U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-14819
RENT-A-WRECK OF AMERICA, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its Charter)
Delaware 95-3926056
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11460 Cronridge Drive, Suite 120, Owings Mills, Md 21117
- -------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (410) 581-5755
--------------
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,035,792 shares as of January
18, 1999.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - DECEMBER 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and
December 31, 1998 (Unaudited) 2-3
Consolidated Statements of Earnings for
the Three and Nine Months ended
December 31, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Nine Months ended December 31,
1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-8
Item 2. Management's Discussion and Analysis or
Plan of Operations 8-12
PART II. OTHER INFORMATION
Item 1. Legal proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1998
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ..................... $1,215,615 $1,236,715
Restricted Cash ............................... 394,021 742,147
Accounts Receivable, net of allowance
for doubtful accounts of $682,631 and
$809,361 at March 31, 1998 and
December 31, 1998, respectively:
Continuing License Fees and
Advertising Fees ........................ 302,367 354,092
Current Portion of Notes Receivable ....... 342,765 445,204
Current Portion of Direct Financing
Leases .................................. 37,653 12,411
Insurance Premiums Receivable ............. 560,219 --
Other ..................................... 176,166 242,726
Prepaid Expenses .............................. 133,856 149,451
---------- ----------
TOTAL CURRENT ASSETS ........................ 3,162,662 3,182,746
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture ..................................... 71,655 92,405
Computer Hardware and Software ................ 314,657 359,421
Machinery and Equipment ....................... 101,868 103,750
Leasehold Improvements ........................ 37,896 37,896
Vehicles ...................................... 23,347 94,750
---------- ----------
549,423 688,222
Less: Accumulated Depreciation and
Amortization ............................ (265,476) (351,851)
---------- ----------
NET PROPERTY AND EQUIPMENT ..................... 283,947 336,371
---------- ----------
OTHER ASSETS:
Trademarks and other Intangible Assets,
net of accumulated amortization of
$105,951 and $121,092 at March 31, 1998
and December 31, 1998, respectively .......... 203,129 194,684
Long-term Portion of Notes and Direct
Financing Lease Receivables .................. 14,374 13,022
---------- ----------
217,503 207,706
---------- ----------
TOTAL ASSETS ............................... $3,664,112 $3,726,823
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1998 1998
---------- ----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ............. $ 634,374 $ 695,234
Dividends Payable ................................. 27,320 27,320
Insurance Premiums Payable ........................ 488,397 58,637
Insurance Fees, Claims, and Loss Reserves ......... 244,815 329,794
Income Taxes Payable .............................. 239,316 227,276
Other ............................................. 1,506 1,506
---------- ----------
TOTAL CURRENT LIABILITIES ....................... 1,635,728 1,339,767
---------- ----------
TOTAL LIABILITIES ............................... 1,635,728 1,339,767
---------- ----------
COMMITMENTS AND CONTINGENCIES ...................... -- --
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,366,000 shares at
March 31, 1998 and December 31, 1998
(aggregate liquidation preference $1,092,800
at March 31, 1998 and December 31, 1998) ........ 13,660 13,660
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding 4,189,692 shares at March 31, 1998
and 4,035,792 shares at December 31, 1998 ....... 41,896 40,358
Additional Paid-In Capital ........................ 2,900,382 2,709,333
Accumulated Deficit ............................... (927,554) (376,295)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ..................... 2,028,384 2,387,056
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ....................................... $3,664,112 $3,726,823
========== ==========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1998 1997 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Initial License Fees.................... $ 237,250 $ 228,250 $ 633,500 $ 907,301
Advertising Fees ....................... 173,274 217,073 565,033 667,813
Continuing License Fees ................ 525,425 647,829 1,827,426 2,021,895
Insurance premiums ..................... 159,121 202,357 395,124 565,374
Vehicle Rental Operations .............. 3,508 3,910 11,717 12,200
Other .................................. 33,645 45,011 109,212 121,720
