U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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: 3,953,217 shares as of October
27, 1999.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - SEPTEMBER 30, 1999
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and September 30, 1999 (Unaudited) 2-3
Consolidated Statements of Earnings for
the Three Months and Six Months ended
September 30, 1998 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Three Months and Six Months ended
September 30, 1998 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-9
Item 2. Management's Discussion and Analysis or Plan of Operation 9-15
Part II. Other Information
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
Part I - Financial Information
Item 1 - Financial Statements
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, September 30,
1999 1999
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ....................... $ 861,794 $ 1,544,758
Restricted Cash ................................. 718,543 799,385
Accounts Receivable, net of allowance
for doubtful accounts of $655,418 and $757,059
at March 31, 1999 and September 30, 1999,
respectively:
Continuing License Fees and
Advertising Fees .......................... 336,242 456,615
Current Portion of Notes Receivable ......... 388,812 485,790
Current Portion of Direct Financing
Leases .................................... 7,850 325
Insurance Premiums Receivable ............... 635,532 --
Other ....................................... 61,081 70,471
Prepaid Expenses ................................ 166,421 157,141
Deferred Tax Assets ............................. 199,028 252,875
----------- -----------
TOTAL CURRENT ASSETS .......................... 3,375,303 3,767,360
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture ....................................... 93,505 95,074
Computer Hardware and Software .................. 370,012 382,824
Machinery and Equipment ......................... 82,650 83,761
Leasehold Improvements .......................... 37,896 37,896
Vehicles ........................................ 90,507 132,952
----------- -----------
674,570 732,507
Less: Accumulated Depreciation and
Amortization ............................. (388,887) (443,812)
----------- -----------
NET PROPERTY AND EQUIPMENT ........................ 285,683 288,695
----------- -----------
OTHER ASSETS:
Intangible Assets, net of accumulated
amortization of $126,192 and $136,383
at March 31, 1999 and September 30, 1999,
respectively .................................. 192,872 192,669
Long-term Portion of Notes and Direct
Financing Lease Receivables ................... 32,088 55,342
----------- -----------
224,960 248,011
----------- -----------
TOTAL ASSETS .................................. $ 3,885,946 $ 4,304,066
=========== ===========
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, September 30,
1999 1999
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ................. $ 709,506 $ 783,723
Dividends Payable ..................................... 22,782 22,400
Insurance Financing Payable ........................... 564,684 294,150
Insurance Loss Reserves ............................... 366,022 447,606
Income Taxes Payable .................................. 181,662 241,314
----------- -----------
TOTAL CURRENT LIABILITIES ........................... 1,844,656 1,789,193
----------- -----------
TOTAL LIABILITIES ................................... 1,844,656 1,789,193
----------- -----------
COMMITMENTS AND CONTINGENCIES ........................... -- --
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,139,125 and 1,120,000
shares at March 31, 1999 and at September 30, 1999
(aggregate liquidation preference $911,300 at
March 31, 1999 and $896,000 at September 30, 1999) ... 11,391 11,200
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
3,934,092 shares at March 31, 1999 and
3,953,217 shares at September 30, 1999 ............... 39,340 39,532
Additional Paid-In Capital ............................ 2,209,182 2,209,182
(Accumulated Deficit) Retained Earnings ............... (218,623) 254,959
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .......................... 2,041,290 2,514,873
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 3,885,946 $ 4,304,066
=========== ===========
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 Six Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
REVENUES:
Initial License Fees ............... $ 367,051 $ 362,000 $ 679,051 $ 724,001
Continuing License Fees ............ 791,488 929,852 1,374,066 1,609,157
Advertising Fees ................... 259,285 291,855 450,740 512,639
Insurance premiums ................. 200,974 227,402 363,017 403,251
Other .............................. 47,466 54,932 84,999 96,154
----------- ----------- ----------- -----------
1,666,264 1,866,041 2,951,873 3,345,202
----------- ----------- ----------- -----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits ................ 220,806 238,245 424,993 484,682
Sales and Marketing Expenses ....... 147,754 135,273 368,961 313,637
