UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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 1-14510
PRECISION AUTO CARE, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1847851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
748 Miller Drive, S.E., Leesburg, Virginia 20175
(Address of principal executive offices)
(Zip Code)
703-777-9095
(Registrant's telephone number, including area code)
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 5,474,435 shares of
Common Stock as of February 15, 1998.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Precision Auto Care, Inc. ("PAC" or the "Company") was established to create an
international provider of automotive services which are offered principally as
franchise operations marketed under the "Precision" brand name. On November 12,
1997, simultaneously with the closing of its initial public offering (the
"Offering") of common stock (the "Common Stock"), PAC acquired in a series of
separate merger and exchange offer transactions, businesses engaged in (i)
franchising and operating automobile repair and maintenance service centers
("Precision Tune Auto Care"), (ii) operating self-service and automated car wash
centers ("Precision Auto Wash"), and (iii) franchising and operating fast oil
change and lubrication service centers ("Precision Lube Express"). Through the
Combinations, PAC acquired the outstanding capital stock of WE JAC Corporation
("WE JAC"), Miracle Industries, Inc. ("Miracle Industries"), Lube Ventures, Inc.
("Lube Ventures"), Rocky Mountain Ventures, Inc. ("Rocky Mountain I"), Rocky
Mountain Ventures II, Inc. ("Rocky Mountain II"), Miracle Partners, Inc.
("Miracle Partners"), and membership interests in Prema Properties, Ltd. ("Prema
Properties") Ralston Car Wash, Ltd. ("Ralston Car Wash"), and KBG, LLC ("KBG")
(each a "Constituent Company" and collectively the "Constituent Companies").
The consideration for the Combinations consisted of Common Stock. The
Combinations are accounted for under the purchase method of accounting. WE JAC
has been designated as the accounting acquirer for financial statement
presentation purposes in accordance with the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 97, which states that the combining
company which receives the largest portion of voting rights in the combined
corporation is presumed to be the acquirer for accounting purposes. Therefore,
the accompanying historical financial statements as of June 30, 1997 and for the
three month periods ended December 31, 1996 and 1997 that are presented as the
historical financial statements of the registrant are statements of WE JAC.
Unless the context otherwise requires, all references herein to the Company
include WE JAC and the other Constituent Companies.
Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto, the Financial Statements of WE JAC, Miracle
Industries, Lube Ventures, and Prema Properties, and related notes thereto, and
management's discussion and analysis of financial condition and results of
operations related thereto, all of which are included in the Company's
Registration Statement on Form S-1 (No. 333-34439), as amended (the
"Registration Statement"), filed with the SEC in connection with the Offering.
Additionally the financial statements herein should be read in conjunction with
the Financial Statements of Rocky Mountain I, Rocky Mountain II, Miracle
Partners, and Ralston Car Wash and related notes thereto, all of which are
included in the Company's Registration Statement on Form S-4 (No. 333-34449) as
amended (the "Registration Statement") filed with the SEC in conjunction with
the Combination.
2
<PAGE>
PRECISION AUTO CARE, INC.
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,308 $ 577
Accounts receivable 7,706 4,080
Inventory 2,347 768
Notes receivable, current portion 1,000 513
Prepaid expenses 2,054 661
Deferred costs 62 1,211
-------- --------
Total current assets 14,478 7,811
Notes receivable, noncurrent portion, net of allowance 1,371 1,361
Property, plant, and equipment, net 13,529 854
Other assets:
Goodwill 31,737 15,968
Deposits, trademarks, and other 891 700
-------- --------
Total other assets 32,628 16,669
======== ========
Total assets $ 62,005 $ 26,694
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,779 $ 4,943
Accrued liabilities 1,649 178
Notes payable, current 610 7,228
Revolving line-of-credit 1,529
Income taxes payable 1,278 680
Refundable deposits 130 81
Deferred revenue, current portion 335 413
-------- --------
Total current liabilities 9,781 15,053
Long-term debt, net of current portion 6,678 622
Other long-term liabilities 715 724
-------- --------
Total liabilities 17,173 16,400
Stockholders' equity:
Preferred stock, $.01 par; 1,000,000 shares authorized;
none outstanding
Common stock, $.01 par; 19,000,000 shares authorized;
5,474,435 and 1,333,700 shares outstanding 54 16
Additional paid-in capital 41,677 8,408
Retained earnings 5,572 4,343
Treasury stock, at cost; 247,040 shares (2,472) (2,472)
-------- --------
Total stockholders' equity 44,832 10,294
======== ========
Total liabilities and stockholders' equity $ 62,005 $ 26,694
======== ========
</TABLE>
<PAGE>
PRECISION AUTO CARE, INC.
