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, 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
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(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: 4,268,692 shares as of
February 4, 1998.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - December 31, 1997
INDEX
Part I. Financial Information Page
- ------------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and
December 31, 1997 (Unaudited) 2-3
Consolidated Statements of Earnings for
the Three and Nine Months ended
December 31, 1996 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Nine Months ended December 31, 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 7-15
Part II. Other Information
- ---------------------------
Item 1. Legal proceedings 16
Item 3. Defaults Upon Senior Securities 16
Item 5. Other Information-Retirement of
Stock Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Part I - Financial Information
Item 1 - Financial Statements
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1997 1997
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ........................................... $ 531,035 $ 1,105,554
Restricted cash ..................................................... $ 546,543 $ 499,878
Accounts Receivable, net of allowance
for doubtful accounts of $762,757 and $670,460 at
March 31, 1997 and December 31, 1997, respectively:
Continuing License Fees and
Advertising Fees .............................................. 291,181 302,269
Current Portion of Notes Receivable ............................. 415,072 393,179
Current Portion of Direct Financing
Leases ........................................................ 47,228 39,307
Insurance Premiums Receivable ................................... 25,784 17,861
Other ........................................................... 25,136 11,086
Prepaid Expenses .................................................... 117,566 180,163
----------- -----------
TOTAL CURRENT ASSETS ............................................ 1,999,545 2,549,297
----------- -----------
PROPERTY AND EQUIPMENT:
Vehicles .......................................................... 53,025 19,590
Furniture, Equipment and Leasehold
Improvements .................................................... 738,130 514,716
Less: Accumulated Depreciation and
Amortization ............................................... (448,472) (240,639)
----------- -----------
NET PROPERTY AND EQUIPMENT .......................................... 342,683 293,667
----------- -----------
OTHER ASSETS:
Trademarks and other Intangible Assets, net of
accumulated amortization of $88,729 and $100,971
at March 31, 1997 and December 31, 1997,
respectively .................................................... 219,086 207,696
Long-term Portion of Notes and Direct Financing Lease
Receivables, net of allowance of $16,278 and $0
at March 31, 1997 and December 31, 1997,
respectively .................................................... 32,629 14,662
----------- -----------
251,715 222,358
----------- -----------
TOTAL ASSETS .................................................... $ 2,593,943 $ 3,065,322
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1997 1997
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses .......................... $ 720,338 $ 705,314
Dividends Payable .............................................. 28,782 27,733
Insurance Premiums, Deposits, and Provision for
Loss ......................................................... 50,828 258,510
Current Maturities of Capital Lease Obligations ................ 8,578 --
----------- -----------
TOTAL CURRENT LIABILITIES .................................... 808,526 991,557
----------- -----------
CAPITAL LEASE OBLIGATIONS, Less Current Maturities ............... 30,089 --
----------- -----------
TOTAL LIABILITIES ............................................ 838,615 991,557
----------- -----------
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 1,386,625 shares at December 31, 1997
(aggregate liquidation preference $1,151,300
at March 31, 1997 and $1,109,300 at
December 31, 1997) ........................................... 14,391 13,866
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding 4,234,767 shares at March 31, 1997 and
4,268,692 shares at December 31, 1997 ........................ 42,347 42,687
Additional Paid-In Capital ..................................... 3,021,490 3,006,684
Accumulated Deficit ............................................ (1,322,900) (989,472)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................................... 1,755,328 2,073,765
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ..................................................... $ 2,593,943 $ 3,065,322
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended December 31, Ended December 31,
1996 1997 1996 1997
------------------------ ------------------------
REVENUES:
Initial License Fees.......................... $ 157,500 $ 237,250 $ 620,000 $ 633,500
Advertising Fees ............................. 138,800 173,274 495,167 565,033
Continuing License Fees ...................... 436,424 525,425 1,528,091 1,827,426
Insurance Premiums ........................... 39,723 159,121 133,164 395,124
