U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-14819
RENT-A-WRECK OF AMERICA, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its Charter)
Delaware 95-3926056
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11460 Cronridge Drive, Suite 120, Owings Mills, Md 21117
- -------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (410) 581-5755
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,098,792 shares as of
October 15, 1998.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and
September 30, 1998 (unaudited) 2-3
Consolidated Statements of Earnings for
the Three and Six Months ended
September 30, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Six Months ended September 30,
1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations 8-11
PART II. OTHER INFORMATION
Item 1. Legal proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
1998 1998
--------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ..................... $ 1,215,615 $ 1,035,871
Restricted Cash ............................... 394,021 786,583
Accounts Receivable, net of allowance for
doubtful accounts of $682,631 and $741,564
at March 31, 1998 and September 30, 1998,
respectively:
Continuing License Fees and
Advertising Fees ......................... 302,367 402,814
Current Portion of Notes Receivable ........ 342,765 453,251
Current Portion of Direct Financing
Leases ................................... 37,653 20,582
Insurance Premiums Receivable .............. 560,219 33,360
Other ...................................... 176,166 182,511
Prepaid Expenses .............................. 133,856 154,865
----------- -----------
TOTAL CURRENT ASSETS ....................... 3,162,662 3,069,837
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture ..................................... 71,655 84,884
Computer Hardware and Software ................ 314,657 346,058
Machinery and Equipment ....................... 101,868 103,748
Leasehold Improvements ........................ 37,896 37,896
Vehicles ...................................... 23,347 97,745
----------- -----------
549,423 670,331
Less: Accumulated Depreciation and
Amortization ............................ (265,476) (323,117)
----------- -----------
NET PROPERTY AND EQUIPMENT ..................... 283,947 347,214
----------- -----------
OTHER ASSETS:
Trademarks and other Intangible Assets, net
of accumulated amortization of $105,951
and $116,004 at March 31, 1998 and
September 30, 1998, respectively ............ 203,129 199,523
Long-term Portion of Notes and Direct
Financing Lease Receivables ................. 14,374 14,624
----------- -----------
217,503 214,147
----------- -----------
TOTAL ASSETS ............................... $ 3,664,112 $ 3,631,198
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, September 30,
1998 1998
--------- -------------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses .............. $ 873,690 $ 800,496
Dividends Payable .................................. 27,320 27,320
Insurance Premiums Payable ......................... 488,397 235,852
Insurance Fees, Claims, and Loss Reserves .......... 244,815 245,630
Other .............................................. 1,506 1,506
---------- ----------
TOTAL CURRENT LIABILITIES ........................ 1,635,728 1,310,804
---------- ----------
TOTAL LIABILITIES ................................ 1,635,728 1,310,804
---------- ----------
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 at
March 31, 1998 and September 30, 1998
(aggregate liquidation preference $1,092,800
at March 31, 1998 and September 30, 1998) ........ 13,660 13,660
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
4,189,692 shares at March 31, 1998 and
4,098,792 shares at September 30, 1998 ........... 41,896 40,988
Additional Paid-In Capital ......................... 2,900,382 2,790,730
Accumulated Deficit ................................ (927,554) (524,984)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ....................... 2,028,384 2,320,394
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ......................................... $3,664,112 $3,631,198
========== ==========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Six Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
---- ---- ---- ----
REVENUES:
Initial License Fees ........... $ 125,750 $ 367,051 $ 396,250 $ 679,051
Advertising Fees ............... 214,914 259,285 391,759 450,740
Continuing License Fees ........ 753,276 791,488 1,302,001 1,374,066
Insurance premiums ............. 148,436 200,974 236,003 363,017
Vehicle Rental Operations ...... 5,481 4,815 8,209 8,290
Direct Financing Leases to
Franchisees ................... 1,700 525 2,075 525
Other .......................... 32,901 42,126 73,492 76,184
---------- ---------- ---------- ----------
1,282,458 1,666,264 2,409,789 2,951,873
---------- ---------- ---------- ----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits ............ 195,678 220,806 390,893 424,993
Sales and Marketing Expenses ... 92,064 147,754 278,209 368,961
