United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File Number 0-14819
RENT-A-WRECK OF AMERICA, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 95-3926056
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10324 South Dolfield Drive, Owings Mills, MD 21117
- -------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (410) 581-5755
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,435,496 shares as of
February 6, 2001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - DECEMBER 31, 2000
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 2000 (Unaudited) 2-3
Consolidated Statements of Earnings for the Three and
Nine Month Periods ended December 31, 1999 and 2000 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
ended December 31, 1999 and 2000 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis or Plan of Operation 11-15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
1
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2000 2000
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ............................................................ $ 701,808 $ 554,715
Restricted Cash ...................................................................... 745,514 932,021
Accounts Receivable, net of allowance for doubtful accounts of $829,253
and $868,854 at March 31, 2000 and December 31, 2000, respectively:
Continuing License Fees and Advertising Fees ........................................ 365,462 457,939
Current Portion of Notes Receivable ................................................. 416,002 502,311
Current Portion of Direct Financing Leases .......................................... 5,406 10,734
Insurance Premiums Receivable ....................................................... -- 8,760
Other ............................................................................... 305,685 65,093
Prepaid Expenses and Other ........................................................... 184,045 192,652
Income Taxes Recoverable ............................................................. -- 594,630
Deferred Taxes ....................................................................... 614,541 388,460
----------- -----------
TOTAL CURRENT ASSETS ............................................................ 3,338,463 3,707,315
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture ............................................................................ 99,399 109,434
Computer Hardware and Software ....................................................... 431,918 594,407
Machinery and Equipment .............................................................. 98,172 98,576
Leasehold Improvements ............................................................... 54,321 59,564
Vehicles ............................................................................. 187,360 299,529
----------- -----------
871,170 1,161,510
Less: Accumulated Depreciation and Amortization ...................................... (493,612) (587,034)
----------- -----------
NET PROPERTY AND EQUIPMENT ...................................................... 377,558 574,476
----------- -----------
OTHER ASSETS:
Intangible Assets, net of accumulated amortization of $132,035 and
$147,461 at March 31, 2000 and December 31, 2000, respectively ...................... 193,666 193,412
Long-term Portion of Notes and Direct Financing Lease Receivables, net of
allowance of $3,000 and $0 at March 31, 2000 and December 31, 2000, respectively..... 70,438 69,278
----------- -----------
264,104 262,690
----------- -----------
TOTAL ASSETS .................................................................... $ 3,980,125 $ 4,544,481
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2000 2000
---------- ----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ....................................... $1,359,215 $ 967,592
Dividends Payable ........................................................... 22,100 22,100
Insurance Financing Payable ................................................. -- 119,574
Insurance Loss Reserves ..................................................... 379,075 490,913
Income Taxes Payable ........................................................ 338,550 --
---------- ----------
TOTAL CURRENT LIABILITIES ............................................... 2,098,940 1,600,179
---------- ----------
LONG-TERM LIABILITIES:
Deferred Tax Liability ...................................................... 45,681 45,681
---------- ----------
TOTAL LONG-TERM LIABILITIES ............................................. 45,681 45,681
---------- ----------
TOTAL LIABILITIES ....................................................... 2,144,621 1,645,860
---------- ----------
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
at March 31, 2000 and at December 31, 2000 (aggregate liquidation
preference $884,000 at March 31, 2000 and December 31, 2000) ............... 11,050 11,050
Common Stock, $.01 par value; authorized 25,000,000 shares; issued and
outstanding 3,568,217 shares at March 31, 2000 and 4,435,496 shares at
December 31, 2000 .......................................................... 35,682 44,355
Additional Paid-In Capital .................................................. 1,423,181 2,211,154
Retained Earnings ........................................................... 365,591 632,062
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ................................................ 1,835,504 2,898,621
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $3,980,125 $4,544,481
========== ==========
The accompanying notes are an integral part of these financial statements.
