<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------------- --------------
Commission file number 0-29797
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
(Exact name of registrant as specified in its charter)
Delaware 22-368051
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Jericho Turnpike
Floral Park, New York 11001
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: 516-488-8600
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
7,732,709 shares, $.001 par value, as of September 30, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
F-1
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
I N D E X
---------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
As at September 30, 2000 and December 31, 1999 ............................. F-3
Consolidated Statements of Income
For the Nine Months Ended September 30, 2000 and 1999 ...................... F-4
Consolidated Statements of Operations
For the Three Months Ended September 30, 2000 and 1999 ..................... F-5
Consolidated Statements of Stockholders' Equity
For the Year Ended December 31, 1999 and
Nine Months Ended September 30, 2000 ....................................... F-6
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 ...................... F-7
Notes to Consolidated Financial Statements.................................. F-8 - F-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................................... F-10 - F-12
Part II - Other Information:
Item 3 Through Item 9 - Not Applicable .....................................
Signatures .................................................................
</TABLE>
F-2
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
A S S E T S
September 30, December 31,
------------ ------------
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 4,773 $ 33,106
Net investment in direct financing leases 6,247,722 7,712,004
Prepaid expenses 10,000 13,375
------------ ------------
Total current assets 6,262,495 7,758,485
Vehicles held for sale or re-lease 2,225,414 1,300,843
Net investment in direct financing leases 21,057,048 19,349,913
Furniture and equipment - net of depreciation
and amortization 92,203 112,453
Due from related parties 67,796 -
Other assets 4,025 78,573
------------ ------------
$ 29,708,981 $ 28,600,267
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of loans payable $ 5,770,302 $ 7,613,318
Accounts payable and accrued expenses 222,110 517,091
Loan payable stockholder 305,187 107,894
------------ ------------
Total current liabilities 6,297,599 8,238,303
Loans payable - net of current maturities 21,841,666 18,996,847
Deferred income taxes 761,000 701,000
------------ ------------
Total liabilities 28,900,265 27,936,150
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, authorized -
1,000,000 shares, none issued and outstanding
Common stock, $.001 par value, authorized -
25,000,000 shares, issued and outstanding -
7,732,709 shares at September 30, 2000 and
7,532,709 shares at December 31 ,1999 7,733 7,533
Additional paid-in capital 328,257 163,637
Retained earnings 1,050,563 973,947
------------ ------------
1,386,553 1,145,117
Less: Due from related party 577,837 481,000
------------ ------------
808,716 664,117
------------ ------------
$ 29,708,981 $ 28,600,267
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------------------
2000 1999
--------- ----------
<S> <C> <C>
Revenues:
Amortization of unearned
lease income $3,066,307 $2,801,032
Gain on sale of vehicles 233,499 118,917
---------- ----------
Total revenues 3,299,806 2,919,949
---------- ----------
Costs and expenses:
Interest 1,930,758 1,315,308
Amortization of initial direct costs 258,765 181,155
Provision for bad debts 156,000 132,000
Salaries and wages 352,861 242,588
Other selling and administrative costs 464,806 467,707
---------- ----------
Total costs and expenses 3,163,190 2,338,758
---------- ----------
Income before provision for income taxes 136,616 581,191
Provision for income taxes 60,000 236,000
---------- ----------
Net income $ 76,616 $ 345,191
========== ==========
Earnings per share:
Basic and diluted:
Net income per share $0.01 $0.05
===== =====
Weighted average number of shares outstanding 7,687,984 7,301,996
========== ==========
(A)
</TABLE>
(A) Proforma - See Note 1(e).
See notes to consolidated financial statements.
F-4
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30,
------------------------------
2000 1999
--------- ----------
<S> <C> <C>
Revenues:
Amortization of unearned
lease income $ 661,829 $1,388,041
Gain on sale of vehicles 140,610 ( 109,939)
--------- ----------
Total revenues 802,439 1,278,102
--------- ----------
Costs and expenses:
Interest 624,274 575,059
Amortization of initial direct costs 86,255 129,155
Provision for bad debts - 4,000
Salaries and wages 114,140 108,776
Other selling and administrative costs 76,006 116,190
--------- ----------
Total costs and expenses 900,675 933,180
--------- ----------
Income (loss) before provision for income taxes ( 98,236) 344,922
Provision (credit) for income taxes ( 32,167) 144,000
--------- ----------
Net income (loss) ($ 66,069) $ 200,922
========= ==========
Earnings (loss) per share:
Basic and diluted:
Net income (loss) per share ($0.01) $.03
======= ====
Weighted average number of shares outstanding 7,732,492 7,481,781
========= ==========
(A)
</TABLE>
(A) Proforma - See Note 1(e).
