United States 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 June 30, 2002
[ ] 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 Road, 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 filed by
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 shares of
common stock, as of the latest practicable date: 4,186,296 shares of common
stock as of August 12, 2002.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
FORM 10-QSB - JUNE 30, 2002
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 and June 30, 2002 (Unaudited) 2-3
Consolidated Statements of Earnings for the Three Months
ended June 30, 2001 and 2002 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
ended June 30, 2001 and 2002 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis or Plan of Operation 13-15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Disclosure 19
Item 6. Exhibits and Reports on Form 8-K 20
Item 7. Financial Statements and Exhibits 20
Signatures 22
1
RENT-A-WRECK OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2002 2002
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents ....................... $ 447,991 $ 345,978
Restricted Cash ................................. 600,000 600,000
Accounts Receivable, net of allowance
for doubtful accounts of $1,014,333 and
$1,195,950 at March 31, 2002 and
June 30, 2002, respectively:
Continuing License Fees and
Advertising Fees ........................ 389,417 361,117
Current Portion of Notes Receivable ....... 525,158 583,151
Current Portion of Direct Financing
Leases .................................. 22,163 25,674
Insurance Premiums Receivable ........... 78,100 7,630
Vehicle Rental Operation ................ 92,413 100,520
Other ................................... 203,931 196,173
Prepaid Expenses and Other ...................... 199,370 209,909
Prepaid Income Tax Expense ...................... 373,647 383,990
Deferred Tax .................................... 501,216 571,320
----------- -----------
TOTAL CURRENT ASSETS .......................... 3,433,406 3,385,462
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture ....................................... 99,676 90,430
Computer Hardware and Software .................. 564,169 606,022
Machinery and Equipment ......................... 71,288 54,756
Leasehold Improvements .......................... 28,417 28,417
Vehicles ........................................ 1,242,149 1,000,902
----------- -----------
2,005,699 1,780,527
Less: Accumulated Depreciation and
Amortization ............................. (578,793) (579,043)
----------- -----------
NET PROPERTY AND EQUIPMENT .................... 1,426,906 1,201,484
----------- -----------
OTHER ASSETS:
Intangible Assets, net of accumulated
amortization of $175,584 and $181,308 at March
31, 2002 and June 30, 2002, respectively ...... 175,976 170,519
Long-term Portion of Notes and Direct Financing
Lease Receivables, net of allowance of $183,180
and $88,929 at March 31, 2002 and June 30,
2002, respectively .......................... 52,804 151,270
----------- -----------
228,780 321,789
----------- -----------
TOTAL ASSETS .................................. $ 5,089,092 $ 4,908,735
=========== ===========
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, June 30,
2002 2002
---------- ----------
(Unaudited)
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses ............. $ 793,497 $ 557,750
Dividends Payable ................................. 21,687 21,687
Current Portion of Vehicle Financing Payable ...... 100,008 100,008
Insurance Loss Reserves ........................... 621,905 705,779
---------- ----------
TOTAL CURRENT LIABILITIES ....................... 1,537,097 1,385,224
---------- ----------
LONG-TERM LIABILITIES:
Vehicle Financing Payable, net of current portion . 355,560 330,558
Deferred Tax Liability ............................ 107,813 107,813
---------- ----------
TOTAL LONG-TERM LIABILITIES ..................... 463,373 438,371
---------- ----------
TOTAL LIABILITIES ............................... 2,000,470 1,823,595
---------- ----------
COMMITMENTS AND CONTINGENCIES ....................... -- --
SHAREHOLDERS' EQUITY:
Convertible Cumulative Series A Preferred Stock,
$.01 par value; authorized 10,000,000 shares;
issued and outstanding 1,084,375 shares at
March 31, 2002 and at June 30, 2002 (aggregate
liquidation preference $867,500 at March 31,
2002 and June 30, 2002) ......................... 10,844 10,844
Common Stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
4,205,296 and 4,186,296 shares at March 31,
2002 and June 30, 2002, respectively ............ 42,053 41,863
Additional Paid-In Capital ........................ 1,906,773 1,874,167
Retained Earnings ................................. 1,128,952 1,158,266
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ...................... 3,088,622 3,085,140
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $5,089,092 $4,908,735
========== ==========
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 Ended June 30,
----------------------------
2001 2002
----------- -----------
REVENUES:
Initial License Fees ....................... $ 504,501 $ 431,000