STATEMENT OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Proforma Combined Proforma Combined
Adjusted for Offering and Acquisition Adjusted for Offering and Acquisition
Three Months Ended December 31, Six Months Ended Ended December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C>
SALES
Franchising
Development 434 730 533 1,056
Royalty 3,521 3,129 7,316 6,737
Manufacturing & Distribution 6,500 6,360 13,319 13,023
Company Center Operations 1,110 912 2,062 1,794
Other 60 83 116 143
----------- ----------- ----------- -----------
Total Sales 11,625 11,214 23,344 22,753
DIRECT COST 8,036 8,506 16,435 16,992
----------- ----------- ----------- -----------
CONTRIBUTION 3,590 2,709 6,910 5,761
GENERAL & ADMINISTRATIVE 1,064 942 2,164 1,825
DEPRECIATION 212 207 458 418
AMORTIZATION 378 398 756 781
----------- ----------- ----------- -----------
OPERATING INCOME 1,936 1,162 3,531 2,738
OTHER INCOME (EXPENSE)
Other Income (Expense) (63) 55 29 (10)
Interest Income 26 65 81 65
Interest Expense (122) (110) (245) (221)
----------- ----------- ----------- -----------
Total Other Income (Expense) (159) 10 (134) (166)
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 1,776 1,172 3,397 2,572
----------- ----------- ----------- -----------
INCOME TAXES 810 560 1,578 1,210
=========== =========== =========== ===========
NET INCOME $ 966 $ 612 $ 1,819 $ 1,362
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.18 $ 0.11 $ 0.33 $ 0.25
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.11 $ 0.33 $ 0.25
=========== =========== =========== ===========
SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 5,474,435 5,474,435 5,474,435 5,474,435
=========== =========== =========== ===========
SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 5,496,880 5,496,880 5,496,880 5,496,880
=========== =========== =========== ===========
</TABLE>
<PAGE>
PRECISION AUTO CARE, INC.
STATEMENT OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended Ended December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C>
SALES
Franchising
Development 387 $ 700 $ 492 $ 906
Royalty 3,515 3,123 7,300 6,828
Manufacturing & Distribution 5,706 2,941 8,527 5,791
Company Center Operations 710 710
Other 60 83 116 143
----------- ----------- ----------- -----------
Total Sales 10,378 6,846 17,145 13,669
DIRECT COST 7,149 4,986 11,879 9,998
----------- ----------- ----------- -----------
CONTRIBUTION 3,229 1,860 5,267 3,670
GENERAL & ADMINISTRATIVE 1,064 459 1,870 983
DEPRECIATION 146 71 196 142
AMORTIZATION 349 254 579 493
----------- ----------- ----------- -----------
OPERATING INCOME 1,669 1,076 2,622 2,053
OTHER INCOME (EXPENSE)
Other Income (Expense) (52) (45) 34 (99)
Interest Income 60 36 97 74
Interest Expense (196) (218) (492) (446)
----------- ----------- ----------- -----------
Total Other Income (Expense) (188) (227) (361) (471)
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 1,481 849 2,261 1,581
----------- ----------- ----------- -----------
INCOME TAXES 687 377 1,040 713
=========== =========== =========== ===========
NET INCOME $ 794 $ 472 $ 1,221 $ 868
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.09 $ 0.27 $ 0.16
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.09 $ 0.27 $ 0.16
=========== =========== =========== ===========
SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 4,992,078 4,027,365 4,509,722 4,027,365
=========== =========== =========== ===========
SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 5,014,523 4,049,810 4,532,167 4,049,810
=========== =========== =========== ===========
</TABLE>
<PAGE>
PRECISION AUTO CARE, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
Six Months Ended
December 31,
1997
(Unaudited)
----------------
OPERATING ACTIVITIES:
Net Income 1,229
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 774
Changes in operating assets and liabilities
Accounts and notes receivable (3,260)
Inventory 132
Prepaid expenses (973)
Accounts payable and accrued liabilities (580)
Income taxes payable 598
Deferred revenue, net 258
-------
Net cash used in operating activities (1,821)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (275)
Acquisition of area rights (638)
Acquisition of manufacturing facility (2,850)
-------
Net cash used in investing activities (3,762)
FINANCING ACTIVITIES:
Issuance of common stock 20,534
Loan acquisition costs (40)
Proceeds from term loan and line of credit 5,742
Transaction costs 1,149
Repayments of long-term debt and notes payable (21,071)
-------
Net cash provided by financing activities 6,315
-------
Net change in cash and cash equivalents 731
Cash and cash equivalents at beginning of period 577
-------
Cash and cash equivalents at end of period 1,308
=======
<PAGE>
Notes to Financial Statements
December 31, 1997
(Unaudited)
1. Basis of Presentation
Precision Auto Care, Inc. was established to create an international provider of
automotive services which are offered principally as franchise operations
marketed under the "Precision" brand name. On November 12, 1997, PAC acquired
the Constituent Companies for consideration consisting of common stock. The
closing of the Offering also occurred on that date.
