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 September 30, 1998
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 6,120,543 shares of Common
Stock as of October 31, 1998.
<PAGE>
Precision Auto Care, Inc.
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 1
General Information 1
Consolidated Balance Sheets at September 30, 1998 and June 30, 1998 3
Consolidated Statement of Operations for the three months ended 5
September 30, 1998 and 1997
Pro Forma Combined Statement of Operations for the three months ended 6
September 30, 1998 and 1997
Consolidated Statement of Cash Flows for the three months ended 7
September 30, 1998 and 1997
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information 23
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
</TABLE>
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to Precision Auto Care, Inc. or its management are intended to identify
such forward-looking statements. All statements regarding Precision Auto Care,
Inc. or Precision Auto Care, Inc.'s expected future financial position, business
strategy, cost savings and operating synergies, projected costs and plans, and
objectives of management for future operations are forward-looking statements.
Although Precision Auto Care, Inc. believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the factors set forth in the Company's 10-K filing for the year ending
June 30, 1998 under the caption "Business -- Risk Factors," general economic and
business and market conditions, changes in federal and state laws, increased
competitive pressure in the automotive aftermarket services business, and costs
or difficulties relating to the integration of acquired businesses (including
the businesses the Company acquired in connection with its November 1997 initial
public offering), including difficulties in achieving expected cost savings and
operating synergies.
ii
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
General Information
Precision Auto Care, Inc. ("Precision Auto Care" or the "Company") is a provider
of automotive maintenance services with franchised and Company-operated centers
located in the United States and in certain international locations. The
Company's services are provided to automobile owners and focus on those high
frequency items required to properly maintain the vehicle on a periodic basis.
The Company offers these services through three "Precision" brands that are
intended to be complementary:
o Precision Tune Auto Care provides automotive maintenance services which
require relatively short service times including engine performance, oil
change and lubrication and brake services. At September 30, 1998 these
services were provided at 558 Precision Tune Auto Care centers of which
four are owned and operated by the Company.
o Precision Auto Wash provides self-service and touchless automatic car
wash services. The advanced operating systems used at prototype
Precision Auto Wash centers permit remote monitoring and administration
of operations. The no-touch car wash technology employed in Precision
Auto Wash centers also provides a high-quality wash with less risk of
vehicle damage than traditional car wash systems. At September 30, 1998,
there were 37 Precision Auto Wash centers, of which 32 are owned and
operated by the Company.
o Precision Lube Express provides convenient fast oil change and lube
services. Because Precision Lube Express centers consist of "above
ground" configured modular buildings manufactured and sold by the
Company, operations can commence more quickly and with less capital
investment than is the case for many competitors. At September 30,
1998, there were 15 Precision Lube Express centers of which seven are
owned and operated by the Company. As of that date there were also 18
Lube Depot centers operated by franchisees, some of which are expected
to become Precision Lube Express centers.
The Company supports its franchisees and Company-owned centers by distributing
certain automotive and car washing parts and supplies, and manufacturing and
distributing pre-fabricated modular buildings and car wash equipment and
chemicals.
The Company, a Virginia corporation, was incorporated in April 1997, but through
predecessors has been in the automotive maintenance services business for over
twenty years. The first Precision Tune was established in 1976 to provide quick,
convenient and inexpensive engine tune-ups. Franchising of Precision Tune
centers began the next year. As changes in automotive technology reduced the
need for traditional tune-ups, Precision Tune expanded its menu of offered
automotive maintenance services to include oil changes, fuel injection service,
air conditioning service, cooling system service, brake service and more
diagnostic services. In September 1996, Precision Tune's name was changed to
Precision Tune Auto Care to reflect the shift in emphasis.
The Company is the result of the November 1997 combination of WE JAC Corporation
(the owner of Precision Tune Auto Care) and nine other automotive maintenance
services companies in connection with the Company's initial public offering (the
"IPO Combination"). The nine companies joined with WE JAC Corporation in the IPO
Combination were: Miracle Industries, Inc.; Lube Ventures, Inc.; Rocky Mountain
Ventures, Inc.; Rocky Mountain Ventures II, Inc.; Prema Properties, Ltd.;
Miracle Partners,
1
<PAGE>
Inc.; Ralston Car Wash Ltd.; KBG, LLC and Worldwide Drying Systems, Inc.
(referred to individually as a "Predecessor Company" or collectively, the
"Predecessor Companies"). With the IPO Combination, the "Precision" family of
brands was expanded to include car wash and quick oil change and lube services.
In March 1998, the Company acquired Promotora de Francquicias Praxis S.A. de
C.V., previously a holder of a master franchise agreement for Precision Tune
Auto Care in Mexico and Puerto Rico.
2
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30,
1998 June 30,
(Unaudited) 1998
---------- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,056,692 $ 2,070,294
Accounts receivable, net 8,733,208 9,050,190
Inventory 4,939,798 4,201,752
Notes receivable, current portion, net of allowance 754,395 1,519,642
Prepaid expenses 2,661,122 2,217,164
Deferred income taxes, net 867,519 722,000
----------- -----------
Total current assets 19,012,734 19,781,042
Notes receivable, non-current portion, net of
allowance 677,494 654,382
Property, plant and equipment, at cost 22,355,083 20,978,240
Less accumulated depreciation (2,018,071) (1,678,527)
----------- -----------
20,337,012 19,299,713
Goodwill and other intangibles, net of accumulated
amortization 45,934,363 45,631,583
Deposits, trademarks and other assets 1,372,707 1,182,502
----------- -----------
Total assets $87,334,310 $86,549,222
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30,
1998 June 30,
(Unaudited) 1998
---------- ----
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $10,041,895 $9,336,120
Current maturities, notes payable 942,581 1,060,910
Current maturities, term loan 13,692,069 2,352,948
Current maturities, line of credit 9,515,000 ---
Deferred revenue, current portion 935,137 962,977
----------- -----------
Total current liabilities 35,126,682 13,712,955
Revolving line of credit, net of current portion --- 10,333,000
Term loan, net of current portion --- 9,045,052
Notes payable, net of current portion 1,471,068 1,471,068
Deferred revenue, net of current portion 393,338 393,338
Other liabilities 117,061 639,223
----------- -----------
Total liabilities 37,108,149 35,594,636
Stockholders' equity:
Common stock, $0.01 par 61,205 61,205
Additional paid-in capital 45,682,551 45,682,551
Retained earnings 4,493,380 5,210,830
Foreign currency translation adjustment (10,975) ---
----------- -----------
Total stockholders' equity 50,226,161 50,954,586
----------- -----------
Total liabilities and stockholders' equity $87,334,310 $86,549,222
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
<CAPTION>
Three Months Ended September 30,
1998 1997
---- ----
<S>
Sales: <C> <C>
Franchise development $ 283,024 $ 105,000
Royalties 3,839,218 3,786,000
Manufacturing & distribution 5,824,735 2,821,000
Company centers 1,794,502 ---
Other 48,276 56,000
----------- ----------
Total sales 11,789,755 6,767,000
Direct cost 9,923,752 4,730,000
----------- ----------
Contribution 1,866,003 2,037,000
General and administrative expense 1,205,938 805,000
Depreciation expense 306,473 50,000
Amortization of franchise rights and goodwill 503,510 230,000
----------- ----------
Operating income (loss) (149,918) 952,000
Interest expense (442,948) (296,000)
Interest income 44,507 37,000
Other income (expense) (314,610) 88,000
----------- ----------
Income (loss) before income taxes (862,969) 781,000
Provision for income tax expense (benefit) (145,519) 353,000
----------- ----------
Net income (loss) ($717,450) $ 428,000
=========== ==========
Basic net income (loss) per share ($0.12) $0.32
Diluted net income (loss) per share ($0.12) $0.32
Weighted average shares outstanding - basic 6,120,543 1,333,700
Weighted average shares outstanding - diluted 6,120,543 1,352,098
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
<CAPTION>
Three Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Sales:
Franchise development $ 283,024 $ 136,000
Royalties 3,839,218 3,795,000
Manufacturing & distribution 5,824,735 6,780,000
Company centers 1,794,502 952,000
Other 48,276 56,000
----------- -----------
Total sales 11,789,755 11,719,000
Direct cost 9,923,752 8,399,000
----------- -----------
Contribution 1,866,003 3,320,000
General and administrative expense 1,205,938 1,101,000
Depreciation expense 306,473 246,000
Amortization of franchise rights and goodwill 503,510 391,000
----------- -----------
Operating income (149,918) 1,582,000
Interest expense (442,948) (115,000)
Interest income 44,507 55,000
Other income (expense) (314,610) 93,000
----------- -----------
Income (loss) before income taxes (862,969) 1,615,000
Provision for income tax expense (benefit) (145,519) 731,000
----------- -----------
Net income (loss) ($717,450) $ 884,000
=========== ===========
Basic net income (loss) per share ($0.12) $0.16
Diluted net income (loss) per share ($0.12)
Weighted average shares outstanding - basic 6,120,543 5,496,880
Weighted average shares outstanding - diluted 6,120,543
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) ($717,450) $ 428,000
Adjustments to reconcile net income to net cash
flow from operating activities
Depreciation and amortization 809,983 279,000
Deferred income taxes (145,519) ---
Foreign currency translation adjustment (10,975) ---
Changes in operating assets and liabilities:
Accounts and notes receivable 1,059,117 (106,000)
Inventory (738,046) 10,000
Prepaid expenses (443,958) (82,000)
Accounts payable and accrued liabilities 705,775 254,000
Income taxes payable --- 7,000
Deferred revenue, net (27,840) (82,000)
Other operating assets and liabilities (712,367) (302,000)
----------- ---------
Net cash provided by operating activities (221,280) 406,000
Cash flow from investing activities:
Purchases of property and equipment (843,144) (28,000)
Purchase of franchise agreements and rights --- (143,000)
Acquisitions (1,306,918) ---
----------- ---------
Net cash used in investing activities (2,150,062) (171,000)
Cash flow from financing activities:
Proceeds from term loan and line of credit 1,476,069 60,000
Repayments of long-term debt and notes
payable (118,329) (308,000)
----------- ---------
Net cash provided by (used in) financing
activities 1,357,740 (248,000)
----------- ---------
Net change in cash and cash equivalents (1,013,602) (13,000)
Cash and cash equivalents at beginning of year 2,070,294 577,000
----------- ---------
Cash and cash equivalents at end of year $ 1,056,692 $ 564,000
=========== =========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the three months ended September 30, 1998
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Precision Auto Care, Inc. (the Company) is an international provider of
automotive maintenance services, including specialized automotive care services,
self-service and touchless automatic car wash services, and fast oil change and
lube services, which are conducted principally as franchise operations. These
services are provided under the Precision Tune Auto Care, Precision Auto Wash,
and Precision Lube Express brand names. The Company also distributes auto parts
primarily to its affiliated business units and franchisees and manufactures
equipment which is sold primarily to third parties. Additionally, the Company
assembles and sells modular automotive lubrication units, primarily to its Lube
Express franchisees.