Continuing License Fees .................... 879,535 634,565
Advertising Fees ........................... 235,699 188,445
Insurance Premiums ......................... 344,022 303,244
Vehicle Rental Operations .................. 52,730 120,487
Other ...................................... 31,398 30,796
----------- -----------
2,047,885 1,708,537
----------- -----------
EXPENSES:
Salaries, Consulting Fees and
Employee Benefits ........................ 271,354 375,989
Advertising and Promotion .................. 301,754 249,359
Sales and Marketing ........................ 227,774 241,944
Direct Expenses - Rental Operations ........ 23,150 53,941
Insurance Underwriting Expenses ............ 237,075 293,392
General and Administrative Expenses ........ 318,828 350,881
Depreciation & Amortization ................ 45,987 74,077
----------- -----------
1,425,922 1,639,583
----------- -----------
OPERATING INCOME ....................... 621,963 68,954
OTHER INCOME (EXPENSE)
Interest Income ............................ 33,995 19,347
Interest Expense ........................... (6,197) (5,238)
----------- -----------
27,798 14,109
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE ....... 649,761 83,063
----------- -----------
INCOME TAX EXPENSE ........................... 250,808 32,061
----------- -----------
NET INCOME ............................. $ 398,953 $ 51,002
DIVIDENDS ON CONVERTIBLE CUMULATIVE
PREFERRED STOCK ............................ 22,100 21,687
----------- -----------
NET INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ............... $ 376,853 $ 29,315
----------- -----------
EARNINGS PER COMMON SHARE
Basic ...................................... $ .09 $ .01
----------- -----------
Weighted average common shares ............... 4,385,496 4,196,527
=========== ===========
Diluted .................................... $ .07 $ .01
----------- -----------
Weighted average common shares
plus options and warrants ................... 5,490,496 5,281,971
=========== ===========
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)
Three Months Ended June 30,
--------------------------
2001 2002
----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ................................................ $ 398,953 $ 51,002
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization ......................... 45,987 74,077
Deferred income taxes ................................. (17,331) --
(Gain) loss on disposal of property and equipment ..... (95) 12,548
Provision for doubtful accounts ....................... 44,876 87,366
Changes in assets and liabilities:
Accounts and notes receivable ......................... (424,727) (148,915)
Prepaid expenses and other ............................ (10,072) (10,539)
Prepaid income tax .................................... 258,434 (10,343)
Deferred tax .......................................... -- (70,104)
Accounts payable and accrued
expenses ............................................ 85,066 (235,747)
Insurance loss reserves ............................... (22,584) 83,874
----------- -----------
Net cash provided by (used in) operating activities ... 358,507 (166,781)
----------- -----------
Cash flows from investing activities:
Increase (decrease) in restricted cash .................... 27,567 --
Proceeds from sale of property and equipment .............. 6,200 233,160
Acquisition of property and equipment and intangible assets (353,816) (88,906)
----------- -----------
Net cash (used in) provided by investing activities ... (320,049) 144,254
----------- -----------
Cash flow from financing activities:
Decrease in vehicle financing payable ..................... -- (25,002)
Increase in insurance financing payable ................... 439,181 --
Repurchase and retirement of common stock ................. -- (32,797)
Preferred dividends paid .................................. (22,100) (21,687)
----------- -----------
Net cash provided by (used in) financing activities ... 417,081 (79,486)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ........................................ 455,539 (102,013)
Cash and cash equivalents at beginning of period ............ 554,181 447,991
----------- -----------
Cash and cash equivalents at end of period .................. $ 1,009,720 $ 345,978
----------- -----------
Supplemental disclosure of cash flow information:
Interest paid ............................................. $ 6,197 $ 5,238
Taxes paid ................................................ $ 9,705 $ 114,477
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
JUNE 30, 2002
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements presented herein include the accounts
of Rent-A-Wreck of America, Inc. ("RAWA, Inc.") and its wholly owned
subsidiaries, Rent-A-Wreck One Way, Inc. ("RAW One Way"), Consolidated American
Rental Insurance Company, LTD ("CAR Insurance") and Bundy American Corporation
("Bundy"), and Bundy's subsidiaries, Rent-A-Wreck Leasing, Inc. ("RAW Leasing")
and Priceless Rent-A-Car, Inc. ("PRICELESS"), and Priceless's subsidiary,
Priceless Rent-A-Car of Maryland, Inc. ("Rental Operations").
