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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]
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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