UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
[ ] TRANSITION REPORT UNDER 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.
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(NAME OF SMALL BUSINESS 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 under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange 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 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 [ ]
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. $5,601,315
3,943,217 shares of common stock were outstanding as of May 19, 1999.
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 $3,734,124 on May 19, 1999. 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......................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 10
Part II
Item 5. Market for the Common Equity and Related Stockholder
Matters........................................................ 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14
Item 7. Financial Statements............................................ 23
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 49
Part III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act..... 49
Item 10. Executive Compensation.......................................... 51
Item 11. Security Ownership of Certain Beneficial Owners and Management... 54
Item 12. Certain Relationships and Related Transactions................... 56
Item 13. Exhibits and Reports on Form 8-K................................. 56
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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$$ used vehicle rental franchise program are
required by the Company to meet higher standards than the Rent-A-Wreck program,
such as utilizing vehicles that are less than three years old. As of March 31,
1999, 141 of the Company's 629 franchisees were participating in this program.
The Company believes the PRICELE$$ 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, and 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 the franchisees'
fleet size or gross revenues.
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
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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 two trucks to operate under
this program. These trucks and two existing Company-owned vans 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.
In 1997, the Company 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.
CAR Insurance has an agreement with AIG whereby CAR Insurance's
coverage is subject to a per loss limit of $100,000 per person and $300,000 per
accident. Under the contract, AIG also provides an aggregate stop loss
protection of $1,300,000, thus capping CAR Insurance's exposure to loss. In
carrying out the program, the Company utilizes Hertz Claim Management
Corporation as the Third Party Administrator. On March 1, 1999, the Company
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replaced Willis Corroon with Rental Industry Services ("Rise") as the insurance
broker and retained Willis Corroon as a consultant for this program. The focus
of growth for CAR Insurance will be in those states where the Company's
insurance advisor believes the driver's (not the owner's) insurance is deemed to
be primarily responsible for any losses. As of March 31, 1999, approximately 69
of the Company's franchisees were insuring a total of 1,459 vehicles under this
program. Franchisees apply for this insurance coverage with Rise. Rise 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 and assisting the Company on the
appropriate reserves for all known claims. Willis Corroon further assists the
Company in establishing reserves for known and unknown claims which have run 53%
and 55% of the net premiums for the years ended March 31, 1998 and 1999.
On March 1, 1999, the Company added a new program to offer insurance
coverage to all of its franchisees who do business in those states where the
Company's insurance advisor believes the owner's (not the driver's) insurance is
deemed to be primarily responsible for any losses. In those states, this is the
only program that the Company offers to its franchisees. In carrying out this
new program, the Company utilizes Rise as the insurance broker and CAR Insurance
is not involved. Franchisees apply for this insurance coverage with Rise. Rise
processes the franchisees' applications and, if approved, the franchisee is
required to pay premiums in advance on a monthly basis. The Company bills and
collects the premiums, which are forwarded to Rise, and receives fees from Rise
for this program. The Company has no exposure to loss from insurance claims
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, 1999, the Company
was financing 16 vehicles for 5 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 and PRICELE$$ programs.
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
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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. 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, 1999, 122 new franchises were
granted, 14 existing franchise locations were transferred to new ownership and
51 franchises were terminated by the Company. The majority of these terminations
resulted from monetary default. This resulted in approximately 611 franchised
locations throughout the United States, as well as 18 franchised locations in
Europe and Asia at the end of this fiscal year compared to approximately 542
franchised locations throughout the United States, as well as 16 franchised
locations in Europe and Asia at the end of the fiscal year ended March 31, 1998.
EMPLOYEES
As of March 31, 1999, the Company employed 22 people, consisting of 12
full-time employees and 2 part-time employees engaged in franchise sales and
service and 7 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 regional and local independent companies
also compete with the Company in various areas. In most major urban areas,
companies such as Hertz, Avis, National, Enterprise 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 REGULATIONS
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 information about the
franchisor, its existing franchises, the rights and obligations of franchisees,
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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 June 1999, the Company is currently authorized to sell franchises
in all 50 states under its "Rent-A-Wreck" and "PRICELE$$" trade and service
marks. The Company has registered its "Rent-A-Wreck" trade and service mark in
approximately 36 foreign countries and is in the process of registering its
"PRICELE$$" trade and service mark in 21 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.
INSURANCE REGULATIONS
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 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
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Corporation and AICCO 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 6,790 square feet of
executive office space at 11460 Cronridge Drive, Suite 120, Owings Mills, MD
21117, which lease will expire in November 1999 (see note 8). The Company also
rents on a month-to-month basis approximately 781 square feet of executive
office space at 11460 Cronridge Drive, Suite 118, Owings Mills, MD 21117 (see
Item 12, Certain Relationships and Related Transactions).
Management believes that the facilities leased by the Company are
adequate for the Company's current and foreseeable future operations or that
adequate alternative space is readily available.
ITEM 3. LEGAL PROCEEDINGS
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
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the 4th
quarter of the fiscal year ended March 31, 1999.
PART II. OTHER INFORMATION
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, trades on the Nasdaq
SmallCap Market under the symbol RAWA.
The range of high and low bid quotations for the quarterly periods of
the current and prior fiscal years was as follows:
Year Ended
March 31, 1999 High* Low*
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First Fiscal Quarter $1 3/32 $1 1/32
Second Fiscal Quarter 1 1
Third Fiscal Quarter 1 1/2 1 1/4
Fourth Fiscal Quarter 1 1/4 1 3/16
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
* 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 has preferred stock issued with 1,139,125 shares outstanding
for the fiscal year ended March 31, 1999. 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 $91,130. The terms of the outstanding
preferred stock provide that the Company may not declare or pay dividends,
whether in cash or in property, on the common stock unless the full dividends on
the preferred stock for all past dividend periods and the current dividend
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period have been paid or declared and a sum set aside for payment thereof. The
preferred stock is convertible into common on a share-for-share basis. There is
no public market for the preferred stock.
The number of stockholders of record of the Company's Common Stock as
of May 19, 1999 was 206. 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 1,300 as
of May 28, 1999. 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.
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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 each
of the five years in the period ended March 31, 1999, 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.
Year ended March 31,
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1995 1996 1997 1998 1999
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(in thousands except per share
and number of franchises)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) $26,482 $29,864 $34,661 $40,018 $45,358
Number of Franchises 384 429 477 558 629
COMPANY'S RESULTS OF OPERATIONS
Total Revenue $ 3,003 $ 3,455 $ 3,785 $ 4,677 $ 5,601
Costs and expenses and Other 2,655 3,029 3,252 3,983 4,564
Income before income
taxes $ 416 $ 489 $ 600 $ 756 1,113
Net income 383 459 537 548 858
Earnings per common share
Basic $ .06 $ .08 $ .10 $ .10 $ .18
Weighted average common
shares 4,238 4,210 4,102 4,267 4,086
Diluted $ .06 $ .07 $ .09 $ .09 $ .15
Weighted average common
shares plus options and
warrants 6,086 6,197 6,083 5,915 5,611
COMPANY'S BALANCE SHEET DATA
Working Capital $ 850 $ 902 $ 1,191 $ 1,527 $ 1,531
Total assets 2,102 2,164 2,594 3,664 3,886
Long-term obligations -- 36 30 -- --
Shareholders' Equity 1,299 1,372 1,755 2,028 2,041
(1) The franchisees' revenue data have been derived from unaudited license fee
reports provided by franchisees.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 1999 vs. year ended March 31, 1998
The Company operates in two principal segments: Vehicle Rental
Franchise Programs (franchising) and Insurance Coverage (insurance). For the
year ended March 31, 1999, franchising operations comprised 87% of consolidated
net revenues (88% in 1998) and 94% of consolidated income before taxes (93% in
1998).