All of the above entities are collectively referred to as the "Company"
unless the context provides or requires otherwise. All material intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
The consolidated balance sheet as of June 30, 2002, and the consolidated
statements of earnings and cash flows for the three-month periods ended June 30,
2001 and 2002 have been prepared by the Company without audit. In the opinion of
management, all adjustments which are necessary to present a fair statement of
the results of operations for the interim periods have been made, and all such
adjustments are of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's March
31, 2002 Form 10-KSB filed with the Securities and Exchange Commission. The
interim results of operations for the three month periods ended June 30, 2001
and 2002 are not necessarily indicative of operating results for the full fiscal
year.
2. PREFERRED STOCK
During the three month period ended June 30, 2002, the Company declared
dividends on the Preferred Stock totaling $21,687 which are expected to be paid
during the second quarter of the Company's 2003 fiscal year.
6
3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators utilized in the
computation of basic and diluted earnings per share for the three-month periods
ended June 30, 2001 and 2002 is as follows:
2001 2002
---------- ----------
BASIC EPS COMPUTATION
Numerator:
Net income applicable to common shares .......... $ 376,853 $ 29,315
Denominator:
Weighted average common shares .................. 4,385,496 4,196,527
---------- ----------
Basic EPS ........................................ $ .09 $ .01
========== ==========
DILUTED EPS COMPUTATION
Numerator:
Net income applicable to common shares .......... $ 376,853 $ 29,315
Dividends on convertible preferred stock ........ 22,100 21,687
---------- ----------
398,953 51,002
---------- ----------
Denominator
Weighted average common shares .................. 4,385,496 4,196,527
Weighted average convertible preferred stock .... 1,105,000 1,084,375
Weighted average options and warrants ........... -- 1,069
---------- ----------
5,490,496 5,281,971
---------- ----------
Diluted EPS ...................................... $ .07 $ .01
========== ==========
For the three month period ended June 30, 2001, options for the purchase of
35,000 shares of common stock were excluded from the calculation of diluted EPS
as their effect would have been antidilutive. For the three month period ended
June 30, 2002, options for the purchase of 10,000 shares of common stock were
excluded from the calculation of diluted EPS as their effect would have been
antidilutive.