The Company began business operations upon completion of its November 1997
Initial Public Offering (IPO) of common stock. Concurrent with the IPO, ten
companies were combined to create Precision Auto Care. All of the combining
companies had conducted business operations prior to the IPO. The financial
statements presented herein for the period ending September 30, 1997 have been
prepared based on the historical financial statements of WE JAC Corporation,
which was deemed to be the accounting acquirer of the remaining combining
companies for financial reporting purposes. The Company has made several other
acquisitions subsequent to the IPO. The Company conducts substantially all of
its operations through its subsidiaries.
The accompanying financial statements are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The statements have been prepared in the ordinary course of
business for the purpose of providing information with respect to the interim
periods, and are subject to audit at the end of the fiscal year. 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 interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 1998 and 1997 audited financial
statements included with the Company's filing on Form 10K. The results for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and divisions, Precision Tune Auto
Care, Inc., HydroSpray Car Wash Equipment Co., Ltd., Precision Building
Solutions Incorporated, Car Wash Division (comprised of companies formerly known
as Prema Properties, Ltd., Miracle Partners, Inc., Rocky Mountain Ventures,
Inc., Rocky Mountain Ventures II, Ralston Car Wash Ltd.) , National Auto
Chemical, Worldwide Drying Systems, Inc., Indy Ventures, Inc. and Promotora de
Francquicias Praxis, S.A. de C.V., ("Praxis") (a Mexican corporation.)
Currency Translation
The U.S. dollar is the functional currency for all the Company's consolidated
operations, including its Mexican subsidiary whose economic environment is
highly inflationary. All gains and losses from currency translation are included
in earnings.
Revenue Recognition
Revenues from the sale of parts is recognized when the parts are shipped from
the Company's warehouse. Revenues from the sale of modular automobile
lubrication units is recognized when such units have been shipped to customers
and the Company has performed on all obligations related to the sale, such as
installation and assistance with site development.
8
<PAGE>
The Company's royalty revenues are recognized as earned and in accordance with
specific terms of each Agreement. At the end of each accounting period, royalty
revenue estimates are made for the franchisee's revenues earned but not yet
reported. The royalty accrual is adjusted in subsequent periods as a result of
immaterial differences between franchisee's actual and estimated revenues.
Revenue from the sale of a franchise is recognized 50% at the time of sale and
50% upon the opening of the franchised center.
The Company enters into domestic Area Representative Agreements and
international Master License Agreements (Agreements) which grant the
subfranchisor and master licensor, respectively, the right to sell, on the
Company's behalf, Precision Tune Auto Care franchises, Precision Auto Wash
franchises and Precision Lube Express franchises within a specific geographic
region. Revenue from the sale of area representative rights is deferred and
recognized ratably over the terms of the Agreement, generally 10 years, because
the Company's obligation under the Agreement does not depend significantly upon
the number of franchises opened. Revenue from the sale of master license rights,
for geographic areas outside the U.S., is recognized upon signing the Agreement
because the Company is not required to support the international franchises as
there is no contractual agreement between the Company and the international
franchisees.
Revenues from automobile oil change, lubrication and wash services are generally
paid in cash and are recognized at the time of service.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less.
Inventory
Inventory is stated at cost, which is lower than market. The cost of auto parts
inventory is determined by the "moving average" method. The cost of modular
automotive lubrication units, car wash equipment, and car wash supplies and is
determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets. The
estimated useful lives are as follows:
Years
Building and leasehold -----
improvements 11-30
Furniture and fixtures 5-7
Equipment 7-10
Other items 5-7
Goodwill and Other Intangible Assets
Purchase price in excess of the fair market value of net assets acquired is
included in goodwill/franchise rights. Franchise rights held by one of the
Company's predecessors are being amortized over 30 years on a straight line
basis. Goodwill related to the Company's acquisitions is being amortized on a
straight line basis over 30 years. Certain other intangibles, including
covenants not to compete and consulting agreements, are amortized on a straight
line basis over periods ranging from six months to two years.
9
<PAGE>
The Company occasionally repurchases franchise rights. The lower of the cost or
fair market value of repurchased franchise rights is also included in goodwill
and other intangibles. The decision to repurchase is made solely at management's
discretion and is not a contractual obligation. The Company also will
periodically obtain possession of franchise rights by exchanging notes payable
or exercising rights outlined in the franchise agreements. The Company amortizes
the repurchased franchise rights over the remaining terms of the franchise
agreements on a straight line basis.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. A valuation allowance is established, if necessary, to reduce
deferred income tax assets to the amount expected to be realized.
The companies combining at the time of the IPO filed final individual federal
tax returns for the period ending November 12, 1997. For the year ended June 30,
1998, the Company will file a consolidated federal income tax return. For
financial reporting purposes, the Company computes its federal and state income
taxes on a separate company basis.
Impairment of Long-Lived Assets
The Company evaluates the carrying amount of long-lived assets to be held and
used, including goodwill, franchise rights and other intangible assets, when
events and circumstances warrant such a review. The carrying amount of a
long-lived asset is considered impaired when the estimated undiscounted cash
flow from each asset is less than its carrying amount. In that event, the
Company would record a loss equal to the amount by which the carrying amount
exceeds the fair market value of the long-lived asset. Fair market value would
be determined primarily using the estimated cash flows discounted at a rate
consistent with the risk involved.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, trade accounts
receivable and notes receivable. The Company's cash is held at what management
believes to be stable financial institutions. The trade receivable balances are
dispersed among a wide customer and franchisee base. The Company routinely
assesses the financial strength of its customers. The Company maintains reserves
for credit losses, and such losses have been within management's expectations.
All of the Company's assets are located in the United States, except trade
receivables of $1.2 million, inventory of $310,000, property and equipment of
$485,000, and capitalized franchise rights of $564,000, which are located in
Mexico.
Earnings Per Share
In February 1997, the Financial Accounting Standards Boards (FASB) issued SFAS
No. 128, "Earnings Per Share," which became effective for reporting periods
ending after December 15, 1997. The Company has disclosed basic and diluted
earnings per share for all periods presented in accordance with this standard.
10
<PAGE>
Comprehensive Income
Effective for the fiscal year ended June 30, 1999, the Company will adopt SFAS
No. 130, "Reporting Comprehensive Income." SFAS 130 requires that an enterprise
classify items of other comprehensive income by their nature and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital. The Company will be required to restate
earlier periods provided for comparative purposes, but does not believe the
adoption of SFAS 130 will be material to the Company's financial statements.
Business Segments
Effective for the fiscal year ended June 30, 1999, the Company will adopt SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
The Company is reviewing the requirements of this statement and believes that it
will require some additional disclosure. This statement does not impact the
basic consolidated financial statements; it only affects the nature, extent and
presentation of segment information in the notes to the consolidated financial
statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock options and presents in Note 12 pro forma net income and
earnings per share data as if the accounting prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" had been applied.
