-----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, HzyhgzaiB+em2Hno1MIB81eXWVVTTd/EFgij7lqTSSaA3blCUzYXgMhUqevRVB2Q m93gtr2boxhZmhZNrhBmhA== 0000950147-01-501245.txt : 20010716 0000950147-01-501245.hdr.sgml : 20010716 ACCESSION NUMBER: 0000950147-01-501245 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010713 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: 1680391 BUSINESS ADDRESS: STREET 1: 10324 S. DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117 BUSINESS PHONE: 4105815755 MAIL ADDRESS: STREET 1: 10324 S. DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117 10KSB40 1 e-7138.txt ANNUAL REPORT FOR THE FISCAL YR ENDED 3/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 [ ] TRANSITION REPORT UNDER 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. (Name of Small Business Issuer in its Charter) DELAWARE 95-3926056 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10324 South Dolfield Road, Owings Mills, MD 21117 (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number: (410) 581-5755 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange 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 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. $6,846,345 4,385,496 shares of common stock were outstanding as of June 8, 2001. Aggregate market value of voting stock held by nonaffiliates of registrant, based upon the average of the high and low price of the Common Stock on the Nasdaq SmallCap Market, was approximately $4.6 million on June 8, 2001. 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: None Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business............................................. 1 Item 2. Description of Property............................................. 7 Item 3. Legal Proceedings................................................... 7 Item 4. Submission of Matters to a Vote of Security Holders................. 7 Part II Item 5. Market for the Common Equity and Related Stockholder Matters........ 8 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 10 Item 7. Financial Statements................................................ 18 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 45 Part III Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.................. 45 Item 10. Executive Compensation............................................. 47 Item 11. Security Ownership of Certain Beneficial Owners and Management..... 49 Item 12. Certain Relationships and Related Transactions..................... 51 Item 13. Exhibits and Reports on Form 8-K................................... 51 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"), and Bundy's subsidiary Priceless Rent-A-Car, Inc. ("Priceless"). Bundy was incorporated in California on April 22, 1977 and redomesticated in Maryland effective March 29, 1996. Priceless was incorporated in Maryland on September 30, 1999. The Company markets and administers the Rent-A-Wreck (R) and PRICELE$$ (R) vehicle rental franchise programs and related services. The Company's franchisees, in aggregate, operate one of the largest used vehicle rental fleets in the nation, offering rentals of cars, trucks and vans at rates that management believes are generally less than those charged by national new car rental companies. The Company also formed a new subsidiary, Consolidated American Rental Insurance Company, Ltd ("CAR Insurance") on March 1, 1997 to offer automobile liability and physical damage reinsurance to its franchisees. The Company also has franchisees in Europe. Reference to the "Company" includes Rent-A-Wreck of America, Inc. and its subsidiaries unless the context otherwise requires. THE FRANCHISE PROGRAM The Company sells to qualified persons the right to operate a Rent-A-Wreck or PRICELE$$ 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$$ used vehicle rental franchise program are required by the Company to meet higher standards than the Rent-A-Wreck program, such as utilizing vehicles that are less than three years old. As of March 31, 2001, 158 of the Company's 669 franchisees were participating in the Priceless program. The Company believes the PRICELE$$ name appeals to a different clientele and therefore compliments 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, and trade and service marks. When the Company sells a franchise, it charges an initial franchise fee relating to the start-up services performed by the Company. 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 the Company's franchisees' fleet size or gross revenues. 1 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 of the Company 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. CAR Insurance, which is domiciled in Bermuda and a subsidiary of the Company, offers automobile liability and physical damage reinsurance through American International Group ("AIG") for the vehicles belonging to its franchisees. CAR Insurance has an agreement with AIG whereby CAR Insurance's coverage is subject to a per loss limit of $100,000 per person and $300,000 per accident. Under the contract, AIG also provides an aggregate stop loss protection of $1,300,000, thus capping CAR Insurance's exposure to loss. In carrying out the program, the Company utilizes Hertz Claim Management Corporation ("Hertz") as the Third Party Administrator, Rental Industry Services ("Rise") as the insurance broker, and Willis Corroon as a consultant for this program. On March 1, 2001, the Company replaced Hertz with Crawford & Co. ("Crawford") as the Third Party Administrator. The focus of growth for CAR Insurance will be in those states where the Company's insurance advisor believes the driver's (not the owner's) insurance is deemed to be primarily responsible for any losses. As of March 31, 2001, approximately 92 of the Company's franchisees were insuring a total of 2,416 vehicles under this program. Franchisees apply for this insurance coverage with Rise. Rise processes the franchisees' applications and, if approved, the franchisee is required to pay premiums in advance on a monthly basis. Hertz is responsible for processing all claims and assisting the Company on the appropriate reserves for all known claims occurred prior to March 1, 2001, and Crawford is responsible for all claims occurred after March 1, 2001. On March 1, 1999, the Company added a new program to offer insurance coverage to all of its franchisees who do business in those states where the Company's insurance advisor believes the owner's (not the driver's) insurance is deemed to be primarily responsible for any losses. In those states, this is the only program that the Company offers to its franchisees. In carrying out this new program, the Company utilizes Rise as the insurance broker, and franchisees apply for this insurance coverage with Rise. Rise processes the franchisees' applications and, if approved, the franchisee is required to pay premiums in 2 advance on a monthly basis. The Company bills and collects the premiums, which are forwarded to Rise, and receives fees from Rise for this program. The Company believes it has no exposure to loss from insurance claims under this program. As of March 31, 2001, approximately 28 of the Company's franchisees were insuring a total of 518 vehicles under this program. Priceless operates a wheelchair van rental program, on a limited test basis, in Maryland and Florida. The Company markets this program primarily in communities catering to disabled individuals. There are nine vehicles currently operating under this program. On March 1, 2001, the Company started its own store for renting vehicles to the public. The store is located at the Company's corporate office in Owings Mills, Maryland and operates under the PRICELE$$ brand name. 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 in its discretion 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's loan is secured by the vehicles. As of March 31, 2001, the Company was financing 13 vehicles for 2 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 and PRICELE$$ programs. 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. 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 3 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 amounts on different programs such as advertising on Westwood One Radio, 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 two full-time and one part-time salespeople at its corporate headquarters, and in addition, utilizes the services of two independent franchise brokers located throughout the United States. During the fiscal year ended March 31, 2001, 74 new franchises were granted, 22 existing franchise locations were transferred to new ownership and 80 franchises were terminated by the Company. The majority of these terminations resulted from breach of the franchise agreement. This resulted in approximately 641 franchised locations throughout the United States, as well as 28 franchised locations in Europe at March 31, 2001 compared to approximately 652 franchised locations throughout the United States, as well as 23 franchised locations in Europe and Asia at March 31, 2000. EMPLOYEES As of March 31, 2001, the Company employed 28 people, consisting of 13 full-time employees and 5 part-time employees engaged in franchise sales and service and 8 full-time employees and 2 part-time employees engaged in administrative activities. In addition, the Company retains the services of 2 franchise brokers who market and 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. COMPETITION The Company pioneered the concept of used car rentals to the public. 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. Although most franchisees service some business and leisure travelers from outside the community, the Company's customers generally are people from the local community. The Company's franchisees generally serve customers needing vehicles for insurance and service replacement, commercial, short-term moving and general use. 4 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 franchisees the flexibility to offer an appropriate range of vehicles for their areas. Significant competition exists in the local markets. Large systems like U-Save compete nationwide. Dozens of regional and local independent companies also compete with the Company in various areas. In most major urban areas, companies such as Hertz, Avis, National, Enterprise and Budget operate city and suburban offices, as well as operating in airport terminals. During the early 1990's, 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 often risen, although Hertz has recently been re-acquired by Ford. Because the Company's franchisees generally attempt to provide 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 REGULATIONS 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 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 of a franchise 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. 5 As of June 2001, 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 53 foreign countries and its "PRICELE$$" trade and service mark in approximately 4 foreign countries. TRADEMARKS The Company believes that name recognition of its primary trademark "Rent-A-Wreck" is important to its franchise program. A trademark may be held for an indefinite duration, but it may be lost or its value diminished if adequate steps to police its use are not taken. The Company believes that its efforts to police the use of its trademarks are adequate. The Company is actively promoting its existing "PRICELE$$" trademark. The Company believes this trademark will provide additional sales opportunities for its franchisees due to new target customers of "PRICELE$$" rental fleets. INSURANCE REGULATIONS GOVERNMENT REGULATION RELATING TO INSURANCE PROGRAM. As part of the insurance program, the Company utilizes CAR Insurance, its wholly owned subsidiary domiciled in Bermuda. Insurance companies such as CAR Insurance are subject to the laws and regulations of 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 of 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, Crawford, and the financing of such insurance program 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") has 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. 6 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. ITEM 2. DESCRIPTION OF PROPERTY The Company currently leases from an affiliate, KA Real Estate Associates, LLC, ("KA") approximately 9,100 square feet of executive office space at 10324 South Dolfield Road, Owings Mills, MD 21117. This lease will expire in October 2006 (see note 8 to the Company's consolidated financial statements and Item 12, Certain Relationships and Related Party Transactions). Management believes that the facilities leased by the Company are adequate for the Company's current and foreseeable future operations. ITEM 3. LEGAL PROCEEDINGS The Company is party to routine legal proceedings incidental to its business from time to time. Certain claims, suits and complaints arise in the ordinary course of business and may be filed against the Company. Based on facts now known to the Company, management believes all such matters are adequately provided for, covered by insurance or, if not so covered or provided for, are without merit, or involve such amounts that would not materially adversely affect the consolidated results of operations or financial position of the Company. In December 2000, the Company and certain employees were named in a lawsuit seeking declaratory and injunctive relief, rescission, and monetary damages in the sum of $5 million. This lawsuit alleges similar claims to a lawsuit that was previously dismissed, and the Company believes the claims are without merit. They will be vigorously defended. 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, 2001. 7 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 was as follows: Year Ended March 31, 2001 High* Low* -------------- ----- ---- First Fiscal Quarter $1.89 $1.79 Second Fiscal Quarter 1.54 1.46 Third Fiscal Quarter 1.71 1.63 Fourth Fiscal Quarter 1.76 1.70 Year Ended March 31, 2000 High* Low* -------------- ----- ---- First Fiscal Quarter $1.71 $1.47 Second Fiscal Quarter 1.95 1.84 Third Fiscal Quarter 2.00 1.93 Fourth Fiscal Quarter 2.27 2.08 - ---------- * 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 has preferred stock issued with 1,105,000 shares outstanding as of March 31, 2001. This stock has a cumulative quarterly dividend of two cents per share. Based on the current number of outstanding preferred shares, the annual aggregate dividend is $88,400. 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 public market for the preferred stock. The number of stockholders of record of the Company's common stock as of June 15, 2001 was 168. This figure does not include individual participants in securities position listings of registered clearing agencies. The Company estimates that the number of beneficial stockholders was approximately 1,000 as of June 15, 2001. Trading activity with respect to the Common Stock has been limited, and the Company believes that 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. 8 SELECTED FINANCIAL DATA Set forth below is selected financial data with respect to the consolidated statements of earnings of the Company and its subsidiaries for each of the five years in the period ended March 31, and with respect to the balance sheets thereof at March 31 in each of those years. The selected financial data has been derived from the Company's audited consolidated financial statements and should be read in conjunction with the audited 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, ------------------------------------------------------- 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- (in thousands except per share and number of franchises) FRANCHISEES' RESULTS (UNAUDITED) Franchisees' Revenue (1) $34,661 $40,018 $45,358 $51,707 $56,630 Number of Franchises 477 558 652 675 669 (outstanding at year-end) COMPANY'S RESULTS OF OPERATIONS Total Revenue $ 3,785 $ 4,677 $ 5,601 $ 6,282 $ 6,846 Operating expenses 3,252 3,983 4,564 5,279 6,501 Income before income taxes $ 600 $ 756 $ 1,113 $ 1,101 $ 487 Net income 537 548 858 821 263 Earnings per common share Basic $ .10 $ .10 $ .18 $ .19 $ .04 Weighted average common shares 4,102 4,267 4,086 3,808 4,066 Diluted $ .09 $ .09 $ .15 $ .14 $ .04 Weighted average common shares plus convertible preferred stock, options and warrants 6,083 5,915 5,611 5,902 4,356 EBITDA (2) 721 888 1,313 1,922 1,934 COMPANY'S BALANCE SHEET DATA Working Capital $ 1,191 $ 1,527 $ 1,531 $ 1,240 $ 1,940 Total assets 2,594 3,664 3,886 3,980 4,374 Long-term obligations 30 -- -- -- -- Shareholders' Equity 1,755 2,028 2,041 1,836 2,863
- ---------- (1) The franchisees' revenue data have been derived from unaudited license fee reports provided by franchisees. (2) "EBITDA" is earnings before interest expense, depreciation, amortization, taxes and repurchase of options. EDITDA should not be interpreted as a measure of operating results, cash flow provided by operating activities, a measure of liquidity, or as an alternative to any generally accepted accounting principle measure of performance. The Company is reporting EBITDA because it is a widely used financial measure of the potential capacity of a company to incur and service debt. Rent-A-Wreck's reported EBITDA may not be comparable to similarly titled measures used by other companies. 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year ended March 31, 2001 as compared to year ended March 31, 2000: The Company operates in two principal segments: Vehicle Rental Franchise Programs (franchising) and Insurance Coverage (insurance). Franchising consists of operations under the Rent-A-Wreck and Priceless lines of business. For the year ended March 31, 2001, the Company's principal operations franchising, comprised 79% of consolidated net revenues (82% in 2000). The majority of the Company's operating income for the fiscal year ended March 31, 2000, and all of the Company's operating income for the fiscal year ended March 31, 2001 came from franchising. The Company generated operating income from its insurance segment of approximately $240,640 for the fiscal year ended March 31, 2000, compared to an operating income of $20,854 from that segment for the fiscal year ended March 31, 2001. Revenue from franchising operations, which includes initial license fees, continuing license fees, and advertising fees, increased by $260,267 (5%). Although the Company sold 74 new locations in 2001 compared to 75 new locations in 2000, initial license fees decreased by $70,552 (6%), which resulted primarily from a decrease in average price per sale in 2001 compared to 2000. Price per sale is a function of the population of the exclusive territory granted to a new franchisee. The timing of closings of new franchise sales, each of which is for a relatively large amount and the completion of the initial services required to be completed by the Company, 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 $295,423 (10%), and advertising fees increased by $35,396 (4%) due to the fleet growth at existing franchises and the Company's dedication of more resources to its collection efforts. Revenues from insurance premiums increased by $332,959 (38%) due to higher participation by the Company's franchisees in the CAR Insurance program. Insurance premium revenue is recognized ratably over the life of the policies. Vehicle rental operations increased by $30,161 (87%) due primarily to the wheelchair van program. Other revenue decreased by $58,936 (30%) due primarily to a one-time gain from litigation against a former franchisee, which the Company resolved in August 1999. The Company was awarded $101,045, which it collected in April 2000, in connection with the litigation of the award. $49,750 was allocated to other revenue, while the remaining amount of $51,295 was allocated to license fees, advertising fees and interest income. Total operating expenses increased by $1,221,903 (23%) in fiscal 2001 compared to the prior year. Salary expense increased by $24,096 (3%) primarily as a result of new hires in response to the growth of the Company's franchising operations. Advertising and promotion expenses increased by $80,273 (6%), which resulted primarily from an increase in national advertising expense to promote the Company. Sales and marketing expenses decreased by $222,992 (38%), which 10 resulted primarily from a decrease in bad debt expense due to the Company's more aggressive collection efforts. General and administrative expenses increased by $194,994 (19%), which resulted primarily from an increase in legal fees, collection fees and rent expense. Insurance underwriting expenses increased by $530,112 (93%) due to an increase in paid losses and loss reserves for reported claims in connection with higher participation by the Company's franchisees in its CAR Insurance program, offset by a decrease in loss reserves for unreported claims. Effective June 30, 1993, the Company issued options (the "Options") to K.A.B., Inc. ("KAB"), a company owned by an affiliate, for the purchase of up to 2,250,000 shares of the Company's common stock. During the years ended March 31, 2000 and 2001, the Company entered into an agreement to repurchase 500,000 of the options for $625,000 and to repurchase 957,721 of the options for $1,234,560, respectively. As of March 31, 2001, all of these options have been exercised or repurchased. Depreciation and amortization expense increased by $5,860 (3%) in fiscal 2001 compared to the prior year. This increase resulted primarily from additional depreciation associated with the purchase of additional vehicles in the wheelchair van rental program and computer software and hardware. The Company realized operating income of $344,935, before taxes and interest, in 2001 compared to operating income of $1,002,387 in 2000, reflecting a decrease of $657,452. This decrease resulted primarily from the Company's repurchase of options to buy 957,721 shares of the Company's common stock for $1,234,560 and a decrease in underwriting profit in the Company's CAR Insurance program, offset by a decrease in sales and marketing expenses due to more successful collection efforts, an increase in continuing license fees due to the addition of new franchises and fleet growth at existing franchises. If the repurchase of options in both fiscal years ended March 31, 2001 and 2000 had not impacted the Consolidated Statements of Earnings for the Years Ended March 31, 2001 and 2000 (in which case there would have been no corresponding tax benefit), operating income would have been $1,579,494 and $1,627,387 in 2001 and 2000, respectively, instead of $344,935 and $1,002,387. Net income would have been $1,021,041 and $1,204,379 in 2001 and 2000, respectively, instead of $263,022 in 2001 and $820,629 in 2000. Basic earnings per share would have been $.25 and $.29 in 2001 and 2000 instead of $.04 and $.19, and diluted earnings per share would have been $.19 and $.20 in 2001 and 2000 instead of $.04 and $.14. The Company incurred an expense of $1,234,560 and $625,000 for repurchase of options in 2001 and 2000, respectively, when it implemented such repurchases as part of the stock buyback program it initiated in 1995. Including the total of 1,457,721 options repurchased in 2001 and 2000, and 110,000 common shares bought in 2001 and 2000, the Company has to date repurchased more than 3 million shares or potential shares. The Company repurchased KAB's options for several 11 reasons. First, by repurchasing these options, the Company was able to retire these options, thereby reducing fully-diluted shares outstanding. Second, because the difference between market price and strike price represents taxable ordinary income to the holders when they are exercised, options are a substantial and potentially depressing overhang on the market because holders generally need to sell exercised options promptly to pay income taxes generated by exercise. Directly repurchasing options reduced this overhang. Furthermore, by using a portion of net income, supplemented by the tax deduction an option repurchase generates, to finance the repurchase of a portion of management's options, the aggregate number of options and warrants outstanding was able to be virtually eliminated while hopefully enhancing the value of all outstanding shares by increasing prospective diluted earnings per share. Net interest income increased by $43,291 (44%). This increase was primarily due to interest earned on the increased cash deposits which are held in interest bearing accounts. Income tax expense for the year ended March 31, 2001 decreased by $56,554 (20%) from 2000. This decrease was primarily due to lower taxable income for the year ended March 31, 2001 compared to the prior year. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had working capital of $1,940,176 compared to $1,239,523 at March 31, 2000. This increase of $700,653 resulted primarily from net cash profit earned during the year and cash received in connection with the exercise of options and warrants, partially offset by cash paid by the Company to repurchase 957,721 options and 110,000 shares of its common stock, as well as the payment of preferred stock dividends. In fiscal 2001, the Company's allowance for doubtful accounts was $854,423 compared to $832,253 in the prior year. The Company wrote off $32,462 of doubtful accounts during fiscal 2001 and $68,279 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. 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 decreased by $147,627 (21%). This decrease resulted primarily from the Company's repurchase of 957,721 options, offset by the exercise of 927,279 options and warrants. Restricted cash increased by $146,547 (20%) from an increase in the national advertising funds. Restricted cash includes (1) a deposit of $600,000 as security for the letter of credit with Bank of America backing 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 various advertising programs. 12 In March 2000, the Company obtained a $1,000,000 letter of credit with Bank of America in connection with the Company's CAR Insurance subsidiary and replaced its letters of credit with The Chase Manhattan Bank and the Bank of Butterfield. This letter of credit is part of the agreement between the Company and Bank of America as security for the letter of credit issued to American International Group ("AIG") by Bank of America. This letter of credit is secured by a certificate of deposit of $600,000 held by Bank of America plus 50% of all the Company's eligible accounts receivable. Funds drawn against the letter of credit bear interest at Bank of America's prime commercial lending rate plus 1.5% (which prime rate was 7.00% on June 14, 2001). For the years ended March 31, 2001 and 2000, AIG did not draw any funds from the letter of credit. In November 1999, the Company moved to a new location, which is owned by KA Real Estate Associates, LLC, ("KA") a related party to KAB. The Company entered into an operating lease with KA which requires monthly payments of $9,700 through October 2006. Property and equipment increased by $182,342 (21%) from March 31, 2000 to March 31, 2001. This increase occurred primarily due to additional investment in computer software and hardware, leasehold improvements and vehicles. The Company purchased six vehicles in connection with the wheelchair van program and three vehicles for the Company's Priceless store. Cash used in operations was $138,729, resulting primarily from an increase in prepaid income tax expense, a decrease in accounts payable, accrued expenses, and income taxes payable, offset by net income before depreciation plus the decrease in accounts and notes receivable, prepaid expenses, and an increase in insurance loss reserves. Accounts payable and accrued expenses decreased primarily from compensation expense in connection with the Company's repurchase of 500,000 options for $625,000 during the fiscal year ended March 31, 2000, which the Company paid in April and May 2000. Accounts and notes receivable decreased primarily due to funds received from AIG in connection with the reinsurance program and funds recovered from settlement of a lawsuit. Insurance loss reserves increased primarily due to an increase in the number of claims associated with the increased participation in the CAR insurance program. Income taxes payable decreased due to taxes paid for the year ended March 31, 2001. Cash used in investing activities of $623,370 related primarily to an increase in restricted cash in connection with the national advertising funds, the acquisition of property and equipment and the costs associated with obtaining trademarks, partially offset by the proceeds from the sale of three vehicles. Cash provided in financing activities during the year ended March 31, 2001 was $614,472, resulting from net proceeds from the exercise of options and warrants, offset by the payment of preferred dividends and buybacks of common stock. 