-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ROhcYRSlBI2LgWihgdbXqTiDGyYJthBL4Blkz7yMrNe+Oasg88pYHyFx94HHhEJy zqt7WY/eT6+D7bhtxbW5PQ== 0000950147-98-000512.txt : 19980630 0000950147-98-000512.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950147-98-000512 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENT A WRECK OF AMERICA INC CENTRAL INDEX KEY: 0000763567 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 953926056 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-14819 FILM NUMBER: 98657069 BUSINESS ADDRESS: STREET 1: 11460 CRONRIDGE DRIVE SUITE 118 CITY: OWINGS MILLS STATE: MD ZIP: 21117 BUSINESS PHONE: 4105815755 MAIL ADDRESS: STREET 1: 11460 CRONRIDGE DRIVE STE 118 CITY: OWINGS MILLS STATE: MD ZIP: 21117 10KSB40 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-KSB /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File No. 0-14819 RENT-A-WRECK OF AMERICA, INC. ----------------------------- (EXACT NAME OF ISSUER IN ITS CHARTER) Delaware 95-3926056 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ----------- Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] State issuer's revenues for its most recent fiscal year. $4,676,645 ---------- 4,162,792 shares of common stock were outstanding as of May 26, 1998. Aggregate market value of voting stock held by nonaffiliates of registrant, based upon the average of the last bid and asked price of the Common Stock on the Nasdaq SmallCap Market, was $2,538,080 on May 26, 1998. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive. The following documents are incorporated by reference and made a part of the Form 10-KSB: 1. None Transitional Small Business Disclosure Format (check one): Yes No X --- --- 1 TABLE OF CONTENTS PART I Page - ------ ---- Item 1. Description of Business................. 3 Item 2. Description of Property................. 8 Item 3. Legal Proceedings....................... 9 Item 4. Submission of Matters to a Vote of Security Holders................... 10 Part II - ------- Item 5. Market for the Common Equity and Related Stockholder Matters........... 11 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 15 Item 7. Financial Statements.................... 23 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 50 Part III - -------- Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 50 Item 10. Executive Compensation.................. 50 Item 11. Security Ownership of Certain Beneficial Owners and Management................. 52 Item 12. Certain Relationships and Related Transactions.......................... 55 Item 13. Exhibits and Reports on Form 8-K........ 55 2 PART I ------ Item 1. Description of Business - ------- ----------------------- General Rent-A-Wreck of America, Inc. (the "Company") was incorporated in Delaware on October 12, 1983. The Company conducts its operations primarily through its wholly owned subsidiary, Bundy American Corporation ("Bundy"). Bundy was incorporated in California on April 22, 1977 and redomesticated in Maryland effective October 22, 1996. The Company markets and administers the Rent-A-Wreck (R) and PRICELE$$ (R) vehicle rental franchise programs and related services. The Company's franchisees, in aggregate, operate one of the largest used vehicle rental fleets in the nation, offering rentals of cars, trucks and vans at rates that are generally less than those charged by new car rental companies. The Company also has franchisees in Europe and Asia. Reference to the "Company" includes Rent-A-Wreck of America, Inc. and its subsidiaries unless the context otherwise requires. The Franchise Program The Company sells to qualified persons the right to operate a Rent-A-Wreck or PRICELE$$ franchise, or both, for renting and leasing used motor vehicles (automobiles, vans and trucks) to the general public. The franchisees who participate in the PRICELE$$ used vehicle rental franchise program are required by the Company to meet higher standards than the Rent-A-Wreck program, such as utilizing vehicles that are under three years old. As of March 31, 1998, 73 of the Company's 484 franchisees are participating in this program. The Company believes the PRICELE$$ name appeals to a different clientele and therefore complements the Rent-A-Wreck program. The Company offers each franchisee territory rights in which the Company will not open another franchise. Franchisees purchase the right to use certain of the Company's resources, experience and knowledge in connection with the operation of the business for a specified period of time, typically ten years. The franchisee utilizes the Company's systems, methods, specifications, standard operating procedures, guidance, trade and service marks. When the Company sells a franchise, it charges an initial franchise fee that varies according to the population of the franchisee's primary service area at the time the franchise is granted. The Company may finance the initial fee over a period not to exceed twelve months based on the creditworthiness of the franchisee. Additionally, franchisees are required to pay the Company monthly royalties and contribute to the national advertising fund. These fees vary according to franchisees' fleet size or gross revenues. 3 The Company provides its franchisees with a central reservation system and marketing force for the insurance replacement business. This department is based in Baltimore, Maryland, and the Company is developing this program so that it can be used nationwide. The Company uses an established insurance company client base, acquired in December 1996, to provide the Company's franchisees with referrals for insureds requiring temporary replacement vehicles after an accident. The Company collects reservation fees from its franchisees for these referrals. Rent-A-Wreck One Way, Inc., a wholly owned subsidiary, operates a truck rental program, on a limited, test basis, in the immediate area of the Company's headquarters in Maryland. The Company has purchased three trucks to operate under this program. These trucks and an existing Company-owned van are placed with one or more of the Company's franchisees which are utilizing them in their fleets. The franchisees pay fees to the Company for these vehicles based on the mileage used. The Company believes the Rent-A-Wreck name is unique and enjoys national recognition. Ongoing marketing programs further promote recognition of the Rent-A-Wreck and PRICELE$$ names in both domestic and foreign markets. The Company develops and executes advertising and marketing programs that have included radio and television commercials, direct mail, print advertising, promotional items and sponsorship at sporting events. Public relations activities conducted on the franchisees' behalf include a franchise award announcement, grand opening press release and anniversary press releases. Assistance in planning and implementing local promotional activities is available to franchisees. The Public Relations Department also publishes the "Rent-A-Wreck Reporter", which is distributed internally to franchisees and externally to trade and consumer media and referral sources such as insurance adjusters, automotive repair shops, travel agents and corporate travel managers. Through July 1, 1997, the Company offered to its franchisees a physical damage insurance program through its wholly owned subsidiary Central Life and Casualty, Limited ("CLC"). Franchisees paid monthly premiums based on their vehicles' wholesale value, and in return CLC provided them with coverage for damage to their vehicles up to their wholesale value. CLC utilized Lindsey Morden as its insurance adjuster and paid claims from premiums collected. During the fiscal year ended March 31, 1998, approximately 11 of the Company's franchisees participated in this program. The Company replaced this program with the insurance program described in the following paragraph. The Company has formed a wholly owned insurance subsidiary, Consolidated American Rental Insurance Company, LTD ("CAR Insurance") domiciled in Bermuda to provide automobile liability and physical damage reinsurance through American International Group ("AIG") for the vehicles belonging to its franchisees. 4 AIG provides insurance coverage for the Company's franchisees. CAR Insurance reinsures AIG's coverage subject to a per loss limit of $100,000 per person and $300,000 per accident. AIG also provides an aggregate stop loss protection of $1,300,000 for the first year and second year of this agreement, thus capping CAR Insurance's exposure to loss. In carrying out the program, the Company utilizes Willis Corroon as the insurance broker, Hertz Claim Management Corporation as the Third Party Administrator, and AICCO Premium Financing. AICCO finances premiums to participants in the program. CAR Insurance intends to limit its exposure to 1,500 vehicles during fiscal year 1998 and 2,000 vehicles during fiscal year 1999. The focus of growth for CAR Insurance will be in those states where the Company's insurance advisor believes the driver's insurance is deemed to be primarily responsible for any losses. Franchisees apply for this insurance coverage with Willis Corroon. Willis Corroon processes the franchisees' applications and, if approved, the franchisee is required to pay premiums in advance on a monthly basis. Hertz Claim Management Corporation is responsible for processing all claims. As of March 31, 1998, approximately 61 of the Company's franchisees were insuring an approximate total of 1,259 of their vehicles under this program. The Company has arranged a program whereby franchisees may finance vehicle purchases over a 24-30 month period. The program is available to qualified applicants who maintain a level of creditworthiness that the Company has assessed on a case by case basis. The franchisees' qualification is based on their credit history with the Company, as well as their credit standing as reported by national credit bureaus. The franchisees are responsible for purchasing the vehicles with funds loaned by the Company, and the Company is listed on the vehicles' title as a lienholder. As of March 31, 1998, the Company was financing 19 vehicles for 8 of its franchisees. The Company is committed to educating and training its franchisees. The Company conducts Rent-A-Wreck School at its headquarters in Maryland every 45 days. All new franchisees are required to attend. School is also available at no charge to current franchisees and their staff. During an intensive five-day period, attendees learn all aspects of the Rent-A-Wreck program. This includes vehicle acquisition, maintenance and sales, telephone techniques, counter procedures, rental operations, promotion, publicity, advertising and sales approaches, relevant aspects of insurance, accounting and other general business skills. The Company also employs field service staff who have many years of experience in the car rental industry and whose responsibility is to provide continuous advice via personal visits and a toll-free telephone number. Additionally, the Company holds and strongly encourages franchisees to attend its convention once a year, and regional meetings which are held twice a year in eastern and western regions of the United States. 5 The Company utilizes these meetings to present new programs to franchisees and to provide continued training and advice. The Company's National Franchisee Advisory Council, which consists of seven members, meets quarterly. Six of the members are elected by the franchisees in their region. The seventh member is a franchisee appointed by the Company. The Council is a forum through which franchisees can express opinions and concerns to the Company. The Council also provides suggestions as to how the Company's National Advertising Fund is allocated. Advertising monies paid into the National Advertising Fund are expended by the Company on the franchisees' behalf after consultation with the National Franchisee Advisory Council. Based on the Council's recommendations, the Company has expended these funds on different programs such as advertising on Westwood One Radio, the Weather Channel and the Travel Channel and sponsoring a race car to further promote the Company's national exposure. The Company markets its franchise programs primarily by attending various trade shows and by conducting an ongoing direct mailing campaign. The Company employs four full time salespeople at its corporate headquarters, and in addition the Company utilizes the services of three independent franchise brokers located throughout the United States. These representatives are responsible for responding to potential franchisees' inquiries. During the fiscal year ended March 31, 1998, 136 new franchises were granted, 11 existing franchise locations were transferred to new ownership and 55 franchises were terminated by the Company. The majority of these terminations resulted from monetary default. This resulted in approximately 542 franchised locations throughout the United States, as well as 16 franchised locations located in Europe and Asia at the end of this fiscal year compared to approximately 468 franchised locations throughout the United States, as well as 9 franchised locations in Europe and Asia at the end of the fiscal year ended March 31, 1997. Employees As of March 31, 1998, the Company employed 21 people, consisting of 13 full-time employees and 1 part-time employee engaged in franchise sales and service and 6 full-time employees and 1 part-time employee engaged in administrative activities. In addition, the Company retains the services of 3 franchise brokers who sell the Company's franchises. None of the employees is covered by a collective bargaining agreement, and management believes that its relations with its employees are good. 6 Competition The Company pioneered the concept of used car rentals. Unlike the traditional airport rental companies, Rent-A-Wreck developed its niche serving the "neighborhood" rental market. The Company emphasizes convenience and service and offers rentals of used cars, trucks and vans at rates that are typically lower than those charged by new car rental companies. The Company's customers generally are people from the local community, although most franchisees service some business and leisure travelers from outside the community. The Company's franchisees generally serve customers needing vehicles for insurance and service replacement, commercial, short-term moving and general use. Rent-A-Wreck franchisee fleets usually consist of a variety of used vehicles, although some locations rent new cars as well. The franchisees offer to customers various vehicles according to local demand. Trucks, passenger vans and cargo vans are available at many locations. This allows the franchisees the flexibility to offer an appropriate range of vehicles for their area. Significant competition exists in the local markets. Large systems like U-Save compete nationwide. Dozens of local independent companies also compete with the Company in various areas. In most major urban areas, companies such as Hertz, Avis, National and Budget operate city and suburban offices, as well as operating in airport terminals. Earlier this decade, many of the new car rental companies were owned, wholly or partially, by automobile manufacturers who sold their rental subsidiaries cars at discounted prices and guaranteed to repurchase cars after four to nine months in rental service. This enabled the rental companies to pass along their savings to retail customers in the form of lower rental prices. Over the last few years, the rental companies have been returning to independent ownership, the new car discounts and buybacks have been reduced, and new car retail rental prices have risen, reflecting real costs more accurately. Because the Company's franchisees generally attempt to provide substantial discounts off the retail prices charged by the large new car rental companies, the Company believes that the increase in prices charged by such companies has enabled the Company's franchisees to compete more effectively and profitably. Government Regulation The offering and sale of franchises is subject to Federal and State regulation and regulations by foreign governments. The Federal Trade Commission ("FTC") has adopted regulations requiring full pre-sale disclosure to prospective franchisees of certain information, including 7 information about the franchisor, its existing franchises, the rights and obligations of franchisees, and termination, cancellation and renewal of franchises. Disclosure is required to be made prior to the sale in the form of an offering circular. Many states in which the Company sells or may sell franchises may require pre-sale registration of the Company and/or the Company's offering circular and franchise agreement to be used in selling franchises from or in the state. The Company must apply for renewal with many of these states annually. Many states also regulate various aspects of the franchisor-franchisee relationship, including regulations regarding awarding, renewing and terminating franchise relationships. Compliance with the laws of the state from or in which the sale is to be made, in addition to the Federal regulations, may be required because FTC franchising regulations will not preempt state or local laws and regulations which are consistent with its Federal regulations, or which, if inconsistent, would provide protection to prospective franchisees equal to or greater than that imposed by the Federal franchising regulations. As of April 1998, the Company is currently authorized to sell franchises in all 50 states under its "Rent-A-Wreck" and "PRICELE$$" trade and service marks. The Company has registered its "Rent-A-Wreck" trade and service mark in approximately 33 foreign countries and is in the process of registering its "PRICELE$$" trade and service mark in 4 foreign countries and the entire European Community. Trademarks The Company believes that name recognition of its primary trademark "Rent-A-Wreck" is important to its franchise program. A trademark may be held for an indefinite duration, but it may be lost or its value diminished if adequate steps to police its use are not taken. The Company believes that its efforts to police the use of its trademarks are adequate. The Company is actively promoting its existing "PRICELE$$" trademark. The Company believes this trademark will provide additional sales opportunities for its franchisees due to new target customers of "PRICELE$$" rental fleets. Item 2. Description of Property - ------- ----------------------- The Company currently leases approximately 6,790 square feet of executive office space at 11460 Cronridge Drive, Suite 120, Owings Mills, MD 21117, which lease will expire in November 1999. The Company also rents on a month-to-month basis approximately 861 square feet of executive office space at 11460 Cronridge Drive, Suite 118, Owings 8 Mills, MD 21117 (see Item 12, Certain Relationships and Related Transactions). Management believes that the facilities leased by the Company are adequate for the Company's current and foreseeable future operations or that adequate alternative space is readily available. Item 3. Legal Proceedings - ------- ----------------- 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 claim against the Company has been dismissed, but the Court now has before it Plaintiff's Motion to Reconsider. If the motion is granted, the Company believes that Plaintiff's counsel will dismiss the Company as a defendant. A lawsuit that was initiated in August 1994 by Mongo, Inc. and John and Roberta Batcher was dismissed in April 1997. The Company is aware that Mongo, Inc. and John Batcher 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. The case was dismissed without prejudice on May 11, 1998. Bundy initiated a lawsuit on November 21, 1994 in the United States District Court for the Southern District of New York to collect amounts owed by a former franchisee, Motorcar Exchange, Inc., and its principals, Gary and Debbie Blankfort. In April 1996, Bundy obtained a default judgment against the defendants for approximately $140,000 in addition to a contempt judgment for approximately $70,000 plus interest. Subsequently, one of the defendants, Debbie Blankfort, filed a petition as a debtor under the United States bankruptcy laws. On July 13, 1996, Bundy filed a petition in the Southern District of New York for a determination that the amounts due pursuant to the judgment it received in April 1996 are not dischargeable as a result of the bankruptcy petition filed by Debbie Blankfort. Such petition is still pending, and the Company intends to pursue its remedies. 9 The Company is also involved in routine litigation incidental to its business. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matters were submitted to a vote of security holders during the 4th quarter of the fiscal year ended March 31, 1998. 10 Part II. Other Information Item 5. Market for the Common Equity and - ------- -------------------------------- Related Stockholder Matters --------------------------- The Company's Common Stock, $.01 par value, trades on the Nasdaq SmallCap Market under the symbol RAWA. The range of high and low bid quotations for the quarterly periods of the current and prior fiscal years were as follows: Year Ended March 31, 1998 High* Low* --------------------- -------- --------- First Fiscal Quarter $ 1 1/2 $ 1 1/4 Second Fiscal Quarter 1 3/16 1 1/16 Third Fiscal Quarter 1 1 Fourth Fiscal Quarter 1 3/32 1 Year Ended March 31, 1997 High* Low* --------------------- -------- --------- First Fiscal Quarter $ 1 1/2 $ 31/32 Second Fiscal Quarter 1 1/2 1 1/16 Third Fiscal Quarter 1 5/16 29/32 Fourth Fiscal Quarter 2 1/4 1 * Bid quotations as reported by Nasdaq reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions. The Company has never paid any cash dividends on its Common Stock, nor does it anticipate paying dividends on its Common Stock in the foreseeable future. The Company currently has preferred stock issued with 1,366,000 shares outstanding. This stock has a cumulative quarterly dividend of two cents per share. Based on the current number of outstanding preferred shares, the annual dividend is $109,280. The terms of the outstanding preferred stock provide that the Company may not declare or pay dividends, whether in cash or in property, on the common stock unless the full dividends on the preferred stock for all past dividend periods and the current dividend period have been paid or declared and a sum set aside for payment thereof. The preferred stock is convertible into common on a share-for-share basis. There is no 11 public market for the preferred stock. At June 1, 1998, undeclared and unpaid cumulative preferred dividend arrearages amounted to $177,209. The number of stockholders of record of the Company's Common Stock as of May 27, 1998 was 228. This figure does not include individual participants in securities position listings of registered clearing agencies. The Company believes that the number of beneficial stockholders was approximately 1,400 as of May 26, 1998. Trading activity with respect to the Common Stock has been limited, and the volume of transactions should not of itself be deemed to constitute an "established public trading market". A public trading market having the characteristics of depth, liquidity and orderliness depends upon the existence of market makers as well as the presence of willing buyers and sellers, which are circumstances over which the Company does not have control. On April 23, 1998, the Company approved the repurchase of up to an additional 500,000 shares of the Company's outstanding common or preferred stock. 12 Selected Financial Data - ----------------------- Set forth below are selected financial data with respect to the consolidated statements of operations of the Company and its subsidiaries for each of the five years in the period ended March 31, 1998, and with respect to the balance sheets thereof at March 31 in each of those years. The selected financial data have been derived from the Company's audited consolidated financial statements and should be read in conjunction with the financial statements and related notes thereto and other financial information appearing elsewhere herein. The selected financial data is not required by Form 10-KSB and has been included herein to provide an overview of the Company's operations.