Advertising and Promotion ...... 314,813 410,684 571,043 644,478
Underwriting Expenses .......... 121,535 152,986 182,634 290,046
General and Administrative
Expenses ...................... 256,004 209,520 487,059 454,976
Depreciation & Amortization .... 30,252 36,115 60,796 70,134
---------- ---------- ---------- ----------
1,010,346 1,177,865 1,970,634 2,253,588
---------- ---------- ---------- ----------
OPERATING INCOME ............... 272,112 488,399 439,155 698,285
INTEREST INCOME, NET ............ 14,476 15,909 32,567 32,029
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAX EXPENSE................. 286,588 504,308 471,722 730,314
---------- ---------- ---------- ----------
INCOME TAX EXPENSE .............. 94,603 169,460 147,103 228,802
---------- ---------- ---------- ----------
NET INCOME ................... $ 191,985 $ 334,848 $ 324,619 $ 501,512
DIVIDENDS ON CONVERTIBLE
CUMULATIVE PREFERRED STOCK ..... 27,733 27,320 56,378 54,640
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ... $ 164,252 $ 307,528 $ 268,241 $ 446,872
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic .......................... $ .04 $ .08 $ .06 $ .11
---------- ---------- ---------- ----------
Weighted average common shares .. 4,291,859 4,097,596 4,291,859 4,097,596
========== ========== ========== ==========
Diluted ........................ $ .03 $ .06 $ .05 $ .09
---------- ---------- ---------- ----------
Weighted average common shares
plus options and warrants ...... 6,123,714 5,505,006 6,123,714 5,505,006
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
------------------------------
1997 1998
---- ----
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income ................................... $ 324,619 $ 501,512
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .............. 60,796 70,134
Gain on disposal of property and
equipment................................. (4,011) (390)
Provision for doubtful accounts ............ (23,390) 58,933
Changes in assets and liabilities:
Accounts and notes receivable .............. 39,644 267,469
Prepaid expenses ........................... (106,958) (21,009)
Accounts payable and accrued
expenses ................................. 41,558 (73,194)
Insurance fees, claims, and
loss reserves ............................ 309,079 815
---------- ----------
Net cash provided by operating activities .. 641,337 804,270
---------- ----------
Cash flows from investing activities:
Increase in restricted cash .................. (65,067) (392,562)
Proceeds from sale of property and equipment . 29,160 34,550
Acquisition of property and equipment ........ (42,032) (157,507)
Additions to trademarks and other ............ (442) (6,447)
---------- ----------
Net cash used in investing activities ...... (78,381) (521,966)
---------- ----------
Cash flow from financing activities:
Decrease in insurance premiums payable ....... (47,464) (252,545)
Issuance of common stock ..................... 25,000 16,000
Repayments of long-term debt ................. (38,667) --
Retirement of common stock ................... (7,787) (126,561)
Preferred dividends paid ..................... (98,554) (98,942)
---------- ----------
Net cash used in financing activities ...... (167,472) (462,048)
---------- ----------
Net increase (decrease) in cash and
cash equivalents ......................... 395,484 (179,744)
Cash and cash equivalents at beginning
of period ................................... 858,426 1,215,615
---------- ----------
Cash and cash equivalents at end of period .... $1,253,910 $1,035,871
========== ==========
Supplemental disclosure of cash flow
information:
Interest paid ............................... $ 11,262 11,308
Taxes paid .................................. $ 70,991 $ 309,282
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated balance sheet as of September 30, 1998, the
consolidated statements of earnings for the three and six-month periods ended
September 30, 1997 and 1998 and the consolidated statements of cash flows for
the six-month periods ended September 30, 1997 and 1998 have been prepared by
the Company without audit. In the opinion of management, all adjustments which
are necessary to present a fair statement of the results of operations for the
interim periods have been made, and all such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's March 31, 1998 annual report on Form 10-KSB. The
results of operations for the interim periods are not necessarily indicative of
the results for a full year.
2. PREFERRED STOCK
As of March 31, 1998, preferred dividend arrearages were $221,511. The
Company paid $44,302 of these arrearages during the quarter ended June 30, 1998.
A quarterly preferred dividend of $27,320 was declared for the first quarter
ended June 30, 1998 and it was paid on August 6, 1998. For the quarter ended
September 30, 1998, the Company declared preferred dividends totaling $27,320
which are expected to be paid during the third quarter of the Company's fiscal
year. As of September 30, 1998, preferred dividend arrearages were $177,209.