Direct Financing Leases to Franchisees ....... 225 225 5,723 2,300
Other ........................................ 24,441 36,928 75,067 118,629
---------- ---------- ---------- ----------
797,113 1,132,223 2,857,212 3,542,012
---------- ---------- ---------- ----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits .......................... 177,088 192,915 556,603 583,808
Sales and Marketing Expenses ................. 56,070 101,976 384,402 380,005
Advertising and Promotion .................... 189,035 274,178 680,169 845,401
Underwriting Expenses ........................ 1,398 158,486 18,041 341,120
General and Administrative Expenses .......... 209,174 226,197 598,269 713,256
Depreciation & Amortization .................. 27,911 29,295 83,466 90,091
---------- ---------- ---------- ----------
660,676 983,047 2,320,950 2,953,681
---------- ---------- ---------- ----------
OPERATING INCOME ......................... 136,437 149,176 536,262 588,331
INTEREST INCOME, NET ........................... 18,048 13,418 48,802 45,985
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE ......... 154,485 162,594 585,064 634,316
---------- ---------- ---------- ----------
INCOME TAX EXPENSE ............................. 59,631 47,266 104,931 194,369
---------- ---------- ---------- ----------
NET INCOME................................ $ 94,854 $ 115,328 $ 480,133 $ 439,947
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK .............................. 29,975 27,733 90,865 84,111
---------- ---------- ---------- ----------
NET INCOME AFTER DIVIDENDS ON
CONVERTIBLE CUMULATIVE PREFERRED STOCK ....... $ 64,879 $ 87,595 $ 389,268 $ 355,836
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic......................................... $ .02 $ .02 $ .10 $ .08
========== ========== ========== ==========
Diluted....................................... .02 $ .02 $ .08 $ .07
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31,
-------------------------------
1996 1997
----------- -----------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net income ................................................... $ 480,133 $ 439,947
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............................ 83,466 90,091
Gain on disposal of property and equipment ............... (1,578) (4,152)
Provision for doubtful accounts .......................... 115,696 (108,575)
Changes in assets and liabilities:
Accounts and notes receivable .......................... (191,974) 167,240
Prepaid expenses ....................................... (24,659) (62,597)
Accounts payable and accrued
expenses ............................................. 44,924 (16,074)
Insurance premiums, deposits, and
loss reserves ........................................ 43,247 207,682
----------- -----------
Net cash provided by operating activities ................ 549,255 713,562
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment ................. 28,250 29,160
Acquisition of property and equipment ........................ (119,436) (55,873)
Additions to trademarks and other ............................ (70,646) (852)
----------- -----------
Net cash used in investing activities .................... (161,832) (27,565)
----------- -----------
Cash flow from financing activities:
Repayments of long-term debt ................................. (11,022) (38,667)
Issuance of common stock ..................................... 25,000 25,000
Retirement of common stock ................................... (66,748) (18,189)
Retirement of preferred stock ................................ (85,300) --
Preferred dividends paid ..................................... (123,723) (126,287)
----------- -----------
Net cash used in financing activities .................... (261,793) (158,143)
----------- -----------
Net increase in cash and cash
equivalents ........................................... 125,630 527,854
Cash and cash equivalents at beginning of period ............... 579,871 1,077,578
----------- -----------
Cash and cash equivalents at end of period ..................... $ 705,501 $ 1,605,432
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 5,440 $ 16,106
Taxes paid ................................................... $ 55,737 $ 87,044
The accompanying notes are an integral part of these financial statements.
5
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 1997, the
consolidated statements of earnings for the three and nine-month periods ended
December 30, 1996 and 1997 and the consolidated statements of cash flows for the
nine-month periods ended December 31, 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 financial statements 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 any future period or the 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.
A quarterly preferred dividend of $28,645 was declared for the first quarter
ended June 30, 1997 and it was paid on August 11, 1997. For the quarter ended
September 30, 1997, the Company declared preferred dividends totaling $27,733
which were paid on November 10, 1997. For the quarter ended December 31, 1997,
the Company declared dividends totaling $27,733 which are expected to be paid
during the fourth quarter of the Company's fiscal year. As of December 31, 1997,
preferred dividend arrearages were $224,909.
