UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
The number of shares of Common Stock, par value $.01 per share, as of
April 30, 1998 was 6,100,543 shares.
<PAGE>
Precision Auto Care, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
<S><C>
Consolidated Balance Sheets at March 31, 1998 and June 30, 1997 4
Consolidated Statement of Operations for the quarter and nine months 5
ended March 31, 1998 and 1997
Pro Forma Combined Statement of Operations for the quarter and nine 6
months ended March 31, 1998 and 1997
Consolidated Statement of Cash Flows for the nine months 7
ended March 31, 1998 and 1997
Notes to the Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Part II Other Information 21
Signatures 22
Exhibit Index
Exhibit 11 23
Exhibit 27 24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Precision Auto Care, Inc. ("PAC" or the "Company") was established to
create an international provider of automotive services which are offered
principally as franchise operations marketed under the "Precision" brand
name. On November 12, 1997, simultaneously with the closing of its initial
public offering (the "Offering") of common stock (the "Common Stock"), PAC
acquired in a series of separate merger and exchange offer transactions (the
"Combinations"), businesses engaged in (i) franchising and operating
automobile repair and maintenance service centers ("Precision Tune Auto
Care"), (ii) operating self-service and automated car wash centers
("Precision Auto Wash"), and (iii) franchising and operating fast oil change
and lubrication service centers ("Precision Lube Express"). Through the
Combinations, PAC acquired the outstanding capital stock of WE JAC
Corporation ("WE JAC"), Miracle Industries, Inc. ("Miracle Industries"), Lube
Ventures, Inc. ("Lube Ventures"), Rocky Mountain Ventures, Inc. ("Rocky
Mountain I"), Rocky Mountain Ventures II, Inc. ("Rocky Mountain II"), Miracle
Partners, Inc. ("Miracle Partners"), and membership interests in Prema
Properties, Ltd. ("Prema Properties") Ralston Car Wash, Ltd. ("Ralston Car
Wash"), and KBG, LLC ("KBG") (each a "Constituent Company" and collectively
the "Constituent Companies").
The consideration for the Combinations consisted of Common Stock. The
Combinations are accounted for under the purchase method of accounting. WE JAC
has been designated as the accounting acquirer for financial statement
presentation purposes in accordance with the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 97, which states that the combining
company which receives the largest portion of voting rights in the combined
corporation is presumed to be the acquirer for accounting purposes. Therefore,
the accompanying historical financial statements as of June 30, 1997 and for the
three month and nine month periods ended March 31, 1997, that are presented as
the historical financial statements of the Company, are statements of WE JAC,
the accounting acquirer. Unless the context otherwise requires, all references
herein to the Company include WE JAC and the other Constituent Companies.
Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto, the Financial Statements of WE JAC, Miracle
Industries, Lube Ventures, and Prema Properties, and related notes thereto, and
management's discussion and analysis of financial condition and results of
operations related thereto, all of which are included in the Company's
Registration Statement on Form S-1 (No. 333-34439), as amended (the
"Registration Statement"), filed with the SEC in connection with the Offering.
Additionally, the financial statements herein should be read in conjunction with
the Financial Statements of Rocky Mountain I, Rocky Mountain II, Miracle
Partners, and Ralston Car Wash and related notes thereto, all of which are
included in the Company's Registration Statement on Form S-4 (No. 333-34449) as
amended (the "Registration Statement") filed with the SEC in conjunction with
the Combination.
<PAGE>
Precision Auto Care, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------------- -----------------
<S><C>
ASSETS
Current Assets:
Cash $ 3,308 $ 577
Accounts receivable 10,176 4,080
Notes receivable, current portion 847 513
Inventory 3,410 768
Prepaid expenses 1,749 1,873
----------------- -----------------
Total current assets 19,490 7,811
Notes receivable, noncurrent portion, net of allowance 1,460 1,361
Property, plant, and equipment, net. 15,469 854
Other assets:
Cost in excess of net assets of acquired businesses 43,143 15,878
Deposits, trademarks, and other 1,296 790
----------------- -----------------
44,439 16,668
----------------- -----------------
Total assets $ 80,858 $ 26,694
================= =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable & accrued liabilities $ 8,687 $ 5,121
Notes payable, current 1,240 8,757
Income taxes payable 1,381 680
Refundable deposits 332 81
Deferred revenue, current portion 413 413
----------------- -----------------
Total current liabilities 12,053 15,052
Long-term debt, net of current portion 15,443 622
Deferred revenue, net of current portion 989 530
Other long-term liabilities 493 195
----------------- -----------------
Total liabilities 28,978 16,399
Stockholders' equity:
Preferred stock, $.01 par; 1,000,000 shares authorized;
none outstanding
Common stock, $.01 par; 19,000,000 shares authorized;
6,100,543 and 1,333,700 shares outstanding 61 16
Additional paid-in capital 45,610 8,408
Retained earnings 6,209 4,343
Treasury stock, at cost; 247,040 shares in 1997 - (2,472)
----------------- -----------------
Total stockholders' equity 51,880 10,295
================= =================
Total liabilities and stockholders' equity $ 80,858 $ 26,694
================= =================
</TABLE>
<PAGE>
Precision Auto Care, Inc.