6
<PAGE>
3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators utilized in the
computation of basic and diluted earnings per share for the three-month and
six-month periods ended September 30, 1997 and 1998 is as follows:
Three Months Six Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
---- ---- ---- ----
BASIC EPS COMPUTATION
Numerator:
Net income applicable to
common and common
equivalent shares .... $ 164,252 $ 307,528 $ 268,241 $ 446,872
Denominator:
Weighted average common
shares ................ 4,291,859 4,097,596 4,291,859 4,097,596
---------- ---------- ---------- ----------
Basic EPS ............... $ .04 $ .08 $ .06 $ .11
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to
common and common
equivalent shares .... $ 164,252 $ 307,528 $ 268,241 $ 446,872
Dividends on convertible
preferred stock ....... 27,733 27,320 56,378 54,640
---------- ---------- ---------- ----------
191,985 334,848 324,619 501,512
---------- ---------- ---------- ----------
Denominator
Weighted average common
shares ................ 4,291,859 4,097,596 4,291,859 4,097,596
Convertible preferred
stock ................. 1,386,625 1,366,000 1,386,625 1,366,000
Weighted average options
and warrants .......... 445,230 41,410 445,230 41,410
---------- ---------- ---------- ----------
6,123,714 5,505,006 6,123,714 5,505,006
---------- ---------- ---------- ----------
Diluted EPS ............. $ .03 .06 $ .05 .09
========== ========== ========== ==========
4.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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
SEPTEMBER 30, 1997
Revenue from franchising operations which includes initial license
fees, continuing license fees, advertising fees and direct financing leases
increased by $322,709 (29%). Initial license fees increased by $241,301 (192%)
due to the addition of new franchises. Continuing license fees increased by
$38,212 (5%) and advertising fees increased by $44,371 (21%). These increases
resulted primarily from the fleet growth at existing franchises, the addition of
new franchises and the Company's dedication of additional resources to the
collection effort. Revenues from insurance premiums increased by $60,538 (43%)
due to higher participation by the Company's franchisees in the CAR Insurance
program that started in March 1997, partially offset by a $13,303 (100%)
reduction in the physical damage insurance program ("CLC") due to its
termination and replacement by CAR Insurance.
Total operating expenses increased by $167,519 (17%) in this period
compared to the same three-month period in the prior year. Salary expense
increased by $25,128 (13%) primarily as a result of hiring two additional
employees in order to assist in managing the growth of the Company. Sales and
marketing expenses increased by $55,690 (60%) due to the larger amount of
franchise sales in this period compared to the same period in the prior year and
the repurchase of a territory from an existing franchisee which was resold by
the Company at a profit. Advertising and promotion expenses increased by $95,871
(30%), which resulted primarily from an increase in national advertising expense
to promote the Company and the amounts spent on the Enterprise Rent-A-Car
Company ("Enterprise") lawsuit concerning limits on the use of certain
advertising. Insurance underwriting expenses increased by $31,451 (26%) due to
an increase in paid losses and loss reserves for future claims in connection
with higher participation of the Company's franchisees in its CAR Insurance
program. General and administrative expenses decreased by $46,484 (18%), which
resulted primarily from a reduction in legal fees.
Depreciation and amortization expense increased by $5,863 (19%) in this
period compared to the same period in the prior year. This increase was
primarily due to the additional investment in computer software and hardware and
the purchase of two additional vehicles.
Net interest income increased $1,433 (10%). This increase was primarily
due to interest earned on the cash reserves which are held in interest bearing
accounts.
The Company realized operating income of $488,399, before taxes and
interest, for the three-month period ended September 30, 1998 compared to
operating income of $272,112 for the same period in the prior year, reflecting
an increase of $216,287 (79%). This increase resulted primarily from the
increase in initial license fees, continuing license fees and insurance premiums
due to the addition of new franchises and the Company's collection efforts.
Income tax expense for the three-month period ended September 30, 1998
increased by $74,857 (79%) compared to the three-month period ended September
30, 1997 due to higher pre-tax earnings.
8
<PAGE>
YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR
Net revenues increased by $542,084 (22%) for the six-month period ended
September 30, 1998 as compared to the same period in the prior year. This
increase occurred due to a $282,801 (71%) increase in initial license fees, a
$72,065 (5%) increase in continuing license fees, a $58,981 (15%)increase in
advertising fees, and a $127,014 (54%) increase in premiums in connection with
the new reinsurance program. These increases occurred for the same reasons
indicated above. The direct financing leases to franchisees decreased by 75% in
the current six-month period compared to the same period in the prior year. This
decrease was due to fewer franchisees electing to participate in the Company's
direct financing leasing program primarily because of increased attractiveness
of competitive programs.