For financial statement purposes, WEJAC, one of the Constituent Companies, has
been identified as the accounting acquirer. Accordingly, the historical
financial statements represent those of WEJAC prior to the Combination and the
Offering. The Combination was accounted for using the purchase method of
accounting. Allocations of the purchase price to the assets acquired and
liabilities assumed of the Constituent Companies have been initially assigned
and recorded based on the book value at the time of the Combination and may be
revised as additional information concerning the valuation of such assets and
liabilities becomes available.
The interim financial statements for the three and six month periods ended
December 31, 1996 and 1997 are unaudited, and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments
necessary to fairly present the financial position of the company, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
The unaudited pro forma combined financial information for the three and six
month periods ended December 31, 1996 and 1997 includes the results of the
Constituent Companies as if the Combinations had occurred at the beginning of
each respective three month period. The pro forma combined financial information
includes the effects of : (i) the Combinations; (ii) the provision for income
taxes as if the income was subject to corporate federal and state income taxes
during the periods; (iii) repayment of debt of $18.6 million; and (iv)
amortization of goodwill resulting from the Combinations. Prior to the
Combinations, the Constituent Companies were not under common control or
management; accordingly, the pro forma combined financial information may not be
indicative of or comparable to the Company's post-Combination results of
operations.
2. Summary of Significant Accounting Policies
There have been no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
1 to the Financial Statements to WE JAC, Miracle Industries, Lube Ventures,
Rocky Mountain I, Rocky Mountain II, Miracle Partners, Prema Properties, and
Ralston Car Wash, included
<PAGE>
in the Financial Statements contained in the Company's Registration Statements
on Forms S-1 and/or S-4.
3. Credit Facility and Long-Term Debt
On November 12, 1997, the Company entered into a 3 year $20 million line of
credit with Signet Bank. $10 million of the facility may be used as a revolving
line and credit and $10 million for acquisitions and capital expenditures. The
credit agreement requires the Company to comply with various loan covenants,
which include maintenance of certain financial ratios, restrictions on
additional indebtedness and restrictions on liens, guarantees, advances, capital
expenditures, sale of assets and dividends. Interest on the outstanding balances
will be computed on either the Bank's floating and fluctuating prime commercial
lending rate or the London Interbank Offered rate (LIBOR) plus a margin ranging
from .25% to 2.00% depending on certain financial ratios. Availability fees
ranging from .25% to .30% will be payable on the unused portion of the line of
credit. The Company's subsidiaries have guaranteed repayment of all amounts due
under the credit facility.
On November 12, 1997, proceeds from the Offering were used to prepay outstanding
long-term debt some of which was guaranteed by stockholders of the Constituent
Companies who were released from personal guarantees on that debt. The Company
simultaneously drew on the line of credit for $1.6 million to pay off any
balances remaining after application of the Offering proceeds.
As of December 31, 1997, the Company had outstanding $3.2 million on the
revolving line of credit and $1.5 million on the acquisition line.
4. Capital Stock
On November 12, 1997, PAC completed the Offering, which involved the sale by PAC
of 2,666,540 shares of Common stock at a price to the public of $9.00 per share.
The net proceeds to PAC from the Offering (after deducting underwriting
discounts, commissions and offering expenses) was $19.6 million. Of this amount
$18.6 million was used to repay debt.
5. Earnings Per Share
The computation of pro forma net income per share for the three month period
ended December 31, 1997 is based on 5,496,880 shares outstanding which includes
the following shares:
Issued in consideration for acquisition of Constituent companies 2,780,695
Sold pursuant to offering 2,666,540
Shares issued upon exercise of common stock warrants
simultaneously with the offering 27,200
Common equivalent shares outstanding using the treasury
stock method related to options and warrants 22,445
---------
5,496,880
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 will have no material effect on the reported earnings per share
for the Company.
6. Accounting and Disclosure Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" which requires companies to report by
major components and in total, the change in its net assets during the period
from non-owner sources. It also issued SFAS No. 131, "Disclosures about segments
of an Enterprise and Related Information", which establishes annual and interim
reporting standards for a company's operating segments and related disclosures
about its products, services, geographic areas and major customers. Both
Statements are effective for fiscal years beginning after December 15, 1997.
Adoption of these standards will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect, while not yet
determined by the Company, will be , limited to the presentation of its
disclosures.
7. Income Taxes
Prior to the combinations, the stockholders of Miracle Industries, Lube
Ventures, Rocky Mountain I, Rocky Mountain II, and Miracle Partners elected to
be taxed under Subchapter S of the Internal Revenue Code. The members of Prema
Properties, Ralston Car Wash, and KBG elected to be taxed as Limited Liability
Companies of the Internal Revenue Code. Under these provisions, the entities
were not subject to income taxation for federal purposes. As pass through
entities the stockholders and members report their share of taxable earnings or
losses in their personal tax returns.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Constituent Companies for periods commencing on
the date of the Combinations (November 12, 1997). The Constituent Companies will
be individually responsible for filing federal income tax returns based on
earnings through November 11, 1997. The provision for income taxes included in
the Pro Forma Combined Statements of Operations for the three and six month
periods ended December 31, 1996 and 1997 assumes the application of statutory
federal and state income tax rates and the partial non-deductibility of goodwill
amortization.
