================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 [ ] 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 of (I.R.S. Employer 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 Check whether the issuer (1) has filed all reports required to be fby Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:4,310,496 shares as of November 7, 2001. Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X] ================================================================================ RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES FORM 10-QSB - SEPTEMBER 30, 2001 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 and September 30, 2001 (Unaudited) 2-3 Consolidated Statements of Earnings for the Three and Six Month periods ended September 30, 2000 and 2001 (Unaudited) 4 Consolidated Statements of Cash Flows for the Six Months ended September 30, 2000 and 2001 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-9 Item 2. Management's Discussion and Analysis or Plan of Operation 10-14 PART II. OTHER INFORMATION Selected Financial Data 15 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 16 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, September 30, 2001 2001 ----------- ------------ (Unaudited) CURRENT ASSETS: Cash and Cash Equivalents ............................... $ 554,181 $ 683,995 Restricted Cash ......................................... 892,061 786,343 Accounts Receivable, net of allowance for doubtful accounts of $854,423 and $940,803 at March 31, 2001 and September 30, 2001, respectively: Continuing License Fees and Advertising Fees .......... 417,513 517,385 Current Portion of Notes Receivable ................... 415,829 634,987 Current Portion of Direct Financing Leases ............ 15,321 5,049 Insurance Premiums Receivable ......................... 5,384 36,150 Vehicle Rental Operation .............................. 1,971 43,964 Other ................................................. 81,359 212,574 Prepaid Expenses and Other .............................. 165,811 182,040 Prepaid Income Tax Expense .............................. 524,155 45,690 Deferred Tax ............................................ 341,983 359,314 ----------- ----------- TOTAL CURRENT ASSETS ................................ 3,415,568 3,507,491 ----------- ----------- PROPERTY AND EQUIPMENT: Furniture ............................................... 95,837 96,794 Computer Hardware and Software .......................... 470,153 555,051 Machinery and Equipment ................................. 65,644 70,470 Leasehold Improvements .................................. 23,767 23,767 Vehicles ................................................ 398,111 1,012,324 ----------- ----------- 1,053,512 1,758,406 Less: Accumulated Depreciation and Amortization ......... (363,075) (456,290) ----------- ----------- NET PROPERTY AND EQUIPMENT .......................... 690,437 1,302,116 ----------- ----------- OTHER ASSETS: Intangible Assets, net of accumulated amortization of $152,770 and $164,185 at March 31, 2001 and September 30, 2001, respectively ....................... 194,192 182,985 Long-term Portion of Notes and Direct Financing Lease Receivables, net of allowance of $0 and $169,259 at March 31, 2001 and September 30, 2001, respectively .... 73,536 75,251 ----------- ----------- 267,728 258,236 ----------- ----------- TOTAL ASSETS ........................................ $ 4,373,733 $ 5,067,843 =========== =========== The accompanying notes are an integral part of these financial statements. 2 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY March 31, September 30, 2001 2001 ---------- ------------ (Unaudited) CURRENT LIABILITIES: Accounts Payable and Accrued Expenses ......................... $ 942,965 $ 807,778 Dividends Payable ............................................. 22,100 22,100 Insurance Financing Payable ................................... -- 273,855 Insurance Loss Reserves ....................................... 510,327 508,924 ---------- ---------- TOTAL CURRENT LIABILITIES ................................... 1,475,392 1,612,657 ---------- ---------- LONG-TERM LIABILITIES: Deferred Tax Liability ........................................ 35,514 35,514 ---------- ---------- TOTAL LONG-TERM LIABILITIES ................................. 35,514 35,514 ---------- ---------- TOTAL LIABILITIES ........................................... 1,510,906 1,648,171 ---------- ---------- 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, 2001 and at September 30, 2001 (aggregate liquidation preference $884,000 at March 31, 2001 and September 30, 2001) ...................................... 11,050 11,050 Common Stock, $.01 par value; authorized 25,000,000 shares; issued and outstanding 4,385,496 shares at March 31, 2001 and 4,310,496 at September 30, 2001 .............................. 43,855 43,105 Additional Paid-In Capital .................................... 