See notes to consolidated financial statements.
F-5
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999(CONSOLIDATED) AND 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Shares Additional
--------------------------- Paid-In
Shares Amount Capital
---------- -------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997 100 $150,000 $ -
Net income for the year ended December 31, 1998 - - -
---------- -------- ----------
Balance at December 31, 1998 100 150,000 -
Issuance of shares of common stock for cash,
net of offering costs 67,200 67 16,716
Reverse acquisition of Royal Acceptance Corp. 7,465,509 7,466 1,116,459
Recapitalization upon reverse acquisition ( 100) ( 150,000) ( 969,538)
Due from related party - - -
Net income for the year ended
December 31, 1999 - - -
---------- -------- ----------
Balance at December 31, 1999 7,532,709 7,533 163,637
Due from related party - - -
Issuance of shares of common stock for cash 200,000 200 164,620
Net income for the nine months ended
September 30, 2000 - - -
---------- -------- ----------
Balance at June 30, 2000 7,732,709 $ 7,733 $ 328,257
========== ======== ==========
<CAPTION>
Due from Total
Retained Related Stockholders'
Earnings Party Equity
---------- --------- --------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 599,064 $ - $749,064
Net income for the year ended December 31, 1998 90,812 - 90,812
---------- --------- --------
Balance at December 31, 1998 689,876 - 839,876
Issuance of shares of common stock for cash,
net of offering costs - - 16,783
Reverse acquisition of Royal Acceptance Corp. ( 1,119,538) 4,387
Recapitalization upon reverse acquisition 1,119,538 - -
Due from related party - ( 481,000) ( 481,000)
Net income for the year ended
December 31, 1999 284,071 - 284,071
---------- --------- --------
Balance at December 31, 1999 973,947 ( 481,000) 664,117
Due from related party - ( 96,837) ( 96,837)
Issuance of shares of common stock for cash - - 164,820
Net income for the nine months ended
September 30, 2000 76,616 - 76,616
---------- --------- --------
Balance at June 30, 2000 $1,050,563 ($577,837) $808,716
========== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ROYAL ACCEPTANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 76,616 $ 345,191
----------- -----------
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 279,015 193,080
Gain on sale of vehicles ( 233,499) ( 118,917)
Deferred income taxes 60,000 232,000
Increase (decrease) in cash flows as
a result of changes in asset and
liability account balances:
Net investment in direct financing leases ( 501,616) ( 11,196,495)
Vehicles held for sale or re-lease ( 691,072) ( 534,443)
Prepaid expenses 3,375 -
Other assets 2,000 -
Loans payable 1,001,803 10,930,728
Accounts payable and accrued expenses ( 294,983) 308,823
Proceeds of vehicles sold - -
----------- -----------
Total adjustments ( 374,977) ( 185,224)
----------- -----------
Net cash used in operating activities ( 298,361) 159,967
----------- -----------
Cash flows from investing actitivites:
Acquisition of furniture and equipment - ( 34,035)
----------- -----------
Cash flows from financing activities:
Sale of capital stock 164,820 -
Loans payable officer 197,293 103,394
Increase in loans to related party ( 92,085) ( 435,150)
--------- ----------
Net cash provided by financing activities 270,028 ( 331,756)
----------- -----------
Net decrease in cash ( 28,333) ( 205,824)
Cash acquired at acquisition of Royal Acceptance - 2,412
Cash at beginning of period 33,106 237,957
----------- -----------
Cash at end of period $ 4,773 $ 34,545
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest $ 1,930,758 $ 1,315,308
=========== ===========
Income taxes $ - $ -
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ROYAL ACCEPTANCE CORORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Organization:
Royal Acceptance Corporation ("Royal") was
incorporated in the State of Delaware on November 15, 1996. On
July 15, 1999, pursuant to a reorganization under section
368(a)(1)(B) of the Internal Revenue Code, Royal acquired from
Alliance Holdings Limited Partnership ("Alliance") all of the
issued and outstanding capital stock of RIT Auto Leasing
Group, Inc. ("RIT") in exchange for 5,650,000 shares of
Royal's common stock. After the acquisition, the former RIT
stockholder, who is Alliance's general partner, and who became
President, Secretary and Director of Royal owned approximately
72% of Royal's outstanding common stock. The transaction is
being accounted for as a reverse acquisition of Royal by RIT.