3
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended December 31, Ended December 31,
------------------------- -------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
REVENUES:
Initial License Fees ......................................... $ 152,002 $ 154,500 $ 876,003 $ 945,952
Continuing License Fees ...................................... 702,519 756,747 2,311,676 2,581,166
Advertising Fees ............................................. 221,159 229,936 733,798 776,059
Insurance premiums ........................................... 230,818 297,756 634,069 878,005
Wheelchair van rentals ....................................... 6,597 20,285 18,578 40,974
Other ........................................................ 42,281 45,931 126,454 117,666
---------- ---------- ---------- ----------
1,355,376 1,505,155 4,700,578 5,339,822
---------- ---------- ---------- ----------
EXPENSES:
Salaries, Consulting Fees and Employee Benefits .............. 204,643 217,890 689,325 684,033
Advertising and Promotion .................................... 323,366 325,556 1,037,131 1,078,232
Sales and Marketing Expenses ................................. 110,168 105,453 423,805 305,640
General and Administrative Expenses .......................... 309,349 310,259 788,865 877,560
Repurchase of Options ........................................ -- -- -- 1,234,560
Underwriting Expenses ........................................ 180,635 236,162 505,713 825,906
Depreciation & Amortization .................................. 35,052 44,475 100,167 124,561
---------- ---------- ---------- ----------
1,163,213 1,239,795 3,545,006 5,130,492
---------- ---------- ---------- ----------
OPERATING INCOME ......................................... 192,163 265,360 1,155,572 209,330
OTHER INCOME (EXPENSE)
Interest Income .............................................. 26,767 27,471 78,685 109,408
Interest Expense ............................................. (6,694) (6,936) (20,021) (20,790)
---------- ---------- ---------- ----------
20,073 20,535 58,664 88,618
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE ......................... 212,236 285,895 1,214,236 297,948
---------- ---------- ---------- ----------
INCOME TAX (EXPENSE) BENEFIT ................................... (56,741) (110,354) (393,243) 34,823
---------- ---------- ---------- ----------
NET INCOME ............................................... $ 155,495 $ 175,541 $ 820,993 $ 332,771
DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK ............ 22,400 22,100 67,400 66,300
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES.... $ 133,095 $ 153,441 $ 753,593 $ 266,471
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic ........................................................ $ .04 $ .03 $ .20 $ .07
---------- ---------- ---------- ----------
Weighted average common shares ............................... 3,783,652 4,486,366 3,889,015 3,961,013
========== ========== ========== ==========
Diluted ...................................................... $ .03 $ .03 $ .14 $ .06
---------- ---------- ---------- ----------
Weighted average common shares plus convertible
preferred stock, options and warrants.......................... 5,962,235 5,593,517 5,987,134 5,473,250
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31,
------------------------------
1999 2000
----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ..................................................... $ 820,993 $ 332,771
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............................... 100,167 124,561
Deferred income taxes ....................................... (79,030) 226,081
Gain on disposal of property and equipment .................. -- (8,090)
Provision for doubtful accounts ............................. 185,697 36,601
Changes in assets and liabilities:
Accounts and notes receivable ............................... 222,407 21,037
Prepaid expenses ............................................ 15,788 (8,607)
Income taxes recoverable .................................... -- (594,630)
Accounts payable and accrued expenses ....................... (38,808) (391,623)
Income taxes payable ........................................ 56,480 (338,550)
Insurance loss reserves ..................................... 151,444 111,838
----------- -----------
Net cash provided by (used in) operating activities...... 1,435,138 (488,611)
----------- -----------
Cash flows from investing activities:
(Increase) in restricted cash ................................. (8,501) (186,507)
Proceeds from sale of property and equipment .................. -- 32,620
Acquisition of property and equipment ......................... (121,763) (339,340)
Additions to intangible assets ................................ (16,162) (15,173)
----------- -----------
Net cash used in investing activities ................... (146,426) (508,400)
----------- -----------
Cash flow from financing activities:
(Decrease) increase in insurance financing payable ............ (447,024) 119,574
Net proceeds from exercise of stock options and warrants....... -- 896,866
Retirement of common stock .................................... (790,000) (100,222)
Preferred dividends paid ...................................... (214,697) (66,300)
----------- -----------
Net cash (used in) provided by financing activities...... (1,451,721) 849,918
----------- -----------
Net (decrease) increase in cash and cash equivalents..... (163,009) (147,093)
Cash and cash equivalents at beginning of period ................ 861,794 701,808
----------- -----------
Cash and cash equivalents at end of period ...................... $ 698,785 $ 554,715
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid ................................................. $ 20,021 $ 20,790
Taxes paid .................................................... $ 419,433 $ 670,993
The accompanying notes are an integral part of these financial statements.