Statements of Operations
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
1998 1997 1998 1997
------------------- ------------------- ------------------ ------------------
<S><C>
Sales
Franchising
Development $ 688 $ 239 $ 1,218 $ 1,265
Royalty 3,440 3,413 10,752 10,120
Manufacturing & distribution 6,026 3,023 14,504 8,815
Company center operations 1,456 2,165
Other 157 99 273 242
------------------- ------------------- ------------------ ------------------
Total sales 11,767 6,774 28,912 20,442
Direct cost 8,146 4,971 20,073 14,670
------------------- ------------------- ------------------ ------------------
Contribution 3,621 1,803 8,839 5,772
General & administrative expenses 885 675 2,706 2,135
Depreciation & amortization 603 274 1,378 730
------------------- ------------------- ------------------ ------------------
Operating income 2,133 854 4,755 2,907
Other income (expense)
Interest income 40 34 136 108
Interest expense (238) (292) (730) (738)
Other income (expense) (68) (89) (32) (189)
------------------- ------------------- ------------------ ------------------
Total other income (expense) (266) (347) (626) (819)
Earnings before income taxes 1,867 507 4,129 2,088
------------------- ------------------- ------------------ ------------------
Provision for income taxes 862 253 1,903 966
------------------- ------------------- ------------------ ------------------
Net earnings $ 1,005 $ 254 $ 2,226 $ 1,122
=================== =================== ================== ==================
Earnings per share
Basic $ 0.18 $ 0.19 $ 0.62 $ 0.76
=================== =================== ================== ==================
Diluted $ 0.18 $ 0.18 $ 0.61 $ 0.73
=================== =================== ================== ==================
</TABLE>
<PAGE>
Precision Auto Care, Inc.
Pro Forma Combined Statements of Operations
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Proforma Combined Proforma Combined
Adjusted for Offering and Acquisition Adjusted for Offering and Acquisition
Three Months Ended March 31, Nine Months Ended March 31,
1998 1997 1998 1997
------------------ ------------------ ------------------- -------------------
<S><C>
Sales
Franchising
Development $ 688 $ 272 $ 1,220 $ 1,328
Royalty 3,440 3,412 10,756 10,149
Manufacturing & distribution 6,026 5,346 19,345 18,368
Company center operations 1,456 1,259 3,517 3,052
Other 157 98 273 243
------------------ ------------------ ------------------- -------------------
Total sales 11,767 10,387 35,111 33,140
Direct cost 8,146 7,396 24,580 24,388
------------------ ------------------ ------------------- -------------------
Contribution 3,621 2,991 10,531 8,752
General & administrative 885 961 3,050 2,786
Depreciation & amortization 603 722 1,817 1,920
------------------ ------------------ ------------------- -------------------
Operating income 2,133 1,308 5,664 4,046
Other income (expense)
Interest income 40 49 121 114
Interest expense (238) (110) (483) (331)
Other income (expense) (68) (288) (37) (298)
------------------ ------------------ ------------------- -------------------
Total other income (expense) (266) (349) (399) (515)
Earnings before taxes 1,867 959 5,265 3,531
------------------ ------------------ ------------------- -------------------
Income taxes 862 523 2,441 1,733
------------------ ------------------ ------------------- -------------------
Net earnings $ 1,005 $ 436 $ 2,824 $ 1,798
================== ================== =================== ===================
Earnings per share
Basic $ 0.18 $ 0.08 $ 0.52 $ 0.32
================== ================== =================== ===================
Diluted $ 0.18 $ 0.08 $ 0.51 $ 0.32
================== ================== =================== ===================
</TABLE>
<PAGE>
Precision Auto Care, Inc.
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 1997
------------------- -------------------
<S><C>
Operating activities:
Net income $ 2,226 $ 1,122
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,378 730
Gain on sale of assets (29)
Changes in operating assets and liabilities
Accounts and notes receivable (4,387) (1,674)
Inventory (643) 254
Prepaid expenses, deposits, and other (453) (369)
Accounts payable and accrued liabilities 463 1,054
Income taxes payable 638 390
Deferred revenue, net 57 (325)
------------------- -------------------
Net cash provided by operating activities (750) 1,182
Investing activities:
Purchases of property, plant and equipment (1,409) (222)
Sale of assets 127 207
Acquisition of area rights (582) (377)
Acquisition of businesses (20,071)
------------------- -------------------
Net cash used in investing activities (21,935) (392)
Financing activities:
Issuance of common stock 24,627 106
Purchase of treasury stock (2,472)
Transaction costs (4,957)
Proceeds from term loan and line of credit 7,417
Increase in term loan 8,468 2,919
Repayments of long-term debt (9,778) (1,564)
Payment of cash dividend (361)
------------------- -------------------
Net cash used in financing activities 25,416 (1,011)
------------------- -------------------
Net change in cash and cash equivalents 2,731 (221)
Cash at beginning of period 577 751
------------------- -------------------
Cash at end of period $ 3,308 $ 530
=================== ===================
</TABLE>
<PAGE>
Precision Auto Care, Inc.