---------- ---------- ---------- ----------
1,132,223 1,344,430 3,542,012 4,296,303
---------- ---------- ---------- ----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits ...................... 192,915 225,812 583,808 650,805
Sales and Marketing Expenses ............ 101,976 163,752 380,185 532,713
Advertising and Promotion ............... 274,178 303,040 845,221 947,518
Underwriting Expenses ................... 158,486 174,432 341,120 464,478
General and Administrative Expenses ..... 226,197 213,325 713,256 668,301
Depreciation & Amortization ............. 29,295 35,045 90,091 105,179
---------- ---------- ---------- ----------
983,047 1,115,406 2,953,681 3,368,994
---------- ---------- ---------- ----------
OPERATING INCOME .................... 149,176 229,024 588,331 927,309
INTEREST INCOME, NET ..................... 13,418 20,407 45,985 52,436
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE .... 162,594 249,431 634,316 979,745
---------- ---------- ---------- ----------
INCOME TAX EXPENSE ....................... 47,266 73,422 194,369 302,224
---------- ---------- ---------- ----------
NET INCOME.......................... $ 115,328 $ 176,009 $ 439,947 $ 677,521
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK ........................ 27,733 27,320 84,111 81,960
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES............ $ 87,595 $ 148,689 $ 355,836 $ 595,561
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic................................... $ .02 $ .04 $ .08 $ .15
---------- ---------- ---------- ----------
Weighted average common shares ........... 4,292,454 4,078,781 4,276,386 4,106,907
========== ========== ========== ==========
Diluted................................. $ .02 $ .03 $ .07 $ .12
---------- ---------- ---------- ----------
Weighted average common shares
plus options and warrants ............... 5,919,012 5,568,516 5,902,944 5,596,642
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31,
------------------------------
1997 1998
---------- ----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income ...................................... $ 439,947 $ 677,521
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................. 90,091 105,179
Gain on disposal of property and equipment .... (4,152) (1,577)
Provision for doubtful accounts ............... (108,575) 126,730
Changes in assets and liabilities:
Accounts and notes receivable and other ....... 167,240 239,359
Prepaid expenses .............................. (62,597) (15,595)
Accounts payable and accrued
expenses ..................................... (124,436) 60,860
Income Taxes Payable .......................... 108,362 (12,040)
Insurance fees, claims, and
loss reserves ................................ 148,101 84,979
----------- -----------
Net cash provided by operating activities ... 653,981 1,265,416
----------- -----------
Cash flows from investing activities:
Decrease (Increase) in restricted cash .......... 52,592 (348,126)
Proceeds from sale of property and equipment .... 29,160 42,386
Acquisition of property and equipment ........... (55,870) (183,272)
Additions to trademarks and other ............... (852) (6,694)
----------- -----------
Net cash used in investing activities ....... 25,030 (495,706)
----------- -----------
Cash flow from financing activities:
Increase (Decrease) in insurance premiums
payable ....................................... 59,581 (429,760)
Issuance of common stock ........................ 25,000 16,000
Repayments of long-term debt .................... (38,667) --
Retirement of warrants .......................... -- (10,000)
Retirement of common stock ...................... (18,189) (198,588)
Preferred dividends paid ........................ (126,287) (126,262)
----------- -----------
Net cash used in financing activities ....... (98,562) (748,610)
----------- -----------
Net increase in cash and cash equivalents ... 580,449 21,100
Cash and cash equivalents at beginning
of period ....................................... 531,127 1,215,615
----------- -----------
Cash and cash equivalents at end of period ....... $ 1,111,576 $ 1,236,715
=========== ===========
Supplemental disclosure of cash
flow information:
Interest paid .................................. $ 16,106 17,947
Taxes paid ..................................... $ 87,044 $ 367,758
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements presented herein include the accounts
of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned
subsidiaries, Rent-A-Wreck Operations, Inc. ("RAW OPS"), Rent-A-Wreck One Way,
Inc. ("RAW One Way"), Consolidated American Rental Insurance Company, LTD ("CAR
Insurance") and Bundy American Corporation ("Bundy"), and Bundy's subsidiaries,
Rent-A-Wreck Leasing, Inc. ("RAW Leasing"), URM Corporation ("URM") and Central
Life and Casualty Company, Limited ("CLC").