5
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements presented herein include the accounts
of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned
subsidiaries, Rent-A-Wreck One Way, Inc. ("RAW One Way"), Consolidated American
Rental Insurance Company, LTD ("CAR Insurance") and Bundy American Corporation
("Bundy"), and Bundy's subsidiaries, Rent-A-Wreck Leasing, Inc. ("RAW Leasing")
and Priceless Rent-A-Car, Inc. ("PRICELESS").
All of the above entities are collectively referred to as the "Company"
unless the context provides or requires otherwise. All material intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
The consolidated balance sheet as of December 31, 2000, and the
consolidated statements of earnings for the three and nine month periods ended
December 31, 1999 and 2000 and statements of cash flows for the nine month
periods ended December 31, 1999 and 2000 have been prepared by the Company
without audit. In the opinion of management, all adjustments which are necessary
to present a fair statement of the results of operations for the interim periods
have been made, and all such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's March 31, 2000 Form 10-KSB filed with the
Securities and Exchange Commission. The interim results of operations for the
three and nine month periods ended December 31, 1999 and 2000 are not
necessarily indicative of the operating results for the full fiscal year.
2. REPURCHASE OF STOCK OPTIONS
On September 21, 2000, the Board of Directors authorized the repurchase of,
and the Company entered into an agreement to repurchase, 957,721 options, held
by affiliates, for an aggregate price of $1,234,560. The repurchase has been
included in the consolidated statement of earnings for the nine month period
ended December 31, 2000 and resulted in compensation expense of $1,234,560. As
of December 31, 2000, the Company had outstanding and exercisable options for
the purchase of 35,000 shares of its common stock at an exercise price of $1.64.
6
3. INCOME TAXES
Income tax liabilities and assets are recognized for the deferred tax
consequences of temporary differences or carryforwards that will result in net
taxable income or deductible amounts in future periods. Deferred tax expense or
benefit is the result of changes in the net asset or liability for deferred
taxes.
The tax provision for the three and nine month periods ended December 31,
2000 differs from that anticipated under statutory rates as a result of a
permanent difference allowing the Company a deduction for compensation expense
as a result of the exercise of options and warrants.
4. PREFERRED STOCK
During the nine months ended December 31, 2000, the Company has declared
dividends on preferred stock totaling $66,300, of which $44,200 has been paid.
5. NEW ACCOUNTING STANDARD
NEW ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," ("SAB 101"), which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC. SAB 101 is effective for the fourth quarter of fiscal 2001 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB No. 20, "Accounting Changes". Management of the Company estimates that the
implementation of SAB 101 will have the effect of reducing earnings and
recording deferred revenue of approximately $149,000 for the fiscal year ending
March 31, 2001.
This change relates to recognition of initial fees from sales of new
franchises. SAB 101 requires the Company to recognize such fees over the average
expected life of the initial license.
7
6. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted number of common
shares outstanding during the year. Diluted earnings per share is computed based
on the weighted average number of common shares outstanding plus the effect of
stock options, warrants and convertible preferred stock. The dilutive effect of
dilutive common share equivalents determined using the Treasury Stock Method
based on the Company's average stock price.