8. Commitments and Contingencies
The Company carries a broad range of insurance coverage, including general and
business liability, commercial property, workers' compensation and general
umbrella policies. In November 1997, the Company secured Directors and Officers
and Prospectus Liability insurance coverage with an aggregate limit of $5
million, this amount was subsequently increased to $10 million. The Company has
not incurred significant claims or losses on any of its insurance policies
during the periods presented in the accompanying financial statements.
5
<PAGE>
At December 31, 1997, the Company has lease commitments for office space, a
training center, and a number of service center locations. These leases expire
between 1998 and 2008, with renewal options in certain of the leases. Most of
the service center location leases are subleased to franchisees.
The future minimum lease payments and related sublease payments for leases with
terms in excess of one year as of December 31, 1997 have not materially changed
from June 30, 1997 when they were as follows:
Future Minimum Sublease
Lease Payments Income Net
----------------- ------------- --------
1998 $1,200,884 $ 820,000 $ 380,884
1999 977,895 535,000 442,895
2000 822,895 371,000 451,895
2001 730,264 353,000 377,264
2002 657,000 353,000 304,000
Thereafter 1,220,000 1,148,000 72,000
---------- --------- ----------
$5,608,938 $3,580,000 $2,028,938
========== ========== ==========
9. Purchase Accounting
WE JAC issued in total 1,447,070 shares of its common stock to
shareholders of the Constituent Companies in exchange for all of the outstanding
shares of the respective companies. The fair market value of the shares issued
is determined by the offering price of $9.00 per share for a total of
$13,023,630. The assets acquired and liabilities assumed in the transaction
consisted of the following:
Assets
Cash $ 249,790
Accounts Receivable 563,131
Inventory 1,710,838
Prepaid Expenses 419,511
Building and Fixtures 9,544,941
Equipment and Vehicles 444,145
Land 2,606,975
Other Assets 537,166
Liabilities
Accounts payable $ 1,456,076
Accrued liabilities 979,093
Current and non-current debt 13,237,528
The difference between the total consideration of the stock and the net value of
the assets received and liabilities assumed is $12,619,830 which was booked as
goodwill. Inventory was valued at the lower of cost or market. Accounts
receivable is the amount expected to be collectible. Property, plant and
equipment have been recorded at net book value and may be written up or down
when further evidence would warrant such an adjustment. Liabilities are recorded
as true obligations assumed by PACI.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Pro Forma
Financial Statements of the Company and related notes thereto and the Financial
Statements of WEJAC and the Constituent Companies and related notes thereto,
included in the Company's Registration Statements. Statements contained in this
discussion regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. The
forward looking statements are subject to numerous risks and uncertainties to
the Company, including but not limited to the risks associated with: successful
integration of the Constituent Companies, factors affecting internal growth and
management of growth, the Company's acquisition strategy and availability of
financing, the automotive industry, seasonality, quarterly fluctuations and
general economic conditions, dependence on technology and other factors
discussed in the Registration Statements.
RESULTS OF OPERATIONS-PRO FORMA COMBINED
The pro forma combined results of operations of the Company for the three month
period discussed herein are only a summation of the revenues, direct costs,
general and administrative expenses, and operating income of the Constituent
Companies on a historical basis, which include pro forma adjustments for
amortization of goodwill, interest expense eliminated on prepayment of debt and
income taxes. This data may not be comparable to and may not be indicative of
the Company's post-Combination results of operations due to a variety of
factors, including: (i) the Constituent Companies were not under common control
or management and had different tax and capital structures during the periods
presented; (ii) the Company will incur incremental costs related to its new
corporate management and costs of being a public company; (iii) the Company will
use the purchase method of accounting and establish a new basis of accounting to
record the Combinations; (iv) the combined data does not reflect potential
benefits and cost savings the Company may realize when operating as a combined
entity. Future quarterly results may also be materially affected by the timing
and magnitude of acquisitions, integration costs, variation in product mix, and
seasonality of the automotive service industry. See "Seasonality and Quarterly
Fluctuations--Pro Forma Combined." Accordingly, the operating results for
interim periods shown or for other interim periods are not necessarily
indicative of the results that may be achieved for any subsequent interim period
or for a full fiscal year.