The results of operations of Royal is included in the
accompanying financial statements since the date of
acquisition. Royal, prior to the RIT acquisition, had been
virtually inactive since 1995.
The following summarized unaudited pro/forma
information assumes the acquisition had occurred on January 1,
1999.
<TABLE>
<CAPTION>
For the Nine For the Three
Months Ended Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues $2,919,949 $1,278,102
========== ==========
Net income $ 230,964 $ 144,057
========== ==========
Earnings per share:
Basic and diluted $0.03 $0.01
===== =====
</TABLE>
(b) Principles of Consolidation:
The accompanying interim unaudited consolidated
financial statements include the accounts of Royal and its
wholly-owned subsidiary, RIT. All material inter-company
transactions have been eliminated in consolidation.
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Basis of Presentation:
The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, the statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly
the financial position as of September 30, 2000 and the
results of operations and cash flows for the three months and
nine months ended September 30, 2000 and 1999 and not
necessarily indicative of the results to be expected for the
year ended December 31, 2000.
The December 31, 1999 balance sheet has been derived
from the audited financial statements at the date included in
the Company's annual report contained in Form 10KSB. These
unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in
the Company's annual report contained in Form 10KSB for the
year ended December 31, 1999.
(d) Financial Statement Presentation:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts and disclosures accordingly. Actual results
could differ from those estimates.
(e) Per Share Data:
Net income per share was computed by the weighted
average number of shares outstanding during each period. The
issuance of all common shares in connection with the
acquisition of RIT (Note 1(a)) has been retroactively
reflected in the computation as if it had occurred on December
31, 1998. In addition, the weighted average number of shares
outstanding for the nine and three months ended September 30,
1999 reflects the revenue purchase of Royal as if it had
occurred on December 31, 1998.
F-9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company is in the business of leasing predominately new and pre-owned
automobiles with terms generally ranging from twelve to sixty months. It markets
its leasing services through its dealer network and advertising. The sources of
its automobiles for lease are generally automobile dealers in the Eastern region
of the United States. The Company also leases and finances commercial industrial
equipment such as computers, airplanes, boats and construction equipment.
However, through September 30, 2000 commercial industrial equipment accounts for
an insignificant portion of company leases.
Forward Looking Statements and Certain Risk Factors
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward-looking statements that may be deemed to have been made in this Form
10SB or that are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in the Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "expect", "believe",
"anticipate", "intend", "could", "estimate", "continue", or the negative
variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors that may affect the Company's results
include, but are not limited to, the lack of substantial profits, its dependence
on key personnel, its ongoing need for additional financing and its dependence
on the automobile industry. The Company is also subject to other risks detailed
herein or which will be detailed from time to time in the Company's future
filings with the Securities and Exchange Commission.
Results of Operations
Nine months ended September 30, 2000 and 1999:
Revenues are summarized as follows:
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
a) Amortization of unearned
lease income $3,066,307 $2,801,032 $265,275 9.47%
---------- ---------- -------- -----
b) Gain (loss) on sale of
vehicles 233,499 118,917 114,582 96.35%
---------- ---------- -------- -----
$3,299,806 $2,919,949 $379,857 13.01%
========== ========== ======== =====
</TABLE>
F-10
<PAGE>
Results of Operations (Continued)
a) Revenues for the nine months ended September 30, 2000 increased by
approximately 13% when compared with the same period in 1999. The increase
was a result of management's efforts to increase its dealer networks which
has been expanded to include locations in Florida, North Carolina,
California, Georgia and Illinois. Management has also expanded its
financial relationships to include several new major financing sources
enabling the Company to consummate additional lease agreements. Increase in
customer referrals has also had an impact on the Company's revenues.
Included in unearned income are initial payments received from leasees
which aggregated $433,483 and $495,839 during the nine months ended
September 30, 2000 and 1999, respectively. 50% of such payments consist of
application fees and approximately 50% of nonrefundable payment of the
first month's lease payment. It is the Company's policy to charge these
amounts to operations when received since they are nonrefundable and there
is no risk of forfeiture.
b) In the event that the purchase option is not exercised by the lessee or the
vehicle is repossessed, the Company either re-leases or sells the vehicle.