Revenue from franchising operations, which includes initial license
fees, continuing license fees, and advertising fees, increased by $741,162
(19%). Initial license fees increased by $274,199 (35%) 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 $320,403 (13%), and advertising fees increased by $146,560 (20%)
due to the fleet growth at existing franchises and the Company's dedication of
more resources to its collection efforts.
Revenues from insurance premiums increased by $159,470 (28%) due to
higher participation by the Company's franchisees in the CAR Insurance program
that started in March 1997. Insurance premium revenue is recognized ratably over
the life of the policies.
Other revenue increased by $23,263 (17%) due primarily to an increase
in promotional material purchased by the Company's franchisees.
Total operating expenses increased by $581,108 (15%) in fiscal 1999
compared to the prior year. Salary expense increased by $145,613 (19%) primarily
as a result of hiring additional employees in response to the growth of the
Company's franchising operations. Advertising and promotion expenses increased
by $161,298 (14%), which resulted primarily from an increase in national
advertising expense to promote the Company. Sales and marketing expenses
increased by $127,234 (25%), which resulted primarily from a larger amount of
franchise sales made in fiscal 1999 compared to the prior year, the cost of the
repurchase of a territory from an existing franchisee which was resold by the
Company at a profit, an increase in bad debt expense due to the Company's higher
sales, and the recovery of a bad debt in the prior year which had been fully
reserved. General and administrative expenses decreased by $73,185 (7%), which
resulted primarily from a reduction in legal fees.
Insurance underwriting expenses increased by $163,174 (36%) due to an
increase in paid losses and loss reserves for future claims in connection with
higher participation by the Company's franchisees in its CAR Insurance program.
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Depreciation and amortization expense increased by $56,974 (47%) in
fiscal 1999 compared to the prior year. This increase was primarily due to
additional depreciation from the 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 7 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 $1,037,647, before taxes and
interest, in 1999 compared to operating income of $694,085 for 1998, reflecting
an increase of $343,562 (49%). 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.
Net interest income increased by $12,788 (21%). This increase was
primarily due to interest earned on the increased cash deposits which are held
in interest bearing accounts.
Income tax expense for the year ended March 31, 1999 increased by
$46,279 (22%) over 1998 due to higher pre-tax earnings, partially offset by a
reduction in the deferred tax asset valuation allowance. The valuation allowance
has been reduced in light of favorable earnings and expected future earnings and
is re-assessed quarterly.
Effective June 30, 1993, the Company issued ten-year options (the
"Options") to K.A.B. for the purchase of up to 2,250,000 shares of the Company's
common stock. The Board of Directors approved the vesting of 1,000,000 Options
at an exercise price of $1.00 per share and, as later amended by the Board,
provided that the balance of the Options (an aggregate of 1,250,000 Options)
(the "Unvested Options") would vest at $1.15 per share on July 1,2002 subject to
an acceleration in exercisability upon achievement of certain financial or stock
targets. The Unvested Options can be accelerated upon achieving the following:
Number of
Shares Alternative Vesting Event:
------ --------------------------
500,000 Completion of the first fiscal year
in which the Company has Profits of
at least $750,000 or in which the
Stock Price is at least $4.00
750,000 Completion of the first fiscal year
in which the Company has Profits of
at least $1,000,000 or in which the
Stock Price is at least $5.00
14
<PAGE>
For purposes hereof, "Profits" means any fiscal period where the
Company's pretax operating profit meets such targets during such period as
determined in accordance with generally accepted accounting principles based on
the Company's books and records, and excludes any profit or loss from financial
transactions and any charge for compensation expense relating to these options.
For purposes hereof, "Stock Price" means the average closing high bid
price for the Company's Common Stock as reported on Nasdaq (or, if applicable,
the NASD Bulletin Board or pink sheets) over any 30 consecutive calender days
during the applicable fiscal year.
As of result of achieving the financial targets during the year ended
March 31, 1999, all 1,250,000 Unvested Options are exercisable.
Effective January 1, 1999, the annual management fee earned by K.A.B.
increased from $250,000 to $300,000 (in addition to reimbursement of expenses).
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, 1999, the Company had working capital of $1,530,647
compared to $1,526,934 at March 31, 1998. This increase of $3,713 resulted
primarily from net profit earned during the year, offset by an increase in cash
paid by the Company to repurchase its common and preferred stock and warrants
through its buyback program, and an increase in loss reserves for the
reinsurance program. In fiscal 1999, the Company's allowance for doubtful
accounts was $655,418 compared to $682,631 in the prior year. The Company wrote
off $215,787 of its doubtful accounts during fiscal 1999 and $169,859 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 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 decreased by $353,821 (29%). This decrease
resulted primarily from an additional deposit of $388,000 in the Bank of
Butterfield (Bermuda) in connection with the Company's CAR Insurance Program.
Restricted cash increased by $324,521 (82%) due to an additional deposit in
connection with the agreement between the Company and The Chase Manhattan Bank
("Chase"), offset by decreases in the national advertising funds. Restricted
cash includes (1) a deposit of $638,000 being held in the Bank of Butterfield
for securing the letter of credit with 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 various advertising programs.
15
<PAGE>
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 7.75% on June 2, 1999). For the years ended March 31,
1998 and 1999, 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
7.75% on June 2, 1999). For the years ended March 31, 1998 and 1999, AIG has not
drawn any funds from the letter of credit. This letter of credit is secured by
all of the Company's assets.
The Company rents its office facilities under the terms of an operating
lease. The monthly office facilities lease commitments were $5,400 and $5,670 at
March 31, 1998 and 1999, respectively. The Company also rents additional space
from a related party on a month-to-month basis for approximately $670 per month.
Furniture, equipment and leasehold improvements increased by $57,987
(11%) from March 31, 1998 to March 31, 1999. This increase occurred primarily
due to additional investment in computer software and hardware, offset by the
writing off of fully depreciated or disposed assets. Vehicles increased by
$67,160 (288%) from March 31, 1998 to March 31, 1999 due to the purchase of four
vehicles for the one-way program and a vehicle for use by the Company, offset by
sales of four vehicles which were also used under the one-way program.
Cash provided by operations was $906,073, resulting primarily from net
income before depreciation plus the increases in accounts payable, accrued
expenses, and insurance loss reserves, offset by the increases in accounts and
notes receivable, and prepaid expenses, and decrease in income taxes payable.
Accounts and notes receivable in conjunction with the Company's franchising
program increased by $25,471 primarily due to a higher volume of sales. Accounts
receivable relating to the reinsurance program increased by $75,313 as a result
16
<PAGE>
of higher participation of the Company's franchisees in this program. Prepaid
expenses increased primarily due to the finance charge paid to AICCO in
connection with the CAR Insurance program. Accounts payable and accrued expenses
increased primarily from higher professional fees in connection with the CAR
Insurance program. Income taxes payable decreased primarily due to estimated
income taxes paid for the year ended March 31, 1999.
