UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-26616
CRD HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 75-2256798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5808 SEPULVEDA BLVD., SUITE 502
VAN NUYS, CALIFORNIA 91411
(Address of principal executive offices)
(Zip Code)
(818) 909-7425
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 No X
--- ---
As of January 29, 2003, there were 8,583,500 shares outstanding of the
registrant's common stock, $0.001 par value.
1
INDEX
PART I. FINANCIAL INFORMATION
<Table>
<Caption>
PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001............3
Consolidated Statements of Operations
Three and Nine months ended September 30, 2002 and 2001
(unaudited).....................................................4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(unaudited).......................................................5
Notes to Consolidated Financial Statements ...........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........14
ITEM 4. CONTROLS AND PROCEDURES..............................................14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15
ITEM 5. OTHER INFORMATION....................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................15
Signatures...........................................................16
</Table>
2
CRD HOLDINGS, INC.
(FORMERLY KNOWN AS GUMP & COMPANY, INC.)
(A MAJORITY OWNED SUBSIDIARY OF MAII HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
September 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
<Table>
<Caption>
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents, including $2,000,000 of restricted cash ..................... $ 2,206,153 $ 193,328
Accounts receivable, net of allowance for doubtful accounts of $544,962 and $373,609 ... 1,095,882 693,960
Other receivables, net of allowance for doubtful accounts of $49,231 and $0 ............ 618,815 1,129,837
Revenue generating equipment ........................................................... 16,764,157 11,428,698
Prepaid expenses and other current assets .............................................. 310,379 39,879
------------ ------------
Total current assets ............................................................. 20,995,386 13,485,702
Property and Equipment, net ................................................................ 624,174 507,053
Goodwill ................................................................................... 12,479,568 11,535,155
Deposits ................................................................................... 97,336 319,671
------------ ------------
Total assets ..................................................................... $ 34,196,464 $ 25,847,581
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Lines of credit ........................................................................ $ 14,503,877 $ 9,392,866
Current portion of capital lease obligations ........................................... 27,051 23,706
Accounts payable and accrued expenses .................................................. 2,783,325 1,631,344
Notes payable .......................................................................... 80,000 --
Loan from parent ....................................................................... 7,647,781 3,444,364
Loan from officer ...................................................................... 66,093 --
------------ ------------
Total current liabilities ........................................................ 25,108,127 14,492,280
Capital lease obligations, net of current portion .......................................... 32,292 53,445
------------ ------------
Total liabilities ............................................................... 25,140,419 14,545,725
------------ ------------
Commitments:
Shareholders' Equity
Preferred stock, $0.01 par value, $10,000,000 shares authorized, no shares issued
or outstanding ..................................................................... -- --
Common stock, $0.001 par value, 40,000,000 shares authorized; 8,583,500 and
8,250,000 shares issued and outstanding, respectively .............................. 8,583 8,250
Additional paid-in capital .............................................................. 12,250,471 12,250,804
Accumulated deficit ..................................................................... (3,203,009) (957,198)
------------ ------------
Total shareholders' equity ...................................................... 9,056,045 11,301,856
------------ ------------
Total liabilities and shareholders' equity ...................................... $ 34,196,464 $ 25,847,581
============ ============
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
CRD HOLDINGS, INC.
(FORMERLY KNOWN AS GUMP & COMPANY, INC.)
(A MAJORITY OWNED SUBSIDIARY OF MAII HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
<Table>
<Caption>
THREE THREE NINE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenue ............................................... $ 5,431,088 $ -- $ 17,653,047 --
Cost of revenues .......................................... 4,498,585 -- 13,049,342 --
------------ ------------ ----------- ------------
Gross profit .............................................. 932,503 -- 4,603,705 --
Costs and expenses:
Salaries and benefits ................................... 1,545,964 -- 3,970,877 --
Selling, general and
administrative ....................................... 1,047,298 -- 2,878,639 --
------------ ------------ ----------- ------------
Operating income (loss) ............................. (1,660,759) -- (2,245,811) --
Other (income) expense:
Interest income and other,
net .................................................. -- -- -- --
------------ ------------ ----------- ------------
Net income (loss) ......................................... $(1,660,759) $ -- $(2,245,811) $ --
============ ============ =========== ============
Net income (loss) per share (basic) ....................... $ (0.19) $ -- $ (0.27) $ --
============ ============ =========== ============
Net income (loss) per share (diluted) ..................... $ (0.19) $ -- $ (0.27) $ --
============ ============ =========== ============
Weighted average number of common shares (in thousands)
(basic) ................................................... 8,583,500 2,033,201 8,374,754 2,033,201
============ ============ =========== ============
Weighted average number of common shares (in thousands)
(diluted) ................................................. 8,583,500 2,033,201 8,374,754 2,033,201
============ ============ =========== ============
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
CRD HOLDINGS, INC.