6
3. EARNINGS PER COMMON SHARE
The computation of earnings per common share for the three and
nine-month periods ended December 31, 1996 and 1997, respectively, 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 for the three and nine-month periods ended December 31, 1996, cumulative
preferred dividends in the amounts of $29,975 and $90,865 for each period were
subtracted from net income to arrive at the earnings applicable to common
shareholders. For the three and nine-month periods ended December 31, 1997,
cumulative preferred dividends in the amounts of $27,733 and $84,111 for each
period were 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.
A reconciliation of the numerators and denominators in the computation
of basic and diluted earnings per share for the three and nine-month periods
ended December 31, 1997 is as follows:
Basic EPS Computation Quarter Year-to-date
---------- ------------
Numerator:
Net income applicable to
common shares $ 87,595 $ 355,836
Denominator:
Weighted average common
shares 4,297,418 4,278,354
---------- ----------
Basic EPS $ .02 $ .08
========== ==========
7
Diluted EPS Computation
Numerator:
Net income applicable to
common shares $ 87,595 $ 355,836
Dividends on convertible
preferred stock 27,733 84,111
---------- ----------
115,328 439,947
---------- ----------
Denominator
Weighted average common
shares 4,297,418 4,278,354
Convertible preferred
stock 1,386,625 1,386,625
Weighted average options
and warrants 54,675 270,018
---------- ----------
5,738,718 5,934,997
---------- ----------
Diluted EPS $ .02 $ .07
========== ==========
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 DECEMBER 31, 1997 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1996
Revenue from franchising operations, which includes initial license
fees, continuing license fees, advertising fees and direct financing leases
increased by $203,225 (28%). This increase occurred primarily due to an increase
in initial license fees, continuing license fees and advertising fees. Initial
license fees increased by $79,750 (51%) 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
8
or decreases in reported results. Management does not believe these short-term
variations are indicative of longer term trends. Continuing license fees
increased by $89,001 (20%), and advertising fees increased by $34,474 (25%) due
to the fleet growth at existing franchises and the Company's dedication of more
resources to its collection efforts. Revenues from insurance premiums were
$159,121 due to the new reinsurance program that started in March 1997,
partially offset by a $19,801 (100%) reduction in premiums from the physical
damage insurance program ("CLC") and by a $19,921 (100%) reduction in premiums
from the national insurance program ("URM") due to their termination and
replacement by the reinsurance program operated through CAR Insurance. Insurance
premium revenue is recognized ratably over the life of the policies. Reserves
are established for unearned premiums received. Other revenue increased by
$12,487 (51%) due primarily to increased sales of promotional materials to the
Company's franchisees. Such purchases can not be predicted in advance by the
Company.
Total operating expenses increased by $322,371 (49%) in this period
compared to the same period in the prior year. Salary expense increased by
$15,827 (9%) primarily as a result of additional hires in response to the growth
of the Company. General and administrative expenses increased by $17,023 (8%),
which resulted primarily from additional expenses such as management fees, audit
fees and letter of credit(LOC)fees related to the reinsurance company
established in March 1997. General and administrative expenses include a $5,500
additional reserve for legal expenses during the three-month period ended
December 31, 1997 compared to the same period in the prior year due to a $22,466
award of legal fees and out of pocket expenses to a former franchisee in
complete resolution of litigation, which award the Company began to accrue in
the third quarter. The remaining $16,966 will be reserved during the fourth
quarter of the Company's fiscal year. Sales and marketing expenses increased by
$45,906 (82%). This increase resulted primarily from additional commission
expenses due to the larger amount of franchise sales made in this period
compared to the same period in the prior year. Sales and marketing expenses also
increased due to an increase in bad debt expense in this period compared to the
same period in the prior year which resulted from the collection on a note
receivable in the prior year which had been 100% reserved. Underwriting expenses
increased by $157,088 (11,237%), which resulted primarily from additional
expenses such as paid losses and loss reserves related to the new reinsurance
company.