7
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996-PRO FORMA COMBINED
The following table sets forth certain selected pro forma combined financial
data as a percentage of revenues for the period indicated:
Three Months Ended December 31,
1996 % 1997 %
----------------------------------
(in thousands)
Revenue $11,214 100 $11,625 100
Direct Cost 8,506 76 8,036 69
General and Administrative 942 8 1,064 9
Operating Income 1,162 10 1,936 17
Revenues. Revenues increased $411,000, or 3.6%, to $11.6 million for the three
months ended December 31, 1997 from $11.2 million for three months ended
December 31, 1996. A 3% increase in Precision Tune Auto Care same store sales
and an overall 13% increase in Precision Tune Auto Care retail sales, led to an
increase in royalty revenue of $392,000. Improved equipment sales in December
led to an increase in manufacturing and distribution revenue of $140,000; and
improved marketing and operations led to an increase of car wash and lube
revenues of $198,000. This was offset by a decrease in franchise development
revenues of $296,000. In the second quarter of 1996, the Company sold the Brazil
master license for $320,000, which was only partially offset by the sale of the
Indonesia master license during the second quarter of FY1998 for $200,000. Sales
of new franchises were below last year as a result of having to re-file and get
approved the Company's Uniform Franchise Offering Circular during the second
quarter of FY1998. Until that was approved, no new sales offerings could be
made.
Direct Cost. Direct Cost decreased $470,000, or 5.5%, to $8.0 million for the
three months ended December 31, 1997 from $8.5 million for the three months
ended December 31, 1996. This reflects a decrease of $31,000 in development.
Improved operational and cost control in manufacturing and distribution led to a
cost reduction of $512,000. This was offset by an increase in royalty cost of
$31,000. Car wash operations increased costs $147,000 as additional
infrastructure, marketing programs and personnel were introduced into the system
to build same sales store in the future.
General and Administrative Expenses. General and administrative expenses
increased $122,000, or 13 %, to $1.1 million for the three months ended December
31, 1997 from $942,000 for the three months ended December 31, 1996. General and
administrative expenses as a percentage of revenues increased from 8% to 9% from
December 31, 1996 to December 31, 1997. The increase was primarily associated
with expenses were incurred for additional administrative support for the new
business units and public company operations.
Operating Income. Operating income increased $774,000, or 67%, to $1.9 million
for the three months ended December 31, 1997 from $1.1 million for the three
months ended December 31, 1996. As a percentage of revenue, operating income
increased to 17%
8
<PAGE>
from 10% primarily due to increased revenues and margins in franchising royalty
and manufacturing and distribution operations.
Net Income. Net income increased $354,000 or 58% for the three months ended
December 31, 1997 from $612,000, for the three months ended December 31, 1996.
Per share earnings increased to $.7 per share to $.18 per share for the three
months ended December 31, 1997 from $0.11 for the three months ended December
31, 1996.
Earnings before interest, income taxes, depreciation and the amortization of
goodwill, (EBITDA earnings) increased $.12 or 36% to $.45 per share for the
three months ended December 31, 1997 from $.33 per share for the three months
ended December 31, 1996.
Earnings Before Interest, Income Taxes, Depreciation and Amortization of
Goodwill
The following table reconciles reported earnings to EBITDA earnings for the
three months ended December 31, 1997.
Proforma Combined
as Adjusted for Combination and Offering
Reported Earnings EBITDA Earnings
----------------- ---------------
Income before tax
expense $ 1,776 $ 1,776
Interest expense 96
Income tax expense (810)
Depreciation 212
Amortization 378
Net Income 966 2,462
Per Common Share $ .18 $ .45
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996-PRO FORMA COMBINED
The following table sets forth certain selected pro forma combined financial
data as a percentage of revenues for the period indicated:
Six Months Ended December 31,
1996 % 1997 %
----------------------------------
(in thousands)
Revenue $22,753 100 $23,344 100
Direct Cost 16,992 75 16,435 70
General and Administrative 1,825 8 2,164 9
Operating Income 2,738 12 3,531 15
9
<PAGE>
Revenues. Revenues increased $591,000, or 2.6%, to $23.3 million for the six
months ended December 31, 1997 from $22.7 million for six months ended December
31, 1996. A Precision Tune Auto Care same store sales increase of 3% and an
overall increase in Precision Tune Auto Care retail sales of 13% primarily
accounts for the increase in royalty revenue of $579,000. Increased marketing
and advertising efforts led to the increase in manufacturing and distribution
revenue of $296,000 and car wash and lube revenues of $268,000. These increases
were offset by a decrease in franchise development revenues of $523,000. During
the first six months of last year the Company sold master licenses to Brazil for
$320,000 and Jamaica for $90,000 which was only partially offset by the sale of
the Indonesia master license for $200,000 in the first six month of this year.
Sales of new franchises during the first six months of this year were below last
year as a result of having to re-file and get approved the Company's Uniform
Franchise Offering Circular (UFOC) during the second quarter of FY1998.
Franchise sales were "blacked out" until that offering circular was approved by
all the required states. At the end of the quarter, the majority of the states
had approved the UFOC.
Direct Cost. Direct Cost decreased $557,000, or 3.3%, to $16.4 million for the
six months ended December 31, 1997 from $16.9 million for the six months ended
December 31, 1996. Development costs decreased $95,000 as a result of the "black
out" on sales and advertising during the period. Royalty costs decreased
$128,000 as a result of purchasing back area sub franchisor territories.
Improved operations and cost control in manufacturing and distribution reduced
costs $311,000. These reductions were offset by an increase of $140,700 in car
wash operations costs as additional as additional infrastructure, marketing
programs and personnel were introduced into the system to build same sales store
in the future.