A reconciliation of the numerators and denominators utilized in the
computation of basic and diluted earnings per share for the three and nine month
periods ended December 31, 1999 and 2000 is as follows:
Three Months Nine Months
Ended December 31, Ended December 31,
------------------------ ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
BASIC EPS COMPUTATION
Net income (Loss) applicable to common and
common equivalent shares........................ $ 133,095 $ 153,441 $ 753,593 $ 266,471
Weighted average common shares .................. 3,783,652 4,486,366 3,889,015 3,961,013
---------- ---------- ---------- ----------
Basic EPS ........................................ $ .04 $ .03 $ .20 $ .07
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Net income (Loss) applicable to common and
common equivalent shares........................ $ 133,095 $ 153,441 $ 753,593 $ 266,471
Dividends on convertible preferred stock ........ 22,400 22,100 67,400 66,300
---------- ---------- ---------- ----------
155,495 175,541 820,993 332,771
---------- ---------- ---------- ----------
Weighted average common shares .................. 3,783,652 4,486,366 3,889,015 3,961,013
Effect of the conversion of preferred stock ..... 1,120,000 1,105,000 1,127,475 1,105,000
Options and warrants ............................ 1,058,583 2,151 970,644 407,237
---------- ---------- ---------- ----------
5,962,235 5,593,517 5,987,134 5,473,250
---------- ---------- ---------- ----------
Diluted EPS ...................................... $ .03 .03 $ .14 .06
========== ========== ========== ==========
8
GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in two principal segments: Vehicle Rental
Franchise Programs and Insurance Coverage for its franchisees. Corporate costs
are allocated to each segment's operations and are included in the measure of
each segment's profit or loss. The geographic data include revenues based upon
customer locations and assets based on physical locations.
The Company's foreign operations are presently conducted by CAR Insurance
in Bermuda.
Information by geographic area and industry segment is as follows:
Nine Months Nine Months
Ended Ended
December 31, December 31,
1999 2000
----------- -----------
Net revenues from external customers
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 3,687,372 $ 4,047,424
Vehicle Rental Franchises-Pricele$$-(U.S.) 359,836 412,843
Corporate-(U.S.) 20,902 1,550
Insurance-(U.S.) 632,468 878,005
Insurance-(Bermuda) -- --
----------- -----------
$ 4,700,578 $ 5,339,822
=========== ===========
Segment operating income (loss)
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 1,240,175 $ 668,679
Vehicle Rental Franchises-Pricele$$-(U.S.) 12,591 (58,513)
Corporate-(U.S.) (69,832) (47,204)
Insurance-(U.S.) (27,362) (353,632)
Insurance-(Bermuda) -- --
----------- -----------
$ 1,155,572 $ 209,330
=========== ===========
Expenditures for segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ --
Vehicle Rental Franchises-Pricele$$-(U.S.) 77,504 108,383
Corporate-(U.S.) 44,259 230,957
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
----------- -----------
$ 121,763 $ 339,340
=========== ===========
9
Nine Months Nine Months
Ended Ended
December 31, December 31,
1999 2000
----------- -----------
Depreciation and amortization
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 12,467 $ 13,469
Vehicle Rental Franchise-Pricele$$-(U.S.) 9,143 28,218
Corporate-(U.S.) 78,557 82,874
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
--------- ---------
$ 100,167 $ 124,561
========= =========
Interest income
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 27,861 $ 45,817
Vehicle Rental Franchises-Pricele$$-(U.S.) 2,682 5,243
Corporate-(U.S.) 18,255 7,078
Insurance-(U.S.) 6,264 51,000
Insurance-(Bermuda) 23,623 270
--------- ---------
$ 78,685 $ 109,408
========= =========
Interest expense
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 397 $ 15
Vehicle Rental Franchise-Pricele$$-(U.S.) -- 12
Corporate-(U.S.) 1 --
Insurance-(U.S.) 19,623 20,763
Insurance- (Bermuda) -- --
--------- ---------
$ 20,021 $ 20,790
========= =========
Income tax expense (benefit)
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 387,346 $ (34,823)
Vehicle Rental Franchises-Pricele$$-(U.S.) 5,897 --
Corporate-(U.S.) -- --
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
--------- ---------
$ 393,243 $ (34,823)
========= =========
Nine Months Nine Months
Ended Ended
March 31, December 31,
1999 2000
----------- -----------
Segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $2,264,794 $2,367,920
Vehicle Rental Franchises-Pricele$$-(U.S.) 388,517 496,805
Corporate-(U.S.) 256,127 540,777
Insurance-(U.S.) 1,062,789 1,130,811
Insurance-(Bermuda) 7,898 8,168
---------- ----------
$3,980,125 $4,544,481
========== ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 30, 1999
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.