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, PAC acquired the Predecessor 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 Predecessor 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 Predecessor 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 month periods ended September 30,
1997 and 1998 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.
11
<PAGE>
The unaudited pro forma combined financial information for the three month
period ended September 30, 1997 includes the results of the Predecessor
Companies as if the Combinations had occurred at the beginning of that 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 Predecessor
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.
NOTE 3. CREDIT FACILITY AND LONG-TERM DEBT
On November 12, 1997, the Company entered into a $25 million Loan and Security
Agreement (the Loan Agreement) with its primary lender (the Lender). The loan is
a combination of a Line of Credit Loan, which may not exceed $11 million, and an
Acquisition Line of Credit, and is secured by all of the assets of the Company.
The loan accrues interest, payable monthly, at a base rate which approximates
prime, or the LIBOR Rate, plus an applicable margin which varies from zero to
2.0%. At September 30, 1998, $23.2 million was outstanding on the loans.
The Loan Agreement contains affirmative, negative and financial covenants. As of
June 30, 1998, the Company was in violation of certain covenants, which the
lender subsequently waived.
On October 12, 1998, the Company and the Lender executed an amendment to the
Loan Agreement with an effective date of October 1, 1998, whereby the amounts
available under the Line of Credit Loan and Acquisition Line of Credit must be
reduced to $5 million and $10 million, respectively, effective on the earlier of
January 31, 1999 or the execution of certain real estate refinancing
transactions which the Company currently has in process. The Company expects
that these financings will yield approximately $15 million in net cash proceeds
and will require monthly payments based on annual rates of 8.5% to 11% for terms
of ten to twenty years. Additionally, amounts repaid under the Acquisition Line
of Credit may not be reborrowed.
Pursuant to the amended Credit Agreement, the Company obtained $2 million in
subordinated debt financing and is required to comply with various loan
covenants, which include maintenance of certain financial ratios, restrictions
on, among other things, additional indebtedness, liens, guarantees, advances,
capital expenditures, sale of assets and dividends. In addition, the Company
will not be permitted to make any acquisitions without the bank's prior consent.
Interest on the outstanding balances under the credit facility will continue to
be computed based on either the bank's floating and fluctuating prime portion
lending rate or the London Interbank Offered Rate (Libor) plus a margin ranging
from 0.25% to 2.50% pending on certain financial ratios. Availability fees
ranging from 0.25% to 0.5% will be payable on the unused portion of the Line of
Credit Loan. The Company's subsidiaries are joint and several obligors with
respect to all amounts due under the credit facility.
Based on the results of the quarter ending September 30, 1998, the Company was
not in compliance with these revised financial ratios. The Company has notified
its bank of such non-compliance and has requested that the bank grant waivers or
amendments to relieve this non-compliance, but there can be no assurance that
its bank will grant such waivers or amendments. If the Company fails to obtain
waivers or amendments of the revised financial and other covenants set forth in
the amended Credit Agreement, the Company's liquidity, financial condition and
results of operations could be materially adversely affected. The covenant
violations at September 30, 1998 create an event of default under the Credit
12
<PAGE>
Agreement and allows the bank to call the loan. All amounts outstanding under
the Credit Agreement are shown as current liabilities.
The Company has recently initiated a program to improve its liquidity that
involves selected reductions in staffing levels, reduction of expenses,
disposition of selected assets and accelerated collections of receivables. While
Company management believes that this program will improve its cash flow and
ability to meet future bank covenants, there can be no assurance that such
program will be effective in meeting its objectives or that if such objectives
are met, that the resulting improvements in liquidity will be sufficient to
avoid the need for additional reductions in expenditures, sales of additional
assets, or supplemental financing.
NOTE 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 approximately $20.1 million.
Of this amount approximately $18.6 million was used to repay debt.
NOTE 5. 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 Predecessor Companies for periods commencing on
the date of the Combinations (November 12, 1997). The Predecessor 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 month periods
ended September 30, 1996 and 1997 assumes the application of statutory federal
and state income tax rates and the partial non-deductibility of goodwill
amortization.
NOTE 6. 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. The Company has not incurred significant claims or losses on any of its
insurance policies during the periods presented in the accompanying financial
statements.
At June 30, 1998, the Company had 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.
NOTE 7. SUBSEQUENT EVENTS
On October 15, 1998 the Company entered into a subordinated debt agreement with
Board LLC, which was organized by substantially all of the Directors of the
Company for the sole purpose of providing
13
<PAGE>
additional financing to the Company. Under the terms of the agreement, the
Company received $2 million and will make monthly interest payments at an annual
rate of 14% with the principal to be paid at the end of the loan term of twelve
months.
14
<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 Actual and Pro
Forma Financial Statements of the Company and related notes thereto included in
the Company's Registration Statements and in the Form 10-K filed for the year
ending June 30, 1998.
The Company, a Virginia corporation, was incorporated in April 1997. It began
operations after the November 1997 combination with WE JAC Corporation (the
owner of Precision Tune Auto Care) and nine other automotive maintenance
services companies in connection with the Company's initial public offering (the
"IPO Combination"). The nine companies joined with WE JAC Corporation in
connection with the IPO Combination were: Miracle Industries, Inc.; Lube
Ventures, Inc.; Rocky Mountain Ventures, Inc.; Rocky Mountain Ventures II, Inc.;
Prema Properties, Ltd.; Miracle Partners, Inc.; Ralston Car Wash Ltd.; KBG, LLC
and Worldwide Drying Systems, Inc. (referred to individually as a "Predecessor
Company" or collectively, the "Predecessor Companies"). In March 1998 the
Company acquired Promotora de Francquicias Praxis S.A. de C.V. ("Praxis"), a
company which operates five company-owned centers and served as the holder of a
master franchise agreement for Mexico and Puerto Rico. The results presented
herein as "Actual" for the three months ending September 30, 1997 represent
those of WE JAC. The results presented herein as Pro Forma Combined consist of
the combined results of WE JAC and the Predecessor Companies as if these
entities had been combined for all periods presented herein. The Pro Forma
Combined results do not reflect any results of Praxis for periods of time prior
to the date on which it was acquired.
Company revenues are derived from four primary areas: franchise development,
royalties, manufacturing and distribution and Company-owned centers. Franchise
development revenues include sales of franchises and master licenses along with
revenue from the Company's turnkey program, under which the Company sells retail
centers to franchisees. Royalty revenues are derived from royalty fees paid by
individual franchisees to the Company based on qualified retail sales by the
franchisee. Manufacturing and distribution revenues are derived from the
manufacture and sale of automotive parts and equipment and car wash parts,
supplies and chemicals. Company-owned center revenue is derived from Precision
Tune Auto Care, Precision Auto Wash and Precision Lube Express centers owned and
operated by the Company.
Direct costs consist of the cost of parts and equipment, fees paid to area
developers for the sale of new franchises and for supporting franchisees on an
ongoing basis, corporate costs associated with directly supporting the franchise
system, and the cost of operating Company-owned centers. General and
administrative expenses include all legal, accounting, general overhead,
information technology and corporate staff expenses. Other income and expense
items consist of depreciation and amortization, interest income and expense and
the operating results of Precision Tune Auto Care centers held for resale by the
Company.
During the year ended June 30, 1998, the Company negotiated the terms of seven
acquisitions that would have added approximately 470 retail centers producing
approximately $210 million in system-wide retail sales to the Company's existing
retail system. (System-wide retail sales include sales of both franchise stores,
only a portion of which is recognized by the Company as royalty revenue, and
Company-owned centers.) The Company had been arranging approximately $150
million of financing for the proposed acquisitions. As previously announced, the
Company has determined that it will not proceed with the proposed acquisitions.
As a result, the Company recognized a charge to earnings of $602,000 in the
quarter ending June 30, 1998 and a charge of $200,000 in the quarter ended
September 30, 1998 relating to professional fees, deposits and other costs
relating to the proposed acquisitions.
15
<PAGE>
Presentation of Pro Forma Combined Results
To obtain Pro Forma Results, the historical results of operations of the
Predecessor Companies have also been adjusted to reflect certain purchase
accounting adjustments, including (i) the amortization of goodwill arising from
the IPO Combination, (ii) the elimination of management fees charged between
certain Predecessor Companies, (iii) the elimination of inter-company
transactions and (iv) adjustments to interest expense based upon the assumed
reduction in debt from the proceeds of the Company's initial public offering.
Results of Operations-Pro Forma Combined
The pro forma combined results of operations of the Company for the periods
discussed herein are only a summation of the revenues, direct costs, general and
administrative expenses, and operating income of the Predecessor Companies on a
historical basis, which include pro forma adjustments or 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 Predecessor 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.
Three Months Ended September 30, 1998 Compared to Pro Forma Three Months Ended
September 30, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
Three Months Ended September 30,
(Thousands) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $11,790 100 $11,719 100
Direct Cost 9.924 84 8,399 72
General and Administrative 1,206 10 1,101 9
Operating Income (150) -1 1,582 13
Pro Forma Revenue. Revenue for the three months ended September 30, 1998 was
$11.8 million, an increase of $71,000, or 1%, compared with pro forma revenue of
$11.7 million for the corresponding three-month period of the prior year.