Year ended March 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 ----------------------------------------------------- (in thousands except per share and number of franchises) Franchisees' Results (Unaudited) Franchisees' Revenue (1) $ 25,522 $ 26,482 $ 29,864 $ 34,661 $ 40,018 Number of Franchises 365 384 429 477 558 Company's Results of Operations Total Revenue $ 3,224 $ 3,003 $ 3,455 $ 3,785 $ 4,677 Costs and expenses and Other 3,511 2,655 3,029 3,252 3,983 Income (loss) before income taxes $ (262) $ 416 $ 489 $ 600 $ 756 Net income (loss) (236) 383 459 537 548 Earnings (loss) per common share Basic $ (.10) $ .06 $ .08 $ .10 $ .10 Weighted average common shares 3,758 4,238 4,210 4,102 4,267 Diluted $ (.10) $ .06 $ .07 $ .09 $ .09 Weighted average common shares plus options and warrants 5,727 6,086 6,197 6,083 5,915
13 Company's Balance Sheet Data Working Capital $ 572 $ 850 $ 902 $ 1,191 $ 1,527 Total assets 2,553 2,102 2,164 2,594 3,664 Long-term obligations 119 -- 36 30 -- Shareholders' Equity 1,048 1,299 1,372 1,755 2,028
(1) The franchisees' revenue data have been derived from unaudited license fee reports provided by franchisees. 14 Item 6. Management's Discussion and Analysis of - ------- --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- RESULTS OF OPERATIONS Year ended March 31, 1998 vs. year ended March 31, 1997 Revenue from franchising operations, which includes initial license fees, continuing license fees, advertising fees and direct financing leases, increased by $439,150 (12%). This increase occurred primarily due to an increase in revenue from initial license fees, continuing license fees and advertising fees. Initial license fees increased by $43,002 (6%) due to the addition of new franchises. The timing of closings of new franchise sales, each of which is for a relatively large amount, varies, contributing to periodic increases or decreases in reported results. Management does not believe these short-term variations are indicative of longer term trends. Continuing license fees increased by $321,446 (15%), and advertising fees increased by $77,900 (12%) 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 $579,063 due to the new reinsurance program that started in March 1997, partially offset by a $78,906 (86%) reduction in premiums from the physical damage insurance program ("CLC") and by a $67,551 (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. Other revenue increased by $25,307 (24%) due primarily to an increase in the insurance replacement program. Total operating expenses increased by $730,923 (22%) in fiscal 1998 compared to the prior year due primarily to an increase in underwriting expenses of $426,202 (1,586%) and an increase in general and administrative expenses of $159,832 (19%). These increases resulted primarily from the new reinsurance program. Advertising and promotion expenses increased by $100,048 (12%) due primarily to an increase in national advertising expense to promote the Company. Salary expense increased by $22,265 (3%) due to the growth of the Company. Sales and marketing expenses increased by $15,779 (2%), which resulted primarily from additional commission expenses due to the larger amount of franchise sales made in fiscal 1998 compared to the prior year and additional marketing expenses for attracting new franchisees, partially offset by a reduction in bad debt expenses due to improved collection of outstanding accounts receivable and collection of previously reserved accounts receivable. Net interest income decreased $4,220 (6%). This decrease was primarily due to lower interest received on the Company's direct financing leasing program primarily because of increased attractiveness of competitive programs. 15 Depreciation and amortization expense increased by $6,797 (6%) in fiscal 1998 compared to the prior year. This increase was primarily due to the additional investment to update computer software and hardware. Vehicles, office furniture, equipment and leasehold improvements are carried at cost. Depreciation has been provided by the straight-line method over the estimated useful lives of the assets ranging from 3 to 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 $694,085, before taxes and interest, in 1998 compared to operating income of $533,363 for 1997, reflecting an increase of $160,722 (30%). This increase resulted primarily from the increase in initial license fees and continuing license fees due to the addition of new franchises, fleet growth at existing franchises and the Company's improved collection efforts and collection of previously reserved accounts. Income tax expense for the year ended March 31, 1998 increased by $146,089 (234%) over 1997 due to higher pre-tax earnings and the depletion of the Company's federal income tax net operating loss carryforward in fiscal 1997, partially offset by a reduction in the deferred tax asset valuation allowance. The valuation allowance is being reduced in light of favorable earnings and expected future earnings and is re-assessed quarterly. Inflation has had no material impact on the operations and financial condition of the Company for all years presented. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had working capital of $1,526,934 compared to $1,191,019 at March 31, 1997. This increase of $335,915 primarily resulted from net profit earned during the year and a reduction in allowance for doubtful accounts based on the Company's historical reserves experience, offset by increased reserves for the reinsurance program. Of the net increase, $96,404 is due to a reduction in the required allowance for doubtful accounts as a result of improved collection efforts. In fiscal 1998, the Company's allowance for doubtful accounts was $682,631 compared to $779,035 in the prior year. The Company wrote off $169,859 of its doubtful accounts during fiscal 1998 and $217,162 during the prior year. The Company generally requires officers and directors of franchisees to provide personal guarantees of the franchisee's obligations under the franchise agreement. In January 1997, the Company's management improved its collection effort by dedicating part of the time of one employee to coordinate collections from franchisees. This new effort 16 resulted in more accounts being kept current and yielded a collection of $19,895 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 the prior year, and, accordingly, this collection improved cash flow in fiscal 1998 compared to the prior year. In April 1998, the Company hired a part-time employee to dedicate more resources to collection efforts. The Company's collection effort is designed to increase liquidity through improved cash flow; however, there can be no assurance that the Company will be successful in these efforts. Cash and cash equivalents increased by $607,189 (100%). 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 $75,130 (16%) due to higher advertising expenses. Restricted cash includes (1) 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") as part of the insurance program described below and (2) funds being held on behalf of the Company's franchisees in the national advertising fund to be spent on different advertising programs. In March 1997, the Company deposited $250,000 on behalf of its CAR Insurance subsidiary in the Bank of Butterfield. This deposit was restricted by a $250,000 letter of credit with the Bank of Butterfield in connection with the Company's CAR Insurance subsidiary. In June 1998, the Company made an additional deposit of $388,000 in the Bank of Butterfield resulting in a total amount of $638,000, all of which is restricted by a $638,000 letter of credit with the Bank of Butterfield. This letter of credit is part of the agreement between the Company and Chase as security for the letter of credit issued to American International Group ("AIG") by Chase. Funds drawn against the letter of credit bear interest at The Bank of Butterfield's prime commercial lending rate plus 2.0% (which prime rate was 8.5% on June 4, 1998). For the years ended March 31, 1997 and 1998, Chase has not drawn any funds from the letter of credit. In June 1997, the Company finalized a $500,000 letter of credit with Chase in connection with the Company's new CAR Insurance subsidiary. This letter of credit is part of the reinsurance agreement with AIG to secure payment of claims. In fiscal 1998, AIG requested the Company to increase the letter of credit with Chase from $500,000 to $1,000,000. Chase approved the Company's request to increase the letter of credit from $500,000 to $1,000,000, under the terms and conditions of the letter of credit dated June 3, 1997, and a first amendment dated June 1, 1998. Funds drawn against the letter of credit bear interest at Chase's prime commercial lending rate plus 3% (which prime rate was 8.5% on June 4, 1998). For the years ended March 31, 1997 and 1998, AIG has not drawn any funds from the letter of credit. This letter of credit is secured by the 17 letter of credit with the Bank of Butterfield and 50% of the Company's receivables under 90 days old. 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 March 31, 1998, 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 commitments were $5,200 and $5,400 at March 31, 1997 and 1998, respectively. The Company also rents additional space on a month to month basis for approximately $670 per month. Furniture, equipment and leasehold improvements decreased by $212,054 (29%) from March 31, 1997 to March 31, 1998. This decrease occurred primarily due to writing off the assets that were not in use or were fully depreciated. Vehicles decreased by $29,678 (56%) from March 31, 1997 to March 31, 1998 due to sales of a rental van and an executive vehicle which was partially offset by the purchase of a truck for the Company's one way program. The Company has made and will continue to make certain expenditures to ensure that its software system and applications continue to function properly in and after 2000. These expenditures have not been and are not anticipated to be material to the Company's financial position or results of operations. The Company expects to spend approximately $3,000 in its fiscal year 1999 to ensure that its software systems and applications continue to function properly in and after the year 2000. No amounts were spent in fiscal 1998. Cash provided by operations was $398,372, resulting primarily from net income before depreciation plus the increase in accounts payable, accrued expenses and insurance fees, claims and loss reserves, offset by the increase in the Company's receivables. Prepaid expenses and other increased primarily due to purchase of additional promotional items. Insurance fees, claims and loss reserves increased due to the new insurance program. Accounts and notes receivable decreased primarily due to the Company's collections efforts. Cash used in investing activities of $32,429 related primarily to the acquisition of computer software and hardware and maintaining trademarks. Cash provided by financing activities during the same period was $176,388, resulting from an increase in insurance premiums payable and the issuance of common stock in connection with the acquisition of assets, offset by the payment of preferred dividends, repayment of long-term debt and buyback of common and preferred stock. During the year ended March 31, 1996, the Company announced a buyback of up to 250,000 shares of its common stock and/or its Series A convertible 18 preferred stock. On April 8, 1996, the Board of Directors authorized the repurchase of an additional 250,000 shares of the Company's outstanding common and preferred stock. During the year ended March 31, 1997, the Company bought back 66,500 shares of its common stock at a cost of $66,749 and also bought back 67,625 shares of its preferred stock at a cost of $85,301. These shares were retired in the year ended March 31, 1997. During the year ended March 31, 1998, the Company bought back 117,575 shares of its common stock at a cost of $121,509 and also bought back 20,625 shares of its preferred stock at a cost of $25,781. These shares were retired in the year ended March 31, 1998. On April 23, 1998, the Company approved the repurchase of up to an additional 500,000 shares of the Company's outstanding common or preferred stock. The Company believes it has sufficient working capital to support its business plan through fiscal 1998. IMPORTANT FACTORS The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to stockholders. This Report contains forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including the statements regarding anticipated growth of the Company and trends in the industry. In connection with these "safe harbor" provisions, the Company identifies important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such forward-looking statement is qualified by reference to the following cautionary statements. Limited Insurance Experience; Potential for Negative Claims Experience. The Company's reinsurance business exposes its assets to significant liability for claims and losses under the program. There can be no assurance that the premiums collected will be adequate to cover the liabilities incurred. Because of the Company's limited experience with insurance risks and the inherent uncertainties in estimating the ultimate costs of claims, losses and adjustment expenses may deviate substantially from expectations. Furthermore, the timing, frequency and extent of liabilities under this program cannot be predicted accurately because the conditions and events which established the Company's loss expectancies may not recur in the future. Unexpected losses associated with this program could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, if the Company expands the program as anticipated, the effect of such losses could be compounded. Government Regulation Relating to Insurance Program. As part of the insurance program, the Company utilizes Consolidated American Rental Insurance Company, Ltd ("CAR Insurance"), its wholly owned subsidiary 19 domiciled in Bermuda. Insurance companies such as CAR Insurance are subject to the laws and regulations in the jurisdictions in which they are chartered and do business. Such laws and regulations generally are designed to protect the interests of policyholders rather than the interests of shareholders or the Company. In general, insurance regulatory agencies have broad authority over insurers' capital and surplus levels, dividend payments, financial disclosure, reserve requirements, investment parameters and premium rates. The regulation of CAR Insurance and its insurance program involving AIG, Hertz Claim Management Corporation and AICCO Premium Financing could have a material effect on the Company's business, financial condition and results of operations. The Company's insurance program offered through CAR Insurance is conducted via "fronting" arrangements with AIG. Because some states currently restrict or limit such arrangements, the ability of the Company to expand the program into those states is also limited. In addition, the National Association of Insurance Commissioners ("NAIC") adopted a model act concerning such "fronting" arrangements. The model act requires reporting and prior approval of reinsurance transactions relating to these arrangements and limits the amount of premiums that can be written under certain circumstances. No determination can be made as to whether, or in what form, such act may ultimately be adopted by any state, and the Company is therefore unable to predict whether the model act will affect its operations or relationships with insurers. Some states currently regulate third party administration and premium financing arrangements, such as those used by the Company. Any or all of these regulations could have a material effect on the program being offered by the Company. State regulation requires licensing of persons soliciting the sale of insurance within that state. In certain states, licenses are obtained by individual agents rather than a corporate entity. Due to the Company's recent development of the reinsurance program and limited experience with its other insurance programs, there can be no assurance that its activities will not be deemed to be in violation of licensing or other insurance laws or regulations. Such violations could subject the Company to significant fines and penalties which could have a material adverse effect on its business, financial condition and results of operations. Dependence on Franchisees; Credit Risks. The Company's revenues are substantially dependent on fees paid by its franchisees. These fees fluctuate based on the franchisee's performance. Franchisees are independent contractors who operate their business independent of the Company. Any failure of franchisees to operate their businesses, or inability of the Company to collect fees owed by franchisees, could have a material adverse effect on the Company's business, financial condition and results of operations. 20 Dependence on Trademarks. The Company's success depends in significant part on its ability to maintain and protect its primary trademarks involving the "Rent-A-Wreck" name. The Company's revenues are almost exclusively derived from the goodwill associated with the name. Significant negative publicity related to the name or the inability of the Company to pursue infringements and maintain its proprietary rights would have a material adverse effect on the Company's business, financial condition and results of operations. Intense Competition. The vehicle rental industry in which the Company and its franchisees operate is characterized by intense competition, particularly with respect to price and service, from national, regional and local vehicle rental companies. Many of these competitors, particularly national competitors and those with relationships with vehicle manufacturers, have substantially greater resources than the Company. In addition, competition exists from many smaller, independent operations in local markets. Any failure by the Company and its franchisees to offer services and prices that compete favorably in the marketplace would have a material adverse effect on the Company's business, financial condition and results of operations. Compliance with Governmental Regulations. The Company's operations are subject to numerous federal, state, local and foreign laws, including federal and state laws governing the offer and sale of franchises and relationship with franchisees. Several states' laws require the Company to renew its state franchise registration annually. If the Company does not maintain required state registrations, it must terminate franchise sales activity in those states. While the Company has suspended franchise sales activity in the past until such registrations were properly renewed, the Company believes that it is currently in material compliance with such laws. Changes in franchise laws could require the Company to make material alterations to its core business. Additionally, failure to comply with franchise or other laws could subject the Company to significant fines and penalties and have a material adverse effect on the Company's business, financial condition and results of operations. During the past several years, a number of states have interpreted existing laws as requiring out-of-state companies which generate income by granting franchises in the state to file returns and pay tax in the state. Following this trend, other states have adopted laws specifically designed to impose tax on out-of-state companies granting franchises in the state. While many companies, along with many tax practitioners and commentators, contend that the application of such laws violates the federal constitution, the United States Supreme Court has not yet ruled on the issue directly. If the application of these laws is constitutional, if the laws apply to the activities of the Company, or if the states' interpretation of existing laws is applied retroactively, any resulting 21 taxes and associated interest and penalties for which the Company may be liable also could have a material adverse effect on the Company. Risks of International Operations. During the fiscal year ended March 31, 1998, approximately 1% of the Company's revenues were derived from international operations. The Company's international operations are subject to certain risks, including adverse developments in foreign political and economic environments, varying government regulations, including regulations regarding the protection of trademarks and the offer and sale of franchises, foreign currency fluctuations and potential adverse tax consequences. There can be no assurance that any of these factors, especially if the Company is successful in expanding its international presence, will not have a material effect on the Company's business, financial condition and results of operations. Developments in any of these areas, which are more fully described elsewhere in "Item 1 - Description of Business" which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. 22 Item 7. Financial Statements - ------- -------------------- Index to Consolidated Financial Statements and Supporting Schedules ------------------------------------------------------------------- Page ---- Report of Independent Certified Public Accountants... 24 Financial Statements: Consolidated Balance Sheet as of March 31, 1998............................................. 25 Consolidated Statements of Earnings for the Years Ended March 31, 1997 and 1998............................................. 27 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1997 and 1998......................................... 