(FORMERLY KNOWN AS GUMP & COMPANY, INC.)
(A MAJORITY OWNED SUBSIDIARY OF MAII HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
<Table>
<Caption>
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) from continuing operations ................................ $ (2,245,811) $ --
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for doubtful accounts .......................................... 220,584 --
Depreciation and amortization ............................................ 3,239,051 --
(Gain) loss on sale of revenue generating equipment ...................... (231,460) --
(Increase) decrease in:
Accounts receivable .................................................. (573,275) --
Other receivables .................................................... (83,418) --
Prepaid expenses and other current assets ............................ (270,500) --
Deposits ............................................................. 222,335 --
(Increase) decrease in:
Accounts payable and accrued expenses ................................. 1,188,074 --
------------- -------------
Net cash provided by operating activities ..................................... 1,465,580 --
Cash flows from investing activities:
Property and equipment purchases ......................................... (229,332) --
Sale of revenue generating equipment ..................................... 6,780,459 --
Purchase of revenue generating equipment ................................. (3,336,172) --
Loan from parent ......................................................... 1,989,493 --
Net loan proceeds from officer ........................................... 66,093 --
------------- -------------
Net cash provided by investing activities ..................................... 5,270,541 --
Cash flows from financing activities:
Payments on line of credit ............................................... (4,741,980) --
Proceeds from loan ....................................................... 80,000 --
Payments on loans ........................................................ (43,508) --
Payments on capital lease obligations .................................... (17,808) --
------------- -------------
Net cash used in financing activities ......................................... (4,723,296) --
------------- -------------
Net increase (decrease) in cash and cash equivalents .......................... 2,012,825 --
Cash and cash equivalents at beginning of period ............................... 193,328 --
------------- -------------
Cash and cash equivalents at end of period ..................................... $ 2,206,153 $ --
============= =============
Supplemental schedule of noncash investing and financing activities-
revenue generating equipment financed through line of credit ................ $ 9,989,308 $
revenue generating equipment financed with working capital provided by
a parent .................................................................. $ 2,213,924 $
SEE NOTES TO THE FINANCIAL STATEMENTS.
5
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
CRD Holdings, Inc., formerly Gump & Company, Inc., was originally
incorporated on September 28, 1988 under the laws of the State of Delaware under
the name of Brian Capital, Inc. On September 15, 1993, Brian Capital, Inc.
changed its name to Sea Pride Industrie, Inc. On August 18, 1997, Sea Pride
Industries, Inc. changed its name to Gump & Company, Inc. and on June 12, 2002
Gump & Company, Inc. changed its name to CRD Holdings, Inc. (the "Company") as
part of the transaction with Car Rental Direct, Inc., discussed below.
The Company was organized as a publicly held corporation to pursue a
business combination with a privately held entity believed to have growth and
profit potential, irrespective of the industry in which it is engaged.
Car Rental Direct, Inc. ("CRD"), a wholly-owned subsidiary of the
Company, was incorporated in the State of Nevada on September 22, 1999 and is a
rental car company that specializes in renting cars to customers whose personal
or corporate vehicle is out of service for an extended period of time. CRD
currently owns and operates 30 daily rental locations, four satellite locations,
and one wholesale used car facility in California, Arizona and Nevada. CRD
facilities are located within strip malls as well as in free-standing buildings,
hotels and car dealerships. At September 30, 2002, CRD had 168 employees and
owns and operates a fleet of approximately 2,060 cars.
CRD uses a wide variety of makes and models of cars for daily rental
purposes, nearly all of which are current year or the previous year's models.
CRD rents cars on a daily, weekend, weekly or monthly basis, with rental charges
computed on a limited or unlimited mileage rate, or on a time rate plus a
mileage charge. CRD rates vary at different locations depending on local market,
competitive and cost factors, and virtually all rentals are made utilizing rate
plans under which the customer is responsible for gasoline used during the
rental.