Advertising and Promotion .......... 410,684 391,746 644,478 713,765
Underwriting Expenses .............. 152,986 180,124 290,046 325,078
General and Administrative Expenses 209,520 245,155 454,976 479,516
Depreciation & Amortization ........ 36,115 32,980 70,134 65,115
----------- ----------- ----------- -----------
1,177,865 1,223,523 2,253,588 2,381,793
----------- ----------- ----------- -----------
OPERATING INCOME ............... 488,399 642,518 698,285 963,409
OTHER INCOME (EXPENSE)
Interest Income .................... 20,052 27,506 43,337 51,899
Interest Expense ................... (4,143) (6,694) (11,308) (13,308)
----------- ----------- ----------- -----------
15,909 20,812 32,029 38,591
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 504,308 663,330 730,314 1,002,000
----------- ----------- ----------- -----------
INCOME TAX EXPENSE ................... 169,460 230,863 228,802 336,502
----------- ----------- ----------- -----------
NET INCOME ..................... $ 334,848 $ 432,467 $ 501,512 $ 665,498
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK .................... 27,320 22,400 54,640 45,000
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ....... $ 307,528 $ 410,067 $ 446,872 $ 620,498
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE
Basic .............................. $ .08 $ .11 $ .11 $ .16
----------- ----------- ----------- -----------
Weighted average common shares ....... 4,097,596 3,943,543 4,130,064 3,941,985
=========== =========== =========== ===========
Diluted ............................ $ .06 $ .07 $ .09 $ .11
----------- ----------- ----------- -----------
Weighted average common shares
plus options and warrants ........... 5,466,630 6,106,494 5,535,090 5,999,891
=========== =========== =========== ===========
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)
Six Months Ended
September 30,
--------------------------
1998 1999
----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ..................................... $ 501,512 $ 665,498
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .............. 70,134 65,115
Gain on disposal of property and equipment . (390) --
Deferred income taxes ...................... -- (53,847)
Provision for doubtful accounts ............ 58,933 101,641
Changes in assets and liabilities:
Accounts and notes receivable .............. 267,469 291,421
Prepaid expenses ........................... (21,009) 9,280
Accounts payable and accrued
expenses ................................. (3,109) 73,835
Income taxes payable ....................... (70,085) 59,652
Insurance loss reserves .................... 815 81,584
----------- -----------
Net cash provided by operating activities .. 804,270 1,294,179
----------- -----------
Cash flows from investing activities:
(Increase) decrease in restricted cash ......... (392,562) (80,842)
Proceeds from sale of property and equipment ... 34,550 --
Acquisition of property and equipment .......... (157,507) (57,554)
Additions to intangible assets ................. (6,447) (9,988)
----------- -----------
Net cash used in investing activities ...... (521,966) (148,384)
----------- -----------
Cash flow from financing activities:
Decrease in insurance financing payable ........ (252,545) (270,534)
Issuance of common stock ....................... 16,000 --
Retirement of common stock ..................... (126,561) --
Preferred dividends paid ....................... (98,942) (192,297)
----------- -----------
Net cash used in financing activities ...... (462,048) (462,831)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ............................. (179,744) 682,964
Cash and cash equivalents at beginning of period . 1,215,615 861,794
----------- -----------
Cash and cash equivalents at end of period ....... $ 1,035,871 $ 1,544,758
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 11,308 13,308
Taxes paid ..................................... $ 309,282 $ 337,755
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
SEPTEMBER 30, 1999
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 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")
and Priceless Rent-A-Car, Inc. ("PRICELESS") which was formed on September 30,
1999.
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 in the consolidated financial
statements.
The consolidated balance sheet as of September 30, 1999, and the
consolidated statements of earnings and cash flows for the three and six-month
periods ended September 30, 1998 and 1999 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, 1999 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
On May 7, 1999, the Company paid 100% of remaining dividend arrearages
($146,915) on the Company's Convertible Cumulative Series A Preferred Stock. A
quarterly preferred dividend of $22,600 was declared for the first quarter ended
June 30, 1999 and it was paid on August 11, 1999. For the quarter ended
September 30, 1999, the Company declared preferred dividends totaling $22,400
which are expected to be paid during the third quarter of the Company's fiscal
year.