28 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997 and 1998.............. 29 Notes to Consolidated Financial Statements....................................... 30 Supporting Schedules: Schedule II - Valuation and Qualifying Accounts........................... 57 Schedules other than those listed above have been omitted because they are either not required, inapplicable, or the required information is included in the Consolidated Financial Statements or notes thereto. 23 [LETTERHEAD OF GRANT THORNTON LLP] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- Board of Directors Rent-A-Wreck of America, Inc. We have audited the accompanying consolidated balance sheet of Rent-A-Wreck of America, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1998, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years ended March 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rent-A-Wreck of America, Inc., and subsidiaries, as of March 31, 1998, and the consolidated results of their operations and their consolidated cash flows for the years ended March 31, 1998 and 1997 in conformity with generally accepted accounting principles. We have also audited Schedule II for the years ended March 31, 1998 and 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP Baltimore, Maryland May 21, 1998 24 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1998 ASSETS 1998 ---------- CURRENT ASSETS: Cash and Cash Equivalents............................ $1,215,615 Restricted Cash...................................... 394,021 Accounts Receivable, net of allowance for doubtful accounts of $682,631: Continuing License Fees and Advertising Fees............................... 302,367 Current Portion of Notes Receivable.............. 342,765 Current Portion of Direct Financing Leases......................................... 37,653 Insurance Premiums Receivable.................... 560,219 Other............................................ 176,166 Prepaid Expenses and Other........................... 133,856 ---------- TOTAL CURRENT ASSETS............................... 3,162,662 ---------- PROPERTY AND EQUIPMENT: Furniture............................................ 71,655 Computer Hardware and Software....................... 314,657 Machinery and Equipment.............................. 101,868 Leasehold Improvements............................... 37,896 Vehicles............................................. 23,347 ---------- 549,423 Less: Accumulated Depreciation and Amortization.................................. (265,476) ----------- NET PROPERTY AND EQUIPMENT......................... 283,947 ----------- OTHER ASSETS: Trademarks and other Intangible Assets, net of accumulated amortization of $105,951............... 203,129 Long-term Portion of Notes and Direct Financing Lease Receivables, net of allowance of $0................ 14,374 ---------- 217,503 ----------- TOTAL ASSETS....................................... $3,664,112 ========== The accompanying notes are an integral part of this financial statement. 25 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1998 LIABILITIES AND SHAREHOLDERS' EQUITY 1998 ----------- CURRENT LIABILITIES: Accounts Payable and Accrued Expenses................ $ 873,690 Dividends Payable.................................... 27,320 Insurance Premiums Payable........................... 489,903 Insurance Fees, Claims, and Loss Reserves...................................... 244,815 ----------- TOTAL CURRENT LIABILITIES.......................... 1,635,728 ----------- TOTAL LIABILITIES.................................. 1,635,728 ----------- COMMITMENTS AND CONTINGENCIES - SHAREHOLDERS' EQUITY: Convertible Cumulative Series A Preferred Stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 1,366,000 shares (aggregate liquidation preference $1,092,800) 13,660 Common Stock, $.01 par value; authorized 25,000,000 shares; issued and outstanding 4,189,692 shares....................... 41,896 Additional Paid-In Capital........................... 2,900,382 Accumulated Deficit.................................. (927,554) ----------- TOTAL SHAREHOLDERS' EQUITY......................... 2,028,384 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $3,664,112 ========== The accompanying notes are an integral part of this financial statement. 26 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED MARCH 31, 1997 AND 1998 1997 1998 ----------- ---------- REVENUES: Initial License Fees..................... $ 751,000 $ 794,002 Advertising Fees......................... 673,090 750,990 Continuing License Fees.................. 2,079,657 2,401,103 Insurance Premiums....................... 161,497 579,063 Vehicle Rental Operations................ 5,482 15,104 Direct Financing Leases to Franchisees... 6,923 3,725 Other.................................... 107,351 132,658 ----------- ---------- 3,785,000 4,676,645 ----------- ---------- EXPENSES: Salaries, Consulting Fees, and Employee Benefits...................... 747,743 770,008 Advertising and Promotion................ 822,587 922,635 Underwriting Expenses.................... 26,880 453,082 Sales and Marketing ..................... 699,819 715,598 General and Administrative .............. 839,944 999,776 Depreciation and Amortization........... 114,664 121,461 ----------- ---------- 3,251,637 3,982,560 ----------- ---------- OPERATING INCOME.................. 533,363 694,085 INTEREST INCOME, NET....................... 66,567 62,347 ----------- ---------- INCOME BEFORE INCOME TAX EXPENSE.. 599,930 756,432 INCOME TAX EXPENSE......................... 62,439 208,528 ----------- ---------- NET INCOME........................ 537,491 547,904 DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK.......................... (119,648) (111,431) ----------- ----------- NET INCOME AFTER DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK... $ 417,843 $ 436,473 =========== ========== EARNINGS PER COMMON SHARE Basic.................................... $ .10 $ .10 =========== ========== Weighted average common shares............. 4,101,904 4,266,711 =========== ========== Diluted.................................. $ .09 $ .09 =========== ========== Weighted average common shares plus options and warrants................. 6,083,043 5,914,752 =========== ========== The accompanying notes are an integral part of these financial statements. 27 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
Preferred Stock Common Stock Additional ---------------------- -------------------- Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ----------- --------- --------- --------- ---------- ------------ ---------- Balance, April 1, 1996............ 1,566,375 $ 15,664 4,121,642 $ 41,216 $2,992,198 $(1,676,685) $1,372,393 Issuance of common stock and exercise of warrants.......... - - 120,000 1,200 148,800 - 150,000 Retirement of common stock...... - - (66,500) (665) (66,084) - (66,749) Retirement of preferred stock... (67,625) (677) - - (53,424) (31,200) (85,301) Conversion of preferred stock into common stock............... (59,625) (596) 59,625 596 - - - Preferred dividends paid ($.08 per share).................... - - - - - (119,648) (119,648) Preferred dividend arrearages paid ......................... - - - - - (32,858) (32,858) Net income...................... - - - - - 537,491 537,491 ----------- --------- --------- --------- ---------- ------------ ---------- Balance, March 31, 1997........... 1,439,125 14,391 4,234,767 42,347 3,021,490 (1,322,900) 1,755,328 Issuance of common stock ....... - - 20,000 200 24,800 - 25,000 Retirement of common stock...... - - (117,575) (1,176) (120,333) - (121,509) Retirement of preferred stock... (20,625) (206) - - (25,575) - (25,781) Conversion of preferred stock into common stock............... (52,500) (525) 52,500 525 - - - Preferred dividends paid ($.08 per share).................... - - - - - (111,431) (111,431) Preferred dividend arrearages paid ......................... - - - - - (41,127) (41,127) Net income...................... - - - - - 547,904 547,904 ----------- --------- --------- --------- ---------- ------------ ---------- Balance, March 31, 1998........... 1,366,000 $ 13,660 4,189,692 $ 41,896 $2,900,382 $ (927,554) $2,028,384 =========== ========= ========== ========= ========== ============ ==========
The accompanying notes are an integral part of these financial statements. 28 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
1997 1998 ----------- ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net Income............................................... $ 537,491 $ 547,904 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 114,664 121,461 Gain on disposal of property and equipment........... (2,403) (4,065) Provision for doubtful accounts...................... (13,945) (96,404) Changes in assets and liabilities: Accounts and notes receivable........................ 192,949 (500,111) Prepaid expenses and Other........................... (31,779) (16,290) Accounts payable and accrued expenses........................................... 119,357 151,890 Insurance fees, claims, and loss reserves...................................... (58,867) 193,987 ----------- ----------- Net cash provided by operating activities........... 857,467 398,372 ----------- ----------- Cash flows from investing activities: (Increase) decrease in restricted cash................... (469,152) 75,130 Proceeds from sale of property and equipment............. 29,075 36,683 Acquisition of property and equipment.................... (144,460) (75,270) Additions to trademarks and other........................ (75,956) (4,114) ----------- ----------- Net cash (used in) provided by investing activities. (660,493) 32,429 ----------- ----------- Cash flows from financing activities: Increase in insurance premiums payable................... - 489,903 Issuance of common stock................................. 150,000 25,000 Repayments of obligation under capital lease............. (13,863) (38,667) Retirement of common stock............................... (66,749) (121,509) Retirement of preferred stock............................ (85,301) (25,781) Preferred dividends paid................................. (152,506) (152,558) ----------- ----------- Net cash (used in) provided by financing activities. (168,419) 176,388 ----------- ----------- Net increase in cash and cash equivalents........................................ 28,555 607,189 Cash and cash equivalents at beginning of year............. 579,871 608,426 ----------- ----------- Cash and cash equivalents at end of year................... $ 608,426 $1,215,615 =========== =========== Supplemental disclosure of cash flow information: Interest paid............................................ $ 6,096 $ 10,115 Taxes paid............................................... $ 38,722 $ 103,733
The accompanying notes are an integral part of these financial statements. 29 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements presented herein include the accounts of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned subsidiaries, Rent-A-Wreck Operations, Inc. ("RAW OPS"), Rent-A-Wreck One Way, Inc. ("RAW One Way"), Consolidated American Rental Insurance Company, LTD ("CAR Insurance") and Bundy American Corporation ("Bundy"), and Bundy's subsidiaries, Rent-A- Wreck Leasing, Inc. ("RAW Leasing"), URM Corporation ("URM") and Central Life and Casualty Company, Limited ("CLC"). All of the above entities are collectively referred to as the "Company" unless the context provides or requires otherwise. All material intercompany balances and transactions have been eliminated. The Company markets and administers the Rent-A-Wreck and PRICELE$$ vehicle rental franchise programs throughout the United States, as well as various foreign countries. Restricted Cash Restricted cash includes a deposit of $250,000 being held in the Bank of Butterfield (Bermuda) securing the letter of credit with The Chase Manhattan Bank ("Chase") and funds being held for $144,021 on behalf of the Company's franchisees in the national advertising fund to be spent on different advertising programs. Accounts and Notes Receivable Substantially all receivables derived from franchises granted by the Company are personally guaranteed by the officers or directors of the franchisees. Initial license fees are collected upon execution of the contract or financed, generally over a twelve-month period with interest. Property and Equipment Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, utilizing primarily the straight-line method for financial statement purposes. Accelerated 30 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MARCH 31, 1998 Property and Equipment-continued methods of depreciation are used for substantially all assets for income tax purposes. The estimated service lives used in determining depreciation are as follows: Furniture 3 years Computer Hardware and Software 5 years Machinery and Equipment 5 years Leasehold Improvements 3 years Vehicles 5 years Trademarks and Other Intangible Assets Costs associated with trademarks are capitalized and amortized on the straight-line method to operations over periods ranging from ten to forty years. Intangibles represent costs in excess of net assets acquired in connection with businesses acquired and are being amortized to operations on a straight-line basis over ten years. The recoverability of carrying values of intangible assets is evaluated on a recurring basis. The primary indicators are current or forecasted profitability of the related business. There have been no adjustments to the carrying values of intangible assets resulting from these evaluations. Insurance Reserves The Company recognizes a liability for re-insured auto claims at the time a claim is reported to the Company by the third party administrator. The third party administrator establishes the initial claim reserve based on information relating to the nature, severity and the cost of similar claims. The Company provides for claims incurred, but not reported, based on industry-wide data and the Company's past claims experience through consultation with third party actuaries. The liability recorded may be more or less than the actual amount of the claims when they are submitted and paid. Changes in the liability are charged or credited to operations as the estimates are revised. Income Taxes Income taxes are provided for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, liabilities and assets are recognized for the deferred tax consequences of temporary differences or carryforwards that will result in net taxable income or deductible amounts in future periods. Deferred tax expense or benefit is the result of changes in the net asset or liability for deferred taxes. The 31 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MARCH 31, 1998 principal items giving rise to temporary differences are depreciation, reserves and accrued liabilities. Revenue Recognition Initial License, Advertising and Continuing License Fees -------------------------------------------------------- Revenues are composed primarily of initial license fees, continuing license fees, and advertising fees. Franchisees have certain rights to use the Company's trademarked names, "Rent-A-Wreck" and "PRICELE$$", in a specified territory. Although the franchisee has continuing access to the use of certain of the Company's resources, experience and knowledge, the Company recognizes the initial license fee as revenue upon completion of an initial orientation and training course since this represents substantially all of the initial services required. Many franchisees have had prior business experience and, therefore, require little assistance in commencing business. There is no obligation beyond the initial training as related to the initial license fee. Continuing license and advertising fees are recognized as revenues on a monthly basis over the contract year based primarily on franchisees' reported gross revenues. Direct Financing Leases ----------------------- The Company offers, on a selective basis to qualified franchisees, the opportunity to finance vehicles for their rental fleets under a direct financing program. The Company recognizes the related interest, documentation and administrative revenues as they are received. The Company accounts for the financing of the vehicles with the franchisees as direct financing leases (see Note 3). Other ----- Insurance administration and physical damage program revenues are recognized ratably over the term of the coverage. Promotional material revenues are recorded when shipped. Advertising Advertising costs are expensed as incurred and are classified as advertising and promotion expenses. 32 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MARCH 31, 1998 Stock-Based Compensation Compensation costs for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount to be paid to acquire the stock. Compensation cost for stock awards is recorded based on the quoted market value of the Company's stock at the time of grant. Earnings Per Common Share The computation of earnings per common share is presented on a basic and diluted basis in accordance with Statement of Financial Accounting Standards 128, Earnings Per Share. In computing basic earnings per share, preferred dividends are subtracted from net income to arrive at the earnings applicable to common shareholders. In computing diluted earnings per share, the dilutive effect of stock options, warrants, and the conversion of cumulative preferred stock was considered in determining the weighted average number of common and common equivalent shares. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents. Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and reported revenues and expenses. Actual results could differ from those estimates. Newly Issued Accounting Standard In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), which is effective for fiscal years beginning after December 15, 1997. The statement establishes revised standards under which an entity must report business segment information in its financial statements. The Company plans to adopt SFAS 131 in the fiscal year beginning April 1, 1998. 33 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Reclassifications Certain prior year amounts have been reclassified to conform to the 1998 presentation. 2. CAPTIVE INSURANCE COMPANY In March, 1997, Rent-A-Wreck of America, Inc. formed a wholly owned, Bermuda-based captive insurance subsidiary, Consolidated American Rental Insurance Company, LTD ("CAR Insurance"), to provide automobile liability and physical damage insurance for vehicles owned by participating franchisees. American International Group (AIG) provides policy fronting, excess insurance coverage, and an aggregate stop loss protection of $1,300,000. CAR Insurance reinsures AIG's coverage subject to a per loss limit of $100,000 per person and $300,000 per accident. As security for the reinsurance arrangement with AIG, the Company has obtained standby letters of credit from Chase ($500,000) and Bank of Butterfield ($250,000). In addition, certain assets of the Company have been pledged to secure the agreement with Chase. The letters of credit were increased subsequent to year end (see note 14). 34 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 3. DIRECT FINANCING LEASES The components of the Company's net investment in direct financing leases are as follows: March 31, 1998 ------------ Total Minimum Lease Payments to be Received........ $69,184 Less Amounts Representing Administration Costs Included in Total Minimum Lease Payments............ 1,292 ------- Minimum Lease Payment Receivable................... 67,892 Less Allowance for Uncollectibles......... 15,927 ------- Net Minimum Lease Payments Receivable.............. 51,965 Less Unearned Income...................... 3,405 ------- Net Investment in Direct Financing Leases.......... 48,560 ------- Current Portion .......................... $37,653 Non-Current Portion....................... 10,907 ------- Net Investment in Direct Financing Leases.......... $48,560 ======= The total minimum lease payments receivable in the two succeeding fiscal years are as follows: 1999 .............................$56,937 2000.............................. 12,247 ------- Total $69,184 ======= 35 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: March 31, 1998 --------- Accounts Payable............................... $ 161,830 National Advertising Fund...................... 144,022 Payroll........................................ 30,219 Commissions and Royalties...................... 144,040 Professional Fees.............................. 83,254 Income Taxes Payable........................... 201,676 Other.......................................... 108,649 --------- $ 873,690 ========= 36 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 5.EARNINGS PER SHARE A reconciliation of the numerators and denominators in the computation of basic and diluted earnings per share for the years ended March 31, 1997 and 1998 is as follows: 1997 1998 ---------- ----------- BASIC EPS COMPUTATION Numerator: Net income applicable to common shares $ 417,843 $ 436,473 Denominator: Weighted average common shares 4,101,904 4,266,711 ---------- ---------- Basic EPS $ .10 $ .10 ========== ========== DILUTED EPS COMPUTATION Numerator: Net income applicable to common shares $ 417,843 $ 436,473 Dividends on convertible preferred stock 119,648 111,431 ---------- --------- 537,491 547,904 ---------- --------- Denominator Weighted average common shares 4,101,904 4,266,711 Convertible preferred stock 1,439,125 1,366,000 Weighted average options and warrants 542,014 282,041 ---------- --------- 6,083,043 5,914,752 Diluted EPS $ .09 $ .09 ========== ========== 37 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 6. INCOME TAXES The Company accounts for income taxes on the liability method, as prescribed by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). The provision for income taxes for the years ended March 31, 1997 and 1998 consists of the following: 1997 1998 ---- ---- Currently payable State income taxes................. $ 28,214 $ 51,341 Federal income taxes............... 