Total operating expenses increased by $282,954 (14%) in this period
compared to the same period in the prior year. Salary expense increased by
$34,100 (9%) primarily as a result of additional employees in response to the
growth of the Company. Sales and marketing expenses increased by $90,752 (33%),
which resulted primarily from a larger amount of franchise sales made in the
current six-month period compared to the same period in the prior year and the
repurchase of a territory from an existing franchisee which was resold by the
Company at a profit. Advertising and promotion expenses increased by $73,435
(13%), which resulted primarily from an increase in national advertising expense
to promote the Company and the costs spent on the Enterprise lawsuit concerning
limits on the use of certain advertising. Underwriting expenses increased by
$107,412 (59%) due to an increase in paid losses and loss reserves for future
claims in connection with higher participation by the Company's franchisees.
General and administrative expenses deceased by $32,083 (6%), which resulted
primarily from a reduction in legal fees.
Depreciation and amortization expense increased by $9,338 (15%) for the
six-month period ended September 30, 1998 as compared to the same period in the
prior year. This increase was primarily due to the additional investment in
computer software and hardware and due to the purchase of two additional
vehicles.
The Company realized operating income of $698,285, before taxes and
interest, for the six-month period ended September 30, 1998 as compared to
operating income of $439,155 for 1997, reflecting an increase of $259,130. This
increase resulted primarily from the increase in initial license fees,
continuing license fees and insurance premiums.
Income tax expense for the six-month period ended September 30, 1998
increased by $81,699 (56%) compared to the six-month period ended September 30,
1997 due to higher pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $1,759,033
compared to $1,526,934 at March 31, 1998. This increase of $232,099 resulted
primarily from the net profit earned during the six-month period ended September
30, 1998.
The Company has a $1,000,000 letter of credit from The Chase Manhattan
Bank ("Chase") in connection with the Company's CAR Insurance subsidiary. This
letter of credit is part of the reinsurance agreement with American
International Group ("AIG") to secure payment of claims. If funds were drawn
against the letter of credit due to a default, the borrowings would bear
interest at 3% plus Chase's prime commercial lending rate (which prime rate was
8.25% on October 15, 1998). For the quarter ended September 30, 1998, AIG has
not drawn any funds from the letter of credit. This letter of credit is secured
by all of the Company's assets.
9
<PAGE>
Furniture, equipment and leasehold improvements increased by $46,510
(9%) from March 31, 1998 to September 30, 1998. This increase occurred primarily
due to additional investment in computer software and hardware. Vehicles
increased by $74,398 (319%) from March 31, 1998 to September 30, 1998 due to the
purchase of a vehicle for the one-way program and a vehicle for the Company.
Cash provided by operations was $804,270, resulting primarily from net
income before depreciation plus the decrease in accounts and notes receivable,
increase in insurance fees, claims and loss reserves, offset by the increase in
the Company's prepaid expenses, decrease in accounts payable and accrued
expenses. Accounts and notes receivable decreased primarily from funds received
from AIG in connection with the reinsurance program. Prepaid expenses increased
primarily due to the purchase of additional promotional items. Accounts payable
and accrued expenses decreased primarily from income taxes paid for the year
ended March 31, 1998. Cash used in investing activities of $521,966 related
primarily to the acquisition of computer software and hardware, two vehicles and
the annual costs associated with renewing trademarks. Cash used in financing
activities during the same period was $462,048, resulting from a decrease in
insurance premiums payable and the payment of preferred dividends and buyback of
common stock offset by the issuance of common stock in connection with warrants
which were exercised.
In June 1995 and April 1996, the Company approved the repurchase of up
to a total of 500,000 shares of the Company's outstanding common or preferred
stock. 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. For the six months ended September 30, 1998, the Company repurchased and
retired 120,900 shares of its common stock. As of September 30, 1998, the
Company has repurchased and retired a total of 599,000 shares under this
program. A total of 401,000 shares is still available for repurchase under this
1998 repurchase program.
The Company believes it has sufficient working capital to support its
business plan through fiscal 1999.
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company.
The statements regarding anticipated future performance of the Company
contained in this report are forward-looking statements which are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties that
could cause the Company's actual results to differ materially from the
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to, the Company's limited experience in
the reinsurance business and the potential for negative claims experience, the
effects of government regulation of the Company's franchise and insurance
programs including maintaining properly registered franchise documents and
making any required alterations in the Company's franchise program to comply
with changes in the laws, competitive pressures from other motor vehicle rental
companies which have greater marketing and financial resources than the Company,
protection of the Company's trademarks, and the dependence on the Company's
relationships with its franchisees. These risks and uncertainties are more fully
described under the caption, "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Important Factors" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998.