General and Administrative Expenses. General and administrative expenses
increased $339,000, or 18.5%, to $2.2 million for the six months ended December
31, 1997 from $1.8 million for the six months ended December 31, 1996. General
and administrative expenses as a percentage of revenues increased from 8% to 9%
from December 31, 1996 to December 31, 1997. Additional costs associated with
public company operations and required additional support needed for the
additional operating units resulted in the increase in G&A.
Operating Income. Operating income increased $793,000, or 29%, to $3.5 million
for the six months ended December 31, 1997 from $2.7 million for the six months
ended December 31, 1996. As a percentage of revenue, operating income increased
to 15% from 12% primarily due to increased revenues and margins in franchising
royalty and manufacturing and distribution operations.
Net Income. Net income increased $457,000 or 33% to $1.8 million for the six
months ended December 31, 1997 from $1.3 million for the six months ended
December 31, 1996. Per share earnings increased to $.8 per share to $.33 per
share for the six months ended December 31, 1997 from $0.25 for the three months
ended December 31, 1996.
Earnings before interest, income taxes, depreciation and the amortization of
goodwill, (EBITDA earnings) increased $.16 or 22% to $.87 per share for the six
months ended December 31, 1997 from $.71 per share for the six months ended
December 31, 1996.
10
<PAGE>
Earnings Before Interest, Income Taxes, Depreciation and Amortization of
Goodwill
The following table reconciles reported earnings to EBITDA earnings for the six
months ended December 31, 1997.
Proforma Combined as Adjusted for Combination and Offering
Reported Earnings EBITDA Earnings
----------------- ---------------
Income before tax
expense $ 3,397 $ 3,397
Interest expense 164
Income tax expense (1,578)
Depreciation 458
Amortization 755
Net Income 1,819 4,775
Per Common Share $ .71 $ .87
SEASONALITY AND QUARTERLY FLUCTUATIONS - PRO FORMA COMBINED
Seasonal changes may impact various sectors of the Company's business
differently and, accordingly, the Company's operations may be affected by
seasonal trends in certain periods. In particular, severe weather in winter
months can adversely affect the Company because such weather makes it difficult
for consumers in affected parts of the country to travel to Precision Tune Auto
Care, Precision Lube Express, and Precision Auto Wash centers and obtain
services. Severe winter weather and rainy conditions may also adversely impact
the Company's sale and installation of car wash equipment. Conversely, the
Precision Auto Wash business is favorably impacted by the normal winter weather
conditions as demand for the Company's car wash service increases substantially
in winter months.
RESULTS OF OPERATIONS-ACTUAL
The combined results of operations of the Constituent Companies for the three
and six month periods ended December 31, 1997 do not represent the combined
results of operations presented in accordance with generally accepted accounting
principles, but include the operating results of the individual Constituent
Companies for the time periods during which they were a member of the
consolidated group and do not include the effect of proforma adjustments. The
results for the three months ended December 31, 1996 only represent WE JAC's
results as W JAC is designated as the accounting acquirer for financial
statement purposes in accordance with the Securities and Exchange ("SEC") Staff
Accounting Bulletin No. 97, which states that the combining company which
receives the largest portion of the voting rights in the combined corporation is
presumed to be the acquirer for accounting purposes. This data may be not
comparable to and may not be indicative of the Company's post-combination
results of operations.
11
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996-ACTUAL
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
Three Months Ended December 31,
1996 % 1997 %
----------------------------------
(in thousands)
Revenue $6,846 100 $10,378 100
Direct Cost 4,986 73 7,149 69
General and Administrative 459 7 1,064 10
Operating Income 1,076 16 1,669 16
Revenues. Revenues increased $3.5 million to $10.3 million or 51.5% for the
three months ended December 31, 1997 from $6.8 million for three months ended
December 31, 1996. Precision Tune Auto Care same store sales increases of 3%
accounts for the increase in royalty revenue of $392,000. The increase in
manufacturing and distribution revenue of $2.7 million resulted from the
acquisition of additional operating units. The purchase of additional units and
improved operating and marketing programs increased car wash and lube revenues
by $710,000. These increases were offset by a decrease in franchise development
revenues of $313,000.
Direct Cost. Direct Cost increased $2.2 million, or 43%, to $7.1 million for the
three months ended December 31, 1997 from $4.9 million for the three month
period ended December 31, 1996. This reflects an increase in development costs
of $65,000 as additional costs were incurred for the new franchise offerings.
Manufacturing and distribution costs increased $1.8 million and car wash
operations increased $391,000 from the addition of more operating units. These
increases were offset by a reduction in royalty costs of $46,000 from the
purchase of area sub franchisors.
General and Administrative Expenses. General and administrative expenses
increased $605,000, or 132%, to $1.0 million for the three months ended December
31, 1997 from $459,000 for the three months ended December 31, 1996. Required
additional administrative costs to support public company operations and the
additional operating companies caused the majority of the increase.
