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 December 31, 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 (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
4,230,296 shares of common stock were outstanding as of February 1, 2002.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - DECEMBER 31, 2001
INDEX
Part I. Financial Information Page
- ----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2001 (Unaudited) 2-3
Consolidated Statements of Earnings for the Three and
Nine Month periods ended December 31, 2000 and 2001
(Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
ended December 31, 2000 and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis or Plan of Operation 13-17
Part II. Other Information
- --------------------------
Selected Financial Data 18-19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
1
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2001
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ........................ $ 554,181 $ 791,369
Restricted Cash .................................. 892,061 664,803
Accounts Receivable, net of allowance
for doubtful accounts of $854,423 and $965,125
at March 31, 2001 and December 31, 2001,
respectively:
Continuing License Fees and
Advertising Fees ......................... 417,513 473,426
Current Portion of Notes Receivable ........ 415,829 464,740
Current Portion of Direct Financing
Leases ................................... 15,321 15,738
Insurance Premiums Receivable .............. 5,384 26,172
Vehicle Rental Operation ................... 1,971 101,657
Other ...................................... 81,359 327,782
Prepaid Expenses and Other ....................... 165,811 214,799
Prepaid Income Tax Expense ....................... 524,155 193,823
Deferred Tax ..................................... 341,983 359,314
----------- -----------
TOTAL CURRENT ASSETS ........................... 3,415,568 3,633,623
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture ........................................ 95,837 98,860
Computer Hardware and Software ................... 470,153 547,391
Machinery and Equipment .......................... 65,644 71,289
Leasehold Improvements ........................... 23,767 28,417
Vehicles ......................................... 398,111 1,335,869
----------- -----------
1,053,512 2,081,826
Less: Accumulated Depreciation and
Amortization .............................. (363,075) (514,270)
----------- -----------
NET PROPERTY AND EQUIPMENT ..................... 690,437 1,567,556
----------- -----------
OTHER ASSETS:
Intangible Assets, net of accumulated
amortization of $152,770 and $169,865 at
March 31, 2001 and December 31, 2001,
respectively .................................. 194,192 181,695
Long-term Portion of Notes and Direct Financing
Lease Receivables, net of allowance of $0 and
$169,259 at March 31, 2001 and December 31,
2001, respectively ......................... 73,536 162,548
----------- -----------
267,728 344,243
----------- -----------
TOTAL ASSETS ................................... $ 4,373,733 $ 5,545,422
=========== ===========
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,
2001 2001
---------- -----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ............. $ 942,965 $ 891,149
Dividends Payable ................................. 22,100 22,100
Insurance Financing Payable ....................... -- 109,542
Vehicle Financing Payable ......................... -- 100,008
Insurance Loss Reserves ........................... 510,327 624,397
---------- ----------
TOTAL CURRENT LIABILITIES ....................... 1,475,392 1,747,196
---------- ----------
LONG-TERM LIABILITIES:
Vehicle Financing Payable ......................... -- 380,562
Deferred Tax Liability ............................ 35,514 35,514
---------- ----------
TOTAL LONG-TERM LIABILITIES ..................... 35,514 416,076
---------- ----------
TOTAL LIABILITIES ............................... 1,510,906 2,163,272
---------- ----------
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 December 31, 2001
(aggregate liquidation preference $884,000
at March 31, 2001 and December 31, 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 4,230,296
at December 31, 2001 ............................ 43,855 42,303
Additional Paid-In Capital ........................ 2,267,709 1,984,309
Retained Earnings ................................. 540,213 1,344,488
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ...................... 2,862,827 3,382,150
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ........................................ $4,373,733 $5,545,422
========== ==========
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,
-------------------------- --------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
REVENUES:
Initial License Fees ..................... $ 154,500 $ 201,456 $ 945,952 $ 925,457
Continuing License Fees .................. 756,747 824,008 2,581,166 2,778,417
Advertising Fees ......................... 229,936 230,010 776,059 806,041
Insurance premiums ....................... 301,598 291,537 881,847 962,262
Vehicle Rental Operations ................ 20,285 147,953 41,028 276,138
Other .................................... 42,089 29,547 113,770 103,883
