------ ----------
<S> <C> <C> <C>
Ken Blum, Jr. President /s/ Ken Blum, Jr. cac
- ----------------------------- --------------------------------------
Lori Shaffron Vice-President /s/ Lori Shaffron cac
- ----------------------------- --------------------------------------
Ken Blum, Jr. Secretary /s/ Ken Blum, Jr. cac
- ----------------------------- --------------------------------------
Treasurer
- ----------------------------- --------------------------------------
Mitro GS Khosrav CAO /s/ Mitro GS Khosrav cac
- ----------------------------- --------------------------------------
</TABLE>
IN WITNESS WHEREOF, I have hereunto set my hand as Secretary and affixed the
seal of the said Corporation this 2 day of June, 1998,
<TABLE>
<S> <C>
*Attest (Second Officer) /s/ Ken Blum, Jr. cac
--------------------------------------
Secretary
</TABLE>
Mitro GS Khosrav cac
- -----------------------------
Signature
CAO
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Title
AFFIX
(CORPORATE SEAL)
HERE
*Note: In case the Secretary is authorized to sign by the above
Resolutions, this certificate should be attested by a second Officer
of Corporation.
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 LEASING, INC. Maryland
4. U R M CORPORATION California
5. RENT-A-WRECK/URM, INC. Maryland
6. CONSOLIDATED AMERICAN RENTAL INSURANCE Bermuda
COMPANY, LTD
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,609,636
<SECURITIES> 0
<RECEIVABLES> 1,940,009
<ALLOWANCES> 682,631
<INVENTORY> 0
<CURRENT-ASSETS> 3,162,662
<PP&E> 549,423
<DEPRECIATION> 265,476
<TOTAL-ASSETS> 3,664,112
<CURRENT-LIABILITIES> 1,635,728
<BONDS> 0
41,896
13,660
<COMMON> 0
<OTHER-SE> 1,972,828
<TOTAL-LIABILITY-AND-EQUITY> 3,664,112
<SALES> 0
<TOTAL-REVENUES> 4,676,645
<CGS> 0
<TOTAL-COSTS> 2,091,315
<OTHER-EXPENSES> 1,829,737
<LOSS-PROVISION> 61,508
<INTEREST-EXPENSE> 22,692
<INCOME-PRETAX> 756,432
<INCOME-TAX> 208,528
<INCOME-CONTINUING> 547,904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 547,904
<EPS-PRIMARY> .10 <F1>
<EPS-DILUTED> .09
<FN>
Represents Basic Earnings Per Share in accordance with Statement of
Financial Accounting Standards 128
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RENT-A-WRECK
0F AMERICA, INC.'S FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FROM 10-KSB.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<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> .10 <F1>
<EPS-DILUTED> .09
<FN>
Represents Basic Earnings Per Share in accordance with Statement of
Financial Accounting Standards 128
</FN>
</TABLE>