In the event of sale, the variant between the selling price and the
carrying amount of the lease is picked up in income. During the nine months
ended September 30, 2000 and 1999 the Company realized a gain from the sale
of vehicles of $233,499 and $118,917, respectively. The increase in profit
from 1999 and 2000 was the result of a loss on the sale of vehicles during
the three months ended September 30, 1999.
Interest expense:
The profitability of the Company's leases is primarily based upon the
difference between the interest rate implicit in it's leases and it's cost
of funds (the "Spread"). As summarized below during nine months ended
September 30, 2000 the Spread was 8.32% as compared to 13.83% a year
earlier. During the nine months ended September 30, 2000 the Company's cost
of financing increased, however, the Company could not pass along the
increase to its leasees. In addition, due to increased competition the
Company had to decrease the interest rate inherent in its leases which
sharply decreased the rate of return on its income earning assets.
Average yield of implicit on leases versus average cost of financing.
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Average yield implicit in income
earning assets:
Amortization of unearned lease income $ 3,066,307 $ 2,801,032
Average investment in leases 27,183,344 19,803,822
----------- -----------
Annualized rate of return on income earning assets 15.04% 18.86%
====== ======
Average cost of financing:
Interest expense $ 1,930,758 $ 1,315,308
Average loans payable balance 27,111,067 18,182,888
----------- -----------
Annualized average cost of financing 9.50% 9.65%
===== =====
Spread 5.54% 9.21%
===== =====
</TABLE>
F-11
<PAGE>
Results of Operations (Continued)
Initial direct costs:
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total lease revenue $3,066,307 $2,801,032 $ 265,275 9.47
Amortization of initial
direct cost 258,765 181,155 77,610 42.84
---------- ---------- ---------
Percentage 8.44% 6.47% 1.97%
===== ===== =====
</TABLE>
Initial direct costs consists primarily of commissions, auto repairs and
repossession costs. Such costs are amortized over the life of the lease on a
straight-line basis. As a percentage of revenue, such amortization increased by
1.97% for the nine months ended September 30, 2000 as compared to the same
period 1999. Such increase was due to a large increase in leases entered into
during the nine months ended September 30, 2000 as compared to a year earlier.
The percentage increase is due costs being amortized on a straight-line basis
over the life of the lease.
Selling, general and administration expenses:
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues $3,299,806 $2,919,949 $379,857 13.01
Selling, general and
administrative expenses 973,667 842,295 131,372 15.60
---------- ---------- ---------- ---------
29.51% 28.85% 0.66%
====== ====== =====
</TABLE>
Selling, general and administrative expenses ("SG&A") increased from $842,295
during the nine months ended September 30, 2000 to $973,667 during the nine
months ended September 30, 2000 (an increase of $131,372). This increase was
attributed to increases in bad debts and salaries and wages and professional
fees which were caused by the large increase in revenues. However, as a
percentage of revenues, SG&A expenses decreased by only .66% due to revenues
increasing at the same rate as SG&A expenses.
F-12
<PAGE>
Results of Operations (Continued)
Such increases are summarized as follows:
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------------------ Increase
2000 1999 (Decrease)
--------- -------- --------
<S> <C> <C> <C>
a) Salaries and wages $352,861 $242,588 $110,273
b) Provision for bad debts 156,000 132,000 24,000
d) Other 464,806 467,707 ( 2,901)
--------- -------- --------
$973,667 $842,295 $131,372
========= ======== ========
</TABLE>
The expansion of leasing operations during the latter part of 1999 and during
the nine months ended September 30, 2000 necessitated the hiring of additional
office personnel. Due to the increase in leasing operations, a provision for bad
debts was required during the nine months ended September 30, 2000, whereas, a
smaller provision was necessary during the same period in 1999. Other expenses
decrease by $2,901.
Three months ended September 20, 2000 and 1999.
Revenues are summarized as follows:
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
a) Amortization of unearned
lease income $ 661,829 $1,388,041 ($ 726,212) (52.32%)
b) Gain (loss) on sale of
of vehicles 140,610 ( 109,939) 250,549 (227.90%)
---------- ---------- ---------- ----------
$ 802,439 $1,278,102 ($ 475,663) 37.22%
========== ========== ========== ==========
</TABLE>
a) Revenues for the quarter ended September 30, 2000 decreased by
approximately 52.32% when compared with the same period in 1999. The
Company enjoyed a extremely large increase in revenue during the September
1999 quarter due to an expansion of their dealer networks which has been
expanded to include locations in Florida, North Carolina, California,
Georgia and Illinois. The aforementioned large revenue increase during the
September 1999 quarter, coupled with a soft leasing period during the
September 2000 quarter combined to account for the large decrease in
revenues.