13 In 1995 and 1996, the Company approved the repurchase of up to a total of 500,000 shares of the Company's outstanding common or preferred stock. On April 23, 1998, the Company approved the repurchase of up to an additional 500,000 shares of the Company's outstanding common or preferred stock. On March 3, 1999, the Company approved the repurchase of an additional 119,075 shares of the Company's outstanding common or preferred stock. During the year ended March 31, 1996, the Company repurchased and retired 89,375 shares of its common stock at a cost of $117,907 and also bought back 116,400 shares of its preferred stock at a cost of $118,562. During the year ended March 31, 1997, the Company repurchased and retired 67,625 shares of its common stock at a cost of $85,301 and also bought back 66,500 shares of its preferred stock at a cost of $66,749. During the year ended March 31, 1998, the Company repurchased and retired 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. During the year ended March 31, 1999, the Company repurchased and retired 311,600 shares of its common stock at a cost of $358,674. The Company also repurchased and retired 226,875 shares of its preferred stock at a cost of $363,001 and also bought back 102,500 warrants at a cost of $11,250. As of March 31, 1999, the Company had repurchased and retired a total of 1,119,075 shares under this program, which was the total number of shares authorized for repurchase at that time. In November 1999, the Board of Directors authorized the repurchase of, and the Company repurchased and retired 400,000 shares of its common stock at a cost of $790,000. In January 2000, the Company's Board of Directors authorized the repurchase and retirement of up to 1 million shares of common stock, convertible cumulative series A preferred stock, options or warrants. The Board also authorized the repurchase, and the Company entered into an agreement to repurchase, 500,000 options for $625,000 under this program. The obligation to purchase these options was paid in April and May of 2000. In September 2000, the Company's Board of Directors authorized the repurchase of up to 1 million shares of its common or preferred stock, including options for its common stock. The Board also authorized the repurchase, and the Company entered into an agreement to repurchase, 957,721 options for $1,234,560 under this program. The obligation to purchase these options was paid in September 2000. In December 2000, the Company bought back and retired 60,000 shares of its common stock at a cost of $100,222. In February 2001, the Company bought back and retired 50,000 shares of its common stock at a cost of $93,772. Since the inception of this plan in 1995, the Company's Board of Directors has authorized the repurchase and retirement of 3,519,075 shares of common stock, convertible cumulative series A preferred stock, options or warrants, and the Company has repurchased and retired a total of 3,086,796 shares. The Company believes it has sufficient working capital to support its business plan through fiscal 2002. 14 IMPORTANT FACTORS The statements regarding anticipated future performance of the Company contained in this report are forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from the forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the Company's limited experience in the reinsurance business and the potential for negative claims experience, the effects of government regulation on the Company's franchise and insurance programs including maintaining properly registered franchise documents and making any required alterations in the Company's franchise program to comply with changes in the laws, competitive pressures from other motor vehicle rental companies which have greater marketing and financial resources than the Company, protection of the Company's trademarks, and the dependence on the Company's relationships with its franchisees. These risks and uncertainties are more fully described elsewhere in, "Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Important Factors". All forward-looking statements should be considered in light of these risks and uncertainties. LIMITED INSURANCE HISTORY AND 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 or that the Company's reserves will be sufficient. Because of the Company's limited experience with insurance risks and the inherent uncertainties in estimating the ultimate costs of claims, reserves are particularly uncertain and 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 as a result of the need to make payments in excess of the Company's reserves. Additionally, if the Company expands the program as anticipated, the effect of such losses and/or reserves could be compounded. DEPENDENCE ON FRANCHISEES; CREDIT RISKS. The Company's revenues are substantially dependent on fees paid by its franchisees. These fees fluctuate based on the franchisees' performance. Franchisees are independent contractors who operate their businesses independently 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. 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" and "PRICELE$$" names. The Company's revenues are almost 15 exclusively derived from the goodwill associated with the names. Significant negative publicity related to either of the names or the inability of the Company to pursue infringements and maintain its proprietary rights could 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 the 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 taxes in the state. Following this trend, other states have adopted laws specifically designed to impose taxes 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 taxes and associated interest and penalties for which the Company may be liable could have a material adverse effect on the Company. RISKS OF INTERNATIONAL OPERATIONS. During the fiscal year ended March 31, 2001, 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, 16 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 adverse 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. 17 ITEM 7. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPORTING SCHEDULES Page ---- Report of Independent Certified Public Accountants......................... 19 Financial Statements: Consolidated Balance Sheet as of March 31, 2001............................ 20 Consolidated Statements of Earnings for the Years Ended March 31, 2000 and 2001.................................................................. 22 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2000 and 2001................................................... 23 Consolidated Statements of Cash Flows for the Years Ended March 31, 2000 and 2001.................................................................. 24 Notes to Consolidated Financial Statements................................. 25 Supporting Schedules: Schedule II - Valuation and Qualifying Accounts............................ 52 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. 18 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, 2001, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years ended March 31, 2001 and 2000. 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 auditing standards generally accepted in the United States of America. 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, 2001, and the consolidated results of their operations and their consolidated cash flows for the years ended March 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II for the years ended March 31, 2001 and 2000. 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 June 22, 2001 19 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 2001 ASSETS CURRENT ASSETS: Cash and Cash Equivalents ...................................... $ 554,181 Restricted Cash ................................................ 892,061 Accounts Receivable, net of allowance for doubtful accounts of $854,423: Continuing License Fees and Advertising Fees ................. 417,513 Current Portion of Notes Receivable .......................... 415,829 Current Portion of Direct Financing Leases ................... 15,321 Insurance Premiums Receivable ................................ 5,384 Other ........................................................ 83,330 Prepaid Expenses and Other ..................................... 165,811 Prepaid Income Tax Expense ..................................... 524,155 Deferred Taxes ................................................. 341,983 ----------- TOTAL CURRENT ASSETS ..................................... 3,415,568 ----------- PROPERTY AND EQUIPMENT: Furniture ...................................................... 95,837 Computer Hardware and Software ................................. 470,153 Machinery and Equipment ........................................ 65,644 Leasehold Improvements ......................................... 23,767 Vehicles ....................................................... 398,111 ----------- 1,053,512 Less: Accumulated Depreciation and Amortization ................ (363,075) ----------- NET PROPERTY AND EQUIPMENT ............................... 690,437 ----------- OTHER ASSETS: Intangible Assets, net of accumulated amortization of $152,770.................................................... 194,192 Long-term Portion of Notes and Direct Financing Lease Receivables.................................................... 73,536 ----------- 267,728 ----------- TOTAL ASSETS ............................................. $ 4,373,733 =========== The accompanying notes are an integral part of this financial statement. 20 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 2001 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses ............................ $ 942,965 Dividends Payable ................................................ 22,100 Insurance Loss Reserves .......................................... 510,327 ---------- TOTAL CURRENT LIABILITIES .................................. 1,475,392 ---------- LONG-TERM LIABILITIES: Deferred Tax Liability ........................................... 35,514 ---------- TOTAL LONG-TERM LIABILITIES ................................ 35,514 ---------- TOTAL LIABILITIES .......................................... 1,510,906 ---------- COMMITMENTS AND CONTINGENCIES ...................................... -- SHAREHOLDERS' EQUITY: Convertible Cumulative Series A Preferred Stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 1,105,000 shares (aggregate liquidation preference $884,000)............... 11,050 Common Stock, $.01 par value; authorized 25,000,000 shares; issued and outstanding 4,385,496 shares.......................... 43,855 Additional Paid-In Capital ....................................... 2,267,709 Retained Earnings ................................................ 540,213 ---------- TOTAL SHAREHOLDERS' EQUITY ................................. 2,862,827 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $4,373,733 ========== The accompanying notes are an integral part of this financial statement. 21 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED MARCH 31, 2000 AND 2001
2000 2001 ----------- ----------- REVENUES: Initial License Fees ................................... $ 1,090,003 $ 1,019,451 Continuing License Fees ................................ 3,102,395 3,397,818 Advertising Fees ....................................... 971,126 1,006,522 Insurance Premiums ..................................... 887,311 1,220,270 Vehicle Rental Operations .............................. 34,615 64,776 Other .................................................. 196,444 137,508 ----------- ----------- 6,281,894 6,846,345 ----------- ----------- EXPENSES: Salaries, Consulting Fees, and Employee Benefits........ 932,990 957,086 Advertising and Promotion .............................. 1,377,000 1,457,273 Insurance Underwriting Expenses ........................ 570,965 1,101,077 Sales and Marketing .................................... 579,281 356,289 Repurchase of Previously Granted Options ............... 625,000 1,234,560 General and Administrative ............................. 1,022,931 1,217,925 Depreciation and Amortization ......................... 171,340 177,200 ----------- ----------- 5,279,507 6,501,410 ----------- ----------- OPERATING INCOME ................................. 1,002,387 344,935 OTHER INCOME (EXPENSE) Interest Income ........................................ 122,919 167,113 Interest Expense ....................................... (24,500) (25,403) ----------- ----------- 98,419 141,710 ----------- ----------- INCOME BEFORE INCOME TAX EXPENSE ................. 1,100,806 486,645 INCOME TAX EXPENSE ....................................... 280,177 223,623 ----------- ----------- NET INCOME ....................................... $ 820,629 $ 263,022 DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK....... (89,500) (88,400) ----------- ----------- NET INCOME AFTER DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK ......................................... $ 731,129 $ 174,622 =========== =========== EARNINGS PER SHARE Basic .................................................. $ .19 $ .04 =========== =========== Weighted average common shares ......................... 3,808,147 4,065,680 =========== =========== Diluted ................................................ $ .14 $ .04 =========== =========== Weighted average common shares plus convertible preferred stock, options and warrants ................. 5,901,617 4,355,823 =========== ===========
The accompanying notes are an integral part of these financial statements. 22 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 2000 AND 2001
(Accumulated Preferred Stock Common Stock Additional Deficit) --------------------- --------------------- Paid-in Retained Shares Amount Shares Amount Capital Earnings Total ---------- -------- ---------- -------- ----------- --------- ----------- Balance, April 1, 1999 ................... 1,139,125 $11,391 3,934,092 $39,341 $2,209,181 $(218,623) $2,041,290 Retirement of common stock ............. -- -- (400,000) (4,000) (786,000) -- (790,000) Conversion of preferred stock to common stock .......................... (34,125) (341) 34,125 341 -- -- -- Preferred dividends paid ($.08 per share)................................. -- -- -- -- -- (89,500) (89,500) Preferred dividend arrearages paid...... -- -- -- -- -- (146,915) (146,915) Net income ............................. -- -- -- -- -- 820,629 820,629 ---------- ------- ---------- ------- ---------- --------- ---------- Balance, March 31, 2000 .................. 1,105,000 11,050 3,568,217 35,682 1,423,181 365,591 1,835,504 Retirement of common stock ............. -- -- (110,000) (1,100) (192,894) -- (193,994) Exercise of stock options, warrants, and related tax benefit................ -- -- 927,279 9,273 1,037,422 -- 1,046,695 Preferred dividends paid ($.08 per share)................................. -- -- -- -- -- (88,400) (88,400) Net income ............................. -- -- -- -- -- 263,022 263,022 ---------- ------- ---------- ------- ---------- --------- ---------- Balance, March 31, 2001 .................. 1,105,000 $11,050 4,385,496 $43,855 $2,267,709 $ 540,213 $2,862,827 ========== ======= ========== ======= ========== ========= ==========
The accompanying notes are an integral part of these financial statements. 23 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000 AND 2001
2000 2001 ----------- ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net Income ........................................................ $ 820,629 $ 263,022 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................................... 171,340 177,200 Deferred income taxes ........................................... (369,832) 262,391 Tax benefit for exercise of stock options and warrants .................................................. -- 149,829 Loss (gain) on disposal of property and equipment ............... 1,757 (13,782) Provision for doubtful accounts ................................. 173,775 22,170 Changes in assets and liabilities: Accounts and notes receivable ................................... 124,777 129,910 Prepaid expenses and other ...................................... (17,624) 18,234 Prepaid income taxes ............................................ -- (524,155) Accounts payable and accrued expenses ...................................................... 649,027 (416,250) Income taxes payable ............................................ 156,888 (338,550) Insurance loss reserves ......................................... 13,053 131,252 ----------- ----------- Net cash provided by (used in) operating activities.......... 1,723,790 (138,729) ----------- ----------- Cash flows from investing activities: Increase in restricted cash ....................................... (26,971) (146,547) Proceeds from sale of property and equipment ...................... 43,000 54,620 Acquisition of property and equipment ............................. (252,071) (510,182) Additions to intangible assets .................................... (56,635) (21,261) ----------- ----------- Net cash used in investing activities ....................... (292,677) (623,370) ----------- ----------- Cash flows from financing activities: Decrease in insurance financing payable ........................... (564,684) -- Net proceeds from exercise of stock options and warrants .......... -- 896,866 Repurchase and retirement of common stock ......................... (790,000) (193,994) Preferred dividends paid .......................................... (236,415) (88,400) ----------- ----------- Net cash (used in) provided by financing activities.......... (1,591,099) 614,472 ----------- ----------- Net decrease in cash and cash equivalents ................... (159,986) (147,627) Cash and cash equivalents at beginning of year ...................... 861,794 701,808 ----------- ----------- Cash and cash equivalents at end of year ............................ $ 701,808 $ 554,181 =========== =========== Supplemental disclosure of cash flow information: Interest paid ..................................................... $ 24,500 $ 25,403 Income taxes paid ................................................. $ 481,669 $ 673,709
The accompanying notes are an integral part of these financial statements. 24 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND NATURE OF BUSINESS The consolidated financial statements presented herein include the accounts of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned subsidiaries, Rent-A-Wreck One Way, Inc,. ("RAW One Way"), Consolidated American Rental Insurance Company, Ltd ("CAR Insurance") and Bundy American Corporation ("Bundy"), and Bundy's subsidiaries, Rent-A-Wreck Leasing, Inc. ("RAW Leasing"), and Priceless Rent-A-Car, Inc. ("Priceless"). 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. The Company also provides insurance coverage on the vehicles of some of its franchisees. 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. RESTRICTED CASH Restricted cash includes a deposit of $600,000 being held in Bank of America securing the letter of credit with Bank of America and $292,061 held on behalf of the Company's franchisees in the national advertising fund to be spent on various 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. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable, which takes into consideration prior account loss experience and creditworthiness of the franchisees. 25 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MARCH 31, 2001 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 methods of depreciation and amortization are used for income tax purposes. The estimated service lives used in determining depreciation for financial reporting are as follows: Furniture 3 years Computer Hardware and Software 3-5 years Machinery and Equipment 5 years Leasehold Improvements 3-7 years Vehicles 5 years INTANGIBLE ASSETS Intangible assets include the value of trademarks which are amortized on the straight-line method to operations over periods ranging from ten to forty 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 initial claim reserve is established 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 the Company's past claims experience. 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. 26 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED MARCH 31, 2001 INCOME TAXES Income tax liabilities and assets are recognized for the deferred tax consequences of temporary differences or carry-forwards 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. 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 to be rendered by the Company in accordance with the specific provisions of SFAS No. 45 "Accounting for Franchise Fee Revenue". Many franchisees have had prior business experience; consequently, they 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). INSURANCE PREMIUMS Insurance premiums are recognized ratably over the term of the coverage. 27 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 ADVERTISING Advertising costs are expensed as incurred and are classified as advertising and promotion expenses. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of Statements of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAB No. 123). Compensation costs for stock options are 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 Basic earnings per share amounts have been computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding options and warrants and the conversion of preferred stock, calculated using the treasury stock method, unless they are anti-dilutive. 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 accounting principles generally accepted in the United States of America, 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. 28 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 NEWLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value and gains or losses depends on the intended use of the derivative and its resulting designation. The statement was originally effective for fiscal years beginning after June 15, 1999. In July 1999, FASB issued SFAS No. 138 "Accounting for Certain Derivative Investments and Certain Hedging Activities" delayed implementation of this standard for one year, to June 30, 2000 and added certain other related accounting and financial statement disclosure prescriptions. The Company will adopt SFAS 133 in the first quarter of fiscal 2002. The Company does not expect the adoption of SFAS Nos. 133 and 138 will have a material effect on its consolidated financial statements. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2001 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. The Company's insurance operations are subject to the laws and regulations in the jurisdictions in which they are chartered and do business. American International Group ("AIG") supports the operations and 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 a letter of credit with Bank of America ("BOA") for $1,000,000. This letter of credit is secured by a certificate of deposit held by Bank of America ($600,000) plus 50% of the Company's eligible accounts receivable. Funds drawn against the letter of credit bear interest at BOA's prime commercial rate plus 1.5%. As of March 31, 2001, no amounts have been drawn under the line of credit. 29 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 3. DIRECT FINANCING LEASES The components of the Company's net investment in direct financing leases as of March 31, 2001 are as follows: Total Minimum Lease Payments to be Received ..................... $55,332 Less Amounts Representing Administration Costs Included in Total Minimum Lease Payments ................................ 3,181 ------- Minimum Lease Payment Receivable ................................ 52,151 Less Allowance for Uncollectibles ............................. 15,215 ------- Net Minimum Lease Payments Receivable ........................... 36,936 Less Unearned Income .......................................... 5,046 ------- Net Investment in Direct Financing Leases ....................... $31,890 ======= Current Portion ............................................... $15,321 Non-Current Portion ........................................... 16,569 ------- Net Investment in Direct Financing Leases ....................... $31,890 ======= The total minimum lease payments receivable in succeeding fiscal years are as follows: 2002........................................................ $33,786 2003........................................................ 17,928 2004........................................................ 3,618 ------- Total ................................................. $55,332 ======= 30 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at March 31, 2001: Accounts Payable................................................ $ 134,290 National Advertising Fund....................................... 292,061 Payroll......................................................... 57,872 Commissions and Royalties....................................... 144,585 Professional Fees............................................... 78,163 Other........................................................... 235,994 ---------- $ 942,965 ========== 31 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 5. EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the computation of basic and diluted earnings per share for the years ended March 31, 2000 and 2001 is as follows: 2000 2001 ---------- ---------- BASIC EPS COMPUTATION Numerator: Net income applicable to common shares ............ $ 731,129 $ 174,622 Denominator: Weighted average common shares .................... 3,808,147 4,065,680 ---------- ---------- Basic EPS .......................................... $ .19 $ .04 ========== ========== DILUTED EPS COMPUTATION Numerator: Net income applicable to common shares ............ $ 731,129 $ 174,622 Dividends on convertible preferred stock .......... 89,500 -- ---------- ---------- 820,629 174,622 ---------- ---------- Denominator Weighted average common shares .................... 3,808,147 4,065,680 Weighted average convertible preferred stock ...... 1,122,993 -- Weighted average options and warrants ............. 970,477 290,143 ---------- ---------- 5,901,617 4,355,823 Diluted EPS ........................................ $ .14 $ .04 ========== ========== Preferred shares convertible into 1,105,000 shares of common stock were outstanding during fiscal 2001 but were not included in the computation of diluted EPS because the effect of doing so is antidilutive. 32 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 6. INCOME TAXES The provision for income taxes for the years ended March 31, 2000 and 2001 consists of the following: 2000 2001 --------- --------- Currently payable State and other income taxes ....................... $ 79,659 $ 36,170 Federal income taxes ............................... 570,350 (74,937) --------- --------- Total currently payable (receivable) ................................. 650,009 (38,767) Deferred ........................................... (369,832) 262,390 --------- --------- Total ........................................ $ 280,177 $ 223,623 ========= ========= The Company's provision for income taxes differs from the anticipated United States federal statutory rate. Differences between the statutory rate and the Company's provision are as follows: 2000 2001 ----- ----- Federal taxes at statutory rate ...................... 34.0% 34.0% Reduction in valuation allowance ..................... (9.2) -- State taxes, net ..................................... 4.8 6.4 Non-deductible expense ............................... -- 2.5 Other ................................................ (4.1) 3.1 ----- ----- Total ........................................... 25.5% 46.0% ===== ===== 33 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 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 bases as of March 31, 2001, are as follows: Deferred tax assets: Reserve for doubtful accounts ................................... $ 338,352 Other ........................................................... 3,631 --------- 341,983 Deferred tax liabilities: Fixed assets .................................................... (35,514) --------- Net deferred tax asset before valuation allowance ............................................. 306,469 Valuation allowance ............................................... -- --------- Net deferred tax asset ............................................ $ 306,469 ========= 34 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company's corporate offices were occupied under the terms of operating leases from both related and non-related parties, the longest of which expired in November 1999. On November 19, 1999, the Company moved its corporate offices to a new location, which is owned by KA Real Estate Associates, LLC, ("KA") a related party. The operating lease, which expires on October 31, 2006, has the following minimum annual lease payments: March 31, 2002.......................... $118,126 2003.......................... 121,670 2004.......................... 125,320 2005.......................... 129,080 Thereafter.................... 76,598 -------- Total.................... $570,794 ======== Total rent expense for the years ended March 31, 2000 and 2001 was $85,824 and $114,087, respectively, of which $45,670 and $114,087, respectively, was to a related party (see Note 8). LITIGATION The Company is party to routine 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 have a material adverse affect on the consolidated results of operations or financial position of the Company. In December 2000, the Company and certain employees were named in a lawsuit seeking declaratory and injunctive relief, rescission, and monetary damages in the sum of $5 million. This lawsuit alleges similar claims to a lawsuit that was previously dismissed, and the Company believes the claims are without merit. They will be vigorously defended. 35 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 8. RELATED PARTY TRANSACTIONS The Company 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. 