All forward-looking statements should be considered in light of these risks and
uncertainties.
YEAR 2000 ISSUE
The Year 2000 issue is a result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with embedded technology that are time
sensitive may recognize the date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions or engage in ordinary business activities.
10
<PAGE>
The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to the
year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology systems, including accounting, data processing, telephone and PBX
systems as well as alarm systems, fax machines and other miscellaneous systems.
Both information technology and non-information technology systems may contain
embedded technology which complicates the year 2000 identification, assessment,
remediation and testing efforts. Based upon its identification and assessment
efforts to date, the Company believes that its computer equipment and software
is generally Year 2000 compliant.
Using both internal and external resources to identify the needed Year
2000 remediation, the Company currently believes that its Year 2000
identification, assessment, remediation and testing efforts which began
approximately six months ago are completed and any additional equipment
purchased hereafter will be Year 2000 compliant. Consequently, and based upon
independent experts' review, the Company believes that it is Year 2000
compliant.
Most of the information the Company receives in the ordinary course is
in written form and entered by the Company into its computer operations. For
example, reports from franchisees and otherwise are prepared in written form and
not received electronically. The Company has orally confirmed with key vendors
who have indicated that they either have or expect to address all significant
Year 2000 issues on a timely basis.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation and testing efforts as well as those current and
anticipated costs to be incurred by the Company with respect to Year 2000 issues
of third parties will not exceed $5,000, which expenditures will be funded from
operating cash flows. As of October 21, 1998, the Company had incurred costs of
approximately $1,000. The Company presently believes that the Year 2000 issue
will not pose significant operational problems for the Company; however, if all
Year 2000 issues are not properly identified or assessment, remediation and
testing are not effected timely, there can be no assurances that the Year 2000
issue will not materially adversely affect the Company's results of operations
or adversely affect the Company's relationship with customers, vendors or
others. Additionally, there can be no assurances that the Year 2000 issues of
other entities will not have a material adverse effect on the Company's system
or results of operations.
Because the Company believes that all items have been resolved, the
Company has not begun or completed an analysis of the operational problems and
costs (including lost revenues) that would be reasonably likely to result from a
failure of the Company and certain third parties to complete efforts to achieve
Year 2000 compliance on a timely basis, nor has a contingency plan been
developed for dealing with the most reasonably likely worst-case scenario and
such scenario has not been clearly identified. The Company does not plan to
complete analysis and contingency plans because it believes it is Year 2000
compliant.
During early 1998, the Company engaged an independent expert to
evaluate its Year 2000 identification, assessment, remediation and testing
efforts, and such fees were included in the amount spent to date.
The following information is based upon management's best estimates and
was derived using numerous assumptions regarding future events, including the
continued availability of third party remediation plans and other factors. There
can be no assurances that these estimates will prove to be accurate, and actual
results could differ materially from those currently anticipated. Specific
factors that could cause such material differences include, but are not limited
to, availability and costs of personnel trained in Year 2000 issues, the ability
to identify, assess and remediate and test all relevant computer codes and
imbedded technology and similar uncertainties.
11
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of earnings of the Company and its subsidiaries for the
fiscal quarters ended September 30, 1997 and 1998 and with respect to the
balance sheets thereof at September 30 in each of those years.
The selected financial data have been derived from the Company's
unaudited consolidated financial statements and should be read in conjunction
with the financial statements and related notes thereto and other financial
information appearing elsewhere herein.
Three Months Six Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
---- ---- ---- ----
(in thousands except per share and
number of franchises)
(Unaudited)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) $12,555 $13,191 $21,700 $22,901
Number of Franchises 469 588 469 588
RESULTS OF OPERATIONS
Total Revenue $ 1,282 $ 1,666 $ 2,410 $ 2,952
Costs and expenses and Other 1,010 1,178 1,971 2,254
Income before income
taxes 287 504 472 730
Net income 192 335 325 502
Earnings per share
Basic $ .04 $ .08 $ .06 $ .11
Weighted average common
shares 4,292 4,098 4,292 4,098
Diluted $ .03 $ .06 $ .05 $ .09
Weighted average common 6,124 5,505 6,124 5,505
shares
Six Months
Ended September 30,
1997 1998
---- ----
(Unaudited)
BALANCE SHEET DATA
Working capital $1,458 $1,759
Total assets $3,152 $3,631
Shareholders' equity $2,002 $2,320
(1) The franchisees' revenue data have been derived from unaudited reports
provided by franchisees submitted when paying license fees and advertising fees
to the Company.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1998, the Company issued 20,000 shares of its common stock
in connection with the exercise of warrants. See also Item 5 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information disclosed in footnote 2 to the financial statements
provided in Part I Item 1 of this Report on Form 10-QSB is incorporated herein
by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1998, approximately 96% of the outstanding shares of
Series A Preferred Stock consented to the corporation's authorization of the
repurchase of up to 500,000 shares of the Company's Common Stock or its Series A
Preferred Stock.