Revenue from franchising operations, which includes initial license fees,
continuing license fees and advertising fees, increased by $65,503 (6%). Initial
license fees increased by $2,498 (2%), continuing license fees increased by
$54,228 (8%), and advertising fees increased by $8,777 (4%). These increases
resulted primarily from the addition of new franchises and fleet growth at
existing franchises. The timing of closings of new franchise sales, each of
which is for a relatively large amount of revenue, varies over the year,
contributing to periodic increases or decreases in reported results. Management
does not believe these short-term variations are indicative of longer term
trends.
Revenues from insurance premiums increased by $66,938 (29%) due to higher
participation by the Company's franchisees and fleet growth at participating
franchises in the Company's CAR Insurance program.
Revenues from wheelchair van rentals increased by $13,688 (207%) due to
additional vehicles purchased by the Company in connection with the wheelchair
van program.
Total operating expenses increased by $76,582 (7%) compared to the prior
period. This increase resulted primarily from the increase in salary expense and
insurance underwriting expenses. Salary expense for both segments increased by
$13,247 (6%) primarily as a result of hiring additional employees in response to
the growth of the Company. Insurance underwriting expenses increased by $55,527
(31%) due to an increase in paid losses and loss reserves for unsettled claims
in connection with higher participation by the Company's franchisees in its CAR
insurance program.
Depreciation and amortization expense increased by $9,423 (27%), which was
primarily due to 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 $265,360, before taxes and
interest, for the three-month period ended December 31, 2000 compared to
operating income of $192,163 for the same period in the prior year, reflecting
11
an increase of $73,197 (38%). This increase resulted primarily from an increase
in initial license fees and continuing license fees due to the addition of new
franchises, fleet growth at existing franchises and the Company's improved
collection efforts and collection of previously reserved accounts, an increase
in insurance premiums due to higher participation by the Company's franchisees
and fleet growth at participating franchises in the Company's CAR insurance
program, and an increase in the wheelchair van rental program which is on a
limited, test basis, in the immediate area of the Company's headquarters in
Maryland and at the location of one of the Company's franchisees in Florida.
Income tax expense for the quarter ended December 31, 2000 increased by
$53,613 (94%) compared to the three-month period ended December 31, 1999 due to
higher pre-tax earnings.
YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR
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
nine-month period ended December 31, 2000, the franchising operations segment
comprised 84% of consolidated net revenues (86% in the comparable 1999 quarter).
Net revenues increased by $639,244 (14%) for the nine-month period ended
December 31, 2000 compared to the same period in the prior year. This increase
occurred due to a $69,949 (8%) increase in initial license fees, a $269,490(12%)
increase in continuing license fees, a $42,261 (6%)increase in advertising fees,
a $243,936 (38%) increase in premium income associated with the reinsurance
program, and a $22,396 (121%) increase in rental income in connection with the
wheelchair van program. These increases occurred for the same general reasons as
those for the three-month period documented above.
Total operating expenses increased by $1,585,486 (45%) in this period
compared to the same period in the prior year. Advertising and promotion
expenses increased by $41,101 (4%), which resulted primarily from an increase in
advertising expense to promote the Company. Sales and marketing expenses
decreased by $118,165 (39%), which resulted primarily from a reduction in bad
debt expense due to the Company's collection efforts. General and administrative
expenses increased by $88,695 (11%), which resulted primarily from an increase
in rent expense at the Company's new headquarters location and an increase in
legal fees and amounts paid for collection expense. Underwriting expenses
increased by $320,193 (63%) due to an increase in paid losses and loss reserves
for unsettled claims in connection with higher participation by the Company's
franchisees in this program.
Depreciation and amortization expense increased by $24,394 (24%) which was
primarily due to additional depreciation associated with the purchase of
vehicles and additional investment in computer software and hardware.
12
On September 21, 2000, the Company entered into an agreement to repurchase
957,721 options for $1,234,560. These options were held by related parties and
resulted in the Company's recognition of additional compensation expense of
$1,234,560.