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 each of the years ended March 31, 2000 and 2001 were $300,000. On January 19, 2000, the Company's Board of Directors reached an agreement with KAB to extend the term of its Management Agreement with the Company for five additional years through June 30, 2008 on its present terms. The Board also authorized the repurchase of, and the Company entered into an agreement to repurchase, 500,000 options, originally issued to KAB, for $625,000. On September 21, 2000, the Company's Board of Directors authorized the repurchase of, and the Company entered into an agreement to repurchase, an additional 957,721 options originally issued to KAB and later transferred to Kenneth L. Blum, Jr. and Robin Cohn, for $1,234,560. Robin Cohn subsequently transferred her options to her husband, Alan Cohn. On September 25, 2000, the remaining 617,279 options for the Company's common stock, which were held by Kenneth L. Blum, Jr. and Alan Cohn, were exercised at $1.00 per share, for which the Company received $617,279. Through November 19, 1999, the Company leased 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 $4,951 for the year ended March 31, 2000, to ABIS under this agreement. On November 1, 1999, the Company entered into a lease agreement with KA, a related party of KAB, to lease approximately 9,100 square feet of executive office space, which expires on October 31, 2006. The Company paid KA $114,087 for the year ended March 31, 2001. On January 19, 2000, the Board of Directors authorized expenditures totaling $250,000 for the development by ABIS of a centralized software reporting package to be used by the Company's franchisees. The Company paid $4,940 and $177,255 for the years ended March 31, 2000 and 2001, respectively, to ABIS under this arrangement. The Company has retained Richter Investment Corp. ("Richter"), an affiliate of William L. Richter (a director of the Company), to serve as exclusive financial advisor for the Company. For its role 36 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 8. RELATED PARTY TRANSACTIONS-CONTINUED of financial advisor, Richter's fees will be based upon transactions completed, as defined in the agreement. Richter received $47,912 for its role in connection with the exercise of options for the year ended March 31, 2001. Through March 31, 1999, Richter provided ongoing financial management services to the Company at no charge. Effective April 1, 1999, Richter receives an annual consulting fee of $30,000. 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. COMMON STOCK, STOCK OPTION PLANS AND COMMON STOCK WARRANTS COMMON STOCK In November 1999, the Company repurchased and retired 400,000 shares of its common stock at a cost of $790,000. In the year ended March 31, 2001, the Company repurchased and retired 110,000 shares of its common stock at a cost of $193,994. OPTIONS 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. The Company issued stock options to acquire 2,250,000 shares of its common stock to KAB in conjunction with its management agreement. 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, and (c)13,333 and 16,667 vested and unvested options, respectively, to William L. Richter. During the year ended March 31, 2000, Robin Cohn transferred 1,087,500 options to Alan Cohn, Ms. Cohn's husband. 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 unvested options were subject to an acceleration of exercisability upon achievement of certain financial stock targets. Such targets were achieved during the year ended March 31, 1999, and at March 31, 1999, all options were fully vested. On January 19, 2000, the Board 37 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 9. COMMON STOCK, STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED of Directors approved the extension of the term of the KAB Management Agreement for an additional five years expiring June 30, 2008. The Board also authorized the repurchase of, and the Company entered into an agreement to repurchase, 500,000 options for an aggregate price of $625,000. The repurchase has been included in the consolidated statement of earnings for the year ended March 31, 2000. On July 24, 2000, William L. Richter, Richter and Kenneth L. Blum, Jr. exercised 30,000, 45,000, and 100,000 options, respectively. On September 21, 2000, the Board authorized the repurchase of, and the Company entered into an agreement to repurchase, 449,449 options from Mr. Kenneth L. Blum, Jr. and 508,272 options from Alan Cohn for an aggregate price of $1,234,560. The repurchase has been included in the consolidated statement of earnings for the year ended March 31, 2001. On September 21, 2000, Kenneth L. Blum and Alan Cohn exercised their remaining 617,279 options at $1.00 per share, and the Company received $617,279. There were no stock options granted during fiscal year 2000. On November 2, 2000, the Company's Stock Option Plan was approved by the Company's shareholders pursuant to which the Board of Directors of the Company may grant stock options to provide incentives to outside directors of the Company. Accordingly, in November 2000, the Board authorized and the Company granted to Alan Aufzien and Thomas Volpe, the Company's outside directors, options to purchase 30,000 and 5,000 shares, respectively, of the Company's common stock at $1.64, the current market price, solely in their capacity as directors. The Company is planning to grant each of Alan Aufzien and Thomas Volpe options to purchase 5,000 shares of the Company's common stock on an annual basis. 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 2001: risk-free interest rate of 6.4%; expected volatility of 48.5%; and expected lives of 7 years. 38 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 9. COMMON STOCK, STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED The following table summarizes option activity for the years ended March 31, 2000 and 2001:
2000 2001 Weighted Weighted Average Average 2000 2001 Exercise Exercise Shares Shares Price Price ------ ------ ----- ----- Options outstanding at beginning of year ....... 2,250,000 1,750,000 $1.08 $1.06 Options exercised .............................. -- (792,279) -- 1.01 Options granted ................................ -- 35,000 -- 1.64 Options repurchased ............................ (500,000) (957,721) 1.15 1.11 Options expired ................................ -- -- -- -- Options outstanding at end of year ............. 1,750,000 35,000 $1.06 $1.64 Option price range for exercised shares ........ -- $1.00 to $1.15 Weighted-average fair value of options, granted during the year........................ -- $.98
At March 31, 2000 and 2001, 1,750,000 and 35,000 options were exercisable. The following table summarizes options outstanding at March 31, 2001: Weighted Average Number Exercise Weighted Average Remaining Outstanding Price Exercise Price Contractual Life ----------- ----- -------------- ---------------- 35,000 $1.64 $1.64 9.64 39 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 9. COMMON STOCK, STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED The following table presents the pro forma net income and earnings per share that would have been recorded 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 as required by SFAS No. 123. 2000 2001 -------- -------- Net income applicable to common and common equivalent shares As reported .......................................... $731,129 $174,622 Pro forma ............................................ $664,166 $153,568 Net earnings per share Basic: As reported .......................................... $ .19 $ .04 Pro forma ............................................ $ .17 $ .04 Diluted: As reported .......................................... $ .14 $ .04 Pro forma ............................................ $ .13 $ .04 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of normal publicly traded options, and because 40 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 9. COMMON STOCK, STOCK OPTION PLANS AND COMMON STOCK WARRANTS - CONTINUED changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. WARRANTS Warrants for 30,000 shares of the Company's common stock exercisable at $.80 per share were issued to Richter in connection with previous private placement transactions for which Richter acted as agent. Richter assigned 12,000 of these warrants to William L. Richter and 4,000 warrants to Richter employees. On February 11, 1999, Richter exercised 14,000 of these warrants and William L. Richter exercised 12,000 of these warrants. On March 1, 1999, the Company bought back a total of 2,500 of these warrants from Richter employees at $.50 per warrant, and the remaining 1,500 of these warrants expired. On July 24, 2001, William L. Richter exercised 54,000 warrants, and Richter exercised 81,000 warrants. A summary of changes in outstanding warrants for the year ended March 31, 2001 is as follows: Number of Exercise Price Warrants per Warrant -------- ----------- Outstanding, beginning of year .................. 135,000 $1.00 - $1.15 Issued .......................................... -- $ -- Exercised ....................................... (135,000) $1.00 - $1.15 Bought Back ..................................... -- $ -- Canceled ........................................ -- $ -- --------- Outstanding, end of year ........................ -- ========= 41 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 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 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 the Company's 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 holds a proxy to vote approximately 95% of the preferred stock, and, by virtue of his control over Richter, 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, 2000, 34,125 shares of preferred stock were converted to common stock reducing the outstanding preferred shares from 1,139,125 to 1,105,000. During the year ended March 31, 2000, the Company declared preferred dividends totaling $89,500, plus $146,915 (100%) of dividend arrearages, and at March 31, 2001, unpaid declared preferred dividends totaled $22,100. 11. OTHER REVENUES Components of other revenues for the years ended March 31, 2000 and 2001 were as follows: 2000 2001 -------- -------- Promotional materials................. $128,141 $126,938 Litigation settlement................. 49,750 -- Other................................. 18,553 10,570 -------- -------- $196,444 $137,508 ======== ======== 12. CONCENTRATIONS OF CREDIT RISK - CASH The Company maintains its cash balances in financial institutions, which balances 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. 42 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 13. GEOGRAPHIC AND INDUSTRY SEGMENTS The Company currently operates in two principal segments: Vehicle Rental Franchise Programs and Insurance Coverage. Corporate costs are allocated to each segment's operations and are included in the measure of each segment's profit or loss. The geographic data include revenues based upon customer locations and assets based on physical locations. The Company's foreign operations are presently conducted by CAR Insurance in Bermuda (see note 2). Information by geographic area and industry segment is as follows: 2000 2001 ----------- ----------- Net revenues from external customers Vehicle Rental Franchises-Rent A Wreck-(U.S.) ... $ 4,879,638 $ 5,102,119 Vehicle Rental Franchises-Priceless-(U.S.) ...... 495,214 537,495 Corporate-(U.S.) ................................ 21,202 1,550 Insurance-(U.S.) ................................ 885,840 1,205,181 Insurance-(Bermuda) ............................. -- -- ----------- ----------- $ 6,281,894 $ 6,846,345 =========== =========== Segment operating income Vehicle Rental Franchises-Rent A Wreck-(U.S.) ... $ 1,206,238 $ 1,015,220 Vehicle Rental Franchises-Priceless-(U.S.) ...... (349,253) (607,355) Corporate-(U.S.) ................................ (95,238) (83,784) Insurance-(U.S.) ................................ 240,640 20,854 Insurance-(Bermuda) ............................. -- -- ----------- ----------- $ 1,002,387 $ 344,935 =========== =========== Segment assets Vehicle Rental Franchises-Rent A Wreck-(U.S.) ... $ 2,264,794 $ 2,351,100 Vehicle Rental Franchises-Priceless-(U.S.) ...... 388,517 574,373 Corporate-(U.S.) ................................ 256,127 384,141 Insurance-(U.S.) ................................ 1,062,789 1,055,877 Insurance-(Bermuda) ............................. 7,898 8,242 ----------- ----------- $ 3,980,125 $ 4,373,733 =========== =========== Expenditures for segment assets Vehicle Rental Franchises-Rent A Wreck-(U.S.) ... $ -- $ -- Vehicle Rental Franchises-Priceless-(U.S.) ...... 187,605 240,075 Corporate-(U.S.) ................................ 64,466 270,107 Insurance-(U.S.) ................................ -- -- Insurance-(Bermuda) ............................. -- -- ----------- ----------- $ 252,071 $ 510,182 =========== =========== 43 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED MARCH 31, 2001 13. GEOGRAPHIC AND INDUSTRY SEGMENTS-CONTINUED 2000 2001 -------- -------- Depreciation and amortization Vehicle Rental Franchises-Rent A Wreck-(U.S.) ............ $ 17,701 $ 17,997 Vehicle Rental Franchise-Priceless-(U.S.) ................ 51,480 45,528 Corporate-(U.S.) ......................................... 102,159 113,675 Insurance-(U.S.) ......................................... -- -- Insurance-(Bermuda) ...................................... -- -- -------- -------- $171,340 $177,200 ======== ======== Interest income Vehicle Rental Franchises-Rent A Wreck-(U.S.) ............ $ 52,057 $ 85,800 Vehicle Rental Franchises-Priceless-(U.S.) ............... 6,132 8,037 Corporate-(U.S.) ......................................... 20,732 8,357 Insurance-(U.S.) ......................................... -- 64,575 Insurance-(Bermuda) ...................................... 43,998 344 -------- -------- $122,919 $167,113 ======== ======== Interest expense Vehicle Rental Franchises-Rent A Wreck-(U.S.) ............ $ 396 $ 15 Vehicle rental Franchise-Priceless-(U.S.) ................ 17 11 Corporate-(U.S.) ......................................... 1 -- Insurance-(U.S.) ......................................... 24,086 25,377 Insurance- (Bermuda) ..................................... -- -- -------- -------- $ 24,500 $ 25,403 ======== ======== Income taxes Vehicle Rental Franchises-Rent A Wreck-(U.S.) ............ $280,177 $206,913 Vehicle rental Franchises-Priceless-(U.S.) ............... -- -- Corporate-(U.S.) ......................................... -- -- Insurance-(U.S.) ......................................... -- 16,710 Insurance-(Bermuda) ...................................... -- -- -------- -------- $280,177 $223,623 ======== ======== 44 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 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, 2001. 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. CLASS I DIRECTORS: Kenneth L. Blum, Sr., 74. Kenneth L. Blum, Sr. has served as Chairman and a Director of the Company since June 1993, has been the Company's Chief Executive Officer since December 1993, and was its President from June 1993 to October 1994. Since 1990, Mr. Blum has been a management consultant to a variety of companies, including American Business Information Systems, Inc., a high-volume laser printing company. Mr. Blum is a director of Avesis Incorporated, which markets and administers discount benefit programs. Mr. Blum is the father of the Company's President, Kenneth L. Blum, Jr. Mr. Blum controls K.A.B., Inc., a Florida corporation ("KAB"), which has a Management Agreement with the Company. See "Certain Transactions." Kenneth L. Blum, Jr., 37, has served as Secretary of the Company since March 1994, as Vice President from May 1994 to October 1994, as President since October 1994, and as director since October 1998. Mr. Blum is also President of American Business Information Systems, Inc., a high-volume laser printing company and computer service bureau. Mr. Blum is the son of the Company's Chairman and Chief Executive Officer. 45 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE-CONTINUED CLASS II DIRECTORS: William L. Richter, 58, has been a director of the Company since November 1989 and previously served as a director from 1983 to 1985. Mr. Richter was Co-Chairman of the Company from November 1989 to June 1993 and has been Vice Chairman since June 1993. For the past eleven years, Mr. Richter has been President of Richter and its wholly owned subsidiary, Richter & Co., Inc., a registered broker-dealer until November 1999, and merchant banking firm. Richter & Co., Inc. was merged into its parent on December 31, 1999. Mr. Richter has been a Senior Managing Director of Cerberus Capital Management, L.P. (or its predecessor organization) since its founding in late 1992. Mr. Richter is a Director and Co-Chairman of Avesis Incorporated, which markets and administers discount benefit programs. Alan L. Aufzien, 71, has served as a Director of the Company since November 1989. Mr. Aufzien has also been a partner in the Norall Organization, a private investment company, since 1987. Since 1983, he has also been the president and a director of New York Harbour Associates, Inc. (a real estate development firm). From 1986 to 1996, Mr. Aufzien was the Chairman of Meadowlands Basketball Association (New Jersey Nets) and currently serves as a director of that organization. Mr. Aufzien is also a director of First Real Estate Trust of New Jersey. Thomas J. Volpe, 65, has served as a Director of the Company since July 2000. Until his retirement in February 2001, Mr. Volpe served as the Senior Vice President of Financial Operations at The Interpublic Group of Companies, Inc. He served in this capacity from March 1986. Prior to his employment at The Interpublic Group of Companies, Mr. Volpe was employed at the Colgate Palmolive Company as the Vice President and Treasurer. He currently serves as Director of Alliance Atlantic Communication Inc., American Technical Ceramics and Paragon Trade Brands. All directors hold office for one-year terms, until their successors are duly elected at the next annual meeting and qualified. 46 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, 1999, 2000 and 2001. No other executive officer who was serving as an executive officer during fiscal 2001 received salary and bonus which aggregated at least $100,000 for services rendered to the Company during the fiscal year ended March 31, 2001. Annual Long-term Compensation Awards Compensation ----------------------------- ---------------- Securities Underlying Name and Principal Position Year Salary(1) Options/SARs(#) - --------------------------- ---- --------- --------------- Kenneth L. Blum, Sr., CEO 2001 $300,000 -- (2) 2000 300,000 -- (2) 1999 262,500 -- (2) - ---------- (1) Mr. Blum became Chief Executive Officer of the Company in connection with the Management Agreement between the Company and KAB, effective June 30, 1993. Mr. Blum does not receive cash compensation directly from the Company. KAB receives cash compensation pursuant to the Management Agreement of $300,000 per year ($250,000 per year prior to January 1, 1999) plus expense reimbursements ($10,014 in the year ended March 31, 2001). The amounts indicated in the table represent compensation received by KAB pursuant to the Management Agreement. Mr. Blum is the sole stockholder of KAB. See "Certain Transactions - Management Agreement with KAB and Related Transactions - Management Agreement." (2) During the year ended March 31, 1994, KAB 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, 1996, KAB transferred the options to certain related parties. 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. As a result of the Company's financial performance for the fiscal 47 ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE-CONTINUED year ended March 31, 1999, the Company met the performance targets, and the balance of the options became fully vested as of March 31, 1999. See "Certain Transactions - Management Agreement with KAB and Related Transactions - Stock Option Grant." 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 KAB and Related Transactions - Stock Option Grant." AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES 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 KAB 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. On March 3, 1999, the Company's Board of Directors approved that the Company pay William L. Richter consulting fees of $30,000 per year beginning April 1, 1999. The fees have been assigned to Richter. The Board authorized the issuance of 5,000 options per year to Mr. Alan Aufzien and Mr. Thomas J. Volpe, outside directors, for their participation on the Company's Board of Directors. 48 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of June 8, 2001, 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 securities reflected in such table. All the outstanding shares of Series A Preferred 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 Percent Percent Name and Address of Beneficial Owner Title of Class Beneficially Owned of Class of Common - ------------------------------------ -------------- ------------------ -------- --------- Kenneth L. Blum, Sr. (6) -- -- -- -- 10324 S. Dolfield Road Owings Mills, MD 21117 David Schwartz Common 465,000 10.5 10.5 Bundy Rent-A-Wreck 12333 W. Pico Blvd. Los Angeles, California 90064 William L. Richter(3)(4) Common 992,706(3) 22.5(3) 22.5 c/o Richter Investment Corp. Preferred(3) 1,050,000(3) 95.0 37.0(4) 450 Park Avenue New York, NY 100022 Alan L. Aufzien(5) Common 62,500 1.4 1.4 P.O. Box 2369 Preferred(4) 34,375 3.1 1.8 Secaucus, NJ 07094 Thomas J. Volpe (8) Common 5,000 ** ** 1271 Avenue of Americas New York, NY 10020 Kenneth L. Blum, Jr.(6) Common 530,718 12.0 12.0 10324 S. Dolfield Road Owings Mills, MD 21117 Alan Cohn (6)(7) Common 456,395 10.3 10.3 c/o Rent-A-Wreck of America, Inc. 10324 S. Dolfield Road Owings Mills, MD 21117 Robert M. Temko Common 269,100 6.1 6.1 39 Hidden Valley Drive Newark, Delaware 19711 All Directors and Executive Officers as a Group including the Directors Common 1,590,924(3)(5)(6) 36.0 36.0(4) Named Above (4 persons) Preferred(2)(3) 1,050,000(3)(4) 95.0 47.8
- ---------- * 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 Series A Preferred. ** Less than 1%. 49 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - CONTINUED FOOTNOTES (1) Based on 4,385,496 common shares and 1,105,000 Series A Preferred Shares outstanding and 35,000 options for shares of common stock exercisable immediately on the date of this table, June 8, 2001. (2) Holders of Series A Preferred, 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 proxies granted to Richter, 95.0% of the Series A Preferred may be voted by Richter as of the date of this table. The proxies are effective until such time that less than 500,000 shares of Series A Preferred remain outstanding. See note 4 below. (3) Includes 178,750 shares of Series A Preferred held by Mr. Richter. Also includes 1,200 shares of Common Stock held by spouse's IRA. Also includes 550,000 shares of Series A Preferred and 617,975 shares of Common Stock held by Richter. Also includes an additional 321,250 shares of Series A Preferred as to which Richter holds voting authority via proxy (see note 2 above). Mr. Richter holds a controlling interest in Richter. Mr. Richter and Richter have the same address. (4) Includes 321,250 shares of Series A Preferred as to which Richter holds voting authority via proxy (see note 2 and 3 above) because Richter would not have voting or investment control of the converted Common Stock issued upon conversion of such shares of Series A Preferred. (5) 34,375 shares of Series A Preferred, held by a partnership controlled by Mr. Aufzien, are subject to a voting proxy granted to Richter. Also includes 30,000 options for shares of common stock exercisable immediately. (6) Mr. Blum, Sr. is the father of Kenneth L. Blum, Jr. and Robin Cohn; see note 7 below. Mr. Blum disclaims beneficial ownership of shares held by Mr. Blum, Jr. and Ms. Cohn. (7) Includes 127,167 shares held jointly with spouse. See note 6 above. (8) Includes 5,000 options for shares of common stock exercisable immediately. 50 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to footnote 8 of the Company's consolidated financial statements, included herein, 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. 2. The Exhibits listed in the Exhibit Index following the Signatures page, which is incorporated herein by this reference. 51 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 2000 and 2001
Additions -------------------- Balance at Charged to Charged Balance Beginning Costs and to Other at End Description of Period Expenses Accounts Deductions of Period - ----------- --------- ---------- -------- ---------- --------- MARCH 31, 2000 Allowance for doubtful accounts ........................ $ 655,418 $ 245,114 $ -- $ 68,279(1) $832,253 ========== ========== ======== ========== ======== Valuation allowance on net deferred tax assets ......... $ 100,730 $ -- $ -- $ 100,730(2) $ -- ========== ========== ======== ========== ======== MARCH 31, 2001 Allowance for doubtful accounts ........................ $ 832,253 $ 48,329 $ -- $ 26,159(1) $854,423 ========== ========== ======== ========== ========
- ---------- (1) Accounts written off (2) Reduction in the valuation allowance based on evaluation of realization of net deferred tax assets. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Rent-A-Wreck of America, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: Rent-A-Wreck of America, Inc. Registrant By: /s/ Mitra Ghahramanlou Date: July 13, 2001 -------------------------- Mitra Ghahramanlou Chief Accounting Officer Pursuant to the requirements of 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 indicated: Signature and Title Date - ------------------- ---- /s/ Kenneth L. Blum, Sr. July 13, 2001 - ------------------------------- Kenneth L. Blum, Sr. Chairman of the Board and Director (Principal Executive Officer) /s/ Mitra Ghahramanlou July 13, 2001 - ------------------------------- Mitra Ghahramanlou Chief Accounting Officer (Principal Financial and Accounting Officer) /s/ Kenneth L. Blum, Jr. July 13, 2001 - ------------------------------- Kenneth L. Blum, Jr. President and Director /s/ William L. Richter July 13, 2001 - ------------------------------- William L. Richter Vice Chairman of the Board and Director /s/ Alan Aufzien July 13, 2001 - ------------------------------- Alan Aufzien, Director /s/ Thomas J. Volpe July 13, 2001 - ------------------------------- Thomas J. Volpe, Director 53 RENT-A-WRECK OF AMERICA, INC. EXHIBIT INDEX FORM 10-KSB FOR FISCAL YEAR ENDED MARCH 31, 2001 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. 9 Voting Trust Form 10-K for the fiscal Agreement year ended March 31, 1990 is incorporated by reference. 10.1 Option Plan Form 10-K for the fiscal year ended March 31, 1993 is incorporated by reference. 10.2 * Management Agreement - Form 8-K, dated June 30, K.A.B., Inc. Related 1993 and is incorporated party dated June 30, by reference. 1993 10.2.1 * 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 Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 10.3 * 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. 10.3.1 * 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 10.4 * 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 10.5 Warrant Agreement - Form 8-K, dated June 30, Richter & Co., Inc. 1993 and is incorporated by reference. 10.6 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. 10.7 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. 10.9 Rent-A-Wreck Franchise Filed herewith Agreement -standard form as of July 21, 2000 Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 10.9.1 Priceless Franchise Filed herewith Agreement standard form as of July 21, 2000. 10.10 Facultative Form 10-KSB for the Reinsurance Agreement fiscal year ended dated March 1, 1997 March 31, 1998. between National Union Fire Insurance Company of Pittsburg, PA. and Consolidated American Rental Insurance Company, Ltd. 10.11 Standby or Performance Form 10-KSB for the Letter of Credit fiscal year ended Application and March 31, 1998. Agreement dated June 3, 1997 between Rent-A-Wreck Of America, Inc. and The Chase Manhattan Bank 10.11.1 First Amendment dated Form 10-KSB for the June 1, 1998 to the fiscal year ended Standby or Performance March 31, 1998. Letter of Credit Application and Agreement dated June 3, 1997 between Rent-A-Wreck Of America, Inc. and The Chase Manhattan Bank 10.12 Borrowing Base Agreement, Form 10-KSB for the dated March 29, 2000, between fiscal year ended Bank of America and March 31, 2000. Rent-A-Wreck of America, Inc., Rent-A-Wreck One Way, Inc., Bundy American Corporation, Rent-A-Wreck Leasing, Inc. and PRICELESS Rent-A-Car, Inc. Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 10.13 Loan Agreement, dated March Form 10-KSB for the 29, 2000, between Bank of fiscal year ended America, N.A. and Rent-A-Wreck March 31, 2000. of America, Inc., Rent-A-Wreck One Way, Inc., Bundy American Corporation, Rent-A-Wreck Leasing, Inc., PRICELESS Rent-A-Car, Inc. and Consolidated American Rental Insurance Company 10.14 Promissory Note, dated Form 10-KSB for the March 29, 2000, between fiscal year ended Bank of America, N.A. and March 31, 2000. Rent-A-Wreck of America, Inc., Rent-A-Wreck One Way, Inc., Bundy American Corporation, Rent-A-Wreck Leasing, Inc., PRICELESS Rent-A-Car, Inc. and Consolidated American Rental Insurance Company 10.15 Security Agreement, dated Form 10-KSB for the March 29, 2000, between fiscal year ended Bank of America, N.A. March 31, 2000. and Bundy American Corporation 10.16 Security Agreement, dated Form 10-KSB for the March 29, 2000, between fiscal year ended Bank of America, N.A. March 31, 2000. and PRICELESS Rent-A-Car, Inc. 10.17 Security Agreement, Form 10-KSB for the dated March 29, 2000, fiscal year ended between Bank of America, March 31, 2000. N.A. and Rent-A-Wreck One Way, Inc. 10.18 Security Agreement, dated Form 10-KSB for the March 29, 2000, between fiscal year ended Bank of America, N.A. March 31, 2000. and Rent-A-Wreck Leasing, Inc. 10.19 Security Agreement, dated Form 10-KSB for the March 29, 2000, between fiscal year ended Bank of America, N.A. and March 31, 2000. Rent-A-Wreck of America, Inc. Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 10.20 Application and Agreement Form 10-KSB for the for Standby Letter of Credit fiscal year ended between Consolidated American March 31, 2000. Rental Insurance Company, Ltd. and National Union Fire Insurance Company 10.21 Financing Statement between Form 10-KSB for the Bank of America, N.A. and fiscal year ended Rent-A-Wreck of America, Inc. March 31, 2000. 10.22 Financing Statement between Form 10-KSB for the Bank of America, N.A. and fiscal year ended Rent-A-Wreck One Way, Inc. March 31, 2000. 10.23 Financing Statement between Form 10-KSB for the Bank of America, N.A. and fiscal year ended Bundy American Corporation March 31, 2000. 10.24 Financing Statement between Form 10-KSB for the Bank of America, N.A. and fiscal year ended Rent-A-Wreck Leasing, Inc. March 31, 2000. 