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 June 30, 1997
[ ] 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: 4,283,517 shares as of July
22, 1997.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - JUNE 30, 1997
INDEX
Part I. Financial Information Page
- ------------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and
June 30, 1997 (Unaudited) 2-3
Consolidated Statements of Earnings for
the Three Months ended
June 30, 1996 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Three Months ended June 30, 1996 and
1997 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-9
Part II. Other Information
- -------- -----------------
Item 1. Legal proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 5. Other Information-Retirement of
Stock Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Part I - Financial Information
Item 1 - Financial Statements
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, June 30,
1997 1997
----------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents, including restricted cash... $1,077,578 $1,107,123
Accounts Receivable, net of allowance
for doubtful accounts of $762,757 and $817,183 at
March 31, 1997 and June 30, 1997, respectively:
Continuing License Fees and
Advertising Fees................................. 291,181 301,782
Current Portion of Notes Receivable................ 415,072 478,562
Current Portion of Direct Financing
Leases........................................... 47,228 42,770
Insurance Premiums Receivable...................... 25,784 7,505
Other.............................................. 25,136 13,051
Prepaid Expenses....................................... 117,566 199,796
----------- ----------
TOTAL CURRENT ASSETS............................... 1,999,545 2,150,589
----------- ----------
PROPERTY AND EQUIPMENT:
Vehicles............................................. 53,025 62,115
Furniture, Equipment and Leasehold
Improvements....................................... 738,130 485,406
Less: Accumulated Depreciation and
Amortization.................................. (448,472) (201,950)
----------- -----------
NET PROPERTY AND EQUIPMENT............................. 342,683 345,571
----------- ----------
OTHER ASSETS:
Trademarks and other Intangible Assets, net of
accumulated amortization of $88,729 and $93,676 at
March 31, 1997 and June 30, 1997, respectively..... 219,086 215,206
Long-term Portion of Notes and Direct Financing Lease
Receivables, net of allowance of $16,278 and $14,979
at March 31, 1997 and June 30, 1997, respectively.. 32,629 36,168
----------- ----------
251,715 251,374
----------- ----------
TOTAL ASSETS....................................... $2,593,943 $2,747,534
=========== ==========
The accompanying notes are an integral part of this financial statement.
2
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, June 30,
1997 1997
----------- ----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses................ $ 720,338 $ 616,925
Dividends Payable.................................... 28,782 28,645
Insurance Premiums, Deposits, and Provision for
Loss............................................... 50,828 234,627
Current Maturities of Capital Lease Obligations...... 8,578 8,919
----------- ----------
TOTAL CURRENT LIABILITIES.......................... 808,526 889,116
----------- ----------
CAPITAL LEASE OBLIGATIONS, Less Current Maturities..... 30,089 27,727
----------- ----------
TOTAL LIABILITIES.................................. 838,615 916,843
----------- ----------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,439,125 shares at March
31, 1997 and 1,432,250 shares at June 30, 1997
(aggregate liquidation preference $1,151,300
at March 31, 1997 and $1,145,800 at June 30, 1997). 14,391 14,322
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding 4,234,767 shares at March 31, 1997 and
4,251,642 shares at June 30, 1997.................. 42,347 42,516
Additional Paid-In Capital........................... 3,021,490 3,033,890
Accumulated Deficit.................................. (1,322,900) (1,260,037)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY......................... 1,755,328 1,830,691
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................................... $2,593,943 $2,747,534
=========== ==========
The accompanying notes are an integral part of this financial statement.