All of the above entities are collectively referred to as the "Company"
unless the context provides or requires otherwise. All material intercompany
balances and transactions have been eliminated.
The consolidated balance sheet as of December 31, 1998, the consolidated
statements of earnings for the three and nine-month periods ended December 31,
1997 and 1998 and the consolidated statements of cash flows for the nine- month
periods ended December 31, 1997 and 1998 have been prepared by the Company
without audit. In the opinion of management, all adjustments which are necessary
to present a fair statement of the results of operations for the interim periods
have been made, and all such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's March 31, 1998 annual report on Form 10-KSB. The results of operations
for the interim periods are not necessarily indicative of the results for a full
year.
2. PREFERRED STOCK
As of March 31, 1998, preferred dividend arrearages were $221,511. The
Company paid $44,302 of these arrearages during the quarter ended June 30, 1998.
A quarterly preferred dividend of $27,320 was declared for the first quarter
ended June 30, 1998 and it was paid on August 6, 1998. For the quarter ended
September 30, 1998, the Company declared preferred dividends totaling $27,320
which were paid on November 11, 1998. For the quarter ended December 31, 1998,
the Company declared dividends totaling $27,320 which are expected to be paid
during the fourth quarter of the Company's fiscal year. As of December 31, 1998,
preferred dividend arrearages were $177,209.
6
<PAGE>
3.EARNINGS PER SHARE
A reconciliation of the numerators and denominators utilized in the
computation of basic and diluted earnings per share for the three-month and
nine-month periods ended December 31, 1997 and 1998 is as follows:
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1998 1997 1998
---------- ---------- ---------- ----------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to
common and common
equivalent shares $ 87,595 $ 148,689 $ 355,836 $ 595,561
Denominator:
Weighted average common
shares 4,292,454 4,078,781 4,276,386 4,106,907
---------- ---------- ---------- ----------
Basic EPS $ .02 $ .04 $ .08 $ .15
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to
common and common
equivalent shares $ 87,595 $ 148,689 $ 355,836 $ 595,561
Dividends on convertible
preferred stock 27,733 27,320 84,111 81,960
---------- ---------- ---------- ----------
115,328 176,009 439,947 677,521
---------- ---------- ---------- ----------
Denominator:
Weighted average common
shares 4,292,454 4,078,781 4,276,386 4,106,907
Convertible preferred
stock 1,386,625 1,366,000 1,386,625 1,366,000
Weighted average options
and warrants 239,933 123,735 239,933 123,735
---------- ---------- ---------- ----------
5,919,012 5,568,516 5,902,944 5,596,642
---------- ---------- ---------- ----------
Diluted EPS $ .02 $ .03 $ .07 $ .12
========== ========== ========== ==========
7
<PAGE>
4.LITIGATION
The Company is party to legal proceedings incidental to its business from
time to time. Certain claims, suits and complaints arise in the ordinary course
of business and may be filed against the Company. Based on facts now known to
the Company, management believes all such matters are adequately provided for,
covered by insurance or, if not so covered or provided for, are without merit,
or involve such amounts that would not materially adversely affect the
consolidated results of operations or financial position of the Company.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS-THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
DECEMBER 31, 1997
Revenue from franchising operations, which includes initial license fees,
continuing license fees and advertising fees, increased by $157,203 (17%).
Continuing license fees increased by $122,404 (23%) and advertising fees
increased by $43,799 (25%). These increases resulted primarily from the fleet
growth at existing franchises, the addition of new franchises and the Company's
dedication of additional resources to the collection effort. Revenues from
insurance premiums increased by $43,236 (27%) due to higher participation by the
Company's franchisees in the CAR Insurance program that began operations in
March 1997.