Cash used in investing activities of $491,112 related primarily to an
increase in restricted cash as required by the Company's letter of credit, the
acquisition of computer software and hardware, four vehicles and the costs
associated with obtaining trademarks.
Cash used in financing activities during the same period was $768,782,
resulting from the payment of preferred dividends and buyback of preferred and
common stock and warrants, offset by an increase in insurance financing payable
and the issuance of common stock in connection with warrants which were
exercised.
In 1995 and 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. On March
3, 1999, the Company approved the repurchase of an additional 119,075 shares of
the Company's outstanding common or preferred stock. 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. During
the year ended March 31, 1999, the Company repurchased and retired 311,600
shares of its common stock at a cost of $358,674. The Company repurchased and
retired 226,875 shares of its preferred stock at a cost of $363,001 and also
bought back 102,500 warrants at a cost of $11,250. As of March 31, 1999, the
Company has repurchased and retired a total of 1,119,075 shares under this
program, which was the total number of shares authorized for repurchase.
The Company believes it has sufficient working capital to support its
business plan through fiscal 2000.
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company.
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
17
<PAGE>
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.
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 in 1998
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 records. For
example, reports from franchisees and others are prepared in written form and
not received electronically. The Company has orally confirmed with key vendors
that they either have addressed 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 March 31, 1999, 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 if 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 systems
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
18
<PAGE>
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 have been included in the amount spent to date.
The above 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.
IMPORTANT FACTORS
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, 1999.
All forward-looking statements should be considered in light of these risks and
uncertainties.
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 or that
19
<PAGE>
the Company's reserves will be sufficient. Because of the Company's limited
experience with insurance risks and the inherent uncertainties in estimating the
ultimate costs of claims, reserves are particularly uncertain and 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 as a result of
the need to make payments in excess of reserves. Additionally, if the Company
expands the program as anticipated, the effect of such losses and or reserves
could be compounded.
DEPENDENCE ON FRANCHISEES; CREDIT RISKS. The Company's revenues are
substantially dependent on fees paid by its franchisees. These fees fluctuate
based on the franchisees' performance. Franchisees are independent contractors
who operate their business independent of the Company. Any failure of
franchisees to operate their businesses, or inability of the Company to collect
fees owed by franchisees, could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON TRADEMARKS. The Company's success depends in significant
part on its ability to maintain and protect its primary trademarks involving the
"Rent-A-Wreck" name. The Company's revenues are almost exclusively derived from
the goodwill associated with the name. Significant negative publicity related to
the name or the inability of the Company to pursue infringements and maintain
its proprietary rights would have a material adverse effect on the Company's
business, financial condition and results of operations.
INTENSE COMPETITION. The vehicle rental industry in which the Company
and its franchisees operate is characterized by intense competition,
particularly with respect to price and service, from national, regional and
local vehicle rental companies. Many of these competitors, particularly national
competitors and those with relationships with vehicle manufacturers, have
substantially greater resources than the Company. In addition, competition
exists from many smaller, independent operations in local markets. Any failure
by the Company and its franchisees to offer services and prices that compete
favorably in the marketplace would have a material adverse effect on the
Company's business, financial condition and results of operations.
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
20
<PAGE>
registrations were properly renewed, the Company believes that it is currently
in material compliance with such laws. Changes in franchise laws could require
the Company to make material alterations to its core business. Additionally,
failure to comply with franchise or other laws could subject the Company to
significant fines and penalties and have a material adverse effect on the
Company's business, financial condition and results of operations.
During the past several years, a number of states have interpreted
existing laws as requiring out-of-state companies which generate income by
granting franchises in the state to file returns and pay tax in the state.
Following this trend, other states have adopted laws specifically designed to
impose tax on out-of-state companies granting franchises in the state. While
many companies, along with many tax practitioners and commentators, contend that
the application of such laws violates the federal constitution, the United
States Supreme Court has not yet ruled on the issue directly. If the application
of these laws is constitutional, if the laws apply to the activities of the
Company, or if the states' interpretation of existing laws is applied
retroactively, any resulting taxes and associated interest and penalties for
which the Company may be liable also could have a material adverse effect on the
Company.
RISKS OF INTERNATIONAL OPERATIONS. During the fiscal year ended March
31, 1999, 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 adverse 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.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPORTING SCHEDULES
Page
----
Report of Independent Certified Public Accountants...................... 23
Financial Statements:
Consolidated Balance Sheet as of March 31, 1999....................... 24
Consolidated Statements of Earnings for the Years Ended
March 31, 1998 and 1999............................................. 25
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 1998 and 1999........................................ 27
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998 and 1999.............................................. 28
Notes to Consolidated Financial Statements............................. 29
Supporting Schedules:
Schedule II - Valuation and Qualifying Accounts...................... 56
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.
22
<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, 1999,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the years ended March 31, 1999 and 1998. 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, 1999, and the consolidated
results of their operations and their consolidated cash flows for the years
ended March 31, 1999 and 1998 in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the years ended March 31, 1999 and 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Baltimore, Maryland
June 10, 1999
23
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ................................... $ 861,794
Restricted Cash ............................................. 718,543
Accounts Receivable, net of allowance
for doubtful accounts of $655,418:
Continuing License Fees and
Advertising Fees ...................................... 336,242
Current Portion of Notes Receivable ..................... 388,812
Current Portion of Direct Financing
Leases ................................................ 7,850
Insurance Premiums Receivable ........................... 635,532
Other ................................................... 61,081
Prepaid Expenses and Other .................................. 166,421
Deferred Taxes .............................................. 199,028
-----------
TOTAL CURRENT ASSETS ...................................... 3,375,303
-----------
PROPERTY AND EQUIPMENT:
Furniture ................................................... 93,505
Computer Hardware and Software .............................. 370,012
Machinery and Equipment ..................................... 82,650
Leasehold Improvements ...................................... 37,896
Vehicles .................................................... 90,507
-----------
674,570
Less: Accumulated Depreciation and
Amortization ......................................... (388,887)
-----------
NET PROPERTY AND EQUIPMENT ................................ 285,683
-----------
OTHER ASSETS:
Intangible Assets, net of accumulated
amortization of $126,192 .................................. 192,872
Long-term Portion of Notes and Direct
Financing Lease Receivables ............................... 32,088
-----------
224,960
TOTAL ASSETS .............................................. $ 3,885,946
===========
The accompanying notes are an integral part of this financial statement.
24
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ....................... $ 709,506
Dividends Payable ........................................... 22,782
Insurance Financing Payable ................................. 564,684
Insurance Loss Reserves ..................................... 366,022
Income Taxes Payable ........................................ 181,662
-----------
TOTAL CURRENT LIABILITIES ................................. 1,844,656
-----------
TOTAL LIABILITIES ......................................... 1,844,656
-----------
COMMITMENTS AND CONTINGENCIES ................................. --
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,139,125 shares
(aggregate liquidation preference $911,300) ............... 11,391
Common Stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding 3,934,092 shares ........... 39,340
Additional Paid-In Capital .................................. 2,209,182
Accumulated Deficit ......................................... (218,623)
-----------
TOTAL SHAREHOLDERS' EQUITY ................................ 2,041,290
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $ 3,885,946
===========
The accompanying notes are an integral part of this financial statement.