(a) The 1998 Annual Meeting of Stockholders of the Company was held on
October 17, 1998.
(b) The following persons were elected as directors of the Company at
the Annual Meeting for a one-year term:
Withheld Broker
For Authority Non-Votes
--- --------- ---------
Class I directors
(elected by holders
of common stock): Kenneth L. Blum, Sr. 2,797,325 11,844 --
Kenneth L. Blum, Jr. 2,798,325 10,844 --
Class II directors
(elected by holders
of preferred stock): Alan L. Aufzien 1,324,750 20,625 --
William L. Richter 1,324,750 20,625 --
13
<PAGE>
Subsequent to the proxy statement and proxy card being distributed, in
early October 1998 and shortly before the 1998 Annual Meeting, Mr. David
Schwartz advised the Company that he would be unavailable to continue to serve
in his capacity as a director and as a nominee for director. Accordingly, and in
accordance with the description in the proxy statement, management nominated Mr.
Kenneth L. Blum, Jr. (currently President of the Company) as nominee for
director and all proxies which were cast for Mr. Schwartz were cast for Mr.
Blum, Jr. who was elected to the Board of Directors.
ITEM 5. OTHER INFORMATION
During the six-month period ended September 30, 1998, the Company
repurchased and retired 120,900 shares of its common stock, reducing total
outstanding common shares from 4,189,692 to 4,098,792.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the Signatures page, which is
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant 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 October 29, 1998
- ------------------------ ----------------
Mitra Ghahramanlou
Chief Accounting Officer
/s/Kenneth L. Blum, Sr. October 29, 1998
- ----------------------- ----------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
15
<PAGE>
EXHIBIT INDEX
TO
RENT-A-WRECK of AMERICA, INC.
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1998
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule Filed herewith.
27.2 Financial Data Schedule Filed herewith.
(Restated from the Quarterly
Period ended September 30, 1997)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RENT-A-WRECK
OF AMERICA'S 10-QSB FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,822,454
<SECURITIES> 0
<RECEIVABLES> 1,666,195
<ALLOWANCES> 741,564
<INVENTORY> 0
<CURRENT-ASSETS> 3,069,837
<PP&E> 670,331
<DEPRECIATION> 323,117
<TOTAL-ASSETS> 3,631,198
<CURRENT-LIABILITIES> 1,310,804
<BONDS> 0
13,660
0
<COMMON> 40,988
<OTHER-SE> 2,265,746
<TOTAL-LIABILITY-AND-EQUITY> 3,631,198
<SALES> 0
<TOTAL-REVENUES> 2,951,873
<CGS> 0
<TOTAL-COSTS> 1,303,485
<OTHER-EXPENSES> 871,224
<LOSS-PROVISION> 78,879
<INTEREST-EXPENSE> 11,308
<INCOME-PRETAX> 730,314
<INCOME-TAX> 228,802
<INCOME-CONTINUING> 501,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501,512
<EPS-PRIMARY> .11
<EPS-DILUTED> .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS IN THE COMPANY'S FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,538,129
<SECURITIES> 0
<RECEIVABLES> 1,609,602
<ALLOWANCES> 752,645
<INVENTORY> 0
<CURRENT-ASSETS> 2,608,746
<PP&E> 530,106
<DEPRECIATION> 221,091
<TOTAL-ASSETS> 3,152,158
<CURRENT-LIABILITIES> 1,150,585
<BONDS> 0
0
13,866
<COMMON> 43,004
<OTHER-SE> 1,944,703
<TOTAL-LIABILITY-AND-EQUITY> 3,152,158
<SALES> 0
<TOTAL-REVENUES> 2,409,789
<CGS> 0
<TOTAL-COSTS> 1,031,886
<OTHER-EXPENSES> 899,055
<LOSS-PROVISION> 39,693
<INTEREST-EXPENSE> 10,406
<INCOME-PRETAX> 471,722
<INCOME-TAX> 147,103
<INCOME-CONTINUING> 324,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,619
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