The Company realized operating income of $209,330, before taxes and
interest, for the nine-month period ended December 31, 2000 as compared to
operating income of $1,155,572 for the nine month period ended December 31,
1999, reflecting a decrease of $946,242 (82%). This decrease resulted primarily
from the Company's repurchase of 957,721 options for $1,234,560, offset by an
increase in initial license fees and continuing license fees due to the addition
of new franchises, fleet growth at existing franchises and the Company's
improved collection efforts and collection of previously reserved accounts. If
the repurchase of options had not impacted the Consolidated Statement of
Earnings for the nine months ended December 31, 2000 (in which case it also
would have produced no partially offsetting reduction in income tax expense),
operating income would have been $1,443,890 in 2000 instead of operating income
of $209,330, which would have been an increase versus the comparable period in
1999 of $288,318 (25%). Net income would have been $982,819 instead of $332,771,
basic earnings per share would have been $.25 instead of $.07, and diluted
earnings per share would have been $.18 instead of $.03.
Income tax expense for the nine-month period ended December 31, 2000
decreased by $428,066 (109%) compared to the nine-month period ended December
31, 1999 resulting in an income tax benefit of $34,823 due to the income tax
benefit associated with the Company's repurchase of 957,721 options and the
exercise of warrants and options for 927,279 shares of common stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had working capital of $2,107,136
compared to $1,239,523 at March 31, 2000. This increase of $867,613 resulted
primarily from the net profit earned during the nine-month period ended December
31, 2000, and the cash proceeds and tax benefit realized by the Company
associated with the repurchase of options and the exercise of warrants and stock
options.
In March 2000, the Company obtained a $1,000,000 letter of credit from 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 9% on January 26, 2001). For the quarter ended
December 31, 2000, AIG did not draw any funds from the letter of credit.
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The Company rents its office facilities under the terms of an operating
lease with a related party. The monthly office facilities lease commitment was
$9,722 at December 31, 2000.
Property and equipment increased by $290,340 (33%) from March 31, 2000 to
December 31, 2000. This increase occurred primarily due to the purchase of
vehicles and computer software and hardware, partially offset by the sale of a
vehicle in connection with the wheelchair van program.
Cash used in operations for the nine months ended December 31, 2000 was
$488,611, resulting from the decrease in accounts payable and accrued expenses,
a decrease in income taxes payable (which resulted in an increase in income
taxes recoverable), an increase in prepaid expenses, partially offset by net
income before depreciation plus the decrease in accounts and notes receivable
and the increase in insurance loss reserves. Accounts payable and accrued
expenses decreased primarily due to payment being made for the Company's
repurchase of 500,000 options for $625,000 during the fiscal year ended March
31, 2000. The net change in the tax liability (which is now a recoverable income
tax refund) is a result of taxes currently payable or recoverable, offset by
taxes paid for the year ended March 31, 2001. 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. Prepaid
expense increased primarily due to additional promotional materials. Insurance
loss reserves increased primarily due to an increase in the number of claims
associated with the increased participation in the CAR insurance program.
Cash used in investing activities of $508,400 related primarily to the
acquisition of vehicles and computer software, hardware, and an increase in
restricted cash due to the Company's additional liability to the national
advertising fund related to an increase in advertising fees, partially offset by
the proceeds from the sale of one vehicle.
Cash provided by financing activities during the same period was $849,918,
resulting from an increase in insurance financing payable in connection with the
CAR insurance program and net proceeds from exercise of options and warrants,
offset by the payment of preferred dividends and buyback of common stock.
The Company believes it has sufficient working capital to support its
business plan through fiscal 2001 and for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," ("SAB 101"), which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC. SAB 101 is effective for the fourth quarter of fiscal 2001 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB No. 20, "Accounting Changes". Management of the Company estimates that the
implementation of SAB 101 will have the effect of reducing earnings and
recording deferred revenue of approximately $149,000 for the fiscal year ending
March 31, 2001.
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This change relates to recognition of initial fees from sales of new
franchises. SAB 101 requires the Company to recognize such fees over the average
expected life of the initial license.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
IMPACT OF INFLATION
Inflation has had no material impact on the operations and financial
condition of the Company.
The statements regarding anticipated future performance of the Company
contained in this report are forward-looking statements which are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties that
could cause the Company's actual results to differ materially from the
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to, the Company's limited experience in
the reinsurance business and the potential for negative claims experience, the
effects of government regulation of the Company's franchise and insurance
programs including maintaining properly registered franchise documents and
making any required alterations in the Company's franchise program to comply
with changes in the laws, competitive pressures from other motor vehicle rental
companies which have greater marketing and financial resources than the Company,
protection of the Company's trademarks, and the dependence on the Company's
relationships with its franchisees. These risks and uncertainties are more fully
described under the caption, "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Important Factors" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000.