Revenue from franchise development activities increased $147,000 or 108% from
the prior year, principally as the result of the sale of franchise agreements by
Praxis, the Company's Mexican subsidiary, and an increase in revenue from area
franchise rights. Royalty revenue increased $44,000 or 1%, due to the addition
of Praxis which generated $342,000 in royalty revenue for the three months.
Royalty revenue from the Company's core business was approximately $300,000
below pro forma revenue for the corresponding three-month period of 1997 due to
an ongoing program to
16
<PAGE>
remove underperforming stores from the system. Manufacturing and distribution
revenues declined $955,000 or 14% from $6.8 million in the three months ending
September 30, 1997 to $5.8 million in the same three months of 1998. The decline
was principally due to lower revenue levels from the subsidiaries acquired in
the November 1997 combination, offset slightly by a $52,000 increase in revenue
from the Company's core distribution services from 1997 to 1998. Revenue from
Company-owned and operated stores increased $843,000 or 89% from $952,000 in the
three months ending September 30, 1997 to $1.8 million in the same period of
1998. The increase was principally due to the inclusion of revenue from stores
owned by Praxis of $570,000, as well as a net increase in store count for
Company-owned wash and lubes and improved same-store sales due to equipment
upgrades and more focused management.
Pro Forma Direct Cost. Direct cost for the three months ending September 30,
1998 was $9.9 million, representing an increase of $1.5 million or 18% over pro
forma direct cost for the same period in 1997. The increase was entirely due to
direct cost from Praxis of $1.6 million which was not included in last year's
pro forma results. Increases in the costs related to franchising activities,
retail operations and distribution activities related to the Company's core
businesses and from Company-owned and operated stores were mainly offset by
lower direct costs from the Company's acquired manufacturing and distribution
subsidiaries resulting from overall lower revenues.
Pro Forma General and Administrative Expense. General and administrative expense
increased $105,000 or 10% to $1.2 million for the same period in 1998 from pro
forma expense of $1.1 million in the three months ending September 30, 1997. The
increase was due to development of the Company's infrastructure as part of its
growth plan undertaken in the previous fiscal year.
Pro Forma Operating Income (Loss). The Company recorded an operating loss for
the three months ending September 30, 1998 of $150,000 compared with pro forma
operating income of $1.6 million for the same period in 1997. The decline was
due to the impact on contribution margin of increased levels of direct cost of
$1.5 million relative to increased revenue of $71,000, slightly higher general
and administrative expense of $105,000 and an increase in depreciation and
amortization expense of $217,000 or 37% compared to pro forma results for the
three months ending September 30, 1997.
Pro Forma Net Income (Loss). The Company recorded a net loss of $717,000 or
$0.12 per share for the three months ending September 30, 1998. This compares
with pro forma net income of $884,000 or $0.16 per share for the same period in
1997. The decrease was largely the result of the variance in operating income.
Increased interest expense resulting from the Company's increased borrowing and
the write-off of acquisition costs discussed above were offset by a decline in
income tax expense.
Actual Three Months Ended September 30, 1998 Compared to Actual Three Months
Ended September 30, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
17
<PAGE>
Three Months Ended September 30,
(Thousands) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $11,790 100 $6,767 100
Direct Cost 9,924 84 4,730 70
General and Administrative 1,206 10 805 12
Operating Income (150) -1 1,233 18
Revenue. Revenue for the three months ended September 30, 1998 was $11.8
million, representing an increase of $5.0 million or 74%, compared with revenue
of $6.8 million for the prior year. The increase related principally to the
results of the companies acquired simultaneous with and after the IPO
Combination.
Direct Cost. Direct cost for the three months ended September 30, 1998 were $9.9
million compared with $4.7 million for the same period in the prior year, an
increase of $5.2 million or 110%. The increase was primarily the result of the
addition to direct cost of the acquired companies discussed above, but was also
due to an increase in direct cost related to the Company's core businesses of
$590,000 or 14% from the prior year. This increase was spread nearly equally
between the Company's franchise and manufacturing and distribution businesses.
General and Administrative Expense. General and administrative expense was $1.2
million for the three months ended September 30, 1998, an increase of $401,000
or 50% over the same period in the prior year. The increase was largely the
result of development of the Company's infrastructure as part of its growth plan
undertaken in the previous fiscal year. General and administrative expense as a
percent of sales decreased from 12% in 1997 to 10% in 1998 as a result of
economies of scale achieved.
Operating Income (Loss). The Company recorded an operating loss of $150,000 for
the three months ended September 30, 1998 compared with operating income of
$952,000 in the same period last year. The decline was due to the increase in
general and administrative expense as well as increases in depreciation and
amortization expense of $524,000. The remaining variance was due to a lower
contribution margin resulting from increases in direct cost which were higher
than the corresponding increases in revenue associated with the manufacturing
and distribution businesses acquired in the IPO combination.
Net income (loss). The Company recorded a net loss of $717,000 or $0.12 per
share in the three months ended September 30, 1998 compared with net income of
$428,000 or $0.16 per share in the prior year. The decline was the result of the
decrease in operating income as well as increased interest expense of $147,000,
the impact of the write-off of acquisition costs and the results of assets held
for sale, partially offset by a net decrease in income tax expense of $499,000.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of cash
flows of Precision Auto Care, Inc.
Three months ended September 30,
1998 1997
---- ----
Net cash provided by operating activities ($221,000) $406,000
Net cash used in investing activities (2,150,000) (171,000)
Net cash used in financing activities 1,357,000 (248,000)
----------- --------
Change in cash and cash equivalents ($1,014,000) ($13,000)
=========== ========
18
<PAGE>
During the three months ended September 30, 1998 the Company's operations used
$221,000 in cash compared with cash provided by operations of $406,000 for the
prior year. The outflow of cash was principally due to increases in inventory
and prepaid expenses and partially offset by a decline in notes receivable. The
increase in inventory was principally due to increased production at the
Company's HydroSpray subsidiary and in lube buildings work-in-process inventory.
Cash used in investing activities during the three months ended September 30,
1998 was $2.2 million, compared with a cash outflow of $171,000 for the prior
year. The outflow in the current year consisted primarily of the repurchase of
franchise operations of $1.3 million and capital expenditures of $843,000. The
capital expenditures consisted mainly of PIN system purchases and signage
upgrades, and upgrades to the Company's internal computer hardware and software
systems.
Cash provided by financing activities was $1.4 million for the three months
ended September 30, 1998 compared with a net cash outflow of $248,000 for the
previous year. The increase in cash resulted from borrowings against the
Company's term loan and line of credit, partially offset by payments of other
long-term debt and notes payable.
As the Company previously announced, the Company has drawn substantially all of
the amounts available under its bank credit facility principally as a result of
acquisition activities the Company suspended during the quarter, and the working
capital requirements described above. The Company presently has borrowed
approximately $23 million under its bank credit agreement, of which $14 million
of these borrowings represents amounts extended under a portion of the bank
credit facility that was dedicated to funding acquisitions (the "Acquisition
Line of Credit") and $9 million represents funds advanced under a general
revolving credit portion of the credit facility (the "Line of Credit Loan"). At
June 30, 1998 the Company was not in compliance with various covenants contained
in its bank credit agreement which its lender subsequently waived in connection
with a recently negotiated amendment to such agreement.
On October 12, 1998 the Company and the bank executed an amendment to its credit
agreement with an effective date of October 1, 1998, pursuant to which amounts
available under the Acquisition Line of Credit and the Line of Credit Loan will
be reduced to $10 million and $5 million, respectively, for a total of $15
million. These reductions will become effective on the earlier of February 1,
1999 or the execution of certain real estate financing transactions which the
Company has initiated recently. The Company expects that these financings will
yield approximately $15 million in net cash proceeds and will require monthly
payments based on annual rates of 8.5% to 10.88% for terms of ten to twenty
years. If the real estate transactions are accomplished on such terms, the
Company expects that the Acquisition Line of Credit will have a $10 million
balance and the $5 million Line of Credit Loan will be available for general
working capital purposes. Pursuant to the amendment, loans extended by the bank
under the Acquisition Line of Credit and the Line of Credit Loan will mature on
September 30, 1999 instead of the November 1, 2000 date which was in effect
prior to the amendment. Additionally, subsequent to September 28, 1998, amounts
repaid under the Acquisition Line of Credit may not be reborrowed.
The terms of the amendment also required the Company to obtain $2 million in the
form of equity financing or debt financing that is subordinate to the bank, in
each case on terms acceptable to the bank, which the Company arranged on October
15, 1998. This subordinated debt bears interest at 14% and matures on October
15, 1999. The terms of the subordinated debt call for increases in the interest
rates if the Company defaults on the subordinated debt or any of the Company's
senior indebtedness.