Net interest income decreased $4,630 (34%). This decrease was primarily
due to interest paid to AICCO on the funds which CAR Insurance Company borrowed
from AICCO to meet the capital requirements of the Bermuda Government in
conjunction with the reinsurance program.
Depreciation and amortization expense increased by $1,384 (5%) in this
period compared to the same period in the prior year. This increase was
primarily due to additional investment to update computer software and hardware.
Vehicles, office furniture, equipment and leasehold improvements
9
are carried at cost. Depreciation has been provided by the straight-line method
over the estimated useful lives of the assets ranging from 3 to 5 years.
Amortization of leasehold improvements is calculated on the straight-line basis
over the shorter of the estimated life of the improvements or the term of the
lease. Betterments, renewals and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance are expensed.
The Company realized operating income of $149,176, before taxes and
interest, for the three-month period ended December 31, 1997 compared to
operating income of $136,437 for the same period in the prior year, reflecting
an increase of $12,739 (9%). This increase resulted primarily from the increase
in initial license fees and continuing license fees due to the addition of new
franchises, fleet growth at existing franchises and the Company's collection
efforts. However, operating margins decreased from 17% for the three-month
period ended December 31, 1996 to 13% for the same period in the current year.
This decrease was primarily due to low operating margin for the Company's new
reinsurance program.
Income tax expense decreased $12,365 (21%) in this period compared to
the same period in the prior year due to a reduction in the Company's deferred
tax asset valuation allowance. In light of the Company's recent earnings, the
valuation allowance is being reduced and re-assessed quarterly.
YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR
Net revenues increased by $684,800 (24%) for the nine-month period
ended December 31, 1997 as compared to the same period in the prior year. This
increase occurred due to a $299,335 (20%) increase in continuing license fees,
$69,866 (14%)increase in advertising fees, $13,500 (2%) increase in initial
license fees and a $261,960 (197%) increase in premiums in connection with the
new reinsurance program. These increases occurred for the same reasons indicated
above. The direct financing leases to franchisees decreased by 60% in the
current nine-month period compared to the same period in the prior year. This
decrease was due to fewer franchisees electing to participate in the Company's
direct financing leasing program primarily because of increased attractiveness
of competitive programs.
Total operating expenses increased by $632,731 (27%) in this period due
primarily to an increase in general and administrative expenses of $114,987
(19%) and an increase in underwriting expenses of $323,079 (1,791%). These
increases resulted primarily from the new reinsurance program. Salary expense
increased by $27,205 (5%) primarily as a result of additional hires in response
to the growth of the Company.
The Company realized operating income of $588,331, before taxes and
interest, for the nine months compared to operating income of $536,262 for
10
1996, reflecting an increase of $52,069. This increase resulted primarily from
the increase in continuing license fees and initial license fees.
Income tax expense for the nine-month period ended December 31, 1997
increased by $89,438 (85%) compared to the nine-month period ended December 31,
1996 due to higher pre-tax earnings and the depletion of the Company's federal
income tax net operating loss carryforward partially offset by a reduction in
the deferred tax asset valuation allowance as described above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $1,557,740
compared to $1,191,019 at March 31, 1997, an increase of $366,721. This increase
primarily resulted from the net profit earned during the period and a reduction
in allowance for doubtful accounts based on the Company's historical reserves
experience, offset by reserves for the reinsurance program. Of the net increase,
$108,575 is due to a reduction in the required allowance for doubtful accounts
as a result of improved collection efforts. At December 31, 1997, the Company's
allowance for doubtful accounts was $670,460 compared to $779,035 at March
31,1997. The Company did not write off any doubtful accounts during the three
month period ended December 31, 1997. The Company generally requires officers
and directors of franchisees to give personal guarantees of the franchisee's
obligations under the franchise agreement. In January 1997, the Company's
management improved its collection efforts from franchisees and guarantors by
dedicating part of the time of one employee to coordinate collections from
franchisees. During the three month period ended December 31, 1997, this new
effort resulted in more accounts being kept current and yielded a collection of
$15,898 of receivables from franchisees and $52,999 on a note receivable arising
out of an asset sale at a franchise location. The Company had reserved against
these receivables in a prior period, and, accordingly, this collection improved
cash flow in the current period by the amount of the collection. The Company is
planning to hire a part-time employee in the fourth quarter of the current
fiscal year to dedicate more resources to collection efforts. The Company's
collection effort is designed to increase liquidity through improved cash flow;
however, there can be no assurance that the Company will be successful in these
efforts.