Included in unearned income are initial payments received from leasees
which aggregated $104,780 and $163,627 during the three months ended
September 30, 2000 and 1999, respectively. 50% of such payments consists of
application fees and approximately 50% of nonrefundable payment of the
first month's lease payment. It is the Company's policy to charge these
amounts to operations when received since they are nonrefundable and there
is no risk of forfeiture.
F-13
<PAGE>
Results of Operations (Continued)
b) In the event that the purchase option is not exercised by the leasees or
the vehicle is repossessed, the Company either re-leases or sells the
vehicle. In the event of a sale, the variant between the selling price and
the carrying amount of the lease is picked up in income. During the three
months ended September 30, 2000 the Company realized a gain from the sale
of vehicles of $140,610 compared with a loss of $109,939 the year before.
The loss during the September 1999 quarter was the result of the sale of
many vehicles which did not go to full term. Loss on such sales are common
since the lease values on the books are extremely high.
Interest expense:
Average rate of return on income earning assets versus average cost of
financing.
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30,
------------------------------- Increase
2000 1999 (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Average yield implicit in income
earning assets:
Amortization of unearned lease income $ 661,829 $ 1,388,041
Average investment in leases 28,000,553 23,433,249
----------- -----------
Annualized rate of return on income
earning asset 9.45% 23.69% 14.24%
----- ------
Average cost of financing:
Interest expense 624,274 575,059
Average loans payable balance 27,593,000 22,552,000
----------- -----------
Annualized average cost of financing 9.05% 10.20% 1.15%
----- ------ -----
Spread 0.40% 13.49% (13.09%)
===== ====== ========
</TABLE>
The profitability of the Company's leases is primarily based upon the difference
between the interest rate implicit in it's leases and it's cost of funds (the
"Spread"). As summarized above the Spread during three months ended September
30, 2000 was only 0.40% as compared to a year earlier. Due to increased
competition during the September 2000 quarter, the Company decreased the
interest rate inherent in its lease which sharply decreased the rate of return
on its income earning assets. Such decrease was a major cause of the loss during
the September 2000 quarter.
Initial direct costs:
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30,
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total lease revenue before $ 661,829 $1,388,041 ( $726,212) ( 52.32)
---------- ---------- ---------
Amortization of initial
direct costs 86,255 129,155 ( 42,900) ( 33.22)
---------- ---------- ---------
Percentage 13.03% 9.30% 3.73%
====== ===== =====
</TABLE>
F-14
<PAGE>
Results of Operations (Continued)
Initial direct costs consists primarily of commissions, auto repairs and
repossession costs. Such costs are amortized over the life of the leases on a
straight-line basis. As a percentage of revenue, such amortization increased by
3.73% for the three months ended September 30, 2000 as compared to the same
period in 1999. Such increase was due to direct costs incurred on the large
increase in leases entered into during the nine months ended September 30, 1999
as compared to the nine months ended September 30, 2000. Initial direct costs
are amortized on a straight-line basis over the life of the lease resulting in
larger amortization during the September 2000 quarter.
Selling, general and administration expenses ("SG&A") as a percentage of total
revenues:
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30,
------------------------------- Increase % Increase
2000 1999 (Decrease) (Decrease)
---------- ---------- --------- ------
<S> <C> <C> <C> <C>
Total revenues $ 802,439 $1,278,102 ($ 475,663) 37.22
---------- ---------- --------- ------
Selling, general and
administrative expenses 190,146 228,966 ( 38,820) ( 16.95)
---------- ---------- --------- ------
23.70% 17.91% 5.79%
===== ===== ====
</TABLE>
SG&A expenses decreased from $228,966 during the September 1999 to $190,146
during the September 2000 quarter (a $38,820 decrease). This decrease was
attributed to decreases in bad debts and professional fees. As a percentage of
revenues, SG&A expenses increase by 5.78% due to the presence of fixed costs
which remained relatively constant on decrease revenues.
Such increases are summarized as follows:
<TABLE>
<CAPTION>
For the Threee
Months Ended
September 30,
------------------------------ Increase
2000 1999 (Decrease)
--------- --------- ---------
<S> <C> <C> <C>
a) Salaries and wages $ 114,140 $108,776 $ 5,364
b) Provision for bad debts - 4,000 ( 4,000)
d) Other 76,006 116,190 ( 40,184)
--------- --------- ---------
$ 190,146 $ 228,966 ($ 38,820)
========= ========= =========
</TABLE>
The expansion of leasing operations during the latter part of 1999 and during
the nine months ended September 30, 2000 necessitated the hiring of additional
office personnel. Other SG&A expenses decreased due to a decrease in
professional fees.