3
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended June 30,
---------------------------
1996 1997
----------- ----------
REVENUES:
Initial License Fees................................ $ 228,000 $ 270,500
Advertising Fees.................................... 170,718 176,845
Continuing License Fees............................. 515,396 548,725
Direct Financing Leases to Franchisees.............. 2,365 375
Insurance Premiums.................................. 42,901 87,567
Other............................................... 21,535 43,319
----------- ----------
980,915 1,127,331
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits................................. 187,789 195,215
Sales and Marketing Expenses........................ 182,512 247,064
Advertising and Promotion.......................... 226,879 256,410
General and Administrative Expenses................. 192,259 231,055
Depreciation and Amortization....................... 28,341 30,544
----------- ----------
817,780 960,288
----------- ----------
OPERATING INCOME................................ 163,135 167,043
INTEREST INCOME, NET.................................. 15,271 18,091
----------- ----------
INCOME BEFORE INCOME TAX EXPENSE................ 178,406 185,134
----------- ----------
INCOME TAX EXPENSE.................................... 21,900 52,500
----------- ----------
NET INCOME...................................... $ 156,506 $ 132,634
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK..................................... 30,915 28,645
----------- ----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES........................ $ 125,591 $ 103,989
----------- ----------
EARNINGS PER COMMON SHARE............................. $ .03 $ .02
=========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING....................... 4,828,267 4,954,975
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
4
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
---------------------------
1996 1997
----------- -----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income ............................................ $ 156,506 $ 132,634
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ..................... 28,341 30,544
Provision for doubtful accounts ................... 80,687 53,127
Changes in assets and liabilities:
Accounts and notes receivable ................... (140,469) (95,936)
Prepaid expenses ............................. (9,301) (82,230)
Accounts payable and accrued
expenses ...................................... 11,919 (103,550)
Insurance premiums, deposits, and
loss reserves ................................. 14,335 183,799
----------- -----------
Net cash provided by operating activities ......... 142,018 118,388
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ................. (32,841) (28,347)
Additions to trademarks and other ..................... (11,012) (1,066)
----------- -----------
Net cash used in investing activities ............. (43,853) (29,413)
----------- -----------
Cash flow from financing activities:
Repayments of long-term debt .......................... (3,936) (2,021)
Issuance of common stock .............................. -- 12,500
Retirement of common stock ............................ (14,000) --
Retirement of preferred stock ......................... (27,019) --
Preferred dividends paid .............................. (64,185) (69,909)
----------- -----------
Net cash used in financing activities ............. (109,140) (59,430)
----------- -----------
Net increase in cash and cash
equivalents .................................... (10,975) 29,545
Cash and cash equivalents at beginning of period ........ 579,871 1,077,578
----------- -----------
Cash and cash equivalents at end of period .............. $ 568,896 $ 1,107,123
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ......................................... $ 1,480 $ 1,492
Taxes paid ............................................ $ 43,986 $ 52,890
Non-cash transactions:
Capital Lease Obligations ............................. $ 3,936 $ 2,021
The accompanying notes are an integral part of these consolidated statements.
5
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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 June 30, 1997, the consolidated
statements of earnings for the three-month periods ended June 30, 1996 and 1997
and the consolidated statements of cash flows for the three-month periods ended
June 30, 1996 and 1997 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. It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's March
31, 1997 audited financial statements. 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, 1997, preferred dividend arrearages were $274,180. The
Company paid $41,127 of these arrearages during the quarter ended June 30, 1997.
For the quarter ended June 30, 1997, the Company declared dividends totaling
$28,645 which are expected to be paid during the second quarter of the Company's
fiscal year.
6
3.EARNINGS PER COMMON SHARE
The computation of earnings per common share for the three-month
periods ended June 30, 1996 and 1997, respectively, is presented on a fully
diluted basis and is based upon the weighted average number of common shares
outstanding for those periods. Any dilutive effect of stock options and warrants
was considered in computation of earnings per common share. In the computation
for the three-month periods ended June 30, 1996 and 1997, cumulative preferred
dividends in the amounts of $30,915 and $28,645 were subtracted from net income
to arrive at the earnings applicable to common shareholders.
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 of Financial
- --------------------------------------------------------
Condition and Results of Operations
-----------------------------------
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30,
1996
Revenue from franchising operations which includes initial license
fees, continuing license fees and direct financing leases increased by $73,839
(10%). This increase occurred primarily due to an increase in initial license
fees and continuing license fees. The initial license fees increased by $42,500
(19%) due to the addition of new franchises and the continuing license fees
increased by $33,329 (6%) due to the fleet growth at existing franchises and the
Company's dedication of more resources to the collection effort. Revenues from
insurance premiums were $72,573 due to the new reinsurance program that started
in March 1997, partially offset by a $12,190 (48%) reduction in the physical
damage insurance program ("CLC") and by a $17,419 (100%) reduction in the
national insurance program ("URM") due to its termination and replacement by CAR
Insurance. Other revenue increased by $21,784 (101%) due primarily to increased
internal marketing activity.