2,267,709 2,118,461 Retained Earnings ............................................. 540,213 1,247,056 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY .................................. 2,862,827 3,419,672 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $4,373,733 $5,067,843 ========== ========== The accompanying notes are an integral part of these financial statements. 3 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Six Months Ended September 30, Ended September 30, -------------------------- -------------------------- 2000 2001 2000 2001 ----------- ----------- ----------- ----------- REVENUES: Initial License Fees $ 422,952 $ 219,500 $ 791,452 $ 724,001 Continuing License Fees 1,009,025 1,074,874 1,824,419 1,954,409 Advertising Fees 304,645 340,332 546,123 576,031 Insurance Premiums 322,880 320,633 580,249 670,725 Vehicle Rental Operations 8,791 75,455 20,743 128,185 Other 36,697 49,008 71,681 74,336 ----------- ----------- ----------- ----------- 2,104,990 2,079,802 3,834,667 4,127,687 ----------- ----------- ----------- ----------- EXPENSES: Salaries, Consulting Fees and Employee Benefits 221,928 301,875 485,643 573,229 Advertising and Promotion 386,518 431,974 752,676 817,460 Sales and Marketing Expenses 91,999 202,271 179,607 352,629 Direct Expenses-Rental Operations 3,879 16,917 1,080 33,751 General and Administrative Expenses 306,999 335,189 567,301 654,017 Repurchase of Options 1,234,560 -- 1,234,560 -- Underwriting Expenses 303,654 221,620 589,744 458,695 Depreciation & Amortization 51,760 65,071 80,086 111,058 ----------- ----------- ----------- ----------- 2,601,297 1,574,917 3,890,697 3,000,839 ----------- ----------- ----------- ----------- OPERATING (LOSS) INCOME (496,307) 504,885 (56,030) 1,126,848 OTHER INCOME (EXPENSE) Interest Income 39,305 74,195 81,937 108,190 Interest Expense (6,927) (5,644) (13,854) (11,841) ----------- ----------- ----------- ----------- 32,378 68,551 68,083 96,349 ----------- ----------- ----------- ----------- (LOSS) INCOME BEFORE INCOME TAX BENEFIT (EXPENSE) (463,929) 573,436 12,053 1,223,197 INCOME TAX BENEFIT (EXPENSE) 328,427 (221,346) 145,177 (472,154) ----------- ----------- ----------- ----------- NET (LOSS) INCOME $ (135,502) $ 352,090 $ 157,230 $ 751,043 DIVIDENDS ON CONVERTIBLE CUMULATIVE PREFERRED STOCK 22,100 22,100 44,200 44,200 ----------- ----------- ----------- ----------- NET (LOSS) INCOME APPLICABLE TO COMMON AND COMMON EQUIVALENT SHARES $ (157,602) $ 329,990 $ 113,030 $ 706,843 ----------- ----------- ----------- ----------- (LOSS) EARNINGS PER COMMON SHARE Basic $ (.04) $ .08 $ .03 $ .16 ----------- ----------- ----------- ----------- Weighted average common shares 3,824,186 4,356,311 3,696,901 4,370,824 =========== =========== =========== =========== Diluted $ (.04) $ .06 $ .03 $ .14 ----------- ----------- ----------- ----------- Weighted average common shares plus convertible preferred stock, options and warrants 3,824,186 5,463,354 5,411,681 5,476,295 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. 4 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30, ---------------------------- 2000 2001 ----------- ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income ...................................................... $ 157,230 $ 751,043 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ................................. 80,086 111,058 Deferred income taxes ......................................... 241,000 (17,331) Gain on disposal of property and equipment .................... (7,944) (901) Provision for doubtful accounts ............................... 19,216 355,639 Changes in assets and liabilities: Accounts and notes receivable ................................. 19,164 (870,086) Prepaid expenses and other .................................... (6,611) (16,229) Prepaid income tax ............................................ -- 478,465 Income taxes recoverable ...................................... (683,097) -- Accounts payable and accrued expenses ......................... (377,505) (135,187) Income taxes payable .......................................... (338,550) -- Insurance loss reserves ....................................... 129,070 (1,403) ----------- ----------- Net cash (used in) provided by operating activities ..... (767,941) 655,068 ----------- ----------- Cash flows from investing activities: Increase (decrease) in restricted cash .......................... (192,659) 105,718 Proceeds from sale of property and equipment .................... 32,575 11,400 Acquisition of property and equipment and intangible assets ..... (276,494) (722,027) ----------- ----------- Net cash used in investing activities ................... (436,578) (604,909) ----------- ----------- Cash flow from financing activities: Increase in insurance financing payable ......................... 297,226 273,855 Net proceeds from exercise of stock options and warrants ........ 