Total operating expenses increased by $132,359 (13%) in this period
compared to the same three-month period in the prior year. Salary expense
increased by $32,897 (17%) primarily as a result of hiring additional employees
in response to the growth of the Company. Sales and marketing expenses increased
by $61,776 (61%) due to an increase in bad debt expense in this period compared
to the same period in the prior year, as the prior year included the recovery of
a bad debt previously reserved. Advertising and promotion expenses increased by
$28,862 (11%), which resulted primarily from an increase in national advertising
expense to promote the Company. Insurance underwriting expenses increased by
$15,946 (10%) 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. General and administrative expenses decreased by
$12,872 (6%), which resulted primarily from a reduction in legal fees.
Depreciation and amortization expense increased by $5,750 (20%) in this
period compared to the same period in the prior year. This increase was
primarily due to the additional investment in computer software and hardware and
the purchase of three additional vehicles.
8
<PAGE>
Net interest income increased $6,989 (52%). This increase was primarily due
to interest earned on the increased cash reserves which are held in interest
bearing accounts.
The Company realized operating income of $229,024, before taxes and
interest, for the three-month period ended December 31, 1998 compared to
operating income of $149,176 for the same period in the prior year, reflecting
an increase of $79,848 (54%). This increase resulted primarily from the increase
in continuing license fees and insurance premiums due to the addition of new
franchises and the Company's collection efforts.
Income tax expense for the three-month period ended December 31, 1998
increased by $26,156 (55%) compared to the three-month period ended December 31,
1997 due to higher pre-tax earnings.
YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR
Net revenues increased by $754,291 (21%) for the nine-month period ended
December 31, 1998 as compared to the same period in the prior year. This
increase occurred due to a $273,801 (43%) increase in initial license fees, a
$194,469(11%) increase in continuing license fees, a $102,780 (18%)increase in
advertising fees, and a $170,250 (43%) increase in premiums in connection with
the new reinsurance program. These increases occurred for the same reasons
indicated above.
Total operating expenses increased by $415,313 (14%) in this period
compared to the same period in the prior year. Salary expense increased by
$66,997 (11%) primarily as a result of additional employees in response to the
growth of the Company. Sales and marketing expenses increased by $152,528 (40%),
which resulted primarily from a larger amount of franchise sales made in the
current nine-month period compared to the same period in the prior year, the
repurchase of a territory from an existing franchisee which was resold by the
Company at a profit, and from the recovery of a bad debt in the prior year which
had been fully reserved. Advertising and promotion expenses increased by
$102,297 (12%), which resulted primarily from an increase in national
advertising expense to promote the Company and the expenses arising from a
lawsuit with a competitor concerning limits on the use of certain advertising
slogans and names. Underwriting expenses increased by $123,358 (36%) due to an
increase in paid losses and loss reserves for future claims in connection with
higher participation by the Company's franchisees. General and administrative
expenses decreased by $44,955 (7%), which resulted primarily from a reduction in
legal fees.
Depreciation and amortization expense increased by $15,088 (17%) for the
nine-month period ended December 31, 1998 as compared to the same period in the
prior year. This increase was primarily due to the additional investment in
computer software and hardware and due to the purchase of three additional
vehicles.
9
<PAGE>
The Company realized operating income of $927,309, before taxes and
interest, for the nine-month period ended December 31, 1998 as compared to
operating income of $588,331 for 1997, reflecting an increase of $338,978 (58%).
This increase resulted primarily from the increase in initial license fees,
continuing license fees and insurance premiums.
Income tax expense for the nine-month period ended December 31, 1998
increased by $107,855 (55%) compared to the nine-month period ended December 31,
1997 due to higher pre-tax earnings.
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
a possible acceleration in exercisability if certain financial or stock targets
were achieved. The year to date earnings may result in certain Unvested Options
held by affiliates becoming exercisable as a result of achieving certain
profitability 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
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.