Notes to Consolidated Financial Statements
March 31, 1998
1. Basis of Presentation
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 Constituent Companies for consideration consisting of
common stock. The closing of the Offering also occurred on that date.
For financial statement purposes, WEJAC, one of the Constituent Companies, has
been identified as the accounting acquirer. Accordingly, the historical
financial statements of Precision Auto Care, Inc. represent those of WEJAC prior
to the Combination and the Offering and include the results of operations and
cash flows of the Constituent Companies subsequent to the Combination. The
Combination was accounted for using the purchase method of accounting.
Allocations of the purchase price to the assets acquired and liabilities assumed
of the Constituent Companies have been initially assigned and recorded based on
the estimated fair market 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 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. 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
results for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
The accompanying unaudited pro forma combined statements of operations includes
the results of the Constituent Companies as if the Combinations had occurred at
beginning of fiscal year 1997. The pro forma combined financial information
includes the effects of : (i) the Combinations; (ii) the provision for income
taxes as if the income was subject to corporate federal and state income taxes
during the periods; (iii) repayment of debt of $18.6 million; and (iv)
amortization of goodwill resulting from the Combinations. Prior to the
Combinations, the Constituent Companies were not under common control or
management; accordingly, the pro forma combined statements of operations may not
be indicative of or comparable to the Company's post-Combination results of
operations.
<PAGE>
2. Inventory
The components of inventory at March 31, 1998 and June 30, 1997 were:
<TABLE>
<CAPTION>
(in Thousands)
------------------------------
1998 1997
------ ------
<S><C>
Raw material $ 955 -
Work in process 450 -
Finished goods 178 -
Parts and supplies 1,827 $ 768
----- -----
Total $3,410 $ 768
</TABLE>
3. Credit Facility and Long-Term Debt
On November 12, 1997, the Company entered into a three year $20 million Loan and
Security Agreement with a bank. The Loan and Security Agreement provides for a
revolving line of credit and an acquisition and capital expenditure line of
credit. Borrowings under the acquisition and capital expenditure line of credit
are amortized over a five year period and borrowings under both the acquisition
and revolving lines of credit at due and payable on November 1, 2000. The credit
agreement, as amended, requires the Company to comply with various loan
covenants, which include maintenance of certain financial ratios, restrictions
on additional indebtedness and restrictions on liens, guarantees, advances,
capital expenditures, sale of assets and dividends. Interest on the outstanding
balances is computed on either the Bank's floating and fluctuating prime
commercial lending rate or the London Inter-bank Offered rate (LIBOR) plus a
margin ranging from .25% to 2.00% depending on certain financial ratios.
Availability fees ranging from .25% to .30% are payable on the unused portion of
the line of credit. The Company's subsidiaries have guaranteed repayment of all
amounts due under the credit facility.
As of March 31, 1998, the Company had outstanding $7.4 million on the revolving
line of credit and $6.9 million on the acquisition line bearing an interest rate
of 7.4% per annum.
4. Capital Stock
On November 12, 1997, the Company issued 1,436,799 shares of Common Stock in
connection with the Combination and 2,666,540 shares in connection with the
Offering. The shares issued in connection with the Offering were sold at a price
of $9.00 per share. The net proceeds to the Company from the Offering (after
deducting underwriting discounts, commissions and offering expenses) were $19.6
million. Of this amount $18.6 million was used to repay debt.
In January the Company issued 17,114 shares of Common Stock to employees under
the 1997 Employee Stock Purchase Plan, which permits employees to purchase
shares of the Company's Common Stock at 85% of fair market value during the
quarterly offering period.
<PAGE>
In March 1998 the Company issued 619,265 shares of Common Stock in connection
with the acquisition of Promotora de Franquicias Praxis, S.A. de C.V. (See
Note 10 of Notes to Consolidated Financial Statements).
5. Accounting and Disclosure Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" which requires companies to report by
major components and in total, the change in its net assets during the period
from non-owner sources. The FASB also issued SFAS No. 131, "Disclosures about
segments of an Enterprise and Related Information", which establishes annual and
interim reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Both Statements are effective for fiscal years beginning after December 15,
1997. Adoption of these standards will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect, while
not yet determined by the Company, will be , limited to the presentation of its
disclosures.
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 had no material effect on the reported earnings per share for the
Company.
6. 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 will
include the operations of the Constituent Companies for periods commencing on
the date of the Combinations (November 12, 1997). The Constituent Companies will
be individually responsible for filing federal income tax returns based on
earnings through November 11, 1997. The provision for income taxes included in
the Pro Forma Combined Statements of Operations for the three and nine month
periods ended March 31, 1998 and 1997 assumes the application of statutory
federal and state income tax rates and the partial non-deductibility of goodwill
amortization.
8. Commitments and Contingencies
The Company carries a broad range of insurance coverage, including general and
business liability, commercial property, workers' compensation and general
umbrella policies. In November 1997, the Company secured Directors and Officers
and Prospectus Liability insurance coverage with an aggregate limit of $5
million, this
<PAGE>
amount was subsequently increased to $10 million. The Company has not incurred
significant claims or losses on any of its insurance policies during the periods
presented in the accompanying financial statements.