25
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1999
1998 1999
----------- -----------
REVENUES:
Initial License Fees ......................... $ 794,002 $ 1,068,201
Continuing License Fees ...................... 2,401,103 2,721,506
Advertising Fees ............................. 750,990 897,550
Insurance Premiums ........................... 579,063 738,533
Vehicle Rental Operations .................... 15,104 15,879
Other ........................................ 136,383 159,646
----------- -----------
4,676,645 5,601,315
----------- -----------
EXPENSES:
Salaries, Consulting Fees, and
Employee Benefits .......................... 771,508 917,121
Advertising and Promotion .................... 1,128,801 1,290,099
Insurance Underwriting Expenses .............. 453,082 616,256
Sales and Marketing .......................... 509,432 636,666
General and Administrative ................... 998,276 925,091
Depreciation and Amortization ............... 121,461 178,435
----------- -----------
3,982,560 4,563,668
----------- -----------
OPERATING INCOME ......................... 694,085 1,037,647
INTEREST INCOME, NET ........................... 62,347 75,135
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE ......... 756,432 1,112,782
INCOME TAX EXPENSE ............................. 208,528 254,807
----------- -----------
NET INCOME ............................... 547,904 857,975
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK .............................. (111,431) (104,742)
----------- -----------
NET INCOME AFTER DIVIDENDS ON
CONVERTIBLE CUMULATIVE PREFERRED STOCK ....... $ 436,473 $ 753,233
=========== ===========
EARNINGS PER COMMON SHARE
Basic ........................................ $ .10 $ .18
=========== ===========
Weighted average common shares ................. 4,266,711 4,085,860
=========== ===========
Diluted ...................................... $ .09 $ .15
=========== ===========
Weighted average common shares
plus options and warrants ..................... 5,914,752 5,611,423
=========== ===========
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1999
<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, 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
Issuance of common stock ..... -- -- 56,000 560 36,340 -- 36,900
Retirement of common stock ... -- -- (311,600) (3,116) (355,558) -- (358,674)
Retirement of preferred stock (226,875) (2,269) -- -- (360,732) -- (363,001)
Retirement of warrants ....... -- -- -- -- (11,250) -- (11,250)
Preferred dividends paid ($.08
per share) ................. -- -- -- -- -- (104,742) (104,742)
Preferred dividend arrearages
paid ....................... -- -- -- -- -- (44,302) (44,302)
Net income ................... -- -- -- -- -- 857,975 857,975
--------- -------- --------- ------- ---------- ----------- ----------
Balance, March 31, 1999 ....... 1,139,125 $ 11,391 3,934,092 $39,340 $2,209,182 $ (218,623) $2,041,290
========= ======== ========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1999
1998 1999
----------- -----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net Income ..................................... $ 547,904 $ 857,975
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................ 121,461 178,435
Deferred income taxes ........................ (68,508) (130,520)
Gain on disposal of property and equipment ... (4,065) (3,382)
Provision for doubtful accounts .............. (96,404) (27,153)
Changes in assets and liabilities:
Accounts and notes receivable ................ (403,101) (100,784)
Prepaid expenses and other ................... (44,792) (32,564)
Accounts payable and accrued
expenses ................................... (27,074) 75,861
Income taxes payable ......................... 178,964 (31,496)
Insurance loss reserves ...................... 193,987 119,701
----------- -----------
Net cash provided by operating activities .... 398,372 906,073
----------- -----------
Cash flows from investing activities:
Decrease (increase)in restricted cash .......... 75,130 (324,521)
Proceeds from sale of property and equipment ... 36,683 51,602
Acquisition of property and equipment .......... (75,270) (208,208)
Additions to intangible assets ................. (4,114) (9,985)
----------- -----------
Net cash provided by (used in) investing
activities .................................. 32,429 (491,112)
----------- -----------
Cash flows from financing activities:
Increase in insurance financing payable ........ 489,903 76,287
Issuance of common stock ....................... 25,000 36,900
Repayments of obligation under capital lease ... (38,667) --
Retirement of warrants ......................... -- (11,250)
Retirement of common stock ..................... (121,509) (358,674)
Retirement of preferred stock .................. (25,781) (363,001)
Preferred dividends paid ....................... (152,558) (149,044)
----------- -----------
Net cash provided by (used in) financing
activities .................................. 176,388 (768,782)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ................................. 607,189 (353,821)
Cash and cash equivalents at beginning of year .. 608,426 1,215,615
----------- -----------
Cash and cash equivalents at end of year ........ $ 1,215,615 $ 861,794
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 10,115 $ 21,780
Income taxes paid .............................. $ 103,733 $ 415,454
The accompanying notes are an integral part of these financial statements.
28
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RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF BUSINESS
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. The Company also provides insurance coverage on the
vehicles of some of its franchiees. 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.
RESTRICTED CASH
Restricted cash includes a deposit of $638,000 being held in the Bank
of Butterfield (Bermuda) securing the letter of credit with The Chase Manhattan
Bank ("Chase") and $80,543 held on behalf of the Company's franchisees in the
national advertising fund to be spent on various 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
29
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999
PROPERTY AND EQUIPMENT-CONTINUED
purposes. Accelerated methods of depreciation and amortization are used for
substantially all assets for income tax purposes. The estimated service lives
used in determining depreciation for financial reporting are as follows:
Furniture 3 years
Computer Hardware and Software 3-5 years
Machinery and Equipment 5 years
Leasehold Improvements 3 years
Vehicles 5 years
INTANGIBLE ASSETS
Intangible assets include the value of trademarks and costs in excess
of net assets acquired in connection with businesses acquired. Trademarks are
amortized on the straight-line method to operations over periods ranging from
ten to forty years. Costs in excess of net assets acquired in connection with
businesses acquired 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.
30
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
MARCH 31, 1999
INCOME TAXES
Income tax 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.
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).
INSURANCE PREMIUMS
Insurance premiums are recognized ratably over the term of the
coverage.
31
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
ADVERTISING
Advertising costs are expensed as incurred and are classified as
advertising and promotion expenses.
STOCK-BASED COMPENSATION
Compensation costs for stock options are 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.
32
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income (SFAS 130), which is effective for fiscal years beginning after December
15, 1997. The Statement establishes standards for reporting and display of
comprehensive income and its components. Adoption of this standard did not have
an effect on the Company.
In June 1997, the FASB issued SFAS 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 on the basis that is used internally for evaluating
segment performance. The Company adopted SFAS 131 in the fiscal year beginning
April 1, 1998 and has restated its prior year segment data to conform to this
presentation.
In December 1997, SFAS No. 132, Employers' Disclosures about Pension
and Other Postretirement Benefits, was issued and is effective for the Company's
1999 fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Implementation of this
disclosure standard did not affect the Company's financial position or results
of operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards for derivative instruments, and for hedging activities.
Implementation of this standard is not anticipated to have an effect on the
Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1999 presentation.