6
3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators utilized in the
computation of basic and diluted earnings per share for the three-month and
six-month periods ended September 30, 1998 and 1999 is as follows:
Three Months Six Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
BASIC EPS COMPUTATION
Net income applicable to
common and common
equivalent shares ...... $ 307,528 $ 410,067 $ 446,872 $ 620,498
Weighted average common
shares ................... 4,097,596 3,943,543 4,130,064 3,941,985
---------- ---------- ---------- ----------
Basic EPS .................. $ .08 $ .11 $ .11 $ .16
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Net income applicable to
common and common
equivalent shares ...... $ 307,528 $ 410,067 $ 446,872 $ 620,498
Dividends on convertible
preferred stock .......... 27,320 22,400 54,640 45,000
---------- ---------- ---------- ----------
334,848 432,467 501,512 665,498
---------- ---------- ---------- ----------
Weighted average common
shares ................... 4,097,596 3,943,543 4,130,064 3,941,985
Weighted average
convertible preferred
stock .................. 1,366,000 1,129,674 1,366,000 1,131,232
Weighted average options
and warrants ............. 3,034 1,033,277 39,026 926,674
---------- ---------- ---------- ----------
5,466,630 6,106,494 5,535,090 5,999,891
---------- ---------- ---------- ----------
Diluted EPS ................ $ .06 .07 $ .09 .11
========== ========== ========== ==========
7
GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in two principal segments: Vehicle Rental
Franchise Programs and Insurance Coverage. Corporate costs are allocated to each
segment's operations and are included in the measure of each segment's profit or
loss. The geographic data include revenues based upon customer locations and
assets based on physical locations.
The Company's foreign operations are presently conducted by CAR Insurance
in Bermuda.
Information by geographic area and industry segment is as follows:
Six Months
Ended September 30,
-------------------------
1998 1999
---------- ----------
Net revenues from external customers
Vehicle Rental Franchises-United States ........ $2,588,856 $2,941,951
Insurance-United States ........................ 363,017 403,251
Insurance-Bermuda .............................. -- --
---------- ----------
$2,951,873 $3,345,202
========== ==========
Segment income before taxes
Vehicle Rental Franchises-United States ........ $ 683,952 $ 945,483
Insurance-United States ........................ 34,714 41,226
Insurance-Bermuda .............................. 11,648 15,291
---------- ----------
$ 730,314 $1,002,000
========== ==========
Segment assets
Vehicle Rental Franchises-United States ........ $2,793,107 $3,103,983
Insurance-United States ........................ 193,818 540,827
Insurance-Bermuda .............................. 644,273 659,256
---------- ----------
$3,631,198 $4,304,066
========== ==========
Expenditures for segment assets
Vehicle Rental Franchises-United States ........ $ 157,507 $ 57,554
Insurance-United States ........................ -- --
Insurance-Bermuda .............................. -- --
---------- ----------
$ 157,507 $ 57,554
========== ==========
Depreciation and amortization
Vehicle Rental Franchises-United States ........ $ 70,134 $ 65,115
Insurance-United States ........................ -- --
Insurance-Bermuda .............................. -- --
---------- ----------
$ 70,134 $ 65,115
========== ==========
Interest income
Vehicle Rental Franchises-United States ........ $ 28,251 $ 30,954
Insurance-United States ........................ 3,438 5,654
Insurance-Bermuda .............................. 11,648 15,291
---------- ----------
$ 43,337 $ 51,899
========== ==========
8
GEOGRAPHIC AND INDUSTRY SEGMENTS-CONTINUED
Six Months
Ended September 30,
-------------------------
1998 1999
---------- ----------
Interest expense
Vehicle Rental Franchises-United States ........ $ 42 $ 378
Insurance-United States ........................ 11,266 12,930
Insurance-Bermuda .............................. -- --
---------- ----------
$ 11,308 $ 13,308
========== ==========
Income taxes
Vehicle Rental Franchises-United States ........ $ 228,802 $ 336,502
Insurance-United States ........................ -- --
Insurance-Bermuda .............................. -- --
---------- ----------
$ 228,802 $ 336,502
========== ==========
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.
In August 1999, the Company settled a pending lawsuit against a former
franchisee. As a result of the settlement agreement, the Company anticipates
receiving $100,000 in release of its claims which will result in $100,000 of
additional income. To date the Company has not recorded any gain as the
settlement is being finalized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Revenue from franchising operations, which includes initial license fees,
continuing license fees and advertising fees, increased by $165,883 (12%).
Continuing license fees increased by $138,364 (17%), and advertising fees
increased by $32,570 (13%). These increases resulted primarily from fleet growth
at existing franchises.
9
Revenues from insurance premiums increased by $26,428 (13%) due to higher
participation by the Company's franchisees in the Company's CAR Insurance
program.
Other revenue increased by $7,466 (16%) due primarily to an increase in a
wheelchair van rental program which is being tested in the immediate area of the
Company's headquarters in Maryland.