----------- ----------- ----------- -----------
1,505,155 1,724,511 5,339,822 5,852,198
----------- ----------- ----------- -----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits ...................... 227,142 344,243 712,785 917,472
Advertising and Promotion ................ 325,556 334,013 1,078,232 1,151,473
Sales and Marketing Expenses ............. 91,896 148,065 271,503 500,694
Direct Expenses - Rental Operations ...... 4,305 46,538 5,385 80,289
General and Administrative Expenses ...... 310,259 337,625 877,560 991,642
Repurchase of Options .................... -- -- 1,234,560 --
Underwriting Expenses .................... 236,162 286,711 825,906 745,406
Depreciation & Amortization .............. 44,475 64,311 124,561 175,369
----------- ----------- ----------- -----------
1,239,795 1,561,506 5,130,492 4,562,345
----------- ----------- ----------- -----------
OPERATING INCOME ..................... 265,360 163,005 209,330 1,289,853
OTHER INCOME (EXPENSE)
Interest Income .......................... 27,471 42,880 109,408 151,070
Interest Expense ......................... (6,936) (11,208) (20,790) (23,049)
----------- ----------- ----------- -----------
20,535 31,672 88,618 128,021
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE ..... 285,895 194,677 297,948 1,417,874
----------- ----------- ----------- -----------
INCOME TAX (EXPENSE) BENEFIT ............... (110,354) (75,145) 34,823 (547,299)
----------- ----------- ----------- -----------
NET INCOME ........................... $ 175,541 $ 119,532 $ 332,771 $ 870,575
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK .......................... 22,100 22,100 66,300 66,300
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ............. $ 153,441 $ 97,432 $ 266,471 $ 804,275
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE
Basic .................................... $ .03 $ .02 $ .07 $ .19
----------- ----------- ----------- -----------
Weighted average common shares ............. 4,486,366 4,268,418 3,961,013 4,336,564
=========== =========== =========== ===========
Diluted .................................. $ .03 $ .02 $ .06 $ .16
----------- ----------- ----------- -----------
Weighted average common shares plus
convertible preferred stock, options
and warrants .............................. 5,593,517 5,375,175 5,473,250 5,442,464
=========== =========== =========== ===========
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,
------------------------------
2000 2001
----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ............................................... $ 332,771 $ 870,575
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ........................ 124,561 175,369
Deferred income taxes ................................ 226,081 (17,331)
Gain on disposal of property and equipment ........... (8,090) 4,648
Provision for doubtful accounts ...................... 36,601 279,961
Changes in assets and liabilities:
Accounts and notes receivable ........................ 21,037 (841,111)
Prepaid expenses ..................................... (8,607) (48,988)
Income taxes recoverable ............................. (594,630) 330,332
Accounts payable and accrued
expenses ........................................... (391,623) (51,816)
Income taxes payable ................................. (338,550) --
Insurance loss reserves .............................. 111,838 114,070
----------- -----------
Net cash (used in) provided by operating activities .. (488,611) 815,709
----------- -----------
Cash flows from investing activities:
(Increase) decrease in restricted cash ................... (186,507) 227,258
Proceeds from sale of property and equipment ............. 32,620 11,400
Acquisition of property and equipment .................... (339,340) (1,051,439)
Additions to intangible assets ........................... (15,173) (4,598)
----------- -----------
Net cash used in investing activities ................ (508,400) (817,379)
----------- -----------
Cash flow from financing activities:
Increase in insurance financing payable .................. 119,574 109,542
Increase in vehicle financing payable .................... -- 480,570
Net proceeds from exercise of stock options and warrants . 896,866 --
Retirement of common stock ............................... (100,222) (284,954)
Preferred dividends paid ................................. (66,300) (66,300)
----------- -----------
Net cash provided by financing activities ............ 849,918 238,858
----------- -----------
Net (decrease) increase in cash and cash
equivalents ....................................... (147,093) 237,188
Cash and cash equivalents at beginning of period ........... 701,808 554,181
----------- -----------
Cash and cash equivalents at end of period ................. $ 554,715 $ 791,369
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid ............................................ $ 20,790 $ 23,049
Taxes paid ............................................... $ 670,993 $ 275,889
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, 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"), and Priceless's subsidiary,
Priceless Rent-A-Car of Maryland, Inc. ("Rental Operations").