33
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
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. The
Company's insurance operations are subject to the laws and regulations in the
jurisdictions in which they are chartered and do business. 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 ($1,000,000) and the Bank of
Butterfield ($638,000). In addition, all assets of the Company have been pledged
to secure the agreement with Chase.
34
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
3. DIRECT FINANCING LEASES
The components of the Company's net investment in direct financing
leases as of March 31, 1999 are as follows:
Total Minimum Lease Payments to be Received ................ $55,798
Less Amounts Representing Administration
Costs Included in Total Minimum Lease Payments ......... 1,558
-------
Minimum Lease Payment Receivable ........................... 54,240
Less Allowance for Uncollectibles ....................... 11,665
-------
Net Minimum Lease Payments Receivable ...................... 42,575
Less Unearned Income .................................... 7,137
-------
Net Investment in Direct Financing Leases .................. $35,438
=======
Current Portion ......................................... $ 7,850
Non-Current Portion ..................................... 27,588
-------
Net Investment in Direct Financing Leases .................. $35,438
=======
The total minimum lease payments receivable in the three succeeding
fiscal years are as follows:
2000 ......................... $27,525
2001.......................... 18,662
2002.......................... 9,611
-------
Total $55,798
=======
35
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
4.INTANGIBLE ASSETS
Intangible assets consist of the following at March 31, 1999:
Costs in Excess of Net Assets Acquired .................... $ 50,000
Trademarks ................................................ 269,064
--------
319,064
Less Accumulated Amortization ............................. 126,192
--------
$192,872
========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at March
31, 1999:
Accounts Payable .......................................... $126,278
National Advertising Fund ................................. 108,754
Payroll ................................................... 61,415
Commissions and Royalties ................................. 166,371
Professional Fees ......................................... 135,109
Other ..................................................... 111,579
--------
$709,506
========
36
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
6.EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the
computation of basic and diluted earnings per share for the years ended March
31, 1998 and 1999 is as follows:
1998 1999
---------- ----------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to common shares .......... $ 436,473 $ 753,233
Denominator:
Weighted average common shares .................. 4,266,711 4,085,860
Basic EPS ........................................ $ .10 $ .18
========== ==========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to common shares .......... $ 436,473 $ 753,233
Dividends on convertible preferred stock ........ 111,431 104,742
---------- ----------
547,904 857,975
---------- ----------
Denominator
Weighted average common shares .................. 4,266,711 4,085,860
Weighted average convertible preferred stock .... 1,366,000 1,346,731
Weighted average options and warrants ........... 282,041 178,832
---------- ----------
5,914,752 5,611,423
Diluted EPS ...................................... $ .09 $ .15
========== ==========
37
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
7. INCOME TAXES
The provision for income taxes for the years ended March 31, 1998 and
1999 consists of the following:
1998 1999
--------- ---------
Currently payable
State income taxes ....................... $ 51,341 $ 52,461
Federal income taxes ..................... 225,695 332,866
--------- ---------
Total currently payable .............. 277,036 385,327
Deferred .................................. (68,508) (130,520)
--------- ---------
Total ................................ $ 208,528 $ 254,807
========= =========
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, 1998 and 1999 is as follows:
1998 1999
--------- ---------
Federal taxes at statutory rate ........... $ 257,187 $ 378,346
Reduction in valuation allowance........... (100,000) (176,000)
State and local taxes, net ................ 51,341 52,461
--------- ---------
Total ........................... $ 208,528 $ 254,807
========= =========
38
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
7. 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, 1999, are as follows:
Deferred tax assets:
Reserve for doubtful accounts .................. $ 255,613
Accrued expenses ............................... 68,798
Other .......................................... 13,795
---------
338,206
Deferred tax liabilities:
Fixed assets ................................... (38,448)
---------
Net deferred tax asset before
valuation allowance ............................ 299,758
Valuation allowance .............................. (100,730)
---------
Net deferred tax asset ........................... $ 199,028
=========
The net change in the valuation allowance for the year ended March 31,
1999 was a decrease of $176,000. The valuation allowance has been 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, 1999
8. 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 (see note 15). Future minimum lease payments under
non-cancelable agreements are as
follows:
March 31,
---------
2000.....................$45,357
Total rent expense for the years ended March 31, 1998 and 1999 was
$71,999 and $71,510, of which $9,649 and $8,044, respectively, was to a related
party (see Note 9).
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.
9. 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,
1998 and 1999 were $250,000 and $262,500 respectively. KAB also holds an option
to purchase up to 2,250,000 shares of the Company's common stock (see note 10).
40
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
9. 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 $9,649 and $8,044 for the
years ended March 31, 1998 and 1999, 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, 1998 and 1999, $21,839 and $1,175,
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, 1998 and 1999, there were no fees paid
to Richter & Co., Inc. pursuant to this agreement.
Through March 31, 1999, Richter & Co., Inc. has provided ongoing
financial management services to the Company at no charge. Effective April 1,
1999, Richter & Co., Inc. will receive an annual consulting fee of $30,000. 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.
10. 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.
The Company has issued stock options to acquire 2,250,000 shares of its
common stock to KAB in conjunction with its management agreement. 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 (C) 13,333 and
16,666 vested and unvested options, respectively, to Mr. Richter. In April 1996,
41
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
10. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED
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
unvested options are subject to an acceleration of exercisability upon
achievement of certain financial stock targets. Such targets were achieved
during the year ended March 31, 1999, and at March 31, 1999, all options are
fully vested.
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes options-pricing model. There were no stock options
granted during fiscal years 1998 and 1999.
The following table summarizes option activity:
1998 1999
Weighted Weighted
Average Average
1998 1999 Exercise Exercise
Shares Shares Price Price
------ ------ ----- -----
Options outstanding at
beginning of year .............. 2,265,000 2,250,000 $1.08 $1.08
Options exercised ................ -- -- -- --
Options granted .................. -- -- -- --
Options canceled ................. -- -- -- --
Options expired .................. (15,000) -- 1.44 --
---------- ---------
Options outstanding at
end of year ..................... 2,250,000 2,250,000 $1.08 $1.08
Option price range at
end of year...................... $ 1.00 to $ 1.00 to
$ 1.15 $ 1.15
Option price range for
exercised shares................. -- --
Weighted-average fair value
of options, granted during
the year......................... $ -- $ --
42
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
10. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED
At March 31, 1998 and 1999, 1,000,000 and 2,250,000 options,
respectively, were exercisable.
The following table summarizes options outstanding at March 31, 1999:
Weighted Average
Number Exercise Weighted Average Remaining
Outstanding Price Exercise Price Contractual Life
----------- ----- -------------- ----------------
2,250,000 $1.00 to $1.08 4.25 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:
1998 1999
-------- --------
Net income applicable to common
and common equivalent shares
As reported ..................... $436,473 $753,233
Pro forma ....................... $351,579 $668,270
Earnings per share
Basic:
As reported ..................... $ .10 $ .18
Pro forma ....................... $ .08 $ .16
Diluted:
As reported ..................... $ .09 $ .15
Pro forma ....................... $ .06 $ .12
In consideration of investment banking services rendered in connection
with the negotiation of the management agreement with KAB, the Company granted
Richter & Co., Inc. five-year warrants, originally expiring June 30, 1998, to
purchase 155,000 shares of the Company's common stock. The exercise price of
43
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
10. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED
20,000 of such warrants was $.80. Those were exercised on June 25, 1998, 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 were issued to Richter & Co., Inc. in connection with previous
private placement transactions for which Richter & Co., Inc. acted as agent.