34,225 225,695 -------- ------- Total currently payable...... 62,439 277,036 Deferred............................. - (68,508) -------- ------- Total........................ $ 62,439 $208,528 ======== ======== The reconciliation of the provision for income taxes computed at statutory rates to the provision for income taxes provided on pre-tax income for the year ended March 31, 1997 and 1998 is as follows: 1997 1998 --------- --------- Federal taxes at statutory rate............................ $ 189,825 $ 257,187 Utilization of tax loss carryforward.................... (155,600) - Reduction in valuation allowance.. - (100,000) State and local taxes, net........ 28,214 51,341 --------- --------- Total....................... $ 62,439 $ 208,528 ========= ========= 38 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 6. INCOME TAXES-continued The significant components of the deferred income tax asset and (liability), stated by source of the difference between financial accounting and tax basis as of March 31, 1998 is as follows: 1998 ---------- Deferred tax assets: Reserve for doubtful accounts................. $ 266,225 Accrued expenses.............................. 101,190 Other ........................................ 10,891 ---------- 378,306 Deferred tax liabilities: Fixed assets.................................. (33,068) ---------- Net deferred tax asset before valuation allowance........................... 345,238 Valuation allowance............................. (276,730) ---------- Net deferred tax asset.......................... $ 68,508 ========== The net change in the valuation allowance for the year ended March 31, 1998 was a decrease of $100,000. The valuation allowance is being reduced in light of favorable earnings and expected future earnings and is re-assessed quarterly. 39 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 7. COMMITMENTS AND CONTINGENCIES Lease Commitments ----------------- The Company's corporate offices are occupied under the terms of operating leases from both related and non-related parties, the longest of which expires in November, 1999. Future minimum lease payments under non-cancelable agreements are as follows: March 31, --------- 1999.....................$66,712 2000.....................$45,357 Total rent expense for the years ended March 31, 1997 and 1998 was $70,064 and $71,999, of which $7,189 and $9,649, respectively was to the related party (see Note 8). 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. 8. RELATED PARTY TRANSACTIONS The Company has entered into a Management Agreement with K.A.B., Inc. (KAB), a management consulting group controlled by and affiliated with Kenneth L. Blum, Sr., Chairman of the Board of Directors and Chief Executive Officer of the Company, which expires July 1, 2003. As a part of this agreement, KAB provides direct overall management of the Company's operations. Total annual fees paid to KAB under the management agreement for the years ended March 31, 1997 and 1998 were $200,000 and $250,000 respectively. KAB has also been granted an option to purchase up to 2,250,000 shares of the Company's common stock (see note 9). 40 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 8. RELATED PARTY TRANSACTIONS - continued The Company leases a portion of its corporate offices under the terms of a month-to-month operating lease with American Business Information Systems, Inc. (ABIS), a related party of KAB. The Company paid $7,189 and $9,649 for the years ended March 31, 1997 and 1998, respectively, to ABIS under this agreement. In 1995, the Company entered into an agreement with ABIS, a related party of KAB, to develop computer software and related documentation over a five-year term. For the years ended March 31, 1997 and 1998, $34,204 and $21,839, respectively, have been paid to ABIS under this agreement. In 1995, the Company retained Richter & Co., Inc., a related party, to serve as exclusive financial advisor and placement agent for the Company. For its role of placement agent and financial advisor, Richter & Co., Inc.'s fees will be contingent and based upon transactions completed, as defined in the agreement. For the years ended March 31, 1997 and 1998, there were no fees paid to Richter & Co., Inc. pursuant to this agreement. Richter & Co., Inc. provides ongoing financial management services to the Company at no charge. In the opinion of management, the terms of the Company's agreements with Richter, KAB and ABIS taken as a whole are at least as favorable to the Company as could be obtained from third parties. 9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS Options and warrants to acquire shares of the Company's common stock are granted at a value not less than 100% of the fair market value of the underlying stock on the date of issuance. Under the Company's stock option plans, 300,000 shares of the Company's common stock are reserved and available for issuance upon the exercise of options granted to employees, including officers and directors. At March 31, 1998, no options were outstanding under the plan. The Company has issued stock options to acquire 2,250,000 shares of its common stock to 41 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued KAB in conjunction with its management agreement. These options are not part of the foregoing plan. During the year ended March 31, 1996, KAB transferred (a)483,333 and 604,167 vested and unvested options, respectively, to each of Kenneth L. Blum Jr., the Company's president, and Mr. Blum's sister, Robin Cohn; (b) 20,000 and 25,000 vested and unvested options, respectively, to Richter & Co., Inc., an affiliate of William L. Richter, a director of the Company and financial advisor; and 13,333 and 16,666 vested and unvested options, respectively, to Mr. Richter. In April 1996, the Company approved the extension of the term of the KAB Management Agreement for five years expiring June 30, 2003, the extension of the options originally granted to KAB by five years (with a corresponding delay in the fixed vesting date until July 1, 2002), and the addition of a cashless exercise feature. The fair value of each option grant is estimated on the date of grant, using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants issued in fiscal year 1997: risk free interest rate of 6.870%; expected volatility of 57.880%, and expected lives of 2.92 to 6.21 years. There were no stock options granted during fiscal year 1998. 42 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued The following table summarizes option activity: 1997 1998 Weighted Weighted Average Average 1997 1998 Exercise Exercise Shares Shares Price Price --------- --------- -------- -------- Options outstanding at beginning of year 2,305,000 2,265,000 $ 1.17 $ 1.08 Options exercised - - - - Options granted 2,250,000 - 1.15 - Options canceled (2,250,000) - 1.30 - Options expired (40,000) (15,000) - 1.44 ----------- ---------- Options outstanding at end of year 2,265,000 2,250,000 $ 1.08 $ 1.08 Option price range at end of year $ 1.00 to $ 1.00 to $ 1.44 $ 1.15 Option price range for exercised shares - - Weighted-average fair value of options, granted during the year $ 0.70 $ - At March 31, 1997 and 1998, 1,015,000 and 1,000,000 options, respectively, were exercisable. 43 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued The following table summarizes options outstanding at March 31, 1998: Weighted Average Number Exercise Weighted Average Remaining Outstanding Price Exercise Price Contractual Life ----------- --------- ---------------- ---------------- 2,250,000 $ 1.00 to $ 1.08 5.25 years $ 1.15 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock options plans. Had compensation cost been recognized based on the fair value at the grant date on a straight-line basis over the vesting period of the grant for the fiscal 1997 awards consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the following pro forma amounts: 1997 1998 ----------- ----------- Net income applicable to common and common equivalent shares As reported $ 417,843 $ 436,473 Pro forma $ 190,546 $ 351,579 Earnings per share Basic: As reported $ .10 $ .10 Pro forma $ .05 $ .08 Diluted: As reported $ .09 $ .09 Pro forma $ .03 $ .06 44 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 9. STOCK OPTION PLANS AND COMMON STOCK WARRANTS - continued In consideration of services rendered in connection with the negotiation of the management agreement with KAB, the Company granted Richter & Co., Inc. five-year warrants, expiring June 30, 1998, to purchase 155,000 shares of the Company's Common Stock for its services as investment banker. The exercise price of 20,000 of such warrants was $.80, and the exercise price of the remaining 135,000 warrants is tied to the exercise and vesting provisions of the options issued to KAB in connection with the management agreement. Richter & Co., Inc. assigned 62,000 of these warrants to William L. Richter. In April, 1996, the Company extended 135,000 of the warrants originally issued to Richter & Co., Inc. for an additional five years in consideration of services rendered in connection with the renegotiation of the KAB Management Agreement and related services. Warrants for 30,000 shares of the Company's common stock exercisable at $.80 per share have been issued to Richter & Co., Inc. in connection with previous private placement transactions for which Richter & Co., Inc. acted as agent. Richter & Co., Inc. has assigned 12,000 of these warrants to William L. Richter and 4,000 warrants to Richter & Co., Inc. employees. On September 30, 1994, the Company issued warrants for 100,000 shares of the Company's common stock to Whale Securities Co., L.P. for consulting services. The exercise price is $1.25 per share. A summary of changes in outstanding warrants for the year ended March 31, 1998 is as follows: Number of Exercise Price Warrants per Warrant ---------- -------------- Outstanding, beginning of year.. 290,000 $.80 - $1.50 Issued.......................... - Exercised....................... - Canceled........................ (5,000) $1.25 ---------- Outstanding, end of year........ 285,000 $.80 - $1.25 ========== 45 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 10. PREFERRED STOCK The terms of the outstanding preferred stock provide that the Company may not declare or pay dividends, whether in cash or in property, on the common stock unless all dividends on the preferred stock for all past dividend periods and the then current dividend period shall have been paid or declared and a sum set aside for payment thereof. Holders of Preferred Stock, voting as a class, are entitled to elect up to four members of a seven member Board of Directors and are also entitled to vote as a class on other significant corporate actions. Pursuant to the terms of a voting trust, Richter Investment Corp. holds a proxy to vote approximately 96% of the Preferred Stock, and, by virtue of his control over Richter Investment Corp., William L. Richter can be deemed to have voting control over such shares. The holders of the Series A Preferred are entitled to cumulative dividends at an annual rate of eight cents per share. The Series A Preferred is convertible, at the option of the holder, into common shares on the basis of one share of common for each share of Series A Preferred. During the year ended March 31, 1998, the Company repurchased and retired 20,625 shares of preferred stock and 52,500 preferred shares were converted to common shares, reducing the total outstanding preferred shares from 1,439,125 to 1,366,000. At March 31, 1998, undeclared and unpaid cumulative preferred dividends amounted to $221,511. During the year ended March 31, 1998, the Company declared preferred dividends totaling $111,431, plus $41,127 of dividend arrearages, and at March 31, 1998, unpaid declared preferred dividends totaled $27,320. 11. OTHER REVENUES Components of other revenues for the years ended March 31, 1997 and 1998 were as follows: 1997 1998 -------- -------- Promotional materials....... 94,685 106,779 Other....................... 12,666 25,879 -------- -------- $107,351 $132,658 ======== ======== 46 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 12. CONCENTRATIONS OF CREDIT RISK - CASH The Company maintains its cash balances in a financial institution located in Maryland, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts, and management believes the Company is not exposed to significant credit risk. 13. GEOGRAPHIC AND INDUSTRY SEGMENTS The Company currently operates in two principal segments: Vehicle Rental Franchise Programs and Insurance Coverage. The Company's foreign operations are presently conducted by CAR Insurance in Bermuda. Information by geographic area and industry segment is as follows: 1997 1998 ---------- ---------- Net revenues to unaffiliated customers Vehicle Rental Franchises-United States $3,623,503 $4,097,582 Insurance-United States 161,497 20,921 Insurance-Bermuda - 558,142 ---------- ---------- $3,785,000 $4,676,645 ========== ========== Operating income (loss) Vehicle Rental Franchises-United States $ 438,622 $ 645,103 Insurance-United States 94,741 26,460 Insurance-Bermuda - 22,522 ---------- ---------- $ 533,363 $ 694,085 ========== ========== Assets Vehicle Rental Franchises-United States $2,247,278 $2,630,585 Insurance-United States 77,495 10,625 Insurance-Bermuda 269,170 1,022,902 ---------- ---------- $2,593,943 $3,664,112 ========== ========== Capital expenditures Vehicle Rental Franchises-United States $ 144,460 $ 75,270 Insurance-United States - - Insurance-Bermuda - - ---------- ---------- $ 144,460 $ 75,270 ========== ========== Depreciation and amortization expense Vehicle Rental Franchises-United States $ 114,664 $ 121,461 Insurance-United States - - Insurance-Bermuda - - ---------- ---------- $ 114,664 $ 121,461 ========== ========== 47 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 14. SUBSEQUENT EVENTS On April 23, 1998, the Company approved the repurchase of up to an additional 500,000 shares of the Company's outstanding common or preferred stock, subject to the same terms and conditions of the share repurchase program initiated in the year ended March 31, 1996. On May 15, 1998, the Company paid 20% of the dividend arrearages on all preferred shares outstanding as of March 31, 1998. These paid arrearages totaled $44,302, which was paid with and in addition to the regular quarterly preferred dividend on May 15, 1998. Remaining undeclared and unpaid cumulative preferred dividends were reduced to $177,209. In June 1998, Chase increased the letter of credit associated with the reinsurance arrangement from $500,000 to $1,000,000. The Company made an additional deposit of $388,000 in the Bank of Butterfield resulting in a total restricted deposit of $638,000, which is secured by a $638,000 letter of credit with the Bank of Butterfield. 48 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Item 8. Changes in and Disagreements with Accountants on - ------- ------------------------------------------------ Accounting and Financial Disclosure ----------------------------------- Not Applicable. (The Company need not provide the disclosure called for by this Item because it has been previously reported, as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended). PART III -------- Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND - ------- ----------------------------------------------- CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) ---------------------------------------------- OF THE EXCHANGE ACT ------------------- Under the securities laws of the United States, the Company's directors, its executive officers, and any persons holding more than 10% of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established, and the Company is required to disclose any failure to file by these dates. The Company believes that all of these filing requirements were satisfied during the fiscal year ended March 31, 1998. In making these disclosures, the Company has relied solely on representations of its directors and executive officers and copies of the reports that they have filed with the Commission. Item 10. EXECUTIVE COMPENSATION - -------- ---------------------- Summary Compensation Table -------------------------- The following table and related notes set forth information regarding the compensation awarded to, earned by or paid to the Company's Chief Executive Officer for services rendered to the Company during the fiscal years ended March 31, 1996, 1997 and 1998. No other executive officer who was serving as an executive officer during the year ended March 31, 1998 received salary and bonus which aggregated at least $100,000 for services rendered to the Company during the fiscal year. 49
Annual Long-Term Compensation Compensation Awards ---------------- ------------------------- Securities Underlying Name and Principal Position Year Salary($)(1) Options/SARs(#) - ---------------------------- -------- ---------------- ------------------------- Kenneth L. Blum, Sr., CEO 1998 $250,000 --(2) 1997 250,000 --(2) 1996 200,000 --(2)
(1) Mr. Blum became Chief Executive Officer of the Company in connection with a Management Agreement between the Company and K.A.B., Inc., a Florida corporation ("K.A.B.") effective June 30, 1993. Mr. Blum does not receive cash compensation directly from the Company. K.A.B. receives cash compensation pursuant to the Management Agreement of $250,000 per year plus expense reimbursements (in the amount of $8,037). The amounts indicated in the table represent compensation received by K.A.B. pursuant to the Management Agreement. Mr. Blum is the sole stockholder of K.A.B. See Item 12. Certain Relationships and Related Transactions under the caption "Certain Transactions - Management Agreement with K.A.B., Inc. and Related Transactions - Management Agreement." (2) During the year ended March 31, 1994, K.A.B. received options for the purchase of 2,250,000 shares of the Company's Common Stock in connection with the Management Agreement. During the year ended March 31, 1995, the Board of Directors approved the vesting of 1,000,000 of these options at an exercise price of $1.00 per share. Effective July 20, 1995 the exercise price of the balance of the options was set by the Board of Directors at $1.15 per share, with vesting, subject to continued employment, on July 1, 2002, or earlier subject to satisfaction of performance targets. Also effective on that date, K.A.B. transferred the Options to certain transferees. See Item 12. Certain Relationships and Related Transactions under the caption "Certain Transactions - Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option Grant." 50 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Option/SAR Grants in Last Fiscal Year No stock options or SARs were granted to the executive officer named in the Summary Compensation Table during the last fiscal year. See Item 12. Certain Relationships and Related Transactions under the caption "Certain Transactions - Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option Grant." Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Value Table No executive officer named in the Summary Compensation Table held or exercised options at the end of the last fiscal year. See Item 12. Certain Relationships and Related Transactions under the caption "Certain Transactions - Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option Grant." Employment/Change of Control Arrangements In the event of termination of the Management Agreement with K.A.B. without cause, all options granted to K.A.B. in connection with the Management Agreement remain outstanding for the balance of their ten-year term. See Item 12. Certain Relationships and Related Transactions under the caption "Certain Relationships and Related Transactions -- Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option Grant." Compensation of Directors Currently, directors of the Company who also serve as officers of the Company and outside directors receive no cash compensation in connection with the services they render as directors. (Officers, however, receive compensation in their capacity as officers as described above.) Directors are reimbursed for expenses incurred in connection with their board service. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - -------- ----------------------------------------------- AND MANAGEMENT -------------- As of May 26, 1998, the persons and entities identified in the following table, including all directors, executive officers and persons known to the Company to own more than 5% of the Company's voting securities, owned beneficially, within the meaning of Securities and Exchange Commission Rule 13d-3, the shares of voting 51 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - -------- ----------------------------------------------- AND MANAGEMENT-continued ------------------------ securities reflected in such table. All the outstanding shares of Preferred Stock are immediately convertible at the option of the holder into Common Stock, on a share-for-share basis. Except as otherwise specified, the named beneficial owner has sole investment and voting power with respect to such shares.