All forward-looking statements should be considered in light of these risks and
uncertainties.
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SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of operations of the Company and its subsidiaries for
the nine month periods ended December 31, 1999 and 2000 and with respect to the
balance sheets at December 31, 1999 and 2000.
The selected financial data have been derived from the Company's unaudited
consolidated financial statements and should be read in conjunction with the
financial statements and related notes thereto and other financial information
appearing elsewhere herein.
Three Months Nine Months
Ended December 31, Ended December 31,
------------------- ------------------
1999 2000 1999 2000
-------- -------- -------- --------
(in thousands except per share and number of franchises)
(Unaudited)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) $11,709 $12,612 $38,528 $43,019
Number of Franchised locations 667 677 667 677
COMPANY'S RESULTS OF OPERATIONS
Total Revenue $ 1,355 $ 1,505 $ 4,701 $ 5,340
Operating expenses 1,163 1,240 3,545 5,130
Income before income taxes $ 212 $ 286 $ 1,214 $ 298
Net income 155 176 821 333
Earnings per common share
Basic $ .04 $ .03 $ .20 $ .07
Weighted average common shares 3,784 4,486 3,889 3,961
Diluted $ .03 $ .03 $ .14 $ .06
Weighted average common shares plus
convertible preferred stock, options
and warrants 5,962 5,593 5,987 5,473
EBITDA (2) 254 337 1,334 1,688
December 31,
--------------------
1999 2000
------- -------
(Unaudited)
BALANCE SHEET DATA
Working capital $ 1,308 $ 2,107
Total assets $ 3,425 $ 4,544
Shareholders' equity $ 1,858 $ 2,899
p
(1) The franchisees' revenue data have been derived from unaudited reports
provided by franchisees for use in calculating license fees.
(2) "EBITDA" is earnings before interest expense, depreciation, amortization,
taxes and repurchase of options. EBITDA 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 24, 2000, 175,000 options and 135,000 warrants were exercised at $1.00
and $1.15 by affiliates. On September 22, 2000, 617,279 options were exercised
at $1.00 by affiliates. These transactions were exempt under Rule 701 and
Section 4(2) of the Securities Act. On December 18, 2000, the Company bought
back and retired 60,000 shares of its common stock from non-affiliates. See also
Item 5 below.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2000 Annual Meeting of Stockholders of the Company was held on
November 2, 2000.
(b) The following persons were reelected as all of the directors of the
Company at the Annual Meeting for a one-year term (or until replaced):
Withheld Broker
For Authority Non-Votes
--------- --------- ---------
Class I directors (elected by holders
of common stock): Kenneth L. Blum, Sr. 3,121,542 19,855 --
Kenneth L. Blum, Jr. 3,121,542 19,855 --
Class II directors (elected by holders
of preferred stock): Alan L. Aufzien 1,070,625 -- --
William L. Richter 1,070,625 -- --
Thomas Volpe 1,070,625 -- --
(c) In addition, the Company's option plan was approved:
Adoption of the Company's Stock Option Plan:
Common Stock: 3,015,826 97,055 28,516
Preferred Stock: 1,050,000 20,625 --
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2000, 927,279 options and warrants
were exercised for 927,279 shares of the Company's common stock, increasing
total outstanding common stock from 3,568,217 to 4,495,496. During the quarter
ended December 31, 2000, the Company bought back 60,000 shares of its common
stock, reducing total outstanding common stock from 4,495,496 to 4,435,496.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Exhibit Index following the Signatures page, which is
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Rent-A-Wreck of America, Inc.
(Registrant)
By: Date:
/s/ Mitra Ghahramanlou February 10, 2001
- -----------------------------------
Mitra Ghahramanlou
Chief Accounting Officer
/s/ Kenneth L. Blum, Sr. February 10, 2001
- -----------------------------------
Kenneth L. Blum, Sr.
CEO and Chairman of the Board
18