On June 12, 2002, the Company entered into an Agreement and Plan of
Merger whereby it acquired all of the outstanding common stock of CRD from CRD's
parent, MAII Holdings, Inc. ("MAII"),in exchange for an aggregate of 8,250,000
shares of newly issued common stock. For accounting purposes, the transaction
has been treated as a recapitalization of CRD, with CRD as the accounting
acquirer (reverse acquisition), and has been accounted for in a manner similar
to a pooling of interests. The operations of the Company have been included with
those of CRD from the acquisition date. After this transaction MAII owned
approximately 96% of the issued and outstanding common stock of the Company. The
Company had minimal assets and liabilities at the date of the acquisition and
did not have significant operations prior to the acquisition. Therefore, no pro
forma information is presented. The Company has changed its year-end to December
31, as part of the merger with CRD.
In connection with the transaction, the Company also amended and
restated its Certificate of Incorporation to: (i) increase the number of
authorized shares of the Company's Common Stock from 20,000,000 to 40,000,000
and to decrease the par value of the Company's Common Stock from $0.01 per share
to $0.001 per share; and (ii) increase the number of authorized shares of the
Company's Preferred Stock from 2,000,000 to 10,000,000, with no change in par
value.
6
NOTE 2 - TRANSACTIONS
On May 1, 2002, CRD entered into an agreement ("Asset Purchase
Agreement") to acquire substantially all of the operating assets of a Discount
Rent-A-Car franchisee ("Seller"). The closing was subject to the obtaining of
certain assignments and other conditions. In conjunction with the Asset Purchase
Agreement, CRD has entered into an operating agreement ("Operating Agreement")
with Seller to operate the Seller's business. The Operating Agreement is
effective May 1,2002 and will be terminated upon the closing or termination of
the Asset Purchase Agreement.
On August 29, 2002, the Asset Purchase Agreement was terminated as
assignments and consents of certain creditors were not obtained and new
liabilities of the Seller were discovered during the Company's due diligence
process. Following the announcement by the Company to terminate the Asset
Purchase Agreement, the Company continued to operate the Seller's fleet under a
management agreement as negotiations to purchase the Seller's fleet continued
between the Company, the Seller, and Ford Motor Credit Corporation ("Ford") who
had provided the Company with a vehicle financing credit line.
On September 4, 2002, Ford reduced the Company's credit line from $18
million to $10 million primarily based on the Company's termination of the Asset
Purchase Agreement. The Company believes the decision by Ford to reduce its
credit line was improper as the $18 million fleet facility provided by Ford was
not contingent upon the closing of the Asset Purchase Agreement and was
specifically negotiated out of the Ford Master Loan And Security Agreement
("Loan") and Ford Amendment To Master Loan And Security Agreement ("Amendment"),
dated February 21, 2002 and April 19, 2002, respectively.
In October 2002, the Company, the Seller and Ford terminated all
negotiations for the Company to purchase the Seller's fleet. As a result, the
Company began returning to the Seller Seller's Fleet vehicles operated under
the management Agreement, as those vehicles come off rent and are returned to
the Company.
On October 29, 2002, the Company withdrew its $2 million certificate of
deposit credit enhancement with Ford in order to make the funds available for
credit enhancements with other potential lenders.
On November 1, 2002, Ford notified the Company in writing that it was
terminating its relationship with the Company, effective March 2, 2003, based on
the following: 1) Ford belief that it could, in its sole discretion, modify the
amount of the line and terminate the line under the loan agreement; 2) the
Company's withdrawal of the $2 million credit enhancement; 3) failure of the
Company to respond to a request by Ford made on October 22, 2002, as part of
Ford's review to reinstate the Company's credit line to $18 million, that the
Company provide Ford with CRD's third quarter financial statements (by month), a
business plan forecast based on third quarter actual conditions and a summary of
business operations that relate to both CRD's third quarter results and
projections; and 4) tone and content of a letter sent by the Company on October
30, 2002 to Ford outlining the Company's dispute with Ford regarding the
reduction of the credit facility.
Effective January 27, 2003, the Company and Ford Motor Credit Company entered
into a Forbearance Agreement and Release pursuant to which the parties have
settled their disputes and provided that the Company does not default under the
Agreement.