10.25 Financing Statement between Form 10-KSB for the Bank of America, N.A. and fiscal year ended PRICELESS Rent-A-Car, Inc. March 31, 2000. 10.26 Borrowing Base Certificate Form 10-KSB for the fiscal year ended March 31, 2000. 10.27 Pledge and Assignment of Form 10-KSB for the Deposits between Bank of fiscal year ended America, N.A. and March 31, 2000. Consolidated American Rental Insurance Company, LTD 10.28 Irrevocable Line of Credit Form 10-KSB for the from Consolidated American fiscal year ended Rental Insurance Company, March 31, 2000. Ltd. to AIG Management, Inc. Incorporated Exhibit No. Exhibit by Reference from - ----------- ------- ----------------- 10.29 Bank of America Statement Form 10-KSB for the of Commissions, Fees and fiscal year ended Charges dated 03/30/00 March 31, 2000. to Consolidated American Rental Insurance Company, Ltd. 10.30 Bank of America Irrevocable Form 10-KSB for the Standby Letter of Credit fiscal year ended to Consolidated American March 31, 2000. Rental Insurance Company, Ltd. 10.31 Certificate of Corporate Form 10-KSB for the Resolutions of Rent-A-Wreck fiscal year ended of America, Inc. March 31, 2000. 10.32 Certificate of Corporate Form 10-KSB for the Resolutions of Rent-Wreck fiscal year ended Leasing, Inc. March 31, 2000. 10.33 Certificate of Corporate Form 10-KSB for the Resolutions of Bundy fiscal year ended American Corporation, Inc. March 31, 2000. 10.34 Certificate of Corporate Form 10-KSB for the Resolutions of Rent-A-Wreck fiscal year ended One Way, Inc. March 31, 2000. 10.35 Certificate of Corporate Form 10-KSB for the Resolutions of PRICELESS fiscal year ended Rent-A-Car, Inc. March 31, 2000. 10.36 Certificate of Corporate Form 10-KSB for the Resolutions of Consolidated fiscal year ended American Rental Insurance March 31, 2000. Company, LTD 10.37 Lease Agreement, dated Form 10-KSB for the June 3, 1999, between KA fiscal year ended Real Estate Associates, LLC March 31, 2000. and Rent-A-Wreck, Inc. with Confirmatory Addendum to Lease, dated September 16, 1999, between KA Real Estate Associates, LLC and Rent-A-Wreck of America, Inc. 10.38 Financial Advising Agreement, Form 10-KSB for the dated November 6, 1999, between fiscal year ended Richter Investment Corp. and March 31, 2000. Rent-A-Wreck of America, Inc. 21 List of Subsidiaries Filed herewith. - ---------- * Management contract or compensatory plan or arrangement. EX-10.9 2 ex-10_9.txt FRANCHISE AGREEMENT Exhibit 10.9 RENT-A-WRECK FRANCHISE AGREEMENT THIS AGREEMENT is made and entered into this ____ day of ____________, 20__ by and between BUNDY AMERICAN CORPORATION, a Maryland corporation, with its principal office at 10324 South Dolfield Road, Owings Mills, Maryland 21117 ("Company") and __________________________________________________________ ____________________________________________________________________________ whose principal address is ____________________________________________________________________________ __________________________________________________ ("FRANCHISEE"). 1. THE FRANCHISE. A. PREAMBLES. COMPANY has developed a system for the operation of a vehicle rental and leasing business under the name "RENT-A-WRECK". COMPANY uses and licenses the trade and service mark "RENT-A-WRECK" and related logo, and other marks which COMPANY has developed and may develop in the future (the "Marks"). FRANCHISEE has applied for a franchise to own and operate a RENT-A-WRECK business and such application has been approved by COMPANY in reliance upon all of the representations made therein. COMPANY expressly disclaims the making of, and FRANCHISEE acknowledges that he has not received or relied upon, any warranty or guaranty, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement. FRANCHISEE acknowledges that he has read this Agreement and COMPANY's Franchise Offering Circular and that he has no knowledge of any representations by COMPANY, or its officers, directors, shareholders, employees or agents that are contrary to the statements made in COMPANY's Franchise Offering Circular or to the terms herein. B. GRANT. Subject to the provisions of this Agreement, COMPANY hereby grants to FRANCHISEE a franchise (the "Franchise") to operate a RENT-A-WRECK business (the "BUSINESS") offering vehicles for rental and utilizing COMPANY's formats, methods, standards, operating procedures and the Marks at (and only at) the premises (the "Premises") identified in Section 1 of Exhibit A, which is attached hereto and made a part hereof by this reference, for a term of ten (10) years commencing on the date of execution hereof. Termination or expiration of this Agreement constitutes termination or expiration of the Franchise. Provided that FRANCHISEE is in compliance with this Agreement, COMPANY shall not operate or grant a franchise for the operation of another RENT-A-WRECK Business within FRANCHISEE's primary service area (the "Primary Service Area"), as described in Section 2 of Exhibit A. However, COMPANY has the right to operate, or license others to operate, vehicle sales, rental or leasing businesses within FRANCHISEE's Primary Service Area under other trade names, trademarks or service marks. COMPANY has the right to operate, or license others to operate, RENT-A-WRECK businesses anywhere outside the Primary Service Area regardless of proximity to the boundaries of the Primary Service Area. FRANCHISEE may not regularly deliver vehicles to, transport customers to or pick-up customers at locations within the primary service area of another RENT-A-WRECK business during the term of this Agreement. FRANCHISEE acknowledges that COMPANY may enter into national account contracts and, subject to FRANCHISEE's qualification for participation in such accounts, FRANCHISSE will be offered the opportunity to service such accounts. If FRANCHISEE is not qualified to participate, COMPANY shall have the right to use other sources to service such accounts, wherever located. c. RENEWAL. FRANCHISEE shall have the right to obtain a renewal franchise ("Renewal Franchise"), and successive renewal franchises thereafter, each for a term of five (5) years, at FRANCHISEE's sole option, if FRANCHISEE is in complete compliance with the terms and conditions of the Franchise Agreement, notifies COMPANY in writing of his desire to obtain a Renewal Franchise no later than ninety (90) days but no earlier than one hundred eighty (180) days prior to the expiration of this Agreement, releases COMPANY of any and all possible claims related to this Agreement and/or FRANCHISEE's relationship with COMPANY, terminates this Agreement and executes COMPANY's then-current form of franchise agreement containing the then-current terms, conditions, fees and contributions for the operation of the BUSINESS modified to reflect that FRANCHISEE is receiving a Renewal Franchise and such ancillary agreements as are then customarily used by COMPANY in granting renewal franchises. 2. DEVELOPMENT AND OPENING OF THE BUSINESS. A. LOCATION OF THE BUSINESS PREMISES. FRANCHISEE may operate the BUSINESS only at the Premises or at a substitute location and premises hereafter approved by COMPANY in writing. The Premises, or substitute location hereafter approved by COMPANY, must be located entirely within the Primary Service Area. On or before the execution of this Agreement, FRANCHISEE shall provide at COMPANY's request: (1) evidence of FRANCHISEE's ownership of premises for the BUSINESS; or (2) a copy of a lease for the premises of the BUSINESS on terms satisfactory to COMPANY and which shall be executed prior to the opening of the BUSINESS. B. DEVELOPMENT AND OPENING OF THE BUSINESS. FRANCHISEE agrees to develop the BUSINESS and have the BUSINESS open and operating within ninety (90) days of the date of this Agreement. C. SIGNS, EQUIPMENT AND FORMS. FRANCHISEE must prominently display on or near the Premises, a sign that COMPANY has approved as meeting its specifications and standards for design and appearance. FRANCHISEE also agrees to acquire: (1) a fax machine capable of receiving transmissions 24 hours a day; and (2) at such time as FRANCHISEE has a fleet of ten (10) or more Rental Vehicles, a computer system meeting COMPANY's specifications and standards. FRANCHISEE shall use only Rental Agreements purchased from COMPANY, or use Rental Agreement forms generated by FRANCHISEE's computer in a format, and containing only language, approved in a prior writing by COMPANY. As used in this Agreement, the phrase "Rental Agreement" means a sequentially-numbered retail contract form used for the renting of vehicles that is printed by COMPANY, or that is approved in a prior writing by COMPANY for printing by the FRANCHISEE's computer using computer software applications approved by COMPANY. 2 3. FLEET REQUIREMENTS. A. DEFINITION OF "RENTAL VEHICLE". As used in this Agreement, the term "Rental Vehicle" shall mean any vehicle directly or indirectly owned, used or kept for rental by FRANCHISEE in the Primary Service Area, whether or not used in the BUSINESS. Rental Vehicle includes but is not limited to vehicles rented, leased or sold on a rent to own basis. B. DEFINITION OF "AGREEMENT YEAR". As used in this Agreement, the tern "Agreement Year" shall mean a one-year period of time commencing on an anniversary date of the execution of this Agreement and ending on the day before the next anniversary date. The first Agreement Year commences on the date of execution hereof. C. THE FLEET. FRANCHISEE agrees to have the minimum number of Rental Vehicles available for lease or rental in the Rental Vehicle fleet of the BUSINESS (the "Fleet") as specified in Section 3 of Exhibit A. D. COMPANY VEHICLES. COMPANY may place Rental Vehicles at the BUSINESS and FRANCHISEE must make such vehicles available to customers. COMPANY will pay the costs of maintenance and insurance on such vehicles. COMPANY will pay FRANCHISEE a commission on all rentals of these vehicles. Such vehicles will not be subject to Monthly Fees (defined below) or advertising contributions. 4. FEES. A. INITIAL FRANCHISE FEE. FRANCHISEE agrees to pay to COMPANY a nonrecurring initial franchise fee in the amount specified in Section 4 of Exhibit A which shall be payable to COMPANY upon the execution of this Agreement. The initial franchise fee shall be fully earned by COMPANY and non-refundable. B. CONTINUING FRANCHISE FEE. 1. Monthly Fee. FRANCHISEE agrees to pay to COMPANY a monthly continuing franchise fee (the "Monthly Fee") in the amount of thirty dollars ($30.00) for each Rental Vehicle in the Fleet. The Monthly Fee must be received by COMPANY on or before the tenth (10th) day of each month for the total number of Rental Vehicles insured in the Fleet on the last day of the preceding calendar month. In order to verify the number of Rental Vehicles in FRANCHISEE's Fleet each month, FRANCHISEE will submit to COMPANY (along with the Monthly Fee) a copy of each of FRANCHISEE's monthly insurance statements for the preceding month showing the number of Rental Vehicles. The amount of Monthly fees paid by FRANCHISEE shall be subject to the minimum fee schedule provided in Section 4B(2) of this Agreement. 2. Minimum Fee. The minimum annual total of Monthly Fees paid by FRANCHISEE (the "Minimum Fee") shall be as specified in Section 5 of Exhibit A. If in any Agreement Year, the total Monthly Fees paid by FRANCHISEE in such Agreement Year are less than the Minimum Fee for such Agreement Year provided herein, FRANCHISEE agrees to pay to COMPANY an amount equal to the difference between the Monthly Fees paid and the Minimum Fee for such Agreement Year. Such 3 amount shall be paid by FRANCHISEE to COMPANY within thirty (30) days after the last day of such Agreement Year. 3. Monthly Fee and Minimum Fee Increases. COMPANY shall have the right to increase the Monthly Fee once per Agreement Year. The amount of such increase shall not exceed ten percent (10%) of the Monthly Fee charged as of the date of such increase. Additionally, the maximum Monthly Fee COMPANY will charge during the initial term of the Agreement is Forty-Five Dollars ($45) per Rental Vehicle per month. COMPANY shall have the right to increase the Minimum Fee once per Agreement year. The increase in Minimum Fee shall not exceed ten percent (10%) of the Minimum Fee specified in the Minimum Fee schedule in Exhibit A for that Agreement Year. For each subsequent Agreement Year, the increase in the Minimum Fee shall not exceed ten percent (10%) of the Minimum Fee for the preceding Agreement Year. C. LATE PAYMENT FEES AND INTEREST ON LATE PAYMENTS. Monthly Fees owed by FRANCHISEE may be assessed a late payment fee on the first business day after their due date, which late payment shall be immediately due and payable and equal to five percent (5%) of the amount owed. Additionally, all amounts owed COMPANY shall bear interest after their due date accruing at the highest applicable rate for open account business credit, not to exceed two percent (2%) per month. FRANCHISEE acknowledges that this Section 4C shall not constitute COMPANY'S agreement to accept such payments after same are due or a commitment by COMPANY to extend credit to the BUSINESS and that FRANCHISEE's failure to pay all amounts when due shall constitute grounds for termination of the Agreement. D. APPLICATION OF PAYMENTS. Notwithstanding any designation by FRANCHISEE, COMPANY shall have sole discretion to apply any payments received from FRANCHISEE or any indebtedness of COMPANY to FRANCHISEE, to any past due indebtedness of FRANCHISEE for Monthly Fees, contributions to the Funds (as defined below in Section 7A), purchases from COMPANY or its Affiliates, late payment fees, interest, or any other indebtedness of FRANCHISEE to COMPANY or its Affiliates. 5. TRAINING AND GUIDANCE. A. TRAINING. COMPANY shall furnish to FRANCHISEE a training program for the operation of the BUSINESS as designated by COMPANY prior to the opening of the BUSINESS. The training program shall be furnished at COMPANY's principal office and/or at such other location designated by COMPANY. FRANCHISEE may attend additional initial training at a location designated by COMPANY which is within driving distance of the Premises of the BUSINESS. FRANCHISEE shall be responsible for any travel and living expenses which he or his employees incur in connection with such training. FRANCHISEE and FRANCHISEE's general manager (the person(s) identified in Section 6D) shall be required to complete the training program to the satisfaction of COMPANY. B. HIRING AND TRAINING OF EMPLOYEES BY FRANCHISEE. FRANCHISEE shall hire all employees of the BUSINESS, be exclusively responsible for the terms of their employment and compensation and for the proper training of such employees in the operation of the BUSINESS, provided 4 that supervisory employees hired by FRANCHISEE after the opening of the BUSINESS may, subject to reasonable limitations prescribed by COMPANY and at FRANCHISEE's expense for travel and living costs, enroll in training programs conducted by COMPANY. C. GUIDANCE. COMPANY shall furnish to FRANCHISEE guidance in connection with the operation of the BUSINESS. Such guidance shall be furnished in the form of COMPANY's operating manual (the "Operating Manual"), bulletins, other written materials, group meetings and consultations by telephone and/or consultants at the offices of COMPANY or at the BUSINESS. 6. BUSINESS IMAGE AND OPERATING STANDARDS. A. BUSINESS IMAGE, OPERATING STANDARDS AND COMPANY PROGRAMS. FRANCHISEE agrees to maintain the appearance of the BUSINESS consistent with the image of a BUSINESS as a clean, attractive and efficiently operated business for the rental and lease of vehicles. FRANCHISEE further agrees to conspicuously identify himself at the Premises and in all dealings with customers, suppliers, public officials and others as the owner of the BUSINESS under a franchise from COMPANY. FRANCHISEE agrees not to use this Agreement or the Franchise as collateral to secure any personal or corporate obligation. FRANCHISEE, if requested by COMPANY, agrees to acquire, at FRANCHISEE's sole expense, computer hardware and software programs meeting COMPANY's specifications to assist in the operation of the BUSINESS. B. UNIFORM IMAGE AND SPECIFICATIONS, STANDARDS AND PROCEDURES. The presentation of a uniform image to the public is an essential element of a successful franchise system and FRANCHISEE agrees to operate the BUSINESS in accordance with the specifications, standards and procedures prescribed by COMPANY, including without limitation: (1)mechanical condition, running order, safety, repair, age and appearance of Rental Vehicles; (2)the safety, maintenance and appearance of the Premises; (3)appearance and training of employees; (4)use of standard rental and leasing agreements and forms; (5)minimum standards with respect to customers and hours of operation of the BUSINESS; (6)compliance with and participation in COMPANY's programs; (7)compliance with all reasonable insurance policy requirements of COMPANY; (8)establishment of minimum daily business hours for the BUSINESS; (9)proper display of the Marks; (10)quality business and advertising practices and controls: and (11)obtain an automobile dealer's license, where possible. Mandatory specifications, standards and operating procedures prescribed from time to time by COMPANY in the Operating Manual for the BUSINESSES or communicated to FRANCHISEE in writing, shall constitute provisions of this Agreement as if set forth herein. All references herein to the Agreement shall include all such mandatory specifications, standards and operating procedures. COMPANY will loan to FRANCHISEE during the term of the Franchise one copy of the Operating Manual. COMPANY shall have the right to add to and otherwise modify the Operating Manual from time to time to reflect changes in the specifications, standards of operating procedures for a RENT-A-WRECK business. FRANCHISEE shall keep his copy of the Operating Manual current. The master copy 5 of the Operating Manual shall be maintained by COMPANY at its principal office and shall be controlling in the event of a dispute. C. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES. FRANCHISEE shall secure and maintain in force all required licenses, permits and certificates relating to the operation of the BUSINESS and shall operate the BUSINESS in full compliance with all applicable laws, ordinances and regulations. The BUSINESS shall in all dealings with its customers, suppliers, COMPANY and the public adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct. FRANCHISEE agrees to refrain from any business or advertising practice which may be injurious to COMPANY and the goodwill associated with the Marks and other RENT-A-WRECK businesses. FRANCHISEE shall notify COMPANY in writing within five (5) days of the commencement of any action, suit or proceeding which may adversely affect the operation or financial condition of FRANCHISEE or the BUSINESS. D. MANAGEMENT OF THE BUSINESS. The BUSINESS shall, at all times during the term of this Agreement, be under the direct, on-premises supervision of a trained and competent general manager who has completed COMPANY's training program or equivalent training to COMPANY's satisfaction, and who is employed on a full-time basis to work for and at the BUSINESS. The person(s) specified in Section 6 of Exhibit A will initially exercise the functions of general manager with respect to all elements of the BUSINESS. FRANCHISEE shall keep COMPANY informed at all times of the identity of the general manager of the BUSINESS. E. INSURANCE. FRANCHISEE shall maintain reasonable coverage for the rental or lease of any vehicle owned, rented or leased by FRANCHISEE or the BUSINESS and any other vehicle which is rented, leased, or sold on a rent-to-own basis, or is available for rental, lease or sale to customers of FRANCHISEE. Such insurance shall provide coverage against bodily and personal injury, death and property damage caused by or occurring in conjunction with the rental or lease of vehicles, the operation of the BUSINESS or otherwise in conjunction with the conduct of business by FRANCHISEE pursuant to the Franchise with such minimum limits as COMPANY specifies in writing from time to time. Such insurance shall not be a claims-made policy, but must be written on an occurrence form. Such insurance coverage shall be maintained under one or more policies of insurance issued by carriers rated "A" or better by Alfred M. Best & Company, Inc., unless otherwise approved by writing by Company. COMPANY may designate one or more suppliers of rental vehicle liability insurance, and the designated supplier may be COMPANY or an affiliate, and FRANCHISEE must purchase such coverage from the designated supplier. All liability insurance policies required hereunder shall name COMPANY (and its officers, directors and employees) as an additional insured, contain a waiver by the insurance carrier of all subrogation rights against COMPANY and shall provide that COMPANY receive thirty (30) days prior written notice of termination, expiration or cancellation or modification of any such policy. FRANCHISEE shall furnish to COMPANY annually a copy of the certificate of or other evidence of the renewal or extension of each such insurance policy. COMPANY may reasonably increase the minimum protection requirement as of the renewal date of any policy, and reasonably require different or additional kinds of insurance at any time, including excess liability (umbrella) insurance, which COMPANY deems, in COMPANY's sole discretion, to be necessary or advantageous to FRANCHISEE or COMPANY's system of franchises. FRANCHISEE shall at all times during the term of the Franchise maintain in force at his sole expense comprehensive general liability insurance coverage (including, but not limited to, coverage for personal injury, property damage and product and motor vehicle liability) against claims arising from the operation of the Business. FRANCHISEE appoints COMPANY its attorney-in-fact to direct any and all of FRANCHISEE's insurers to provide COMPANY, upon COMPANY'S request, with information showing the number of vehicles FRANCHISEE has insured at any time. 6 F. COMPANY PROGRAMS. FRANCHISEE shall subscribe to, participate in and comply with any of the programs, promotions, campaigns or activities which COMPANY enters into, engages in or reasonably prescribes (e.g., credit card programs, telephone service programs or advertising programs). FRANCHISEE shall supervise and service such programs, promotions and activities pursuant to the terms thereof. FRANCHISEE shall contribute to the expenses thereof, if any, on the same pro rate basis as other franchisees. FRANCHISEE shall encourage and solicit vehicle rental customers to patronize other RENT-A-WRECK business, and will exclusively refer, commission free, all vehicle reservations to other franchisees or COMPANY rental locations, when there is such a franchisee or COMPANY rental location in the area concerned. FRANCHISEE also shall provide a 24-hour emergency road service. If COMPANY offers a national program, FRANCHISEE may be required to participate in such program. FRANCHISEE shall provide COMPANY with information about FRANCHISEE's emergency service providers and shall keep such information current so that COMPANY can make arrangements when and if necessary. FRANCHISEE is authorized to expend up to seventy dollars ($70) on behalf of another franchisee without his authorization. Any amount in excess of seventy dollars ($70) shall require the oral authorization from the other franchisee. FRANCHISEE agrees to bill the franchisee from whom such car was rented, only for the actual out-of-pocket cost of such servicing, and to promptly pay other franchisees who assist one of its customers. G. CUSTOMER COMPLAINTS. FRANCHISEE shall make every attempt to resolve disputes with its customers in a fair and even-handed manner. Customer complaints originating with COMPANY shall be referred first to FRANCHISEE for resolution. COMPANY has the right to intervene in disputes that cannot be resolved by FRANCHISEE, and to resolve such disputes on terms it deems fair and reasonable in its sole discretion. Such resolutions may result in payments to customers, for which FRANCHISEE shall be solely responsible. COMPANY has the right to make such payments to customers on FRANCHISEE's behalf, in which cases, FRANCHISEE shall pay said amounts to COMPANY on demand. 7. ADVERTISING AND PROMOTION. A. BY COMPANY. Recognizing the value of uniform advertising and promotion to the goodwill and public image of RENT-A-WRECK businesses of COMPANY, COMPANY agrees to maintain and administer an advertising fund (the "National Fund") for the preparation of advertising materials and such advertising programs as COMPANY may deem necessary or appropriate. FRANCHISEE shall contribute to the National Fund seven dollars ($7) for each Rental Vehicle in the Fleet. Such contribution is due and payable by the tenth (10th) day of each month on the total number of Rental Vehicles in the Fleet on the last day of the preceding calendar month. In order to verify the number of Rental Vehicles in the Fleet each month, FRANCHISEE will submit to COMPANY (along with the advertising contribution) a copy of FRANCHISEE's monthly insurance statements for the preceding month showing the number of Rental Vehicles. Additionally, FRANCHISEE agrees to contribute, as specified from time to time by COMPANY, to a regional advertising fund (the "Regional Fund"); provided, however, that such contribution may not exceed FRANCHISEE's payment to the National Fund. If FRANCHISEE's advertising contributions are not current, then FRANCHISEE may be excluded from participating in any program paid for by the National Fund. 7 FRANCHISEE agrees that the National and Regional Funds (the "Funds") may be used to meet any and all costs of maintaining , administering, directing and preparing national, regional or local advertising, sales promotion and public relations activities, including, without limitation, the costs of preparing and conducting television, radio, magazine, billboard, newspaper and other media programs and activities, and employing advertising agencies. COMPANY may spend in any fiscal year an amount greater or less than the aggregate contributions of RENT-A-WRECK businesses to the Funds in that year and COMPANY may make loans to the Funds bearing reasonable interest to cover any deficits of the Funds and cause the Funds to invest any surplus for future use by the Funds. FRANCHISEE shall have no right, claim or interest of any kind in or to any of the contributions paid by the FRANCHISEE, or any other entity, or to any allocation of or use of the National Fund or Regional Fund, The Funds shall be accounted for separately from the other funds of COMPANY and shall not be used to defray any of COMPANY's general operating expenses not associated with or attributable to the activities of the Funds. A report of the operations of the Funs shall be prepared annually by COMPANY and shall be made available to FRANCHISEE upon request. Franchisee's contribution to either or both the Funds may be increased if: (i)the majority of the duly elected or appointed members of COMPANY's Franchisee Advisory Council (the "Advisory Council" recommends an increase; and (ii)COMPANY, in its sole discretion, approves the Advisory Council's recommendation; provided, however, that such increase shall only occur once during any Agreement Year; and, provided further that the amount of such increase will not exceed ten percent (10%) of the contribution charged as of the date of such increase. If COMPANY's Franchise Advisory Council has been disbanded or terminated, COMPANY may in its sole discretion increase Franchisee's contributions to the Funds, subject to the above restrictions, provided that COMPANY increases the contributions of all other franchisees in cases where COMPANY has the contractual right to do so. FRANCHISEE understands and acknowledges that the Funds are intended to maximize general public recognition and patronage of the Marks and the entire system for the benefit of all RENT-A-WRECK businesses and that COMPANY undertakes no obligation in administering the Funds to ensure that expenditures which are proportionate or equivalent to FRANCHISEE's contributions are made for the market area of the BUSINESS or that any RENT-A-WRECK businesses benefit directly or pro-rata from the placement of advertising. Except as expressly provided in this Section, COMPANY assumes no direct or indirect liability or obligation to FRANCHISEE with respect to the maintenance, direction or administration of the Funds. FRANCHISEE acknowledges and agrees that COMPANY has no fiduciary obligation to FRANCHISEE or any other RENT-A-WRECK business in connection with the collection, control or administration of monies paid to the Fund. B. BY FRANCHISEE. FRANCHISEE agrees to list and advertise the BUSINESS in conformance with the requirements specified in COMPANY's Operating Manual. FRANCHISEE shall not advertise in any telephone directory or other medium that is circulated wholly outside the Primary Service Area. If FRANCHISEE advertises in a telephone directory in which advertisements by another or other Rent-A-Wreck franchisee(s) appear, all franchisees who advertise in that directory shall share a single display advertisement. If the franchisees cannot agree on the size or content or cost-sharing of the joint advertisement, COMPANY shall, in its sole discretion, 8 determine the size, content, cost sharing arrangements and all other aspects of the joint advertisement; and that decision shall be binding on FRANCHISEE. Additionally, FRANCHISEE shall maintain at least two (2) telephone numbers, one of which shall be a local number and the other a toll free number. The numbers shall be listed and identified exclusively with the BUSINESS and shall be separate and distinct from all other telephone numbers maintained for or by the FRANCHISEE. FRANCHISEE shall register all of its telephone numbers used in connection with the BUSINESS with COMPANY within five (5) days of first use, to provide updates if any changes to such numbers occur and execute COMPANY's form of Assignment of Telephone Numbers and Listings which is attached to this Agreement as Exhibit B. 8. MARKS. A. OWNERSHIP AND GOODWILL OF MARKS. FRANCHISEE acknowledges that COMPANY is the owner of the Marks licensed to FRANCHISEE by this Agreement, that FRANCHISEE's right to use the Marks is derived solely from this Agreement and is limited to the conduct of business by FRANCHISEE pursuant to and in compliance with this Agreement and all applicable specifications, standards and operating procedures prescribed by COMPANY from time to time during the term of the FRANCHISEE. Any unauthorized use of the Marks by FRANCHISEE shall constitute an infringement of the rights of COMPANY in and to the Marks. FRANCHISEE agrees that all usage of the Marks by the FRANCHISEE and any goodwill established thereby shall inure to the exclusive benefit of COMPANY and FRANCHISEE acknowledges that this Agreement does not confer any goodwill or other interests in the Marks upon FRANCHISEE. B. LIMITATIONS ON FRANCHISEE'S USE OF MARKS. FRANCHISEE agrees to use the Marks as the sole identification of the BUSINESS, provided that FRANCHISEE shall identify himself as the independent owner thereof in the manner prescribed by COMPANY. FRANCHISEE shall not use any Mark or any corporate or business name of COMPANY, (i)as part of any corporate or trade name, (ii)with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to FRANCHISEE hereunder), (iii)in any modified form, (iv)as part of any domain name, website, home page, electronic address, or other interactive site maintained on the internet, the world wide web, or any other similar proprietary or common carrier electronic delivery system, or (v)in any manner not expressly authorized in writing by COMPANY. FRANCHISEE agrees to prominently display the Marks on or in connection with all advertising, rental agreements, stationary, forms and any other materials designated by COMPANY, and in the manner prescribed by COMPANY, to give such notices of trade and service mark registrations and copyrights as COMPANY specifies and to obtain such fictitious or assumed name registrations as may be required under applicable law. C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS. FRANCHISEE shall immediately notify COMPANY of any apparent infringement of or challenge to FRANCHISEE'S use of any Mark. COMPANY shall have sole discretion to take such action as it deems appropriate and the right to exclusively control any litigation or proceeding arising out of any such infringement or 9 challenge and FRANCHISEE agrees to render such assistance in connection therewith as COMPANY deems necessary or advisable. D. INDEMNIFICATION OF FRANCHISEE. COMPANY agrees to indemnify FRANCHISEE against and to reimburse FRANCHISEE for all damages for which he is held liable in any proceeding arising out of his authorized use of any Mark pursuant to and in compliance with this Agreement and for all costs reasonably incurred by FRANCHISEE in such proceeding in which FRANCHISEE is named as a party, provided that FRANCHISEE has timely notified COMPANY of such claim or proceeding and has otherwise complied with this Agreement. If it becomes advisable at any time in COMPANY'S sole discretion for COMPANY and/or FRANCHISEE to modify or discontinue use of any Mark, and/or use one or more additional or substitute trade or service marks, FRANCHISEE agrees to comply with COMPANY's direction within a reasonable time after notice thereof. COMPANY will pay for FRANCHISEE's out of pocket expenses incurred in complying with such direction. 