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. VEHICLE FINANCING PAYABLE
The Company recently opened two stores under its trademark, Priceless, in
conjunction with its Rental Operations segment. These stores are located in the
state of Maryland. In October 2001, the Company obtained a line of credit in the
amount of $500,000, which is part of the $1,500,000 line of credit with Merrill
Lynch, to purchase vehicles. This line of credit is secured by a certificate of
deposit of $600,000 held by Merrill Lynch, and in addition, Merrill Lynch has a
first lien on all of the Company's assets. For the quarter ended December 31,
2001, the Company borrowed $480,570 from this line of credit, which is payable
in a 5-year term in equal monthly principal payments of $8,334 starting January
2002. In addition, this line of credit bears an interest rate of 2.90% plus the
30-day Dealer Commercial Paper Rate published in the Wall Street Journal, based
upon actual days elapsed over a 360-day year. The effective rate at December 31,
2001 was 4.68%.
6
3. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) 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, 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 April 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.
In July, 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement Obligations". This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement applies to all entities. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of". The provisions of the
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001.
The Company is evaluating the impact of the adoption of these standards and
has not yet determined the effect of adoption on its financial position and
results of operations, but in any event, does not expect any impact to be
material.
7
4. STOCKHOLDERS EQUITY
PREFERRED STOCK
During the nine months ended December 31, 2001, the Company has declared
dividends on preferred stock totaling $66,300, of which $44,200 has been paid.
COMMON STOCK
During the nine months ended December 31, 2001, the Company repurchased and
retired 155,200 shares of its common stock for a total purchase price of
$284,954.
8
5. 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 nine month
periods ended December 31, 2000 and 2001 is as follows:
Three Months Nine Months
Ended December 31, Ended December 31,
----------------------- -----------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
BASIC EPS COMPUTATION
Net income applicable
to common and common
equivalent shares $ 153,441 $ 97,432 $ 266,471 $ 804,275
Weighted average common
shares - Basic 4,486,366 4,268,418 3,961,013 4,336,564
---------- ---------- ---------- ----------
Basic EPS $ .03 $ .02 $ .07 $ .19
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Net income applicable
to common and common
equivalent shares $ 153,441 $ 97,432 $ 266,471 $ 804,275
Dividends on convertible
preferred stock 22,100 22,100 66,300 66,300
---------- ---------- ---------- ----------
175,541 119,532 332,771 870,575
---------- ---------- ---------- ----------
Weighted average common
shares - Basic 4,486,366 4,268,418 3,961,013 4,336,564
Weighted average convertible
preferred stock 1,105,000 1,105,000 1,105,000 1,105,000
Weighted average options
and warrants 2,151 1,757 407,237 900
---------- ---------- ---------- ----------
Weighted average common
shares - Diluted 5,593,517 5,375,175 5,473,250 5,442,464
---------- ---------- ---------- ----------
Diluted EPS $ .03 .02 $ .06 .16
========== ========== ========== ==========
9
6. GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in three principal segments: Vehicle Rental
Franchise Programs, Insurance Coverage for its franchisees, and Vehicle Rental
Operations. 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.