F-15
<PAGE>
Financial Condition
The Company's cash position at September 30, 2000 was $4,773, a decrease of
$28,333 from December 31, 1999. The net investment in direct finance leases
represents the aggregate future lease payments due to the Company from its
leasees. Such amount was $27,304,770 at September 30, 2000 and $27,061,917 at
December 31, 1999. Management feels that it has adequately reserved for any
possible bad debt. Purchase of leased vehicles are financed under several
separate credit facilities. Such indebtedness aggregated $27,611,968 at
September 30, 2000 and $26,610 at December 31, 1999.
Vehicle held for sale or re-lease increased from $1,300,843 at December 31, 2000
to $2,225,414. Such increase was the result of an increase in vehicle coming off
lease during the first nine months of 2000 compared with the same period in
1999.
Accounts payable and accrued expenses decreased from $512,091 at December 31,
1999 to $222,110 at September 30, 2000. The balance at December 1, 1999 was very
high due to the accrual of year ended expenses. Such nonrecurring amounts were
paid during the nine months ended September 30, 2000. Approximately $197,000 was
loaned to the Company by its president during the nine months ended September
30, 2000, thus increasing the loan balance to approximately $305,000.
Due to the timing difference between book and tax treatment of leasing
operations, the Company has a deferred tax liability as of September 30, 2000 of
$761,000. Such amount increased by $55,000 during the nine months ended
September 30, 2000.
Stockholders' equity increased by $144,599 during the nine months ended
September 30, 2000. Such increases was the result of income of $76,616 and the
sale of 200,000 common shares for $164,820. These increases in stockholders'
equity were partially offset by additional amounts loaned to an affiliate of
$96,837.
Liquidity and Capital Resources:
During the nine months ended September 30, 2000 cash of $298,361 was used in
operations which is summarized as follows: (i) net income of $182,132, which is
adjusted for non cash items of $105,516, (ii) an increase in loans payable of
$1,001,803 and (iii) a decrease in prepaid expenses and other assets of $5,375.
Offsetting these increase in cash flows was: (i) a decrease in the net
investment in direct finance leases in the amount of $501,616, (ii) an increase
in vehicles held for sale or re-lease of $691,072 and (iii) a decrease in
accounts payable and accrued expenses of $294,983.
During the nine months ended September 30, 2000, the Company raised $164,820
through the sale of 200,000 shares of its common stock pursuant to Rule 504
offerings at prices ranging from $.25 to $1.00.
The Company had negative working capital at September 30, 2000 of $35,104, which
showed an improvement over the negative working capital balance at December 31,
1999 which was $479,818. When the current portion of unearned income is added
back to the September 30, 2000 working capital deficiency, the result is a
positive working capital balance of $539,486.
F-16
<PAGE>
Results of Operations (Continued)
Management's primary goal is to expand its leasing operations, increase and
obtain better terms with respect to the financing of the vehicles it leases and
to increase the profitability of its vehicle remarketing program. The strategy
for continued growth is to (i) increase lease origination by (a) increased name
recognition, (b) acquisition of similar companies or their assets, (c) the
development, expansion and retention of existing clients, and (d) the expansion
into new geographic markets, (ii) increase and improve the terms of its
financing arrangements, (iii) further develop and increase the profitability of
its used automobile remarketing operations and (iv) lease primarily to high
quality credit applicants in order to continue to build a lease profolio with
low delinquency and credit loss rate.
Management believes that anticipated cash flow from operations and the proceeds
raised through its private offering will be sufficient to fund its operations
for the next 12 months assuming that those operations are consistent with
management's expectations of its anticipated increase in revenues. The company
may need additional financing thereafter. There can be no assurance that the
Company will be able to obtain financing on a favorable or timely basis. The
type, timing and terms of financing elected by the Company will depend upon its
cash needs, the availability of other financing sources and the prevailing
conditions in the financial markets. Moreover, any statement regarding the
Company's ability to fund its operations from expected cash flows is speculative
in nature and inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 20, 2000
Royal Acceptance Corporation
By: /s/ Richard Toporek
--------------------------
Richard Toporek, President
(Principal Financial and
Accounting Officer)