9. KNOW-HOW. COMPANY possesses proprietary know-how comprising methods, techniques, specifications, procedures, information, systems and knowledge of and experience in the development and operation of RENT-A-WRECK businesses (the "Know-How"). COMPANY will disclose the Know-How to FRANCHISEE in the training program, the Operating Manual and in guidance furnished to FRANCHISEE during the term of the Franchise. FRANCHISEE acknowledges that the Know-How is proprietary and a trade secret of COMPANY and disclosed to FRANCHISEE solely for use by FRANCHISEE in the operation of the BUSINESS during the term of the Franchise. FRANCHISEE acknowledges that it would not be possible for COMPANY to protect its trade secrets against unauthorized use or disclosure if FRANCHISEE holds an interest in a business similar to the BUSINESS. FRANCHISEE therefore agrees that all employees of the BUSINESS shall execute COMPANY's then current form of confidentiality and non-competition agreement and FRANCHISEE, FRANCHISEE's general manager and FRANCHISEE's immediate family members and owners will not during the term of the Franchise have any interest as an owner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business. As used in this Agreement, "Competitive Business" means any business or enterprise other than a RENT-A-WRECK or PRICELE$$ business that rents or leases automobiles, vans or trucks, or any other vehicles. 10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION. The parties agree that this Agreement does not create a fiduciary relationship between them, that the parties are and shall be independent contractors and that nothing in this Agreement is intended to make either party a general or special agent, legal representative, subsidiary, joint-venturer, partner, employee or servant of the other for any purpose. COMPANY shall not be obligated for any damages to any person or property directly or indirectly arising out of the operation of the BUSINESS whether caused by FRANCHISEE's negligent or willful action or failure to act. COMPANY shall have no liability for any sales, use, excise, gross receipts, income, property or other taxes, whether levied upon FRANCHISEE, the BUSINESS or its assets, or upon COMPANY, in connection with the business conducted by FRANCHISEE, or any fees, contributions to other payments made by FRANCHISEE to COMPANY. 10 FRANCHISEE shall indemnify, defend and hold COMPANY, its subsidiaries, affiliates, stockholders, directors, officers, employees, agents, successors and assignees harmless against any liability for any claims, actual and consequential damages, taxes, attorneys' fees and costs incurred in defending any claim against any of them, directly of indirectly arising out of the operation of the BUSINESS. The indemnities and assumptions of liabilities and obligations herein shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement. 11. RECORDS AND REPORTS. A. RECORDS. During the term of the Franchise, FRANCHISEE agrees, at his expense, to use the rental agreement numbering system assigned to him by COMPANY and the then current standard rental agreement specified by COMPANY, and to maintain at FRANCHISEE's principal office and preserve for three (3) years from the date of their preparation any and all rental agreements, records of Rental Vehicles and such other documents, supporting records and forms designated by COMPANY. COMPANY may require that specified information be compiled by FRANCHISEE in a computerized database. FRANCHISEE shall provide COMPANY on or before the tenth (10th) day of each month with copies of each rental agreement entered into during the preceding calendar month. FRANCHISEE shall pay COMPANY a one hundred dollar ($100.00) fee for each rental agreement which is missing or which FRANCHISEE fails to provide to COMPANY as required herein. B. REPORTS. FRANCHISEE shall furnish COMPANY on the tenth (10th) day of each month, in the form prescribed by COMPANY from time to time, a report signed and verified by FRANCHISEE (or, if a corporation or partnership, an officer or managing partner of FRANCHISEE), if such statements are prepared by FRANCHISEE's internal staff, or by a Certified Public Accountant, if such statements are prepared by a Certified Public Accountant, accurately reflecting each Rental Vehicle in the Fleet, the number of the rental agreements used, total Gross Revenues for the preceding month, weekly and/or monthly summaries of daily activity reports and such other data, information and supporting records as COMPANY from time to time requires. FRANCHISEE shall also furnish COMPANY semi-annual reports, in such form as specified by COMPANY, containing information including but not limited to that supplied in FRANCHISEE's monthly reports during the preceding six (6) months, and such other data, information and records as COMPANY may from time to time require. COMPANY may require that FRANCHISEE submit reports via e-mail or other computerized form and/or that COMPANY have access to FRANCHISEE's computer system to obtain such reportable information. C. STANDARD CHART OF ACCOUNTS. FRANCHISEE shall establish a bookkeeping and accounting system which utilizes, without violation, COMPANY's then current standard chart of accounts. All bookkeeping and accounting records maintained by FRANCHISEE, all financial statements prepared by or for FRANCHISEE and all reports submitted by FRANCHISEE to COMPANY shall conform to COMPANY's then current standard chart of accounts as described in the Operating Manual. All such bookkeeping and accounting records and all financial statements, for such periods as may from time to time be prescribed in the Operating Manual, shall be maintained available for inspection by COMPANY during normal business hours. 11 12. COMPANY'S RIGHT TO INSPECT AND AUDIT THE BUSINESS. To determine whether FRANCHISEE is complying with this Agreement, COMPANY shall have the right at any time during business hours, and without prior notice to FRANCHISEE, to inspect the BUSINESS, the Rental Vehicles in the Fleet, all records of the BUSINESS, whether hand-written, printed, computer-generated or electronic; and, FRANCHISEE shall allow COMPANY full and complete access to all computers and computer systems used in the BUSINESS. FRANCHISEE also agrees to allow COMPANY access to the federal, state and local income tax returns of FRANCHISEE and FRANCHISEE hereby waives any privilege pertaining thereto. FRANCHISEE shall fully cooperate with representatives of COMPANY making any such inspection and/or audit and shall permit representatives of COMPANY to take photographs, movies or video-tapes of the BUSINESS and to interview the employees of the BUSINESS. COMPANY shall bear the cost of all such inspection and audits, provided that if any such inspection or audit discloses that FRANCHISEE has failed to comply with any provision of this Agreement or the Operating Manual in a manner that would permit COMPANY to terminate this Agreement pursuant to Section 15 of this Agreement, in addition to al other remedies and rights available to COMPANY, the cost of such inspection and/or audit, including normal daily compensation, traveling expenses, room and board (not to exceed one thousand dollars ($1,000.00), shall be borne by FRANCHISEE. COMPANY's rights under this Section 12 shall apply only to the operation of the BUSINESS. 13. ASSIGNMENT. A. BY COMPANY. This Agreement and the Franchise is fully assignable by COMPANY and shall inure to the benefit of any assignee(s) or other legal successor(s) to the interest of COMPANY herein. B. FRANCHISEE MAY ASSIGN WITH THE APPROVAL OF COMPANY. FRANCHISEE understands and acknowledges that the right and duties created by this Agreement are personal to FRANCHISEE or to its owner and that COMPANY has granted the Franchise in reliance upon the individual or collective character, skill, aptitude, attitude, business ability and financial capacity of FRANCHISEE or its owner. Therefore, the Franchise, the BUSINESS (or any interest therein) or any part or all of the ownership of FRANCHISEE may be assigned, sold, subdivided or otherwise transferred by FRANCHISEE or its owner only upon prior written approval of COMPANY, and any such assignment or transfer without such approval shall constitute a breach hereof and convey no rights to or interests in the Franchise of the BUSINESS. C. CONDITIONS FOR APPROVAL OF ASSIGNMENT. If FRANCHISEE and its owners are in full compliance with this Agreement, COMPANY shall not unreasonably withhold its approval of an assignment, provided that the proposed assignee(s) are, in the opinion of COMPANY, individuals of good moral character who have sufficient business experience, aptitude and financial resources to own and operate the BUSINESS and otherwise meet COMPANY's then applicable standards for franchisees, and further provided that the 12 following conditions are met prior to, or concurrently with, the effective date of the assignment: 1. all obligations of FRANCHISEE and its owner incurred in connection with this Agreement have been assumed by the assignee; 2. FRANCHISEE shall have paid such continuing franchise and service fees, advertising contributions and any other amounts owed to COMPANY or its affiliates, or to any other person or entity to which non-payment will affect the ongoing operations of the BUSINESS, which are then due and unpaid; 3. the assignee agrees to complete the training program required of new franchisees; 4. the assignee and its owner shall have executed and agreed to be bound by COMPANY's then current form of franchise agreement and such ancillary agreements as are then customarily used by COMPANY in the grant of franchises for RENT-A-WRECK businesses of COMPANY; 5. FRANCHISEE or the assignee shall have paid a reasonable transfer fee to COMPANY in an amount equal to the transfer fee then being charged by COMPANY; 6. COMPANY shall have approved the material terms and conditions of such assignment; and 7. FRANCHISEE and its owner shall have executed a release of COMPANY of all possible liability to FRANCHISEE and its owner and a non-competition covenant in favor of COMPANY and the assignee, agreeing that for a period of not less than two (2) years, commencing on the effective date of the assignment, they will not have any interest as an owner, investor, partner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business (as defined in Section 9) located within the Primary Service Area or within five miles of the border of the Primary Service Area. D. DEATH OR DISABILITY OF FRANCHISEE. Upon the death or permanent disability of FRANCHISEE or a principal owner of FRANCHISEE, the executor, administrator, conservator or other personal representative of such person shall, within six (6) months from the date of death or disability, assign his interest in the Franchise and the BUSINESS or FRANCHISEE, to a third party approved by COMPANY subject to the conditions of Section 13C of this Agreement. E. COMPANY'S RIGHT OF FIRST REFUSAL. If FRANCHISEE or its owner(s) shall at any time determine to sell an interest in the BUSINESS or an ownership interest in FRANCHISEE, FRANCHISEE or its owner(s) shall obtain a bona fide, executed written offer and a reasonable earnest money deposit from a responsible and fully disclosed purchaser and shall submit an exact copy of such offer to COMPANY. COMPANY shall have the right, exercisable by written notice delivered to FRANCHISEE or its owners(s) within thirty (30) days from the date of delivery of an exact copy of such offer to COMPANY, to purchase such interest in the BUSINESS or such ownership interest in FRANCHISEE for the price and on the terms and conditions contained in such 13 offer, provided that COMPANY may substitute cash for any form of payment proposed in such offer and shall have not less than thirty (30) days to prepare for closing. If the proposed assignment or franchise transfer includes assets of FRANCHISEE not strictly related to the BUSINESS, COMPANY shall not be required to purchase such other assets. If COMPANY does not exercise its right of first refusal, FRANCHISEE or its owner(s) may complete the sale to such purchaser pursuant to and on the terms of such offer, subject to COMPANY's approval of the purchaser as provided in Sections 13B and 13C, provided that if the sale to such purchaser is not completed within ninety (90) days after delivery of such offer to COMPANY, or if there is a material change in the terms of the sale, COMPANY shall again have the right of first refusal herein provided. F. DELEGATION BY COMPANY. FRANCHISEE agrees that COMPANY shall have the right, from time to time, to delegate the performance of any portion or all of its obligations and duties under this Agreement to designees, whether the same are agents of COMPANY or independent contractors with which COMPANY has contracted to provide such services. 14. TERMINATION OF THE FRANCHISE BY COMPANY. If FRANCHISEE (or FRANCHISEE's owners): (a) fails to secure premises for the BUSINESS as provided in Section 2A of this Agreement; (b) fails to develop the BUSINESS and have the BUSINESS open and operating within ninety (90) days of the date of this Agreement as provided in Section 2B of this Agreement; (c) fails to meet the Fleet requirements provided in Section 3 of this Agreement; or (d) fails to satisfactorily complete the training program as provided in Section 5A of this Agreement, COMPANY shall have the right to terminate this Agreement, effective fifteen (15) days after delivery of notice of termination to FRANCHISEE. COMPANY shall have the further right to terminate this Agreement effective upon delivery of notice of termination of FRANCHISEE if FRANCHISEE (or FRANCHISEE's owners): (1) makes an assignment for the benefit of creditors; (2) makes a written admission of inability to pay debts or obligations as they become due; (3) files a voluntary petition in bankruptcy; (4) is adjudicated as bankrupt or insolvent; (5) files a petition or other pleading seeking reorganization, dissolution or any similar relief under any statute, law or regulation or admits or fails to immediately contest the material allegations of a petition or other pleading filed in any such proceeding; (6) seeks, consents to or acquiesces in the appointment of any trustee, receiver or liquidator of the BUSINESS or all or a substantial part of any of its assets, or fails to vacate the appointment of any trustee, receiver or liquidator for any such purpose within thirty (30) days of such appointment; 14 (7) has made any material misrepresentation or omission in its application; (8) abandons or fails to actively operate the BUSINESS for a period of more than seven (7) consecutive days without the prior written consent of COMPANY; (9) attempts to transfer, or transfers control of all or any interest in the BUSINESS or Franchise or FRANCHISEE, without the prior written permission of COMPANY; (10) submits on three or more separate occasions during the term of this Agreement reports which understate the number of Rental Vehicles in the Fleet or Gross Revenues generated by the BUSINESS by more than ten percent (10%); (11) fails on two (2) or more separate occasions within any six (6) consecutive month period to submit when due, reports or other data, information or records, and/or to pay when due the continuing franchise and service fees, advertising contributions or other payments due to COMPANY, and/or otherwise fails to comply with this Agreement, whether or not such failures to comply are corrected after notice to them; (12) fails to maintain the insurance coverage required by Section 6E of this Agreement or experiences an excessive loss ratio which is disproportionate to industry standards applied on a regional basis in connection with any liability insurance program endorsed by COMPANY. (13) entered into a PRICELE$$ Franchise Agreement for substantially the same primary service area as the RENT-A-WRECK Primary Service Area and such PRICELE$$ Franchise Agreement is terminated or expires without renewal; (14) (i) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any felony; or, (ii) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any criminal offense related to the BUSINESS, other than minor traffic violations; or, (iii) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any crime or commits any act, whether or not related to the BUSINESS that COMPANY determines, in its sole discretion, threatens the integrity or reputation of COMPANY, any of the Marks, the BUSINESS or other RENT-A-WRECK BUSINESSES; or (15) directly or indirectly maintains Rental Vehicles within the Primary Service Area on which no royalties are paid to COMPANY. COMPANY shall have the further right to terminate this Agreement without further notice, such termination effective immediately upon the expiration of any correction or cure period, if FRANCHISEE, its owners or the BUSINESS fails to comply with any other provision of this Agreement or any mandatory specification, standard or operating procedure prescribed by COMPANY and do not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to them if a non-monetary matter is involved and fifteen (15) days after written notice if a monetary matter is involved, however, see (11) above which applies as specified therein. 15 15. RIGHTS OF COMPANY AND OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION OF THE FRANCHISE. A. PAYMENT OF AMOUNTS OWED TO COMPANY. Within fifteen (15) days after the effective date of termination or expiration of the Franchise, FRANCHISEE agrees to pay to COMPANY any unpaid continuing franchise fees, advertising contributions, interest due COMPANY on any of the foregoing and all other amounts owed to COMPANY or its affiliates, whether such obligations were incurred under this Agreement or otherwise in the conduct of the BUSINESS, and pay other franchisees of COMPANY or any other person or entity any monies owed to them incurred in connection with the operation of the BUSINESS (i.e., phone bills, rent). B. DE-IDENTIFICATION. FRANCHISEE agrees that after the termination or expiration of the Franchise he will immediately: 1. return to COMPANY all copies of the Operating Manual and other items or materials which have been loaned or furnished without charge by COMPANY; 2. take such action as may be required to cancel all fictitious or assumed name or equivalent registrations relating to his use of any Mark; 3. remove from the Premises or take down all signs, sign-faces, advertising materials, forms, invoices and other materials containing any Mark or otherwise identifying or relating to the BUSINESS, unless COMPANY exercises its option to purchase under Section 15C. 4. notify the telephone company and all listing agencies of the termination or expiration of FRANCHISEE's right to use any telephone number and any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of same to or at the direction of COMPANY. FRANCHISEE acknowledges that as between COMPANY and FRANCHISEE, COMPANY has the sole rights to and interest in all telephone numbers and directory listings associated with any Mark and FRANCHISEE authorizes COMPANY and any officer of COMPANY as his attorney-in-fact, to direct the telephone company and all listing agencies to transfer same to COMPANY under the Telephone Numbers and Listings Assignment signed concurrently with the Franchise Agreement. At COMPANY's direction, should FRANCHISEE fail to do so, the telephone company and all listing agencies may accept such direction or this Agreement as conclusive proof of the exclusive rights of COMPANY in such telephone numbers and directory listing and its authority to direct their transfer, and take such other actions or execute such other documents, including but not limited to execution of COMPANY's telephone number transfer form, as may be necessary or as COMPANY requests; 5. not directly or indirectly at any time or in any manner identify himself or any business as a current or former RENT-A-WRECK business, or as a franchisee, licensee or dealer of or as otherwise associated with COMPANY, or use any Mark, any colorable imitation thereof or other indicia of a RENT-A-WRECK business in any manner or for any purpose, or utilize for any purpose any trade name, trade or service mark or other commercial symbol that suggests or indicates a connection or association with COMPANY or use any of COMPANY's trade secrets, forms, slogans, signs, symbols, devices or materials that indicate an association with COMPANY or that is or was used by COMPANY and/or other RENT-A-WRECK businesses; 16 6. take any actions necessary to effectuate the transfer to whomever COMPANY directs or to attempts to cancel or terminate, all at COMPANY's sole election, any and all of the licenses, agreements and permits, which were used in conjunction with the BUSINESS; and 7. furnish to COMPANY within thirty (30) days after the effective date of termination or expiration evidence satisfactory to COMPANY of FRANCHISEE's compliance with the foregoing obligations. C. COVENANT NOT TO COMPETE. FRANCHISEE agrees that upon termination of the Franchise prior to its expiration, for a period of two (2) years, commencing on the effective date of termination, or the date on which FRANCHISEE ceases to conduct the business conducted pursuant to this Agreement, whichever is later, FRANCHISEE, its general manager and FRANCHISEE's immediate family members and owners will not have any interest as an owner, partner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business (as defined in Section 9) located within the Primary Service Area or within five miles of the border of the Primary Service Area. D. CONTINUING OBLIGATIONS All obligations of COMPANY and FRANCHISEE which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding its expiration or termination and until they are satisfied in full or by their nature expire. 16. ENFORCEMENT A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS Each section, paragraph, term and provision of this Agreement shall be considered severable and if any such portion of this Agreement is held to be invalid, contrary to, or in conflict with any applicable present or future law or regulation, it shall not have any effect upon such other portions of this Agreement as may remain otherwise intelligible. If any applicable and binding law or rule of any jurisdiction requires a greater prior notice of the termination of this Agreement or refusal to grant a Renewal Franchise than is required hereunder, or the taking of some other action not required hereunder or any provision of this Agreement or any specification, standard or operating procedure prescribed by COMPANY is invalid or unenforceable, the prior notice and/or other action required by such law or rule shall be substituted for the comparable provisions hereof, and COMPANY shall have the right to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to be valid and enforceable. FRANCHISEE agrees to be bound by any such modification to this Agreement. B. WAIVER OF OBLIGATIONS COMPANY and FRANCHISEE may by written instrument unilaterally waive or reduce any obligation of or restriction upon the other under this Agreement, 17 effective upon delivery of written notice thereof to the other, but this Agreement may not be otherwise modified except by written agreement signed by both parties. COMPANY and FRANCHISEE shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement by virtue of any custom or practice of the parties at variance with the terms hereof; any failure, refusal or neglect of COMPANY or FRANCHISEE to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder; any waiver, forbearance, delay, failure or omission by COMPANY to exercise any right, power or option with respect to any other RENT-A-WRECK business(es); or the acceptance by COMPANY of any payments due from FRANCHISEE after any breach of this Agreement. C. FRANCHISEE MAY NOT WITHHOLD PAYMENTS. FRANCHISEE agrees that he will not, on grounds of the alleged nonperformance by COMPANY of any of its obligations hereunder, withhold payment of any continuing franchise and service fees, advertising contributions or any other amounts due COMPANY or its affiliates. D. COSTS AND ATTORNEYS' FEES. If a claim for amounts owed by FRANCHISEE to COMPANY or its affiliates is asserted in any legal proceeding before a court or arbitrator, or if COMPANY or FRANCHISEE is required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in such proceeding shall be entitled to reimbursement of its costs and expenses, including but not limited to attorneys' and accountants' fees. E. GOVERNING LAW/CONSENT TO JURISDICTION Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Sections 1051 et seq.), this Agreement and the franchise shall be governed by the laws of the State of Maryland. FRANCHISEE agrees that COMPANY may institute any action against FRANCHISEE in any state or federal court of general jurisdiction in the State of Maryland and FRANCHISEE irrevocably submits to the jurisdiction of such court and waives any objection he may have to the jurisdiction or venue of such court. F. ARBITRATION. Except for controversies, disputes or claims related to or based on FRANCHISEE'S use of the Marks after this Agreement expires or terminates, all controversies, disputes or claims between COMPANY and its shareholders, officers, directors, agents and employees and FRANCHISEE (its owners, guarantors, affiliates and employees, if applicable) arising out of or related to: 1. this Agreement or any other agreement between FRANCHISEE and COMPANY or any provision of any of these agreements; 2. COMPANY's relationship with FRANCHISEE; 3. the validity of this Agreement or any other agreement between COMPANY and FRANCHISEE or any provision of any of these agreements; or 18 4. any System Standards relating to establishing or operating the BUSINESS; must be submitted for arbitration, on demand of either party, to the Baltimore, Maryland office of the American Arbitration Association. The arbitration proceedings will be conducted at the American Arbitration Association office and, except as this Agreement otherwise provides, heard by one arbitrator according to the then current commercial arbitration rules of the American Arbitration Association. All matters relating to arbitration will be governed by the Federal Arbitration Act (9 U.S.C. ss.ss. 1 et seq.) and not by any state arbitration law. Notwithstanding the above paragraph, the obligation to arbitrate shall not be binding on COMPANY in claims for the collection of monies due to COMPANY from FRANCHISEE if the amount claimed by COMPANY is less than ten thousand dollars ($10,000). The arbitrator has the right to award or include in his or her award any relief which he or she deems proper in the circumstances, including, without limitation, money damages (with interest on unpaid amounts from the date due), specific performance, injunctive relief and attorneys' fees and costs, provided that the arbitrator may not declare any Mark generic or otherwise invalid or, except as Subsection G below otherwise provides, award exemplary or punitive damages. The arbitrator's award and decision are conclusive and binding upon all parties, and judgment upon the award may be entered in any court of competent jurisdiction. COMPANY and FRANCHISEE agree to be bound by the provisions of any limitation on the period of time in which claims must be brought under applicable law or this Agreement, whichever expires earlier. COMPANY and FRANCHISEE further agree that, in any arbitration proceeding, each must submit or file any claim which would constitute a compulsory counterclaim (as defined by Rule 13 of the Federal Rules of Civil Procedure) within the same proceeding as the claim to which it relates. Any claim which is not submitted or filed as required is forever barred. COMPANY and FRANCHISEE agree that arbitration will be conducted on an individual, not a class-wide, basis, and that an arbitration proceeding between COMPANY and its shareholders, officers, directors, agents and employees and FRANCHISEE (and/or FRANCHISEE's owners, guarantors, affiliates and employees, if applicable) may not be consolidated with any other arbitration proceeding between COMPANY and any other person, corporation, limited liability entity or partnership. Despite COMPANY's agreement to arbitrate, COMPANY and FRANCHISEE each have the right in a proper case to seek temporary restraining orders and temporary or preliminary injunctive relief from a court of competent jurisdiction; provided, however, that COMPANY and FRANCHISEE must contemporaneously submit COMPANY's dispute for arbitration on the merits as provided in this Subsection. The provisions of this Subsection are intended to benefit and bind certain third party non-signatories and will continue in full force and effect subsequent to and notwithstanding this Agreement's expiration or termination. 