Total(1) ---------------------------- Shares Name and Address of Beneficial Title of Beneficially % of Owner Class Owned % of Class Common - ------------------------------- -------------- ---------------- -------------- ---------- David Schwartz Common 865,000(2) 20.8 -- Bundy Rent-A-Wreck 12333 W. Pico Blvd. Los Angeles, CA 90064 Cumberland Associates Common 151,200(3) 3.6 -- 1114 Ave. of the Amer. Preferred(4) 96,250 7.0 5.8 New York, NY 10035 William L. Richter Common 881,040(5) 20.5 -- c/o Richter & Co., Inc. Preferred(4) 1,342,875(5) 96.0 33.1(6) 450 Park Avenue New York, NY 100022 Alan L. Aufzien Common 32,500 ** -- P.O. Box 2369 Preferred(4) 34,375 2.5 1.6 Secaucus, NJ 07094 Kenneth L. Blum, Sr.(8) -- -- -- -- 11460 Cronridge Dr., #120 Owings Mills, MD 21117 Kenneth L. Blum, Jr.(7)(8) Common 650,000 14.0 -- 11460 Cronridge Dr., #120 Owings Mills, MD 21117 Robin Cohn (7)(8) Common 649,999 14.0 -- c/o Rent-A-Wreck of America, Inc. 11460 Cronridge Dr., #120 Owings Mills, MD 21117 All Directors and Executive Officers Common 2,428,540(5) 50.7 -- as a Group, including the Directors (7)(8) Named Above (5 persons) Preferred(4) 1,311,000(5) 96.0 57.4(6)
52 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - -------- ----------------------------------------------- AND MANAGEMENT-continued ------------------------ * Represents percentage ownership of Common Stock based upon shares of Common Stock owned or deemed owned due to presently exercisable warrants and options and after such person's conversion of Preferred Stock. ** Less than 1%. (1) Based on 4,162,792 Common Shares and 1,366,000 shares of Preferred Stock outstanding on the date of this table, May 26, 1998. (2) Pledged to secure third-party bank loan to stockholder. (3) Cumberland Associates is a limited partnership organized under the laws of the State of New York and is engaged in the business of managing, on a discretionary basis, eleven securities accounts. K. Tucker Andersen, Richard Reiss, Jr., Robert Bruce III, and Oscar S. Schafer are the general partners (the "General Partners") of Cumberland Associates. The business address of each of the General Partners is the same as that of Cumberland Associates. By virtue of Rule 13d-3, each of the General Partners may be deemed the beneficial owner of all of the shares of Common Stock owned by Cumberland Associates. The foregoing information is based on a Schedule 13D dated October 10, 1989, filed by Cumberland Associates, as supplemented by additional information supplied to the Company by Cumberland Associates. (4) Holders of Preferred Stock, voting as a class, are entitled to elect up to four members of a seven member Board of Directors and are also entitled to vote as a class on other significant corporate actions. Currently holders of preferred stock nominate and elect two of the four directors. Pursuant to the terms of proxies granted to Richter Investment Corp. ("RIC"), 96% of the Preferred Stock may be voted by RIC as of the date of this table. The proxies are effective until such time that less than $500,000 of Preferred Stock remains outstanding. See note 5 below. (5) Includes 57,334 shares of Common Stock issuable upon exercise of options and warrants (currently exercisable or exercisable within 60 days), 178,750 shares of Preferred Stock, and 6,200 shares of Common Stock and 13,750 shares of Preferred Stock held by family members. Also includes 550,000 shares of Preferred Stock and 275,000 shares of Common Stock held by RIC, 144,375 shares of Common Stock and warrants (currently exercisable or exercisable within 60 days) to acquire 82,000 shares of Common Stock held by Richter & Co., Inc. ("RCI"), and 46,600 shares of Common Stock held in RCI's trading account. Also includes an additional 568,500 shares of Preferred Stock as to which RIC holds voting 53 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - -------- ----------------------------------------------- AND MANAGEMENT-continued ------------------------ authority via proxy (see note 4 above). Mr. Richter has voting control of RIC, and RIC holds 100% of the outstanding stock of RCI. Mr. Richter, RIC and RCI have the same address. Mr. Aufzien's 34,375 shares of preferred stock are subject to a voting proxy granted to RIC. (6) Excludes 568,500 shares of Preferred Stock as to which RIC holds voting authority via proxy (see notes 4 and 5 above) because RIC would not have voting or investment control of the Common Stock issued upon conversion of such Preferred Stock. (7) Mr. Blum, Sr. is the father of Kenneth L. Blum Jr. and Robin Cohn; see note 9 below. Mr. Blum disclaims beneficial ownership of shares held by Mr. Blum, Jr. and Ms. Cohn. See also Item 12. Certain Relationships and Related Transactions. (8) Includes 483,333 shares issuable pursuant to currently exercisable options and, in the case of Ms. Cohn, includes 166,666 shares held jointly with spouse. See note 8 above. Mr. Blum, Jr. and Ms. Cohn disclaim beneficial ownership of shares held by each other. For information regarding additional options held by Mr. Blum, Jr. and Ms. Cohn which are not currently exercisable (and thus not deemed beneficially owned for purposes of the above table), see Item 12. Certain Relationships and Related Transactions under the caption "Certain Transactions - Management Agreement with K.A.B., Inc. and Related Transactions - Stock Option Grant." Item 12. Certain Relationships and Related Transactions - -------- ---------------------------------------------- Reference is made to footnote 8 of the Company's audited financial statements for the description of such information. Item 13. Exhibits and Reports on Form 8-K - -------- -------------------------------- (a) The following documents are filed as part of this report: 1. The financial statements, notes thereto and Report of Independent Public Accountants listed in the Index to Consolidated Financial Statements set forth in Item 7. 54 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 1998 Item 13. Exhibits and Reports on Form 8-K-continued - -------- ------------------------------------------ 2. The Exhibits listed in the Exhibit Index following the Signatures page, which is incorporated herein by this reference. 3. Financial Statement Schedules for the years in the period ended March 31, 1997 and 1998, as applicable. 55 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997 and 1998
ADDITIONS ----------------------------- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND CHARGED TO AT END DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD - ----------- --------- -------- -------------- ---------- --------- MARCH 31, 1997 Allowance for doubtful accounts $ 792,980 $ 203,217 $ - $ 217,162 (1) $ 779,035 ========= ========= ============ ========= ========= Valuation allowance on net deferred tax assets $ 513,000 $ - $ - $ 136,000 $ 377,000 ========= ========= ============ ========= ========= MARCH 31, 1998 Allowance for doubtful accounts $ 779,035 $ 73,455 $ - $ 169,859 (1) $ 682,631 ========= ========= ============ ========= ========= Valuation allowance on net deferred tax assets $ 377,000 $ - $ - $ 100,000 $ 277,000 ========= ========= ============ ========== =========
(1) Accounts written off 56 (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 57 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Rent-A-Wreck of America, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: Rent-A-Wreck of America, Inc. Registrant By: Date: /s/ Mitra Ghahramanlou June 25, 1998 - ----------------------------- ----------------------------- Mitra Ghahramanlou Chief Accounting Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates as indicated: 58 Signature and Title Date - ------------------- ---- /s/ Kenneth L. Blum, Sr. June 25, 1998 - ------------------------------ ------------------------ Kenneth L. Blum, Sr. Chairman of the Board and Director (Principal Executive Officer) /s/ Mitra Ghahramanlou June 25, 1998 - ------------------------------ ------------------------ Mitra Ghahramanlou Chief Accounting Officer (Principal Financial and Accounting Officer) /s/ David Schwartz June 25, 1998 - ------------------------------ ------------------------ David Schwartz Vice Chairman of the Board /s/ William L. Richter June 25, 1998 - ------------------------------ ------------------------ William L. Richter Vice Chairman of the Board /s/ Alan Aufzien June 25, 1998 - ------------------------------ ------------------------ Alan Aufzien, Director 59 RENT-A-WRECK OF AMERICA, INC. EXHIBIT INDEX FORM 10-KSB FOR FISCAL YEAR ENDED MARCH 31, 1998 Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 3.1 Certificate of Form 10-K for the Incorporation Fiscal year ended March 31, 1997. 3.2 Bylaws, Form 10-K as amended for the fiscal year ended March 31, 1986, in which the Bylaws, are incorporated by reference and amendments to Bylaws are filed therein. 4.1 Terms of $250,000 Form 10-QSB for the Letter of Credit quarter ended issued by the December 31, 1997. Bank of Butterfield, as contained in application dated June 20, 1997, with attached Letter of Set-Off 4.15 Amendment to Letter Filed herewith. Of Credit terms of $638,000 by the Bank of Butterfield, as contained in application dated June 20, 1997, with attached Letter of Set-Off 60 4.2 Financing Statement Form 10-QSB for the dated June 10, 1997 quarter ended by Rent-A-Wreck June 30, 1997. Leasing in favor of The Chase Manhattan Bank 4.3 General Security Form 10-QSB for the Agreement dated quarter ended June 4, 1997 by June 30, 1997. Rent-A-Wreck Leasing in favor of The Chase Manhattan Bank 4.4 Financing Statement Form 10-QSB for the dated June 10, quarter ended 1997 by Rent-A-Wreck June 30, 1997. Operation, Inc. in favor of The Chase Manhattan Bank 4.5 General Security Form 10-QSB for the Agreement dated quarter ended June 4, 1997 by June 30, 1997. Rent-A-Wreck Operation, Inc. in favor of The Chase Manhattan Bank 4.6 Financing Statement Form 10-QSB for the dated June 10, 1997 quarter ended by Rent-A-Wreck One June 30, 1997. Way in favor of The Chase Manhattan Bank 4.7 General Security Form 10-QSB for the Agreement dated quarter ended June 4,1997 by June 30, 1997. Rent-A-Wreck One Way in favor of The Chase Manhattan Bank 61 4.8 Financing Statement Form 10-QSB for the dated June 10, 1997 quarter ended by Bundy American June 30, 1997. Corporation in favor of The Chase Manhattan Bank 4.9 General Security Form 10-QSB for the Agreement dated June 4, quarter ended 1997 by Bundy American June 30, 1997. Corporation in favor of The Chase Manhattan Bank 4.10 Financing Statement Form 10-QSB for the by Rent-A-Wreck of quarter ended America, Inc. dated June 30, 1997. June 10, 1997 in favor of The Chase Manhattan Bank 4.11 General Security Form 10-QSB for the Agreement dated quarter ended June 4, 1997 by June 30, 1997. Rent-A-Wreck of America, Inc. in favor of The Chase Manhattan Bank 4.12 Financing Statement Form 10-QSB for the dated June 10, 1997 quarter ended by URM Corporation in June 30, 1997. favor of The Chase Manhattan Bank 4.13 General Security Form 10-QSB for the Agreement dated quarter ended June 4, 1997 by June 30, 1997. URM Corporation in favor of The Chase Manhattan Bank 62 4.14 Financing Statement Form 10-QSB for the dated June 6, 1997 quarter ended by Central Life and June 30, 1997. Casualty Company, Limited in favor of The Chase Manhattan Bank 4.15 General Security Form 10-QSB for the Agreement dated quarter ended June 4, 1997 by June 30, 1997. Central Life and Casualty Company, Limited, in favor of The Chase Manhattan Bank 9 Voting Trust Form 10-K for the fiscal Agreement year ended March 31, 1990 is incorporated by reference 10.1 Asset Purchase Form 10-QSB for the Agreement dated quarter ended December December 3, 1996 31, 1996. Between Baltimore Car and Truck Rental, Inc., Insurance Rentals, Inc., Mark Eisenberg, and the Company. 10.2 Commercial Installment Form 8-K, Dated Sales and Finance February 21, 1992 and is Agreement, as Amended incorporated by reference; Amendment filed with Form 10-KSB for the fiscal year ended March 31, 1995 and is incorporated by reference. 10.3 Promissory Note - Form 10-K for the fiscal David Schwartz, year ended March 31, 1993 Shareholder as Amended is incorporated by reference. 63 10.4 Option Plan Form 10-K for the fiscal year ended March 31, 1993 is incorporated by reference. 10.5 * Management Agreement - Form 8-K, dated June 30, K.A.B., Inc. Related 1993 and is incorporated party dated June 30, by reference. 1993 10.5.1 * Amendment to Management Form 10-K for the fiscal Agreement with K.A.B., year ended March 31, Inc., Related party 1997. dated March 27, 1996 10.6 * Stock Option Grant to Form 8-K, dated June 30, K.A.B., Inc. dated 1993 and is incorporated June 30, 1993 by reference. Amendment filed on Form 10-K for the fiscal year ended March 31, 1997. 10.6.1 * Amendment to Stock Form 10-K for the fiscal Option Grant to year ended March 31, K.A.B., Inc. dated 1997. July 20, 1995 10.7 * Registration Rights Form 8-K, dated June 30, Agreement dated June 1993 and is incorporated 30, 1993, among K.A.B., by reference. Inc., Kenneth L. Blum, Jr., Alan S. Cohn and the Company 10.8 Commercial Installment Form 10-KSB for the Sales and Finance fiscal year ended Agreement-K.A.B., Inc. March 31, 1994. dated August 1, 1993 10.9 Franchise Agreement - Form 10-KSB for the standard form fiscal year ended March 31, 1994. 64 10.10 Warrant Agreement - Form 8-K, dated June 30, Richter & Co., Inc. 1993 and is incorporated by reference. 10.11 Software Development Form 10-KSB for the and Computer Usage fiscal year ended Agreement effective March 31, 1995. January 1, 1995 between National Computer Services, Inc. and the Company. 10.12 Financial Advisory Form 10-KSB for the Agreement between fiscal year ended the Company and March 31, 1995. Richter & Co., Inc. dated March 20, 1995. 10.13 Lease between the Form 10-KSB for the Company and Owings fiscal year ended Mills Commerce March 31, 1996. Centre Limited Partnership dated September 19, 1995 and subordination, Attornment and Non- Disturbance Agreement. 10.14 Franchise Agreement - Form 10-KSB for the standard form as of fiscal year ended August 3, 1995 March 31, 1996. 10.15+ Facultative Filed herewith. Reinsurance Agreement dated March 1, 1997 between National Union Fire Insurance Company of Pittsburg, PA. and Consolidated American Rental Insurance Company, LTD. 65 10.16 Standby or Performance Filed herewith. Letter of Credit Application and Agreement dated June 3, 1997 between Rent-A-Wreck Of America, Inc. and The Chase Manhattan Bank 10.16.1 First Amendment dated Filed herewith. June 1, 1998 to the Standby or Performance Letter of Credit Application and Agreement dated June 3, 1997 between Rent-A-Wreck Of America, Inc. and The Chase Manhattan Bank 21 List of Subsidiaries Filed herewith. 27.1 Financial Data Schedule Filed herewith. 27.2 Amended Financial Data Schedule Filed herewith. + Confidential Treatment sought for a portion of this exhibit. * Management contract or compensatory plan or arrangement. 66 EX-10.15 2 FACULTATIVE REINSURANCE AGREEMENT FACULTATIVE REINSURANCE AGREEMENT between NATIONAL UNION FIRE INSURANCE COMPANY OF PlTTSBURGH, PA. (hereinafter called the "Company") and CONSOLIDATED AMERICAN RENTAL INSURANCE COMPANY, LTD. (hereinafter called "the Reinsurer") WITNESSETH: WHEREAS, the Company is willing to cede to the Reinsurer certain insurance under the terms and conditions hereinafter set forth; and WHEREAS, the Reinsurer is willing to reinsure such insurance on said terms and conditions: NOW, THEREFORE, in consideration of the premiums Schedule(s) and of the mutual covenants and agreements herein set forth, the parties hereto hereby covenant and agree as follows: ARTICLE I POLICY(IES) REINSURED: - ---------------------- As per Schedule(s) attached hereto and made a part hereof. [Confidential Treatment sought for Schedule I] ARTICLE II TERM: - ----- This Agreement is effective at 12:01 A.M. Eastern Standard Time, the 1st day of March, 1997. This Agreement shall continue in effect until terminated. ARTICLE III TERRITORY: - ---------- This Agreement shall cover Losses occurring within the territorial limits provided by the Policies reinsured hereunder and listed in Schedule(s). ARTICLE IV DEFINITIONS: - ------------ A. The term "Policies" as used in this Agreement shall mean any and all binders, certificates, policies and contracts of insurance, accepted or held covered provisionally or otherwise and issued to the Insured named in Schedule(s) hereof. B. The term "Ultimate Net Loss" as used in this Agreement shall mean the actual Loss sustained by the Company, but salvages and all other recoveries, including recoveries under all other reinsurance except catastrophe excess reinsurance of the Company, shall be deducted from such Loss to arrive at the amount of liability, if any, attached hereunder. All salvages, recoveries, or payments recovered or received subsequent to loss settlement hereunder, shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto. Nothing in this clause shall be construed to mean that Losses are not recoverable hereunder, until the Company's Ultimate Net Loss has been ascertained. C. The term "Gross Premiums Written" as used in this Agreement shall mean Direct Written Premiums for Policies covered hereunder, adding all other Additional Premiums and subtracting all other Return Premiums and cancellations; however, Direct Premiums written on installment premium payment policies shall be deemed to be the installment due in the period for which the account is rendered, in accordance with the Reports and Remittances article contained in this Agreement. D. The term "Unearned Premiums Reserve" as used in this Agreement shall mean the premium represented by the unexpired portion of the policy in force as of any specified date. E. The term "Losses Paid" as used in this Agreement shall mean Losses Paid less Recoveries for Salvage and Subrogation. F. The term "Allocated Loss Expenses" as used in this Agreement shall mean all court costs and court expenses; pre- and postjudgment interest; fees for service of process; attorneys' fees; cost of undercover operative and detective services; costs of employing experts; costs for legal transcripts; costs for copies of any public records; costs of depositions and court-reported or recorded statements; costs and expenses of subrogation and any similar fee, cost or expense reasonably chargeable to the investigation, negotiation, settlement or defense of a claim or loss or to the protection and perfection of the subrogation rights of the Company and/or of the Client. "Allocated Loss Expenses" shall not mean fees for attorneys who are employees of the Company or on permanent retainer. G. The term "Unallocated Loss Expense" as used in this Agreement shall mean the Claims Service Fees charged hereunder as per Schedule(s) hereof. H. The term "AIGRM Supervision Fee" shall mean the fee for services provided in serving as liaison between the Reinsurer and the Claims Administrator, reviewing claims in accordance with the Claims Handling Guidelines issued by AIG Risk Management, Inc. (AIGRM) and monitoring and evaluating performance of the Claims Administrator, and shall be adjusted as shown in the Schedule(s). I. The term "Outstanding Loss Reserves" as used in this Agreement shall mean losses reported to the Company which have been reserved but unpaid at any specified date. J. The term "Losses" as used in this Agreement shall mean payments to claimants under Policies reinsured hereunder. K. The term "Loss Escrow Fund" as used in this Agreement shall mean a non-interest bearing escrow fund established in the amount shown in the Schedule(s) and adjusted in accordance with Article VII. L. The term "IBNR" (Incurred But Not Reported) as used in this Agreement shall mean a reserve for liability for future payment on Losses which have already occurred but have not yet been reported to the Company and shall also include expected future development on Outstanding Loss Reserves. M. The term "Obligations" as used in this Agreement shall mean: (a) Losses and Allocated Loss Expenses paid by the Company but not recovered from the Reinsurer; (b) Outstanding Loss Reserves; (c) Reserves for Losses Incurred But Not Reported; (d) Reserves for Allocated Loss Expenses; and (e) Reserves for Unearned Premium. (f) Plus the difference between (a) through (e) above and the amount of Security set by the Company. N. Deductible Loss(es) as used in this Agreement shall mean those Losses paid by the original insured under the Policy(ies) reinsured hereunder. ARTICLE V REINSURING CLAUSE: As per Schedule(s). - ----------------- ARTICLE VI PREMIUM AND COMMISSION: - ----------------------- The Premiums due the Reinsurer for the Reinsurance hereunder shall be calculated in accordance with the Schedule(s). ARTICLE VII CLAIMS: - ------- The Reinsurer agrees to abide by the loss settlements of the Company, it being understood, however, that when so requested, the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance, and that the Reinsurer may cooperate in every respect in the defense or control of such claim, suit or proceeding. For the payment of Losses and Loss Expenses the Reinsurer will fund a Loss Escrow Fund in the amount shown in the Schedule(s) or two and one half (2 1/2) months estimated Ultimate Net Loss which will be replenished by the Reinsurer at the same time as the account current shown in Schedule(s). The Company may deduct paid loss and loss expenses paid as provided for in the REPORTS AND REMITTANCES ARTICLE, and the Company shall record and advise the Reinsurer of these deductions as provided in the REPORTS AND REMITTANCES ARTICLE. The Company may, at its option, demand prompt payment of any loss where the Reinsurer's share exceeds the amount shown in the Schedule(s) where the Reinsurer will promptly pay such amounts. ARTICLE VIII CLAIMS SERVICE FEES: Adjustable as per