Cash and cash equivalents increased by $574,519 (108%). This increase
resulted primarily from the increase in initial license fees and continuing
license fees due to the addition of new franchises, fleet growth at existing
franchises and the Company's collection efforts. Restricted cash decreased by
$46,665 (9%) due to higher national advertising expenses. Restricted cash
includes a deposit of $250,000 being held in the Bank of Butterfield (Bermuda)
for securing the letter of credit with The Chase Manhattan Bank ("Chase") and
funds being held on behalf of the Company's franchisees in the national
advertising fund to be spent on different advertising programs.
In March 1997 the Company deposited $250,000 under its CAR Insurance
subsidiary in the Bank of Butterfield. This deposit is restricted by a $250,000
letter of credit with the Bank of Butterfield in connection with the Company's
CAR Insurance subsidiary. 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%
(which prime rate was 6.25% on January 28, 1998). For the quarter ended December
31, 1997, Chase has not drawn any funds from the letter of credit. This letter
of credit expires on March 31, 1998 but will automatically extend without
amendment for additional one year periods unless sixty days notice is given
prior to the expiration date. As of February 9, 1998, no such notice had been
received.
11
In June 1997 the Company finalized an $800,000 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. Funds drawn against the letter of credit bear interest at Chase's prime
commercial lending rate plus 3% (which prime rate was 8.5% on January 28, 1998).
For the quarter ended December 31, 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 was committed under capital lease agreements for various
equipment, and it rents its office facilities under the terms of an operating
lease. The capital lease obligations were $38,667 and $0 at March 31,1997 and
December 31, 1997, respectively. The Company has utilized its working capital to
pay for these obligations. During the quarter ended September 30, 1997, the
Company fully paid its obligations under these capital leases. The monthly
office facilities lease obligations were $5,200 and $5,400 at March 31, 1997 and
December 31, 1997, respectively. The Company also rents additional space on a
month to month basis for approximately $900 per month.
Furniture, equipment and leasehold improvements decreased by $223,414
(30%) from March 31, 1997 to December 31, 1997. This decrease occurred primarily
due to writing off the assets that were not in use or were fully depreciated.
Vehicles decreased by $33,435 (63%) from March 31, 1997 to December 31, 1997 due
to sales of a rental van and an executive vehicle which was partially offset by
the purchase of a truck for the one way program.
Cash provided by operations was $713,562 during the nine-months ended
December 31, 1997, resulting from an increase in net income, an increase in
reinsurance premiums, deposits, and loss reserves and an increase in accounts
and notes receivable offset by a decrease in accounts payable and accrued
expenses and an increase in prepaid expenses. Prepaid expenses increased
primarily due to expenses related to the new reinsurance company such as LOC
fees and legal and secretarial fees. Insurance premiums, deposits, and loss
reserves increased due to the new reinsurance program. Accounts and notes
receivable decreased primarily due to the Company's collection efforts. Cash
used in investing activities of $27,565 related primarily to the acquisition of
computer software and hardware and maintaining trademarks. Cash used in
financing activities was $158,143, which was applied to payments of preferred
dividends, long-term debt and buyback of common stock 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.
12
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company during the periods presented.
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 in the
Company's new reinsurance program, the effects of government regulation of the
Company's franchise and reinsurance 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.