7
4. GEOGRAPHIC AND INDUSTRY SEGMENTS
The Company currently operates in three principal segments: Vehicle Rental
Franchise Programs, Insurance Coverage, 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:
Three Months Ended
June 30,
--------------------------
2001 2002
----------- -----------
Net revenues from external customers
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 1,397,399 $ 1,068,628
Vehicle Rental Franchises-Pricele$$-(U.S.) 253,734 215,253
Vehicle Rental Operations-(U.S.) 52,731 120,487
Corporate-(U.S.) -- 925
Insurance-(U.S.) 344,021 303,244
Insurance-(Bermuda) -- --
----------- -----------
$ 2,047,885 $ 1,708,537
----------- -----------
Segment operating income
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 510,576 $ 252,718
Vehicle Rental Franchises-Pricele$$-(U.S.) 86,059 27,095
Vehicle Rental Operations-(U.S.) (48,486) (100,004)
Corporate-(U.S.) (15,607) (22,201)
Insurance-(U.S.) 89,421 (88,654)
Insurance-(Bermuda) -- --
----------- -----------
$ 621,963 $ 68,954
=========== ===========
Segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 2,187,294 $ 2,324,018
Vehicle Rental Franchises-Pricele$$-(U.S.) 457,203 265,140
Vehicle Rental Operations-(U.S.) 614,064 1,027,892
Corporate-(U.S.) 529,923 390,898
Insurance-(U.S.) 1,455,523 892,444
Insurance-(Bermuda) 8,242 8,343
----------- -----------
$ 5,252,249 $ 4,908,735
=========== ===========
8
4. GEOGRAPHIC AND INDUSTRY SEGMENTS-CONTINUED
Three Months Ended
June 30,
--------------------------
2001 2002
----------- -----------
Expenditures for segment assets
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ --
Vehicle Rental Franchises-Pricele$$-(U.S.) -- --
Vehicle Rental Operations-(U.S.) 303,581 39,593
Corporate-(U.S.) 50,235 49,313
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
----------- -----------
$ 353,816 $ 88,906
=========== ===========
Depreciation and amortization
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 4,528 $ 4,540
Vehicle Rental Franchises-Pricele$$-(U.S.) 1,016 1,184
Vehicle Rental Operations-(U.S.) 19,602 51,341
Corporate-(U.S.) 20,841 17,012
Insurance-(U.S.) -- --
Insurance-(Bermuda) -- --
----------- -----------
$ 45,987 $ 74,077
=========== ===========
Interest income
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 19,555 $ 12,769
Vehicle Rental Franchises-Pricele$$-(U.S.) 1,890 1,939
Vehicle Rental Operations-(U.S.) -- --
Corporate-(U.S.) 1,534 1,587
Insurance-(U.S.) 11,016 3,048
Insurance-(Bermuda) -- 4
----------- -----------
$ 33,995 $ 19,347
=========== ===========
Interest expense
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ -- $ --
Vehicle Rental Franchises-Pricele$$-(U.S.) -- --
Vehicle Rental Operations-(U.S.) -- 5,238
Corporate-(U.S.) -- --
Insurance-(U.S.) 6,197 --
Insurance-(Bermuda) -- --
----------- -----------
$ 6,197 $ 5,238
=========== ===========
Income taxes
Vehicle Rental Franchises-Rent-A-Wreck-(U.S.) $ 198,010 $ 20,854
Vehicle Rental Franchises-Pricele$$-(U.S.) 33,948 11,207
Vehicle Rental Operations-(U.S.) -- --
Corporate-(U.S.) -- --
Insurance-(U.S.) 18,850 --
Insurance-(Bermuda) -- --
----------- -----------
$ 250,808 $ 32,061
=========== ===========
9
5. LITIGATION
Rent-A-Wreck of America, Inc. (the "Company") is party to routine 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 effect on the consolidated results of operations or
financial position of the Company.
In April, 2001, the Company and one of its subsidiaries, Bundy American
Corporation, Inc., were impleaded into a personal injury lawsuit, pending since
1992, involving injuries to a pedestrian claiming to have been involved in a
motor vehicle accident with an auto owned and rented by an independent licensee
of the Company. The plaintiff seeks damages totaling $9 million. The Company
believes it has several meritorious defenses and believes the claims against the
Company are without merit. The Company is vigorously defending the lawsuit, and
expects to file a summary judgment motion in the near future. The Company
intends to move for dismissal of the lawsuit and/or, if necessary, try the case
to conclusion, and pursue any appeals as may be necessary to sustain its
position. No trial date has been scheduled.
On May 14, 2001, a Carney, Maryland franchisee of Bundy American
Corporation filed an action in Baltimore City Superior Court, Case No.