Information by geographic area and industry segment is as follows:
Nine Months Ended
December 31,
--------------------------
2000 2001
----------- -----------
Net revenues from external customers
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 4,047,424 $ 4,055,957
Vehicle Rental Franchises-Pricele$$-(U.S.) 367,973 556,341
Vehicle Rental Operations-(U.S.) 41,028 276,138
Corporate-(U.S.) 1,550 1,500
Insurance-(U.S.) 881,847 962,262
Insurance-(Bermuda) -- --
----------- -----------
$ 5,339,822 $ 5,852,198
----------- -----------
Segment operating income
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 668,679 $ 1,472,261
Vehicle Rental Franchises-Pricele$$-(U.S.) (59,202) (84,896)
Vehicle Rental Operations-(U.S.) 689 (155,338)
Corporate-(U.S.) (47,204) (52,409)
Insurance-(U.S.) (353,632) 110,235
Insurance-(Bermuda) -- --
----------- -----------
$ 209,330 $ 1,289,853
=========== ===========
Expenditures for segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ --
Vehicle Rental Franchises-Pricele$$-(U.S.) -- --
Vehicle Rental Operations-(U.S.) 108,383 936,080
Corporate-(U.S.) 230,957 115,359
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
----------- -----------
$ 339,340 $ 1,051,439
=========== ===========
Depreciation and amortization
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 13,469 $ 12,083
Vehicle Rental Franchises-Pricele$$-(U.S.) 1,957 3,502
Vehicle Rental Operations-(U.S.) 26,261 99,539
Corporate-(U.S.) 82,874 60,245
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
----------- -----------
$ 124,561 $ 175,369
=========== ===========
10
Nine Months Ended
December 31,
----------------------
2000 2001
--------- ---------
Interest income
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 45,817 $ 109,812
Vehicle Rental Franchises-Pricele$$-(U.S.) 5,243 16,645
Vehicle Rental Operations-(U.S.) -- --
Corporate-(U.S.) 7,078 3,066
Insurance-(U.S.) 51,000 21,537
Insurance-(Bermuda) 270 10
--------- ---------
$ 109,408 $ 151,070
========= =========
Interest expense
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 15 $ --
Vehicle Rental Franchises-Pricele$$-(U.S.) 12 --
Vehicle Rental Operations-(U.S.) -- 5,287
Corporate-(U.S.) -- --
Insurance-(U.S.) 20,763 17,762
Insurance- (Bermuda) -- --
--------- ---------
$ 20,790 $ 23,049
========= =========
Income tax benefit (expense)
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 34,823 $(508,822)
Vehicle Rental Franchises-Pricele$$-(U.S.) -- (3,189)
Vehicle Rental Operations-(U.S.) -- --
Corporate-(U.S.) -- --
Insurance-(U.S.) -- (35,288)
Insurance-(Bermuda) -- --
--------- ---------
$ 34,823 $(547,299)
========= =========
March 31, December 31,
2001 2001
---------- -----------
Segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $2,351,100 $1,997,276
Vehicle Rental Franchises-Pricele$$-(U.S.) 268,587 453,749
Vehicle Rental Operations-(U.S.) 305,786 1,430,967
Corporate-(U.S.) 384,141 472,820
Insurance-(U.S.) 1,055,877 1,182,276
Insurance-(Bermuda) 8,242 8,334
---------- ----------
$4,373,733 $5,545,422
========== ==========
11
7. 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. The
Company intends to vigorously defend such suit.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 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 December 31, 2001, initial license fees, continuing
license fees and advertising fees increased by $114,291 (10%). Initial license
fees increased by $46,956 (30%), and continuing license fees increased by
$67,261 (9%). The increase in initial license fees resulted primarily from the
addition of new franchises. 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 entirely from confessions of judgment
from 6 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. For the quarter ended December 31, 2001, the Company executed additional
confessions of judgment totaling $160,050, resulting in a total balance due from
confessions of judgment of $363,398. If the confessions of judgment had not
impacted the continuing license fees and advertising fees, the result would have
been decreases of $50,169 (7%) and $28,832 (12%), respectively.
Revenues from insurance premiums decreased by $10,061 (3%) 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
has more stringent qualifying criteria.
Revenues from vehicle rental operations increased by $127,668 (629%) due to
more Company-owned cars being added to the Rental Operations fleet.
The operating expenses for all segments increased by $321,711 (26%) for the
three-month period ended December 31, 2001. Salary expense for all segments
increased by $117,101 (52%), 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 $8,457 (3%), which resulted primarily from an increase in
national advertising expense to promote the Company and its brand. Sales and
marketing expenses increased by $56,169 (61%), 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 $42,233 (981%), due to the opening of the Company's stores. General and
administrative expenses for all three segments increased by $27,366 (9%), which
resulted primarily from an increase in professional fees.