896,866 -- Retirement of common stock ...................................... -- (150,000) Preferred dividends paid ........................................ (44,200) (44,200) ----------- ----------- Net cash provided by financing activities ............... 1,149,892 79,655 ----------- ----------- Net increase in cash and cash equivalents ............... (54,627) 129,814 Cash and cash equivalents at beginning of period .................. 701,808 554,181 ----------- ----------- Cash and cash equivalents at end of period ........................ $ 647,181 $ 683,995 ----------- ----------- Supplemental disclosure of cash flow information: Interest paid ................................................... $ 13,854 $ 11,841 Taxes paid ...................................................... $ 634,629 $ 11,020 The accompanying notes are an integral part of these financial statements. 5 RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements presented herein include the accounts of Rent-A-Wreck of America, Inc. (the "Company") 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 intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the interim consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the Company's March 31, 2001 audited financial statements filed with the Securities and Exchange Commission on Form 10-KSB. The interim operating results are not necessarily indicative of the operating results for the full fiscal year. 2. RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets". SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. This Statement, when adopted, requires that goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective April 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. Although the Company is still reviewing the provisions of this Statement, management's preliminary assessment is that this Statement will not have a material impact on the Company's financial position or results of operations. 3. STOCKHOLDERS EQUITY PREFERRED STOCK A quarterly preferred dividend of $22,100 was declared for the first quarter ended June 30, 2001 and it was paid on August 13, 2001. For the quarter ended September 30, 2001, the Company declared preferred dividends totaling $22,100 which are expected to be paid during the third quarter of the Company's 2002 fiscal year. COMMON STOCK In August 2001, the Company repurchased and retired 75,000 shares of its common stock for a total purchase price of $150,000. 6 4. EARNINGS PER SHARE A reconciliation of the numerators and denominators utilized in the computation of basic and diluted earnings per share for the three and six month periods ended September 30, 2000 and 2001 is as follows: Three Months Six Months Ended September 30, Ended September 30, -------------------------- ------------------------- 2000 2001 2000 2001 ----------- ----------- ----------- ----------- BASIC EPS COMPUTATION Net (loss) income applicable to common and common equivalent shares $ (157,602) $ 329,990 $ 113,030 $ 706,843 Weighted average common shares - Basic 3,824,186 4,356,311 3,696,901 4,370,824 ----------- ----------- ----------- ----------- Basic EPS $ (.04) $ .08 $ .03 $ .16 =========== =========== =========== =========== DILUTED EPS COMPUTATION Net (loss) income applicable to common and common equivalent shares $ (157,602) $ 329,990 $ 113,030 $ 706,843 Dividends on convertible preferred stock 22,100 22,100 44,200 44,200 ----------- ----------- ----------- ----------- (135,502) 352,090 157,230 751,043 ----------- ----------- ----------- ----------- Weighted average common shares - Basic 3,824,186 4,356,311 3,696,901 4,370,824 Weighted average convertible preferred stock -- 1,105,000 1,105,000 1,105,000 Weighted average options and warrants -- 2,043 609,780 471 Weighted average common shares - Diluted 3,824,186 5,463,354 5,411,681 5,476,295 ----------- ----------- ----------- ----------- Diluted EPS $ (.04) .06 $ .03 .14 =========== =========== =========== =========== The incremental shares from assumed conversions of preferred stock, which amount to 1,105,000 for the three months ended September 30, 2000 are not included in computing the diluted per share amounts since inclusion of such shares would be anti-dilutive. 5. 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 includes revenues based upon customer locations and assets based on physical locations. The Company's foreign operations are presently conducted by CAR Insurance in Bermuda. 