Total operating expenses increased by $45,658 (4%) compared to the prior
period. Salary expense increased by $17,439 (8%) primarily as a result of hiring
additional employees in response to the growth of the Company. Sales and
marketing expenses decreased by $12,481 (8%), which resulted primarily from the
repurchase of a territory from an existing franchisee. In the quarter ended
September 30, 1998, the cost of which was charged to sales and marketing expense
because the Company was able to resell the territory to a new franchisee for a
greater amount. Advertising and promotion expenses decreased by $18,938 (5%),
which resulted primarily from a decrease in national advertising expense.
Insurance underwriting expenses increased by $27,138 (18%) due to an increase in
paid losses and loss reserves for future claims in connection with higher
participation of the Company's franchisees in its CAR Insurance program. General
and administrative expenses increased by $35,635 (17%), which resulted primarily
from an increase in the management fee earned by K.A.B., an affiliate, payment
of monthly consulting fees to Richter & Co., Inc., an affiliate, and an increase
in legal and other professional fees. Depreciation and amortization expense
decreased by $3,135 (9%) due to the disposal of assets and older assets becoming
fully depreciated offset by additional investment in computer software and
hardware.
The Company realized operating income of $642,518, before taxes and
interest, for the three-month period ended September 30, 1999 compared to
operating income of $488,399 for the same period in the prior year, reflecting
an increase of $154,119 (32%). This increase resulted primarily from the
increase in continuing license fees due to the addition of new franchises and
fleet growth at existing franchises.
Net interest income increased $4,903 (31%). This increase was primarily due
to interest earned on the increased cash deposits which are held in interest
bearing accounts.
Income tax expense for the three-month period ended September 30, 1999
increased by $61,403 (36%) compared to the three-month period ended September
30, 1998 due to higher pre-tax earnings, partially offset by a reduction in the
deferred tax asset valuation allowance. The valuation allowance has been reduced
in light of favorable earnings and expected future earnings and is re-assessed
quarterly.
YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR
Net revenues increased by $393,329 (13%) for the six-month period ended
September 30, 1999 as compared to the same period in the prior year. This
10
increase occurred due to a $44,950 (7%) increase in initial license fees, a
$235,091(17%) increase in continuing license fees, a $61,899 (14%)increase in
advertising fees, and a $40,234 (11%) increase in premium income associated with
the new reinsurance program. These increases occurred for the same reasons as
those for the three-month period documented above.
Total operating expenses increased by $128,205 (6%) in this period compared
to the same period in the prior year. Salary expense increased by $59,689 (14%)
primarily as a result of additional employees in response to the growth of the
Company. Sales and marketing expenses decreased by $55,324 (15%), which resulted
primarily from the repurchase of a territory from an existing franchisee. In the
quarter ended September 30, 1998, the cost of which was charged to sales and
marketing expense because the Company was able to resell the territory to a new
franchisee for a greater amount. Advertising and promotion expenses increased by
$69,287 (11%), which resulted primarily from an increase in national advertising
expense to promote the Company. Underwriting expenses increased by $35,032 (12%)
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 increased by $24,540 (5%), which resulted primarily from
an increase in the management fee earned by K.A.B, an affiliate, and payment of
monthly consulting fees to Richter & Co., Inc., an affiliate. Depreciation and
amortization expense decreased by $5,019 (7%) due to disposal of assets and
older assets becoming fully depreciated offset by additional investment in
property and equipment.
The Company realized operating income of $963,409, before taxes and
interest, for the six-month period ended September 30, 1999 as compared to
operating income of $698,285 for 1998, reflecting an increase of $265,124 (38%).
This increase resulted primarily from the increase in initial license fees,
continuing license fees and insurance premiums.
Income tax expense for the six-month period ended September 30, 1999
increased by $107,700 (47%) compared to the six-month period ended September 30,
1998 due to higher pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $1,978,167
compared to $1,530,647 at March 31, 1999. This increase of $447,520 resulted
primarily from the net profit earned during the six-month period ended September
30, 1999, reduced by the payoff of all dividend arrearages on the Company's
Preferred Stock.
The Company has finalized a $1,000,000 letter of credit with 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. Funds drawn
against the letter of credit bear interest at 3% plus Chase's prime commercial
lending rate (which prime rate was 8.25% on October 27, 1999). For the quarter
ended September 30, 1999, AIG has not drawn any funds from the letter of credit.
This letter of credit is secured by a pledge of all of the Company's assets.
11
The Company rents its office facilities under the terms of an operating
lease. The monthly office facilities lease commitments were $5,449 and $5,670 at
September 30, 1998 and 1999, respectively.