While the Company has initiated the process pursuant to which it expects to
obtain the real estate financing described above, the Company has not yet
received a commitment letter or other binding agreement with respect to such
financing and there can be no assurance that the Company will consummate real
estate financing on the terms described above. In the event that the Company
fails to
19
<PAGE>
consummate the real estate financing, the Company will need to seek alternative
sources of financing. Also, to the extent that the Company realizes less than
$10 million in net cash proceeds from any such financings the Company will be
obligated to reduce the Acquisition Line of Credit and the Line of Credit Loan
to the required levels from other sources and there can be no assurance that
other sources will be available or the terms on which such sources may be
available.
As amended, the Credit Agreement requires the Company to comply with various
loan covenants, which include maintenance of certain financial ratios,
restrictions on, among other things, additional indebtedness, liens, guarantees,
advances, capital expenditures, sale of assets and dividends. In addition, the
Company will not be permitted to make any acquisitions without the bank's prior
consent. Accordingly, the Company does not expect that it will be in a position
to pursue acquisitions or significant capital investments until its working
capital position has improved significantly. Interest on the outstanding
balances under the credit facility will continue to be computed based on either
the bank's floating and fluctuating prime portion lending rate or the London
Interbank Offered Rate (Libor) plus a margin ranging from 1.25% to 2.75% pending
on certain financial ratios. Availability fees ranging from 0.25% to 0.75% will
be payable on the unused portion of the Line of Credit Loan. The Company
subsidiaries are joint and several obligors with respect to all amounts due
under the credit facility.
Based on the results of the quarter ending September 30, 1998, the Company was
not in compliance with these revised financial ratios. The Company has notified
its bank of such non-compliance and has requested that the bank grant waivers or
amendments to relieve this non-compliance, but there can be no assurance that
its bank will grant such waivers or amendments. Until the Company obtains
waivers or amendments of the revised financial and other covenants set forth in
the amended Credit Agreement, the Company's liquidity, financial condition and
results of operations could be materially adversely affected as the Company is
in default of the Amendment to the Credit Agreement and the loans are due on
demand.
From the time that the Company utilized substantially all of its credit facility
in August 1998, the Company's liquidity has been constrained and the Company's
ability to meet obligations to its suppliers in a timely manner has been
adversely affected. In October 1998, a new Chief Executive Officer joined the
Company and under his direction the management of the Company has initiated a
program to improve its liquidity. Actions taken to date under this program
include: a reduction in staffing levels of 10% in the Company's field operations
and 15% at the Company's headquarters; reductions in expenses; improved
inventory management; and an acceleration in the collection of accounts
receivable. Future actions under this program are expected to include expanded
expense reductions, dispositions of selected assets, an assessment of the
strategic and financial performance of all aspects of the Company's operations
and the restructuring and reorganization of those operations of the Company that
are not meeting their strategic and financial objectives.
While Company management believes that this program will improve its cash flow
and ability to meet future bank covenants and vendor obligations in a timely
manner, there can be no assurance that such program will be effective in meeting
its objectives or that if such objectives are met, that the resulting
improvements in liquidity will be sufficient to avoid the need for additional
reductions in expenditures, sales of additional assets, or supplemental
financing. This liquidity improvement program is expected to be implemented
principally in the quarters ending December 31, 1998 and March 31, 1999, during
which time actions taken to improve the Company's cash flow may have an adverse
effect on the reported net income of the Company for those periods.
20
<PAGE>
The Company believes that the lending arrangements discussed above combined with
expected improvements in cash flow from operations generated by the recent
liquidity improvement program will be sufficient to support its existing
operations, provided that the Company obtains approximately $15 million in net
cash proceeds from the real estate financing transactions discussed above. If
the Company fails to obtain the real estate financing on the terms described
above (and fails to arrange alternative financing on a timely basis), the
Company's liquidity, financial condition and results of operations could be
materially adversely affected.
Seasonality and Quarterly Fluctuations
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 Auto Care,
Precision Lube Express, and Precision Auto Wash centers. Severe winter weather
and rainy conditions may also adversely impact the Company's sale and
installation of car was equipment. Conversely, the Precision Auto Wash business
is favorably impacted by normal winter weather conditions as demand for the
Company's car wash service increases substantially in winter months.
Year 2000 (Y2K) Compliance
The Company has conducted a review of its computer systems and has identified
the systems that could be affected by the "Year 2000" issue. The Year 2000 issue
is principally the result of computer programs that have time-sensitive software
which may recognize a date using "00" as the year 1900 rather than the year
2000. The Year 2000 issue may also affect the systems and applications of the
Company's vendors or customers.
While the Company has not performed a detailed analysis of the Y2K capabilities
of its primary vendors, management believes that sufficient alternative sources
of supplies and services are available to be called upon in the event one of the
Company's vendors suffers a Y2K related disruption of its operations.
As part of management's proactive review of internal telecommunications and
computer systems, a decision was reached in 1997 to replace a portion of the
Company's current computer system, which is not Y2K compliant, with a new
management information system (MIS) system starting in 1998 for completion in
1999. New software and hardware were identified and a new system purchased in
the first quarter of 1998. The new MIS system is certified to be Y2K compliant.
Hardware and software costs were approximately $180,000 in FY98. Additional
programming costs are expected to reach $250,000 during FY99 representing 33% of
the MIS budget. The new software has been loaded on the new computer and is
currently being integrated into the Company's existing network. The Company
expects initial trial conversion to the new system to take place by December 31,
1998 for corporate headquarters based activities. Field activities are scheduled
to be brought on-line during the remainder of 1999. Potential risks of this
conversion include the lack of adequate internal personnel resources to perform
the conversion and unanticipated delays in software modifications specific to
managing franchise royalty accounting.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's major market risk exposure is to changing interest rates. The
Company's policy is to manage interest rate risk through the use of a
combination of fixed and floating rate debt. The table below provides
information about the Company's debt obligations that are sensitive to changes
in interest rates.
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
(In $Thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Term loan $4,647 $2,353 $2,353 $2,353 $1,986 -- $13,692
Variable rate LIBOR + 1.25 - 2.75%
Line of credit -- $9,515 -- -- -- -- $ 9,515
Variable rate LIBOR + 1.25 - 2.75%
</TABLE>
22
<PAGE>
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) On October 15, 1998, the Company issued subordinated debt in the
amount of $2 million to Board LLC, a Virginia limited liability
company, in a transaction exempt from registration under the
Securities Act pursuant to Section 4(2) thereof and Rule 506
promulgated thereunder. Given that Board LLC was formed and
capitalized solely by members of the Company's Board of Directors
(all but Messrs. Pappas and Clineburg), Board LLC is an "accredited
investor" as that term is defined by Rule 501.
As previously reported in Part II of the Company's Registration
Statement on Form S-1, in connection with the transactions which
formed a part of the Plan of Reorganization and Agreement for Share
Exchange Offers (the "Combination Agreement") dated August 27, 1997
by and among Precision Auto Care, Inc., a Virginia corporation, WE
JAC Corporation, a Delaware corporation, Miracle Industries, Inc., an
Ohio corporation, Lube Ventures, Inc., a Delaware corporation,
Miracle Partners, Inc., a Delaware corporation, Prema Properties,
Ltd., an Ohio limited liability company, Rocky Mountain Ventures,
Inc., a Colorado corporation, Rocky Mountain Ventures II, Inc., a
Colorado corporation, Ralston Car Wash, Ltd., a Colorado limited
liability company, and The Karl Byrer Group, Inc., a Colorado
corporation, the Company issued a total of 305,060 shares in
transactions which were exempt from registration under the Securities
Act pursuant to Section 4(2) thereof and Rule 152 promulgated
thereunder. These shares were issued in consideration for the
Company's acquisition of certain companies pursuant to the
Combination Agreement. The stock certificates representing such
shares bear restrictive legends and the five individuals who acquired
such shares represented to the Company they were acquiring the shares
for investment purposes.
d) Not applicable.
23
<PAGE>
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
10.1 Agreement with John F. Ripley, dated October 21, 1998
10.2 Employment Agreement with Charles L. Dunlap, dated October 21,
1998
11 Statement re: Computation of per share earnings
27 Financial Data Schedule
b) On September 23, 1998, the Company filed a Form 8-K to announce a
preliminary estimate of its earnings for the year ending June 30,
1998 and to announce that it was renegotiating the terms of various
credit facilities with its primary lender in order to regain
compliance with its debt covenants.
24
<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.
November 16, 1998 PRECISION AUTO CARE, INC.
By: ________________________________
Charles L. Dunlap
President and Chief Executive Officer
By: _______________________________
John F. Moynahan
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
Number Page
- ------ ----
10.1 Agreement with John F. Ripley, dated October 21, 1998
10.2 Employment Agreement with Charles L. Dunlap, dated
October 21, 1998
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
26
October 21, 1998
PERSONAL AND CONFIDENTIAL
Mr. John F. Ripley
35481 Troon Court
Round Hill, Virginia 20141
Dear Jay:
This letter sets forth the agreement between Precision Auto Care, Inc.