At March 31, 1998, the Company has lease commitments for office space, a
training center, and a number of service center locations. These leases expire
between 1998 and 2008, with renewal options in certain of the leases. Most of
the service center location leases are subleased to franchisees.
The future minimum lease payments and related sublease payments for leases with
terms in excess of one year as of March 31, 1998 have not materially changed
from June 30, 1997 when they were as follows:
<TABLE>
<CAPTION>
Future Minimum Sublease
Lease Payments Income Net
----------------- ---------- ----------
<S><C>
1998 $1,200,884 $ 820,000 $ 380,884
1999 977,895 535,000 442,895
2000 822,895 371,000 451,895
2001 730,264 353,000 377,264
2002 657,000 353,000 304,000
Thereafter 1,220,000 1,148,000 72,000
---------- ---------- ----------
$5,608,938 $3,580,000 $2,028,938
========== ========== ==========
</TABLE>
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.
9. Purchase Accounting
WE JAC issued in November 1997 a total of 1,436,799 shares of common stock to
shareholders of the Constituent Companies in exchange for all of the outstanding
shares of the respective companies. The fair market value of the shares issued
is determined by the offering price of $9.00 per share for a total of
$12,931,938. The assets acquired and liabilities assumed in the transaction
consisted of the following:
Assets
Cash $ 249,790
Accounts Receivable 563,131
Inventory 1,710,838
Prepaid Expenses 419,511
Building and Fixtures 9,544,941
Equipment and Vehicles 444,145
Land 2,606,975
Other Assets 537,166
<PAGE>
Liabilities
Accounts payable $ 1,456,076
Accrued liabilities 979,093
Current and non-current debt 13,237,528
The difference between the total consideration of the stock and the net value of
the assets received and liabilities assumed is $12,528,138 which was recorded as
cost in excess of net assets of acquired businesses. Inventory was valued at the
lower of cost or market. Accounts receivable is the amount expected to be
collectible. Property, plant and equipment have been recorded at estimated fair
market value and may be adjusted when further evidence would warrant such an
adjustment. Liabilities are recorded as true obligations assumed by PAC.
10. Acquisitions
On March 31, 1998, the Company acquired all of the outstanding stock of
Promotora de Franquicias Praxis, S.A. de C.V. ("Praxis"), the Master Licensee of
the Precision Tune Auto Care franchise for Mexico. The purchase price was
approximately $10.5 million, which included $3.8 million in cash and 619,265
shares of the Company's common stock valued at $6.7 million. The cash portion of
the purchase price was financed by borrowing under the Company's acquisition
line of credit.
On March 20, 1998, the Company acquired substantially all of the assets of
Greenwood Manufacturing, Inc. ("Greenwood"), a sheet metal fabricator, for
approximately $450,000 in cash. The Company also acquired on March 31, 1998, a
25% member interest in Indy Ventures L.L.C., the owner and operator car wash and
lube centers Indiana. The Company had previously acquired a 50% ownership in
Indy Ventures in connection with the Combination in November 1997. The purchase
of Greenwood and the 25% members interest in Indy Ventures was financed by
borrowing under the Company's line of credit.
The acquisitions of Praxis, Greenwood and Indy Ventures were accounted using the
purchase method of accounting, and the purchase prices were allocated to the
assets acquired and the liabilities assumed based on their estimated fair market
value. The excess of the preliminary allocation of the cost of the acquisition
over the estimated fair market value of the net assets acquired is being
amortized over a period of thirty years.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Pro Forma
Financial Statements of the Company and related notes thereto and the Financial
Statements of WEJAC and the Constituent Companies and related notes thereto,
included in the Company's Registration Statements. Statements contained in this
discussion regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. The
forward looking statements are subject to numerous risks and uncertainties to
the Company, including but not limited to the risks associated with: successful
integration of the Constituent Companies, factors affecting internal growth and
management of growth, the Company's acquisition strategy and availability of
financing, the automotive industry, seasonality, quarterly fluctuations and
general economic conditions, dependence on technology and other factors
discussed in the Registration Statements.
RESULTS OF OPERATIONS-PRO FORMA COMBINED
The pro forma combined results of operations of the Company for the periods
discussed herein are only a summation of the revenues, direct costs, general and
administrative expenses, and operating income of the Constituent Companies on a
historical basis, which include pro forma adjustments for amortization of
goodwill, interest expense eliminated on prepayment of debt and income taxes.
This data may not be comparable to and may not be indicative of the Company's
post-Combination results of operations due to a variety of factors, including:
(i) the Constituent Companies were not under common control or management and
had different tax and capital structures during the periods presented; (ii) the
Company will incur incremental costs related to its new corporate management and
costs of being a public company; (iii) the Company will use the purchase method
of accounting and establish a new basis of accounting to record the
Combinations; (iv) the combined data does not reflect potential benefits and
cost savings the Company may realize when operating as a combined entity. Future
quarterly results may also be materially affected by the timing and magnitude of
acquisitions, integration costs, variation in product mix, and seasonality of
the automotive service industry. See "Seasonality and Quarterly Fluctuations".