Total operating expenses increased by $142,508 (17%) in this period
compared to the same period in the prior year. Salary expense increased by
$7,426 (4%) primarily as a result of additional hires in response to the growth
of the Company. General and administrative expenses increased by $38,796 (20%),
which resulted primarily from additional expenses related to
7
the new reinsurance company. Sales and marketing expenses increased by $64,552
(35%), which resulted primarily from the new reinsurance program, an addition to
commission expense due to a larger amount of franchise sales made in this period
compared to the same period in the prior year, and a partially non-recurring
promotional campaign to sell more franchises.
Net interest income increased $2,820 (18%), primarily due to the
Company's collection effort.
Depreciation and amortization expense increased by $2,203 (8%) 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.
The Company realized operating income of $167,043, before taxes and
interest, for the three-month period ended June 30, 1997 compared to operating
income of $163,135 for the same period in the prior year, reflecting an increase
of $3,908 (2%). This increase resulted primarily from the increase in initial
license fees and continuing license fees due to the addition of new franchises
and the Company's collection efforts.
Income tax expense for the three-month period ended June 30, 1997
increased by $30,600 (140%) compared to the three-month period ended June 30,
1996 due to higher pre-tax earnings and the depletion of the Company's federal
income tax net operating loss carryforward.
Inflation has had no material impact on the operations and financial
condition of the Company for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $1,261,473
compared to $1,191,019 at March 31, 1997. This increase of $70,454 primarily
resulted from the net profit earned during the three-month period ended June 30,
1997.
The Company has finalized an $800,000 letter of credit with The Chase
Manhattan Bank ("Chase") in connection with the Company's new CAR Insurance
subsidiary. This letter of credit is part of the reinsurance agreement with
American International Group ("AIG") to secure payment of claims. Funds drawn
against the letter of credit bear interest at 3% plus Chase's prime commercial
lending rate (which prime rate was 8.5% on August 8, 1997). For the quarter
ended June 30, 1997, 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 is committed under capital lease agreements for various
equipment, and it rents its office facilities under the terms of an operating
lease. The capital lease obligations were $38,667 and $36,646 at June 30,
8
1996 and June 30, 1997, respectively. The Company is utilizing its working
capital to pay for these obligations.
The furniture, equipment and leasehold improvements decreased by
$252,724 (34%). This decrease accrued primarily due to writing off the assets
that were not in use and were fully depreciated.
Cash provided by operations was $118,388, resulting from an increase in
net income and an increase in insurance premiums, deposits, and loss reserves
offset by an increase in accounts and notes receivable and a decrease in
accounts payable and accrued expenses. Insurance premiums, deposits, and loss
reserves increased due to the new insurance program. Accounts and notes
receivable increased primarily from addition of new franchises which financed a
portion of their initial fees owed to the Company by notes issued by the
Company. Accounts payable and accrued expenses decreased primarily due to the
Company's payments on the year-end audit and new advertising programs. Cash used
in investing activities of $29,413 related primarily to the acquisition of
computer software and hardware and maintaining trademarks. Cash used in
financing activities was $59,430, which was applied to payments of preferred
dividends offset by issuance of common stock in connection with the acquisition
of assets.
The Company believes cash provided by operations and its letter of
credit will provide sufficient working capital to support its business plan
through fiscal 1998.
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, 1997.
All forward-looking statements should be considered in light of these risks and
uncertainties.
9
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 June 30, 1996 and 1997 and with respect to the balance
sheets thereof at June 30 in each of those years.
The selected financial data have been derived from the Company's
unaudited consolidated financial statements and should be read in conjunction
with the financial statements and related notes thereto and other financial
information appearing elsewhere herein.