13
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 three and
nine-month periods ended December 31, 1996 and 1997 and with respect to the
balance sheets thereof at December 31 in each of those years. Except as
otherwise noted, 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,
1996 1997 1996 1997
--------------------------------------------------------
(in thousands except per share and number of franchises)
(Unaudited)
Franchisees' Results (Unaudited)
- --------------------------------
Franchisees' Revenue (1) $ 7,274 $ 8,757 $25,468 $30,457
Number of Franchises 469 485 469 485
Results of Operations
- ---------------------
Net Revenue $ 797 $ 1,132 $ 2,857 $ 3,542
Costs and expenses and Other 661 983 2,321 2,954
Income before income
taxes 154 163 585 634
Net income 95 115 480 440
Earnings per share
Basic (2) $ .02 $ .02 $ .10 $ .08
Weighted average common
shares 4,063 4,297 4,094 4,278
Diluted (2) $ .02 .02 $ .08 .07
Weighted average common
shares plus options and
warrants 5,844 5,739 5,875 5,935
Nine Months
Ended December 31,
1996 1997
-------------------
(Unaudited)
Balance Sheet Data
- ------------------
Working capital $ 1,026 $ 1,558
Total assets $ 2,471 $ 3,065
Long-term obligations $ 33 $ -
Shareholders' equity $ 1,602 $ 2,074
(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.
14
(2) Basic earnings per share are after deducting a provision for preferred
dividends of $29,975 and $90,865, for the three and nine-month periods ended
December 31, 1996. For the three and nine-month periods ended December 31, 1997,
basic earnings per share are after deducting a provision for preferred dividends
of $27,733 and $84,111. Diluted earnings per share assumes a conversion of
cumulative preferred stock into common shares and, accordingly, no deduction
from earnings is made for preferred dividends.
15
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" and the Company's Report on 10-QSB for the quarter ended September
30, 1997 under the Caption "Part II, Item 1. Legal Proceedings".
On October 1, 1997 suit was initiated in the District Court of Oklahoma
County, State of Oklahoma against the Company and a Rent-A-Wreck franchisee by
an automobile dealer in connection with the plaintiff's sale of cars to the
franchisee for which plaintiff has allegedly not yet been paid. Plaintiff
alleges that the Company fraudulently induced it to deal with the franchisee and
seeks $241,000 in damages plus interest. The Company believes the claim against
it is without merit and intends to defend it vigorously.
Regarding the lawsuit that was initiated in August 1994 by Mongo, Inc.
and John and Roberta Batcher and ultimately dismissed in April 1997, the Company
is aware that Mongo, Inc. and John Batcher have filed another summons on August
21, 1997 in the Supreme Court, State of New York, County of Suffolk regarding a
lawsuit against the Company, Bundy, K.A.B. Inc., officers of the Company and
other defendants. The summons mentions relief sought of $7,000,000 plus
interest. The summons is not accompanied by a complaint, and the Company is
investigating the basis for this summons given that the plaintiffs' previous
claims against the Company were dismissed. In November 1997, the Company removed
the case to the U.S. District Court for the Eastern District of New York, and on
February 4, 1998 the Company petitioned the court to dismiss the case.
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
- ------- -------------------------------------------------
On November 17, 1997 the Company bought back and retired 15,000 shares
of its common stock. On December 23, 1997 the Company retired 6,700 shares of
its common stock which were returned to the Company in partial satisfaction of a
franchisee's debt. On December 31, 1997 the Company bought back and retired
10,000 shares of its common stock.
16
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.
17
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 February 10, 1998
- ----------------------- ------------------------
Mitra Khosravi
Chief Accounting Officer
/s/Kenneth L. Blum, Sr. February 10, 1998
- ----------------------- ------------------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
18
EXHIBIT INDEX
TO
RENT-A-WRECK of AMERICA, INC.
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 1997
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Terms of $250,000 Letter of Filed herewith.
Credit issued by the Bank of
Butterfield, as contained in
application dated June 20,
1997, with attached Letter
of Set-off
27 Financial Data Schedule Filed herewith.
19