Operating Income. Operating income increased $593,000 to $1.7 million for the
three months ended December 31, 1997 from $1.1 million for the three months
ended December 31, 1996. Operating income as a percentage of revenue remained
constant at 16%.
Net income increased $332,000 to $794,000 or 68% for the three months ended
December 31, 1997, from $472,000 for the three months ended September 30, 1996.
12
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996-ACTUAL
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
Six Months Ended December 31,
1996 % 1997 %
----------------------------------
(in thousands)
Revenue $13,669 100 $17,145 100
Direct Cost 9,998 73 11,879 69
General and Administrative 983 7 1,870 11
Operating Income 2,053 15 2,622 15
Revenues. Revenues increased $3.5 million to $17.1 million or 25% for the six
months ended December 31, 1997 from $13.6 million for six months ended December
31, 1996. Increases in same store sales of 3% and 13% in retail sales, led to an
increase in royalty revenue of $472,000. The acquisition of additional operating
units increased manufacturing and distribution revenue $2.7 million. The
acquisition of additional operating units and Improved marketing programs and
operations increased car wash and lube revenues by $710,000. These increases
were offset by a decrease in franchise development revenues of $414,000. Large
master license sales in 1996 and lower franchise sales resulting from a "black
out" period while a new UFOC was approved, exacerbated the difference between
the results for development in the first six months of FY1996 vs FY1997.
Direct Cost. Direct Cost increased $1.8 million, or 19%, to $11.8 million for
the six months ended December 31, 1997 from $9.9 million for the six month
period ended December 31, 1996. The increase in manufacturing and distribution
costs of $1.8 million is accounted primarily by the costs associated with the
purchase of additional operating units. Car wash operation costs increased
$391,000 as the result of bringing additional units on line and increased
expenditures for marketing and operations. Development costs decreased $75,000
during the "black out" period as advertising was curtailed. Royalty costs
decreased $118,000 from the purchase of additional area sub franchisors.
General and Administrative Expenses. General and administrative expenses
increased $887,000, or 90%, to $1.8 million for the six months ended December
31, 1997 from $983,000 for the six months ended December 31, 1996. Additional
costs associated with the merger of the companies and operating as a public
company, account for most of this increase.
Operating Income. Operating income increased $569,000 to $2.6 million for the
six months ended December 31, 1997 from $2.0 million for the six months ended
December 31, 1996. Operating income as a percentage of revenue remained constant
at 15%.
13
<PAGE>
Net income increased $353,000 to $1.2 million or 41% for the six months ended
December 31, 1997, from $868,000 for the six months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES - ACTUAL
The following table sets forth selected information from the statement of cash
flows of WE JAC and the Combined Companies for the time periods during which
they were a member of the consolidated group and do not include the effect of
pro forma adjustments:
Six months ended December 31,
1996 1997
--------------------
(in thousands)
Net cash provided by operating activities $ 940 $ 477
Net cash used in investing activities (428) (3,762)
Net cash used in financing activities (899) (4,017)
Change in cash and cash equivalents (388) 731
From October 1, 1997 through December 31, 1997, the Combined Companies generated
$477,000 in net cash from operating activities. This amount was lower than the
net cash provided by operating activities for the three months ended December
31, 1996 principally because of the increase in accounts receivable, prepaid
expenses and accounts payable associated with the Combination. Cash used by
investing activities in 1997 primarily consisted of the costs associated with
the purchase of a manufacturing facility. Financing activities in 1997 included
the net proceeds for the Offering less $18.6 million in payment on bank debt and
was provided $5 million primarily of from bank debt.
On November 12, 1997, the Company received a commitment from Signet Bank for a
$20 million line of credit. $10 million of the facility may be used as a
revolving line and credit and $10 million for acquisitions, capital
expenditures. The credit agreement will require the Company to comply with
various loan covenants, which include maintenance of certain financial ratios,
restrictions on additional indebtedness and restrictions on liens, guarantees,
advances, capital expenditures, sale of assets and dividends. Interest on the
outstanding balances will be computed on either the Bank's floating and
fluctuating prime commercial lending rate or the London Interbank Offered rate
(LIBOR) plus a margin ranging from .25% to 2.00% depending on certain financial
ratios. Availability fees ranging from .25% to .30% will be payable on the
unused portion of the line of credit. The Company's subsidiaries will be
required to guarantee repayment of all amounts due under the credit facility.
On November 12, 1997 PAC completed the Offering, which involved the sale by PAC
of 2,666,540 shares of Common stock at a price to the public of $9.00 per share.
The net proceeds to PAC from the Offering (after deducting underwriting
discounts, commissions and offering expenses) was $19.6 million. Of this amount
$18.6 was used to prepay long-term debt. The Company simultaneously drew on the
line of credit for $1.6 million to pay off any balances remaining after
application of the Offering proceeds.