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.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997-PRO FORMA COMBINED
The following table sets forth certain selected pro forma combined financial
data as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31
1998 % 1997 %
-----------------------------------------------
(in thousands)
<S><C>
Revenue $11,767 100 $10,387 100
Direct Cost 8,146 69 7,396 71
General and Administrative 885 7 961 9
Operating Income 2,133 18 1,308 12
</TABLE>
Revenues. Revenues increased $1.4 million, or 13.3%, to $11.8 million for the
three months ended March 31, 1998 from $10.4 million for three months ended
March 31, 1997. Development sales increased $416,000 over 1997 from the sale of
a master license to Indonesia, an increase franchise sales in Mexico and the
sale of a turnkey car wash in Indiana. Royalty revenue for the quarter from the
auto care system increased proportionately with the growth in center sales. The
mild winter weather improved car wash equipment sales in the third quarter by
$680,000. The milder weather allowed construction to proceed which would
normally be slowed or halted during inclement weather. Milder winter weather
also contributed to an increase of $198,000 in car wash and lube revenues as
cars were able to move about more.
Direct Cost. Direct Cost increased $750,000, or 10.1%, to $8.1 million for the
three months ended March 31, 1998 from $7.4 million for the three months ended
March 31, 1997. The increase reflects a $38,000 increase in development costs
from improved sales. Improved efficiencies and cost control in retail operations
led to a decrease in direct costs of $172,000. Increased sales in manufacturing
and distribution led to a resultant increase in direct costs of $552,000.
Although company store operations showed improved sales, direct costs increased
$256,000 which was disproportional to the sales increase. This increase resulted
from costs associated with the additional marketing programs and personnel
needed to build same store sales in the future. Direct cost as a percentage of
sales decreased to 69% from 71% from March 31, 1998 to March 31, 1997.
General and Administrative Expenses. General and administrative expenses
decreased $76,000, or 7.9%, to $885,000 for the three months ended March 31,
1998 from $961,000 for the three months ended March 31, 1997. General and
administrative expenses as a percentage of sales decreased to 7.5% from 9.3%
from March 31, 1997 to March 31, 1998. The decrease is attributed to the
continued consolidation of support activities from the field and the continued
implementation of a cost control program.
Operating Income. Operating income increased $825,000, or 63.1%, to $2.1 million
for the three months ended March 31, 1998 from $1.3 million for the three months
ended March 31, 1997. As a percentage of revenue, operating income increased to
18.1%
<PAGE>
from 12.6% primarily due to increased revenues and margins in franchising,
royalty income and manufacturing and distribution operations.
Net Income. Net income increased $569,000 or 130.5% to $1 million for the three
months ended March 31, 1998 from $436,000, for the three months ended March 31,
1997. Net income as a percent of sales increased to 8.5% from 4.2%. Per share
earnings increased to $.18 per share for the three months ended March 31, 1998
from $0.08 for the three months ended March 31, 1997.
Earnings before interest, income taxes, depreciation and the amortization of
goodwill (EBITDA earnings). EBITDA increased $927,000 or 53.2% to $2.7 million
for the three months ended March 31, 1998 from $1.7 million for the three months
ended March 31, 1997.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31,
1997-PRO FORMA COMBINED
The following table sets forth certain selected pro forma combined financial
data as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 % 1997 %
----------------------------------------------
(in thousands)
<S><C>
Revenue $35,111 100 $33,140 100
Direct Cost 24,580 70 24,388 74
General and Administrative 3,050 9 2,786 9
Operating Income 5,664 16 4,046 11
</TABLE>
Revenues. Revenues increased $2 million, or 6.0%, to $35.1 million for the nine
months ended March 31, 1998 from $33.1 million for nine months ended March 31,
1997. Franchising activities showed a modest nine month decrease of $69,000 over
last year. During the first nine months of 1997 the Company sold master licenses
to Brazil for $320,000 and Jamaica for $90,000 which was only partially offset
by the sales of master licenses to Indonesia for $200,000 and the Dominican
Republic for $85,000 during the first nine months of this year. Sales of new
franchises during the first nine months of 1998 were below 1997 as a result of
having to re-file and get approval of the Company's Uniform Franchise Offering
Circular (UFOC) during the second quarter of FY1998 due to the merger and IPO.
Franchise sales could not be made or were "blacked out" until that offering
circular was approved by all the required states, which has been completed.
Royalty revenues increased $610,000 over 1997. Precision Tune Auto Care same
store sales increases and a 7% overall increase in Precision Tune Auto Care
retail sales accounts for the increase. Favorable weather conditions, and
increased marketing and advertising efforts led to the increase in manufacturing
and distribution revenue of $936,000 and car wash and lube revenues of $466,000.
Direct Cost. Direct Cost increased $192,000, or 1.0%, to $24.6 million for the
nine months ended March 31, 1998 from $24.4 million for the nine months ended
March 31, 1997. Franchising costs decreased $94,000, primarily as a result of a
decrease in
<PAGE>
advertising costs associated with the "black out" on sales activities during the
period.
Increased efficiencies and the purchase of area sub-franchisor rights accounts
for the $265,000 decrease in royalty costs. Additional sales, advertising and
personnel expenses account for the $241,000 increase in manufacturing and
distribution costs. Company store operations also experienced an increase of
$396,000 in costs as continued infrastructure for marketing programs and
personnel were introduced into the system to build same sales store in the
future.