19 G. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL Except for claims COMPANY may bring against FRANCHISEE for his unauthorized use of the Marks or unauthorized use or disclosure of any confidential information, COMPANY and FRANCHISEE and their respective owners waive to the fullest extent the law permits any right to or claim for any punitive or exemplary damages against the other and agree that, in the event of a dispute between COMPANY and FRANCHISEE, the party making a claims will be limited to equitable relief and recovery of any actual damages its sustains. However, if FRANCHISEE is required to indemnify COMPANY for any claim or liability under Section 10, FRANCHISEE shall indemnify COMPANY for the full amount of any such claim or liability, including any punitive damages. COMPANY and FRANCHISEE irrevocably waive trial by jury in any action, proceeding or counterclaim, whether at law or in equity, brought by either of them. H. BINDING EFFECT. This Agreement is binding upon COMPANY and FRANCHISEE and their respective executors, administrators, heirs, beneficiaries, assigns and successors in interest and may not be modified except by a written agreement signed by both COMPANY and FRANCHISEE. I. LIMITATIONS OF CLAIMS. Except for claims arising from FRANCHISEE's non-payment or underpayment of amounts FRANCHISEE owes COMPANY under this Agreement or otherwise, any and all claims arising out of or relating to this Agreement or COMPANY's relationship with FRANCHISEE will be barred unless a judicial or arbitration proceeding is commenced within twelve (12) months from the date on which the party asserting the claim knew or should have known of the facts giving rise to the claims. J. CONSTRUCTION. The preambles and exhibits(s) are a part of this Agreement, which constitutes the entire agreement of the parties, and there are no other oral or written understandings or agreements between COMPANY and FRANCHISEE relating to the subject matter of this Agreement. The term "FRANCHISEE" as used herein is applicable to one or more persons, a corporation or a partnership and the singular usage includes the plural and the masculine and neuter usages include the other and the feminine. If two or more persons are at any time FRANCHISEE hereunder, their obligations and liabilities to COMPANY shall be joint and several. References to "FRANCHISEE" and "assignee" which are applicable to an individual or individuals shall mean the principal owner or owners of the equity or operating control of FRANCHISEE or the assignee and the general manager(s) of the FRANCHISEE or the assignee, if FRANCHISEE is a corporation or partnership. 17. NOTICES AND PAYMENTS. All written notices and reports permitted or required to be delivered by this Agreement or the operating manual shall be deemed so delivered at the time delivered by hand, one (1) business day after sending by overnight delivery service or electronic system or two (2) business days after placed in the mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its current principal business address. All payments and reports required by this Agreement shall be directed to COMPANY at the address notified to FRANCHISEE from time to time. Any required payment or report not actually received by COMPANY during regular business hours on the date due and not postmarked by postal authorities at least two (2) days prior thereto, shall be deemed delinquent. 20 IN WITNESS WHEREOF the parties hereto have executed, sealed and delivered this Agreement in multiple originals on the day and year first above written. COMPANY FRANCHISEE BUNDY AMERICAN CORPORATION, a If an Individual Maryland corporation _____________________, an individual By:___________________________ Title:________________________ By:___________________________ Date:_________________________ Date:_________________________ If a corporation: ______________________________ a ______________________ corporation By:___________________________ Title:________________________ Date:_________________________ By:___________________________ Title:________________________ Date:_________________________ If a partnership: ______________________________ a ______________________ partnership By:___________________________ Title:________________________ Date:_________________________ By:___________________________ Title:________________________ Date:_________________________ 21 EXHIBIT A TO THE RENT-A-WRECK FRANCHISE AGREEMENT BY AND BETWEEN BUNDY AMERICAN CORPORATION AND ___________________________ DATED: _______________, ____ AGREEMENT TERMS 1. Premises. The Premises referred to in Section 1B of the above captioned agreement shall be located at and only at the following address or such other address(es) as are approved in writing by COMPANY: ________________________________________________________________________________ ________________________________________________________________________________ 2. Primary Service Area. The Primary Service Area referred to in Section 1B of the above captioned agreement shall be all of the area located within: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3. Fleet. The minimum number of Rental Vehicles in the Fleet referred to Section 3C of the above-captioned agreement throughout the following period shall be: Time Period Number of Rental Vehicles One or before the last month of the first Agreement Year _____________________ (____) One or before the last month of the second Agreement Year _____________________ (____) One or before the last month of the third Agreement Year _____________________ (____) At no time after the end of the third Agreement Year shall there be less than _____________________ (____) Rental Vehicles in the Fleet. 4. Initial Franchise Fee: The initial franchise fee referred to in Section 4A of the above-captioned agreement shall be _____________________ Dollars ($_____________________). 5. Minimum Fee. The Minimum Fee referred to in Section 4B(2) of the above-captioned agreement shall be as follows: Agreement Year Minimum Fee - -------------- ----------- First (1st) _____________________ Second (2nd) _____________________ Third (3rd) _____________________ After the end of the third (3rd) Agreement Year, the annual Minimum Fee shall be _____________________ Dollars ($_____________________). 6. General Manager(s). The initial manager(s) referred to in Section 6D of the above-captioned agreement shall be: NAME ADDRESS TITLE ---- ------- ----- COMPANY FRANCHISEE BUNDY AMERICAN CORPORATION, a If an Individual Maryland corporation _____________________, an individual By:___________________________ Title:________________________ By:___________________________ Date:_________________________ Date:_________________________ If a corporation: ______________________________ a ______________________ corporation By:___________________________ Title:________________________ Date:_________________________ By:___________________________ Title:________________________ Date:_________________________ If a partnership: ______________________________ a ______________________ partnership By:___________________________ Title:________________________ Date:_________________________ By:___________________________ Title:________________________ Date:_________________________ EXHIBIT B TO THE RENT-A-WRECK FRANCHISE AGREEMENT BY AND BETWEEN BUNDY AMERICAN CORPORATION AND ___________________________ DATED: _______________, ____ ASSIGNMENT OF TELEPHONE NUMBERS AND LISTINGS In accordance with the terms of the RENT-A-WRECK Franchise Agreement between ___________________________________ ("FRANCHISEE") and Bundy American Corporation, a Maryland corporation ("COMPANY"), executed concurrently with this Assignment, under which COMPANY granted FRANCHISEE the right to own and operate a RENT-A-WRECK business located at ___________________________________ (the "BUSINESS"), FRANCHISEE, for value received, hereby assigns to COMPANY, all of FRANCHISEE's right, title and interest in and to those certain telephone numbers and regular, classified or other telephone directory listings (collectively, the "Telephone Numbers and Listings") associated with COMPANY's trade and service marks and used from time to time in connection with the operation of the BUSINESS. This assignment is for collateral purposes only and, except as specified herein, COMPANY shall have no liability or obligation of any kind whatsoever arising from or in connection with this Assignment unless COMPANY shall notify the telephone company and all listing agencies (collectively, the "Telephone Company") pursuant to the terms hereof to effectuate the assignment. Upon termination or expiration of the Franchise Agreement (without renewal or extension), COMPANY shall have the right and is hereby empowered to effectuate the assignment of the Telephone Numbers and Listings, and, in such event, FRANCHISEE shall have no further right, title or interest in the Telephone Numbers and Listings and shall remain liable to the Telephone Company for all past due fees owing to the Telephone Company on or before the effective date of the assignment hereunder. FRANCHISEE agrees and acknowledges that as between COMPANY and FRANCHISEE, upon termination or expiration of the Franchise Agreement, COMPANY shall have the sole right to and interest in the Telephone Numbers and Listings, and FRANCHISEE appoints COMPANY as FRANCHISEE's true and lawful attorney-in-fact to direct the Telephone Company to assign same to COMPANY, and execute such documents and take such actions as may be necessary to effectuate the assignment. Upon such event, FRANCHISEE shall immediately notify the Telephone Company to assign the Telephone Numbers and Listings to COMPANY. If FRANCHISEE fails to promptly direct the Telephone Company to assign the Telephone Numbers and Listings to COMPANY, COMPANY shall direct the Telephone Company to effectuate the assignment contemplated hereunder to COMPANY. The parties agree that the Telephone Company may accept COMPANY's written direction or this Assignment as conclusive proof of COMPANY's exclusive rights in and to the Telephone Numbers and Listings upon such termination or expiration. The parties further agree that if the Telephone Company requires that the parties execute the Telephone Company's assignment forms or other documentation at the time of termination or expiration, COMPANY's execution of such forms or documentation shall effectuate FRANCHISEE's consent and agreement to the assignment. The parties agree that at any time after the date hereof, they will perform such acts and execute and deliver such documents as may be necessary to assist in or accomplish the assignment described herein upon termination or expiration of the Franchise Agreement. ASSIGNOR ___________________________________ ___________________________________ Date: (FRANCHISEE) ___________________________________ ___________________________________ ASSIGNEE: BUNDY AMERICAN CORPORATION By:________________________________ Its:____________________________ APPROVED AND ACCEPTED BY: ___________________________________ (Telephone Company Authorized Representative) ___________________________________ (Name of Telephone Company) OWNER'S GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS This Guaranty must be signed by the principal owners ("Guarantor(s)") of ___________________________________ ("FRANCHISEE") under the foregoing RENT-A-WRECK Franchise Agreement (the "Agreement"). In consideration of and as an inducement to the execution of the Agreement by Bundy American Corporation ("COMPANY") each Guarantor signing this Guaranty hereby personally and unconditionally: (A) guarantees to COMPANY and COMPANY's successors and assigns that FRANCHISEE will punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement; and (B) agrees to be personally bound by, and personally liable for the breach of, each and every provision in the Agreement. Each Guarantor waives: (1) acceptance and notice of acceptance by COMPANY of Guarantor's obligations under this Guaranty; (2) notice of demand for payment of any indebtedness or nonperformance of any obligation guaranteed by Guarantor; (3) protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations guaranteed by Guarantor; (4) any right Guarantor may have to require that an action be brought against FRANCHISEE or any other person as condition of Guarantor's liability; (5) all rights to payment and claims for reimbursement or subrogation which any of the undersigned Guarantor may have against FRANCHISEE arising as a result of the execution of and performance under this Guaranty by Guarantor; and (6) all other notices and legal or equitable defenses to which Guarantor may be entitled in Guarantor's capacity as guarantor(s). Each Guarantor consents and agrees that: (a) Guarantor's direct and immediate liability under this Guaranty shall be joint and several; (b) Guarantor will make any payment or render any performance required under the Agreement upon demand if FRANCHISEE fails or refuses punctually to do so; (c) Guarantor's liability will not be contingent or conditioned upon COMPANY's pursuit of any remedies against FRANCHISEE or any other person; (d) Guarantor's liability will not be diminished, relieved or otherwise affected by any extension of time, credit or other indulgence which COMPANY may from time to time grant to FRANCHISEE or to any other person, including, for example, the acceptance of any partial payment or performance or the compromise or release of any claims and no such indulgence shall in any way modify or amend this Guaranty; and (e) this Guaranty will continue and be irrevocable during the term of the Agreement and, if required by the Agreement, after its termination or expiration. Each Guarantor now executes and delivers this Guaranty as of the execution of the Agreement. PERCENTAGE OF GUARANTOR(S) OWNERSHIP IN FRANCHISEE ___________________________________ _______% ___________________________________ _______% ___________________________________ _______% EX-10.9.1 3 ex-10_91.txt PRICELESS FRANCHISE AGREEMENT Exhibit 10.9.1 PRICELESS RENT-A-CAR, INC. FRANCHISE AGREEMENT THIS AGREEMENT is made and entered into this ___ day of _____________, 20___ by and between PRICELESS RENT-A-CAR, INC., a Maryland corporation, with its principal office at 10324 South Dolfield Road, Owings Mills, Maryland 21117 ("COMPANY") and _____________________________________________________ whose principal address is ___________________________________________ ("FRANCHISEE"). 1. THE FRANCHISE. A. PREAMBLES. COMPANY has developed a system for the operation of a vehicle rental and leasing business under the name "PRICELE$$". COMPANY uses and licenses the trade and service mark "PRICELE$$" and related logo, and other marks which COMPANY has developed and may develop in the future (the "Marks"). FRANCHISEE has applied for a franchise to own and operate a PRICELE$$ business and such application has been approved by COMPANY in reliance upon all of the representations made therein. COMPANY expressly disclaims the making of, and FRANCHISEE acknowledges that he has not received or relied upon, any warranty or guaranty, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement, FRANCHISEE acknowledges that he has read this Agreement and COMPANY's Franchise Offering Circular and that he has no knowledge of any representations by COMPANY, or its officers, directors, shareholders, employees or agents that are contrary to the statements made in COMPANY's Franchise Offering Circular or to the terms herein. B. GRANT. Subject to the provisions of this Agreement, COMPANY hereby grants to FRANCHISEE a franchise (the "Franchise") to operate a PRICELE$$ business (the "BUSINESS") offering vehicles for rental and utilizing COMPANY's formats, methods, standards, operating procedures and the Marks at (and only at) the premises (the "Premises") identified in Section 1 of Exhibit A, which is attached hereto and made a part hereof by this reference, for a term of ten (10) years commencing on the date of execution hereof. Termination or expiration of this Agreement constitutes termination or expiration of the Franchise. Provided that FRANCHISEE is in compliance with is Agreement, COMPANY shall not operate or grant a franchise for the operation of another PRICELE$$ Business within FRANCHISEE's primary service area (the "Primary Service Area"), as described in Section 2 of Exhibit A. However, COMPANY has the right to operate, or license others to operate, vehicle sales, rental or leasing businesses within FRANCHISEE's Primary Service Area under other trade names, trademarks or service marks. COMPANY has the right to operate, or license others to operate, PRICELE$$ businesses anywhere outside the Primary Service Area regardless of proximity to the boundaries of the Primary Service Area. FRANCHISEE may not regularly deliver vehicles to, transport customers to or pick-up customers at locations within the primary service area of another PRICELE$$ [or Rent-A-Wreck] business during the term of this Agreement. FRANCHISEE acknowledges that COMPANY may enter into national account contracts and, subject to FRANCHISEE's qualification for participation in such accounts, FRANCHISEE will be offered the opportunity to service such accounts. If FRANCHISEE is not qualified to participate, COMPANY shall have the right to use other sources to service such accounts, wherever located. C. RENEWAL. FRANCHISEE shall have the right to obtain a renewal franchise ("Renewal Franchise"), and successive renewal franchises thereafter, each for a term of five (5) years, at FRANCHISEE's sole option, if FRANCHISEE is in complete compliance with the terms and conditions of the Franchise Agreement, notifies COMPANY in writing of his desire to obtain a Renewal Franchise no later than ninety (90) days but no earlier than one hundred eighty (180) days prior to the expiration of this Agreement, releases COMPANY of any and all possible claims related to this Agreement and/or FRANCHISEE's relationship with COMPANY, terminates this Agreement and executes COMPANY's then-current form of franchise agreement containing the then-current terms, conditions, fees and contributions for the operation of the BUSINESS modified to reflect that FRANCHISEE is receiving a Renewal Franchise and such ancillary agreements as are then customarily used by COMPANY in granting renewal franchises. 2. DEVELOPMENT AND OPENING OF THE BUSINESS. A. LOCATION OF THE BUSINESS PREMISES. FRANCHISEE may operate the BUSINESS only at the Premises or at a substitute location and premises hereafter approved by COMPANY in writing. The Premises, or substitute location hereafter approved by COMPANY, must be located entirely within the Primary Service Area. On or before the execution of this Agreement, FRANCHISEE shall provide at COMPANY's request: (1) evidence of FRANCHISEE's ownership of premises for the BUSINESS; or (2) a copy of a lease for the premises of the BUSINESS on terms satisfactory to COMPANY and which shall be executed prior to the opening of the BUSINESS. B. DEVELOPMENT AND OPENING OF THE BUSINESS. FRANCHISEE agrees to develop the BUSINESS and have the BUSINESS open and operating within ninety (90) days of the date of this Agreement. C. SIGNS, EQUIPMENT AND FORMS. FRANCHISEE must prominently display on or near the Premises, a sign that COMPANY has approved as meeting its specifications and standards for design and appearance. FRANCHISEE also agrees to acquire: (1) a fax machine capable of receiving transmissions 24 hours a day; and (2) at such time as FRANCHISEE has a fleet of ten (10) or more Rental Vehicles, a computer systems meeting COMPANY's specifications and standards. FRANCHISEE shall use only Rental Agreements purchased from COMPANY, or use Rental Agreement forms generated by FRANCHISEE's computer in a format, and containing only language, approved in a prior writing by COMPANY. As used in this Agreement, the phrase "Rental Agreement" means a sequentially-numbered retail contract form used for the renting of vehicles that is printed by COMPANY, or that is approved in a prior writing by COMPANY for printing by the FRANCHISEE's computer using computer software applications approved by COMPANY. 2 3. FLEET REQUIREMENTS. A. DEFINITION OF "RENTAL VEHICLE". As used in this Agreement, the term "Rental Vehicle" shall mean any vehicle directly or indirectly owned, used or kept for rental by FRANCHISEE in the Primary Service Area, whether or not used in the BUSINESS. Rental Vehicle includes but is not limited to vehicles rented, leased or sold on a rent to own basis. B. DEFINITION OF "AGREEMENT YEAR". As used in this Agreement, the term "Agreement Year" shall mean a one-year period of time commencing on an anniversary date of the execution of this Agreement and ending on the day before the next anniversary date. The first Agreement Year commences on the date of execution hereof. C. THE FLEET. FRANCHISEE agrees to have the minimum number of Rental Vehicles available for lease or rental in the Rental Vehicle of the BUSINESS (the "Fleet") as specified in Section 3 of Exhibit A. D. COMPANY VEHICLES. COMPANY may place Rental Vehicles at the BUSINESS and FRANCHISEE must make such vehicles available to customers. COMPANY will pay the costs of maintenance and insurance on such vehicles. COMPANY will pay FRANCHISEE a commission on all rentals of these vehicles. Such vehicles will not be subject to Monthly Fees (defined below) or advertising contributions. 4. FEES. A. INITIAL FRANCHISE FEE. FRANCHISEE agrees to pay to COMPANY a nonrecurring initial franchise fee in the amount specified in Section 4 of Exhibit A which shall be payable to COMPANY upon the execution of this Agreement. The initial franchise fee shall be fully earned by COMPANY and non-refundable. B. CONTINUING FRANCHISE FEE. 1. Monthly Fee. FRANCHISEE agrees to pay to COMPANY a monthly continuing franchise fee (the "Monthly Fee") in the amount of thirty dollars ($30.00) for each Rental Vehicle in the Fleet. The Monthly Fee must be received by COMPANY on or before the tenth (10th) day of each month for the total number of Rental Vehicles insured in the Fleet on the last day of the preceding calendar month. In order to verify the number of Rental Vehicles in FRANCHISEE's Fleet each month, FRANCHISEE will submit to COMPANY (along with the Monthly Fee) a copy of each of FRANCHISEE's monthly insurance statements for the preceding month showing the number of Rental Vehicles. The amount of Monthly Fees paid by FRANCHISEE shall be subject to the minimum fee schedule provided in Section 4B(2) of this Agreement. 3 2. Minimum Fee. The minimum annual total of Monthly Fees paid by FRANCHISEE (the "Minimum Fee") shall be as specified in Section 5 of Exhibit A. If in any Agreement Year, the total Monthly Fees paid by FRANCHISEE in such Agreement Year are less than the Minimum Fee for such Agreement Year provided herein, FRANCHISEE agrees to pay to COMPANY an amount equal to the difference between the Monthly Fees paid and the Minimum Fee for such Agreement Year. Such amount shall be paid by FRANCHISEE to COMPANY within thirty (30) days after the last day of such Agreement Year. 3. Monthly Fee and Minimum Fee Increases. COMPANY shall have the right to increase the Monthly Fee once per Agreement Year. The amount of such increase shall not exceed ten percent (10%) of the Monthly Fee charged as of the date of such increase. Additionally, the maximum Monthly Fee COMPANY will charge during the initial term of this Agreement is Forty-Five Dollars ($45) per Rental Vehicle per month. COMPANY shall have the right to increase the Minimum Fee once per Agreement Year. The increase in Minimum Fee shall not exceed ten percent (10%) of the Minimum Fee specified in the Minimum Fee schedule in Exhibit A for that Agreement Year. For each subsequent Agreement Year, the increase in the Minimum Fee shall not exceed ten percent (10%) of the Minimum Fee for the preceding Agreement Year. C. LATE PAYMENT FEES AND INTEREST ON LATE PAYMENTS. Monthly Fees owed by FRANCHISEE may be assessed a late payment fee on the first business day after their due date, which late payment shall be immediately due and payable and equal to five percent (5%) of the amount owed. Additionally, all amounts owed COMPANY shall bear interest after their due date accruing at the highest applicable rate for open account business credit, not to exceed two percent (2%) per month. FRANCHISEE acknowledges that this Section 4C shall not constitute COMPANY's agreement to accept such payments after same are due or a commitment by COMPANY to extend credit to the BUSINESS and that FRANCHISEE's failure to pay all amounts when due shall constitute grounds for termination of this Agreement. D. APPLICATION OF PAYMENTS. Notwithstanding any designation by FRANCHISEE, COMPANY shall have sole discretion to apply any payments received from FRANCHISEE or any indebtedness of COMPANY to FRANCHISEE, to any past due indebtedness of FRANCHISEE for Monthly Fees, contributions to the Funds (as defined below in Section 7A), purchases from COMPANY or its Affiliates, late payment fees, interest, or any other indebtedness of FRANCHISEE to COMPANY or its Affiliates. 5. TRAINING AND GUIDANCE. A. TRAINING. COMPANY shall furnish to FRANCHISEE a training program for the operation of the BUSINESS as designated by COMPANY prior to the opening of the BUSINESS. The training program shall be furnished at COMPANY's principal office and/or at such other location designated by COMPANY. FRANCHISEE may attend additional initial 4 training at a location designated by COMPANY which is within driving distance of the Premises of the BUSINESS. FRANCHISEE shall be responsible for any travel and living expenses which he or his employees incur in connection with such training. FRANCHISEE and FRANCHISEE's general manager (the person(s) identified in Section 6D) shall be required to complete the training program to the satisfaction of COMPANY. B. HIRING AND TRAINING OF EMPLOYEES BY FRANCHISEE. FRANCHISEE shall hire all employees of the BUSINESS, be exclusively responsible for the terms of their employment and compensation and for the proper training of such employees in the operation of the BUSINESS, provided that supervisory employees hired by FRANCHISEE after the opening of the BUSINESS may, subject to reasonable limitations prescribed by COMPANY and at FRANCHISEE's expense for travel and living costs, enroll in training programs conducted by COMPANY. C. GUIDANCE. COMPANY shall furnish to FRANCHISEE guidance in connection with the operation of the BUSINESS. Such guidance shall be furnished in the form of COMPANY's operating manual (the "Operating Manual"), bulletins, other written materials, group meetings and consultations by telephone and/or consultants at the offices of COMPANY or at the BUSINESS. 6. BUSINESS IMAGE AND OPERATING STANDARDS. A. BUSINESS IMAGE, OPERATING STANDARDS AND COMPANY PROGRAMS FRANCHISEE agrees to maintain the appearance of the BUSINESS consistent with the image of a BUSINESS as a clean, attractive and efficiently operated business for the rental and lease of vehicles. FRANCHISEE further agrees to conspicuously identify himself at the Premises and in all dealings with customers, suppliers, public officials and others as the owner of the BUSINESS under a franchise from COMPANY. FRANCHISEE agrees not to use this Agreement or the Franchise as collateral to secure any personal or corporate obligation. FRANCHISEE, if requested by COMPANY, agrees to acquire, at FRANCHISEE's sole expense, computer hardware and software programs meeting COMPANY's specifications to assist in the operation of the BUSINESS. B. UNIFORM IMAGE AND SPECIFICATIONS, STANDARDS AND PROCEDURES. The presentation of a uniform image to the public is an essential element of a successful franchise system and FRANCHISEE agrees to operate the BUSINESS in accordance with the specifications, standards and procedures prescribed by COMPANY, including without limitation: (1) mechanical condition, running order, safety, repair, age and appearance of Rental Vehicles; (2) the safety, maintenance and appearance of the Premises; (3) appearance and training of employees; (4) use of standard rental leasing agreements and forms; (5) minimum standards with respect to customers and hours of operation of the BUSINESS; (6) compliance with and participation in COMPANY's programs; (7) compliance with all reasonable insurance policy requirements of COMPANY; (8) establishment of minimum daily business hours for the BUSINESS; (9) proper display of the Marks; (10) quality business and advertising practices and controls; and (11) obtain an automobile dealer's license, where possible. 