Schedule(s). - ------------------- ARTICLE IX REPORTS AND REMITTANCES: - ----------------------- Within the time shown in the Schedule(s) while this Agreement remains in effect, the Company shall render to the Reinsurer an account current and the balance due shall be paid by the debtor party to the other within the time shown in the Schedule(s) after the close of the month or as soon as reasonably practicable thereafter. ARTICLE X RESERVE DEPOSIT (NON-ADMITTED REINSURER): - ----------------------------------------- With respect to the premium derived from any jurisdiction in which an insured risk is located and in which the Reinsurer is not admitted, the Company shall be entitled to require from the Reinsurer any one or a combination of the following; (1) a Letter of Credit complying with 11 NYCRR 79 (Regulation 133), (2) A Security Trust complying with 11 NYCRR 126 (Regulation 114) and/or (3) Cash as security for the payment of the latter's Obligations hereunder. The amount required shall initially equal the amount shown in the Schedule(s). The amount shall be adjusted to equal the Reinsurer's Obligations. Upon default by the Reinsurer of sums due and owing to the Company, the Company may appropriate as much of the Letter of Credit, Security Trust and/or Cash as necessary to eliminate the default. The Company may, however, at its discretion, require payment of any sum in default, and it shall be no defense to any such claim that the Company might have had recourse to the Letter of Credit, Security Trust and/or Cash. The Company and the Reinsurer hereby agree that the Letter of Credit, Security Trust and/or Cash, provided pursuant to this Agreement may be drawn upon at any time, notwithstanding any other provisions herein contained. The Letter of Credit, Security Trust and/or Cash may be utilized by Company or any successor by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company for any of the following reasons: (i) To reimburse the Company for the Reinsurer's share of premiums returned to the owners of the Policy(ies) reinsured hereunder due to cancellations of said Policy(ies); (ii) To reimburse the Company for the Reinsurer's share of surrenders and benefits or losses paid by the Company under the terms and provisions of the Policy(ies) reinsured hereunder; (iii) To fund an account with the Company in an amount at least equal to the deduction, for reinsurance ceded, from the Company's liabilities for Policy(ies) ceded hereunder. Such amount shall include, but not be limited to, amounts for policy reserves, reserves for claims and losses incurred (including IBNR, Allocated Loss Expenses and Unearned Premiums); and (iv) To pay any other amounts due to the Company under this Agreement. All of the foregoing apply without diminution because of the insolvency of the Company or the Reinsurer. ARTICLE Xl INDEMNIFICATION AND ERRORS AND OMISSIONS: - ----------------------------------------- Any recitals in this Agreement of the terms and provisions of the original policy or policies are merely descriptive and the Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under the original policy or policies. The Company shall be the sole judge as to what shall constitute a claim or loss covered under the Company's original policy or policies and as to the Company's liability thereunder and as to amount or amounts which it shall be proper for the Company to pay thereunder and the Reinsurer shall be bound by the judgement of the Company as to the liability and obligation of the Company under its policy or policies. Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission, or error had not been made, provided such delay, omission or error is rectified as soon as possible. ARTICLE XII TAXES: - ------ The Company will be liable for taxes (except Federal Excise Tax) on premiums reported to the Reinsurer hereunder. Federal Excise Tax applies only to those reinsurers which are not exempt from Federal Excise Tax. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax one percent (1%) of the subject premium shown in Schedule(s), or such other rate that may be in effect from time to time, to the extent such premium is subject to Federal Excise Tax. ARTICLE XIII INSPECTION: - ----------- The Company shall place at the disposal of the Reinsurer, and the Reinsurer shall have the right to inspect, at all reasonable times, through its authorized representatives, all books, records and papers of the Company in connection with the reinsurance hereunder, or any claims in connection herewith. ARTICLE XIV FOLLOW THE FORTUNES CLAUSE: - --------------------------- The Reinsurer's liability shall attach simultaneously with that of the Company and all reinsurance for which the Reinsurer shall be liable by virtue of this Agreement shall be subject in all respects to the same risks, terms, rates, conditions, interpretations, assessments, waivers, and to the same modifications, alterations and cancellations, as the respective insurances (or reinsurances) of the Company to which such reinsurances relate. This Agreement shall further protect the Company in connection with any loss for which the Company may be legally liable to pay in excess of the limit having been incurred because of failure by it to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against their Insured or in the preparation or prosecution of an appeal consequent upon such action. The true intent of the Agreement being that the Reinsurer shall, in every case to which this Agreement applies and in the Proportions specified herein, follow the fortunes of the Company. This Article shall not apply insofar as it can be shown that the Company has been negligent or guilty of bad faith in handling a claim which is the subject matter of this Agreement. ARTICLE XV INSOLVENCY: - ----------- In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer (on the basis of the liability of the Company under contract or contracts reinsured without diminution because of the insolvency of the Company) to the Company or to its liquidator, receiver, or statutory successor, except as provided by Section 4118 of the New York Insurance Law or except: (1) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (2) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such policy obligations of the Company as direct obligations, of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the contract or contracts reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that, during the pendency of such claim the Reinsurer may investigate such claim and interpose at their own expense in the proceeding where such claim is to be adjudicated, any defense or defenses which they may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE XVI ARBITRATION CLAUSE: - ------------------- All disputes or differences arising out of the interpretation of this Agreement shall be submitted to the decision of two (2) Arbitrators, one to be chosen by each party, and in the event the Arbitrators fail to agree, to the decision of an Umpire to be chosen by the Arbitrators. The Arbitrators and Umpire shall be executive officials of Fire and Casualty Insurance or Reinsurance Companies. If either of the parties fails to appoint an Arbitrator within one (1) month after being required by the other party in writing to do so, or if the Arbitrators fail to appoint an Umpire, within one (1) month of a request in writing by either of them to do so, such Arbitrator or Umpire, as the case may be, shall at the request of either party be appointed by a Justice of the Supreme Court of the State of New York. The Arbitration proceedings shall take place in New York, New York. The applicant shall submit its case within one (1) month after the appointment of the Court of Arbitration, and the respondent shall submit his reply within one (1) month after receipt of a claim. The Arbitrators and Umpire are relieved from all Judicial formality and may abstain from following the strict rules of law. They shall settle any dispute under this Agreement according to an equitable rather than a strictly legal interpretation of its terms and their decision shall be final and not subject to appeal. Each party shall bear the expenses of its Arbitrator and shall jointly and equally share with the other the expenses of the Umpire and of the Arbitration. This Article shall survive the termination of this Agreement. ARTICLE XVII RESERVES: - --------- The Reinsurer will maintain legal reserves with respect to Outstanding Losses and Loss Expenses and Unearned Premium Reserves. ARTICLE XVIII TERMINATION: - ------------ A. Neither the Company nor the Reinsurer may terminate this Agreement while the Policy(ies) listed in the Schedule(s), Item B are in force; however, if the policy(ies) listed in the Schedule(s), item B are in fact terminated then in that event and that event only this Agreement may be terminated simultaneously therewith. B. However, the Company shall have the right to terminate this Agreement immediately by giving the Reinsurer notice: (1) If the performance of the whole or any part of this Agreement be prohibited or rendered impossible de jure or defacto in particular and without prejudice to the generality of the preceding words in consequence of any law or regulation which is or shall be in force in any state or territory or if any law or regulation shall prevent directly or indirectly the remittance of any or all or any part of the balance or payments due to or from the Reinsurer. (2) If the reinsurer at any time shall: (a) Become insolvent, or (b) Suffer any impairment of capital, or (c) File a Petition in bankruptcy, or (d) Go into liquidation or rehabilitation, or (e) Have a receiver appointed, or (f) Be acquired or controlled by any other insurance company or organization. (3) In the event of the severance or obstruction of free and unfettered communication and/or normal commercial and/or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations, or any circumstances arising out of political, financial or economic emergency. All notices of termination in accordance with any of the provisions of this paragraph may be by Telex or Telegram and shall be deemed to be served upon dispatch, or where communications between the parties are interrupted, upon attempt dispatch. C. All notices of termination served in accordance with any of the provisions of this Article shall be addressed to the party concerned at its head office or at any other address previously designated by that party herein. D. In the event of this Agreement being terminated the rights and obligations of both parties to this Agreement shall remain in full force until the effective date of termination. E. As respects coverage hereunder, it is understood and agreed that upon termination of this Agreement, coverage will continue hereunder beyond such termination date until the natural expiration date, the cancellation date, or the date which the Company, as a matter of law, may terminate coverage under the Policy(ies) listed in Article I hereof. F. Should this Agreement terminate while a loss occurrence is in progress, the Reinsurer shall be liable to the extent of their interest, subject to the other conditions of this contract, for all losses resulting from such loss occurrence whether such losses arise before or after such termination. ARTICLE XIX SERVICE OF SUIT: - ---------------- It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction and all matter arising hereunder shall be determined in accordance with the law and practice of such court. It is further agreed that service of process in such suit may be made upon the parties indicated in the Schedule(s) and that in any suit instituted against any of them upon this contract, the Reinsurer will abide by the final decision of such court or appellate court in the event of an appeal. The Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The party(ies) listed in the Schedule(s) are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory, or district of the United States which makes provisions therefor, Reinsurer hereon hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement of reinsurance, and hereby designate the above named as the person to whom the said office is authorized to mail such process or a true copy thereof. ARTICLE XX FOREIGN EXCHANGE: - ----------------- All premium and loss payments hereunder shall be in United States Currency. Premiums due hereunder in other than United States Currency shall be paid by the Company in United States Dollars at the rates of exchange at which the original accounts were settled. Failing this the rate of exchange applied shall be that used by the Company in their own books of account or in accordance with any subsequent adjustments thereto. The amounts recoverable for losses in other than United Stales Currency shall be converted into United States Dollars at the same rates of exchange as were applied in the settlement of the original losses. Failing this the rate of exchange applied shall be that used by the Company in their own books either at the time of the settlement or in accordance with any subsequent adjustment thereto. ARTICLE XXI OFFSET CLAUSE: - -------------- The Company and the Reinsurer shall have the right to offset any balance(s) due from one to the other under this Agreement. The party asserting the right of offset may exercise such right at any time whether the balance(s) due are on account of premiums or losses or otherwise. In the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives in New York, New York this 5th day of May, 1998. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. BY: /s/ Jeff Engelbrecht ----------------------------------- TITLE: Attorney in Fact -------------------------------- ADDRESS: 70 Pine Street New York, NY 10270 and in Bermuda this 30 day of April, 1998 CONSOLIDATED AMERICAN RENTAL INSURANCE CO., LTD. -------------------------------------- BY: /s/ [Illegible] ----------------------------------- TITLE: DIRECTOR -------------------------------- ADDRESS: 40 CHURCH STREET ------------------------------ HAMILTON, BERMUDA ------------------------------ EX-10.16 3 STANDBY OR PERFORMANCE LETTER OF CREDIT STANDBY OR PERFORMANCE LETTER OF CREDIT APPLICATION AND AGREEMENT This Agreement consists of three parts. The first part is an Application for a Standby or Performance Letter of Credit in which the Applicant(s) sets forth the terms of the Letter of Credit that it (they) has (have) asked us to issue. The second part, which will apply in the event we issue the Letter of Credit, sets forth the Terms and conditions that govern the relationship between the Applicant(s) and us. Among other things, it covers the obligation of the Applicant(s) to reimburse us, the security provide for their obligations, that upon the occurrence of certain events the Applicant(s) will deliver additional security for its (their) obligations and defines the rights of, and remedies available to, us under various circumstances. The third part is an Authorization of the Account Party, if the Account Party is not also the Order Party, under which the Account Party agrees to be bound by this Agreement. Part I: Application for Standby or Performance Letter of Credit TO: THE CHASE MANHATTAN BANK, N.A. Letter of Credit Division 4 Chase Metro Tech Center Brooklyn, New York 11245 The undersigned hereby request(s) that you issue your irrevocable letter of credit by: |X| Airmail |_| Teletransmission (Specify means ________) |_| Courier Service (if none specified, issuer may choose) IN FAVOR OF TO BE ADVISED THROUGH: |_| Check Box if also to be confirmed by Advising Bank National Union Fire Ins. Co. - ---------------------------- ----------------------------- of Pittsburg, PA - ---------------------------- ----------------------------- 99 John Street - 10th Floor - ---------------------------- ----------------------------- New York, NY 10270 - ---------------------------- ----------------------------- - -or- P.O. Box 923 - ---------------------------- ----------------------------- Wall Street Station - ---------------------------- ----------------------------- New York, NY 10268 - ---------------------------- ----------------------------- ("Beneficiary") By order of Rent-A-Wreck of America, Inc. ----------------------------------------- ("Order Party") for account of Consolidated American Rental Insurance Co., Ltd. ------------------------------------------------------ ("Account Party") Up to an aggregate amount of $500,000 (U.S. Dollars) -------------------------------- Available by (complete A or B, NOT both): --- A. |_| Drafts at sight on the issuer payable at the Issuer's counters accompanied by: See attached. B. |_| Tested Telex Demand to the Issuer stating: EXPIRATION DATE: Drafts and documents must be dated and presented to, or Tested Telex Demand received by, the issuer not later than 5/ /98. --------- |_| Credit to contain "Evergreen" clause with no less than 60 days' notice of non-renewal to the Beneficiary. ------ |_| Partial drawings prohibited. Unless otherwise stated herein, the negotiating/paying bank (if any) is authorized to send all documents to you in one airmail or courier service, if available. |_| Special Instructions: Specify below. If additional space is needed, include additional sheets. These sheets form an integral part of this Application. Part II: Terms and Conditions In consideration of the issuance by the Bank of the Credit as requested in the Application, the Applicant hereby agrees with the Bank as follows: 1. Definitions. The following terms shall have the meanings set forth below: (1) "Applicant" means each party signing the Application, whether as Order Party or as Account Party. (2) "Agreement" means the Application, the Terms and Conditions and the Authorization. (3) "Application" means Part I of this Agreement and shall also include all subsequent written and oral requests by the Applicant for amendments to the Credit. (4) "Bank" means the issuer of the Credit as indicated in Part I. (5) "Credit" means the letter of credit issued by the Bank by order of the Applicant pursuant to the Application, as such Credit may be amended from time to time. (6) "Instrument" means any draft, receipt, acceptance, teletransmission (including but not limited to telex or cable) or other written demand for payment under the Credit. (7) "Third Party" means any person or entity other than the Applicant liable for the obligations of the Applicant under this Agreement. (8) "Uniform Customs and Practice" means the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, or any subsequent revision thereof adhered to by the Bank on the date the Credit is issued. 2. Reimbursement Obligation. A. Payment. The Applicant will pay the Bank, on demand, at the Bank's principal office, in immediately available funds, the amount required to pay each instrument or other amount paid or to be paid under the Credit upon documents presented in substantial compliance with the terms of the Credit. Such payment shall be made with interest from the date of the Bank's payment of such Instrument or other amount paid by the Bank to the date of reimbursement. Such payments shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges, withholdings, and all liabilities with respect thereto. B. Authorization To Charge Accounts. The Applicant expressly authorizes the Bank (but the Bank shall not be required), without demand for payment or notice to the Applicant, which are hereby expressly waived, to charge, debit and/or setoff against the demand deposit account referred to at the end of this Agreement and any other account(s) maintained by the Applicant with any office of the Bank or any subsidiary or any affiliate of the Bank (now or in the future, whether general or special, time or demand, matured or unmatured) and to apply immediately, any balance of deposits and any sums credited by or due or payable from the Bank to the Applicant in such account or accounts, to the payment of any and all of Applicant's obligations and liabilities to the Bank hereunder, including without limitation, obligations and liabilities under Paragraphs 2A and C and Paragraphs, 3 and 8 hereunder, all without prejudice to the rights of the Bank against the Applicant with respect to any and all amounts which may be or remain unpaid. C. Foreign Currency Obligations. If the Instrument is in foreign currency, the Applicant's payment shall be in United States currency at the Bank's then current selling rate for cable transfers to the place of payment of the Instrument on the date of such payment or of the Bank's settlement of its obligation, as the Bank may require. If, for any cause, on the date of payment or settlement, as the case may be, there is no selling rate or other rate of exchange generally current in New York for effecting such transfers, the Applicant will pay the Bank on demand an amount in United States currency equivalent to the Bank's actual cost of settlement of its obligation however or whenever the Bank shall make such settlement, with interest from the date of settlement to the date of payment by the Applicant. The Applicant will comply with all governmental exchange regulations now or hereafter applicable to the Credit or Instrument or payments related thereto and will pay the Bank, on demand, in United States currency, such amount as the Bank may have been required to expend on account of such regulations. 