Quarters ended June 30,
-----------------------
1996 1997
-----------------------
(in thousands except per share
and number of franchises)
(Unaudited)
Franchisees' Results
Franchisees' revenue (1) $8,590 $9,145
Number of franchises 444 468
Results of Operations
Total revenue $ 981 $1,127
Total expense 818 960
Income before income
taxes 178 185
Net income 156 132
Earnings per common share (2) $ .03 $ .02
Weighted average number of
shares outstanding 4,828 4,955
Balance Sheet Data
Working capital $ 927 $1,261
Total assets $2,238 $2,748
Long-term obligations $ 35 $ 28
Shareholders' equity $1,424 $1,831
(1) The franchisees' revenue data have been derived from unaudited
reports provided by franchisees in paying license fees.
(2) Earnings per common share are after deducting a provision for
preferred dividends of $30,915 and $28,645 in the quarters ended June 30, 1996
and 1997, respectively.
10
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
Information is incorporated by reference from the Company's Report Form
10-KSB for the year ended March 31, 1997 under the caption "Item 3 Legal
Proceedings".
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
The Company issued 6,875 shares of its common stock on June 4, 1997
pursuant to section 3(a)(9) of the Securities Act of 1933, as amended. The
shares were issued to a holder of the Company's preferred shares who converted
his preferred shares into common shares on a one-for-one basis.
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 5. OTHER INFORMATION-RETIREMENT OF STOCK INFORMATION
- ------- -------------------------------------------------
During the quarter ended June 30, 1997, 6,875 shares of preferred stock
were converted to common shares, reducing total outstanding preferred shares
from 1,439,125 to 1,432,250.
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.
11
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 Khosravi August 11, 1997
- ----------------------- ---------------------
Mitra Khosravi
Chief Accounting Officer
/s/Kenneth L. Blum, Sr. August 11, 1997
- ----------------------- ---------------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
12
EXHIBIT INDEX
TO
RENT-A-WRECK of AMERICA, INC.
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1997
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Standby or Performance Letter of Credit Application And
Agreement to the Chase Manhattan Bank dated June 3, 1997.
4.2 Financing Statement dated June 10, 1997 by Rent-A-Wreck
Leasing in favor of The Chase Manhattan Bank
4.3 General Security Agreement dated June 4, 1997 by Rent-A-Wreck
Leasing in favor of The Chase Manhattan Bank
4.4 Financing Statement dated June 10, 1997 by Rent-A-Wreck
Operation, Inc. in favor of The Chase Manhattan Bank
4.5 General Security Agreement dated June 4, 1997 by Rent-A-Wreck
Operation, Inc. in favor of The Chase Manhattan Bank
4.6 Financing Statement dated June 10, 1997 by Rent-A-Wreck One
Way in favor of The Chase Manhattan Bank
4.7 General Security Agreement dated June 4, 1997 by Rent-A-Wreck
One Way in favor of The Chase Manhattan Bank
4.8 Financing Statement dated June 10, 1997 by Bundy American
Corporation in favor of The Chase Manhattan Bank
4.9 General Security Agreement dated June 4, 1997 by Bundy
American Corporation in favor of The Chase Manhattan Bank
4.10 Financing Statement by Rent-A-Wreck of America, Inc. dated
June 10, 1997 in favor of Chase Manhattan Bank
4.11 General Security Agreement dated June 4, 1997 by Rent-A-Wreck
of America, Inc. in favor of The Chase Manhattan Bank
13
4.12 Financing Statement dated June 10, 1997 by URM Corporation in
favor of The Chase Manhattan Bank
4.13 General Security Agreement dated June 4, 1997 by URM
Corporation in favor of The Chase Manhattan Bank
4.14 Financing Statement dated June 6, 1997 by Central Life and
Casualty Company, Limited in favor of The Chase Manhattan Bank
4.15 General Security Agreement dated June 4, 1997 by Central Life
and Casualty Company, Limited, in favor of The Chase Manhattan
Bank
10.1 Amendment to Management Agreement between Rent-A-Wreck Of
America, Inc., and K.A.B., Inc. effective July 1, 1997.
27 Financial Data Schedule
14