7 Information by geographic area and industry segment is as follows: Six Months Ended September 30, -------------------------- 2000 2001 ----------- ----------- Net revenues from external customers Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 2,998,051 $ 2,917,661 Vehicle Rental Franchises-Pricele$$-(U.S.) 237,915 410,816 Vehicle Rental Operations-(U.S.) 20,744 128,185 Corporate-(U.S.) 1,550 300 Insurance-(U.S.) 576,407 670,725 Insurance-(Bermuda) -- -- ----------- ----------- $ 3,834,667 $ 4,127,687 =========== =========== Segment operating income Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 419,490 $ 1,122,572 Vehicle Rental Franchises-Pricele$$-(U.S.) (275,584) (4,323) Vehicle Rental Operations-(U.S.) (100,512) (138,765) Corporate-(U.S.) (46,620) (20,561) Insurance-(U.S.) (52,804) 167,925 Insurance-(Bermuda) -- -- ----------- ----------- $ (56,030) $ 1,126,848 =========== =========== Expenditures for segment assets Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ -- Vehicle Rental Franchises-Pricele$$-(U.S.) 10,107 208 Vehicle Rental Operations-(U.S.) 94,464 631,535 Corporate-(U.S.) 171,923 90,284 Insurance-(U.S.) -- -- Insurance-(Bermuda) -- -- ----------- ----------- $ 276,494 $ 722,027 =========== =========== Depreciation and amortization Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 8,944 $ 9,056 Vehicle Rental Franchises-Pricele$$-(U.S.) 1,177 2,358 Vehicle Rental Operations-(U.S.) 20,843 59,554 Corporate-(U.S.) 49,122 40,090 Insurance-(U.S.) -- -- Insurance-(Bermuda) -- -- ----------- ----------- $ 80,086 $ 111,058 =========== =========== Interest income Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 36,675 $ 72,493 Vehicle Rental Franchises-Pricele$$-(U.S.) 4,314 12,587 Vehicle Rental Operations-(U.S.) -- -- Corporate-(U.S.) 5,612 2,829 Insurance-(U.S.) 35,336 20,199 Insurance-(Bermuda) -- 82 ---------- ---------- $ 81,937 $ 108,190 ========== ========== Interest expense Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ -- Vehicle Rental Franchises-Pricele$$-(U.S.) 12 -- Vehicle Rental Operations-(U.S.) -- -- Corporate-(U.S.) -- -- Insurance-(U.S.) 13,842 11,841 Insurance- (Bermuda) -- -- ---------- ---------- $ 13,854 $ 11,841 ========== ========== 8 Six Months Ended September 30, ------------------------ 2000 2001 ---------- ---------- Income tax benefit (expense) Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 145,177 $ (433,677) Vehicle Rental Franchises-Pricele$$-(U.S.) -- (3,189) Vehicle Rental Operations-(U.S.) -- -- Corporate-(U.S.) -- -- Insurance-(U.S.) -- (35,288) Insurance-(Bermuda) -- -- ---------- ---------- $ 145,177 $ (472,154) ========== ========== Year Six Months Ended Ended March 31, September 30, 2001 2001 ---------- ------------ Segment assets Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $2,351,100 $2,178,805 Vehicle Rental Franchises-Pricele$$-(U.S.) 268,587 408,675 Vehicle Rental Operations-(U.S.) 305,786 941,943 Corporate-(U.S.) 384,141 331,520 Insurance-(U.S.) 1,055,877 1,198,575 Insurance-(Bermuda) 8,242 8,325 ---------- ---------- $4,373,733 $5,067,843 ========== ========== 6. LITIGATION The Company is party to legal proceedings incidental to its business from time to time. Certain claims, suits and complaints arise in the ordinary course of business and may be filed against the Company. Based on facts now known to the Company, management believes all such matters are adequately provided for, covered by insurance or, if not so covered or provided for, are without merit, or involve such amounts that would not have a material adverse affect on the consolidated results of operations or financial position of the Company. In December 2000, the Company and certain employees were named in a lawsuit seeking declaratory and injunctive relief, rescission, and monetary damages in the sum of $5 million. This lawsuit alleges similar claims to a lawsuit that was previously dismissed, and the Company believes the claims are without merit. They will be vigorously defended. 7. SUBSEQUENT EVENTS In October 2001, the Company finalized a line of credit for $1,500,000 with Merrill Lynch. The purpose of this line of credit is to provide additional funds for purchasing vehicles in connection with the Company's Rental Operations, and to provide security for the reinsurance arrangement with AIG. This letter of credit has replaced the letter of credit with Bank of America. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 The Company operates in three principal segments: Vehicle Rental Franchise Programs (Franchising), Insurance Coverage (Insurance) and Vehicle Rental Operations (Rental Operations). For the quarter ended September 30, 2001, initial license fees, continuing license fees and advertising fees decreased by $101,916 (6%). Initial license fees decreased by $203,452 (48%), continuing license fees increased by $65,849 (6%), and advertising fees increased by $35,687 (12%). The decrease in initial license fees resulted primarily from the timing of closings of new franchise sales, each of which is for a relatively large amount of revenue which contributes to periodic increases or decreases in reported results throughout the year. While there can be no assurances, management does not believe these short-term variations are indicative of longer term trends. The increase in continuing license fees and advertising fees resulted from confessions of judgment from 11 franchisees for past due fees which had not previously been recorded as revenues since the Company did not believe collectability was probable at that time. The Company has initiated lawsuits to pursue claims for past due fees from another 14 franchisees. Revenues from insurance premiums decreased by $2,247 (1%) due to a lower number of vehicles in the Company's CAR Insurance program. This lower number is a direct consequence of the Company's new underwriting standards policy, which is designed to tighten the number of candidates who meet such suitable criteria. Revenues from vehicle rental operations increased by $66,664 (758%) due to more Company-owned cars being added to the Rental Operations fleet. 