NOTE 3 - UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 2002, and the related
consolidated statements of operations for the three months and nine months ended
September 30, 2002 and 2001 and cash flows for the nine months ended September
30, 2002 and 2001 have been prepared by the Company without an audit. The
December 31, 2001 consolidated balance sheet is derived from the audited balance
sheet as of that date. In the opinion of management, all adjustments necessary
to present fairly the financial position at September 30, 2002, and the results
of operations and cash flows for all periods presented have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. The carrying amounts of these assets approximate fair
value due to the short maturity of the investments. On April 19, 2002, the
Company increased its line of credit with a lender and was required to reserve
$2 million as part of the credit facility. The $2 million used for the reserve
was provided by MAII, the Company's parent and majority shareholder, and is
included on the balance sheet in loan from parent. As of October 28, 2002, the
$2 million reserve was invested in a one month recurring certificate of deposit.
On October 29, 2002, the Company withdrew its $2 million certificate of deposit
and paid back the $2 million loan from parent.
7
Revenue Recognition
Revenue consists primarily of fees from vehicle rentals and the sale of
vehicles. The Company recognizes revenue over the period in which the vehicles
are rented and recognizes revenue on the sale of the vehicles upon execution of
a bill of sale.
Revenue Generating Equipment
Revenue generating equipment consists of rental vehicles that are
stated at cost, less accumulated depreciation. The straight-line method is used
to depreciate revenue generating equipment to estimated residual values over
periods typically ranging from 44 months to 60 months. However, for certain
vehicles purchased from a manufacturer that has filed for bankruptcy protection,
depreciation was accelerated to 33 months to account for the decline in value of
those vehicles. Upon the sale of vehicles, the net book value of vehicles is
included as a component of cost of revenues in the accompanying statements of
operations. At September 30, 2002, revenue generating equipment was $16,764,157,
net of accumulated depreciation of $4,027,766, compared to revenue generating
equipment of $11,428,698, net of accumulated depreciation of $4,404,605 at
December 31, 2001. Depreciation expense for the three and nine months ended
September 30, 2002 was $1,285,639 and $3,126,840.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives as follows:
<Table>
Computers and software 5 years
Furniture and fixtures 7 years
Building improvements 7 years
</Table>
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or losses on the
sale of property and equipment are reflected in the statements of operations.
Self-Insurance Liability
The Company retains up to $35,000 of risk per claim, plus claims
handling expense for its automobile collision liability risks. Costs in excess
of this retained risk per claim are insured under various contracts with
insurance carriers. The ultimate costs of these retained insurance risks are
estimated by management, are based upon historical claims experience, and are
adjusted for current trends and changes in claims handling procedures.
8
Income Taxes
The Company accounts for income taxes under the asset and liability
method which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Earnings (Loss) Per Share
The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed similar to basic
earnings (loss) per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
Long Term Incentive Plan
In June 2002, the Company adopted the 2002 Long Term Incentive Plan (the "2002
Plan") to allow officers, employees, and certain non-employees to receive awards
under the 2002 Plan, including options to purchase common stock, SAR's,
restricted stock, deferred stock, dividend equivalents and other stock-based
awards. For stock options granted under the 2002 Plan, regular salaried
employees and directors may be granted options exercisable at not less than 100%
of the fair market value of the shares at the date of grant and the duration may
not exceed ten years. The exercise price of any option granted to a person who
owns stock possessing more than 10% of the voting power of all classes of common
stock of the Company or any subsidiary of the Company must be 110% of the fair
market value of the common stock on the date of grant, and the duration may not
exceed five years. Options generally become exercisable at a rate of one-third
of the shares subject to option on each of the first, second, and third
anniversary dates of the grant. A maximum number of 2,200,000 shares of the
Company's common stock may be issued under the 2002 Plan.
In June 2002, the Board of Directors authorized the granting under the 2002
plan of 988,700 incentive stock options and 392,000 non-qualified stock options
to certain employees and non-employees. As of the date of this filing these
options have not been granted.
Reclassifications
Certain balances have been reclassified to conform with the current
period presentation.