Property and equipment increased by $57,937 (9%) from March 31, 1999 to
September 30, 1999. This increase occurred primarily due to the purchase of one
vehicle for the wheelchair van program and an additional investment in computer
software and hardware.
Cash provided by operations was $1,294,179, resulting primarily from net
income before depreciation plus the decrease in accounts and notes receivable
and prepaid expenses and the increase in insurance loss reserves, accounts
payable and accrued expenses and income taxes payable. Accounts and notes
receivable decreased primarily due to funds received from AIG in connection with
the reinsurance program. Accounts payable and accrued expenses increased
primarily due to the Company's additional liability to the national advertising
fund. Income taxes payable increased primarily due to higher pre-tax earnings,
offset by estimated income taxes paid for the year ended March 31, 1999.
Cash used in investing activities of $148,384 related primarily to the
acquisition of computer software, hardware, annual costs associated with
renewing trademarks and an increase in restricted cash due to the Company's
additional liability to the national advertising fund.
Cash used in financing activities during the same period was $462,831,
resulting from a decrease in insurance financing payable and the payment of
preferred dividends.
The Company believes it has sufficient working capital to support its
business plan through fiscal 2000.
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company.
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
12
with changes in the laws, competitive pressures from other motor vehicle rental
companies which have greater marketing and financial resources than the Company,
protection of the Company's trademarks, and the dependence on the Company's
relationships with its franchisees. These risks and uncertainties are more fully
described under the caption, "Item 6 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Important Factors" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999.
All forward-looking statements should be considered in light of these risks and
uncertainties.
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.
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. The Company presently believes that the Year 2000 issue
will not pose significant operational problems for the Company; however, if all
Year 2000 issues are not properly identified or if assessment, remediation and
testing are not effected timely, there can be no assurances that the Year 2000
issue will not materially adversely affect the Company's results of operations
or adversely affect the Company's relationship with customers, vendors or
others. Additionally, there can be no assurances that the Year 2000 issues of
other entities will not have a material adverse effect on the Company's systems
or results of operations.
13
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 above.
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 cost 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
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of earnings of the Company and its subsidiaries for the
fiscal quarters ended September 30, 1998 and 1999 and with respect to the
balance sheets thereof at September 30 in each of those years.
The selected financial data have been derived from the Company's unaudited
consolidated financial statements and should be read in conjunction with the
financial statements and related notes thereto and other financial information
appearing elsewhere herein.
Three Months Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1999 1998 1999
------- ------- ------- -------
(in thousands except per share and number
of franchises)
(Unaudited)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) ......... $13,191 $15,498 $22,901 $26,819
Number of Franchises ............. 588 671 588 671
RESULTS OF OPERATIONS
Total Revenue .................... $ 1,666 $ 1,866 $ 2,952 $ 3,345
Costs and expenses and Other ..... 1,178 1,224 2,254 2,382
Income before income taxes ....... 504 663 730 1,002
Net income ....................... 335 432 502 665
Earnings per share
Basic ........................... $ .08 $ .11 $ .11 $ .16
Weighted average common shares ... 4,098 3,944 4,130 3,942
Diluted ......................... $ .06 $ .07 $ .09 $ .11
Weighted average common shares ... 5,467 6,106 5,535 6,000
September 30,
----------------
1998 1999
------ ------
(Unaudited)
BALANCE SHEET DATA
Working capital $1,759 $1,978
Total assets $3,631 $4,304
Shareholders' equity $2,320 $2,515
(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
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 29, 1999, a shareholder converted 9,125 shares of preferred stock
to common stock. On September 28, 1999, a shareholder converted 10,000 shares of
preferred stock to common stock. See also Item 5 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
During the quarter ended June 30, 1999, a shareholder converted 9,125
shares of preferred stock to common stock reducing total outstanding preferred
shares from 1,139,125 to 1,130,000 and increasing total outstanding common
shares from 3,934,092 to 3,943,217. During the quarter ended September 30, 1999,
a shareholder converted 10,000 shares of preferred stock to common stock
reducing total outstanding preferred shares from 1,130,000 to 1,120,000 and
increasing total outstanding common shares from 3,943,217 to 3,953,217.
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
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 November 8, 1999
- -----------------------------
Mitra Ghahramanlou
Chief Accounting Officer
/s/ Kenneth L. Blum, Sr. November 8, 1999
- -----------------------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
17
EXHIBIT INDEX
TO
RENT-A-WRECK of AMERICA, INC.
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1999
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule Filed herewith.