13
Insurance underwriting expenses increased by $50,549 (21%) due to an
increase in loss reserves for unsettled claims.
Depreciation and amortization expense increased by $19,836 (45%), 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.
The Company realized operating income of $163,005, before taxes and
interest, for the three-month period ended December 31, 2001, compared to
$265,360 for the three-month period ended December 31, 2000, reflecting a
decrease of $102,355 (39%), which resulted primarily from an increase in Rental
Operations expenses.
Net interest income increased by $11,137 (54%). This increase was primarily
due to recording some interest income in connection with the confessions of
judgment referred to above.
Income tax expense for the quarter ended December 31, 2001 decreased by
$35,209 (32%) compared to the three-month period ended December 31, 2000 due to
lower pre-tax earnings.
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 nine months ended December 31, 2001,
franchising operations comprised 79% of consolidated net revenues (83% in 2000)
and 108% of consolidated operating income (291% in 2000).
Net revenues increased by $512,376 (10%) for the nine-month period ended
December 31, 2001 compared to the same period in the prior year. This increase
occurred due to a $197,251(8%) increase in continuing license fees, a $29,982
(4%) increase in advertising fees, a $80,415 (9%) increase in premium income
associated with the Insurance segment, and a $235,110 (573%) increase in Rental
Operations, offset by a $20,495 (2%) decrease in initial license fees.
Generally, the increases in continuing license fees and advertising fees
occurred for the same reasons as those for the three-month period stated above.
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. The increase in insurance premiums resulted from
higher participation by the Company's franchisees in the Company's CAR Insurance
program. The increase in vehicle rental operations resulted from more
Company-owned cars being added to the Rental Operations fleet. The increase in
continuing license fees and advertising fees resulted entirely from confessions
of judgment from 16 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. For the nine-month period ended December 31, 2001, the
Company executed confessions of judgment totaling $421,197, resulting in a total
balance due from confessions of judgment of $363,398. If the confessions of
judgment had not impacted the continuing license fees and advertising fees, the
result would have been decreases of $126,633 (5%) and $52,793 (7%),
respectively.
14
If the repurchase of options had not impacted the consolidated statement of
operations for the nine months ended December 31, 2000, operating expenses would
have been $3,895,932 instead of $5,130,492.
Excluding the repurchase of options in 2000, total operating expenses
increased by $666,413 (17%) in this period compared to the same period in the
prior year. Salary expense increased by $204,687 (29%), 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 $73,241 (7%), which resulted
primarily from an increase in national advertising expenses to promote the
Company. Sales and marketing expenses increased by $229,191 (84%), 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 $74,904 (140%), due to the opening of the
Company's stores. General and administrative expenses increased by $114,082
(13%), which resulted primarily from an increase in professional fees.
Underwriting expenses decreased by $80,500 (11%) 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 $50,808 (41%) 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 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. 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.
Excluding the repurchase of options, the Company realized operating income
of $1,443,890, before taxes and interest, for the nine-month period ended
December 31, 2000 as compared to operating income of $1,289,853 for the nine
month period ended December 31, 2001, reflecting a decrease of $154,037 (11%).
This decrease resulted primarily from 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 $870,575 for the nine months ended December 31, 2001
compared to net income of $982,819, excluding the repurchase of options for the
same period in the prior year, reflecting a decrease of $112,244 (11%).
Income tax expense for the nine-month period ended December 31, 2000 was 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. Excluding the repurchase of these options,
the income tax expense would have been $549,689 for the nine months ended
December 31, 2000 compared to $547,299 for the nine months ended December 31,
2001.
15
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had working capital of $1,886,427
compared to $1,940,176 at March 31, 2001. This decrease of $53,749 in working
capital stems from an increase in financing and reserve accruals related to the
insurance operations coupled with the borrowings to finance the acquisition of
the Company store vehicles and payments made for income taxes partially offset
by an increase in receivables and prepaid expenses.
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
($500,000), and to provide security for the reinsurance arrangement with AIG.
This letter of credit has replaced the letter of credit with Bank of America.