(the "Company") and you concerning your resignation as a director and the
Company's President and Chief Executive Officer and your rendering of services
to the Company on a part-time basis, as more fully set forth herein. This letter
contains the entire agreement and, except as otherwise provided herein,
supersedes all prior agreements, arrangements, understandings, whether written
or oral, regarding your rendering of services to the Company and your
compensation therefor. Without limiting the generality of the foregoing, except
as provided in paragraphs 3 and 5 below the terms of your prior employment
agreements are terminated and shall not have any further effect.
1. You agree to resign, effective immediately from your position as
director, President and Chief Executive Officer of the Company and from any
other position or capacity in which you are currently serving the Company and
any of its subsidiaries, except that you will continue to provide services to
the Company in accordance with and subject to the limitations of paragraph 2 of
this letter.
2. From and after the date of this Agreement through October 21, 1999, you
agree to provide services to the Company as an advisor in connection with
special projects assigned to you by the Board of Directors or the Company's
Chief Executive Officer, appropriate to your former position with the Company.
Any such services that you provide to the Company shall not interfere with any
full or part-time employment that you may now or hereafter have or with any
other business ventures or opportunities with which you may now or hereafter be
involved, including the search for and/or investigation for such employment,
ventures or opportunities. It is understood that this paragraph does not require
the Company to request, or you to provide, any
<PAGE>
Mr. John F. Ripley
October 21, 1998
Page 2
minimum or maximum number of hours of services. The Company expects that these
services will be provided from your current or future home and/or at locations
other than the headquarters of the Company within commuting distance of your
home. You shall render services hereunder to the Company in the capacity of an
independent contractor.
3. You have agreed to provide these services for compensation from the
Company of $10,000 per month during the term of this letter, without regard to
the quantity or quality of such services. In addition, the Company shall
reimburse you for any expenses incurred by you in providing such services. The
first monthly payment shall be due November 21, 1998. We will also continue your
present health benefits through October 31, 1999. You will receive your bonus
for the fiscal year ended June 30, 1998 (which we both agree is in the amount of
$100,000) in eight equal monthly installments which shall be payable to you
commencing November 21, 1998. Amounts payable to you shall be net of applicable
withholding taxes.
4. Except as provided in the following sentence, you agree that you hereby
forfeit all of your rights to and in any and all stock options granted to you
under the Company's option plans, your previous employment agreements or
otherwise, and that you shall not have the ability to exercise any of such
options following the date of this letter. Notwithstanding the foregoing, you
will be entitled to exercise the options set forth on Exhibit A to this letter
at the corresponding exercise prices until the close of business on October 21,
1999. Following that date, all of those options shall expire and you shall not
be entitled to exercise them or have any other rights in respect of them
following that date.
5. The Company and you hereby agree that the provisions relating to
confidential information and competitive activities set forth in Sections 4, 5
and 6 of the Employment Agreement between you and the Company dated June 17,
1998 shall remain in full force and effect and shall remain fully enforceable
against you and the Company in accordance with their terms. The covenants
contained in Section 5(a) of the Employment Agreement relating to competitive
activities shall expire on October 21, 2000.
6. You agree that you will cooperate with the Company in collecting the
loan the Company extended to PAISA, Inc., Haniff Hirji and Gulshan Hirji in the
original principal amount of $500,000 on or about June 25, 1998 (the "PAISA
Loan"). In the event that the PAISA Loan and all accrued interest thereon is
repaid in full by June 21, 1999, the term of this letter shall be extended by
six months and the Company will (A) continue to pay you $10,000 per month until
April 21, 2000, (B) continue your present health benefits until April 30, 2000,
and (C) permit you to exercise the options set forth on Exhibit A to this letter
until the close of business on April 21, 2000.
7. You agree that the terms, provisions and conditions of this letter, and
the negotiations in connection therewith, are strictly confidential and shall
not be disclosed to any person or entity except to the extent required by law,
including rules and regulations of the Securities and Exchange Commission. You
shall return to the Company any and all documents
<PAGE>
Mr. John F. Ripley
October 21, 1998
Page 3
belonging to the Company and, consistent with the terms of Section 4 of your
current Employment Agreement, shall maintain the confidentiality of any and all
confidential or trade secret material with which you have come into contact as
a result of your service to the Company.
8. By agreeing to accept the provisions of this letter, you hereby release
any and all claims that you now have or may hereafter have against the Company,
its officers, directors, agents or employees, directly or indirectly related to
the matters set forth herein, or otherwise related to your employment with and
service to the Company, except to receive the benefits described herein.
Notwithstanding the foregoing, this release shall not affect any rights you may
have to seek indemnification from time to time from the Company in accordance
with the Company's charter or bylaws, to the extent to which you become subject
to legal proceedings and would be entitled to indemnification thereunder in
respect of matters which involve actions you took in your capacity as an officer
or director of the Company, and the Company shall provide such indemnification
to the full extent permitted by its existing charter and bylaws.
9. Upon your acceptance of the provisions of this letter, the Company
hereby releases any and all claims that it now has or may hereafter have against
you, directly or indirectly related to the matters set forth herein, or
otherwise related to your employment with or service to the Company, except to
receive the services on the terms described herein. Notwithstanding the
foregoing, in the event that the Company advances or provides you with fees and
expenses pursuant to indemnification from the Company in accordance with the
Company's charter or bylaws, and it is later determined that you do not meet the
legal standards or requirements in order to receive indemnification from the
Company under Virginia law, the Company shall be entitled to seek the return of
any amounts it may have advanced or provided to you.
10. The terms and conditions contained in this letter may be changed or
amended only by written agreement executed by you and the Company. In the event
any portion of this letter is deemed for any reason to be unenforceable, such
unenforceability shall be strictly limited, and all other provisions shall
remain in full force and effect.
<PAGE>
Mr. John F. Ripley
October 21, 1998
Page 4
Please indicate your acceptance of and agreement with the foregoing
provisions, and your acknowledgement that this letter sets forth all of the
terms and conditions applicable to your resignation as director and President
and Chief Executive Officer of the Company and your continued
employment/consulting relationship with the Company, by signing and dating this
letter in the space indicated below and returning a copy to me.
Very truly yours,
PRECISION AUTO CARE, INC.
By:__________________________________
Lynn E. Caruthers
AGREED AND ACCEPTED AS OF
THIS _____ DAY OF OCTOBER 1998.
By:____________________________
John F. Ripley
<PAGE>
EXHIBIT A
Options to purchase 80,338 shares of common stock with an exercise price of
$7.05 per share.
Options to purchase 7,920 shares of common stock with an exercise price of $8.00
per share.
Options to purchase 4,842 shares of common stock with an exercise price of
$10.00 per share.
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of this 21st day of October, 1998, by and between
Charles L. Dunlap, a resident of Ruxton, Maryland (the "Executive"), and
Precision Auto Care, Inc., a Virginia corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Executive desires to provide his services to the Company and
the Company desires to employ the Executive upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
covenants and agreements contained herein, and intending to be legally bound,
the parties hereby agree as follows:
1. Employment and Term.
The Company will employ the Executive, and the Executive hereby accepts
employment with the Company, for an initial term commencing on October 21, 1998,
and continuing for a period of three (3) years until and including October 20,
2001 (the "Initial Term"), unless such employment is earlier terminated as
provided herein. After expiration of the Initial Term, the Executive's
employment under this Agreement shall continue until terminated as provided
herein.
2. Duties.
The Executive shall serve in the capacity of President and Chief Executive
Officer. He shall also be elected and serve as a member of the Company's Board
of Directors. During the term of his employment hereunder, the Executive shall
devote his full business time and attention to the performance of his duties for
the Company.
3. Compensation.
(a) Base Salary. The Company shall pay the Executive, and the
Executive shall accept, as full compensation for all services rendered
hereunder, a basic salary (the "Base Salary") and the other compensation and
benefits provided hereunder. The Executive's Base Salary effective October 21,
1998, shall be at an annual rate of Two Hundred Thousand Dollars ($200,000),
payable in approximately equal installments at such intervals as are consistent
with the Company's pay periods for salaried executive employees. The Executive's
Base Salary shall be reviewed by the Board of Directors within 90 days of the
date of this Agreement and thereafter no less frequently than once in any
twelve-month period and may be increased, but not decreased regardless of any
change in or diminution of the Executive's duties owed to the Company.
<PAGE>
(b) Performance Bonus. The Executive shall participate in bonus
plans and shall be entitled to receive bonuses thereunder, as may be approved by
the Board of Directors in its discretion.
(c) Benefits.
(i) The Executive shall be eligible to participate
in retirement, group insurance, medical, dental, vacation and any other plans or
programs of substantially similar character as are made generally available to
executive employees of the Company which do not duplicate the benefits otherwise
specifically provided in this Agreement. All such benefits are to be provided by
the Company, subject to the terms of any welfare or pension plan sponsored by
the Company.