5 Mandatory specifications, standards and operating procedures prescribed from time to time by COMPANY in the Operating Manual for the BUSINESSES or communicated to FRANCHISEE in writing, shall constitute provisions of this Agreement as if set forth herein. All references herein to this Agreement shall include all such mandatory specifications, standards and operating procedures. COMPANY will loan to FRANCHISEE during the term of the Franchise one copy of the Operating Manual. COMPANY shall have the right to add to and otherwise modify the Operating Manual from time to time to reflect changes in the specifications, standards or operating procedures for a PRICELE$$ business. FRANCHISEE shall keep his copy of the Operating Manual current. The master copy of the Operating Manual shall be maintained by COMPANY at its principal office and shall be controlling in the event of a dispute. C. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES. FRANCHISEE shall secure and maintain in force all required licenses, permits and certificates relating to the operation of the BUSINESS and shall operate the BUSINESS in full compliance with all applicable laws, ordinances and regulations. The BUSINESS shall in all dealings with its customers, suppliers, COMPANY and the public adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct. FRANCHISEE agrees to refrain from any business or advertising practice which may be injurious to COMPANY and the goodwill associated with the Marks and other PRICELE$$ businesses. FRANCHISEE shall notify COMPANY in writing within five (5) days of the commencement of any action, suit or proceeding which may adversely affect the operation or financial condition of FRANCHISEE or the BUSINESS. D. MANAGEMENT OF THE BUSINESS. The BUSINESS shall, at all times during the term of this Agreement, be under the direct, on-premises supervision of a trained and competent general manager who has completed COMPANY's training program or equivalent training to COMPANY's satisfaction, and who is employed on a full-time basis to work for and at the BUSINESS. The person(s) specified in Section 6 of Exhibit A will initially exercise the functions of general manager with respect to all elements of the BUSINESS. FRANCHISEE shall keep COMPANY informed at all times of the identity of the general manager of the BUSINESS. E. INSURANCE. FRANCHISEE shall maintain reasonable coverage for the rental or lease of any vehicle owned, rented or leased by FRANCHISEE or the BUSINESS and any other vehicle which is rented, leased or sold on a rent-to-own basis or is available for rental, lease or sale to customers of FRANCHISEE. Such insurance shall provide coverage against bodily and personal injury, death and property damage caused by or occurring in conjunction with the rental or lease of vehicles, the operation of the BUSINESS or otherwise in conjunction with the conduct of business by FRANCHISEE pursuant to the Franchise with such minimum limits as COMPANY specifies in writing from time to time. Such insurance shall not be a claims-made policy, but must be written on an occurrence form. Such insurance coverage shall be maintained under one or more policies of insurance issued by 6 carriers rated "A" or better by Alfred M. Best & Company, Inc., unless otherwise approved in writing by company. COMPANY may designate one or more suppliers of rental vehicle liability insurance, and the designated supplier may be COMPANY or an affiliate, and FRANCHISEE must purchase such coverage from the designated supplier. All liability insurance policies required hereunder shall name COMPANY (and its officers, directors and employees) as an additional insured, contain a waiver by the insurance carrier of all subrogation rights against COMPANY and shall provide that COMPANY receive thirty (30) days prior written notice of termination, expiration or cancellation or modification of any such policy. FRANCHISEE shall furnish to COMPANY annually a copy of the certificate of or other evidence of the renewal or extension of each such insurance policy. COMPANY may reasonably increase the minimum protection requirement as of the renewal date of any policy, and reasonably require different or additional kinds of insurance at any time, including excess liability (umbrella) insurance, which COMPANY deems, in COMPANY's sole discretion, to be necessary or advantageous to FRANCHISEE or COMPANY's system of franchises. FRANCHISEE shall at all times during the term of the Franchise maintain in force at his sole expense comprehensive general liability insurance coverage (including, but not limited to, coverage for personal injury, property damage and product and motor vehicle liability) against claims arising from the operation of the Business. FRANCHISEE appoints COMPANY its attorney-in-fact to direct any and all of FRANCHISEE's insurers to provide COMPANY, upon COMPANY's request, with information showing the number of vehicles FRANCHISEE has insured at any time. F. COMPANY PROGRAMS. FRANCHISEE shall subscribe to, participate in and comply with any of the programs, promotions, campaigns or activities which COMPANY enters into, engages in or reasonably prescribes (e.g., credit card programs, telephone service programs or advertising programs). FRANCHISEE shall supervise and service such programs, promotions and activities pursuant to the terms thereof. FRANCHISEE shall contribute to the expenses thereof, if any, on the same pro rata basis as other franchisees. FRANCHISEE shall encourage and solicit vehicle rental customers to patronize other PRICELE$$ businesses, and will exclusively refer, commission free, all vehicle reservations to other franchisees or COMPANY rental locations, when there is such a franchisee or COMPANY rental location in the area concerned. FRANCHISEE also shall provide 24-hour emergency road service. If COMPANY offers a national program, FRANCHISEE may be required to participate in such program. FRANCHISEE shall provide COMPANY with information about FRANCHISEE's emergency service providers and shall keep such information current so that COMPANY can make arrangements when and if necessary. FRANCHISEE is authorized to expend up to seventy dollars ($70) on behalf of another franchisee without his authorization. Any amount in excess of seventy dollars ($70) shall require the oral authorization from the other franchisee. FRANCHISEE agrees to bill the franchisee from whom such car was rented only for the actual out-of-pocket cost of such servicing, and to promptly pay other franchisees who assist one of its customers. 7 G. CUSTOMER COMPLAINTS. FRANCHISEE shall make every attempt to resolve disputes with its customers in a fair and even-handed manner. Customer complaints originating with COMPANY shall be referred first to FRANCHISEE for resolution. COMPANY has the right to intervene in disputes that cannot be resolved by FRANCHISEE, and to resolve such disputes on terms it deems fair and reasonable in its sole discretion. Such resolutions may result in payments to customers, for which FRANCHISEE shall be solely responsible. COMPANY has the right to make such payments to customers on FRANCHISEE's behalf, in which cases, FRANCHISEE shall pay said amounts to COMPANY on demand. 7. ADVERTISING AND PROMOTION. A. BY COMPANY. Recognizing the value of uniform advertising and promotion to the goodwill and public image of PRICELE$$ businesses of COMPANY, COMPANY agrees to maintain and administer an advertising fund (the "National Fund") for the preparation of advertising materials and such advertising programs as COMPANY may deem necessary or appropriate. FRANCHISEE shall contribute to the National Fund seven dollars ($7.00) for each Rental Vehicle in the Fleet. Such contribution is due and payable by the tenth (10th) day of each month on the total number of Rental Vehicles in the Fleet on the last day of the preceding calendar month. In order to verify the number of Rental Vehicles in the Fleet each month, FRANCHISEE will submit to COMPANY (along with the advertising contribution) a copy of FRANCHISEE's monthly insurance statements for the preceding month showing the number of Rental Vehicles. Additionally, FRANCHISEE agrees to contribute, as specified from time to time by COMPANY, to a regional advertising fund (the "Regional Fund"); provided, however, that such contribution may not exceed FRANCHISEE's payment to the National Fund. If FRANCHISEE's advertising contributions are not current, then FRANCHISEE may be excluded from participating in any program paid for by the National Fund. FRANCHISEE agrees that the National and Regional Funds (the "Funds") may be used to meet any and all costs of maintaining, administering, directing and preparing national, regional or local advertising, sales promotion and public relations activities, including, without limitation, the costs of preparing and conducting television, radio, magazine, billboard, newspaper and other media programs and activities, and employing advertising agencies. COMPANY may spend in any fiscal year an amount greater or less than the aggregate contributions of PRICELE$$ businesses to the Funds in that year and COMPANY may make loans to the Funds bearing reasonable interest to cover any deficits of the Funds and cause the Funds to invest any surplus for future use by the Funds. FRANCHISEE shall have no right, claim or interest of any kind in or to any of the contributions paid by FRANCHISEE, or any other entity, or to any allocation of or use of the National Fund or Regional Fund. The Funds shall be accounted for separately from the other funds of COMPANY and shall not be used to defray any of COMPANY's general operating expenses not associated with or attributable to the activities of the Funds. A report of the operations of the Funds shall be prepared annually by COMPANY and shall be made available to FRANCHISEE upon request. 8 Franchisee's contribution to either or both the Funds may be increased if: (i) the majority of the dully elected or appointed members of COMPANY's Franchisee Advisory Council (the "Advisory Council") recommends an increase; and (ii) COMPANY, in its sole discretion, approves the Advisory Council's recommendation; provided, however, that such increase shall only occur once during any Agreement Year; and, provided further that the amount of such increase will not exceed ten percent (10%) of the contribution charged as of the date of such increase. If COMPANY's Franchise Advisory Council has been disbanded or terminated, COMPANY may in its sole discretion increase Franchisee's contributions to the Fund, subject to the above restrictions, provided that COMPANY increases the contributions of all other franchisees in cases where COMPANY has the contractual right to do so. FRANCHISEE understands and acknowledges that the Funds are intended to maximize general public recognition and patronage of the Marks and the entire system for the benefit of all PRICELE$$ businesses and that COMPANY undertakes no obligation administering the Funds to ensure that expenditures which are proportionate or equivalent to FRANCHISEE's contributions are made for the market area of the BUSINESS or that any PRICELE$$ businesses benefit directly or pro-rata from the placement of advertising. Except as expressly provided in this Section, COMPANY assumes no direct or indirect liability or obligation to FRANCHISEE with respect to the maintenance, direction or administration of the Funds. FRANCHISEE acknowledges and agrees that COMPANY has no fiduciary obligation to FRANCHISEE or any other PRICELE$$ business in connection with the collection, control or administration of monies paid into the Fund. B. BY FRANCHISEE. FRANCHISEE agrees to list and advertise the BUSINESS in conformance with the requirements specified in COMPANY's Operating Manual. FRANCHISEE shall not advertise in any telephone directory or other medium that is circulated wholly outside the Primary Service Area. If FRANCHISEE advertises in a telephone directory in which advertisements by another or other PRICELE$$ franchisee(s) appear, all franchisees who advertise in that directory shall share a single display advertisement. If the franchisees cannot agree on the size or content or cost-sharing of the joint advertisement, COMPANY shall, in its sole discretion, determine the size, content, cost sharing arrangements and all other aspects of the joint advertisement; and that decision shall be binding on FRANCHISEE. Additionally, FRANCHISEE shall maintain at least two (2) telephone numbers, one of which shall be a local number and the other a toll free number. The numbers shall be listed and identified exclusively with the BUSINESS and shall be separate and distinct from all other telephone numbers maintained for or by FRANCHISEE. FRANCHISEE shall register all of its telephone numbers used in connection with the BUSINESS with COMPANY within five (5) days of first use, to provide updates if any changes to such numbers occur and execute COMPANY's form of Assignment of Telephone Numbers and Listings which is attached to this Agreement as Exhibit B. 8. MARKS. A. OWNERSHIP AND GOODWILL OF MARKS. FRANCHISEE acknowledges that COMPANY or its affiliate owns the Marks licensed to FRANCHISEE by this Agreement, that FRANCHISEE's right to use the 9 Marks is derived solely from this Agreement and is limited to the conduct of business by FRANCHISEE pursuant to and in compliance with this Agreement and all applicable specifications, standards and operating procedures prescribed by COMPANY from time to time during the term of the FRANCHISE. Any unauthorized use of the Marks by FRANCHISEE shall constitute an infringement of the rights of COMPANY in and to the Marks. FRANCHISEE agrees that all usage of the Marks by the FRANCHISEE and any goodwill established thereby shall inure to the exclusive benefit of COMPANY and FRANCHISEE acknowledges that this Agreement does not confer any goodwill or other interests in the Marks upon FRANCHISEE. B. LIMITATIONS ON FRANCHISEE'S USE OF MARKS. FRANCHISEE agrees to use the Marks as the sole identification of the BUSINESS, provided that FRANCHISEE shall identify himself as the independent owner thereof in the manner prescribed by COMPANY. FRANCHISEE shall not use any Mark or any corporate or business name of COMPANY, (i) as part of any corporate or trade name, (ii) with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to FRANCHISEE hereunder), (iii) in any modified form, (iv) as part of any domain name, website, home page, electronic address, or other interactive site maintained on the internet, the world wide web, or any other similar proprietary or common carrier electronic delivery system, or (v) in any manner not expressly authorized in writing by COMPANY. FRANCHISEE agrees to prominently display the Marks on or in connection with all advertising, rental agreements, stationery, forms and any other materials designated by COMPANY, and in the manner prescribed by COMPANY, to give such notices of trade and service mark registrations and copyrights as COMPANY specifies and to obtain such fictitious or assumed name registrations as may be required under applicable law. C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS. FRANCHISEE shall immediately notify COMPANY of any apparent infringement of or challenge to FRANCHISEE'S use of any Mark. COMPANY shall have sole discretion to take such action as it deems appropriate and the right to exclusively control any litigation or proceeding arising out of any such infringement or challenge and FRANCHISEE agrees to render such assistance in connection therewith as COMPANY deems necessary or advisable. D. INDEMNIFICATION OF FRANCHISEE. COMPANY agrees to indemnify FRANCHISEE against and to reimburse FRANCHISEE for all damages for which he is liable in any proceeding arising out of his authorized use of any Mark pursuant to and in compliance with this Agreement and for all costs reasonably incurred by FRANCHISEE in such proceeding in which FRANCHISEE is named as a party, provided that FRANCHISEE has timely notified COMPANY of such claim or proceeding and has otherwise complied with this Agreement. If it becomes advisable at any time in COMPANY's sole discretion for COMPANY and/or FRANCHISEE to modify or discontinue use of any Mark, and/or use one or more additional or substitute trade or service marks, FRANCHISEE agrees to comply with COMPANY's direction within a reasonable time after notice thereof. COMPANY will pay for FRANCHISEE's out-of-pocket expenses incurred in complying with such direction. 10 9. KNOW-HOW. COMPANY possesses proprietary know-how comprising methods, techniques, specifications, procedures, information, systems and knowledge of and experience in the development and operation of PRICELE$$ businesses (the "Know-How"). COMPANY will disclose the Know-How to FRANCHISEE in the training program, the Operating Manual and in guidance furnished to FRANCHISEE during the term of the Franchise. FRANCHISEE acknowledges that the Know-How is proprietary and a trade secret of COMPANY and disclosed to FRANCHISEE solely for use by FRANCHISEE in the operation of the BUSINESS during the term of the Franchise. FRANCHISEE acknowledges that it would not be possible for COMPANY to protect its trade secrets against unauthorized use or disclosure if FRANCHISEE holds an interest in a business similar to the BUSINESS. FRANCHISEE therefore agrees that all employees of the BUSINESS shall execute COMPANY's then current form of confidentiality and non-competition agreement and FRANCHISEE, FRANCHISEE's general manager and FRANCHISEE's immediate family members and owners will not during the term of the Franchise have any interest as an owner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business. As used in this Agreement, "Competitive Business" means any business or enterprise other than a PRICELE$$ or RENT-A-WRECK business that rents or leases automobiles, vans or trucks, or any other vehicles. 10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION. The parties agree that this Agreement does not create a fiduciary relationship between them, that the parties are and shall be independent contractors and that nothing in this Agreement is intended to make either party a general or special agent, legal representative, subsidiary, joint venturer, partner, employee or servant of the other for any purpose. COMPANY shall not be obligated for any damages to any person or property directly or indirectly arising out of the operation of the BUSINESS, whether caused by FRANCHISEE's negligent or willful action or failure to act. COMPANY shall have no liability for any sales, use, excise, gross receipts, income, property or other taxes, whether levied upon FRANCHISEE, the BUSINESS or its assets, or upon COMPANY, in connection with the business conducted by FRANCHISEE, or any fees, contributions or other payments made by FRANCHISEE to COMPANY. FRANCHISEE shall indemnify, defend and hold COMPANY, its subsidiaries, affiliates, stockholders, directors, officers, employees, agents, successors and assignees harmless against any liability for any claims, actual and consequential damages, taxes, attorneys' fees and costs incurred in defending any claim against any of them, directly or indirectly arising out of the operation of the BUSINESS. The indemnities and assumptions of liabilities and obligations herein shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement. 11 11. RECORDS AND REPORTS. A. RECORDS. During the term of the Franchise, FRANCHISEE agrees, at his expense, to use the rental agreement numbering system assigned to him by COMPANY and the then current standard rental agreement specified by COMPANY, and to maintain at FRANCHISEE's principal office and preserve for three (3) years from the date of their preparation any and all rental agreements, records of Rental Vehicles and such other documents, supporting records and forms designated by COMPANY. COMPANY may require that specified information be compiled by FRANCHISEE in a computerized database. FRANCHISEE shall provide COMPANY on or before the tenth (10th) day of each month with copies of each rental agreement entered into during the preceding calendar month. FRANCHISEE shall pay COMPANY a one hundred dollar ($100.00) fee for each rental agreement which is missing or which FRANCHISEE fails to provide to COMPANY as required herein. B. REPORTS. FRANCHISEE shall furnish COMPANY on the tenth (10th) day of each month, in the form prescribed by COMPANY from time to time, a report signed and verified by FRANCHISEE (or, if a corporation or partnership, an officer or managing partner of FRANCHISEE), if such statements are prepared by FRANCHISEE's internal staff, or by a Certified Public Accountant, if such statements are prepared by a Certified Public Accountant, accurately reflecting each Rental Vehicle in the Fleet, the number of the rental agreements used, total Gross Revenues for the preceding month, weekly and/or monthly summaries of daily activity reports and such other data, information and supporting records as COMPANY from time to time requires. FRANCHISEE shall also furnish COMPANY semi-annual reports, in such form as specified by COMPANY, containing information including but not limited to that supplied in FRANCHISEE's monthly reports during the preceding six (6) months, and such other data, information and records as COMPANY may from time to time require. COMPANY may require that FRANCHISEE submit reports via e-mail or other computerized form and/or that COMPANY have access to FRANCHISEE's computer system to obtain such reportable information. C. STANDARD CHART OF ACCOUNTS. FRANCHISEE shall establish a bookkeeping and accounting system which utilizes, without violation, COMPANY's then current standard chart of accounts. All bookkeeping and accounting records maintained by FRANCHISEE, all financial statements prepared by or for FRANCHISEE and all reports submitted by FRANCHISEE to COMPANY shall conform to COMPANY's then current standard chart of accounts as described in the Operating Manual. All such bookkeeping and accounting records and all financial statements, for such periods as may from time to time be prescribed in the Operating Manual, shall be maintained available for inspection by COMPANY during normal business hours. 12. COMPANY'S RIGHT TO INSPECT AND AUDIT THE BUSINESS. To determine whether FRANCHISEE is complying with this Agreement, COMPANY shall have the right at any time during business hours, and without prior notice to FRANCHISEE, to inspect the BUSINESS, the Rental Vehicles in the Fleet, all 12 records of the BUSINESS, whether handwritten, printed, computer-generated or electronic; and, FRANCHISEE shall allow COMPANY full and complete access to all computers and computer systems used in the BUSINESS. FRANCHISEE also agrees to allow COMPANY access to the federal, state and local income tax returns of FRANCHISEE and FRANCHISEE hereby waives any privilege pertaining thereto. FRANCHISEE shall fully cooperate with representatives of COMPANY making any such inspection and/or audit and shall permit representatives of COMPANY to take photographs, movies or videotapes of BUSINESS and to interview the employees of the BUSINESS. COMPANY shall bear the cost of all such inspections and audits, provided that if any such inspection or audit discloses that FRANCHISEE has failed to comply with any provisions of this Agreement or the Operating Manual in a manner that would permit COMPANY to terminate this Agreement pursuant to Section 15 of this Agreement, in addition to all other remedies and rights available to COMPANY, the cost of such inspection and/or audit, including normal daily compensation, traveling expenses, room and board (not to exceed one thousand dollars ($1,000.00), shall be borne by FRANCHISEE. COMPANY's rights under this Section 12 shall apply only to the operation of the BUSINESS. 13. ASSIGNMENT. A. BY COMPANY. This Agreement and the Franchise is fully assignable by COMPANY and shall inure to the benefit of any assignee(s) or other legal successor(s) to the interest of COMPANY herein. B. FRANCHISEE MAY ASSIGN WITH THE APPROVAL OF COMPANY. FRANCHISEE understands and acknowledges that the right and duties created by this Agreement are personal to FRANCHISEE or to its owner and that COMPANY has granted the franchise in reliance upon the individual or collective character, skill, aptitude, attitude, business ability and financial capacity of FRANCHISEE or its owner. Therefore, the Franchise, the BUSINESS (or any interest therein) or any part or all of the ownership of FRANCHISEE may be assigned, sold, subdivided or otherwise transferred by FRANCHISEE or its owner only upon the prior written approval of COMPANY, and any such assignment or transfer without such approval shall constitute a breach hereof and convey no rights to or interests in the Franchise or the BUSINESS. C. CONDITIONS FOR APPROVAL OF ASSIGNMENT. If FRANCHISEE and its owners are in full compliance with this Agreement, COMPANY shall not unreasonably withhold its approval of an assignment, provided that the proposed assignee(s) are, in the opinion of COMPANY, individuals of good moral character who have sufficient business experience, aptitude and financial resources to own and operate the BUSINESS and otherwise meet COMPANY's then applicable standards for franchisees, and further provided that the following conditions are met prior to, or concurrently with, the effective date of this assignment: 1. all obligations of FRANCHISEE and its owner incurred in connection with this Agreement have been assumed by the assignee; 13 2. FRANCHISEE shall have paid such continuing franchise and service fees, advertising contributions and any other amounts owed to COMPANY or its affiliates, or to any other person or entity to which non-payment will affect the ongoing operations of the BUSINESS, which are then due and unpaid; 3. the assignee agrees to complete the training program required of new franchisees; 4. the assignee and its owner shall have executed and agreed to be bound by COMPANY's then current form of franchise agreement and such ancillary agreements as are then customarily used by COMPANY in the grant of franchises for PRICELE$$ businesses of COMPANY; 5. FRANCHISEE or the assignee shall have paid a reasonable transfer fee to COMPANY in an amount equal to the transfer fee then being charged by COMPANY; 6. COMPANY shall have approved the material terms and conditions of such assignment; and 7. FRANCHISEE and its owner shall have executed a release of COMPANY of all possible liability to FRANCHISEE and its owner and a non-competition covenant in favor of COMPANY and the assignee, agreeing that for a period of not less than two (2) years, commencing on the effective date of the assignment, they will not have any interest as an owner, investor, partner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business (as defined in Section 9) located within the Primary Service Area or within five miles of the border of the Primary Service Area. D. DEATH OR DISABILITY OF FRANCHISEE. Upon the death or permanent disability of FRANCHISEE or a principal owner of FRANCHISEE, the executor, administrator, conservator or other personal representative of such person shall, within six (6) months from the date of death or disability, assign his interest in the Franchise and the BUSINESS or FRANCHISEE, to a third party approved by COMPANY subject to the conditions of Section 13C of this Agreement. 14 E. COMPANY'S RIGHT OF FIRST REFUSAL. If FRANCHISEE or its owner(s) shall at any time determine to sell an interest in the BUSINESS or an ownership interest in FRANCHISEE, FRANCHISEE or its owner(s) shall obtain a bona fide, executed written offer and a reasonable earnest money deposit from a responsible and fully disclosed purchaser and shall submit an exact copy of such offer to COMPANY. COMPANY shall have the right, exercisable by written notice delivered to FRANCHISEE or its owner(s) within thirty (30) days from the date of delivery of an exact copy of such offer to COMPANY, to purchase such interest in the BUSINESS or such ownership interest in FRANCHISEE for the price and on the terms and conditions contained in such offer, provided that COMPANY may substitute cash for any form of payment proposed in such offer and shall have not less than thirty (30) days to prepare for closing. If the proposed assignment or franchise transfer includes assets of FRANCHISEE not strictly related to the BUSINESS, COMPANY shall not be required to purchase such other assets. If COMPANY does not exercise its right of first refusal, FRANCHISEE or its owner(s) may complete the sale to such purchaser pursuant to and on the terms of such offer, subject to COMPANY's approval of the purchaser as provided in Sections 13B and 13C, provided that if the sale to such purchaser is not completed within ninety (90) days after delivery of such offer to COMPANY, or if there is a material change in the terms of the sale, COMPANY shall again have the right of first refusal herein provided. F. DELEGATION BY COMPANY. FRANCHISEE agrees that COMPANY shall have the right, from time to time, to delegate the performance of any portion or all of its obligations and duties under this Agreement to designees, whether the same are agents of COMPANY or independent contractors with which COMPANY has contracted to provide such services. 