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. If the repurchase of options had not impacted the consolidated statement of operations for the three months ended September 30, 2000, operating expenses would have been $1,366,737 instead of $2,601,297. Excluding the repurchase of these options in the quarter ended September 30, 2000, total operating expenses for all segments increased by $208,180 (15%) for the three-month period ended September 30, 2001. Salary expense for all segments increased by $79,947 (36%), which resulted primarily from hiring additional employees in the Company's Rental Operations segment and hiring a subrogation expert in connection with the Insurance segment. Advertising and promotion expenses increased by $45,456 (12%), which resulted primarily from an increase in national advertising expense to promote the Company and its brand. Sales and marketing expenses increased by $110,272 (120%), which resulted primarily from an increase in reserves for bad debt expense due to the confessions of judgment referred to above. General and administrative expenses for all three segments increased by $28,190 (9%), which resulted primarily from an increase in professional fees. 10 Insurance underwriting expenses decreased by $82,034 (27%) due to a decrease in paid losses and loss reserves for unsettled claims due to the Company's improved underwriting and subrogation efforts. Depreciation and amortization expense increased by $13,311 (26%), which was primarily due to additional depreciation associated with the purchase of vehicles in the Company's Rental Operations and additional investment in computer software and hardware. If the repurchase of options had not impacted the consolidated statement of operations for the three months ended September 30, 2000 (in which case it also would have produced no partially offsetting reduction in income tax expense), operating income would have been $738,253 instead of an operating loss of $496,307, net income would have been $515,023 instead of a net loss of $135,502, basic earnings per share would have been $.13 instead of ($.04), and diluted earnings per share would have been $.10 instead of ($.04). Excluding the repurchase of these options in the quarter ended September 30, 2000, the Company realized operating income of $738,253, before taxes and interest, for the three-month period ended September 30, 2000, compared to $504,885 for the three-month period ended September 30, 2001, reflecting a decrease of $233,368 (32%), which resulted primarily from a decrease in initial license fees and an increase in Rental Operations expenses, partially offset by a decrease in underwriting expenses. Excluding the repurchase of these options in the quarter ended September 30, 2000, net income was $515,023 for the three months ended September 30, 2000 compared to net income of $352,090 for the three months ended September 30, 2001, reflecting a decrease of $162,933 (32%). Net interest income increased by $36,173 (112%). This increase was primarily due to recording some interest income in connection with the confessions of judgment referred to above. For the quarter ended September 30, 2000, the Company had an income tax benefit of $328,427 primarily 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. Excluding the repurchase of these options, the income tax expense would have been $255,607 for the three months ended September 30, 2000 compared to $221,346 for the quarter ended September 30, 2001. YEAR TO DATE RESULTS OF OPERATIONS COMPARED TO SAME PERIOD IN PRIOR YEAR The Company operates in three principal segments: Vehicle Rental Franchise Programs (Franchising), Insurance Coverage (Insurance) and Vehicle Rental Operations (Rental Operations). For the six months ended September 30, 2001, franchising operations comprised 81% of consolidated net revenues (84% in 2000) and 99% of consolidated operating income (257% in 2000). Net revenues increased by $293,020 (8%) for the six-month period ended September 30, 2001 compared to the same period in the prior year. This increase occurred due to a $129,990(7%) increase in continuing license fees, a $29,908 (5%)increase in advertising fees, a $90,476 (15%) increase in premium income associated with the Insurance segment, and a $107,442 (518%) increase in Rental Operations, offset by a $67,451 (8%) decrease in initial license fees. Generally, these increases and this decrease occurred for the same reasons as those for the three-month period stated above. 