24-C-01-002408, alleging it suffered $400,000 in contract damages caused by
Bundy when the franchisee lost a competitive bid for auto rental business let by
the Baltimore City Police Department. Plaintiff also named as co-defendant the
Bundy franchisee that won the bid. Bundy filed a counterclaim against Plaintiff
in the amount of approximately $70,000 for abandoning another of Plaintiff's
Bundy franchises. The case is in the discovery process. Trial by jury is set for
November 18, 2002.
To date none of the discovery supports Plaintiff's claim, either as to
liability or as to amount. Plaintiff has offered to settle the claim for
$350,000. Bundy's outside trial counsel has advised against a settlement that
would have Bundy pay Plaintiff any monies at all. Counsel advises that it will
defend on legal and factual grounds, and that it believes that the Bundy
counterclaim is on solid legal and factual footing.
6. SUBSEQUENT EVENTS
On August 12, 2002, the Board of Directors of the Company discussed whether
the Company should terminate the registration of its common stock under Section
12 of the Securities Exchange Act of 1934 (the "1934 Act"). The Board discussed
the advantages of maintaining its Section 12 registration and its quotation on
the Nasdaq Small Cap market, including the limited liquidity it provided for
shareholders. The Board also evaluated the cost of maintaining the Company as an
SEC registrant, including the increased accounting, legal and Nasdaq Small Cap
fees and the costs of personnel who spend a considerable amount of time
complying with the securities laws and preparing the periodic reports. The Board
was informed of the limited benefits of the Nasdaq quotation, including the fact
that the Nasdaq Small Cap market for the Company's shares since 1985 has not had
the depth and liquidity to provide for a full market for all shares.
The Company has also been informed that it presently qualifies to terminate
its registration under the 1934 Act in accordance with SEC rules. After
reviewing all these matters, the Board decided unanimously that it was in the
best interests of the Company and its shareholders to authorize the Company to
terminate its registration under the 1934 Act by filing a Form 15 with the SEC.
This form is expected to be filed on August 30, 2002, which will have the effect
of deregistering the common stock of the Company, delisting the common stock on
the Nasdaq Small Cap market, and immediately terminating the Company's
obligation to file Forms 10-KSB, 10-QSB and 8-K.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO JUNE 30, 2001
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 June 30, 2002, the
Company's Franchising segment comprised 75% of consolidated net revenues (81% in
2001) and 408% of consolidated operating income (96% in 2001).
For the quarter ended June 30, 2002, initial license fees, continuing
license fees and advertising fees decreased by $365,725 (23%). Initial license
fees decreased by $73,501 (15%), continuing license fees decreased by $244,970
(28%), and advertising fees decreased by $47,254 (20%). The decrease in initial
license fees, continuing license fees and advertising fees resulted partially
from reduced travel demands arising, in part, from September 11th and general
economic uncertainties which have reduced travel. In addition, a substantial
number of franchisees have not been paying the full royalties which they would
normally be expected to remit, and the Company has been less successful than it
had been in the past in making collections.
Revenues from insurance premiums decreased by $40,778 (13%) due to a lower
number of vehicles in the Company's CAR Insurance program. This lower number is
a direct consequence of the lower number of vehicles in participating
franchisees' fleets due to reduced travel demands.
Vehicle rental operations revenues increased by $67,757 (128%) due to more
Company-owned cars being added to the Rental Operations fleet.
Total operating expenses for the three segments increased by $213,661 (15%)
compared to the prior period. Salary expense for three segments increased by
$104,635 (39%), 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
decreased by $52,395 (17%), which resulted primarily from a decrease in national
advertising expense. Sales and marketing expenses increased by $14,170 (6%),
which resulted primarily from an increase in reserves for bad debt expense of
$42,566 partially offset by a decrease in marketing expense. Direct expenses for
the Company's Rental Operations increased by $30,791 (133%), primarily due to
the increase in the number of the Company-owned vehicles. Insurance underwriting
expenses increased by $56,317 (24%) due to an increase in paid losses and loss
reserves for unsettled claims. General and administrative expenses for three
segments increased by $32,053 (10%), which resulted primarily from increases in
collection and legal expenses.