Richter & Co., Inc. assigned 12,000 of these warrants to William L. Richter and
4,000 warrants to Richter & Co., Inc. employees. On February 11, 1999, Richter &
Co., Inc. exercised 14,000 of these warrants and William L. Richter exercised
12,000 of these warrants. On March 1, 1999, the Company bought back a total of
2,500 of these warrants from Richter & Co., Inc. employees at $.50 per warrant,
and the remaining 1,500 of these warrants have expired.
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 was $1.25 per share. On November 23, 1998, the
Company bought back these warrants for $10,000.
A summary of changes in outstanding warrants for the year ended March
31, 1999 is as follows:
Number of Exercise Price
Warrants per Warrant
-------- -----------
Outstanding, beginning of year...... 285,000 $ .80 - $1.50
Issued.............................. -- $ --
Exercised........................... (46,000) $ .80
Bought Back......................... (102,500) $ .80 - $1.25
Canceled............................ (1,500) $ .80
---------
Outstanding, end of year............ 135,000 $1.00 - $1.15
=========
44
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
11. 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 95% 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, 1999, the Company repurchased and
retired 226,875 shares of preferred stock, reducing the total outstanding
preferred shares from 1,366,000 to 1,139,125. During the year ended March 31,
1999, the Company declared preferred dividends totaling $104,743, plus $44,302
of dividend arrearages, and at March 31, 1999, unpaid declared preferred
dividends totaled $22,782. At March 31, 1999, undeclared and unpaid cumulative
preferred dividends amounted to $147,737.
12. OTHER REVENUES
Components of other revenues for the years ended March 31, 1998 and
1999 were as follows:
1998 1999
-------- --------
Promotional materials............... $106,779 $135,278
Other............................... 29,604 24,368
-------- --------
$136,383 $159,646
======== ========
45
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
13. CONCENTRATIONS OF CREDIT RISK - CASH
The Company maintains its cash balances in financial institutions,
which balances 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.
14. GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in two principal segments: Vehicle
Rental Franchise Programs and Insurance Coverage. Corporate costs are allocated
to each segment's operations and are included in the measure of each segment's
profit or loss. The geographic data include revenues based upon customer
locations and assets based on physical locations.
The Company's foreign operations are presently conducted by CAR
Insurance in Bermuda (see note 2).
Information by geographic area and industry segment is as follows:
1998 1999
---------- ----------
Net revenues from external customers
Vehicle Rental Franchises-United States ........ $4,097,582 $4,862,782
Insurance-United States ........................ 579,063 738,533
Insurance-Bermuda .............................. -- --
---------- ----------
$4,676,645 $5,601,315
========== ==========
Segment income before taxes
Vehicle Rental Franchises-United States ........ $ 645,324 $ 978,477
Insurance-United States ........................ 48,761 59,170
Insurance-Bermuda .............................. -- --
---------- ----------
$ 694,085 $1,037,647
========== ==========
Segment assets
Vehicle Rental Franchises-United States ........ $2,630,585 $2,498,757
Insurance-United States ........................ 764,274 742,156
Insurance-Bermuda .............................. 269,253 645,033
---------- ----------
$3,664,112 $3,885,946
========== ==========
46
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1999
14. GEOGRAPHIC AND INDUSTRY SEGMENTS-CONTINUED
1998 1999
-------- --------
Expenditures for segment assets
Vehicle Rental Franchises-United States .......... $ 75,270 $208,208
Insurance-United States .......................... -- --
Insurance-Bermuda ................................ -- --
-------- --------
$ 75,270 $208,208
======== ========
Depreciation and amortization
Vehicle Rental Franchises-United States .......... $121,461 $178,435
Insurance-United States .......................... -- --
Insurance-Bermuda ................................ -- --
-------- --------
$121,461 $178,435
======== ========
Interest income
Vehicle Rental Franchises-United States .......... $ 66,225 $ 64,872
Insurance-United States .......................... 445 --
Insurance-Bermuda ................................ 18,369 32,043
-------- --------
$ 85,039 $ 96,915
======== ========
Interest expense
Vehicle Rental Franchises-United States .......... $ 10,115 $ 182
Insurance-United States .......................... 12,577 21,598
Insurance-Bermuda ................................ -- --
-------- --------
$ 22,692 $ 21,780
======== ========
Income taxes
Vehicle Rental Franchises-United States .......... $192,498 $254,807
Insurance-United States .......................... 16,030 --
Insurance-Bermuda ................................ -- --
-------- --------
$208,528 $254,807
======== ========
15. SUBSEQUENT EVENTS
On May 7, 1999, the Company's Board of Directors authorized the payment
of 100% of remaining dividend arrearages as of May 6, 1999 ($146,915) on
preferred shares to the shareholders of record as of that date.
On May 7, 1999, the Company's Board of Directors also approved that
office space be leased from KA Estate Associates, LLC, a firm owned by Kenneth
L. Blum, Jr. and Alan Cohn, effective at the expiration of the Company's current
lease and subject to the lease terms being equivalent or superior to terms
available to the Company on comparable space in the vicinity.
47
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, 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, 1999. 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.
CLASS I DIRECTORS:
Kenneth L. Blum, Sr., 72. Kenneth L. Blum, Sr. has served as Chairman
and a Director of the Company since June 1993, has been the Company's Chief
Executive Officer since December 1993, and was its President from June 1993 to
October 1994. Since 1990, Mr. Blum has been a management consultant to a variety
of companies, including National Computer Services, Inc., a computer service
bureau, and American Business Information Systems, Inc., a high-volume laser
printing company. Mr. Blum is a director of Avesis Incorporated, which markets
and administers discount benefit programs. Mr. Blum is the father of the
Company's President, Kenneth L. Blum, Jr. Mr. Blum controls K.A.B., Inc., a
Florida corporation ("K.A.B."), which has a Management Agreement with the
Company. See "Certain Transactions."
Kenneth L. Blum, Jr., 35, has served as Secretary of the Company since
March 1994, as Vice President from May 1994 to October 1994, as President since
October 1994, and as director since October 1998. Mr. Blum is also President of
48
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT-CONTINUED
American Business Information Systems, Inc., a high-volume laser printing
company and computer service bureau. Mr. Blum is the son of the Company's
Chairman and Chief Executive Officer.
CLASS II DIRECTORS:
William L. Richter, 56, has been a director of the Company since
November 1989 and served previously as a director from 1983 to 1985. Mr. Richter
was Co-Chairman of the Company from November 1989 to June 1993 and has been Vice
Chairman since June 1993. For the past ten years, Mr. Richter has been President
of Richter Investment Corp. and its wholly owned subsidiary, Richter & Co.,
Inc., a registered broker-dealer and investment banking firm. Mr. Richter has
been a Senior Managing Director of Cerberus Capital Management, L.P. (or its
predecessor organization) since their founding in late 1992. Mr. Richter is a
Director and Co-Chairman of Avesis Incorporated, which markets and administers
discount benefit programs.