11 If the repurchase of options had not impacted the consolidated statement of operations for the six months ended September 30, 2000, operating expenses would have been $2,656,137 instead of $3,890,697. Excluding the repurchase of options in 2000, total operating expenses increased by $344,702 (13%) in this period compared to the same period in the prior year. Salary expense increased by $87,586 (18%), which resulted primarily from additional hiring for the Company's Rental Operations and hiring of a subrogation expert in connection with the Company's Insurance segment. Advertising and promotion expenses increased by $64,784 (9%), which resulted primarily from an increase in national advertising expenses to promote the Company. Sales and marketing expenses increased by $173,022 (96%), which resulted primarily from an increase in reserves for bad debt expense due to the confessions of judgment referred to above. Direct expenses for the Company's Rental Operations increased by $32,671 (302%), due to addition of personnel, vehicles and facilities. General and administrative expenses increased by $86,716 (15%), which resulted primarily from an increase in professional fees. Underwriting expenses decreased by $131,049 (22%) in paid losses and loss reserves for unsettled claims due to the Company's improved underwriting and subrogation efforts. Depreciation and amortization expense increased by $30,972 (39%) which was primarily due to additional depreciation associated with the purchase of vehicles for the Company's Rental Operations and additional investment in computer software and hardware. If the repurchase of options had not impacted the Consolidated Statement of Earnings for the six months ended September 30, 2000 (in which case it also would have produced no partially offsetting reduction in income tax expense), operating income would have been $1,178,530 in 2000 instead of an operating loss of $56,030. Net income would have been $807,276 instead of $157,230, basic earnings per share would have been $.21 instead of $.03, and diluted earnings per share would have been $.15 instead of $.03. Excluding the repurchase of options, the Company realized operating income of $1,178,530, before taxes and interest, for the six-month period ended September 30, 2000 as compared to operating income of $1,126,848 for the six month period ended September 30, 2001, reflecting a decrease of $51,682 (4%). This decrease resulted primarily from a decrease in initial license fees and an increase in the Company's Rental Operations expenses, partially offset by an increase in insurance premiums as well as a decrease in underwriting expenses. Net income was $751,043 for the six months ended September 30, 2001 compared to net income of $807,276 for the same period in the prior year, reflecting a decrease of $56,233 (7%). 12 Income tax expense for the six-month period ended September 30, 2000 was an income tax benefit of $145,177 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. Excluding the repurchase of these options, the income tax expense would have been $439,337 for the six months ended September 30, 2000 compared to $472,154 for the six months ended September 30, 2001. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company had working capital of $1,894,834 compared to $1,940,176 at March 31, 2001. This decrease of $45,342 resulted primarily from cash of $150,000 paid by the Company to buy back 75,000 shares of its common stock, as well as the payment of preferred stock dividends, offset by the net profit earned during the six-month period ended September 30, 2001. 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 canceled 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 5% on November 7, 2001). For the quarter ended September 30, 2001, AIG did not draw any funds from the letter of credit. In October 2001, the letter of credit from Bank of America was replaced by a letter of credit from Merrill Lynch. Property and equipment increased by $704,894 (67%) from March 31, 2001 to September 30, 2001. This increase occurred primarily due to the purchase of 56 vehicles in connection with the Company's Rental Operations and additional investment in computer software and hardware. Cash provided by operations was $655,068, resulting from net income before depreciation plus the decrease in prepaid income tax expense, partially offset by the increase in accounts and notes receivable and prepaid expenses and the decrease in insurance loss reserves and the decrease in accounts payable and accrued expenses. Prepaid income tax decreased due to the income tax expense for the six months ended September 30, 2001. Accounts and notes receivable increased primarily due to the timing differences between funds paid to and received from AIG in connection with the reinsurance program. Prepaid expenses increased primarily due to the interest paid on insurance financing in connection with the reinsurance program and additional promotional materials. Insurance loss reserves decreased primarily due to a decrease in paid losses and unsettled claims associated with the CAR Insurance program. Accounts payable and accrued expenses decreased primarily due to a decrease in accrued national advertising expenses. 