10
<PAGE>
Consequently, if the Profits for the year ending March 31, 1999 meet or
exceed $750,000, then 500,000 Unvested Options will become exercisable, and if
Profits exceed $1,000,000, then all 1,250,000 Unvested Options will become
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).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $1,842,979
compared to $1,526,934 at March 31, 1998. This increase of $316,045 resulted
primarily from the net profit earned during the nine-month period ended December
31, 1998.
The Company has a $1,000,000 letter of credit from The Chase Manhattan Bank
("Chase") in connection with the Company's CAR Insurance subsidiary. This letter
of credit is part of the reinsurance agreement with American International Group
("AIG") to secure payment of claims. If funds were drawn against the letter of
credit due to a default, the borrowings would bear interest at 3% plus Chase's
prime commercial lending rate (which prime rate was 7.75% on January 15, 1999).
For the quarter ended December 31, 1998, AIG did not draw any funds from the
letter of credit. This letter of credit is secured by all of the Company's
assets.
Property and equipment increased by $67,396 (13%) from March 31, 1998 to
December 31, 1998. This increase occurred primarily due to additional investment
in computer software and hardware. Vehicles increased by $71,403 (306%) from
March 31, 1998 to December 31, 1998 due to the purchase of two vehicles for the
one-way program and a vehicle for use by the Company.
Cash provided by operations was $1,265,416, resulting primarily from net
income before depreciation plus the decrease in accounts and notes receivable,
increase in insurance fees, claims and loss reserves, increase in accounts
payable and accrued expenses, offset by the increase in the Company's prepaid
expenses and decrease in income taxes payable. Accounts and notes receivable in
conjunction with the Company's franchising program increased by $254,300
primarily due to a higher volume of sales. Accounts receivable relating to the
reinsurance program decreased by $560,219 as a result of funds received from the
finance company. Prepaid expenses increased primarily due to the purchase of
additional promotional items. Accounts payable and accrued expenses increased
primarily from higher commissions payable and accrued national advertising
expense. Income taxes payable decreased primarily due to income taxes paid for
the year ended March 31, 1998.
11
<PAGE>
Cash used in investing activities of $495,706 related primarily to an
increase in restricted cash as required by the Company's letter of credit, the
acquisition of computer software and hardware, three vehicles and the annual
costs associated with renewing trademarks.
Cash used in financing activities during the same period was $748,610,
resulting from a decrease in insurance premiums payable and the payment of
preferred dividends and buyback of common stock and warrants offset by the
issuance of common stock in connection with warrants which were exercised.
In June 1995 and April 1996, the Company approved the repurchase of up to a
total of 500,000 shares of the Company's outstanding common or preferred stock.
On April 23, 1998, the Company approved the repurchase of up to an additional
500,000 shares of the Company's outstanding common or preferred stock. For the
nine months ended December 31, 1998, the Company repurchased and retired 183,900
shares of its common stock. As of December 31, 1998, the Company has repurchased
and retired a total of 662,000 shares under this program. A total of 338,000
shares are still available for repurchase under this 1998 repurchase program.
The Company believes it has sufficient working capital to support its
business plan through fiscal 1999.
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company.
The statements regarding anticipated future performance of the Company
contained in this report are forward-looking statements which are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties that
could cause the Company's actual results to differ materially from the
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to, the Company's limited experience in
the reinsurance business and the potential for negative claims experience, the
effects of government regulation of the Company's franchise and insurance
programs including maintaining properly registered franchise documents and
making any required alterations in the Company's franchise program to comply
with changes in the laws, competitive pressures from other motor vehicle rental
companies which have greater marketing and financial resources than the Company,
protection of the Company's trademarks, and the dependence on the Company's
relationships with its franchisees. These risks and uncertainties are more fully
described under the caption, "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Important Factors" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998.
All forward-looking statements should be considered in light of these risks and
uncertainties.
12
<PAGE>
YEAR 2000 ISSUE
The Year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with embedded technology that are time
sensitive may recognize the date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions or engage in ordinary business activities.