The Company realized operating income of $68,954, before taxes and
interest, for the three-month period ended June 30, 2002 compared to operating
income of $621,963 for the same period in the prior year, reflecting a decrease
of $553,009 (89%). This decrease resulted primarily from a decrease in
continuing license fees, a decrease in initial license fees, a decrease in
insurance premiums as well as an increase in underwriting expenses and an
increase in the Company's Rental Operations expenses.
11
Net interest income decreased by $14,648 (43%). This decrease was primarily
due to lower interest rates earned on smaller average cash deposits, which are
held in interest bearing accounts.
Income tax expense for the quarter ended June 30, 2002 decreased by
$218,747 (87%) compared to the three-month period ended June 30, 2001 due to
lower pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had working capital of $2,000,238 compared to
$1,896,309 at March 31, 2002. This increase of $103,929 in working capital stems
from a decrease in accounts payable and accrued expenses and an increase in
receivables and prepaid expenses partially offset by an increase in reserve
accruals related to the insurance and payments made for the buyback of common
stock as well as preferred stock dividends. At June 30, 2002, the Company's
allowance for doubtful accounts was $1,284,879 compared to $1,197,513 at March
31, 2002 and $899,299 at June 30, 2001. The Company wrote off $17,980 of
doubtful accounts during the three months ended June 30, 2002.
In October 2001, the Company entered into 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 line of credit provides security for a $1,000,000 letter of credit issued
to American International Group ("AIG"). This letter of credit is secured by a
certificate of deposit of $600,000 held by Merrill Lynch. In addition, Merrill
Lynch has a first lien on all the Company's assets. At June 30, 2002, the
Company owed a balance of $430,566 on its line of credit for purchasing
additional vehicles for its Rental Operations.
The vehicle financing payable contains restrictive covenants covering
ratios relating to minimum tangible net worth and a fixed charge coverage ratio,
as well as other customary covenants, representations and warranties and events
of default. On June 30, 2002, the Company was not in compliance with the fixed
charge coverage ratio and obtained a waiver of its noncompliance from the lender
for a period not to extend beyond September 30, 2002.
The Company rents its office facilities under the terms of an operating
lease with a related party. The monthly office facilities lease commitment was
$10,014 at June 30, 2002.
Property and equipment decreased by $225,172 (11%) from March 31, 2002 to
June 30, 2002. This decrease occurred primarily due to the sale of 23 vehicles
in connection with the Company's store partially offset by the purchase of one
vehicle in connection with the wheelchair van program and additional investment
in the continued development of a centralized software reporting package to be
utilized by the Company's franchisees with American Business Information Systems
("ABIS"), a related party entity, and the purchase of computer hardware.
Pursuant to authorization of the Board of Directors on January 19, 2000,
the Company hired ABIS to develop a centralized software reporting package to be
used by the franchisees. Through June 30, 2002, the Company had paid $240,288 to
ABIS. The centralized software reporting package is currently being tested at
the Company's store in Maryland, and management expects it will be Beta tested
with a limited number of franchisees in three to six months.
Cash used in operations was $166,781, resulting from a decrease in accounts
payable and accrued expenses, an increase in accounts and notes receivable, an
increase in prepaid expenses and an increase in prepaid income tax, partially
offset by an increase in insurance loss reserves. Accounts payable and accrued
expenses decreased primarily from a decrease in national advertising expense.
Accounts and notes receivable increased primarily due to an increase in initial
license fees financed by the Company for the sale of additional franchises.
Prepaid expenses increased primarily due to additional promotional materials and
payment of fees in connection with the Company's line of credit with Merrill
Lynch. Prepaid income tax increased primarily due to additional payments made
for the Company's earnings for the fiscal year ended March 31, 2002. Insurance
loss reserves increased primarily due to an increase in unsettled claims
associated with the CAR insurance program.