14
<PAGE>
SEASONALITY AND QUARTERLY FLUCTUATIONS - ACTUAL
Net revenues and net income are generally higher in the first and fourth fiscal
quarters. The Company expects this seasonality to continue in the future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to routine litigation in the
ordinary course of business, including contract, franchisee and
employment-related litigation. In the course of enforcing its rights under
existing and former franchisee agreements, the Company is subject to complaints
and letters threatening litigation concerning the interpretation and application
of these agreements, particularly in the case of defaults and terminations. None
of these routine matters, individually or in the aggregate, are believed by the
Company to be material to its business or financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable
(d) On November 6, 1997, the Company's Registration Statement
on Form S-1 (Commission File No. 333-34439) was declared effective by the
Securities and Exchange Commission. The Registration Statement covered an
offering of 2,810,140 shares of the Company's common stock. The offering was
completed following the sale of all of the securities which were registered.
A.G. Edwards & Sons, Inc. and Ferris, Baker Watts, Incorporated acted as
co-managing underwriters for the offering. The title of the class of securities
registered was the Common Stock of the Company. 2,666,540 shares were registered
and sold by the Company. An additional 143,600 shares were registered and sold
on behalf of selling shareholders.
The aggregate offering price of the shares of common stock sold by the
Company was $23,998,860 and the aggregate offering price of the shares of common
stock sold by the selling shareholders was $1,292,400. The Company incurred
approximately $2.7 million in expenses in connection with the issuance and
distribution of the securities registered. This amount does not include
$1,679,920 of underwriting discounts and commissions payable by the Company. All
such expenses involved direct or indirect payments to third parties and did
involve any direct or indirect payments to directors or officers (or their
associates) or to persons owning 10% or more of any class of equity securities
of the Company or to the Company's affiliates. The net offering proceeds to the
registrant after deducting the total expenses was $19.6 million.
15
<PAGE>
From the effective date of the Securities Act registration statement to
December 31, 1997, the Company has used $18.6 million of the proceeds to
discharge indebtedness and $1.0 million of the proceeds to finance the cash
purchase price of its recently completed acquisition of Worldwide Drying
Systems, Inc. All of such payments were direct or indirect payments to
unaffiliated third parties. As noted in the prospectus forming a part of the
Registration Statement, certain amounts of the indebtedness that was repaid
with the net proceeds of the offering were guaranteed by certain directors and
officers of the Company. This application of proceeds reflects the repayment of
$1.3 million more of indebtedness than was contemplated by the prospectus in
lieu of the immediate payment of expenses associated with upgrading signage and
installing a "point of sale" computer system at each Precision Auto Care center.
The Company does not believe that this is a material difference and notes that
it applied the proceeds in this manner because it will take time to install the
point of sale system and signage at each center and the Company determined it
was prudent to eliminate additional indebtedness pending the application of
funds to the signage upgrades and point of sale computer system installations in
the coming months.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: Computation of per share earnings
27 Financial Data Schedule
(b) The Company did not file any Reports on Form 8-K
during the quarter ended December 31, 1997.
16
<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.
February 16, 1998 PRECISION AUTO CARE, INC.
By:
John F. Ripley
President and Chief Executive
Officer
By:
Peter J. Kendrick
Senior Vice President--Finance
and Treasurer
17
Precision Auto Care, Inc.
Exhibit 11-Statement Re: Computation of Per Share Earnings
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C>
Weighted average shares outstanding
Common Stock 4,992 4,027 4,510 4,027
Weighted average shares issuable upon exercise
of common stock options, if dilutive 14 14 14 14
Common stock and common stock equivalents
issued at prices below the IPO price during
the twelve months preceding the initial
filing of the Registration Statement 8 8 8 8
====== ======== ======= ======
Total weighted average shares 5,015 4,050 4,532 4,050
====== ======== ======= ======
====== ======== ======= ======
Net ncome $ 794 $ 472 $ 1,221 $ 868
====== ======== ======= ======
====== ======== ======= ======
Basic earnings per share $ 0.16 $ 0.12 $ 0.27 $ 0.22
====== ======== ======= ======
====== ======== ======= ======
Dilutive earnings per share $ 0.16 $ 0.12 $ 0.27 $ 0.21
====== ======== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,308,000
<SECURITIES> 0
<RECEIVABLES> 7,706,000
<ALLOWANCES> 0
<INVENTORY> 2,347,000
<CURRENT-ASSETS> 14,478,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,005,000
<CURRENT-LIABILITIES> 8,565,000
<BONDS> 6,678,000
0
0
<COMMON> 55,000
<OTHER-SE> 44,777,000
<TOTAL-LIABILITY-AND-EQUITY> 44,832,000
<SALES> 17,145,000
<TOTAL-REVENUES> 17,145,000
<CGS> 11,879,000
<TOTAL-COSTS> 14,501,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492,000
<INCOME-PRETAX> 2,261,000
<INCOME-TAX> 1,040,000
<INCOME-CONTINUING> 1,221,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,221,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