(ii) Pursuant to the terms of the Company's existing
stock option plans, the Executive shall be granted non-qualified stock options
to purchase 100,000 shares of Common Stock of the Company. The options shall
vest in equal installments of one-third of the total shares granted on each of
the first three anniversaries of the grant date, which shall be October 21,
1998. Accordingly, options to purchase 33,334 shares shall vest and become
exercisable on and after October 21, 1999, options to purchase 33,333 shares
shall vest and become exercisable on and after October 21, 2000 and the
remaining options to purchase 33,333 shares shall vest and become exercisable on
and after October 21, 2001. The exercise price shall be equal to $4.25 which is
the closing price of the Company's Common Stock as of October 21, 1998. The
options shall expire on October 20, 2008 unless they shall otherwise sooner
expire in accordance with the terms of the applicable stock option plans.
(iii) The Company shall reimburse the Executive for
reasonable moving expenses which shall not exceed $15,000.
(iv) The Company shall reimburse the Executive for
all expenses incurred by him in the performance of his duties pursuant to this
Agreement in accordance with the Company's policies concerning the reimbursement
of expenses.
(v) Executive shall receive such other benefits
and/or allowances as are permitted to him from time to time by the Board of
Directors.
(d) Restructuring of Payments. Notwithstanding anything in this
Agreement to the contrary, in the event that, in the opinion of the Company's
auditors, any payments of compensation to be made hereunder would be treated as
"excess parachute payments" within the meaning of section 280G of the Internal
Revenue Code as amended, the Company and the Executive shall use their best
efforts to restructure any of the payments so as to avoid the imposition of
excise tax upon the Executive and the loss of deduction for such payments by the
Company.
-2-
<PAGE>
4. Confidentiality.
While employed by the Company under this Agreement and at all times
thereafter, the Executive shall not, without the prior written consent of the
Company, divulge to any third party or use for his own benefit or the benefit of
any third party, or for any purpose other than the exclusive benefit of the
Company, any confidential or proprietary business or technical information
revealed, obtained or developed in the course of his employment with the Company
or his duties performed for the Company or which is otherwise the property of
the Company or any of its subsidiaries or affiliated companies; provided that,
nothing contained herein shall restrict the Executive's use or disclosure of
such information (i) in the proper course of conduct of the Company's business,
(ii) known generally to the public (other than that which he may have disclosed
in breach of this Agreement) or (iii) as required by law so long as the
Executive gives the Company prior notice of such required disclosure and
cooperates with the Company in keeping the information confidential unless
precluded from doing so by legal authority.
5. Covenant Not to Compete.
(a) The Executive shall not, within any geographical area while
employed by the Company or while performing duties for the Company hereunder,
and within the United States of America for two (2) years thereafter, directly
or indirectly engage or become interested in (as owner, stockholder, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) any
business that engages in an auto care or manufacturing business of a type
conducted by the Company or any of its subsidiaries during the term of this
Agreement. Notwithstanding the foregoing, the Company recognizes that the
Executive has been employed by companies engaged in petroleum marketing and
refining businesses and nothing contained herein shall prohibit the Executive
from engaging or being involved in a business which principally markets or
refines petroleum products and which may incidentally engage in businesses
competitive with business conducted by the Company or a Subsidiary during the
term of this Agreement so long as Executive's duties principally involve the
petroleum marketing and refining aspects of such a business. In addition, the
Executive may hold as a passive investment up to five percent (5%) of the
outstanding securities of any class of any publicly-held entity that engages in
the auto care industry.
(b) It is the desire and the intent of the parties that the
provisions of this Section 5 shall be enforceable to the fullest extent
permissible under applicable law and public policy. Accordingly, if this Section
5 or any portion thereof shall be adjudicated to be invalid or unenforceable,
the length and scope of this Section 5 shall be reduced to the extent necessary
so that this covenant may be enforced to the fullest extent possible under
applicable law.
6. Enforcement.
(a) Injunctive Relief. The parties recognize that, in the event of
any breach by the Executive of any of the provisions of Section 4 or 5 hereof,
the Company will suffer continuing and irreparable harm for which the Company
will not have an adequate remedy at law. The Executive hereby waives any and all
right to assert any claim or defense that the Company has an adequate remedy at
law for any such breach. In recognition thereof, the Company and the Executive
-3-
<PAGE>
hereby agree that, in the event of any such breach, the Company will be entitled
to seek injunctive relief or any other appropriate remedy to enforce such
provisions. The parties further agree that this Section 6 shall not in any way
limit remedies at law or in equity otherwise available to the Company. In the
event the Company seeks injunctive relief and is unsuccessful on the merits, or
terminates such action prior to entry of a judgment or other ruling on the
merits, other than a termination of such action due to a settlement agreement
between the Company and the Executive, the Company shall reimburse the Executive
for his reasonable attorneys' fees.
(b) Arbitration. In the event of any dispute between the parties
under or relating to this Agreement or relating to the Executive's employment by
the Company, such dispute shall be submitted to and settled by arbitration in
the Commonwealth of Virginia in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association then in effect, by an
arbitrator or arbitrators selected in accordance with said rules. The
arbitrator(s) shall have the right and authority to determine how their award or
decision as to each issue and matter in dispute may be implemented or enforced.
Any decision or award shall be final and conclusive on the parties; there shall
be no appeal therefrom other than for claimed bias, fraud or misconduct by the
arbitrator(s); judgment upon any award or decision may be entered in any court
of competent jurisdiction in the Commonwealth of Virginia or elsewhere; and the
parties hereto consent to the application by any party in interest to any court
of competent jurisdiction for confirmation or enforcement of such award. The
party against whom a decision or award is made shall pay the fees of the
American Arbitration Association. Notwithstanding the foregoing, the Company, at
its sole option, shall be entitled to elect to enforce its rights contemplated
by Section 6(a) hereof relating to breaches of Section 4 or 5 hereof by
arbitration pursuant to a proceeding commenced by the Company in a court of
competent jurisdiction in lieu of an arbitration proceeding.
7. Termination of Employment.
(a) Death. The Executive's employment hereunder shall terminate in
the event of Executive's death. Except for any salary and benefits accrued,
vested and unpaid as of the date of any such termination and except for any
benefits to which the Executive or his heirs or personal representatives may be
entitled under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company, the Company shall be under no
further obligation hereunder to the Executive or his heirs or personal
representatives, and the Executive or his heirs and personal representatives no
longer shall be entitled to receive any payments or any other rights or benefits
under this Agreement.
(b) Disability. The Company may terminate the Executive's employment
hereunder for "Disability," if an independent physician mutually selected by the
Executive or his representative and the Board of Directors or its designee has
determined that the Executive has been substantially unable to render to the
Company services of the character contemplated by Section 2 of this Agreement,
by reason of a physical or mental illness or other condition continuing for more
than one hundred twenty (120) consecutive days or for shorter periods
aggregating more than one hundred eighty (180) days in any period of twelve (12)
consecutive months (excluding in each case days on which the Executive was on
vacation). In the event of such Disability, the Executive shall be entitled to
receive any salary and benefits accrued, vested and unpaid as of the date of any
such
-4-
<PAGE>
termination and any benefits to which the Executive may be entitled under and
in accordance with the terms of any employee benefit plan, policy or program
maintained by the Company. The Company shall be under no further obligation
hereunder to the Executive, and the Executive no longer shall be entitled to
receive any other payments, rights or benefits under this Agreement.
(c) Termination by the Company for Cause. The Company may terminate
the Executive's employment hereunder for "Cause." For purposes of this
Agreement, "Cause" shall mean any of the following:
(i) The Executive's willful misconduct or gross
negligence;
(ii) The Executive's conscious disregard of his
obligations hereunder;
(iii) The Executive's conscious violation of any material
provision of the Company's by-laws or of its other stated policies, standards or
regulations; or
(iv) A determination that the Executive has
demonstrated a dependence upon any addictive substance, including alcohol,
controlled substances, narcotics or barbiturates.
In the event that the Company terminates the Executive's employment for
Cause, the Executive shall be entitled to receive a severance benefit of two (2)
months' Base Salary in effect at the time of termination. The Executive shall
not be entitled to receive any other payments or any other rights or benefits
under this Agreement (except for any salary and benefits accrued, vested and
unpaid as of the date of any such termination) or otherwise and the Company
shall be under no further obligation hereunder to the Executive. Following any
termination for Cause, the Company shall have such rights and remedies as may be
available to it for any breach of this Agreement or otherwise.
(d) Termination by the Company other than for Cause. The Company may
terminate the Executive's employment hereunder at any time for any other reason,
provided that the Company has given the Executive ninety (90) days' written
notice of termination, termination being effective upon expiration of the notice
period. In the event of such termination, the Executive shall be entitled to
receive a severance benefit equal to Base Salary at the rate in effect at the
time of termination for the remainder of the Initial Term or for eighteen (18)
months, whichever is greater, and shall also be entitled to receive any salary
and benefits accrued, vested and unpaid as of the date of any such termination
and any benefits to which the Executive may be entitled under and in accordance
with the terms of any employee benefit plan, policy or program maintained by the
Company. Upon the Executive's receipt of such severance benefit, salary and
benefits, the Company shall be under no further obligation hereunder to the
Executive and the Executive no longer shall be entitled to receive any payments
or any other rights or benefits under this Agreement or otherwise.