Change in Accounting Principle
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. SFAS 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives but requires that these assets be reviewed for
impairment at least annually or on an interim basis if an event occurs or
circumstances change that could indicate that their value has diminished or been
impaired. Other intangible assets will continue to be amortized over their
estimated useful lives. Pursuant to SFAS 142, amortization of goodwill and
assembled workforce intangible assets recorded in business combinations prior to
June 30, 2001 ceased effective January 1, 2002. Goodwill resulting from business
combinations completed after June 30, 2001 will not be amortized. The Company
will test goodwill and intangible assets with indefinite lives for impairment
during the fiscal year beginning January 1, 2002 and any resulting impairment
charge will be reflected as a cumulative effect of a change in accounting
principle.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in APB No. 30 will now be used to classify those gains
and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS
No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-lease transactions. This statement
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No. 145 to
have a material impact, if any, on its financial position or results of
operations.
9
In June 2002, the FASB issued SFAS No. 146 " Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3 a
liability for an exit cost as defined was recognized at the date of an entity's
commitment to an exit plan. The Company does not expect adoption of SFAS No. 146
to have a material impact, if any, on its financial position or results of
operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. The Company does not expect adoption of
SFAS No. 147 to have a material impact, if any, on its financial position or
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure."SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not expect adoption of SFAS No. 147 to have a material
impact, if any, on its financial position or results of operations.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 consisted of the
following:
<Table>
Computers and software $ 496,925
Furniture and fixtures 200,916
Building improvements 207,504
----------
905,345
Less accumulated depreciation and amortization (281,171)
----------
TOTAL $ 624,174
==========
</Table>
Depreciation and amortization expense for the three and nine months
ended September, 30 2002 was $40,457 and $112,211, respectively.
NOTE 6 - LINE OF CREDIT
In January 2002, the Company discovered an additional $798,269 of lines
of credit outstanding in connection with the acquisition of CRD, which in turn
increased goodwill.
On April 19, 2002, the Company increased its line of credit with a
lender from $10 million to $18 million. Cash of $2 million was restricted for
use as collateral for this line of credit.
On September 4, 2002, Ford reduced the Company's credit line from $18
million to $10 million primarily based on the Company's termination of the Asset
Purchase Agreement as referred to in NOTE 2.
As of September 30, 2002, the Company's outstanding line of credit was
$14,503,877 compared to $9,392,866 at December 31, 2001. Interest expense for
the three and nine months ended September 30, 2002 was $311,782 and $690,981,
respectively. The lines of credit expire between November 2002 and October 2005.
On October 29, 2002, the Company withdrew its $2 million certificate of
deposit credit enhancement with Ford in order to make the funds available for
credit enhancements with other potential lenders.
On November 1, 2002, Ford notified the Company in writing that it was
terminating its relationship with the Company, effective March 2, 2003, giving
the Company approximately 120 days to obtain other financing facilities. As of
September 30, 2002, the Company's outstanding line of credit with Ford was
$12,328,610. On January 27, 2003, the Company settled its dispute with Ford and
was given twelve months to find another credit facility.
NOTE 7 - NOTES PAYABLE
At September 30, 2002 and December 31, 2001, notes payable was $80,000
and $0, respectively. The balance at September 30, 2002 is comprised of a
promissory note in the amount of $80,000, bearing no interest, due on demand.
NOTE 8 - COMMITMENTS
10
Leases
The Company leases its office facilities and car rental lots under
various operating lease agreements with third parties. In addition, the Company
also leases certain computer equipment and software under capital leases. The
leases have initial terms of between 18 months and five years and require fixed
monthly payments. Rent expense was $250,470 and $665,380 for the three and nine
months ended September 30, 2002, respectively.
NOTE 9. RELATED PARTY TRANSACTIONS
Loans from Parent & Officer
Loans from parent represents money lent to CRD from MAII to purchase
revenue generating equipment and for working capital. At September 30, 2002 and
December 31, 2001, loans from parent was $7,647,781 and $3,444,364,
respectively. At September 30, 2002 and December 31, 2001, loans from officer
was $66,093 and $0, respectively. Loans from parent and officer bear no interest
and are due on demand.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS:
Forward-looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements requires managers to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses and disclosures on the date of the financial statements. On an
on-going basis, we evaluate our estimates, including, but not limited to, those
related to revenue recognition, accounts receivable and impairment of
intangibles. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
consolidated financial statements.