Alan L. Aufzien, 69, has served as a Director of the Company since
November 1989. Mr. Aufzien has also been a partner in the Norall Organization, a
private investment company, since 1987. Since 1983, he has also been the
president and a director of New York Harbour Associates, Inc. (a real estate
development firm). From 1986 to 1996, Mr. Aufzien was the Chairman of
Meadowlands Basketball Association (New Jersey Nets) and currently serves as a
director of that organization. Mr. Aufzien is also a director of First Real
Estate Trust of New Jersey.
49
<PAGE>
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, 1997, 1998 and 1999. No other executive officer who was serving as an
executive officer during fiscal 1999 received salary and bonus which aggregated
at least $100,000 for services rendered to the Company during the fiscal year
ended March 31, 1999.
Annual Long-term Compensation
Compensation Awards
------------ ---------------------
Securities Underlying
Name and Principal Position Year Salary (1) Options/SARS(#)
- --------------------------- ---- --------- ---------------------
Kenneth L. Blum, Sr., CEO 1999 $262,500 -- (2)
1998 250,000 -- (2)
1997 250,000 -- (2)
(1) Mr. Blum became Chief Executive Officer of the Company in connection with
the Management Agreement between the Company and 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 $300,000 per year (250,000 per year prior to January 1, 1999)
plus expense reimbursements ($7,850 in the year ended March 31, 1999). 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 "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
50
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE-CONTINUED
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 "Certain Transactions - Management Agreement with K.A.B.,
Inc. and Related Transactions - Stock Option Grant."
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 VALUES
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. On March 3, 1999, the
Company's Board of Directors approved that the Company pay William L. Richter
consulting fees of $30,000 per year beginning April 1, 1999. The fees will be
assigned to Richter & Co., Inc.
51
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 19, 1999, 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 securities reflected in such table. All the
outstanding shares of Series A Preferred 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)
---------------------
Name and Address Shares Percent Percent
of Beneficial Owner Title of Class Beneficially Owned of Class of Common
- ------------------- -------------- ------------------ -------- ---------
<S> <C> <C> <C> <C>
David Schwartz
Bundy Rent-A-Wreck
12333 W. Pico Blvd.
Los Angeles, California 90064 Common 865,000(2) 21.9 21.9
William L. Richter
c/o Richter & Co., Inc.
450 Park Avenue Common 992,706(4) 23.9(4) 23.9
New York, NY 100022 Preferred(3) 1,075,000(4) 95.1 35.4(5)
Alan L. Aufzien
P.O. Box 2369 Common 32,500 ** **
Secaucus, NJ 07094 Preferred(4) 34,375 3.0 1.7(8)
Kenneth L. Blum, Sr.(6)
11460 Cronridge Dr., #120
Owings Mills, MD 21117 -- -- -- --
Kenneth L. Blum, Jr.(6)(7)
11460 Cronridge Dr., #120
Owings Mills, MD 21117 Common 1,249,167 24.8 24.8
Robin Cohn (6)(7)
c/o Rent-A-Wreck of America, Inc.
11460 Cronridge Dr., #120
Owings Mills, MD 21117 Common 1,254,167 24.9 24.9
Common 2,274,373 (4)(6)(7) 43.4 43.4 (5)
All Directors and Executive Officers
as a Group including the Directors
Named Above (4 persons) Preferred(3)(4) 1,075,000(4)(5) 95.1 50.4(8)
</TABLE>
* 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 Series A Preferred.
** Less than 1%.
52
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT-CONTINUED
FOOTNOTES
(1) Based on 3,943,217 Common Shares and 1,130,000 Series A Preferred Shares
outstanding on the date of this table, May 19, 1999.
(2) Pledged to secure third-party bank loan to Mr. Schwartz.
(3) Holders of Series A Preferred, 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 proxies granted to Richter Investment Corp. ("RIC"), 95.2% of the
Series A Preferred may be voted by RIC as of the date of this table. The
proxies are effective until such time that fewer than 500,000 shares of
Series A Preferred remain outstanding. See note 4 below.
(4) Includes 84,000 shares of Common Stock issuable upon exercise of options
and warrants, 178,750 shares of Series A Preferred, and 1,200 shares of
Common Stock held by spouse and 13,750 shares of Series A Preferred and
5,000 shares of Common Stock held by a family member. Also includes 550,000
shares of Series A Preferred and 321,600 shares of Common Stock held by
RIC, 296,375 shares of Common Stock and warrants (currently exercisable or
exercisable within 60 days) held by Richter & Co., Inc. ("RCI"). Also
includes an additional 332,500 shares of Series A Preferred as to which RIC
holds voting authority via proxy (see note 3 above). Mr. Richter holds a
controlling interest in 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 Series A Preferred, held by a partnership controlled by Mr.
Aufzien, are subject to a voting proxy granted to RIC.
(5) Excludes 332,500 shares of Series A Preferred as to which RIC holds voting
authority via proxy (see notes 3 and 4 above) because RIC would not have
voting or investment control of the converted Common Stock issued upon
conversion of such shares of Series A Preferred.
(6) Mr. Blum, Sr. is the father of Kenneth L. Blum, Jr. and Robin Cohn; see
note 7 below. Mr. Blum disclaims beneficial ownership of shares held by Mr.
Blum, Jr. and Ms. Cohn.
(7) Includes 1,087,500 shares issuable pursuant to currently exercisable
options and, in the case of Ms. Cohn, includes 166,667 shares held jointly
with spouse. See note 6 above. Mr. Blum, Jr. and Ms. Cohn disclaim
beneficial ownership of shares held by each other. For additional
information regarding options held by Mr. Blum, Jr. and Ms. Cohn, see
footnote 10 of the Company's audited financial statements found in Item 7.
53
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to footnote 9 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.
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, 1998 and 1999, as applicable.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
54
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998 and 1999
<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, 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(2) $277,000
======== ======== ======== ======== ========
MARCH 31, 1999
Allowance for
doubtful accounts $682,631 $188,574 $ -- $215,787(1) $655,418
======== ======== ======== ======== ========
Valuation allowance on
net deferred tax assets $277,000 $ -- $ -- $176,000(2) $101,000
======== ======== ======== ======== ========
</TABLE>
(1) Accounts written off
(2) Reduction in the valuation allowance based on evaluation of realization of
net deferred tax assets.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Rent-A-Wreck of America, Inc. has duly 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 23, 1999
- ------------------------------
Mitra Ghahramanlou
Chief Accounting Officer
Pursuant to the requirements of 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 indicated:
Signature and Title Date
------------------- ----
/s/ Kenneth L. Blum, Sr. June 23, 1999
- ------------------------------
Kenneth L. Blum, Sr.
Chairman of the Board
and Director (Principal
Executive Officer)
/s/ Mitra Ghahramanlou June 23, 1999
- ------------------------------
Mitra Ghahramanlou
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
/s/ Kenneth L. Blum, Jr. June 23, 1999
- ------------------------------
Kenneth L. Blum, Jr.
President and Director
/s/ William L. Richter June 23, 1999
- ------------------------------
William L. Richter
Vice Chairman of the Board
and Director
/s/ Alan Aufzien June 23, 1999
- ------------------------------
Alan Aufzien, Director
56
<PAGE>
RENT-A-WRECK OF AMERICA, INC.