3. Payment of Commissions, Expenses, Counsel Fees, Interest and Additional Costs. A. Commissions, Etc. The Applicant will pay the Bank, on demand, at its principal office at 1 Chase Manhattan Plaza, New York, New York 10081, the Bank's commission and all charges, costs and expenses paid or incurred by the Bank in connection with the Credit, including fees and charges of counsel, and costs allocated by the Bank's internal legal department in connection with the preparation, performance or enforcement of this Agreement or the Credit. Commissions payable hereunder shall be at the rate customarily charged by the Bank at the time in like circumstances. B. Interest. The Applicant agrees to pay interest on any amounts due under this Agreement which are not paid when due at 3% plus that rate of interest from time to time announced by the Bank at its principal office, as its prime commercial lending rate, which rate shall not exceed the maximum rate permissible under applicable law. C. Additional Costs. The Applicant shall also pay to the Bank on demand such amounts as the Bank in its sole discretion determines are necessary to compensate it for any cost attributable to its issuing or having the Credit outstanding. Such costs shall include any cost resulting from the application of any law or regulation to the Bank regarding any reserve, assessment, capital adequacy or similar requirement relating to letters of credit or the reimbursement agreements with respect thereto or to similar liabilities or assets of the Bank, whether existing at the time of issuance of the Credit or adopted thereafter. In the case of sale of a participation permitted by paragraph 16 hereof, all amounts payable by the Applicant under this paragraph, shall be determined as if the Bank had not sold such participation. The Applicant acknowledges that there may be various methods of allocating costs to the Credit and agrees that the Bank's allocation for purposes of determining the cost referred to above (including the cost of maintaining capital required in connection with the Credit) shall be conclusive and binding upon the Applicant, provided such allocation is made in good faith. The Applicant also agrees to pay all withholding, stamp and other taxes or duties imposed by any taxing authority on payments under the Credit and this Agreement and to indemnify the Bank against all liabilities, costs, claims, and expenses resulting from any omission to pay or delay in paying any such duty or tax. 4. Successors; Bank's Honoring. The Bank may honor, as complying with the terms of the Credit and of the Application, any drawing by, or Instrument or other document signed or issued by, a person (or a transferee of such person) purporting to be an administrator, executor, trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver, other legal representative or successor by operation of law of the party authorized under the Credit to draw under the Credit or to sign or issue such Instruments or other documents; provided, that any such drawing, Instrument or other document is otherwise in substantial compliance with the Credit. 5. Amendment, Change, Modification, No Waiver. No amendment, change, modification or waiver to which the Bank has consented shall be deemed to mean that the Bank will consent or has consented to any other or subsequent request to amend, change, modify or waive a term of the Credit. The Bank shall not be deemed to have amended, changed or modified any term hereof or to have waived any of its rights hereunder, unless the Bank or its authorized agent shall have consented to such amendment, change or modification in writing or signed such waiver. 6. U.C.P.; Agreements and Acknowledgments. A. The Uniform Customs and Practice. The Uniform Customs and Practice shall be binding on the Applicant and the Bank except to the extent it is otherwise expressly agreed. B. Other Agreements and Acknowledgments. It is also agreed that: (1) user(s) of the Credit shall not be deemed agents of the Bank; (2) none of the Bank, its affiliates, subsidiaries or its correspondents shall be responsible for, and the obligation of the Applicant to pay the Bank under Section 2 hereof shall not be affected by, (i) any act, error, neglect, default, omission, insolvency or failure in business of any of its correspondents or (ii) the form, validity, accuracy, sufficiency, legal effect or genuineness of any Instrument or other document presented under the Credit; (3) any action, inaction or omission on the part of the Bank or any of its affiliates, subsidiaries or correspondents under or in connection with the Credit or the related Instruments, documents or property, if in good faith, shall be binding upon the Applicant and shall not place the Bank or any such affiliate, subsidiary or correspondent under any liability to the Applicant or affect in any way whatsoever the Applicant's obligation to pay the Bank under Section 2 hereof and in no event shall the Bank or any such affiliate, subsidiary or correspondent be liable for any special or consequential damages; (4) the Applicant will promptly examine: (i) the copy of the credit (and of any amendments thereof) sent to it by the Bank; and (ii) all instruments and documents delivered to it from time to time, and in the event of any claim of noncompliance with Applicant's instructions or other irregularity, the Applicant will immediately notify the Bank thereof in writing, the Applicant being conclusively deemed to have waived any such claim against the Bank and any of its affiliates, subsidiaries and correspondents unless notice is given as aforesaid; (5) if the Credit states any condition (whether for information or otherwise) without specifying the document to be presented to determine compliance therewith, the Bank may (but shall not be obligated to) treat such condition as not stated and disregard it for purposes of determining compliance with the terms of the Credit; and (6) the Bank shall have no obligation to notify the Applicant of discrepancies in any Instruments or other documents presented under the Credit and any such notification or request for a waiver of such discrepancies shall not constitute a waiver of such discrepancies by the Bank nor an agreement to notify or seek a waiver of any future discrepancies. 7. Instructions; No Liability. Instructions whether given orally (in person or by telephone), in writing (by teletransmission or other means) or by electronic means may be honored by the Bank when received from anyone purporting to be authorized to give such instructions for the Applicant. Each oral instruction shall be confirmed in writing by the person giving such instruction, or other authorized officer, but the Bank's responsibility with respect to any instruction shall not be affected by its failure to receive, or the content of, such confirmation. The Bank shall have no responsibility to notify Applicant of any discrepancies between Applicant's oral instructions and its written confirmation, and in the event of any such discrepancy, the oral instruction shall govern. The Bank shall be fully protected in, and shall incur no liability to the Applicant for, acting upon any oral, written or electronic instructions which the Bank in good faith believes to have been given by any authorized person, and in no event shall the Bank be liable for special, indirect or consequential damages. The Bank may, at its option, use any means of verifying any instructions received by it. The Bank also may, at its option, refuse to act on any instruction or any part thereof, without incurring any responsibility for any loss, liability or expense arising out of such refusal. 8. Indemnification. The Applicant agrees to indemnify and hold harmless the Bank, each affiliate and subsidiary of the Bank and the correspondents of any of them, against any and all claims, losses, liabilities, damages, costs, penalties and fines, including reasonable counsel fees and allocated costs of internal counsel, howsoever arising from or in connection with the Credit, including, without limitation, any such claim, liability, damage, cost liability or fine arising out of any transfer, sale, delivery, surrender or endorsement of any document at any time(s) held by the Bank or any of its affiliates or subsidiaries, or held for the account of any of them by any correspondent of any of them, or arising out of any action, suit or proceeding for injunctive or other judicial or administrative relief or any other judicial or governmental order and affecting, directly or indirectly, the Bank or such affiliate, subsidiary or correspondent. 9. Licenses. The Applicant will procure promptly any necessary import, export or other licenses in connection with the Credit and any property shipped thereunder, and will comply with all foreign and domestic governmental regulations in regard to the shipment of such property or the financing thereof and will furnish the Bank on its demand, with evidence thereof. 10. Pledge and Assignment of Security. A. Pledge and Grant of Security Interests. As security for the payment or performance of (i) any and all of the Applicant's obligations and/or liabilities to the Bank under this Agreement (including the contingent obligation under paragraph 11 to pay or deliver to the Bank the maximum amount available under the Credit whether or not a drawing, claim or demand for payment has been made under the Credit) and (ii) all other obligations and/or liabilities of the Applicant to the Bank, absolute or contingent, due or to become due, or which are now or may at any time(s) hereafter be owing by the Applicant to the Bank, the Applicant hereby: (1) pledges and/or grants to the Bank a continuing lien upon and assignment of all right, title and interest of the Applicant in and to the balance of every deposit account, now or at any time hereafter existing, or the Applicant with any office of the bank or any affiliate or subsidiary thereof, wherever located, and any other claims of the Applicant against any office of the Bank or any affiliate or subsidiary thereof, and in and to all money, instruments, securities, documents, chattel paper, demands, precious metals, funds, and all claims and demands and rights and interest therein of the Applicant, and in and to all evidences thereof, which have been or at any time shall be delivered to or otherwise come into the possession, custody or control of any office of the Bank or any affiliate or subsidiary thereof, or into the possession, custody or control of any affiliate, agent or correspondent of any such entity for any purpose, whether or not for the express purpose of being used by any such entity as collateral security or for safekeeping and the Bank shall be deemed to have possession, custody or control of all such property actually in transit to, or set apart for, it or any of its affiliates or subsidiaries (or any of their agents, correspondents or others acting in their behalf), it being understood that the receipt at any time by such entities (or any of their agents, correspondents, or others acting in their behalf), of other security of whatever nature, including cash, shall not be deemed a waiver of any of the Bank's rights or powers hereunder. The Applicant agrees that such affiliates or subsidiaries shall be agent(s) of the Bank for the purpose of perfecting a security interest in any such deposit accounts or other property; and (2) pledges and/or grants to the Bank a security interest in any and all property the Applicant holds as security for the obligations of any party related to the Credit, and further, subordinates its right to payment from such property and the proceeds thereof to the rights of the Bank, until the bank is paid in full, and agrees that it will hold in trust for and promptly deliver to the Bank any payment received from such property or proceeds. B. Additional Rights of the Bank. The Bank is authorized to take any action necessary to protect its rights in the security provided hereunder (whether or not a drawing, claim or demand for payment has been made under the Credit) including but not limited to segregating all or any part of the balance of any deposit account referred to in paragraph 10(A) or other security to be applied to the Applicant's obligations to the Bank as provided in paragraph 11. 11. Events of Default; Obligations; Remedies. Upon the occurrence of any of the events described in this paragraph 11 (whether or not a drawing, claim or demand for payment has been made under the Credit) the Applicant agrees that (A) any and all obligations and liabilities of the Applicant to the Bank, matured or unmatured, absolute or contingent, whether now existing or hereafter incurred (including the obligations hereunder), shall be due and payable forthwith without notice or demand and (B) the Bank may (i) charge, debit and/or setoff against any account of the Applicant maintained at any office of the Bank or at any subsidiary or affiliate of the Bank (now or in the future, whether general or special, time or demand, matured or unmatured) for the maximum amount available under the Credit and also for any and all other obligations and liabilities of the Applicant (and for those of each of its subsidiaries and affiliates) to the Bank hereunder or otherwise, matured or unmatured, absolute or contingent, whether now existing or hereafter incurred, (ii) demand that the Applicant, and the Applicant shall upon such demand, deliver, transfer or assign to the Bank cash or other property of a value and character satisfactory to the Bank (together with executed financing statements in such form as the Bank may reasonably require) as security for all such obligations and liabilities and/or (iii) liquidate any or all of the property pledged, assigned and/or in which the Bank has been granted a security interest, and in each case, the Bank shall hold such amounts, proceeds and collateral as security for (or at the Bank's option, make payment in satisfaction of) the Applicant's (and such subsidiaries' and affiliates) obligations and liabilities, matured or unmatured, absolute or contingent, whether now existing or hereafter incurred, hereunder or otherwise to the Bank: (1) if there shall occur any material adverse change in the condition (financial or otherwise), business, operations or prospects of the Applicant or any Third Party; (2) if any statement made, or any information or report furnished to, the Bank in connection with this Agreement contained any misstatement of a material fact or omitted to state a material fact or any fact necessary to make any statement contained therein not materially misleading; (3) the death or dissolution of the Applicant or any Third Party; (4) if any obligation and/or liability of the Applicant or any Third Party shall not be paid or performed when due, or any default or event of default (as such is defined under any agreement for the payment of money to which the Applicant or a Third Party is a party) remains uncured after the cure period provided in the related agreement has elapsed; or (5) if the Applicant or a Third Party shall become insolvent (however such insolvency may be evidenced or defined) or generally not be able to pay its debts as they become due, or make a general assignment for the benefit of creditors, or if the Applicant or a Third Party shall suspend the transaction of its usual business or be expelled or suspended from any exchange, or if an application is made by any judgment creditor of the Applicant or a Third Party for an order directing the Bank to pay over money or to deliver other property, or if a petition in bankruptcy shall be filed by or against the Applicant or a Third party, or if a petition shall be filed by or against the Applicant or any proceeding shall be instituted by or against the Applicant or a Third Party for any relief under any bankruptcy or insolvency laws or any law relating to the relief of debtors, readjustment or indebtedness, reorganization, composition or extensions, or if any governmental authority, or any court at the instance of any governmental authority, shall take possession of any substantial part of the property of the Applicant or a Third Party or shall assume control over the affairs or operations of the Applicant or a Third Party, or if a receiver or custodian shall be appointed of, or a writ or order of attachment or garnishment shall be issued or made against, any of the property or assets of the Applicant or a Third Party or the Applicant or a Third Party shall represent that any of the foregoing has occurred or will occur; (6) if a temporary restraining order, injunction (preliminary or permanent) or any similar order is issued in connection with the Credit or any Instrument or document relating thereto which order may apply, directly or indirectly, to the Bank; or (7) the Bank shall in good faith deem itself insecure at any time. 12. Continuing Rights and Obligations. The Bank's rights and liens hereunder shall continue unimpaired, and the Applicant shall be and remain obligated in accordance with the terms and provisions hereof, notwithstanding the release and/or substitution of any property which may be held as security hereunder at any time, or of any rights or interest therein or the release of any Third Party. No delay, extension of time, renewal, compromise or other indulgence which may occur or be granted by the Bank shall impair the Bank's rights or liens hereunder. 13. Partnership Applicants; Multiple Applicants, Etc. If the Applicant is a partnership, its obligation hereunder shall continue in force, and apply, notwithstanding any change in the membership of such partnership, however arising, or the release of any partner from liability. If more than one entity and/or person signs this Agreement whether as Order Party or Account Party, (i) each of them shall be jointly and severally liable hereunder and all the terms and provisions regarding liabilities, obligations and property of such entities and/or persons shall apply to any liabilities, obligations and property of any and all of them and (ii) each of them hereby agrees that, without notice to or further consent by the other, the liability of any Applicant hereunder may from time to time, in whole or in part, be renewed, extended, modified, released or reduced by the Bank without affecting or releasing in any way the liability of the other Applicant. The Applicant waives any defense whatsoever which might constitute a defense available to, or discharge of, a surety or a guarantor. 14. Jurisdiction and Venue; Service of Process; Appointment of Agent; Waiver; Commencement of Action. The Applicant hereby consents to the nonexclusive jurisdiction over the person of the Applicant of any court of record of the State in which the branch of the Bank to which this Agreement is addressed is located or of the United States District Court for the appropriate District of such State and agrees that such court shall be a proper forum for any action or suit brought by the Bank. Service of process in any action or suit arising out of or in connection with this Agreement or the Credit may be made upon the Applicant by mailing a copy of the summons to the Applicant either at the address set forth in the Application or at the Applicant's last address appearing in the Bank's records. In addition, if the Applicant is organized or incorporated in a jurisdiction outside the United States of America, the Applicant designates the Consul General or equivalent official of the country of incorporation of the Applicant as the true and lawful agent and attorney-in- fact of the Applicant for receipt of the summons, writs and notices in connection with any such action or suit. No litigation in respect of any matter arising under or in connection with the Credit or this Agreement may be brought by the Applicant against the Bank unless such litigation shall be commenced in a court of competent jurisdiction in the City of New York, State of New York, within one (1) year after (i) the expiration date of the Credit or (ii) the alleged breach shall have purportedly occurred, whichever is earlier. The Applicant also waives: (1) the right to trial by jury in the event of any litigation to which the Bank and the Applicant are parties in respect of any matter arising under of in respect of the Credit or, this Agreement, whether or not such litigation has been commenced in respect of the Credit (including, but not limited to, this Agreement) and whether or not other persons are also parties thereto; (2) the right to interpose any claim, setoff, or counterclaim, of any nature or description and any defense based upon the statute of limitations, laches, waiver, estoppel or setoff, howsoever described. (3) any immunity it or its property may now or hereafter have from suit, jurisdiction attachment (whether prior to judgment or in aid or execution), execution or other legal process; (4) any claim against the Bank for consequential or special damages; and (5) notice of acceptance of this Agreement. 