14. TERMINATION OF THE FRANCHISE BY COMPANY. If FRANCHISEE (or FRANCHISEE's owners): (a) fails to secure premises for the BUSINESS as provided in Section 2A of this Agreement; (b) fails to develop the BUSINESS and have the BUSINESS open and operating within ninety (90) days of the date of this Agreement as provided in Section 2B of this Agreement; (c) fails to meet the Fleet requirements provided in Section 3 of this Agreement; or (d) fails to satisfactorily complete the training program as provided in Section 5A of this Agreement, COMPANY shall have the right to terminate this Agreement, effective fifteen (15) days after delivery of notice of termination to FRANCHISEE. COMPANY shall have the further right to terminate this Agreement effective upon delivery of notice of termination to FRANCHISEE if FRANCHISEE (or FRANCHISEE's owners): 1. makes an assignment for the benefit of creditors; 2. makes a written admission of inability to pay debts or obligations as they become due; 3. files a voluntary petition in bankruptcy; 4. is adjudicated as bankrupt or insolvent; 5. files a petition or other pleading seeking reorganization, dissolution or any similar relief under any statute, law or regulation or admits or fails to immediately contest the material allegations of a petition or other pleading filed in any such proceeding; 15 6. seeks, consents to or acquiesces in the appointment of any trustee, receiver or liquidator of the BUSINESS or all or substantial part of any of its assets, or fails to vacate the appointment of any trustee, receiver or liquidator for any such purpose within thirty (30) days of such appointment; 7. has made any material misrepresentation or omission in its application; 8. abandons or fails to actively operate the BUSINESS for a period of more than seven (7) consecutive days without the prior written consent of COMPANY; 9. attempts to transfer, or transfers control of all or any interest in the BUSINESS or Franchise or FRANCHISEE, without the prior written permission of COMPANY. 10. submits on three or more separate occasions during the term of this Agreement reports which understate the number of Rental Vehicles in the Fleet or Gross Revenues generated by the BUSINESS by more than ten percent (10%); 11. fails on two (2) or more separate occasions within any six (6) consecutive month period to submit when due, reports or other data, information or records, and/or pay when due the continuing franchise and service fees, advertising contributions or other payments due to COMPANY, and/or otherwise fails to comply with this Agreement, whether or not such failures to comply are corrected after notice to them; 12. fails to maintain the insurance coverage required by Section 6E of this Agreement or experiences an excessive loss ratio which is disproportionate to industry standards applied on a regional basis in connection with any liability insurance program endorsed by COMPANY. 13. entered into a RENT-A-WRECK Franchise Agreement for substantially the same primary service area as the PRICELE$$ Primary Service Area and such RENT-A-WRECK Franchise Agreement is terminated or expires without renewal; 14. (i) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any felony; or (ii) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any criminal offense related to the BUSINESS, other than minor traffic violations; or (iii) is convicted of, pleads guilty to, or enters a plea of nolo contendere to any crime or commits any act, whether or not related to the BUSINESS that COMPANY determines, in its sole discretion, threatens the integrity or reputation of COMPANY, any of the Marks, the BUSINESS or other PRICELE$$ BUSINESSES; or 15. directly or indirectly maintains Rental Vehicles within the Primary Service Area on which no royalties are paid to COMPANY. 16 COMPANY shall have the further right to terminate this Agreement without further notice, such termination effective immediately upon the expiration of any correction or cure period, if FRANCHISEE, its owners or the BUSINESS fails to comply with any other provision of this Agreement or any mandatory specification, standard or operating procedure prescribed by COMPANY and do not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to them if a non-monetary matter is involved and fifteen (15) days after written notice if a monetary matter is involved, however, see (11) above which applies as specified therein. 15. RIGHTS OF COMPANY AND OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION OF THE FRANCHISE. A. PAYMENT OF AMOUNTS OWED TO COMPANY. Within fifteen (15) days after the effective date of termination or expiration of the Franchise, FRANCHISEE agrees to pay to COMPANY any unpaid continuing franchise fees, advertising contributions, interest due COMPANY on any of the foregoing and all other amounts owed to COMPANY or its affiliates, whether such obligations were incurred under this Agreement or otherwise in the conduct of the BUSINESS, and pay other franchisees of COMPANY or any other person or entity any monies owed to them incurred in connection with the operation of the BUSINESS (i.e. phone bills, rent). B. DE-IDENTIFICATION. FRANCHISEE agrees that after the termination or expiration of the Franchise he will immediately: 1. return to COMPANY all copies of the Operating Manual and other items or materials which have been loaned or furnished without charge by COMPANY; 2. take such action as may be required to cancel all fictitious or assumed name or equivalent registrations relating to his use of any Mark; 3. remove from the Premises or take down all signs, sign-faces, advertising materials, forms, invoices and other materials containing any Mark or otherwise identifying or relating to the BUSINESS, unless COMPANY exercises its option to purchase under Section 15C; 4. notify the telephone company and all listing agencies of the termination or expiration of FRANCHISEE's right to use any telephone number and any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of same to or at the direction of COMPANY. FRANCHISEE acknowledges that as between COMPANY and FRANCHISEE, COMPANY has the sole rights to and interest in all telephone numbers and directory listings associated with any Mark and FRANCHISEE authorizes COMPANY and any officer of COMPANY as his attorney in fact, to direct the telephone company and all listing agencies to transfer same to COMPANY under the Telephone Numbers and Listings Assignment signed concurrently with the Franchise Agreement. At COMPANY's direction, should FRANCHISEE fail to do so, the telephone company and all listing agencies may accept such direction or this Agreement as conclusive proof 17 of the exclusive rights of COMPANY in such telephone numbers and directory listing and its authority to direct their transfer, and take such other actions or execute such other documents, including but not limited to execution of COMPANY's telephone number transfer form, as may be necessary or as COMPANY requests; 5. not directly or indirectly at any time or in any manner identify himself or any business as a current or former PRICELE$$ business, or as a franchisee, licensee or dealer of or as otherwise associated with COMPANY, or use any Mark, any colorable imitation thereof or other indicia of a PRICELE$$ business in any manner or for any purpose, or utilize for any purpose any trade name, trade or service mark or other commercial symbol that suggests or indicates a connection or association with COMPANY or use of any of COMPANY's trade secrets, forms, slogans, signs, symbols, devices or materials that indicate an association with COMPANY or that is or was used by COMPANY and/or other PRICELE$$ businesses; 6. take any actions necessary to effectuate the transfer to whomever COMPANY directs or to attempt to cancel or terminate, all at COMPANY's sole election, any and all of the licenses, agreements and permits, which were used in conjunction with the BUSINESS; and 7. furnish to COMPANY within thirty (30) days after the effective date of termination or expiration evidence satisfactory to COMPANY of FRANCHISEE's compliance with the foregoing obligations. C. COVENANT NOT TO COMPETE. FRANCHISEE agrees that upon termination of the Franchise prior to its expiration, for a period of two (2) years, commencing on the effective date of termination, or the date on which FRANCHISEE ceases to conduct the business conducted pursuant to this Agreement, whichever is later, FRANCHISEE, its general manager and FRANCHISEE's immediate family members and owners will not have any interest as an owner, partner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competitive Business (as defined in Section 9) located within the Primary Service Area or within five miles of the border of the Primary Service Area. D. CONTINUING OBLIGATIONS. All obligations of COMPANY and FRANCHISEE which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding its expiration or termination and until they are satisfied in full or by their nature expire. 16. ENFORCEMENT. A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS Each section, paragraph, term and provision of this Agreement shall be considered severable and if any such portion of this Agreement is held to be invalid, contrary to, or in conflict with any applicable present or future law or regulation, it shall not have any effect upon such other portions of this Agreement as may remain otherwise intelligible. If any applicable and binding 18 law or rule of any jurisdiction requires a greater prior notice of the termination of this Agreement or refusal to grant a Renewal Franchise than is required hereunder, or the taking of some other action not required hereunder or any provision of this Agreement or any specification, standard or operating procedure prescribed by COMPANY is invalid or unenforceable, the prior notice and/or other action required by such law or rule shall be substituted for the comparable provisions hereof, and COMPANY shall have the right to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to be valid and enforceable. FRANCHISEE agrees to be bound by any such modification to this Agreement. B. WAIVER OF OBLIGATIONS. COMPANY and FRANCHISEE may by written instrument unilaterally waive or reduce any obligation or restriction upon the other under this Agreement, effective upon delivery of written notice thereof to the other, but this Agreement may not be otherwise modified except by written agreement signed by both parties. COMPANY and FRANCHISEE shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement by virtue of any custom or practice of the parties at variance with the terms hereof; any failure, refusal or neglect of COMPANY or FRANCHISEE to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder; any waiver, forbearance, delay, failure or omission by COMPANY to exercise any right, power or option with respect to any other PRICELE$$ business(es); or the acceptance by COMPANY of any payments due from FRANCHISEE after any breach of this Agreement. C. FRANCHISEE MAY NOT WITHHOLD PAYMENTS. FRANCHISEE agrees that he will not, on grounds of the alleged nonperformance by COMPANY of any of its obligations hereunder, withhold payment of any continuing franchise and service fees, advertising contributions or any other amounts due COMPANY or its affiliates. D. COSTS AND ATTORNEYS' FEES. If a claim for amounts owed by FRANCHISEE to COMPANY or its affiliates is asserted in any legal proceeding before a court or arbitrator, or if COMPANY or FRANCHISEE is required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in such proceeding shall be entitled to reimbursement of its costs and expenses, including but not limited to attorneys' and accountants' fees. E. GOVERNING LAW/CONSENT TO JURISDICTION. Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Sections 1051 et seq.), this Agreement and the Franchise shall be governed by the laws of the State of Maryland. FRANCHISEE agrees that COMPANY may institute any action against FRANCHISEE in any state or federal court of general jurisdiction in the State of Maryland and FRANCHISEE irrevocably submits to the jurisdiction of such court and waives any objection he may have to the jurisdiction or venue of such court. 19 F. ARBITRATION. Except for controversies, disputes or claims related to or based on FRANCHISEE'S use of the Marks after this Agreement expires or terminates, all controversies, disputes or claims between COMPANY and its shareholders, officers, directors, agents and employees and FRANCHISEE (its owners, guarantors, affiliates and employees, if applicable) arising out of or related to: 1. this Agreement or any other agreement between FRANCHISEE and COMPANY or any provision of any of these agreements; 2. COMPANY'S relationship with FRANCHISEE; 3. the validity of this Agreement or any other agreement between COMPANY and FRANCHISEE or any provision of any of these agreements; or 4. any System Standards relating to establishing or operating the BUSINESS; must be submitted for arbitration, on demand of either party, to the Baltimore, Maryland office of the American Arbitration Association. The arbitration proceedings will be conducted at that American Arbitration Association office and, except as this Agreement otherwise provides, heard by one arbitrator according to the then current commercial arbitration rules of the American Arbitration Association. All matters relating to arbitration will be governed by the Federal Arbitration Act (9 U.S.C. ss.ss. 1 et seq.) and not by any state arbitration law. Notwithstanding the above paragraph, the obligation to arbitrate shall not be binding on COMPANY in claims for the collection of monies due to COMPANY from FRANCHISEE if the amount claimed by COMPANY is less than ten thousand dollars ($10,000). The arbitrator has the right to award or include in his or her award any relief which he or she deems proper in the circumstances, including, without limitation, money damages (with interest on unpaid amounts from the date due), specific performance, injunctive relief and attorneys' fees and costs, provided that the arbitrator may not declare any Mark generic or otherwise invalid or, except as Subsection G below otherwise provides, award exemplary or punitive damages. The arbitrator's award and decision are conclusive and binding upon all parties, and judgment upon the award may be entered in any court of competent jurisdiction. COMPANY and FRANCHISEE agree to be bound by the provisions of any limitation on the period of time in which claims must be brought under applicable law or this Agreement, whichever expires earlier. COMPANY and FRANCHISEE further agree that, in any arbitration proceeding, each must submit or file any claim which would constitute a compulsory counterclaim (as defined by Rule 13 of the Federal Rules of Civil Procedure) within the same proceeding as the claim to which it relates. Any claim which is not submitted or filed as required is forever barred. 20 COMPANY and FRANCHISEE agree that arbitration will be conducted on an individual, not a class-wide, basis, and that an arbitration proceeding between COMPANY and its shareholders, officers, directors, agents and employees and FRANCHISEE (and/or FRANCHISEE's owners, guarantors, affiliates and employees, if applicable) may not be consolidated with any other arbitration proceeding between COMPANY and any other person, corporation, limited liability entity or partnership. Despite COMPANY's agreement to arbitrate, COMPANY and FRANCHISEE each have the right in a proper case to seek temporary restraining orders and temporary or preliminary injunctive relief from a court of competent jurisdiction; provided, however, that COMPANY and FRANCHISEE must contemporaneously submit COMPANY's dispute for arbitration on the merits as provided in this Subsection. The provisions of this Subsection are intended to benefit and bind certain third party non-signatories and will continue in full force and effect subsequent to and notwithstanding this Agreement's expiration or termination. G. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL. Except for claims COMPANY may bring against FRANCHISEE for his unauthorized use of the Marks or unauthorized use or disclosure of any confidential information, COMPANY and FRANCHISEE and their respective owners waive to the fullest extent the law permits any right to or claim for any punitive or exemplary damages against the other and agree that, in the event of a dispute between COMPANY and FRANCHISEE, the party making a claim will be limited to equitable relief and recovery of any actual damages it sustains. However, if FRANCHISEE is required to indemnify COMPANY for any claim or liability under Section 10, FRANCHISEE shall indemnify COMPANY for the full amount of any such claim or liability, including any punitive damages. COMPANY and FRANCHISEE irrevocably waive trial by jury in any action, proceeding or counterclaim, whether at law or in equity, brought by either of them. H. BINDING EFFECT. This Agreement is binding upon COMPANY and FRANCHISEE and their respective executors, administrators, heirs, beneficiaries, assigns and successors in interest and may not be modified except by a written agreement signed by both COMPANY and FRANCHISEE. I. LIMITATIONS OF CLAIMS. Except for claims arising from FRANCHISEE's non-payment or underpayment of amounts FRANCHISEE owes COMPANY under this Agreement or otherwise, any and all claims arising out of or relating to this Agreement or COMPANY's relationship with FRANCHISEE will be barred unless a judicial or arbitration proceeding is commenced within twelve (12) months from the date on which the party asserting the claim knew or should have known of the facts giving rise to the claims. 21 J. CONSTRUCTION. The preambles and exhibit(s) are a part of this Agreement, which constitutes the entire agreement of the parties, and there are no other oral or written understandings or agreements between COMPANY and FRANCHISEE relating to the subject matter of this Agreement. The term "FRANCHISEE" as used herein is applicable to one or more persons, a corporation or a partnership and the singular usage includes the plural and the masculine and neuter usages include the other and the feminine. If two or more persons are at any time the FRANCHISEE hereunder, their obligations and liabilities to COMPANY shall be joint and several. References to "FRANCHISEE" and "assignee" which are applicable to an individual or individuals shall mean the principal owner or owners of the equity or operating control of FRANCHISEE or the assignee and the general manager(s) of the FRANCHISEE or the assignee, if FRANCHISEE is a corporation or partnership. 17. NOTICES AND PAYMENTS. All written notices and reports permitted or required to be delivered by this Agreement or the operating manual shall be deemed so delivered at the time delivered by hand, one (1) business day after sending by overnight delivery service or electronic system or two (2) business days after placed in the mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its current principal business address. All payments and reports required by this Agreement shall be directed to COMPANY at the address notified to FRANCHISEE from time to time. Any required payment or report not actually received by COMPANY during regular business hours on the date due and not postmarked by postal authorities at least two (2) days prior thereto, shall be deemed delinquent. IN WITNESS WHEREOF the parties hereto have executed, sealed and delivered this Agreement in multiple originals on the day and year first above written. COMPANY: FRANCHISEE: PRICELESS RENT-A-CAR, INC., a If an individual: Maryland Corporation ___________________, an individual By:_______________________________ By:_______________________________ Title:_________________________ Date:__________________________ Date:__________________________ 22 If a corporation: _________________________________, a ____________________ corporation By:_______________________________ Title:_________________________ Date:__________________________ By:_______________________________ Title:_________________________ Date:__________________________ If a partnership: _________________________________, a ____________________ partnership By:_______________________________ Title:_________________________ Date:__________________________ By:_______________________________ Title:_________________________ Date:__________________________ 23 EXHIBIT A TO THE PRICELESS FRANCHISE AGREEMENT BY AND BETWEEN PRICELESS RENT-A-CAR, INC. AND ________________________ DATED:_____________ AGREEMENT TERMS 1. Premises. The Premises referred to in Section 1B of the above captioned agreement shall be located at and only at the following address or such other address(es) as are approved in writing by COMPANY: ________________________________________________________________________________ ________________________________________________________________________________ 2. Primary Service Area. The Primary Service Area referred to in Section 1B of the above-captioned agreement shall be all of the area located within: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3. Fleet. The minimum number of Rental Vehicles in the Fleet referred to in Section 3C of the above-captioned agreement throughout the following period shall be: Time Period Number of Rental Vehicles On or before the last month of the first Agreement Year _________________________(____) On or before the last month of the second Agreement Year _________________________(____) On or before the last month of the third Agreement Year _________________________(____) At no time after the end of the third Agreement Year shall there be less than __________________________ (______) Rental Vehicles in the Fleet. 4. Initial Franchise Fee. The initial franchise fee referred to in Section 4A of the above-captioned agreement shall be ______________________________________ Dollars ($_____________). 5. Minimum Fee. The Minimum Fee referred to in Section 4B(2) of the above-captioned agreement shall be as follows: Agreement Year Minimum Fee First (1st) ___________________________________ Second (2nd) ___________________________________ Third (3rd) ___________________________________ After the end of the third (3rd) Agreement Year, the annual Minimum Fee shall be ______________________________________ Dollars ($_____________). 6. General Manager(s). The initial general manager(s) referred to in Section 6D of the above-captioned agreement shall be: NAME ADDRESS TITLE ---- ------- ----- PRICELESS RENT-A-CAR, INC., a FRANCHISEE: Maryland Corporation If an individual: By:_______________________________ ___________________, an individual Title:_________________________ Date:__________________________ By:_______________________________ Date:__________________________ If a corporation: _________________________________, a ____________________ corporation By:_______________________________ Title:_________________________ Date:__________________________ By:_______________________________ Title:_________________________ Date:__________________________ If a partnership: _________________________________, a ____________________ partnership By:_______________________________ Title:_________________________ Date:__________________________ By:_______________________________ Title:_________________________ Date:__________________________ EXHIBIT B TO THE PRICELESS FRANCHISE AGREEMENT BY AND BETWEEN PRICELESS RENT-A-CAR, INC. AND ________________________ DATED:_____________ ASSIGNMENT OF TELEPHONE NUMBERS AND LISTINGS In accordance with the terms of the PRICELE$$ Franchise Agreement between _____________________________ ("FRANCHISEE") and Priceless Rent-A-Car, Inc., a Maryland corporation ("COMPANY"), executed concurrently with this Assignment, under which COMPANY granted FRANCHISEE the right to own and operate a PRICELE$$ business located at ___________________________________ ________________________________ (the "BUSINESS"), FRANCHISEE, for value received, hereby assigns to COMPANY, all of FRANCHISEE'S right, title and interest in and to those certain telephone numbers and regular, classified or other telephone directory listings (collectively, the "Telephone Numbers and Listings") associated with COMPANY's trade and service marks and used from time to time in connection with the operation of the BUSINESS. This assignment is for collateral purposes only and, except as specified herein, COMPANY shall have no liability or obligation of any kind whatsoever arising from or in connection with this Assignment unless COMPANY shall notify the telephone company and all listing agencies (collectively, the "Telephone Company") pursuant to the terms hereof to effectuate the assignment. Upon termination or expiration of the Franchise Agreement (without renewal or extension), COMPANY shall have the right and is hereby empowered to effectuate the assignment of the Telephone Numbers and Listings, and, in such event, FRANCHISEE shall have no further right, title or interest in the Telephone Numbers and Listings and shall remain liable to the Telephone Company for all past due fees owing to the Telephone Company on or before the effective date of the assignment hereunder. FRANCHISEE agrees and acknowledges that as between COMPANY and FRANCHISEE, upon termination or expiration of the Franchise Agreement, COMPANY shall have the sole right to and interest in the Telephone Numbers and Listings, and FRANCHISEE appoints COMPANY as FRANCHISEE's true and lawful attorney-in-fact to direct the Telephone Company to assign same to COMPANY, and execute such documents and take such actions as may be necessary to effectuate the assignment. Upon such event, FRANCHISEE shall immediately notify the Telephone Company to assign the Telephone Numbers and Listings to COMPANY. If FRANCHISEE fails to promptly direct the Telephone Company to assign the Telephone Numbers and Listings to COMPANY, COMPANY shall direct the Telephone Company to effectuate the assignment contemplated hereunder to COMPANY. The parties agree that the Telephone Company may accept COMPANY's written direction or this Assignment as conclusive proof of COMPANY's exclusive rights in and to the Telephone Numbers and Listings upon such termination or expiration. The parties further agree that if the Telephone Company requires that the parties execute the Telephone Company's assignment forms or other documentation at the time of termination or expiration, COMPANY's execution of such forms or documentation shall effectuate FRANCHISEE's consent and agreement to the assignment. The parties agree that at any time after the date hereof, they will perform such acts and execute and deliver such documents as may be necessary to assist in or accomplish the assignment described herein upon termination or expiration of the Franchise Agreement. ASSIGNOR: __________________________________ (FRANCHISEE) __________________________________ Date ASSIGNEE: PRICELESS RENT-A-CAR, INC. By:_______________________________ Its:___________________________ APPROVED AND ACCEPTED BY: __________________________________ (Telephone Company Authorized Representative) __________________________________ (Name of Telephone Company) OWNERS'S GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS This Guaranty must be signed by the principal owners ("Guarantor(s)") of _______________________________ ("FRANCHISEE") under the foregoing PRICELE$$ Franchise Agreement (the "Agreement"). In consideration of and as an inducement to the execution of the Agreement by Priceless Rent-A-Car, Inc. ("COMPANY") each Guarantor signing this Guaranty hereby personally and unconditionally: (A) guarantees to COMPANY and COMPANY's successors and assigns that FRANCHISEE will punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement; and (B) agrees to be personally bound by, and personally liable for the breach of, each and every provision in the Agreement. Each Guarantor waives: (1) acceptance and notice of acceptance by COMPANY of Guarantor's obligations under this Guaranty; (2) notice of demand for payment of any indebtedness or nonperformance of any obligation guaranteed by Guarantor; (3) protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations guaranteed by Guarantor; (4) any right Guarantor may have to require that an action be brought against FRANCHISEE or any other person as a condition of Guarantor's liability; (5) all rights to payment and claims for reimbursement or subrogation which any of the undersigned Guarantor may have against FRANCHISEE arising as a result of the execution of and performance under this Guaranty by Guarantor; and (6) all other notices and legal or equitable defenses to which Guarantor may be entitled in Guarantor's capacity as guarantor(s). Each Guarantor consents and agrees that: (a) Guarantor's direct and immediate liability under this Guaranty shall be joint and several; (b) Guarantor will make any payment or render any performance required under the Agreement upon demand if FRANCHISEE fails or refuses punctually to do so; (c) Guarantor's liability will not be contingent or conditioned upon COMPANY's pursuit of any remedies against FRANCHISEE or any other person; (d) Guarantor's liability will not be diminished, relieved or otherwise affected by any extension of time, credit or other indulgence which COMPANY may from time to time grant to FRANCHISEE or to any other person, including, for example, the acceptance of any partial payment or performance or the compromise or release of any claims and no such indulgence shall in any way modify or amend this Guaranty; and (e) this Guaranty will continue and be irrevocable during the term of the Agreement and, if required by the Agreement, after its termination or expiration. Each Guarantor now executes and delivers this Guaranty as of the date of execution of the Agreement. GUARANTORS PERCENTAGE OF OWNERSHIP IN FRANCHISE ______________________________________ ________% ______________________________________ ________% ______________________________________ ________% EX-21 4 ex21.txt 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. PRICELESS RENT-A-CAR, INC. Maryland 5. CONSOLIDATED AMERICAN RENTAL INSURANCE COMPANY, LTD Bermuda -----END PRIVACY-ENHANCED MESSAGE-----