General and Administrative Expenses. General and administrative expenses
increased $264,000, or 9.5%, to $3.1 million for the nine months ended March 31,
1998 from $2.8 million for the nine months ended March 31, 1997. General and
administrative expenses as a percentage of revenues remained essentially
constant at 9% from March 31, 1997 to March 31, 1998.
Operating Income. Operating income increased $1.6 million or 40%, to $5.7
million for the nine months ended March 31, 1998 from $4.0 million for the nine
months ended March 31, 1997. As a percentage of revenue, operating income
increased to 16% from 11% primarily due to increased revenues and margins in
royalty and manufacturing and distribution operations.
Net Income. Net income increased $1 million or 57.1% to $2.8 million for the
nine months ended March 31, 1998 from $1.8 million for the nine months ended
March 31, 1997. Per share earnings increased to $.51 per share for the nine
months ended March 31, 1998 from $0.32 for the nine months ended March 31, 1997.
Earnings before interest, income taxes, depreciation and the amortization of
goodwill, (EBITDA earnings). EBITDA increased $1.5 million or 25% to $7.6
million from the nine months ended March 31, 1998 from $6.1 million for the nine
months ended March 31, 1997.
RESULTS OF OPERATIONS-ACTUAL
On November 12, 1997, Precision Auto Care, Inc., a non-operating company
acquired in a series of separate merger and stock exchange offer transactions
the outstanding capital stock of the Constituent Companies, including WE JAC. In
the Combination of the Constituent Companies, WE JAC shareholders received the
largest portion of he voting rights in the combined corporation. In accordance
with the Securities and Exchange Commission's Staff Accounting Bulletin No. 97,
WE JAC is presumed to be the acquirer of the Constituent Companies for
accounting and reporting purposes. Therefore, the Company's actual reported
results of operations include the results of operations of WE JAC for the period
subsequent to the Combination on November 12, 1997. Consequently, the actual
results of operations reported herein may not be comparable to and indicative of
the Company's post Combination results of operations.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997-ACTUAL
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 % 1997 %
-------------------------------------------
(in thousands)
<S><C>
Revenue $11,767 100 $6,774 100
Direct Cost 8,146 69 4,971 73
General and Administrative 885 8 675 10
Operating Income 2,133 18 854 13
</TABLE>
Revenues. Revenues increased $5 million to $11.8 million or 74% for the three
months ended March 31, 1998 from $6.8 million for three months ended March 31,
1997. Development sales increased $449,000 over 1997 from the sale of a master
license to Indonesia, franchises in Mexico and the sale of car wash development
property in Indiana. The acquisition of additional operating units increased
manufacturing and distribution revenues by $3 million. Mild winter weather also
contributed to improved equipment sales by allowing construction to proceed
which would normally be halted during inclement weather. Company store
operations increased $1.4 million, there were to comparable operations in 1997.
Direct Cost. Direct Cost increased $3.2 million, or 64%, to $8.1 million for the
three months ended March 31, 1998 from $5.0 million for the three months ended
March 31, 1997. This increase is directly attributable to manufacturing and
distribution costs of $2.2 million associated with the acquisition of additional
operating units. Company wash and lube operation costs of $979,000 also
contributed to the increase. There were no company wash and lube store
operations in 1997.
General and Administrative Expenses. General and administrative expenses
increased $210,000, or 31%, to $885,000 for the three months ended March 31,
1998 from $675,000 for the three months ended March 31, 1997. Additional
administrative costs required to support public company operations and the
additional operating companies caused the majority of the increase. General and
administrative expenses as a percentage of revenues decreased to 8% for the
three months ended March 31, 1998 from 10% for the three months ended March 31,
1997.
Operating Income. Operating income increased $1.3 million or 150% to $2.1
million for the three months ended March 31, 1998 from $854,000 for the three
months ended March 31, 1997. Operating income as a percentage of revenue
increased to 18% from 13%.
Net income increased $751,000 to $1.0 million or 295% for the three months
ended March 31, 1998, from $254,000 for the three months ended March 31, 1997.
<PAGE>
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31,
1997-ACTUAL
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 % 1997 %
----------------------------------------------
(in thousands)
<S><C>
Revenue $28,912 100 $20,442 100
Direct Cost 20,073 69 14,670 72
General and Administrative 2,706 9 2,135 10
Operating Income 4,755 16 2,907 14
</TABLE>
Revenues. Revenues increased $8.5 million to $28.9 million or 41% for the nine
months ended March 31, 1998 from $20.4 million for nine months ended Match 31,
1997. Franchise and master license sales showed a $47,000 decrease in at March
31, 1998 over last year. Large master license sales in FY1996 and lower
franchise sales resulting from a "black out" period while a new UFOC was
approved, exacerbated the difference between the results for development in the
first nine months of FY1998 vs FY1997. Increases in Precision Tune Auto Care
same store sales of 4% and 7% in retail sales, led to an increase in royalty
revenue of $631,000. The acquisition of additional operating units increased
manufacturing and distribution revenue by $5.7 million. The addition of company
wash and lube operations added wash and lube revenues of $2.2 million.