15. Assignment and Applicable Law. This Agreement may not be assigned by the Applicant without the prior written consent of the Bank. The Bank may assign or sell participations in all or any part of the Credit or this Agreement to another entity and the Bank may disseminate credit information relating to the Applicant in connection with any proposed participation. This Agreement and all rights, obligations and liabilities arising hereunder shall be binding upon and inure to the benefit of the Bank and the Applicant and their respective successors and permitted assigns and shall be governed by, and construed in accordance with, the internal laws of the jurisdiction in which the branch of the Bank to which this Agreement is addressed is located, without reference to that jurisdiction's principles of conflicts of law, and to the extent that there is any conflict between such laws and the Uniform Customs and Practice, the Uniform Customs and Practice shall control. Demand Deposit A/C #__________________ THE TERMS AND CONDITIONS SET FORTH ABOVE HAVE BEEN READ AND ARE HEREBY ACCEPTED AND MADE APPLICABLE TO THIS AGREEMENT AND THE CREDIT. WE WARRANT THAT NO SHIPMENT OR PAYMENT TO BE MADE IN CONNECTION WITH THIS AGREEMENT Rent-A-Wreck of America, Inc. IS IN VIOLATION OF UNITED STATES ----------------------------- TRADE, CURRENCY CONTROL OR (Order Party) OTHER REGULATIONS. WE FURTHER 11460 Cronridge Drive, #120 WARRANT THAT THE AGREEMENT Owings Mills, MD 21116 BELOW HAS BEEN DULY AND VALIDLY ----------------------------- EXECUTED BY OR ON BEHALF OF THE (Address) ACCOUNT PARTY. /s/ Kenneth Blum, Jr. ----------------------------- (Authorized Signature) (Title) 5/16/97 ----------------------------- (Date) EX-10.16.1 4 AMENDMENT TO LTR OF CREDIT (CHASE MANHATTAN BANK) Craig W. Clausen Vice-President Middle Market Banking Group 1411 Broadway-5th Floor New York, New York 10018 (212) 391-7157 (212) 391-7117 (Fax) June 1, 1998 Mr. Kenneth Blum, Jr., President Ms. Mitra Khosravi, Chief Financial Officer Rent a Wreck of America, Inc. 11460 Cronridge Drive-Suite 120 Owings Mills, Maryland 21117 Dear Mr. Blum, Jr. and Ms. Khosravi, The Chase Manhattan Bank ("Chase") is pleased to inform you that it has approved your request to increase your current $500,000.000 standby letter of credit up to but not to exceed $1,000,000.00, under the terms and conditions of the Standby or Performance Letter of Credit Application and Agreement (the "Agreement") dated June 3, 1997 and a First Amendment thereto (the "Amendment") dated June 1, 1998. The amendment increasing your existing standby letter of credit will be issued, once a duly signed copy of the "Amendment" is received, all terms and conditions of the "Amendment" are fulfilled, including but not limited to the receipt of the increased standby letter of credit for $638,000.00 issued by The Bank N T of Butterfield, LTD., in favor of Chase. Yours truly, Craig W. Clausen cc: Robert A Bova FIRST AMENDMENT (the "Amendment") dated as of June 1, 1998 to the STANDBY OR PERFORMANCE LETTER OF CREDIT APPLICATION AND AGREEMENT dated June 3, 1997 (the "AGREEMENT") between RENT-A-WRECK OF AMERICA, INC., a California corporation (the "Applicant") and THE CHASE MANHATTAN BANK, a New York banking corporation (the "Bank"). WHEREAS, the Applicant and the Bank are parties to the Agreement; and WHEREAS, the parties desire to amend the Agreement as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Definitions. Except as otherwise stated, capitalized terms defined in the Agreement and used herein without definition shall have the respective meanings assigned to them in the Agreement. 2. Amendments to the Agreement. (a) Section 11, Events of Default; Obligations; Remedies is amended as follows: (1) by deleting "$1,300,000" in Section 11(9) and substituting therefor "$2,000,000" as the amended Consolidated Tangible Net Worth requirement; (2) by adding two additional Event Of Defaults as Section (12) and (13) which shall read: "(12) if the Collateral Pool is less than $1,000,000 at any fiscal quarter end. ("Collateral Pool""is defined as the sum of (a) the stated amount of the standby letter of credit in favor of the Bank issued by The Bank of N T Butterfield, LTD. in the original stated amount of $638,000 (as amended, extended or supplemented from time to time, the "Back Up L/C") and (b) 50% of the Eligible Receivables of the Applicant and all of its wholly-owned subsidiaries ("Borrowing Base"). Eligible Receivables are those receivables where no more than 90 days has elapsed from invoice date and are otherwise satisfactory to the Bank.) (13) if the Borrowing Base is less than $362,000 at any time, provided, however, that the Applicant shall have 5 business days after notice by the Bank to increase the stated amount of the Back Up L/C by the amount of such deficiency (it being understood that if the stated amount of the Back Up L/C is so increased, it cannot subsequently be reduced)." 3. Representations and Warranties. To induce the Bank to enter into this First Amendment, the Applicant hereby represents and warrants that: (a) It has the power, authority and legal right to make and deliver this First Amendment and to perform its obligations under the Agreement, as modified by this First Amendment, without any notice, consent, approval or authorization not already obtained, and it has taken all necessary action to authorize the same. (b) The making and delivery of this First Amendment and the performance of the Agreement as modified by this First Amendment do not violate any provision of its charter or by-laws or other corporate documents or result in the breach of or constitute a default under or require any consent under any indenture or other agreement or instrument to which it is a party or by which it or any of its property may be bound or affected. The Agreement as modified by this First Amendment constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally. (c) No Event of Default under the Agreement has occurred and is continuing under the Agreement as of the date of this First Amendment and after giving effect thereto. 4. Effective Date. This First Amendment shall become effective as of the date hereof when the Bank shall have received (a) counterparts of this First Amendment duly executed by each of the parties hereto and (b) its requisite administrative and legal processing fees. 5. Counterparts. This First Amendment may be signed in any number of counterparts, each of which shall be an original and all of which taken together shall constitute a single instrument with the same effect as if the signatures thereto and hereto were upon the same instrument. 6. Full Force and Effect. Except as expressly amended by this First Amendment, all of the terms and provisions of the Agreement and any other documents executed in connection therewith, shall continue in full force and effect, are hereby ratified and confirmed in all respects, and all parties shall be entitled to the benefits thereof. 7. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of New York. 2 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executive and delivered by their proper and duly authorized officers as of the date set forth above. RENT-A-WRECK OF AMERICA, INC. THE CHASE MANHATTAN BANK By:/s/ Mitra GH Khosravi By:/s/ Craig Clausen --------------------------------- ------------------------------------- Title: Chief Accounting Officer Title: Vice President By:/s/ Lori Sheffron --------------------------------- Title: Vice President 3 L/C No.: P-384861 Global Trade Services Group AMENDMENT NO: 2 P.O. Box 44 Church Street Station New York, NY 10008-0044 Cable Address: CHAMANBANK New York Advising Bank APPLICANT: ************DIRECT ************ CONSOLIDATED AMERICAN RENTAL INSURANCE CO., LTD. 11460 CRONRIDGE DRIVE, SUITE 120 OWINGS MILLS, MARYLAND 21117 Beneficiary NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA 70 PINE ST. 4TH FLOOR NY, NY 10270 ATTN: ART STILLWELL IN ACCORDANCE WITH INSTRUCTIONS RECEIVED, THE ABOVE-REFERENCED LETTER OF CREDIT HAS BEEN AMENDED AS FOLLOWS: 1 - LETTER OF CREDIT AMOUNT IS INCREASED BY USD 500,000.00 (FIVE HUNDRED THOUSAND AND 00/100 UNITED STATES DOLLARS). THE AGGREGATE AMOUNT AVAILABLE UNDER THIS LETTER OF CREDIT SHALL NOT EXCEED USD 1,000,000.00. ALL OTHER TERMS AND CONDITIONS OF THE CREDIT REMAIN UNCHANGED. P-384861- -009-A1-01- /S/ ELSIE VEGA ---------------------------------- AUTHORIZED SIGNATURE ELSIE VEGA BANK OF N.T. BUTTERFIELD & SON LTD OUTGOING WIRE MESSAGE TO: CHASE MANHATTAN BANK, N.A. NEW YORK ATTENTION: STANDBY LETTER OF CREDIT DEPT. KINDLY ADVISE THE FOLLOWING AMENDMENT WITHOUT ADDING YOUR ENGAGEMENT TO YOUR:- CHASE MANHATTAN BANK 380 MADISON AVENUE GROUND FLOOR NEW YORK, N.Y. 10017 ATTN: CRAIG CLAUSEN YOUR REFERENCE: P386812 OUR REFERENCE: IRREVOCABLE LETTER OF CREDIT NO. G13163 WE HEREBY AMEND OUR IRREVOCABLE LETTER OF CREDIT NO. G13163 AS FOLLOWS:- LETTER OF CREDIT IS INCREASED BY USD388,000.00 UP TO A MAXIMUM LIABILITY OF USD638,000.00 (SIX HUNDRED AND THIRTY EIGHT THOUSAND UNITED STATES DOLLARS) ALL OTHER TERMS AND CONDITIONS REMAIN THE SAME. THESE ARE THE OPERATIVE INSTRUCTIONS AS PER I.C.C. PUBLICATION NO. 500. KINDLY ADVISE BENEFICIARY URGENTLY ATTN: CRAIG W. CLAUSEN REGARDS, SABRINA CHARLTON LETTERS OF CREDIT DEPT. # 13163 CUSTOMER CONSOLIDATED AMERICAN RENTAL INS. CO. 06/01/98 The Chase Manhattan Bank Chase Corporate Resolutions CORPORATE RESOLUTIONS I, the undersigned Secretary, hereby certify to The Chase Manhattan Bank, that at a meeting of the Board of Directors of Rent A Wreck of America, Inc. ("Corporation") a corporation organized and existing under the laws of California duly called and duly held on the 3 day of June, 1998, the following Resolutions were duly adopted, and that the said Resolutions have been entered upon the regular minute books of the Corporation, are in accordance with the By-Laws and are now in full force and effect. RESOLVED: 1. The Officers of Corporation, or any one or more of them, are hereby authorized to open a bank account or accounts from time to time with The Chase Manhattan Bank and its subsidiaries and affiliates (each being hereinafter referred to as "Bank") for and in the name of Corporation with such title or titles as he or they may designate. 2. The Mitro GS Khosrav, (CAO), Lori Shaffron (VP) of Corporation, signing Mitro GS Khosrav, Lori Shaffron (anything more than $500.00 (two). and their successors ("Authorized Person(s)") are hereby authorized to sign, by hand or by facsimile (including, but not limited to, computer generated) signature(s), checks, drafts, acceptances and other instruments (hereinafter each collectively referred to as "Item(s)"). Notwithstanding the above, any Authorized Person is authorized singly to: (1) initiate Automated Clearing House ("ACH") debits without a signature; (2) initiate payments by use of Depository Transfer Checks ("DTC") without a signature other than the name of Corporation printed on the DTC; or (3) give instructions, by means other than the signing of an Item, with respect to any account transaction, including, but not limited to, the payment, transfer or withdrawal of funds by wire, computer or other electronic means, or otherwise, or of money, credits, items or property at any time held by Bank for account of Corporation ("Instructions"). 3. Bank is hereby authorized to honor and pay Items, whether signed by hand or by facsimile (including, but not limited to, computer generated) signature(s). In the case of facsimile signatures, Bank is authorized to pay any Item if the signature, regardless of how or by whom affixed, and whether or not the form of signature used on such Item was actually prepared by or for Corporation, resembles the specimens filed with Bank by Corporation. Bank is further authorized to honor and pay DTCs, ACHs, Instructions, and other orders given singly by any Authorized Person, including such as may bring about or increase an overdraft and such as may be payable to or for the benefit of any Authorized Person or other Officer or employee individually, without inquiry as to the circumstances of the issuance or the disposition of the proceeds thereof and without limit as to amount. 4. Bank is hereby authorized to accept for deposit, for credit, or for collection, or otherwise, Items endorsed by any person or by stamp or other impression in the name of Corporation without inquiry as to the circumstances of the endorsement or any lack of endorsement or any lack or the disposition of the proceeds. 5. Any one of the Authorized Person(s) of Corporation is hereby authorized to secure from Bank one or more Chase Business Banking Card(s) (the "Card(s)") on behalf of Corporation which may be used by any cardholder named by such Authorized Person(s) to initiate electronic fund transactions as described in the Chase Business Banking Card Agreement (the "Agreement") with respect to any and all such accounts of Corporation as Corporation or such Authorized Person(s) may designate, including without limitation, transfers from business credit line accounts. Such Authorized Person(s) be, and each of them hereby is, further authorized to execute and deliver in the name and on behalf of Corporation an Agreement and supporting documentation governing the issuance and use of such Cards with such changes, if any, as the Authorized Person(s) executing the same shall approve, and to otherwise conduct any business whatsoever relative to the account(s) and Cards as may be necessary or advisable in order to carry out the full intent and purposes of said Agreement and of these resolutions. ----------------------------------------------------------------------- (Indicate account numbers to be accessed by Card) Page 1 of 3 6. The N/A of Corporation, and each of them, and their successors in office, and any other person hereafter authorized on behalf of Corporation to possess a Card ACTING ALONE, may exercise all of the rights and privileges of Corporation with regard to any account linked to the Card. 7. The Ken Blum, Jr. (President), Mitro GS Khosrav (CAO) of Corporation, signing singly are hereby authorized to effect loans and advances and obtain credit at any time for Corporation from Bank (and guarantee on behalf of Corporation the obligations of others to Bank), secured or unsecured, and for such loans and advances and credit and guarantees to make, execute and deliver promissory notes and other written obligations or evidence of indebtedness of Corporation, applications for letters of credit, instruments of guarantee and indemnity and any agreements or undertakings, general or specific, with respect to any of the foregoing, and as security for the payment of loans, advances, indebtedness, guarantees and liabilities of, or credit given to, Corporation or others to pledge, hypothecate, mortgage, assign, transfer, grant liens and security interests in, give rights with respect to, endorse and deliver property of any description, real or personal, and any interest therein and evidence of any thereof at any time held by Corporation, and to execute mortgages, deeds of trust, security agreements, instruments of transfer, assignment or pledge, powers of attorney and other agreements or instruments which may be necessary or desirable in connection therewith; and also to sell to, or discount with Bank, commercial paper, bills receivable, accounts receivable, stocks, bonds or any other securities or property at any time held by Corporation, and to that end to endorse, assign, transfer and deliver the same; to execute and deliver instruments or agreements of subordination and assignment satisfactory to Bank and also to give any orders or consents for the delivery, sale, exchange or other disposition of any property or interest therein or evidence thereof belonging to Corporation and at any time in hands of Bank, whether as collateral or otherwise; and to execute and deliver such other agreements, instruments and documents and to do such other acts and things as may be necessary or desirable or required by Bank in connection with any of the foregoing and Bank is hereby authorized to honor, accept and execute any of the transactions described above. 8. All loans, discounts and advances heretofore obtained on behalf of Corporation and all notes and other obligations or evidences thereof of Corporation held by Bank are hereby approved, ratified, and confirmed. 9. Corporation does hereby give to Bank a continuing lien for the amount of any and all liabilities and obligations of Corporation to Bank and claims of every nature and description of Bank against Corporation, whether now existing or hereafter incurred, originally contracted with Bank and/or with another or others and now or hereafter owing to or acquired in any manner by Bank, whether contracted by Corporation alone or jointly and/or severally with another or others, absolute or contingent, secured or unsecured, matured or unmatured upon any and all moneys, securities and any and all other property of Corporation and the proceeds thereof, now of hereafter actually or constructively held or received by or in transit in any manner to or from Bank, its correspondents or agents from or for Corporation, whether for safekeeping, custody, pledge, transmission, collection or otherwise coming into the possession of Bank in any way. 10. In case of conflicting claims or disputes, or doubt on Bank's part as to the validity, extent, modification, revocation or exercise of any of the authorities herein contained Bank may but need not recognize nor give any effect to any notice from any Officer, or from any other person, purporting to cancel, restrict or change any of said authorities, or the exercise thereof, unless Bank is required to do so by the judgment, decree or order of a court having jurisdiction of the subject matter and of the parties to such conflicting claims or disputes. 11. Corporation agrees to be bound by the Terms and Conditions for Business Accounts and Services, currently in effect and as amended hereafter, as well as any signature card, deposit ticket, checkbook, passbook, statement of account, receipt instrument, document or other agreements, such as but not limited to, funds transfer agreements, delivered or made available to Corporation from Bank and by all notices posted at the office of Bank at which the account of Corporation is maintained, in each case with the same effect as if each and every term thereof were set forth in full herein and made a part hereof. 12. The Officers of Corporation or any one or more of them are hereby authorized to act for Corporation in all other matters and transactions relating to any of its business with Bank including, but not limited to, the execution and delivery of any agreements or contracts necessary to effect the foregoing Resolutions. Page 1 of 2 13. Bank is hereby released from any liability and shall be indemnified against any loss, liability or expense arising from honoring any of these Resolutions. 14. Subject to paragraph 10 above, each of the foregoing Resolutions and the authority thereby conferred shall remain in full force and effect until written notice of revocation or modification by presentation of new Corporate Resolutions and signature cards shall be received by Bank; provided that such notice shall not be effective with respect to any revocation or modification of said authorities until Bank shall have had a reasonable opportunity to act thereon following receipt of such notice or with respect to any checks or other instruments for the payment of money or the withdrawal of funds dated on or prior to the date of such notice, but presented to Bank after the receipt of such notice. The Secretary or any Assistant Secretary or any other Officer of Corporation is hereby authorized and directed to certify, under the seal of Corporation or not, but with like effect in the latter case, to Bank the foregoing Resolutions, the names of the Officers and other representatives of Corporation and any changes from time to time in the said Officers and representatives and specimens of their respective signatures. Bank may conclusively assume that persons at any time certified to it to be Officers or others representatives of Corporation continue as such until receipt by Bank of written notice to the contrary. I FURTHER CERTIFY that the persons herein designated as Officers of Corporation have been duly elected to and now hold the offices in Corporation set opposite their respective names and that the following are the authentic, official signatures of the said respective Officers and of the named signatories who are not Corporate Officers, to wit:
Name (Typewritten or Printed) Office Signatures - ----------------------------- ------ ---------- Ken Blum, Jr. President /s/ Ken Blum, Jr. cac - ----------------------------- -------------------------------------- Lori Shaffron Vice-President /s/ Lori Shaffron cac - ----------------------------- -------------------------------------- Ken Blum, Jr. Secretary /s/ Ken Blum, Jr. cac - ----------------------------- -------------------------------------- Treasurer - ----------------------------- -------------------------------------- Mitro GS Khosrav CAO /s/ Mitro GS Khosrav cac - ----------------------------- --------------------------------------
IN WITNESS WHEREOF, I have hereunto set my hand as Secretary and affixed the seal of the said Corporation this 2 day of June, 1998, *Attest (Second Officer) /s/ Ken Blum, Jr. cac -------------------------------------- Secretary
Mitro GS Khosrav cac - ----------------------------- Signature CAO - ----------------------------- Title AFFIX (CORPORATE SEAL) HERE *Note: In case the Secretary is authorized to sign by the above Resolutions, this certificate should be attested by a second Officer of Corporation. EX-21 5 LIST OF SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES RENT-A-WRECK OF AMERICA, INC. State or Other Subsidiary Name and Jurisdiction of Name Under Which Business is Done Organization - --------------------------------- --------------- 1. RENT A WRECK ONE WAY, INC. Maryland 2. BUNDY AMERICAN CORPORATION Maryland 3. RENT A WRECK LEASING, INC. Maryland 4. U R M CORPORATION California 5. RENT-A-WRECK/URM, INC. Maryland 6. CONSOLIDATED AMERICAN RENTAL INSURANCE Bermuda COMPANY, LTD EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1 U.S. Dollars YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 1 1,609,636 0 1,940,009 682,631 0 3,162,662 549,423 265,476 3,664,112 1,635,728 0 41,896 13,660 0 1,972,828 3,664,112 0 4,676,645 0 2,091,315 1,829,737 61,508 22,692 756,432 208,528 547,904 0 0 0 547,904 .10 .09 Represents Basic Earnings Per Share in accordance with Statement of Financial Accounting Standards 128
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RENT-A-WRECK 0F AMERICA, INC.'S FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FROM 10-KSB. 1 U.S. DOLLARS YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 1 1,007,578 0 1,590,929 779,035 0 1,999,545 791,155 448,472 2,593,943 808,526 0 14,391 0 42,347 1,698,590 2,593,943 0 3,785,000 0 1,549,286 1,499,134 203,217 6,096 599,930 62,439 537,491 0 0 0 537,491 .10 .09 Represents Basic Earnings Per Share in accordance with Statement of Financial Accounting Standards 128
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