EXHIBIT INDEX
FORM 10-KSB
FOR FISCAL YEAR
ENDED MARCH 31, 1999
Exhibit Incorporated
No. Exhibit by Reference from
--- ------- -----------------
3.1 Certificate of Incorporation Form 10-K for the Fiscal year
ended March 31, 1997.
3.2 Bylaws, as amended Form 10-K 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 Letter of Credit Form 10-QSB for the quarter
issued by the Bank of Butterfield, ended December 31, 1997.
as contained in application dated
June 20, 1997, with attached Letter
of Set-Off
4.15 Amendment to Letter Of Credit terms Form 10-KSB for the fiscal
of $638,000 by the Bank of year ended March 31, 1998
Butterfield, as contained in
application dated June 20, 1997,
with attached Letter of Set-Off
4.2 Financing Statement dated June 10, Form 10-QSB for the quarter
1997 by Rent-A-Wreck Leasing in ended June 30, 1997.
favor of The Chase Manhattan Bank
4.3 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by Rent-A-Wreck ended June 30, 1997.
Leasing in favor of The Chase
Manhattan Bank
4.4 Financing Statement dated June 10, Form 10-QSB for the quarter
1997 by Rent-A-Wreck Operation, ended June 30, 1997.
Inc. in favor of The Chase
Manhattan Bank
57
<PAGE>
4.5 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by Rent-A-Wreck ended June 30, 1997.
Operation, Inc. in favor of The
Chase Manhattan Bank
4.6 Financing Statement dated June 10, Form 10-QSB for the quarter
1997 by Rent-A-Wreck One Way in ended June 30, 1997.
favor of The Chase Manhattan Bank
4.7 General Security Agreement dated Form 10-QSB for the quarter
June 4,1997 by Rent-A-Wreck One Way ended June 30, 1997.
in favor of The Chase Manhattan
Bank
4.8 Financing Statement dated June 10, Form 10-QSB for the quarter
1997 by Bundy American Corporation ended June 30, 1997.
in favor of The Chase Manhattan
Bank
4.9 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by Bundy American ended June 30, 1997.
Corporation in favor of The Chase
Manhattan Bank
4.10 Financing Statement by Rent-A-Wreck Form 10-QSB for the quarter
of America, Inc. dated June 10, ended June 30, 1997.
1997 in favor of The Chase
Manhattan Bank
4.11 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by Rent-A-Wreck of ended June 30, 1997.
America, Inc. in favor of The Chase
Manhattan Bank
4.12 Financing Statement dated June 10, Form 10-QSB for the quarter
1997 by URM Corporation in favor of ended June 30, 1997.
The Chase Manhattan Bank
58
<PAGE>
4.13 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by URM Corporation in ended June 30, 1997.
favor of The Chase Manhattan Bank
4.14 Financing Statement dated June 6, Form 10-QSB for the quarter
1997 by Central Life and Casualty ended June 30, 1997.
Company, Limited in favor of The
Chase Manhattan Bank
4.15 General Security Agreement dated Form 10-QSB for the quarter
June 4, 1997 by Central Life and ended June 30, 1997.
Casualty Company, Limited, in favor
of The Chase Manhattan Bank
9 Voting Trust Agreement Form 10-K for the fiscal year
ended March 31, 1990
10.1 Option Plan Form 10-K for the fiscal year
ended March 31, 1993
10.2* Management Agreement - K.A.B., Inc. Form 8-K, dated June 30, 1993
Related party dated June 30, 1993
10.2.1* Amendment to Management Agreement Form 10-K for the fiscal year
with K.A.B., Inc., Related party ended March 31, 1997.
dated March 27, 1996
10.3* Stock Option Grant to K.A.B., Inc. Form 8-K, dated June 30, 1993
dated June 30, 1993 and Amendment No. 1 to Form
10-K for the fiscal year ended
March 31, 1997.
10.3.1* Amendment to Stock Option Grant to Form 10-K for the fiscal year
K.A.B., Inc. dated July 20, 1995 ended March 31, 1997.
10.4* Registration Rights Agreement dated Form 8-K, dated June 30, 1993
June 30, 1993, among K.A.B., Inc.,
Kenneth L. Blum, Jr., Alan S. Cohn
and the Company
10.5 Warrant Agreement - Richter & Co., Form 8-K, dated June 30, 1993
Inc.
10.6 Software Development and Computer Form 10-KSB for the fiscal
Usage Agreement effective January year ended March 31, 1995.
1, 1995 between National Computer
Services, Inc. and the Company.
59
<PAGE>
10.7 Financial Advisory Agreement Form 10-KSB for the fiscal
between the Company and Richter & year ended March 31, 1995.
Co., Inc. dated March 20, 1995.
10.8 Lease between the Company and Form 10-KSB for the fiscal
Owings Mills Commerce Centre year ended March 31, 1996.
Limited Partnership dated September
19, 1995 and subordination,
Attornment and Non-Disturbance
Agreement.
10.9 Franchise Agreement - standard form Form 10-KSB for the fiscal
as of August 3, 1995 year ended March 31, 1996.
10.10 Facultative Reinsurance Agreement Form 10-KSB for the fiscal
dated March 1, 1997 between year ended March 31, 1998.
National Union Fire Insurance
Company of Pittsburg, PA. and
Consolidated American Rental
Insurance Company, LTD.
10.11 Standby or Performance Letter of Form 10-KSB for the fiscal
Credit Application and Agreement year ended March 31, 1998.
dated June 3, 1997 between
Rent-A-Wreck Of America, Inc. and
The Chase Manhattan Bank
10.11.1 First Amendment dated June 1, 1998 Form 10-KSB for the fiscal
to the Standby or Performance year ended March 31, 1998.
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 Financial Data Schedule Filed herewith.
* Management contract or compensatory plan or arrangement.
60
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. RENT-A-WRECK/URM, INC. Maryland
5. CENTRAL LIFE AND CASUALTY COMPANY, LIMITED British Virgin Islands
6. CONSOLIDATED AMERICAN RENTAL INSURANCE COMPANY, LTD Bermuda
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RENT-A-WRECK
OF AMERICA, INC.'S 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,580,337
<SECURITIES> 0
<RECEIVABLES> 2,055,942
<ALLOWANCES> 655,418
<INVENTORY> 0
<CURRENT-ASSETS> 3,375,303
<PP&E> 674,570
<DEPRECIATION> 388,887
<TOTAL-ASSETS> 3,885,946
<CURRENT-LIABILITIES> 1,884,656
<BONDS> 0
11,391
0
<COMMON> 39,340
<OTHER-SE> 1,990,559
<TOTAL-LIABILITY-AND-EQUITY> 3,885,946
<SALES> 0
<TOTAL-REVENUES> 5,601,315
<CGS> 0
<TOTAL-COSTS> 2,543,021
<OTHER-EXPENSES> 1,799,293
<LOSS-PROVISION> 221,354
<INTEREST-EXPENSE> 21,780
<INCOME-PRETAX> 1,112,782
<INCOME-TAX> 254,807
<INCOME-CONTINUING> 857,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 857,975
<EPS-BASIC> .18
<EPS-DILUTED> .15
</TABLE>