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 December 31, 1998, the Company had incurred costs of
approximately $1,000. The Company presently believes that the Year 2000 issue
will not pose significant operational problems for the Company; however, if all
Year 2000 issues are not properly identified or if assessment, remediation and
13
<PAGE>
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
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.
14
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of earnings of the Company and its subsidiaries for the
fiscal quarters ended December 31, 1997 and 1998 and with respect to the balance
sheets thereof at December 31 in each of those years.
The selected financial data have been derived from the Company's unaudited
consolidated financial statements and should be read in conjunction with the
financial statements and related notes thereto and other financial information
appearing elsewhere herein.
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1998 1997 1998
---- ---- ---- ----
(in thousands except per share and
number of franchises)
(Unaudited)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) $8,575 $10,797 $30,457 $33,698
Number of Franchises 485 623 485 623
RESULTS OF OPERATIONS
Total Revenue $1,132 $ 1,344 $ 3,542 $ 4,296
Costs and expenses and
Other 983 1,115 2,954 3,369
Income before income
taxes 163 249 634 980
Net income 115 176 440 678
Earnings per share:
Basic $ .02 $ .04 $ .08 $ .15
Weighted average common
shares 4,292 4,079 4,276 4,107
Diluted $ .02 $ .03 $ .07 $ .12
Weighted average common
shares 5,919 5,569 5,903 5,597
Nine Months
Ended December 31,
1997 1998
---- ----
(Unaudited)
BALANCE SHEET DATA
Working capital $1,558 $1,843
Total assets $3,065 $3,727
Shareholders' equity $2,074 $2,387
(1) The franchisees' revenue data have been derived from unaudited reports
provided by franchisees submitted when paying license fees and advertising
fees to the Company.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to legal proceedings incidental to its business from
time to time. Certain claims, suits and complaints arise in the ordinary course
of business and may be filed against the Company. Based on facts now known to
the Company, management believes all such matters are adequately provided for,
covered by insurance or, if not so covered or provided for, are without merit,
or involve such amounts that would not materially adversely affect the
consolidated results of operations or financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information disclosed in footnote 2 to the financial statements
provided in Part I Item 1 of this Report on Form 10-QSB is incorporated herein
by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
During the nine-month period ended December 31, 1998, the Company
repurchased for $198,588 and retired 183,900 shares of its common stock,
reducing total outstanding common shares from 4,189,692 to 4,035,792 as of
December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the Signatures page, which is incorporated
herein by reference.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RENT-A-WRECK OF AMERICA, INC.
(Registrant)
By: Date:
/s/ Mitra Ghahramanlou February 3, 1999
- ---------------------------- ----------------
Mitra Ghahramanlou
Chief Accounting Officer
/s/ Kenneth L. Blum, Sr. February 3, 1999
- ---------------------------- ----------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
17
<PAGE>
EXHIBIT INDEX
TO
RENT-A-WRECK of AMERICA, INC.
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 1998
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule Filed herewith.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RENT-A-WRECK
OF AMERICA, INC.'S 10-QSB FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,978,862
<SECURITIES> 0
<RECEIVABLES> 1,634,090
<ALLOWANCES> 809,361
<INVENTORY> 0
<CURRENT-ASSETS> 3,182,746
<PP&E> 688,222
<DEPRECIATION> 351,851
<TOTAL-ASSETS> 3,726,823
<CURRENT-LIABILITIES> 1,339,767
<BONDS> 0
13,660
0
<COMMON> 40,358
<OTHER-SE> 2,333,038
<TOTAL-LIABILITY-AND-EQUITY> 3,726,823
<SALES> 0
<TOTAL-REVENUES> 4,296,303
<CGS> 0
<TOTAL-COSTS> 1,944,709
<OTHER-EXPENSES> 1,356,488
<LOSS-PROVISION> 67,797
<INTEREST-EXPENSE> 6,339
<INCOME-PRETAX> 979,745
<INCOME-TAX> 302,224
<INCOME-CONTINUING> 677,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677,521
<EPS-PRIMARY> .15
<EPS-DILUTED> .12
</TABLE>