This letter of credit is part of the agreement between the Company and Merrill
Lynch as security for the letter of credit issued to American International
Group ("AIG") by Merrill Lynch. In addition, Merrill Lynch has a first lien on
all of the Company's assets. This letter of credit is secured by a certificate
of deposit of $600,000 held by Merrill Lynch plus 50% of all the Company's
eligible accounts receivable. In the quarter ended December 31, 2001, the
Company borrowed $480,570 from its line of credit for purchasing additional
vehicles for its Rental Operations.
Property and equipment increased by $1,028,314 (98%) from March 31, 2001 to
December 31, 2001. This increase occurred primarily due to the purchase of 75
vehicles in connection with the Company's Rental Operations and additional
investment in computer software and hardware.
Cash provided by operations was $815,709, resulting from net income before
depreciation plus the decrease in prepaid income tax expense and the increase in
insurance loss reserves, partially offset by the increase in accounts and notes
receivable and prepaid expenses and the decrease in accounts payable and accrued
expenses. Prepaid income tax decreased due to the income tax expense for the
nine months ended December 31, 2001. Accounts and notes receivable increased
primarily due to the confessions of judgment from 16 franchisees for past due
fees. Prepaid expenses increased primarily due to additional promotional
materials. Insurance loss reserves increased primarily due to an increase in
unsettled claims associated with the CAR Insurance program. Accounts payable and
accrued expenses decreased primarily due to a decrease in accrued national
advertising expenses.
Cash used in investing activities of $817,379 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 was $238,858, resulting from an
increase in insurance financing payable in connection with the CAR insurance
program, an increase in vehicle financing payable in connection with the
Company's Vehicle Rental Operations, 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.
16
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 results to differ materially from the
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to, the Company's limited experience in
the reinsurance business and the potential for negative claims experience, the
effects of government regulation on the Company's franchise and insurance
programs including maintaining properly registered franchise documents and
making any required alterations in the Company's franchise program to comply
with changes in the laws, competitive pressures from other motor vehicle rental
companies which have greater marketing and financial resources than the Company,
protection of the Company's trademarks, and the dependence on the Company's
relationships with its franchisees. These risks and uncertainties are more fully
described 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.
17
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, 2000 and 2001 and with respect to the
balance sheets at December 31, 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 Nine Months
Ended December 31, Ended December 31,
--------------------- ---------------------
2000 2001 2000 2001
-------- -------- -------- --------
(in thousands except per share and number of franchises)
(Unaudited)
FRANCHISEES' RESULTS (UNAUDITED)
Franchisees' Revenue (1) $ 12,612 $ 13,733 $ 43,019 $ 46,307
Number of Franchised locations 677 659 677 659
COMPANY'S RESULTS OF OPERATIONS
Total Revenue $ 1,505 $ 1,724 $ 5,340 $ 5,852
Operating expenses 1,240 1,561 5,130 4,562
Income before income taxes $ 286 $ 195 $ 298 $ 1,418
Net income 176 119 333 871
Earnings per common share
Basic $ .03 $ .02 $ .07 $ .19
Weighted average common shares 4,486 4,268 3,961 4,337
Diluted $ .03 $ .02 $ .06 $ .16
Weighted average common
shares plus convertible
preferred stock, options
and warrants 5,593 5,375 5,473 5,442
EBITDA (2) 337 270 1,688 1,616
December 31,
---------------------
2000 2001
-------- --------
(Unaudited)
BALANCE SHEET DATA
Working capital $ 2,107 $ 1,886
Total assets $ 4,544 $ 5,545
Shareholders' equity $ 2,899 $ 3,382
18
(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.
19
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. During the quarter ended December 31, 2001, the
Company bought back 80,200 shares of its common stock reducing total outstanding
common shares from 4,385,496 to 4,230,296.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter in which this report
was filed.
20
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 12, 2002
- ----------------------------- -----------------
Mitra Ghahramanlou
Chief Accounting Officer
/s/ Kenneth L. Blum, Sr. February 12, 2002
- ----------------------------- -----------------
Kenneth L. Blum, Sr.
CEO and Chairman of
the Board
21