Revenue Recognition
The Company's revenue was generated solely by its wholly owned
subsidiary CRD. Revenue from CRD consists primarily of fees from rentals and the
sale of vehicles. The Company recognizes revenue over the period in which the
vehicles are rented and recognizes revenue on the sale of the vehicles upon
execution of a bill of sale.
Three and nine months ended September 30, 2002 and 2001.
As discussed in the notes to the consolidated financial statements,
effective June 12, 2002, pursuant to an Agreement and Plan of Merger dated as of
June 12, 2002, Gump & Company, Inc., a Delaware Corporation, subsequently
renamed to CRD Holdings, Inc. (the "Company") completed a transaction with MAII
Holdings, Inc., a Texas corporation ("MAII"), CRD Acquisition, Inc., a Nevada
corporation and a wholly-owned subsidiary of the Company ("CRD Acquisition"),
Car Rental Direct, Inc., a Nevada corporation and a wholly-owned subsidiary of
MAII ("Car Rental Direct"), and certain holders of the outstanding capital stock
of the Company (the "Merger Agreement"), pursuant to which CRD Acquisition
merged with and into CRD (the "Merger"). CRD emerged from the Merger as the
surviving corporation and a wholly-owned subsidiary of the Company, with the
Company as a majority owned subsidiary of MAII. The Company had no operations
prior to the merger. Further, the results of operations for the three months and
nine months ended September 30, 2002 are not comparable to those in 2001.
11
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables list the Company's quarterly financial information
for the first three quarters ended March 31, June 30, and September 30, 2002:
(Selected financial data for 2001 is not provided since the Company did not have
at least a full quarter of activity).
<Table>
<Caption>
2002
--------------------------------
First Second Third
Quarter Quarter Quarter
--------- --------- --------
Net Revenue (in millions) $ 4.5 $ 7.7 $ 5.4
Cost of revenues (in millions) 3.1 5.4 4.5
--------- --------- --------
Gross profit (in million) 1.4 2.3 0.9
Salaries and benefits (in millions) 1.0 1.4 1.5
Selling, general, and
administration (in millions) 1.1 0.8 1.1
--------- --------- --------
Net income (loss) (in millions) $ (0.7) $ 0.1 $ (1.7)
========= ========= ========
Earnings per share:
Basic $ (0.08) $ 0.01 (0.19)
Diluted $ (0.08) $ 0.01 (0.19)
Weighted-average (basic) 8,250 8,290 8,584
Weighted-average (diluted) 8,250 8,290 8,584
</Table>
NET REVENUES. Net revenues for the three and nine months ended
September 30, 2002 were $5.4 and $17.6 million, respectively. Net revenues of
$5.4 million in the third quarter decreased by $2.3 million or 29% from net
revenues of $7.7 million in the second quarter, as the Company was unable to
utilize the full $18 million credit facility provided by Ford or secure adequate
additional credit facilities to replace older model vehicles sold by the
Company. The Company operated 2,060 vehicles in the third quarter compared to
2,300 vehicles operated in the second quarter. Net Revenues of $7.7 million in
the second quarter increased by $3.2 million or 71% from net revenues of $4.5
million in the first quarter as a result of the Company operating nine new
offices and operating 800 more vehicles in the second quarter compared to the
first quarter.
COST OF REVENUES. Cost of revenues was $4.5 and $13.0 million for the
three and nine months ended September 30, 2002, which consists primarily of
vehicle depreciation, interest on lines of credit, and cost of vehicle sales.
Cost of revenues in the third quarter decreased $0.9 million or 17%, compared to
cost of revenues in second quarter which increased $2.3 million or 74% from the
first quarter.
GROSS PROFIT. Gross profit was $0.9 and $4.6 million for the three and
nine months ended September 30, 2002. Gross profit of $0.9 million in the third
quarter decreased $1.4 million or 61% compared to $2.3 million in the second
quarter which increased by $0.9 million or 64% from gross profit of $1.4 million
in the first quarter. The increase in gross profit in the second quarter over
the first quarter is primarily attributable to expanding CRD's market presence
in Arizona under the Operating Agreement as referred to in Note 2, whereas the
decreased gross profit in the third quarter under the second quarter is
primarily attributed to a decrease in net revenues.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense was $1.5
and $3.9 million for the three and nine months ended September 30, 2002.