Cash provided by investing activities of $144,254 related primarily to
proceeds from the sale of 23 vehicles, reduced by additional computer software
and hardware.
Cash used in financing activities during the same period was $79,486,
resulting from a decrease in vehicle financing payable in connection with the
Rental Operations, the buyback of common stock and by the payment of preferred
dividends. The Company's stock-buyback program may have to be curtailed if
operating results and cash flow generation do not improve.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
12
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, 2002.
All forward-looking statements should be considered in light of these risks and
uncertainties.
13
SELECTED FINANCIAL DATA
Set forth below are selected financial data with respect to the
consolidated statements of earnings of the Company and its subsidiaries for the
fiscal quarters ended June 30, 2002 and 2001 and with respect to the balance
sheets thereof at June 30 in each of those years.
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 ended June 30,
---------------------------------
2001 2002
---- ----
(in thousands except per share
amounts and number of franchises)
(Unaudited)
FRANCHISEES' RESULTS
Franchisees' revenue (1) $14,659 $10,576
Number of franchised locations 677 642
RESULTS OF OPERATIONS
Total revenue $ 2,048 $ 1,708
Total expense 1,426 1,640
Income before income taxes 650 83
Net income 399 51
Earnings per common share
Basic $ .09 $ .01
Weighted average common shares 4,385 4,196
Diluted $ .07 $ .01
Weighted average common shares plus
convertible preferred stock, and
options and warrants 5,490 5,282
EBITDA (2) 702 162
BALANCE SHEET DATA
Working capital $ 2,024 $ 2,000
Total assets $ 5,252 $ 4,908
Shareholders' Equity $ 3,240 $ 3,085
- ----------
(1) The franchisees' revenue data have 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. DISCLOSURE
On August 12, 2002, the Board of Directors of Rent-A-Wreck of America, Inc.
(the "Company") discussed whether the Company should terminate the registration
of its common stock under Section 12 of the Securities Exchange Act of 1934 (the
"1934 Act"). The Board discussed the advantages of maintaining its Section 12
registration and its quotation on the Nasdaq Small Cap market, including the
limited liquidity it provided for shareholders. The Board also evaluated the
cost of maintaining the Company as an SEC registrant, including the increased
accounting, legal and Nasdaq Small Cap fees and the costs of personnel who spend
a considerable amount of time complying with the securities laws and preparing
the periodic reports. The Board was informed of the limited benefits of the
Nasdaq quotation, including the fact that the Nasdaq Small Cap market for the
Company's shares since 1985 has not had the depth and liquidity to provide for a
full market for all shares.
The Company has also been informed that it presently qualifies to terminate
its registration under the 1934 Act in accordance with SEC rules. After
reviewing all these matters, the Board decided unanimously that it was in the
best interests of the Company and its shareholders to authorize the Company to
terminate its registration under the 1934 Act by filing a Form 15 with the SEC.
This form is expected to be filed on August 30, 2002, which will have the effect
of deregistering the common stock of the Company, delisting the common stock on
the Nasdaq Small Cap market, and immediately terminating the Company's
obligation to file Forms 10-KSB, 10-QSB and 8-K.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See the Exhibit Index following the Signatures page of this
report, which is incorporated herein by reference.
(b) Reports on Form 8-K: The Registrant filed no Current Reports on Form
8-K during the period covered by this report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits:
See Exhibit Index following the Signatures page, which is incorporated
herein by reference.
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)
By: Date:
/s/ Kenneth L. Blum, Sr. August 19, 2002
- ----------------------------- --------------------
Kenneth L. Blum, Sr.
Chief Financial Officer
/s/ Kenneth L. Blum, Sr. August 19, 2002
- ----------------------------- --------------------
Kenneth L. Blum, Sr.
CEO and Chairman of the Board
17
RENT-A-WRECK OF AMERICA, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 0-14819)
EXHIBIT INDEX
TO
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2002
99.1 Certification of Chief Executive Officer Filed herewith.
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Filed herewith.
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
18