(e) Termination by the Executive for Good Reason. Notwithstanding
anything herein to the contrary, the Executive shall be entitled to terminate
his employment hereunder for
-5-
<PAGE>
"Good Reason" without breach of this Agreement. For purposes of this Agreement,
"Good Reason" shall exist in the event of any of the following:
(i) A change in the Executive's place of employment
outside of a 100-mile radius of Loudoun County, Virginia;
(ii) A material diminution in title or a substantial
elimination of the duties and responsibilities of the Executive;
(iii) A failure of the Executive to be elected to the
Company's Board of Directors, or, once elected, his removal therefrom other than
in connection with a termination of his employment hereunder;
(iv) A material breach by the Company of its
obligations hereunder; or
(v) The Executive shall cease to be the President
and Chief Executive Officer of the Company following a "change in control" of
the Company. For purposes of this Section 7(e)(v), a "change in control of the
Company" shall mean (A) the acquisition, directly or indirectly, by any "person"
(as such term is defined in Section 13(d) and 14(d) of the Securities Exchange
Act of 1934 as in effect on the date hereof), of voting power over voting shares
of the Company that would entitle holders thereof to cast at least twenty
percent (20%) of the votes that all shareholders would be entitled to cast in
the election of directors of the Company; or (B) during any period of two
consecutive years during the Initial Term of this Agreement, individuals who at
the beginning of such period constitute the Company Board of Directors cease for
any reason to constitute at least a majority thereof, unless the election of
each director who is not a director at the beginning of such period shall have
been approved in advance by directors representing at least a majority of the
directors then in office who are directors at the beginning of such period. For
the purpose of this Section 7(e)(v), "President and Chief Executive Officer of
the Company" shall mean that after a change in control of the Company has
occurred, you are the President and Chief Executive Officer of (1) the Company,
if it is the surviving entity in any merger, share exchange, acquisition or
other business combination with the Company, (2) the successor entity to the
Company in any merger, share exchange, consolidation, acquisition or other
business combination with the Company, or (3) any entity that beneficially owns
a majority of the voting stock of the Company.
In the event of such termination by the Executive, the Executive shall
nonetheless be entitled to receive a severance benefit equal to Base Salary at
the rate in effect at the time of termination for the remainder of the Initial
Term or for eighteen (18) months, whichever is greater. Except for such
severance benefit and except for any salary and benefits accrued, vested and
unpaid as of the date of such termination, the Executive no longer shall be
entitled to receive any payments or any other rights or benefits under this
Agreement, and the Company shall have no further obligation hereunder or
otherwise to the Executive following any such termination.
-6-
<PAGE>
(f) Termination by the Executive for other than Good Reason. The
Executive may terminate his employment hereunder at any time for any other
reason, provided the Executive has given the Company one hundred eighty (180)
days' written notice of termination, termination being effective upon expiration
of the notice period. In the event of such termination, the Executive shall be
entitled to receive any salary and benefits accrued, vested and unpaid as of the
date of any such termination and any benefits to which the Executive may be
entitled under and in accordance with the terms of any employee benefit plan,
policy or program maintained by the Company. The Company shall be under no
further obligation hereunder to the Executive and the Executive no longer shall
be entitled to receive any other payments, rights or benefits under this
Agreement or otherwise.
(g) Pro-Rata Bonus. Whenever, pursuant to this Section 7, the
Executive is entitled, upon the termination of his employment, to receive
"salary...accrued, vested and unpaid as of the date of any such termination",
the amount due him may include a pro-rata performance bonus, if it would be
appropriate to calculate a pro-rata portion of a performance bonus in accordance
with the provisions of any bonus plan which may have been implemented in
accordance with Section 3(b) hereof.
8. Place of Employment. The Company agrees that the principal location at
which the Executive is to render his services hereunder will be within a
100-mile radius of Loudoun County, Virginia.
9. Withholding. Notwithstanding anything herein to the contrary, all
payments required to be made hereunder by the Company to the Executive, or his
estate or beneficiaries, shall be subject to the withholding of such amounts as
the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation.
10. Survival. This Agreement shall survive any termination of the
Executive's employment hereunder unless otherwise provided herein.
11. Miscellaneous.
(a) Successors and Assigns. The Company may assign this Agreement
to, and only to, an entity which is owned more than fifty percent (50%),
directly or indirectly, by the Company, and any person or entity which acquires
all or substantially all of the Company's business, and, subject to the
foregoing, upon such assignment this Agreement shall inure to the benefit of and
be binding upon such entity. This Agreement shall not be assignable by the
Executive and shall inure to the benefit of and be binding upon him and his
personal representative and other legal representatives. It is understood that
this Section 11(a) shall not affect the right of the Executive to terminate his
employment for "Good Reason" pursuant to Section 7(e) hereof.
(b) Notice. Any notice or communication required or permitted under
this Agreement shall be made in writing or sent by certified or registered mail,
return receipt requested and postage prepaid, addressed as follows:
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<PAGE>
If to the Executive:
Charles L. Dunlap
1213 Berwick Road
Ruxton, Maryland 21204
If to the Company:
Precision Auto Care, Inc.
748 Miller Drive, S.E.
P.O. Box 5000
Leesburg, Virginia 20175
Attention: Arnold Janofsky, Esq.
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above. Notice shall be
deemed given when received by the other party, including by his or its agent.
(c) Entire Agreement; Amendments. This Agreement contains the entire
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior discussions, agreements and understandings relating
thereto between them. This Agreement may not be changed or modified, except by
an agreement in writing executed by the Company, with the approval of its Board
of Directors or its designee, and by the Executive.
(d) Waiver. The waiver of a breach of any term or provision of this
Agreement shall not operate as or be construed to be a waiver of any other or
subsequent breach of this Agreement.
(e) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement, and the performance
of the obligations imposed by this Agreement, shall be governed by the laws of
the Commonwealth of Virginia applicable to contracts made and wholly to be
performed in such state, without regard to choice of law principles.
(f) Severability. In the event that any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable, in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision of the Agreement. Such
invalid, illegal or unenforceable provision(s) shall be deemed modified to the
extent necessary to make it (them) valid, legal and enforceable.
(g) Indemnification. The Executive shall be entitled to the benefit
of the indemnification provided by the Charter and the Bylaws of the Company;
provided that the Company shall be permitted to amend such provisions from time
to time so long as the Executive, to the extent permitted by applicable law, is
afforded indemnification at least as favorable as that provided by the Charter
and Bylaws as in effect on the date hereof.
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<PAGE>
(h) Captions. All captions and section headings used herein are for
convenient reference only and do not form a part of this Agreement.
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute one and the same Agreement.
(j) Computation of Time. In computing any period of time pursuant to
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday, Sunday,
or a legal holiday, in which event the period shall begin to run on the next day
which is not a Saturday, Sunday, or legal holiday. Likewise, if the period of
time concludes on a Saturday, Sunday or a legal holiday, the period shall run
until the end of the next day thereafter which is not a Saturday, Sunday, or
legal holiday.
(k) Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or plural
as the identity of the person or persons may require.
12. Executive's Legal Fees. The Company shall reimburse Executive for the
reasonable legal fees incurred by him in connection with the negotiation and
execution of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
PRECISION AUTO CARE, INC.
By:___________________________
Name: Lynn E. Caruthers
Title: Chairperson of the Board
______________________________
Charles L. Dunlap
-9-
Precision Auto Care, Inc.
Exhibit 11-Statement Re: Computation of Per Share Earnings
(In Thousands, except per share data)
Pro Forma Combined As Adjusted
For Combination and Offering
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Weighted average shares outstanding common stock 6,121 5,474
Weighted average shares issuable upon exercise of dilutive common
stock options -- 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
-- -
Total weighted average shares 6,121 5,497
====== =====
Net Income (Loss) ($717) $884
====== =====
Earnings (loss) per share ($0.12) $0.16
====== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,056,692
<SECURITIES> 0
<RECEIVABLES> 11,380,729
<ALLOWANCES> 1,893,126
<INVENTORY> 4,939,798
<CURRENT-ASSETS> 19,012,734
<PP&E> 22,355,083
<DEPRECIATION> 2,018,071
<TOTAL-ASSETS> 87,334,310
<CURRENT-LIABILITIES> 35,126,682
<BONDS> 0
0
0
<COMMON> 61,205
<OTHER-SE> 50,803,381
<TOTAL-LIABILITY-AND-EQUITY> 87,334,310
<SALES> 5,824,735
<TOTAL-REVENUES> 11,789,755
<CGS> 5,775,282
<TOTAL-COSTS> 11,939,673
<OTHER-EXPENSES> 314,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 442,948
<INCOME-PRETAX> (862,969)
<INCOME-TAX> (145,519)
<INCOME-CONTINUING> (717,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (717,450)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