Salaries and benefits expense was $1.0, $1.4, and 1.5 million in the first,
second and third quarters in 2002, respectively. The increase in salaries and
benefits in the second quarter compared to the first quarter was a result of
hiring approximately 40 additional employees in May 2002 as part of operating
nine new locations in Arizona under the Operating Agreement referred to in Note
2. As of September 30, 2002, CRD had 168 employees, most of which were
full-time. As part of an effort to operate within the reduced and eliminated
credit facility with Ford as referred to in Note 2, the Company has implemented
layoffs across all departments. In October through December 2002, the Company
terminated 67 employees. Additional layoffs may occur in order to operate
profitably within the Company's cost structure and decreased vehicle fleet size.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative was $1.1 and $3.0 million for the three and nine months ended
September 30, 2002. Selling, general and administrative expense was $1.1, $0.8,
and $1.1 million in the first, second, and third quarters, respectively. These
expenses were primarily insurance expenses, consulting expenses, and expenses
associated with the operation of the rental facilities and corporate offices.
Also included in selling, general and administrative is facilities expense of
$218,133, $287,569, and $320,260 for the first, second, and third quarters,
respectively, consisting primarily of rent and utilities. Additionally, the
provision for uncollectible accounts was $56,131, ($23,552), and $109,946 for
the first, second, and third quarters in 2002, respectively. As part of an
effort to operate within the reduced and eliminated credit facility with Ford as
referred to in Note 2, the Company has reduced the number of locations from 30
to 18 in October and November 2002.
12
OPERATING INCOME (LOSS). The Company's operating loss was $1.7 million
$2.2 million for the three and nine months ended September 30, 2002.
BENEFIT FROM INCOME TAXES. For the three and nine months ended
September 30, 2002, the Company did not record a tax provision as the Company
has had net losses to date.
NET INCOME (LOSS). The Company's recorded a net loss of $1.7 million
and $2.2 million for the three and nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002 and December 31, 2001, the Company had an
accumulated deficit of $3,203,009 and $957,198.
As of September 30, 2002, CRD has a $10,000,000 flooring line with Ford
Motor Credit Corporation ("Ford"), which bears interest at a revolving rate
equal to the prime rate from time to time plus such prime rate minus Ford's
A-1/P-1 paper note. As a condition of such flooring line, the Company has
pledged to Ford a $2,000,000 certificate of deposit. This flooring line is for
the purchase of Ford vehicles for CRD's fleet. As of September 30, 2002, CRD has
drawn down approximately $12.3 million under this flooring line. CRD also has
loans outstanding with other vehicle credit facilities. CRD's flooring line and
credit facilities are secured by titles to vehicles purchased with such
facilities.
As a result of the Company's efforts to decrease costs primarily
through salaries, benefits and vehicle expenses, higher utilizations of
personnel and vehicle expenses are being realized. Cash reserves remain strong
as of the date of this filing and the Company has significant equity in its
vehicles. Additionally, the Company's parent has committed to fund the
operations to the extent it is able. Finally, the Company has engaged an
investment capital firm to provide additional equity placements and to replace
the current flooring line with Ford.
Net cash provided by operating activities during the nine months ended
September 30, 2002 was $1,465,580 which was primarily from net losses, increases
in accounts receivable, other receivables and prepaid expenses, offset by
depreciation and amortization, provision for doubtful accounts, loss on disposal
of vehicles and accounts payable.
Investing activities for the nine months ended September 30, 2002
provided positive cash flow of $5,270,541. CRD's investing activities are
primarily the receipts from vehicle sales, loans from parent and purchases of
revenue generating equipment. For the nine months ended September 30, 2002 the
sale of revenue generating equipment provided cash flows of $6,780,459 and loan
from parent provided cash flows of $1,989,493. Purchases of revenue generating
equipment was $3,336,172.
Net cash used in financing activities during the nine months ended
September 30, 2002 was $4,723,296. CRD's financing activities are primarily the
payments on lines of credit used to support the Company's vehicle inventory.
Payments on fleet lines were $4,741,980 for the nine months ended September 30,
2002.
As a result of the preceding, the net cash increase for the nine months
ended September 30, 2002 was $2,012,825.