Direct Cost. Direct Cost increased $5.4 million, or 37%, to $20.1 million for
the nine months ended March 31, 1998 from $14.7 million for the nine month
period ended March 31, 1997. Development costs decreased $176,000 during the
"black out" period as advertising and sales costs were curtailed. Royalty costs
increased $214,000 from increased sales volume. The increase in manufacturing
and distribution costs of $4.0 million is accounted primarily by the costs
associated with the purchase of additional operating units. Car wash operation
costs increased $1.4 million over the previous year when there were no sales for
company store wash and lube operations.
General and Administrative Expenses. General and administrative expenses
increased $570,000, or 27%, to $2.7 million for the nine months ended March 31,
1998 from $2.1 million for the nine months ended March 31, 1997. Additional
costs associated with the merger of the companies and operating as a public
company, account for most this increase. General and administrative expenses as
a percentage of revenues however decreased to 9% for the nine months ended March
31, 1998 from 10% for the nine months ended March 31, 1997.
Operating Income. Operating income increased $1.8 million or 64% to $4.8 million
for the nine months ended March 31, 1998 from $2.9 million for the nine months
ended March 31, 1997. Operating income as a percentage of revenue increased to
16% from 14% over the same period last year.
<PAGE>
Net income increased $1.1 million to $2.2 million or 98% for the nine months
ended December 31, 1997, from $1.1 million for the nine months ended March 31,
1997. Net income as a percentage of revenue increased to 8% from 5% over the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES-ACTUAL
The following table sets forth selected information from the statement of cash
flows of WE JAC and the Combined Companies for the time periods during which
they were a member of the consolidated group and do not include the effect of
proforma adjustments.
<TABLE>
<CAPTION>
Nine months ended March 31,
1998 1997
----------------------------------
(in thousands)
<S><C>
Net cash used/provided by operating activities $ (750) $ 1,182
Net cash used in investing activities (21,935) (392)
Net cash provided/used in financing activities 25,416 (1,011)
Change in cash 2,731 (221)
</TABLE>
From July 1, 1997 through March 31, 1998, the Combined Companies used $750,000
in net cash from operating activities. This amount was lower than the net cash
provided by operating activities for the nine months ended March 31, 1997
principally because of the increase in sales and the resulting accounts
receivable during the period. In addition, inventory increased to service the
additional sales. Prompt payment to our vendors to insure timely delivery of
needed parts and supplies decreased accounts payable. Increased income for the
period led to an increase in the use of cash required for income taxes. The
significant use of cash used by investing activities for the nine months ended
March 31, 1998 primarily consisted of the acquisition costs associated with the
purchase of the additional operating units. Net cash provided by financing
activities for the nine months ended March 31, 1998 included $24.6 million in
proceeds from the Offering less transaction costs of $5.0 million and payment on
the original long-term debt of $9.8 million. This was offset by an proceeds from
a new term loan and line of credit of $7.4 million and an increase in a new term
loan of $8.5 million. The increase in cash results from the balance of the
proceeds of the Offering offset against the payment on the original debt.
On November 12, 1997, the Company received from Signet Bank a $20 million line
of credit, $10 million which was structured as a revolving line of credit to be
used for working capital purposes and $10 million of which was structured as a
line for term loans to fund acquisitions. The bank, which is now part of First
Union National Bank has subsequently increased the line of credit to $25
million, with flexible thresholds for the working capital and acquisition
portions. 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 and procedures for the
approval of acquisitions. Interest on the outstanding balances will be computed
on either the Bank's floating and fluctuating prime commercial lending rate or
the London
<PAGE>
Interbank Offered rate (LIBOR) plus a margin ranging from .25% to 2.00%
depending on certain financial ratios. Availability fees ranging from .25% to
.30% will be payable on the unused portion of the line of credit. The Company's
subsidiaries are joint and several obligors with respect to all amounts due
under the credit facility.
The Company expects that the consummation of future acquisitions could reduce
the Company's liquidity, therefore, the Company intends to make arrangements to
secure additional financing to fund future acquisitions and related working
capital demands. There can be no assurance that the Company will obtain such
financing or that such financing will be obtained on terms favorable to the
Company.
On November 12, 1997 PAC completed the Offering, which involved the sale by PAC
of 2,666,540 shares of Common stock at a price to the public of $9.00 per share.
The net proceeds to PAC from the Offering (after deducting underwriting
discounts, commissions and offering expenses) was $19.6 million. Of this amount
$18.6 was used to prepay long-term debt. The Company simultaneously drew on the
line of credit for $1.6 million to pay off any balances remaining after
application of the Offering proceeds.
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 Tune 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 wash equipment. Conversely, the Precision Auto Wash business
is favorably impacted by the normal winter weather conditions as demand for the
Company's car wash service increases substantially in winter months.
<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 March 31, 1998, the Registrant issued, in the
aggregate, 619,265 shares of its common stock to the three stockholders of
Promotora de Francquicias Praxis, S.A. de C.V. ("Praxis"), in connection with
the Registrant's acquisition of Praxis. The transactions were exempt from
registration under Section 4(2) of the Securities Act of 1933. The Registrant
did not engage in any advertising or general solicitation in connection with the
offer and sale of the securities andobtained investment representations from
each of the stockholders. The certificates issed by th Registrant also bear an
appropriate restrictive legend.