13 Cash used in investing activities of $604,909 related primarily to the acquisition of vehicles, computer software and hardware, offset by a decrease in restricted cash due to additional national advertising expenses and proceeds from the sale of three vehicles. Cash provided by financing activities during the same period was $79,655, resulting from an increase in insurance financing payable in connection with the CAR insurance program, offset by the buyback of common stock and the payment of preferred dividends. The Company believes it has sufficient working capital to support its business plan through fiscal 2002. FORWARD LOOKING STATEMENTS 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 rto differ materially from the forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the Company's limited experience in the reinsurance business and the potential for negative claims experience, the effects of government regulation on the Company's franchise and insurance programs including maintaining properly registered franchise documents and making any required alterations in the Company's franchise program to comply with changes in the laws, competitive pressures from other motor vehicle rental companies which have greater marketing and financial resources than the Company, protection of the Company's trademarks, and the dependence on the Company's relationships with its franchisees. These risks and uncertainties are more fully described 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, 2001. All forward-looking statements should be considered in light of these risks and uncertainties. 14 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 six month periods ended September 30, 2000 and 2001 and with respect to the balance sheets at September 30, 2000 and 2001. The selected financial data have been derived from the Company's unaudited consolidated financial statements and should be read in conjunction with the financial statements and related notes thereto and other financial information appearing elsewhere herein. Three Months Six Months Ended September 30, Ended September 30, -------------------- ------------------- 2000 2001 2000 2001 -------- -------- -------- -------- (in thousands except per share and number of franchises) (Unaudited) FRANCHISEES' RESULTS (UNAUDITED) Franchisees' Revenue (1) $16,817 $17,915 $30,407 $32,573 Number of Franchised locations 669 688 669 688 COMPANY'S RESULTS OF OPERATIONS Total Revenue $ 2,105 $ 2,079 $ 3,835 $ 4,128 Operating expenses 2,601 1,575 3,891 3,001 (Loss) income before income taxes $ (464) $ 573 $ 12 $ 1,223 Net (loss) income (136) 352 157 751 (Loss) earnings per common share Basic $ (.04) $ .08 $ .03 $ .16 Weighted average common shares 3,824 4,356 3,697 4,371 Diluted $ (.04) $ .06 $ .03 $ .14 Weighted average common shares plus convertible preferred stock, options and warrants 3,824 5,463 5,412 5,476 EBITDA (2) 839 644 1,351 1,346 September 30, ----------------- 2000 2001 ------ ------ (Unaudited) BALANCE SHEET DATA Working capital $2,092 $1,895 Total assets $4,700 $5,068 Shareholders' equity $2,845 $3,420 - ---------- (1) The franchisees' revenue data has been derived from unaudited reports provided by franchisees in paying 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. 15 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION During the quarter ended September 30, 2001, the Company bought back 75,000 shares of its common stock reducing total outstanding common shares from 4,385,496 to 4,310,496. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K See exhibit index. 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rent-A-Wreck of America, Inc. (Registrant) Date: November 19, 2001 By: /s/ Mitra Ghahramanlou ------------------------------- Mitra Ghahramanlou Chief Accounting Officer Date: November 19, 2001 By: /s/ Kenneth L. Blum, Sr. ------------------------------- Kenneth L. Blum, Sr. CEO and Chairman of the Board 17 EXHIBIT INDEX TO RENT-A-WRECK of AMERICA, INC. FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2001 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 Unconditional Guaranty Filed herewith 10.2 Unconditional Guaranty Filed herewith 10.3 Unconditional Guaranty Filed herewith 10.4 Loan and Security Agreement Filed herewith 10.5 Security Agreement Filed herewith 10.6 Security Agreement Filed herewith 10.7 Loan and Security Agreement Filed herewith 10.8 Letter of Credit Amendment Filed herewith 10.9 Irrevocable Letter of Credit Filed herewith