13
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in APB No. 30 will now be used to classify those gains
and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS
No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-lease transactions. This statement
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No. 145 to
have a material impact, if any, on its financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146 " Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3 a
liability for an exit cost as defined was recognized at the date of an entity's
commitment to an exit plan. The Company does not expect adoption of SFAS No. 146
to have a material impact, if any, on its financial position or results of
operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. The Company does not expect adoption of
SFAS No. 147 to have a material impact, if any, on its financial position or
results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure."SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not expect adoption of SFAS No. 147 to have a material
impact, if any, on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 4. CONTROLS AND PROCEDURES.
With the participation of management, CRD's chief executive officer
evaluated its disclosure controls and procedures on September 30, 2002. Based on
this evaluation, the chief executive officer concluded that the disclosure
controls and procedures are effective in connection with CRD's filing of its
quarterly report on Form 10-Q for the quarterly period ended September 30, 2002.
Subsequent to September 30, 2002 through the date of this filing of Form 10-Q
for the quarterly period ended September 30, 2002, there have been no
significant changes in CRD's internal controls or in other factors that could
significantly affect these controls, including any significant deficiencies or
material weaknesses of internal controls that would require corrective action.
PART II
ITEM 1. LEGAL PROCEEDINGS.
As of the date hereof, there are no legal proceedings pending against
or involving the Company that in the opinion of management, could have a
material adverse effect on the business, financial condition or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with the Agreement and Plan of Merger dated as of June
12, 2002, the Company issued 8,250,000 shares of common stock to MAII and
2,291,472 shares of common stock were cancelled.
14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The holders of approximately 99% of the Company's outstanding common
stock approved, by written consent, (a) the Agreement and Plan of Merger dated
as of June 12, 2002 between the Company and MAII; (b) the Company's Amended and
Restated Certificate of Incorporation; and (c) and the Company's 2002 Long-Term
Incentive Plan, the holders of 99% of the Company's outstanding shares of common
stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INDEX TO EXHIBITS
The Exhibits listed below are filed as part of this Report on Form
10-Q.
<Table>
<Caption>
Exhibit
No. Document
- ------- ---------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 12, 2002, by and among
MAII Holdings, Inc., a Texas Corporation, Car Rental Direct, Inc., a
Nevada corporation, Gump & Company, Inc., a Delaware corporation, CRD
Acquisition, Inc., a Nevada corporation, and certain holders of the
outstanding capital stock of Gump (incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on behalf of the
Company on June 19, 2002).
2.2 Reorganization Agreement, dated as of June 12, 2002, by and among Gump
& Company, Inc., Mark Disalvo, California Brokerage Services, Inc.,
Kevin Halter, and Robert M. Kern (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on behalf of the
Company on June 19, 2002).
3.1 Amended and Restated Certificate of Incorporation of Gump & Company,
Inc., dated as of June 12, 2002 Articles of Incorporation (incorporated
by reference to Form 8-K filed With the Securities and Exchange
Commission on behalf of the Company on June 19, 2002).
3.2 Bylaws (incorporated by reference to Form S-1 filed with the Securities
and Exchange Commission on behalf of the Company on January 26, 1989).
4.1 Form of Stock Certificate.
4.2 Long Term Incentive Plan.*
10.1 Employee/Consultant Stock Plan 2002 to (4/24/02) (incorporated by
reference to Form S-8 filed with the Securities and Exchange Commission
on behalf of the Company on April 24, 2002).
10.2 Forbearance Agreement and Release effective as of January 27, 2003, by
and between Car Rental Direct, Inc. Mall Holdings, Inc. Christie Tyler,
Keenan Cheung, Car Rental Direct of Central Arizona, Inc. and Ford
Motor Credit Corporation
99.1 CEO and CFO Certification Pursuant to 18 USC, Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
</Table>
* Filed herewith
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRD Holdings, Inc.
DATE: January 29, 2003
<Table>
<Caption>
Signature Title
- --------- -----
/s/ CHRISTIE S. TYLER Chief Executive Officer and
- ------------------------------ Chief Financial Officer
Christie S. Tyler (duly authorized officer)
</Table>
16
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
By Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings
I, Christie S. Tyler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CRD Holdings, Inc.; 2.
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; 4. I
am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; 6.
I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: January 29, 2003
/s/ CHRISTIE S. TYLER
- --------------------------------------
Christie S. Tyler,
Chief Executive Officer
Chief Financial Officer