(d) On November 6, 1997, the Company's Registration Statement
on Form S-1 (Commission File No. 333-34439) was declared effective by the
Securities and Exchange Commission. The Registration Statement covered an
offering of 2,810,140 shares of the Company's common stock. The offering was
completed following the sale of all of the securities which were registered.
A.G. Edwards & Sons, Inc. and Ferris, Baker Watts, Incorporated acted as
co-managing underwriters for the offering. The title of the class of securities
registered was the Common Stock of the Company. 2,666,540 shares were registered
and sold by the Company. An additional 143,600 shares were registered and sold
on behalf of selling shareholders.
The aggregate offering price of the shares of common stock sold by the
Company was $23,998,860 and the aggregate offering price of the shares of common
stock sold by the selling shareholders was $1,292,400. The Company incurred
approximately $2.7 million in expenses in connection with the issuance and
distribution of the securities registered. This amount does not include
$1,679,920 of underwriting discounts and commissions payable by the Company. All
such expenses involved direct or indirect payments to third parties and did
involve any direct or indirect payments to directors or officers (or their
associates) or to persons owning 10% or more of any class of equity securities
of the Company or to the Company's affiliates. The net offering proceeds to the
registrant after deducting the total expenses was $19.6 million.
<PAGE>
The Company used $18.6 million of the proceeds to discharge indebtedness and
$1.0 million of the proceeds to finance the cash purchase price of its recently
completed acquisition of Worldwide Drying Systems, Inc. All of such payments
were direct or indirect payments to unaffiliated third parties. As noted in the
prospectus forming a part of the Registration Statement, certain amounts of the
indebtedness that was repaid with the net proceeds of the offering were
guaranteed by certain directors and officers of the Company. This application of
proceeds reflects the repayment of $1.3 million more of indebtedness than was
contemplated by the prospectus in lieu of the immediate payment of expenses
associated with upgrading signage and installing a "point of sale" computer
system at each Precision Auto Care center. The Company does not believe that
this is a material difference and notes that it applied the proceeds in this
manner because it will take time to install the point of sale system and signage
at each center and the Company determined it was prudent to eliminate additional
indebtedness pending the application of funds to the signage upgrades and point
of sale computer system installations in the coming months.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: Computation of per share earnings
27 Financial Data Schedule
(b) The Company did not file any Reports on Form 8-K during
the quarter ended March 31, 1998.
<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.
May __, 1998 PRECISION AUTO CARE, INC.
By: _____________________________
John F. Ripley
President and Chief Executive
Officer
By: _____________________________
Peter J. Kendrick
Vice President-Finance
and Treasurer
Precision Auto Care, Inc.
Exhibit 11-Statement Re: Computation of Per Share Earnings
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
Actual 1998 1997 1998 1997
- ---------------- ----------------- ----------------- ----------------- -----------------
<S><C>
Weighted average shares outstanding
common stock 5,481 1,334 3,609 1,486
Weighted average shares issuable upon exercise
of common stock options, if dilutive 60 47 46 47
--------- -------- --------- ---------
Total weighted average shares 5,541 1,381 3,655 1,533
========= ======== ========= =========
Net earnings $ 1,005 $ 254 $ 2,226 $ 1,122
========= ======== ========= =========
Basic earnings per share $ 0.18 $ 0.19 $ 0.62 $ 0.76
========= ======== ========= =========
Diluted earnings per share $ 0.18 $ 0.18 $ 0.61 $ 0.73
========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
Pro Forma 1998 1997 1998 1997
- --------------- ----------------- ----------------- ----------------- -----------------
<S><C>
Weighted average shares outstanding
common stock 5,481 5,464 5,470 5,629
Weighted average shares issuable upon exercise
of common stock options, if dilutive 60 47 46 47
--------- -------- --------- ---------
Total weighted average shares 5,541 5,511 5,516 5,676
========= ======== ========= =========
Net earnings $ 1,005 $ 436 $ 2,824 $ 1,798
========= ======== ========= =========
Basic earnings per share $ 0.18 $ 0.08 $ 0.52 $ 0.32
========= ======== ========= =========
Diluted earnings per share $ 0.18 $ 0.08 $ 0.51 $ 0.32
========= ======== ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1997
<CASH> 3,308,000
<SECURITIES> 0
<RECEIVABLES> 10,176,000
<ALLOWANCES> 0
<INVENTORY> 3,410,000
<CURRENT-ASSETS> 19,490,000
<PP&E> 15,469,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,858,000
<CURRENT-LIABILITIES> 12,053,000
<BONDS> 0
0
0
<COMMON> 61,000
<OTHER-SE> 51,819,000
<TOTAL-LIABILITY-AND-EQUITY> 80,858,000
<SALES> 28,912,000
<TOTAL-REVENUES> 28,912,000
<CGS> 20,073,000
<TOTAL-COSTS> 24,157,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 730,000
<INCOME-PRETAX> 4,129,000
<INCOME-TAX> 1,903,000
<INCOME-CONTINUING> 2,226,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,226,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.19
</TABLE>
